UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

OR

COMMISSION FILE NUMBER 0-19817.

STELLENT, INC.

(952) 903-2000

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes þ No o

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 — 27,208,800 shares as of January 25, 2005.

STELLENT, INC.

FORM 10-Q
INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STELLENT, INC.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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STELLENT, INC.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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STELLENT, INC.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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STELLENT, INC.

NOTE 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Quarterly Reports on Form 10-Q and instructions for Article 10 of Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, have been recorded as necessary to present fairly Stellent, Inc’s (Stellent or the Company) consolidated financial position, results of operations and cash flow for the periods presented. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Fiscal Year 2004 Annual Report on Form 10-K. The consolidated results of operations for the three and nine month periods ended December 31, 2004 and 2003 are not necessarily indicative of the results that may be expected for any future period. References to fiscal years 2005 and 2004, represent the twelve months ended March 31, 2005 and 2004, respectively.

The condensed consolidated balance sheet at March 31, 2004 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Such disclosures are contained in the Company’s Annual Report on Form 10-K.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Revenue Recognition

Revenue consists principally of software license, support, consulting and training fees. The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, and Securities and Exchange Commission Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements.

Product license revenue is recognized under SOP 97-2 when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable and supported and the arrangement does not require services that are essential to the functionality of the software.

Persuasive Evidence of an Arrangement Exists — The Company determines that persuasive evidence of an arrangement exists with respect to a customer under, i) a signature license agreement, which is signed by both the customer and the Company or, ii) a purchase order, quote or binding letter-of-intent received from and signed by the customer, in which case the customer has either previously executed a signature license agreement with us or will receive a shrink-wrap license agreement with the software. The Company does not offer product return rights to end users or resellers.

Delivery has Occurred — The Company’s software may be either physically or electronically delivered to the customer. The Company determines that delivery has occurred upon shipment of the software pursuant to the billing terms of the arrangement or when the software is made available to the customer through electronic delivery. Customer acceptance generally occurs at delivery.

The Fee is Fixed or Determinable — If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, revenue is typically recognized when the arrangement fee becomes due and payable. Fees due under an arrangement are generally deemed fixed and determinable if they are payable within twelve months.

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STELLENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Collectibility is Probable and Supported — The Company determines whether collectibility is probable and supported on a case-by-case basis. The Company may generate a high percentage of our license revenue from our current customer base, for whom there is a history of successful collection. The Company assesses the probability of collection from new customers based upon the number of years the customer has been in business and a credit review process, which evaluates the customer’s financial position and ultimately their ability to pay. If the Company is unable to determine from the outset of an arrangement that collectibility is probable based upon the Company’s review process, revenue is recognized as payments are received.

With regard to software arrangements involving multiple elements, the Company allocates revenue to each element based on the relative fair value of each element. The Company’s determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and have determined that it has sufficient VSOE to allocate revenue to consulting services and post-contract customer support (PCS) components of its license arrangements. Generally, the Company sells its consulting services separately, and has established VSOE on this basis. VSOE for PCS is determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from PCS arrangements are recognized ratably over their respective terms, typically one year.

The Company’s direct customers typically enter into perpetual license arrangements. The Company’s Content Components Division (CCD) generally enters into term-based license arrangements with its customers, the term of which generally exceeds one year in length. The Company recognizes revenue from time-based licenses at the time the license arrangement is signed, assuming all other revenue recognition criteria are met, if the term of the time-based license arrangement is greater than twelve months. If the term of the time-based license arrangement is twelve months or less, the Company recognizes revenue ratably over the term of the license arrangement.

Services revenue consists of fees from consulting services and PCS. Consulting services include needs assessment, software integration, security analysis, application development and training. The Company bills consulting services fees either on a time and materials basis or on a fixed-price schedule. In general, our consulting services are not essential to the functionality of the software. The Company’s software products are fully functional upon delivery and implementation and generally do not require any significant modification or alteration for customer use. Customers purchase the Company’s consulting services to facilitate the adoption of its technology and may dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services. The Company recognizes revenue from consulting services as services are performed. The Company’s customers typically purchase PCS annually, and the Company prices PCS based on either a percentage of the product license fee or product list price, as applicable. Customers purchasing PCS receive product upgrades, Web-based technical support and telephone hot-line support.

Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue.

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STELLENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Cash, Cash Equivalents, Marketable Securities and Investments in Other Companies

Cash and Cash 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 cash equivalents.

