<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 18,214,193 on September 30, 2000.
<PAGE>
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2000 and
December 31, 1999.................................................. Page 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2000 and 1999...................... Page 4
Condensed Consolidated Statements of Cash Flow for the nine months
ended September 30, 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 20
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K................................... Page 20
Signature..................................................................... Page 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 22,358 $ 18,286
Short-term investments...................................................... 77,691 64,258
Accounts receivable, net.................................................... 48,613 37,492
Other current assets........................................................ 12,992 14,674
-------------- --------------
Total current assets.................................................... 161,654 134,710
Property and equipment, net...................................................... 32,403 28,030
Other assets..................................................................... 7,530 6,262
-------------- --------------
$ 201,587 $ 169,002
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 3,649 $ 5,645
Accrued liabilities......................................................... 37,455 33,783
Deferred revenue............................................................ 21,312 18,290
Current portion of capital lease obligation................................. 125 232
-------------- --------------
Total current liabilities............................................... 62,541 57,950
-------------- --------------
Long-term capital lease obligation............................................... - 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; 18,214 and
16,840 shares issued and outstanding 18 17
Additional paid-in capital.................................................. 162,948 138,546
Accumulated other comprehensive loss........................................ (822) (67)
Accumulated deficit......................................................... (23,098) (27,517)
-------------- --------------
Total stockholders' equity.............................................. 139,046 110,979
-------------- --------------
-------------- --------------
$ 201,587 $ 169,002
============== ==============
</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 Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
License................................................... $ 31,368 $ 19,503 $ 81,824 $ 46,589
Service................................................... 20,342 14,273 56,778 40,422
---------- ---------- ----------- -----------
Total revenue......................................... 51,710 33,776 138,602 87,011
---------- ---------- ----------- -----------
Cost of revenue:
License................................................... 2,301 1,317 5,726 3,864
Service................................................... 9,617 7,765 27,467 23,300
---------- ---------- ----------- -----------
Total cost of revenue................................. 11,918 9,082 33,193 27,164
---------- ---------- ----------- -----------
Gross profit................................................... 39,792 24,694 105,409 59,847
---------- ---------- ----------- -----------
Operating expense:
Sales and marketing....................................... 22,044 15,787 59,591 43,054
Research and development.................................. 9,172 6,212 25,647 18,765
General and administrative................................ 5,846 5,613 16,878 13,944
---------- ---------- ----------- -----------
Total operating expense............................... 37,062 27,612 102,116 75,763
---------- ---------- ----------- -----------
Income (loss) from operations.................................. 2,730 (2,918) 3,293 (15,916)
Interest and other income, net................................. 1,104 809 3,303 2,942
---------- ---------- ----------- -----------
Income (loss) before income tax provision (benefit)............ 3,834 (2,109) 6,596 (12,974)
Provision for (benefit from) income taxes...................... 1,265 (717) 2,177 (4,411)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Net income (loss).............................................. $ 2,569 $ (1,392) $ 4,419 $ (8,563)
========== ========== =========== ===========
Basic earnings (loss) per share................................ $ 0.14 $ (0.08) $ 0.25 $ (0.51)
========== ========== =========== ===========
Diluted earnings (loss) per share.............................. $ 0.13 $ (0.08) $ 0.23 $ (0.51)
========== ========== =========== ===========
Shares used to compute basic earnings (loss) per share......... 18,028 16,512 17,618 16,718
========== ========== =========== ===========
Shares used to compute diluted earnings (loss) per share....... 19,974 16,512 19,623 16,718
========== ========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss)................................................................. $ 4,419 $ (8,563)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................... 7,670 6,089
Provision for doubtful accounts................................................. 818 (71)
Loss (gain) on disposal of fixed assets......................................... 554 (143)
Deferred tax asset.............................................................. 3,655 -
Changes in assets and liabilities:
Accounts receivable........................................................... (11,939) (1,807)
Other current assets and other assets......................................... (1,229) (614)
Accounts payable.............................................................. (1,996) 1,902
