<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to________
Commission file number: 0-27358
DOCUMENTUM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4261421
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5671 GIBRALTAR DRIVE, PLEASANTON, CALIFORNIA 94588-8547
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(Registrant's telephone number, including area code): (925) 463-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value
(TITLE OF CLASS)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's Common Stock, par
value $0.001 per share, was 16,640,787 on October 31, 1998.
================================================================================
<PAGE>
FORM 10-Q
Index
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 and December
31, 1997 ................................................................................ Page 3
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 1998 and 1997........................................................ Page 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997........................................................ Page 5
Notes to Condensed Consolidated Financial Statements..................................... Page 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... Page 10
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds................................................ Page 24
Item 5 Other Information........................................................................ Page 24
Item 6. Exhibits and Reports on Form 8-K......................................................... Page 25
Signatures............................................................................................ Page 26
Exhibit Index......................................................................................... Page 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------- ------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,291 $ 14,236
Short-term investments 80,858 78,895
Accounts receivable, net of allowances
of $2,683 and $2,537 (including $745 and
$2,181 receivable from a stockholder and
its affiliates) 25,713 19,996
Other current assets 7,168 3,740
------------------- ------------------
130,030 116,867
Property and equipment, net 13,286 9,837
Other assets 5,491 499
------------------- ------------------
$ 148,807 $ 127,203
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,034 $ 1,721
Accrued liabilities 22,479 15,225
Deferred revenue 12,869 8,224
------------------- ------------------
39,382 25,170
------------------- ------------------
Stockholders' equity:
Preferred stock, $0.001 par value;
5,000 shares authorized none issued
and outstanding - -
Common stock, $0.001 par value;
100,000 shares authorized; 16,634 and
15,603 shares issued and outstanding 17 16
Additional paid-in capital 132,550 96,830
Cumulative translation adjustment 146 8
Retained earnings (accumulated deficit) (23,288) 5,179
------------------- ------------------
109,425 102,033
------------------- ------------------
$ 148,807 $ 127,203
=================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1998 1997 1998 1997
---------------------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Licenses (including $755, $48, $7,539 and
$1,980 from a stockholder and its affiliates) $ 21,562 $ 14,215 $ 57,329 $ 37,284
Services 12,321 5,454 30,063 14,732
------------- ------------- ------------- -------------
Total revenues 33,883 19,669 87,392 52,016
------------- ------------- ------------- -------------
Cost of revenues:
Licenses 944 678 2,851 1,475
Services 7,272 3,166 18,278 8,567
------------- ------------- ------------- -------------
Total cost of revenues 8,216 3,844 21,129 10,042
------------- ------------- ------------- -------------
Gross profit 25,667 15,825 66,263 41,974
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 13,823 8,926 36,239 24,824
Research and development 5,391 2,885 12,764 7,746
General and administrative 2,635 1,407 7,355 3,908
Acquisition and related costs - - 2,171 -
Purchased in process research and development 34,622 - 34,622 -
------------- ------------- ------------- -------------
Total operating expenses 56,471 13,218 93,151 36,478
------------- ------------- ------------- -------------
Income (loss) from operations (30,804) 2,607 (26,888) 5,496
------------- ------------- ------------- -------------
Interest and other income, net 1,112 464 3,256 1,461
------------- ------------- ------------- -------------
Income (loss) before income tax provision (29,692) 3,071 (23,632) 6,957
Provision for income taxes (1,676) (1,044) (4,075) (2,366)
------------- ------------- ------------- -------------
Net income (loss) $ (31,368) $ 2,027 $ (27,707) $ 4,591
============= ============= ============= =============
Basic earnings (loss) per share $ (1.90) $ 0.14 $ (1.72) $ 0.32
============= ============= ============= =============
Diluted earnings (loss) per share $ (1.90) $ 0.14 $ (1.72) $ 0.31
============= ============= ============= =============
Shares used to compute basic earnings (loss) per share 16,500 14,341 16,072 14,293
============= ============= ============= =============
Shares used to compute diluted earnings (loss) per share 16,500 14,994 16,072 14,891
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (27,707) $ 4,591
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 3,931 2,376
Provision for doubtful accounts 687 302
In process research and development write-off 34,622 -
Changes in assets and liabilities:
Accounts receivable (6,283) (2,475)
Other current assets and other assets (8,833) (1,568)
Accounts payable 1,977 900
Accrued liabilities 5,070 4,292
Deferred revenue 4,616 1,949
-------------- ------------
Net cash provided by operating activities 8,080 10,367
-------------- ------------
Cash flows from investing activities:
Purchases of investments (74,716) (46,568)
Sales of investments 72,753 45,146
Purchases of property and equipment (6,575) (5,911)
Other (1,451) -
-------------- ------------
Net cash used in investing activities (9,989) (7,333)
-------------- ------------
Cash flows from financing activities:
Issuance of common stock 4,205 1,544
Repayments on capital lease obligations (49) (190)
Repayment on loan (330) (777)
-------------- ------------
Net cash provided by financing activities 3,826 577
-------------- ------------
Effect of exchange rate on changes in cash 138 (65)
-------------- ------------
Net increase in cash and cash equivalents 2,055 3,546
Cash and cash equivalents at beginning of period 14,236 5,369
-------------- ------------
Cash and cash equivalents at end of period $ 16,291 $ 8,915
============== ============
Supplemental schedule of cash flow information:
Interest paid $ 21 $ 35
Income taxes paid $ 4,788 $ 685
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis of presentation
The unaudited condensed consolidated financial statements of Documentum, Inc.
