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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, 1999
[_] 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)
6801 Koll Center Parkway, Pleasanton, California 94566-7047
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (925) 600-6800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No__.
---
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 29,
2000 as reported on the Nasdaq National market, was approximately
$1,186,562,849. 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 17,484,032 on February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 2000 Annual
Meeting of Stockholders to be held May 25, 2000 are incorporated by reference in
Part III of this Form 10-K.
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FORM 10-K
Index
PART I
Item 1. Business ....................................................................... Page 3
Item 2. Properties ..................................................................... Page 17
Item 3. Legal Proceedings .............................................................. Page 17
Item 4. Submission of Matters to a Vote of Security Holders ............................ Page 17
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ....... Page 18
Item 6. Selected Consolidated Financial Data ........................................... Page 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ..................................................................... Page 20
Item 8. Consolidated Financial Statements and Supplementary Data ....................... Page 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ..................................................................... Page 26
PART III
Item 10. Directors and Executive Officers of the Registrant ............................. Page 27
Item 11. Executive Compensation ......................................................... Page 27
Item 12. Security Ownership of Certain Beneficial Owners and Management ................. Page 27
Item 13. Certain Relationships and Related Transactions ................................. Page 27
PART IV
Item 14. Exhibits, Consolidated Financial Statements, Financial Statement Schedules, and
Reports on Form 8-K ........................................................... Page 28
SIGNATURES.................................................................................... Page 29
2
PART I
ITEM 1. BUSINESS
General
Documentum, Inc. ("Documentum" or the "Company") develops, markets and supports
an open, scalable, standards-based content management platform and application
suite for managing the content organizations rely on for global operations and
to bring their businesses online. Documentum's Internet-scale content management
solutions facilitate e-business connections with customers, business partners
and employees. These solutions enable customers to create, deliver, manage and
personalize all content from contributors within and outside the enterprise, for
key business process, in a targeted manner. Documentum's highly adaptable
collaboration and content management solutions facilitate rapid deployment of
robust e-business applications with the reliability, scalability and
interoperability required by today's 24x7 Internet economy.
Documentum is leveraging its strong heritage in managing dynamic content for
business-critical documents and is extending it to facilitate e-business
connections. Since 1993, Documentum has delivered solutions that enable global
collaboration and knowledge sharing within an enterprise. These solutions have
been largely applied toward accelerating business processes that reduce new
product time to market and time to revenue.
Increasingly, Documentum's content management solutions are being used to
accelerate and extend companies' online presence, delivering active and trusted
content to multiple channels. These solutions enable more than 800 Internet and
Global 2000 companies to apply trusted content within and between organizations,
driving e-business applications that connect employees, customers and business
partners. Content management solutions that facilitate customer and business
connections are a logical extension of traditional Documentum solutions
targeting employee connections. Documentum content management solutions drive
customer connections by delivering active and trusted content on demand to
enable 24x7 customer self-service, online commerce and personalized promotions.
Online procurement, 24x7 partner self-service, and collaborative innovation and
planning are examples of Documentum content management solutions that enable
business connections. In all cases, Documentum content management offers the
same level of security, scalability, business process integration, and
responsiveness required for e-business interactions.
As of December 31, 1999, the Company employed 660 persons, including 228 in
sales and marketing, 107 in its consulting and training services organization,
60 in customer support, 161 in research and development and 104 in finance and
administration. Of these, 163 are located in Europe, 9 are located in Asia
Pacific and the remainder are located in North America.
