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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 March 31, 1998
---------------------
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) (Zip Code)
(Registrant's telephone number, including area code): (925) 463-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value
(TITLE OF CLASS)
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
$0.001 per share, was 15,841,806 on March 31, 1998.
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FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 1998 and December 31,
1997 ........................................................................... Page 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997......................................................... Page 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997......................................................... Page 5
Notes to Condensed Consolidated Financial Statements............................ Page 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... Page 9
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................................... Page 21
Item 6. Exhibits and Reports on Form 8-K................................................ Page 21
Signatures.................................................................................... Page 22
Exhibit Index................................................................................. Page 23
</TABLE>
2
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PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,924 $ 14,236
Short-term investments 80,059 78,895
Accounts receivable, net of allowances of
$2,622 and $2,537 17,773 19,996
Other current assets 4,566 3,740
--------- ---------
123,322 116,867
Property and equipment, net 9,512 9,837
Other assets 409 499
--------- ---------
$ 133,243 $ 127,203
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,228 $ 1,721
Accrued liabilities 16,700 15,203
Deferred revenues 11,525 8,224
Other liabilities 334 22
--------- ---------
30,787 25,170
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized
Common stock, $0.001 par value; 35,000 shares authorized; 16 16
Additional paid-in capital 97,503 96,830
Cumulative translation adjustment 26 8
Retained earnings 4,911 5,179
--------- ---------
102,456 102,033
--------- ---------
$ 133,243 $ 127,203
========= =========
</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
MARCH 31,
-------------------------------------------
1998 1997
--------- ------------
<S> <C> <C>
Revenues:
Licenses $ 17,051 $ 11,062
Services 8,021 3,975
--------- ---------
Total revenues 25,072 15,037
--------- ---------
Cost of revenues:
Licenses 1,204 386
Services 5,045 2,490
--------- ---------
Total cost of revenues 6,249 2,876
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Gross profit 18,823 12,161
--------- ---------
Operating expenses:
Sales and marketing 10,569 7,285
Research and development 3,641 2,298
General and administrative 2,296 1,304
Acquisition and related costs 2,171 -
--------- ---------
Total operating expenses 18,677 10,887
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Income from operations 146 1,274
--------- ---------
Interest and other income, net 1,110 445
--------- ---------
Income before income tax provision 1,256 1,719
Provision for income taxes (766) (602)
--------- ---------
Net income $ 490 $ 1,117
========= =========
Basic earnings per share $ 0.03 $ 0.08
========= =========
Diluted earnings per share $ 0.03 $ 0.08
========= =========
Shares used to compute basic earnings per share 15,807 14,174
========= =========
Shares used to compute diluted earnings per share 16,729 14,880
========= =========
</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>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------------
1998 1997
--------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 490 $ 1,117
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,118 711
Provision for doubtful accounts 715 (176)
Changes in assets and liabilities:
Accounts receivable 1,630 2,604
Other current assets and other assets (707) (373)
Accounts payable 211 (282)
Accrued liabilities 932 927
Deferred revenue 3,272 2,163
--------- ----------
Net cash provided by operating activities 7,661 6,691
--------- ----------
Cash flows from investing activities:
Purchases of short-term investments (26,737) (22,586)
Sales of investments 25,573 25,760
Purchases of property and equipment (424) (1,177)
Other 10 -
--------- ----------
Net cash (used) provided by investing
activities (1,578) 1,997
--------- ----------
Cash flows from financing activities:
Issuance of common stock 658 120
Repayments on capital lease obligations (71) (62)
Repayment on term loan - (170)
--------- ----------
Net cash provided (used) by financing
activities 587 (112)
--------- ----------
Effect of exchange rate on changes in cash 18 (41)
--------- ----------
Net increase in cash and cash equivalents 6,688 8,535
Cash and cash equivalents at beginning of period 14,236 5,369
--------- ----------
Cash and cash equivalents at end of period $ 20,924 $ 13,904
========= ==========
Supplemental schedule of cash flow information:
Interest paid $ - $ 45
Income taxes paid $ 1,529 $ 22
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 present fairly 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 included in the Company's 1997 Annual Report
on Form 10-K. The consolidated results of operations for the period ended March
31, 1998 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire fiscal year ending December 31, 1998.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Documentum International, Inc. and Workgroup
Management, Inc. ("WMI") in the United States, and Documentum Software Europe
Ltd., in the United Kingdom. All significant inter-company accounts and
transactions have been eliminated.
