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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5671 GIBRALTAR DRIVE, PLEASANTON, CALIFORNIA 94588-8547
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(Registrant's telephone number, including area code): (510) 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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
Incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on February 27,
1998 as reported on the Nasdaq National market, was approximately $478,787,000.
Shares of common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock, par value
$.001 per share, was 15,824,173 on February 27, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 1998 Annual
Meeting of Stockholders to be held May 28, 1998 are incorporated by reference in
Part III of this Form 10-K.
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FORM 10-K
INDEX
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PART I
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Item 1. Business ...................................................................... Page 3
Item 2. Properties .................................................................... Page 17
Item 3. Legal Proceedings ............................................................. Page 17
Item 4. Submission of Matters to a Vote of Security Holders ........................... Page 17
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ...... Page 18
Item 6. Selected Financial Data ....................................................... Page 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................... Page 20
Item 8. Consolidated Financial Statements and Supplementary Data ...................... Page 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................... Page 25
PART III
Item 10. Directors and Executive Officers of the Registrant ............................ Page 26
Item 11. Executive Compensation ........................................................ Page 26
Item 12. Security Ownership of Certain Beneficial Owners and Management ................ Page 26
Item 13. Certain Relationships and Related Transactions ................................ Page 26
PART IV
Item 14. Exhibits, Consolidated Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K ............................................ Page 27
SIGNATURES............................................................................................ Page 28
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PART I
ITEM 1. BUSINESS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1954, as
amended (the "Exchange Act") 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 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 as well
as those discussed under the caption "Risk Factors." 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.
GENERAL
Documentum, Inc. ("Documentum" or the "Company") 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. The Documentum Enterprise Document Management System
(EDMS) is the choice of Global 1000 companies that require a fast-payback
document management solution designed for rapid and flexible deployment, ease of
use and high return on investment. With the Documentum EDMS, these companies are
achieving dramatic improvements in business-critical document processes with
powerful benefits: accelerated time to market, improved product quality,
enhanced operational efficiencies and guaranteed regulatory or contract
compliance.
The Company was incorporated in Delaware in January 1990. The Company's
principal executive offices are located at 5671 Gibraltar Drive, Pleasanton,
California 94588. Its telephone number is (510) 463-6800. The Company's home
page can be located on the World Wide Web at www.documentum.com. As used
in this document, the "Company" and "Documentum" refer to Documentum, Inc. and
its subsidiaries.
Documentum/R/, Documentum WorkSpace/R/, Documentum DocPage Server/TM/,
Documentum RightSite/TM/, Documentum SiteSpace/TM/, Documentum SmartSpace/TM/,
Documentum ViewSpace/TM/, Documentum DocSolutions/TM/, Documentum DocLink/TM/,
Documentum CADLink/TM/, Documentum DocPage Builder/TM/, Docbase/TM/,
Docobject/TM/, Docbasic/TM/, Quickbuilder/TM/, and UnaLink/TM/ are trademarks of
Documentum, Inc. All other trademarks or service marks appearing in this
document are the property of their respective holders.
INDUSTRY BACKGROUND
In today's corporate environments, documents are a critical asset. The
knowledge they contain fuels the productivity of a company's most vital business
processes--from product development, engineering change, and manufacturing to
marketing, sales, and distribution. These business-critical documents control
(or are controlled by) business policies and procedures. They are often tailored
to individual needs, and exist in a variety of electronic formats ranging from
text files, word processing documents and spreadsheets to Web pages and Java
applets, CAD drawings, graphics and images, and even video or audio clips.
Examples of business-critical documents include aircraft maintenance manuals;
drug manufacturing recipes; current and approved standard operating procedures
for a manufacturing plant; sales reports by product, region and time of year; or
the latest release of new product collateral, produced and delivered in
different formats and languages for multiple distribution channels around the
world.
In a typical corporate environment, documents are created, modified,
distributed and stored using multiple software systems. These software
applications run on a variety of computing platforms that may be geographically
dispersed, with little compatibility or data sharing capability between systems.
Corporate intranets based on Web technology are playing an ever-growing role in
information distribution and access across an enterprise, increasing
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the need for coordinated access to business-critical knowledge across a broader
base of users. Dynamic business activities combined with overwhelming amounts of
information increase the risk that information is out of date, inaccessible and
out of sync with business processes. Without an effective means of searching for
and reusing enterprise information, workers are often forced to recreate
documents from scratch, duplicating effort and increasing the margin for error.
Professionals often spend a disproportionate amount of their time locating,
processing, sharing and assembling documents rather than engaging in higher-
value activities. Additional complexity is added by documentation procedures,
which are often performed by teams of workers who are geographically dispersed
and use different client platforms.
As a result, important processes are often slowed and even stalled because
the documents on which they depend are out-of-date, inaccurate, or simply
unavailable to the people who need them. The inability to access and manage this
critical business information hampers knowledge worker productivity and presents
one of the greatest obstacles facing Global 1000 organizations.
Historically, companies have tried to address these document management
challenges either with costly and labor-intensive manual processes, or with
internally-developed systems based on proprietary technologies that are
difficult to implement, manage and maintain. The proliferation of productivity
tools such as word processors and spreadsheets has streamlined individual
document creation. However, these tools do not address productivity in processes
that require a number of individuals to collaborate and contribute information
across organizational and geographic barriers.
Large organizations need enterprise-wide solutions to optimize the value of
their business-critical documents by automating the associated procedures that
take place between a document's creation and its use or reuse. These procedures
range over the document's entire lifecycle--from information capture to managing
and controlling updates to the document, automating its approval process and
release, assembling document components, delivering the appropriate document to
the relevant user on a timely basis, and making the document easy for users to
find and access. Business-critical documents must easily integrate with the
organization's existing business processes and procedures, and the solution must
scale effectively in a heterogeneous computing environment. In addition, today's
companies require a document management solution that not only supports
traditional client/server systems but can be delivered just as easily on Web
platforms. This requires features for improving the quality and usability of Web
content and reducing the costs of controlling and maintaining ever-growing
intranet Web sites.
The solution is an enterprise-wide strategy for managing the flow of documents
by automating such important document processes as change, access privileges,
effectivity dates, distribution, and notification. By enabling an organization
to effectively use and reuse critical corporate knowledge, enterprise document
management can deliver many powerful benefits including accelerated time to
market, improved product quality, enhanced operational efficiency, and
regulatory compliance.
DOCUMENTUM'S SOLUTION
Documentum was established to deliver document management software that
addresses the specific challenges of managing business-critical documents
effectively across the enterprise. Documentum provides document management
solutions based on its core technology, the Documentum EDMS, and tailored to key
applications in four targeted industry segments: discrete manufacturing, process
manufacturing, finance, and business/government services.
The Documentum EDMS is a family of Web and client/server software products
designed to meet enterprise requirements for capturing knowledge, validating its
accuracy, and distributing it according to a company's business policies across
a global network. The Documentum EDMS is designed to deliver fast-payback
document management applications that meet four key enterprise requirements.
These include:
. INTEGRITY. The Documentum EDMS automates all processes for creating,
reviewing, approving, distributing, and archiving information according to
defined business rules and practices. This ensures that accurate and
appropriate knowledge can be delivered to the right people at the right time.
. REUSE. The Documentum EDMS provides maximum flexibility in the way that users
can access, use, and reuse knowledge in the form of documents and Web pages.
With the Documentum EDMS, information can be assembled and reassembled in any
combination without having to be recreated--saving users countless hours of
rework and enabling them to devise new purposes for existing knowledge.
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. INTEGRATION. The Documentum EDMS seamlessly integrates document management
with business processes as well as the systems infrastructure that supports
those workflow processes. Because the Documentum EDMS is tightly integrated
with a range of applications and interfaces such as Web browsers, computer-
aided design (CAD) systems, Microsoft Office applications, SAP's R/3,
Peoplesoft, and other engineering resource planning (ERP) systems, virtually
any authorized user can access information on demand.
. SCALABILITY. The Documentum EDMS can be easily scaled at every level to meet
the changing needs of the business. The system can effectively support
thousands of users and millions of documents across departmental boundaries,
and it can leverage a company's existing, massively deployed network and
intranet infrastructure for easy growth from pilot applications through
global, multi-site implementations. The Documentum EDMS is designed for the
distributed enterprise, with an architecture that enables a range of
configuration options for placing information close to users while optimizing
management and administration.
The Documentum EDMS stores and manages documents through a dynamic document
and Web page repository known as a Docbase. With a powerful combination of
document, object, workflow, relational, and Web technologies, the Docbase
captures, stores, indexes and manages the attributes, relationships, content and
operations of each version of every document. This enables the system to manage
not only the documents and Web pages themselves, but also their associated
workflows, attributes (or metadata), annotations, and business rules. This
document information is stored within the Docbase as a Docobject. Driven by
business rules, Docobjects can be combined and re-combined on demand to form
Virtual Documents--dynamic compound document configurations that can come from
any source in the enterprise.
THE DOCUMENTUM EDMS
The Documentum Docpage Server
At the heart of the Documentum EDMS is the Documentum DocPage Server,
providing a rich set of document and Web content management services for
controlling and managing business-critical information and processes throughout
the enterprise. The DocPage Server is the only server that satisfies all the
requirements for true enterprise document management: preserving document
integrity across all document versions, enabling the reuse of knowledge in
documents to improve productivity, and integrating document management with your
existing technology infrastructure and business procedures.
Documentum RightSite
Documentum RightSite is an integrated server of the Documentum EDMS that
extends the power of enterprise document management to the Web. RightSite
enables companies to deliver high-quality, business-critical information via
corporate Intranets or the Internet. RightSite solves the complex challenges of
capturing, managing, and assembling frequently changing information on corporate
Web sites.