("Documentum" or the "Company") included herein reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows for the periods presented. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's 1997 Annual Report
on Form 10-K, the Company's quarterly reports on Form 10-Q for the three months
ended March 31, 1998 and June 30, 1998 and the Company's Prospectus included in
Form S-3 dated July 13, 1998. The consolidated results of operations for the
period ended September 30, 1998 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1998.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Documentum International, Inc., Workgroup
Management, Inc. ("WMI") and Relevance Technologies, Inc. ("Relevance") in the
United States, Nihon Documentum KK, in Japan and Documentum Software Europe
Ltd., in the United Kingdom. All significant inter-company accounts and
transactions have been eliminated.
Earnings per share
Basic earnings per share is computed using the weighted average number of
shares of common stock. Diluted earnings per share is computed using the
weighted average number of shares of common stock and common equivalent shares
outstanding during the period. Common equivalent shares consist of stock
options (using the treasury stock method). Common equivalent shares are excluded
from the computation if their effect is antidilutive.
The following is a reconciliation of the computation for basic and diluted
EPS (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ (31,368) $ 2,027 $ (27,707) $ 4,591
---------------- ---------------- ---------------- ----------------
Shares calculation
Average basic shares outstanding 16,500 14,341 16,072 14,293
Effect of Dilutive Securities:
Options - 653 - 598
Total shares used to compute ---------------- ---------------- ---------------- ----------------
diluted earnings per share 16,500 14,994 16,072 14,891
================ ================ ================ ================
Earnings (loss) per basic share $ (1.90) $ 0.14 $ (1.72) $ 0.32
================ ================ ================ ================
Earnings (loss) per diluted share $ (1.90) $ 0.14 $ (1.72) $ 0.31
================ ================ ================ ================
</TABLE>
6
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Weighted average options to purchase 1,514,704 shares of common stock at
prices ranging from $0.3121 to $59.625 per share were outstanding for the three
months ended September 30, 1998 but were not included in the computation of
diluted EPS because inclusion of such options would have been anti-dilutive.
Weighted average options to purchase 1,328,786 shares of common stock at prices
ranging from $0.3121 to $59.625 per share were outstanding for the nine months
ended September 30, 1998 but were not included in the computation of diluted EPS
because inclusion of such options would have been anti-dilutive.
Revenue recognition
In October, 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition", which the Company has adopted for transactions entered into during
the fiscal year beginning January 1, 1998. SOP 97-2 provides guidance for
recognizing revenue on software transactions and supersedes SOP 91-1, "Software
Revenue Recognition". In March 1998, the AICPA issued Statement of Position No.
98-4 ("SOP 98-4"), "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition". SOP 98-4 defers, for one year, the application
of certain passages in SOP 97-2 which limit what is considered vendor-specific
objective evidence ("VSOE") necessary to recognize revenue for software licenses
in multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
Adoption of the remaining provisions of SOP 97-2 did not have a material impact
on revenue recognition during the three and nine months ended September 30,
1998.
Comprehensive net income
Effective January 1998, Documentum adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting of comprehensive income (loss) and its
components in a full set of general-purpose financial statements. Comprehensive
income is comprised of net income (loss) and other comprehensive earnings such
as foreign currency translation gain/loss and unrealized gains or losses on
available-for-sale marketable securities. The Company's unrealized gains and
losses on available for sale marketable securities have been insignificant for
all periods presented. Documentum's total comprehensive earnings (losses) were
as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (31,368) $ 2,027 $ (27,707) $ 4,591
Other comprehensive income
Foreign translation adjustment 109 (38) 138 (65)
----------------- ----------------- ----------------- ------------------
Comprehensive net income (loss) $ (31,259) $ 1,989 $ (27,569) $ 4,526
================= ================= ================= ==================
</TABLE>
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about
7
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
products and services, geographic areas and major customers. The Company will
adopt SFAS 131 for fiscal year ending December 31, 1998 and has not evaluated
the impact of such adoption on the notes to its consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value, and the
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. To date, the Company has not
engaged in hedging activities as the exposure to foreign currency fluctuations
has been insignificant.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance regarding the determination of whether computer software is internal-
use software, the capitalization of costs incurred for computer software
developed or obtained for internal use and accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. The Company has not yet determined the effect,
if any, of adopting SOP 98-1, which will be effective for the Company's fiscal
year ending December 31, 1999.
Accrued expenses and other current liabilities:
September 30, December 30,
1998 1997
----------------- -----------------
(in thousands)
Current accrued liabilities
Compensation & related benefits $ 9,638 $ 6,479
Taxes 4,358 3,663
Other current liabilities 8,483 5,083
----------------- -----------------
$ 22,479 $ 15,225
================= =================
Business acquisition
On January 5, 1998, the Company acquired all the outstanding shares of WMI, a
privately-held company, in exchange for 192,473 shares of the Company's common
stock valued on the transaction date at approximately $6.7 million. The
acquisition was accounted for as a pooling of interests. WMI was a professional
services firm with approximately 35 employees (as of the date of the
acquisition) located in Oakland, California specializing in the design,
development and implementation of document management systems for the
semiconductor industry. As of December 31, 1997, WMI had $530,000 in total
assets. The Company believes that this acquisition is immaterial to the
Company's prior financial statements and as such the Company's prior financial
statements have not been restated. The acquisition of WMI is part of the
Company's strategic plan to add specific domain expertise in targeted vertical
industries. The Company recorded merger expenses of approximately $2.2 million
in connection with the acquisition in the first quarter of 1998. The $2.2
million primarily consisted of accounting and legal fees and other related
transactions costs.
