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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 0-27358
DOCUMENTUM, INC.
(exact name of registrant as specified in its charter)
DELAWARE 95-4261421
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5671 GIBRALTAR DRIVE
PLEASANTON, CALIFORNIA 94588-8547
(Address of principal executive offices)
TELEPHONE NUMBER (510) 463-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, par
value $.001 per share, was 14,026,391 on June 30, 1996.
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FORM 10-Q
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as
of June 30, 1996 and December 31, 1995.................. 3
Condensed Consolidated Statement of
Operations for the three and six months ended
June 30, 1996 and June 30, 1995......................... 4
Condensed Consolidated Statement of
Cash Flows for the six months ended
June 30, 1996 and June 30, 1995......................... 5
Notes to Condensed Consolidated
Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................................. 7-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 15-16
Signature.............................................................. 17
Exhibit Index.......................................................... 18
2
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PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,366 $ 5,978
Short-term investments 44,158 -
Accounts receivable, net of allowances of $671 and
$647 (including $1,309 and $622 receivable from
a stockholder and its affiliates) 6,708 6,073
Other current assets 1,182 738
------- -------
Total current assets 60,414 12,789
Property and equipment, net 4,562 3,201
Other assets 424 511
------- -------
$65,400 $16,501
======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 903 $ 564
Accrued liabilities 4,998 4,693
Deferred revenue 3,419 2,164
Current portion of long term obligations 853 744
------- -------
Total current liabilities 10,173 8,165
------- -------
Long term obligations, less current portion 599 691
------- -------
Mandatorily redeemable convertible preferred stock;
0 and 49,020 shares designated, issued and outstanding - 13,391
------- -------
Stockholders' equity (deficit)
Preferred stock, $0.001 par value; 5,000 and
60,000 shares authorized
Common stock, $0.001 par value; 35,000 and 100,000
shares authorized; 14,026 and 1,880 shares issued
and outstanding 14 2
Additional paid-in capital 60,333 1,206
Notes receivable from stockholders (216) (240)
Unrealized loss on investments (191) -
Cumulative translation adjustment (52) (55)
Accumulated deficit (5,260) (6,659)
------- -------
Total stockholders' equity (deficit) 54,628 (5,746)
------- -------
$65,400 $16,501
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
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DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Licenses (including $1,609, $409, $3,322
and $2,265 from a stockholder and its affiliates) $ 7,653 $ 4,574 $14,641 $ 8,315
Services 2,554 1,181 4,248 2,034
------- ------- ------- -------
Total revenues 10,207 5,755 18,889 10,349
------- ------- ------- -------
Cost of revenues:
Licenses 418 381 921 587
Services 1,744 784 2,920 1,370
------- ------- ------- -------
Total cost of revenues 2,162 1,165 3,841 1,957
------- ------- ------- -------
Gross profit 8,045 4,590 15,048 8,392
------- ------- ------- -------
Operating expenses:
Sales and marketing 4,584 2,851 8,606 5,388
Research and development 1,788 1,015 3,329 1,742
General and administrative 918 468 1,877 883
------- ------- ------- -------
Total operating expenses 7,290 4,334 13,812 8,013
------- ------- ------- -------
Income from operations 755 256 1,236 379
Interest and other income, net 579 47 917 108
------- ------- ------- -------
Income before income tax provision 1,334 303 2,153 487
Provision for income taxes (467) (76) (754) (122)
------- ------- ------- -------
Net income $ 867 $ 227 $ 1,399 $ 365
======= ======= ======= =======
Net income per share $0.06 $0.02 $0.10 $0.03
Shares used to compute net income per share 14,938 12,934 14,535 12,934
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
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DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30
-----------------------
1996 1995
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,399 $ 365
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities;
Depreciation and amortization 870 347
Provision for doubtful accounts 24 88
Changes in assets and liabilities:
Accounts receivable (659) (1,769)
Other current assets and other assets (358) (29)
Accounts payable 340 8
Accrued liabilities 305 266
Deferred revenue 1,255 541
-------- -------
Net cash provided by (used in)
operating activities 3,176 (183)
-------- -------
Cash flows from investing activities:
Purchase of short-term investments, net (44,349) -
Purchases of property and equipment (2,230) (757)
-------- -------
Net cash used in investing activities (46,579) (757)
-------- -------
Cash flows from financing activities:
Issuance of common stock, net 45,772 151
Proceeds from term loan 387 -
Repayments on capital lease obligations (128) 379
Repayment on term loan (243) -
-------- -------
Net cash provided by financing activities 45,788 530
-------- -------
Effect of exchange rate on changes in cash 3 (19)
-------- -------
Net increase (decrease) in cash and cash equivalents 2,388 (429)
Cash and cash equivalents at beginning of period 5,978 6,289
-------- -------
Cash and cash equivalents at end of period $ 8,366 $ 5,860
======== =======
Supplemental schedule of noncash transactions:
Conversion of preferred stock to common stock $ 13,391 $ -
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
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DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements of Documentum,
Inc. ("Documentum" or the "Company") included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to fairly state the Company's consolidated financial
position, results of operations, and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements as included in the Company's Registration
Statement on Form S-1. The consolidated results of operations for the period
ended June 30, 1996 are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire fiscal year ending December 31,
1996.