Marketable Securities: Investments in debt securities with a remaining maturity of one year or less at the date of purchase are classified as short-term marketable securities. Investments are held in debt securities of the United States government and with corporations that have the highest possible credit rating. Investments in debt securities with a remaining maturity of greater than one year are classified as long-term marketable securities. These investments are classified as held to maturity and recorded at amortized cost as the Company has the ability and positive intent to hold to maturity.

Investments in Other Companies: Investments in other companies includes investments in two non-public, start-up technology companies for which the Company uses the cost method of accounting. These investments are classified as long-term as the Company anticipates holding them for more than one year. The Company holds less than 20% interest in, and does not directly or indirectly exert significant influence over any of the respective investees.

During the three months ended December 31, 2003, the Company sold the portion of these investments which was publicly traded. This investment was classified as available-for-sale and the Company had recorded an other-than-temporary impairment related to this asset during fiscal 2003. This investment was sold and the Company recorded a gain of approximately $388 during the three months ended December 31, 2003.

Warranties

The Company generally warrants its software products for a period of 30 to 90 days from the date of delivery and estimates probable product warranty costs at the time revenue is recognized. The Company exercises judgment in determining its accrued warranty liability. Factors that may affect the warranty liability include historical and anticipated rates of warranty claims, material usage, and service delivery costs. Warranty costs incurred have not been material.

Indemnification Obligations

The Company generally undertakes intellectual property indemnification obligations in its software products or services agreements with customers. Typically, these obligations provide that the Company will indemnify, defend and hold the customers harmless against claims by third parties that its software products or services infringe upon the copyrights, trademarks, patents or trade secret rights of such third parties. No material claim has been made by any third party with regard to the Company’s software products or services.

Comprehensive Income (Loss)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board “FASB” reached a consensus on EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. This EITF sets out criteria for whether revenue can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria considers whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the rights of return for the delivered item. This EITF was required to be adopted by the Company beginning April 1, 2004. The adoption of this EITF did not have a material effect on the Company’s consolidated financial statements.

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STELLENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

In June 2004, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides further guidance on the meaning of other-than-temporary impairment and its application to debt and equity securities. A majority of EITF 03-1 was effective for all reporting periods beginning after June 15, 2004. In September of 2004, the FASB issued FSP EITF Issue 03-1-1, which delayed the effective date for the measurement and recognition guidance included in the EITF. FSP EITF Issue 03-1-1 is expected to be superseded by FSP EITF Issue 03-1-a, sometime in early 2005. FSP EITF Issue 03-1-a provides further implementation guidance for the application of paragraph 16 and on the meaning of other-than-temporary impairment and its applications to certain investments included in the EITF. The adoption of this EITF did not and is not anticipated to have a material effect on how the company analyzes and records other-than- temporary impairments on its investments in other companies.

In December 2004, the FASB issued a revision to Statement No. 123 (revised 2004), Share-Based Payment. Statement 123(R) will, with certain exceptions, require entities that grant stock options and shares to employees to recognize the fair value of those options and shares as compensation cost over the service (vesting) period in their financial statements. The measurement of that cost will be based on the fair value of the equity or liability instruments issued. Statement 123(R) is required to be adopted by the Company in the first interim period beginning after June 15, 2005. As part of this adoption, the Company will begin expensing its options effective July 1, 2005 and has also elected to not restate prior period results. Since the Company will continue to issue stock options to employees as a form of incentive compensation and because the company has a significant amount of outstanding stock options that will vest on or after July 1, 2005, the Company expects the adoption of this FASB to have a significant impact on the financial statements, but has not yet determined the impact.

Stock-based Compensation

The Company has stock option plans for employees and a separate stock option plan for directors. The intrinsic value method is used to value the stock options issued to employees and directors, and the Company accounts for those plans under the recognition and measurement principles of Financial Accounting Standards Board (FASB) APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. In the periods presented, no stock-based employee compensation cost is reflected in net income (loss), excluding the amortization of unearned compensation expense related to the Optika transaction, as all other options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had the fair value method been applied, the compensation expense would have been different in the periods presented. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value method for the following periods:

Supplemental information:

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STELLENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Note 2. Basic and Diluted Net Income (Loss) Per Common Share

Basic net income (loss) per share is computed using the weighted average number of shares outstanding of common stock. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options and warrants (using the treasury stock method) of 1,321 and 1,663 shares for the three months ended December 31, 2004 and 2003, respectively, and 1,127 and 554 shares for the nine months ended December 31, 2004 and 2003, respectively. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.

