Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the fiscal year ended December 31, 1998
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 0-27358
DOCUMENTUM, INC.
(exact name of registrant as specified in its charter)
Delaware 95-4261421
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5671 Gibraltar Drive, Pleasanton, California 94588-8547
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (925) 463-6800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on February 28,
1999 as reported on the Nasdaq National market, was approximately $217,954,000.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock, par value
$.001 per share, was 16,873,435 on February 28, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 1999 Annual
Meeting of Stockholders to be held May 27, 1999 are incorporated by reference in
Part III of this Form 10-K.
FORM 10-K
Index
PART I
Item 1. Business........................................................................ Page 3
Item 2. Properties...................................................................... Page 19
Item 3. Legal Proceedings............................................................... Page 20
Item 4. Submission of Matters to a Vote of Security Holders............................. Page 20
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters........ Page 21
Item 6. Selected Consolidated Financial Data............................................ Page 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... Page 23
Item 8. Consolidated Financial Statements and Supplementary Data........................ Page 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... Page 31
PART III
Item 10. Directors and Executive Officers of the Registrant.............................. Page 31
Item 11. Executive Compensation.......................................................... Page 31
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. Page 31
Item 13. Certain Relationships and Related Transactions.................................. Page 31
PART IV
Item 14. Exhibits, Consolidated Financial Statements, Financial Statement Schedules, and
Reports on Form 8-K............................................................. Page 32
SIGNATURES.................................................................................... Page 33
2
PART I
ITEM 1. BUSINESS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act")and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") 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 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.
General
Documentum, Inc. ("Documentum" or the "Company") develops, markets and
supports a software application environment for automating the flow of knowledge
in and between organizations, and a family of Web applications that accelerate
the innovation of new products and processes. As a logical evolution of the
Company's industry-leading enterprise document management software, Documentum's
Web applications are designed to dramatically improve competitive advantage by
automating the knowledge-based processes within and between organizations. These
processes comprise the knowledge chain, or the flow of ideas, knowledge,
documents, and business policies that impact a company's ability to achieve
market leadership through innovation of new products and processes. Documentum
applications enable Global 2000 companies to link knowledge workers, projects,
and key processes with the knowledge on which they depend. Fostering innovation
through knowledge chains can result in accelerated time to market and time to
revenue for new products, an enhanced ability to identify and capture new
markets, and trusted knowledge exchanges to enable e-business.
Since 1993, Documentum has delivered document management software solutions
that address the specific challenges of managing business-critical documents
effectively across the enterprise. The Company has become the recognized leader
in enterprise document management software, with more than 570 Global 2000
customers who are themselves market leaders in such industries as global
pharmaceuticals, chemicals and petrochemicals, plant engineering and
construction, investment and commercial banking, computer and electronics
manufacturing and telecommunications. Documentum's customers have deployed a
range of applications based on Documentum software that harness the power of the
Web to effectively automate knowledge chains.
Documentum is leveraging this strong document management heritage to broaden
its market scope and take advantage of the Web's vast potential for automating
corporate knowledge chains -- not only across the enterprise, but also from
business to business. Taking its cue from customers and their successful,
Documentum-based Web solutions, the Company is offering a family of applications
that accelerate innovation for new products and processes. Documentum executed
on the first phase of this strategy in the fourth quarter of 1998 when it
shipped the DocControl Manager, a Web application for managing controlled
documents, based upon the Company's Enterprise Document Management System 98
("EDMS 98"). With the recently-announced Documentum Web Application Environment,
EDMS 98 will be evolved and extended to provide a robust platform for the
delivery of subsequent Web applications tailored to specific requirements in
four targeted industry segments: discrete manufacturing, process manufacturing,
finance, and business and government services.
As of December 31, 1998, the Company employed 616 persons, including 201 in
sales and marketing, 118 in its consulting and training services organization,
53 in customer support, 160 in research and development and 84 in finance and
administration. Of these, 142 are located in Europe, and the remainder is
located in North America and Asia.
3
The Company was incorporated in Delaware in January 1990. The Company's
principal executive offices are located at 5671 Gibraltar Drive, Pleasanton,
California 94588. Its telephone number is (925) 463-6800. The Company's home
page can be located on the World Wide Web at http://www.documentum.com. As used
in this document, the "Company" and "Documentum" refer to Documentum, Inc. and
its subsidiaries.
Documentum(R), the Now You Know(TM) tagline, Documentum Innovation
Application Series(TM), Documentum WorkSpace(R), Documentum SmartSpace(R),
Documentum ViewSpace(R), Documentum DocPage Server(R), Documentum
RightSite(R), Documentum SiteSpace(TM), Documentum DocSolutions(TM), Documentum
DocLink(TM), Documentum CADLink(TM), Documentum DocPage Builder(TM),
Docbase(TM), Docobject(TM), Docbasic(TM), Quickbuilder(TM), and UnaLink(TM) are
trademarks of Documentum, Inc. All other trademarks or service marks appearing
in this document are the property of their respective holders.
Industry Background
In today's global and increasingly competitive business environment, product
innovation is an absolutely essential ingredient for market leadership. Consider
a worldwide pharmaceutical company, whose success is tied to its ability to
identify a new compound that uniquely solves a pressing medical problem, develop
the compound into a tested and approved drug, and bring the drug to market
before the competition delivers its own solution. Such product innovation and
the processes that drive it are fundamentally dependent on a company's ability
to access, apply, and act upon knowledge -- both within and beyond the
enterprise. In the case of the pharmaceutical company, the processes involved in
developing a new compound into a drug and bringing it to market rely on a vast
universe of knowledge, from the scientific data and clinical trials information
generated within the company to the medical research, information from
regulatory agencies, and market research data that must be obtained from outside
sources.
At the same time and with astonishing speed, the Web has become the
infrastructure equivalent of an e-business dial tone. Even before the Web,
companies faced an uphill struggle to manage the increasing volume of business-
critical information vital to key processes ranging from product development,
engineering change, and manufacturing to marketing, sales, and distribution.
Now, information is proliferating like never before. Leveraging Web technology
to access, share, and make decisions based on business-critical information
presents enormous potential for streamlining the processes that support product
innovation and help achieve competitive advantage. For global organizations to
effectively apply knowledge over the Web, however, they must have assurance that
the information is current, accurate, and personalized.
First-generation Web applications have facilitated knowledge searches over the
Web, but they cannot guarantee the integrity of knowledge contained in the
business-critical content vital to product and process innovation. This
integrity is absolutely necessary for such documents as product specifications,
research results, market development studies, product configuration options,
drug manufacturing recipes, standard operating procedures for a manufacturing
plant, and competitive intelligence data. Nor can first-generation Web
applications effectively tailor the delivery of knowledge to different knowledge
workers based upon their job roles and responsibilities. As a result, knowledge
workers such as researchers, engineers, product managers, and sales
professionals must either search for the right information or re-create it when
it cannot be found. To truly exploit the Web for business advantage, global
organizations must ensure instant access to reliable information, whether it
exists within the organization or outside of it. This will enable knowledge
workers to leverage the Web to apply knowledge for making and acting on
critical business decisions.
To be effective, Web applications must maximize knowledge worker productivity
by automating the knowledge-based processes within and between organizations,
also known as the knowledge chain. A knowledge chain describes the way global
organizations link relevant knowledge with specific projects, key processes, and
the people who rely on them. The knowledge chain complements another set of
essential processes -- the supply chain. The supply chain improves the
productivity of operational workers by managing the flow of materials and
products from order to delivery and tracking their costs. Supply chain
management deals with transactional information, and operates within structured,
deterministic processes (e.g., inventory management, manufacturing, shipping and
accounting). On the other hand, the knowledge chain improves knowledge worker
productivity by focusing on the volumes of non-transactional information or
unstructured information. This unstructured knowledge exists in a wide range of
formats from text files, word processing documents and spreadsheets to Web pages
and Java applets, CAD
4
drawings, graphics and images, and multimedia. Likewise, the
knowledge chain operates within dynamic processes that are unstructured and
unpredictable.
Historically, global organizations have not fully automated their knowledge
chains, since much of the knowledge necessary for developing, manufacturing,
marketing, selling and supporting products exist in unstructured form and cannot
be effectively managed by a relational database. In a business environment
characterized by global competition and shrinking product lifecycles, the
inability to automate knowledge chains negatively impacts product and process
innovation. Therefore, some industry analysts have estimated the market
potential of Web applications for knowledge workers could be significantly
larger than that of the supply chain management market popularized by
application suites from companies such as SAP and PeopleSoft.
Documentum's Solution
Documentum is taking advantage of the market opportunity for Web applications
that streamline product and process innovation as a logical expansion of the
enterprise document management (EDM) market. The EDM market grew up around
business challenges in the client/server environment that closely parallel the
Web scenario described above. Documentum has achieved leadership in the EDM
market with its Documentum Enterprise Document Management System (EDMS), a
family of software solutions that enables companies to share, manage, and reuse
the vital corporate knowledge contained in documents. The Documentum EDMS has
been deployed by more than 570 Global 2000 companies that require a fast-payback
document management solution offering rapid and flexible deployment, ease of
use, and high return on investment. With the Documentum EDMS, these companies
are achieving dramatic improvements in business-critical document processes with
powerful benefits: accelerated time to market, improved product quality,
enhanced operational efficiencies, and guaranteed regulatory or contract
compliance.
With its family of Web applications for innovation of new products and
processes, Documentum is leveraging its technology leadership and expertise to
expand its market focus. Documentum's applications harness the Web to
automatically connect knowledge workers to the information they need, at the
time they need it, in the right format and business context. Built upon scalable
server and repository technologies, Documentum Web applications ensure the
integrity of content delivered over the Web. By dynamically serving up and
personalizing Web content, Documentum Web applications enable the rapid
generation of custom Web sites. Global organizations can share and apply
knowledge as needed, without forcing knowledge workers to search the Web or
recreate information that may already exist.
Documentum applications incorporate essential components that are absent from
first-generation Web applications. These include a scalable knowledge
repository, the Docbase, that secures, versions, and manages unstructured
content and Web pages, and domain expertise that is codified into the
applications to meet specific challenges in vertical industries. These elements
enable Web applications that are easy to maintain and administer.
As the underlying database for Documentum's Web applications, the Docbase
differs from the relational databases that drive traditional enterprise
applications. Relational databases are designed to handle structured,
transactional information and cannot be adapted to manage unstructured
information such as Web pages, text files, images, scanned paper documents,
XML/SGML fragments, and multimedia formats. In 1993, Documentum broke new ground
by introducing the Docbase as the industry's first scalable, object-oriented
knowledge repository for managing these types of unstructured data formats. The
Docbase combines document, object, workflow, relational, and Web technologies to
store, index and manage the attributes, relationships, content and operations of
each version of every document. This enables the system to manage not only the
documents and Web pages themselves, but also their associated workflows,
attributes (or metadata), annotations, and business rules. Of particular value
to Web applications is the Docbase's ability to manage documents at the
component level, enabling them to be combined and recombined on demand from any
source in the organization.
The return on investment from Documentum Web applications comes when they are
applied to a specific business task. To prepare for a sales call, for example, a
Documentum Web application could instantly deliver over the Web background
information on any prospect, the related industry, the business challenge,
current products or solutions, and competitive offerings. In research and
development, a Documentum Web application could connect researchers to valuable
internal and external research archives over the Web, and provide a secure
repository for
5
managing and archiving research data. In product development, a Documentum Web
application could improve the sharing of engineering and marketing information
over the Web, so organizations could compress delivery schedules while
increasing the reliability of new product designs. In each example, significant
advantages result from exploiting Web technology to link knowledge with
projects, key processes, lessons learned and established best practices, and
domain experts.
With Documentum's existing and upcoming server technology for Web
applications, global organizations can:
. Manage the entire lifecycle of Web content and business-critical documents,
from creation and capture on through to changing, securing, routing,
publishing, and archiving for thousands of users;
. Personalize the collection and publishing of information to knowledge workers,
in the preferred format, at the right time, and for a specific business
purpose;
. Manage the collaborations and deliverables of project teams;
. Let knowledge workers access information through their tool of choice: a Web
browser, Microsoft Explorer, a desktop application such as Microsoft Office,
or an enterprise application such as SAP R/3 or PeopleSoft;
. Leverage global e-mail and messaging systems for effective communication.
Documentum Products
Documentum Web Application Environment: EDMS 98
At the heart of Documentum's product strategy is the Documentum Web
Application Environment, a robust environment that enables the cost-effective
deployment of Documentum Web applications. The Web Application Environment
facilitates development of applications by Documentum customers and system
integrator partners, as well as Documentum's own packaged applications. The
first generation of the Documentum Web Application Environment, EDMS 98,
consists of Web application servers, a family of Intranet clients, and
development tools, all of which create a distributed application architecture
for the rapid development and deployment of global applications.
. Application Servers. EDMS 98 includes a Web application server called the
DocPage Server. The DocPage Server implements a knowledge repository, the
Docbase, and a rich set of document and Web content management services for
controlling and managing business-critical information and processes
throughout the enterprise. The DocPage Server securely controls and manages
the lifecycle of business projects and policies, Web pages, shared business-
critical documents, and information. EDMS 98 also includes Documentum
RightSite, an integrated server that extends the power of enterprise document
management to the Web. RightSite enables companies to deliver high-quality,
business-critical information via corporate Intranets or the Internet. With
future releases of the Documentum Web Application Environment over time,
Documentum will be delivering other servers that provide addition Web
application functionality such as a server for managing access, versioning,
and sharing of XML content and a server for enabling knowledge workers to
intelligently mine content from a wide variety of sources and repositories .
. Intranet Clients. Within the enterprise, Documentum has identified three
classes of knowledge workers: coordinators, contributors, and consumers. EDMS
98 offers a range of Web browser-based clients, each designed to deliver the
appropriate Documentum functionality to a different class of knowledge worker.
Documentum WorkSpace Intranet provides a full complement of knowledge
management services to coordinators. Documentum SmartSpace Intranet is an
easy-to-use environment that enables knowledge contributors to provide content
and perform a range of knowledge management tasks over the Web. Finally,
Documentum ViewSpace Intranet is targeted to information consumers, enabling
them to use their Web browsers to access and view knowledge stored in one or
more Docbases. Documentum's Intranet clients provide a powerful cross-platform
solution from any client machine including Windows, Unix, and Macintosh.
. Documentum DocPage Builder. The DocPage Builder is a set of tools for
integrating desktop systems and building tailored document management
applications. The DocPage Builder includes Docbasic, Documentum's cross-
platform programming language; Quickbuilder, a screenpainter tool for
modifying screen graphics; and the Documentum Client Libraries, a set of
object-oriented application programming interfaces (APIs) that enable third-
party application developers to access the functionality of the DocPage
Server.
6
Documentum Web Applications
The Company offers a range of applications for product and process innovation
based upon EDMS 98 and the Documentum Application Environment. Documentum
applications that are either in development or currently shipping fall into the
following categories:
. Marketing and Sales. Documentum offers a Web application that help companies
collapse time to revenue for new products by increasing the efficiency and
productivity of the sales force. This application provides marketing and sales
executives with greater knowledge about their industry, customers, products,
and competitors within the framework of their sales processes. This
application enables companies to build and manage a library of sales and
marketing knowledge for direct, "on-demand" access by the sales
representatives and other sales channels.