2 Initial Public Offering
-----------------------
In February 1996, the Company completed its initial public offering and
issued 2,058,000 shares of its common stock to the public at a price of $24.00
per share. The Company received approximately $45.1 million in cash, net of
underwriting discounts, commissions and other offering costs. Simultaneously,
all outstanding shares of preferred stock were automatically converted into
common stock at a ratio of 5 to 1.
3 Net Income Per Share
--------------------
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the if converted
method) and stock options and warrants (using the treasury method). Common
equivalent shares are excluded from the computation if their effect is
antidilutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin, convertible preferred stock (using the if converted
method) and common stock options issued subsequent November 30, 1994 through the
effective date of the initial public offering, have been included in the
computation as if they were outstanding for all periods.
4 Accrued Expense and Other Current Liabilities
---------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS)
------------------------
JUNE 30, DECEMBER 31,
------------------------
1996 1995
------ ------
<S> <C> <C>
Compensation and related benefits $2,074 $1,975
Other 2,924 2,718
------ ------
$4,998 $4,693
====== ======
</TABLE>
6
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DOCUMENTUM, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed herein as
well as those discussed under the caption "Risk Factors" in the Company's
Registration Statement on Form S-1. No. 33-80047 and the Company's quarterly
report on Form 10-Q for the three months ended March 31, 1996. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revision to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
Documentum was formed in 1990 to provide object-oriented, client/server
software solutions that enable large organizations to effectively manage and
optimize the use of their unstructured business-critical information. The
Company was originally incorporated as a wholly-owned subsidiary of Xerox
Corporation ("Xerox"), and in October 1993 and September 1994 the Company raised
equity from outside investors and Xerox through the sale of Preferred Stock of
the Company, which reduced Xerox ownership to approximately 38%. As of June 30,
1996 Xerox ownership was approximately 32%.
From its inception through December 1992, the Company's activities consisted
primarily of developing its products, establishing its infrastructure and
conducting market research. The Company shipped the first commercial version of
its Documentum Server product in late 1992, and since then substantially all of
the Company's revenues have been from licenses of its family of enterprise
document management system ("EDMS") products and related services, which include
maintenance and support, training and consulting services. The Company
continues to invest in research and development in order to update its family of
products. In the first half of 1996, the Company introduced Release 3.0 of
Documentum EDMS, an update to the Company's core product with a range of new
features. Also in the first half of 1996, the Company shipped new products for
delivering document management functionality to the World Wide Web as well as
for Microsoft NT, Lotus Notes and Interleaf users. The Company expects that
EDMS-related revenue will continue to account for substantially all of the
Company's revenues for the foreseeable future. As a result, the Company's future
operating results are dependent upon continued market acceptance of EDMS and
enhancements thereto.
Since inception, the Company has invested significant resources in developing
its EDMS software, as well as building its sales, marketing and general
administrative organizations. As a result, since inception the Company's
operating expenses have increased in absolute dollar amounts and are expected to
continue to increase for the remainder of the fiscal year.
Although the Company has experienced significant revenue growth in recent
years, the Company does not believe that such growth rates are sustainable.
Accordingly, the rate at which the Company has grown in the past should not be
considered to be indicative of future revenue growth, if any, or future
operating results. There can be no assurance that the Company will remain
profitable on a quarterly basis. The Company's limited operating history makes
the prediction of future operating results difficult, if not impossible.
7
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RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ----------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Licenses 75.0% 79.5% 77.5% 80.3%
Services 25.0% 20.5% 22.5% 19.7%
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Cost of revenues:
Licenses 4.1% 6.6% 4.9% 5.7%
Services 17.1% 13.6% 15.5% 13.2%
------ ------ ------ ------
Total cost of revenues 21.2% 20.2% 20.4% 18.9%
------ ------ ------ ------
Gross profit 78.8% 79.8% 79.6% 81.1%
------ ------ ------ ------
Operating expenses:
Sales and marketing 44.9% 49.7% 45.6% 52.1%
Research and development 17.5% 17.6% 17.6% 16.8%
General and administrative 9.0% 8.1% 9.9% 8.5%
------ ------ ------ ------
Total operating expenses 71.4% 75.4% 73.1% 77.4%
------ ------ ------ ------
Income from operations 7.4% 4.4% 6.5% 3.7%
------ ------ ------ ------
Interest and other income, net 5.7% 0.8% 4.9% 1.0%
------ ------ ------ ------
Income before income tax provision 13.1% 5.2% 11.4% 4.7%
Provision for income taxes (4.6%) (1.3%) (4.0%) (1.2%)
------ ------ ------ ------
Net income 8.5% 3.9% 7.4% 3.5%
====== ====== ====== ======
</TABLE>
REVENUES
--------
The Company's revenues are derived from perpetual licenses for its document
management software and related services, which include maintenance and support,
training and consulting services. Annual maintenance and support services and
training and consulting services are charged separately from software licenses.