Note 3. Mergers and Acquisitions

On May 13, 2004, the Company acquired the outstanding shares of Stellent, S.A. De C.V. for approximately $750, creating a business presence in Mexico. The Company is required to make contingent consideration payments (earn out) for two years from the date of acquisition. Earn out amounts cannot exceed $300 in the first year and $450 in the second year after the acquisition which will be recorded as goodwill. No contingent consideration accruals or payments were required through December 31, 2004.

On May 28, 2004, the Company acquired all outstanding shares of Optika Inc. for $10,000 in cash, approximately 4,200 shares of the Company’s common stock valued at $41,416, the assumption of Optika’s outstanding common stock options, and direct acquisition costs of approximately $1,839. The Company acquired Optika in order to add to, or strengthen and expand, its Universal Content Management software in the areas of document imaging, business process management and compliance capabilities. The valuation of the Company’s stock was set at an average price at the time the merger agreement was signed, which was January 11, 2004. The fair value of Optika’s option plan of $7,964 was estimated as of January 11, 2004 using the Black-Scholes option-pricing model with the following assumptions: no estimated dividends, expected volatility of 95%, risk free interest rate of 2.5% and expected option terms of 3 years for all options.

The total estimated purchase price is allocated to Optika’s net tangible and identifiable intangible assets based upon their estimated fair values as of the date of completion of the acquisition. The excess of the purchase price over the net tangible and identifiable intangible assets has been recorded as goodwill. A restructuring plan was adopted as a result of the acquisition. The acquisition restructuring charge relates to severance costs for terminated employees of $596 and facility closing costs of $263 primarily related to lease obligations. During the three months ended December 31, 2004, the Company paid out $38 and $5 in severance and facility costs, respectively. At December 31, 2004, the remaining amount to be paid related to severance and facilities were $222 and $111, respectively. Based upon the purchase price and valuation, the following represents the allocation of the aggregate purchase price to the acquired net assets of Optika:

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STELLENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The estimate of unearned compensation was based on the fair market value of the unvested options as of May 28, 2004. Compensation expense will be recognized over the remaining vesting period of the options, which ranges from one month to 48 months, as each option grant vests.

Stellent’s management valued the identifiable intangible assets acquired using an appraisal. Identifiable intangible assets consist of:

As part of the acquisition of Optika the Company also acquired net deferred tax assets of approximately $13,390. These deferred tax assets relate to net operating loss (NOL) carryforwards and the tax effects of temporary differences primarily related to deferred revenue, depreciation and amortization and other accrued expenses.

Realization of the NOL carryforwards and the deferred tax temporary differences, which were acquired, are contingent on future taxable earnings. The deferred tax assets were reviewed for expected utilization using a more likely than not approach by assessing the available positive and negative evidence surrounding their recoverability.

The Company has recorded a full valuation allowance against the net deferred tax assets, acquired or otherwise, due to the uncertainty of future taxable income, which is necessary to realize the benefits of the deferred tax assets. NOL carryforwards were approximately $34,803. These NOLs begin to expire in 2009 and are subject to annual utilization limits due to prior ownership changes.

The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portion thereof, to be utilized, and will reduce the valuation allowance appropriately at such time when it is determined that the more likely than not criteria is satisfied. Reversal of the valuation allowance will be applied first to reduce to zero any goodwill related to the acquisition, then to reduce to zero other noncurrent intangible assets related to the acquisition, and then to reduce income tax expense.

The following unaudited pro forma condensed consolidated results of operations have been prepared as if the acquisition of Optika had occurred as of April 1, 2003:

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STELLENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The unaudited pro forma condensed consolidated results of operations are not necessarily indicative of results that would have occurred had the acquisition occurred as of April 1, 2003, nor are they necessarily indicative of the results that may occur in the future.

During the second quarter of fiscal year 2005 the Company acquired a Korean entity for approximately $200. This amount was recorded as goodwill and other intangible assets.

Note 4. Contingencies

The Company is a defendant, along with certain current and former officers and directors of the Company, in a putative class action lawsuit entitled “In re Stellent Securities Litigation.” The lawsuit is a consolidation of several related lawsuits (the first of which was commenced on July 31, 2003) and is pending before the United States District Court for the District of Minnesota. The plaintiff alleges that the defendants made false and misleading statements relating to the Company and its future financial prospects in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiff seeks monetary damages against the defendants in unspecified amounts. Management believes the lawsuit is without merit and will vigorously defend the lawsuit.

Additionally, the Company is subject to various claims and litigation in the ordinary course of its business, including employment matters and intellectual property claims. Management does not believe the outcome of any current legal matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Note 5. Restructuring Charges

In the quarter ended September 30, 2002, in connection with management’s plan to reduce costs and improve operating efficiencies, the Company recorded a restructuring charge of approximately $800. The restructuring charge was comprised primarily of severance pay and benefits related to the involuntary termination of 27 employees of approximately $400 with the remaining $400 related to the closing of facilities and other exit costs. At December 31, 2004, $332 remained to be paid in connection with these charges.

