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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 September 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 14,032,794 on September 30, 1996.
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1.
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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 September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statement of
Operations for the three and nine months ended
September 30, 1996 and September 30, 1995 4
Condensed Consolidated Statement of
Cash Flows for the nine months ended
September 30, 1996 and September 30, 1995 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16-17
Signature 18
Exhibit Index 19
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)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,139 $ 5,978
Short-term investments 46,836 -
Accounts receivable, net of allowances
of $788 and $647 (including $1,037 and
$622 receivable from a stockholder and
its affiliates) 7,479 6,073
Other current assets 948 738
------- -------
Total current assets 63,402 12,789
Property and equipment, net 5,287 3,201
Other assets 406 511
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$69,095 $16,501
======= =======
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $ 1,072 $ 564
Accrued liabilities 6,810 4,693
Deferred revenue 3,865 2,164
Current portion of long term obligations 898 744
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Total current liabilities 12,645 8,165
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Long term obligations, less current portion 344 691
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Mandatorily redeemable convertible preferred
stock; 0 and 49,020 shares designated,
issued and outstanding - 13,391
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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; 14,033
and 1,880 shares issued and
outstanding 14 2
Additional paid-in capital 60,364 1,206
Notes receivable from
stockholders and other (364) (295)
Accumulated deficit (3,908) (6,659)
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Total stockholders' equity (deficit) 56,106 (5,746)
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$69,095 $16,501
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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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Revenues
Licenses (including $700, $3,346, $4,022 and $5,611 from a
stockholder and its affiliates) $ 9,127 $ 5,615 $23,768 $13,930
Services 2,909 1,391 7,157 3,425
------- ------- ------- -------
Total revenues 12,036 7,006 30,925 17,355
------- ------- ------- -------
Cost of revenues:
Licenses 476 242 1,397 829
Services 1,732 932 4,652 2,302
------- ------- ------- -------
Total cost of revenues 2,208 1,174 6,049 3,131
------- ------- ------- -------
Gross profit 9,828 5,832 24,876 14,224
------- ------- ------- -------
Operating expenses:
Sales and marketing 5,159 3,356 13,765 8,744
Research and development 2,175 1,327 5,504 3,069
General and administrative 1,074 724 2,951 1,607
------- ------- ------- -------
Total operating expenses 8,408 5,407 22,220 13,420
------- ------- ------- -------
Income from operations 1,420 425 2,656 804
Interest and other income, net 660 83 1,577 191
------- ------- ------- -------
Income before income tax provision 2,080 508 4,233 995
Provision for income taxes (728) (127) (1,482) (249)
------- ------- ------- -------
Net Income $ 1,352 $ 381 $ 2,751 $ 746
======= ======= ======= =======
Net income per share $ 0.09 $ 0.03 $ 0.19 $ 0.06
Shares used to compute net income per share 14,923 12,934 14,664 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)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
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Cash flows from operating activities:
Net income $ 2,751 $ 746
Adjustments to reconcile net income to
net cash provided by operating activities;
Depreciation and amortization 1,416 602
Provision for doubtful accounts 141 109
Changes in assets and liabilities:
Accounts receivable (1,547) (1,557)
Other current assets and other assets (105) (19)
Accounts payable 509 (60)
Accrued liabilities 2,116 984
Deferred revenue 1,701 735
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Net cash provided by
operating activities 6,982 1,540
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Cash flows from investing activities
Purchase of short-term investments, net (46,965) -
Purchases of property and equipment (3,500) (1,732)
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Net cash used by investing activities (50,465) (1,732)
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Cash flows from financing activities
Issuance of common stock, net 45,828 241
Proceeds from term loan 387 -
Repayments on capital lease obligations (216) 796
Repayment on term loan (365) -
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Net cash provided by financing activities 45,634 1,037
-------- -------
Effect of exchange rates on changes in cash 10 (45)
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Net increase in cash and cash equivalents 2,161 800
Cash and cash equivalents at beginning of period 5,978 6,289
-------- -------
Cash and cash equivalents at end of period $ 8,139 $ 7,089
======== =======
Supplemental disclosures:
Cash paid for income taxes 1,487 106
Cash paid for interest 100 65
Non-cash investing and financing activities:
Conversion of preferred stock to common stock 13,391 -
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
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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 September 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 to 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