. Quality Management. Beginning with the first shipping application, the
Documentum DocControl Manager, this series of Web applications helps
manufacturing companies meet quality goals for new products by automating the
creation, sharing and management of controlled documents across a global
network. These applications place documents such as standard operating
procedures (SOPs), materials safety datasheets (MSDS), work instructions and
test protocols, product and packaging specifications, and plant engineering
drawings under the secure control of a common enterprise repository.
Controlled documents can be automatically and securely routed, approved,
distributed, and tracked across a corporate intranet, and the current version
of a document becomes instantly accessible to any authorized user from a Web
browser.
. Project/Team Management. This Web application automates activities at the core
of product and process innovation -- the collaboration by teams as they
contribute explicit knowledge to knowledge chains both within and between
companies. This application streamlines all processes by which teams develop
new products, ensure their quality and manufacturing integrity, and deliver
products to market.
In addition to its Web Application Environment and its own Web applications,
the Company offers a number of integrations with major business applications.
These product integrations enable customers to extend their existing enterprise
applications with Documentum functionality and provide knowledge workers with
access to business-critical documents from within their familiar applications.
The Company's product integrations include:
. Documentum DocLink for SAP. DocLink for SAP is a bi-directional interface that
provides seamless integration between Documentum and SAP's R/3. DocLink for
SAP enables corporations to use intranet and client/server technology to
seamlessly link corporate knowledge with SAP information in a paperless,
electronic environment. Knowledge workers using Microsoft Office, AutoCAD and
other desktop applications can collaborate to create, review, annotate,
assemble and approve documents such as designs, drawings, specifications,
standard operating procedures, data sheets and production plans. These
documents can then be released to R/3 users for immediate, direct access.
. Documentum/PeopleSoft Integration. Documentum and PeopleSoft have teamed to
provide an integration of Documentum with the PeopleSoft Manufacturing
product. The Documentum/PeopleSoft integration links engineering,
manufacturing, and downstream functions into a single system for managing all
product information, documents and data seamlessly across the enterprise.
. Documentum CADLink Product Suite. Powered by Documentum, CADLink is a suite of
products for managing and accelerating the creation, access, approval, and
release of CAD drawings. CADLink tightly integrates the AutoCAD and
MicroStation CAD systems with Documentum's state-of-the-art Web Application
Environment for a comprehensive CAD management solution. CADLink enables true
engineering drawing lifecycle management, integrating the design workshop with
the many enterprise users who require access to the critical information held
in CAD drawings.
. Documentum UnaLink. Documentum UnaLink is a server-to-server based integration
of Documentum with Lotus Notes. UnaLink lets customers leverage Notes' group
collaboration capabilities to participate in lifecycle
7
management of business-critical documents, including complex compound
documents. UnaLink provides Notes users with a gateway to Documentum's Docbase
repository for storing and managing enterprise documents.
Consulting and Support Services
Turning a Web application vision into reality must involve a strategic
methodology. Global organizations lacking the expertise for developing this
methodology can turn to Documentum Worldwide Consulting Services. Documentum
Consulting understands the different approaches for defining this vision and
strategy. Documentum Consulting offers the technical services for knowledge-
enabling a global enterprise, and can perform valuable knowledge flow audits to
measure the impact of specific knowledge chains on business performance.
Documentum Worldwide Consulting Services offers a full range of global
consulting services and programs designed to deliver complete Web applications
in the Company's target industry segments. Documentum Consulting's industry-
aligned consulting services including design, development and deployment
services for Documentum Web applications. In financial services, for instance,
the Company offers a consulting practice for delivering applications designed to
reduce operational risk for investment and commercial banking and brokerage
industries. These solutions foster innovation in back-office processes by
accelerating knowledge management tasks such as processing transactions,
preparing tailored portfolio reports, and generating and managing new account
documentation.
In order to enhance its consulting expertise in the semiconductor and
electronics marketplace, the Company acquired Workgroup Management, Inc. (WMI)
of Oakland, California in the first quarter of 1998. WMI is a systems integrator
with expertise in implementing business-critical knowledge management systems
for semiconductor and electronics companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Developments."
The Company also offers a range of worldwide customer support and education
services through its Customer Support Services organization. The Company
currently operates four Technical Support Centers in geographic locations that
ensure access to at least one open support center, regardless of local time.
These support centers are located in California, the United Kingdom, Germany,
and Australia. Each center offers different levels of hotline technical support,
remote dial-in services for problem identification and access to maintenance and
patch releases for supported and purchased products. The Documentum Education
Center offers a curriculum of courses on Documentum products for end users,
developers and system administrators. Courses are available at the Company's
training centers in Pleasanton, Chicago, Philadelphia and London, and can also
be delivered at the customer's site.
Strategy
The Company's objective is to leverage its market leadership in enterprise
document management to become the leading worldwide supplier of Web applications
for product and process innovation and an application software environment to
automate knowledge chains. To achieve this objective, the Company's strategy
includes penetrating global industries vertically, extending its technology
leadership, delivering Web applications, leveraging its technology partnerships,
focusing on enterprise deployments and utilizing multiple distribution channels.
Penetrate Global Industries Vertically. A key component of Documentum's
strategy is to focus on strategic vertical markets with compelling business-
critical needs for Documentum Web applications; namely, industries where more
efficient management of corporate knowledge to foster product innovation results
in an immediate and substantial payback. Specifically, the Company is targeting
four key industry segments: the process manufacturing sector including
chemicals, petrochemicals, consumer products and construction engineering
companies; the discrete manufacturing sector including electronics, computer,
automotive and aerospace manufacturing companies; the financial services sector
including investment banking, commercial banking and brokerage companies; and
the business and government services sector including telecommunications and
utilities companies and federal, state and local government agencies.
Extend Technology Leadership. The Company's strategy is to continue to enhance
its Web application environment and to add functionality to Web applications
that strengthen their ability to help knowledge workers access, share, and act
upon relevant and accurate knowledge. One example of this strategy is the
intelligent content
8
mining technology that Documentum obtained through its acquisition of Relevance
this year. With the purchase of Relevance, Documentum's solutions will have the
enhanced ability to deliver the most relevant information to users as it relates
to a specific industry or business task, whether this information is housed in a
Documentum repository, other internal company resources, or external sources
such as databases, wire services and the Internet.
The Company will also continue to provide greater flexibility in terms of
information delivery, document repositories, and the number and variety of
supported client, server and relational database management system (RDBMS)
platforms. Documentum expects to enhance the features of its products by
continuing to make them compatible with new technologies as well as existing
applications and by responding to the unique needs of large organizations.
Deliver Web Applications. The Company's goal is to lead the market for Web
applications that improve knowledge worker productivity in the areas of product
and process innovation. The Company's focus on key vertical markets plays a
vital role in this strategy, and the Company intends to expand its domain
expertise in these vertical markets to identify the specific areas for which
Web-based applications can accelerate product and process innovation. For
instance, the Company offers Web applications in several vertically focused
categories.
Leverage Technology Partnerships. The Company has accelerated the development,
introduction and acceptance of Documentum solutions through selected third party
system integrators and reseller partners. The Company has a strategic
relationship with Microsoft that includes a joint initiative between the two
companies to address expanding knowledge application opportunities and develop
solutions that leverage their complementary technologies. In addition, the
Company has embedded in its software certain industry-standard features and
functionality licensed from Adobe, Microsoft and Verity, and the Company
integrates its applications with other business-critical applications from
vendors including SAP, PeopleSoft, and Lotus, a division of IBM. Besides
Microsoft, the Company maintains partnerships with numerous best-in-class
software companies for the joint development of applications that integrate
Documentum technology. Finally, the Company conducts joint marketing and sales
activities with complementary strategic hardware and software vendors, including
Hewlett-Packard, IBM, Sun Microsystems, Informix, Lotus, Microsoft, Netscape,
Oracle and Sybase.
Focus on Enterprise Deployments. The Company has designed its products to
scale from focused business-critical applications consisting of hundreds of user
seats to use across the enterprise and beyond, with Web access to knowledge both
within and outside the organization. These enterprise-wide deployments often
involve multiple applications for thousands of user seats at multiple sites. The
Company believes that initial customer success using Documentum products to
capture business-critical information is an essential factor in a customer's
decision to deploy the Company's products throughout the enterprise. The Company
has a two-pronged strategy to drive customers towards enterprise-wide
deployment. First, the Company provides targeted consulting and training
services to its customers and systems integrators. Second, the Company has
established strategic partnerships with major, or vertically focused, systems
integrators, including, among others, Cap Gemini, Computer Sciences Corporation,
IBM Professional Services, Deloitte & Touche, Ernst & Young and Xerox
Professional Document Services. These partners provide customization of the
Company's applications for individual customer needs and integration with third-
party applications.
Utilize Multiple Distribution Channels. The Company's strategy is to expand
its multiple distribution channels to reach the broadest customer base in its
targeted industries. The Company sells through its direct sales force as well as
through indirect channels, primarily consisting of systems integrators and
distributors. Documentum intends to continue to focus on growing its indirect
sales channels to include value-added resellers, and to expand both direct and
indirect distribution channels on a worldwide basis by hiring additional sales
persons and recruiting additional integrators, particularly in vertical
industries.
Customers
The Company has directly or indirectly licensed its products to more than 570
end user customers in a broad range of industries worldwide, including process
manufacturing, discrete manufacturing, financial services, and business and
government services.
9
The potential for payback and operational improvements from Documentum
solutions is substantial. A Documentum solution for Rhone-Poulenc Rorer is
shaving up to a full year off the product development cycle. At Ford Motor
Company, a Documentum-based Marketing, Sales and Service Library is helping
customer service groups provide prompt, accurate replies to more than 12,000
calls from customer and business accounts every business day. In its first year
of deployment, Platinum Technology, Inc. realized a $6 million return on
investment from its Web-based Documentum solution through increased sales force
productivity by centralizing information and transferring knowledge across a
fast-growing, highly distributed enterprise. Scudder Kemper Investments, Inc.,
the global investment management company, relies on Documentum to manage Web
content on its next generation Web site that features intelligent querying and
personalized content delivery. Volkswagen, AG has selected Documentum as its
worldwide corporate standard for all document, Web content and knowledge
management applications. Volkswagen currently has Documentum projects underway
that will implement highly automated, efficient document-centric business
processes and link unstructured documents with structured, transaction-based
data managed by SAP R/3.
Sales and Marketing
The Company sells its products through its own direct sales force as well as
complementary indirect channels primarily consisting of systems integrators and
distributors. Sales teams are organized around the Company's key vertical
markets of process manufacturing, discrete manufacturing, financial services,
and business and government services. The Company currently has 14 sales offices
in the United States, three sales offices in Europe, one sales office in Japan,
one sales office in Korea, and distributors in Europe, the Middle East, Asia-
Pacific, South Africa and Canada. The Company also has strategic relationships
with more than 30 systems integrators and distributors worldwide.
The Company targets global customers in its key vertical markets including
process manufacturing, discrete manufacturing, financial services, and business
and government services. The Company has designated a team of industry
specialists, marketing managers and development engineers that work to further
penetrate customers in existing vertical markets as well as promote applications
in new vertical markets. One of the Company's objectives is to reduce customers'
product development time and increase operational efficiency by designing Web
applications for particular business-critical processes.
The Company's field sales force conducts multiple presentations and
demonstrations of the Documentum EDMS solution to management and users at the
customer site as part of the direct sales effort. Sales cycles generally last
from six to 12 months. The direct sales force is responsible for local partner
support, joint sales efforts and management of multiple channels. See "Risk
Factors--Lengthy Sales and Implementation Cycles."
The sales staff is currently based at the Company's corporate headquarters in
Pleasanton, California and at field sales offices in the U.S. metropolitan areas
of Atlanta, Boston, Chicago, Cleveland, Dallas, Denver, Detroit, Houston, Los
Angeles, Minneapolis, New York, Philadelphia, San Francisco, and Washington,
D.C., and abroad in London, Munich, Paris, Tokyo and Seoul. To support its sales
force, the Company conducts comprehensive marketing programs, which include
public relations, telemarketing, seminars, trade shows, education and user group
conferences.
Product Development
The Company has committed, and expects to continue to commit, substantial
resources to product development. The Company's existing products were designed
after extensive work with potential customers to assess their needs. The
Company reviews customer feedback on existing products and works with customers
and potential customers to anticipate future functionality requirements, as part
of its product development efforts.
The Company expects to continue to enhance its existing products, develop new
products and augment its product and technology base through acquisitions. For
the years ended December 31 1998, 1997 and 1996, research and development
expenses were $18.2 million, $11.0 million and $7.9 million respectively.
Historically, the Company has expensed its software development costs as
incurred.
10
With future releases of the Documentum Web Application Environment, Documentum
will extend the functionality of EDMS 98 to offer robust new capabilities for
delivering Web applications that enable innovation for new products and
processes. These capabilities include:
. Relevance Server. With the Relevance Server, the Documentum Web Application
Environment will include technology obtained through the Company's 1998
acquisition of Relevance Technologies, Inc. ("Relevance"). The Relevance
Server will select, organize, and deliver information and expertise according
to its value to a given business process. Instead of having to proactively
search for information, knowledge workers can "mine" task-specific knowledge
from virtually any source: intranets, extranets, and the Internet, and
virtually any repository accessible from a global network. This includes
enterprise and group repositories such as relational databases, Docbases
containing unstructured information, groupware databases, file systems, and
Web sites. The ability to automatically link knowledge workers with the most
relevant knowledge repositories and file stores is a key enabler of knowledge
chains, and a significant advance from first-generation Web applications.
. Explorer Integration. The Documentum Web Application Environment will feature
a seamless integration with Microsoft Windows Explorer, enabling knowledge
workers to perform a wide range of powerful knowledge management tasks and
manage knowledge contained in one or more Docbases from within the familiar
Windows Explorer environment. Documentum will offer two levels of
functionality through Windows Explorer, corresponding to the capabilities
found previously in Documentum's two former stand-alone client/server
products, Documentum WorkSpace and Documentum SmartSpace. Through the Explorer
integration, users interact with Explorer as they do normally, but in addition
to accessing their Windows desktop, C drive, and "Network Neighborhood," they
can access Documentum repositories and objects (including Docbases, personal
cabinets, workflow tasks and checked out files). The Explorer integration also
delivers powerful features for mobile users who are frequently disconnected
from the network.
. Developer Studio. The Developer Studio is a powerful development environment
that leverages Microsoft's Visual Studio tools to enable developers to easily
create and package together the elements that comprise Documentum
applications. These application elements, called DocApps, can then be easily
installed in multiple Docbases throughout the enterprise. DocApps consist of
various application elements including user interface components, document
lifecycle definitions, security settings, document type definitions, workflow
templates and more. The Developer Studio offers an easy-to-use environment for
creating, reusing, and assembling these various elements to deliver true
value-add applications.
. Documentum Administrator. The Documentum Administrator is a Web browser-based
interface that enables system administrators to perform a wide range of
application administration tasks, including user/group management, format and
template management, full text index management, and session monitoring and
management. The Documentum Administrator provides a simplified and centralized
point of access for managing and administering a global, distributed
environment of servers regardless of their location.