Documentum Clients
Within the enterprise, Documentum has identified three classes of document
management users: document coordinators, document contributors, and information
consumers. The Documentum EDMS is delivered via a range of client products, each
designed to deliver the appropriate DocPage Server and RightSite functionality
to a different class of user on client platforms including Web browsers, Windows
(3.1, 95 and NT), Macintosh, Solaris, HP-UX and IBM AIX. Customers purchase
different combinations of seats of the products depending on the level of
functionality they choose to deliver to each user population. Documentum's
client products include:
. DOCUMENTUM WORKSPACE. Through its own robust client environment or integration
with familiar desktop applications such as Microsoft Office, WorkSpace gives
document coordinators access to the full power and features of the DocPage
Server.
. DOCUMENTUM SMARTSPACE AND DOCUMENTUM SMARTSPACE INTRANET. SmartSpace provides
an easy-to-use client environment that enables document contributors to
perform basic document management tasks. SmartSpace also supports integration
with familiar desktop applications such as Microsoft Office. The Company also
offers Documentum SmartSpace/TM/ Intranet, an extension of the SmartSpace
product to the Web platform which enables users to contribute content and
perform a range of document management tasks over the Web.
. DOCUMENTUM VIEWSPACE INTRANET. Designed for information consumers, ViewSpace
Intranet enables Web browser users to access and view documents in a Docbase.
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Product Integrations
In addition to its core server and client products, the Company offers a
number of integrations with major business applications. These product
integrations enable customers to extend their existing enterprise applications
with document management functionality and provide end-users with access to
business-critical documents from their familiar applications. The Company's
product integrations include:
. DOCUMENTUM DOCLINK FOR SAP. DocLink for SAP is a bi-directional interface that
provides seamless integration between the Documentum EDMS and SAP's R/3.
DocLink for SAP enables corporations to use intranet and client/server
technology to seamlessly link corporate knowledge with SAP information in a
paperless, electronic environment. Knowledge workers using Microsoft Office,
AutoCAD and other desktop applications can easily collaborate to create,
review, annotate, assemble and approve documents such as designs, drawings,
specifications, standard operating procedures, data sheets and production
plans. These documents can then be released for immediate, direct access by
R/3 users.
. DOCUMENTUM/PEOPLESOFT INTEGRATION. Documentum and PeopleSoft have teamed to
provide a powerful integration of the Documentum EDMS with the PeopleSoft
Manufacturing product. The Documentum/PeopleSoft integration links
engineering, manufacturing, and downstream functions into a single system for
managing all product information, documents and data seamlessly across the
enterprise.
. DOCUMENTUM CADLINK PRODUCT SUITE. Powered by the Documentum EDMS, CADLink is a
suite of products for managing and accelerating the creation, access,
approval, and release of CAD drawings. CADLink tightly integrates the AutoCAD
and MicroStation CAD systems with Documentum's state-of-the-art DocPage Server
and client environments for the most comprehensive CAD management solution
available today. CADLink enables true engineering drawing lifecycle
management, integrating the design workshop with the many enterprise users who
require access to the critical information held in CAD drawings.
. DOCUMENTUM UNALINK. Documentum UnaLink is a server-to-server based integration
of the Documentum EDMS with Lotus Notes. UnaLink lets customers leverage
Notes' group collaboration capabilities to participate in lifecycle management
of business-critical documents, including complex compound documents. UnaLink
provides Notes users with a gateway to Documentum's Docbase repository for
storing and managing enterprise documents.
. OFFICE INTEGRATIONS. In addition to Documentum's integrated product offerings,
default functionality within Documentum WorkSpace and Documentum SmartSpace
delivers transparent and seamless integration with Microsoft Office, Microsoft
Outlook, MS Windows Explorer, and all ODMA-compliant applications. This
enables users to directly access documents stored in a Docbase from their own
familiar desktop applications such as Microsoft Word.
Documentum DocPage Builder
The DocPage Builder is a set of tools for integrating desktop systems and
building tailored document management applications. The DocPage Builder includes
Docbasic, Documentum's cross-platform programming language; Quickbuilder, a
screenpainter tool for modifying screen graphics; and the Documentum Client
Libraries, a set of object-oriented application programming interfaces (APIs)
that enable third-party application developers to access the functionality of
the DocPage Server.
CONSULTING SERVICES
In addition to the Documentum EDMS product family, the Company offers a full
range of global consulting services and programs designed to deliver complete
document management solutions in the target industry segments of process
manufacturing, discrete manufacturing, finance, and government/business
services. Documentum's consulting group offers a full range of industry-aligned
consulting services including design, development and deployment services for
Documentum EDMS products, DocSolution service delivery, applications and
technology integration, and Web-based digital document management services
enabled by Documentum's RightSite integrated Web product. DocSolutions combine
core Documentum EDMS technology with a set of frameworks based on the best
practices garnered from common document management challenges encountered in
typical business environments. Documentum has developed DocSolutions for
Standard Operating Procedures (SOPs) and
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Engineering Change Notices (ECNs) in the manufacturing segments, and
DocSolutions for Swaps and Derivatives and Retail Banking SOPs in the financial
services segment.
In order to enhance its consulting expertise in the semiconductor and
electronics marketplace, the Company acquired Workgroup Management, Inc. (WMI)
of Oakland, California in the first quarter of 1998. WMI is a systems integrator
with expertise in implementing business-critical document management systems for
semiconductor and electronics companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent
Developments."
PROFESSIONAL SERVICES
The Company offers a range of worldwide technical support and education
services through its Professional Services organization. The Company currently
operates three Technical Support Centers, one at its worldwide headquarters in
Pleasanton, one in the United Kingdom and one in Munich, Germany. Each center
offers hotline technical support, remote dial-in services for problem
identification and access to maintenance and patch releases for supported and
purchased products. The Documentum Education Center offers a curriculum of
courses on the Documentum EDMS for end users, developers and system
administrators. Courses are available at the Company's training centers in
Pleasanton, Chicago, Philadelphia and London, and can also be delivered at the
customer's site.
STRATEGY
The Company's objective is to be the leading worldwide supplier of enterprise
document and knowledge management solutions. To achieve this objective, the
Company's strategy includes extending its technology leadership, penetrating
global industries vertically, delivering comprehensive solutions, leveraging its
technology partnerships, focusing on enterprise deployments and utilizing
multiple distribution channels.
Extend Technology Leadership. The Company's strategy is to continue to enhance
its existing server and client technologies, to add functionality to the
Documentum EDMS solutions and to provide greater flexibility in terms of
information delivery, document repositories, and the number and variety of
supported client, server and relational database management system (RDBMS)
platforms. Documentum expects to enhance the features of its products by
continuing to make them compatible with new technologies as well as existing
applications and by responding to the unique needs of large organizations.
Penetrate Global Industries Vertically. A key component of Documentum's
strategy is to identify strategic vertical markets with compelling business-
critical needs for the Documentum EDMS: namely, industries where more efficient
management of the knowledge contained in documents results in an immediate and
substantial payback. The Company has extended its initial focus from the
pharmaceutical industry to leverage this leadership across other key industries
including process manufacturing companies such as chemicals, petrochemicals,
consumer products and construction engineering; discrete manufacturing with
major customers in the electronics, computer, automotive and aerospace
manufacturing industries; and financial, with customers in financial services,
investment and commercial banking, and brokerage. In addition, the Company is
expanding its customer base in additional markets for business and government
services including utilities, publishing and media, telecommunications services,
and agencies of the federal, state and local government.
Deliver Comprehensive Solutions. The Company's goal is to deliver increased
value to its customers by providing a solutions framework combined with the
Documentum EDMS to achieve an identifiable business objective. For a particular
business process, the Company provides a DocSolution which consists of
predefined document types, workflows, business rules and consulting services.
Consulting services are tailored to a customer's specific business processes and
IT systems by the customer, Documentum and third parties. By configuring the
best practices framework and by adding partner technologies and consulting
services, Documentum, or its partners, provide a comprehensive approach to
delivering document management solutions for business-critical processes.
Leverage Technology Partnerships. The Company has accelerated the development,
introduction and acceptance of the Documentum EDMS solutions through selected
third party system integrators and reseller partners. For example, the Company
has embedded in its software certain industry-standard features and
functionality licensed from Adobe, Microsoft and Verity. In addition, the
Company integrates its solutions with other business-critical
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applications from vendors including SAP, PeopleSoft, and Lotus. The company
maintains partnerships with numerous best-in-class software companies for the
joint development of DocSolutions and other whole product solutions that
integrate Documentum EDMS technology. Finally, the Company conducts joint
marketing and sales activities with complementary strategic hardware and
software vendors, including Hewlett-Packard, IBM, Sun Microsystems, Informix,
Lotus, Microsoft, Netscape, Oracle and Sybase.
Focus on Enterprise Deployments. The Company has designed its products to
scale from focused business-critical applications consisting of hundreds of user
seats to enterprise-wide use consisting of multiple applications for thousands
of user seats at multiple sites. The Company believes that initial customer
success in capturing business-critical information by utilizing the Company's
Documentum EDMS family of products is an essential factor in a customer's
decision to deploy the Company's products throughout the enterprise. The Company
has a two-pronged strategy to drive customers towards enterprise-wide
deployment. First, the Company provides targeted consulting and training
services to its customers and systems integrators. Second, the Company has
established strategic partnerships with major, or vertically focused, systems
integrators, including, among others, Cap Gemini, Computer Sciences Corporation,
IBM Professional Services, Deloitte & Touche, Ernst & Young and Xerox
Professional Document Services. These partners provide customization of the
Company's Documentum EDMS products for individual customer needs and integration
with third-party applications.