License revenues are recognized upon shipment of the product if no significant
vendor obligations remain and collection of the resulting receivable is
probable. In instances where a significant vendor obligation exists, revenue
recognition is delayed until the obligation has been satisfied. Allowances for
estimated future returns, which to date have been immaterial, are provided upon
shipment. Annual maintenance and support revenues consist of ongoing support and
product updates and are recognized ratably over the term of the contract.
Renewals of maintenance contracts are recorded when collectibility is deemed
probable. Revenues from training and consulting are recognized when the
services are performed. Payments received in advance of revenue recognition are
recorded as deferred revenue.
Total revenues increased by 77.4% from $5.8 million for the three months
ended June 30, 1995 to $10.2 million for the three months ended June 30, 1996,
and increased by 82.5% from $10.3 million for the six months ended June 30,
8
<PAGE>
1995 to $18.9 million for the six months ended June 30, 1996. This growth was
due primarily to the increase in the number of licenses sold, reflecting
increased acceptance of the Company's EDMS family of products and expansion of
the Company's sales organization. License revenues increased by 67.3% from $4.6
million for the three months ended June 30, 1995 to $7.7 million for the three
months ended June 30, 1996, and increased by 76.1% from $8.3 million for the six
months ended June 30, 1995 to $14.6 million for the six months ended June 30,
1996. Services revenue increased 116.3% from $1.2 million for the three months
ended June 30, 1995 to $2.6 million for the three months ended June 30, 1996,
and increased by 108.8% from $2.0 million for the six months ended June 30, 1995
to $4.2 million for the six months ended June 30, 1996. The increase in service
revenues was attributable to a larger installed base of customers as well as
increased revenues from delayed maintenance contract renewals. During the next
quarter, the Company believes that it might receive additional delayed renewal
revenues. However, the Company believes that the potential revenues from delayed
renewals will not account for a significant amount of revenue in the next
quarter. The Company's future financial performance will depend, in significant
part, on the successful development, introduction and customer acceptance of
these new products as well as enhanced versions of the Documentum EDMS family of
products. There can be no assurance that the Company will continue to be
successful in developing and marketing these Documentum EDMS products.
Although the Company's customer base has grown as revenues have increased,
a relatively small number of end user customers have historically accounted for
a significant percentage of the Company's revenues. The loss of a major
customer or any reduction or delay in orders by such customers would have a
material adverse effect on the Company's business, operating results and
financial condition. License revenues from Xerox and Xerox affiliates acting in
its role as an indirect channel partner represented 8.9%, and 21.0% of total
license revenues for the three months ended June 30, 1995 and 1996,
respectively, and 27.2%, and 22.7% of total license revenues for six months
ended June 30, 1995 and 1996, respectively.
The Company markets its products through its direct sales force and its
indirect channel partners, including systems integrators and distributors.
Revenues from all indirect channel partners, including Xerox and Xerox
affiliates, comprised 17.4% and 43.1% of license revenues for the three months
ended June 30, 1995 and 1996, respectively, and 34.1% and 38.3% of license
revenues for the six months ended June 30, 1995 and 1996, respectively. In
addition, certain of the Company's direct revenues arise out of the Company's
relationships with indirect channel partners. Revenues for any period from
indirect partners including Xerox and affiliates are subject to significant
variations. As a result, the Company believes that period to period comparisons
of indirect revenues are not necessarily meaningful and should not be relied
upon as indications of future performance. There can be no assurance that Xerox
or the Company's other indirect channel partners will elect or be able to
continue to market or support EDMS effectively, or that economic conditions or
industry demand will not adversely affect these partners. Management believes
that the revenues, gross profit and costs and expenses relating to transactions
with Xerox are indicative of amounts which would have been incurred or realized
from nonrelated parties.
International revenues represented 8.3% and 24.9% of license revenues for the
three months ended June 30, 1995 and 1996, respectively, and 33.6% and 25.6% of
license revenues for the six months ended June 30, 1995 and 1996, respectively.