Earnings per share
Basic earnings per share is computed using the weighted average number of
shares of common stock. Diluted earnings per share is computed using the
weighted average number of shares of common stock and common equivalent shares
outstanding during the period. Common equivalent shares consist of convertible
preferred stock (using the if converted method) and stock options and warrants
(using the treasury stock method). Common equivalent shares are excluded from
the computation if their effect is antidilutive.
The following is a reconciliation of the computation for basic and diluted EPS:
Three Months Ended March 31,
------------------------------------
1998 1997
----------------- ----------------
(in thousands, except per share data)
Net income $ 490 $ 1,117
------------ -----------
Shares calculation
Average basic shares outstanding 15,807 14,174
Effect of dilutive securities:
Options 922 706
------------ -----------
Total shares used to compute
diluted earnings per share 16,729 14,880
============ ===========
Earnings per basic share $ 0.03 $ 0.08
============ ===========
Earnings per diluted share $ 0.03 $ 0.08
============ ===========
6
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DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Options to purchase 27,743 shares of common stock at prices ranging from
$42.13 to $52.63 per share were outstanding at March 31, 1998 but were not
included in the computation of diluted EPS because either the option's exercise
price was greater than the average market price of the common shares or
inclusion of such options would have been anti-dilutive.
Revenue recognition
In October, 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition", which the Company has adopted for transactions entered into during
the fiscal year beginning January 1, 1998. SOP 97-2 provides guidance for
recognizing revenue on software transactions and supersedes SOP 91-1, "Software
Revenue Recognition". In March 1998, the AICPA issued Statement of Position No.
98-4 ("SOP 98-4"), "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition". SOP 98-4 defers, for one year, the application
of certain passages in SOP 97-2 which limit what is considered vendor-specific
objective evidence ("VSOE") necessary to recognize revenue for software licenses
in multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
Adoption of the remaining provisions of SOP 97-2 did not have a material impact
on revenue recognition during the three months ended March 31, 1998.
Comprehensive net income
Effective January 1998, Documentum adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is comprised of net income and other comprehensive earnings such as
foreign currency translation gain/loss and unrealized gains or losses on
available-for-sale marketable securities. The Company's unrealized gains and
losses on available for sale marketable securities have been insignificant for
all periods presented. Documentum's total comprehensive earnings were as
follows:
Recent accounting pronouncements
Three Months Ended March 31,
------------------------------------
1998 1997
----------------- ----------------
(in thousands)
Net income $ 490 $ 1,117
Other comprehensive income
Foreign translation adjustment 18 (41)
------------ -----------
Comprehensive net income $ 508 $ 1,076
============ ===========
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 for fiscal year ending December 31,
1998 and has not evaluated the impact of such adoption on the notes to its
consolidated financial statements.
7
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Documentum, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(UNAUDITED)
Accrued expenses and other current liabilities:
March 31, December 31,
1998 1997
---------- ------------
(in thousands)
Current accrued liabilities
Compensation & related benefits $ 6,222 $ 6,479
Taxes 2,867 3,663
Other current liabilities 7,611 5,061
--------- ---------
$ 16,700 $ 15,203
========= =========
Business acquisition
On January 5, 1998 the Company acquired all the outstanding shares of WMI, a
privately-held company, in exchange for 192,473 shares of the Company's common
stock valued on the transaction date at approximately $6.7 million. The
acquisition was accounted for as a pooling of interests. WMI is a professional
services firm with approximately 35 employees (as of the date of the
acquisition) located in Oakland, California specializing in the design,
development and implementation of document management systems for the
semiconductor industry. As of December 31, 1997, WMI had $530,000 in total
assets. The Company believes that this acquisition is immaterial to the
Company's prior financial statements and as such the Company's prior financial
statements have not been restated. The acquisition of WMI is part of the
Company's strategic plan to add specific domain expertise in targeted vertical
industries. The Company recorded merger expenses of approximately $2.2 million
in connection with the acquisition in the first quarter of 1998. The $2.2
million primarily consisted of accounting and legal fees and other related
transactions costs.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed herein under the caption "Risk Factors,"
as well as those discussed in the Company's 1997 annual report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect the Company's business and results of operations.
