<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, 2000
--------------
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 17,535,023 on March 31, 2000.
<PAGE>
FORM 10-Q
Index
<TABLE>
<CAPTION>
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000 and December
31, 1999......................................................................... Page 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999.................................................... Page 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and 1999.......................................................... 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... Page 19
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K................................................. Page 20
Signatures.................................................................................. Page 20
</TABLE>
2
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DOCUMENTUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
-----------------------------------------
2000 1999
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,067 $ 18,286
Short-term investments 64,762 64,258
Accounts receivable, net 38,898 37,492
Other current assets 15,511 14,674
-------------- ---------------
Total current assets 149,238 134,710
Property and equipment, net 28,513 28,030
Other assets 5,817 6,262
-------------- ---------------
$ 183,568 $ 169,002
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 5,926 5,645
Accrued liabilities 29,451 33,783
Deferred revenue 24,280 18,290
Current portion of capital lease obligation 223 232
-------------- ---------------
Total current liabilities 59,880 57,950
-------------- ---------------
Long-term capital lease obligation 22 73
-------------- ---------------
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;
17,535 shares and 16,840 shares issued and outstanding 18 17
Additional paid-in capital 151,019 138,546
Accumulated other comprehensive loss (186) (67)
Accumulated deficit (27,185) (27,517)
-------------- ---------------
Total stockholders' equity 123,666 110,979
-------------- ---------------
$ 183,568 $ 169,002
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue:
License $ 24,958 $ 11,235
Service 17,214 12,770
----------- -----------
Total revenue 42,172 24,005
----------- -----------
Cost of revenue:
License 1,907 1,017
Service 8,457 7,736
----------- -----------
Total cost of revenue 10,364 8,753
----------- -----------
Gross profit 31,808 15,252
----------- -----------
Operating expenses:
Sales and marketing 18,526 13,065
Research and development 7,674 6,165
General and administrative 5,895 3,699
----------- -----------
Total operating expenses 32,095 22,929
----------- -----------
Loss from operations (287) (7,677)
Interest and other income, net 782 966
----------- -----------
Income (loss) before income tax provision (benefit) 495 (6,711)
Provision for (benefit from) income taxes 163 (2,282)
----------- -----------
Net income (loss) $ 332 $ (4,429)
=========== ===========
Basic earnings (loss) per share $ 0.02 $ (0.26)
=========== ===========
Diluted earnings (loss) per share $ 0.02 $ (0.26)
=========== ===========
Shares used to compute basic earnings (loss) per
share 17,223 16,827
=========== ===========
Shares used to compute diluted earnings (loss) per
share 19,414 16,827
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 332 $ (4,429)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on disposal of fixed assets 310 -
Depreciation and amortization 2,579 1,548
Provision for doubtful accounts 308 437
Changes in assets and liabilities:
Accounts receivable (1,714) 11,172
Other current assets and other assets (392) (457)
Accounts payable 281 1,607
Accrued liabilities (4,332) (7,535)
Deferred revenue 5,990 989
---------- ---------
Net cash provided by operating activities 3,362 3,332
---------- ---------
Cash flows from investing activities:
Purchases of short-term investments (17,372) (14,672)
Sales of short-term investments 16,868 15,350
Purchases of property and equipment (3,372) (2,726)
---------- ---------
Net cash used in investing activities (3,876) (2,048)
---------- ---------
Cash flows from financing activities:
Issuance of common stock 12,474 2,398
Payments on capital lease obligations (60) (32)
---------- ---------
Net cash provided by financing activities 12,414 2,366
---------- ---------
Effect of exchange rate on changes in cash (119) (144)
---------- ---------
Net increase in cash and cash equivalents 11,781 3,506
Cash and cash equivalents at beginning of period 18,286 16,240
---------- ---------
Cash and cash equivalents at end of period $ 30,067 $ 19,746
========== =========
</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 1999 Annual Report on Form 10-K. The consolidated results of
operations for the period ended March 31, 2000 are not necessarily indicative of
the results to be expected for any subsequent quarter or for the entire fiscal
year ending December 31, 2000.
New Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company will adopt SAB
101 as required in the second quarter of 2000 and is evaluating the effect that
such adoption may have on its consolidated results of operations and financial
position.