A significant portion of the international revenues are derived from the
Company's indirect channel partners, which include Xerox and certain Xerox
affiliates. International revenues are subject to significant variations. As a
result, the Company believes that period to period comparison of international
revenues are not necessarily meaningful and should not be relied upon as
indications of future performance.
While the Company believes that large multinational organizations represent a
significant opportunity for revenue growth and the Company intends to continue
expansion of its international sales operations, there can be no assurance that
the Company will be successful in meeting the requirements of these large
organizations or that the Company will be able to effectively support this
international expansion. The Company's direct international sales are primarily
denominated in United States dollars and the Company does not currently engage
in hedging activities. Although exposure to currency fluctuations to date has
been insignificant, there can be no assurance that fluctuations in the currency
exchange rates in the future will not have a material adverse impact on revenues
from direct international sales and thus the Company's business, operating
results and financial condition. Sales generated by the Company's indirect
channel partners currently are generally paid to the Company in United States
dollars. To the extent that international indirect sales are denominated in
local currencies, foreign currency translations may contribute to significant
fluctuations in, and could have a material adverse effect upon, the Company's
business, operating results and financial condition.
9
<PAGE>
Revenues for any quarter are subject to significant variation in amount as
well as in composition, including the balance of direct and indirect revenues,
the balance of domestic and international revenues and the balance of license
and service revenues. As a result, the Company believes that period-to-period
comparisons are not necessarily meaningful and should not be relied upon as
indications of future performance.
COST OF REVENUES
----------------
Cost of license revenues consists primarily of the royalties paid to third-
party vendors. It also includes product costs such as packaging, documentation,
production and freight. Cost of license revenues increased by 9.7% from
$381,000 for the three months ended June 30, 1995 to $418,000 for the three
months ended June 30, 1996, and increased by 56.9% from $587,000 for the for the
six month period ended June 30, 1995 to $921,000 for the six month period ended
June 30, 1996, representing 8.3% and 5.5% of license revenues for the three
months ended June 30, 1995 and 1996, respectively, and 7.1% and 6.3% of license
revenues for the six months ended June 30, 1995 and 1996, respectively. The
increase in cost of license revenues was principally related to the increase in
the number of software licenses sold. The decrease in cost of license revenues
as a percentage of license revenues was due to a new royalty agreement with a
third-party vendor as well as the mix of third party products sold during the
quarter.
Cost of services revenues consists primarily of personnel-related costs
incurred in providing telephone support, consulting services and training to
customers. Cost of services revenues increased by 122.4% from $784,000 for the
three months ended June 30, 1995 to $1.7 million for the three months ended June
30, 1996, and increased by 113.1% from $1.4 million for the six months ended
June 30, 1995 to $2.9 million for the six months ended June 30, 1996,
representing 66.4% and 68.3% of related services revenues for the three months
ended June 30, 1995 and 1996, respectively, and, 67.3% and 68.7% of the related
services revenues for the six months ended June 30, 1995 and 1996, respectively.
The increase in cost of services revenues was a result of increased personnel-
related costs as the Company expanded its customer support and training
operations to support its increased installed customer base, as well as payments
to third parties for support.
OPERATING EXPENSES
------------------
Sales and marketing. Sales and marketing expenses consist primarily of
-------------------
salaries, benefits, sales commissions and other expenses related to the direct
sales force, various marketing expenses and costs of other market development
programs. Sales and marketing expenses increased by 60.8% from $2.9 million for
the three months ended June 30, 1995 to $4.6 million for the three months ended
June 30, 1996, and increased 59.7% from $5.4 million for the six months ended
June 30, 1995 to $8.6 for the six months ended June 30, 1996, representing 49.7%
and 44.9% of total revenues for the three months ended June 30, 1995 and 1996,
respectively, and 52.1% and 45.6% of total revenues for the six months ended
June 30, 1995 and 1996, respectively. The increase in dollar amount was
primarily due to the expansion of the Company's sales force and increased
marketing activities including public relations and promotional expenses. The
decrease as a percentage of revenues is primarily due to economies of scale
realized as certain expenses, such as management compensation and facilities,
grew proportionately less than revenues. The Company expects that sales and
marketing expenses will increase in dollar amount for the remainder of the year,
in order to support the Company's anticipated revenue growth.
