**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended March 31, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Commissionfile number 0-19817**

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**Stellent, Inc.**

(Exact name of registrantas specified in its charter)
| **Minnesota**                     |   | **41-1652566**         |
|-----------------------------------|--------|------------------------|
| *(State or other jurisdiction of* |   | *(I.R.S.  Employer*    |
| *incorporation or organization)*  |   | *Identification  No.)* |
|                              |   |                   |

 

**7500 Flying Cloud Drive,Suite 500**

**Eden Prairie, MN 55344**

(Address of principalexecutive offices and zip code) 

**(952) 903-2000**

(Registrant’s telephone number, includingarea code)

**Securities registeredpursuant to Section 12(b) of the Act: **

**None**

**Securities registeredpursuant to Section 12(g) of the Act: Preferred Share**

**PurchaseRights; Common Stock, par value $.01 per share**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. Yes o No x

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x  No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct (Check one)

Large Accelerated Filer o      AcceleratedFiler x      Non-Accelerated Filer o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o  Nox

The aggregate market valueof the registrant’s common stock held by non-affiliates of the registrant as ofSeptember 30, 2005 was approximately $221,109,000 based on the closing saleprice for the registrant’s common stock on that date as reported by The NASDAQStock Market. For purposes of determining such aggregate market value, allofficers and directors of the registrant are considered to be affiliates of theregistrant, as well as shareholders holding 10% or more of the outstandingcommon stock as reflected on Schedules 13D or 13G filed with the registrant.This number is provided only for the purpose of this report on Form 10-K anddoes not represent an admission by either the registrant or any such person asto the status of such person.

As of June 2, 2006, the registrant had approximately29,555,000 shares of common stock issued and outstanding.

 

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**STELLENT, INC.**

**FORM 10-KFor the fiscal year ended March 31, 2006**

**TABLEOF CONTENTS**

|                   | ** ** | **Description**                                                                                                     | ** ** | **Page** | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART I**   |       |                                                                                                                |       |     |       |   |   |
| Item  1.          |       | Business                                                                                                            |       |     | 1          |   |   |
| Item  1A          |       | Risk Factors                                                                                                        |       |     | 8          |   |   |
| Item 1B           |       | Unresolved Staff  Comments                                                                                          |       |     | 13         |   |   |
| Item  2.          |       | Properties                                                                                                          |       |     | 13         |   |   |
| Item 3.           |       | Legal Proceedings                                                                                                   |       |     | 13         |   |   |
| Item 4.           |       | Submission of  Matters to a Vote of Security Holders                                                                |       |     | 14         |   |   |
| Item 4A.          |       | Executive  Officers of the Registrant                                                                               |       |     | 14         |   |   |
| **PART II**  |       |                                                                                                                |       |     |       |   |   |
| Item 5.           |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |     | 15         |   |   |
| Item 6.           |       | Selected Financial  Data                                                                                            |       |     | 16         |   |   |
| Item 7.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       |     | 17         |   |   |
| Item 7A.          |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |     | 38         |   |   |
| Item 8.           |       | Financial  Statements and Supplementary Data                                                                        |       |     | 40         |   |   |
| Item 9.           |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |       |     | 41         |   |   |
| Item 9A.          |       | Controls and  Procedures                                                                                            |       |     | 41         |   |   |
| Item 9B.          |       | Other Information                                                                                                   |       |     | 42         |   |   |
| **PART III** |       |                                                                                                                |       |     |       |   |   |
| Item 10.          |       | Directors and  Executive Officers of the Registrant                                                                 |       |     | 42         |   |   |
| Item 11.          |       | Executive  Compensation                                                                                             |       |     | 42         |   |   |
| Item 12.          |       | Security  Ownership of Certain Beneficial Owners and Management and related stockholder  matters                    |       |     | 42         |   |   |
| Item 13.          |       | Certain  Relationships and Related Transactions                                                                     |       |     | 48         |   |   |
| Item 14.          |       | Principal  Accountant Fees and Services                                                                             |       |     | 48         |   |   |
| **PART IV**  |       |                                                                                                                |       |     |       |   |   |
| Item 15.          |       | Exhibits and  Financial Statement Schedules                                                                         |       |     | 48         |   |   |
| Signatures        |       |                                                                                                                | 53         |     |       |
| Certifications    |       |                                                                                                                |       |     |       |

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the registrant’s definitive ProxyStatement for the annual meeting of Shareholders to be held on August 1,2006 are incorporated by reference in Part III of this Annual Report on Form 10-K.(The Compensation Committee Report and the stock performance graph contained inthe registrant’s Proxy Statement are expressly not incorporated by reference inthis Annual Report on Form 10-K). The Proxy Statement will be filedwithin 120 days after the end of the fiscal year ended March 31, 2006.

**Item 1.   *Business***

**Forward-Looking Statements**

The information presented in this Annual Report on Form 10-Kunder the headings “Item 1. Business”, “Item 2. Properties”, “Item 3. LegalProceedings”, “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operation” and “Item 7A. Quantitative and QualitativeDisclosures About Market Risk” contain forward-looking statements within themeaning of the safe harbor provisions of Section 27A of the Securities Actof 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. Such forward-looking statements are based on the beliefs ofour company’s management as well as on assumptions made by, and informationcurrently available to, us at the time such statements were made. When used inthe Annual Report on Form 10-K, the words “approximate”, “anticipate,”“believe,” “estimate,” “expect,” “intend,” and similar expressions, as theyrelate to us, are intended to identify such forward-looking statements.Although we believe these statements are reasonable, such statements aresubject to risks and uncertainties, including those discussed under “Item 1A. RiskFactors” of this Annual Report on Form 10-K, that could cause actualresults to differ materially from those projected. Because actual results maydiffer, readers are cautioned not to place undue reliance on theseforward-looking statements.

**OVERVIEW**

In1997, we launched one of the first software product suites on the market thatwas fully developed and created expressly for Web-based content and documentmanagement. At the time, content management—today considered a criticalcomponent of an organization’s communication and information technology (IT)infrastructure—was an emerging technology used to help companies easily andquickly share information with employees, partners, customers and prospectsusing the World Wide Web.

Currently,our suite of software solutions help customers worldwide solve businessproblems related to efficiently creating, managing, sharing and archivingcritical information.

We help our customers optimize the use of our softwareproducts by providing them with value-based consulting services related totheir content management needs. We also provide our customers with a range ofproduct support programs that allow them to select maintenance and supportservices that are appropriate for their business.

**PRODUCTS AND SERVICES**

Stellent’s products and services consist of content management,filtering and conversion software products; electronic content managementconsulting services; and post-contract software maintenance and support.

**Content Management,Filtering and Conversion Software**

Universal ContentManagement is Stellent’s primary software product, consisting of a unifiedarchitecture and product which power multiple applications. These applicationshelp organizations manage their business information—such as records, legaldocuments such as contracts, business documents, presentations, Web content andgraphics—via the Web, from the time it’s created to the time it’s archived 

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or disposed of, so employees, customers, partners andinvestors can more easily find, access and re-use that information. WithStellent software, customers can increase employee productivity, reduceexpenses and improve company-wide collaboration and communication.

OurUniversal Content Management software addresses the key elements of contentmanagement—document management and imaging, Web content management, digitalasset management, records and retention management, and collaboration—from aunified architecture, enabling customers to fully leverage their contentmanagement investment across the organization. We believe our tightlyintegrated products allow companies to implement content management-basedapplications using fewer products and consulting services than other contentmanagement offerings, which can lead to a lower total cost of ownership.

Bothtechnical and non-technical users find using the Stellent system easy. Userscan submit, or contribute, business content—such as a word processing document,spreadsheet, CAD file or image—to the Stellent system, and the Stellenttechnology automatically converts the file to a format that can be viewed on aWeb site without needing the software application that created the file. Thisautomatic conversion capability enables even non-technical users to easilypublish information to a site, such as an employee portal or partner extranet,so the information can be shared with other users.

Our Universal Content Management software is comprisedprimarily of Stellent Content Server—a data repository that provides a core setof content services to help ensure users can access only the most currentinformation as appropriate to their role or permissions—the following five keycontent management application modules:

·        *Web Content Management:*   Enablesorganizations to create web content, and manage and publish Web sites.

·        *Document Management and Imaging:*   ProvidesWeb-based management, collaboration and access to business information createdin common office software applications or created as paper documents which arethen converted into electronic images.

·        *Digital Asset Management:*   Enablesdigital assets—such as photos, graphics, audio clips and video clips—to besearched, accessed, viewed, managed, distributed and re-purposed via the Web.

·        *Records and Retention Management:*   Providesa Web-based method for managing business records and creating rules—such asexpiration, archiving and deletion—regarding how long content needs to beretained and what actions to take regarding the content.

·        *Collaboration Management:*   Enablesthe creation of a project or team space for sharing documents, schedules anddiscussions among a team via the Web.

*Stellent also offers end-user andOEM customers the content filtering and conversion components of its UniversalContent Management software. These technologies make information created inmore than 390 common office software applications more accessible to thebusiness users who need it. Since business information is often difficult toaccess without the native software application in which it was created,Stellent’s technologies convert files into any one of 11 common output formats,empowering users to locate and view information without needing the softwareapplication that created the file. Other technology companies embed thesetechnologies in their own solutions to enable them to extract text and metadataand provide a high-fidelity view of file contents.*

**Consulting Services**

*Ourconsulting services group is focused on delivering value-based contentmanagement solutions to our customers. Our consulting services professionalsemploy a combination of business analysis, enterprise architecture, applicationanalysis, installation, configuration, development and integration skills with*

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*experience-based project methodologyand management knowledge to facilitate the rollout of content managementsolutions at all levels of a customer’s organization. Available on a worldwidebasis, we act as a business partner to our customers by providing a broad spectrumof services including:*

*·**      *Technicalarchitecture analysis and needs assessment, such as software, security andmetadata analysis

*·**      *Solutionsdevelopment and deployment strategies 

*·**      *Softwareinstallation and configuration 

*·**      *Customapplication development 

*·**      *Thirdparty product integration 

*·**      *Projectmanagement 

*·**      *Knowledgetransfer 

*These services can be offered inconjunction with our software products to new customers, or on a stand alonebasis to our existing customers to assist them in driving additional contentmanagement solutions across their enterprises. These services are sold inconjunction with our software products and are offered for fees, the amount ofwhich depends on the nature and scope of the project.*

**Product Support**

*Weoffer several product support programs that allow customers to select theoffering(s) that best satisfies their maintenance and support requirements.From the initial installation and configuration of Stellent to the point ofapplication deployment, our product support resources offer customer servicethrough quick response time, trouble-shooting and the delivery of complete andcomprehensive technical solutions. Customers may access product supportresources on a worldwide basis for assistance during the customer’s normalbusiness hours. Additional support offerings are available which supplement thecustomer’s product support requirements.*

*Product support offerings arerenewable on an annual basis and are typically priced as a percentage of theproduct license fees or percentage of product list price.*

**MARKETS AND CUSTOMERS**

*Asof March 31, 2006, approximately 4,153 end-user content management, viewing andconversion customers and 549 OEM customers had selected Stellent solutions topower their content-centric business applications. No single customer accountedfor ten percent or more of our total revenues in fiscal year 2006.*

*Customersprimarily use our products as follows:*

·        *Enterprise Content Management:*   Enterprisecontent management (ECM) is an infrastructure for all content-basedapplications—such as public-facing Web sites, corporate intranets, dealer andpartner extranets, human resource portals, customer service Web sites,marketing brand management, and accounts payable imaging—within an enterprise,allowing organizations to strategically select, deploy and maintain aneffective, efficient knowledge platform within their organizations. Oftentimes, the ability to provide an ECM infrastructure is a requirement inline-of-business transactions as companies look ahead to other upcoming contentmanagement needs.

•     *Multi-SiteManagement*:   Multi-site management refers to a contentmanagement infrastructure for creating and managing multiple, distributed Webproperties such as public Web sites, intranets, extranets and portals.Stellent’s second-generation, multi-site management solution offers a rapidlydeployable product, allowing companies to easily launch and maintain multipleinternal or external sites while preserving appropriate corporate branding.

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·        *Governance, Risk and Compliance:*   Theincreasingly expanded visibility of various compliance requirements—mostnotably Sarbanes-Oxley—continues to be a significant factor in technologyinfrastructure and application purchasing decisions. Compliance solutionspowered by content management technologies—both as platforms tosupport multiple compliance initiatives across organizations andspecific solutions to individual regulatory challenges—assist organizations intheir compliance processes by automating the capture, management, retentionand disposition of critical documentation for processes, objectivesand risks, as well as the long-term management of the physical andelectronic documentary evidence of regulatory compliance.

·        *Enterprise Records and Retention Management:*   Thetremendous amount of content companies generate is stored in a variety ofrepositories and applications across the organization. Much of the content isredundant, outdated and counterproductive, and some of it poses a complianceand legal risk for the companies. In order to alleviate this risk andefficiently manage the volumes of content, organizations need to retain only asmuch content as is necessary;consistently and universally applypolicies on how long content should be kept; apply legal holds promptly and universally; and enable the right people with the technologyneeded to properly design the policies. Stellent’s enterprise recordsand retention management solution offers a single platform that applies recordspolicies, retention policies, legal discovery and content holds to all relevantcontent across an organization—regardless of where it is stored and withoutrequiring it to be moved—in a consistent, legally defensible way.

·       *Content Filtering and Conversion*:   Stellent’s contentfiltering and conversion technologies support multiple operating systems andinternational environments. These technologies enable access to content inapplications for diverse markets such as content management, search andretrieval, security and policy management, mobile and wireless, messaging,collaboration and publishing.

**SALES AND MARKETING**

Wemarket and sell our products using a combination of direct and indirectdistribution channels primarily in North America and Europe. Our primarydistribution channel is our direct sales force, which targets mid- andlarge-size organizations. Our sales personnel work with target accounts toaddress unsolved business needs which can be satisfied by the application of abusiness process built around our Stellent Universal Content Managementsoftware. The analysis process will typically include a business process andtechnical systems evaluation performed by our pre-sales personnel, followed bydemonstrations of our products’ capabilities and direct negotiations with oursales staff. As part of our selling model, Stellent has chosen to focus onspecific vertical markets where we have developed subject matter expertise inthese markets to solve common business problems. In addition, we have usedinternal and external telemarketing operations that are responsible forcustomer prospecting, lead generation and follow-up. These activities identifyand develop leads for further sales efforts by our direct sales force. As of March 31,2006, we had a worldwide total of 122 direct and indirect sales and salessupport personnel and 27 marketing personnel, which includes businessdevelopment and alliances.

Wealso use indirect sales channels to increase the distribution and visibility ofour products through strategic alliances with resellers, OEMs, key systemsintegrators and other channel partners in both domestic and internationalmarkets.

Wecurrently have operations or collaborations in Australia, Germany, Japan,Korea, the Netherlands, the United Kingdom and the United States. Our abilityto achieve significant revenue growth in the future will depend in large parton how successfully we recruit, train and retain sufficient direct and indirectsales and support personnel, and how well we continue to establish and maintainrelationships with our strategic partners, OEMs, key systems integrators andother channel partners.

We use a variety ofmarketing programs to build market awareness of our brand name and of ourproducts, as well as to attract potential customers to our products. A broadmix of programs is used to 

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accomplish these goals,including market research, product and strategy updates with industry analysts,public relations activities, direct mail and relationship marketing programs,seminars, trade shows, speaking engagements, Web site marketing and jointmarketing programs. Our marketing organization produces marketing materials insupport of sales to prospective customers that include brochures, data sheets,white papers, presentations and demonstrations.

**CONTRACTS**

The types of license contracts we enter into with ourcustomers are typically perpetual arrangements for our end-user customers orare term-based arrangements for our OEM customers. Virtually all of ourcustomers initially purchase maintenance contracts, which entitle them tounspecified upgrades and product support. The primary reward or benefits to usof a perpetual licensing arrangement is the annual renewal of post-contractsupport. The primary benefit of a term-based license is the ability to predictfuture license revenue streams from that customer. The primary risk associatedwith the perpetual licensing arrangement is the non-renewal of post-contractsupport. The primary risk of a term-based license arrangement is the potentialnon-renewal of that arrangement. Many of our direct customers enter intoservices arrangements, which may include needs assessment, softwareintegration, security analysis, application development and training.Application development generally is not critical to the functionality of thedelivered software.

**PRODUCT TRAINING**

We provide a full range of educational courses on ourUniversal Content Management software. The comprehensive web-based modules andinstructor-led classes enable business end-users, administrators, sitedesigners, and developers to use our software more productively. Standardclasses are scheduled at our designated worldwide training facilities, and bothstandard and customized classes are frequently taught at customer sites.

**RESEARCH AND DEVELOPMENT**

Wehave made substantial investments in research and development through bothinternal development and technology acquisitions. Our research and developmentexpenditures for fiscal 2004, 2005 and 2006, were approximately $13.3 million,$18.0 million and $20.2 million, respectively. Research and developmentexpenses represented 18%, 17%, and 16%, respectively, of total revenue in thoseyears. We expect that we will continue to commit significant resources toresearch and development in the future. As of March 31, 2006, we had 150employees engaged in research and development activities.

Inorder to continue to provide product leadership in the content management andcontent components market, we intend to make major product releasesapproximately once per year. The success of new introductions is dependent onseveral factors, including timely completion and market introduction of newproducts, differentiation of new products and enhancements from those of ourcompetitors and market acceptance of new products and enhancements.

Themarket for our products is characterized by rapid technological change, frequentnew product introductions and enhancements, evolving industry standards andrapidly changing customer requirements. The introduction of productsincorporating new technologies and the emergence of new industry standardscould render existing products obsolete and unmarketable. Our future successwill depend in part on our ability to anticipate changes, enhance our currentproducts, develop and introduce new products that keep pace with technologicaladvancements and address the increasingly sophisticated needs of our customers.We may not be successful in developing and marketing new products andenhancements that respond to competitive and technological developments andchanging customer needs.

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**PROPRIETARY RIGHTSAND LICENSING**

We rely on a combination of copyright, trade secret,trademark, confidentiality procedures and contractual provisions to protect ourproprietary rights. United States and international copyright laws providelimited protections for our software, documentation and other writtenmaterials. We license our products in object code format for limited use bycustomers. We treat the source code for our products as a trade secret and werequire all employees and third-parties who need access to the source code tosign non-disclosure agreements.

Despite our efforts to protect our proprietary rights,unauthorized parties may attempt to copy aspects of our products or to obtainand use information that we regard as proprietary. Policing unauthorized use ofour products is difficult, and while we are unable to determine the extent towhich piracy of our software exists, software piracy can be expected to be apersistent problem. Litigation may be necessary in the future to enforce ourintellectual property rights, to protect our trade secrets, to determine thevalidity and scope of the proprietary rights of others or to defend againstclaims of infringement or invalidity. However, the laws of many countries donot protect our proprietary rights to as great an extent as do the laws of theUnited States. Any litigation could result in substantial costs and diversionof resources and could have a material adverse effect on our business,operating results and financial condition. Our efforts to protect ourproprietary rights may not be adequate or our competitors may independentlydevelop similar technology. Our failure to meaningfully protect our propertycould have a material adverse effect on our business, operating results andfinancial condition.

Third parties may makeclaims of infringements with respect to our current or future product, but wecannot be sure that any such claims will arise. We expect that developers ofcontent management and content component products will increasingly be subjectto infringement claims as the number of products and competitors in our marketgrows and as the functionality of products in different segments of thesoftware industry increasingly overlaps. Any claims, with or without merit,could be time consuming to defend, result in costly litigation, divertmanagement’s attention and resources, cause product shipment delays or requireus to enter into royalty or licensing agreements. Royalty or licensingagreements, if required, may not be available on terms acceptable to us or atall. A successful claim of product infringement against us and our failure orinability to license the infringed technology or develop or license technologywith comparable functionality could have a material adverse effect on ourbusiness, operating results and financial condition.

**ACQUISITIONS**

In June 2005, we acquiredcertain assets of privately held e-Onehundred Group, a financial compliancesolutions provider, for $5.0 million in cash, 274,000 shares of the Company’sstock valued at $2.0 million and a potential $2.0 million cash earn-out over aone-year period based upon revenue performance. We acquired certain assets ofthe e-Onehundred Group to strengthen our domain expertise and to add to ourproduct set which will enable us to more quickly capitalize on the growingfinancial compliance market by efficiently building a portfolio of applicationson top of its scalable compliance platform.

**SUPPLIERS**

We have no sole source orlimited source suppliers that we materially depend upon for our productsdescribed above.

**COMPETITION**

The market for content management and contenttransformation software is intensely competitive, subject to rapidtechnological change and significantly affected by new product introductionsand 

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enhancements and othermarket activities of industry participants. We believe our competitiveadvantages include superior technology and lower overall cost of ownership.However, we expect competition to persist and intensify in the future. Ourprimary source of competition across the range of our product and serviceofferings is from content management products offered by companies such as EMCCorporation, FileNET Corporation, IBM Corporation, Interwoven, Inc., MicrosoftCorporation, and Vignette Corporation. We also compete with current orpotential customers who may develop solutions internally. Our governance, riskand compliance solutions primarily compete with specialty providers in thearea, including OpenPages, Paisley Consulting, and Bwise. Our competitiveadvantage over these providers is the underlying ECM platform that we leverageas well as our financial viability. In the area of content filtering andconversion technologies, our primary competition is Verity, which was recentlyacquired by Autonomy.

**Many of our competitors have longeroperating histories and significantly greater financial, technical, marketing and otherresources than we do and thus may be able to respond more quickly to new orchanging opportunities, technologies and customer requirements. In particular,we believe that EMC Corporation, FileNet Corporation, IBM Corporation andMicrosoft Corporation all have larger market positions than we do. Also, manycurrent and potential competitors have greater name recognition and access tolarger customer bases than we have. Such competitors may be able to undertakemore extensive promotional activities and offer more attractive terms topurchasers than we can. In addition, current and potential competitors haveestablished or may establish cooperative relationships among themselves or withthird parties to enhance their products. Accordingly, it is possible that newcompetitors or alliances among competitors may emerge and rapidly acquiresignificant market share.**

Competition in our marketcould materially and adversely affect our ability to obtain revenues fromsoftware license fees from new or existing customers on terms favorable to us.Further, competitive pressures may require us to reduce the price of oursoftware. In either case, we cannot be sure that we will be able to competesuccessfully with existing or new competitors or that competition will not havea material adverse effect on our business, operating results and financialcondition.

**EMPLOYEES**

As of March 31, 2006, wehad 560 employees. Our future success will depend in part on our ability toattract, retain, integrate and motivate highly qualified sales, technical andmanagement personnel, for whom competition is intense. From time to time wealso employ independent contractors to support our services, productdevelopment, sales and marketing departments. Our employees are not representedby any collective bargaining unit, and we have never experienced a workstoppage. We believe our relations with our employees are good.

**GEOGRAPHICINFORMATION**

Financial informationabout geographic areas is incorporated by reference from Footnote 11 to ourConsolidated Financial Statements included elsewhere in this Annual Report on Form10-K.

**AVAILABLEINFORMATION**

Our Web site is:http://www.stellent.com. We make available, free of charge, through our Website, our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports, as soon asreasonably practicable after we electronically file such materials with, orfurnish them to, the Securities and Exchange Commission.

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**Item 1A.*Risk**Factors***

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

The risks and uncertainties described below are notthe only risks we face. These risks include those that we consider to besignificant at this time to investment decisions regarding our common stock.There may be risks that you, in particular, view differently than we do, andthere are other risks and uncertainties that we do not presently know of orthat we currently deem immaterial, but that may, in fact, harm our business inthe future. If any of these events occur, they could have a material adverseeffect on our business, results of operations and financial condition could beseriously harmed, and the trading price of our common stock could decline.

You should considercarefully the following factors, in addition to other information in this AnnualReport on Form 10-K, in evaluating our company and business.

**BECAUSE OUR INFRASTRUCTURECOSTS ARE GENERALLY FIXED AND THE TIMING OF OUR REVENUES FROM QUARTERTO QUARTER IS HIGHLY VARIABLE, OUR FUTURE PERFORMANCE IS DIFFICULT TO PREDICT,MAKING AN INVESTMENT IN OUR COMMON STOCK SUBJECT TO HIGH VOLATILITY.**

While our products and services are not seasonal, ourrevenues and operating results are difficult to predict and may fluctuatesignificantly from quarter to quarter. If our quarterly revenues or operatingresults fall below the expectations of investors or securities analysts, theprice of our common stock could fall substantially. A large part of our salestypically occurs in the last month of a quarter, frequently in the last week oreven the last days of the quarter. If these sales were delayed from one quarterto the next for any reason, our operating results could fluctuate dramatically.In addition, our sales cycles may vary, making the timing of sales difficult topredict. Furthermore, our infrastructure costs are generally fixed. As aresult, modest fluctuations in revenues between quarters may cause largefluctuations in operating results. These factors all tend to make the timing ofrevenues unpredictable and may lead to high period-to-period fluctuations inoperating results.

Ourquarterly revenues and operating results may fluctuate for several additionalreasons, many of which are outside of our control, including the following:

·       demandfor our products and services;

·       thetiming of new product introductions and sales of our products and services;

·       unexpecteddelays in introducing new products and services;

·       increasedexpenses, whether related to sales and marketing, research and development,administration or services;

·       changesin the rapidly evolving market for Web content management solutions;

·       themix of revenues from product licenses and services, as well as the mix ofproducts licensed;

·       themix of services provided and whether services are provided by our staff orthird-party contractors;

·       themix of domestic and international sales;

·       costsrelated to possible acquisitions of technology or businesses;

·       generaleconomic conditions; and

·       publicannouncements by our competitors.

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**WE HAVE A HISTORY OF MAKING ACQUISITIONS, INCLUDINGLARGE STRATEGICACQUISITIONS, AND FUTUREPOTENTIAL ACQUISITIONS MAY BE DIFFICULT TO COMPLETE OR TO INTEGRATE AND MAY DIVERTMANAGEMENT’S ATTENTION AND CAUSE OUR OPERATING RESULTS TO SUFFER.**

We may seek to acquire orinvest in businesses, products or technologies that are complementary to ourbusiness. If we identify an appropriate acquisition opportunity, we may beunable to negotiate favorable terms for that acquisition, successfully financethe acquisition or integrate the new business or products into our existingbusiness and operations. In addition, the negotiation of potential acquisitionsand the integration of acquired businesses or products may divert managementtime and resources from our existing business and operations. To financeacquisitions, we may use a substantial portion of our available cash or we mayissue additional securities, which would cause dilution to our shareholders.

**WE MAY NOT BE PROFITABLE IN THE FUTURE, WHICH WOULDCAUSE OUR FINANCIAL POSITIONTO SUFFER AND MAY CAUSE THE MARKET PRICE OF OUR STOCK TO FALL.**

Our revenues may not grow in future periods and we maynot sustain profitability. If we do not sustain profitability, our financialposition will suffer and the market price of our stock may fall. Our ability tosustain profitable operations depends upon many factors beyond our directcontrol. These factors include, but are not limited to:

·       the demand for ourproducts;

·       our ability to quicklyintroduce new products;

·       the level of product andprice competition;

·       our ability to controlcosts; and

·       generaleconomic conditions.

**THE INTENSE COMPETITION IN OUR INDUSTRY FROM RECENTAND EXPECTED INDUSTRY CONSOLIDATION MAY REDUCE OUR FUTURE SALES AND PROFITS.**

Themarket for our products is highly competitive and is likely to become morecompetitive from recent and expected industry consolidation. We may not be ableto compete successfully in our chosen marketplace, which may have a materialadverse 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 ofour current and potential competitors have greater name recognition, access tolarger customer bases, and substantially more resources than we have.Competitors with greater resources than ours may be able to respond morequickly than we can to new opportunities, changing technology, productstandards or customer requirements.

**WE DEPEND ON THE CONTINUED SERVICE OF OUR KEYPERSONNEL; IF WE LOSE THE SERVICES OF OUR KEY PERSONNEL OUR ABILITY TO EXECUTEOUR OPERATING PLAN, AND OUR OPERATING RESULTS, MAY SUFFER.**

We are a small company and depend greatly on theknowledge and experience of our senior management team and other key personnel.If we lose any of these key personnel, our business, operating results andfinancial condition could be materially adversely affected. Our success willdepend in part on our ability to attract and retain additional personnel withthe highly specialized expertise necessary to generate revenue and to engineer,design and support our products and services. Like other software companies, weface intense competition for qualified personnel. We may not be able to attractor retain such personnel.

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**WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON SALESOF OUR CONTENT MANAGEMENT SOFTWARE, FOR OUR REVENUES; IF OUR CONTENT MANAGEMENTSOFTWARE DOES NOT GAIN AND MAINTAIN CUSTOMER ACCEPTANCE, OUR REVENUES ANDOPERATING RESULTS MAY SUFFER.**

We currently derive all of our revenues from productlicenses and services associated with our suite of content management andviewing, software products. The market for these products is new and rapidly evolving.We cannot be certain that a viable market for our products will continue orthat it will be sustainable. If we do not increase employee productivity andrevenues related to our existing products or generate revenues from newproducts and services, our business, operating results and financial conditionmay be materially adversely affected. We will continue to depend on revenuesrelated to new and enhanced versions of our software products for theforeseeable future. Our success will largely depend on our ability to increasesales from existing products and generate sales from product enhancements andnew products. We cannot be certain that we will be successful in upgrading andmarketing our existing products or that we will be successful in developing andmarketing new products and services. The market for our products is highlycompetitive and is subject to rapid technological change. Technologicaladvances could make our products less attractive to customers and adverselyaffect our business. In addition, complex software product development involvescertain inherent risks, including risks that errors may be found in a productenhancement or new product after its release, even after extensive testing, andthe risk that discovered errors may not be corrected in a timely manner.

**IF WE CANNOT COST-EFFECTIVELY PROTECT OUR INTELLECTUALPROPERTY, WHICH CONSISTS PRIMARILY OF OUR PROPRIETARY SOFTWARE PRODUCTS, OURBUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION MAY SUFFER.**

Ifwe are unable to protect our intellectual property, or incur significantexpense in doing so, our business, operating results and financial conditionmay be materially adversely affected. Any steps we take to protect ourintellectual property may be inadequate, time consuming and expensive. Withoutsignificant patent or copyright protection, we may be vulnerable to competitorswho develop functionally equivalent products. We may also be subject to claimsthat our current products infringe on the intellectual property rights ofothers. Any such claim may have a material adverse effect on our business,operating results and financial condition.

Weanticipate that software product developers will be increasingly subject toinfringement claims due to growth in the number of products and competitors inour industry, and the overlap in functionality of products in differentindustries. Any infringement claim, regardless of its merit, could betime-consuming, expensive to defend, or require us to enter into royalty orlicensing agreements. Such royalty or licensing agreements may not be availableon commercially favorable terms, or at all.

We rely on trade secret protection, confidentialityprocedures 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 mayindependently develop substantially equivalent information.

**OUR PRODUCTS MAY NOTBE COMPATIBLE WITH COMMERCIAL WEB BROWSERS AND OPERATING SYSTEMS, WHICH MAY LIMITOUR ABILITY TO GENERATE REVENUES FROM OUR PRODUCTS.**

Our products utilizeinterfaces that are compatible with commercial Web browsers. In addition, ourStellent Content Management System is a server-based system written in Javathat functions in both Windows NT and UNIX environments. We must continuallymodify our products to conform to commercial Web browsers and operatingsystems. If our products were to become incompatible with commercial Webbrowsers and operating systems, our business would be harmed. In addition,uncertainty related to the timing and nature of product introductions ormodifications by vendors of Web browsers and 

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operatingsystems may have a material adverse effect on our business, operating resultsand financial condition.

**WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS IF OURSOFTWARE PRODUCTS DAMAGE CUSTOMER’S DATA, FAIL TO MAINTAIN ACCESS SECURITY OROTHERWISE FAIL TO PERFORM TO SPECIFICATIONS, WHICH COULD HARM OUROPERATING RESULTS AND FINANCIAL POSITION AND REDUCE THE VALUE OF AN INVESTMENTIN OUR COMMON STOCK.**

If software errors or design defects in our productscause damage to customers’ data and our agreements do not protect us fromrelated product liability claims, our business, operating results and financialcondition may be materially adversely affected. In addition, we could besubject to product liability claims if our security features fail to preventunauthorized third parties from entering our customers’ intranet, extranet orInternet Websites. Our software products are complex and sophisticated and maycontain design defects or software errors that are difficult to detect andcorrect. Errors, bugs or viruses spread by third parties may result in the lossof market acceptance or the loss of customer data. Our agreements withcustomers that attempt to limit our exposure to product liability claims maynot be enforceable in certain jurisdictions where we operate.

**FUTURE REGULATION OF THE INTERNET COULD BE ADOPTEDTHAT WOULD RESTRICT OUR BUSINESS, WHICH MAY LIMIT OUR ABILITY TO GENERATEREVENUES FROM OUR PRODUCTS.**

Federal, state or foreign agencies may adopt newlegislation or regulations governing the use and quality of Web content. Wecannot predict if or how any future laws or regulations would impact ourbusiness and operations. Even though these laws and regulations may not applyto our business directly, they could indirectly harm us to the extent that theyimpact our customers and potential customers.

**WE HAVE BEEN NAMED A DEFENDANT IN SECURITIESCLASS-ACTION LAWSUITS AND WE MAY IN THE FUTURE BE NAMED IN ADDITIONALLITIGATION, WHICH MAY RESULT IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT’SATTENTION AND RESOURCES.**

Shareholderclass-action suits have been filed naming Stellent and certain of our currentand former officers and directors as co-defendants. We have reached a finalsettlement during fiscal year 2006 and we do not anticipate any furtherlitigation costs associated with lawsuit. Also, certain current and formerofficers and directors were named in a derivative lawsuit that followed thecompletion of a special litigation committee process in which the plaintiff, onbehalf of the Corporation, alleged that the board breached its fiduciary dutiesby allowing certain circumstances to exist that gave rise to the Federal casedescribed above. A special litigation committee has recommended that theCompany not pursue an action against the Board and/or the Company’s officers. TheCompany moved to dismiss the action. While the motion to dismiss was pendingthe Company's insurance carriers, because of the ongoing expense of litigationand the role the plaintiff's counsel played in the special litigation committeeprocess, agreed to settle the pending derivative lawsuit for a payment of $250,000.The settlement is subject to preliminary and final court approval. Thesettlement will be paid entirely from proceeds of an insurance policy.

Securities class-action litigation has often beenbrought against companies following periods of volatility in the price of theirsecurities. This risk is greater for technology companies, which haveexperienced greater-than-average stock price volatility in recent years and, asa result, have been subject to, on average, a greater number of securitiesclass-action claims than companies in other industries. We may in the futureagain be the target of this kind of litigation, and such litigation could alsoresult in substantial costs and divert management’s attention and resources.

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**THE MARKET PRICE OF OUR COMMON STOCK COULD FLUCTUATESIGNIFICANTLY DUE TO VARIATIONS IN OUR OPERATING RESULTS, CHANGES IN THESOFTWARE INDUSTRY AND OTHER FACTORS.**

Themarket price of our common stock has fluctuated significantly in the past andmay do so in the future. The market price of our common stock may be affectedby each of the following factors, many of which are outside of our control:

·       variations in quarterlyoperating results;

·       changes in estimates bysecurities analysts;

·       changes in marketvaluations of companies in our industry;

·       announcements ofsignificant events, such as major sales;

·       acquisitions of businessesor losses of major customers; and

·       salesof our equity securities.

**WE CAN ISSUE SHARES OF PREFERRED STOCK WITHOUTSHAREHOLDER APPROVAL, WHICH COULD ADVERSELY AFFECT THE RIGHTS OF COMMONSHAREHOLDERS.**

Our articles of incorporation permit us to establishthe rights, privileges, preferences and restrictions, including voting rights,of unissued shares of our capital stock and to issue such shares withoutapproval from our shareholders. The rights of holders of our common stock maysuffer as a result of the rights granted to holders of preferred stock that maybe issued in the future. In addition, we could issue preferred stock to preventa change in control of our company, depriving shareholders of an opportunity tosell their stock at a price in excess of the prevailing market price.

**OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN PROVISIONS OFMINNESOTA LAW MAY MAKE A TAKEOVER OF STELLENT DIFFICULT, DEPRIVING SHAREHOLDERSOF OPPORTUNITIES TO SELL SHARES AT ABOVE-MARKET PRICES.**

Our shareholder rights plan and certain provisions ofMinnesota law may have the effect of discouraging attempts to acquire Stellentwithout the approval of our board of directors. Consequently, our shareholdersmay lose opportunities to sell their stock for a price in excess of theprevailing market price.

**WHEN WE BEGIN ACCOUNTING FOR STOCK-BASED COMPENSATIONUSING THE FAIR VALUE METHOD, IT WILL SIGNIFICANTLY INCREASE OUR COMPENSATIONEXPENSE.**

In December 2004, Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(revised 2004),*Share-Based Payment,*known as Statement 123(R). Statement 123(R) supersedes APB Opinion No. 25.Under APB Opinion No. 25, no compensation expense is recognized foremployee stock option grants if the exercise price of the Company’s stockoption grants is at or above the fair market value of the underlying stock onthe date of grant. SFAS No. 123(R) requires the determination of the fairvalue of the share-based compensation at the grant date and the recognition ofthe related expense over the period in which the share-based compensationvests, which will increase our compensation expense significantly. We adoptedSFAS No. 123(R) effective April 1, 2006. As part of this adoption, webegan expensing options effective April 1, 2006. Based on the currentamount of outstanding stock options that will vest on or after April 1,2006, we anticipate recognizing $4.0 million to $6.0 million of compensationexpense during fiscal year 2007. This amount will fluctuate depending on futurestock options granted to or forfeited by employees and directors.

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**NEW LEGISLATION IS LIKELY TO IMPACT OUR FUTURE CONSOLIDATEDFINANCIAL POSITION AND RESULTS OF OPERATIONS.**

Recently, there have been significant regulatorychanges, including the Sarbanes-Oxley Act of 2002, that will continue to havean impact on our future consolidated financial position and results of operations.The Sarbanes-Oxley Act of 2002 and other rule changes and proposedlegislative initiatives which following several highly publicized corporateaccounting and corporate governance failures, have increased general andadministrative costs. Additional regulatory changes may increase our costsfurther. Further, the impact of these changes may increase costs incurred byour customers and prospects, which could result in delays or cancellations inspending on enterprise content management software and services like those thatwe provide. Such delays and cancellations could have a material adverse impacton our consolidated statement of operations and financial condition.

**Item 1B.   *Unresolved Staff Comments***

Not applicable.

**Item 2.   *Properties***

In May of2005, we entered into a six-year lease of approximately 42,000 square feet of afacility located in Eden Prairie, Minnesota. We moved our corporateheadquarters to this facility in the quarter ended September 30, 2005. Inconnection with our acquisition of Optika in May 2004, we assumed a leasewith approximately 39,000 square feet of office space in Colorado Springs,Colorado which expires in March 2007.

In addition, domestically we lease approximately 1,000square feet of office space in Massachusetts until September 2006;approximately 28,000 square feet of space in downtown Chicago, Illinois with alease term expiring September 2006; approximately 5,000 square feet ofspace in New York, New York with a lease term expiring in September 2007;approximately 12,000 square feet in Redmond, Washington with a lease termexpiring in December 2007; and approximately 7,000 square feet inFarmington, Connecticut with a lease term expiring in December 2009;during fiscal year 2006, we terminated office lease space of 6,000 and 1,600square feet in Massachusetts and Grand Forks, North Dakota, respectively. Internationallywe lease approximately 9,000 square feet in London, United Kingdom with a leaseterm expiring in April 2016, approximately 4,000 square feet in Tokyo witha lease term expiring in December 2007; and approximately 6,000 squarefeet in the Netherlands with a lease term expiring in June 2006.Management believes that our facilities are suitable and adequate for currentoffice requirements.

**Item 3.   *Legal Proceedings***

Inthe normal course of business, we are subject to various claims and litigation,including employment matters and intellectual property claims. Management doesnot believe the outcome of any current legal matters will have a materialadverse effect on our consolidated financial position, results of operations orcash flows.

TheCompany was a defendant, along with certain current and former officers anddirectors of the Company, in a putative class action lawsuit entitled *In re Stellent Securities Litigation.*Thelawsuit was a consolidation in Federal District Court for the District ofMinnesota of several related lawsuits (the first of which was commenced on July 31,2003). The plaintiff alleged that the defendants made false and misleadingstatements relating to the Company and its future financial prospects inviolation of Sections 10(b) and 20(a) of the Securities ExchangeAct of 1934. In fiscal year 2005 a settlement was reached, subject to finaldocumentation and preliminary and final court approval. The Company receivedthe final court approval in the third quarter of fiscal year 2006. No furtherexpenses are anticipated with this lawsuit.

Certain current and former officers and directors werealso named in a derivative lawsuit that followed the completion of a speciallitigation committee process in which the plaintiff, on behalf of the 

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Corporation, alleged thatthe board breached its fiduciary duties by allowing certain circumstances toexist that gave rise to the Federal case described above. A special litigationcommittee has recommended that the Company not pursue an action against theBoard and/or the Company’s officers. The Company moved to dismiss the action. Whilethe motion to dismiss was pending the Company's insurance carriers, because ofthe ongoing expense of litigation and the role the plaintiff's counsel playedin the special litigation committee process, agreed to settle the pendingderivative lawsuit for a payment of $250,000. The settlement is subject to preliminary and final court approval. Thesettlement will be paid entirely from proceeds of an insurance policy.

**Item 4.   *Submission of Matters to a Vote of Security Holders***

No matter was submitted to a vote of our securityholders during the fourth quarter of fiscal year 2006.

**Item 4A.   *Executive Officers of the Registrant***

    (a)  Executive Officers of the Registrant

The Executive Officers of our company are:

| **Name**           | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                                                | ** ** |
|--------------------|------------|------------|------------|---------|------------|-----------------------------------------------------------------------------|------------|
| Robert F. Olson    |       |       | 50         |    |       | President  and Chief Executive Officer and  Chairman of the Board           |       |
| Daniel P. Ryan     |       |       | 47         |    |       | Chief  Operating Officer                                                    |       |
| Darin P. McAreavey |       |       | 37         |    |       | Executive Vice  President, Chief Financial Officer, Secretary and Treasurer |       |

 

Robert F. Olson founded our business and has served asChairman of the Board of Stellent, Inc. and our predecessor company since1990. He also served as our Chief Executive Officer and Chairman of the Boardfrom October 2000 to July 2001, and as our President, Chief ExecutiveOfficer and Chairman of the Board from 1990 to October 2000 and from April 2003to present. From 1987 to 1990, he served as the General Manager of the GreatwayCommunications Division of Anderberg-Lund Printing Company, an electronicpublishing sales and service organization. Prior to that time, Mr. Olsonheld management and marketing positions in several electronic publishingservice organizations.

Daniel P. Ryan has served as our Chief OperatingOfficer since March 2006, and has served as our Executive Vice Presidentof Marketing and Business Development since April 2003, and as our SeniorVice President of Marketing and Business Development from April 2002through March 2003. He has also served as our Senior Vice President ofCorporate and Business Development from November 2001 to April 2002.From April 1999 to November of 2001, he served as Vice President ofMarketing and Business Development. From September 1997 to April 1999,he served as Vice President of Marketing for Foglight Software, Inc., adeveloper of enterprise performance management solutions. Prior to that time, Mr. Ryanserved as Director of Marketing for Compact Devices, Inc.

Darin P. McAreavey has served as our Executive VicePresident, Chief Financial Officer, Secretary and Treasurer since June 2006,and served as our Corporate Controller from September 2004 to June 2006.From September 1995 to August 2004, Mr. McAreavey held senioraccounting and financial management positions with Computer Network TechnologyCorporation, a provider of storage area networking products, software, servicesand solutions in the wide area network extension and networking market, includingDirector of Finance. Prior to that time, Mr. McAreavey was employed by KPMGLLP.

Officers of our Company are chosen by and serve at thediscretion of the Board of Directors. There are no family relationships amongany of the directors or officers of our Company.

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**PART II**

**Item 5.**                        *Market for Registrant’s Common Equity, Related Stockholder Matters, andIssuer Purchases of EquitySecurities*

Our common stock, par value $0.01 per share, is tradedon The NASDAQ National Market under the symbol STEL. At June 2, 2006, ourcommon stock was held by approximately 420 record holders. This does notinclude shareholders whose stock was held in the name of a bank, broker orother nominee. On June 2, 2006, the closing sale price of a share of ourcommon stock was $11.47.

Thehigh and low sale prices per share of our common stock for the four quartersduring the fiscal years ended March 31, 2005 and 2006 were as follows:

| ** **                                  | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------|------------|----------|------------|---------|------------|
| **Fiscal year ended  March 31, 2005:** |       |     |       |    |       |
| First Quarter                               |       | $        | 8.95       |    | $          | 6.60 |   |
| Second Quarter                              |       | 8.66     |       | 6.05    |       |
| Third Quarter                               |       | 9.25     |       | 6.40    |       |
| Fourth Quarter                              |       | 9.21     |       | 8.01    |       |
| **Fiscal year ended  March 31, 2006:** |       |     |       |    |       |
| First Quarter                               |       | $        | 8.76       |    | $          | 6.75 |   |
| Second Quarter                              |       | 8.84     |       | 7.12    |       |
| Third Quarter                               |       | 10.91    |       | 8.42    |       |
| Fourth Quarter                              |       | 12.25    |       | 9.29    |       |

 

**Dividend Policy**

Our Board of Directorsdeclared and paid a quarterly cash dividend of $0.03 per share of common stockin the fourth quarter of fiscal year 2006. The total amount of the dividend was$0.9 million. In addition, the Board of Directors declared a dividend of $0.03per share of common stock on May 9, 2006 to be paid on June 27, 2006to stockholders of record on June 15, 2006. The determination to pay futuredividends on common stock will be at the discretion of the Board of Directorsand will depend on the Company’s financial condition, results of operations,cash requirements, prospects and such other factors as the Board of Dirctorsmay deem relevent. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,’’ the Consolidated Statements ofShareholders’ Equity and Note 5 of the Notes to Consolidated FinancialStatements.

**Issuer Purchases ofEquity Securities**

We did not make anypurchases of our equity securities during the fourth quarter of fiscal year2006.

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**Item 6.**                        *Selected Financial Data*

TheSelected Consolidated Financial Data (in thousands except per share data)presented below as of and for each of the fiscal years in the five year periodended March 31, 2006 have been derived from our Consolidated FinancialStatements. The Selected Consolidated Financial Data should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the Consolidated Financial Statements and therelated Notes.

| ** **                                                 | ** ** | **Year Ended March 31,**                            | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2002**                                                           | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statement of  Operations Data:**            | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Product licenses                                           |       | $                                                                  | 66,908     |   | $ | 40,364 |   | $ | 41,571 |   | $ | 54,376 |   | $ | 56,950 |   |
| Services                                                   |       | 9,648                                                              |       | 9,726 |   | 14,349 |   | 19,772 |   | 26,836 |   |
| Post-contract support                                      |       | 11,784                                                             |       | 15,344 |   | 19,854 |   | 32,663 |   | 39,599 |   |
| Total revenues                                             |       | 88,340                                                             |       | 65,434 |   | 75,774 |   | 106,811 |   | 123,385 |   |
| Cost of revenues:                                          |       |                                                               |       |   |   |   |   |   |   |   |   |
| Product licenses                                           |       | 5,005                                                              |       | 6,480 |   | 4,936 |   | 5,017 |   | 3,886 |   |
| Services                                                   |       | 10,021                                                             |       | 8,416 |   | 13,272 |   | 19,550 |   | 25,046 |   |
| Post-contract support                                      |       | 3,371                                                              |       | 3,730 |   | 3,885 |   | 5,350 |   | 7,269 |   |
| Amortization of  capitalized software from acquisitions    |       | 966                                                                |       | 1,892 |   | 1,574 |   | 2,390 |   | 1,879 |   |
| Total cost of revenues                                     |       | 19,363                                                             |       | 20,518 |   | 23,667 |   | 32,307 |   | 38,080 |   |
| Gross profit                                               |       | 68,977                                                             |       | 44,916 |   | 52,107 |   | 74,504 |   | 85,305 |   |
| Operating expenses:                                        |       |                                                               |       |   |   |   |   |   |   |   |   |
| Sales and marketing                                        |       | 46,672                                                             |       | 38,343 |   | 39,122 |   | 42,365 |   | 46,787 |   |
| General and  administrative                                |       | 11,884                                                             |       | 11,301 |   | 8,856 |   | 14,097 |   | 12,282 |   |
| Research and development                                   |       | 17,601                                                             |       | 15,766 |   | 13,263 |   | 17,958 |   | 20,153 |   |
| Acquisition—related  sales, marketing and other costs |       | —                                                             |       | — |   | — |   | 886 |   | — |   |
| Acquisition and related  costs                             |       | 237                                                                |       | 1,127 |   | — |   | — |   | — |   |
| Amortization of acquired  intangible assets and other      |       | 12,914                                                             |       | 6,635 |   | 2,006 |   | 677 |   | 626 |   |
| Impairment charge on  fixed assets                         |       | —                                                             |       | — |   | — |   | 375 |   | — |   |
| Restructuring charges                                      |       | —                                                             |       | 4,368 |   | 743 |   | 3,673 |   | 1,123 |   |
| Total operating expenses                                   |       | 89,308                                                             |       | 77,540 |   | 63,990 |   | 80,031 |   | 80,971 |   |
| Income (loss) from  operations                             |       | (20,331                                                            | )          | (32,624 | ) | (11,883 | ) | (5,527 | ) | 4,334 |   |
| Other income (expense):                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest income (expense)  net                             |       | 3,755                                                              |       | 1,957 |   | 982 |   | 822 |   | 2,181 |   |
| Investment (impairment)  gain on sale                      |       | (5,722                                                             | )          | (1,733 | ) | 388 |   | (1,136 | ) | — |   |
| Total other income (expense)                               |       | (1,967                                                             | )          | 224 |   | 1,370 |   | (314 | ) | 2,181 |   |
| Net income (loss) before  income taxes                     |       | (22,298                                                            | )          | (32,400 | ) | (10,513 | ) | (5,841 | ) | 6,515 |   |
| Provision for income  taxes                                |       | —                                                             |       | — |   | — |   | — |   | 173 |   |
| Net income (loss)                                          |       | $                                                                  | (22,298    | ) | $ | (32,400 | ) | $ | (10,513 | ) | $ | (5,841 | ) | $ | 6,342 |   |
| Net income (loss) per common  share:                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                      |       | $                                                                  | (1.00      | ) | $ | (1.45 | ) | $ | (0.48 | ) | $ | (0.22 | ) | $ | 0.22 |   |
| Diluted                                                    |       | $                                                                  | (1.00      | ) | $ | (1.45 | ) | $ | (0.48 | ) | $ | (0.22 | ) | $ | 0.21 |   |
| Cash dividends declared  per common share                  |       | $                                                                  | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 0.03 |   |
| Weighted average common  shares outstanding:               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                      |       | 22,286                                                             |       | 22,345 |   | 22,028 |   | 26,244 |   | 28,266 |   |
| Diluted                                                    |       | 22,286                                                             |       | 22,345 |   | 22,028 |   | 26,244 |   | 29,615 |   |

 

| ** **                                        | ** ** | **As of March 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------|------------|
| ** **                                        | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Consolidated  Balance Sheet Data:**             | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash, cash equivalents  and marketable securities |       | $                                  | 96,158     |   | $ | 81,169 |   | $ | 73,512 |   | $ | 72,750 |   | $ | 81,753 |   |
| Working capital                                   |       | 102,850                            |       | 69,823 |   | 72,520 |   | 67,371 |   | 66,445 |   |
| Total assets                                      |       | 165,926                            |       | 129,709 |   | 124,688 |   | 187,652 |   | 206,549 |   |
|                                                   |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

**Overview**

*General*

In 1997, we launched one of the first software productsuites on the market specifically developed and created for managing businessinformation using the Web. From the beginning, Stellent focused on developingsoftware that could be quickly implemented, easily used and easily scaled fromline-of-business to enterprise-wide applications. This focus remains truetoday. While early on we developed document management and Web contentmanagement applications, in recent years we also expanded our product set toaddress market needs for an enterprise infrastructure for content-centricapplications; Web-based management of business records; and a contentmanagement-based infrastructure to meet compliance mandates—particularly thoseregarding financial compliance, such as Sarbanes-Oxley.

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

In fiscal year 2006, our software application modulesincluded Web content management, document management and imaging, digital assetmanagement, records and retention management, collaboration management, andcontent conversion and viewing. Currently, customers use our software toorganize and maintain the electronic business information created by internaland external sources using a broad range of common software applications, suchas Microsoft Office, AutoDesk AutoCAD and Sun StarOffice. This electronicbusiness information includes items such as Web pages, digital assets, scannedimages, Microsoft Word documents, business records, contracts, spreadsheets andforms.

Our software also assists in the conversion of paperdocuments to electronic format. Using Stellent technology, customers can thenpublish that information to public Web sites and/or secure Web sites availableonly to select audiences. Additionally, software vendors and manufacturers ofelectronic devices, such as cell phones and PDAs, embed our Stellent Outside Insoftware within their own technology to enable users to access and viewelectronic information from those applications or devices. We market ourproducts primarily to customers in the retail/consumer goods, financialservices, healthcare (including insurance), government, and manufacturingindustries located in the United States, Canada, Europe and Asia.

Our approach has been to develop our productsinternally and acquire select third-party technologies that enhance ourproducts’ capabilities. This approach has resulted in an integrated softwaresolution used by companies for line-of-business applications or enterprise-widedeployment.

In June 2005, weacquired certain assets of privately held e-Onehundred Group, a financialcompliance solutions provider, for $5.0 million in cash, 274,000 shares ofthe Company’s stock valued at $2.0 million and a potential $2.0 million cashearn-out over a one-year period based upon revenue performance. We acquired certainassets of e-Onehundred Group to strengthen our domain expertise and add to ourproduct set which will enable us to more quickly capitalize on the growingfinancial compliance market by efficiently building a portfolio of applicationson top of certain assets of e-Onehundred Group’s scalable compliance platform.

*Market Trends*

Overall the market trend for enterprise content managementshowed continued signs of improvement during fiscal year 2006. Our licenserevenue increased modestly by $2.6 million or 5% from fiscal year 2005 tofiscal year 2006. This compares to an increase of $12.8 million or 31% fromfiscal year 2004 to fiscal year 

17

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2005, which was primarilydue to our acquisition of Optika in May of 2004. We continue to experiencea significant increase in our services, which grew 36% from fiscal year 2005 tofiscal year 2006, due in roughly equal parts to our acquisition of certainassets of the e-Onehundred Group in June of 2005 and to an increase in thenumber of consulting engagements. Also contributing to the overall increase inrevenue from fiscal 2005 to 2006 was a 21% increase in our post-contractsupport. Our post-contract support renewal rate continues to be very high, atrend that we see continuing. During fiscal year 2006, we derived approximately74% of our revenue from the United States market and approximately 26% fromvarious international markets, primarily Europe. We have also been expandinginto the Asian markets, particularly Japan, Korea and most recently Singapore.The percentage of revenue derived from Asia remains small compared to theUnited States and Europe.

We have continued to experience a shift in our revenuemix from product licenses to post-contract support and consulting services overthe past several years as a result of our continued growth of our installedbase. Our license revenue, as a percent of total revenue, has decreased from 55%to 51% to 46% in fiscal years 2004, 2005 and 2006, respectively, while ourpost-contact support revenue has increased from 26% to 30% to 32% in fiscalyears 2004, 2005 and 2006, respectively. Our consulting services and trainingrevenue, as a percent of total revenue, was 19%, 19% and 22% in fiscal years2004, 2005 and 2006, respectively. We expect our installed software base tocontinue to grow, and with it our post-contract support revenue. With a largerportion of our revenues coming from both services and post-contract support,our overall gross margins may decrease. However, we anticipate our productlicense revenues for fiscal year 2007 to be approximately 47% to 49% of ourtotal revenue. On a longer term basis, we are anticipating our product licenserevenue to increase to approximately 48-50% of our total revenue.

We believe Stellenttoday can compete effectively in a rapidly evolving marketplace. We believe thecontent management market is healthier than many other segments of theinformation technology sector and that it will perform better than the averageinformation technology sector in customer spending during fiscal year 2007. Webelieve that:

·        thetrend toward companies seeking solutions for managing multiple internal andexternal Web sites will continue,

·        contentwithin the enterprise will continue to grow at a high rate,

·        vendorconsolidation, and demand for integrated solutions, will continue to be adriving force in technology buying decisions; and

·        compliancemandates and records management initiatives are increasingly driving technologypurchasing decisions, and influencing which vendors are selected to powerinformation-related initiatives.

While we believe thegeneral and long-term market trends identified above will create continueddemand for our products, the market for content management software and ourproducts at any particular time is highly dependent on information technologyspending. Although we experienced an overall increase in our revenue for fiscalyear 2006, the United States and international economic conditions continue tobe a challenging environment to do business within, specifically for largecapital expenditures. In addition, we believe continuing difficult economic andmarket conditions are putting pressure on the ability of certain contentmanagement software companies to survive as independent entities.

*Restructurings*

In connection with theCompany’s plans to continue to reduce costs and improve operating efficiencies,the Company adopted two restructuring plans during fiscal 2006. The initialrestructuring plan of fiscal year 2006 took place during the second quarterwhich included a plan to reorganize the Company’s international salesoperations and consolidate certain general and administrative activities. 

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Thisrestructuring included the termination of eight employees and the closure ofthe Company’s Brazilian facility. During the fourth quarter of fiscal year2006, the Company adopted a restructuring plan to eliminate our digital assetmanagement group as the technology has been fully integrated into our contentserver product. The expenses recognized during each of the second and fourthquarter of fiscal year 2006 related to these restructuring plans was $0.5million. During the second quarter of fiscal year 2006, the Company incurred anadditional restructuring charge of $0.1 million as a result of a change inestimate related to a fiscal year 2005 restructuring plan. During the fourthquarter of fiscal year 2006, the Company received a benefit of $0.1 million asa result of a change in estimate related to a fiscal year 2005 restructuringplan. We expect the restructuring actions taken during fiscal year 2006 willresult in a reduction to our annual operating expenses of approximately $2.5million. Additional information on our restructuring plans is contained inFootnote 10 to the Consolidated Financial Statements.

**RESULTS OFOPERATIONS**

During fiscal year 2006,we continued to market and license our product and services primarily through adirect sales force and augmented our sales efforts through other relationships,such as with other software vendors, system integrators, resellers and others.Our total revenues generated from operations outside of the United Statesdecreased slightly in fiscal year 2006 to 26% from approximately 27% in fiscalyear 2005. No customer accounted for more than 10% of total revenues in fiscalyears 2006 and  2005.

**Revenues**

| ** **                         | ** ** | **Years Ended March 31,**                   | ** ** | **Percentage Change** | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **2006**                                                   | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                         | ** ** | **(In thousands,  except for percentages)** | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Product licenses                   |       | $                                                          | 56,950     |                       | $          | 54,376 |   | $ | 41,571 |   |   | 5 | % |   |   | 31 | % |   |
| Services                           |       | 26,836                                                     |       | 19,772                     |       | 14,349 |   |   | 36 | % |   |   | 38 | % |   |
| Post-contract  support             |       | 39,599                                                     |       | 32,663                     |       | 19,854 |   |   | 21 | % |   |   | 65 | % |   |
| Total                              |       | $                                                          | 123,385    |                       | $          | 106,811 |   | $ | 75,774 |   |   | 16 | % |   |   | 41 | % |   |
| As a percentage of total  revenue: |       |                                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Product licenses                   |       | 46                                                         | %          | 51                         | %          | 55 | % |   |   |   |   |   |   |   |   |
| Services                           |       | 22                                                         | %          | 19                         | %          | 19 | % |   |   |   |   |   |   |   |   |
| Post-contract support              |       | 32                                                         | %          | 30                         | %          | 26 | % |   |   |   |   |   |   |   |   |

 

Total revenues increased by $16.6 million, or 16%, to$123.4 million for fiscal year 2006 from $106.8 million for fiscal year 2005.The increase in revenues was due to an overall increase in our services andpost-contract support revenue primarily as a result of increased customerutilization of our consulting services personnel to implement our software andsupporting a larger installed base, along with approximately $2.3 millionof additional services revenue generated from our June 2005 acquisition ofcertain assets of the e-Onehundred Group during fiscal year 2006. We alsoexperienced an overall increase in our product license revenue from end-usercustomers in fiscal year 2006 when compared to the prior year, as we continueto experience a growing demand from such customers, specifically for use incompliance and multi-site management applications. These increases werepartially offset by a decrease in our product license revenue to OEM customers,primarily as a result of recognizing fewer seven figure license transactions whichrepresented approximately $2.3 million to such customers during fiscal year2006 compared to approximately $7.7 million in the prior year.  This is due to less demand for our filteringand conversion technology during fiscal 2006 when compared to the prior fiscalyear.

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Total revenues increased by $31.0 million, or 41%, to$106.8 million for fiscal year 2005 from $75.8 million for fiscal year 2004. Theincrease in revenues was due to our acquisition of Optika on May 28, 2004,seven-figure OEM license transactions totaling approximately $7.7 million andan overall increase in our end-user license revenue. Additionally, we had anincrease in revenues for services and post-contract support due to a largerbase of installed products and a continued increased use by our customers inusing our consulting services personnel to implement our software.

Sales outside the UnitedStates represented 26%, 27%, and 28% of our total revenues in fiscal years 2006,2005, and 2004, respectively.

*Product Licenses*

Revenues generated from product licenses increased by$2.6 million, or 5%, to $57.0 million for fiscal year 2006 from $54.4 millionfor fiscal year 2005. The increase in license revenue was due to an overallincrease in demand from end-user customers, including four seven-figuretransactions. We continue to experience a growing demand for our end-user applications,specifically in compliance and multi-site management applications. The increasein end-user product license revenues was partially offset by a decrease in our OEMproduct license revenues as a result of recognizing fewer seven figure OEMtransactions due to less demand for our filtering and conversion technologyduring fiscal year 2006 when compared to the prior fiscal year. The market forour products at any particular time is highly dependent on informationtechnology spending and we cannot be certain whether, and if so, when, spendingon information technology will fluctuate. Although we continue to anticipateexpenditures for information technology to remain soft into fiscal year 2007,we do expect our overall license revenue to increase in absolute dollars and itshould represent approximately 47% to 49% of our total revenue.

