<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 JUNE 30, 1999
----------------
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)
6801 Koll Center Parkway, Pleasanton, California 94566-3145
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (925) 600-6800
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 16,585,050 on June 30, 1999.
<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 June 30, 1999 and December
31, 1998........................................................................ Page 3
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 1999 and 1998.................................................... Page 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998.......................................................... Page 5
Notes to Condensed Consolidated Financial Statements............................ Page 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... Page 9
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PAGE 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................ PAGE 24
SIGNATURES..................................................................................... PAGE 25
</TABLE>
<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>
June 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,012 $ 16,240
Short-term investments 73,247 84,203
Accounts receivable, net of allowances of $2,063 and $2,496
(including $984 and $2,485 receivable from a
stockholder and its affiliates) 23,641 32,745
Other current assets 8,841 8,192
------------- ------------
Total current assets 122,741 141,380
Property and equipment, net 23,749 13,426
Other assets 6,336 5,843
------------- ------------
$ 152,826 $ 160,649
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,120 $ 3,176
Accrued liabilities 21,526 26,170
Deferred revenue 16,807 14,490
------------- ------------
Total current liabilities 46,453 43,836
------------- ------------
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;
16,585 and 16,707 shares issued and outstanding 17 17
Additional paid-in capital 132,875 135,849
Accumulated other comprehensive income (243) 52
Accumulated deficit (26,276) (19,105)
------------- ------------
Total stockholders' equity 106,373 116,813
------------- ------------
$ 152,826 $ 160,649
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenue:
License (including $472, $5,929, $737 and $6,784
from a stockholder and its affiliates) $ 15,852 $ 18,716 $ 27,086 $ 35,767
Service 13,378 9,721 26,149 17,742
----------------- ----------------- ----------------- -----------------
Total revenue 29,230 28,437 53,235 53,509
----------------- ----------------- ----------------- -----------------
Cost of revenue:
License 1,529 703 2,547 1,906
Service 7,800 5,961 15,536 11,007
----------------- ----------------- ----------------- -----------------
Total cost of revenue 9,329 6,664 18,083 12,913
----------------- ----------------- ----------------- -----------------
Gross profit 19,901 21,773 35,152 40,596
----------------- ----------------- ----------------- -----------------
Operating expenses:
Sales and marketing 14,201 11,847 27,266 22,416
Research and development 6,389 3,732 12,554 7,374
General and administrative 4,632 2,424 8,331 4,719
Acquisition and related costs --- --- --- 2,171
----------------- ----------------- ----------------- -----------------
Total operating expenses 25,222 18,003 48,151 36,680
----------------- ----------------- ----------------- -----------------
Income (loss) from operations (5,321) 3,770 (12,999) 3,916
----------------- ----------------- ----------------- -----------------
Interest and other income, net 1,167 1,034 2,134 2,144
----------------- ----------------- ----------------- -----------------
Income (loss) before income tax provision (benefit) (4,154) 4,804 (10,865) 6,060
Provision for (benefit from) income taxes (1,412) 1,633 (3,694) 2,399
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (2,742) $ 3,171 $ (7,171) $ 3,661
================= ================= ================= =================
Basic earnings (loss) per share $ (0.16) $ 0.20 $ (0.43) $ 0.23
================= ================= ================= =================
Diluted earnings (loss) per share $ (0.16) $ 0.19 $ (0.43) $ 0.22
================= ================= ================= =================
Shares used to compute basic earnings (loss) per share 16,821 15,903 16,824 15,855
================= ================= ================= =================
Shares used to compute diluted earnings (loss) per share 16,821 17,014 16,824 16,883
================= ================= ================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,171) $ 3,661
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 3,320 2,337
Provision for doubtful accounts (432) 651
Gain on sale of fixed assets (143) ---
Changes in assets and liabilities:
Accounts receivable 9,536 (2,281)
Other current assets and other assets (1,142) (8,423)
Accounts payable 4,944 710
Accrued liabilities (4,587) 2,607
Deferred revenue 2,317 3,191
-------------- --------------
Net cash provided by operating activities 6,642 2,453
-------------- --------------
Cash flows from investing activities:
Purchases of short-term investments (62,570) (54,709)
Sales of short-term investments 73,526 53,980
Net purchases of property and equipment (13,500) (3,376)
Other --- 10
-------------- --------------
Net cash used in investing activities (2,544) (4,095)
-------------- --------------
Cash flows from financing activities:
Issuance of common stock 2,588 2,532
Repurchase of common stock (5,562) ---
Repayments on capital lease obligations (57) (71)
Repayments on loan --- (330)
-------------- --------------
Net cash (used in) provided by financing acitivities (3,031) 2,131
-------------- --------------
Effect of exhange rate on changes in cash (295) 29
-------------- --------------
Net increase in cash and cash equivalents 772 518
Cash and cash equivalents at beginning of period 16,240 14,236
-------------- --------------
Cash and cash equivalents at end of period $ 17,012 $ 14,754
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of presentation
The unaudited condensed consolidated financial statements of Documentum
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 1998 Annual Report on Form 10-K. The consolidated
results of operations for the period ended June 30, 1999 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending December 31, 1999.
Comprehensive net income
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 June 30, Six Months Ended June 30,
--------------------------------------------- ---------------------------------------------
1999 1998 1999 1998
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (2,742) $ 3,171 $ (7,171) $ 3,661
Other comprehensitve income
Foreign translation adjustment (151) 11 (295) 29
-------------------- -------------------- -------------------- --------------------
Comprehensive net income (loss) $ (2,893) $ 3,182 $ (7,466) $ 3,690
==================== ==================== ==================== ====================
</TABLE>
Revenue recognition
The Company's revenue is derived from the sale of perpetual licenses for
its content management and web application software and related services, which
include maintenance and support, consulting and training services. Revenue from
license arrangements are recognized upon shipment of the product if collection
of the resulting receivable is probable. If a vendor obligation exists under the
license arrangement, revenue is deferred based on vendor-specific objective
evidence of the undelivered element. If vendor-specific objective evidence does
not exist for all undelivered elements, all revenue is deferred until sufficient
evidence exists or all elements have been delivered. Allowances for estimated
future returns are provided upon shipment. Payments received in advance of
revenue recognition are recorded as deferred revenue. Revenue from annual
maintenance and support is deferred and recognized ratably over the term of the
contract. Revenue from consulting and training is deferred and recognized when
the services are performed and collectibility is deemed probable. During 1998,
the Company recognized revenue in accordance with Statement of Position No. 97-2
("SOP 97-2"), "Software Revenue Recognition". In December 1998, the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition,
with Respect to Certain Transactions." The provisions of SOP 98-9 have been
adopted for transactions entered into during the fiscal year beginning January
1, 1999. The adoption of SOP 98-9 did not have a material impact on revenue
recognized during the three and six months ended June 30, 1999.