Research and development. Research and development expenses consist
------------------------
primarily of salaries and benefits for software developers, contracted
development efforts and related facilities costs. Research and development
expenses increased by 76.2% from $1.0 million for the three months ended June
30, 1995 to $1.8 million for the three months ended June 30, 1996, and increased
91.1% from $1.7 million for the six months ended June 30, 1995 to $3.3 million
for the six months ended June 30, 1996, representing 17.6% and 17.5% of total
revenues for the three months ended June 30, 1995 and 1996, respectively, and ,
16.8% and 17.6% of total revenues for the six months ended June 30, 1995 and
1996, respectively. The increase in dollar amount and as a percentage of
revenues reflects the expansion of the Company's engineering staff and related
costs required to support the development of new products and enhancement of
existing products. Accounting Standards No. 86 (''SFAS 86'') requires the
capitalization of software development costs once technological feasibility is
established. To date, the period between achieving technological feasibility,
which the Company has defined as the establishment of a working model, and the
general availability of such software has been short and software development
costs qualifying for capitalization have been insignificant. As a result, no
software development costs have been capitalized. The Company expects research
and development expenses will increase in
10
<PAGE>
dollar amount for the remainder of the year in order to support increased
development efforts to both existing products and new products.
General and administrative. General and administrative expenses consist
--------------------------
primarily of personnel costs for finance, management information systems, human
resources and general management as well as outside professional services and
insurance expenses. General and administrative expenses increased by 96.2% from
$468,000 for the three months ended June 30, 1995 to $918,000 for the three
months ended June 30, 1996, and increased 112.6% from $883,000 for the six
months ended June 30, 1995 to $1.9 million for the six months ended June 30,
1996, representing 8.1% and 9.0% of total revenues for the three months ended
June 30, 1995 and 1996, respectively, and 8.5% and 9.9% of total revenues for
the six months ended June 30, 1995 and 1996, respectively. The increase in
dollar amount and as a percentage of revenues is primarily due to increased
staffing and professional fees necessary to manage and support the Company's
growth, and provide the infrastructure required for a public company. The
Company expects general and administrative expenses to increase in dollar amount
for the remainder of the year in order to support the growing needs of the
company.
INTEREST AND OTHER INCOME, NET
------------------------------
Interest and other income, net consists primarily of interest income earned on
the Company's cash and cash equivalents and short term investments, and other
items including foreign exchange gains and losses. Interest and other income,
net increased from $47,000 for the three months ended June 30, 1995 to $579,000
for the three months ended June 30, 1996, and increased from $108,000 for the
six months ended June 30, 1995 to $917,000 for the six months ended June 30,
1996. The increase in dollar amount is primarily due to higher cash balances
resulting from the infusion of cash from the Company's initial public offering
of common stock completed in February 1996.
PROVISION FOR INCOME TAXES
--------------------------
The provision for income taxes reflects the estimated annualized effective
tax rate applied to earnings for both the three months ended June 30, 1996 and
the six months ended June 30, 1996, which include consideration of the Company's
anticipated taxable income, tax rates and changes in its valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company completed an initial public offering of its
common stock, and received net proceeds of approximately $45.1 million.
The Company's cash and investments totaled $52.5 million at June 30, 1996,
representing 80.3% of total assets. Net cash provided by operating activities
was $3.2 million for the six months ended June 30, 1996 and was primarily
attributable to net income of $1.4 million, the increase in deferred revenue of
$1.3 million and depreciation and amortization of $870,000, offset by the
increase in accounts receivable of $659,000. During the six months ended June
30, 1996, capital expenditures of $2.2 million were primarily for computer
equipment, fixed assets and leasehold improvements acquired in conjunction with
the Company's expansion to new facilities.
The Company has invested the Company's cash in excess of current operating
requirements in investment grade securities. The investments have variable and
fixed interest rates and short term and long term maturities. In accordance
with SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities" such investments are classified as "available for sale". At June
30, 1996, the Company had an unrealized loss of $191,000, which is classified as
a separate component of equity. Although the Company believes that it has the
ability to hold such investments to maturity, there can be no assurances that
the Company will not liquidate such investments before the maturity date and
that a portion or all of the loss would be realized.
The Company's current line of credit allows for borrowings of up to $2.0
million at the bank's prime rate and expires in November 1996. As of June 30,
1996 the Company had no outstanding borrowings under its line of credit. The
Company also has a term note with its bank allowing for additional borrowings of
$1.1 million at the bank's prime rate plus 0.5%. At June 30, 1996 the Company
had $1.5 million outstanding under its term note agreements with the bank and
various lease obligations. Under the term note, interest and principal are due
in equal monthly installments through November 1998. The borrowings under the
term note are secured by substantially all of the Company's assets and are
subject to certain financial covenants.
11
<PAGE>
The Company currently has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and capital leases.
