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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

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)

(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 39,846,960 on July 31, 2002.

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FORM 10-Q

Index

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PART I. FINANCIAL INFORMATION

DOCUMENTUM, INC.

*Certain prior year amounts have been reclassified to conform to current year’s presentation.

See accompanying notes to condensed consolidated financial statements.

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DOCUMENTUM, INC.

*Certain prior year amounts have been reclassified to conform to current year’s presentation.

See accompanying notes to condensed consolidated financial statements.

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DOCUMENTUM, INC.

See accompanying notes to condensed consolidated financial statements.

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DOCUMENTUM, INC.

Note 1. Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions in Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring adjustments except as described in Notes 6, 7, and 8, have been recorded as necessary to present fairly Documentum’s (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 2001 Annual Report on Form 10-K. The consolidated results of operations for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the results that may be expected for any future period.

Note 2. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Documentum International, Inc., Relevance Technologies, Inc. (“Relevance”) and Documentum Canada Holdings, Inc. in the United States, Nihon Documentum KK, in Japan, Documentum Software Europe Ltd., in the United Kingdom, Documentum GmbH, in Germany, Documentum FSC and Documentum Holdings, Ltd. in Barbados, Documentum PTE, Ltd. in Singapore, Documentum Ireland Holdings, Ltd. in Ireland, Documentum SARL in France and Documentum Canada Company in Nova Scotia, Canada. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of these financial statements requires that the Company make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates including those related to revenue recognition, allowance for doubtful accounts, warranty reserves, income taxes, restructuring accruals, sales commission, and useful lives of intangible assets and property and equipment, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts realized or paid could differ from the estimates made by management with respect to these items and other items that require management’s estimates.

During the six months ended June 30, 2002 the Company recognized a benefit, net of tax, of approximately $0.5 million to revise the estimate used to determine the accrual for commission expense at December 31, 2001 to actuals.

Revenue Recognition

The Company’s revenue is derived from the sale of licenses for its enterprise content management solutions and related services, which include maintenance and support, consulting and education services. The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions” and SAB No. 101 “Revenue Recognition in Financial Statements”. Revenue from license arrangements is recognized upon contract execution, provided that all shipment obligations have been met, fees are fixed or determinable, and collection is probable. If an undelivered element of the arrangement exists, revenue is

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DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

deferred based on vendor-specific objective evidence of the fair value of the undelivered element. If vendor-specific objective evidence of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered. The Company recognizes revenue on transactions with extended payment terms to the extent such payments are due within nine months from contract execution date and to the extent the Company has a history of successfully collecting under the original payment terms for transactions with similar types of customers and similar economics without providing concessions. License revenue from resellers or distributors is recognized when product is shipped to the reseller, distributor or end user and such sell through is reported to the Company. Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue. Revenue from annual maintenance and support agreements is deferred and recognized ratably over the term of the contract. Revenue from consulting and training are deferred and recognized when the services are performed and collectibility is deemed probable.

Deferred Revenue

Deferred revenue primarily relates to support agreements that have been paid for by customers prior to the performance of those services. Generally, the services will be provided in the next twelve months. Payments received in advance of revenue recognition for license fees are recorded as deferred revenue.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Concentrations of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, short-term investments, long-term investments, and accounts receivable. The Company deposits substantially all of its cash with three separate financial institutions.

The Company generally does not require collateral for its accounts receivable and maintains reserves for potential credit losses. At June 30, 2002, one customer comprised 15% of accounts receivable and at June 30, 2001 no one customer comprised 10% or more of accounts receivable.

Property and equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized over the estimated useful life or the life of the lease, whichever is shorter. Depreciation expense was $4.1 million and $3.5 million for the three months ended June 30, 2002 and 2001, respectively, and $7.7 million and $6.7 million for the six months ended June 30, 2002 and 2001, respectively. In accordance with SFAS No. 144, the Company evaluates long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. During the quarter ended June 30, 2002, the Company decided not to deploy certain purchased software as the Company determined that the software was not going to be supported in the future by the respective vendors. Accordingly, the Company recognized a charge of $1.6 million to dispose of the software.

Software development costs

Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 (“SFAS 86”) requires the capitalization of certain software development costs once technological feasibility is established. The capitalized cost is then amortized on a straight-line basis over

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DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

the estimated product life, or on the ratio of current revenue to total projected product revenue, whichever amount of amortization is greater. To date, the period between achieving technological feasibility, which the Company has defined as the establishment of a working model, and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.

Accounting for the Costs of Computer Software Developed or Obtained for Internal Use

In accordance with the provisions of Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”), certain costs of computer software developed or obtained for internal use have been capitalized in connection with the implementation of the software. The estimated useful life of costs capitalized is evaluated for each specific project and ranges from one to three years. The Company capitalized an insignificant amount of costs for the three and six months ended June 30, 2002 and $1.0 million for the three and six months ended June 30, 2001.