In the quarter ended June 30, 2003, in connection with management’s plan to reduce costs and improve operating efficiencies, the Company recorded a restructuring charge of approximately $800. This restructuring charge was comprised primarily of $400 in severance pay and benefits related to the involuntary termination of employees, with the remaining $400, related to the closing of facilities and other exit costs. This plan included the closing of an office facility as part of its acquisition of certain assets of Active IQ in March 2003. The facility was closed during the quarter ended June 30, 2003 and approximately $50 was recorded to facility closing costs and future lease payments. The remaining $350 of facility closing costs related to a change in the estimated costs of closing a research and development facility in Massachusetts, which was closed in the quarter ended September 30, 2002. At December 31, 2004, approximately $6 remained to be paid in connection with these charges.

In the quarter ended March 31, 2003, in connection with management’s plans to reduce costs and improve operating efficiencies, the Company recorded a restructuring charge of approximately $350. The restructuring charge was comprised primarily of severance pay and benefits related to the involuntary termination of employees totaling approximately $300 with the remaining $50 related to the closure of facilities and other exit costs. At December 31, 2004, no amounts remained to be paid in connection with these charges.

In the quarter ended June 30, 2004, with the integration of Optika and in connection with management’s plans to reduce costs and improve operating efficiencies, the Company adopted a restructuring plan. The restructuring plan includes the termination of approximately 30 employees of Stellent, Inc. and the shutdown of the Company’s New York facility. Restructuring charges during the first quarter of fiscal year 2005 related to this plan were approximately $1,900 for employee termination benefits and approximately $600 for excess facilities. At December 31, 2004, approximately $808 remained to be paid in connection with these charges.

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STELLENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

The table below summarizes the Company’s restructuring plans:

Restructuring Plans

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form 10-Q for the period ended December 31, 2004 contains certain forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such forward-looking statements are based on the beliefs of our management as well as on assumptions made by, and information currently available to, us at the time such statements were made. When used in this Form 10-Q, the words anticipate, believe, estimate, expect, intend and similar expressions, as they relate us, are intended to identify such forward-looking statements. Although we believe these statements are reasonable, readers of this Form 10-Q should be aware that actual results could differ materially from those projected by such forward-looking statements as a result of the risk factors listed below. Readers of this Form 10-Q should consider carefully the factors listed below, as well as the other information and data contained in this Form 10-Q. We caution the reader, however, that such list of may not be exhaustive and that those or other factors, many of which are outside of our control, could have a material adverse effect on us and our results of operations. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth hereunder. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

OVERVIEW

In 1997, we launched one of the first software product suites on the market specifically developed and created for managing business documents using the Web. From the beginning, we focused on developing software that could be quickly implemented, easily used and easily scaled from line-of-business to enterprise-wide applications. While early on we developed document management and Web content management applications, in recent years we have also expanded our product set to address market needs for: (a) Web-based management of digital assets, which are digital materials such as photos and graphics, and business records; (b) imaging; (c) business process management; and (d) records management.

The business information we manage for our customers is in an electronic form and is generally considered unstructured data, or data that is not easily managed by relational databases. In fact, the vast majority of information in any business is considered to be unstructured information, and typically resides in areas such as personal computers, conventional file servers and paper documents.

Our Universal Content Management software addresses primarily four areas of the enterprise content management market, Web content management, document management, digital asset management and imaging, which are supported by collaboration, records management and business process management services. Currently, customers use our Universal Content Management software to organize and maintain the electronic business information created by internal and external sources using a broad range of common software applications, such as Microsoft Office, AutoDesk AutoCAD and Sun StarOffice. This electronic business information includes items such as Web pages, digital assets, scanned images, Microsoft Office documents, scanned invoices, spreadsheets, email and forms. Our software also assists in the conversion of paper documents to electronic format. Using our technology, customers can then publish that information to public Web sites and/or secure Web sites available only to select audiences. Common applications powered by our technology include corporate intranets, accounts payable/receivable processes, claims processing, public Web sites, call centers/self-help Web sites, compliance processes and dealer extranets as well as enterprise-wide content management initiatives.

Additionally, software vendors and manufacturers of electronic devices, such as cell phones and PDAs, embed our Content Component software within their own technology to enable users to access and view electronic information from those applications or devices. We market our products primarily to customers in the financial services, healthcare (including insurance), government, and manufacturing industries located in the United States, Canada, Europe, Latin America and Asia.