Net income (loss) per share
Basic net income (loss) per share is computed using the weighted average
number of shares of common stock. Diluted net income (loss) 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
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, Six Months Ended June 30,
--------------------------------------------- ---------------------------------------------
1999 1998 1999 1998
-------------------- -------------------- -------------------- --------------------
(in thousands, except per share data) (in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income (loss) $ (2,742) $ 3,171 $ (7,171) $ 3,661
-------------------- -------------------- -------------------- --------------------
Shares calculation
Average basic shares outstanding 16,821 15,903 16,824 15,855
Options --- 1,111 --- 1,028
-------------------- -------------------- -------------------- --------------------
Total shares used to compute
diluted earnings per share 16,821 17,014 16,824 16,883
==================== ==================== ==================== ====================
Earnings (loss) per basic share $ (0.16) $ 0.20 $ (0.43) $ 0.23
==================== ==================== ==================== ====================
Earnings (loss) per diluted share $ (0.16) $ 0.19 $ (0.43) $ 0.22
==================== ==================== ==================== ====================
</TABLE>
Options to purchase 3,487,866 and 95,203 shares of common stock were
outstanding during the three months ended June 30, 1999 and June 30, 1998,
respectively, and 3,579,512 and 90,200 shares of common stock were outstanding
during the six months ended June 30 1999 and June 30 1998, respectively, but
were not included in the computation of diluted EPS because either the option's
exercise price was greater than the average market price of the common shares
during the period or inclusion of such options would have been anti-dilutive.
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 on the date of
acquisition. WMI was a professional services firm with approximately 35
employees 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.
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 using the
purchase method of accounting on the date of acquisition. Relevance was a
development stage software company with approximately 25 employees 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
June 30, 1998, Relevance had no revenues and had gross assets of approximately
$3.6 million.
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The company recorded $34.6 million as a charge related to the write off of
purchased in process research and development.
Stock Repurchase
On April 15, 1999 the Board of Directors approved the repurchase of up to
$20 million of the Company's common stock on the open market or in private
transactions. In June 1999, the Company repurchased and retired 395,000 shares
of its common stock for approximately $5.6 million.
Rights Plan
On February 3, 1999, the Company adopted a Share Purchase Plan ("Rights
Plan") under which all stockholders of record as of February 24, 1999 will
receive rights to purchase shares of a new series of Preferred Stock. The rights
will be exercisable only if a person or group acquires 20% or more of the
Company's Common Stock or announces a tender offer for 20% or more of the Common
Stock. If a person acquires 20% or more of the Company's Common Stock, all
rightsholders except the purchaser will be entitled to acquire the Company's
Common Stock at a 50% discount. The Company's Board of Directors may redeem the
rights prior to the time a person acquires more than 20% of the Company's Common
Stock.
Subsequent Event
In June 1999, the Company terminated its existing line of credit. There were
no borrowings outstanding at the time of termination. In August 1999, the
Company entered into an unsecured revolving line of credit agreement with a new
bank. The agreement allows for borrowings of up to $20 million bearing interest
at the Company's option of; (1) the bank's prime rate or (2) the LIBOR rate plus
1.50%, and expires on July 30, 2001. The Company must comply with certain
financial covenants and conditions as described in the agreement.
<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 as well as those discussed under
the caption "Risk Factors". Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Company's other
reports filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect the Company's
business.
<PAGE>
Results of Operations
The following table sets forth certain items from the Company's condensed
consolidated statements of operations as a percentage of total revenue for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------- ---------------------------------------------
1999 1998 1999 1998
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Revenue:
License 54.2% 65.8% 50.9% 66.8%
Service 45.8% 34.2% 49.1% 33.2%
-------------------- -------------------- -------------------- --------------------
Total revenue 100.0% 100.0% 100.0% 100.0%
-------------------- -------------------- -------------------- --------------------
Cost of revenue:
License 5.2% 2.5% 4.8% 3.6%
Service 26.7% 21.0% 29.2% 20.6%
-------------------- -------------------- -------------------- --------------------
Total cost of revenue 31.9% 23.5% 34.0% 24.2%
-------------------- -------------------- -------------------- --------------------
Gross profit 68.1% 76.5% 66.0% 75.8%
-------------------- -------------------- -------------------- --------------------
Operating expenses:
Sales and marketing 48.6% 41.7% 51.2% 41.9%
Research and development 21.9% 13.1% 23.6% 13.8%
General and administrative 15.8% 8.5% 15.6% 8.8%
Acquisition and related costs 0.0% 0.0% 0.0% 4.1%
-------------------- -------------------- -------------------- --------------------
Total operating expenses 86.3% 63.3% 90.4% 68.6%
-------------------- -------------------- -------------------- --------------------
Income (loss) from operations (18.2)% 13.2% (24.4)% 7.2%
-------------------- -------------------- -------------------- --------------------
Interest and other income, net 4.0% 3.6% 4.0% 4.0%
-------------------- -------------------- -------------------- --------------------
Income (loss) before income
tax provision (benefit) (14.2)% 16.8% (20.4)% 11.2%
Provision for (benefit from) income taxes (4.8)% 5.7% (6.9)% 4.5%
-------------------- -------------------- -------------------- --------------------
Net income (loss) (9.4)% 11.1% (13.5)% 6.7%
==================== ==================== ==================== ====================
As a Percentage of Related Revenue:
Cost of license revenue 9.6% 3.8% 9.4% 5.3%
Cost of service revenue 58.3% 61.3% 59.4% 62.0%
</TABLE>
Revenue
The Company's revenue is derived from the sale of perpetual licenses for its
content management and web application software and related services, which
include maintenance and support, consulting and training services. Revenue from
license arrangements is recognized upon shipment of the product if collection of
the resulting receivable is probable. If a vendor obligation exists under the
license arrangement, revenue is deferred based on vendor-specific objective
evidence of the undelivered element. If vendor-specific objective evidence does
not exist for all undelivered elements, all revenue is deferred until sufficient
evidence exists or all elements have been delivered. Allowances for estimated
future returns are provided upon shipment. Payments received in advance of
revenue recognition are recorded as deferred revenue. Revenue from annual
maintenance and support are deferred and recognized ratably over the term of the
contract. Revenue from consulting and training is deferred and
<PAGE>
recognized when the services are performed and collectibility is deemed
probable. During 1998, the Company recognized revenue in accordance with
Statement of Position No. 97-2 (SOP 97-2"), "Software Revenue Recognition". In
December 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." The
provisions of SOP 98-9 have been adopted for transactions entered into during
the fiscal year beginning January 1, 1999. The adoption of SOP 98-9 did not have
a material impact on revenue reconized during the three and six months ended
June 30, 1999.