Revenues for productlicenses increased by $12.8 million, or 31%, to $54.4 million for year 2005from $41.6 million for fiscal year 2004. The increase in product licenserevenues was attributable to sales generated from our acquisition of Optika in May of2004, an increase in our revenues from OEM customers and an overall increase demandfrom end-user customers, both domestic and internationally. The increase in revenuesfrom OEM customers related to seven figure license transactions totalingapproximately $7.7 million in fiscal year 2005.

*Services*

Revenues for services increased by $7.0 million, or36%, to $26.8 million for fiscal year 2006 from $19.8 million for fiscal year2005. The increase in revenues for services was due to an increased number ofconsulting engagements associated with the increased number of new productlicense transactions sold during fiscal year 2006, as well as $2.8 million ofservices revenue generated from the acquisition of certain assets of the e-OnehundredGroup in June 2005. We anticipate that the percentage of service revenueto total revenue will be approximately 17% to 20% for fiscal year 2007 andservice revenue in absolute dollars will increase.

Revenues for services increased by $5.4 million, or38%, to $19.8 million for fiscal year 2005 from $14.3 million for fiscal year2004. The increase in revenues for services was due to the Optika acquisitionand an increased number of consulting engagements associated with the increasednumber of new license transactions sold during the fiscal year.

Generally, customersprefer to have us perform consulting services or supplement their internalinformation technology staff, a trend we believe will continue. Our consultingservice revenue relates almost exclusively to software licenses to end-user customers,as our OEM customers embed our software in their own software and they in turn performthe consulting services to their own end-user customers. Revenues related toconsulting services work can increase as a result of a larger install base ofproducts with end-user customers. Because we expect the trends toward companiesincreasingly using the Web for 

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communicatingand publishing business information and viewing information electronically tocontinue, we expect revenues attributable to consulting services to continue toincrease. A decline in product license revenues to end-user customers mayresult in fewer consulting services engagements.

*Post-ContractSupport*

Revenues for post-contract support increased by $6.9million, or 21%, to $39.6 million for fiscal year 2006 from $32.7 million forfiscal year 2005. The increase in revenues for our post-contract support wasdue to supporting a larger customer installed base of software products. Weanticipate that the percentage of post-contract support revenue to totalrevenue will be approximately 33% to 35% for fiscal year 2007 and post-contractsupport revenue in absolute dollars will increase.

Revenues for post-contract support increased by $12.8million, or 65%, to $32.7 million for fiscal year 2005 from $19.9 million forfiscal year 2004. The increase in revenues for our post-contract support wasdue to the Optika acquisition and supporting a larger customer installed baseof software products.

As we license ourproducts, whether on a perpetual basis to end-user customers, or on a termbasis to OEM customers, our installed base of software products increases.Since the rate of annual renewals of post-contract customer support services onour software products has remained high, our post-contract customer supportrevenues grow because we have a larger installed base of products. Sincepost-contract customer support contracts are generally sold with each licensetransaction, a decline in license revenues may also result in a decline incustomer support revenues. However, since post-contract customer supportrevenues are recognized over the duration of the support contract, the impactwould lag behind a decline in license revenues.

**Cost of Revenues and Gross Profit**

| ** **                                                      | ** ** | **Years Ended March 31,**              | ** ** | **Percentage Change** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                      | ** ** | **2006**                                              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands,  except for percentages)** | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Cost of product  licenses                                       |       | $                                                     | 3,886      |                       | $          | 5,017 |   | $ | 4,936 |   |   | (23 | )% |   |   | 2 | % |   |
| Cost of services                                                |       | 25,046                                                |       | 19,550                     |       | 13,272 |   |   | 28 | % |   |   | 47 | % |   |
| Cost of  post-contract support                                  |       | 7,269                                                 |       | 5,350                      |       | 3,885 |   |   | 36 | % |   |   | 38 | % |   |
| Cost of  amortization of capitalized software from acquisitions |       | 1,879                                                 |       | 2,390                      |       | 1,574 |   |   | (21 | )% |   |   | 52 | % |   |
| Total cost of  revenues                                         |       | $                                                     | 38,080     |                       | $          | 32,307 |   | $ | 23,667 |   |   | 18 | % |   |   | 37 | % |   |
| Gross profit                                                    |       | $                                                     | 85,305     |                       | $          | 74,504 |   | $ | 52,107 |   |   |   |   |   |   |   |   |   |
| As a percentage of total  revenue:                              |       |                                                  |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Cost of product  licenses                                       |       | 3                                                     | %          | 5                          | %          | 6 | % |   |   |   |   |   |   |   |   |
| Cost of services                                                |       | 20                                                    | %          | 18                         | %          | 18 | % |   |   |   |   |   |   |   |   |
| Cost of  post-contract support                                  |       | 6                                                     | %          | 5                          | %          | 5 | % |   |   |   |   |   |   |   |   |
| Cost of  amortization of capitalized software from acquisitions |       | 2                                                     | %          | 2                          | %          | 2 | % |   |   |   |   |   |   |   |   |
| Total cost of  revenues                                         |       | 31                                                    | %          | 30                         | %          | 31 | % |   |   |   |   |   |   |   |   |
| Gross profit                                                    |       | 69                                                    | %          | 70                         | %          | 69 | % |   |   |   |   |   |   |   |   |

 

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*Cost of Revenues—General*

Total cost of revenues increased by $5.8 million, or18%, to $38.1 million for fiscal year 2006 from $32.3 million for fiscal year2005. Total cost of revenues as a percentage of total revenues was 31% infiscal year 2006 compared to 30% for fiscal years 2005. Gross profit increasedby $10.8 million, or 14%, to $85.3 million for fiscal year 2006 from $74.5million for fiscal year 2005. Total gross profit as a percentage of totalrevenues, or gross margin, was 69% for the fiscal year 2006 down slightly from70% for fiscal year 2005. The decrease in our total gross margin was due to ourservices revenue accounting for a larger percentage of our overall revenue. Ouroverall services revenue was up 36% from fiscal year 2005 to fiscal year 2006and accounted for approximately 22% of our total revenue, where our licenserevenue had increased 5% and accounted for approximately 46% of our totalrevenue. Our services revenue gross profit in fiscal year 2006 was 7% versusour license gross profit of 90%. Gross margins, and gross profit may decreasein fiscal year 2007 due to additional compensation expenses as a result ofadopting FAS 123(R).

Total cost of revenuesincreased by $8.6 million, or 37%, to $32.3 million for fiscal year 2005 from$23.7 million for fiscal year 2004. Total cost of revenues as a percentage oftotal revenues was 30% for fiscal years 2005 compared to 31% for fiscal year2004. Gross profit increased by $22.4 million, or 43%, to $74.5 million forfiscal year 2005 from $52.1 million for fiscal year 2004. Total gross profit asa percentage of total revenues was 70% for the fiscal year 2005 up slightlyfrom 69% for fiscal year 2004. The increase in gross profit dollars was largelyattributable to our acquisition of Optika.

*Cost of Revenues—Product Licenses*

| ** **                                                      | ** ** | **Years Ended March 31,**                   | ** ** | **Percentage Change** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                      | ** ** | **2006**                                                   | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands,  except for percentages)** | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Cost of product  licenses                                       |       | $                                                          | 3,886      |                       | $          | 5,017 |   | $ | 4,936 |   |   | (23 | )% |   |   | 2 | % |   |
| Cost of  amortization of capitalized software from acquisitions |       | 1,879                                                      |       | 2,390                      |       | 1,574 |   |   | (21 | )% |   |   | 52 | % |   |
| Total                                                           |       | $                                                          | 5,765      |                       | $          | 7,407 |   | $ | 6,510 |   |   | (22 | )% |   |   | 14 | % |   |
| Gross  profit—licenses                                     |       | $                                                          | 51,185     |                       | $          | 46,969 |   | $ | 35,061 |   |   |   |   |   |   |   |   |   |
| As a percentage of  license revenue:                            |       |                                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Cost of product  licenses                                       |       | 7                                                          | %          | 9                          | %          | 12 | % |   |   |   |   |   |   |   |   |
| Cost of  amortization of capitalized software from acquisitions |       | 3                                                          | %          | 5                          | %          | 4 | % |   |   |   |   |   |   |   |   |
| Total cost of  license revenues                                 |       | 10                                                         | %          | 14                         | %          | 16 | % |   |   |   |   |   |   |   |   |
| Gross profit—licenses                                      |       | 90                                                         | %          | 86                         | %          | 84 | % |   |   |   |   |   |   |   |   |

 

*Costof product licenses.**  *Costof product licenses includes expenses incurred to manufacture, package anddistribute our software products and related documentation, as well as costs oflicensing third-party software embedded in, or sold in conjunction with, oursoftware products. Cost of product licenses represented 7%, 9%, and 12% oftotal license revenues in fiscal years 2006, 2005 and 2004, respectively.

Cost of revenues for product licenses decreased by$1.1 million or 23%, to $3.9 million for fiscal year 2006 from $5.0 million forfiscal year 2005. Gross profit as a percentage of revenues for product licenseswas 93% for fiscal year 2006 compared to 91% for fiscal year 2005. The decreasein cost of revenues for product licenses was attributable to lower third-partysoftware royalty costs associated with technology incorporated into our softwareproducts was approximately $1.1 million. During the first quarter of fiscalyear 2006, we acquired the source code for our Sarbanes-Oxley application frome-Onehundred Group, which also contributed to lower third-party royalty costsof approximately $0.4 million. These reductions 

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were partially offset by achange in mix of software product license toward applications that includesoftware elements that carry higher costs of revenue.

In an on going effort to enhance the features andfunctionality of our suite of software products, we have continued to elect tolicense or purchase more third party software. We expect to continue to licenseor purchase third party software, which may cause our cost of license revenueto increase.

Cost of revenues for product licenses increased by$0.1 million or 2%, to $5.0 million for fiscal year 2005 from $4.9 million forfiscal year 2004. Gross profit as a percentage of revenues for product licenseswas 91% for fiscal year 2005 and 88% for fiscal year 2004. The overall grossprofit percentage increase in product licenses for fiscal year 2005 was due toour acquisition of Optika, whose product applications yield a higher grossmargin than our historical software license applications. In addition, the mixof software product license shifted toward applications that include softwareelements that carry lower costs of revenue.

*Amortizationof Capitalized Software from Acquisitions.**  *Cost of revenues related toamortization of capitalized software from acquisitions was $1.9 million forfiscal year 2006 compared to $2.4 million for fiscal year 2005. The cost ofrevenues for amortization of capitalized software from acquisitions wasattributable to the amortization of capitalized software obtained in theacquisitions of stock and/or assets of RESoft, Kinecta, Active IQ, Ancept,Optika and the e-Onehundred Group, in July 2001, April 2002, March 2003,August 2003, May 2004 and June 2005, respectively. The decreaseof $0.5 million from fiscal year 2005 to fiscal year 2006 was attributed to thecompletion of amortization of capitalized software of approximately$0.9 million related to our acquisition of Kinecta during our fiscal year2005. This was partially offset by amortization expense of $0.4 million recognizedin connection with our acquisition of Optika starting in June of 2004 andthe e-Onehundred Group in June of 2005. We acquired technology from thecompanies listed above for incorporation into our software products in order tomaintain competitive functionality. We expect to continue to evaluate selectivepotential acquisitions. To the extent we consummate additional acquisitions,and depending on the structure of such acquisitions, the assets acquired andthe consideration paid, our costs of revenues related to amortization ofcapitalized software from acquisitions may increase.

Cost of revenues relatedto amortization of capitalized software from acquisitions increased $0.8million for fiscal year 2005 to $2.4 million from $1.6 million for fiscal year2004. The increase in cost of revenues related to amortization of capitalizedsoftware from fiscal 2004 compared to fiscal 2005  was attributable to the acquisition ofOptika, which was partially offset by the completion in June of 2003 and June of2004 of amortization capitalized software related to our acquisitions from RESoft,Inc. in 2001 and Inso Corporation in 2000.

*Cost of Revenues—Services*

| ** **                            | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                            | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Cost of services                      |       | $                                        | 25,046     |                       | $          | 19,550 |   | $ | 13,272 |   |   | 28 | % |   |   | 47 | % |   |
| Gross profit                          |       | $                                        | 1,790      |                       | $          | 222 |   | $ | 1,077 |   |   |   |   |   |   |   |   |   |
| As a percentage  of services revenue: |       |                                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Cost of services  revenues            |       | 93                                       | %          | 99                         | %          | 93 | % |   |   |   |   |   |   |   |   |
| Gross profit—services            |       | 7                                        | %          | 1                          | %          | 7 | % |   |   |   |   |   |   |   |   |

 

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Cost of services,consisting of personnel, billable and unbilled travel expenses and otheroperating expenses, increased by $5.4 million, or 28%, to $25.0 million forfiscal year 2006 from $19.6 million for fiscal year 2005. Gross profit as apercentage of revenues for services improved to 7% for fiscal year 2006 from 1%for fiscal year 2005. The increase in consulting service costs when comparingfiscal year 2006 to fiscal year 2005 is due primarily to our acquisition of certainassets of the e-Onehundred Group in June 2005 and additional personnelcosts incurred to generate the overall increase in our services revenue. Wemade significant changes during fiscal year 2006 to our consulting servicescost structure, including the hiring of a new head of services in Europe,increasing our hourly billing rates, improving our utilization and implementinga web based time management system. We believe that we will continue to improvethe utilization of the combined service departments of Stellent, Optika and thee-Onehundred Group, however our cost of consulting and training services mayincrease due in part to additional compensation expense recognized as a resultof adopting FAS 123(R) for fiscal year 2007.

Cost of services increasedby $6.3 million, or 47%, to $19.6 million for fiscal year 2005 from $13.3million for fiscal year 2004. Gross profit as a percentage of revenues forservices was 1% for fiscal year 2005, compared to 7% for fiscal year 2004. Thedecrease in the gross profit dollars and percentage in service revenues was dueto an increase in personnel related costs and the Optika Acquisition.

Since our service revenueshave lower gross margins than our license revenues, our overall gross marginswill typically decline if our service revenues increase as a percent of totalrevenues. Our cost of service revenues as a percentage of service revenues mayvary from period to period, depending in part on whether the services areperformed by our in-house staff, subcontractors or third-party systemintegrators. If our customers perform more services activities in-house orincrease the use of third-party systems integrators, our service revenuesrealized on a per-customer basis may decline and result in lower gross margins.

*Cost of Revenues—Post-Contract Support*

| ** **                                         | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|----------------------------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                                         | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Post-contract  support                             |       | $                                        | 7,269      |                       | $          | 5,350 |   | $ | 3,885 |   |   | 36 | % |   |   | 38 | % |   |
| Gross profit                                       |       | $                                        | 32,330     |                       | $          | 27,313 |   | $ | 15,969 |   |   |   |   |   |   |   |   |   |
| As a percentage of  post-contract support revenue: |       |                                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Post-contract  support cost of revenues            |       | 18                                       | %          | 16                         | %          | 20 | % |   |   |   |   |   |   |   |   |
| Gross profit—post-contract  support           |       | 82                                       | %          | 84                         | %          | 80 | % |   |   |   |   |   |   |   |   |

 

Cost of post-contractsupport services, consisting of personnel and other operating expenses,increased by $1.9 million, or 36%, to $7.3 million for fiscal year 2006 from$5.4 million for fiscal year 2005. Gross profit as a percentage forpost-contract support was 82% for fiscal year 2006, compared to 84% for fiscalyear 2005. The increase in the gross profit dollars was due to a growinginstalled base of software products. The slight decrease in gross profit as apercentage of post-contract support revenue was due to the additional personnelcosts associated with our 24/7 support staff and other technical supportgroups. We believe we will be able to achieve economies of scale as we continueto grow our installed base, which will allow us to add a minimal level of staffto support increased sales. However, our profit margin for post-contractsupport revenue may decline in fiscal 2007 if increased compensation expensedue to adopting FAS 123(R) outstrips the impact of economies of scale.

Cost of post-contractsupport services increased by $1.5 million, or 38%, to $5.4 million for fiscalyear 2005 from $3.9 million for fiscal year 2004. Gross profit as a percentagefor post-contract support was 84% for fiscal year 2005, compared to 80% forfiscal year 2004. The increase in the gross profit dollars and as a 

24

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percentageof post-contract support revenue was due to the revenue generated from theacquisition of Optika’s installed base on May 28, 2004 and an increase inpost-contract support revenue generated by a growing install base of softwarefor end-user customers in fiscal year 2005.

Since our post-contractrevenues have lower gross margins than our license revenues, our overall grossmargins will typically decline if our post-contract revenues increase as apercent of total revenues relative to the license revenue increase. Our cost ofpost-contract support as a percentage of post-contract support revenues mayvary from period to period, depending in part on whether we are able to sellsupport on new product license revenue and on whether our annual renewal rateswith our existing customers continues to remain high. Any significant change inour annual renewal rates could result in a decline in our gross profit margins.

**Operating Expenses**

*Sales and Marketing*

| ** **                    | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                    | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Sales and  marketing          |       | $                                        | 46,787     |                       | $          | 42,365 |   | $ | 39,122 |   |   | 10 | % |   |   | 8 | % |   |
| Percentage of total  revenues |       | 38                                       | %          | 40                         | %          | 52 | % |   |   |   |   |   |   |   |   |
|                               |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketingexpenses consist of salaries, commissions, benefits and related costs for salesand marketing personnel, travel and marketing programs, including customerconferences, promotional materials, trade shows and advertising. Sales andmarketing expenses increased by $4.4 million, or 10%, for fiscal year 2006 fromfiscal year 2005. As a percentage of total revenues, sales and marketingexpenses were 38% for fiscal year 2006 compared to 40% for fiscal year 2005. Theincrease in sales and marketing expense in fiscal year 2006 was due primarilyto additional variable costs associated with the additional revenue generated. Wealso incurred approximately $0.4 million of severance costs associatedwith the departure of our Executive Vice President of Field Operations, higherlevels of costs associated with sales conferences of approximately$0.6 million and costs associated with other marketing programs andinitiatives of approximately $0.2 million. The overall decrease in sales andmarketing as a percentage of revenue is primarily due to a larger revenue base,achieving improved productivity from our sales personnel and the salesrestructuring actions undertaken during fiscal 2006 and fiscal 2005. Our salesand marketing expenses may increase in fiscal 2007 due to additionalcompensation expense as a result of adopting FAS 123(R). Ultimately, theoverall sales and marketing expenses as a percentage of total revenue will bedependent on the timing of hiring of new sales and marketing personnel, ourspending on marketing programs and the level of revenues, in particular licenserevenues, in each period.

Sales and marketingexpenses increased by $3.2 million, or 8%, for fiscal year 2005 from fiscalyear 2004. As a percentage of total revenues, sales and marketing expenses were40% for fiscal year 2005 compared to 52% for fiscal year 2004. The increase indollars is a direct result of the Optika acquisition. The overall decrease insales and marketing as a percentage of revenue is primarily due to a largerrevenue base, achieving improved productivity from our sales personnel, costsynergies from the acquisition of Optika and the restructurings undertaken byus during the  first and fourth quartersof fiscal year 2005.

*General and Administrative*

| ** **                    | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                    | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| General and  administrative   |       | $                                        | 12,282     |                       | $          | 14,097 |   | $ | 8,856 |   |   | (13 | )% |   |   | 59 | % |   |
| Percentage of total  revenues |       | 10                                       | %          | 13                         | %          | 12 | % |   |   |   |   |   |   |   |   |
|                               |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

25

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General and administrativeexpenses consist of salaries and benefits, and related costs for generalcorporate functions, including finance, accounting, human resources, legal andinformation technology, as well as insurance, professional fees, facilitiescosts and bad debt expense.  General andadministrative expenses decreased by $1.8 million, or 13%, for fiscal year2006 from fiscal year 2005. The decrease in general and administrative expensesin fiscal year 2006 when compared to the same period in fiscal year 2005 wasdue to lower levels of professional fees as a result of the final settlement ofour shareholders’ lawsuit of approximately $0.6 million, and lower levelsof professional fees and other consulting costs related to our compliance withthe Sarbanes-Oxley Act of 2002 and acquisition related activities totalingapproximately $1.2 million. Our overall bad debt expense was approximately$0.2 million lower in fiscal year 2006 when compared to fiscal year 2005. Ourgeneral and administrative expenses as a percentage of total revenue mayincrease in fiscal year 2007 due to additional compensation expenses as aresult of adopting FAS 123(R). If new regulations are enacted by Congress,the Securities and Exchange Commission or the national stock exchanges, itcould also result in an increase of our general and administrative expenses.

For fiscal year 2005,general and administrative expenses increased by $5.2 million, or 59%, forfiscal year 2005 from fiscal year 2004. The increase in general andadministrative expenses was due to increased legal, accounting and otherprofessional fees associated with additional regulations enacted by the Federalgovernment, acquisition related activities and the preliminary settlement ofour class action shareholder lawsuit.

*Research and Development*

| ** **                    | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                    | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Research and  development     |       | $                                        | 20,153     |                       | $          | 17,958 |   | $ | 13,263 |   |   | 12 | % |   |   | 35 | % |   |
| Percentage of total  revenues |       | 16                                       | %          | 17                         | %          | 18 | % |   |   |   |   |   |   |   |   |
|                               |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Research and developmentexpenses consist of salaries and benefits, third-party contractors, facilitiesand related overhead costs associated with our product development and qualityassurance activities. For fiscal year 2006, research and development expensesincreased by $2.2 million, or 12%, from fiscal year 2005. During fiscal year2006, our research and development efforts remained focused on enhancing ourmany products, specifically in the compliance area. During fiscal year 2006 weannounced the  release of our UniversalRetention Management product, which is a new application built on distributedarchitecture that enables companies to apply records and retention polices in aconsistent, legally defensible way across the entire enterprise.  We also released version 7.6 of ourSarbanes-Oxley Solution, which provides for enhanced enterprise features andease of deployment. The increase in research and development for fiscal year2006 when compared to fiscal year 2005 was due to employee related costs andcontract labor. Research and development expenses as a percentage of totalrevenue may increase in fiscal year 2007 due to additional compensationexpenses as a result of adopting FAS 123(R) for fiscal year 2007.

For fiscal year 2005,research and development expenses increased by $4.7 million, or 35%, fromfiscal year 2004, due to our acquisition of Optika in May 2004 and otherpersonnel costs associated with enhanced product development efforts.

26

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*Acquisition Costs*

| ** **                                                       | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                                                       | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                                                       | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Acquisition—related  sales, marketing and other costs  |       |                                     | $          | —                     |       |   | $ | 886 |   |   | $ | — |   |   |   | (100 | )% |   |   | 100 | % |   |
| Percentage of total  revenues                                    |       |                                     | —     | %                          |       | 1 | % |   | — | % |   |   |   |   |   |   |   |   |   |
|                                                                  |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

*Amortization of Acquired Intangible Assets and Other*

| ** **                                            | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                                            | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Amortization of  acquired intangible assets and other |       | $                                        | 626        |                       | $          | 677 |   | $ | 2,006 |   |   | (8 | )% |   |   | (66 | )% |   |
| Percentage of total  revenues                         |       | 1                                        | %          | 1                          | %          | 3 | % |   |   |   |   |   |   |   |   |
|                                                       |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization of acquiredintangible assets for fiscal years 2006 and 2005 related to our acquisitions ofOptika in May 2004 and acquisition of certain assets of e-Onehudred Group inJune 2005. A portion of the purchase price of certain assets of Optika ande-Onehundred Group was allocated to customer base and is being amortized over10 and three years, respectively. Amortization of acquired intangibleassets and stock compensation related to the unvested stock options acquired inthe acquisition of Optika totaled $0.6 million in fiscal year 2006compared to $0.7 million in fiscal year 2005. The decrease when comparing fiscalyear 2006 to fiscal year 2005 is attributable lower stock compensation expense,which was partially offset by additional amortization expense associated withour acquisition of certain assets of the e-Onehundred Group in June 2005.

For fiscal year 2005,amortization of acquired intangible assets and unearned compensation totaled$0.7 million compared to $2.0 million in fiscal year 2004. Thedecrease when comparing fiscal year 2005 to fiscal year 2004 is attributable tothe completion in June 2003 of amortization of substantially all of theintangibles related to our acquisition from Inso Corporation in 2000.

*Impairment Charge on Fixed Assets*

During the fourth quarterof fiscal year 2005 we completed a physical inventory of our fixed assets whichincludes equipment, furniture and leasehold improvement on our leasedfacilities. As a result of this physical inventory, we identified certain fixedassets which had been either decommissioned and had no value or were physicallydisposed of during fourth quarter of fiscal year 2005. In accordance withStatement of Financial Accounting Standard (SFAS) No. 144 *Accounting for Impairment or Disposal of Long-Lived Assets*we recorded an impairment charge of $0.4 million which represented theremaining net book value of these assets as of March 31, 2005.

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*Restructuring Charges*

| ** **                    | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                    | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Restructuring  charges        |       | $                                        | 1,123      |                       | $          | 3,673 |   | $ | 743 |   |   | (69 | )% |   |   | 394 | % |   |
| Percentage of total  revenues |       | 1                                        | %          | 3                          | %          | 1 | % |   |   |   |   |   |   |   |   |
|                               |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

We assessed many factors in determining whether andwhen to restructure our operations, with a significant consideration being theperformance of the economy and the market conditions for information technologyin the United States, Europe and the rest of the world. During fiscal year2006, we adopted a restructuring plan to reorganize our international salesoperations and consolidate certain general and administrative activities. Aninitial charge of $0.5 million was recognized during the second quarter offiscal year 2006, which included the costs for pay and benefits related to theinvoluntary termination of eight employees or approximately $0.3 million withthe remaining $0.2 million related to the closure of our Brazilian facility. Inthe third quarter of fiscal year 2006, a change of estimate was recorded whichresulted in $0.1 million additional expense related to this restructuring plan.The second restructuring charge of $0.5 million was recorded during the fourthquarter of fiscal year 2006, which primarily included costs for pay andbenefits related to the involuntary termination of 20 employees related to theelimination of our digital asset management group as the technology had beenfully integrated into our other software products product. See furtherdiscussion of restructuring charges in Note 10 to the Consolidated FinancialStatements.

During fiscal year 2005, in connection with theacquisition of Optika and management’s plan to reduce costs and improveoperating efficiencies, we recorded two restructuring charges. The initialcharge of $2.5 million was recognized during the first quarter of fiscal year2005, which included costs for pay and benefits related to the involuntarytermination of 30 employees of approximately $1.9 million with the remaining$0.6 million related to the closure of our New York facility. In the fourthquarter of fiscal year 2005 a change of estimate was recorded which resulted in$0.1 million additional expense related to this restructuring plan. The annualeffect on expenses and cash flows associated with the termination of theseemployees was estimated to have decreased our expenses and increased our cashflow by approximately $4.4 million. The second restructuring charge of $1.1million was recorded during our fourth quarter of fiscal year 2005, whichincluded costs for pay and benefits related to the involuntary termination of25 employees of approximately $1.0 million and $0.1 million related to theclosure of our Mexican facility.

**Other Income (Expense)**

| ** **                            | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                            | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Interest income                       |       | $                                        | 2,181      |                       | $          | 822 |   | $ | 982 |   |   | 165 | % |   |   | (16 | )% |   |
| Investment gain  on sale (impairment) |       | —                                   |       | (1,136                     | )          | 388 |   |   | (100 | )% |   |   | (393 | )% |   |
| As a percentage  of total revenues:   |       |                                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                       |       | 2                                        | %          | 1                          | %          | 1 | % |   |   |   |   |   |   |   |   |
| Investment gain on sale  (impairment) |       | —                                   | %          | (1                         | )%         | 1 | % |   |   |   |   |   |   |   |   |
|                                       |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Interest income.**  *Interest income for all years wasrelated to short-term investments purchased with the proceeds of our publicstock offerings completed in June 1999 and March 2000, along withcash generated from operations.

The increase in interestincome for the fiscal year ended March 31, 2006 from 2005 is due to anincrease in the market interest rates earned by the invested funds of approximately$1.0 million and an increase of approximately $0.4 million due to anincrease in the average balance of invested funds over the prior year.

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The decrease in interest income for the fiscal yearended March 31, 2005 from 2004 is due to a decrease in the average balanceof invested funds.

*Investmentimpairment.**  *Duringfiscal year 2005, we recognized an impairment charge of $1.1 million related toour remaining investments in two non-public, start-up technology companies.Both of these companies are still in business, but upon review of theirbusiness plans or the incremental financing that they received, we determinedthe change in their valuation was other-than-temporary impairment.

During fiscal year 2004,we sold our shares in a publicly traded company, an investment for which thevalue was previously written down to zero as the result of an other thantemporary impairment. We realized approximately $0.4 million in proceeds andgain from the sale.

**Income Taxes**

| ** **                    | ** ** | **Years Ended March 31,** | ** ** | **Percentage Change** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **2006**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| ** **                    | ** ** | **(In thousands,**                  | ** ** | ** **                 | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **except for percentages)**    | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Provision for  income taxes   |       | $                                        | 173        |                       |       | $ | — |   |   |   | $ | — |   |   |   | 100 | % |   |   | — | % |   |
| Percentage of total  revenues |       | —                                   | %          |                       | —     | % |   |   | — | % |   |   |   |   |   |   |   |   |   |
|                               |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During fiscal year 2006 weincurred $0.2 million for a tax provision primarily related to the AlternativeMinimum Tax and Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standard (SFAS) No. 109 *Accountingfor Income Taxes*. See further discussion of Income Taxes in Note 8to the Consolidated Financial Statements.

**Net Operating LossCarryforwards**

As of March 31, 2006,we had net operating loss (NOL) carryforwards of approximately $126.3 millionin the United States (U.S.) and foreign NOL carryforwards of approximately$36.0 million. The net operating loss carryforwards will expire at variousdates beginning in 2010, if not utilized. The Tax Reform Act of 1986 imposessubstantial restrictions on the utilization of net operating losses and taxcredits in the event of an “ownership change” of a corporation. Our ability toutilize net operating loss carryforwards on an annual basis will be limited asa result of “ownership changes” in connection with the sale of equitysecurities. We have provided a valuation allowance against the entire amount ofthe deferred tax asset as of March 31, 2006 because of uncertaintyregarding its full realization. Our accounting for deferred taxes involves theevaluation of a number of factors concerning the realizability of our deferredtax assets. In concluding that a valuation allowance was required, managementconsidered such factors as our history of operating losses, potential futurelosses and the nature of our deferred tax assets. See further discussion of ourNOL carryforwards in Note 8 to the Consolidated Financial Statements.

**Liquidity andCapital Resources**

We have funded our operations and satisfied ourcapital expenditure requirements through revolving working capital and termloans from banking institutions, private placements and public offerings ofsecurities.

To date, we have invested our capital expenditures inproperty and equipment, consisting largely of computer hardware and software.Capital expenditures for fiscal year 2006 and 2005 were $5.5 million and $1.9million, respectively. We have also entered into capital and operating leasesfor facilities and equipment. We expect that our capital expenditures willincrease as our employee base grows. At March 31, 2006, we had capitalexpenditure lease commitments with remaining total payments of $0.8 million.

29

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As of March 31, 2006,we had $81.8 million in cash and marketable securities and $66.4 million inworking capital. We currently believe that our cash and cash equivalents onhand will be sufficient to meet our working capital requirements for theforeseeable future, particularly through March 31, 2007. On a longer termbasis, we may require additional funds to support our working capitalrequirements or for other purposes and may seek to raise such additional fundsthrough public or private equity financings or from other sources. We cannot becertain that additional financing will be available on terms favorable to us,or on any terms, or that any additional financing will not be dilutive.