---------------------------------------------
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1996 1995
------ ------
Compensation and related benefits $2,903 $1,975
Other 3,907 2,718
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$6,810 $4,693
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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 future 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 reports on Form 10-Q for the three months ended March 31, 1996 and
June 30, 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 which was formed in 1990, provides object-oriented, client/server
software solutions that enable large organizations to effectively manage and
optimize the use of their unstructured business-critical information. 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 nine months 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 nine months 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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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1996 1995 1996 1995
------ ------ ------ ------
Revenues:
Licenses 75.8% 80.1% 76.9% 80.3%
Services 24.2% 19.9% 23.1% 19.7%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of revenues:
Licenses 4.0% 3.5% 4.6% 4.7%
Services 14.4% 13.3% 15.0% 13.3%
----- ----- ----- -----
Total cost of
revenues 18.4% 16.8% 19.6% 18.0%
----- ----- ----- -----
Gross profit 81.6% 83.2% 80.4% 82.0%
----- ----- ----- -----
Operating expenses:
Sales and marketing 42.9% 47.9% 44.5% 50.4%
Research and development 18.1% 18.9% 17.8% 17.7%
General and administrative 8.9% 10.3% 9.5% 9.3%
----- ----- ----- -----
Total operating expenses 69.9% 77.1% 71.8% 77.4%
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Income from operations 11.7% 6.1% 8.6% 4.6%
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Interest and other income, net 5.5% 1.2% 5.1% 1.1%
----- ----- ----- -----
Income before income tax provision 17.2% 7.3% 13.7% 5.7%
Provision for income taxes (6.0%) (1.9%) (4.8%) (1.4%)
----- ----- ----- -----
Net income 11.2% 5.4% 8.9% 4.3%
===== ===== ===== =====
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 deferred 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 are recognized for providing
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.
License revenues increased by 62.5% from $5.6 million for the three months
ended September 30, 1995 to $9.1 million for the three months ended September
30, 1996, and increased by 70.6% from $13.9 million for the nine months ended
September 30, 1995 to $23.8 million for the nine months ended September 30,
1996. The growth in license
8.
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revenues was due primarily to an 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. During the quarter ended
September 30, 1996, a single sale to one customer accounted for 27% and 10% of
total license revenues for the quarter ended September 30, 1996 and for the nine
months ended September 30, 1996, respectively. 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.
Services revenue increased 109.1% from $1.4 million for the three months
ended September 30, 1995 to $2.9 million for the three months ended September
30, 1996, and increased by 109.0% from $3.4 million for the nine months ended
September 30, 1995 to $7.2 million for the nine months ended September 30, 1996.
The increase in services revenues was attributable to a larger installed base of
customers as well as to increased revenues from delayed maintenance contract
renewals.
The Company markets its products through its direct sales force and its
indirect channel partners including Xerox and certain Xerox affiliates, who have
acted as systems integrators, a VAR and a distributor for the Company's
products. As of September 30, 1996, Xerox owned approximately 30% of the
Company's outstanding common shares. 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. License revenues from Xerox and Xerox affiliates acting in its role as
an indirect channel partner represented 59.6%, and 7.7% of total license
revenues for the three months ended September 30, 1995 and 1996, respectively,
and 40.3%, and 16.9% of total license revenues for nine months ended September
30, 1995 and 1996, respectively. The decrease in license revenues from Xerox and
Xerox affiliates as a percent of product revenues is due to one large sale
recorded during the quarter ended September 30, 1995 which was equal to 38% of
license revenues for the quarter. The Company is continuing its efforts to
market its products through indirect channel partners. Revenues from all
indirect channel partners, including Xerox and Xerox affiliates, comprised 61.8%
and 21.6% of license revenues for the three months ended September 30, 1995 and
1996, respectively, and 45.3% and 32.0% of license revenues for the nine months
ended September 30, 1995 and 1996, respectively. The decrease in indirect
channel partner revenues as a percent of product revenues is due to the impact
of the large sale through Xerox recorded in the quarter ended September 30,
1995. 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.
International revenues represented 15.0% and 29.7% of license revenues for the
three months ended September 30, 1995 and 1996, respectively, and 26.1% and
27.2% of license revenues for the nine months ended September 30, 1995 and 1996,
respectively. The increase in international revenues as a percent of license
revenues for the three months ended September 30, 1996 is due to the expansion
of the Company's sales force in Europe as well as a large deal recorded during
the quarter. 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.