License revenue decreased by 15% or $2.9 million for the three months ended
June 30, 1999 from $18.7 million for the three months ended June 30, 1998 and
decreased 24% or $8.7 million for the six months ended June 30, 1999 from $35.8
million for the six months ended June 30, 1998. License revenue was adversely
impacted by a general industry slowdown in customer license sales for enterprise
software applications. The Company experienced a weakness in customer demand
and difficulty in closing large license contracts with customers during the
first six months of 1999. For the three and six months ended June 30, 1999 and
1998, license revenue from Xerox and certain Xerox affiliates, as systems
integrators, a VAR and a distributor for the Company's products, accounted for
30%, 32%, 32% and 19% of total license revenue respectively. The loss of a major
customer or any reduction or delay in orders by such customers would have a
material adverse effect on the Company's business, operating results and
financial condition. Also, the Company's strategy to provide customers with
whole solutions could result in software licenses being bundled with services.
Therefore, with certain future transactions, the delivery of services may delay
recognition of license revenue. Although the Company experienced significant
revenue growth from 1992 to 1998, the Company does not believe that license
revenue will increase in 1999 nor that historical growth rates are sustainable
in the future.
Service revenue increased by 38% to $13.4 million for the three months ended
June 30, 1999 from $9.7 million, for the three months ended June 30, 1998, and
increased 47% to $26.1 million for the six months ended June 30, 1999 from $17.7
million for the six months ended June 30, 1998, representing 46%, 34%, 49%, and
33% of total revenue in the respective periods. The increase in dollars was
attributable to a larger installed base of customers receiving ongoing
maintenance, training and support services and increases in the Company's
professional services staff in conjunction with the Company's focus to expand
solution offerings to customers. The increase in service revenue as a percent
of total revenue was mainly due to a decrease in total license revenue.
The Company markets its products through its direct sales force and its
indirect channel partners. While historically, the Company has generated the
majority of its revenue from its direct sales force, the Company has also
focused on complementing its direct sales channel with indirect channels,
consisting of systems integrators and distributors. Revenue from all indirect
channel partners comprised 29% and 47% of license revenue for the three months
ended June 30, 1999 and 1998, respectively, and 32% and 34% for the six months
ended June 30, 1999 and 1998, respectively. Revenue from indirect partners for
any period is subject to significant variations. As a result, the Company
believes that period to period comparisons of indirect revenue is not
necessarily meaningful and should not be relied upon as indications of future
performance.
International revenue represented 45% and 31% of license revenue for the
three months ended June 30, 1999 and 1998, respectively, and 45% and 34% for the
six months ended June 30, 1999 and 1998, respectively. The increase in
international revenue as a percent of license revenue was primarily due to a
decrease in license revenue. In addition, sales in Asia continue to grow as a
result of growth in the sales force, resulting in increased revenue from Asia as
a percentage of total international revenue. 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 revenue is
not necessarily meaningful and should not be relied upon as indications of
future performance.
Cost of revenue
Cost of license revenue consists primarily of the royalties paid to third-
party vendors, packaging, documentation, production and freight costs.
Royalties, which are paid to third-parties for selected products, include both
fixed fees and variable fees. Cost of license revenue increased by 118% to $1.5
million for the three months ended June 30, 1999 from $0.7 million for the three
months ended June 30, 1998, and increased by 34% to $2.5
<PAGE>
million for the six months ended June 30, 1999 from $1.9 million for the six
months ended June 30, 1998, representing 10% and 4% of the related license
revenue for the three months ended June 30, 1999 and 1998, respectively, and 9%
and 5% of the related license revenue for the six months ended June 30, 1999 and
1998 respectively. The increase in cost of license revenue was related to a
shift in the mix of products being sold. The Company currently carries more
third party products and is selling a greater number of those products than it
had in the same periods in the prior year. Thus, royalty expenses associated
with the increase in sales of third party products have increased over the
comparable periods in 1998. The Company expects the cost of license revenue to
fluctuate in dollar amount as the related license revenue fluctuates.
Cost of services revenue consists primarily of personnel-related costs
incurred in providing consulting services, training to customers and telephone
support. Cost of services revenue increased by 31% to $7.8 million for the
three months ended June 30, 1999 from $6.0 million for the three months ended
June 30, 1998, and increased 41% to $15.5 million for the six months ended June
30, 1999 from $11.0 million for the six months ended June 30, 1998, representing
58% and 61% of the related services revenue for the three months ended June 30,
1999 and 1998, respectively and 59% and 62% of the related service revenue for
the six months ended June 30, 1999 and 1998, respectively. The increase in cost
of services revenue in dollar amount was a result of increased personnel-related
costs as the Company expanded its consulting and training operations to support
its larger installed customer base, as well as an increase in solutions offered
to customers. The Company expects the cost of services revenue to increase in
dollar amount as the related services revenue increases.