Industry Standards
Documentum is committed to providing comprehensive, open Web applications
targeted to customers' unique business requirements. The Company is active in
numerous standards efforts for the Web, including the Web Distributed Authoring
and Versioning (WebDAV) standard and Extensible Markup Language (XML), and the
Company's products ensure interoperability with critical Web standards such as
HTTP and HTML.
As a result of its enterprise document management heritage, Documentum
participates actively in the leading organization that has taken the initiative
to define standards specifically for the document management arena, the Open
Document Management API (ODMA). The ODMA standards committee has developed an
API to enable document management capabilities to be integrated into a wide
range of desktop applications. Documentum has embraced the ODMA standard as a
means of providing direct access to document and knowledge management
capabilities within standard desktop applications, and is currently shipping
products that integrate this standard. In 1996, ODMA formally accepted
Documentum's query extension enabling desktop application users to
simultaneously search document repositories from different vendors. Documentum
also remains very active in the Document Management Alliance (DMA), which has
published a specification for broader interoperability and connectivity between
heterogeneous document management services, repositories and applications.
11
In addition, the Company is participating in the Workflow Management Coalition
(WfMC), which has established widely accepted workflow standards. The Documentum
Application Environment delivers workflow solutions fully compliant with the
WfMC standard.
The Company has enhanced the architecture of its open, extensible server to
support industry-standard platforms, applications, and networks including the
Web. For example, the Company has achieved logo certification for Microsoft
BackOffice, Windows NT and Windows 95. Other industry-leading technologies that
Documentum is actively supporting include LDAP, OLE DB, COM/DCOM, Java, ASP, and
JSP. The Company has also recently introduced key enhancements for capturing
information and automating processes on the Web. Those include extending the
workflow capabilities of the Company's Web clients, providing an enhanced
workflow editor, and delivering a Microsoft integration that enables users to
access Docbase documents from the Windows Explorer. Documentum has also provided
support for other information delivery vehicles such as SAP, Lotus Notes, CAD
systems, and PeopleSoft.
Risk Factors
Uncertainty of Future Operating Results. Our future operating results may
vary significantly and are difficult to predict due to a number of factors, of
which many are beyond our control. These factors include:
. demand for our products;
. the level of product and price competition;
. the length of our sales cycle;
. the size and timing of individual license transactions;
. the delay or deferral of customer implementations;
our success in expanding our customer support organization, direct sales
. force and indirect distribution channels;
. the timing of new product introductions and product enhancements;
. changes in our pricing policy;
. the publication of opinions concerning us, our products or technology by
industry analysts;
. the mix of products and services sold;
. levels of international sales;
. activities of and acquisitions by competitors;
. the timing of new hires;
. changes in foreign currency exchange rates;
. our ability to develop and market new products and control costs; and
. domestic and international economic and political conditions.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate significantly. Based on the preceding factors,
we may experience a shortfall in revenue or earnings or otherwise fail to meet
public market expectations, which could materially adversely affect our
business, financial condition and the market price of our common stock.
Fluctuations in Quarterly Operating Results. Our net revenue and operating
results may vary drastically from quarter to quarter because of numerous factors
largely beyond our control, including the following:
. the potential delay in recognizing revenue from license transactions;
. 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.
12
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 revenues per order, and the number
of large individual license sales we have made has continued to increase. As a
result, the loss or delay of individual orders could have a significant impact
on quarterly operating results and revenues. Furthermore, the timing of license
revenue is difficult to predict because of the length of our sales cycle, which
typically ranges from six to 12 months from initial contact. Also, our strategy
of providing customers with complete document management solutions typically
results in software licenses being bundled with services. In these cases, the
delivery of services may delay recognition of license revenue. Because our
operating expenses are based on anticipated revenue trends and because a high
percentage of these expenses is relatively fixed, any shortfall from anticipated
revenue or a delay in the recognition of revenue from license transactions could
cause significant variations in operating results from quarter to quarter and
could result in operating losses. If these expenses precede, or are not
followed by, increased revenues, our operating results could be materially and
adversely affected.
As a result of the foregoing and other factors, operating results for any
quarter are subject to significant variation, and we believe that period-to-
period comparisons of our results of operations are not necessarily meaningful
in terms of their relation to future performance. You should not rely upon
these comparisons as indications of future performance. Furthermore, it is
likely that our future quarterly operating results from time to time will not
meet the expectations of public market analysts or investors, in which case
there would likely be a material adverse effect on the price of our common
stock.
Lengthy Sales and Implementation Cycles. The timing of the sales and
implementation of our products is lengthy and not predictable with any degree of
certainty. You should not rely on prior sales and implementation cycles as an
indication of future cycles.
The licensing of our software products is often an enterprise-wide decision by
prospective customers and generally requires us to engage in a lengthy sales
cycle (generally between six and 12 months) to provide a significant level of
education to prospective customers regarding the use and benefits of our
products. Additionally, the size and complexity of any particular transaction
can also cause delays in the sales cycle. The implementation of our products
involves a significant commitment of resources by customers over an extended
period of time and is commonly associated with substantial reengineering efforts
by the customer. For these and other reasons, the sales and customer
implementation cycles are subject to a number of significant delays over which
we have little or no control. A delay in the sale or customer implementation of
even a limited number of license transactions could have a material adverse
effect on our business, financial condition and operations and cause our
operating results to vary significantly from quarter to quarter.
Product Concentration. To date, substantially all of our revenues have been
attributable to sales of licenses of the Documentum EDMS family of products and
related services. We expect such products and related services to continue to
account for a substantial majority of our future revenues. Furthermore, we
expect that our recently announced Web Application Environment, the evolution of
the EDMS family of products, will account for an increasingly large portion of
future revenues. As a result, factors adversely affecting the pricing of or
demand for such products, such as competition or technological change, could
have a material adverse effect on our business, financial condition and results
of operations.
New Versions, New Products and Rapid Technological Change. The document
management software and services market in which we compete is characterized by
(1) rapid technological change, (2) frequent introduction of new products and
enhancements, (3) changing customer needs, and (4) evolving industry standards.
The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable.
Accordingly, the life cycles of our products are difficult to estimate. To keep
pace with technological developments, evolving industry standards and changing
customer needs, we must support existing products and develop new products. Our
future success also depends in part on our abilities to execute on our strategy
of developing web applications in certain target vertical industries and to
maintain and enhance relations with technology partners, including RDBMS
vendors, in order to provide our customers with integrated product solutions.
13
We may not be successful in maintaining and enhancing the aforementioned
relationships or in developing, marketing and releasing new products or new
versions of our products that respond to technological developments, evolving
industry standards or changing customer requirements. We may also experience
difficulties that could delay or prevent the successful development,
introduction and sale of these enhancements. In addition, these enhancements
may not adequately meet the requirements of the marketplace and may not achieve
any significant degree of market acceptance. If we fail to successfully
maintain or enhance relationships with our technology partners or to execute on
our integrated product solution strategy, or if release dates of any future
products or enhancements are delayed, or if these products or enhancements fail
to achieve market acceptance when released, our business, operating results and
financial condition could be materially and adversely affected. We have in the
past experienced delays in the release dates of enhancements to our products.
While the delays we have experienced to date have been minor (not exceeding six
months), there can be no assurance that we will not experience significant
future delays in product introduction.
Dependence on Emerging Markets. The market for document management software
and services is intensely competitive, highly fragmented and rapidly changing.
Our future financial performance will depend primarily on the continued growth
of the market for document management software and services and the adoption of
our products by organizations in this market. If the document management
software and services market fails to grow or grows more slowly than we
currently anticipate, our business, financial condition and operating results
would be materially and adversely effected.
Intense Competition. Our products target the emerging market for Web-based
and client/server software solutions. This market is intensely competitive,
rapidly changing and significantly affected by new product introductions and
other market activities of industry participants. We encounter direct
competition from a number of public and private companies that offer a variety
of products and services addressing this market. These companies include
FileNet, OpenText, and PC DOCS. Additionally, several other enterprise software
vendors, such as Microsoft, Oracle and Lotus (a division of IBM) are potential
competitors in the future. Many of these current and potential competitors have
longer operating histories, significantly greater financial, technical,
marketing and other resources, significantly greater name recognition and a
larger installed base of customers than we do. In addition, several of these
companies, including Microsoft, Oracle, Lotus and others, have well-established
relationships with our current and potential customers and strategic partners,
as well as extensive resources and knowledge of the enterprise software industry
that may enable them to more easily offer a single-vendor solution. As a
result, these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products, than we can.
We also face indirect competition from systems integrators. We rely on a
number of systems consulting and systems integration firms for implementation
and other customer support services, as well as for recommendations of our
products during the evaluation stage of the purchase process. Although we seek
to maintain close relationships with these service providers, many of them have
similar, and often more established, relationships with our competitors. If we
are unable to develop and maintain effective, long-term relationships with these
third parties, our competitive position would be materially and adversely
affected. Further, many of these third parties possess industry-specific
expertise and have significantly greater resources than we do, and may market
software products that compete with us in the future.
There are many factors that may increase competition in the market for Web-
based and client/server software solutions, including (1) entry of new
competitors, (2) alliances among existing competitors and (3) consolidation in
the software industry. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect our business, financial condition and operating results. If we
cannot compete successfully against current and future competitors or overcome
competitive pressures, our business, operating results and financial condition
may be adversely affected.
End-User Customer and Industry Concentration. Our success depends on
maintaining relationships with our existing customers. A relatively small
number of customers have accounted for a significant percentage of our revenues.
For 1998, 1997 and 1996, sales to our five largest customers accounted for 17%,
25% and 20% of license revenues, respectively. Additionally, our customers are
somewhat concentrated in the process and discrete
14
manufacturing, pharmaceutical and architectural engineering and construction
industries. We expect that sales of our products to a limited number of
customers and industry segments will continue to account for a significant
percentage of revenue for the foreseeable future. The loss of a small number of
customers or any reduction or delay in orders by any such customer, or our
failure to market successfully our products to new customers and new industry
segments could have a material adverse effect on our business, financial
condition and operating results.
Reliance on Certain Relationships. We have established strategic
relationships with a number of organizations that we believe are important to
our sales, marketing and support activities and the implementation of our
products. We believe that our relationships with these organizations, including
indirect channel partners and other consultants, provide marketing and sales
opportunities for our direct sales force, expand the distribution of our
products and broaden our product offerings through product bundling. These
relationships allow us to keep pace with the technological and marketing
developments of major software vendors and provide us with technical assistance
for our product development efforts. Our failure to maintain these
relationships, or to establish new relationships in the future, could have a
material adverse effect on our business, financial condition and results of
operations.
Management of Growth. Our business has grown rapidly in recent years. This
growth has placed a significant strain on our management systems and resources.
In addition, we have recently completed two acquisitions, the January 1998
acquisition of WMI, and the July 1998 acquisition of Relevance. Each of these
acquisitions required the integration of a number of employees, systems and
facilities increasing the strain on management's systems and resources.
To manage future growth we must continue to (1) improve and maintain our
financial and management controls, reporting systems and procedures on a timely
basis and (2) expand, train and manage our employee work force. If we fail to
manage our growth effectively, our business, financial condition and results of
operations could be materially and adversely affected.
Dependence on Key Personnel. Our future performance depends in significant
part on the continued service of our key technical, sales and senior management
personnel, none of whom is bound by an employment agreement with us. The loss
of services of one or more of our executive officers or key technical personnel
would have a material adverse effect on our business, operating results and
financial condition.
Our future success also depends on our continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and there can be no assurance that we can retain
key employees or that we can attract, assimilate or retain other highly
qualified personnel in the future.
International Operations. Our revenues are primarily derived from large
multi-national companies. To service the needs of these companies, we must
provide worldwide product support services. The Company has offices in London,
Paris, Munich, Tokyo, Melbourne and Seoul. The Company operates its
international technical support operations in the London, Munich and Melbourne
offices. We have expanded, and intend to continue expanding, our international
operations and enter additional international markets. This will require
significant management attention and financial resources that could adversely
affect our operating margins and earnings. We may not be able to maintain or
increase international market demand for our products. If we do not, our
international sales will be limited, and our business, operating results and
financial condition could be materially and adversely affected.
Our international operations are subject to a variety of risks, including (1)
foreign currency fluctuations, (2) economic or political instability, (3)
shipping delays, (4) various trade restrictions, (5) our limited experience in,
and the costs of, localizing products for foreign countries, (6) longer accounts
receivable payment cycles and (7) difficulties in managing international
operations, including, among other things, the burden of complying with a wide
variety of foreign laws.
Dependence on Proprietary Technology and Risks of Infringement. We rely
primarily on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We also believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are
15
essential to establishing and maintaining a technology leadership position. We
seek to protect our software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. Our means of protecting
our proprietary rights in the United States or abroad may not be adequate.
Additionally, our competition may independently develop similar technology.
Although we do not believe that we are infringing any proprietary rights of
others, third parties may claim that we have infringed their intellectual
property rights. Furthermore, former employers of our former, current or
future employees may assert claims that such employees have improperly disclosed
to us the confidential or proprietary information of such former employers.
Any such claims, with or without merit, could (1) be time-consuming to defend,
(2) result in costly litigation, (3) divert management's attention and
resources, (4) cause product shipment delays, and (5) require us to pay money
damages or enter into royalty or licensing agreements. A successful claim of
intellectual property infringement against us and our failure or inability to
license or create a workaround for such infringed or similar technology may
materially and adversely affect our business, operating results and financial
condition.
We license certain software from third parties, including software that is
integrated with internally developed software and used in our products to
perform key functions. These third-party software licenses may not continue to
be available to us on acceptable terms. The loss of, or inability to maintain,
any of these software licenses could result in shipment delays or reductions.
This could materially adversely affect our business, operating results and
financial condition.
Product Liability. Our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in our license agreements may not be effective under the laws of
certain jurisdictions. A successful product liability claim brought against us
could have a material adverse effect upon our business, financial condition and
results of operations.
Uncertainty of the Effects of the Year 2000 on Computer Programs and Systems.
Many currently installed computer systems and software programs use only two-
digit date code fields to identify the year, e.g., 85=1985. These date code
fields will need to accept four-digit entries to distinguish 21st century dates
from 20th century dates. Until the date fields are updated, the systems and
programs could fail or give erroneous results when referencing dates following
December 31, 1999. Such failures or errors could occur prior to the actual
change in century.
We have designed and tested the most current versions of our products to be
Year 2000 compliant and are currently engaged in a comprehensive Year 2000
project to further identify date-processing risks associated with our
information systems, products, operations and infrastructure, suppliers and
customers. We have notified all of our customers of date processing problems
associated with older versions of our products and encouraged them to either
upgrade to a Year 2000 compliant version or resolve the potential date
processing issues. As a number of our customers will continue to run product
versions that are not year 2000 compliant, the Company may incur increased
expenses and additional liabilities relating to these date-processing issues.
Given the unprecedented nature of this problem, we cannot reasonably estimate
potential losses from claims of breach of contract or warranty arising from
these issues at this time, and we cannot reliably measure the effect that any
potential losses will have on our financial condition and operations. In
addition, there can be no assurances that the Company's current product versions
do not contain undetected errors or defects associated with Year 2000 date-
processing issues that may result in additional material costs to the Company.