8
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
On July 16, 1998, the Company acquired all the outstanding shares of
Relevance Technologies, Inc. ("Relevance"), a privately held company, in
exchange for consideration totaling approximately $36.5 million, including
578,488 shares of the Company's common stock. The acquisition was accounted for
by the purchase method of accounting. Relevance was a development stage software
company with approximately 25 employees (as of the date of the acquisition)
located in San Francisco, California specializing in the development of content
mining technology for unstructured information. The acquisition of Relevance
represents a new market opportunity for Documentum to develop additional
applications for the sharing and applying of both corporate and Internet based
knowledge. As of May 31, 1998, Relevance had no revenues and had gross assets of
approximately $3.6 million. The Company recorded $34.6 million as a charge
related to the write off of purchased in process research and development.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed herein under the caption "Risk Factors,"
as well as those discussed in the Company's 1997 annual report on Form 10-K and
the Company's quarterly reports on Form 10-Q for the three months ended March
31, 1998 and June 30, 1998. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect the Company's
business and results of operations.
OVERVIEW
Documentum, 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. During the quarter
ended September 30, 1998, the Company introduced Enterprise Documents Management
System 98 (EDMS 98), an enterprise application platform for automating the end-
to-end lifecycle management of business-critical documents. The latest version
of EDMS delivers enhanced Web clients that feature an intelligent user interface
and records management services to archive documents. In addition to EDMS 98,
Documentum began shipping the following new products: Documentum DocInput to
electronically capture paper documents; Documentum DocViewer to view documents
and images; and FrameLink to publish complex documents. The Company continues to
invest in research and development in order to update its family of products.
The Company expects that Documentum EDMS and 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."
On January 5, 1998, the Company acquired all the outstanding shares of WMI, a
privately-held company, in exchange for 192,473 shares of the Company's common
stock valued on the transaction date at approximately $6.7 million. The
acquisition was accounted for as a pooling of interests. WMI was a professional
services firm with approximately 35 employees (as of the date of the
acquisition) located in Oakland, California specializing in the design,
development and implementation of document management systems for the
semiconductor industry. As of December 31, 1997, WMI had $530,000 in total
assets. The Company believes that this acquisition is immaterial to the
Company's prior financial statements and as such the Company's prior financial
statements have not been restated. The acquisition of WMI is part of the
Company's strategic plan to add specific domain expertise in targeted
10
<PAGE>
vertical industries. The Company recorded merger expenses of approximately $2.2
million in connection with the acquisition in the first quarter of 1998. The
$2.2 million primarily consisted of accounting and legal fees and other related
transactions costs.
On July 16, 1998, the Company acquired all the outstanding shares of
Relevance Technologies, Inc. ("Relevance"), a privately held company, in
exchange for consideration totaling approximately $36.5 million, including
578,488 shares of the Company's common stock. The acquisition was accounted for
by the purchase method of accounting. Relevance was a development stage software
company with approximately 25 employees (as of the date of the acquisition)
located in San Francisco, California specializing in the development of content
mining technology for unstructured information. The acquisition of Relevance
represents a new market opportunity for Documentum to develop additional
applications for the sharing and applying of both corporate and Internet based
knowledge. As of May 31, 1998, Relevance had no revenues and had gross assets of
approximately $3.6 million. The Company recorded $34.6 million as a charge
related to the write off of purchased in process research and development.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Licenses 63.6% 72.3% 65.6% 71.7%
Services 36.4% 27.7% 34.4% 28.3%
----------- ----------- ------------ -----------
Total revenues 100.0% 100.0% 100.0% 100.0%
----------- ----------- ------------ -----------
Cost of revenues:
Licenses 2.8% 3.4% 3.3% 2.8%
Services 21.5% 16.1% 20.9% 16.5%
----------- ----------- ------------ -----------
Total cost of revenues 24.3% 19.5% 24.2% 19.3%
----------- ----------- ------------ -----------
Gross profit 75.7% 80.5% 75.8% 80.7%
----------- ----------- ------------ -----------
Operating expenses:
Sales and marketing 40.8% 45.4% 41.5% 47.7%
Research and development 15.9% 14.7% 14.6% 14.9%
General and administrative 7.8% 7.2% 8.4% 7.5%
Acquisition and related costs 0.0% 0.0% 2.5% 0.0%
Purchased in process research and development 102.2% 0.0% 39.6% 0.0%
----------- ----------- ------------ -----------
Total operating expenses 166.7% 67.3% 106.6% 70.1%
----------- ----------- ------------ -----------
Income (loss) from operations (91.0%) 13.2% (30.8%) 10.6%
----------- ----------- ------------ -----------
Interest and other income, net 3.3% 2.4% 3.7% 2.8%
----------- ----------- ------------ -----------
Income (loss) before income tax provision (87.7%) 15.6% (27.1%) 13.4%
Provision for income taxes (4.9%) (5.3%) (4.7%) (4.6%)
----------- ----------- ------------ -----------
Net income (loss) (92.6%) 10.3% (31.8%) 8.8%
=========== =========== ============ ===========
As a Percentage of Related Revenues:
Cost of license revenues 4.4% 4.8% 5.0% 4.0%
Cost of service revenues 59.0% 58.0% 60.8% 58.2%
</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, fees
are fixed and determinable and collection of the resulting receivable is
probable. Allowances for estimated future returns are provided upon shipment.
Annual maintenance and support revenues are realized 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.
12
<PAGE>
In October, 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition", which the Company has adopted for transactions entered into during
the fiscal year beginning January 1, 1998. SOP 97-2 provides guidance for
recognizing revenue on software transactions and supersedes SOP 91-1, "Software
Revenue Recognition." In March 1998, the AICPA issued Statement of Position No.
98-4 ("SOP 98-4"), "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition." SOP 98-4 defers, for one year, the application
of certain passages in SOP 97-2 which limit what is considered vendor-specific
objective evidence ("VSOE") necessary to recognize revenue for software licenses
in multiple-element arrangements when undelivered elements exist. Additional
guidance is expected to be provided prior to adoption of the deferred provision
of SOP 97-2. The Company will determine the impact, if any, the additional
guidance will have on current revenue recognition practices when issued.