Operating expenses
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, benefits, sales commissions and other expenses related to the direct
sales force, various marketing expenses and costs of other market development
programs. Sales and marketing expenses increased by 20% to $14.2 million for
the three months ended June 30, 1999 from $11.8 million for the three months
ended June 30, 1998 and increased 22% to $27.3 million for the six months ended
June 30, 1999 from $22.4 million for the six months ended June 30 1998,
representing 49% and 42% of total revenue for the three months ended June 30,
1999 and 1998, respectively, and 51% and 42% of total revenue for the six months
ended June 30, 1999 and 1998, respectively. The increase in dollar amount was
the result of the Company's strategy to continue to invest in its sales and
marketing infrastructure, including an increase in the number of sales teams
and the number of marketing programs over the comparable period of 1998. The
increase in sales and marketing expenses as a percentage of total revenue was
primarily due to a decrease in total license revenue. The Company expects that
sales and marketing expense will continue to increase in dollar amount.
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 71% to $6.4 million for the three months ended June 30,
1999 from $3.7 for the three months ended June 30, 1998, and increased by 70% to
$12.6 million for the six months ended June 30, 1999 from $7.4 million for the
six months ended June 30, 1998, representing 22% and 13% of total revenue for
the three months ended June 30, 1999 and 1998, respectively, and 24% and 14% of
total revenue for the six months ended June 30, 1999. The increase in dollar
amount reflects the expansion of the Company's engineering staff and related
costs required to support the development of new products, including Documentum
4i, which was introduced in the second quarter of 1999, and enhancement of
existing products. The increase in research and development expenses as a
percentage of total revenue was primarily due to a decrease in total license
revenue. Based on the Company's research and development process, costs incurred
between the establishment of technological feasibility and general release have
not been material and therefore have been expensed as incurred. The Company
expects research and development costs will continue to increase in dollar
amount in order to support increased development efforts to both existing
products and new products.
General and administrative. General and administrative expenses consist
primarily of personnel costs for finance, management information systems, legal,
human resources and general management as well as outside professional services.
General and administrative expenses increased by 91% to $4.6 million for the
three months ended June 30, 1999 from $2.4 million for the three months ended
June 30, 1998, and increased by 77% to $8.3 million for the six months ended
June 30, 1999 from $4.7 million for the six months ended June 30, 1998,
representing 16% and 9% of total revenue for the three months ended June 30,
1999 and 1998, respectively, and 16% and 9% of total revenue for the six months
ended June 30, 1999 and 1998, respectively. The increase in dollar amount is
primarily due to increased staffing and professional fees necessary to manage
and support the Company's
<PAGE>
growth, as well as consulting costs associated with changes in the Company's
system implementation. The increase in general and administrative expenses as a
percentage of total revenue was primarily due to a decrease in total license
revenue. 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. In connection with the 1998 merger with WMI,
the Company incurred charges of $2.2 million primarily consisting of accounting
and legal fees and other transaction related costs. Approximately, $537,738 of
the costs incurred in connection with the acquisition are included in accrued
liabilities at June 30, 1999.
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, the gain on sale of fixed
assets, and interest expense. Interest and other income, net, increased to $1.2
million for the three months ended June 30, 1999 from $1.0 million for the three
months ended June 30, 1998 and was $2.1 million for the six months ended June
30, 1999 and 1998. The increase in the second quarter of 1999 over the same
period in 1998, was primarily due to a gain recognized on the sale of fixed
assets from the previous office facility. To date, the Company's international
sales have been generally denominated in U.S. dollars and the Company has not
engaged in hedging activities as the exposure to currency fluctuations has been
insignificant. In the future, as the Company expands its international
operations, the Company expects to have an increased amount of non-U.S. dollar
denominated contracts. Unexpected changes in the exchange rates for these
foreign currencies could result in significant fluctuation in the foreign
currency translation gains and losses in future periods.
Income taxes
Income tax provision (benefit) for the interim periods are based on
estimated annual income tax rates. The Company's effective tax rate is 34%. For
three months and six months ended June 30, 1999, the Company recorded a tax
benefit of $1.4 million and $3.7 million, respectively, which it believes is
fully recoverable for income tax purposes based on carryback potential against
taxes previously paid. The effective tax rate used to calculate the income tax
provision for the six months ended June 30, 1998 was higher than the 34%
primarily due to non-deductible items related to the acquisition of WMI in the
first quarter of 1998.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments totaled
$90.3 million at June 30, 1999 representing 59% 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 $6.6 million and $2.5 million
for the six months ended June 30, 1999 and 1998, respectively. For the six
months ended June 30, 1999, the cash generated by operations was primarily
attributable to a decrease in accounts receivable of $9.5 million, account
payable increase of $4.9 million, depreciation and amortization of $3.3 million,
and deferred revenue of approximately $2.3 million offset by a increase in other
assets of $1.1 million, a decrease in accrued liabilities of $4.6 million and a
net loss of $7.2 million. For the six months ended June 30, 1998, the cash
generated by operations was primarily attributable to net income of $3.7
million, an increase in accounts payable of $0.7 million, accrued liabilities of
$2.6 million, depreciation and amortization of $2.3 million, provision for
doubtful accounts of $0.7 million and deferred revenue of $3.2 million, offset
by the increase in accounts receivable of $2.3 million and other assets of $8.4
million, consisting primarily of $2.5 million for prepaid rent related to a new
lease, $1.4 million prepaid third party royalties and $1.5 million for an
investment in Relevance. For the six months ended June 30, 1999 and 1998,
capital expenditures, net of dispositions, were $13.5 million and $3.4 million,
respectively. Capital expenditures for the six months ended June 30, 1999 were
primarily for computer equipment, office furniture and leasehold improvements
related to the new office facility described below.
<PAGE>
On April 15 1999, the Board of Directors approved the repurchase of up to
$20.0 million of Documentum's common stock. During the three months ended June
30, 1999, the Company repurchased and retired 395,000 shares of its common stock
for approximately $5.6 million.
In June 1998, the Company signed and made a deposit of $2.5 million to lease
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 serves as the Company's
headquarters and contains the principal administrative, engineering,
manufacturing, marketing and sales facilities. The Company has made significant
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.
On January 15, 1998, the Company entered into an unsecured revolving credit
agreement with a new bank. The agreement allowed 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 expired in December 1999. The Company terminated this line of
credit effective in June 1999.
In August 1999, the Company entered into an unsecured revolving line of
credit agreement with a new bank. The agreement allows for borrowings of up to
$20 million bearing interest at the Company's option of; (1) the bank's prime
rate or (2) the LIBOR rate plus 1.50%, and expires on July 30, 2001. The Company
must comply with certain financial covenants and conditions as described in the
Facility.