The Company classifies license revenue as domestic or international based upon
the billing location of the customer. In many instances, especially with large
purchases from multinational companies, the customer has the right to deploy the
licenses anywhere in the world. Thus the percentages discussed herein represent
where licenses were sold, and may or may not represent where they are used. 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
9.
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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.
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 96.7% from
$242,000 for the three months ended September 30, 1995 to $476,000 for the three
months ended September 30, 1996, and increased by 68.5% from $829,000 for the
for the nine month period ended September 30, 1995 to $1.4 million for the nine
month period ended September 30, 1996, representing 4.3% and 5.2% of license
revenues for the three months ended September 30, 1995 and 1996, respectively,
and 6.0% and 5.9% of license revenues for the nine months ended September 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 increase in costs of license revenues as a percentage of license revenues
was due primarily to royalties paid to third-party vendors. The Company expects
that the cost of license revenues will increase in dollar amount for the
remainder of the year in connection with the Company's anticipated revenue
growth.
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 85.8% from $932,000 for the
three months ended September 30, 1995 to $1.7 million for the three months ended
September 30, 1996, and increased by 102.1% from $2.3 million for the nine
months ended September 30, 1995 to $4.7 million for the nine months ended
September 30, 1996, representing 67.0% and 59.5% of related services revenues
for the three months ended September 30, 1995 and 1996, respectively, and, 67.2%
and 65.0% of the related services revenues for the nine months ended September
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
in both the US and Europe, as well as payments to third parties for support. The
cost of services revenues decreased as a percent of related revenues due to the
impact of maintenance renewals after the initial one year term which increased
services revenues. The Company expects that the cost of services revenues will
increase in dollar amount and may increase as a percent of services revenues for
the remainder of the year in order to support and service the growing installed
base of customers.
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 53.7% from $3.4 million for
the three months ended September 30, 1995 to $5.2 million for the three months
ended September 30, 1996, and increased 57.4% from $8.7 million for the nine
months ended September 30, 1995 to $13.8 for the nine months ended September 30,
1996, representing 47.9% and 42.9% of total revenues for the three months ended
September 30, 1995 and 1996, respectively, and 50.4% and 44.5% of total revenues
for the nine months ended September 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 as well as expansion in Europe. 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 63.9% from $1.3 million for the three months ended
September 30, 1995 to $2.2 million for the three months ended September 30,
1996, and increased 79.3% from $3.1 million for the nine months ended September
30, 1995 to $5.5 million for the nine months ended September 30, 1996,
representing 18.9% and 18.1% of total revenues for the three
10.
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months ended September 30, 1995 and 1996, respectively, and 17.7% and 17.8% of
total revenues for the nine months ended September 30, 1995 and 1996,
respectively. The increase in dollar amount 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 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 48.3% from
$724,000 for the three months ended September 30, 1995 to $1.1 million for the
three months ended September 30, 1996, and increased 83.6% from $1.6 million for
the nine months ended September 30, 1995 to $3.0 million for the nine months
ended September 30, 1996, representing 10.3% and 8.9% of total revenues for the
three months ended September 30, 1995 and 1996, respectively, and 9.3% and 9.5%
of total revenues for the nine months ended September 30, 1995 and 1996,
respectively. The increase in dollar amount 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 $83,000 for the three months ended September 30, 1995 to
$660,000 for the three months ended September 30, 1996, and increased from
$191,000 for the nine months ended September 30, 1995 to $1.6 million for the
nine months ended September 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 of 35% applied to earnings for both the three months ended September
30, 1996 and the nine months ended September 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 $55.0 million at September 30,
1996, representing 79.6% of total assets. Net cash provided by operating
activities was $7.0 million for the nine months ended September 30, 1996 and was
primarily attributable to net income of $2.8 million, the increase in accrued
liabilities of $2.1 million, the increase in deferred revenue of $1.7 million
and depreciation and amortization of $1.4 million, offset by the increase in
accounts receivable of $1.5 million. During the nine months ended September 30,
1996, capital expenditures of $3.5 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
September 30, 1996, the Company had an unrealized loss which was immaterial.
Although the
11.
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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. The Company
intends to renew the line of credit. As of September 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 September 30, 1996 the Company had $1.2 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.
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 material
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
12.
<PAGE>
benefits of the Company's products. Additionally, the size of the transaction
and the complexity of the arrangement can also cause delays in the sales cycle.
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 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.