OVERVIEW
Documentum, which was formed in 1990, develops, markets and supports a family
of Intranet and client/server software-based solutions that enable companies to
share, manage and reuse the vital corporate knowledge contained in documents.
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.
The Company expects that Documentum EDMS-related license and service revenues
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 and related solutions, as well as building its sales,
services, 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.
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. See "Risk Factors--Uncertainty of Future
Operating Results; Fluctuations in Quarterly Operating Results."
9
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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 MARCH 31,
----------------------------
1998 1997
--------- ----------
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Licenses 68% 74%
Services 32% 26%
-------- -------
Total revenues 100% 100%
-------- -------
Cost of revenues:
Licenses 5% 3%
Services 20% 17%
-------- -------
Total cost of revenues 25% 20%
-------- -------
Gross profit 75% 80%
-------- -------
Operating expenses:
Sales and marketing 42% 48%
Research and development 14% 15%
General and administrative 9% 9%
Acquisition and related costs 9% 0%
-------- -------
Total operating expenses 74% 72%
-------- -------
Income from operations 1% 8%
-------- -------
Interest and other income, net 4% 3%
-------- -------
Income before income tax provision 5% 11%
Provision for income taxes (3%) (4%)
-------- -------
Net income 2% 7%
======== =======
AS A PERCENTAGE OF RELATED REVENUES:
Cost of license revenues 7% 3%
Cost of service revenues 63% 63%
Revenues
The Company's revenues are derived from the sale of perpetual licenses for its
document management software and related services, which include maintenance and
support, consulting and training services. License revenues are recognized upon
shipment of the product if no significant vendor obligations remain, fees are
fixed and determinable 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 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
consulting and training are recognized when the services are performed and
collectibility is deemed probable.
In October, 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition", which the Company has adopted for transactions entered into during
the fiscal year beginning January 1, 1998. SOP 97-2 provides guidance for
recognizing revenue
10
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on software transactions and supersedes SOP 91-1, "Software Revenue
Recognition." In March 1998, the AICPA issued Statement of Position No. 98-4
("SOP 98-4"), "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition." SOP 98-4 defers, for one year, the application of
certain passages in SOP 97-2 which limit what is considered vendor-specific
objective evidence ("VSOE") necessary to recognize revenue for software licenses
in multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
Adoption of the remaining provisions of SOP 97-2 did not have a material impact
on revenue recognition during the three months ended March 31, 1998.
License revenues increased by 54% to $17.1 million for the three months ended
March 31, 1998 from $11.1 million for the three months ended March 31, 1997. The
growth in license revenues was due to an increase in the number of licenses
sold, reflecting increased acceptance of the Company's EDMS family of products,
as well as an increase in the number of customers who purchased additional
product licenses, and the expansion of the Company's sales organization. For
the three months ended March 31, 1998 and 1997 license revenues from Xerox and
certain Xerox affiliates, acting as systems integrators, accounted for 5% and 9%
of total license revenues, respectively. 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.
Also, the Company's strategy to provide customers with whole solutions could
result in software licenses being bundled with services. Therefore, with certain
future transactions, the delivery of services may delay recognition of license
revenue.
Service revenues increased by 102% to $8.0 million for the three months ended
March 31, 1998 from $4.0 million for the three months ended March 31, 1997,
representing 32% and 26% of total revenues for the respective periods. The
increase in both service revenue dollars and in service revenues as a percent of
total revenues was attributable to an increased demand for services as well as a
larger installed base of customers receiving ongoing maintenance, training and
support services and increases in the Company's professional services consulting
staff.