The Company believes that its existing cash, cash equivalents and short-term
investment balances, its available bank financing and the cash flows generated
from operations, if any, will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures for at least the next twelve
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 periodically evaluates, in the ordinary course of
business, potential investments such as businesses, products or technologies.
See "Risk Factors Risks Associated with Acquisitions".
Quantitative and Qualitative Disclosure About Market Risk - Interest Rate Risk
As of June 30, 1999 the Company's investment portfolio includes $53.5
million of short-term corporate and municipal bonds which are subject to no
interest rate risk when held to maturity but may increase or decrease in value
if interest rates change prior to maturity. The Company maintains sufficient
cash and cash equivalent balances to typically hold its investments to maturity.
The remaining $19.7 million of short-term investments are held in short-term
securities bearing stated interest rates and are therefore subject to no
interest rate risk. An immediate 10% change in interest rates would be
immaterial to the Company's financial condition or results of operations.
Year 2000 Readiness Disclosure
The Company's State of Readiness
Throughout the coming year, 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 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, and in
December 1998 established a Year 2000 Program Office to manage the Year 2000
project. The Year 2000 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. All contingency planning is
targeted for completion in September 1999. The Year 2000 project is ongoing,
and its phases are not sequential. Instead, as risks are identified, the
assessment and remediation plans are begun. The Company is currently performing
work in all three phases of the project.
<PAGE>
During 1998, the Company identified two date-processing issues in third-
party software that is embedded in its product line. Engineering efforts were
made by the Company to address those date-processing issues, and technical fixes
were made available. In October of 1998, the Company released the "EDMS 98"
suite of core products which included those fixes and which have been verified
as Y2K-compliant according to definitions posted on the Company's Web site. The
Company is currently working with its customers who are not utilizing or
implementing the EDMS 98 products to identify and remediate any problems
associated with the identified date processing issues.
In addition, the Company has recently released its 4i application series,
and has performed all appropriate Year 2000 testing on those products. The
Company will continue to make changes to those products if and when Year 2000
issues are determined.
The Company has substantially completed its review of internal systems, and
believes it has identified all mission-critical problems. During 1999, the
Company planned to modify or replace any non-compliant software, systems and
equipment as part of a comprehensive infrastructure upgrade that coincided with
the move of its headquarters facilities to a new location, which was completed
on schedule. Further remediation of desktop software is targeted for completion
in September 1999.
Further, the Company is engaged in a comprehensive customer communications
initiative in 1999 to ensure that all relevant Year 2000 data is available to
customers for their Year 2000 planning. Finally, the Company intends to create
and manage detailed contingency plans for all third-party suppliers that have
not adequately responded to the vendor compliance surveys managed by the Y2K
Program Office, and for all mission-critical systems as part of its objective to
ensure business continuity at the turn of the century.
The Costs to address the Company's Year 2000 Issues
Although the Company will continue to prioritize resources in product
engineering and internal business infrastructure groups to address Year 2000
issues, those resources are allocated within the normal software development and
infrastructure and facilities improvement processes of the Company. Therefore,
no complete estimate of the expected total cost of this effort can be made at
this time. Internally, the Company has budgeted $900,000 in 1999 for
incremental Y2K remediation to be performed preceding, during and in the months
following the move of its headquarters. The costs related to Y2K have been
immaterial to date.
The Company is also engaged in a thorough risk assessment of all license and
service agreements, and is in the process of contingency planning to address any
issues that may arise.
The Company has determined that a best estimate of unexpected costs is less
than $2 million for risks that are quantifiable at this time (services,
additional engineering, downtime for failure of local power grids or other
mission-critical systems, etc.).
The Risks of the Company's Year 2000 Issues
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.
Possible losses from claims of breach of contract or warranty due to Year
2000 non-compliance of earlier versions of DCTM's software cannot be reasonably
estimated at this time; previous to the release of EDMS 98, date processing
problems were discovered in two (embedded OEM) third-party vendors' software. A
program is being initiated to address those problems for customers who cannot,
for legitimate business reasons, update to the compliant release, according to
definitions posted on the Company's website. In addition, that program will also
address custom applications, and installations that have been delivered by
DCTM's consulting services organization.
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.
Additionally, no estimate
<PAGE>
can be made at this time of possible losses from asserted and nonasserted claims
of breach of contract or warranty due to Year 2000 noncompliance, nor can any
assurance be given that the Year 2000 problem will not have an adverse impact on
the Company's operations, revenue, or earnings.
Risk Factors
Uncertainty of Future Operating Results. Our future operating results may
vary significantly and are difficult to predict due to a number of factors, of
which many are beyond our control. These factors include:
. demand for our products;
. the level of product and price competition;
. the length of our sales cycle;
. the size and timing of individual license transactions;
. the delay or deferral of customer implementations;
. our success in expanding our customer support organization, direct sales
force and indirect distribution channels;
. the timing of new product introductions and product enhancements;
. changes in our pricing policy;
. the publication of opinions concerning us, our products or technology by
industry analysts;
. 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;
. our ability to develop and market new products and control costs; and
. domestic and international economic and political conditions.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate significantly. For example, during the first
half of fiscal year 1999, the Company's revenue was significantly lower than
expected. As a result of the relatively fixed nature of the Company's expenses,
the Company experienced a net loss for the period. Based on the preceding
factors, we may experience a shortfall in revenue or earnings or otherwise fail
to meet public market expectations, which could materially adversely affect our
business, financial condition and the market price of our common stock.
Fluctuations in Quarterly Operating Results. Our net revenue and operating
results may vary drastically from quarter to quarter because of numerous factors
largely beyond our control, including the following:
. the potential delay in recognizing revenue from license transactions;
. the discretionary nature of our customers' budget and purchase cycles;
. variations in our customers' fiscal or quarterly cycles;
. the size and complexity of our license transactions;
. the timing of new product releases;
. seasonal variations in operating results; and
. the tendency to realize a substantial amount of revenue in the last weeks, or
even days, of each quarter.