Utilize Multiple Distribution Channels. The Company's strategy is to expand
its multiple distribution channels to reach the broadest customer base in its
targeted industries. The Company sells through its direct sales force as well as
through indirect channels, primarily consisting of systems integrators and
distributors. Documentum intends to continue to focus on growing its indirect
sales channels to include value-added resellers, and to expand both direct and
indirect distribution channels on a worldwide basis by hiring additional sales
persons and recruiting additional integrators, particularly in vertical
industries.
CUSTOMERS
The Company has directly or indirectly licensed its products to more than 350
end user customers in a broad range of industries worldwide, including process
manufacturing, discrete manufacturing, finance, and business/government
services. Examples of customers from these four key markets who are using the
Documentum EDMS to accelerate their business-critical processes include:
Process Manufacturing: Based on Documentum's RightSite engine for managing Web
site content, Dow Chemical Company has deployed a corporate intranet to deliver
accurate, current SOPs and technical product documentation to all employees
worldwide. At Monsanto, the Documentum EDMS is integrated with SAP's R/3 in a
global application that streamlines management and delivery of a wide range of
business-critical documents, including regulatory submissions, research and
development documents, and manufacturing quality documents. Bayer Corporation
has deployed the Documentum EDMS in its Biotechnology Division to improve
management and distribution of thousands of SOPs and other manufacturing
documents, for more efficient drug manufacture, greater quality assurance, and
FDA compliance.
Discrete Manufacturing: Whirlpool has deployed the Documentum EDMS and
RightSite over a corporate intranet for the speedy and accurate delivery of
product marketing materials, specification sheets, and owner manuals to dealers,
partners, and customers. In the automotive industry, Delco is using the
Documentum EDMS to enable and assure continued compliance with QS9000 quality
standards (the automotive derivative of ISO9000)--and General Motors is using
Documentum to streamline and manage distribution and access to engineering
information for enhanced quality and accuracy.
Finance: Barclays Bank PLC has implemented an enterprise application of the
Documentum EDMS for controlling, managing changes to, and distributing SOPs for
a wide variety of standard banking procedures. The new system helps the bank
react quickly to market and regulatory changes, and ensures operational
consistency. Pictet and Cie, Switzerland's foremost private bank, has also
implemented the Documentum EDMS to centralize and manage client contact
information, for quick and accurate response to client inquiries and heightened
customer service. In addition, the Documentum EDMS has been implemented by
several leading Wall Street brokerage forms to automate the execution of swaps
and derivatives trading.
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Business and Government Services: Simon and Schuster has chosen the Documentum
EDMS as its enterprise standard for managing production workflows and storing
graphical components in the manufacture of commercial and higher education
books. On the federal government level, several thousand users at the U.S. Food
and Drug Administration are fully utilizing the document control, security, and
lifecycle management features of the Documentum EDMS to accelerate their massive
submissions load.
SALES AND MARKETING
The Company sells its products through its own direct sales force as well as
complementary indirect channels primarily consisting of systems integrators and
distributors. Sales teams are organized around the Company's key vertical
markets of process manufacturing, discrete manufacturing, finance, and
business/government services. The Company currently has fourteen sales offices
in the United States, three sales offices in Europe, one sales office in Japan,
one sales office in Korea, and distributors in Europe, the Middle East, Asia-
Pacific, South Africa and Canada. The Company also has strategic relationships
with more than 30 systems integrators and distributors worldwide.
The Company targets global customers in its key vertical markets including
process manufacturing, discrete manufacturing, finance, and business/government
services. The Company has formed an internal Industry Solutions organization to
focus the Company's efforts on developing complete, whole-product solutions for
these targeted industries to further penetrate customers in existing vertical
markets as well as promote document management systems in its new vertical
markets. This Group works to develop DocSolutions by combining the Documentum
EDMS enterprise application with industry and process expertise. The Industry
Solutions Group consists of industry specialists, marketing managers and
development engineers that team with Documentum's consultants and partners to
develop best practices solutions that are rapidly deployed for a high return on
investment for its customers. One of the Industry Solutions Group's objectives
is to reduce customers' product development time and increase operational
efficiency by designing DocSolutions for particular business-critical
processes.
The Company's field sales force conducts multiple presentations and
demonstrations of the Documentum EDMS solution to management and users at the
customer site as part of the direct sales effort. Sales cycles generally last
from six to 12 months. The direct sales force is responsible for local partner
support, joint sales efforts and management of multiple channels. See "Risk
Factors--Lengthy Sales and Implementation Cycles."
The sales staff is currently based at the Company's corporate headquarters in
Pleasanton, California and at field sales offices in the U.S. metropolitan areas
of Atlanta, Boston, Chicago, Cleveland, Dallas, Denver, Detroit, Houston, Los
Angeles, Minneapolis, New York, Philadelphia, San Francisco, and Washington,
D.C., and abroad in London, Munich, Paris, Tokyo and Seoul. To support its sales
force, the Company conducts comprehensive marketing programs, which include
public relations, telemarketing, seminars, trade shows, education and user group
conferences.
PRODUCT DEVELOPMENT
The Company has committed, and expects to continue to commit, substantial
resources to product development. The Company's existing products were designed
after extensive work with potential customers to assess their needs. The
Company reviews customer feedback on existing products and works with customers
and potential customers to anticipate future functionality requirements, as part
of its product development efforts.
The Company expects to continue to enhance its existing products, develop new
products and augment its product base through acquisitions. For the years ended
December 31, 1997, 1996 and 1995, research and development expenses were $11.0
million, $7.9 million and $4.5 million. Historically, the Company has expensed
its software development costs as incurred. The Company anticipates that it
will continue to commit substantial resources to research and development in the
future.
The Company's future success will depend in part on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that respond to evolving customer requirements and keep pace with
competitive product introductions and technological developments, satisfy
diverse and evolving customer requirements and otherwise achieve market
acceptance. There can be no assurance that the Company will be successful in
continuing to develop and market on a timely and cost-effective basis fully
functional product enhancements or new products that respond to technological
advances by others, or that its enhanced and new
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products will achieve market acceptance. In addition, the Company has in the
past experienced delays in the development, introduction and marketing of new or
enhanced products, and there can be no assurance that the Company will not
experience similar delays in the future. Any failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--New Products and Rapid
Technological Change."
INDUSTRY STANDARDS
Documentum is committed to providing comprehensive, open document management
solutions targeted to customers' unique business requirements. Documentum
participates actively in the two leading organizations which have taken the
initiative to define standards specifically for the document management arena.
These include the Open Document Management API (ODMA) and the Document
Management Alliance (DMA). Documentum currently chairs the ODMA standards
committee, which is developing an API to enable document management capabilities
to be integrated into a wide range of desktop applications. DMA has published a
specification for broader interoperability and connectivity between
heterogeneous document management services, repositories and applications. In
1996, ODMA formally accepted Documentum's query extension enabling desktop
application users to simultaneously search document repositories from different
vendors. Documentum is currently shipping products which integrate the ODMA
standard.
In addition, the Company is participating in the Workflow Management Coalition
(WfMC), currently working to establish workflow standards. The Company is also
active in standards efforts for the World Wide Web, including the Web
Distributed Authoring and Versioning (WebDAV) standard and Extensible Markup
Language (XML), and the Company's products ensure interoperability with critical
Web standards such as HTTP and HTML.
The Company has enhanced the architecture of its open, extensible server to
support industry-standard platforms, applications, and networks including the
Web. For example, the Company has achieved logo certification for Microsoft
BackOffice, Windows NT and Windows 95. The Company has also recently introduced
key enhancements for capturing information and automating business processes on
the Web. Those include extending the workflow capabilities of the Company's Web
clients, providing a graphical workflow tool, and delivering a Microsoft
integration that enables users to access Docbase documents from the Windows
Explorer. Besides expanding the functionality of its own easy-to-use WorkSpace
client environment for document coordinators, Documentum continues to enhance
its client products for document contributors, coordinators and consumers
working in both Web and client/server environments. Documentum has also provided
support for other information delivery vehicles such as SAP, Lotus Notes, CAD
systems, and PeopleSoft.
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 sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" in this Report
contain forward-looking statements within the meaning of Section 27A of the
Securities Act, and Section 21E of the Exchange Act. 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 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.
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<PAGE>
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 twelve 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. See
"Business--Product Development."
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 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
11
<PAGE>
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. See
"Business--The Documentum EDMS" and "--Product Development."
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 Company in the future or will
not otherwise reduce or discontinue their relationships with or support of the
Company and its products.
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<PAGE>
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.
For the years ended December 31, 1997, 1996 and 1995, the top five customers
accounted for 25%, 20% and 37% , of license revenues, respectively. 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. See "Business--Sales and Marketing."
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," "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Recent Developments,"
"Business--Sales and Marketing" and "Management."
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
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.
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<PAGE>
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 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
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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. See "Business--Product Development."
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--Recent
Developments."
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. See "Market for the Registrant's
Common Equity and Related Stockholder Matters".