Comprehensive income
Comprehensive income is comprised of net income (loss) and other comprehensive
earnings such as foreign currency translation gain/loss and unrealized holding
gains or losses on available-for-sale marketable securities. The Company's
unrealized holding gains and losses on available-for-sale marketable securities
have been insignificant for all periods presented. Documentum's total
comprehensive income (loss) was as follows (in thousands):
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
Net income (loss) $ 332 $ (4,429)
Other comprehensive income
Foreign currency translation adjustment (119) (144)
-------- ---------
Comprehensive income (loss) $ 213 $ (4,573)
======== =========
Earnings (loss) per share
Basic net earnings (loss) per share is computed using the weighted average
number of shares of common stock. Diluted net earnings (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 the treasury stock method). Common equivalent
shares are excluded from the computation if their effect is antidilutive.
6
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DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a reconciliation of the computation for basic and diluted
earnings (loss) per share (in thousands, except per share data):
Three Months Ended March 31,
-----------------------------
2000 1999
-------- ---------
Net income (loss) $ 332 $ (4,429)
======== =========
Shares calculation
Weighted average basic shares outstanding 17,223 16,827
Effect of dilutive stock options 2,191 -
-------- ---------
Total shares used to compute
diluted earnings per share 19,414 16,827
======== =========
Basic Earnings (loss) per share $ 0.02 $ (0.26)
======== =========
Diluted earnings (loss) per share $ 0.02 $ (0.26)
======== =========
Options to purchase 46,328 and 510,542 shares of common stock were outstanding
during the three months ended March 31, 2000 and 1999, respectively, but were
not included in the computation of diluted earnings (loss) per share 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.
Related Party Transactions
The Company has distribution agreements with Xerox and its affiliated entities,
which provide Xerox, or its affiliates with the non-exclusive rights to sell the
Company's products in specified territories. Prior to September 1999, Xerox
owned approximately 10% of the Company's outstanding common shares; however, on
September 29, 1999 Xerox sold a majority of its holdings and on October 6, 1999
Xerox completely divested all of their remaining holdings in the Company. For
the three months ended March 31, 1999, the Company recognized license revenue
from Xerox and its affiliated entities in the amount $265,000.
Segment Reporting
The Company's management considers its business activities to be focused on the
license of its products and related services to customers. Since Management's
primary form of internal reporting is aligned with the offering of products and
services, the Company believes it operates in one segment. The Company markets
its products in the United States and in other foreign countries through its
direct sales force, worldwide systems integrators and distributors.
7
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Percentage of revenue by country or region was as follows:
Three Months Ended March 31,
--------------------------------------
2000 1999
--------------------------------------
United States 67% 69%
Europe 31% 27%
Asia 1% 4%
Other countries 1% 0%
There were no customers that comprised 10% or more of the Company's revenue for
the three months ended March 31, 2000 and 1999.
Subsequent Events
In April 2000, the Company purchased 400,000 shares of Series B Preferred Stock
in an Application Service Provider for $2.0 million.
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
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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:
Three Months Ended
March 31,
-------------------
2000 1999
-------- -------
Revenue:
License 59% 47%
Service 41% 53%
-------- -------
Total revenue 100% 100%
-------- -------
Cost of revenue:
License 5% 5%
Service 20% 32%
-------- -------
Total cost of revenue 25% 37%
-------- -------
Gross profit 75% 63%
-------- -------
Operating expenses:
Sales and marketing 44% 54%
Research and development 18% 26%
General and administrative 14% 15%
-------- -------
Total operating expenses 76% 95%
-------- -------
Loss from operations (1%) (32%)
Interest and other income, net 2% 4%
-------- -------
Income (loss) before income tax provision (benefit) 1% (28%)
Provision for (benefit from) income taxes 0% (10%)
-------- -------
Net income (loss) 1% (18%)
======== =======
As a Percentage of Related Revenue:
Cost of license revenue 8% 9%
Cost of service revenue 49% 61%
Revenues
The Company's revenues are derived from the sale of licenses for its
internet-scale content management solutions and related services, which include
maintenance and support, consulting and training services. Revenues from license
arrangements are recognized upon contract execution, provided all shipment
obligations have been met, fees are fixed or determinable, and collection is
probable. If an ongoing 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. Revenues from annual maintenance
and support are deferred and recognized ratably over the term of the contract.
Revenues from
10
<PAGE>
consulting and training are deferred and recognized when the services are
performed and collectibility is deemed probable. Beginning January 1, 1998, the
Company has recognized revenue in accordance with Statement of Position (SOP)
97-2, "Software Revenue Recognition," as amended.