In addition, many companies are expending significant resources to correct or
"patch" their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software
16
products such as those that we offer. The efforts and resources expended to
address Year 2000 issues may affect the purchasing patterns of our customers and
potential customers. We also believed that many potential customers may defer
purchasing Year 2000 compliant products until it is absolutely necessary,
accelerate purchasing Year 2000 compliant products, switch to other systems or
suppliers, or purchase our products only as an interim solution. If any of the
above were to happen, our business, operating results or financial condition
could be materially adversely affected.
We are currently evaluating our information technology and non-information
technology infrastructure for Year 2000 compliance to determine what actions are
required to make all internal systems Year 2000 compliant and what actions are
needed to mitigate vulnerability to problems related to enterprises with which
we interact. We also utilize third-party vendor network equipment,
telecommunication products and other products and services, including utilities,
that may or may not be Year 2000 compliant. However, if all Year 2000 issues
are not properly identified, or assessment, remediation and testing are not
effected timely with respect to Year 2000 problems that are identified, there
can be no assurance that the Year 2000 issue will not materially adversely
impact our results of operations or adversely affect our relationships with
customers, vendors, or others. In addition, there can be no assurance that we
will not be affected by Year 2000 disruption in the operation of the enterprises
with which we interact. Accordingly, Year 2000 problems could have a material
adverse effect upon our business.
Although we have expended and will continue to expend resources and time to
address potential Year 2000 problems, there can be no assurance that we will be
successful in our efforts to identify and address all Year 2000 issues.
Additionally, there can be no assurance that we will not be affected by Year
2000 disruptions in the operations of the enterprises with which we interact.
Accordingly, Year 2000 problems could have a material adverse effect upon our
business.
Risk of Product Defects. Software products frequently contain errors or
failures, especially when first introduced or when new versions are released.
Also, new products or enhancements may contain undetected errors, or "bugs," or
performance problems that, despite testing, are discovered only after a product
has been installed and used by customers. Errors or performance problems could
cause delays in product introduction and shipments or require design
modifications, either of which could lead to a loss in or delay in recognition
of revenue.
Our products are typically intended for use in applications that may be
critical to a customer's business. As a result, we expect that our customers
and potential customers will have a greater sensitivity to product defects than
the market for software products generally. Despite extensive testing by us and
by current and potential customers, errors may be found in new products or
releases after commencement of commercial shipments, resulting in loss of
revenue or delay in market acceptance, damage to our reputation, diversion of
development resources, the payment of monetary damages or increased service or
warranty costs, any of which could have a material adverse effect upon our
business, operating results and financial condition.
Risks Associated with Acquisitions. As part of our business strategy, we
frequently evaluate strategic opportunities available to us and expect to make
acquisitions of, or significant investments in, businesses that offer
complementary products and technologies. For example, the Company acquired WMI
in January, 1998 and Relevance Technologies in July 1998. Such acquisitions
will, and any future acquisitions or investments would, expose us to the risks
commonly encountered in acquisitions of businesses. Future acquisitions of
complementary technologies, products or businesses will result in the diversion
of management's attention from the day-to-day operations of our business and the
potential disruption of our ongoing business. Additionally, such acquisitions
may include numerous other risks, including difficulties in the integration of
the operations, products and personnel of the acquired companies. Future
acquisitions may also result in dilutive issuances of equity securities, the
incurrence of debt and amortization expenses related to goodwill and other
intangible assets. Our failure to successfully manage future acquisitions may
have a material adverse effect on our business and financial results.
Possible Volatility of Stock Price. The trading price of our common stock is
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant orders, changes in earning
estimates by analysts, announcements of technological innovations or new
products by us or our competitors, general conditions in the software and
computer industries and other events or factors. In addition, the stock market
in general has experienced extreme price and volume fluctuations which have
affected the market price for many
17
companies in industries similar or related to ours and which have been unrelated
to the operating performance of these companies. These market fluctuations may
adversely affect the market price of our common stock.
Effects of Certain Charter Document Provisions that may Prevent Certain
Corporate Actions. Our Board of Directors is authorized to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further approval by our stockholders. The Preferred Stock
could be issued with voting, liquidation, dividend and other rights superior to
those of the common stock. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of our outstanding voting stock. We have
instituted a classified Board of Directors in our Amended and Restated
Certificate of Incorporation. This and certain other provisions of our Amended
and Restated Certificate of Incorporation and certain provisions of our Amended
and Restated Bylaws and of Delaware law, could delay or make more difficult a
merger, tender offer or proxy contest.
Executive Officers
The executive officers of the Company and their ages are as follows:
NAME AGE POSITION
- ---- --- --------
Jeffrey A. Miller 48 President, Chief Executive Officer and Director
Mark S. Garrett 41 Vice President, Chief Financial Officer and Secretary
Thomas P. Heydler 42 Vice President, Marketing and Industries
Paul J. Hoffman 48 Vice President, Worldwide Sales
Howard I. Shao 43 Vice President, Product Development
Burnes S. Hollyman 47 Vice President, Consulting Services
Jeffrey A. Miller has served as the Company's President, Chief Executive
Officer and member of the Board of Directors since July 1993. From April 1991 to
March 1993, Mr. Miller was a division president at Cadence Design Systems, Inc.,
a supplier of electronic design automation software ("Cadence"). From February
1983 to April 1991, Mr. Miller was Vice President and General Manager and Vice
President of Marketing of Adaptec, Inc., a supplier of computer input/output
controllers. From 1976 to 1983, Mr. Miller held various positions at Intel
Corporation, a manufacturer of semiconductor components. Mr. Miller received his
M.B.A. and B.S. in Electrical Engineering and Computer Science from the
University of Santa Clara.
Mark S. Garrett has served the Company's Vice President, Chief Financial
Officer and Secretary since January 1997. From February 1995 through December
1996, Mr. Garrett was Vice President of Worldwide Corporate Financial Planning
and Analysis at Cadence. From August 1994 to February 1995, Mr. Garrett served
as Finance Group Director for the Spectrum Services division at Cadence. From
January 1993 to July 1994, Mr. Garrett was Finance Group Director for Technology
Development at Cadence. From June 1991 to December 1992, Mr. Garrett was
Division Controller and Finance Director for the Systems and CAE Divisions of
Cadence. From June 1979 to May 1991, Mr. Garrett held various financial
positions at IBM Corporation. Mr. Garrett received his M.B.A. from Marist
College and his B.S.B.A. from Boston University.
Thomas P. Heydler has served as the Company's Vice President, Marketing and
Industries since August 1998. From April 1996 to August 1998, he served as vice
president and general manager of the Company's Europe, Asia, and Middle East
operations. From August 1991 to March 1995 Mr. Heydler served as vice president
and general manager of Cadence Design Systems, Europe. From July 1984 to August
1991 he held various positions in software development, product marketing,
Management Consulting and General Management at Siemens AG, Munich. Mr. Heydler
received his B.S. in Electrical Engineering and Computer Science from Technical
University of Munich.
Paul J. Hoffman has served as the Company's Vice President, Worldwide Sales
since September 1996. From September 1994 to September 1996, Mr. Hoffman was
Vice President, Worldwide Operations for Oracle, a relational database software
company. From June 1992 until September 1994 he served as Vice President, Direct
18
Marketing Division, USA for Oracle and from June 1990 until June 1992 he served
as Area Vice President, West for Oracle. Mr. Hoffman received his B.S. in
Finance from Fairfield University.
Howard I. Shao, a founder of the Company, has served as Vice President,
Product Development since January 1997. Prior to that, Mr. Shao was the
Company's Vice President, Research and Development since June 1990. From 1984 to
June 1990, Mr. Shao held a variety of management positions at Ingres
Corporation, a relational database company, including Director Product
Development. From 1981 to 1984, Mr. Shao was the Manager of Department Database
Processor at TTI/Citicorp, a software division of Citicorp. Mr. Shao was a co-
founder of Transtech International, a software company. Mr. Shao received his
M.B.A. from Pepperdine University and a B.S. in Computer Science from the
Massachusetts Institute of Technology.
Burnes S. Hollyman has served as the Company's Vice President, Worldwide
Consulting Services since December 1997. From 1993 to December 1997, Mr.
Hollyman was Vice President of Renaissance Worldwide, a business and technology
strategy/solutions provider and professional services company. While there he
held several positions including Vice President in charge of the New York
Regional office, Practice Leader in charge of the New Media Practice, and Chief
Information Officer for several years. From 1986 to 1993, Mr. Hollyman was a
Director and Practice Leader at The DMR Group in the Emerging Technologies
Practice. From 1983 to 1986 he was a Senior Manager at Peat, Marwick Mitchell in
its High Technology Practice. Mr. Hollyman has a B.A. degree from New York
University and an M.A. from the University of Texas, with PhD coursework at the
University of Texas.
Employees
As of December 31, 1998, the Company employed 616 persons, including 201 in
sales and marketing, 118 in its consulting and training services organization,
53 in customer support, 160 in research and development and 84 in finance and
administration. Of these, 142 are located in Europe, and the remainder is
located in North America. The Company's employees are not represented by a labor
union. The Company has experienced no work stoppages and believes its
relationship with its employees is good. Competition for qualified personnel in
the Company's industry is intense. The Company believes that its future success
will depend in part on its continued ability to attract, hire and retain
qualified personnel.
ITEM 2. PROPERTIES
As of December 31, 1998 the Company leased all of its facilities and its
principal locations are in or near the following cities:
Lease
Location Square Feet Expiration Date Principal Activities
- -------- ----------- --------------- --------------------
Pleasanton, CA........../1/ 116,400 June, 1999 Corporate HQ, Development, Sales,
Marketing, Services and support
Chicago, IL............... 10,025 July, 2001 Sales, Marketing, Services and
support
Philadelphia, PA.......... 16,685 July, 2002 Sales, Marketing and Services
Paris, France............. 12,941 February, 2007 Sales, Services
Tokyo, Japan.............. 14,696 August, 2000 Sales, Services
Munich, Germany........... 15,710 October, 2001 Sales, Services
Uxbridge, England......... 35,520 April, 2013 Sales, Marketing, Services and
Support
- ----------------------
/1/ The Company has signed a lease for approximately 185,000 square feet in
Pleasanton, CA commencing in June 1999.
19
The Company's principal administrative, engineering, manufacturing, marketing
and sales facilities total approximately 116,400 square feet in four buildings
in Pleasanton, California under leases which expire in June, 1999. In June
1998, the Company signed leases for approximately 122,000 square feet and 63,000
square feet in Pleasanton, California beginning in June 1999 and January 2000,
respectively, and expiring in May 2005 and December 2006, respectively. This
space will serve as the Company's headquarters and will contain the principal
administrative, engineering, manufacturing, marketing and sales facilities. The
Company expects to make capital purchases related to leasehold improvements and
office furniture for the new facilities. The Company currently has no other
significant capital spending or purchase commitments other than normal purchase
commitments and commitments under facilities and capital leases. In addition,
the Company leases offices for sales, marketing and customer service activities
in selected locations throughout the U.S., Europe and Asia. In addition to the
new Pleasanton CA space, the Company has already secured suitable additional
space.
In addition to the new facility located in Pleasanton, CA, the Company
anticipates expanding its facilities depending upon the availability of suitable
additional space. Currently the Company is seeking to expand its facilities and
the Company could experience difficulty finding adequate space for expansion.
Failure to obtain space or to obtain it on reasonably attractive commercial
terms may inhibit the Company's ability to grow, or otherwise adversely effect
the Company's operations and financial results.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq National
Market under the symbol "DCTM". The following table sets forth, for the periods
indicated, the high and low sale prices for the Common Stock as reported by
Nasdaq National Market.
High Low
---------- -----------
Fiscal 1997:
First Quarter $38.00 $13.81
Second Quarter 26.00 13.75
Third Quarter 39.00 24.38
Fourth Quarter 42.25 26.00
Fiscal 1998:
First Quarter $54.38 $32.75
Second Quarter 59.63 40.88
Third Quarter 54.50 34.75
Fourth Quarter 54.00 16.75
The trading price of the Company's Common Stock is subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of new products by the Company or its competitors, announcements
of technological innovations, as well as other events or factors. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price of many high
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
effect the market price of the Company's Common Stock.
As of December 31, 1998, the number of common stockholders of record was 343.
The Company believes that the number of beneficial holders of its common stock
is in excess of 500.
The Company has never paid any cash dividends on its capital stock and does
not expect to pay any such dividends in the foreseeable future. In addition, an
existing bank credit agreement currently restricts the Company's ability to pay
cash dividends without the bank's consent.
On February 3, 1999, the Board of Directors declared a dividend distribution,
payable to stockholders of record on that date, of one Preferred Share Purchase
Right for each outstanding share of Common Stock (par value $0.001). The Rights
were issued on February 24, 1999, expire 10 years after issuance, and will be
exercisable only if a person or group becomes the beneficial owner of 20% or
more of the Common Stock (such person or group, a "20% holder") or commences a
tender or exchange offer which would result in the offeror beneficially owning
20% or more of the Common Stock. Each Right entitles the registered holder to
buy one one-hundredth of a share of newly issued Series A Junior Participating
Preferred Stock at an exercise price of $200.00 subject to certain adjustments.
Each one one-hundredth of a share of Preferred Shares has designations and
powers, preferences and rights, and the qualifications, limitations and
restrictions which make its value approximately equal to the value of a Common
Share. The Company will generally be entitled to redeem the Rights at $0.001
per Right at any time prior to the day of the first public announcement of the
existence of a 20% holder. The description and terms of the Rights are set
forth in a Rights Agreement (the "Rights Agreement"), dated as of February 3,
1999 entered into between the Company and BankBoston, N.A., as rights agent (the
"Rights Agent"). The Rights Agreement was filed as an exhibit to the Company's
Current Report on Form 8-K dated February 3, 1999, filed with the SEC.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Company's Board of Directors, except pursuant to an
offer conditioned on a substantial number of Rights being acquired.