We continue to evaluatepotential strategic acquisitions that could utilize equity and/or cashresources. Such opportunities could develop quickly due to market andcompetitive factors.

Cash, cash equivalents andmarketable securities increased $9.0 million, or 12%, to $81.8 million as of March 31,2006 from $72.8 million at March 31, 2005. The increase was primarily dueto positive cash flow generated from operations during fiscal year 2006, theproceeds of stock option exercises and our employee stock purchase plan. Ourcash, cash equivalents and marketable securities decreased $0.8 million, or 1%from fiscal 2005 to fiscal 2004. The decrease was primarily due to ouracquisition of Optika, partially offset by the positive cash flow generatedfrom operations and financing activities during fiscal year 2005.

Cashprovided by (used) in 2006, 2005 and 2004 was as follows (in thousands):

| ** **                                       | ** ** | **Years Ended March 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash provided by  (used in) operating activities |       | $                                        | 12,925     |   | $ | 2,917 |   | $ | (5,809 | ) |
| Cash provided by  (used in) investing activities |       | (34,402                                  | )          | (2,171 | ) | 10,307 |   |
| Cash provided by  financing activities           |       | 8,005                                    |       | 3,912 |   | 1,867 |   |
|                                                  |            |                                          |            |  |  |  |  |  |  |  |

 

*Operating Activities:**  *Net cash provided by operatingactivities of $12.9 million in fiscal year 2006 resulted primarily from netincome of $6.3 million. After excluding the effects of non-cash expenses,including depreciation and amortization of $3.1 million, amortization ofintangible assets of $2.5 million and lease incentives of $1.0 million, theadjusted cash provided before the effect of changes in working capitalcomponents was $12.9 million. Additional cash provided was the result of anincrease of $1.5 million of other accrued liabilities, an increase of $0.5million in deferred revenue, these additions to cash were partially offset byan increase of $1.2 million in accounts receivable, $0.7 million decrease inaccounts payable, and $0.1 million increase in prepaid expenses and othercurrent assets.

Net cash provided byoperating activities of $2.9 million in fiscal year 2005 resulted from theeffects of non-cash expenses including depreciation and amortization of $3.5million, amortization of intangible assets of $3.1 million and , an impairmentcharge on fixed assets of $0.4 million were included in our net loss of $5.8million. The adjusted cash provided before the effect of changes in workingcapital components was $1.2 million. Additional cash provided was the result ofan increase of $4.4 million in deferred revenue, $1.2 million of other accruedliabilities, $0.7 million in accounts payable, a $2.4 million decrease inprepaid expenses and other current assets, $1.1 million related to thewrite-down of investments in other companies and, these additions to cash werepartially offset by an increase of $8.1 million in accounts receivable.

Net cash used in operatingactivities of $5.8 million in fiscal year 2004 resulted from a net loss of$10.5 million. After excluding the effects of non-cash expenses includingdepreciation and amortization of $3.4 million and amortization of intangibleassets of $3.6 million, the adjusted cash usage before the effect of changes inworking capital components was $3.5 million. Additional cash usage was theresult of an increase of $3.6 million in accounts receivable, $0.7 million inprepaid expenses and other current assets and $0.4 million related to the saleof an investment in another company, partially offset by an increase of $1.9million in deferred revenues and other accrued liabilities and an increase ofapproximately $0.5 million in accounts payable.

30

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Our primary source of operating cash flow is thecollection of accounts receivable from our customers offset by payments to ouremployees, vendors and service providers. We measure the effectiveness of ourcollection efforts by an analysis of average accounts receivable daysoutstanding (“days outstanding”). Days outstanding were 91 days on March 31,2006 and 84 days on March 31, 2005 and 2004, respectively. Collections ofaccounts receivable and related days outstanding will fluctuate in futureperiods due to the timing and amount of our future revenues, payment terms oncustomer contracts and the effectiveness of our collection efforts.

Our operating cash flows will also be impacted in thefuture based on the timing of payments to our vendors. We endeavor to pay ourvendors and service providers in accordance with invoice terms and conditions.The timing of cash payments in future periods will be impacted by the nature ofvendor arrangements and management’s assessment of our cash inflows.

*InvestingActivities:*   Net cash used in investingactivities was $34.4 million for fiscal year 2006. This resulted from netpurchases of marketable securities of $23.4 million, $5.4 million used in thee-Onehundred acquisition, $5.5 million to purchase property and equipment, and$0.1 million related to the purchase of other intangible assets. During thesecond quarter of fiscal year 2006, we completed the move into our newcorporate headquarters. In connection with this move, we were provided with$1.0 million of tenant improvements by our landlord, which was included in our$5.5 million of property and equipment purchases.

Net cash used in investing activities was $2.2 millionfor fiscal year 2005. This resulted from net maturities of marketablesecurities of $10.8 million, offset by approximately $11.1 million used inacquiring Optika and other entities, and approximately $1.9 million to purchaseequipment and furniture.

Net cash provided by investing activities was $10.3million for fiscal year 2004. This resulted from net proceeds from investmenttrading and maturities of $14.4 million and a $0.4 million investment gain onsale, partially offset by approximately $2.3 million to purchase property andequipment and $2.2 million used to acquire Ancept, Inc.

Generally, our investment portfolio is classified asheld to maturity. Our investments objectives are to preserve principal andprovide liquidity, while at the same time maximizing yields withoutsignificantly increasing risk. We generally hold investments in commercialpaper, corporate bonds and United States government agency securities tomaturity.

We anticipate that we will continue to purchaseproperty and equipment needed in the normal course of our business. The amountand timing of these purchases and the related cash outflows in future periodsis difficult to predict and is dependent on a number of factors including thehiring of employees, the rate of change of computer hardware and software usedin our business and our business outlook.

*FinancingActivities:*   Net cash provided by financingactivities of $8.0 million in fiscal 2006 included approximately $9.4 millionfrom the net proceeds from the issuance of common stock under our EmployeeStock Purchase Plan and upon the exercises of stock options, offset by $0.9million cash dividend paid to shareholders and $0.5 million of payments relatedto capital lease obligations.

Net cash provided by financing activities of $3.9million in fiscal 2005 included approximately $4.5 million from the netproceeds from the issuance of common stock under our Employee Stock PurchasePlan and upon the exercises of stock options, partially offset by $0.6 millionof payments related to capital lease obligations.

Net cash provided by financing activities of $1.9million in fiscal 2004 included approximately $2.2 million from the netproceeds from the issuance of common stock under our Employee Stock PurchasePlan and upon the exercises of stock options, partially offset by $0.3 millionof repurchased stock.

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Our cash flows from financingactivities are the result of cash receipts from the issuance of common stock.We receive cash from the exercise of common stock options and the sale ofcommon stock under our Employee Stock Purchase Plan. While we expect tocontinue to receive these proceeds in future periods, the timing and amount ofsuch proceeds is difficult to predict and is contingent on a number of factorsincluding the price of our common stock, the number of employees participatingin our stock option plans and our Employee Stock Purchase Plan and generalmarket conditions. During fiscal 2006, we issued all available shares under theEmployee Stock Purchase Plan. It is our current intention not to authorizeadditional shares under this plan. Our Board of Directors approved a $0.03 percommon share dividend during the fourth quarter of fiscal year 2006. OnMay 9, 2006, the Board of Directors declared a quarterly cash dividend of$0.03 per share to be paid on June 27, 2006 to stockholders of record on June 15,2006. The determination to pay future dividends on common stock will be at thediscretion of the Board of Directors and will depend on the Company’s financialcondition, results of operations, cash requirements, prospects and otherfactors as the Board of Directors may deem relevent. 

**Financial RiskManagement**

As a global concern, weface exposure to adverse movements in foreign currency exchange rates. Theseexposures may change over time as business practices evolve and could have amaterial adverse impact on our consolidated financial results. Our primaryexposures relate to non-United States dollar-denominated revenues and operatingexpenses in Europe, Asia Pacific, Australia and Canada. At the present time,the exposure is not significant. We do not anticipate significant currencygains or losses in the near term.

**ContractualObligations**

Thetable below discloses a summary of the Company’s specified contractualobligations at March 31, 2006 (in thousands):

| ** **            | ** ** | **Total** | ** ** | **Under  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **After  5 Years** | ** ** |
|-----------------------|------------|-----------|------------|------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| Earn out  payments(1) |       | $         | 1,500      |                   | $          | 1,500          |       | $              | —     |                    | $          | — |   | $ | — |   |
| Purchase orders       |       | 1,215     |       | 1,215                  |       | —         |       | —         |       | —                  |       |
| Capital leases        |       | 800       |       | 505                    |       | 295            |       | —         |       | —                  |       |
| Operating leases      |       | 11,010    |       | 3,257                  |       | 2,942          |       | 2,288          |       | 2,523                   |       |
| Total                 |       | $         | 14,525     |                   | $          | 6,477          |       | $              | 3,237      |                    | $          | 2,288 |   | $ | 2,523 |   |

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(1)          TheCompany has agreed to make earn out payments dependent upon the future revenueperformance of certain companies acquired. The expected payments of $1,500noted above are based on the anticipated future levels of revenues of the productsrelated to the acquired companies.

**Off-balance sheetarrangements**

We did not have anyoff-balance sheet arrangements as of March 31, 2006 or 2005.

**Critical AccountingPolicies and Estimates**

In preparingour condensed consolidated financial statements, we make estimates, assumptionsand judgments that can have a significant impact on our revenues, loss fromoperations and net loss, as well as on the value of certain assets andliabilities on our consolidated balance sheet. We believe that there areseveral accounting policies that are critical to an understanding of ourhistorical and future performance, as these policies affect the reportedamounts of revenues, expenses and significant estimates and 

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judgments applied by management. While there are anumber of accounting policies, methods and estimates affecting our consolidatedfinancial statements, areas that are particularly significant include:

·       revenuerecognition;

·       estimatingthe allowance for doubtful accounts;

·       estimatingthe accrual for restructuring and excess facilities costs;

·       accountingfor income taxes; and

·       valuation and evaluatingimpairment of long-lived assets, intangible assets and goodwill.

***Revenue Recognition***

We currently derive all ofour revenues from licenses of software products and related services. Werecognize revenue in accordance with Statement of Position (SOP) 97-2,*Software Revenue Recognition*, as amendedby SOP 98-9, Modification of SOP 97-2, *SoftwareRevenue Recognition with Respect to Certain Transactions*, andSecurities and Exchange Commission Staff Accounting Bulletin 104, *Revenue Recognition*.

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

Persuasive Evidence of anArrangement Exists—We determine that persuasive evidence of an arrangementexists with respect to a customer under, i) a signature license agreement,which is signed by both the customer and us, or, ii) a purchase order, quote orbinding letter-of-intent received from and signed by the customer, in whichcase the customer has either previously executed a signature license agreementwith us or will receive a shrink-wrap license agreement with the software. Wedo not offer product return rights to end users or resellers.

Delivery has Occurred—Oursoftware may be either physically or electronically delivered to the customer.We determine that delivery has occurred upon shipment of the software pursuantto the billing terms of the arrangement or when the software is made availableto the customer through electronic delivery. Customer acceptance generallyoccurs at delivery.

The Fee is Fixed orDeterminable—If at the outset of the customer arrangement, we determine thatthe arrangement fee is not fixed or determinable, revenue is typicallyrecognized when the arrangement fee becomes due and payable. Fees due under anarrangement are generally deemed fixed and determinable if they are payablewithin twelve months.

Collectibility is Probableand Supported—We determine whether collectibility is probable and supported ona case-by-case basis. We may generate a high percentage of our license revenuefrom our current customer base, for whom there is a history of successfulcollection. We assess the probability of collection from new customers basedupon the number of years the customer has been in business and a credit reviewprocess, which evaluates the customer’s financial position and ultimately theirability to pay. If we are unable to determine from the outset of an arrangementthat collectibility is probable based upon our review process, revenue isrecognized as payments are received.

With regard to softwarearrangements involving multiple elements, we allocate revenue to each elementbased on the relative fair value of each element. Our determination of fairvalue of each element in multiple-element arrangements is based onvendor-specific objective evidence (VSOE). We limit our assessment of VSOE foreach element to the price charged when the same element is sold separately. Wehave analyzed all of the elements included in our multiple-element arrangementsand have determined 

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that wehave sufficient VSOE to allocate revenue to consulting services andpost-contract customer support (PCS) components of our license arrangements.Generally, we sell our consulting services separately, and have establishedVSOE on this basis. VSOE for PCS is determined based upon the customer’s annualrenewal rates for these elements. Accordingly, assuming all other revenuerecognition criteria are met, revenue from perpetual licenses is recognizedupon delivery using the residual method in accordance with SOP 98-9, andrevenue from PCS is recognized ratably over their respective terms, typicallyone year.

Our end-user customerstypically enter into perpetual license arrangements. Our OEM customers generallyenter into term-based license arrangements, the term of which generally exceedsone year in length. We recognize revenue from time-based licenses at the timethe license arrangement is signed, assuming all other revenue recognitioncriteria are met, if the term of the time-based license arrangement is greaterthan twelve months. If the term of the time-based license arrangement is twelvemonths or less, we recognize revenue ratably over the term of the licensearrangement.

Services revenue consistsof fees from consulting services and PCS. Consulting services include needsassessment, software integration, security analysis, application developmentand training. We bill consulting services fees either on a time and materialsbasis or on a fixed-price schedule. In general, our consulting services are notessential to the functionality of the software. Our software products are fullyfunctional upon delivery and implementation and generally do not require anysignificant modification or alteration for customer use. Customers purchase ourconsulting services to facilitate the adoption of our technology and maydedicate personnel to participate in the services being performed, but they mayalso decide to use their own resources or appoint other professional serviceorganizations to provide these services. Software products are billedseparately from professional services. We recognize revenue from consulting servicesas services are performed. Our customers typically purchase PCS annually, andwe price PCS based on a percentage of the product license fee or of the productlist price. Customers purchasing PCS receive product upgrades, Web-basedtechnical support and telephone hot-line support.

Customer advances andbilled amounts due from customers in excess of revenue recognized are recordedas deferred revenue.

We follow very specificand detailed guidelines, discussed above, in determining revenues; however,certain judgments and estimates are made and used to determine revenuerecognized in any accounting period. Material differences may result in theamount and timing of revenue recognized for any period if different conditionswere to prevail. For example, in determining whether collection is probable, weassess our customers ability and intent to pay. Our actual experience withrespect to collections could differ from our initial assessment if, forinstance, unforeseen declines in the overall economy occur and negativelyimpact our customers financial condition.

*Accounts Receivable and Allowance for DoubtfulAccounts*

The preparation of ourconsolidated financial statements requires management to make estimates andassumptions that affect the reported amount of assets and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereported period. Specifically, we make estimates as to the overallcollectibility of accounts receivable and provide an allowance for amountsdeemed to be uncollectible. Management specifically analyzes its accountsreceivable and historical bad debt experience, customer concentrations,customer credit-worthiness, current economic trends and changes in its customerpayment terms when evaluating the adequacy of the allowance for doubtfulaccounts. At March 31, 2006 and 2005, our allowance for doubtful accountsbalance, which related to specific accounts where we believe collection is notprobable and to a lesser extent our historical experience applied to accountsreceivable not specifically reserved, was $0.8 million. These amounts represent3% of total gross accounts receivable at March 31, 2006 and 2005.

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*Restructuring andExcess Facilities Accrual*

Due to certain economic factorsin prior years and associated reduction in information technology spendingduring this time, we implemented a series of restructuring and facility consolidationplans to improve our operating performance. We also implemented restructuringplans related to the integration of our acquisition of Optika. Restructuringand facilities consolidation costs consist of expenses associated withworkforce reductions and consolidation of excess facilities.

*WorkforceReductions*

In connection with ourrestructuring plans, we accrue for severance payments and other relatedtermination benefits provided to employees in connection with involuntary staffreductions. We accrue for these benefits in the period when benefits arecommunicated to the terminated employees. Typically, terminated employees arenot required to provide continued service to receive termination benefits. Ifcontinued service is required, then the severance liability is accrued over therequired service period. In general, we use a formula based on a combination ofthe number of years of service and the employee’s position within the Companyto calculate the termination benefits to be provided to affected employees. At March 31,2006 and 2005, a total $0.4 million and $1.0 million, respectively, was accruedfor future severance and termination benefits payments, which is payablethrough September  2006.

*Excess Facilities*

In connection with ourrestructuring and facility consolidation plans, we perform evaluations of ourthen-current facilities requirements and identify facilities that are in excessof our current and estimated future needs. When a facility is identified asexcess and we have ceased use of the facility, we accrue the fair value of thelease obligations. In determining fair value, we consider expected subleaseincome over the remainder of the lease term and related exit costs, if any. Todetermine the estimated sublease income, we receive appraisals from real estatebrokers to aid in our estimate. In addition, during our evaluation of ourfacilities requirements, we also identify operating equipment and leaseholdimprovements that may have suffered a reduction in their economic useful lives.Most of our excess facilities are being marketed for sublease and are currentlyunoccupied. Accordingly, our estimate of excess facilities could differ fromactual results and such differences could result in additional charges thatcould materially affect our consolidated financial position and results ofoperations. At March 31, 2006 and 2005, we had $0.2 million and $0.7million, respectively, accrued for excess facilities, which is payable through September 2006.We reassess our excess facilities liability each period based on current realestate market conditions.

*Accounting forIncome Taxes*

As part of the process of preparing our consolidatedfinancial statements, we are required to estimate our income tax liability ineach of the jurisdictions in which we do business. This process involvesestimating our actual current tax expense together with assessing temporarydifferences resulting from differing treatment of items, such as deferredrevenues, for tax and accounting purposes. These differences result in deferredtax assets and liabilities. We must then assess the likelihood that thesedeferred tax assets will be recovered from future taxable income and, to theextent we believe that recovery is not more likely than not or unknown, we mustestablish a valuation allowance.

Significant management judgment is required indetermining our provision for income taxes, our deferred tax assets andliabilities and any valuation allowance recorded against our deferred taxassets. At March 31, 2006, we have recorded a full valuation allowance of$73.1 million against our deferred tax assets, due to uncertainties related toour ability to utilize our deferred tax assets, consisting principally ofcertain net operating losses carried forward. The valuation allowance is basedon our estimates of taxable income by jurisdiction and the period over whichour deferred tax assets will be recoverable. We had U.S. 

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net operating loss (NOL)carryforwards of approximately $126.3 million and foreign NOL carryforwards ofapproximately $36.0 million at March 31, 2006. These NOL carryforwardsbegin to expire in 2010 and are subject to annual utilization limitations dueto prior ownership changes. In addition, we had combined federal and stateresearch and development credit carryforwards of approximately $5.7 million at March 31,2006.

Realization of the NOL carryforwards, the research anddevelopment credit carryforwards, and other deferred tax temporary differencesis contingent on future taxable earnings. The deferred tax asset was reviewedfor expected utilization using a “more likely than not” approach as required bySFAS No. 109, *Accounting for IncomeTaxes*, by assessing the available positive and negative evidencesurrounding its recoverability.

We will continue to assessand evaluate strategies that will enable the deferred tax asset, or portionthereof, to be utilized, and will reduce the valuation allowance appropriatelyat such time when it is determined that the “more likely than not” approach issatisfied.

*Valuation and Evaluationof Impairment of Long-Lived Assets*

We account for long-livedassets in accordance with the provisions of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*. This Statement requires that long-livedand intangible assets be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net undiscounted cashflows expected to be generated by the asset. If the carrying amount of an assetexceeds its estimated future cash flows, an impairment charge is recognized inthe amount by which the carrying amount of the asset exceeds the fair value ofthe asset. Assets to be disposed of are reported at the lower of the carryingamount or fair value less costs to sell. During the fourth quarter of fiscalyear 2005 we completed a physical inventory of our fixed assets which includesequipment, furniture and leasehold improvement on our leased facilities. As aresult of this physical inventory, we identified certain fixed assets which hadbeen either decommissioned and had no value or were physically disposed ofduring fiscal year 2005. In accordance with SFAS No. 144  we recorded an impairment charge of $0.4million which represented the remaining net book value of these assets as of March 31,2005.

*Valuation andEvaluation Goodwill and Other Acquired Intangible Assets*

On April 1,2002, we adopted SFAS No. 142, *Goodwill and OtherIntangible Assets*.  SFAS No. 142requires that goodwill no longer be amortized and that goodwill be testedannually for impairment or more frequently if events and circumstances warrant.We are required to perform an impairment review of goodwill on at least anannual basis. This impairment review involves a two-step process as follows:

·       Step1—We compare the fair value of our reporting unit to its carrying value,including goodwill. If the reporting unit’s carrying value, including goodwill,exceeds the unit’s fair value, we move on to Step 2. If the unit’s fair valueexceeds the carrying value, no further work is performed and no impairmentcharge is necessary.

·       Step2—We perform an allocation of the fair value of the reporting unit to itsidentifiable tangible and non-goodwill intangible assets and liabilities. Thisderives an implied fair value for the reporting unit’s goodwill. We thencompare the implied fair value of the reporting unit’s goodwill with thecarrying amount of the reporting unit’s goodwill. If the carrying amount of thereporting unit’s goodwill is greater than the implied fair value of itsgoodwill, an impairment charge would be recognized for the excess.

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We have determined that we have two reporting units. Weperformed and completed our required annual impairment testing on January 1,2006. Upon completing our internal review, we determined that the carryingvalue of our recorded goodwill as of this date had not been impaired and noimpairment charge was  recorded.

We are also required toassess goodwill for impairment on an interim basis when indicators exist thatgoodwill may be impaired based on the factors mentioned above. For example, ifour market capitalization declines below our net book value or we suffer asustained decline in our stock price, we will assess whether our goodwill hasbeen impaired. A significant impairment could result in additional charges andhave a material adverse impact on our consolidated financial condition andoperating results. Additionally, no circumstances occurred during the fourthquarter of fiscal year 2006 which would have created an impairment loss at March 31,2006.

**Recent AccountingPronouncements**

In November 2005, the Financial AccountingStandards Board (FASB) issued FASB Staff Position (FSP) FAS 115-1,*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*. The guidance in this FSPaddresses the determination of when an investment is considered impaired,whether that impairment is other-than-temporary, and the measurement of animpairment loss. The FSP also includes accounting considerations subsequent tothe recognition of an other-than-temporary impairment and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments. The guidance in this FSP amends FASBStatement No. 115,*Accounting forCertain Investments in Debt and Equity Securities*. The guidance inthis FSP nullifies certain requirements of EITF Issue No. 03-1,*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*, and supersedes*EITF Abstracts*, Topic D-44,*Recognition of Other-Than-Temporary Impairment uponthe Planned Sale of a Security Whose Cost Exceeds Fair Value*. Theguidance in this FSP is required to be applied to reporting periods beginningafter December 15, 2005. The Company’s adoption of this Staff Positionduring fiscal year 2006 did not have a material impact on its consolidatedfinancial statements.

In May 2005, the FASB issued SFAS No. 154,*Accounting Changes and Error Corrections.*This new standard replaces APB Opinion No. 20,*Accounting Changes*, and FASB Statement No. 3,*Reporting Accounting Changes in Interim FinancialStatements*. Among other changes, SFAS No. 154 requires that avoluntary change in accounting principle be applied retrospectively with allprior period financial statements presented on the new accounting principle,unless it is impracticable to do so. SFAS No. 154 also provides that (1) achange in method of depreciating or amortizing a long-lived nonfinancial assetbe accounted for as a change in estimate (prospectively) that was effectedby a change in accounting principle, and (2) correction of errors inpreviously issued financial statements should be termed a restatement. The newstandard is effective for accounting changes and correction of errors made infiscal years beginning after December 15, 2005. The Company’s adoption ofthe provisions of SFAS No. 154 did not have a material impact on the Company’sconsolidated financial statements.

In December 2004,FASB issued SFAS No. 123 (revised 2004),*Share-Based Payment,* known as Statement 123(R). Statement 123(R) supersedesAPB Opinion No. 25. Under APB Opinion No. 25, no compensation expenseis recognized for employee stock option grants if the exercise price of theCompany’s stock option grants is at or above the fair market value of theunderlying stock on the date of grant. SFAS No. 123(R) requires thedetermination of the fair value of the share-based compensation at the grantdate and the recognition of the related expense over the period in which theshare-based compensation vests. The original effective date for SFAS No. 123(R)for the Company was July 1, 2005. However, on April 14, 2005, the Securitiesand Exchange Commission (SEC) adopted a new rule that amends the effectivedates for SFAS No. 123(R). The SEC’s new rule allows companies toimplement SFAS No. 123(R) at the beginning of their next fiscal year,instead of the next reporting period, that begins 

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after June 15,2005. Therefore, the Company adopted SFAS No. 123(R) effective April 1,2006. As part of this adoption, the Company began expensing options effective April 1,2006 and has also elected not to restate the prior period results. Based on thecurrent amount of outstanding stock options that will vest on or after April 1,2006, the Company anticipates recognizing $4.0 million to $6.0 millionof compensation expense under SFAS No. 123(R) during fiscal year 2007.This amount will fluctuate depending on future stock options granted to orforfeited by employees and directors.

**Related PartyTransactions**

We held investments in and notes with five non-publicstart-up technology companies, owning approximately 3% to 12% of thesecompanies, and in publicly traded technology companies listed on NASDAQ,primarily Active IQ, in which the Company owned 5.4%, exclusive of warrants. Investmentsin these companies were made with the intention of giving us opportunities tohave new technologies developed for us or to give us leverage into certainvertical markets that we may not otherwise be able to obtain on our own. At March 31,2003, we had remaining value in two of these non-public company investments andowned approximately 9% to 13% of them. At March 31, 2004, our investmentsin these two non-public companies were approximately 8% and 11%.  The value of these two investments at March 31,2003 and 2004 was approximately $1.1 million. A permanent decline in value forthese two companies of approximately $1.1 million was recorded in fiscal 2005.

Upon our acquisition of certain assets of Active IQ inMarch 2003, we recorded an impairment of approximately $1.1 millionrelated to our investment in Active IQ. For substantially all of the year endedMarch 31, 2003, our investment in Active IQ was less than 5%. In fiscal2004, we sold this investment and recorded a gain of approximately $0.4 million.

During the years ended March 31, 2003, and March 31,2004, we entered into several sales transactions with companies affiliated withmembers of our Board of Directors. Revenues of $0.4 million and $0.2 millionfrom these sales transactions was recorded during the years ended March 31,2003, and March 31, 2004, respectively. At March 31, 2003, and March 31,2004, we had an account receivable balance of approximately $0.3 million and$0.1 million associated with these transactions, respectively. The terms andconditions, including fees, with respect to the transactions were substantiallysimilar to those with unaffiliated third parties negotiated at arms length. Themembers of our Board of Directors affiliated with these companies had no director indirect material interest in the transactions.

In March 2004, weentered into a non-exclusive reseller agreement with Optika, Inc., acompany with which we had announced a definitive merger agreement in January 2004and later acquired in May 2004 (see Note 2 to the Consolidated FinancialStatements). The agreement provided for the sale of Optika products by us. Inthe year ended March 31, 2004, we recognized approximately $0.2 million ofrevenue under the agreement.

**Item 7A.   *Quantitative and Qualitative Disclosures About Market Risk***

**Interest Rate Risk**

The primary objectives of our investment activitiesare to preserve principal and provide liquidity while at the same timemaximizing yields without significantly increasing risk. To achieve theseobjectives, we maintain our portfolio of cash equivalents and short-terminvestments in a variety of securities, including government and corporateobligations, certificates of deposit and money market funds. See Note 1 ofNotes to the Consolidated Financial Statements.

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Thefollowing table presents the fair value of cash, cash equivalents andmarketable securities that are subject to interest rate risk and the averageinterest rate as of March 31, 2006 (dollars in thousands):

| ** **                                        | ** ** | **2006**      | ** ** |
|---------------------------------------------------|------------|---------------|------------|
| Cash, cash  equivalents and marketable securities |       | $ 81,753 |       |
| Approximate average  interest rate                |       | 3.70          | %          |

 

Thefollowing table presents the fair value of cash, cash equivalents andmarketable securities that are subject to interest rate risk and the averageinterest rate as of March 31, 2005 (dollars in thousands):

| ** **                                        | ** ** | **2005**      | ** ** |
|---------------------------------------------------|------------|---------------|------------|
| Cash, cash  equivalents and marketable securities |       | $ 72,750 |       |
| Approximate average  interest rate                |       | 1.9           | %          |

 

Our cash equivalents and short-term investments aresubject to interest rate risk and will decline in value if market interestrates increase or decrease. Assuming an average investment balance of $75.0million, if interest rates were to increase (decrease) by one hundred basispoints, this would result in an approximate $0.7 million increase (decrease) inannual interest income. Additionally, we have the ability to hold ourinvestments until maturity and, therefore, we would not expect to recognize anadverse impact on income or cash flows.

As of March 31, 2006,we did not hold derivative financial instruments and have never held suchinstruments in the past.

**Foreign CurrencyRisk**

The majority of ourrevenues and expenses are denominated in United States Dollars. As a result, wehave not experienced significant foreign exchange gains and losses to date.While we do expect transactions in foreign currencies in fiscal year 2007, wedo not anticipate that foreign exchange gains or losses will be significant. Wehave engaged in limited and immaterial amount of foreign currency forwardcontract activities to date. We did not have any outstanding as of March 31,2006.

**Commodity PriceRisk**

We did not hold commodityinstruments as of March 31, 2006, and have never had such instruments inthe past.