License revenues increased by 122% or $13.8 million to $25.0 million for the
three months ended March 31, 2000 from $11.2 million for the three months ended
March 31, 1999. The increase in license revenue for the three months ended March
31, 2000 over the same period in 1999 in absolute dollars and as a percentage of
total revenues was due to an increase in the number of licenses sold, as well as
an increase in the number of customers who purchased additional product
licenses. In addition, the Company experienced increases in revenue due to
customer acceptance of Documentum 4i, which was released in the second half of
1999 and expands the Company's product offerings into web content management.
For the three months ended March 31, 2000, license sales to customers who used
our software to link customers, suppliers and partners over the web generated
$9.2 million in license revenue. In 1999, license revenues were adversely
impacted by a general industry slowdown in customer license sales for enterprise
software applications. For the three months ended March 31, 1999, the Company
experienced a weakness in customer demand and difficulty in closing large
license contracts with customers. For the three months ended March 31, 2000 and
1999 the Company had sales to a single customer accounting for $3.7 million and
$1.4 million, respectively, or 15% and 13% of total license revenues,
respectively. For the three months ended March 31,1999, license revenue from
Xerox and certain Xerox affiliates, as systems integrators, accounted for 2% of
total license revenues. 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.
Service revenues increased by 35% to $17.2 million for the three months ended
March 31, 2000 from $12.8 million for the three months ended March 31, 1999,
representing 41% and 53% of total revenues in the respective periods. The
increase in absolute 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 decrease in
service revenues as a percent of total revenues was primarily due to the
increase in total license revenues in the first quarter of 2000 over the same
period in 1999, causing services revenues to be lower as a percentage of total
revenues.
The Company markets its products through its direct sales force and its indirect
channel partners. While historically the Company has generated the majority of
its revenues from its direct sales force, the Company has also focused on
complementing its direct sales channel with indirect channels, consisting of
systems integrators and distributors. Revenues from all indirect channel
partners comprised 37% and 35% of license revenues for the three months ended
March 31, 2000 and 1999, respectively. Revenues from indirect partners for any
period are subject to significant variations. As a result, the Company believes
that period to period comparisons of indirect revenue are not necessarily
meaningful and should not be relied upon as an indication of future performance.
International revenues represented 45% and 43% of license revenues for the three
months ended March 31, 2000 and 1999, respectively. The increase in
international revenues as a percent of license revenues in 2000 was primarily
due to significant sales to two customers in the amount of $1.5 million and $1.2
million in Europe. The Company classifies license revenues 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 are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Cost of revenues
Cost of license revenues 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 and
variable fees. Cost of license revenues increased by 88% to $1.9 million for the
three months ended March 31, 2000 from $1.0 million for the three months ended
March 31, 1999 representing 8% and 9% of the related license revenues for the
three months ended March 31, 2000 and 1999, respectively. The increase in cost
of license revenues
11
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in absolute dollars was related to higher license sales for the three months
ended March 31, 2000 over the comparable period, as well as a continued shift in
the mix of products being sold. The Company currently carries and integrates
into its products 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 period in 1999. Cost of revenues decreased in the
first quarter of fiscal year 2000 as a percentage of license revenues due to the
increase in license revenues in the first quarter of fiscal year 2000 over the
same period in 1999, as described above. The Company expects the cost of license
revenues to fluctuate in absolute dollar amount and as a percentage of total
license revenues as the related license revenues fluctuate.
Cost of services revenue consists primarily of personnel-related costs incurred
in providing consulting services, training to customers, and maintenance
services, which includes telephone support. Cost of services revenue increased
by 9% to $8.5 million for the three months ended March 31, 2000 from $7.7
million for the three months ended March 31, 1999, representing 49% and 61% of
the related services revenue for the three months ended March 31, 2000 and 1999,
respectively. The increase in cost of services revenue in absolute dollar amount
was a result of increased personnel-related costs as the Company expanded its
consulting, training, and maintenance operations to support its larger installed
customer base, as well as an increase in solutions offered to customers. The
decrease in cost of services revenue as a percentage of services revenue for the
three months ended March 31, 2000 over the same period in 1999 was primarily due
to economies of scale realized as certain expenses such as technical support
grew proportionately less than maintenance revenue. The Company expects the cost
of services revenue to increase in absolute dollar amount as the related service
revenues increase.
