<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 MARCH 31, 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)
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 16,913,021 on April 30, 1999.
<PAGE>
FORM 10-Q
Index
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of March 31, 1999 and December
31, 1998........................................................................ Page 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998......................................................... Page 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 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 2 CHANGES IN SECURITIES AND USE OF PROCEEDS........................................ Page 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................................................. Page 23
SIGNATURES.................................................................................... Page 24
</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>
March 31, December 31,
-----------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,746 $ 16,240
Short-term investments 83,525 84,203
Accounts receivable, net of allowances of $2,933 and $2,496
(including $1,009 and $2,485 receivable from a stockholder
and its affiliates) 21,136 32,745
Other current assets 8,474 8,192
------------------- -------------------
Total current assets 132,881 141,380
Property and equipment, net 14,604 13,426
Other assets 6,018 5,843
=================== ===================
$ 153,503 $ 160,649
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,783 $ 3,176
Accrued liabilities 18,603 26,170
Deferred revenue 15,479 14,490
------------------- -------------------
Total current liabilities 38,865 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;
16,890 and 16,707 shares issued and outstanding 17 17
Additional paid-in capital 138,247 135,849
Accumulated other comprehensive income (92) 52
Accumulated deficit (23,534) (19,105)
------------------- -------------------
Total stockholders' equity 114,638 116,813
=================== ===================
$ 153,503 $ 160,649
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Revenue:
License (including $265 and $855
from a stockholder and its affiliates) $ 11,235 $ 17,051
Service 12,770 8,021
----------------- ----------------
Total revenue 24,005 25,072
----------------- ----------------
Cost of revenue:
License 1,017 1,204
Service 7,736 5,045
----------------- ----------------
Total cost of revenue 8,753 6,249
----------------- ----------------
Gross profit 15,252 18,823
----------------- ----------------
Operating expenses:
Sales and marketing 13,065 10,569
Research and development 6,165 3,641
General and administrative 3,699 2,296
Acquisition and related costs - 2,171
----------------- ----------------
Total operating expenses 22,929 18,677
----------------- ----------------
Income (loss) from operations (7,677) 146
----------------- ----------------
Interest and other income, net 966 1,110
----------------- ----------------
Income (loss) before income tax provision (benefit) (6,711) 1,256
Provision for (benefit from) income taxes (2,282) 766
================= ================
Net income (loss) $ (4,429) $ 490
================= ================
Basic earnings (loss) per share $ (0.26) $ 0.03
================= ================
Diluted earnings (loss) per share $ (0.26) $ 0.03
================= ================
Shares used to compute basic earnings (loss) per share 16,827 15,807
================= ================
Shares used to compute diluted earnings (loss) per share 16,827 16,729
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,429) $ 490
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,548 1,118
Provision for doubtful accounts 437 715
Changes in assets and liabilities:
Accounts receivable 11,172 1,630
Other current assets and other assets (457) (707)
Accounts payable 1,607 211
Accrued liabilities (7,535) 932
Deferred revenue 989 3,272
-------------- ------------
Net cash provided by operating activities 3,332 7,661
-------------- ------------
Cash flows from investing activities:
Purchases of short-term investments (14,672) (26,737)
Sales of investments 15,350 25,573
Purchases of property and equipment (2,726) (424)
Acquisition of business, net of cash acquired - 10
-------------- ------------
Net cash used in investing activities (2,048) (1,578)
-------------- ------------
Cash flows from financing activities:
Issuance of common stock 2,398 658
Repayments on capital lease obligations (32) (71)
-------------- ------------
Net cash provided by financing activities 2,366 587
-------------- ------------
Effect of exchange rate on changes in cash (144) 18
-------------- ------------
Net increase in cash and cash equivalents 3,506 6,688
Cash and cash equivalents at beginning of period 16,240 14,236
============== ============
Cash and cash equivalents at end of period $ 19,746 $20,924
============== ============
</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
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 March 31, 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):
Three Months Ended March 31,
----------------------------
1999 1998
-------------- -------------
Net income (loss) $ (4,429) $ 490
Other comprehensive income
Foreign translation adjustment (144) 18
-------------- -------------
Comprehensive net income (loss) $ (4,573) $ 508
============== =============
Revenue recognition
The Company's revenue is derived from the sale of perpetual licenses for its
document management 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 months ended March 31, 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
6
<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):
Three Months Ended March 31,
-----------------------------
1999 1998
-------------- -------------
Net income (loss) $ (4,429) $ 490
============== =============
Shares calculation:
Average basic shares outstanding 16,827 15,807
Options - 922
-------------- -------------
Total shares used to compute
diluted earnings per share 16,827 16,729
============== =============
Earnings (loss) per basic share $ (0.26) $ 0.03
============== =============
Earnings (loss) per diluted share $ (0.26) $ 0.03
============== =============
Options to purchase 510,542 and 27,743 shares of common stock were outstanding
during the three months ended March 31, 1999 and March 31, 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.