Accrued liabilities........................................................... 3,672 (2,732)
Deferred revenue.............................................................. 3,022 8,199
----------- -----------
Net cash provided by operating activities................................... 8,646 2,260
----------- -----------
Cash flow from investing activities:
Purchases of short-term investments............................................... (220,823) (73,556)
Sales of short-term investments................................................... 207,390 91,384
Net purchases of property and equipment........................................... (12,597) (18,424)
Purchases of long-term investments................................................ (2,012) -
----------- -----------
Net cash used in investing activities....................................... (28,042) (596)
----------- -----------
Cash flow from financing activities:
Issuance of common stock.......................................................... 24,403 3,941
Repurchase of common stock........................................................ - (10,062)
Proceeds from debt................................................................ - 292
Repayments on capital lease obligations........................................... (180) -
----------- -----------
Net cash provided by (used in) financing acitivities........................ 24,223 (5,829)
----------- -----------
Effect of exchange rate changes on cash................................................ (755) 52
----------- -----------
Net increase (decrease) in cash and cash equivalents................................... 4,072 (4,113)
Cash and cash equivalents at beginning of period....................................... 18,286 16,240
----------- -----------
Cash and cash equivalents at end of period............................................. $ 22,358 $ 12,127
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUBSEQUENT EVENT
STOCK SPLIT
On October 18, 2000, Documentum's Board of Directors declared a two-for-one
stock split on the Company's Common Stock effected in the form of a stock
dividend to be distributed on November 13, 2000 to stockholders of record on
November 1, 2000. The effective date of the stock split will be November 14,
2000. The accompanying financial statements do not reflect the impact of this
stock split.
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 flow 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 September 30, 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 amended, as required in the fourth quarter of 2000. The Company does not
expect the adoption of SAB 101 to have a material impact on its results of
operations or financial position.
The Company will adopt SFAS No. 133, "Accounting of Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, when required, in the first
quarter of fiscal year 2001. The Company does not expect the adoption of SFAS
No. 133, as amended, to have a material impact on its results of operations or
financial position.
6
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive earnings such as foreign currency translation gains or losses 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):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $2,569 $(1,392) $4,419 $(8,563)
Other comprehensive income (loss):
Foreign currency translation adjustment (328) 347 (755) 52
--------------- --------------- -------------- --------------
Comprehensive income (loss) $2,241 $(1,045) $3,664 $(8,511)
=============== =============== ============== ==============
</TABLE>
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed using the weighted average number of
shares of common stock. Diluted 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.
The following is a reconciliation of the computation for basic and diluted
earnings (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Net income (loss)............................................... $ 2,569 $ (1,392) $ 4,419 $ (8,563)
========= =========== ========= ===========
Shares calculation:
Weighted average shares outstanding............................. 18,028 16,512 17,618 16,718
Stock options................................................... 1,946 - 2,005 -
========= =========== ========= ===========
Total shares used to compute diluted earnings per share......... 19,974 16,512 19,623 16,718
========= =========== ========= ===========
Earnings (loss) per basic share................................. $ 0.14 $ (0.08) $ 0.25 $ (0.51)
========= =========== ========= ===========
Earnings (loss) per diluted share............................... $ 0.13 $ (0.08) $ 0.23 $ (0.51)
========= =========== ========= ===========
</TABLE>
7
<PAGE>
DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Options to purchase 253,368 and 3,161,353, shares of common stock were
outstanding during the three months ended September 30, 2000 and 1999,
respectively, and 168,028, and 3,485,766 shares of common stock were outstanding
during the nine months ended September 30, 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 and nine months ended September 30, 1999, the Company recognized
license revenue from Xerox and its affiliated entities in the amount of $118,000
and $855,000, respectively.
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.
Percentage of revenue by country or region was as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------- -------------- -----------
United States 73% 63% 71% 67%
Europe 22% 34% 26% 29%
Asia 2% 3% 2% 3%
Other countries 3% 0% 1% 1%
For the three months ended September 30, 2000, there was a sale to one customer
that comprised 11% of total revenue. For the nine months ended September 30,
2000, and for the three and nine months ended September 30, 1999, no customer
comprised more that 10% of total revenue.