Adoption of the remaining provisions of SOP 97-2 did not have a material impact
on revenue recognition during the three and nine months ended September 30,
1998.
License revenues increased by 52% to $21.6 million for the three months ended
September 30, 1998 from $14.2 million for the three months ended September 30,
1997, and increased 54% to $57.3 million for the nine months ended September 30,
1998 from $37.3 million for the nine months ended September 30, 1997. The
growth in license revenues was due to an increase in the number of licenses
sold, reflecting increased acceptance of the Company's EDMS family of products,
as well as an increase in the number of customers who purchased additional
product licenses, and the expansion of the Company's sales organization. During
the three months ended September 30, 1998, the Company had a single sale to one
customer accounting for $3.7 million or 17% of total license revenues. For the
three months ended September 30, 1998 and 1997 and the nine months ended
September 30, 1998 and 1997, license revenues from Xerox and certain Xerox
affiliates, acting as systems integrators, accounted for 4%, 0%, 13% and 5% 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.
Additionally, the Company's strategy to provide customers with whole solutions
could result in software licenses being bundled with services. Therefore, with
certain future transactions, the delivery of services may delay recognition of
license revenue.
Service revenues increased by 126% to $12.3 million for the three months
ended September 30, 1998 from $5.5 million for the three months ended September
30, 1997, and increased 104% to $30.1 million for the nine months ended
September 30, 1998 from $14.7 million for the nine months ended September 30,
1997, representing 36%, 28%, 34% and 28% of total revenues for the respective
periods. The increase in both service revenue dollars and in service revenues as
a percent of total revenues was attributable to an expansion of consulting
services offerings, partially attributed to the WMI acquisition, as well as a
larger installed base of customers receiving ongoing maintenance, training and
support services and increases in the Company's professional services consulting
staff.
The Company markets its products through its direct sales force and its
indirect channel partners. While historically the Company generated the majority
of its revenues from its direct sales force, the Company has also focused on
complementing its direct sales channel with indirect channels, consisting of
systems integrators, distributors and resellers. Revenues from all indirect
channel partners comprised 29% and 15% of license revenues for the three months
ended September 30, 1998 and 1997, respectively, and 32% and 21% of license
revenues for the nine months ended September 30, 1998 and 1997, respectively.
License revenues from indirect channels include revenues from Xerox, a related
party owning approximately 10% of the Company's outstanding common shares as of
September 30, 1998. License revenues from Xerox acting in its role as an
indirect channel partner represented 4% and 0% of license revenues for the three
months ended September 30, 1998 and 1997, respectively, and 13% and 5% of
license revenues for the nine months ended September 30, 1998 and 1997,
respectively. The increase in both indirect channel revenues and revenues from
Xerox as a percentage of license revenues is due mainly to two large Xerox
indirect sales during the nine months ended September 30, 1998. Revenues from
indirect partners for any period are subject to significant variations. As a
result, the Company believes that period to period comparisons of indirect
revenues are not necessarily meaningful and should not be relied upon as
indications of future performance. There can be no assurance that the Company's
indirect channel partners will elect or be able to continue to market or support
Documentum EDMS effectively, or that economic conditions or industry demand will
not adversely affect these partners. See "Risk Factors Reliance on Certain
Relationships."
International revenues represented 24% and 32% of license revenues for the
three months ended September 30, 1998 and 1997, respectively, and 30% and 28% of
license revenues for the nine months ended September 30, 1998
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and 1997, respectively. International revenues historically have consisted
primarily of revenues from 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, service and support operations, there can
be no assurance that the Company will be successful in meeting the requirements
of these large organizations or that the Company will be able to effectively
support this international expansion. The Company's international sales are
primarily denominated in U.S. dollars and the Company does not currently engage
in hedging activities. Although exposure to currency fluctuations to date has
been insignificant, there can be no assurance that fluctuations in the 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 39% to $944,000 for the three months ended
September 30, 1998 from $678,000 for the three months ended September 30, 1997,
and increased 93% to $2.9 million for the nine months ended September 30, 1998
from $1.5 million for the nine months ended September 30, 1997, representing 4%
and 5% of the related license revenues for the three months ended September 30,
1998 and 1997, respectively, and 5% and 4% of related license revenues for the
nine months ended September 30, 1998 and 1997, respectively. During the third
quarter, the Company introduced several new products bearing royalty
obligations. As a result, the Company expects the cost of license revenue to
increase in dollar amount.
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 130% to $7.3 million for the
three months ended September 30, 1998 from $3.2 million for the three months
ended September 30, 1997, and increased 113% to $18.3 million for the nine
months ended September 30, 1998 from $8.6 million for the nine months ended
September 30, 1997, representing 59% and 58% of the related services revenues
for the three months ended September 30, 1998 and 1997, respectively, and 61%
and 58% of related services revenues for the nine months ended September 30,
1998 and 1997, respectively. The increase in cost of services revenues in
dollar amount and as a percentage of related revenues resulted from increased
investments in the Company's service operations, increased consulting headcount
and the integration of the operations for WMI. 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, indirect channel group, various marketing expenses and costs of
other market development programs. Sales and marketing expenses increased by 55%
to $13.8 million for the three months ended September 30, 1998 from $8.9 million
for the three months ended September 30, 1997, and increased by 46% to $36.2
million for the nine months ended September 30, 1998 from $24.8 million for the
nine months ended September 30, 1997, representing 41% and 45% of total revenues
for the three months ended September 30, 1998 and 1997, respectively, and 42%
and 48% of total revenues for the nine months ended September 30, 1998 and 1997,
respectively. The increase in dollar amount was the result of the Company's
continued investment in its sales and marketing infrastructure, including
increasing the number of sales teams and increasing the number of marketing and
DocSolution programs. The decrease in spending as a percentage of revenues is
primarily due to economies of scale realized as certain expenses such as
management compensation grew proportionately less than revenues. The
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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
87% to $5.4 million for the three months ended September 30, 1998 from $2.9
million for the three months ended September 30, 1997, and increased 65% to
$12.8 million for the nine months ended September 30, 1998 from $7.7 million for
the nine months ended September 30, 1997, representing 16% and 15% of total
revenues for the three months ended September 31, 1998 and 1997, respectively
and 15% and 15% of total revenues for the nine months ended September 30, 1998
and 1997, respectively. The increase in dollar amount reflects the expansion of
the Company's engineering staff, including the acquisition of Relevance 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. As a result of the Company's recent acquisition of
Relevance and the continued focus on product development the Company expects
research and development costs will continue to increase in dollar amount.