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 42% to $18.5 million for the
three months ended March 31, 2000 from $13.1 million for the three months ended
March 31, 1999, representing 44% and 54% of total revenues for the three months
ended March 31, 2000 and 1999, respectively. The increase in absolute 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 marketing programs over the comparable period. The decrease in sales
and marketing expenses as a percentage of total revenues for the three months
ended March 31, 2000 over the comparable period in 1999 was primarily due to (1)
the increase in license revenues for the three months ended March 31, 2000, as
described above, and (2) economies of scale realized in the first quarter of
fiscal year 2000 as certain expenses such as management compensation grew
proportionately less than revenues. The Company expects that sales and marketing
expense will continue to increase in absolute 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 24%
to $7.7 million for the three months ended March 31, 2000 from $6.2 million for
the three months ended March 31, 1999, representing 18% and 26% of total
revenues for the three months ended March 31, 2000 and 1999, respectively. The
increase in absolute dollar amount reflects the expansion of the Company's
engineering staff and related costs required to support the development of new
web content products, including Documentum 4i eBusiness Edition, which was
introduced in the first quarter of 2000, and enhancements to existing products.
The decrease as a percentage of total revenue for the three months ended March
31, 2000 over the comparable period in 1999 was due to the increase in license
revenues for the three months ended March 31, 2000, as described above. Based on
the Company's research and development process, costs incurred between the
establishment of technological feasibility and general release have been
insignificant and therefore have been expensed as incurred. The Company expects
research and development costs will continue to increase in absolute dollar
amount in order to support increased development efforts to both existing and
new products.
General and administrative. General and administrative expenses consist
primarily of personnel costs for finance, information technology, legal, human
resources and general management, as well as outside professional services.
General and administrative expenses increased by 59% to $5.9 million for the
three months ended March 31, 2000 from $3.7 million for the three months ended
March 31, 1999, representing 14% and 15% of total revenues for the
12
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three months ended March 31, 2000 and 1999, respectively. The increase in
absolute dollar amount for the three months ended March 31, 2000 over the
comparable period in 1999 was primarily due to increased staffing and
professional fees necessary to manage and support the Company's planned growth,
as well as consulting costs associated with changes to the Company's information
systems. The decrease as a percentage of total revenue is due to the increase in
license revenues in the first quarter of fiscal year 2000, as described above.
The Company expects general and administrative expenses to increase in absolute
dollar amount in order to support the growing needs of the Company.
Interest and other income, net
Interest and other income, net, consists primarily of interest income earned on
the Company's cash, 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, decreased $0.2 million for
the three months ended March 31, 2000 to $0.8 million from $1.0 million for the
three months ended March 31, 1999. The decrease for the three months ended March
31, 2000 over the same period in 1999 was primarily due to interest income
earned on higher cash and investment balances in the first quarter of fiscal
year 1999. 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 is based on estimated
annual income tax rates. The Company's effective tax rate for the three months
ended March 31, 2000 and 1999 was 33% and 34%, respectively. The decrease in the
Company's effective tax rate is a result of increased benefit from the Federal
Research and Development Credit due to the recent extension of the credit to
June 30, 2004.
Liquidity and Capital Resources
The Company's cash, cash equivalents and short-term investments totaled $94.8
million at March 31, 2000 representing 52% of total assets. The Company has
invested its 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 $3.4 million and $3.3 million for
the three months ended March 31, 2000 and 1999, respectively. For the three
months ended March 31, 2000, cash generated by operations was primarily
attributable to net income of $0.3 million, adjusted for depreciation and
amortization of $2.6 million, loss on the disposal of fixed asset of $0.3
million and provision for doubtful accounts of $0.3 million, an increase in
deferred revenue and accounts payable of $6.0 million and $0.3 million,
respectively, offset by a decrease in accrued liabilities of $4.3 million and an
increase in accounts receivable and other assets of $1.7 million and $0.4
million, respectively. For the three months ended March 31, 1999, cash generated
by operating activities was primarily attributable to a net loss of $4.4
million, adjusted for depreciation and amortization of $1.5 million, and
provision for doubtful accounts of $0.4 million, increases in accounts payable
and deferred revenue of $1.6 million and $1.0 million, respectively, decreases
in accounts receivable of $11.2 million, offset by a decrease in accrued
liabilities of $7.5 million and an increase in other assets of $0.5 million.
For the three months ended March 31, 2000 and 1999, capital expenditures were
$3.4 million and $2.7 million, respectively. Capital expenditures for the three
months ended March 31, 2000 and 1999, were primarily for computer equipment,
office furniture and leasehold improvements related to the new office facility
described below, as well as expenditures for computer software applications
related to changes and improvements made in the Company's information systems.