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 Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
License...................................................... 61% 58% 59% 54%
Service...................................................... 39% 42% 41% 46%
----------- ---------- ---------- ----------
Total revenue.............................................. 100% 100% 100% 100%
----------- ---------- ---------- ----------
Cost of revenue:
License...................................................... 4% 4% 4% 4%
Service...................................................... 19% 23% 20% 27%
Total cost of revenue...................................... 23% 27% 24% 31%
----------- ---------- ---------- ----------
Gross profit.................................................... 77% 73% 76% 69%
----------- ---------- ---------- ----------
Operating expense:
Sales and marketing.......................................... 43% 47% 43% 49%
Research and development..................................... 18% 18% 19% 22%
General and administrative................................... 11% 17% 12% 16%
----------- ---------- ---------- ----------
Total operating expense.................................... 72% 82% 74% 87%
----------- ---------- ---------- ----------
Income (loss) from operations................................... 5% (9)% 2% (18)%
Interest and other income, net.................................. 2% 3% 2% 3%
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Income (loss) before income tax provision (benefit)............. 7% (6)% 4% (15)%
Provision for (benefit from) income taxes....................... 2% (2)% 2% (5)%
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Net income (loss)............................................... 5% (4)% 2% (10)%
=========== ========== ========== ==========
As a Percentage of Related Revenue:
Cost of license revenue......................................... 7% 7% 7% 8%
Cost of service revenue......................................... 47% 54% 48% 58%
</TABLE>
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 and 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
10
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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 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 61% or $11.9 million to $31.4 million for the
three months ended September 30, 2000 from $19.5 million for the three months
ended September 30, 1999 and increased by 76% or $35.2 million to $81.8 million
for the nine months ended September 30, 2000 from $46.6 million for the nine
months ended September 30, 1999. The increase in license revenue for the three
and nine months ended September 30, 2000 over the same periods in 1999 in
absolute dollars and as a percentage of total revenues was due to an increase in
the number of new 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 expanded the Company's product
offerings into web content management. In 1999, license revenues were adversely
impacted by a general industry slowdown in customer license sales for enterprise
software applications. For the three and nine months ended September 30, 1999,
the Company experienced a weakness in customer demand and difficulty in closing
large license contracts with customers. For the three months ended September 30,
2000 the company had sales to two customers which accounted for $5.6 million and
$3.2 million of license revenue, respectively, or 18% and 10% of license
revenue, respectively. For the three months ended September 30, 1999 the company
had sales to a single customer which accounted for $4.5 million or 23% of total
license revenues. The Company did not have any sales to a single customer that
accounted for greater than 10% of license revenue for the nine months ended
September 30, 2000 or for the nine months ended September 30, 1999. For the
three and nine months ended September 30 1999, license revenue from Xerox and
certain Xerox affiliates, as systems integrators, accounted for 1% and 2% of
total license revenues, respectively.
Service revenues increased by 43% to $20.3 million for the three months ended
September 30, 2000 from $14.3 million for the three months ended September 30,
1999, representing 39% and 42% of total revenues in the respective periods and
increased by 41% to $56.8 million for the nine months ended September 30, 2000
from $40.4 million for the nine months ended September 30, 1999, representing
41% and 47% 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 consulting 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 nine months 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 34% and 28% of license revenues for the three months ended
September 30, 2000 and 1999, respectively, and 40% and 30% of license revenue
for the nine months ended September 30, 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 34% and 53% of license revenues for the three
months ended September 30, 2000 and 1999, respectively, and 38% and 48% of
license revenues for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in international revenues as a percent of license
revenues in 2000 was primarily due to a rise in total license revenue in the
first nine months of 2000 as compared to the same period in 1999. In addition,
the Company had a sale to a single domestic customer in the amount of $5.6
million during the three months ended September 30, 2000. The general industry
slowdown in the first nine months of fiscal year 1999 negatively impacted
domestic revenue to a greater extent than international revenue. In addition, in
fiscal 1999 the Company had an enterprise-wide sale to a single global customer
in the amount of $4.5 million in Europe, which increased international revenue
as a percentage of overall worldwide sales. The Company classifies license
revenues as domestic or international based upon the billing location of the
customer. In many instances, especially with large
11
<PAGE>
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 75% to $2.3 million for the
three months ended September 30, 2000 from $1.3 million for the three months
ended September 30, 1999, and increased by 48% to $5.7 million for the nine
months ended September 30, 2000 from $3.9 million for the nine months ended
September 30, 1999 representing 7% of the related license revenues for the three
months ended September 30, 2000 and 1999 and 7% and 8% of the related license
revenues for the nine months ended September 30, 2000 and 1999, respectively.