The Company believes that its existing cash balances, its available bank
financing and the cash flows generated from operations, if any, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. A portion of the Company's cash
could be used to acquire or invest in complementary businesses or products or
obtain the right to use complementary technologies. The Company is currently
evaluating, in it's ordinary course of business, potential investments such as
businesses, products or technologies. The Company has no current
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
presented in this report.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
- ----------------------------------------------------------------------------
Results. Prior growth rates in the Company's revenue and operating results
- -------
should not be considered indicative of future growth, if any, or of future
operating results. Future operating results will depend upon many factors,
including the demand for the Company's products, the level of product and price
competition, the length of the Company's sales cycle, the size and timing of
individual license transactions, the delay or deferral of customer
implementations, the budget cycles of the Company's customers, the Company's
success in expanding its direct sales force and indirect distribution channels,
the timing of new product introductions and product enhancements by the Company
and its competitors, the mix of products and services sold, levels of
international sales, activities of and acquisitions by competitors, the timing
of new hires, changes in foreign currency exchange rates, the ability of the
Company to develop and market new products and control costs and general
domestic and international economic and political conditions. In addition, the
operating results of many software companies reflect seasonal trends, and the
Company's business, operating results and financial condition may be affected by
such trends in the future. The Company's sales generally reflect a relatively
high amount of revenues per order. The loss or delay of individual orders,
therefore, could have a significant impact on the revenues and quarterly results
of the Company. Moreover, the timing of license revenue is difficult to predict
because of the length of the Company's sales cycle, which is typically six to
twelve months from the initial contact. Because the Company's operating expenses
are based on anticipated revenue trends and because a high percentage of the
Company's expenses are relatively fixed, a delay in the recognition of revenue
from a limited number of license transactions could cause significant variations
in operating results from quarter to quarter and could result in losses. To the
extent such expenses precede increased revenues, the Company's operating results
would be materially adversely affected. As a result of these factors, operating
results for any quarter are subject to significant variation, and the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Furthermore, due to all of the foregoing factors, it is likely that
in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's common stock would likely be materially adversely affected.
Lengthy Sales and Implementation Cycles. The license of the Company's software
- ---------------------------------------
products is often an enterprise-wide decision by prospective customers and
generally requires the Company to engage in a lengthy sales cycle (typically
between six and twelve months) to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's products.
In addition, the implementation by customers of the Company's products involves
a significant commitment of resources by such customers over an extended period
of time and is commonly associated with substantial reengineering efforts. For
these and other reasons, the sales and customer implementation cycles are
subject to a number of significant delays over which the Company has little or
no control. Delay in the sale or customer implementation of a limited number of
license transactions could have a material adverse effect on the Company's
business and operations and cause the Company's operating results to vary
significantly from quarter to quarter. Therefore, the Company believes that its
quarterly operating results are likely to vary in the future.
Product Concentration. To date, substantially all of the Company's revenues
---------------------
have been attributable to sales of licenses of the Documentum EDMS family of
products and related services. The Company currently expects the Documentum EDMS
family of products, and related services, to account for substantially all of
its future revenues. As a
12
<PAGE>
result, factors adversely affecting the pricing of or demand for the Documentum
EDMS products such as competition or technological change could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's future financial performance will depend, in
significant part, on the successful development, introduction and customer
acceptance of new and enhanced versions of the Documentum EDMS family of
products. There can be no assurance that the Company will continue to be
successful in developing and marketing the Documentum EDMS products.
New Products and Rapid Technological Change. The document management
-------------------------------------------
software market is characterized by rapid technological change, changes in
customer requirements, frequent new product introductions and enhancements and
emerging industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. Accordingly, the life cycles of the
Company's products are difficult to estimate. The Company's future success will
depend in part upon its ability to enhance current products and to develop and
introduce new products that respond to evolving customer requirements and keep
pace with technological developments and emerging industry standards, such as
new operating systems, hardware platforms, user interfaces and relational
database management system ("RDBMS") software. The Company's future success will
also depend in part upon its ability to maintain and enhance relationships with
its technology partners, such as RDBMS vendors, in order to provide its
customers with integrated product solutions. There can be no assurance that the
Company will be successful in maintaining these relationships or in developing
and marketing product enhancements or new products that respond to technological
change, updates and enhancements to third party products used in conjunction
with the Company's products, changes in customer requirements or emerging
industry standards; that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of new
products and enhancements; or that any new products or enhancements that the
Company may introduce will adequately meet the requirements of the marketplace
and achieve market acceptance. Moreover, the Company has in the past experienced
delays in the release dates of enhancements to its EDMS products. If release
dates of any future EDMS enhancements are delayed or, if when released, fail to
achieve market acceptance, the Company's business, financial condition and
results of operations could be materially adversely affected. To date, the
delays the Company has experienced have been minor in nature and are often the
result of adding enhancements or functionality based upon customer feedback
during beta product versions. These delays have generally not exceeded three
months in duration from the Company's scheduled internal release dates, however,
there can be no assurance that the Company may not experience future delays in
product introduction. The inability of the Company, for technological or other
reasons, to develop and introduce new products or enhancements in a timely
manner in response to changing customer requirements, technological change or
emerging industry standards, would have a material adverse effect on the
Company's business, results of operations and financial condition.