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 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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EXECUTIVE OFFICERS
The executive officers of the Company and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jeffrey A. Miller 47 President, Chief Executive Officer and Director
Mark S. Garrett 40 Vice President, Chief Financial Officer and Secretary
Paul J. Hoffman 47 Vice President, Worldwide Sales
Robert K. Reid 47 Vice President, Manufacturing Industry Group
Howard I. Shao 42 Vice President, Product Development
Burnes S. Hollyman 46 Vice President, Consulting Services
</TABLE>
Jeffrey A. Miller has served as the Company's President, Chief Executive
Officer and member of the Board of Directors since July 1993. From April 1991 to
March 1993, Mr. Miller was a division president at Cadence Design Systems, Inc.,
a supplier of electronic design automation software ("Cadence"). From February
1983 to April 1991, Mr. Miller was Vice President and General Manager and Vice
President of Marketing of Adaptec, Inc., a supplier of computer input/output
controllers. From 1976 to 1983, Mr. Miller held various positions at Intel
Corporation, a manufacturer of semiconductor components. Mr. Miller received his
M.B.A. and B.S. in Electrical Engineering and Computer Science from the
University of Santa Clara.
Mark S. Garrett has served the Company's Vice President, Chief Financial
Officer and Secretary since January 1997. From February 1995 through December
1996, Mr. Garrett was Vice President of Worldwide Corporate Financial Planning
and Analysis at Cadence. From August 1994 to February 1995, Mr. Garrett served
as Finance Group Director for the Spectrum Services division at Cadence. From
January 1993 to July 1994, Mr. Garrett was Finance Group Director for Technology
Development at Cadence. From June 1991 to December 1992, Mr. Garrett was
Division Controller and Finance Director for the Systems and CAE Divisions of
Cadence. From June 1979 to May 1991, Mr. Garrett held various financial
positions at IBM Corporation. Mr. Garrett received his M.B.A. from Marist
College and his B.S.B.A. from Boston University.
Paul J. Hoffman has served as the Company's Vice President, Worldwide Sales
since September 1996. From September 1994 to September 1996, Mr. Hoffman was
Vice President, Worldwide Operations for Oracle, a relational database software
company. From June 1992 until September 1994 he served as Vice President, Direct
Marketing Division, USA for Oracle and from June 1990 until June 1992 he served
as Area Vice President, West for Oracle. Mr. Hoffman received his B.S. in
Finance from Fairfield University.
Robert K. Reid has served the Company as Vice President, Industry Solutions
since January 1997. Prior to that, Mr. Reid was the Company's Vice President of
Marketing since August 1993. From 1988 to August 1993, Mr. Reid was Vice
President of Marketing for Octel Communications Corp., a voicemail company.
From 1983 to 1988, Mr. Reid was Vice President of Marketing for NBI, Inc., an
office systems company. From 1980 to 1983, Mr. Reid was Vice President of
Marketing for Zenith Data Systems Corp., a personal computer company. Mr. Reid
received his B.S. in Communications from the University of Tennessee.
Howard I. Shao, a founder of the Company, has served as Vice President,
Product Development since January 1997. Prior to that, Mr. Shao was the
Company's Vice President, Research and Development since June 1990. From 1984 to
June 1990, Mr. Shao held a variety of management positions at Ingres
Corporation, a relational database company, including Director Product
Development. From 1981 to 1984, Mr. Shao was the Manager of Department Database
Processor at TTI/Citicorp, a software division of Citicorp. Mr. Shao was a co-
founder of Transtech International, a software company. Mr. Shao received his
M.B.A. from Pepperdine University and a B.S. in Computer Science from the
Massachusetts Institute of Technology.
Burnes S. Hollyman has served as the Company's Vice President, Worldwide
Consulting Services since December 1997. From 1993 to December 1997, Mr.
Hollyman was Vice President of Renaissance Worldwide, a business and technology
strategy/solutions provider and professional services company. While there he
held several positions including Vice President in charge of the New York
Regional office, Practice Leader in charge of the New Media Practice, and Chief
Information Officer for several years. From 1986 to 1993, Mr. Hollyman was a
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Director and Practice Leader at The DMR Group in the Emerging Technologies
Practice. From 1983 to 1986 he was a Senior Manager at Peat, Marwick Mitchell
in its High Technology Practice. Mr. Hollyman has a B.A. degree from New York
University and an M.A. from the University of Texas, with PhD coursework at the
University of Texas.
EMPLOYEES
As of December 31, 1997, the Company employed 388 persons, including 167 in
sales and marketing, 51 in its consulting and training services organization, 35
in customer support, 88 in research and development and 47 in finance and
administration. Of these, 77 are located in Europe, and the remainder are
located in North America. The Company's employees are not represented by a labor
union. The Company has experienced no work stoppages and believes its
relationship with its employees is good. Competition for qualified personnel in
the Company's industry is intense. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel.
ITEM 2. PROPERTIES
As of December 31, 1997 the Company leased all of its facilities and its
principal locations are in or near the following cities:
<TABLE>
<CAPTION>
LEASE
LOCATION SQUARE FEET EXPIRATION DATE PRINCIPAL ACTIVITIES
-------- ----------- --------------- --------------------
<S> <C> <C> <C>
Pleasanton, CA............. 61,200 October, 2001 Corporate HQ, Development, Sales,
27,700 February, 2007 Marketing, Services and support
Philadelphia, PA........... 11,154 July 31, 2002 Sales, Marketing, Services and
support
Chicago, IL................ 9,624 July, 2001 Sales, Marketing, Services and
support
Munich, Germany............ 7,013 October, 2001 Sales, Services
Stockley Park, England..... 35,520 April, 2013 Sales, Marketing, Services and
support
</TABLE>
The Company's principal administrative, engineering, manufacturing, marketing
and sales facilities total approximately 88,900 square feet and are located in
three buildings in Pleasanton, California under leases which expire in October,
2001 and February, 2007. In addition, the Company leases offices for sales,
marketing and customer service activities in selected locations throughout the
U.S., Europe and Asia.
In 1998, the Company anticipates expanding existing facilities depending upon
the availability of suitable additional space. Currently the Company is seeking
to expand its facilities and the Company could experience difficulty finding
adequate space for expansion Failure to obtain space or to obtain it on
reasonably attractive commercial terms may inhibit the Company's ability to
grow, or otherwise adversely effect the Company's operations and financial
results.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq National
Market under the symbol "DCTM". The Company completed its initial public
offering of its common stock on February 5, 1996 at an offering price of $24.00
per share. The following table sets forth, for the periods indicated, the high
and low sale prices for the Common Stock as reported by Nasdaq National Market.
HIGH LOW
------ ------
Fiscal 1996:
First Quarter (from February 5, 1996) $40.00 $28.00
Second Quarter 46.50 29.88
Third Quarter 33.00 22.25
Fourth Quarter 41.50 30.50
Fiscal 1997:
First Quarter $38.00 $13.81
Second Quarter 26.00 13.75
Third Quarter 39.00 24.38
Fourth Quarter 42.25 26.00
The trading price of the Company's Common Stock is subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of new products by the Company or its competitors, announcements
of technological innovations, as well as other events or factors. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price of many high
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
effect the market price of the Company's Common Stock.
As of December 31, 1997, the number of common stockholders of record was 316.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any such dividends in the foreseeable future. In addition, an
existing bank credit agreement currently restricts the Company's ability to pay
cash dividends without the bank's consent.
18
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses $54,536 $34,630 $20,377 $ 8,919 $ 1,557
Services 21,099 10,672 5,079 1,454 507
------- ------- ------- ------- -------
Total revenues 75,635 45,302 25,456 10,373 2,064
------- ------- ------- ------- -------
Cost of revenues:
Licenses 2,453 1,923 1,188 518 134
Services 12,327 6,845 3,324 1,304 283
------- ------- ------- ------- -------
Total cost of revenues 14,780 8,768 4,512 1,822 417
------- ------- ------- ------- -------
Gross profit 60,855 36,534 20,944 8,551 1,647
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing 35,084 19,909 12,513 6,254 1,595
Research and development 10,986 7,880 4,512 2,523 1,750
General and administrative 5,976 4,114 2,430 1,738 1,134
------- ------- ------- ------- -------
Total operating expenses 52,046 31,903 19,455 10,515 4,479
------- ------- ------- ------- -------
Income (loss) from operations 8,809 4,631 1,489 (1,964) (2,832)
------- ------- ------- ------- -------
Interest and other income, net 2,333 2,268 239 75 9
------- ------- ------- ------- -------
Income (loss) before income tax provision 11,142 6,899 1,728 (1,889) (2,823)
Provision for income taxes (3,788) (2,415) (468) -- --
------- ------- ------- ------- -------
Net income (loss) $ 7,354 $ 4,484 $ 1,260 $(1,889) $(2,823)
======= ======= ======= ======= =======
Net income per basic common share(1) $ 0.51 $ 0.33 $ 0.73
======= ======= =======
Shares used in basic share computation(1) 14,463 13,790 1,731
======= ======= =======
Net income per diluted common share(1) $ 0.49 $ 0.30 $ 0.10
======= ======= =======
Shares used in diluted share computation(1) 15,098 14,734 12,934
======= ======= =======
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 14,236 $ 5,369 $ 5,978 $ 6,289 $ 3,658
Short-term investments 78,895 46,803 -- -- --
Working capital 91,697 51,821 4,624 5,256 3,630
Total assets 127,203 74,944 16,501 10,916 5,368
Long-term obligations -- 211 691 544 542
Mandatorily redeemable convertible preferred stock -- -- 13,391 13,391 8,940
Stockholders' equity (deficit) 102,033 59,332 (5,746) (7,286) (5,479)
</TABLE>
________
(1) See Note 2 of Notes to Consolidated Financial Statements for an
explanation of shares used in computing net income per basic and
diluted shares.
19
<PAGE>
ITEM 7. 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 as well as those discussed under
the caption "Risk Factors". 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.
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.