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 87% to $2.6 million for the
three months ended September 30, 1998 from $1.4 million for the three months
ended September 30, 1997, and increased 88% to $7.4 million for the nine months
ended September 30, 1998 from $3.9 million for the nine months ended September
30, 1997, representing 8% and 7% of total revenues for the three months ended
September 30, 1998 and 1997, respectively and 8% and 8% of total revenues for
the nine months ended September 30, 1998 and 1997, respectively. The increase
in dollar amount is primarily due to increased staffing and professional fees
necessary to manage and support the Company's growth. The Company expects
general and administrative expenses to increase in dollar amount in order to
support the growing needs of the Company.
Acquisition and related costs. On January 5, 1998, the Company acquired all
the outstanding shares of WMI, a privately-held company, in exchange for 192,473
shares of the Company's common stock valued on the transaction date at
approximately $6.7 million. The acquisition was accounted for as a pooling of
interests. WMI was a professional services firm with approximately 35 employees
as of the date of the acquisition located in Oakland, California specializing in
the design, development and implementation of document management systems for
the semiconductor industry. The acquisition of WMI is part of the Company's
strategic plan to add specific domain expertise in targeted vertical industries.
The Company recorded a one time charge of approximately $2.2 million in
connection with the acquisition.
Purchased in process research and development. On July 16, 1998, the Company
acquired all the outstanding shares of Relevance, a privately-held company, in
exchange for $36.5 million, including 578,488 shares of the Company's common
stock. The acquisition was accounted for by the purchase method of accounting.
Relevance was a development stage software company with approximately 25
employees as of the date of the acquisition located in San Francisco, California
specializing in the development of content mining technology for unstructured
information. The acquisition of Relevance represents a new market opportunity
for Documentum to develop additional applications for the sharing and applying
of both corporate and Internet based knowledge. The Company recorded $34.6
million for the nine months ended September 30, 1998 as a charge related to the
write off of purchased in process research and development.
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 140% to $1.1 million for the three months
ended September 30, 1998 from $464,000 for the three months ended September 30,
1997, and increased 123% to $3.3 million for the nine months ended September 30,
1998 from $1.5 million for the nine months ended September 30, 1997. The
increase is primarily due to interest income earned on higher cash balances. 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
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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 estimated effective tax rate was 34% for the three months ended
September 30, 1998 and 1997, respectively and 34% for the nine months ended
September 30, 1998 and 1997, respectively. The estimated effective tax rate
excludes the effects of the non-deductible write-off of in-process research and
development as a result of the acquisition of Relevance, and the non-deductible
items related to the acquisition of WMI.
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 $97.1 million at September 30,
1998 representing 65% 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 $8.1 million and $10.4 million
for the nine months ended September 30, 1998 and 1997, respectively. For the
nine months ended September 30, 1998, the cash generated by operations was
primarily attributable to a net loss of $27.7 million adjusted for noncash
charges of $39.2 million, growth in accrued liabilities of $5.1 million, growth
in accounts payable of $2.0 million, and deferred revenue of $4.6 million, an
increase in accounts receivable of $6.3 million and an increase in other assets
of $8.8 million, consisting primarily of $2.5 million for prepaid rent related
to a new lease, $2.2 million for prepaid third party royalties and $1.0 million
in deferred tax assets. For the nine months ended September 30, 1997, the cash
generated by operations was primarily attributable to net income of $4.6
million, an increase in accrued liabilities of $4.3 million, an increase in
deferred revenue of $1.9 million and an increase in accounts payable of
$900,000, which was offset by an increase in accounts receivable of $2.5
million. For the nine months ended September 30, 1998 and 1997, capital
expenditures of $6.6 million and $5.9 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. The Company
was in compliance as of September 30, 1998. For the nine months ended September
30, 1998, no amount had been borrowed under the Facility.
In June 1998, the Company signed leases for approximately 122,000 square feet
and 63,000 square feet in Pleasanton, California beginning in June 1999 and
January 2000, respectively, and expiring in May 2005 and December 2006,
respectively. This space will serve as the Company's headquarters and will
contain the principal administrative, engineering, manufacturing, marketing and
sales facilities. The Company expects to make capital purchases related to
leasehold improvements and office furniture for the new facilities. The Company
currently has no other 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
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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."
YEAR 2000 READINESS DISCLOSURE
In the next two years, most companies will face a potentially serious
information systems problem because many software application and operational
programs 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.
The Company has a commenced a comprehensive Year 2000 project to identify the
risks associated with its information systems, products, operations and
infrastructure, suppliers and customers that are not Year 2000 compliant. The
project consists of three phases: (1) identification of risks, (2) assessment of
risks and if necessary, (3) development, implementation and testing of
remediation and contingency plans.