ACQUISITION OF OPTIKA

On May 28, 2004, we acquired all outstanding shares of Optika Inc. for $10 million in cash, approximately 4.2 million shares of Stellent common stock and the assumption by Stellent of Optika’s outstanding common stock options. We acquired Optika in order to add to or strengthen and expand our Universal Content Management software in the areas of document imaging, business process management, ERP implementations and compliance capabilities. The results of Optika are incorporated in our consolidated financials since the acquisition date of May 28, 2004. We approved a restructuring plan related to the acquisition in June 2004, which included the termination of approximately 30 employees and a related restructuring charge of approximately $1.9 million and the shutdown of our New York sales facility and a related restructuring charge of approximately $0.6 million. We anticipate the effects of this restructuring will result in a decrease in combined expenses of approximately $3.5 million in fiscal year 2005, which includes personnel-related cost savings of approximately $2.8 million and facility and other duplicate administrative cost savings of approximately $0.7 million. We have realized many of these cost synergies through December 31, 2004.

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RESTRUCTURING CHARGE

In connection with management’s plans to reduce costs and improve operating efficiencies, the Company approved a restructuring plan in January 2005. The restructuring plan includes the termination of approximately 25 employees and the consolidation of certain facilities. We anticipate that our fourth quarter fiscal year 2005 results will include charges related to our expense reduction actions of approximately $0.8 million, with $0.7 million being associated with personnel severance and $0.1 million associated with the consolidation of certain facilities. We anticipate costs savings over the next twelve months associated with this action to be approximately $1.7 million.

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RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED DECEMBER 31, 2004 AND 2003

REVENUES

(in thousands, except for percentages)

Revenues totaled $27.7 million and $78.3 million for the third quarter and first nine months of fiscal year 2005, respectively, which resulted in increases of $8.5 million and $23.2 million, from $19.2 million and $55.1 million, for the third quarter and first nine months of fiscal 2004, respectively. The increase in revenue for the third quarter of fiscal year 2005 when compared to the same period in the prior year was due to our acquisition of Optika on May 28, 2004, along with an overall increase in our Universal Content Management license revenue. The increase in revenue for the first nine months of fiscal year 2005 when compared to the same period in the prior year was again due to our acquisition of Optika, two seven-figure license transactions recognized in the second quarter of fiscal year 2005 related to Content Component Software and an overall increase in our Universal Content Management license revenue. Additionally, we had an increase in revenues for services and post contract support due to a larger base of installed products and increased use by our customers of our Consulting Services personnel to implement our software. As we license our products, whether on a perpetual basis for our Universal Content Management software or on a term basis for our Content Components software, our installed base of products increases. Since the rate of annual renewals of post contract customer support services for our Universal Content Management and Content Component software has remained high, our post contract customer support revenues have grown as our installed base of products has grown. Also, Universal Content Management revenues related to consulting services work can increase as a result of a larger installed base of products. We expect our installed base of products to continue to increase and our total services revenue to grow.

Product Licenses

Revenues generated from product licenses totaled $13.7 million and $40.1 million for the third quarter and first nine months of fiscal 2005, respectively, which resulted in increases of $3.5 million and $9.9 million, from $10.2 million and $30.2 million, respectively, for the third quarter and first nine months of fiscal 2004, respectively. The increase in product license revenues for the third quarter of fiscal 2005 when compared to the third quarter of fiscal 2004 was attributable to revenues generated from our acquisition of Optika and an overall increase in our Universal Content Management software license revenue, both domestic and internationally. The increase in product license revenue for the first nine months of fiscal year 2005, when compared to the prior year period is due to the two seven-figure license transactions recognized in the second quarter of fiscal 2005 related to our Content Component software, revenues from our Optika acquisition, and an overall increase in sales of our Universal Content Management software. The market for our products at any particular time is highly dependent on information technology spending and we cannot be certain whether, and if so, when, spending on information technology will fluctuate. We anticipate that the percentage of license revenue to total revenue will remain approximately 50 percent in fiscal year 2005, but that license revenue in absolute dollars will increase.

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Services and Post Contract Support

Revenues for services, consisting of consulting services, training and post-contract customer support, totaled $14.0 million and $38.2 million for the third quarter and first nine months of fiscal year 2005, respectively, which represents increases of $5.0 million and $13.3 million, from $9.0 million and $24.9 million, for the third quarter and first nine months of fiscal year 2004, respectively. The increase in revenues for services was due to the Optika acquisition and an increase in consulting services revenue as our customers’ software implementations have become larger and more numerous. Our post-contract customer support revenue has also increased due to the acquisition of Optika and supporting a larger customer installed base of Universal Content Management and Content Component products. We anticipate that the percentage of service revenue to total revenue will remain approximately 50 percent in fiscal year 2005, but that service revenue in absolute dollars will increase.