The increase in cost of license revenues for the nine months ended September 30,
2000, in absolute dollars was related to higher license sales for the nine
months ended September 30, 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 period 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 stayed the same and decreased as a percentage of license revenues for
the three and nine months ended September 30, 2000, respectively, over the
comparable periods in 1999 due to the increase in license revenues in the first
nine months of fiscal year 2000 over the same periods in 1999, as described
above. In addition, in the first nine months of 2000, even though the Company
sold more royalty bearing products than those sold in the same period in 1999,
the sales of these products did not grow proportionately to license revenue thus
cost of license revenue declined as a percentage of license revenue. 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 24% to $9.6 million for the three months ended September 30, 2000 from $7.8
million for the three months ended September 30, 1999 and increased by 18% to
$27.5 million for the nine months ended September 30, 2000 from $23.3 million
for the nine months ended September 30, 1999, representing, 47% and 54% of the
related services revenue for the three months ended September 30, 2000 and 1999,
respectively, and 48% and 58% of the related services revenue for the nine
months ended September 30, 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 and nine months ended
September 30, 2000 over the same periods in 1999 was primarily due to economies
of scale realized as certain expenses such as technical support grew
proportionately less than maintenance revenue, as well as the continued
improvement in consulting margins in fiscal year 2000 over 1999. 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 40% to $22.0 million for the
three months ended September 30, 2000 from $15.8 million for the three months
ended September 30, 1999, and increased 38% to $59.6 million for the nine months
ended September 30, 2000 from $43.1 million for the nine months ended September
30, 1999 representing 43% and 47% of total revenues for the three months ended
September 30, 2000 and 1999, respectively, and 43% and 49% of total revenue for
the nine months ended September 30, 2000 and 1999, respectively. The increase in
absolute dollar amount in 2000 over the comparable period in 1999 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 in order to create awareness and a position in the content management
market. The decrease in sales and marketing expenses as a percentage of total
revenues for the three and nine months ended
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September 30, 2000 over the comparable periods in 1999 was primarily due to (1)
the increase in license revenues for the three and nine months ended September
30, 2000, as described above, and (2) economies of scale realized in the first
nine months 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 48%
to $9.2 million for the three months ended September 30, 2000 from $6.2 million
for the three months ended September 30, 1999, and increased by 37% to $25.6
million for the nine months ended September 30, 2000 from $18.8 million for the
nine months ended September 30, 1999, representing 18% of total revenues for the
three months ended September 30, 2000 and 1999 and 19% and 22% of total revenues
for the nine months ended September 30, 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 and second quarter of 2000, localization of Documentum
4i eBusiness Edition, which began in the second quarter of 2000, and
enhancements to existing products. Research and development costs stayed the
same and decreased as a percentage of total revenue for the three and nine
months ended September 30, 2000, respectively, over the comparable periods in
1999, due to the increase in license revenues for the three and nine months
ended September 30, 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 4% to $5.8 million for the
three months ended September 30, 2000 from $5.6 million for the three months
ended September 30, 1999, and increased by 21% to $16.9 million for the nine
months ended September 30, 2000 from $13.9 million for the nine months ended
September 30, 1999, representing 11% and 17% of total revenues for the three
months ended September 30, 2000 and 1999, respectively, and 12% and 16% of total
revenues for the nine months ended September 30, 2000 and 1999, respectively.