Intense Competition. The market for the Company's products is intensely
- -------------------
competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for open, client/server
software solutions, and the Company's competitors offer a variety of products
and services to address this market. The Company currently encounters direct
competition from a number of public and private companies such as Saros, a
FileNet Company, PC DOCS, Novasoft, Interleaf and Metaphase. Several of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name recognition
and a larger installed base of customers than the Company.
In addition, RDBMS vendors, such as Oracle, may compete with the Company in
the future. For example, Oracle has recently announced products that compete
with the Company's products. Like the Company's current competitors, many of
these companies have longer operating histories, significantly greater resources
and name recognition and a larger installed base of customers than the Company.
Oracle and other potential competitors have well-established relationships with
current and potential customers and strategic partners of the Company, have
extensive knowledge of the relational database industry and have the resources
to enable them to more easily offer a single vendor solution. As a result, these
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products, than can the Company.
The Company also faces indirect competition from systems integrators. The
Company relies on a number of systems consulting and systems integration firms
for implementation and other customer support services, as well as
recommendations of its products during the evaluation stage of the purchase
process. Although the Company seeks to maintain close relationships with these
service providers, many of these third parties have similar, and often more
13
<PAGE>
established, relationships with the Company's principal competitors. If the
Company is unable to develop and retain effective, long-term relationships with
these third parties, the Company's competitive position would be materially
adversely affected. Further, there can be no assurance that these third parties,
many of which have significantly greater resources than the Company, will not
market software products in competition with the Company in the future or will
not otherwise reduce or discontinue their relationships with or support of the
Company and its products.
It is also possible that new competitors such as Microsoft, or alliances among
competitors may emerge and rapidly acquire significant market share. The Company
also expects that competition will increase as a result of software industry
consolidations. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, operating results and financial condition.
14
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
(1) 3.1 Registrant's Amended and Restated Certificate of Incorporation
(2) 3.2 Registrant's Amended and Restated Bylaws.
4.1 Reference is made to Exhibits 3.1 and 3.2
(2) 4.2 Specimen stock certificate
(2) 4.3 Amended and Restated Investor Rights Agreement, dated
September 20, 1994, between the Registrant and certain investors.
(2) 4.4 Warrant Agreement, dated March 1, 1994 between the Registrant and
Comdisco, Inc.
(2) 4.5 Warrant Agreement, dated October 21, 1994, between the Registrant
and Silicon Valley Bank.
(2) 10.1 Registrant's 1993 Equity Incentive Plan, as amended.
(2) 10.2 Form of Incentive Stock Option under the Equity Incentive Plan.
(2) 10.3 Form of Nonstatutory stock Option under the Equity Incentive Plan.
(2) 10.4 Form of Early Exercise Stock Purchase Agreement.
(1) 10.5 Registrant's Employee Stock Purchase Plan, as amended.
(2) 10.6 Registrant's 1995 Non-Employee Directors' Stock Option Plan.
(2) 10.7 Form of Indemnity Agreement between the Registrant and its
officers and directors.
(2) 10.8 Industrial Real Estate Lease, dated June 9, 1995, between the
Registrant and Sunol Center Associates.
(2) 10.9 Letter Agreement, dated July 27, 1993, between the Registrant and
Jeffrey A. Miller.
(2) 10.10 Business Loan Agreement, dated December 23, 1993, between the
Registrant and Silicon Valley Bank.
(2) 10.11 Promissory Note and Loan modification Agreement, dated October 21,
1994 between the Registrant and Silicon Valley Bank.
(2) 10.12 Loan Modification Agreement, dated July 27, 1995, between the
Registrant and Silicon Valley Bank.
+(2) 10.13 International Distributor Agreement, dated December 8, 1993,
between the Registrant and Xerox Canada Ltd.
+(2) 10.14 Agreement for the Supply of Services, dated April 5, 1995, between
the Registrant and Rank Xerox Limited.
(2) 10.15 Series C Stock Purchase Agreement, dated September 20, 1994,
between the Registrant and certain other parties named therein.
(2) 10.16 Promissory Note and Loan Modification Agreement, dated
November 10, 1995, between the Registrant and Silicon Valley Bank.
+(3) 10.17 Services Partner Agreement, dated April 1, 1996, between the
Registrant and Xerox Corporation.
11.1 Statement Regarding computation of Earnings Per Share.
- ---------------------
+ Confidential treatment requested for portions of this exhibit.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-01832) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1,
as amended (No.
15
<PAGE>
33-80047) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly period
ended March 31, 1996 and incorporated herein by reference.
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1996.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
DOCUMENTUM, INC.