Generally, customers prefer to have us perform consulting services rather than using their internal information technology staff, a trend we believe will continue. Our consulting service revenue relates almost exclusively to our Universal Content Management software as our Content Components software is embedded in another company’s software and that company would typically perform the consulting services. As we license our products, whether on a perpetual basis for our Universal Content Management software or on a term basis for our Content Components software, our installed base of products increases. Since the rate of annual renewals of post-contract customer support services on our Universal Content Management and Content Component software has remained high, our post contract customer support revenues grow because we have a larger installed base of products. Also, Universal Content Management revenues related to consulting services work can increase as a result of a larger installed base of products. Because we expect the trend toward companies increasingly using the Web for communicating and publishing business information, and the trend toward electronic devices being used increasingly to view electronic information, to continue, we expect our installed base of products to continue to grow and our services revenues attributable to post-contract customer support to continue to increase.

If our license revenues decline in the future, our support and services revenues may also decline. Specifically, a decline in license revenues may result in fewer consulting services engagements. Additionally, since post-contract customer support contracts are generally sold with each license transaction, a decline in license revenues may also result in a decline in customer support revenues. However, since post-contract customer support revenues are recognized over the duration of the support contract, the impact would lag behind a decline in license revenues.

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COST OF REVENUES AND GROSS PROFIT

Cost of Revenues — General

(in thousands, except for percentages)

Total cost of revenues increased by $2.5 million and $6.9 million, to $8.5 million and $23.9 million for the third quarter and first nine months of fiscal year 2005, respectively, from $6.0 million and $17.0 million, for the third quarter and first nine months of fiscal year 2004, respectively. Total cost of revenues as a percentage of total revenues were 31% and 30% for the third quarter and first nine months of fiscal year 2005, respectively, compared to 31% for the third quarter and first nine months of fiscal year 2004, respectively. Overall gross profit increased by $5.9 million and $16.3 million, or 45% and 43%, respectively, to $19.2 million and $54.4 million for the third quarter and first nine months of fiscal year 2005, respectively, from $13.3 million and $38.1 million for the third quarter and first nine months of fiscal year 2004, respectively. Total gross profit as a percentage of total revenues were 69% and 70% for the third quarter and first nine months of fiscal year 2005, respectively, compared to 69% for the three and nine months of fiscal year 2004, respectively. The increase in gross profit dollars was attributable to the increase in product license revenues and services described above.

18

Cost of Revenues—Product Licenses

(in thousands, except for percentages)

Cost of product licenses includes costs of licensing third-party software embedded in or sold in conjunction with our software products as well as expenses incurred to manufacture, package and distribute our software products and related documentation.

Cost of revenues for product licenses. Cost of revenues for product licenses totaled $1.9 million and $5.3 million for the third quarter and first nine months of fiscal year 2005, which represents increases of $0.3 million and $0.7 million, or 37% and 36%, from $1.5 million and $4.6 million for the third quarter and first nine months of fiscal year 2004, respectively. Gross profit as a percentage of revenues for product licenses were 86% and 87% for the third quarter and first nine months of fiscal year 2005, up from 85% for the third quarter and first nine months of fiscal year 2004. The overall gross margin percentage increase in product licenses for the third quarter of fiscal 2005 when compared to the same period in the prior year can be attributed to our acquisition of Optika, whose products yield a higher gross margin than our traditional Universal Content Management software sales. Overall gross margin percentage increase in product license for the first nine months of fiscal year 2005 when compared to the first nine months of fiscal year 2004, can be attributed to higher levels of our Content Component software revenue recognized in the second quarter of fiscal year 2005, which carry a lower cost of revenue than our Universal Content Management software revenue.

The overall increase in cost of revenues dollars for product licenses was attributable to the acquisition of Optika on May 28, 2004, changes in product mix, amortization of capitalized software from acquisitions discussed below and was partially offset by a reduction in certain fixed costs related to royalties for third-party technology incorporated into our products, which became fully amortized in the previous fiscal year. As new versions of our software continue to be released, we may elect to license or purchase more third party software to be included in our products in order for us to provide certain functionality that we believe is necessary to be competitive.