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ------------ ------------ ------------
(in thousands except per share data)
Consolidated Statement of Operations Data:
Revenues:
Licenses $80,546 $ 54,536 $34,630 $20,377 $ 8,919
------------ ----------- ------------ ------------ ------------
Services 43,283 21,099 10,672 5,079 1,454
------------ ----------- ------------ ------------ ------------
Total revenues 123,829 75,635 45,302 25,456 10,373
------------ ----------- ------------ ------------ ------------
Cost of revenues:
Licenses 4,179 2,453 1,923 1,188 518
Services 25,684 12,327 6,845 3,324 1,304
------------ ----------- ------------ ------------ ------------
Total cost of revenues 29,863 14,780 8,768 4,512 1,822
------------ ----------- ------------ ------------ ------------
Gross profit 93,966 60,855 36,534 20,944 8,551
------------ ----------- ------------ ------------ ------------
Operating expenses:
Sales and marketing 50,425 35,084 19,909 12,513 6,254
Research and development 18,181 10,986 7,880 4,512 2,523
General and administrative 10,255 5,976 4,114 2,430 1,738
Acquisition related costs 2,171 - - - -
Purchased in process research and development 34,622 - - - -
------------ ----------- ------------ ------------ ------------
Total operating expenses 115,654 52,046 31,903 19,455 10,515
------------ ----------- ------------ ------------ ------------
Income (loss) from operations (21,688) 8,809 4,631 1,489 (1,964)
------------ ----------- ------------ ------------ ------------
Interest and other income, net 4,395 2,333 2,268 239 75
------------ ----------- ------------ ------------ ------------
Income (loss) before income tax provision (17,293) 11,142 6,899 1,728 (1,889)
Provision for income taxes (6,231) (3,788) (2,415) (468) -
------------ ----------- ------------ ------------ ------------
Net income (loss) $ (23,524) $ 7,354 $ 4,484 $ 1,260 $ (1,889)
============ =========== ============ ============ ============
Net income (loss) per basic common share (1) $ (1.45) $ 0.51 $ 0.33 $ 0.73
============ =========== ============ ============
Shares used in basic per share computation (1) 16,221 14,463 13,790 1,731
============ =========== ============ ============
Net income (loss) per diluted common share (1) $ (1.45) $ 0.49 $ 0.30 $ 0.10
============ =========== ============ ============
============ =========== ============ ============
Shares used in per diluted share computation (1) 16,221 15,098 14,734 12,934
============ =========== ============ ============
Consolidated Balance Sheet Data:
Cash and cash equivalents $16,240 $ 14,236 $ 5,369 $ 5,978 $ 6,289
Short-term investments 84,203 78,895 46,803 - -
Working capital 97,544 91,697 51,821 4,624 5,256
Total assets 160,649 127,203 74,944 16,501 10,916
Long-term obligations - - 211 691 544
Mandatorily redeemable convertible preferred stock - - - 13,391 13,391
Stockholders' equity (deficit) 116,813 102,033 59,332 (5,746) (7,286)
- -----------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income (loss) per basic and diluted shares.
22
ITEM 7. 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.
Overview
Documentum, which was formed in 1990, develops, markets and supports a
software application environment and a family of Web-based applications for
product and process innovation. From its inception through December 1992, the
Company's activities consisted primarily of developing its products,
establishing its infrastructure and conducting market research. The Company
shipped the first commercial version of its Documentum Server product in late
1992, and since then substantially all of the Company's revenues have been from
licenses of its family of enterprise document management system products and
related services, which include maintenance and support, training and consulting
services. The Company continues to invest in research and development in order
to update its family of products and expand its market focus to deliver Web
applications. In 1996, the Company expanded its presence in the market for Web
technologies by introducing its Documentum RightSite engine for extending
document management capabilities to Web content, and a family of Web-based
clients. During 1997, the Company introduced a number of vertically focused
solutions (DocSolutions) that provided the foundation for the Company's current
family of Web applications. Also, during 1997, the Company introduced and
shipped Documentum DocLink for SAP, introduced and shipped the Documentum
DocPage Server and Documentum WorkSpace products in a localized Kanji version
and expanded its sales efforts in the Asia-Pacific region. During 1998, the
Company introduced Enterprise Documents Management System 98 (EDMS 98), an
enterprise application platform for automating the end-to-end lifecycle
management of business-critical documents. EDMS 98 delivers enhanced Web clients
that feature an intelligent user interface and records management services to
archive documents. The Company expects that license and service revenues from
EDMS 98 and newer product offerings including the Documentum Web Application
Environment, will account for substantially all of the Company's revenues for
the foreseeable future. As a result, the Company's future operating results are
dependent upon continued market acceptance of EDMS 98 and Documentum Web
Application Environment enhancements thereto.
On January 5, 1998 the Company acquired all the outstanding shares of WMI, a
privately-held company, in exchange for approximately 192,473 shares of the
Company's common stock valued on the transaction date at $6.7 million. The
acquisition was accounted for as a pooling of interests. WMI is a professional
services firm with approximately 35 employees located in Oakland, California
specializing in the design, the development and the implementation of document
management systems for the semiconductor industry. The acquisition of WMI is
part of the Company's strategic plan to add specific domain expertise in
targeted vertical industries. As of December 31, 1997, WMI had revenues of
approximately $4 million and gross assets of approximately $1 million and the
Company believes this will have an immaterial effect on the Company's financial
statements as a whole. The Company recorded merger expenses of $2.2 million in
connection with the acquisition in the first quarter of 1998.
On July 16, 1998, the Company acquired all the outstanding shares of
Relevance, a privately held company, in exchange for consideration totaling
approximately $36.5 million, including 578,488 shares of the Company's common
stock. The acquisition was accounted for by the purchase method of accounting.
Relevance was a development stage software company with approximately 25
employees (as of the date of the acquisition) located in San Francisco,
California specializing in the development of content mining technology for
unstructured information.
23
The acquisition of Relevance represents a new market opportunity for Documentum
to develop additional applications for the sharing and applying of both
corporate and Web based knowledge. As of May 31, 1998, Relevance had no revenues
and had gross assets of approximately $3.6 million. The Company recorded $34.6
million as a charge related to the write off of purchased in process research
and development.
Since inception, the Company has invested significant resources in developing
its software and related solutions, as well as building its sales, services,
marketing, and general administrative organizations. As a result, since
inception the Company's operating expenses have increased in absolute dollar
amounts and are expected to continue to increase.
Although the Company has experienced significant revenue growth in recent
years, the Company does not believe that such growth rates are sustainable.
Accordingly, the rate at which the Company has grown in the past should not be
considered to be indicative of future revenue growth, if any, or future
operating results. There can be no assurance that the Company will remain
profitable on a quarterly basis. See "Risk Factors -- Uncertainty of Future
Operating Results" and " Fluctuations in Quarterly Operating Results."
24
Results of Operations
The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of total revenues for the periods
indicated:
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------- ----------- ------------
Revenues:
Licenses 65% 72% 76%
Services 35% 28% 24%
------------- ----------- ------------
Total revenues 100% 100% 100%
------------- ----------- ------------
Cost of revenues:
Licenses 3% 3% 4%
Services 21% 16% 15%
------------- ----------- ------------
Total cost of revenues 24% 19% 19%
------------- ----------- ------------
Gross profit 76% 81% 81%
------------- ----------- ------------
Operating expenses:
Sales and marketing 41% 46% 44%
Research and development 15% 15% 17%
General and administrative 8% 8% 9%
Acquisition and related costs 2% 0% 0%
Purchased in process research and development 28% 0% 0%
------------- ----------- ------------
Total operating expenses 94% 69% 70%
------------- ----------- ------------
Income (loss) from operations (18%) 12% 11%
------------- ----------- ------------
Interest and other income, net 4% 3% 5%
------------- ----------- ------------
Income (loss) before income tax provision (14%) 15% 16%
Provision for income taxes (5%) (5%) (6%)
------------- ----------- ------------
Net income (loss) (19%) 10% 10%
============= =========== ============
As a Percentage of Related Revenues:
Cost of license revenues 5% 4% 6%
Cost of service revenues 59% 58% 64%
Revenues
The Company's revenues are derived from the sale of perpetual licenses for
its document management software and related services, which include
maintenance and support, consulting and training services. Revenues from
license arrangements are recognized upon shipment of the product if collection
of the resulting receivable 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 consulting and training
are deferred and recognized when the services are performed and collectibility
is deemed probable. During 1998, the Company has recognized
25
revenue in accordance with Statement of Position No. 97-2 ("SOP 97-2"),
"Software Revenue Recognition". Prior to 1998, the Company recognized revenues
in accordance with Statement of Position 91-1, "Software Revenue Recognition."
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions."
The provisions of SOP 98-9 will be adopted for transactions entered into
during the fiscal year beginning January 1, 1999.
License revenues increased by 48% to $80.5 million in 1998, by 57% to $54.5
million in 1997, and by 70% to $34.6 in 1996, representing 65%, 72%, and 76%
of total revenues in the respective periods. The growth in license revenues
was due to an increase in the number of licenses sold, reflecting increased
acceptance of the Company's EDMS family of products, as well as an increase in
the number of customers who purchased additional product licenses, and the
expansion of the Company's sales organization. The decrease in license
revenues as a percentage of total revenues is due to increased service
revenue. In 1998, 1997 and 1996 license revenues from Xerox and certain Xerox
affiliates, as systems integrators, a VAR and a distributor for the Company's
products, accounted for 12%, 6%, and 14% of total license revenues
respectively. The loss of a major customer or any reduction or delay in orders
by such customers would have a material adverse effect on the Company's
business, operating results and financial condition. Also, the Company's
strategy to provide customers with whole solutions could result in software
licenses being bundled with services. Therefore, with certain future
transactions, the delivery of services may delay recognition of license
revenue. The Company's first quarter revenues and earnings in any year are
typically flat or lower as compared to the immediate preceding fourth quarter,
due to seasonality, which the Company believes is common in the software
industry.
Service revenues increased by 105% to $43.3 million in 1998, by 98% to $21.1
million in 1997, and by 110% to $10.7 million in 1996, representing 35%, 28%,
and 24% of total revenues in the respective periods. The increase in both
service revenue dollars and in service revenue as a percent of total revenues
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
the solution offerings to customers.
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 31%, 23%, and 32% of license revenues in 1998, 1997
and 1996, respectively. The decrease in indirect channel revenues as a
percentage of license revenues was due to a rapid increase in the direct sales
force during 1997. 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 revenues are not necessarily meaningful and
should not be relied upon as indications of future performance.
International revenues represented 32%, 33%, and 29% of license revenues in
1998, 1997 and 1996, respectively. The increase in international revenues as a
percent of license revenues for the year ended December 31, 1997 was primarily
due to the expansion of the Company's sales force in Europe. The Company
classifies license revenue as domestic or international based upon the billing
location of the customer. In many instances, especially with large purchases
from multinational companies, the customer has the right to deploy the
licenses anywhere in the world. Thus, the percentages discussed herein
represent where licenses were sold, and may or may not represent where the
products are used. As a result, the Company believes that period to period
comparisons of international revenues are not necessarily meaningful and
should not be relied upon as indications of future performance.
Cost of revenues
Cost of license revenues consists primarily of the royalties paid to third-
party vendors. It also includes product costs such as packaging,
documentation, production and freight. Royalties, which are paid to third-
parties for selected products, include both fixed fees and variable fees. Cost
of license revenues increased by 70% to $4.2 million in 1998, 28% to $2.5
million in 1997, and by 62% to $1.9 million in 1996, representing 5%, 4%, and
6%
26
of the related license revenues in 1998, 1997, and 1996. The Company expects
the cost of license revenue to increase in dollar amount as the related
license revenue increases.
Cost of services revenues consists primarily of personnel-related costs
incurred in providing consulting services, training to customers and telephone
support. Cost of services revenues increased by 108% to $25.7 in 1998, by 80%
to $12.3 million in 1997, and by 106% to $6.8 million in 1996, representing
59%, 58% and 64% of the related services revenues in 1998, 1997 and 1996,
respectively. The increase in cost of services revenues in dollar amount was a
result of increased personnel-related costs as the Company expanded its
consulting and training operations to support its increased installed customer
base, as well as an increase in solutions offered to customers. The decrease
in cost of service revenues as a percentage of service revenues in 1997 was
primarily due to economies of scale realized as certain expenses such as
technical support grew proportionately less than maintenance revenues. The
Company expects the cost of services revenue to increase in dollar amount as
the related services revenue increases.
Operating Expenses
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, benefits, sales commissions and other expenses related to the direct
sales force, various marketing expenses and costs of other market development
programs. Sales and marketing expenses increased by 44% to $50.4 million in
1998, 76% to $35.1 million in 1997, and by 59% to $19.9 million in 1996
representing 41%, 46%, and 44% of total revenues for 1998, 1997 and 1996,
respectively. The increase in dollar amount was the result of the Company's
strategy to continue to invest in its sales and marketing infrastructure,
including increasing the number of sales teams and increasing the number of
marketing programs. The decrease in sales and marketing expenses as a
percentage of total revenues in 1998 was primarily due to economies of scale
realized as certain expenses such as management compensation grew
proportionately less than revenues. The Company expects that sales and
marketing expenses will increase in dollar amount to support the Company's
anticipated revenue growth.
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 65% to $18.2 million in 1998, by 39% to $11.0 million in
1997, and by 75% to $7.9 million in 1996, representing 15%, 15% and 17% of
total revenues in 1998, 1997 and 1996, respectively. The increase in dollar
amount reflects the expansion of the Company's engineering staff and related
costs required to support the development of new products and enhancement of
existing products. Based on the Company's research and development process,
costs incurred between the establishment of technological feasibility and
general release have not been material and therefore have been expensed as
incurred. The Company expects research and development costs will continue to
increase in dollar amount in order to support increased development efforts to
both existing products and new products.
General and administrative. General and administrative expenses consist
primarily of personnel costs for finance, management information systems,
legal, human resources and general management as well as outside professional
services. General and administrative expenses increased by 72% to $10.3
million in 1998, by 45% to $6.0 million in 1997, and by 69% to $4.1 million in
1996 representing 8%, 8% and 9% of total revenues in 1998, 1997 and 1996,
respectively. The increase in dollar amount is primarily due to increased
staffing and professional fees necessary to manage and support the Company's
growth. The Company expects general and administrative expenses to increase in
dollar amount in order to support the growing needs of the Company.
Acquisition and related costs. In connection with the merger with WMI, the
Company incurred charges of approximately $2.2 million primarily consisting of
accounting and legal fees and other transaction related costs. Approximately,
$664,000 of the costs incurred in connection with the acquisition are included
in accrued liabilities at December 31, 1998.
Purchased in process research and development. On July 16, 1998, the
Company acquired Relevance, a development stage company. The acquisition was
accounted for by the purchase method of accounting. The Company recorded a
charge of $34.6 million pursuant to an allocation of the purchase price by an
independent appraiser, as a write-off of acquired research and development
related to Relevance's data mining technology to be completed and integrated
into the Company's family of Documentum products. At the date of acquisition, a
technological feasible prototype of Relevance's product did not exist. The
Company has spent $2.4 million in additional research and development during
1998 in an effort to further develop the technology to produce a
27
commercially viable product. At the date of acquisition, the only identifiable
intangible assets acquired were the technology under development and the in-
place workforce. Accordingly, essentially all of the excess purchase price
over net assets acquired, except for amounts assigned to net current assets,
fixed assets and workforce-in-place, was assigned to in-process research and
development.
The valuation of acquired research and development was prepared using the
income approach and contemplated that sales of products incorporating the
Relevance technology would be $139,000 in 1998, $5.9 million in 1999, $15
million in 2000, $24.6 million in 2001 and declining thereafter. The Company
based revenue increases upon the historical growth rate of software sales for
Documentum products. Operating costs as a percentage of revenue ranged from
110% to 47% for the years 1999 through 2001 based on the Company's normal
operating margin. Operating cash flows were reduced by an expected effective
tax rate of 35%. Net cash flows were discounted to their present value at the
acquisition. Through the end of 1998, there were no revenues recognized by the
Company attributable to the Relevance technology.
Interest and other income, net
Interest and other income, net consists primarily of interest income earned
on the Company's cash and cash equivalents and short term investments, and
other items including foreign exchange gains and losses and interest expense.
Interest and other income, net increased by 88% to $4.4 million in 1998, by 3%
to $2.3 million in 1997, and by 849% to $2.3 million in 1996. The increase in
interest and other income was primarily due to interest income earned on
higher cash and investment balances. 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.