(Registrant)
Date: August 7, 1996 By: /s/ Alan Henricks
---------------------
Alan Henricks
Vice President, Finance and Operations,
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
(1) 3.1 Registrant's Amended and Restated Certificate of Incorporation
(2) 3.2 Registrant's Amended and Restated Bylaws.
4.1 Reference is made to Exhibits 3.1 and 3.2
(2) 4.2 Specimen stock certificate
(2) 4.3 Amended and Restated Investor Rights Agreement, dated
September 20, 1994, between the Registrant and certain investors.
(2) 4.4 Warrant Agreement, dated march 1, 1994 between the Registrant and
Comdisco, Inc.
(2) 4.5 Warrant Agreement, dated October 21, 1994, between the
Registrant and Silicon Valley Bank.
(2) 10.1 Registrant's 1993 Equity Incentive Plan, as amended.
(2) 10.2 Form of Incentive Stock Option under the Equity Incentive Plan.
(2) 10.3 Form of Nonstatutory stock Option under the Equity Incentive Plan.
(2) 10.4 Form of Early Exercise Stock Purchase Agreement.
(1) 10.5 Registrant's Employee Stock Purchase Plan, as amended.
(2) 10.6 Registrant's 1995 Non-Employee Directors' Stock Option Plan.
(2) 10.7 Form of Indemnity Agreement between the Registrant and its
officers and directors.
(2) 10.8 Industrial Real Estate Lease, dated June 9, 1995, between the
Registrant and Sunol Center Associates.
(2) 10.9 Letter Agreement, dated July 27, 1993, between the Registrant and
Jeffrey A. Miller.
(2) 10.10 Business Loan Agreement, dated December 23, 1993, between the
Registrant and Silicon Valley Bank.
(2) 10.11 Promissory Note and Loan modification Agreement, dated
October 21, 1994 between the Registrant and Silicon Valley Bank.
(2) 10.12 Loan Modification Agreement, dated July 27, 1995, between the
Registrant and Silicon Valley Bank.
+(2) 10.13 International Distributor Agreement, dated December 8, 1993,
between the Registrant and Xerox Canada Ltd.
+(2) 10.14 Agreement for the Supply of Services, dated April 5, 1995, between
the Registrant and Rank Xerox Limited.
(2) 10.15 Series C Stock Purchase Agreement, dated September 20, 1994,
between the Registrant and certain other parties named therein.
(2) 10.16 Promissory Note and Loan Modification Agreement, dated
November 10, 1995, between the Registrant and Silicon Valley Bank.
+(3) 10.17 Services Partner Agreement, dated April 1, 1996, between the
Registrant and Xerox Corporation.
11.1 Statement Regarding computation of Earnings Per Share.
- ---------------------
+ Confidential treatment requested for portions of this exhibit.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-01832) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1,
as amended (No. 33-80047) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly period
ended March 31, 1996 and incorporated herein by reference.
<PAGE>
DOCUMENTUM, INC.
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------
1996 1995 1996 1995
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net Income $ 867 $ 227 $1,399 $ 365
Primary shares outstanding:
Weighted average shares outstanding
during the period 13,947 1,574 13,519 1,574
Common stock equivalent shares 991 11,360(1) 1,017 11,360(1)
------ ------- ------ -------
14,938 12,934 14,535 12,934
====== ======= ====== =======
Fully diluted shares outstanding:
Weighted average shares outstanding
during the period 13,947 1,574 13,519 1,574
Common stock equivalent shares 991 11,360(1) 1,018 11,360(1)
------ ------- ------ -------
14,938 12,934 14,537 12,934
====== ======= ====== =======
Primary net income per
common stock and common stock
equivalent share (2) $ 0.06 $ 0.02 $ 0.10 $ 0.03
====== ======= ====== =======
</TABLE>
(1) Pursuant to Securities and Exchange Commission staff accounting bulletins,
common and common equivalent shares, options and warrants issued by the
Company during the twelve month period prior to the initial public
offering have been included as if they were outstanding for all periods
presented.
(2) Fully diluted earnings per share is not required to be presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 8,366
<SECURITIES> 44,158
<RECEIVABLES> 7,379
<ALLOWANCES> (671)
<INVENTORY> 0
<CURRENT-ASSETS> 60,414
<PP&E> 6,884
<DEPRECIATION> (2,322)
<TOTAL-ASSETS> 65,400
<CURRENT-LIABILITIES> 10,173
<BONDS> 599
0
0
<COMMON> 14
<OTHER-SE> 54,614
<TOTAL-LIABILITY-AND-EQUITY> 65,400
<SALES> 14,641
<TOTAL-REVENUES> 18,889
<CGS> 921
<TOTAL-COSTS> 3,841
<OTHER-EXPENSES> 13,812
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 2,153
<INCOME-TAX> (754)
<INCOME-CONTINUING> 1,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,399
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