In 1996, the Company expanded its presence in the market for Web technologies by
introducing its Documentum RightSite engine for extending document management
capabilities to Web content, and a family of Web-based clients. During 1997, the
Company introduced four DocSolutions: the DocSolution for Standard Operating
Procedures ("SOPs"), the DocSolution for Engineering Change Notices ("ECNs"),
the DocSolution for Swaps and Derivatives, and the DocSolution for Retail and
Banking SOPs. Also, during 1997, the Company introduced and shipped Documentum
DocLink for SAP, introduced and shipped the Documentum DocPage Server and
Documentum WorkSpace products in a localized Kanji version and expanded its
sales efforts in the Asia-Pacific region. 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".
RECENT DEVELOPMENTS
On January 5, 1998 the Company acquired all the outstanding shares of WMI, a
privately-held company, in exchange for approximately 192,473 shares of the
Company's common stock valued on the transaction date at $6.7 million. The
acquisition was accounted for as a pooling of interests. WMI is a professional
services firm with approximately 35 employees located in Oakland, California
specializing in the design, the development and the implementation of document
management systems for the semiconductor industry. The acquisition of WMI is
part of
20
<PAGE>
the Company's strategic plan to add specific domain expertise in targeted
vertical industries. As of December 31, 1997, WMI had revenues of approximately
$4 million and gross assets of approximately $1 million and the Company believes
this will have an immaterial effect on the Company's financial statements as a
whole. The Company expects to record merger expenses of approximately $2 million
in connection with the acquisition in the first quarter of 1998.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenues:
Licenses 72% 76% 80%
Services 28% 24% 20%
----- ----- -----
Total revenues 100% 100% 100%
----- ----- -----
Cost of revenues:
Licenses 3% 4% 4%
Services 16% 15% 13%
----- ----- -----
Total cost of revenues 19% 19% 17%
----- ----- -----
Gross profit 81% 81% 83%
----- ----- -----
Operating expenses:
Sales and marketing 46% 44% 49%
Research and development 15% 17% 18%
General and administrative 8% 9% 10%
----- ----- -----
Total operating expenses 69% 70% 77%
----- ----- -----
Income from operations 12% 11% 6%
----- ----- -----
Interest and other income, net 3% 5% 1%
----- ----- -----
Income before income tax provision 15% 16% 7%
Provision for income taxes (5%) (6%) (2%)
----- ----- -----
Net income 10% 10% 5%
===== ===== =====
AS A PERCENTAGE OF RELATED REVENUES:
Cost of license revenues 4% 6% 6%
Cost of service revenues 58% 64% 65%
</TABLE>
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 and
collection of the resulting receivable is probable. In instances where a
significant vendor obligation exists, revenue recognition is deferred until the
21
<PAGE>
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
issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition", which the Company currently intends to adopt for transactions
entered 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". The Company believes that the adoption of
SOP 97-2 will not have a significant impact on its current licensing or revenue
recognition practices.
License revenues increased by 57% to $54.5 million in 1997, by 70% to $34.6 in
1996 and by 128% to $20.4 million in 1995, representing 72%, 76% and 80% of
total revenues in the respective periods. 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. In 1997, 1996 and 1995 license revenues from
Xerox and certain Xerox affiliates, as systems integrators, a VAR and a
distributor for the Company's products, accounted for 6%, 14% and 30% 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 stategy 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 recoginition of license
revenue. 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.
Service revenues increased by 98% to $21.1 million in 1997, by 110% to $10.7
million in 1996, and by 249% to $5.1 million in 1995, representing 28%, 24% and
20% of total revenues in 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 has 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 23%, 32% and 36% of license revenues in 1997, 1996
and 1995 respectively. The decrease in indirect channel revenues as a
percentage of license revenues was due to a rapid increase in the direct sales
force during 1997 and 1996. 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 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 33%, 29% and 26% of license revenues in
1997, 1996 and 1995, respectively. The increase in international revenues as a
percent of license revenues for the year ended December 31, 1997 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
22
<PAGE>
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 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 28% to $2.5 million in 1997, by 62% to $1.9 million in 1996 and by
129% to $1.2 million in 1995, representing 4%, 6% and 6% of the related license
revenues in 1997, 1996 and 1995. The decrease in cost of license revenues as a
percentage of license revenues was principally related to the increase in
license revenue relative to the fixed 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 80% to $12.3 million in 1997, by
106% to $6.8 million in 1996 and by 155% to $3.3 in 1995, representing 58%, 64%
and 65% of the related services revenues in 1997, 1996 and 1995, 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 decrease in cost of service revenues as a percentage of
service revenues was primarily due to economies of scale realized as certain
expenses such as technical support grew proportionately less than maintenance
revenues. 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 76% to $35.1 million in
1997, by 59% to $19.9 million in 1996 and by 100% to $12.5 million in 1995
representing 46%, 44% and 49% of total revenues for 1997, 1996 and 1995,
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 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
39% to $11.0 million in 1997, by 75% to $7.9 million in 1996 and by 79% to $4.5
million in 1995, representing 15%, 17%, and 18% of total revenues in 1997, 1996
and 1995, 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 45% to $6.0 million in 1997, by
69% to $4.1 million in 1996 and by 40% to $2.4 million in 1995, representing 8%,
9% and 10% of total revenues in 1997, 1996 and 1995, 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 decrease in general
and administrative expenses
23
<PAGE>
as a percentage of revenues was primarily due to economies of scale realized as
certain expenses such as management compensation grew proportionately less than
revenues. The Company expects general and administrative expenses to increase in
dollar amount 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 and interest expense.
Interest and other income, net increased by 3% to $2.3 million in 1997, by 849%
to $2.3 million in 1996 and by 219% to $0.2 million in 1995. 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 Company's effective tax rates for 1997, 1996 and 1995 were 34%, 35% and
27%, respectively. These rates differ from the statutory rate primarily due to
state and foreign taxes, utilization of tax credits and tax advantaged
investments. The Company anticipates that its effective tax rate will not
increase significantly in 1998.
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 $93.1 million at December 31, 1997
representing 73% 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 $13.6 million, $4.6 million and
$1.5 million in 1997, 1996 and 1995, respectively. For the year ended December
31, 1997, the cash generated by operations was primarily attributable to net
income of $7.4 million, growth in accrued liabilities of $7.1 million,
depreciation and amortization of $3.4 million and deferred revenue of $3.3
million, offset by the increase in accounts receivable of $7.9 million. For the
year ended December 31, 1996, the cash generated by operations was primarily
attributable to net income of $4.5 million, growth in accrued liabilities of
$3.4 million and deferred revenue of $2.8 million, offset by the increase in
accounts receivable of $8.1 million. For the year ended December 31, 1995, the
cash generated by operations was primarily attributable to net income of $1.3
million, depreciation and amortization of $0.9 million and increases in accrued
liabilities of $2.2 million and deferred revenue of $1.1 million, offset by $0.8
million increase in accounts receivable of $3.5 million and other assets of
$809,000. In 1997, 1996 and 1995, capital expenditures of $6.9 million, $5.2
million and $2.8 million, respectively, were primarily for computer equipment,
fixed assets and leasehold improvements acquired in conjunction with the
Company's expansion to new facilities.
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, which the
Company was in compliance with as of February 28, 1998.
24
<PAGE>
The Company currently has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and capital leases.
The Company believes that its existing cash balances, its available bank
financing and the cash flows generated from operations, if any, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. A portion of the Company's cash
could be used to acquire or invest in complementary businesses or products or
obtain the right to use complementary technologies. The Company is currently
evaluating, in 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. 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 for
periods ending after December 15, 1997. Reclassification of financial
statements for earlier periods for comparative purposes is required. The Company
will adopt SFAS 130 in 1998 and does not expect such adoption to have a material
effect on the consolidated financial statements.
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 beginning in 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.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in Part IV Item 14.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
25
<PAGE>
PART III
Certain information required by Part III is omitted from this Report and will
be included in the Registrant's definitive Proxy Statement which will be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the "Proxy
Statement") not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers--See the section titled "Executive Officers" in Part I,
Item 1 hereof.
(b) Directors--The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions."
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT'S, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
<TABLE>
<CAPTION>
PAGE NUMBER
---------------
<S> <C>
1. Consolidated Financial Statements
Report of Independent Accountants ........................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 ................ F-2
Consolidated Statement of Operations for the three years ended
December 31, 1997 ........................................................... F-3
Consolidated Statement of Cash Flows for the three years ended
December 31, 1997 ........................................................... F-4
Consolidated Statement of Stockholders' Equity(Deficit) for the three
years ended December 31, 1997 ............................................... F-5
Notes to Consolidated Financial Statements .................................. F-6
2. Financial Statement Schedules for the three years ended December 31, 1997
All schedules not listed above have been omitted because they are either not
applicable or the required information is shown in the financial
statements or the notes thereto.
3. Exhibits: See accompanying Index to Exhibits. The Exhibits listed in the
accompanying Index to Exhibits are filed or incorporated by reference as part of
this Form.
</TABLE>
(b) Reports on Form 8-K
None.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 10th day of March, 1998.
DOCUMENTUM, INC.