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**Item 8.   *Financial Statements and Supplementary Data***

**QuarterlyFinancial Information (Unaudited)**

| ** **                                             | ** ** | **Three Months Ended**                                      | ** **              |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------|-------------------------|
| ** **                                             | ** ** | **March 31,  2006(1)**                                           | ** **              | **December 31,  2005** | ** ** | **September 30,  2005(2)** | ** ** | **June 30,  2005** | ** ** |
| ** **                                             | ** ** | **(In thousands, except per share amounts)** | ** **              |
| Total revenues                                         |       |                                                                  | $ 32,975           |   |   |   | $ 31,702 |   |   |   | $ 30,147 |   |   | $ 28,561 |   |
| Gross profit                                           |       |                                                                  | $ 23,359           |   |   |   | $ 21,387 |   |   |   | $ 20,449 |   |   | $ 20,110 |   |
| Total operating  expenses                              |       |                                                                  | $ 21,556           |   |   |   | $ 19,695 |   |   |   | $ 20,277 |   |   | $ 19,443 |   |
| Income from  operations                                |       |                                                                  | $ 1,803            |   |   |   | $ 1,692 |   |   |   | $    172 |   |   | $    667 |   |
| Net income                                             |       |                                                                  | $ 2,491            |   |   |   | $ 2,212 |   |   |   | $    557 |   |   | $ 1,082 |   |
| Net income per  common share:                          |       |                                                                  |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                  |       |                                                                  | $   0.09 |   |   |   | $   0.08 |   |   |   | $   0.02 |   |   | $   0.04 |   |
| Diluted                                                |       |                                                                  | $   0.08 |   |   |   | $   0.07 |   |   |   | $   0.02 |   |   | $   0.04 |   |
| Shares used in  computing net income per common share: |       |                                                                  |                    |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                  |       |                                                                  | 29,007                  |   |   |   | 28,447 |   |   |   | 28,101 |   |   | 27,546 |   |
| Diluted                                                |       |                                                                  | 30,851                  |   |   |   | 30,103 |   |   |   | 29,264 |   |   | 28,487 |   |

 

| ** **                                                    | ** ** | **Three Months Ended**                                      | ** **    |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------|---------------|
| ** **                                                    | ** ** | **March 31,  2005(3)**                                           | ** **    | **December 31,  2004** | ** ** | **September 30,  2004** | ** ** | **June 30,  2004(4)** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except per share amounts)** | ** **    |
| Total revenues                                                |       |                                                                  | $ 28,528 |   |   |   | $ 27,667 |   |   |   | $ 27,956 |   |   | $ 22,660 |   |
| Gross profit                                                  |       |                                                                  | $ 20,076 |   |   |   | $ 19,185 |   |   |   | $ 19,635 |   |   | $ 15,608 |   |
| Total operating  expenses                                     |       |                                                                  | $ 22,247 |   |   |   | $ 19,117 |   |   |   | $ 19,030 |   |   | $ 19,637 |   |
| Income (loss)  from operations                                |       |                                                                  | $ (2,171 | ) |   |   | $      68 |   |   |   | $    605 |   |   | $ (4,029 | ) |
| Net income (loss)                                             |       |                                                                  | $ (2,953 | ) |   |   | $    193 |   |   |   | $    754 |   |   | $ (3,835 | ) |
| Net income (loss) per  common share:                          |       |                                                                  |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                         |       |                                                                  | $ (0.11  | ) |   |   | $   0.01 |   |   |   | $   0.03 |   |   | $ (0.16 | ) |
| Diluted                                                       |       |                                                                  | $ (0.11  | ) |   |   | $   0.01 |   |   |   | $   0.03 |   |   | $ (0.16 | ) |
| Shares used in computing  net income (loss) per common share: |       |                                                                  |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                         |       |                                                                  | 27,237        |   |   |   | 26,963 |   |   |   | 26,720 |   |   | 23,879 |   |
| Diluted                                                       |       |                                                                  | 27,237        |   |   |   | 28,284 |   |   |   | 27,776 |   |   | 23,879 |   |

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(1)          Included in net incomefor the fourth quarter of fiscal year 2006 was a restructuring charge of $0.4million, consisting of $0.5 million related to the sale of our Digital AssetManagement group, off-set by a benefit as a result of a change in estimate of$0.1 million related to the Company’s first quarter fiscal year 2005restructuring plan.

(2)          Included in net incomefor the second quarter of fiscal year 2006 was a restructuring charge of $0.6million, which $0.5 million related to reorganizing its international salesoperations and also consolidation of certain general and administrativeactivities and the remaining $0.1 million related to a change in estimatecharge of the first quarter fiscal year 2005 restructuring plan. Net incomealso includes $0.2 million related to litigation expenses regarding thesettlement of the shareholders’ class action lawsuit.

(3)          Included in net loss forthe fourth quarter of fiscal year 2005 was a restructuring charge of $1.1million as part of our final reorganization and integration of Optika, $0.1million change in estimate charge, expense of $0.8 million related tolitigation expenses were included in general and administrative expense for theaccrual of remaining expenses regarding the settlement of the shareholders’class 

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action lawsuit and thesettlement of certain other litigation. It also includes an impairment chargeon our fixed assets which totaled $0.4 million and a $1.1 million investmentimpairment charge.

(4)          Included in net loss forthe first quarter of fiscal year 2005 was $0.9 million of acquisition-relatedsales and marketing charges and a restructuring charge of $2.5 million relatedto the initial integration of  Optika.

We believe that period-to-period comparisons of ourconsolidated financial results should not be relied upon as an indication offuture performance. The operating results of many software companies reflectseasonal trends, and our business, financial condition and results ofoperations may be affected by such trends in the future. These trends mayinclude higher revenues in the fourth quarter as many customers complete annualbudgetary cycles and lower revenues in the first quarter and summer months whenmany businesses experience lower sales, particularly in the European market.

The consolidated financialstatements required by this item are submitted as a separate section of this AnnualReport on Form 10-K. See Item 15.

**Item 9.   *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure***

None.

**Item 9A.   *Controls and Procedures***

**Controls andProcedures**

Our Chief Executive Officer and Chief FinancialOfficer have evaluated that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) and concluded that such disclosurecontrols and procedures were sufficiently effective as of March 31, 2006to ensure that the information required to be disclosed in this Annual Reporton Form 10-K was recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andinstructions for Form 10-K.

Management, including ourChief Executive Officer and Chief Financial Officer, does not expect that ourdisclosure controls and procedures or internal control over financial reportingwill prevent all errors or fraud. An internal control system, no matter howwell designed and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all internal control systems, noevaluation of controls can provide absolute assurance that all control issues,errors and instances of fraud, if any, within Stellent, Inc. have beendetected.

**Management’s Reporton Internal Control over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over our financial reporting (as definedin Rule 13a-15(f) under the Securities Exchange Act of 1934, asamended). Management assessed the effectiveness of our internal control overfinancial reporting as of March 31, 2006. In making this assessment,management used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission and by the Information Systems Auditand Control Association (ISACA) in their Control Objectives for InformationTechnology (COBIT). Based on this framework, management has concluded that ourinternal control over financial reporting was effective as of March 31,2006. Our independent registered public accounting firm, Grant Thornton LLP,has issued an audit report on management’s assessment of, and issued itsopinion on, our internal control over financial reporting, which is included inItem 15 of Form 10-K and is incorporated herein by reference.

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There were no changes inour internal control over financial reporting during the quarter ended March 31,2006 that have materially affected, or are reasonably likely to materiallyaffect our internal control over financial reporting.

**Item 9B.   *Other Information***

None.

**PART III**

**Item 10.   *Directors and Executive Officers of the Registrant***

The information concerning our officers required bythis Item is incorporated by reference to the information included herein underItem 4A. The information concerning our directors and other matters required bythis Item is incorporated by reference to our definitive proxy statement to our2006 Annual Meeting of Stockholders under the caption “Election of Directors”.

The information concerning compliance with Section 16(a) ofthe Exchange Act required by this Item is incorporated by reference to ourdefinitive proxy statement to our 2006 Annual Meeting of Stockholders under thecaption “Section 16(a) Beneficial Ownership Reporting Compliance”.

Codeof Ethics. All of our employees, including our Chief Executive Officer, ChiefFinancial Officer and Chief Operating Officer are required to abide by Stellent’slong-standing business conduct policies to ensure that our business isconducted in a consistently legal and ethical manner. Stellent has posted thetext of such code of ethics on its website 

(http://www.Stellent.com/en/about/investor/governance/index.htm).At the same website, any future amendments to the code of ethics will also beposted. Any person may request a copy of the code of ethics, at no cost, bywriting to us at the following address:

Stellent, Inc.Governance and Nominating Committee7500 Flying Cloud Drive, Suite 500Eden Prairie, MN 55344

**Item 11.   *Executive Compensation***

The information that isrequired by this Item is incorporated by reference to our definitive proxystatement to our 2006 Annual Meeting of Stockholders under the caption “ExecutiveCompensation”.

**Item 12.   *Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters***

The information aboutsecurity ownership of certain beneficial owners and management required by thisItem is incorporated by reference to our definitive proxy statement to our 2006Annual Meeting of Stockholders under the captions “Security Ownership ofCertain Beneficial Owners and Management”.

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**EQUITY COMPENSATIONPLAN INFORMATION**

Thefollowing table provides information as of March 31, 2006 for ourcompensation plans under which securities may be issued:

| **Plan Category**                                     | ** ** | ** ** | ** ** | **Number of securities to be issued  upon exercise of outstanding  options, warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** **                                                        | **Number of securities  remaining available for  future issuance under  equity compensation plans** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  Compensation Plans Approved by Securityholders     |       |       | 5,148,497  |                                                                                                                                                     |       |                                                                                                        | $ 9.84          |                                                                                                                                        |       |   | 6,817,416 | (1) |   |
| Equity  Compensation Plans Not Approved by Securityholders |       |       | 624,618    |                                                                                                                                                     |       |                                                                                                        | $ 9.06          |                                                                                                                                        |       |   | — |   |   |
| Total                                                      |       |       | 5,773,115  |                                                                                                                                                     |       |                                                                                                        | $ 9.76          |                                                                                                                                        |       |   | 6,817,416 |   |   |

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(1)   Includes securities available for future issuance under the 2005Equity Incentive Plan (the “2005 Plan”) shareholder approved compensation plansother than upon the exercise of an outstanding option, or right.

**EQUITY COMPENSATIONPLANS NOT APPROVED BY SECURITY HOLDERS**

***Stellent, Inc. 1999 Employee Stock Option andCompensation Plan***

InNovember 1999, the board adopted the 1999Employee Stock Option and Compensation Plan, known as the 1999 Plan. The1999 Plan has not been approved by our shareholders.

*SharesSubject to the 1999 Plan.*   As of March 31,2006, 707,166 shares of our commonstock were subject to outstanding awards granted under the 1999 Plan. Noadditional awards may be granted under the 1999 Plan. If any award grantedpursuant to the 1999 Plan expires or terminates without being exercised infull, the unexercised shares released from such award will become available forissuance under the 2005 Plan. Previously granted but unexercised awards aresubject to adjustment for any future stock dividends, splits, combinations, orother changes in capitalization as described in the 1999 Plan.

*PlanAdministration.*   The 1999 Plan is administered bya committee of two or more members of the board or if the board has notdesignated a committee, the board will constitute the committee and administerthe 1999 Plan.

*Eligibility.*   All employees of our company andits subsidiaries who are not also officers or directors of our company, andconsultants to our company or its subsidiaries, are eligible to receive awardsunder the 1999 Plan.

*Incentiveand Non-Statutory Stock Options.*   Bothincentive stock options and non-statutory stock options may be granted underthe terms of the 1999 Plan. However, since the 1999 Plan has not been approvedby our shareholders, under the Internal Revenue Code of 1986, incentive stockoptions may not be granted under the 1999 Plan. The exercise price of an optionis determined by the committee. The exercise price may not be less than 100% ofthe fair market value, as defined in the 1999 Plan, of our common stock on thedate the option is granted. Stock options may be granted and exercised at suchtimes as the committee may determine, provided that the term shall not exceedten years and one day from the date of grant. The purchase price for commonstock purchased upon the exercise of stock options may be payable in cash,uncertified or certified check, bank draft, by delivery of shares of our commonstock having a fair market value on the date the option is exercised equal toall or any part of the option price of the stock being purchased, byinstructing us to withhold from the shares of common stock issuable uponexercise of the stock option shares having fair market value on the date theoption is exercised equal to all 

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or any part of the optionprice of the stock being purchased or any other manner authorized by thecommittee.

*StockAppreciation Rights.*   A stock appreciation rightmay be granted under the 1999 Plan with or without reference to any relatedstock option. The recipient of a stock appreciation right receives, withoutpayment to us, a number of shares of common stock, cash or any combinationthereof, the amount of which is determined by dividing: (x) the number of shares of common stock as to whichthe stock appreciation right is exercised multiplied by the amount by which thefair market value of the shares on the exercise date exceeds the purchase priceof shares of common stock under the related stock option or, if there is norelated stock option, an amount determined by the committee at the time ofgrant, by (y) the fair market value of a share of common stock on theexercise date.

*PerformanceShares.*   A performance share consists of an awardthat is paid in shares of common stock. Performance shares entitle therecipient to payment in amounts determined by the committee based upon theachievement of specified performance targets during a specified term.Performance shares may be subject to additional terms and conditions asdetermined by the committee.

*RestrictedStock and Other Stock-Based Awards.*   Thecommittee may grant, either alone or in combination with other types of awards,restricted stock and other stock-based awards. Restricted stock may containsuch restrictions, including provisions requiring forfeiture and imposingrestrictions on stock transfer, as the committee may determine. To enforce therestrictions imposed by the committee, a recipient must enter into an agreementwith us setting forth the conditions of the grant.

*Accelerationof Awards, Lapse of Restrictions, Forfeiture.*   Thecommittee may provide in a recipient’s agreement for the lapse or waiver ofrestrictions or conditions on restricted stock or other awards, or accelerationof the vesting of stock options, stock appreciation rights and other awards, oracceleration of the term with respect to which the achievement of performancetargets for performance shares is determined in the event of a fundamentalchange in the corporate structure of our company, or the replacement of themajority of the board members within a period of less than two years bydirectors not nominated and approved by the board, or, upon a change of controlof our company or a recipient’s death, disability or retirement. Options andstock appreciation rights automatically vest upon death or disability, unlessotherwise provided in a recipient’s agreement, or upon the occurrence of achange in control of our company. If a recipient’s employment or otherrelationship with our company or its affiliates is terminated for any reasonother than death or disability, then any unexercised portion of suchrecipient’s award will generally be forfeited, except as provided in the 1999Plan or such recipient’s agreement or by the committee.

*Adjustments,Modifications, Termination.*   The 1999 Plan givesthe committee discretion to adjust the kind and number of shares available forawards or subject to outstanding awards, the limitations on the number and typeof securities that may be issued to an individual recipient, the exercise priceof outstanding stock options, and performance targets for, and payments under,outstanding awards of performance shares upon mergers, recapitalizations, stockdividends, stock splits or similar changes affecting our company. Adjustmentsin performance targets and payments on performance shares are also permittedupon the occurrence of such other events as may be specified by the committee.The 1999 Plan also gives the board the right to terminate, suspend or modifythe 1999 Plan. Amendments to the 1999 Plan are subject to shareholder approval,however, if needed to comply with applicable laws or regulations. The committeemay generally also alter or amend any agreement covering an award granted underthe 1999 Plan to the extent permitted by law. Under the 1999 Plan, thecommittee generally may cancel outstanding stock options and stock appreciationrights in exchange for the payment of cash or other consideration to therecipients upon dissolutions, liquidations, mergers, statutory share exchangesor similar events involving our company.

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***Stellent, Inc. 2000 Employee Stock Incentive Plan***

In May 2000, the board adopted the 2000 EmployeeStock Incentive Plan, known as the 2000 Employee Plan. The 2000 Employee Planwas amended in October 2001. The 2000 Employee Plan has not been approvedby our shareholders.

*SharesSubject to the 2000 Employee Plan.*   As ofMarch 31, 2006, 1,293,291 sharesof our common stock were subject to outstanding awards granted. No additionalawards may be granted under the 2000 Employee Plan, and any award grantedpursuant to the 2000 Employee Plan expires or terminates without beingexercised in full, the unexercised shares released from such award will becomeavailable for issuance under the 2005 Plan. Previously granted but unexercisedawards are subject to adjustment for any future stock dividends, splits,combinations, or other changes in capitalization as described in the 2000Employee Plan.

*PlanAdministration.*   The 2000 Employee Plan isadministered by a committee of three or more members of the board or if theboard has not designated a committee, the board will constitute the committeeand administer the 2000 Employee Plan. The committee may delegate all or anypart of its responsibilities under the 2000 Employee Plan to officers or otherpersons for purposes of determining and administering awards.

*Eligibility.*   Allemployees of our company and its affiliates who are not officers or directorsof our company are eligible to receive awards under the 2000 Employee Plan.Awards may be granted by the committee to any individuals or entities who arenot employees of our company, but who provide services to us or our affiliatesas a consultant or adviser.

*Non-QualifiedStock Options.*   Non-qualified stock options maybe granted under the 2000 Employee Plan. The exercise price of an option isdetermined by the committee. The exercise price for stock options may not beless than 100% of the fair market value of our common stock on the date theoption is granted. Stock options may be granted and exercised at such times asthe committee may determine. No more than 500,000 shares of common stockunderlying stock options and stock appreciation rights may be granted to anyone person in any year. The purchase price for common stock purchased upon theexercise of stock options may be payable in cash, in our common stock having afair market value on the date the option is exercised equal to the option priceof the stock being purchased, or a combination of cash and stock, as providedin each stock option agreement. In addition, the committee may permitrecipients of stock options to simultaneously exercise options and sell thecommon stock purchased upon exercise and to use the sale proceeds to pay thepurchase price.

*StockAppreciation Rights and Performance Shares.*   Therecipient of a stock appreciation right receives all or a portion of the amountby which the fair market value of a specified number of shares, as of the datethe right is exercised, exceeds a price specified by the committee at the timethe right is granted. The price specified by the committee must be at least100% of the fair market value of our common stock on the date the right isgranted. No more than 500,000 shares of stock underlying stock appreciationrights and stock options may be awarded to any one person in any year.Performance shares entitle the recipient to payments in amounts determined bythe committee based upon the achievement of specified performance targetsduring a specified term. No person may receive performance shares relating tomore than 500,000 shares of our common stock in any year. Payments with respectto stock appreciation rights and performance shares may be paid in cash, sharesof our common stock, or a combination of cash and shares, as determined by thecommittee.

*RestrictedStock and Other Stock-Based Awards.*   Thecommittee may grant, either alone or in combination with other types of awards,restricted stock and other stock-based awards. Restricted stock may containsuch restrictions, including provisions requiring forfeiture and imposingrestrictions on stock transfer, as the committee may determine and set forth ineach restricted stock agreement. No award of 

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restricted stock may vestearlier than one year from the date of grant, except as provided in eachrestricted stock agreement. No more than 400,000 of the shares of common stocksubject to the 2000 Employee Plan may be granted as restricted stock subject toperformance conditions or subject to other stock-based awards.

*Accelerationof Awards, Lapse of Restrictions, Forfeiture.*   Thecommittee may provide in an award agreement for the lapse or waiver ofrestrictions or conditions on restricted stock or other awards, or accelerationof the vesting of stock options, stock appreciation rights and other awards, oracceleration of the term with respect to which the achievement of performancetargets for performance shares is determined in the event of a fundamentalchange in our corporate structure, upon a change of control of our company orupon a recipient’s death, disability or retirement. If a recipient’s employmentor other relationship with our company or its affiliates is terminated for anyreason, then any unexercised portion of such employee’s award will generally beforfeited, except as provided in that employee’s award agreement or by thecommittee.

*Adjustments,Modifications, Termination.*   The 2000 EmployeePlan gives the committee discretion to adjust the kind and number of sharesavailable for awards or subject to outstanding awards, the limitations on thenumber and type of securities that may be issued to an individual participant,the exercise price of outstanding stock options, and performance targets for,and payments under, outstanding awards of performance shares upon a merger,recapitalization, stock dividend, stock split or similar change affecting ourcompany. Adjustments in performance targets and payments on performance sharesare also permitted upon the occurrence of such other events as may be specifiedby the committee. The 2000 Employee Plan also gives the board the right toterminate, suspend or modify the 2000 Employee Plan. Amendments to the 2000Employee Plan are subject to shareholder approval, however, only if needed tocomply with any applicable law or regulation. Termination, suspension ormodification of the 2000 Employee Plan generally may not materially andadversely affect any right an individual participant may have acquired beforethe termination, suspension or modification, unless otherwise provided in thatindividual’s award agreement, or otherwise, or required by law. We (with theapproval of the committee) may amend any agreement covering an award grantedunder the 2000 Employee Plan unless the committee determines that the amendmentwould be materially adverse to the recipient and is not required by law. Underthe 2000 Employee Plan, the committee generally may cancel outstanding stockoptions and stock appreciation rights in exchange for the payment of cash orother consideration to the recipients upon dissolutions, liquidations, mergers,statutory share exchanges or similar events involving our company.

***InfoAccess 1995 Stock Option Plan***

In connection with our acquisition ofInfoAccess, Inc. on September 29, 1999, we assumed theInfoAccess, Inc. 1995 Stock Option Plan, known as the InfoAccess Plan. TheInfoAccess Plan was approved by the shareholders of InfoAccess on May 10,1995, but has not been approved by our shareholders.

*SharesSubject to the InfoAccess Plan.*   As of March 31, 2006, 3,123 shares of our common stock were subject to outstandingawards granted under the InfoAccess Plan. Noadditional stock options may be granted under the InfoAccess Plan.

*PlanAdministration.*   The InfoAccess Plan isadministered by the board or a committee appointed by the board. The board orcommittee has the authority, subject to the terms of the InfoAccess Plan, tointerpret provisions of the InfoAccess Plan and the options granted under itand to adopt rules and regulations for administering the InfoAccess Plan.

*Eligibility.*   Allemployees of InfoAccess were eligible to receive option grants under theInfoAccess Plan prior to our adoption of the InfoAccess Plan. Non-statutorystock options could be granted under the 

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InfoAccess Plan prior toour adoption to individuals or entities that were not employees of InfoAccess,but that provided services to InfoAccess or its affiliates as consultants orindependent contractors.

*Typesof Awards under the InfoAccess Plans.*   Bothincentive stock options and non-statutory stock options could be granted underthe InfoAccess Plan. The exercise price of an option was determined by thecommittee of the board of directors of InfoAccess administering the InfoAccessPlan at the time of the grant. The exercise price for all options under theInfoAccess Plan could not be less than 100% of the fair market value of theshares on the date of the grant. The exercise price for incentive stock optionsgranted to persons who beneficially owned 10% or more of the outstanding stockof InfoAccess at the time of the grant could not be less than 110% of the fairmarket value of the shares on the date of grant. The number of shares andpurchase price of each recipient’s option grant has been adjusted to reflectthe exchange ratio of InfoAccess shares for our shares in the merger of thecompanies. Stock options were granted and may be exercised at such times as thecommittee of the board of directors of InfoAccess administering the InfoAccessPlans at the time of the grant determined; however, under the InfoAccess Plan,if no exercise schedule is set forth in a recipient’s agreement, 25% of theshares subject to the option shall vest two years following the start of therecipient’s continuous relationship with our company, and an additional 25% ofthe shares subject to the option shall vest following each additional year ofthe recipient’s continuous relationship with our company. The purchase pricefor common stock purchased upon the exercise of stock options may be payable incash or the committee may, subject to approval by the board, permit recipientsof stock options to deliver a promissory note as full or partial payment forthe exercise of a stock option. In addition, shares may be purchased with ourcommon stock, that a recipient has held at least six months, having a fairmarket value on the date the option is exercised equal to the option price ofthe stock being purchased.

*Terminationof Employment or Relationship.*   If a recipient’srelationship with our company or its affiliates is terminated for any reasonother than for cause (as defined in the InfoAccess Plan), death or totaldisability, then any portion of the recipient’s option grant that is vested butunexercised may be exercised for a period of thirty days following thetermination of employment, unless the option by its terms expires earlier, andexcept as otherwise provided in the InfoAccess Plan or such recipient’sagreement. If a recipient’s relationship with us or our affiliates isterminated for cause, as defined in the InfoAccess Plan, such recipient’soptions granted under the InfoAccess Plan automatically will terminate as ofthe first discovery by our company of any reason for that recipient’s terminationfor cause. If a recipient’s employment with us or our affiliates is terminatedby such recipient’s total disability, as defined in the InfoAccess Plan, suchrecipient may exercise vested but unexercised options granted under theInfoAccess Plan for a period of three months after such recipient’s terminationdate, subject to the expiration of the option under the terms of suchrecipient’s agreement. If a recipient’s employment with us or our affiliates isterminated by such recipient’s death while an employee of our company or itsaffiliates, or during the period in which options granted under the InfoAccessPlan may be exercised due to the termination of such recipient’s employmentwith us or our affiliates other than for cause (as defined in the InfoAccessPlan) or such recipient’s total disability, such recipient’s legalrepresentative may exercise vested but unexercised options granted to thatrecipient under the InfoAccess Plan for a period of one year after thatrecipient’s death, subject to the expiration of the option under the terms ofsuch recipient’s option agreement.

*Adjustmentsand Modifications.*   The InfoAccess Plan providesthat each option will be proportionately adjusted for any increase or decreasein the number of issued shares of our common stock resulting from a split-up orconsolidation of shares or any like capital adjustment, or the payment of anystock dividend. The InfoAccess Plan gives the board the right to terminate,suspend, or modify the InfoAccess Plan as long as the rights and obligationrelated to outstanding option grants are not adversely affected.

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**Item 13. *Certain Relationships and Related Transactions***

The information that isrequired by this Item is incorporated by reference to our definitive proxystatement for our 2006 Annual Meeting of Stockholders under the caption “CertainRelationships and Related Transactions”.

**Item 14.   *Principal Accountant Fees and Services***

The information that isrequired by this Item is incorporated by reference to our definitive proxystatement for our 2006 Annual Meeting of Stockholders under the caption “Ratificationof Independent Auditors”.

**Item 15.   *Exhibits and  Financial StatementSchedules***

(a)          Documents filed as partof this report:

1.                ConsolidatedFinancial Statements:

| **Description**                                                                                                  | ** ** | ** ** | ** ** | **Page Number in this  Annual Report** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Audited Financial  Statements:                                                                                   |       |       |       |                                                       |       |
| Report of  Independent Registered Public Accounting Firm (regarding Financial  Statements)                       |       |       | 56         |                                                       |       |
| Report of  Independent Registered Public Accounting Firm (regarding Internal Controls Over  Financial Reporting) |       |       | 57         |                                                       |       |
| Consolidated  Balance Sheets                                                                                     |       |       | 58         |                                                       |       |
| Consolidated  Statements of Operations                                                                           |       |       | 59         |                                                       |       |
| Consolidated  Statements of Stockholder’s Equity                                                            |       |       | 60         |                                                       |       |
| Statements of  Cash Flows                                                                                        |       |       | 61         |                                                       |       |
| Notes to Financial Statements                                                                                    |       |       | 62         |                                                       |       |

 

2.                 FinancialStatement Schedule:

**ScheduleII Valuation of Qualifying Accounts**

| **Column A**                | ** ** | ** **              | ** **       | **Column B**                              | ** ** | **Column C** | ** **       | **Column D** | ** ** | **Column E**                        | ** **       |
|----------------------------------|------------|-------------------------|------------------|------------------------------------------------|------------|-------------------|------------------|-------------------|------------|------------------------------------------|------------------|
| **Description**                  | ** ** | ** **              | ** **       | **Balance at  Beginning  of Period** | ** ** | **Additions**     | ** **       | **Deductions**    | ** ** | **Balance at  End of  Period** | ** **       |
| ** **                       | ** ** | **(In thousands)** | ** **       |
| Deducted From  Assets:           |       |                    |             |                                           |       |              |             |              |       |                                     |             |   |   |   |   |   |   |
| Allowance for doubtful accounts: |       |                    |             |                                           |       |              |             |              |       |                                     |             |   |   |   |   |   |   |
| Year ended March 31, 2004   |       |                    | $ 1,400     |                                           |       |              | $ 1,175     |              |       |                                     | $ 1,436     | (a) |   |   | $ 1,139 |   |   |
| Year ended March 31, 2005   |       |                    | $ 1,139     |                                           |       |              | $ 1,057     |              |       |                                     | $ 1,393     | (a) |   |   | $  803 |   |   |
| Year ended  March 31, 2006  |       |                    | $  803 |                                           |       |              | $  908 |              |       |                                     | $  883 | (a) |   |   | $  828 |   |   |
|                                  |            |                         |                  |                                                |            |                   |                  |                   |            |                                          |                  |  |  |  |  |  |  |  |  |  |  |

 

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(a)    Accountswritten off as uncollectible.

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**REPORTOF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM ON SCHEDULE**

To the Board of Directors and ShareholdersStellent, Inc.

We have audited inaccordance with the standards of the Public Company Accounting Oversight Board(United States) the consolidated financial statements of Stellent, Inc.and subsidiaries referred to in our report dated June 12, 2006 which isincluded in the Annual Report to Shareholders and incorporated by reference in PartII of this form. Our audit was conducted for the purpose of forming an opinionon the basic financial statements taken as a whole.  The Schedule II is presented for purposes ofadditional analysis and is not a required part of the basic financialstatements.  This schedule has beensubjected to the auditing procedures, applied in the audit of the basicfinancial statements, and in our opinion, is fairly stated in all materialrespects, in relation to the basic financial statements taken as a whole.
|                        | /s/ GRANT  THORNTON LLP |
|------------------------|-------------------------|
| Minneapolis, Minnesota |                    |
| June 12, 2006     |                    |

 

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**3. Exhibits**

**EXHIBITS**
| File  | ** ** | **Description**                                                                                                                      | ** ** | **Reference**                                                                                                                                                                                    |
|-------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |       | Amended and  Restated Articles of Incorporation                                                                                      |       | Incorporated by  reference to Exhibit 3.1 of the Registrant’s Form 8-K dated  August 29, 2001.                                                                                    |
| 3.2   |       | Bylaws                                                                                                                               |       | Incorporated by  reference to Exhibit 4.2 of the Registrant’s Registration Statement on  Form S-8, File No. 333-75828.                                                            |
| 4.1   |       | Share Rights  Agreement between the Registrant and Wells Fargo Bank Minnesota, N.A., as  Rights Agent, dated as of May 29, 2002 |       | Incorporated by  reference to Exhibit 99.1 of the Registrant’s Registration Statement on  Form 8-A12G, File No. 000-19817, filed June 3, 2002.                               |
| 10.1  |       | Stellent, Inc.  1994-1997 Stock Option and Compensation Plan*                                                                   |       | Incorporated by  reference to Exhibit A of the Registrant’s Definitive Proxy Statement  Schedule 14A, filed with the Securities and Exchange Commission July 28, 1998                  |
| 10.2  |       | InfoAccess, Inc.  1990 Stock Option Plan as amended September 29, 1999                                                     |       | Incorporated by  reference to Exhibit 99.1 of the Registrant’s Registration Statement on  Form S-8, File No. 333-90843                                                       |
| 10.3  |       | InfoAccess, Inc.  1995 Stock Option Plan as amended September 29, 1999                                                     |       | Incorporated by  reference to Exhibit 99.2 of the Registrant’s Registration Statement on  Form S-8, File No. 333-90843                                                       |
| 10.5  |       | Stellent, Inc.  1999 Employee Stock Option and Compensation Plan                                                                |       | Incorporated by  reference to Exhibit 10.31 of the Registrant’s Form 10-Q for the  three months ended September 30, 1999                                                          |
| 10.6  |       | 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 |
| 10.7  |       | Stellent, Inc.  amended and restated 2000 Employee Stock Incentive Plan*                                                        |       | Incorporated by  reference to Exhibit 10.34 of the Registrant’s Form 10-Q for the  three months ended September 30, 2001                                                          |
| 10.8  |       | Stellent, Inc.  Amended and Restated 1997 Directors Stock Option Plan*                                                          |       | Incorporated by  reference to Exhibit B of the Registrant’s Definitive Proxy Statement  Schedule 14A, filed with the Securities and Exchange Commission July 26, 2002                  |
| 10.10 |       | Optika Imaging  Systems, Inc. 1994 Stock Option /Stock Issurance Plan                                                           |       | Incorporated by  reference to Exhibit 99.1 of the Registrant’s Registration Statement on  Form S-8, File No. 333-116000                                                      |
| 10.11 |       | Amendment to  Optika Imaging Systems, Inc. 1994 Stock Option/Stock Issuance Plan                                                |       | Incorporated by  reference to Exhibit 10.1 of the Registrant’s Form 10-Q for  the period Ended June 30, 2004                                                                 |
| 10.12 |       | Optika Inc. 2000  Non-Officer Stock Incentive Plan                                                                                   |       | Incorporated by  reference to Exhibit 99.1 of the Registrant’s Registration Statement on  Form S-8, File No. 333-116000                                                      |

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| 10.13 |   | Optika Inc. 2003  Equity Incentive Plan                                                                                                                                                                                 |   | Incorporated by  reference to Exhibit 99 of the Registrant’s Registration Statement on  Form S-8, File No. 333-116148     |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14 |   | Amendment to  Optika Inc. 2003 Equity Incentive Plan                                                                                                                                                                    |   | Incorporated by  reference to Exhibit 10.1 of the Registrant’s Form 10-Q for  the period Ended June 30, 2004              |
| 10.15 |   | Stellent, Inc.  2005 Equity Incentive Plan *                                                                                                                                                                       |   | Incorporated by  reference to Exhibit A of the Registrant’s Definitive Proxy Statement on  Schedule 14A, filed on July 5, 2005 |
| 10.46 |   | French Annex to  the Stellent, Inc. 2000 Stock Incentive Plan                                                                                                                                                      |   | Incorporated by  reference to Exhibit 10.46 of the Registrant’s Form 10-K for the  fiscal year ended March 31, 2002.           |
| 10.49 |   | Employment  Agreement Dated April 1, 2003, by and between the Registrant and Robert F.  Olson*                                                                                                                |   | Incorporated by  reference to Exhibit 10.49 of the Registrant’s Form 10-Q for the  quarter ended June 30, 2003.                |
| 10.50 |   | Employment  Agreement Dated April 1, 2003 by and between the Registrant and Daniel  Ryan*                                                                                                                          |   | Incorporated by  reference to Exhibit 10.50 of the Registrant’s Form 10-Q for the  quarter ended June 30, 2003                 |
| 10.51 |   | Employment  Agreement Dated April 1, 2003, by and between the Registrant and Gregg A.  Waldon*                                                                                                                |   | Incorporated by  reference to Exhibit 10.51 of the Registrant’s Form 10-Q for the  quarter ended June 30, 2003                 |
| 21    |   | Subsidiaries of  Registrant                                                                                                                                                                                             |   | Electronic  transmission                                                                                                                      |
| 23    |   | Consent of Grant  Thornton LLP                                                                                                                                                                                          |   | Electronic  transmission                                                                                                                      |
| 24    |   | Power of Attorney                                                                                                                                                                                                       |   | Included on the  signature page hereof                                                                                                   |
| 31.1  |   | Certification by  Robert F. Olson, Chairman of the Board, President and Chief Executive  Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                   |   | Electronic  Transmission                                                                                                                      |
| 31.2  |   | Certification by  Darin P. McAreavey, Executive Vice President, CFO, Treasurer and Secretary,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                           |   | Electronic  Transmission                                                                                                                      |
| 32.1  |   | Certification by  Robert F. Olson, Chairman of the Board, President and Chief Executive  Officer, pursuant to 18 USC Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |   | Electronic  Transmission                                                                                                                      |
| 32.2  |   | Certification by  Darin P. McAreavey, Executive Vice President, CFO, Treasurer and  Secretary, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |   | Electronic  Transmission                                                                                                                      |

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*                    Managementcontract, compensation plan or arrangement.