Provision for income taxes
The Company's effective tax rates for 1998, 1997 and 1996 were 34%, 34%, and
35%, respectively. The effective tax rate for 1998 excludes the effects of the
non-deductible write off of in-process research and development as a result of
the acquisition of Relevance and the non-deductible items related to the
acquisition of WMI. The Company anticipates that its effective tax rate will
not increase significantly in 1999.
Liquidity and Capital Resources
Since 1993, the Company has financed its operations primarily through the
sale of stock and through cash generated from operations. In February 1996,
the Company completed its initial public offering, whereby it sold 2,058,000
shares of its common stock, and received net proceeds of approximately $45
million. In October 1997, the Company completed a secondary public offering,
whereby it sold 1,115,700 shares of its common stock, and received net
proceeds of approximately $31 million.
The Company's cash and investments totaled $100.4 million at December 31,
1998 representing 63% of total assets. The Company has invested the Company's
cash in excess of current operating requirements in investment grade
securities. The investments have variable and fixed interest rates and
primarily short term maturities. In accordance with SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities" such investments are
classified as "available for sale".
Net cash provided by operating activities was $12.5 million, $13.6 million,
and $4.6 million in 1998, 1997 and 1996, respectively. For the year ended
December 31, 1998, the cash generated by operations was primarily attributable
to net loss of $23.5 million adjusted for in process research and development
write off of $34.6 million, provision for doubtful accounts of $1.5 million,
depreciation and amortization of $5.5 million, increase in accrued liabilities
of $8.8 million, and deferred revenue of $6.2 million, offset by an increase
in accounts receivable of $14.1 million and in other assets of $6.5 million.
For the year ended December 31, 1997, the cash generated by operations was
primarily attributable to net income of $7.4 million, growth in accrued
liabilities of $7.1 million, depreciation and amortization of $3.4 million and
deferred revenue of $3.3 million, offset by the increase in accounts
receivable of $7.9 million. For the year ended December 31, 1996, the cash
generated by operations was primarily attributable
28
to net income of $4.5 million, growth in accrued liabilities of $3.4 million
and deferred revenue of $2.8 million, offset by the increase in accounts
receivable of $8.1 million. In 1998 and 1997, capital expenditures of $8.3
million and $6.9 million, respectively, were primarily for computer equipment,
fixed assets and leasehold improvements acquired in conjunction with the
Company's expansion to new facilities.
On January 15, 1998, the Company entered into an unsecured revolving credit
agreement (the "Facility") with a new bank. The Facility allows for borrowings
of up to $10 million bearing interest at the Company's option of: (1) the
bank's prime rate minus 0.5%; (2) the LIBOR plus 1.0%; or (3) at the bank's
competitive bid rate, and expires in December 1999. The Company must comply
with certain financial covenants and conditions as described in the Facility.
The Company was in compliance as of December 31, 1998. As of December 31,
1998, no amount was outstanding under the Facility.
In June 1998, the Company signed and made a deposit of $2.5 million to lease
approximately 122,000 square feet and 63,000 square feet in Pleasanton,
California beginning in June 1999 and January 2000, respectively, and expiring
in May 2005 and December 2006, respectively. This space will serve as the
Company's headquarters and will contain the principal administrative,
engineering, manufacturing, marketing and sales facilities. The Company
expects to make capital purchases related to leasehold improvements and office
furniture for the new facilities. The Company currently has no other
significant capital spending or purchase commitments other than normal
purchase commitments and commitments under facilities and capital leases.
The Company believes that its existing cash 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 12 months. A portion of the Company's cash
could be used to acquire or invest in complementary businesses or products or
obtain the right to use complementary technologies. The Company is currently
evaluating, in the ordinary course of business, potential investments such as
businesses, products or technologies. See "Risk Factors - Risks Associated
with Acquisitions".
Quantitative and Qualitative Disclosure About Market Risk - Interest Rate
Risk
As of December 31, 1998 the Company's investment portfolio includes $65.8
million of short-term corporate and municipal bonds which are subject to no
interest rate risk when held to maturity but may increase or decrease in value
if interest rates change prior to maturity. The Company maintains sufficient
cash and cash equivalent balances to typically hold its investments to
maturity. The remaining $18.4 million of short-term investments are held in
short-term securities bearing stated interest rates and are therefore subject
to no interest rate risk. An immediate 10% change in interest rates would be
immaterial to the Company's financial condition or results of operations.
Year 2000 Readiness Disclosure
The Company's State of Readiness
Throughout the coming year, most companies will face a potentially serious
information systems problem because many software application and operational
programs may not properly recognize calendar dates beginning in the year 2000.
This problem could force computers to either shut down or provide incorrect
data or information.
The Company has commenced a comprehensive Year 2000 project to identify the
risks associated with its information systems, products, operations and
infrastructure, suppliers and customers that are not Year 2000 compliant, and
in December 1998 established a Year 2000 Program Office to manage the Year
2000 project. The Year 2000 project consists of three phases: 1)
identification of risks, 2) assessment of risks, and if necessary, 3)
development, implementation, and testing of remediation and contingency plans.
All contingency planning is targeted for completion in July 1999. The Year
2000 project is ongoing, and its phases are not sequential. Instead, as risks
are identified, the assessment and remediation plans are begun. The Company is
currently performing work in all three phases of the project.
During 1998, the Company identified two date-processing issues in third-
party software that is embedded in its product line. Engineering efforts were
made by the Company to address those date-processing issues, and technical
fixes were made available. In October of 1998, the Company released the "EDMS
98" suite of core products which
29
included those fixes and which have been verified as Y2K-compliant according
to definitions posted on the Company's Web site. The Company is currently
working with its customers who are not utilizing or implementing the EDMS 98
products to identify and remediate any problems associated with the identified
date processing issues.
The Company has substantially completed its review of internal systems, and
believes it has identified all mission-critical problems. During 1999, the
Company plans to modify or replace any non-compliant software, systems and
equipment as part of a comprehensive infrastructure upgrade that coincides
with the move of its headquarters facilities to a new location, which is
targeted for completion in July 1999.
Further, the Company is engaged in a comprehensive customer communications
initiative in 1999 to ensure that all relevant Year 2000 data is available to
customers for their Year 2000 planning. Finally, the Company intends to create
and manage detailed contingency plans for all third-party suppliers that have
not adequately responded to the vendor compliance surveys managed by the Y2K
Program Office, and for all mission-critical systems as part of its objective
to ensure business continuity at the turn of the century.
The Costs to address the Company's Year 2000 Issues
Although the Company will continue to prioritize resources in product
engineering and internal business infrastructure groups to address Year 2000
issues, those resources are allocated within the normal software development and
infrastructure and facilities improvement processes of the Company.
Subsequently, no complete estimate of the expected total cost of this effort can
be made at this time. Internally, the Company has budgeted $900,000 in 1999 for
incremental Y2K remediation to be performed preceding or during the move of its
headquarters. The costs related to Y2K have been immaterial to date.
The Company is also engaged in a thorough risk assessment of all license and
service agreements, and is in the process of contingency planning to address
any issues that may arise.
The Company has determined that a best estimate of unexpected costs is less
than $2 million for risks that are quantifiable at this time (services,
additional engineering, downtime for failure of local power grids or other
mission-critical systems, etc.).
The Risks of the Company's Year 2000 Issues
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement or test remediation or
contingency plans, or may find that the costs of these activities exceed
current expectations, and become material. In many cases, the Company is
relying on assurances from third parties, including vendors and partners, that
new and upgraded information systems and other products will be Year 2000
compliant.
Possible losses from claims of breach of contract or warranty due to Year
2000 non-compliance of earlier versions of DCTM's software cannot be
reasonably estimated at this time; previous to the release of EDMS 98, date
processing problems were discovered in two (embedded OEM) third-party vendors'
software. A program is being initiated to address those problems for customers
who cannot, for legitimate business reasons, update to the compliant release.
In addition, that program will also address custom applications, and
installations that have been delivered by DCTM's consulting services
organization.
Even if the Company, in a timely manner, completes all of its assessments,
identifies and tests remediation plans believed to be adequate, and develops
contingency plans believed to be adequate, some problems may not be identified
or corrected in time to prevent material adverse consequences to the Company.
Additionally, no estimate can be made at this time of possible losses from
asserted and nonasserted claims of breach of contract or warranty due to Year
2000 noncompliance, nor can any assurance be given that the Year 2000 problem
will not have an adverse impact on the Company's operations, revenue, or
earnings.
30
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in Part IV Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Certain information required by Part III is omitted from this Report and
will be included in the Registrant's definitive Proxy Statement which will be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers--See the section titled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors--The information required by this Item is incorporated
by reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions."
31
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
Page Number
-----------
1. Consolidated Financial Statements
Report of Independent Accountants...................... F-1
Consolidated Balance Sheets as of
December 31, 1998 and 1997............................ F-2
Consolidated Statement of Operations
for the three years ended December 31, 1998........... F-3
Consolidated Statement of Cash Flows
for the three years ended December 31, 1998........... F-4
Consolidated Statement of Stockholders' Equity
(Deficit) for the three years ended December 31,
1998.................................................. F-5
Notes to Consolidated Financial Statements............. F-6
2. Financial Statement Schedules for the three years
ended December 31, 1998
All schedules not listed above have been omitted because
they are either not applicable or the required information
is shown in the financial statements or the notes thereto.
3. Exhibits: See accompanying Index to Exhibits. The Exhibits
listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Form.
(b) Reports on Form 8-K
Current report on Form 8-K dated October 14, 1998 announcing financial
results for the quarter ended September 30, 1998.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 30th day of March, 1999.
Documentum, Inc.
By: /s/ Mark S. Garrett
------------------------------------------
Mark S. Garrett
Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints jointly and severally, Jeffrey A. Miller
and Mark S. Garrett, and each one of them, his or her attorneys-in-fact, each
with the power of substitution, for him or her in any way and all capacities,
to sign any and all amendments to this Annual Report (Form 10-K) and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each said attorneys-in-fact, or his substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on the 30th day of March, 1999.
Signature Title
/s/ Jeffery A. Miller President, Chief Executive Officer and
- -------------------------------- Director (Principal Executive Officer)
Jeffrey A.Miller
/s/ Mark S. Garrett Vice President and Chief Financial
- -------------------------------- Officer (Principal Financial and
Mark S. Garrett Accounting Officer)
/s/ Robert V. Adams Chairman
- --------------------------------
Robert V. Adams
/s/ Kathryn C. Gould Director
- --------------------------------
Kathryn C. Gould
/s/ John L. Walecka Director
- --------------------------------
John L. Walecka
/s/ Edward J. Zander Director
- --------------------------------
Edward J. Zander
/s/ Geoffrey A. Moore Director
- --------------------------------
Geoffrey A. Moore
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Documentum, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)1 present fairly, in all material respects, the
financial position of Documentum, Inc. and its subsidiaries at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 20, 1999
F-1
DOCUMENTUM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------------------
(in thousands, except per share data) 1998 1997
---------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,240 $ 14,236
Short-term investments 84,203 78,895
Accounts receivable, net of allowances of $2,496 and $2,537
(including $2,485 and $2,181 receivable from a stockholder
and its affiliates) 32,745 19,996
Other current assets 8,192 3,740
---------------------- ----------------------
Total current assets 141,380 116,867
Property and equipment, net 13,426 9,837
Other assets 5,843 499
---------------------- ----------------------
$ 160,649 $ 127,203
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,176 $ 1,721
Accrued liabilities 26,170 15,225
Deferred revenue 14,490 8,224
---------------------- ----------------------
Total current liabilities 43,836 25,170
---------------------- ----------------------
Commitments (Note 10)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 shares authorized;
none issued and outstanding - -
Common stock, $0.001 par value; 100,000 shares authorized;
16,707 and 15,603 shares issued and outstanding 17 16
Additional paid-in capital 135,849 96,830
Accumulated other comprehensive income 52 8
Retained earnings (accumulated deficit) (19,105) 5,179
---------------------- ----------------------
Total stockholders' equity 116,813 102,033
---------------------- ----------------------
$ 160,649 $ 127,203
====================== ======================
See accompanying notes to consolidated financial statements.
F-2
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
----------------------------------------
(in thousands, except per share data) 1998 1997 1996
----------------------------------------
Revenues:
Licenses (including $9,573, $3,340 and
$5,323 from a stockholder and its affiliates) $ 80,546 $ 54,536 $ 34,630
Services 43,283 21,099 10,672
------------- ----------- ------------
Total revenues 123,829 75,635 45,302
------------- ----------- ------------
Cost of revenues:
Licenses 4,179 2,453 1,923
Services 25,684 12,327 6,845
------------- ----------- ------------
Total cost of revenues 29,863 14,780 8,768
------------- ----------- ------------
Gross profit 93,966 60,855 36,534
------------- ----------- ------------
Operating expenses:
Sales and marketing 50,425 35,084 19,909
Research and development 18,181 10,986 7,880
General and administrative 10,255 5,976 4,114
Acquisition and related costs 2,171 - -
Purchased in process research and development 34,622 - -
------------- ----------- ------------
Total operating expenses 115,654 52,046 31,903
------------- ----------- ------------
Income (loss) from operations (21,688) 8,809 4,631
------------- ----------- ------------
Interest and other income, net 4,395 2,333 2,268
------------- ----------- ------------
Income (loss) before income tax provision (17,293) 11,142 6,899
Provision for income taxes (6,231) (3,788) (2,415)
------------- ----------- ------------
Net income (loss) $ (23,524) $ 7,354 $ 4,484
============= =========== ============
Basic earnings (loss) per share $ (1.45) $ 0.51 $ 0.33
============= =========== ============
Diluted earnings (loss) per share $ (1.45) $ 0.49 $ 0.30
============= =========== ============
Shares used to compute basic earnings (loss) per share (Note 8) 16,221 14,463 13,790
============= =========== ============
Shares used to compute diluted earnings (loss) per share (Note 8) 16,221 15,098 14,734
============= =========== ============
See accompanying notes to consolidated financial statements.
F-3
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
---------------------------------------
(in thousands) 1998 1997 1996
---------------------------------------
Cash flows from operating activities:
Net income (loss) $ (23,524) $ 7,354 $ 4,484
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,543 3,425 2,064
Provision for doubtful accounts 1,459 1,488 672
In process research and development write-off 34,622 - -
Deferred tax asset (1,236) (900) (1,273)
Changes in assets and liabilities:
Accounts receivable (14,088) (7,953) (8,130)
Other current assets and other assets (6,473) (437) (379)
Accounts payable 1,119 233 924
Accrued liabilities 8,829 7,079 3,431
Deferred revenue 6,237 3,268 2,792
----------- ----------- -----------
Net cash provided by operating activities 12,488 13,557 4,585
----------- ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (104,661) (97,255) (92,303)
Sales of short term investments 99,352 65,163 45,500
Purchases of property and equipment (8,326) (6,923) (5,202)
Deposits (2,500) - -
Cash used in acquisition (1,461) - -
Other 10 - -
----------- ----------- -----------
Net cash used in investing activities (17,586) (39,015) (52,005)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock 7,504 35,382 47,105
Proceeds from term loan - - 387
Repayments on capital lease obligations (115) (245) (276)
Repayment on term loan (330) (777) (503)
----------- ----------- -----------
Net cash provided by financing acitivities 7,059 34,360 46,713
----------- ----------- -----------
Effect of exhange rate on changes in cash 43 (35) 98
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 2,004 8,867 (609)
Cash and cash equivalents at beginning of period 14,236 5,369 5,978
=========== =========== ===========
Cash and cash equivalents at end of period $ 16,240 $ 14,236 $ 5,369
=========== =========== ===========
Supplemental schedule of cash flow information:
Interest paid $ 26 $ 39 $ 127
Income taxes paid $ 3,687 $ 2,364 $ 2,776
See accompanying notes to consolidated financial statements.