Each customer makes a discretionary decision to implement our products that
is subject to its resources and budget cycles. Additionally, our license sales
generally reflect a relatively high amount of revenue per order, and as a
result, the loss or delay of individual orders as happened in the first six
months of 1999, could have a significant impact on quarterly operating results
and revenue. Furthermore, the timing of license revenue is difficult to predict
because of the length of our sales cycle, which typically ranges from six to 12
months from initial contact. Also, our strategy of providing customers with
complete content management solutions typically results in software licenses
being bundled with services. In these cases, the delivery of services may delay
recognition of license revenue. Because our operating expenses are based on
anticipated revenue trends and because a high percentage of these expenses is
relatively fixed, any shortfall from anticipated revenue or a delay in the
recognition of revenue
<PAGE>
from license transactions could cause significant variations in operating
results from quarter to quarter and could result in operating losses. If these
expenses precede, or are not followed by, increased revenue, our operating
results could be materially and adversely affected.
As a result of the foregoing and other factors, operating results for any
quarter are subject to significant variation, and we believe that period-to-
period comparisons of our results of operations are not necessarily meaningful
in terms of their relation to future performance. You should not rely upon these
comparisons as indications of future performance. Furthermore, it is likely that
our future quarterly operating results from time to time will not meet the
expectations of public market analysts or investors, in which case there would
likely be a material adverse effect on the price of our common stock.
Lengthy Sales and Implementation Cycles. The timing of the sales and
implementation of our products is lengthy and not predictable with any degree of
certainty. You should not rely on prior sales and implementation cycles as an
indication of future cycles.
The licensing of our software products is often an enterprise-wide decision
by prospective customers and generally requires us to engage in a lengthy sales
cycle (generally between six and 12 months) to provide a significant level of
education to prospective customers regarding the use and benefits of our
products. Additionally, the size and complexity of any particular transaction
can also cause delays in the sales cycle. The implementation of our products
involves a significant commitment of resources by customers over an extended
period of time and is commonly associated with substantial reengineering efforts
by the customer. For these and other reasons, the sales and customer
implementation cycles are subject to a number of significant delays over which
we have little or no control. A delay in the sale or customer implementation of
even a limited number of license transactions could have a material adverse
effect on our business, financial condition and operations and cause our
operating results to vary significantly from quarter to quarter.
Product Concentration. To date, substantially all of our revenue have been
attributable to sales of licenses of the Documentum EDMS family of products and
related services. We expect such products and related services to continue to
account for a substantial majority of our future revenue. Furthermore, we
expect that our recently announced Web Application Environment (Documentum 4i),
the evolution of the EDMS family of products and application software products,
will account for an increasingly large portion of future revenue. As a result,
factors adversely affecting the pricing of or demand for such products, such as
competition or technological change, could have a material adverse effect on our
business, financial condition and results of operations.
New Versions, New Products and Rapid Technological Change. The content
management software and services market in which we compete is characterized by
(1) rapid technological change, (2) frequent introduction of new products and
enhancements, (3) changing customer needs, and (4) evolving 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 our products are difficult to estimate. To keep
pace with technological developments, evolving industry standards and changing
customer needs, we must support existing products and develop new products. Our
future success also depends in part on our abilities to execute on our strategy
of developing web applications in certain target vertical industries and to
maintain and enhance relations with technology partners, including RDBMS
vendors, in order to provide our customers with integrated product solutions.
We may not be successful in maintaining and enhancing the aforementioned
relationships or in developing, marketing and releasing new products or new
versions of our products that respond to technological developments, evolving
industry standards or changing customer requirements. We may also experience
difficulties that could delay or prevent the successful development,
introduction and sale of these enhancements. In addition, these enhancements
may not adequately meet the requirements of the marketplace and may not achieve
any significant degree of market acceptance. If we fail to successfully
maintain or enhance relationships with our technology partners or to execute on
our integrated product solution strategy, or if release dates of any future
products or enhancements are delayed, or if these products or enhancements fail
to achieve market acceptance when released, our business, operating results and
financial condition could be materially and adversely affected. We have in the
past experienced delays in the release dates of enhancements to our products.
While the delays we have
<PAGE>
experienced to date have been minor (not exceeding six months), there can be no
assurance that we will not experience significant future delays in product
introduction.
Dependence on Emerging Markets. The market for content management software
and services is intensely competitive, highly fragmented and rapidly changing.
Our future financial performance will depend primarily on the continued growth
of the market for content management software and services and the adoption of
our products by organizations in this market. If the content management
software and services market fails to grow or grows more slowly than we
currently anticipate, our business, financial condition and operating results
would be materially and adversely effected.
Intense Competition. Our products target the emerging market for Web-based
and client/server software solutions. This market is intensely competitive,
rapidly changing and significantly affected by new product introductions and
other market activities of industry participants. We encounter direct
competition from a number of public and private companies that offer a variety
of products and services addressing this market. These companies include
FileNet, OpenText, and Hummingbird (PC DOCS). Additionally, several other
enterprise software vendors, such as Microsoft, Oracle and Lotus (a division of
IBM) are potential competitors in the future. Many of these current and
potential competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than we do. In addition,
several of these companies, including Microsoft, Oracle, Lotus and others, have
well-established relationships with our current and potential customers and
strategic partners, as well as extensive resources and knowledge of the
enterprise software industry that may 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 we can.
We also face indirect competition from systems integrators. We rely on a
number of systems consulting and systems integration firms for implementation
and other customer support services, as well as for recommendations of our
products during the evaluation stage of the purchase process. Although we seek
to maintain close relationships with these service providers, many of them have
similar, and often more established, relationships with our competitors. If we
are unable to develop and maintain effective, long-term relationships with these
third parties, our competitive position would be materially and adversely
affected. Further, many of these third parties possess industry-specific
expertise and have significantly greater resources than we do, and may market
software products that compete with us in the future.
There are many factors that may increase competition in the market for Web-
based and client/server software solutions, including (1) entry of new
competitors, (2) alliances among existing competitors and (3) consolidation in
the software industry. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect our business, financial condition and operating results. If we
cannot compete successfully against current and future competitors or overcome
competitive pressures, our business, operating results and financial condition
may be adversely affected.
End-User Customer and Industry Concentration. Our success depends on
maintaining relationships with our existing customers. A relatively small
number of customers have accounted for a significant percentage of our revenue.