The Company markets its products through its direct sales force and its
indirect channel partners. While historically the Company generated the majority
of its revenues from its direct sales force, the Company has also focused on
complementing its direct sales channel with indirect channels, consisting of
systems integrators and distributors. Revenues from all indirect channel
partners comprised 19% and 18% of license revenues for the three months ended
March 31, 1998 and 1997, respectively. Revenues from indirect partners for any
period 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 the Company's indirect channel partners will
elect or be able to continue to market or support Documentum EDMS effectively,
or that economic conditions or industry demand will not adversely affect these
partners. See "Risk Factors--Reliance on Certain Relationships."
International revenues represented 37% and 15% of license revenues for the
three months ended March 31, 1998 and 1997, respectively. The increase in
international revenues as a percent of license revenues for the three months
ended March 31, 1998 is due to the expansion of the Company's sales force in
Europe. 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
the products are used. As a result, the Company believes that period to period
comparisons 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 international sales are primarily
denominated in U.S. 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
11
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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. See "Risk Factors--International
Operations."
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. Royalties, which are paid to third-parties for selected
products, include both fixed fees and variable fees. Cost of license revenues
increased by 212% to $1.2 million for the three months ended March 31, 1998 from
$386,000 for the three months ended March 31, 1997, representing 7% and 3% of
the related license revenues for the three months ended March 31, 1998 and 1997,
respectively. The increase in cost of license revenues as a percentage of
license revenues was principally related to the increase in variable third-party
royalty fees. The Company expects the cost of license revenue to increase in
dollar amount as the related license revenue increases.
Cost of services revenues consists primarily of personnel-related costs
incurred in providing consulting services, training to customers and telephone
support. Cost of services revenues increased by 103% to $5.0 million for the
three months ended March 31, 1998 from $2.5 million for the three months ended
March 31, 1997, representing 63% of the related services revenues for the three
months ended March 31, 1998 and 1997, respectively. The increase in cost of
services revenues in dollar amount was a result of increased personnel-related
costs as the Company expanded its customer support, training and service
operations to support its increased installed customer base in both the United
States and Europe, as well as payments to third parties for consulting services.
The Company expects the cost of services revenue to increase in dollar amount as
the related services revenue increases.
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 45% to $10.6 million for the
three months ended March 31, 1998 from $7.3 million for the three months ended
March 31, 1997 representing 42% and 48% of total revenues for the three months
ended March 31, 1998 and 1997, respectively. The increase in dollar amount was
the result of the Company's strategy to continue to invest in its sales and
marketing infrastructure, including increasing the number of sales teams and
increasing the number of marketing and DocSolution programs. The decrease in
spending as a percentage of revenues is primarily due to economies of scale
realized as certain expenses such as management compensation grew
proportionately less than revenues. The Company expects that sales and
marketing expenses will increase in dollar amount 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
58% to $3.6 million for the three months ended March 31, 1998 from $2.3 million
for the three months ended March 31, 1997, representing 14% and 15% of total
revenues for the three months ended March 31, 1998 and 1997, 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. Based on the Company's research and
development process, costs incurred between the establishment of technological
feasibility and general release have not been material and therefore have been
expensed as incurred. The Company expects research and development costs will
continue to increase in dollar amount 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, legal,
human resources and general management as well as outside professional services.
General and administrative expenses increased by 76% to $2.3 million for the
three months ended March 31, 1998 from $1.3 million for the three months ended
March 31, 1997, representing 9% of total revenues for the three months ended
March 31, 1998 and 1997, respectively. The increase in dollar amount is
primarily due to increased staffing and professional fees necessary to manage
and support the Company's growth. The Company expects general and administrative
expenses to increase in dollar amount in order to support the growing needs of
the Company.