The Company's Year 2000 project is currently in the first phase and therefore
is not in a position to state the total cost of remediation of all the Year 2000
issues. Costs to date have not been material. The Company does not currently
expect the total costs to be material, and it expects to be able to fund the
total costs through operating cash flows. However, the Company has not yet
completed its identification of risks, assessments and developed remediation and
contingency plans for all problems.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations and become material. In many cases, the Company is relying on
assurances from third parties, including vendors and partners, that new and
upgraded information systems and other products will be Year 2000 compliant.
Even if the Company in a timely manner, completes all of its assessments,
identifies and tests remediation plans believed to be adequate, and develops
contingency plans believed to be adequate, some problems may not be identified
or corrected in time to prevent material adverse consequences to the Company.
RISK FACTORS
In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented in
this report. The section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this report contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, and Section 21E of the Securities Exchange Act 1934. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the Risk Factors set forth below and elsewhere in this report.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Prior growth rates in the Company's revenue and operating results
should not be considered indicative of future growth, if any, or of future
operating results. Future operating results will depend upon many factors,
including the demand for the Company's products, the level of product and price
competition, the length of the Company's sales cycle, the size and timing of
individual license transactions, the delay or deferral of customer
implementations, the budget cycles of the Company's customers, the Company's
success in expanding its direct sales force and indirect distribution channels,
the timing of new product introductions and product enhancements by the Company
and its competitors, the mix of products and services sold, levels of
international sales, activities of and acquisitions by competitors, the timing
of new hires, changes in foreign currency exchange rates, the ability of the
Company to develop and market new products and control costs and general
domestic and international economic and political conditions. The Company's
first quarter revenues and earnings in any year are typically flat or lower as
compared to the immediate preceding fourth quarter, due to seasonality, which
the Company believes is common in the software industry. Moreover, the Company
typically recognizes a substantial amount of its revenue in the last month,
weeks or even
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days of each quarter. The Company's license sales generally reflect a relatively
high amount of revenues per order and the number of large individual license
sales has continued to increase. The loss or delay of individual orders,
therefore, could have a significant impact on the revenues and quarterly results
of the Company. In addition, the timing of license revenue is difficult to
predict because of the length of the Company's sales cycle, which is typically
six to 12 months from the initial contact. Also, the Company's strategy to
provide customers with whole solutions could result in software licenses being
bundled with services. Therefore, with certain future transactions, the delivery
of services may delay recognition of license revenue.
Because the Company's operating expenses are based on anticipated revenue
trends and because a high percentage of the Company's expenses are relatively
fixed, any shortfall from anticipated revenue or a delay in the recognition of
revenue from a limited number of license transactions could cause significant
variations in operating results from quarter to quarter and could result in
losses. As a result of these factors, operating results for any quarter are
subject to significant variation, and the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful related
to future performance and should not be relied upon as indications of future
performance. Furthermore, due to all of the foregoing factors, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts or investors. In such event, the market
price of the Company's common stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Lengthy Sales and Implementation Cycles. The license of the Company's
software products is often an enterprise-wide decision by prospective customers
and generally requires the Company to engage in a lengthy sales cycle (typically
between six and 12 months) to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's products.
Additionally, the size of the transaction and the complexity of the arrangement
can also cause delays in the sales cycle. The implementation by customers of the
Company's products involves a significant commitment of resources by such
customers over an extended period of time and is commonly associated with
substantial business reengineering efforts. For these and other reasons, the
sales and customer implementation cycles are subject to a number of significant
delays over which the Company has little or no control. Delay in the sale or
customer implementation of a limited number of license transactions could have a
material adverse effect on the Company's business, financial condition and
results of operations and cause the Company's operating results to vary
significantly from quarter to quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Product Concentration. To date, substantially all of the Company's revenues
have been attributable to sales of licenses of the Documentum EDMS family of
products and related services. The Company currently expects the Documentum EDMS
family of products and related services to account for substantially all of its
future revenues. As a result, factors adversely affecting the pricing of or
demand for the Documentum EDMS products such as competition or technological
change could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's future financial performance
will depend, in significant part, on the successful development, introduction
and customer acceptance of new and enhanced versions of the Documentum EDMS
family of products. There can be no assurance that the Company will continue to
be successful in developing and marketing the Documentum EDMS products.
New Products and Rapid Technological Change. The document management software
and services market is characterized by rapid technological change, change in
customer requirements, frequent new product introductions and enhancements and
emerging industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. Accordingly, the life cycles of the
Company's products are difficult to estimate. The Company's future success will
depend in part upon its ability to enhance current products and to continue to
develop and introduce new products that respond to evolving customer
requirements and keep pace with technological developments and emerging industry
standards, such as new operating systems, hardware platforms, user interfaces,
the Internet, corporate intranets and RDBMS software. The Company's future
success will also depend in part on its ability to execute on its strategy to
develop whole-product solutions in certain target vertical industries. In
addition, the Company's future success will depend in part upon its ability to
maintain and enhance relationships with its technology partners, such as RDBMS
vendors, in order to provide its customers with integrated product solutions.
There can be no assurance that the Company will be successful in maintaining
these relationships or in developing and marketing product enhancements or in
delivering products that respond to technological change, updates and
enhancements to third party products used in conjunction with the Company's
products, changes in customer requirements or emerging industry standards; that
the Company
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will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and enhancements; or
that any new products or enhancements that the Company may introduce will
adequately meet the requirements of the marketplace and achieve market
acceptance. Moreover, the Company has in the past experienced delays in the
release dates of enhancements to its products. If release dates of any future
product enhancements are delayed or, if when released, fail to achieve market
acceptance, the Company's business, financial condition and results of
operations could be materially adversely affected. To date, the delays the
Company has experienced have been minor in nature and are often the result of
adding enhancements or functionality based upon customer feedback during beta
product versions. These delays have generally not exceeded six months in
duration from the Company's scheduled internal release dates; however, there can
be no assurance that the Company may not experience future delays in product
introduction. The inability of the Company, for technological or other reasons,
to develop and introduce new products or enhancements in a timely manner in
response to changing customer requirements, technological change or emerging
industry standards, would have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Emerging Markets. The market for document management software
and services is intensely competitive, highly fragmented and subject to rapid
change. The Company's future financial performance will depend primarily on
growth in the number of document management applications developed for use in
client/server and intranet 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.