For the three months ended June 30, 1999 and 1998 sales to our five largest
customers accounted for 15% and 34% of license revenue, respectively and 11% and
21% of license revenue for the six months ended June 30, 1999 and 1998.
Additionally, our customers are somewhat concentrated in the process and
discrete manufacturing, pharmaceutical and architectural engineering and
construction industries. We expect that sales of our products to a limited
number of customers and industry segments will continue to account for a
significant percentage of revenue for the foreseeable future. The loss of a
small number of customers or any reduction or delay in orders by any such
customer, or our failure to market successfully our products to new customers
and new industry segments could have a material adverse effect on our business,
financial condition and operating results.
Reliance on Certain Relationships. We have established strategic
relationships with a number of organizations that we believe are important to
our sales, marketing and support activities and the implementation of our
products. We believe that our relationships with these organizations, including
indirect channel partners and other consultants,
<PAGE>
provide marketing and sales opportunities for our direct sales force, expand the
distribution of our products and broaden our product offerings through product
bundling. These relationships allow us to keep pace with the technological and
marketing developments of major software vendors and provide us with technical
assistance for our product development efforts. Our failure to maintain these
relationships, or to establish new relationships in the future, could have a
material adverse effect on our business, financial condition and results of
operations.
Management of Growth. Our business grew rapidly through 1998. This growth
has placed a significant strain on our management systems and resources.
In addition, we have recently completed two acquisitions, the January 1998
acquisition of WMI, and the July 1998 acquisition of Relevance. Each of these
acquisitions required the integration of a number of employees, systems and
facilities increasing the strain on management's systems and resources.
To manage future growth we must continue to (1) improve and maintain our
financial and management controls, reporting systems and procedures on a timely
basis and (2) expand, train and manage our employee work force. If we fail to
manage our growth effectively, our business, financial condition and results of
operations could be materially and adversely affected.
Dependence on Key Personnel. Our future performance depends in significant
part on the continued service of our key technical, sales and senior management
personnel, none of whom is bound by an employment agreement with us. The loss
of services of one or more of our executive officers or key technical personnel
would have a material adverse effect on our business, operating results and
financial condition.
Our future success also depends on our continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that we can retain
key employees or that we can attract, assimilate or retain other highly
qualified personnel in the future.
International Operations. Our revenue is primarily derived from large multi-
national companies. To service the needs of these companies, we must provide
worldwide product support services. The Company has offices in London, Paris,
Munich, Tokyo, Melbourne and Seoul. The Company operates its international
technical support operations in the London, Munich and Melbourne offices. We
have expanded, and intend to continue expanding, our international operations
and enter additional international markets. This will require significant
management attention and financial resources that could adversely affect our
operating margins and earnings. We may not be able to maintain or increase
international market demand for our products. If we do not, our international
sales will be limited, and our business, operating results and financial
condition could be materially and adversely affected.
Our international operations are subject to a variety of risks, including
(1) foreign currency fluctuations, (2) economic or political instability, (3)
shipping delays, (4) various trade restrictions, (5) our limited experience in,
and the costs of, localizing products for foreign countries, (6) longer accounts
receivable payment cycles and (7) difficulties in managing international
operations, including, among other things, the burden of complying with a wide
variety of foreign laws.
Dependence on Proprietary Technology and Risks of Infringement. We rely
primarily on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We also believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential to
establishing and maintaining a technology leadership position. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. Our means of protecting
our proprietary rights in the
<PAGE>
United States or abroad may not be adequate. Additionally, our competition may
independently develop similar technology.
Although we do not believe that we are infringing any proprietary rights of
others, third parties may claim that we have infringed their intellectual
property rights. Furthermore, former employers of our former, current or future
employees may assert claims that such employees have improperly disclosed to us
the confidential or proprietary information of such former employers. Any such
claims, with or without merit, could (1) be time-consuming to defend, (2) result
in costly litigation, (3) divert management's attention and resources, (4) cause
product shipment delays, and (5) require us to pay money damages or enter into
royalty or licensing agreements. A successful claim of intellectual property
infringement against us and our failure or inability to license or create a
workaround for such infringed or similar technology may materially and adversely
affect our business, operating results and financial condition.
We license certain software from third parties, including software that is
integrated with internally developed software and used in our products to
perform key functions. These third-party software licenses may not continue to
be available to us on acceptable terms. The loss of, or inability to maintain,
any of these software licenses could result in shipment delays or reductions.
This could materially adversely affect our business, operating results and
financial condition.
Product Liability. Our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in our license agreements may not be effective under the laws of
certain jurisdictions. A successful product liability claim brought against us
could have a material adverse effect upon our business, financial condition and
results of operations.
Uncertainty of the Effects of the Year 2000 on Computer Programs and
Systems. Many currently installed computer systems and software programs use
only two-digit date code fields to identify the year, e.g., 85=1985. These date
code fields will need to accept four-digit entries to distinguish 21st century
dates from 20th century dates. Until the date fields are updated, the systems
and programs could fail or give erroneous results when referencing dates
following December 31, 1999. Such failures or errors could occur prior to the
actual change in century.
We have designed and tested the most current versions of our products to be
Year 2000 compliant and are currently engaged in a comprehensive Year 2000
project to further identify date-processing risks associated with our
information systems, products, operations and infrastructure, suppliers and
customers. We have notified all of our customers of Y2K related date processing
problems associated with older versions of our products and encouraged them to
upgrade to a Year 2000 compliant version. As a number of our customers will
continue to run product versions that are not year 2000 compliant, the Company
may incur increased expenses and additional liabilities relating to these date-
processing issues. Given the unprecedented nature of this problem, we cannot
reasonably estimate potential losses from claims of breach of contract or
warranty arising from these issues at this time, and we cannot reliably measure
the effect that any potential losses will have on our financial condition and
operations. In addition, there can be no assurances that the Company's current
product versions do not contain undetected errors or defects associated with
Year 2000 date-processing issues that may result in additional material costs to
the Company.
In addition, many companies are expending significant resources to correct
or "patch" their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those that we offer. The efforts and resources expended to address Year
2000 issues may affect the purchasing patterns of our customers and potential
customers. We also believe that many potential customers may defer purchasing
Year 2000 compliant products until it is absolutely necessary, accelerate
purchasing Year 2000 compliant products, switch to other systems or suppliers,
or purchase our products only as an interim solution. If any of the above were
to happen, our business, operating results or financial condition could be
materially adversely affected.