Emerging Markets. The client/server application software market is a
----------------
relatively new market and is intensely competitive, highly fragmented and
subject to rapid change. The Company markets its products solely to customers
who have migrated their enterprise computing systems to client/server computing
environments. The Company's future financial performance will depend in large
part on continued growth in the number of organizations adopting client/server
computing environments. There can be no assurance that the client/server market
will maintain its current level of growth or continue at all. If the
client/server market fails to grow or grows more slowly than the Company
currently anticipates, the Company's business, operating results and financial
condition would be materially adversely affected.
Similarly, the market for document management software is intensely
competitive, highly fragmented and subject to rapid change. The Company's future
financial performance will depend primarily on growth in the number of document
13.
<PAGE>
management applications developed for use in client/server environments. There
can be no assurance that the market for document management software will
continue to grow or that, if it does grow, organizations will adopt the
Company's products. The Company has spent, and intends to continue to spend,
significant resources educating potential customers about the benefits of its
products. However, there can be no assurance that such expenditures will enable
the Company's products to achieve any additional degree of market acceptance,
and if the document management software market fails to grow or grows more
slowly than the Company currently anticipates, the Company's business, operating
results and financial condition would be materially adversely affected.
In addition, the commercial market for products and services designed for use
with the Internet and the World Wide Web has only recently begun to develop, and
the success of the Company's products may depend, in part, on their
compatibility with the Internet and the Web. It is difficult to predict with any
assurance whether the Internet will prove to be a viable commercial marketplace
or whether the demand for Internet related products and services will increase
or decrease in the future. Since the increased commercial use of the Internet
could require substantial modification and customization of the Company's
products and services and the introduction of new products and services, there
can be no assurance that the Company would be able to effectively adapt its
products to the Internet or to successfully compete in the market for Internet-
related products and services.
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 may
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
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>
Management of Growth; Dependence Upon Key Personnel. The Company's ability to
---------------------------------------------------
compete effectively and to manage future anticipated growth, will require the
Company to expand, train and manage its employee work force. The Company's
plans include hiring a significant number of highly-qualified technical, sales
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to attract assimilate or
retain such key employees.
15.
<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.
(4) 10.18 Registrant's 1996 Non-Officer Equity Incentive Plan.
11.1 Statement Regarding computation of Earnings Per Share.
27.1 Financial Data Schedule.
- ---------------------
+ 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)
16.
<PAGE>
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.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-15239) and incorporated herein by reference.
(b) NO REPORTS ON FORM 8-K WERE FILED DURING THE QUARTER ENDED
SEPTEMBER 30, 1996.
17.
<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: November 13, 1996 By: /s/ Alan Henricks
-----------------------
Alan Henricks
Vice President, Finance and Operations,
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
18.
<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.
(4) 10.18 Registrant's 1996 Non-Officer Equity Incentive Plan.
11.1 Statement Regarding computation of Earnings Per Share.
27.1 Financial Data Schedule.
- ---------------------
+ 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.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-15239) and incorporated herein by reference.
19.
<PAGE>
EXHIBIT 11.1
DOCUMENTUM, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
------- ------- ------ ------
Net Income $ 1,352 $ 381 $ 2,751 $ 746
====== ====== ====== ======
Primary shares outstanding:
Weighted average shares
outstanding during the
period 14,029 1,574 13,689 1,574
Common stock equivalent
shares 894 11,360(1) 975 11,360(1)
------ ------ ------ ------
14,923 12,934 14,664 12,934
====== ====== ====== ======
Primary net income per
common stock and common
stock equivalent share (2) $ 0.09 $ 0.03 $ 0.19 $ 0.06
====== ====== ====== ======
(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
20.
<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 SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,139
<SECURITIES> 46,836
<RECEIVABLES> 8,267
<ALLOWANCES> (788)
<INVENTORY> 0
<CURRENT-ASSETS> 63,402
<PP&E> 8,153
<DEPRECIATION> 2,866
<TOTAL-ASSETS> 69,095
<CURRENT-LIABILITIES> 12,645
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 56,092
<TOTAL-LIABILITY-AND-EQUITY> 69,095
<SALES> 23,768
<TOTAL-REVENUES> 30,925
<CGS> 1,397
<TOTAL-COSTS> 6,049
<OTHER-EXPENSES> 22,220
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 101
<INCOME-PRETAX> 4,233
<INCOME-TAX> (1,482)
<INCOME-CONTINUING> 2,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,751
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