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(b)          Exhibits

See Item 15(a)(3)

(c)           Financial Statements

See Item 15(a)(1)

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
|                          | STELLENT, INC. |
|--------------------------|----------------|
|                     | (Registrant)   |
|                     | By:            | /s/  ROBERT F. OLSON |
|                     |           | Robert F. Olson, |
|                     |           | *Chairman  of the Board, President and* |
|                     |           | *Chief  Executive Officer* |
| Date: June 14, 2006 |           |   |

 

53

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**SIGNATURES AND POWEROF ATTORNEY**

Eachof the undersigned hereby appoints Robert F. Olson and Darin P. McAreavey, andeach of them (with full power to act alone), as attorneys and agents for theundersigned, with full power of substitution, for and in the name, place andstead of the undersigned, to sign and file with the Securities and ExchangeCommission under the Securities Act of 1934, as amended, any and all amendmentsand exhibits to this Annual Report on Form 10K and any and allapplications, instruments, and other documents to be filed with the Securitiesand Exchange Commission pertaining to this Annual Report on Form 10-Kor any amendments thereto, with full power and authority to do and perform anyand all acts and things whatsoever requisite and necessary or desirable.Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed by the following persons on behalf of the registrant andin the capacities indicated on June 14, 2006.
|        |   | /s/  ROBERT F. OLSON                                            |
|--------|--------|-----------------------------------------------------------------|
|   |   | Robert F. Olson,                                                |
|   |   | Chairman of the  Board,                                         |
|   |   | Chief Executive  Officer                                        |
|   |   | and President  (Principal Executive Officer)                    |
|   |   | /s/  DARIN P. MCAREAVEY                                         |
|   |   | Darin P.  McAreavey,                                            |
|   |   | Executive Vice  President,                                      |
|   |   | Chief Financial Officer,                                        |
|   |   | Secretary,  Treasurer                                           |
|   |   | (Principal  Financial Officer and Principal Accounting Officer) |
|   |   | /s/  WILLIAM B. BINCH                                           |
|   |   | William B. Binch,  Director                                     |
|   |   | /s/  KENNETH H. HOLEC                                           |
|   |   | Kenneth H. Holec,  Director                                     |
|   |   | /s/  ALAN B. MENKES                                             |
|   |   | Alan B. Menkes,  Director                                       |
|   |   | /s/  PHILIP E. SORAN                                            |
|   |   | Philip E. Soran,  Director                                      |
|   |   | /s/  RAYMOND A. TUCKER                                          |
|   |   | Raymond A.  Tucker, Director                                    |
|   |   | /s/  STEVEN C. WALDRON                                          |
|   |   | Steven C.  Waldron, Director                                    |

 

54

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**STELLENT, INC.**

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                    | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm (regarding Financial Statements)                          |       | 56       |
| Report of Independent Registered Public Accounting  Firm (regarding Internal Control Over Financial Reporting)     |       | 57       |
| Consolidated  Balance Sheets as of March 31, 2005 and 2006                                                    |       | 58       |
| Consolidated Statements of Operations for the years  ended March 31, 2004, 2005 and 2006                      |       | 59       |
| Consolidated Statements of Shareholders’ Equity for  the years ended March 31, 2004, 2005 and 2006  |       | 60       |
| Consolidated Statements of Cash Flows for the years  ended March 31, 2004, 2005 and 2006                      |       | 61       |
| Notes to Consolidated Financial Statements                                                                         |       | 62       |

 

55

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and ShareholdersStellent, Inc.

We have audited the accompanying consolidated balancesheets of Stellent, Inc. (a Minnesota Corporation) and subsidiaries as of March 31,2006 and 2005, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period ended March 31,2006. These financial statements are the responsibility of Stellent, Inc.’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with auditing standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Stellent, Inc. and subsidiaries as of March 31, 2006 and2005, and the consolidated results of their operations and their consolidated cashflows for the each of the three years in the period ended March 31, 2006in conformity with accounting principles generally accepted in the UnitedStates of America.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Stellent, Inc. and subsidiaries’ internalcontrol over financial reporting as of March 31, 2006, based on *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) and ourreport dated June 12, 2006 expressed an unqualified opinion on management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting and an unqualified opinion on the effectiveness of Stellent,Inc. and subsidiaries’ internal control over financial reporting.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota

June 12, 2006

56

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand ShareholdersStellent, Inc.

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting, that Stellent, Inc. and subsidiaries’ (aMinnesota Corporation) maintained effective internal control over financialreporting as of March 31, 2006, based on the criteria established in *Internal Control—Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). Stellent,Inc. and subsidiaries’ management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that anaudit provides a reasonable basis for our opinions.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that Stellent, Inc. and subsidiaries maintained effectiveinternal control over financial reporting as of March 31, 2006, is fairlystated, in all material respects, based on the criteria established in *Internal Control—Integrated Framework* issued by COSO. Also,in our opinion, Stellent, Inc. and subsidiaries maintained, in allmaterial respects, effective internal control over financial reporting as of March 31,2006, based on the criteria established in Internal Control-IntegratedFramework issued by COSO.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofStellent, Inc. and subsidiaries as of March 31, 2006 and 2005, andthe related consolidated statements of operations, shareholders’ equity, andcash flows for each of the three years in the period ended March 31, 2006,and our report dated June 12, 2006 expressed an unqualified opinion on thosefinancial statements.
|                        | /s/ GRANT  THORNTON LLP |
|------------------------|-------------------------|
| Minneapolis, Minnesota |                    |
| June 12, 2006          |                    |

 

57

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**STELLENT, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)**

| ** **                                                                                                               | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                               | ** ** | **2005**           | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                               | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current assets                                                                                                           |       |               |       |   |   |
| Cash and equivalents                                                                                                     |       | $                  | 49,113     |   | $ | 34,741 |   |
| Short-term marketable securities                                                                                         |       | 17,523             |       | 29,900 |   |
| Trade accounts receivable, net                                                                                           |       | 30,063             |       | 31,320 |   |
| Prepaid royalties, current portion                                                                                       |       | 965                |       | 941 |   |
| Prepaid expenses and other current assets                                                                                |       | 3,884              |       | 4,512 |   |
| Total current assets                                                                                                     |       | 101,548            |       | 101,414 |   |
| Long-term  marketable securities                                                                                         |       | 6,114              |       | 17,112 |   |
| Property and  equipment, net                                                                                             |       | 4,333              |       | 7,822 |   |
| Prepaid  royalties, net of current portion                                                                               |       | 1,044              |       | 923 |   |
| Goodwill                                                                                                                 |       | 67,640             |       | 74,409 |   |
| Other acquired  intangible assets, net                                                                                   |       | 5,615              |       | 4,003 |   |
| Other                                                                                                                    |       | 1,358              |       | 866 |   |
|                                                                                                                     |       | $                  | 187,652    |   | $ | 206,549 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                           | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current liabilities                                                                                                      |       |               |       |   |   |
| Accounts payable                                                                                                         |       | $                  | 3,867      |   | $ | 3,072 |   |
| Deferred revenues, current portion                                                                                       |       | 19,854             |       | 20,143 |   |
| Commissions payable                                                                                                      |       | 2,419              |       | 3,839 |   |
| Accrued expenses and other                                                                                               |       | 7,867              |       | 7,442 |   |
| Current portions of obligations under capital leases                                                                     |       | 170                |       | 473 |   |
| Total current liabilities                                                                                                |       | 34,177             |       | 34,969 |   |
| Deferred revenue,  net of current portion                                                                                |       | 946                |       | 1,079 |   |
| Deferred rent,  net of current portion                                                                                   |       | —             |       | 1,264 |   |
| Obligations under  capital leases, net of current portions                                                               |       | —             |       | 281 |   |
| Total liabilities                                                                                                        |       | 35,123             |       | 37,593 |   |
| Shareholders’ equity                                                                                                |       |               |       |   |   |
| Capital stock,  $0.01 par value, 100,000 shares authorized                                                               |       |               |       |   |   |
| Preferred stock, 10,000 shares authorized, no shares  issued and outstanding at March 31, 2005 and 2006             |       | —             |       | — |   |
| Common stock, 90,000 shares authorized, 27,476 and  29,443 shares issued and outstanding at March 31, 2005 and 2006 |       | 275                |       | 294 |   |
| Additional  paid-in capital                                                                                              |       | 243,013            |       | 254,381 |   |
| Unearned  compensation                                                                                                   |       | (469               | )          | (123 | ) |
| Accumulated  deficit                                                                                                     |       | (91,256            | )          | (85,793 | ) |
| Accumulated other  comprehensive income                                                                                  |       | 966                |       | 197 |   |
| Total shareholders’ equity                                                                                          |       | 152,529            |       | 168,956 |   |
|                                                                                                                     |       | $                  | 187,652    |   | $ | 206,549 |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

58

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**STELLENT, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)**

| ** **                                                | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenues                                                  |       |                                    |       |   |   |   |   |
| Product licenses                                          |       | $                                       | 41,571     |   | $ | 54,376 |   | $ | 56,950 |   |
| Services                                                  |       | 14,349                                  |       | 19,772 |   | 26,836 |   |
| Post-contract support                                     |       | 19,854                                  |       | 32,663 |   | 39,599 |   |
| Total revenues                                            |       | 75,774                                  |       | 106,811 |   | 123,385 |   |
| Cost of revenues                                          |       |                                    |       |   |   |   |   |
| Product licenses                                          |       | 4,936                                   |       | 5,017 |   | 3,886 |   |
| Services                                                  |       | 13,272                                  |       | 19,550 |   | 25,046 |   |
| Post-contract support                                     |       | 3,885                                   |       | 5,350 |   | 7,269 |   |
| Amortization of capitalized software from  acquisitions   |       | 1,574                                   |       | 2,390 |   | 1,879 |   |
| Total cost of revenues                                    |       | 23,667                                  |       | 32,307 |   | 38,080 |   |
| Gross profit                                              |       | 52,107                                  |       | 74,504 |   | 85,305 |   |
| Operating expenses                                        |       |                                    |       |   |   |   |   |
| Sales and marketing                                       |       | 39,122                                  |       | 42,365 |   | 46,787 |   |
| General and administrative                                |       | 8,856                                   |       | 14,097 |   | 12,282 |   |
| Research and development                                  |       | 13,263                                  |       | 17,958 |   | 20,153 |   |
| Acquisition—related sales, marketing and other costs |       | —                                  |       | 886 |   | — |   |
| Amortization of acquired intangible assets and other      |       | 2,006                                   |       | 677 |   | 626 |   |
| Impairment charge on fixed assets                         |       | —                                  |       | 375 |   | — |   |
| Restructuring charges                                     |       | 743                                     |       | 3,673 |   | 1,123 |   |
| Total operating expenses                                  |       | 63,990                                  |       | 80,031 |   | 80,971 |   |
| Income (loss)  from operations                            |       | (11,883                                 | )          | (5,527 | ) | 4,334 |   |
| Other income (expense)                                    |       |                                    |       |   |   |   |   |
| Interest income, net                                      |       | 982                                     |       | 822 |   | 2,181 |   |
| Investment (impairment) gain on sale                      |       | 388                                     |       | (1,136 | ) | — |   |
| Total other income (expense)                              |       | 1,370                                   |       | (314 | ) | 2,181 |   |
| Net income (loss)  before income taxes                    |       | (10,513                                 | )          | (5,841 | ) | 6,515 |   |
| Provision for  income taxes                               |       | —                                  |       | — |   | 173 |   |
| Net income (loss)                                         |       | $                                       | (10,513    | ) | $ | (5,841 | ) | $ | 6,342 |   |
| Net income (loss)  per common share:                      |       |                                    |       |   |   |   |   |
| Basic                                                     |       | $                                       | (0.48      | ) | $ | (0.22 | ) | $ | 0.22 |   |
| Diluted                                                   |       | $                                       | (0.48      | ) | $ | (0.22 | ) | $ | 0.21 |   |
| Weighted average shares  outstanding:                     |       |                                    |       |   |   |   |   |
| Basic                                                     |       | 22,028                                  |       | 26,224 |   | 28,266 |   |
| Diluted                                                   |       | 22,028                                  |       | 26,224 |   | 29,615 |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

59

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**STELLENT, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(In thousands, except per share data)**

| ** **                                                 | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **        | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Accumulated** | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**         | ** ** | ** **             | ** ** |
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **(Deficit)/** | ** ** | **Unearned**    | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                 | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**    | ** ** | **Compensation**  | ** ** | **Income (Loss)** | ** ** | **Equity**        | ** ** | **Income (Loss)** | ** ** |
| Balance at  April 1, 2003                             |       | 21,856                |       |        | $          | 219            |       |            |       | $                 | 186,604    |                   |       |              | $          | (74,902                | )          |   |   | $ | — |   |   |   | $ | 315 |   |   |   | $ | 112,236 |   |   |   |   |   |   |
| Exercise of stock  options                                 |       | 274                   |       |        | 3          |           |       |            | 1,341      |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 1,344 |   |   |   |   |   |   |
| Stock issued in  acquisition                               |       | 100                   |       |        | 1          |           |       |            | 753        |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 754 |   |   |   |   |   |   |
| Issuance of common  stock in employee stock purchase plan  |       | 172                   |       |        | 1          |           |       |            | 831        |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 832 |   |   |   |   |   |   |
| Repurchase of  common stock                                |       | (63                   | )          |        | (1         | )              |       |            | (308       | )                 |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | (309 | ) |   |   |   |   |   |
| Foreign currency  translation adjustment gain              |       | —                |       |        | —     |           |       |            | —     |              |       |                   | —     |              |       |                   | —     |   |   |   | 361 |   |   |   | 361 |   |   |   | $ | 361 |   |   |
| Net loss                                                   |       | —                |       |        | —     |           |       |            | —     |              |       |                   | (10,513    | )                 |       |                   | —     |   |   |   | — |   |   |   | (10,513 | ) |   |   | (10,513 | ) |   |
| Balance at  March 31, 2004                            |       | 22,339                |       |        | 223        |           |       |            | 189,221    |              |       |                   | (85,415    | )                 |       |                   | —     |   |   |   | 676 |   |   |   | 104,705 |   |   |   | $ | (10,152 | ) |   |
| Exercise of stock  options                                 |       | 778                   |       |        | 8          |           |       |            | 3,621      |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 3,629 |   |   |   |   |   |   |
| Stock issued and  options assumed in acquisition           |       | 4,203                 |       |        | 42         |           |       |            | 49,338     |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 49,380 |   |   |   |   |   |   |
| Issuance of common  stock in employee stock purchase plan  |       | 156                   |       |        | 2          |           |       |            | 930        |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 932 |   |   |   |   |   |   |
| Unearned  stock-based compensation                         |       | —                |       |        | —     |           |       |            | —     |              |       |                   | —     |              |       |                   | (895       | ) |   |   | — |   |   |   | (895 | ) |   |   |   |   |   |
| Reversal of  compensation expense for terminated employees |       | —                |       |        | —     |           |       |            | (97        | )                 |       |                   | —     |              |       |                   | 97         |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Compensation  expense                                      |       | —                |       |        | —     |           |       |            | —     |              |       |                   | —     |              |       |                   | 329        |   |   |   | — |   |   |   | 329 |   |   |   |   |   |   |
| Foreign currency  translation adjustment gain              |       | —                |       |        | —     |           |       |            | —     |              |       |                   | —     |              |       |                   | —     |   |   |   | 290 |   |   |   | 290 |   |   |   | $ | 290 |   |   |
| Net loss                                                   |       | —                |       |        | —     |           |       |            | —     |              |       |                   | (5,841     | )                 |       |                   | —     |   |   |   | — |   |   |   | (5,841 | ) |   |   | (5,841 | ) |   |
| Balance at March 31,  2005                            |       | 27,476                |       |        | 275        |           |       |            | 243,013    |              |       |                   | (91,256    | )                 |       |                   | (469       | ) |   |   | 966 |   |   |   | 152,529 |   |   |   | $ | (5,551 | ) |   |
| Exercise of stock  options                                 |       | 1,547                 |       |        | 15         |           |       |            | 8,378      |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 8,393 |   |   |   |   |   |   |
| Issuance of common  stock in employee stock purchase plan  |       | 146                   |       |        | 1          |           |       |            | 1,048      |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 1,049 |   |   |   |   |   |   |
| Stock issued in  acquisition                               |       | 274                   |       |        | 3          |           |       |            | 2,005      |              |       |                   | —     |              |       |                   | —     |   |   |   | — |   |   |   | 2,008 |   |   |   |   |   |   |
| Reversal of  compensation expense for terminated employees |       | —                |       |        | —     |           |       |            | (63        | )                 |       |                   | —     |              |       |                   | 63         |   |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Compensation  expense                                      |       | —                |       |        | —     |           |       |            | —     |              |       |                   | —     |              |       |                   | 283        |   |   |   | — |   |   |   | 283 |   |   |   |   |   |   |
| Dividend ($0.03  per share)                                |       | —                |       |        | —     |           |       |            | —     |              |       |                   | (879       | )                 |       |                   | —     |   |   |   | — |   |   |   | (879 | ) |   |   |   |   |   |
| Foreign currency  translation adjustment loss              |       | —                |       |        | —     |           |       |            | —     |              |       |                   | —     |              |       |                   | —     |   |   |   | (769 | ) |   |   | (769 | ) |   |   | $ | (769 | ) |   |
| Net income                                                 |       | —                |       |        | —     |           |       |            | —     |              |       |                   | 6,342      |              |       |                   | —     |   |   |   | — |   |   |   | 6,342 |   |   |   | 6,342 |   |   |
| Balance at March 31,  2006                            |       | 29,443                |       |        | $          | 294            |       |            |       | $                 | 254,381    |                   |       |              | $          | (85,793                | )          |   |   | $ | (123 | ) |   |   | $ | 197 |   |   |   | $ | 168,956 |   |   |   | $ | 5,573 |   |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

60

 

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**STELLENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                                            | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                            | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| Operating activities:                                                                                 |       |                                    |       |   |   |   |   |
| Net income (loss)                                                                                     |       | $                                       | (10,513    | ) | $ | (5,841 | ) | $ | 6,342 |   |
| Adjustments to reconcile net income (loss) to cash  flows provided by (used in) operating activities: |       |                                    |       |   |   |   |   |
| Depreciation and  amortization                                                                        |       | 3,369                                   |       | 3,481 |   | 3,118 |   |
| Amortization of acquired  intangible assets and other                                                 |       | 3,580                                   |       | 3,067 |   | 2,505 |   |
| Impairment charge on  fixed assets                                                                    |       | —                                  |       | 451 |   | — |   |
| Lease incentives                                                                                      |       | —                                  |       | — |   | 1,043 |   |
| Changes in operating assets and liabilities, net of  amounts acquired:                                |       |                                    |       |   |   |   |   |
| Trade accounts  receivable, net                                                                       |       | (3,563                                  | )          | (8,102 | ) | (1,196 | ) |
| Prepaid expenses and  other current assets                                                            |       | (692                                    | )          | 2,354 |   | (183 | ) |
| Accounts payable                                                                                      |       | 461                                     |       | 756 |   | (730 | ) |
| Accrued commissions and  other liabilities                                                            |       | 1,067                                   |       | 1,157 |   | 1,478 |   |
| Deferred revenue                                                                                      |       | 870                                     |       | 4,458 |   | 548 |   |
| Investment impairment  (gain on sale)                                                                 |       | (388                                    | )          | 1,136 |   | — |   |
| Net cash flows provided  by (used in) operating activities                                            |       | (5,809                                  | )          | 2,917 |   | 12,925 |   |
| Investing activities:                                                                                 |       |                                    |       |   |   |   |   |
| Maturities (purchases)  of marketable securities, net                                                 |       | 14,383                                  |       | 10,857 |   | (23,375 | ) |
| Business acquisitions,  net of cash acquired                                                          |       | (2,184                                  | )          | (11,094 | ) | (5,453 | ) |
| Purchases of property  and equipment                                                                  |       | (2,263                                  | )          | (1,934 | ) | (5,490 | ) |
| Purchase of intangibles                                                                               |       | —                                  |       | — |   | (84 | ) |
| Proceeds from sale of  investment in other companies                                                  |       | 388                                     |       | — |   | — |   |
| Other                                                                                                 |       | (17                                     | )          | — |   | — |   |
| Net cash flows provided  by (used in) investing activities                                            |       | 10,307                                  |       | (2,171 | ) | (34,402 | ) |
| Financing activities:                                                                                 |       |                                    |       |   |   |   |   |
| Repurchase of common  stock                                                                           |       | (309                                    | )          | — |   | — |   |
| Issuance of common stock                                                                              |       | 832                                     |       | 932 |   | 1,049 |   |
| Proceeds from stock  options and warrants                                                             |       | 1,344                                   |       | 3,629 |   | 8,393 |   |
| Payments under capital  leases                                                                        |       | —                                  |       | (649 | ) | (558 | ) |
| Cash dividend paid                                                                                    |       | —                                  |       | — |   | (879 | ) |
| Net cash flows provided  by financing activities                                                      |       | 1,867                                   |       | 3,912 |   | 8,005 |   |
| Effect of exchange rate  changes on cash and equivalents                                              |       | 361                                     |       | 290 |   | (900 | ) |
| Net increase (decrease)  in cash                                                                      |       | 6,726                                   |       | 4,948 |   | (14,372 | ) |
| Cash and equivalents at  beginning of year                                                            |       | 37,439                                  |       | 44,165 |   | 49,113 |   |
| Cash and equivalents at  end of year                                                                  |       | $                                       | 44,165     |   | $ | 49,113 |   | $ | 34,741 |   |
| Supplemental disclosure of cash flows information:                                                    |       |                                    |       |   |   |   |   |
| Cash paid for interest                                                                                |       | $                                       | —     |   | $ | 24 |   | $ | 31 |   |
| Non-cash investing and financing activities:                                                          |       |                                    |       |   |   |   |   |
| Common stock issued in  business acquisitions                                                         |       | $                                       | 754        |   | $ | 41,416 |   | $ | 2,008 |   |
| Assumption of stock  option plan related to business combination                                      |       | —                                  |       | 7,964 |   | — |   |
| Purchase of equipment through capital leases                                                          |       | —                                  |       | 819 |   | 1,142 |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data)**

**1.   Summary ofSignificant Accounting Policies**

Stellent, Inc. (the “Company”) develops, markets,and services content management software with the primary focus of helpingorganizations derive maximum value from their content that exists in the normalcourse of business such as Microsoft Office documents, web pages, images,graphics, multimedia, CAD, and other files. With headquarters in Eden Prairie,Minnesota, the Company maintains offices throughout the United States and therest of the world. The Company’s customers are also located throughout theUnited States and the rest of the world.

*Principlesof Consolidation:*   The consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries. All significant intercompany transactions and balances have beeneliminated.

*RevenueRecognition:*   The Company currently derives allof its revenues from licenses of software products and related services. TheCompany recognizes revenue in accordance with Statement of Position (SOP) 97-2,*Software Revenue Recognition,*asamended by SOP 98-9, *Modification ofSOP 97-2, Software Revenue Recognition with Respect to CertainTransactions,*and Securities and Exchange Commission StaffAccounting Bulletin 104, *RevenueRecognition.*

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

*Persuasive Evidence of an ArrangementExists—*The Company determines that persuasive evidence of anarrangement exists with respect to a customer under i) a signature licenseagreement, which is signed by both the customer and the Company, or ii) apurchase order, quote or binding letter-of-intent received from and signed bythe customer, in which case the customer has either previously executed asignature license agreement with the Company or will receive a shrink-wraplicense agreement with the software. The Company does not offer product returnrights to end users or resellers.

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

*The Fee is Fixed or Determinable—*Ifat the outset of the customer arrangement, the Company determines that thearrangement fee is not fixed or determinable, revenue is typically recognizedwhen the arrangement fee becomes due and payable. Fees due under an arrangementare generally deemed fixed and determinable if they are payable within twelvemonths.

*Collectibility is Probable andSupported—*The Company determines whether collectibility isprobable and supported on a case-by-case basis. The Company may generate a highpercentage of its license revenue from its current customer base, for whom thereis a history of successful collection. The Company assesses the probability ofcollection from new customers based upon the number of years the customer hasbeen in business and a credit review process, which evaluates the customer’sfinancial position and ultimately their ability to pay. If the Company isunable to determine from the 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

outset of an arrangement that collectibility isprobable based upon its review process, revenue is recognized as payments arereceived.

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

The Company’s direct customers typically enter intoperpetual license arrangements. The Company’s OEM group generally enters intoterm-based license arrangements with its customers, the term of which generallyexceeds one year in length. The Company recognizes revenue from time-basedlicenses at the time the license arrangement is signed, assuming all otherrevenue recognition criteria are met, if the term of the time-based licensearrangement is greater than twelve months. If the term of the time-basedlicense arrangement is twelve months or less, the Company recognizes revenueratably over the term of the license arrangement.

Services revenue consists of fees from consultingservices, PCS and out-of-pocket expenses reimbursed by the Company. Consultingservices include needs assessment, software integration, security analysis,application development and training. The Company bills consulting services feeseither on a time and materials basis or on a fixed-price schedule. In general,the Company’s consulting services are not essential to the functionality of thesoftware. The Company’s software products are fully functional upon deliveryand implementation and generally do not require any significant modification oralteration for customer use. Customers purchase the Company’s consultingservices to facilitate the adoption of the Company’s technology and maydedicate personnel to participate in the services being performed, but they mayalso decide to use their own resources or appoint other professional serviceorganizations to provide these services. Software products are billedseparately from professional services. The Company recognizes revenue from consultingservices as services are performed. The Company’s customers typically purchasePCS annually, and prices PCS based on a percentage of the product license fee.Customers purchasing PCS receive product upgrades, Web-based technical supportand telephone hot-line support. Unspecified product upgrades are not providedwithout the purchase of PCS. The Company typically has not granted specificupgrade rights in its license agreements. Specified undelivered elements areallocated a relative fair value amount within a license agreement and therevenue allocated for these elements are deferred until delivery occurs.

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

*Costof Revenues:*   The Company expenses allmanufacturing, packaging and distribution costs associated with product licenserevenue as cost of revenues. The Company expenses all technical support 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

service costs associatedwith service revenue as cost of revenues. The Company also expensesamortization of capitalized software from acquisitions as cost of revenues. TheCompany reports out-of-pocket expenses reimbursed by customers as revenue andthe corresponding expenses incurred as costs of revenues.

*Cashand Equivalents:*   The Company considers allshort-term, highly liquid investments that are readily convertible into knownamounts of cash and have original maturities of three months or less to be cashequivalents. At March 31, 2005 and 2006, $7,311 and $6,664 was held at variousfinancial institutions located in Europe and other foreign countries.

*MarketableSecurities:*   Investments in debt securities witha remaining maturity of one year or less at the date of purchase are classifiedas short-term marketable securities. Investments in debt securities with aremaining maturity of greater than one year are classified as long-termmarketable securities. All marketable securities are classified as held tomaturity and recorded at amortized cost as the Company has the ability andpositive intent to hold to maturity. At March 31, 2005 and 2006, costapproximated market value of these investments. Purchases of investments were$184,108, $201,537 and $271,165 for the years ended March 31, 2004, 2005and 2006, respectively. Maturities of investments were $198,491, $212,394 and$247,790 for the years ended March 31, 2004, 2005 and 2006, respectively.The contractual maturities of the marketable securities held at March 31,2006 are $29,900 in fiscal 2007 and $17,112 in fiscal years thereafter.

At March 31,2006, short and long-term marketable securities consisted of the following:

| ** **                        | ** ** | **U.S. government and  agency securities** | ** ** | **Corporate  debt securities** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------|------------|-----------|------------|
| Short-term  marketable securities |       |                                                      | $          | 7,688                               |       |      |       | $ | 22,212 |   |   | $ | 29,900 |   |
| Long-term marketable  securities  |       |                                                      | $          | —                              |       |      |       | $ | 17,112 |   |   | $ | 17,112 |   |

* *

*Investmentsin and Notes with Other Companies:*   Investmentsin other equity securities and related notes with other companies in thesoftware industry are classified as long-term as the Company anticipatesholding them for more than one year. The Company holds less than 20% interestin, and does not directly or indirectly exert significant influence over any ofthe respective investees.

Investments in other companies include investments inseveral non-public, start-up technology companies for which the Company usesthe cost method of accounting. During fiscal 2005, the Company determined,based on its review of the financial statements of such other companies,incremental financing that they received, discussions of business plans andforecasts with other companies’ executives and judgments and assumptions aboutthe respective other companies’ industry, as well as the U.S. and worldeconomies in general, that a permanent decline in value of certain investmentshad occurred and recorded a $1,136 write-down on the investments in andadvances to the companies. No permanent decline in value of investmentsoccurred during fiscal years 2004 or 2006.