The Company was incorporated in Delaware in January 1990. The Company's
principal executive offices are located at 6801 Koll Center Parkway, Pleasanton,
California, 94566. Its telephone number is (925) 600-6800. 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), Documentum 4i(TM), Documentum e-Content Server(TM), Documentum
Desktop Client(TM), Documentum Intranet Client(TM), Documentum Web
Publisher(TM), Documentum Content Personalization Services(TM), Documentum
RightSite(R), Documentum Administrator(TM), Documentum Developer Studio(TM),
Documentum Content Authentication Services(TM), Documentum Site Delivery
Services(TM), Documentum WebCache(TM), Documentum e-Deploy(TM), Documentum e-
Connectors(TM), Documentum e-Connector for SAP(TM), Documentum e-Connector for
Notes Mail(TM), Documentum e-Connector for CAD(TM), Documentum Commerce Server
Integrators(TM), Documentum Application Server Integrators(TM), Documentum
iTeam(TM), Documentum DocControl Manager(TM), Documentum Corrective Action
Manager(TM), Documentum Dynamic Content Assembly(TM), GMPharma(TM), Documentum
DocInput(TM), Documentum DocViewer(TM), Documentum DocLoader(TM),
AutoRender(TM), Documentum Reporting Gateway(TM), Documentum Print Services
Manager(TM), Documentum immedia(TM), Docbase(TM), and Docbroker(TM) are
trademarks of Documentum, Inc. All other trademarks or service marks appearing
in this document are the property of their respective holders.
3
Industry Background
A connected global economy is unleashing substantial e-business potential.
Electronic storefronts, business exchanges, collaborative design and
development, and online customer service represent new opportunities to engage
customers, forge partnerships, foster business relationships and expand markets.
Whether the objective is to drive global interactions or on-line transactions,
content is the cornerstone of e-business.
The ability to create, manage, personalize and publish dynamic content on demand
is vital to e-business connections. Content motivates on-line buying decisions
and extends market reach. It lets knowledge workers collaborate on product
research, design, manufacturing and marketing regardless of their location or
business affiliation, decreasing time to market. Content makes possible self-
service customer support over the Web. It is indispensable to the contracts,
invoices and requests for proposals that result from effective negotiations.
Applying content for e-business is a big leap from first-generation Web sites
that published primarily static information. The content management requirements
for a static site differ significantly from the content management requirements
for an e-commerce or e-business site that offer sophisticated transactional and
interactional capabilities. In these latter examples, outdated content is
unacceptable. Outdated content can discourage online purchases and cause e-
commerce customers to take their business elsewhere. Furthermore, it can
increase call center activity and the costs of e-business. Publishing inaccurate
information has other consequences: loss of credibility and threats of lawsuits.
According to a Forrester Research study on Web site content management, nearly
three-quarters of respondents cited either a lack of resources or keeping
content up-to-date as the biggest challenges in managing content. The
requirements for personalization significantly add to the complexity of content
management. Through personalization, the corporate Web site becomes a
conglomeration of many small, tailored sites. Without an infrastructure that
supports dynamic content assembly and delivery, organizations must create Web
pages manually. Before long, that process becomes unmanageable.
Other obstacles to effective content management result from the inability to
integrate with complementary enterprise systems, application servers, and
commerce servers. Add to that the need for publishing to multiple channels such
as corporate, partner and affiliate Web sites as well as in print, and to fax,
e-mail, cellular phones and PDA devices. Without a content management solution
that can provide best-of-breed integrations, manage the overwhelming volume of
content, and publish content anywhere, organizations cannot effectively leverage
electronic interactions with employees, customers and business partners to
exploit e-business opportunities.
Documentum's Solution
Documentum is taking advantage of this market opportunity with content
management solutions that help Internet companies and established brick-and-
mortar organizations manage the incredible amount of dynamic content needed to
fuel their e-business connections with customers, business partners and
employees. These solutions automate the essential functional requirements of
content management: content contribution, collaboration, content
personalization, site management and content delivery. By integrating with
desktop systems, enterprise systems, e-commerce and Web application servers, and
XML/HTML tools, Documentum content management solutions serve as a technology
component of an Internet-scalable e-business infrastructure.
Today, more than 800 customers have deployed Documentum solutions that may be
used to power e-business applications for driving business, customer and
employee connections. A key enabling technology is Documentum 4i, a leading
content management engine that automates the processes for creating, delivering,
managing and personalizing all content from contributors within and outside the
enterprise, for key business processes, in a targeted manner.