F-4
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Retained
Additional Other Earnings Total
Common Stock Paid-in Comprehensive (Accumulated Stockholders' Comprehensive
(in thousands) Shares Amount Capital Income Deficit) Equity (Deficit) Income (Loss)
---------- ------- ------------- ------------- ------------- ---------------- ------------
Balance as of December 31, 1995 1,880 $ 2 $ 966 $ (55) $ (6,659) $ (5,746) $ -
Common stock options exercised 324 - 647 - - 647 -
Employee stock purchase plan 60 - 1,252 - - 1,252 -
Warrants exercised 73 - - - - - -
Mandatorily preferred conversion 9,804 10 13,381 - - 13,391 -
Issuance of common stock in public
offering net of issuance costs 2,058 2 45,038 - - 45,040 -
Foreign currency translation
adjustment - - - 98 - 98 98
Other (12) - 166 - - 166 -
Net income - - - - 4,484 4,484 4,484
---------- ------- ------------- ------------- ------------- ---------------- ------------
Balance as of December 31, 1996 14,187 14 61,450 43 (2,175) 59,332 $ 4,582
============
Common stock options exercised 269 - 795 - - 795 -
Employee stock purchase plan 81 - 1,740 - - 1,740 -
Issuance of common stock in public
offering net of issuance costs 1,116 2 31,196 - - 31,198 -
Tax Benefit - - 1,493 - - 1,493 -
Foreign currency translation
adjustment - - - (35) - (35) (35)
Other (50) - 156 - - 156 -
Net income - - - - 7,354 7,354 7,354
---------- ------- ------------- ------------- ------------- ---------------- ------------
Balance as of December 31, 1997 15,603 16 96,830 8 5,179 102,033 $ 7,319
============
Stock issued for acquisitions 771 1 31,620 - (760) 30,861 -
Common stock options exercised 294 - 4,181 - - 4,181 -
Employee stock purchase plan 43 - 1,292 - - 1,292 -
Tax Benefit - - 1,929 - - 1,929 -
Foreign currency translation
adjustment - - - 44 - 44 44
Other (4) - (3) - - (3) -
Net income (loss) - - - - (23,524) (23,524) (23,524)
---------- ------- ------------- ------------- ------------- ---------------- ------------
Balance as of December 31, 1998 16,707 $ 17 $ 135,849 $ 52 $ (19,105) $ 116,813 $ (23,480)
========== ======= ============= ============= ============= ================ ============
See accompanying notes to consolidated financial statements.
F-5
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF THE COMPANY:
Documentum, Inc. ("Documentum" or the "Company") was incorporated in the state
of Delaware in January 1990. Documentum develops, markets and supports a
software application environment for automating the flow of knowledge in and
between organizations, and a family of Web applications that accelerate product
and process innovation. The Company operates in one industry segment.
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., Workgroup
Management, Inc. ("WMI") and Relevance Technologies, Inc. ("Relevance") in the
United States, Nihon Documentum KK, in Japan and Documentum Software Europe
Ltd., in the United Kingdom. All significant inter-company accounts and
transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
Foreign currency
Balance sheet accounts are translated into U.S. dollars at exchange rates
prevailing at balance sheet dates. Revenues, costs and expenses are translated
into U.S. dollars at average rates for the period. Gains and losses resulting
from translation are accumulated as a component of stockholders' equity
(deficit). Net gains and losses resulting from foreign exchange transactions are
included in the consolidated statement of operations and were not significant
during any of the periods presented. To date, the Company does not engage in
hedging activities.
Revenue recognition
The Company's revenues are derived from the sale of perpetual licenses for its
document management software and related services, which include maintenance and
support, consulting and training services. Revenues from license arrangements
are recognized upon shipment of the product if collection of the resulting
receivable 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 consulting and training are deferred and recognized when the
services are performed and collectibility is deemed probable. During 1998, the
Company has recognized revenue in accordance with Statement of Position No. 97-2
("SOP 97-2"), "Software Revenue Recognition". Prior to 1998, the Company
recognized revenues in accordance with Statement of Position 91-1, "Software
Revenue Recognition."
In December 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-9 ("SOP 98-9"), "Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions."
The provisions of SOP 98-9 will be adopted for transactions entered into during
the fiscal year beginning January 1, 1999.
F-6
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Financial instruments
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, short-term investments and accounts
receivable. The Company deposits substantially all of its cash with a single
financial institution.
The Company classifies all investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115") which requires investment securities to
be classified as either held to maturity, trading or available-for-sale. The
Company's short-term investments, all of which are classified as available-for-
sale, are managed by a single financial institution. At December 31, 1998, the
fair value of these short-term investments approximated amortized cost and
primarily mature within the next 12 months. Unrealized and realized gains and
losses have been insignificant for all periods presented. The following table
details the Company's short-term investments at December 31, 1998:
Amortized
(in thousands) Cost
---------
Commercial paper $ 1,999
U.S. government agencies 4,000
International bonds and notes 5,418
Preferred stock 7,020
Corporate bonds and notes 14,273
Municipal bonds 51,493
---------
$ 84,203
=========
The Company generally does not require collateral for its accounts receivable
and maintains reserves for potential credit losses. At December 31, 1998, two
customers, including Xerox and affiliated entities comprised 13% of accounts
receivable. At December 31, 1997, two customers, including Xerox and affiliated
entities comprised 15% of accounts receivable. Revenues from export sales,
primarily to Europe, were approximately 32%, 33%, and 29% of license revenues
for the years ended December 31, 1998, 1997 and 1996, respectively.
Property and equipment
Property and equipment, including leasehold improvements, are recorded at
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, three to six years, or the life
of the lease, whichever is shorter.
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 the estimated product life, or on the ratio of
current revenues to total projected product revenues, whichever is greater. To
date, the period between achieving technological feasibility, which the Company
has defined as the
F-7
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Equity-based compensation plans
The Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). The Company, as
allowed by SFAS 123, has elected to continue to measure compensation costs for
its plans using the intrinsic value base method of accounting for stock issued
to employees. However, as required by SFAS 123, pro forma disclosures of net
income and earnings per share are reflected in the notes to the financial
statements as if the fair value based method of accounting was adopted.
Comprehensive net income
Effective January 1998, Documentum adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is comprised of net income (loss) and other comprehensive earnings such
as foreign currency translation gain/loss and unrealized gains or losses on
available-for-sale marketable securities. The Company's unrealized gains and
loss on available-for-sale marketable securities have been insignificant for all
periods presented.
NOTE 3--BUSINESS ACQUISITIONS:
On January 5, 1998, the Company acquired all the outstanding shares of WMI, a
privately-held company, in exchange for 192,473 shares of the Company's common
stock valued on the transaction date at approximately $6.7 million. The
acquisition was accounted for as a pooling of interests on the date of
acquisition. WMI was a professional services firm with approximately 35
employees located in Oakland, California specializing in the design, development
and implementation of document management systems for the semiconductor
industry. As of December 31, 1997, WMI had $530,000 in total assets. The Company
believes that this acquisition is immaterial to the Company's prior financial
statements and as such the Company's prior financial statements have not been
restated. The acquisition of WMI is part of the Company's strategic plan to add
specific domain expertise in targeted vertical industries. The Company recorded
merger expenses of approximately $2.2 million in connection with the acquisition
in the first quarter of 1998. The $2.2 million primarily consisted of accounting
and legal fees and other related transactions costs.
On July 16, 1998, the Company acquired all the outstanding shares of
Relevance, a privately held company, in exchange for consideration totaling
approximately $36.5 million, including 578,488 shares of the Company's common
stock. The acquisition was accounted for using the purchase method of
accounting on the date of acquisition. Relevance was a development stage
software company with approximately 25 employees located in San Francisco,
California specializing in the development of content mining technology for
unstructured information. The acquisition of Relevance represents a new market
opportunity for Documentum to develop additional applications for the sharing
and applying of both corporate and Internet based knowledge. As of June 30,
1998, Relevance had no revenues and had gross assets of approximately $3.6
million. The Company recorded $34.6 million as a charge related to the write
off of purchased in process research and development. The following are
unaudited pro forma combined results of operations for the Company and Relevance
on the basis that the acquisition had taken place and the related charge, noted
above, was recorded at the beginning of the fiscal year for each of the periods
presented:
Year ended December 31,
-----------------------
(Dollars in thousands) 1998 1997
---------- ----------
Total revenue $123,829 $ 75,635
Net income (loss) $(26,293) $ 5,619
F-8
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--RELATED PARTY TRANSACTIONS:
The Company has distribution agreements with Xerox and affiliated entities
which provide Xerox or its affiliates with the non-exclusive rights to sell the
Company's products in specified territories. For the years ended December 31,
1998, 1997 and 1996, the Company recognized license revenues from Xerox and
affiliated entities of $9,573,000, $3,340,000, and $5,323,000, respectively, and
incurred expenses primarily for support services provided by Xerox and
affiliated entities of $8,000, $49,000, and $410,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The net amount due from Xerox
and affiliated entities was $2,485,000, $2,181,000, and $737,000 at December 31,
1998, 1997 and 1996, respectively. Management believes that the revenues, gross
profit and costs and expenses relating to these transactions are indicative of
amounts which would have been incurred or realized from non-related parties. At
December 31, 1998, Xerox owned approximately 10% of the Company's outstanding
common shares.
NOTE 5--BALANCE SHEET COMPONENTS:
December 31,
------------------------------------
(in thousands) 1998 1997 1996
---------- ---------- ----------
Allowance for doubtful accounts:
Balance at beginning of period $ 2,537 $ 1,069 $ 647
Charged to costs and expenses 1,459 1,488 672
Deductions (1,500) (20) (250)
---------- ---------- ----------
$ 2,496 $ 2,537 $ 1,069
========== ========== ==========
December 31,
-----------------------
(in thousands) 1998 1997
---------- ----------
Property and equipment:
Computer equipment $ 17,581 $ 10,489
Office equipment 2,217 1,486
Furniture and fixtures 2,368 2,289
Leasehold improvements and other 3,742 2,514
---------- ----------
25,908 16,778
Accumulated depreciation and amortization (12,482) (6,941)
---------- ----------
$ 13,426 $ 9,837
========== ==========
December 31,
-------------------------
(in thousands) 1998 1997
---------- ----------
Accrued liabilities:
Compensation & related benefits $ 10,219 $ 6,479
Taxes payable 5,942 3,663
Other current liabilities 10,009 5,061
---------- ----------
$ 26,170 $ 15,203
========== ==========
F-9
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--LINE OF CREDIT:
On January 15, 1998, the Company entered into an unsecured revolving credit
agreement (the "Facility") with a new bank. The Facility allows for borrowings
of up to $10 million bearing interest at the Company's option of: (1) the bank's
prime rate minus 0.5%; (2) the LIBOR plus 1.0%; or (3) at the bank's competitive
bid rate, and expires in December 1999. The Company must comply with certain
financial covenants and conditions as described in the Facility. The Company was
in compliance as of February 28, 1999. As of December 31, 1998, no borrowings
were outstanding under the Facility.
NOTE 7--STOCKHOLDERS' EQUITY:
Common stock
Common stock as of December 31, 1998, reflects the sale of 1,115,700 shares of
common stock issued in the Company's public offering completed on October 30,
1997 and the sale of 2,058,000 shares of common stock issued in the Company's
initial public offering completed on February 5, 1996. Aggregate net proceeds to
the Company from both offerings were approximately $76 million.
Preferred stock warrants
In connection with a lease line of credit in March 1994, the Company granted
the lessor a warrant to purchase 295,636 shares of the Company's Series B
Mandatorily Redeemable Convertible Preferred Stock. This warrant was fully
exercised on a net basis on December 18, 1996 and converted into 57,158 shares
of common stock.
On October 31, 1994, the Company granted the bank a warrant to purchase 87,500
shares of the Company's Series C Mandatorily Redeemable Convertible Preferred
Stock, in connection with a line of credit and term note. This warrant was fully
exercised on a net basis on October 25, 1996 and converted into 15,425 shares of
common stock.
NOTE 8--EARNINGS PER SHARE
The following is a reconciliation of the computation for basic and diluted
earnings per share ("EPS"):
Year Ended December 31,
--------------------------------------------------------------
(in thousands) 1998 1997 1996
------------------- ------------------ -------------------
Net income (loss) $ (23,524) $ 7,354 $ 4,484
=================== ================== ===================
Shares calculation
Weighted average basic shares outstanding 16,221 14,463 13,790
------------------- ------------------ -------------------
Effect of dilutive securities:
Options - 635 877
Warrants - - 67
Total shares used to compute
------------------- ------------------ -------------------
diluted earnings (loss) per share 16,221 15,098 14,734
=================== ================== ===================
F-10
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options to purchase 1,307,735 shares of common stock at prices ranging from
$0.31 to $59.63 per share were outstanding during the year ended December 31,
1998, but were not included in the computation of diluted EPS because either the
option's exercise price was greater than the average market price of the common
shares or inclusion of such options would have been anti-dilutive.
NOTE 9--STOCK OPTION AND BENEFIT PLANS:
1993 Equity Incentive Plan
In March 1993, the Board of Directors adopted the 1993 Equity Incentive Plan
(the "Plan") providing for the issuance of nonstatutory common stock options to
employees and consultants of the Company. The Board of Directors has amended the
Plan providing for the grant of incentive stock options ("ISOs"), stock bonuses
and stock appreciation rights and allowing for the sale of restricted stock.
Under the Plan a total of 5,300,138 shares have been authorized for issuance.
Options may be granted at an exercise price at the date of grant of not less
than the fair market value per share for ISOs and not less than 85% of the fair
market value per share for nonstatutory stock options, except for options
granted to a person owning greater than 10% of the total combined voting power
of all classes of stock of the Company, for which the exercise price of the
option must be not less than 110% of the fair market value. All options granted
under this plan have a term of 10 years.
Options granted under the Plan may be exercisable prior to vesting subject to
repurchase by the Company at the option exercise price paid per share with such
repurchase right generally lapsing with respect to 25% after the first year and
ratably each month over the remaining thirty-six month period. In 1998, 1997,
and 1996 the Company issued 1,123,074, 880,000, and 571,900, options under the
Plan, respectively. At December 31, 1998, 36,000 shares were subject to
repurchase by the Company.