13
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In April 2000, the Company purchased 400,000 shares of Series B Preferred Stock
in an Application Service Provider for $2.0 million.
As of March 31, 2000, the Company received $11.1 million and $1.4 million in
proceeds from employee stock option exercises and employee stock purchase plan
purchases, respectively.
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 November 1999, respectively, and expiring
in May 2005 and March 2006, respectively. In January 2000, the Company signed an
amendment to the existing leases, which provides for the rental of an additional
37,138 square feet of space, beginning July 2000 and expiring in March 2006. The
Pleasanton, California space serves as the Company's headquarters and contains
the principal administrative, engineering, marketing and sales facilities. The
Company has made and will continue to make significant capital purchases related
to leasehold improvements and office furniture for 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.
In August 1999, the Company entered into an unsecured revolving line of credit
agreement with a bank (the "Facility"). The Facility allows for borrowings of up
to $20 million bearing interest at the Company's option of either: (1) the
bank's prime rate or (2) the LIBOR rate plus 1.50%. This line of credit expires
on July 30, 2001. The Company must comply with certain financial covenants and
conditions as described in the Facility. The Company did not have any borrowings
outstanding under this line of credit as of March 31, 2000.
In 1999, the Company entered into two capital lease agreements under a
sale-leaseback arrangement for the rental of computer equipment in the amount of
$292,000 and $171,000. The lease agreements require quarterly principal and
interest payments in the amount of $37,000 and $22,000, respectively. The leases
have interest rates of 1.66% and 2.605% and maturity dates of July 2001 and
September 2001, respectively.
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".
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;
14
<PAGE>
. 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 nine
months 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 that 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 harm 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, could have a significant impact
on quarterly operating results and revenue. During the first half of 1999 we had
a number of customers delays orders, resulting in revenue below our
expectations. Furthermore, the timing of license revenue is difficult to predict
because of the length of our sales cycle, which typically ranges from six to
twelve 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 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 harmed.
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 drop in the price of our common stock.
Lengthy Sales and Implementation Cycles. In general, 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 twelve months) to provide a significant level
of education to prospective customers regarding the use and benefits of our
products. We are starting to see shorter sales cycles (two to three months) as
customers purchase our software to help bring their businesses on-line.
Additionally, the size and complexity of any particular transaction can also
cause delays in the sales cycle. The implementation of our products can involve
a significant commitment of resources by customers over an extended
15
<PAGE>
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 harm 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 has been
attributable to sales of licenses of the Documentum EDMS and Documentum 4i
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. As a result, factors adversely affecting the pricing of or demand for
such products, such as competition or technological change, harm 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 content management and business-to-business solutions 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 harmed. 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 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 harmed.
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,
Interwoven and Vignette. 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
16
<PAGE>
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 harm 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 harmed.
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, 2000 and 1999, sales to our five largest customers
accounted for 33% and 35% 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 harm 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 harm our
business, financial condition and results of operations.
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
could harm 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
17
<PAGE>
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 harmed.
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 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 harm 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 harm 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
harm our business, financial condition and results of operations.
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,
18
<PAGE>
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 harm 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. Such 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 harm 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 decrease 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. 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk - Interest
Rate Risk
As of March 31, 2000 the Company's investment portfolio includes $47.6 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 remaining $17.2 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.
19
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 2000.
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, on this 12th day of May, 2000.
DOCUMENTUM, INC.
(Registrant)
By: /s/ Jeffrey A. Miller
----------------------
Jeffrey A. Miller
President and Chief Executive Officer
By: /s/ Kathleen M. Crusco
-----------------------
Kathleen M. Crusco
Acting Chief Financial Officer
Vice President, Finance and Accounting
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10Q FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 30,067
<SECURITIES> 64,762
<RECEIVABLES> 40,775
<ALLOWANCES> 1,877
<INVENTORY> 0
<CURRENT-ASSETS> 149,238
<PP&E> 49,407
<DEPRECIATION> 20,834
<TOTAL-ASSETS> 183,568
<CURRENT-LIABILITIES> 59,880
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 123,648
<TOTAL-LIABILITY-AND-EQUITY> 183,568
<SALES> 24,958
<TOTAL-REVENUES> 42,172
<CGS> 1,907
<TOTAL-COSTS> 10,364
<OTHER-EXPENSES> 32,095
<LOSS-PROVISION> 308
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 495
<INCOME-TAX> 163
<INCOME-CONTINUING> 332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