By: /s/ Mark S. Garrett
---------------------------------------------
MARK S. GARRETT
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints jointly and severally, Jeffrey A. Miller
and Mark S. Garrett, and each one of them, his or her attorneys-in-fact, each
with the power of substitution, for him or her in any way and all capacities, to
sign any and all amendments to this Annual Report (Form 10-K) and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 10th day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Jeffrey A. Miller President, Chief Executive Officer and
- -------------------------------------- Director (Principal Executive Officer)
JEFFREY A. MILLER
/s/ Mark S. Garrett Vice President and Chief Financial
- -------------------------------------- Officer (Principal Financial and
MARK S. GARRETT Accounting Officer)
/s/ Robert V. Adams
- -------------------------------------- Chairman
ROBERT V. ADAMS
/s/ Kathryn C. Gould
- -------------------------------------- Director
KATHRYN C. GOULD
/s/ Colin J. O'Brien
- -------------------------------------- Director
COLIN J. O'BRIEN
/s/ John L. Walecka
- -------------------------------------- Director
JOHN L. WALECKA
/s/ Edward J. Zander
- -------------------------------------- Director
EDWARD J. ZANDER
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Documentum, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1 on page 27 present fairly, in all material
respects, the financial position of Documentum, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
January 20, 1998
F-1
<PAGE>
DOCUMENTUM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,236 $ 5,369
Short-term investments 78,895 46,803
Accounts receivable, net of allowances of $2,537 and $1,069 19,996 13,531
Other current assets 3,740 1,519
-------- -------
Total current assets 116,867 67,222
Property and equipment, net 9,837 6,339
Other assets 499 1,383
-------- -------
$127,203 $74,944
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,721 $ 1,488
Accrued liabilities 15,203 8,124
Deferred revenue 8,224 4,956
Current portion of long term obligations 22 833
-------- -------
Total current liabilities 25,170 15,401
-------- -------
Long term obligations, less current portion -- 211
-------- -------
Commitments (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized
none issued and outstanding -- --
Common stock, $0.001 par value; 35,000 shares authorized;
15,603 and 14,187 shares issued and outstanding 16 14
Additional paid-in capital 96,830 61,450
Cumulative translation adjustment 8 43
Retained earnings (accumulated deficit) 5,179 (2,175)
-------- -------
Total stockholders' equity 102,033 59,332
-------- -------
$127,203 $74,944
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues:
Licenses (including $3,340, $5,323 and
$6,104 from a stockholder and its affiliates) $54,536 $34,630 $20,377
Services 21,099 10,672 5,079
------- ------- -------
Total revenues 75,635 45,302 25,456
------- ------- -------
Cost of revenues:
Licenses 2,453 1,923 1,188
Services 12,327 6,845 3,324
------- ------- -------
Total cost of revenues 14,780 8,768 4,512
------- ------- -------
Gross profit 60,855 36,534 20,944
------- ------- -------
Operating expenses:
Sales and marketing 35,084 19,909 12,513
Research and development 10,986 7,880 4,512
General and administrative 5,976 4,114 2,430
------- ------- -------
Total operating expenses 52,046 31,903 19,455
------- ------- -------
Income from operations 8,809 4,631 1,489
------- ------- -------
Interest and other income, net 2,333 2,268 239
------- ------- -------
Income before income tax provision 11,142 6,899 1,728
Provision for income taxes (3,788) (2,415) (468)
------- ------- -------
Net income $ 7,354 $ 4,484 $ 1,260
======= ======= =======
Basic earnings per share $ 0.51 $ 0.33 $ 0.73
======= ======= =======
Diluted earnings per share $ 0.49 $ 0.30 $ 0.10
======= ======= =======
Shares used to compute basic
earnings per share (Note 2) 14,463 13,790 1,731
======= ======= =======
Shares used to compute diluted
earnings per share (Note 2) 15,098 14,734 12,934
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,354 $ 4,484 $ 1,260
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,425 2,064 921
Provision for doubtful accounts 1,488 672 243
Deferred tax asset (900) (1,273) --
Changes in assets and liabilities:
Accounts receivable (7,953) (8,130) (3,501)
Other current assets and other assets (437) (379) (809)
Accounts payable 233 924 110
Accrued liabilities 7,079 3,431 2,217
Deferred revenue 3,268 2,792 1,063
-------- -------- -------
Net cash provided by operating activities 13,557 4,585 1,504
-------- -------- -------
Cash flows from investing activities:
Purchases of short-term investments (97,255) (92,303) --
Sales of investments 65,163 45,500 --
Purchases of property and equipment (6,923) (5,202) (2,750)
-------- -------- -------
Net cash used in investing activities (39,015) (52,005) (2,750)
-------- -------- -------
Cash flows from financing activities:
Issuance of common stock 35,382 47,105 335
Proceeds from term loan -- 387 973
Repayments on capital lease obligations (245) (276) (237)
Repayment on term loan (777) (503) (81)
-------- -------- -------
Net cash provided by financing activities 34,360 46,713 990
-------- -------- -------
Effect of exchange rate on changes in cash (35) 98 (55)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 8,867 (609) (311)
Cash and cash equivalents at beginning of period 5,369 5,978 6,289
-------- -------- -------
Cash and cash equivalents at end of period $ 14,236 $ 5,369 $ 5,978
======== ======== =======
Supplemental schedule of cash flow information:
Interest paid $ 39 $ 127 $ 101
Income taxes paid $ 2,364 $ 2,776 $ 181
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Cumulative Earnings Total
--------------------
Paid-in Translation (Accumulated Stockholders'
Shares Amount Capital Adjustment Deficit) Equity (Deficit)
------ ------ ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 880 $ 1 $ 632 $ -- $ (7,919) $ (7,286)
Common stock options exercised 1,000 1 303 -- -- 304
Foreign currency translation adjustment -- -- -- (55) -- (55)
Other -- -- 31 -- -- 31
Net income -- -- -- -- 1,260 1,260
------ --- ------- ------ -------- --------
Balance as of December 31, 1995 1,880 2 966 (55) (6,659) (5,746)
Common stock options exercised 324 -- 647 -- -- 647
Employee stock purchase plan 60 -- 1,252 -- -- 1,252
Warrants exercised 73 -- -- -- -- --
Mandatorily preferred conversion 9,804 10 13,381 -- -- 13,391
Issuance of common stock in public offering net
of issuance costs 2,058 2 45,038 -- -- 45,040
Foreign currency translation adjustment -- -- -- 98 -- 98
Other (12) -- 166 -- -- 166
Net income -- -- -- -- 4,484 4,484
------ --- ------- ------ -------- --------
Balance as of December 31, 1996 14,187 14 61,450 43 (2,175) 59,332
Common stock options exercised 269 -- 795 -- -- 795
Employee stock purchase plan 81 -- 1,740 -- -- 1,740
Issuance of common stock in public offering net
of issuance costs 1,116 2 31,196 -- -- 31,198
Tax Benefit -- -- 1,493 -- -- 1,493
Foreign currency translation adjustment -- -- -- (35) -- (35)
Other (50) -- 156 -- -- 156
Net income -- -- -- -- 7,354 7,354
------ --- ------- ------ -------- --------
Balance as of December 31, 1997 15,603 $16 $96,830 $ 8 $ 5,179 $102,033
====== === ======= ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF THE COMPANY:
Documentum, Inc. (the "Company") was incorporated in the state of Delaware in
January 1990 to develop, market and support a family of client/server and
worldwide Web software products that specifically address the challenges of
managing business-critical documents effectively across large enterprises. The
Documentum Enterprise Document Management System ("EDMS") automates and
accelerates the creation, modification and reuse of business-critical documents
and other unstructured data and the collaborative efforts involved in these
activities.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Documentum International, Inc., in the United
States, and Documentum Software Europe Ltd., in the United Kingdom. All
significant inter-company accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
Foreign currency
Balance sheet accounts are translated into U.S. dollars at exchange rates
prevailing at balance sheet dates. Revenues, costs and expenses are translated
into U.S. dollars at average rates for the period. Gains and losses resulting
from translation are accumulated as a component of stockholders' equity
(deficit). Net gains and losses resulting from foreign exchange transactions
are included in the consolidated statement of operations and were not
significant during any of the periods presented. To date, the Company does not
engage in hedging activities.
Revenue recognition
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 and
collection of the resulting receivable is probable. In instances where a
significant vendor obligation exists, revenue recognition is delayed until the
obligation has been satisfied. Allowances for estimated future returns, which to
date have been immaterial, are provided upon shipment. Annual maintenance and
support revenues consist of ongoing support and product updates and are
recognized ratably over the term of the contract. Revenues from consulting and
training are recognized when the services are performed. Payments received in
advance of revenue recognition are recorded as deferred revenue. The Company has
recognized revenues, for all periods presented, in accordance with Statement of
Position 91-1, "Software Revenue Recognition" ("SOP 97-1").
In October, 1997, the American Institute of Certified Public Accountants
issued Statement of Position No 97-2 ("SOP 97-2"), "Software Revenue
Recognition", which the Company currently intends to adopt for transactions
entered into in the fiscal year beginning January 1, 1998. SOP 97-2 provides
guidance on recognizing revenue on software transactions and supersedes SOP 91-
1. The Company believes that the adoption of SOP 97-2 will not have a
significant impact on its current licensing or revenue recognition practices.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
F-6
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial instruments
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, short-term investments and accounts
receivable. The Company deposits substantially all of its cash with a single
financial institution.
The Company classifies all investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115") which requires investment securities to
be classified as either held to maturity, trading or available-for-sale. The
Company's short-term investments, all of which are classified as available-for-
sale, are managed by a single financial institution. At December 31, 1997, the
fair value of these short-term investments approximated amortized cost and
primarily mature within the next 12 months. Unrealized gains and losses have
been insignificant for all periods presented. The following table details the
Company's short-term investments at December 31, 1997:
Amortized
Cost
---------
(in thousands)
Certificates of deposit $ 4,000
Commercial paper 18,359
U.S. government agencies 6,976
Municipal bonds and notes 36,560
Corporate bonds and notes 4,000
Market auction preferred stock 9,000
-------
$78,895
=======
The Company generally does not require collateral for its accounts receivable
and maintains reserves for potential credit losses. At December 31, 1997, two
customers, including Xerox and affiliated entities comprised 15% of accounts
receivable. At December 31, 1996, two customers comprised 26% of accounts
receivable. Revenues from export sales, primarily to Europe, were approximately
33%, 29% and 26% of license revenues for the years ended December 31, 1997, 1996
and 1995, respectively.