Amortization of Capitalized Software from Acquisitions. Cost of product license revenues related to amortization of capitalized software from acquisitions for the third quarter and first nine months of fiscal year 2005 were $0.6 million and $1.7 million, respectively, compared to $0.4 million and $1.2 million for the third quarter and first nine months of fiscal 2004, respectively. The cost of revenues for amortization of capitalized software from acquisitions was attributable to the amortization of capitalized software obtained in the acquisition of certain assets of RESoft, Kinecta, Active IQ, Ancept and Optika, in July 2001, April 2002, March 2003, August 2003 and May 2004, respectively. The increase in cost of revenues related to amortization of capitalized software from acquisitions in the periods presented was attributable to the acquisition of Optika on May 28, 2004, which was partially offset by the completion in June of 2003 and June of 2004 of amortization of capitalized software related to our acquisition of Content Components Division (CCD)  and RESoft, respectively. We acquired technology from the companies listed above for incorporation of technology into our Universal Content Management products in order to maintain competitive functionality. We expect to continue to evaluate selective potential acquisitions. To the extent we consummate additional acquisitions, and depending on the structure of such acquisitions, the assets acquired and the consideration paid, our costs of revenues related to amortization of capitalized software from acquisitions may increase.

19

Cost of Revenues — Services and Post Contract Support

(in thousands, except for percentages)

Cost of services revenues, consisting of personnel and unbilled travel expenses for consulting services, training and post-contract customer support, totaled $6.6 million and $18.5 million for the third quarter and first nine months of fiscal year 2005, respectively, which represents increases of $2.2 million and $6.1 million, from $4.4 million and $12.4 million for the third quarter and first nine months of fiscal year 2004, respectively. Gross profit as a percentage of revenues for services were 53% and 51% for the third quarter and first nine months of fiscal year 2005, respectively, compared to 51% and 50% for the third quarter and first nine months of fiscal year 2004, respectively. The increase in the gross profit in dollars and as a percentage of services revenues was due to the revenue generated from the acquisition of Optika’s installed base since May 28, 2004, the increase in revenues from post-contract customer support from a larger installed base of Universal Content Management products, with little additional support staff needed, and a higher installed base of Content Component software, which requires very little support staff as support is generally provided by the company that embeds our software.

In general, we have had a fairly consistent rate of annual post-contract support renewals for both our Universal Content Management and Content Component software, partially offset by lower utilization of consulting services personnel related to our Universal Content Management software. Our consulting services and training costs as a percentage of revenue increased during the third quarter and first nine months of fiscal 2005 when compared to the same periods in the prior year as a result of subcontracting a greater level of outside consultants for performing certain professional services for us. However, we anticipate that our cost of consulting and training services as a percentage of total consulting and training revenue will decrease during the remainder of fiscal year 2005 as we believe that we can optimize the combined departments and increase the services utilization. During the recent economic slowdown, we saw less competition for skilled software post-contract customer support personnel than we experienced during stronger economic periods. If economic conditions improve, competition for skilled software post-contract customer support personnel may increase and our services costs of revenues may increase and may offset certain of the anticipated cost savings related to the Optika acquisition.

Since our support and service revenues have lower gross margins than our license revenues, our overall gross margins will typically decline if our support and service revenues increase as a percent of total revenues. Our cost of support and service revenues as a percentage of support and service revenues may vary from period to period, depending in part on whether the services are performed by our in-house staff, subcontractors or third-party system integrators. If our customers perform more services activities in-house or increase the use of third-party systems integrators, our support and service revenues and cost of support and service revenues realized on a per-customer basis may decline.

20

OPERATING EXPENSES

Sales and Marketing

(in thousands, except for percentages)

Sales and marketing expenses consist of salaries, commissions, benefits and related costs for sales and marketing personnel, travel and marketing programs, including customer conferences, promotional materials, trade shows, facilities costs and advertising. Sales and marketing expenses were $10.7 million and $31.5 million for the third quarter and first nine months of fiscal year 2005, respectively, increases of $0.4 million and $1.6 million, respectively, from $10.4 million and $29.9 million for the third quarter and first nine months of fiscal year 2004, respectively. As a percentage of total revenues, sales and marketing expenses were 39% and 40% for the third quarter and first nine months of fiscal year 2005, respectively, compared to 54% for the third quarter and first nine months of fiscal year 2004. The increase in dollars is a direct result of the Optika acquisition on May 28, 2004 offset by cost synergies and the restructuring actions undertaken by us. The overall decrease in sales and marketing as a percentage of revenue is primarily due to achieving improved productivity from our sales personnel, cost synergies from the Optika acquisition and the restructuring actions undertaken by us at the end of the first quarter in fiscal year 2005. We believe that our sales and marketing expenses as a percentage of total revenue will continue in this percentage of revenue range during the remainder of fiscal year 2005. We should also start to see the costs savings from the restructuring actions taken in January of 2005. During fiscal year 2004, we saw less competition for general software sales and marketing personnel than we experienced during stronger economic periods. However, competition has intensified for sales personnel who have been successful in the current market conditions. If economic conditions improve, competition for general software sales and marketing personnel may increase and our sales and marketing expenses may increase and may offset anticipated cost savings.