Advertising

The Company expenses costs of advertising as incurred. Advertising expense was insignificant for the three months ended June 30, 2002 compared to $0.1 million for the three months ended June 30, 2001 and $0.2 million and $0.4 million for the six months ended June 30, 2002 and 2001, respectively. Advertising expense is included in sales and marketing expense in the accompanying Condensed Consolidated Statement of Operations.

Note 3. Change in Accounting Principles

On January 1, 2002, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and the Financial Accounting Standards Board (FASB) staff issued EITF 01-14, “Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred” (“EITF 01-14”).

SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually, and more frequently upon the occurrence of certain events. The Company’s recorded goodwill and intangible assets at June 30, 2002 related solely to the acquisition of substantially all of the assets of Bulldog, Inc., on December 5, 2001 and Boxcar, Inc. on January 23, 2002. Goodwill of $0.9 million was recorded in connection with the Boxcar acquisition (see Note 6 for further information). The useful lives assigned to the acquired intangibles at the time of the respective acquisitions was considered appropriate at June 30, 2002. Intangibles not subject to amortization are considered insignificant. The Company had gross intangible assets of $3.0 million and $2.7 million as of June 30, 2002 and December 31, 2001, respectively. Total intangible amortization expense for the six months ended June 30, 2002 was $0.4 million. In connection with the completion of the first step of its transitional analysis, the Company determined that it has two reporting units which are identical to its operating segments. The Company completed the transitional goodwill impairment test. No impairment charges were recognized as a result of the transitional impairment test. Goodwill will be tested for impairment annually on August 1st beginning in fiscal year 2002. The changes in the carrying amount of goodwill for the six month period ended June 30, 2002 are as follows:

EITF 01-14 requires companies to characterize reimbursements received for out-of-pocket expenses as revenue in the income statement instead of as a reduction to the related expense. Upon the adoption of EITF 01-14, comparative financial statements for prior periods must be reclassified to comply with the guidance in this announcement. The adoption of EITF 01-14 resulted in a reclassification from cost of service revenue to service revenue of $0.6 million and $0.5 million for the three months ended June 30, 2002 and 2001, respectively and $1.1 million for the six month periods ended June 30, 2002 and 2001.

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DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4. Recent Accounting Pronouncements

In July 2001, the EITF reached a final consensus on EITF No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.” EITF 00-25 generally requires that consideration, including equity instruments, given to a customer be classified in a vendor’s financial statements not as an expense, but as a reduction to revenue up to the amount of cumulative revenue recognized or to be recognized. In November 2001, the EITF reached a consensus on EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products.” EITF 01-09 clarifies and modifies certain items discussed in EITF 00-25. The impact of adoption of EITF No. 00-25 and EITF No. 01-09 was immaterial for all periods presented.

Note 5. Foreign Currency, Derivative Financial Instruments and Hedging Activities

The Company considers the U.S. dollar to be its functional currency for certain of its foreign subsidiaries and the local currency for all other foreign subsidiaries. For subsidiaries where the local currency is the functional currency, the assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the daily current exchange rates. Gains and losses from translation are included in “Accumulated other comprehensive loss.” Gains and losses resulting from remeasuring monetary asset and liability accounts that are denominated in currencies other than a subsidiary’s functional currency are included in “Interest and other income, net.” Total foreign currency losses were immaterial for the three months ended June 30, 2002, $0.1 million for the three months ended June 30, 2001, and $0.1 million and $0.4 million for the six months ended June 30, 2002 and 2001, respectively.

As indicated in the Company’s 2001 Annual Report on Form 10-K, the Company adopted SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” as amended by SFAS No. 138, effective January 1, 2001, which requires that all derivatives that do not qualify for hedge accounting be recorded on the balance sheet at fair value.

The Company uses foreign currency forward contracts to serve as an economic hedge on receivables and payables denominated in foreign currency and intercompany receivables and payables. The principal foreign currencies hedged are the British pound and the Euro using foreign currency forward contracts ranging in periods from one to nine months. Forward contracts are accounted for on a mark-to-market basis, with realized and unrealized gains or losses recognized in the current period. Gains or losses arising from forward contracts that were effective as an accounting hedge are included in the basis of the designated transactions. The related receivable or liability with counterparties to the forward contracts are recorded in the consolidated balance sheet. Cash flows from settlements of forward contracts are included in operating activities in the consolidated statements of cash flows. Forward contracts to hedge foreign currency transaction exposure of $5.0 million were outstanding at June 30, 2002.

Note 6. Business Acquisitions

On January 23, 2002, the Company acquired privately-held Boxcar Software, Inc. in exchange for consideration totaling $1.4 million, which was comprised of cash consideration of $1.3 million and $0.1 million in acquisition costs. The acquisition was accounted for using the purchase method of accounting on the date of acquisition. Boxcar was a provider of content aggregation and distribution technology allowing companies to gather content from any source, including Web sites, public folders, file systems and legacy applications, and distribute the content in any format and to any destination. In connection with the purchas