Documentum 4i helps to ensure that content applied for e-business is live,
trusted, smart and available in any format. It facilitates content creation
among collaborative teams and speeds deployment by integrating with
complementary system components of the "content supply chain." This contributes
to increased efficiency and predictability, improved accuracy, and repeatable
best practices. In addition, Documentum 4i can automate business processes that
drive the creation, management, approval, distribution, and archival of content,
whether for delivery to a Web site or for internal use. This can involve
partners, customers, employees, or other members of a virtual community.
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Smart content personalization is another valuable feature of Documentum 4i that
tailors content delivery across multiple media. With Documentum 4i, content can
be pulled directly from its centralized content repository, dynamically
assembled and tailored to the interests and preferences of specific users.
Content delivery can be to the Web, or to a cellular phone, pager, fax machine,
printer, CD or PDA device.
Enterprise integration is key to fast, effective deployment. Through the
Documentum Open Content Architecture (OCA), Documentum 4i integrates with the
core components of a global computing infrastructure. This includes integration
with commerce platforms such as IBM and Microsoft, enterprise systems such as
PeopleSoft and SAP that drive back office business processes, target marketing
tools and Web Application Servers from companies such as BEA Systems,
BroadVision, and Art Technology Group (ATG), and authoring tools such as
FrontPage, DreamWeaver and Microsoft Office. Documentum 4i also supports
industry-standard development environments, techniques, languages and
directories such as Microsoft Interdev, JSP, ASP, JavaScript, Java, COM,
Enterprise Java Beans and LDAP.
Documentum content management solutions include a family of e-business
applications built on top of Documentum 4i. These applications incorporate
essential components that are absent from first-generation e-business
applications for static sites. They include a scalable content repository that
secures, versions and manages an unlimited volume of e-business content, and
domain expertise codified into the applications to meet specific challenges of
dynamic e-business sites. These might be to speed the way organizations conceive
and develop new products, inform channels, build partnerships, generate revenues
or respond to customers. These elements enable e-business applications that are
easy to maintain and administer.
Documentum Products
Documentum 4i. Documentum 4i is an Internet-scale content management platform
offering automated services that support content creation, management, staging
and delivery. At the heart of Documentum 4i is the e-Content Server, which
implements the Documentum content repository and a rich set of content
contribution, workflow, process automation services, and lifecycle automation
services for controlling and managing content and processes throughout and
between distributed enterprises. Documentum 4i Desktop and Intranet clients help
users access and view trusted content stored in one or more Documentum content
repositories from their desktops or a Web browser.
Documentum EDMS 98. Documentum EDMS 98 is an enterprise application platform for
automating the end-to-end lifecycle of business-critical documents. It consists
of powerful 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. With EDMS 98,
global organizations can capture, access, and reuse information from any source
in the enterprise to improve operational efficiency and time-to-market, and meet
regulatory compliance standards. EDMS also supports integrations with popular
desktop and enterprise applications such as Microsoft Office, SAP R/3,
PeopleSoft, Lotus Notes, AutoCAD and MicroStation.
Documentum Developer Studio. Developer Studio is a rapid application development
environment and is an integrated development environment within Documentum 4i.
Developer Studio enables developers to rapidly create and package together the
elements that comprise e-business applications, enabling fast deployment of
content management solutions that solve specific business problems. Industry-
standard tools and technologies--including Java, VJ++ and Visual InterDev, as
well as ASP and JSP development tool sare leveraged to offer an entirely
graphical environment for creating, reusing, and assembling components to speed
development of e-business applications. The Desktop Client is extensible and
customizable with the Documentum Developer Studio.
Documentum Administrator. Documentum Administrator is a powerful Web
administration tool designed to remove the complexity of deploying and
maintaining distributed content across multiple internal and external sites.