12
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Acquisition and related costs. On January 5, 1998 the Company acquired all the
outstanding shares of Workgroup Management, Inc. ("WMI"), a privately-held
company, in exchange for 192,473 shares of the Company's common stock valued on
the transaction date at approximately $6.7 million. The acquisition was
accounted for as a pooling of interests. WMI is a professional services firm
with approximately 35 employees (as of the date of the acquisition) located in
Oakland, California specializing in the design, development and implementation
of document management systems for the semiconductor industry. The acquisition
of WMI is part of the Company's strategic plan to add specific domain expertise
in targeted vertical industries. The Company recorded one time charge of
approximately $2.2 million or $0.11 per diluted share in connection with the
acquisition.
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 and interest expense.
Interest and other income, net increased by 149% to $1.1 million for the three
months ended March 31, 1998 from $445,000 for the three months ended March 31,
1997. To date, the Company's international sales have been generally denominated
in U.S. dollars and the Company has not engaged in hedging activities as the
exposure to currency fluctuations has been insignificant. In the future, as the
Company expands its international operations, the Company expects to have an
increased amount of non-U.S. dollar denominated contracts. Unexpected changes in
the exchange rates for these foreign currencies could result in significant
fluctuation in the foreign currency translation gains and losses in future
periods.
Provision for income taxes
The provision for income taxes as a percentage of pretax income was 61% and
35% for the three months ended March 31, 1998 and 1997, respectively. The tax
rate for the three months ended March 31, 1998 was higher than rates for the
three months ended March 31, 1997 due to non-deductible items related to the
acquisition of WMI. The Company anticipates that future periods will reflect
the estimated annualized tax rate of 34%.
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, the Company has financed its operations primarily through the sale
of stock and through cash generated from operations. In February 1996, the
Company completed its initial public offering, whereby it sold 2,058,000 shares
of its common stock, and received net proceeds of approximately $45 million. In
October 1997, the Company completed a secondary public offering, whereby it sold
1,115,700 shares of its common stock, and received net proceeds of approximately
$31 million.
The Company's cash and investments totaled $101.0 million at March 31, 1998
representing 76% of total assets. 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 primarily short term
maturities. In accordance with SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities" such investments are classified as "available for
sale."
Net cash provided by operating activities was $7.7 million and $6.7 million
for the three months ended March 31, 1998 and 1997, respectively. For the three
months ended March 31, 1998, the cash generated by operations was primarily
attributable to net income of $490,000, a decrease in accounts receivable of
$1.6 million, growth in accrued liabilities of $932,000, depreciation and
amortization of $1.1 million, provision for doubtful accounts of $715,000 and
deferred revenue of $3.3 million, offset by the increase in other assets of
$707,000. For the three months ended March 31, 1997, the cash generated by
operations was primarily attributable to net income of $1.1 million, growth in
accrued liabilities of $927,000, a decrease in accounts receivable of $2.6
million and deferred revenue of $2.2 million, offset by the increase in other
assets of $373,000 and the decrease in accounts payable of $282,000. For the
three months ended March 31, 1998 and 1997, capital expenditures of $424,000 and
$1.2 million, respectively, were primarily for computer equipment, fixed assets
and leasehold improvements acquired in conjunction with the Company's expansion
to new facilities.
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<PAGE>
On January 15, 1998, the Company entered into an unsecured revolving credit
agreement (the "Facility") with a new bank. The Facility allows for borrowings
of up to $10 million bearing interest at the Company's option of: (1) the bank's
prime rate minus 0.5%; (2) the LIBOR plus 1.0%; or (3) at the bank's competitive
bid rate, and expires in December 1999. The Company must comply with certain
financial covenants and conditions as described in the Facility. The Company was
in compliance as of March 31, 1998.
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 the ordinary course of business, potential investments such as
businesses, products or technologies. See "Risk Factors--Risks Associated with
Acquisitions."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 for the fiscal year ended December
31, 1998 and has not evaluated the impact of such adoption on the notes to its
consolidated financial statements.
YEAR 2000 DISCLOSURE
In the next two years, most companies will face a potentially serious
information systems problem because many software application and operational
programs written in the past may not properly recognize calendar dates beginning
in the year 2000. This problem could force computers to either shut down or
provide incorrect data or information. During 1997 the Company began to assess
the changes, if any, required to its internal computer programs and hardware.