The increase in absolute dollar amount for the three and nine months ended
September 30, 2000 over the comparable periods 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 nine months 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, increased by $0.3 million
for the three months ended September 30, 2000 to $1.1 million from $0.8 million
for the three months ended September 30, 1999 and increased by $0.4 million for
the nine months ended September 30, 2000 to $3.3 million from $2.9 million for
the nine months ended September 30, 1999. The increase for the three and nine
months ended September 30, 2000 over the same periods in 1999 is a result of
higher average cash balances and higher average interest rates earned on these
cash balances in 2000. The Company has shifted its investment strategy in the
three months ended September 30, 2000 from a portfolio containing predominantly
tax-exempt securities to include more higher-yielding, taxable securities. 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 may 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.
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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 and nine
months ended September 30, 2000 was 33% and was 34% for the three and nine
months ended September 30, 1999. 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 $100.0
million at September 30, 2000 representing 50% 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 $8.6 million and $2.3 million for
the nine months ended September 30, 2000 and 1999, respectively. For the nine
months ended September 30, 2000, cash generated by operations was primarily
attributable to net income of $4.4 million, adjusted for depreciation and
amortization of $7.7 million, provision for doubtful accounts of $0.8 million
and loss on the disposal of fixed assets of $0.5, decrease in deferred tax asset
of $3.6 million, an increase in accrued liabilities and deferred revenue of $3.7
million and $3.0 million, respectively, offset by an increase in accounts
receivable of $11.9 million and decreases in accounts payable and other assets
of $2.0 million and $1.2 million, respectively. For the nine months ended
September 30, 1999, cash generated by operating activities was primarily
attributable to a net loss of $8.6 million, adjusted for depreciation and
amortization of $6.1 million, provision for doubtful accounts of $0.1 million,
gain on sales of fixed assets of $0.1 million, increases in accounts payable and
deferred revenue of $1.9 million and $8.2 million, respectively, offset by
increases in accounts receivable and other assets in the amount of $1.8 million
and $0.6 million, respectively, and a decrease in accrued liabilities of $2.7
million.
For the nine months ended September 30, 2000 and 1999, capital expenditures were
$12.6 million and $18.4 million, respectively. Capital expenditures for the nine
months ended September 30, 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.
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 September 30, 2000, the Company received $20.6 million and $3.8 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
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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 September 30, 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:
o demand for our products;
o the level of product and price competition;
o the length of our sales cycle;
o the size and timing of individual license transactions;
o the delay or deferral of customer implementations;
o our success in expanding our customer support organization, direct
sales force and indirect distribution channels;
o the timing of new product introductions and product enhancements;
o changes in our pricing policy;
o the publication of opinions concerning us, our products or technology
by industry analysts;
o the mix of products and services sold;
o levels of international sales;
o activities of and acquisitions by competitors;
o the timing of new hires;
o changes in foreign currency exchange rates;
o our ability to develop and market new products and control costs; and
o 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:
o the potential delay in recognizing revenue from license transactions;
o the discretionary nature of our customers' budget and purchase cycles;
o variations in our customers' fiscal or quarterly cycles;
o the size and complexity of our license transactions;
o the timing of new product releases;
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o seasonal variations in operating results; and
o 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 nine months of 1999
we had a number of customers delay 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 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 that Documentum 4i and
related products and services will 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
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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 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 September 30, 2000 and 1999, sales to our five largest
customers accounted for
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40% and 42% of license revenue, respectively and for the nine months ended
September 30, 2000 and 1999, sales to our five largest customers accounted for
22% and 23% 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 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
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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, 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.
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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 DISCLOSURES ABOUT MARKET
RISK - INTEREST RATE RISK
As of September 30, 2000 the Company's investment portfolio includes $62.7
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 $15.0 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.
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
September 30, 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 13th day of November, 2000.
DOCUMENTUM, INC.
(Registrant)
By: /s/ BOB L. COREY
--------------------------
Bob L. Corey
Executive Vice President
& Chief Financial Officer
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