*AccountsReceivable:*   Accounts receivable are presentednet of allowances of $803 and $828 as of March 31, 2005 and 2006. TheCompany’s accounts receivable balances are due from companies across a broadrange of industries—Government, Finance, Manufacturing, Consumer, Aerospace andTransportation, Health Care/Insurance, and High Tech/Telecom. Credit isextended based on evaluation of a customer’s financial condition and,generally, collateral is not required. Accounts receivable from sales ofservices are typically due from customers within 30 days and accountsreceivable from sales of licenses 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

are due over terms rangingfrom 30 days to twelve months. Accounts receivable balances are stated atamounts due from customer net of an allowance for doubtful accounts. Accountsoutstanding longer than the contractual payments terms are considered past due.The Company determines its allowance by considering a number of factors,including the length of time trade receivables are past due, the Company’sprevious loss history, the customer’s current ability to pay its obligation tothe Company, and the condition of the general economy and the industry as awhole. The Company writes-off accounts receivable when they becomeuncollectible, and payments subsequently received on such receivables arecredited to the allowance for doubtful accounts.

No customer accounted for 10% or more of the Company’srevenues in the years ended March 31, 2004, 2005, and 2006.

*Propertyand Equipment:*   Property and equipment, includingleasehold improvements, are recorded at cost. Maintenance, repairs and minorrenewals are expensed when incurred. Depreciation of property and equipment iscomputed using the straight-line method over the estimated useful lives of theassets, ranging from two to eight years, or the life of the lease for leaseholdimprovements, whichever is shorter. Equipment under capital leases isdepreciated to its expected value at the end of the lease term. Fully depreciated assets are retained in the assetand accumulated depreciation accounts until disposal. Upon disposal, assets andrelated accumulated depreciation are removed from the accounts and the netamount, less proceeds from disposal, is charged or credited to operations.Property and equipment amounts are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset (assetgroup) may not be recoverable. An impairment loss would be recognized when thecarrying amount of an asset exceeds the estimated undiscounted future cashflows expected to result from the use of the asset and its eventualdisposition. The amount of the impairment loss to be recorded is calculated bythe excess of the asset’s carrying value over its fair value. Fair value isgenerally determined using a discounted cash flow analysis. Duringfiscal year 2005, the Company completed a physical inventory of our fixedassets which includes equipment, furniture and leasehold improvement on itsleased facilities. As a result of this physical inventory, the Companyidentified certain fixed assets which had been either decommissioned and had novalue or were physically disposed of during the fourth quarter of fiscal year2005. The Company recorded an impairment charge of $375 which represented theremaining net book value of these assets as of March 31, 2005. Noimpairment charge occurred during fiscal years 2004 or 2006.

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

*Goodwill:**  *Goodwill is the excess of cost ofan acquired entity over the amounts assigned to assets acquired and liabilitiesassumed in a business combination. Goodwill is not amortized. Goodwill istested for impairment annually, and will be tested for impairment betweenannual tests if an event occurs or circumstances change that would indicate thecarrying amount may be impaired. Impairment testing for goodwill is done at areporting unit level. Reporting units are one level below the business segmentlevel, but can be combined when reporting units within the same segment havesimilar economic characteristics. The Company has determined that there are tworeporting units. The Company performed and completed its required annualimpairment testing on January 1, 2006. Upon completing a reviewinternally, the Company determined that the carrying value of its recordedgoodwill as of this date had not been impaired and no impairment charge wasrecorded. No circumstances occurred during the fourth quarter of fiscal year 2006which would have created an impairment loss at March 31, 2006. The changesin the carrying amount of goodwill for the years ended March 31, 2005 and2006 was as follows:

| ** **                                                   | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | **2005**           | ** ** | **2006** | ** ** |
| Beginning of the  year                                       |       | $                  | 14,780     |   | $ | 67,640 |   |
| Acquisition of  Optika                                       |       | 51,155             |       | 131 |   |
| Acquisition of Stellent,  S.A. De C.V.                       |       | 1,158              |       | 100 |   |
| Acquisition of  Ancept                                       |       | 367                |       | 146 |   |
| Acquisition of Stellent  Information Systems Company Limited |       | 180                |       | — |   |
| Acquisition of  e-Onehundred Group                           |       | —             |       | 6,405 |   |
| Other                                                        |       | —             |       | (13 | ) |
| End of the year                                              |       | $                  | 67,640     |   | $ | 74,409 |   |

* *

*Other acquired intangibleassets:**  *Otheracquired intangible assets are assets acquired from an independent party. Theassets have no significant residual values. There are no other acquiredintangible assets which are not subject to amortization. The other acquiredintangible assets are tested for impairment whenever events or circumstancesindicate that a carrying amount of an asset (asset group) may not berecoverable. The Company has determined that no material impairments existed asof March 31, 2006. An impairment loss is recognized when the carryingamount of an asset exceeds the estimated undiscounted cash flows used indetermining the fair value of the asset. The amount of the impairment loss tobe recorded is calculated by the excess of the asset’s carrying value over itsfair value. Fair value is generally determined using a discounted cash flowanalysis. Other acquired intangible assets by major intangible asset class at March 31,2006 were as follows:

|                 | ** ** | **Acquired  Value** | ** ** | **Amortization  Period in Years** | ** ** |
|-----------------|------------|---------------------|------------|---------------------------------------------|------------|
| Core technology |       |                | $          | 3,690                                       |       |   | 3 |   |
| Customer base   |       |                | 3,039      |                                        |       | 3 to 10 |   |
|                 |       |                | $          | 6,729                                       |       |   | 5.34 weighted |   |
|                 |       |                |       |                                        |       | average years |   |

 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

Grosscarrying amounts and accumulated amortization of the acquired other intangibleswere as follows for each major intangible asset class:

| ** **      | ** ** | **As of March 31, 2005** | ** ** |
|-----------------|------------|----------------------------------------------|------------|
| ** **      | ** ** | **Gross Carrying  Amount**              | ** ** | **Accumulated  Amortization** | ** ** | **Net Balances** | ** ** |
| Core technology |       |                                         | $          | 4,991 |   |   |   | $ | (1,870 | ) |   |   | $ | 3,121 |   |   |
| Customer base   |       |                                         | 2,725      |   |   |   | (231 | ) |   |   | 2,494 |   |   |
|            |       |                                         | $          | 7,716 |   |   |   | $ | (2,101 | ) |   |   | $ | 5,615 |   |   |

 

| ** **      | ** ** | **As of March 31, 2006** | ** ** |
|-----------------|------------|----------------------------------------------|------------|
| ** **      | ** ** | **Gross Carrying  Amount**              | ** ** | **Accumulated  Amortization** | ** ** | **Net Balances** | ** ** |
| Core technology |       |                                         | $          | 3,690 |   |   |   | $ | (2,153 | ) |   |   | $ | 1,537 |   |   |
| Customer base   |       |                                         | 3,039      |   |   |   | (573 | ) |   |   | 2,466 |   |   |
|            |       |                                         | $          | 6,729 |   |   |   | $ | (2,726 | ) |   |   | $ | 4,003 |   |   |

 

Amortization expense for the years ended March 31,2004, 2005 and 2006 related to the acquired other intangible assets was $3,580,$2,738 and $2,222, respectively.

Estimatedamortization expense for other acquired intangible assets is as follows for theyears ending March 31:

| 2007       |   | $   | 1,593  |   |
|------------|--------|-----|--------|--------|
| 2008       |   | 644 |   |
| 2009       |   | 322 |   |
| 2010       |   | 278 |   |
| 2011       |   | 278 |   |
| Thereafter |   | 888 |   |
|       |   | $   | 4,003  |   |

* *

*SoftwareDevelopment Costs:*   Software development costsmay be capitalized once the technological feasibility of the project isestablished. The amount of software development costs that may be capitalizedis subject to limitations based on the net realizable value of the potential product.Typically the period between achieving technological feasibility of the Company’sproducts and the general availability of the products has been short. Nosoftware costs were capitalized during fiscal years 2005 and 2006.

In addition, capitalized software has included thefair value of certain acquired capitalized software costs (see Note 2).Amortization of developed capitalized software is determined annually as thegreater of the amount computed using the ratio of current gross revenues forthe products to their total of current and anticipated future gross revenues orthe straight-line method over the estimated economic life of the products.Capitalized software totaled $1,219 and accumulated amortization was $1,130 atMarch 31, 2005. At March 31, 2006 capitalized software andaccumulated amortization was zero. Amortization expense of developedcapitalized software is included in Cost of Revenues—Product Licenses.

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

*Warranties:*   TheCompany generally warrants its software products for a period of 30 to 90 daysfrom the date of delivery and estimates probable product warranty costs at thetime revenue is recognized. The Company exercises judgment in determining itsaccrued warranty liability. Factors that may affect the warranty liabilityinclude historical and anticipated rates of warranty claims, material usage,and service delivery costs. Warranty costs incurred to date have not beenmaterial.

*IndemnificationObligations:*   The Company generally provides toits customers intellectual property indemnification obligations in its softwareproducts or services. Typically these obligations provide that the Company willindemnify, defend and hold the customers harmless against claims by thirdparties that its software products or services infringe upon the copyrights,trademarks, patents or trade secret rights of such third parties. No such claimhas been made by any third party with regard to the Company’s software productsor services.

*Translationof Foreign Currencies:*   Foreign currency assetsand liabilities of the Company’s international subsidiaries are translatedusing the exchange rates in effect at the balance sheet date. Results ofoperations are translated using the average exchange rates prevailingthroughout the year. The effects of exchange rate fluctuations on translatingforeign currency assets and liabilities into U.S. dollars are accumulated aspart of the foreign currency translation adjustment in shareholders’ equity.

*Reclassifications:*   Certainprior year amounts have been reclassified to conform to the current yearpresentation.

*ComprehensiveIncome (Loss):*   Comprehensive income (loss) asdefined by Statement of Financial Accounting Standards (“SFAS”) No. 130, *Reporting Comprehensive Income*, includes net income (loss)and items defined as other comprehensive income (loss). SFAS No. 130requires that items defined as other comprehensive income (loss), such asforeign currency translation adjustments and unrealized gains and losses on theCompany’s available for sale securities, be separately classified in thefinancial statements. Such items are reported in the consolidated statements ofshareholders’ equity as comprehensive income (loss)

*Advertising:*   TheCompany expenses the cost of advertising as it is incurred. Advertising expensefor the years ended March 31, 2004, 2005 and 2006 was $4,362, $5,095 and$4,890, respectively.

The Company enters into cooperative advertisingprograms with some of its resellers, and when the Company receives anidentifiable benefit in return for consideration, and the Company canreasonably estimate the fair value of the benefit received, the cooperativeadvertising is accounted for as advertising expense. If the fair value cannotbe estimated or an identifiable benefit is not received, the cooperativeadvertising is accounted for as a reduction of revenue.

*Researchand Development:*   These costs are charged tooperations in the year incurred and are shown on a separate line of theConsolidated Statements of Operations. Research and development expenses,covering basis technology research and the application of technology advancesto the development of new and improved products, totaled $13,263, $17,958 and$20,153 for the years ended March 31, 2004, 2005 and 2006, respectively.

*Netincome (Loss) per Common Share:*   The differencein the weighted average shares outstanding for calculating basic and diluted netincome (loss) per share is attributable to the dilution associated with theCompany’s stock-based compensation plans. The Company’s basic net income (loss)per share amounts 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

have been computed bydividing net income (loss) by the weighted average number of outstanding commonshares. The Company’s diluted net income (loss) per share is computed bydividing net income (loss) by the weighted average number of outstanding commonshares and common share equivalents relating to stock options and warrants,when dilutive. For the years ended March 31, 2004 and 2005, the Companyincurred net losses and therefore, basic and diluted per share amounts are thesame. For the year ended March 31, 2006 the Company incurred net incomeand therefore the dilution associated with the Company’s stock-basedcompensation plans was 1,349.

*IncomeTaxes:*   The provision for income taxes isdetermined using the asset and liability approach. Under this approach,deferred income taxes represent the expected future tax consequences oftemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. TheCompany records a valuation allowance to reduce its deferred tax assets whenuncertainty regarding their realization exists. As of March 31, 2006 and2005 a valuation allowance of $73,147 and $71,098, respectively were recorded.See Note 8 to the Consolidated Financial Statements.

*Stock-based Compensation:*   TheCompany has stock option plans for employees and a separate stock option planfor directors, which are described more fully in Note 5. The intrinsic valuemethod is used to value the stock options issued to employees and directors,and the Company accounts for those plans under the recognition and measurementprinciples of Financial Accounting Standards Board (“FASB”), APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and complies with the disclosure provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*, and SFAS No. 148,*Accounting for Stock-Based Compensation-Transitionand Disclosure-an amendment of FASB Statement No. 123*. TheCompany has adopted the disclosure requirements of SFAS No. 148 in thesenotes to the consolidated financial statements. In the years presented, nostock-based employee compensation cost is reflected in net income (loss),excluding the amortization of unearned compensation expense related to theOptika transaction recognized in fiscal year 2005, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. Had the fair value method been applied, thecompensation expense would have been different in the periods presented. Thefollowing table illustrates the effect on net income (loss) and net income(loss) per share if the Company had applied the fair value method for thefollowing periods:

| ** **                                                                                                      | ** ** | **Years Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net income  (loss)—as reported                                                                             |       | $ (10,513                           | )          | $ (5,841 | ) | $ 6,342 |   |
| Add: Stock-based  compensation included in net income (loss) as reported                                        |       | —                                   |       | 329 |   | 283 |   |
| Less: Total  stock-based employee compensation expense determined under fair value based  method for all awards |       | (8,711                                   | )          | (11,828 | ) | (7,003 | ) |
| Net loss—pro forma                                                                                         |       | $ (19,224                           | )          | $ (17,340 | ) | $  (378 | ) |

 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

 

| ** **                                | ** ** | **Years Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| Weighted average shares  outstanding:     |       |                                     |       |   |   |   |   |
| Basic                                     |       | 22,028                                   |       | 26,224 |   | 28,266 |   |
| Diluted                                   |       | 22,028                                   |       | 26,224 |   | 29,615 |   |
| Net income (loss) per  share as reported: |       |                                     |       |   |   |   |   |
| Basic                                     |       | $ (0.48                             | )          | $ (0.22 | ) | $   0.22 |   |
| Diluted                                   |       | $ (0.48                             | )          | $ (0.22 | ) | $   0.21 |   |
| Net loss per share pro  forma:            |       |                                     |       |   |   |   |   |
| Basic                                     |       | $ (0.87                             | )          | $ (0.66 | ) | $ (0.01 | ) |
| Diluted                                   |       | $ (0.87                             | )          | $ (0.66 | ) | $ (0.01 | ) |

 

The weightedaverage fair value of options granted under the stock options plans duringfiscal years 2004, 2005 and 2006 was $4.41, $5.55 and $3.24, per sharerespectively. The weighted average of the employee stock purchase shares forfiscal years 2004, 2005 and 2006 was $2.30, $2.01 and $2.27, respectively. TheCompany amortizes the fair value of compensation using the straight-line methodover the vesting term. Pro forma information regarding the fair value of stockoptions is determined at the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions:

Employeebased stock option plans:

| ** **                                                                | ** ** | **Years Ended March 31,** |
|---------------------------------------------------------------------------|------------|------------------------------------------|
| ** **                                                                | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2006** |
| Risk free  interest yields                                                |       | 2% -  5.5%                               |   | 3.3%  - 3.6% |   | 3.7%  - 4.6% |
| Dividend yield                                                            |       | —                                   |   | — |   | — |
| Volatility factor  of expected market price of Company’s stock  |       | 95%                                      |   | 70%  - 95% |   | 46%  - 58% |
| Weighted average  expected life of options (years)                        |       | 3.25                                     |   | 3.00 - 3.25 |   | 3.00 |

 

Employee stock purchase plan:

| ** **                                                                | ** ** | **Years Ended March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| Risk free  interest yields                                                |       | 1.0%  - 1.1%                             |       | 1.3%  - 2.2% |   | 3.2%  - 4.0% |   |
| Dividend yield                                                            |       | —                                   |       | — |   | — |   |
| Volatility factor  of expected market price of Company’s stock  |       | 83%                                      |       | 45% |   | 45%  - 50% |   |
| Weighted average  expected life of options (years)                        |       | 0.5                                      |       | 0.5 |   | 0.5 |   |

 

In December 2004, FASB issued SFAS No. 123(revised 2004),*Share-Based Payment,*known as Statement 123(R). Statement 123(R) supersedes APB Opinion No. 25.Under APB Opinion No. 25, no compensation expense is recognized foremployee stock option grants if the exercise price of the Company’s stockoption grants is at or above the fair market value of the underlying stock onthe date of grant. SFAS No. 123(R) requires the determination of the fairvalue of the share-based compensation at the grant date and the recognition ofthe related expense over the period in which the share-based compensationvests. The original effective date for SFAS No. 123(R) for the Company wasJuly 1, 2005. However, on April 14, 2005, the Securities and ExchangeCommission (SEC) adopted a new rule that 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

amends the effective datesfor SFAS No. 123(R). The SEC’s new rule allows companies to implementSFAS No. 123(R) at the beginning of their next fiscal year, instead of thenext reporting period, that begins after June 15, 2005. Therefore, theCompany adopted SFAS No. 123(R) effective April 1, 2006. As part ofthis adoption, the Company began expensing options effective April 1, 2006and has elected not to restate the prior period results. Based on the currentamount of outstanding stock options that will vest on or after April 1,2006, the Company anticipates recognizing $4,000 to $6,000 of compensationexpense during fiscal year 2007. This amount will fluctuate depending on futurestock options granted to or forfeited by employees and directors.

*FairValue of Financial Instruments:*   The Company’sfinancial instruments including cash and cash equivalents, short-termmarketable securities, long-term marketable securities, accounts receivable andaccounts payable, and are carried at cost, which approximates fair value due tothe short-term maturity of these instruments.

*Useof Estimates:*   The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

*NewAccounting Pronouncements:*   In November 2005,the FASB issued FASB Staff Position (FSP) FAS 115-1,*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*. The guidance in this FSPaddresses the determination of when an investment is considered impaired,whether that impairment is other-than-temporary, and the measurement of animpairment loss. The FSP also includes accounting considerations subsequent tothe recognition of an other-than-temporary impairment and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments. The guidance in this FSP amends FASBStatement No. 115,*Accounting forCertain Investments in Debt and Equity Securities*. The guidance inthis FSP nullifies certain requirements of EITF Issue No. 03-1,*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*, and supersedes*EITF Abstracts*, Topic D-44,*Recognition of Other-Than-Temporary Impairment uponthe Planned Sale of a Security Whose Cost Exceeds Fair Value*. Theguidance in this FSP is required to be applied to reporting periods beginningafter December 15, 2005. The Company adopted this Staff Position duringfiscal year 2006 and it did not have a material impact on its consolidatedfinancial statements.

In May 2005, the FASB issued SFAS No. 154,*Accounting Changes and Error Corrections.*This new standard replaces APB Opinion No. 20,*Accounting Changes*, and FASB Statement No. 3,*Reporting Accounting Changes in Interim FinancialStatements*. Among other changes, SFAS No. 154 requires that avoluntary change in accounting principle be applied retrospectively with allprior period financial statements presented on the new accounting principle,unless it is impracticable to do so. SFAS No. 154 also provides that (1) achange in method of depreciating or amortizing a long-lived nonfinancial assetbe accounted for as a change in estimate (prospectively) that was effectedby a change in accounting principle, and (2) correction of errors inpreviously issued financial statements should be termed a restatement. The newstandard is effective for accounting changes and correction of errors made infiscal years beginning after December 15, 2005. The Company adopted theprovisions of SFAS No. 154 and it did not have a material impact on theCompany’s consolidated financial statements.

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

In December 2004,FASB issued SFAS No. 123 (revised 2004),*Share-Based Payment,* known as Statement 123(R). Statement 123(R) supersedesAPB Opinion No. 25. Under APB Opinion No. 25, no compensation expenseis recognized for employee stock option grants if the exercise price of theCompany’s stock option grants is at or above the fair market value of theunderlying stock on the date of grant. SFAS No. 123(R) requires thedetermination of the fair value of the share-based compensation at the grantdate and the recognition of the related expense over the period in which theshare-based compensation vests. The original effective date for SFAS No. 123(R)for the Company was July 1, 2005. However, on April 14, 2005, SECadopted a new rule that amends the effective dates for SFAS No. 123(R).The SEC’s new rule allows companies to implement SFAS No. 123(R) atthe beginning of their next fiscal year, instead of the next reporting period,that begins after June 15, 2005. Therefore, the Company adopted SFAS No. 123(R)effective April 1, 2006. As part of this adoption, the Company beganexpensing options effective April 1, 2006 and has elected not to restatethe prior period results. Based on the current amount of outstanding stockoptions that will vest on or after April 1, 2006, the Company anticipatesrecognizing $4,000 to $6,000 of compensation expense during fiscal year 2007.This amount will fluctuate depending on future stock options granted to orforfeited by employees and directors.

**2. BusinessCombinations**

Fiscal year 2006acquisition:

On June 20,2005, the Company acquired certain assets of privately held e-Onehundred Group,a financial compliance solutions provider, for $5,000 in cash and274 shares of the Company’s stock valued at $2,008. The Company alsoincurred approximately $291 in professional fees and other costs directlyassociated with this acquisition. Approximately $6,405 of the purchase pricewas allocated to goodwill, $520 was allocated to other acquired intangibleassets (core technology and customer base, which both will be amortized over athree year period), $551 was allocated to assets acquired and $177 wasallocated to liabilities assumed in the acquisition. The Company is alsorequired to make earn-out payments of potentially $2,000 based upon revenueperformance over a one-year period from the date of acquisition. As of March 31,2006 the Company has not made an earn-out payment. Future earn-out payments areestimated to be $1,500 for the fiscal year ended March 31, 2007.Additional pro forma disclosures required under SFAS No. 141 related tothis acquisition were not considered material.

Fiscal year 2005 acquisitions:

On May 13, 2004, the Company acquired theoutstanding shares of Stellent, S.A. De C.V. for approximately $750 in cash andassumed liabilities of $274, creating a business presence in Mexico. TheCompany was required to make contingent consideration payments (earn out) fortwo years from the date of acquisition. Earn out amounts cannot exceed $300 inthe first year and $450 in the second year after the acquisition which will berecorded as goodwill. During fiscal year 2005 and fiscal year 2006, $134 and$100, respectively, was accrued and recorded as goodwill related to this earnout. The Company does not anticipate any additional earn out to be paid relatedto this acquisition. Additional pro forma disclosures required under SFAS No. 141,related to this acquisition were not considered material.

On May 28, 2004, the Company acquired alloutstanding shares of Optika Inc. for $10,000 in cash, approximately 4,203shares of the Company’s common stock valued at $41,416, the assumption ofOptika’s outstanding common stock options, and direct acquisition costs ofapproximately $1,594. The Company acquired Optika in order to add to, orstrengthen and expand, its Universal Content Management software 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

in the areas of documentimaging, business process management and compliance capabilities. The valuationof the Company’s stock was set at an average price at the time the mergeragreement was signed, which was January 11, 2004. The fair value of Optika’soption plan of $7,964 was estimated as of January 11, 2004 using theBlack-Scholes option-pricing model with the following assumptions: no estimateddividends, expected volatility of 95%, risk free interest rate of 2.5% andexpected option terms of 3 years for all options.

Thetotal estimated purchase price was allocated to Optika’s net tangible andidentifiable intangible assets based upon their estimated fair values as of thedate of completion of the acquisition. The excess of the purchase price overthe net tangible and identifiable intangible assets has been recorded asgoodwill. A restructuring plan was adopted as a result of the acquisition. The acquisitionrestructuring charge relates to severance costs for terminated employees of$596 and facility closing costs of $263 primarily related to lease obligationsand was included in the cost of the acquisition. During fiscal year 2006, theCompany paid out the remaining amounts of $210 and $66 in severance andfacility costs, respectively. Based upon the purchase price and valuation, thefollowing represents the allocation of the aggregate purchase price to theacquired net assets of Optika:

| Purchase price:                                         |   |          |   |   |
|---------------------------------------------------------|--------|---------------|--------|--------|
| Cash                                                    |   | $ 10,000 |   |   |
| Transaction costs                                       |   | 1,594         |   |   |
| Value of common  stock issued                           |   | 41,416        |   |   |
| Value of stock  option grants                           |   | 7,964         |   |   |
| Total purchase  consideration paid                      |   | $ 60,974 |   |   |
| Fair value of  assets acquired and liabilities assumed: |   |          |   |   |
| Cash                                                    |   | $ 7,460  |   |   |
| Accounts  receivable                                    |   | 2,912         |   |   |
| Fixed assets                                            |   | 460           |   |   |
| Other assets                                            |   | 660           |   |   |
| Accounts payable                                        |   | (313          | )      |   |
| Accrued expenses                                        |   | (1,433        | )      |   |
| Deferred revenue                                        |   | (6,194        | )      |   |
| Acquisition  restructuring charge                       |   | (859          | )      |   |
| Goodwill                                                |   | 51,286        |   |   |
| Identifiable  intangible assets                         |   | 6,100         |   |   |
| Unearned  compensation                                  |   | 895           |   |   |
| Total purchase price                                    |   | $ 60,974 |   |   |

 

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

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

The Company valued the identifiable intangible assetsacquired using an appraisal. Identifiable intangible assets consist of:

| ** **      | ** ** | **Fair Value** | ** ** | **Useful Life** | ** ** | **Annual Amortization** | ** ** |
|-----------------|------------|---------------------|------------|----------------------|------------|------------------------------|------------|
| Core technology |       |                | $          | 3,400                |       |                         |       | 3 years |   |   |   | $ | 1,133 |   |   |
| Customer base   |       |                | 2,700      |                 |       |                         | 10 years   |   |   |   | 270 |   |   |
|            |       |                | $          | 6,100                |       |                         |       |   |   |   |   | $ | 1,403 |   |   |

 

As part of the acquisition of Optika, the Company alsoacquired net deferred tax assets of approximately $13,390. These deferred taxassets relate to net operating loss (NOL) carryforwards and the taxeffects of temporary differences primarily related to deferred revenue,depreciation and amortization and other accrued expenses. The $51,286 allocatedto goodwill is not deductible for tax purposes.

Realization of the NOL carryforwards and the deferredtax temporary differences, which were acquired, are contingent on futuretaxable earnings. The deferred tax assets were reviewed for expectedutilization using a more likely than not approach by assessing the availablepositive and negative evidence surrounding their recoverability.

The Company has recorded a full valuation allowanceagainst the net deferred tax assets, acquired or otherwise, due to theuncertainly of future taxable income, which is necessary to realize thebenefits of the deferred tax assets. NOL carryforwards were approximately$34,803. These NOLs begin to expire in 2010 and are subject to annualutilization limits due to prior ownership changes.

The Company will continue to assess and evaluatestrategies that will enable the deferred tax asset, or portion thereof, to beutilized, and will reduce the valuation allowance appropriately at such timewhen 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 anygoodwill related to the acquisition, then to reduce to zero other non-currentintangible assets related to the acquisition, and then to reduce income taxexpense.

Thefollowing unaudited pro forma condensed consolidated results of operations havebeen prepared as if the acquisition of Optika had occurred as of April 1,2003:

| ** **                            | ** ** | **Years Ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **2004**                             | ** ** | **2005** | ** ** |
| Net revenues                          |       | $                                    | 96,967     |   | $ | 109,361 |   |
| Net loss                              |       | $                                    | (12,240    | ) | $ | (9,404 | ) |
| Net loss per share:              |       |                                 |       |   |   |
| Basic and diluted                     |       | $                                    | (0.47      | ) | $ | (0.35 | ) |
| Weighted average shares  outstanding: |       |                                 |       |   |   |
| Basic and diluted                     |       | 26,151                               |       | 26,882 |   |

 

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

During fiscal year 2005, the Company acquired certainassets of Stellent Information Systems Company Limited, a Korean entity, for atotal of $205 in cash. $180 was recorded as goodwill and $25 was 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

allocated to otherintangible assets. Additional pro forma disclosures required under SFAS No. 141,related to this acquisition were not considered material.

Fiscal year 2004 acquisition:

On August 20, 2003,the Company acquired certain assets of Ancept, Inc., a provider ofsoftware for digital asset management, for approximately $2,000 in cash and 100shares of the Company’s stock, which were valued at approximately $800.Approximately $1,914 of the purchase price was allocated to goodwill, $972 wasallocated to capitalized software and $86 was allocated to liabilities assumedin the acquisition. The Company was also required to make contingentconsideration payments based upon certain license revenue sales for two yearsfrom the date of acquisition. Total contingent consideration payments were$140, $367 and $146 for fiscal years 2004, 2005 and 2006, respectively. TheCompany does not anticipate any additional earn out to be paid related to thisacquisition. Additional pro forma disclosures required under SFAS No. 141,related to this acquisition were not considered material.

**3. Related PartyTransactions**

At March 31, 2002, the Company held investmentsin and notes with five non-public start-up technology companies, owningapproximately 3% to 12% of these companies, and in publicly traded technologycompanies listed on NASDAQ, primarily Active IQ, in which the Company owned5.4%, exclusive of warrants. Investments in these companies were made with theintention of giving the Company opportunities to have new technologiesdeveloped or give the Company leverage into certain vertical markets that theCompany may not otherwise be able to obtain on its own. At March 31, 2003,the Company had remaining value in two of these non-public company investmentsand owned approximately 9% to 13% of them. At March 31, 2004, the Company’sinvestments in these two non-public companies were approximately 8% and 11%. Thevalue of these two investments at March 31, 2003 and 2004 was approximately$1,136. A permanent decline in value for these two companies of approximately$1,136 was recorded in fiscal 2005.

Upon the acquisition of certain assets of Active IQ(see Note 2) in March 2003, the Company recorded an impairment ofapproximately $1,100 million related to the Company’s investment in Active IQ.For substantially all of the year ended March 31, 2003, the Company’sinvestment in Active IQ was less than 5%. In fiscal 2004, the Company sold thisinvestment and recorded a gain of approximately $388.

During the years ended March 31, 2003 and March 31,2004, the Company entered into several sales transactions with companiesaffiliated with members of our Board of Directors. Revenue of approximately$393 and $223 from these sales transactions was recorded during the years endedMarch 31, 2003 and March 31, 2004, respectively. At March 31,2003 and March 31, 2004, we had an account receivable balance of $340 and$54 associated with these transactions, respectively. The terms and conditions,including fees, with respect to the transactions were substantially similar tothose with unaffiliated third parties negotiated at arms length. The members ofour Board of Directors affiliated with these companies had no direct orindirect material interest in the transactions.

In March 2004, theCompany entered into a non-exclusive reseller agreement with Optika, Inc.,a company with which we had announced a definitive merger agreement in January 2004and later acquired in May 2004 (see Note 2). The agreement provided forthe sale of Optika products by us. In the year ended March 31, 2004, werecognized approximately $172 of revenue under the agreement.