Non-employee Directors' Stock Option Plan
In November 1995, the Board of Directors adopted the 1995 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for the issuance of up to 250,000 nonstatutory stock options to non-
employee directors of the Company. All options under this plan have a term of 10
years. Each non-employee director of the Company was granted a nonstatutory
option to purchase 15,000 shares of common stock upon the effective date of the
initial public offering. Each non-employee director of the Company will
automatically be granted a nonstatutory option to purchase 15,000 shares of
common stock upon the date on which such person becomes a director. On June 30,
1997, each non-employee director of the Company was granted an annual option to
purchase 5,000 shares of common stock. The plan provides an additional option to
purchase 5,000 shares of common stock that will be granted on June 30/th /of
each year, provided such person has served continuously as a non-employee
director for the past 6 months. Options under the Directors' Plan will be
granted at the fair value of the stock and will vest one-third at date of grant
and the remaining options will vest in two equal annual installments.
In 1998, 1997 and 1996, the Company issued 57,500, 25,000 and 75,000 options
under the Directors' Plan, respectively.
1996 Non-officer Equity Incentive Plan
In October 1996, the Board of Directors adopted the 1996 Non-Officer Equity
Incentive Plan (the "Incentive Plan") providing for the issuance of either
nonstatutory common stock options, stock bonuses, or rights to purchase
restricted stock to employees and consultants of the Company. This plan
explicitly excludes directors and employees serving as officers of the Company.
Under the Incentive Plan, a total of 2,375,000 shares have been authorized for
issuance.
F-11
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options may be granted at an exercise price at the date of grant of not less
than 85% of the fair market value per share for nonstatutory stock options,
stock bonuses and restricted stock purchases as determined by the Board of
Directors. Options granted under the Incentive Plan are exercisable only upon
vesting. All options under this plan have a term of 10 years.
In 1998, 1997 and 1996, the Company issued 3,229,958, 813,150 and 142,301
options under the Incentive Plan, respectively.
1996 Relevance Technologies Stock Plan
Upon the acquisition of Relevance, the Company's Board of Directors adopted
Relevance's stock option plan which was in existence at the time of purchase.
The Relevance Plan provides for the issuance of either nonstatutory common stock
options, stock bonuses, or rights to purchase restricted stock to current
employees of the Company who are former employees of Relevance. Relevance stock
options outstanding at the time of purchase were converted into options to
purchase 73,609 shares of Documentum common stock.
Options may be granted at an exercise price at the date of grant of not less
than 85% of the fair market value per share for nonstatutory stock options,
stock bonuses and restricted stock purchases as determined by the Board of
Directors. Options granted under the Relevance Plan are exercisable only upon
vesting.
At December 31, 1998, 31,000 shares were subject to repurchase by the Company.
A summary of activity under all the plans is as follows:
Options Outstanding
-----------------------------------
Weighted
Average
Shares Exercise Price
-------------- ------------------
Outstanding as of December 31, 1995 1,159,261 $ 1.88
--------------
Granted 789,201 $ 29.39
Exercised (324,591) $ 0.81
Canceled (119,845) $ 8.24
--------------
Outstanding as of December 31, 1996 1,504,026 $ 16.06
--------------
Granted 1,718,150 $ 30.23
Exercised (269,131) $ 2.95
Canceled (188,727) $ 23.82
--------------
Outstanding as of December 31,1997 2,764,318 $ 25.32
--------------
Granted 4,410,532 $ 30.71
Exercised (293,675) $ 11.34
Canceled (3,120,060) $ 36.77
--------------
Outstanding as of December 31, 1998 3,761,115 $ 22.72
==============
F-12
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 9, 1998, holders of stock options under the Plan, the Incentive
Plan and the Relevance Plan were granted the opportunity to exchange previously
granted options for new stock options exercisable at $24.625 per share, the fair
market value in the date of exchange. The remaining original terms of the
options were not changed. Options to purchase 2,890,543 share were exchanged.
At December 31, 1998 options to purchase 1,041,700 shares were vested and
1,509,821 shares were available for future grant under all the plans.
The following table summarizes information regarding stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Range of Exercises Prices 1998 Life (Years) Price 1998 Price
- ------------------------------ ----------------- -------------- ------------- ---------------- -------------
$ 0.3121 - $9.0000 378,730 6.54 $ 2.9768 348,483 $ 3.0412
$15.4375 - $24.5000 384,736 7.91 21.1665 285,579 22.2333
$24.6250 2,834,436 8.56 24.6250 1,246,356 24.6250
$24.8750 - $44.2500 97,713 9.57 34.1228 13,357 24.8892
$46.6250 - $53.4375 65,500 9.46 48.0189 19,167 47.5217
----------------- ----------------
$ 0.3121 - $53.4375 3,761,115 8.33 $ 22.7693 1,912,942 $ 20.5673
================= ================
Options outstanding and options exercisable above do not include 66,214 shares
subject to repurchase by the Company at December 31, 1998.
Employee Stock Purchase Plan
In November 1995, the Board of Directors adopted the Employee Stock Purchase
Plan (the "Purchase Plan"), which provides for the issuance of a maximum of
700,000 shares of common stock. Eligible employees can have up to 10% of their
earnings withheld, up to a maximum of $15,000 per calendar year, to be used to
purchase shares of the common stock on specified dates determined by the Board
of Directors. The price of common stock purchased under the Purchase Plan will
be equal to 85% of the lower of the fair market value of the common stock on the
commencement date of each offering period or the specified purchase date. During
1998, 1997 and 1996, approximately 43,000, 81,000 and 60,000 common shares were
purchased under the Purchase Plan, respectively.
Pro forma stock compensation disclosure
The Company applies the intrinsic value method prescribed by APB No. 25,
"Accounting for Stock Issued to Employees", in accounting for its stock-based
compensation plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value approach set
forth in SFAS 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
F-13
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31,
---------------------------------------
(in thousands) 1998 1997 1996
---------------------------------------
Net income (loss):
As reported $ (23,524) $ 7,354 $ 4,484
Pro forma $ (35,150) $ 2,856 $ 2,015
Basic earnings (loss) per share:
As reported $ (1.45) $ 0.51 $ 0.33
Pro forma $ (2.17) $ 0.20 $ 0.15
Diluted earnings (loss) per share:
As reported $ (1.45) $ 0.49 $ 0.30
Pro forma $ (2.17) $ 0.19 $ 0.14
Earnings (loss) per share was computed using the method described in Note 2.
The fair value of each stock option grant on the date of grant was estimated
using the Black-Scholes option pricing model with the following average
assumptions:
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Volatility 72.77% 63.67% 62.90%
Risk-free interest rate 5.04% 6.00% 6.00%
Dividend yield - - -
Expected lives 4 4 4
Weighted average fair value $ 43.64 $ 28.23 $ 31.57
The fair value of the shares granted under the Purchase Plan was
estimated using the Black-Scholes model with the following assumptions:
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
Volatility 72.77% 63.67% 62.90%
Risk-free interest rate 5.04% 6.00% 6.00%
Dividend yield - - -
Expected lives 4 4 4
Weighted average fair value $ 43.64 $ 28.23 $ 31.57
The pro forma effect on net income for 1998, 1997 and 1996 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to January 1, 1995.
F-14
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
401(k) Plan
In November 1993, the Board of Directors adopted an employee savings and
retirement plan (the "401(k) Plan") covering substantially all of the Company's
employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the statutory prescribed limit and have the
amount of such reduction contributed to the 401(k) Plan. The Company may make
contributions to the 401(k) Plan on behalf of eligible employees. Employees
become 25 percent vested in the Company contributions after one year of service,
and increase their vested percentages by an additional 25 percent for each year
of service thereafter. The Company has not made any contributions to the 401(k)
Plan.
NOTE 10--COMMITMENTS:
Leases
The Company is obligated under non-cancelable operating leases for office
space which expire at various times through 2013. Certain leases for office
space provide for scheduled rent increases and contain options for additional
space. Rent expense is recognized ratably over the lease term. Future minimum
lease commitments under these leases are as follows:
(in thousands)
Year ending December 31,
1999 $ 5,192
2000 7,104
2001 7,050
2002 6,749
2003 6,631
Thereafter 20,873
-------
$53,599
=======
Total rent expense was approximately $3,845,000, $2,432,000, and $1,278,000,
for the years ended December 31, 1998, 1997, and 1996, respectively.
F-15
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--INCOME TAXES:
The provision for income taxes for the years ended December 31, 1998, 1997 and
1996 is as follows:
Year Ended December 31,
--------------------------------------
(in thousands) 1998 1997 1996
---------- ---------- ----------
Current:
Federal $ 5,021 $ 3,336 $ 2,262
State 1,421 632 531
Foreign 1,230 720 895
---------- ---------- ----------
$ 7,672 $ 4,688 $ 3,688
Deferred:
Federal (1,325) (768) (1,144)
State (116) (132) (129)
---------- ---------- ----------
(1,441) (900) (1,273)
---------- ---------- ----------
$ 6,231 $ 3,788 $ 2,415
========== ========== ==========
The components of income before income tax provision are as follows:
Year Ended December 31,
--------------------------------------
(in thousands) 1998 1997 1996
---------- ---------- ----------
Domestic income (loss) $ (20,655) $ 9,442 $ 5,190
Foreign income 3,362 1,700 1,709
---------- ---------- ----------
Income before provision for income taxes $ (17,293) $ 11,142 $ 6,899
========== ========== ==========
The tax provision is reconciled to the amount computed using the
federal statutory rate as follows:
Year Ended December 31,
------------------------------------
(in thousands) 1998 1997 1996
---------- ---------- ----------
Federal statutory tax provision $ (6,052) $ 3,900 $ 2,345
State taxes, net of federal benefit 808 411 397
Future benefits not currently recognized - - (1,100)
Utilization of tax loss and credit carryforward - - (130)
Foreign taxes 53 176 596
Foreign sales corporation benefit (239) (132) -
Tax exempt interest (574) (406) -
Acquisition and merger related costs 12,446 - -
Other (211) (161) 307
---------- ----------- ----------
$ 6,231 $ 3,788 $ 2,415
========== =========== ==========
F-16
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company provides a valuation allowance for deferred tax assets when it is
more likely than not, based on available evidence, that some portion or all of
the deferred assets will not be realized. Based on a revaluation of the
realizability of future tax benefits based on income earned in 1996, creating
available tax carrybacks, the Company released $944,000 of the previously
established valuation allowance during 1996. The significant components of the
Company's deferred tax assets are $3,516,000 and $ 1,906,000 in other current
assets as of December 31, 1998 and 1997, respectively and $1,503,000 and $
267,000 in other assets as of December 31, 1998 and 1997, respectively on the
Balance Sheet and are detailed as follows:
Year Ended December 31,
---------------------------
(in thousands) 1998 1997
---------- ----------
Deferred tax assets:
Reserves and accruals $ 4,044 $ 2,173
Tax loss carryforwards 975 -
---------- ----------
$ 5,019 $ 2,173
========== ==========
NOTE 12--SUBSEQUENT EVENT (UNAUDITED):
On February 3, 1999, the Company adopted a Share Purchase Plan ("Rights Plan")
under which all stockholders of record as of February 24, 1999 will receive
rights to purchase shares of a new series of Preferred Stock. The rights will be
exercisable only if a person or group acquires 20% or more of the Company's
Common Stock or announces a tender offer for 20% or more of the Common Stock. If
a person acquires 20% or more of the Company's Common Stock, all rightsholders
except the purchaser will be entitled to acquire the Company's Common Stock at a
50% discount. The Company's Board of Directors may redeem the rights prior to
the time a person acquires more than 20% of the Company's Common Stock.
F-17
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:
Summarized quarterly supplemental consolidated financial information for 1998
and 1997 is as follows:
Quarter Ended
(in thousands, except -----------------------------------------------------------------------
per share data; unaudited) March 31, June 30, September 30, December 31,
-------------- ------------- -------------- -------------
1998
Total revenues $ 25,072 $ 28,437 $ 33,883 $ 36,437
Gross profit 18,823 21,773 25,667 27,704
Operating income (loss) 146 3,770 (30,804) 5,200
Net income (loss) 490 3,171 (31,368) 4,183
Basic earnings (loss) per share $ 0.03 $ 0.20 $ (1.90) $ 0.25
Diluted earnings (loss) per share $ 0.03 $ 0.19 $ (1.90) $ 0.24
1997
Total revenues $ 15,037 $ 17,310 $ 19,669 $ 23,619
Gross profit 12,161 13,988 15,825 18,881
Operating income 1,274 1,615 2,607 3,313
Net income 1,117 1,447 2,027 2,763
Basic earnings per share $ 0.08 $ 0.10 $ 0.14 $ 0.18
Diluted earnings per share $ 0.08 $ 0.10 $ 0.14 $ 0.18
F-18
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(6)2.1 Agreement and Plan of Merger and Reorganization, dated as of
July 16, 1998, among Registrant, RTI Acquisition Corporation and
Relevance Technologies, Inc.
(1)3.1 Registrant's Amended and Restated Certificate of Incorporation.
(6)3.2 Registrant's Amendment to Amended and Restated Certificate of
Incorporation.
(8)3.3 Registrant's Certificate of Designation of Series A Junior
Participating Preferred Stock.
(2)3.4 Registrant's Amended and Restated Bylaws.
(7)3.5 Registrant's Amendment to Amended and Restated Bylaws.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
(2)4.2 Specimen stock certificate.
(2)4.3 Amended and Restated Investor Rights Agreement, dated September 20,
1994, between the Registrant and certain investors.
(6)4.4 Registration Rights Agreement, dated July 16, 1998 between the
Registrant and certain stockholders. (8)4.5 Rights Agreement dated
as of February 3, 1999 among Registrant and BankBoston, N.A.
(6)10.1 Registrant's 1993 Equity Incentive Plan, as amended.
(2)10.2 Form of Incentive Stock Option under the Equity Incentive Plan.
(2)10.3 Form of Nonstatutory Stock Option under the Equity Incentive Plan.
(2)10.4 Form of Early Exercise Stock Purchase Agreement.
(7)10.5 Registrant's Employee Stock Purchase Plan, as amended.
(2)10.6 Registrant's 1995 Non-Employee Directors' Stock Option Plan.
(2)10.7 Form of Indemnity Agreement between the Registrant and its officers
and directors.
(2)10.8 Industrial Real Estate Lease, dated September 9, 1995, between the
Registrant and Sunol Center Associates.
(2)10.9 Letter Agreement, dated July 27, 1993, between the Registrant and
Jeffrey A. Miller.
(7)10.10 Industrial Real Estate Lease, dated June 22, 1998, between the
Registrant and Patrician Associates, Inc.
Y(3)10.17 Services Partner Agreement, dated April 1, 1996, between the
Registrant and Xerox Corporation.
(6)10.18 Registrant's 1996 Non-Officer Equity Incentive Plan as amended.
(5)10.20 Lease agreement between Registrant and Britannia Hacienda IV Limited
Partnership.
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule.
Y Confidential treatment requested and granted for portions of this exhibit.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-01832) and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1,
as amended (No. 33-80047) and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly period
ended March 31, 1996 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(No. 333-15239) and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's annual report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Registration Statement on Form S-3 (333-
59331).
(7) Filed as an exhibit to the Registrant's Form 10-Q for the quarterly period
ended June 30, 1998 and incorporated herein by reference
(8) Filed as an exhibit to Registrant's current report on Form 8-K dated
February 3, 1999.
F-19