Property and equipment
Property and equipment, including leasehold improvements, are recorded at
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, three to six years, or the life
of the lease, whichever is shorter.
F-7
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Software development costs
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86 ("SFAS
86") requires the capitalization of certain software development costs once
technological feasibility is established. The capitalized cost is then amortized
on a straight-line basis over the estimated product life, or on the ratio of
current revenues to total projected product revenues, whichever is greater. 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. Accordingly, the Company
has not capitalized any software development costs.
Equity-based compensation plans
Under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS 123"), the Company has elected to measure
compensation costs for its plans using the intrinsic value base method of
accounting for stock issued to employees. Pro forma disclosures of net income
and earnings per share are reflected in the notes to the financial statements as
if the fair value based method of accounting was adopted.
Net income per share
The Company has adopted Statement of Financial Accounting Standards No.128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 requires the presentation of basic
earnings per share ("EPS") and diluted EPS, for companies with potentially
dilutive securities, such as options. Earnings per share for all prior periods
have been restated to conform with the provisions of SFAS 128.
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.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued 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 for
periods ending after December 15, 1997. Reclassification of financial
statements for earlier periods for comparative purposes is required. The Company
will adopt SFAS 130 in 1998 and does not expect such adoption to have a material
effect on the consolidated financial statements.
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 beginning in 1998 and has not
evaluated the impact of such adoption on the notes to its consolidated financial
statements.
F-8
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS:
The Company has distribution agreements with Xerox and affiliated entities
which provide Xerox or its affiliates with the non-exclusive rights to sell the
Company's products in specified territories. For the years ended December 31,
1997, 1996 and 1995, the Company recognized license revenues from Xerox and
affiliated entities of $3,340,000, $5,323,000, and $6,104,000, respectively, and
incurred expenses primarily for support services provided by Xerox and
affiliated entities of $49,000, $410,000, and $283,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The net amount due from Xerox
and affiliated entities was $2,181,000, $737,000 and $622,000 at December 31,
1997, 1996 and 1995, respectively. Management believes that the revenues, gross
profit and costs and expenses relating to these transactions are indicative of
amounts which would have been incurred or realized from nonrelated parties. At
December 31, 1997, Xerox owned approximately 10% of the Company's outstanding
common shares.
NOTE 4--BALANCE SHEET COMPONENTS:
December 31,
-------------------------
Allowance for doubtful accounts 1997 1996 1995
------ ------ ------
(in thousands)
Balance at beginning of period $1,069 $ 647 $ 511
Charged to costs and expenses 1,488 672 243
Deductions (20) (250) (107)
------ ------ ------
Balance at end of period $2,537 $1,069 $ 647
====== ====== ======
December 31,
-----------------
Property and equipment 1997 1996
------- -------
(in thousands)
Computer equipment $10,489 $ 6,016
Office equipment 1,486 989
Furniture & fixtures 2,289 1,396
Leasehold improvements and other 2,514 1,454
------- -------
16,778 9,855
Accumulated depreciation and amortization (6,941) (3,516)
------- -------
$ 9,837 $ 6,339
======= =======
December 31,
-----------------------
1997 1996
------- ------
(in thousands)
Current accrued liabilities
Compensation & related benefits $ 6,479 $ 3,617
Taxes payable 3,663 1,103
Other current liabilities 5,061 3,404
-------- --------
$ 15,203 $ 8,124
======== ========
F-9
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LINE OF CREDIT:
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 with the related covenants as of February 28, 1998.
NOTE 6--STOCKHOLDERS' EQUITY:
Common stock
Common stock as of December 31, 1997, reflects the sale of 1,115,700 shares of
common stock issued in the Company's public offering completed on October 30,
1997 and the sale of 2,058,000 shares of common stock issued in the Company's
initial public offering completed on February 5, 1996. Aggregate net proceeds
to the Company from both offerings were approximately $76 million. Upon the
closing of the Company's initial public offering all Mandatorily Redeemable
Convertible Preferred Stock outstanding converted into an aggregate of 9,803,975
shares of common stock.
Preferred stock warrants
In connection with a lease line of credit in March 1994, the Company granted
the lessor a warrant to purchase 295,636 shares of the Company's Series B
Mandatorily Redeemable Convertible Preferred Stock. This warrant was fully
exercised on a net basis on December 18, 1996 and converted into 57,158 common
stock.
On October 31, 1994, the Company granted the bank a warrant to purchase 87,500
shares of the Company's Series C Mandatorily Redeemable Convertible Preferred
Stock, in connection with a line of credit and term note. This warrant was fully
exercised on a net basis on October 25, 1996 and converted into 15,425 common
stock.
NOTE 7--EARNINGS PER SHARE
The following is a reconciliation of the computation for basic and diluted EPS:
Year Ended December 31,
--------------------------
1997 1996 1995
------- ------- -------
(in thousands)
Net income $ 7,354 $ 4,484 $ 1,260
======= ======= =======
Shares calculation
Weighted average basic shares
outstanding 14,463 13,790 1,731
======= ======= =======
Effect of dilutive securities
Convertible preferred stock -- -- 9,804
Options 635 877 1,328
Warrants -- 67 71
------- ------- -------
Total shares used to compute
diluted earnings per share 15,098 14,734 12,934
======= ======= =======
F-10
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options to purchase 891,007 shares of common stock at prices ranging from
$28.94 to $46.00 per share were outstanding at December 31, 1997 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.
NOTE 8--STOCK OPTION AND BENEFIT PLANS:
1993 Equity Incentive Plan
In March 1993, the Board of Directors adopted the 1993 Equity Incentive Plan
(the "Plan") providing for the issuance of nonstatutory common stock options to
employees and consultants of the Company. The Board of Directors has amended the
Plan providing for the grant of incentive stock options ("ISOs"), stock bonuses
and stock appreciation rights and allowing for the sale of restricted stock.
Under the Plan a total of 4,700,138 shares have been authorized for issuance.
Options may be granted at an exercise price at the date of grant of not less
than the fair market value per share for ISOs and not less than 85% of the fair
market value per share for nonstatutory stock options, except for options
granted to a person owning greater than 10% of the total combined voting power
of all classes of stock of the Company, for which the exercise price of the
option must be not less than 110% of the fair market value.
Options granted under the Plan may be exercisable prior to vesting subject to
repurchase by the Company at the option exercise price paid per share with such
repurchase right generally lapsing with respect to 25% after the first year and
ratably each month over the remaining thirty-six month period. In 1997, 1996 and
1995 the Company issued 880,000, 571,900, and 701,300 options under the Plan,
respectively. At December 31, 1997, 140,000 shares were subject to repurchase by
the Company.
Non-employee Directors' Stock Option Plan
In November 1995, the Board of Directors adopted the 1995 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for the issuance of up to 150,000 nonstatutory stock options to non-
employee directors of the Company. Each non-employee director of the Company was
granted a nonstatutory option to purchase 15,000 shares of common stock upon the
effective date of the initial public offering. Each non-employee director of the
Company will automatically be granted a nonstatutory option to purchase 15,000
shares of common stock upon the date on which such person becomes a director. On
June 30, 1997, each non-employee director of the Company was granted an annual
option to purchase 5,000 shares of common stock. The plan provides an additional
option to purchase 5,000 shares of common stock that will be granted on June
30th of each year, provided such person has served continuously as a non-
employee director for the past 6 months. Options under the Directors' Plan will
be granted at the fair value of the stock and will vest one-third at date of
grant and the remaining options will vest in two equal annual installments.
In 1997 and 1996, the Company issued 25,000 and 75,000 options under the
Directors' Plan, respectively.
1996 Non-officer Equity Incentive Plan
In October 1996, the Board of Directors adopted the 1996 Non-Officer Equity
Incentive Plan (the "Incentive Plan") providing for the issuance of either
nonstatutory common stock options, stock bonuses, or rights to purchase
restricted stock to employees and consultants of the Company. This plan
explicitly excludes directors and employees serving as officers of the Company.
Under the Incentive Plan, a total of 1,775,000 shares have been authorized for
issuance.
F-11
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options may be granted at an exercise price at the date of grant of not less
than 85% of the fair market value per share for nonstatutory stock options,
stock bonuses and restricted stock purchases as determined by the Board of
Directors. Options granted under the Incentive Plan are exercisable only upon
vesting.
In 1997 and 1996, the Company issued 813,150 and 142,301 options under the
Incentive Plan, respectively.
A summary of activity under all the plans is as follows:
Options Outstanding
----------------------------
Weighted
Average
Shares Excercise Price
--------- ---------------
Outstanding as of December 31, 1994 1,487,694 $ 0.31
---------
Granted 701,300 $ 2.74
Exercised (999,899) $ 0.42
Canceled (29,834) $ 0.89
---------
Outstanding as of December 31, 1995 1,159,261 $ 1.88
---------
Granted 789,201 $ 29.39
Exercised (324,591) $ 0.81
Canceled (119,845) $ 8.24
---------
Outstanding as of December 31, 1996 1,504,026 $ 16.06
---------
Granted 1,718,150 $ 30.23
Exercised (269,131) $ 2.95
Canceled (188,727) $ 23.82
---------
Outstanding as of December 31, 1997 2,764,318 $ 25.32
=========
At December 31, 1997 options to purchase 936,843 shares were vested and
1,487,642 shares were available for future grant under all the plans.