Because it supports standard Web browsers, Documentum Administrator provides a
universal point of access from any desktop platform for managing and
administering all repositories, servers, users, and groups regardless of their
location across a virtual enterprise. By automating administrative tasks,
Documentum Administrator helps ensure enterprise-wide integrity of business-
critical content while lowering the cost of owning and maintaining e-business
applications.
5
AutoRender. AutoRender transforms common desktop application files into PDF for
broad-based distribution. PDF versions of content are stored as "renditions" of
the original document, both of which are managed as a single object for
simplicity and consistency. AutoRender is a Windows-based system that is
attached to the e-Content Server for the conversion of documents and uses
Adobe's Distiller for best viewing fidelity.
Documentum DocLoader. Documentum DocLoader allows the rapid and controlled
bulkloading of any kind of documents from legacy and external sources into
Documentum EDMS 98 and Documentum 4i. By providing instant access to the content
that drives your key business processes, DocLoader ensures faster ROI from a
Documentum deployment.
Documentum DocViewer. Documentum DocViewer enables access to different types of
images, such as TIFF and PDF. Using the DocViewer, users can view and annotate
TIFF and PDF files using either a client server connection to the e-Content
Server or via a Web client. DocViewer supports Windows 95, 98 and NT platforms.
Documentum DocInput. Documentum DocInput enables users to easily capture paper
documents into the Documentum content repository. In addition to simple
scanning, the product includes a wizard for creating capture processes to easily
automate the capture rules that apply to different types of content. The wizard
prompts the user through a series of questions that define how a specific type
of document is to be captured. The wizard also lets the user define the index or
attribute information that will be collected during the capture.
Documentum e-Business Applications
The Company offers a range of e-business applications that build upon the
Documentum 4i content management platform to facilitate global connections among
organizations and their business partners, customers and employees. Documentum
e-business applications fall into the following categories:
. Quality Management. The iQuality Application Series consists of a series of
e-business applications for enabling the employee connections for speeding
new product design, development, marketing, sales and support. These
applications include: Documentum DocControl Manager for enabling the sharing
and management of global content to meet quality objectives and achieve
compliance, specifically focusing on Good Manufacturing Practices (GMP) and
21CFR11 compliance; Documentum Corrective Action Manager, to enable
corrective action reporting over the Web; and Documentum Content
Authentication Services to meet the audit trail and electronic signature
requirements of regulated industries. Together, these applications form a
tightly integrated solution set especially well suited for meeting stringent
ISO quality and GMP requirements.
. Project/Team Management. Documentum iTeam provides a project portal for
global business collaboration that compresses project timelines and enables
reuse of valuable business know-how and best practices. With iTeam, global
organizations can rapidly assemble distributed project teams and synchronize
the delivery of relevant content for improved decision-making and project
execution.
. Dynamic Content Assembly. Documentum Dynamic Content Assembler (DCA)
automates the routine, labor-intensive tasks of creating and publishing
content. It lets organizations securely manage their content and personalize
it for delivery to the Web and, through the Documentum Open Content
Architecture (OCA), to a printer, CD, fax, e-mail, cellular phone, or PDA
device.
Integrations to Enterprise and Desktop Applications. In addition to its content
management platform and e-business applications, the Company offers a number of
integrations with major business applications and server technologies. These
integrations enable customers to extend their existing enterprise applications
with Documentum functionality and provide knowledge workers with access to
business-critical content from within their familiar applications. The Company's
product integrations include:
Documentum e-Connector for SAP. Documentum e-Connector for SAP is an integrated
suite of products that enhances SAP with robust content management capabilities.
The Documentum 4i platform automates business processes to control, share,
manage and reuse valuable corporate content. DocLink for SAP provides additional
services that integrate this content and SAP-generated content with SAP
processes in a paperless, distributed,
6
electronic environment. With DocLink for SAP, both SAP and non-SAP users can
access information such as vendor contracts, invoices, standard operating
procedures, material safety data sheets, engineering drawings, specifications
and related content directly from their desktops, eliminating the personnel time
and costs of searching for, filing and storing this content.