Efforts will be made to modify or replace any non-compliant software, systems
and equipment by the year 1999. Further, the Company is aware of the risks to
third parties and the potential adverse impact on the Company resulting from the
failure by these parties to adequately address the year 2000 problem. The
Company has expended and will continue to expend appropriate resources to
address this issue on a timely basis. However, no estimate of the expected
total cost of this effort can be made at this time, nor can any assurance be
given that the year 2000 problem will not have an adverse impact on the
Company's earnings.
RISK FACTORS
In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented in
this report. The section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this report contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, and Section 21E of the Securities Exchange Act 1934. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the Risk Factors set forth below and elsewhere 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
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<PAGE>
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. The Company's
first quarter revenues and earnings in any year are typically flat or lower as
compared to the immediate preceding fourth quarter, due to seasonality, which
the Company believes is common in the software industry. Moreover, the Company
typically recognizes a substantial amount of its revenue in the last month,
weeks or even days of each quarter. The Company's license sales generally
reflect a relatively high amount of revenues per order and the number of large
individual license sales has continued to increase. The loss or delay of
individual orders, therefore, could have a significant impact on the revenues
and quarterly results of the Company. In addition, the timing of license revenue
is difficult to predict because of the length of the Company's sales cycle,
which is typically six to 12 months from the initial contact. Also, the
Company's strategy to provide customers with whole solutions could result in
software licenses being bundled with services. Therefore, with certain future
transactions, the delivery of services may delay recognition of license revenue.
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, any shortfall from anticipated revenue or 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. 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 related
to future performance 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 or investors. In such event, the market
price of the Company's common stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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 12 months) to provide a significant level of education to
prospective customers regarding the use and 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 business 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, financial condition and
results of operations and cause the Company's operating results to vary
significantly from quarter to quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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, financial
condition and results of operations. 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
and services market is characterized by rapid technological change, change 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 continue 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,
the Internet, corporate intranets and RDBMS software. The Company's future
success will also depend in part on its ability to execute on its strategy to
develop whole-product solutions in certain target vertical industries. In
addition, the Company's future success will depend in
15
<PAGE>
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 in delivering 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 products. If release dates of
any future product 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 six
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, financial condition and results of operations.
Dependence on Emerging Markets. The market for document management software
and services 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 management applications developed for use in
client/server environments. There can be no assurance that the market for
document management software and services 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 and services market fails to grow or grows more slowly than the Company
currently anticipates, the Company's business, financial condition and results
of operations would be materially adversely affected.
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 FileNet,
OpenText, PC DOCS and Novasoft. Several competitors have longer operating
histories, greater financial, technical, marketing and other resources, greater
name recognition and a larger installed base of customers than the Company.
In addition, other enterprise software vendors, such as Microsoft, Oracle and
Lotus (a division of IBM), may compete with the Company in the future. Like the
Company's current competitors, many of these companies have longer operating
histories, significantly greater resources, name recognition and a larger
installed base of customers than the Company. Microsoft, Oracle, Lotus and other
potential competitors have well-established relationships with current and
potential customers and strategic partners of the Company, have extensive
knowledge of the enterprise software 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 maintain 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
16
<PAGE>
Company in the future or will not otherwise reduce or discontinue their
relationships with or support of the Company and its products.
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, financial condition and results of operations.
End User Customer and Industry Concentration. A relatively small number of end
user customers account for a significant percentage of the Company's revenues.