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
7
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Shares Repurchase
On April 15, 1999 the Board of Directors approved the repurchase of up to $20
million of Documentum's common stock on the open market or in private
transactions. The Company has not yet repurchased any of its common stock.
8
<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.
9
<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
March 31,
-----------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Revenue:
License 47% 68%
Service 53% 32%
----------------- ----------------
Total revenue 100% 100%
----------------- ----------------
Cost of revenue:
License 5% 5%
Service 32% 20%
----------------- ----------------
Total cost of revenue 37% 25%
----------------- ----------------
Gross profit 63% 75%
----------------- ----------------
Operating expenses:
Sales and marketing 54% 42%
Research and development 26% 14%
General and administrative 15% 9%
Acquisition and related costs - 9%
----------------- ----------------
Total operating expenses 95% 74%
----------------- ----------------
Income (loss) from operations (32%) 1%
----------------- ----------------
Interest and other income, net 4% 4%
----------------- ----------------
Income (loss) before income tax provision (benefit) (28%) 5%
Provision for (benefit from) income taxes (10%) 3%
================= ================
Net income (loss) (18%) 2%
================= ================
As a Percentage of Related Revenue:
Cost of license revenue 9% 7%
Cost of service revenue 61% 63%
</TABLE>
Revenue
The Company's revenue is derived from the sale of perpetual licenses for its
document management 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 recognized when the
services are performed and collectibility is deemed probable. During 1998, the
Company recognized revenue in accordance with
10
<PAGE>
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 months ended March 31,
1999.
License revenue decreased by 34% to $11.2 million for the three months ended
March 31, 1999 from $17.1 million for the three months ended March 31, 1998.
The decrease in 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 quarter of 1999. For
the three months ended March 31, 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 2%, and 5% 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 59% to $12.8 million for the three months ended
March 31, 1999 from $8.0 million, for the three months ended March 31, 1998,
representing 53% and 32% 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 35% and 19% of license revenue for the three months
ended March 31, 1999 and 1998, respectively. Revenue from indirect partners for
any period are 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 43% and 37% of license revenue for the three
months ended March 31, 1999 and 1998, respectively. The increase in
international revenue as a percent of license revenue for the three months ended
March 31, 1999 was primarily due to the maturation of the Company's sales force
in Asia. 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 decreased by 16% to $1.0
million for the three months ended March 31, 1999 from $1.2 million for the
three months ended March 31, 1998, representing 9% and 7% of the related license
revenue for the three months ended March 31, 1999 and 1998, respectively. The
decrease in cost of license revenue was related to the decrease in license
revenue. The Company expects the cost of license revenue to fluctuate in dollar
amount as the related license revenue fluctuates.