During the year ended December 31, 1996, the Company had granted certain
options for the purchase of common stock on which the Company will amortize
approximately $73,000 annually of compensation expense over the four-year
vesting period of the options.
F-12
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information regarding stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ----------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE
AT CONTRACTUAL AVERAGE AT WEIGHTED
DECEMBER 31, LIFE EXERCISE DECEMBER 31, AVERAGE
RANGE OF EXERCISES PRICES 1997 (YEARS) PRICE 1997 EXERCISE PRICE
- ------------------------- ----------- ----------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 0.31 - $16.00 573,091 7.52 $ 5.27 500,241 $ 3.72
$17.13 - $29.44 685,862 8.83 $25.28 242,947 $ 24.36
$29.50 - $31.75 593,546 9.60 $30.69 498,840 $ 30.64
$32.00 - $33.88 647,750 9.24 $33.26 485,550 $ 33.14
$34.75 - $46.00 264,069 8.76 $37.42 135,073 $ 37.89
---------- ---------
$ 0.31 - $46.00 2,764,318 8.81 $25.32 1,862,651 $ 23.77
========== =========
</TABLE>
Options outstanding and options exercisable above do not include shares
subject to repurchase by the Company at December 31, 1997.
Employee Stock Purchase Plan
In November 1995, the Board of Directors adopted the Employee Stock
Purchase Plan (the "Purchase Plan"), which provides for the issuance of a
maximum of 350,000 shares of common stock. Eligible employees can have up to 10%
of their earnings withheld, up to a maximum of $15,000 per calendar year, to be
used to purchase shares of the common stock on specified dates determined by the
Board of Directors. The price of common stock purchased under the Purchase Plan
will be equal to 85% of the lower of the fair market value of the common stock
on the commencement date of each offering period or the specified purchase date.
During 1997 and 1996, approximately 81,000 and 60,000 common shares were
purchased under the Purchase Plan, respectively.
Pro forma stock compensation disclosure
The Company applies the intrinsic value method prescribed by APB No. 25.
"Accounting for Stock Issued to Employees," in accounting for its stock-based
compensation plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value approach set
forth in SFAS 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------ ----
<S> <C> <C> <C>
Net income (in thousands):
As reported $7,354 $4,484 $1,260
Pro forma $2,856 $2,015 $1,159
Basic earnings per share:
As reported $ 0.51 $ 0.33 $ 0.73
Pro forma $ 0.20 $ 0.15 $ 0.67
Diluted earnings per share:
As reported $ 0.49 $ 0.30 $ 0.10
Pro forma $ 0.19 $ 0.14 $ 0.09
</TABLE>
Earnings per share was computed using the method described in Note 2.
F-13
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each stock option grant on the date of grant was estimated
using the Black-Scholes option pricing model with the following average
assumptions:
Year Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Volatility 63.67% 62.90% 62.90%
Risk-free interest rate 6.00% 6.00% 5.96%
Dividend yield -- -- --
Expected lives 4 4 4
Weighted average fair value $28.23 $31.57 $ 2.87
The fair value of the shares granted under the Purchase Plan was estimated
using the Black-Scholes model with the following assumptions:
Year Ended December 31,
----------------------
1997 1996
-------- --------
Volatility 63.67% 62.90%
Risk-free interest rate 6.00% 6.00%
Dividend yield -- --
Expected lives 2 2
Weighted average fair value $28.23 $31.57
The pro forma effect on net income for 1997 and 1996 is not representative of
the pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
January 1, 1995.
401(k) Plan
In November 1993, the Board of Directors adopted an employee savings and
retirement plan (the "401(k) Plan") covering substantially all of the Company's
employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the statutory prescribed limit and have the
amount of such reduction contributed to the 401(k) Plan. The Company may make
contributions to the 401(k) Plan on behalf of eligible employees. Employees
become 25 percent vested in the Company contributions after one year of service,
and increase their vested percentages by an additional 25 percent for each year
of service thereafter. The Company has not made any contributions to the 401(k)
Plan.
F-14
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--COMMITMENTS:
Leases
The Company is obligated under non-cancelable operating leases for office
space which expire at various times through 2013. Certain leases for office
space provide for scheduled rent increases and contain options for additional
space. Rent expense is recognized ratably over the lease term. Future minimum
lease commitments under these leases at December 31, 1997 are as follows (in
thousands):
Leases
----------
Year ending December 31,
1998 $ 2,637
1999 2,578
2000 2,563
2001 2,321
2002 1,425
Thereafter 10,903
-----------
$22,427
===========
Total rent expense was approximately $2,432,000, $1,278,000, $696,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 10--INCOME TAXES:
The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Current:
Federal.............................................................. $3,336 $2,262 $217
State................................................................ 632 531 92
Foreign.............................................................. 720 895 159
------ ------ ----
4,688 3,688 468
------ ------ ----
Deferred:
Federal.............................................................. (768) (1,144) --
State................................................................ (132) (129) --
------ ------ ----
(900) (1,273) --
------ ------ ----
$3,788 $2,415 $468
====== ====== ====
</TABLE>
The components of income before income tax provision are as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
---------- ------- ---------
<S> <C> <C> <C>
Domestic income.................................................. $ 9,442 $5,190 $1,281
Foreign income................................................... 1,700 1,709 447
------- ------ ------
Income before provision for income taxes ........................ $11,142 $6,899 $1,728
======= ====== ======
</TABLE>
F-15
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax provision is reconciled to the amount computed using the federal
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Federal statutory tax provision .................................. 3,900 2,345 588
State taxes, net of federal benefit .............................. 411 397 60
Future benefits not currently recognized ......................... - (1,100) 491
Utilization of tax loss and credit carryforward .................. - (130) (710)
Foreign taxes .................................................... 176 596 -
Foreign sales corporation benefit................................. (132) - -
Tax exempt interest............................................... (406) - -
Other ............................................................ (161) 307 39
------ ------- -----
$3,788 $ 2,415 $ 468
====== ======= =====
</TABLE>
The Company provides a valuation allowance for deferred tax assets when it is
more likely than not, based on available evidence, that some portion or all of
the deferred assets will not be realized. Based on a revaluation of the
realizability of future tax benefits based on income earned in 1996, creating
available tax carrybacks, the Company released $944,000 of the previously
established valuation allowance during 1996. The significant components of the
Company's deferred tax assets, are $1,906,000 in other current assets and
$267,000 in other assets on the Balance Sheet, and are detailed as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals.................................. $2,173 $1,067
Tax credit carryforwards............................... - 206
------ ------
$2,173 $1,273
====== ======
</TABLE>
NOTE 11--SUBSEQUENT EVENT:
On January 5, 1998 the Company acquired all the outstanding shares of WMI,
a privately-held company, in exchange for approximately 192,473 shares of the
Company's common stock valued on the transaction date at $6.7 million. The
acquisition was accounted for as a pooling of interests. As of December 31,
1997, WMI had revenues of approximately $4 million and gross assets of
approximately $1 million and the Company believes this will have an immaterial
effect on the Company's financial statements as a whole. WMI is a professional
services firm with approximately 35 employees located in Oakland, California
specializing in the design, the development and the 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 expects to record merger expenses of
approximately $2 million in connection with the acquisition in the first quarter
of 1998.
F-16
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:
Summarized quarterly supplemental consolidated financial information for 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------ -----------
(in thousands, except per share data; unaudited)
<S> <C> <C> <C> <C>
1997
Total revenues $15,037 $17,310 $19,669 $23,619
Gross profit 12,161 13,988 15,825 18,881
Operating income 1,274 1,615 2,607 3,313
Net income 1,117 1,447 2,027 2,763
Basic earnings per share 0.08 0.10 0.14 0.18
Diluted earnings per share $ 0.08 $ 0.10 $ 0.14 $ 0.18
1996
Total revenues $ 8,682 $10,207 $12,036 $14,377
Gross profit 7,003 8,045 9,828 11,658
Operating income 481 755 1,420 1,975
Net income 532 867 1,352 1,733
Basic earnings per share 0.04 0.06 0.10 0.12
Diluted earnings per share $ 0.04 $ 0.06 $ 0.09 $ 0.12
</TABLE>
F-17
<PAGE>
INDEX TO 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)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)10.2 Lease agreement between Registrant and Britannia Hacienda IV
Limited Partnership.
(2)22.1 List of Subsidiaries of Registrant.
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule.
- ------
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.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-08709, 333-01832, 333-15239, 333-39027) of
Documentum, Inc. of our report dated January 20, 1998 appearing on page F-1 of
this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
March 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,236
<SECURITIES> 78,895
<RECEIVABLES> 22,533
<ALLOWANCES> 2,537
<INVENTORY> 0
<CURRENT-ASSETS> 116,867
<PP&E> 16,778
<DEPRECIATION> 6,941
<TOTAL-ASSETS> 127,203
<CURRENT-LIABILITIES> 25,170
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 102,017
<TOTAL-LIABILITY-AND-EQUITY> 127,203
<SALES> 54,536
<TOTAL-REVENUES> 75,635
<CGS> 2,453
<TOTAL-COSTS> 14,780
<OTHER-EXPENSES> 52,046
<LOSS-PROVISION> 102
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 11,142
<INCOME-TAX> 3,788
<INCOME-CONTINUING> 7,354
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,354
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
</TABLE>