In addition, the Company's customers are somewhat concentrated in the process
and discrete manufacturing, pharmaceutical and architectural engineering and
construction industries. The Company expects that sales of its products to a
limited number of customers and industry segments will continue to account for a
high percentage of revenue for the foreseeable future. In addition, the future
success of the Company will depend in part on its ability to obtain orders from
new customers and its ability to successfully market its products to customers
in new industry segments. The loss of a major customer or any reduction or delay
in orders by such customers, or the failure of the Company to successfully
market its products outside existing targeted industry segments, would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Reliance on Certain Relationships. The Company has established strategic
relationships with a number of organizations that it believes are important to
its worldwide sales, marketing and support activities. The Company's
relationships with indirect channel partners and other consultants provide
marketing and sales opportunities for the Company's direct sales force, expand
the distribution of its products and broaden its product offerings through
product bundling. These relationships also assist the Company in keeping pace
with the technological and marketing developments of major vendors, and in
certain instances, provide the Company with technical assistance for the
Company's product development efforts. There can be no assurance that any
customer, systems integrator or distributor will continue to market or to
purchase the Company's products. The failure by the Company to maintain these
relationships, or to establish new relationships in the future, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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. In particular, as part of the Company's strategy of
delivering comprehensive solutions, the Company expects to hire additional
professional service personnel in addition to the employees that joined the
Company in connection with the Company's January 1998 acquisition of WMI.
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.
See "Risks Associated with Acquisitions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
International Operations. The Company's sales are primarily to large
multinational companies. To service the needs of such companies, both
domestically and internationally, the Company and its support partners must
provide worldwide product support services. As a result, the Company intends to
continue expanding its existing international operations and enter additional
international markets, which will require significant management attention and
financial resources and could adversely affect the Company's operating margins
and earnings, if any. The Company has offices in London, Paris, and Munich, and
opened offices in Tokyo and Seoul in December 1997. The Company operates its own
European technical support operation, located in the London office, and recently
expanded this operation into Munich during 1997. In order to successfully expand
international sales, the Company must establish additional foreign operations,
hire additional personnel and develop relationships with additional
international vendors. To the extent that the Company is unable to do so in a
timely manner, the Company's growth, if any, in international sales will be
limited, and the Company's business, financial condition and results of
17
<PAGE>
operations could be materially adversely affected. In addition, there can be no
assurance that the Company will be able to maintain or increase international
market demand for its products.
Additional risks inherent in the Company's international business activities
generally include currency fluctuations, unexpected changes in regulatory
requirements, tariffs and other trade barriers, the Company's limited experience
in localizing products for foreign countries, cost of localization, lack of
acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences, including restrictions on the repatriation
of earnings, and the burdens of complying with a wide variety of foreign laws.
To date, a significant portion of the Company's international revenues have been
denominated in U.S. dollars. 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 international sales and thus the Company's business, financial
condition and results of operations.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success is heavily dependent upon proprietary technology. The Company relies
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. The Company presently has no patents or patent applications
pending. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology. The Company is not aware that any of its products
infringe the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement by the Company with
respect to current or future products. The Company expects that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
In addition, the Company also relies on certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurances that such firms will remain in business, that they will
continue to support their products or that their products will otherwise
continue to be available to the Company on commercially reasonable terms. The
loss or inability to maintain any of these software licenses could result in
delays or reductions in product shipments until equivalent software can be
developed, identified, licensed and integrated, which would adversely affect the
Company's business, financial condition and results of operations.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risk of Product Defects. Software products as complex as those offered by the
Company frequently contain errors or failures, especially when first introduced
or when new versions are released. Although the Company conducts extensive
product testing, the Company has in the past released products that contain
defects, and has
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discovered software errors in certain of its new products and enhancements after
their introduction. The Company could in the future lose or delay recognition of
revenues as a result of software errors or defects. The Company's products are
typically intended for use in applications that may be critical to a customer's
business. As a result, the Company expects that its customers and potential
customers have a greater sensitivity to product defects than the market for
software products generally. Although the Company's business has not been
adversely affected by any such errors to date, there can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in new products or releases after commencement of commercial
shipments, resulting in loss of revenue or delay in market acceptance, diversion
of development resources, damage to the Company's reputation, or increased
service and warranty costs, any of which could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Risks Associated with Acquisitions. As part of its business strategy, the
Company expects to make acquisitions of, or significant investments in,
businesses that offer complementary products and technologies. For example, the
Company recently acquired WMI. Such acquisition will, and any future
acquisitions or investments would, expose the Company to the risks commonly
encountered in acquisitions of businesses. Such risks include, among others,
difficulty of assimilating the operations; information systems and personnel of
the acquired businesses; the potential disruption of the Company's ongoing
business; the inability of management to maximize the financial and strategic
position of the Company through the successful incorporation of acquired
employees and customers; the maintenance of uniform standards, controls,
procedures and policies; and the impairment of relationships with employees and
customers as a result of any integration of new management personnel. There can
be no assurance that any potential acquisition will be consummated or, if
consummated, that it will not have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Possible Volatility of Stock Price. The trading price of the Company's Common
Stock is subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes in
earning estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, general conditions in the software
and computer industries and other events or factors. In addition, the stock
market in general has experienced extreme price and volume fluctuations which
have affected the market price for many companies in industries similar or
related to that of the Company and which have been unrelated to the operating
performance of these companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock.