Documentum e-Connector for Notes Mail. Documentum e-Connector Notes Mail is an
integration between the Lotus Notes Mail client and the Documentum server that
supports participation in content review cycles, and the archiving of e-mail,
without a Documentum client. This real-time "external client to Documentum
server" integration is a substantial change from Documentum's traditional
proprietary client approach. With e-Connector for Notes Mail, customers have the
ability to expand usage of content management across the enterprise while
avoiding much of the maintenance and training costs associated with the
deployment of an additional desktop client. In the application hosting market,
this product allows Notes-based customers to add document management to their
current infrastructure without any content management infrastructure investment
and a very minimal setup time.
Documentum e-Connector for CAD Product Suite. Documentum e-Connector for CAD is
a suite of products for managing and accelerating the creation, access,
approval, and release of CAD drawings. e-Connector for CAD tightly integrates
the AutoCAD and MicroStation CAD systems with Documentum's content management
platform 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 e-Commerce Server Integrators and Documentum Web Application Server
Integrators. These products integrate the Documentum 4i content management
platform with popular e-commerce platforms and Web application servers.
Documentum/PeopleSoft Integration. Documentum and PeopleSoft have teamed to
provide an integration of Documentum with PeopleSoft Manufacturing. The
Documentum/PeopleSoft integration links engineering, manufacturing, and
downstream functions into a single system for managing product information,
documents and data seamlessly across the enterprise.
Documentum also offers a joint pharmaceutical industry solution with
PricewaterhouseCoopers (PwC) called GMPharma(TM) aimed at streamlining
regulatory compliance processes in the pharmaceutical industry. Co-developed and
co-marketed by Documentum and PwC, GMPharma brings together the deep domain
expertise of Documentum for scalable enterprise content management solutions and
PwC's consulting expertise in managing complex, global EDM deployments for
pharmaceutical companies.
Consulting and Support Services
Turning content management applications 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 requirements for defining this vision and strategy,
and offers architectural design and best-in-class implementation strategies to
power enterprise e-business initiatives. These initiatives enable e-business
connections within and between global organizations, with time-to-deployment as
a primary objective.
Documentum Consulting is strategically positioned to take a leadership role in
the design and delivery of best-practice services that address customers' global
e-business initiatives. These services encompass the application of unique
product expertise to the support of market requirements including:
. Solution architecture for global Web content management and other platform
initiatives
. Implementation best practices for Documentum e-business application products
. Support of system integrator and technology partners in the design and
delivery of industry solutions and best-of-breed integrations
. Design and deployment of custom solutions that address unique business or
industry requirements for process and content management functionality
. Superior support for platform technology management functions including
administration, performance and capacity planning, high-availability design,
and deployment strategies
7
The Company also offers a range of worldwide customer support and education
services through its Customer Support Services organization. Documentum
currently operates four Technical Support Centers in geographic locations that
provide local support in all major time zones and, for those customers who need
24x7 support, a follow-the-sun support model. 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. Documentum Education offers a curriculum of
courses on Documentum products for End Users, Application Developers and System
Administrators. Courses are available at the Company's training centers in
Pleasanton, Chicago, Philadelphia, London, Munich, and Paris, and can also be
delivered at a customer's site.
Strategy
The Company's objective is to become the leading provider of content management
solutions. Our strategy is to provide superior products and related services to
accelerate e-business initiatives within Global 2000 and Internet companies. To
achieve this objective, we have adopted the following strategies:
Maintain Leadership in the Content Management Market. The Company's industry-
leading solutions for e-business applications enable enterprises to accelerate
their online presence. These solutions enable customers to create, deliver, and
personalize content of all formats - from internal and external contributors,
for business processes that extend beyond the enterprise, to multiple delivery
channels (print, Web, and PDA) and across an extensive network of affiliate and
partner sites. These customers are applying trusted content within and between
their organizations for online commerce and personalized promotions, 24x7
customer and partner self-service, online exchanges, electronic procurement,
collaborative planning and innovation and related e-business applications. With
our flagship product Documentum 4i, we offer a platform for businesses of any
size to achieve a competitive online presence. We intend to enhance our
technology leadership position through continued innovation on our Documentum 4i
content management platform and e-business applications suite to enable an end-
to-end content supply chain within and between organizations.