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

**4. SupplementalBalance Sheet Information**

**Property andEquipment**

Propertyand equipment consists of the following: 

| ** **                          | ** ** | **March 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **2005**           | ** ** | **2006** | ** ** |
| Equipment and  furniture            |       | $                  | 13,323     |   | $ | 15,725 |   |
| Equipment under  capitalized leases |       | 819                |       | 1,962 |   |
| Leasehold  improvements             |       | 1,926              |       | 3,882 |   |
|                                |       | 16,068             |       | 21,569 |   |
| Less accumulated  depreciation      |       | (11,735            | )          | (13,747 | ) |
|                                |       | $                  | 4,333      |   | $ | 7,822 |   |

 

**Accrued Expensesand Other**

Accruedexpenses and other consists of the following: 

| ** **                   | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2005**           | ** ** | **2006** | ** ** |
| Accrued vacation             |       |               | $          | 1,282 |   |   | $ | 1,770 |   |
| Accrued  restructuring costs |       |               | 1,747      |   |   | 621 |   |
| Other accrued  expenses      |       |               | 4,838      |   |   | 5,051 |   |
|                         |       |               | $          | 7,867 |   |   | $ | 7,442 |   |

 

**5. Shareholders’Equity**

*PreferredStock:*   Stellent’s Certificate of Incorporationprovides for the issuance of up to 10,000 shares of undesignated preferredstock. Undesignated preferred stock may be issued in one or more series, witheach series to have those rights and preferences, including, withoutlimitation, voting rights, dividend rights, conversion rights, redemptionprivileges and liquidation preferences, as shall be determined by unlimiteddiscretion of Stellent’s Board of Directors. At March 31, 2005 and 2006,no preferred stock was issued or outstanding.

*CommonStock:**  *Stellent’sCertificate of Incorporation provides for the issuance of up to 90,000 sharesof common stock with a par value of $0.01. The holders of Stellent common stockare entitled to one vote per share on all matters to be voted upon by itsstockholders. The holders of common stock have no preemptive or conversionrights or other subscription rights. There are no redemption or sinking fundprovisions applicable to the common stock. The determination to pay dividendson common stock will be at the discretion of the Board of Directors and willdepend on the Company’s financial condition, results of operations, cashrequirements, prospects and such other factors as the Board of Directors maydeem relevant.

On March 6, 2006, the Board of Directors declaredthe Company’s initial quarterly cash dividend of $0.03 per share. The dividendwas paid on March 28, 2006 to stockholders of record at the close ofbusiness on March 16, 2006. The total amount of the dividend was $879. On May 9,2006, the Board of Directors 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

declared a quarterly cash dividend of $0.03 per shareto be paid on June 27, 2006 to stockholders of record on June 15,2006.

*Warrants:*   TheCompany had no stock purchase warrants outstanding as of March 31, 2006.

*StockRepurchase:*   In April 2000, the board ofdirectors authorized the repurchase of up to $10,000 of the Company’s commonstock at a price not exceeding $20 per share. In September 2001, the boardof directors authorized the repurchase of up to $20,000 of the Company’s commonstock at a price not exceeding $15 per share. During fiscal 2003 and 2004, theCompany reacquired 757 and 63 shares of common stock at a cost of $3,465 and $309,respectively, which was equal to the fair value of the shares on the dateacquired.

*ShareholderRights Plan:*   On May 29, 2002, the Board ofDirectors of the Company approved a shareholder rights plan which provides forfair and equal treatment of all shareholders in the event an unsolicitedattempt is made to acquire the Company. Under the plan, the Company declared adividend of one preferred share purchase right for each outstanding share ofcommon stock of the Company, payable to shareholders of record on June 13,2002. Each right entitles the holder to purchase from the Company one-hundredthof a Series A junior participating preferred share of the Company at anexercise price of $75. The rights will separate from the common shares and adistribution for the rights will occur, subject to certain criteria, in theevent an investor group acquires 15% or more of the Company’s common stock. Therights are not exercisable until the distribution date and expire on June 13,2012.

*StockOptions:*   The Company maintains several stockoption plans (the Plan), which provide for the grant of stock options and otherstock based awards. The Plan is administered by the Board of Directors, whichhas the discretion to determine the number and purchase price of shares subjectto stock options (which may be below the fair market value of the common stockon the date thereof), the term of each option, and the terms of exercisability.The options generally vest over periods of one to five years and have a maximumlife of ten years. A maximum of 13,400 shares of common stock were issuable toemployees and directors under the terms of Plan, of which a total of 6,818 wereavailable for future grant as of March 31, 2006.

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

Asummary of the Company’s stock option activity, and related information throughMarch 31, 2006 is as follows:

| ** **                             | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Outstanding as of  March 31, 2003 |       | 4,685      |       |                                        | 12.13      |   |   |
| Granted                                |       | 1,838      |       |                                        | 6.47       |   |   |
| Exercised                              |       | (274       | )          |                                        | 4.90       |   |   |
| Forfeited                              |       | (605       | )          |                                        | 17.49      |   |   |
| Outstanding as of  March 31, 2004 |       | 5,644      |       |                                        | 10.06      |   |   |
| Converted Optika options               |       | 1,114      |       |                                        | 6.70       |   |   |
| Granted                                |       | 1,513      |       |                                        | 7.20       |   |   |
| Exercised                              |       | (778       | )          |                                        | 4.67       |   |   |
| Forfeited                              |       | (807       | )          |                                        | 12.56      |   |   |
| Outstanding as of  March 31, 2005 |       | 6,686      |       |                                        | 9.19       |   |   |
| Granted                                |       | 1,322      |       |                                        | 7.84       |   |   |
| Exercised                              |       | (1,547     | )          |                                        | 5.43       |   |   |
| Forfeited                              |       | (688       | )          |                                        | 10.28      |   |   |
| Outstanding as of  March 31, 2006 |       | 5,773      |       |                                        | $          | 9.76 |   |   |
|                                        |            |            |            |                                             |            |  |  |  |

 

Thefollowing table summarizes information about the stock options outstanding atMarch 31, 2006:

| ** **              | ** ** | ** ** | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------|------------|------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Weighted-Average**         | ** ** | ** **                   | ** ** | ** ** | ** ** |
| **Range of**       | ** ** | **Number** | ** ** | **Remaining**                | ** ** | **Weighted-Average**         | ** ** | **Number** | ** ** | **Weighted-Average** | ** ** |
| **Exercise Price** | ** ** | ** ** | ** ** | **Outstanding**              | ** ** | **Contractual Life**    | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| $1.91 - $5.99           |       |       | 961        |                         |       |                         | 6.9        |   |   |   | $ | 4.51 |   |   |   | 838 |   |   |   | $ | 4.53 |   |   |
| $6.00 - $6.99           |       |       | 1,472      |                         |       |                         | 7.0        |   |   |   | 6.48 |   |   |   | 934 |   |   |   | 6.40 |   |   |
| $7.00 - $7.99           |       |       | 1,556      |                         |       |                         | 8.4        |   |   |   | 7.47 |   |   |   | 590 |   |   |   | 7.51 |   |   |
| $8.00 - $16.99          |       |       | 1,111      |                         |       |                         | 7.3        |   |   |   | 10.65 |   |   |   | 710 |   |   |   | 11.44 |   |   |
| $17.00 - $81.82         |       |       | 673        |                         |       |                         | 4.8        |   |   |   | 28.22 |   |   |   | 673 |   |   |   | 28.22 |   |   |
|                    |       |       | 5,773      |                         |       |                         | 7.1        |   |   |   | $ | 9.76 |   |   |   | 3,745 |   |   |   | $ | 11.04 |   |   |
|                         |            |            |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

* *

*Employee Stock PurchasePlan:*   The Company has an employee stock purchaseplan (the Employee Plan), which allows eligible employees to purchase stock ofthe Company at 85% of its fair market value through elected payroll deductionsequal up to 10% of their compensation. During fiscal 2004, 2005 and 2006, 172,156 and 146, respectively, shares of common stock had been purchased under theEmployee Plan. During fiscal 2006, all available shares under the Employee Planwere issued and the Company’s does not currently  intend to authorize any additional shares.

**6. Employee BenefitPlans**

The Company maintainspre-tax salary reduction and profit sharing plans under the provisions of Section 401(k) ofthe Internal Revenue Code. The plans cover substantially all full-timeemployees who have reached the age of 21. Each employee may elect tocontribute to the Plan through payroll deductions 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

of hisor her salary, subject to certain limitations. Total Company contributions tothe plans for the years ended March 31, 2004, 2005 and 2006 were $405,$551 and $667, respectively.

**7. Basic andDiluted Net Income (Loss) Per Common Share**

Basicnet income (loss) per share is computed using the weighted average numberof shares outstanding of common stock. Diluted net income (loss) per shareis computed using the weighted average number of shares of common stock andcommon equivalent shares outstanding during the period. Common equivalentshares consist of stock options and are excluded from the computation if theireffect is anti-dilutive. Options to purchase 5,868 and 6,686 shares of commonstock were outstanding at March 31, 2004 and 2005, but were excluded fromthe computation of common share equivalents because they were anti-dilutive. The components of net income (loss) per basicand diluted shares are as follows:

| ** **                                     | ** ** | **Years Ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net income (loss)  as reported                 |       | $                                        | (10,513    | ) | $ | (5,841 | ) | 6,342 |   |
| Weighted average shares  outstanding:          |       |                                     |       |   |   |   |   |
| Basic                                          |       | 22,028                                   |       | 26,224 |   | 28,266 |   |
| Dilution associated with employee stock option |       | —                                   |       | — |   | 1,349 |   |
| Diluted                                        |       | 22,028                                   |       | 26,224 |   | 29,615 |   |
| Net income (loss) per  share as reported:      |       |                                     |       |   |   |   |   |
| Basic                                          |       | $                                        | (0.48      | ) | $ | (0.22 | ) | $ | 0.22 |   |
| Diluted                                        |       | $                                        | (0.48      | ) | $ | (0.22 | ) | $ | 0.21 |   |

 

**8. Income Taxes**

Theprovision for income taxes consists of the following:

| ** **                           | ** ** | **Years Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| Current:                             |       |                                     |       |   |   |   |   |   |   |   |   |
| U.S. and state                       |       |                                     | $          | — |   |   |   | $ | — |   |   | $ | 37 |   |
| Foreign                              |       |                                     | —     |   |   |   | — |   |   | — |   |
| Total current tax expense (benefit)  |       |                                     | —     |   |   |   | — |   |   | 37 |   |
| Deferred:                            |       |                                     |       |   |   |   |   |   |   |   |   |
| U.S. and state                       |       |                                     | $          | — |   |   |   | $ | — |   |   | $ | 136 |   |
| Foreign                              |       |                                     | —     |   |   |   | — |   |   | — |   |
| Total deferred tax expense (benefit) |       |                                     | —     |   |   |   | — |   |   | 136 |   |
| Total income tax expense  (benefit)  |       |                                     | $          | — |   |   |   | $ | — |   |   | $ | 173 |   |

 

79

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

Deferred tax assets/(liabilities) are comprised of thefollowing:

| ** **                                    | ** ** | **Years Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                 | ** ** | **2006** | ** ** |
| Deferred tax  liabilities:                    |       |                                     |       |   |   |
| Depreciation                                  |       | $                                        | (225       | ) | $ | (469 | ) |
| Other                                         |       | 41                                       |       | 73 |   |
| Deferred tax  assets:                         |       |                                     |       |   |   |
| Deferred revenue                              |       | 871                                      |       | 167 |   |
| Accounts receivable and other reserves        |       | 640                                      |       | 1,098 |   |
| Net operating loss carryforwards              |       | 54,773                                   |       | 58,339 |   |
| Amortization of intangibles                   |       | 8,071                                    |       | 4,771 |   |
| Foreign tax credits                           |       | 309                                      |       | 409 |   |
| Permanent investment write-down               |       | 2,006                                    |       | 1,348 |   |
| Capital loss carryforwards                    |       | —                                   |       | 2,017 |   |
| Research and development credit carryforwards |       | 4,612                                    |       | 5,258 |   |
|                                          |       | 71,098                                   |       | 73,011 |   |
| Valuation  allowance                          |       | (71,098                                  | )          | (73,147 | ) |
| Net deferred tax  asset/(liability)           |       | $                                        | —     |   | $ | (136 | ) |

 

Deferredtax liabilities and deferred tax assets reflect the net tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposes.The Company had net operating loss (NOL) carryforwards of approximately$126,291 in the United States (U.S.) and foreign NOL carryforwards ofapproximately $35,971 at March 31, 2006. The utilization of a portion ofthe Company’s U.S. NOLs and carryforwards is subject to annual limitationsunder Internal Revenue Code Section 382. Subsequent equity changes couldfurther limit the utilization of these NOLs and credit carryforwards. If notused, the NOLs begin to expire in 2010 in the following amounts each year:

| For the year ending March 31, | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                                   |       | $          | —     |       |
| 2008                                                   |       | —     |       |
| 2009                                                   |       | —     |       |
| 2010                                                   |       | 740        |       |
| 2011                                                   |       | 88         |       |
| Thereafter                                             |       | 161,434    |       |
|                                                   |       | $          | 162,262    |       |

 

Realizationof the NOL carryforwards and other deferred tax temporary differences iscontingent on future taxable earnings. The deferred tax asset was reviewed forexpected utilization using a “more likely than not” approach by assessing theavailable positive and negative evidence surrounding its recoverability.Accordingly, a full valuation allowance has been recorded against the Company’sdeferred tax asset, as it was determined based upon past losses that it was “morelikely than not” that the Company’s deferred tax assets would be realized. Infuture years, if the deferred tax assets are determined by management to be 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

more likely than not to be realized, the recognizedtax benefits relating to the reversal of the valuation allowance as of March 31,2006 will be recorded as follows:

| Income tax  benefit from continuing operations |   | $      | 44,150 |   |
|------------------------------------------------|--------|--------|--------|--------|
| Goodwill and  intangibles                      |   | 12,272 |   |
| Additional  paid-in capital                    |   | 16,725 |   |
| Total                                          |   | $      | 73,147 |   |

 

The Company will continue to assess and evaluatestrategies that will enable the deferred tax asset, or portion thereof, to beutilized, and will reduce the valuation allowance appropriately at such timewhen it is determined that the “more likely than not” criteria is satisfied.

TheCompany’s effective tax rate varied from the U.S. federal statutory tax rate asfollows:

| ** **                        | ** ** | **Years Ended March 31,** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2006** | ** ** |
| Federal statutory  rate           |       | (34.0                                    | )%         | (34.0 | )% | 34.0 | % |
| Research and  development credits |       | (0.1                                     | )          | 1.9 |   | (4.4 | ) |
| State taxes                       |       | (0.3                                     | )          | 0.4 |   | — |   |
| Permanent  Differences            |       | (1.8                                     | )          | 4.0 |   | 1.0 |   |
| Change in  valuation allowance    |       | 37.6                                     |       | 27.8 |   | (28.6 | ) |
| Other                             |       | (1.4                                     | )          | (0.1 | ) | 0.7 |   |
| Effective tax  rate               |       | —                                   | %          | — | % | 2.7 | % |

 

**9. Commitments andContingencies**

*Operating and CapitalLeases:*   The Company has entered into certainnon-cancelable operating and capital lease agreements related to office and warehousespace, equipment and vehicles. Total rent expense under operating leases net ofsublease income, was $5,265, $4,548 and $3,718 for the years ended March 31,2004, 2005 and 2006, respectively. Total payments including interest made undercapital leases for fiscal years 2006 and 2005 was $589 and $673, respectively. TheCompany did not have any capital leases for the year ended March 31, 2004.At March 31, 2005 and 2006, leased capital assets included in equipmentand furniture were as follows:

| ** **                            | ** ** | **March 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|
| **Property and equipment:** | ** ** | ** **         | ** ** | **2005** | ** ** | **2006** | ** ** |
| Equipment and  furniture              |       |               | $          | 819 |   |   | $ | 1,962 |   |
| Less accumulated  depreciation        |       |               | (653       | ) |   | (1,216 | ) |
|                                  |       |               | $          | 166 |   |   | $ | 746 |   |
|                                       |            |                    |            |  |  |  |  |  |  |  |  |

 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

Minimumremaining rental commitments under operating leases net of sublease and capitalleases arrangements are as follows as of March 31, 2006:

| ** **                                                 | ** ** | **Operating** | ** ** | **Capital** | ** ** |
|------------------------------------------------------------|------------|---------------|------------|-------------|------------|
| For the year ending  March 31,                        |       |          |       |        |       |   |   |   |   |
| 2007                                                       |       |          | $          | 3,017       |       |   |   | $ | 505 |   |   |
| 2008                                                       |       |          | 1,292      |        |       |   | 208 |   |   |
| 2009                                                       |       |          | 1,156      |        |       |   | 87 |   |   |
| 2010                                                       |       |          | 1,113      |        |       |   | — |   |   |
| 2011                                                       |       |          | 1,038      |        |       |   | — |   |   |
| Thereafter                                                 |       |          | 2,518      |        |       |   | — |   |   |
| Total                                                      |       |          | $          | 10,134      |       |   |   | $ | 800 |   |   |
| Less: Amounts  representing interest                       |       |          |       |        |       |   | (46 | ) |   |
| Present value of future  minimum lease payments            |       |          |       |        |       |   | $ | 754 |   |   |
| Less: Current portions  of obligations under capital lease |       |          |       |        |       |   | (473 | ) |   |
| Obligations under capital leases, net of current  portions |       |          |       |        |       |   | $ | 281 |   |   |

 

*Software Royalties:*   TheCompany has entered into several software royalty agreements whereby it isrequired to pay a royalty amount based upon predetermined payment schedules. AtMarch 31, 2005 and 2006, the Company recorded advanced royalties asprepaid expense of $2,009 and $1,864, respectively. Royalties are recognized asexpense based on sales. During the years ended March 31, 2004, 2005 and2006 royalty expense totaled $3,103, $3,042 and $2,114, respectively.

*Legal Proceedings:*   TheCompany was a defendant, along with certain current and former officers anddirectors of the Company, in a putative class action lawsuit entitled *In re Stellent Securities Litigation.*Thelawsuit was a consolidation of several related lawsuits (the first of which wascommenced on July 31, 2003). The plaintiff alleged that the defendantsmade false and misleading statements relating to the Company and its futurefinancial prospects in violation of Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934. In fiscal year 2005 a settlement was reached,subject to final documentation and preliminary and final court approval. TheCompany received the final court approval in the third quarter of fiscal year2006. No further expenses are anticipated with this lawsuit.

Certaincurrent and former officers and directors were also named in a derivativelawsuit that followed the completion of a special litigation committee processin which the plaintiff, on behalf of the Corporation, alleged that the boardbreached its fiduciary duties by allowing certain circumstances to exist thatgave rise to the Federal case described above. A special litigation committeehas recommended that the Company not pursue an action against the Board and/orthe Company’s officers. The Company moved to dismiss the action. While themotion to dismiss was pending the Company's insurance carriers, because of theongoing expense of litigation and the role the plaintiff's counsel played inthe special litigation committee process, agreed to settle the pendingderivative lawsuit for a payment of $250,000. The settlement is subject topreliminary and final court approval. The settlement will be paid entirely fromproceeds of an insurance policy.

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

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

**10. RestructuringCharges**

The Company initiated four restructuring plans duringfiscal year 2003 in an effort to better align its expenses and revenues inlight of the continued economic slowdown. The Company adopted SFAS No. 146,*Accounting for Costs Associated with Exit orDisposal Activities*, effective January 1, 2003 and hasaccounted for restructuring charges initiated after December 31, 2002under its provisions.

As part of the Company’s fourth restructuring plan,which occurred during March 2003, the Company recorded approximately $452during the first quarter of fiscal 2004, of which $396 related to employeetermination costs for five employees who were identified to be terminated aspart of the plan, but had not been communicated their termination until after March 31,2003. This plan also included the closing of an office facility as part of itsacquisition of Active IQ (see Note 2). The Company closed the facility duringthe first quarter of fiscal 2004 and approximately $56 was recorded forfacility closing costs and future lease payments. During the first quarter offiscal 2004, the Company recorded an additional $360 of facility closing costsrelated to a change in the estimated costs of closing a research anddevelopment facility in Massachusetts, related to the restructuring planinitiated during the second quarter of fiscal 2003, which was closed in thequarter ended September 30, 2002. During the first quarter of fiscal 2006a benefit of $57 was record as a change in the estimated costs related to theMassachusetts research and development facility closed in the quarter ended September 30,2002. A total of $16 remained to be paid in connection with these charges at March 31,2006.

In connection with the integration of Optika and inconnection with our plans to continue to reduce costs and improve operatingefficiencies, the Company adopted two restructuring plans during fiscal 2005.The initial restructuring took place during the first quarter which includedthe termination of 30 employees and the closure of the Company’s New Yorkfacility. Restructuring charges  includedin the Company’s net loss during the first quarter of fiscal year 2005 relatedto this plan were approximately $2,461, which included $1,866 for employeeterminated benefits and $595 for excess facilities. A change of estimaterelated to this restructuring plan resulted in $32 additional expense beingrecognized in the fourth quarter of fiscal year 2005. At March 31, 2006,approximately $247 remained to be paid in connection with these charges. Thefinal fiscal year 2005 restructuring plan was completed during our fourthquarter, which included the termination of 25 employees and the closure of theCompany’s Mexican facility. The expense recognized and included in the Company’snet loss during the fourth quarter of fiscal year 2005 related to theserestructuring plans totaled $1,104, with approximately $990 related to employeeterminated benefits and approximately $114 related to excess facilities. Achange of estimate related to this restructuring plan resulted in $74additional expense being recognized in the first quarter of fiscal year 2006. AtMarch 31, 2006 approximately $56 employee termination benefits remained tobe paid in connection with this charge.

During the second quarter of fiscal year 2006, theCompany adopted a restructuring plan to reorganize its international salesoperations and consolidate certain general and administrative activities. Theinitial charge of $508 was recognized during the second quarter of fiscal year2006, which included the costs for pay and benefits related to the involuntarytermination of 8 employees of approximately $321 with the remaining $187related to the closure of the Company’s Brazilian facility. In the thirdquarter and fourth quarter of fiscal year 2006 a change of estimate wasrecorded which resulted in $67 and $28, respectively, of additional expenserelated to this restructuring plan. The second restructuring plan resulted in acharge of $513 which was recorded during the fourth quarter of fiscal year 2006.The expense recognized included costs for pay and benefits related to theinvoluntary termination of 20 employees of 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data)**

approximately $470 and theremaining $43 related to other exit costs necessary to the eliminate ourdigital asset management group as the technology has been fully integrated intoour other software products. At March 31, 2006 approximately $245 remainedto be paid in connection with this charge.

As of March 31, 2006 the total $621 was includedin “accrued expenses and other” balance within the Company’s ConsolidatedBalance Sheets, of which employee termination benefit costs of $418 and otherexit costs totaling $203 will be paid out through  September 2006.

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**STELLENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**(In thousands, except pershare data)**

Selectedinformation regarding the restructuring charges and related accrued liabilitiesby restructuring plan is as follows:

| ** ** | ** ** | **Restructuring Charges**    | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **Second  Quarter ‘03** | ** ** | **First Quarter ‘04** | ** ** | **First Quarter ‘05** | ** ** | **Fourth Quarter ‘05** | ** ** | **Second Quarter ‘06** | ** ** | **Fourth Quarter ‘06** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Other  Exit  Costs**            | ** ** | **Employee  Termination  Benefits** | ** ** | **Other  Exit  Costs** | ** ** | **Employee  Termination  Benefits** | ** ** | **Other  Exit  Costs** | ** ** | **Employee  Termination  Benefits** | ** ** | **Other  Exit  Costs** | ** ** | **Employee  Termination  Benefits** | ** ** | **Other  Exit  Costs** | ** ** | **Employee  Termination  Benefits** | ** ** | **Other  Exit  Costs** | ** ** | **Total** | ** ** |
|            |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Balance at  April 1, 2003      |   |   | $      | 304    |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   | $      | — |   |   | $      | — |   |   | $     | — |   |   | $ | — |   |   | $ | — |   | $ | 304 |   |
|-------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------|--------|--------|--------|---|--------|--------|--------|---|--------|--------|---|-----|--------|
| Expense                             |   |   | — |   |   |   | 396    |   |   |   | 56     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   |   |   | — |   | 452   |   |
| Payments                            |   |   | (65    | )      |   |   | (245   | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (310  | )      |
| Change in estimate                  |   |   | 360    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 360   |   |
| Balance at  June 30, 2003      |   |   | 599    |   |   |   | 151    |   |   |   | 56     |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   |   |   | — |   | 806   |   |
| Payments                            |   |   | (43    | )      |   |   | (38    | )      |   |   | (56    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (137  | )      |
| Balance at  September 30, 2003 |   |   | 556    |   |   |   | 113    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 669   |   |
| Payments                            |   |   | (43    | )      |   |   | (38    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (81   | )      |
| Balance at  December 31, 2003  |   |   | 513    |   |   |   | 75     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 588   |   |
| Payments                            |   |   | (49    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (49   | )      |
| Change in estimate                  |   |   | — |   |   |   | (69    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (69   | )      |
| Balance at  March 31, 2004     |   |   | 464    |   |   |   | 6      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   |   |   |   | — |   |   | — |   |   | — |   | 470   |   |
| Expense                             |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,866  |   |   |   | 595    |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 2,461 |   |
| Payments                            |   |   | (48    | )      |   |   | — |   |   |   | — |   |   |   | (306   | )      |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (354  | )      |
| Balance at  June 30, 2004      |   |   | 416    |   |   |   | 6      |   |   |   | — |   |   |   | 1,560  |   |   |   | 595    |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 2,577 |   |
| Payments                            |   |   | (33    | )      |   |   | — |   |   |   | — |   |   |   | (794   | )      |   |   | (81    | )      |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (908  | )      |
| Balance at  September 30, 2004 |   |   | 383    |   |   |   | 6      |   |   |   | — |   |   |   | 766    |   |   |   | 514    |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 1,669 |   |
| Payments                            |   |   | (51    | )      |   |   | — |   |   |   | — |   |   |   | (391   | )      |   |   | (81    | )      |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | (523  | )      |
| Balance at  December 31, 2004  |   |   | 332    |   |   |   | 6      |   |   |   | — |   |   |   | 375    |   |   |   | 433    |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 1,146 |   |
| Expense                             |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 990    |   |   | 114    |   |   | — |   |   | — |   |   | — |   |   | — |   | 1,104 |   |
| Payments                            |   |   | (51    | )      |   |   | (6     | )      |   |   | — |   |   |   | (36    | )      |   |   | (87    | )      |   |   | (348   | )      |   | (7     | )      |   | — |   |   | — |   |   | — |   |   | — |   | (535  | )      |
| Change in estimate                  |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 32     |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 32    |   |
| Balance at  March 31, 2005     |   |   | 281    |   |   |   | — |   |   |   | — |   |   |   | 371    |   |   |   | 346    |   |   |   | 642    |   |   | 107    |   |   | — |   |   | — |   |   | — |   |   | — |   | 1,747 |   |
| Payments                            |   |   | (87    | )      |   |   | — |   |   |   | — |   |   |   | (91    | )      |   |   | (87    | )      |   |   | (265   | )      |   | (142   | )      |   | — |   |   | — |   |   | — |   |   | — |   | (672  | )      |
| Change in estimate                  |   |   | (57    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 27     |   |   | 47     |   |   | — |   |   | — |   |   | — |   |   | — |   | 17    |   |
| Balance at  June 30, 2005      |   |   | 137    |   |   |   | — |   |   |   | — |   |   |   | 280    |   |   |   | 259    |   |   |   | 404    |   |   | 12     |   |   | — |   |   | — |   |   | — |   |   | — |   | 1,092 |   |
| Expense                             |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | 321    |   |   | 187    |   |   | — |   |   | — |   | 508   |   |
| Payments                            |   |   | (79    | )      |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (91    | )      |   |   | (216   | )      |   | (12    | )      |   | (160   | )      |   | (43    | )      |   | — |   |   | — |   | (601  | )      |
| Change in estimate                  |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 140    |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   | 140   |   |
| Balance at  September 30, 2005 |   |   | 58     |   |   |   | — |   |   |   | — |   |   |   | 280    |   |   |   | 308    |   |   |   | 188    |   |   | — |   |   | 161    |   |   | 144    |   |   | — |   |   | — |   | 1,139 |   |
| Payments                            |   |   | (42    | )      |   |   | — |   |   |   | — |   |   |   | (9     | )      |   |   | (91    | )      |   |   | (63    | )      |   | — |   |   | (113   | )      |   | (81    | )      |   | — |   |   | — |   | (399  | )      |
| Change in estimate                  |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | 67     |   |   | — |   |   | — |   |   | — |   | 67    |   |
| Balance at  December 31, 2005  |   |   | 16     |   |   |   | — |   |   |   | — |   |   |   | 271    |   |   |   | 217    |   |   |   | 125    |   |   | — |   |   | 115    |   |   | 63     |   |   | — |   |   | — |   | 807   |   |
| Expense                             |   |   | — |   |   |   | — |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   |   |   |   | — |   |   |   |   |   |   |   |   | 470    |   |   | 43     |   | 513   |   |
| Payments                            |   |   | — |   |   |   | — |   |   |   | — |   |   |   |   |   |   |   | (91    | )      |   |   | (69    | )      |   | — |   |   | (115   | )      |   | (34    | )      |   | (257   | )      |   | (11    | )      | (577  | )      |
| Change in estimate                  |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (150   | )      |   |   | — |   |   |   | — |   |   | — |   |   | 28     |   |   | — |   |   | — |   |   | — |   | (122  | )      |
| Balance at  March 31, 2006     |   |   | $      | 16     |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | 121    |   |   |   | $      | 126    |   |   |   | $      | 56     |   |   | $      | — |   |   | $      | 28     |   |   | $     | 29     |   |   | $ | 213    |   |   | $ | 32     |   | $ | 621 |   |

 

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**STELLENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In thousands,**except**per share data)**

**11. Segments ofBusiness and Geographic Area Information**

TheCompany operates in two operating segments which meet the aggregation criteriafor a single reporting segment. A summary of the Company’s operations bygeographic area follows:

| ** **           | ** ** | **Year Ended March 31,** | ** ** |
|----------------------|------------|-----------------------------------------|------------|
| ** **           | ** ** | **2004**                                | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** |
| Revenues:            |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| United States        |       | $                                       | 54,538     |   | 72.0 |   | $ | 77,874 |   | 72.9 |   | $ | 90,835 |   | 73.6 |   |
| Europe               |       | 14,649                                  |       | 19.3 |   | 16,261 |   | 15.2 |   | 20,609 |   | 16.7 |   |
| Asia Pacific         |       | 489                                     |       | 0.7 |   | 6,157 |   | 5.8 |   | 6,313 |   | 5.2 |   |
| Canada               |       | 4,329                                   |       | 5.7 |   | 3,702 |   | 3.5 |   | 4,340 |   | 3.5 |   |
| Other                |       | 1,769                                   |       | 2.3 |   | 2,817 |   | 2.6 |   | 1,288 |   | 1.0 |   |
| Total revenues       |       | $                                       | 75,774     |   | 100.0 |   | $ | 106,811 |   | 100.0 |   | $ | 123,385 |   | 100.0 |   |
| Identifiable assets: |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| United States        |       | $                                       | 3,541      |   |   |   | $ | 3,313 |   |   |   | $ | 7,027 |   |   |   |
| Europe               |       | 894                                     |       |   |   | 696 |   |   |   | 519 |   |   |   |
| Asia Pacific         |       | 36                                      |       |   |   | 318 |   |   |   | 276 |   |   |   |
| Other                |       | —                                  |       |   |   | 6 |   |   |   | — |   |   |   |
| Total                |       | $                                       | 4,471      |   |   |   | $ | 4,333 |   |   |   | $ | 7,822 |   |   |   |

 

Sales are attributed tocountries or region based on the location of the customer.

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