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
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prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not materially and adversely affect its business, financial
condition and results of operations.
End User Customer and Industry Concentration. A relatively small number of
end user customers account for a significant percentage of the Company's
revenues. In addition, the Company's customers are somewhat concentrated in the
process and discrete manufacturing, financial, 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.
Reliance on Certain Relationships. The Company has established strategic
relationships with a number of organizations that it believes are important to
its worldwide sales, marketing and support activities. The Company's
relationships with indirect channel partners and other consultants provide
marketing and sales opportunities for the Company's direct sales force, expand
the distribution of its products and broaden its product offerings through
product bundling. These relationships also assist the Company in keeping pace
with the technological and marketing developments of major vendors, and in
certain instances, provide the Company with technical assistance for the
Company's product development efforts. There can be no assurance that any
customer, systems integrator or distributor will continue to market or to
purchase the Company's products. The failure by the Company to maintain these
relationships, or to establish new relationships in the future, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Management of Growth; Dependence Upon Key Personnel. The Company's ability to
compete effectively and to manage future anticipated growth will require the
Company to expand, train, manage and retain 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. In addition, a substantial number of highly qualified technical personnel
joined the Company in July 1998 in connection with the Relevance acquisition.
The failure of the Company to successfully integrate such personnel into the
Company's operations could have a material adverse effect on the Company's
business, financial condition and results of operations. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to attract, assimilate or retain such key employees. See "Risks Associated
with Acquisitions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
International Operations. The Company's sales are primarily to large
multinational companies. To service the needs of such companies, both
domestically and internationally, the Company and its support partners must
provide worldwide product support services. As a result, the Company intends to
continue expanding its existing international operations and enter additional
international markets, which will require significant management attention and
financial resources and could adversely affect the Company's operating margins
and earnings, if any. The Company has offices outside of the United States in
London, Paris, Munich, Tokyo, Seoul and Melbourne. The Company operates its own
European technical support operation, located in the London and Munich. 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
multi-national 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.
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
20
<PAGE>
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.
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 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
21
<PAGE>
customers, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, diversion of development resources, damage to the Company's
reputation, or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Risks Associated with Acquisitions. As part of its business strategy, the
Company expects to make acquisitions of, or significant investments in,
businesses that offer complementary products and technologies. For example, the
Company recently acquired Relevance. Such acquisition will, and any future
acquisitions or investments would, expose the Company to the risks commonly
encountered in acquisitions of businesses. Such risks include, among others,
difficulty of assimilating the operations; information systems and personnel of
the acquired businesses; the potential disruption of the Company's ongoing
business; the inability of management to maximize the financial and strategic
position of the Company through the successful incorporation of acquired
employees and customers; the maintenance of uniform standards, controls,
procedures and policies; and the impairment of relationships with employees and
customers as a result of any integration of new management personnel. There can
be no assurance that any potential acquisition will be consummated or, if
consummated, that it will not have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Possible Volatility of Stock Price. The trading price of the Company's Common
Stock is subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes in
earning estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, general conditions in the software
and computer industries and other events or factors. In addition, the stock
market in general has experienced extreme price and volume fluctuations which
have affected the market price for many companies in industries similar or
related to that of the Company and which have been unrelated to the operating
performance of these companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock.
Effect of Certain Charter Provisions: Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has the
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to those of the Common Stock. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue any shares of Preferred Stock. Further, certain provisions of the
Company's Amended and Restated Certificate of Incorporation, including
provisions that create a classified board of directors, and certain provisions
of the Company's Amended and Restated Bylaws and of Delaware law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company.
Year 2000 readiness In the next two years, most companies will face a
potentially serious information systems problem because many software
application and operational programs 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.
The Company has a commenced a comprehensive Year 2000 project to identify the
risks associated with its information systems, products, operations and
infrastructure, suppliers and customers that are not Year 2000 compliant. The
project consists of three phases: (1) identification of risks, (2) assessment of
risks and if necessary, (3) development, implementation and testing of
remediation and contingency plans.
The Company's Year 2000 project is currently in the first phase and therefore
is not in a position to state the total cost of remediation of all the Year 2000
issues. Costs to date have not been material. The Company does not currently
expect the total costs to be material, and it expects to be able to fund the
total costs through operating cash flows. However, the Company has not yet
completed its identification of risks, assessments and developed remediation and
contingency plans for all problems.
22
<PAGE>
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations and become material. In many cases, the Company is relying on
assurances from third parties, including vendors and partners, that new and
upgraded information systems and other products will be Year 2000 compliant.
Even if the Company in a timely manner, completes all of its assessments,
identifies and tests remediation plans believed to be adequate, and develops
contingency plans believed to be adequate, some problems may not be identified
or corrected in time to prevent material adverse consequences to the Company.
23
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) Issuance of Common Stock in acquisition of Relevance Technologies, Inc.
On July 16, 1998, the Company issued 578,788 shares of its Common Stock to
the shareholders of privately held Relevance Technologies, Inc. ("Relevance") in
connection with the Company's acquisition of Relevance pursuant to Section 4(2)
of the Securities Act of 1993, as amended.