Effect of Certain Charter Provisions: Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has the
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to those of the Common Stock. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue any shares of Preferred Stock. Further, certain provisions of the
Company's Amended and Restated Certificate of Incorporation, including
provisions that create a classified board of directors, and certain provisions
of the Company's Amended and Restated Bylaws and of Delaware law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company.
Year 2000. In the next two years, most companies will face a potentially
serious information systems problem because many software application and
operational programs written in the past may not properly recognize calendar
dates beginning in the year 2000. This problem could force computers to either
shut down or provide incorrect data or information. During 1997 the Company
began to assess the changes, if any, required to its computer programs and
hardware. Efforts will be made to modify or replace any non-compliant software,
systems and equipment by the year 1999. Further, the Company is aware of the
risks to third parties and the potential adverse impact on the Company resulting
from the failure by these parties to adequately address the year 2000 problem.
The Company has expended and will continue to expend appropriate resources to
address this issue on a
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timely basis. However, no estimate of the expected total cost of this effort can
be made at this time, nor can any assurance be given that the year 2000 problem
will not have an adverse impact on the Company's earnings.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) On January 5, 1998, the Company issued 192,473 shares of its Common Stock
to the shareholders of privately held Workgroup Management, Inc. ("WMI") in
connection with the Company's acquisition of WMI pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(d) There has been no change to the disclosure contained in the Company's
report on Form 10-Q for the quarter ended September 30, 1997 regarding the use
of proceeds generated by the Company's initial public offering of its Common
Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C>
(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)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 september 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
Y(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.
(5)10.20 Lease agreement between Registrant and Britannia Hacienda IV Limited Partnership.
(2)22.1 List of Subsidiaries of Registrant.
27.1 Financial Data Schedule.
</TABLE>
- ------------
Y Confidential treatment requested and granted 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.
(5) Filed as an exhibit to the Registrant's annual report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
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<PAGE>
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1998.
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: May 13, 1998 By: /s/ Mark S. Garrett
-----------------------
Mark S. Garrett
Vice President, and Chief Financial
Officer (Duly Authorized Officer and
Principal Financial Officer)
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C>
(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)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 september 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
Y(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.
(5)10.20 Lease agreement between Registrant and Britannia Hacienda IV Limited Partnership.
(2)22.1 List of Subsidiaries of Registrant.
27.1 Financial Data Schedule.
</TABLE>
- ------------
Y Confidential treatment requested and granted 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.
(5) Filed as an exhibit to the Registrant's annual report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10Q FOR THE PERIOD ENDED MARCH 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,924
<SECURITIES> 80,059
<RECEIVABLES> 20,395
<ALLOWANCES> 2,622
<INVENTORY> 0
<CURRENT-ASSETS> 123,322
<PP&E> 17,570
<DEPRECIATION> 8,058
<TOTAL-ASSETS> 133,243
<CURRENT-LIABILITIES> 30,787
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 102,440
<TOTAL-LIABILITY-AND-EQUITY> 133,243
<SALES> 17,051
<TOTAL-REVENUES> 25,072
<CGS> 1,204
<TOTAL-COSTS> 6,249
<OTHER-EXPENSES> 18,677
<LOSS-PROVISION> 715
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 1,256
<INCOME-TAX> 766
<INCOME-CONTINUING> 490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 490
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