11
<PAGE>
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 53% to $7.7 million for the
three months ended March 31, 1999 from $5.0 million for the three months ended
March 31, 1998, representing 61% and 63% of the related services revenue for the
three months ended March 31, 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 increased 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 24% to $13.1 million for
the three months ended March 31, 1999 from $10.6 million for the three months
ended March 31, 1998 representing 54% and 42% of total revenue for the three
months ended March 31, 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 increasing the number of sales
teams and increasing the number of marketing programs. 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
69% to $6.2 million for the three months ended March 31, 1999 from $3.6 for the
three months ended March 31, 1998, representing 26% and 14% of total revenue for
the three months ended March 31, 1999 and 1998, respectively. The increase in
dollar amount reflects the expansion of the Company's engineering staff and
related costs required to support the development of new products and
enhancement of existing products. 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 61% to $3.7 million for the
three months ended March 31, 1999 from $2.3 for the three months ended March 31,
1998, representing 15% and 9% of total revenue for the three months ended March
31, 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 growth. 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,
$601,000 of the costs incurred in connection with the acquisition are included
in accrued liabilities at March 31, 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 and interest expense.
Interest and other income, net decreased by 13% to $1.0 million for the three
months ended March 31, 1999 from $1.1 million for the three months ended March
31, 1998. 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
12
<PAGE>
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%. The Company
recorded a tax benefit of $2.3 million in the quarter ended March 31, 1999,
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 three months ended March 31, 1998
was higher than the 34% primarily due to non-deductible items related to the
acquisition of WMI.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments totaled $103.3
million at March 31, 1999 representing 67% 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 $3.3 million and $7.7 million
for the three months ended March 31, 1999 and 1998, respectively. For the three
months ended March 31, 1999, the cash generated by operations was primarily
attributable to a decrease in accounts receivable of $11.2 million, account
payable increase of $1.6 million, depreciation and amortization of $1.5 million,
and deferred revenue of approximately $1.0 million offset by a decrease in
accrued liabilities of $7.5 million and a net loss of $4.4 million. For the
three months ended March 31, 1998, the cash generated by operations was
primarily attributable to net income of $0.5 million, a decrease in accounts
receivable of $1.6 million, growth in accrued liabilities of $0.9 million,
depreciation and amortization of $1.1 million, provision for doubtful accounts
of $0.7 million and deferred revenue of $3.3 million, offset by the increase in
other assets of $0.7 million. For the three months ended March 31, 1999 and
1998, capital expenditures of $2.7 million and $0.4 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 March 31, 1999.
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 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, 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 is currently evaluating, 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 March 31, 1999 the Company's investment portfolio includes $65.8 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
13
<PAGE>
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 $17.7 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 July 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.
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.
The Company has substantially completed its review of internal systems, and
believes it has identified all mission-critical problems. During 1999, the
Company plans to modify or replace any non-compliant software, systems and
equipment as part of a comprehensive infrastructure upgrade that coincides with
the move of its headquarters facilities to a new location, which is targeted for
completion in July 1999. 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.
Subsequently, 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 or during 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.).
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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 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. 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;
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<PAGE>
. 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 the number
of large individual license sales we have made has continued to increase. As a
result, the loss or delay of individual orders as happened in the first quarter
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 document 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 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, the evolution of
the EDMS family of 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 document
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
16
<PAGE>
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 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 document 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 document management software and services and the adoption of
our products by organizations in this market. If the document 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 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.
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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 March 31, 1999 and 1998 sales to our five largest
customers accounted for 35% and 37% of license revenue, respectively.
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, 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 has grown 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
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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 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
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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 believed 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 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
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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 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. This 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.
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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, $73,232,000 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.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
---- ------
27.1 Financial Data Schedule.
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(b) No reports on Form 8-K were filed during the quarter ended March
31, 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: May 13, 1999 By: /s/ Mark S. Garrett
-----------------------
Mark S. Garrett
Vice President, and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10Q FOR THE PERIOD ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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0
0
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<EPS-PRIMARY> (0.26)
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</TABLE>