(d) Use of proceeds from initial public offering
The effective date of the Company's first registration statement, filed on
Form S-1 under Securities Act of 1933 (No. 33-80047), was February 5, 1996 (the
"Registration Statement"). The class of securities registered was Common Stock.
The offering commenced on February 5, 1996 and all securities were sold in the
offering. The managing underwriters for the offering were Morgan Stanley & Co.
Incorporated and Alex Brown & Sons Incorporated.
Pursuant to the Registration Statement, the Company sold 2,058,000 shares
of its Common Stock for its own account, for an aggregate offering price of
$49,392,000 and 12,000 shares of its Common Stock for the account of certain
selling stockholders, for an aggregate offering price of $288,000.
The Company incurred expenses of approximately $4,352,440, of which
$3,457,440 represented underwriting discounts and commissions and $895,000
represented estimated other expenses. All such expenses were direct or indirect
payments to others. The net offering proceeds to the issuer after total
expenses was $45,039,560.
The Company has used $1,500,000 of the net proceeds from the offering in
the acquisition of other businesses, $33,200,000 of the net proceeds for working
capital. All remaining proceeds have been invested in commercial paper. The
use of the proceeds from the offering does not represent a material change in
the use of proceeds described in the prospectus.
Item 5. Other Information
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 1999 annual meeting of
stockholders must provide specified information to the Company between February
27, 1999 and March 29, 1999 (unless such matters are included in the Company's
proxy statement pursuant to Rule 14a-8 under Securities Exchange Act of 1934, as
amended).
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(6)2.1 Agreement and Plan of Merger and Reorganization, dated as of
July 16, 1998, among Registrant, RTI Acquisition Corporation and
Relevance Technologies, Inc.
(1)3.1 Registrant's Amended and Restated Certificate of Incorporation
(6)3.2 Registrant's Amendment to Amended and Restated Certificate of
Incorporation
(2)3.3 Registrant's Amended and Restated Bylaws.
(7)3.4 Registrant's Amendment to Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
(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.
(6)4.4 Registration Rights Agreement, dated July 16, 1998 between the
Registrant and certain stockholders
(6)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.
(7)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.
(7)10.10 Industrial Real Estate Lease, dated June 22, 1998, between the
Registrant and Patrician Associates, Inc.
Y(3)10.17 Services Partner Agreement, dated April 1, 1996, between the
Registrant and Xerox Corporation.
(6)10.18 Registrant's 1996 Non-Officer Equity Incentive Plan as amended.
(5)10.20 Lease agreement between Registrant and Britannia Hacienda IV
Limited Partnership.
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.
(6) Filed as an exhibit to Registrant's Registration Statement on Form S-3
(333-59331).
(7) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly period
ended June 30, 1998 and incorporated herein by reference
25
<PAGE>
(b)
(1) Report on Form 8-K dated July 16, 1998, as amended August 5, 1998
relating to the acquisition of Relevance Technologies, Inc.
(2) Report on Form 8-K dated July 16, 1998, relating to the Company's
press release of financial results for the quarter and six months
ended June 30, 1998.
SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
DOCUMENTUM, INC.
(Registrant)
Date: November 12, 1998 By: /s/ Mark S. Garrett
-------------------------------
Mark S. Garrett
Vice President, and Chief Financial
Officer
(Duly Authorized Officer and Principal
Financial Officer)
26
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(6)2.1 Agreement and Plan of Merger and Reorganization, dated as of
July 16, 1998, among Registrant, RTI Acquisition Corporation and
Relevance Technologies, Inc.
(1)3.1 Registrant's Amended and Restated Certificate of Incorporation
(6)3.2 Registrant's Amendment to Amended and Restated Certificate of
Incorporation
(2)3.3 Registrant's Amended and Restated Bylaws.
(7)3.4 Registrant's Amendment to Amended and Restated Bylaws
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
(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.
(6)4.4 Registration Rights Agreement, dated July 16, 1998 between the
Registrant and certain stockholders
(6)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.
(7)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.
(7)10.10 Industrial Real Estate Lease, dated June 22, 1998, between the
Registrant and Patrician Associates, Inc.
Y(3)10.17 Services Partner Agreement, dated April 1, 1996, between the
Registrant and Xerox Corporation.
(6)10.18 Registrant's 1996 Non-Officer Equity Incentive Plan as amended.
(5)10.20 Lease agreement between Registrant and Britannia Hacienda IV
Limited Partnership.
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.
(6) Filed as an exhibit to Registrant's Registration Statement on Form S-3
(333-59331).
(7) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly period
ended June 30, 1998 and incorporated herein by reference
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 16,291 0
<SECURITIES> 80,858 0
<RECEIVABLES> 28,396 0
<ALLOWANCES> 2,683 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 130,030 0
<PP&E> 24,157 0
<DEPRECIATION> 10,871 0
<TOTAL-ASSETS> 148,807 0
<CURRENT-LIABILITIES> 39,382 0
<BONDS> 0 0
0 0
0 0
<COMMON> 17 0
<OTHER-SE> 132,550 0
<TOTAL-LIABILITY-AND-EQUITY> 148,807 0
<SALES> 21,562 57,329
<TOTAL-REVENUES> 33,883 87,392
<CGS> 944 2,851
<TOTAL-COSTS> 8,216 21,129
<OTHER-EXPENSES> 56,471 93,151
<LOSS-PROVISION> 36 687
<INTEREST-EXPENSE> 5 21
<INCOME-PRETAX> (29,692) (23,632)
<INCOME-TAX> 1,676 4,075
<INCOME-CONTINUING> (31,368) (27,707)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (31,368) (27,707)
<EPS-PRIMARY> (1.90) (1.72)
<EPS-DILUTED> (1.90) (1.72)
</TABLE>