General and Administrative

(in thousands, except for percentages)

General and administrative expenses consist of salaries and related costs for general corporate functions, including finance, accounting, human resources, legal and information technology, as well as insurance, professional fees, facilities costs and bad debt expense. General and administrative expenses totaled $3.6 million and $9.2 million during the third quarter and first nine months of fiscal year 2005, respectively, which represents increases of $1.6 million and $2.2 million, from $2.0 million and $6.9 million for the third quarter and first nine months of fiscal year 2004, respectively. The increase in general and administrative expenses was due to increased legal, accounting and other professional fees associated with additional regulations enacted by the Federal government and defense of a class action lawsuit. We believe most cost savings associated with consolidating the accounting, finance and human resource departments of Optika with our corporate headquarters, along with eliminating duplicate expenses such as certain insurance expenses and professional service expense associated with the Optika acquisition will be offset by higher levels of professional fees and consulting costs to comply with regulations that Congress, the Securities and Exchange Commission and the national stock exchanges have enacted or have proposed to enact for publicly traded companies and ongoing defense of a class action lawsuit.

21

Research and Development

(in thousands, except for percentages)

Research and development expenses consist of salaries and benefits, third-party contractors, facilities and related overhead costs associated with our product development and quality assurance activities. Research and development costs totaled $4.6 million and $13.3 million for the third quarter and first nine months of fiscal year 2005, respectively, which represents increases of $1.3 million and $3.4 million, from $3.3 million and $9.8 million for the third quarter and first nine months of fiscal year 2004, respectively. During the third quarter of fiscal year 2005 our research and development efforts were focused on enhancing our many products, while also increasing customer value through the interoperability of those products. These products include Universal Content Management, Imaging and Business Process Management and our Content Integration Suite of products, along with other outside product lines. During the third quarter of fiscal year 2005 we announced the release of version 7.5 of our Universal Content Management software which furthers our primary value proposition of generating rapid customer success through fast implementations and quick, broad user adoption. The increase in research and development expense for the third quarter and first nine months of fiscal year 2005 when compared to the same periods in the prior year was due to our acquisition of Optika on May 28, 2004 and our continued effort to support the many enhancement initiatives currently underway for those products mentioned above. We believe that our research and development as a percentage of total revenue should remain approximately 17% through fiscal year 2005.

Acquisition-Related Sales, Marketing and Other Costs

(in thousands, except for percentages)

During the first quarter of fiscal year 2005 we recognized acquisition-related sales, marketing and other costs totaling $0.9 million related to the Optika acquisition. Approximately $0.6 million of these costs related to advertising done in various periodicals announcing the completion of the Optika acquisition. We have generally not done this type of advertising in the past. From time to time we may seek to acquire businesses, products or technologies that are complementary to our business. Depending on the size, nature and structure of any future business acquisitions, our acquisition-related sales and marketing and other costs may increase substantially.

22

Amortization of Acquired Intangible Assets and Unearned Compensation

(in thousands, except for percentages)

Amortization of intangible assets acquired related to our acquisitions of CCD in July 2000, RESoft in July 2001, Kinecta in April 2002 and Optika in May 2004. A portion of the purchase price of certain assets of CCD was allocated to core technology, customer base, software, trademarks and other intangibles, and was being amortized over the assets estimated useful lives of three to four years. A portion of the purchase price of certain assets of each of RESoft and Kinecta was allocated to certain intangible assets, such as customer base and trademarks, and is also being amortized over their useful lives of three years. A portion of the purchase price of certain assets of Optika was allocated to contractual customer relationships and is being amortized over 10 years. Amortization of acquired intangible assets and unearned compensation totaled $0.2 million and $0.5 million during the third quarter and first nine months of fiscal year 2005, respectively, compared to $0.1 million and $1.9 million for the third quarter and first nine months of fiscal year 2004. The decrease when comparing the first nine months of fiscal year 2005 to the same period of fiscal year 2004 is attributable to the completion in June 2003 of amortization of substantially all of the intangibles related to our acquisition of CCD.

Restructuring Charges

(in thousands, except for percentages)