We are currently evaluating our information technology and non-information
technology infrastructure for Year 2000 compliance to determine what actions are
required to make all internal systems Year 2000 compliant and what
<PAGE>
actions are needed to mitigate vulnerability to problems related to enterprises
with which we interact. We also utilize third-party vendor network equipment,
telecommunication products and other products and services, including utilities,
that may or may not be Year 2000 compliant. However, if all Year 2000 issues are
not properly identified, or assessment, remediation and testing are not effected
timely with respect to Year 2000 problems that are identified, there can be no
assurance that the Year 2000 issue will not materially adversely impact our
results of operations or adversely affect our relationships with customers,
vendors, or others. In addition, there can be no assurance that we will not be
affected by Year 2000 disruption in the operation of the enterprises with which
we interact. Accordingly, Year 2000 problems could have a material adverse
effect upon our business.
Although we have expended and will continue to expend resources and time to
address potential Year 2000 problems, there can be no assurance that we will be
successful in our efforts to identify and address all Year 2000 issues.
Additionally, there can be no assurance that we will not be affected by Year
2000 disruptions in the operations of the enterprises with which we interact.
Accordingly, Year 2000 problems could have a material adverse effect upon our
business.
Risk of Product Defects. Software products frequently contain errors or
failures, especially when first introduced or when new versions are released.
Also, new products or enhancements may contain undetected errors, or "bugs," or
performance problems that, despite testing, are discovered only after a product
has been installed and used by customers. Errors or performance problems could
cause delays in product introduction and shipments or require design
modifications, either of which could lead to a loss in or delay in recognition
of revenue.
Our products are typically intended for use in applications that may be
critical to a customer's business. As a result, we expect that our customers
and potential customers will have a greater sensitivity to product defects than
the market for software products generally. Despite extensive testing by us and
by current and potential customers, errors may be found in new products or
releases after commencement of commercial shipments, resulting in loss of
revenue or delay in market acceptance, damage to our reputation, diversion of
development resources, the payment of monetary damages or increased service or
warranty costs, any of which could have a material adverse effect upon our
business, operating results and financial condition.
Risks Associated with Acquisitions. As part of our business strategy, we
frequently evaluate strategic opportunities available to us and expect to make
acquisitions of, or significant investments in, businesses that offer
complementary products and technologies. For example, the Company acquired WMI
in January, 1998 and Relevance Technologies in July 1998. Such acquisitions
will, and any future acquisitions or investments would, expose us to the risks
commonly encountered in acquisitions of businesses. Future acquisitions of
complementary technologies, products or businesses will result in the diversion
of management's attention from the day-to-day operations of our business and the
potential disruption of our ongoing business. Additionally, such acquisitions
may include numerous other risks, including difficulties in the integration of
the operations, products and personnel of the acquired companies. Future
acquisitions may also result in dilutive issuances of equity securities, the
incurrence of debt and amortization expenses related to goodwill and other
intangible assets. Our failure to successfully manage future acquisitions may
have a material adverse effect on our business and financial results.
Possible Volatility of Stock Price. The trading price of our 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 us or our 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
ours and which have been unrelated to the operating performance of these
companies. These market fluctuations may adversely affect the market price of
our common stock.
Effects of Certain Charter Document Provisions that may Prevent Certain
Corporate Actions. Our Board of Directors is authorized 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 approval by our 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
<PAGE>
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could make it more difficult
for a third party to acquire a majority of our outstanding voting stock. We have
instituted a classified Board of Directors in our Amended and Restated
Certificate of Incorporation. We have also implemented a Share Purchase Plan (or
"Rights Plan") under which all stockholders of record as of February 24, 1999
received rights to purchase shares of a new series of Preferred Stock. The
rights are exercisable only if a person or group acquires 20% or more of our
Common Stock or announces a tender offer for 20% or more of the Common Stock.
These provisions and certain other provisions of our Amended and Restated
Certificate of Incorporation and certain provisions of our Amended and Restated
Bylaws and of Delaware law, could delay or make more difficult a merger, tender
offer or proxy contest.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's annual meeting of stockholders was held on May 27, 1999 (the
"Annual Meeting").
(c) The following matters were voted upon at the Annual Meeting:
(i) The first matter related to the election of two director nominees,
Jeffrey A. Miller and Robert V. Adams as directors of the Company to
serve until the 2002 annual meeting of stockholders. The votes cast
and withheld for such nominees were as follows:
Names For Withheld
--------------- --------------- ----------------
Jeffrey A. Miller 14,199,679 579,530
Robert V. Adams 14,150,660 628,549
(ii) The second matter related to the approval of an amendment to the
Company's 1993 Equity Incentive Plan, to increase the aggregate number
of shares of Common Stock authorized for issuance under such plan by
500,000 shares. 10,659,334 votes were cast for approval, 3,899,290
were cast against approval, and there were 25,812 abstentions and
194,773 broker non-votes.
(iii) The third matter related to the approval of an amendment of the
Company's 1995 Employee Stock Purchase Plan to increase the aggregate
number of shares of Common Stock authorized for issuance under such
plan by 200,000 shares. 14,416,568 votes were cast for approval,
145,444 votes were cast against approval, and there were 21,954
abstentions and 195,243 broker non-votes.
(iv) The fourth matter related to the ratification of the appointment of
PricewaterhouseCoopers LLP as independent auditors of the Company for
its fiscal year ending December 31, 1999. 14,724,669 votes were cast
for ratification, 21,582 votes were cast against ratification, and
there were 32,958 abstentions.
Based on these reporting results, each director nominated was elected and the
second, third and fourth matters were approved.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
27.1 Financial Data Schedule
<PAGE>
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1999.
SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
DOCUMENTUM, INC.
(Registrant)
Date: August 13, 1999 By: /s/ Mark S. Garrett
-----------------------
Mark S. Garrett
Vice President, and Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 17,012 0
<SECURITIES> 73,247 0
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<INTEREST-EXPENSE> 43 55
<INCOME-PRETAX> (4,154) (10,865)
<INCOME-TAX> (1,412) (3,694)
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