Expand Channel Reach and Effectiveness. We expand our channel reach by
strengthening our network of sales and strategic e-business and technology
partners. The Company has accelerated the development, introduction and
acceptance of Documentum solutions through select systems integrators, Internet
professional services providers, e-commerce technology partners, and resellers.
These e-business partners serve as extensions of the sales force and development
staff, enabling the Company to achieve high growth rates without incurring
additional overhead and infrastructure expenses. They bring valuable technical
and domain expertise and established business relationships with companies
seeking to bring their businesses online. By reorganizing our sales and
consulting into a single field organization and assembling teams of e-business
experts to help reduce sales cycles in e-business engagements, we are
accelerating the deployment of content management solutions.
Become the Preferred Supplier of Content Management Solutions for ASPs. We
license our software to Application Service Providers, or ASPs, for companies
that want a third party to host their e-business software solutions or services.
ASPs offer customers the benefits of access to business software without the
need to build and maintain the hardware and network infrastructure or hire and
retain personnel to support it. Documentum intends to pursue new business
opportunities with the mid-tier market through this ASP channel. Documentum has
established the ASPire program to attract and retain leading ASPs, offering
access to Documentum technology, marketing and sales resources and the technical
assistance necessary to deploy Documentum-based technology solutions. Through
the Company's ASPire program, customers "rent" access to Documentum content
management technology to meet their business computing needs.
Expanding Global Presence. We combine extensive operations in North America,
Europe and Asia with a worldwide network of partners to provide dedicated
service to businesses worldwide. The Company will build upon its successful
international business performance by growing its sales, consulting and
technical support operations around the world. We intend to leverage this global
presence to capitalize on the rapid worldwide growth of the electronic commerce
and e-business market. In 1999, the Company formed global account teams to
better manage large global business opportunities, and opened a new support
center in Australia to serve the Asia-Pacific region.
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Raise Broad Awareness and Leverage Deep Vertical Presence. The Company intends
to invest in branding and awareness building efforts to drive greater mind share
of Documentum as the leading provider of content management solutions that power
today's e-business. At the same time, we will extend our established vertical
presence to cultivate and drive emerging e-business opportunities. We will also
invest in establishing thought leadership focused on demonstrating how our
solutions are critical for new and emerging business models.
Customers
With 240 new customers in 1999, Documentum set a new record for adding new
customers in a single year. Over 800 Global 2000 organizations and Internet
companies now rely on Documentum solutions to manage dynamic content within and
between their organizations. These customers include: Administaff, AG Edwards,
AT&T, Bayer AG, BMC Software, BMW AG, BP Amoco, Brodia, Charles Schwab, Chevron,
Delta Airlines, Dow Chemical, Entergy, Ford Motor Company, Linklaters, Monsanto,
Nortel Networks, Origin, PeopleSoft, Pfizer, Rhone-Poulenc Rorer, Scudder,
Telstra, United Airlines, Volkswagen AG, and Wellington Management.
Sales and Marketing
The Company sells its products through its own direct sales force as well as
complementary indirect channels primarily consisting of key systems integrators,
distributors, and technical partners. Sales teams are organized around the
Company's key vertical markets of high tech, process (pharmaceutical and
chemical), financial services, telecommunications and automotive. The Company
targets global customers in its key vertical markets. The Company currently has
14 sales offices in the United States, three sales offices in Europe, sales
offices in Japan, Korea and Australia, as well as distributors in Europe, the
Middle East, Asia-Pacific and South Africa.
The Company's field sales force conducts multiple presentations and
demonstrations of the content management solutions to management and users at
the customer site as part of the direct sales effort. 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. Traditional sales cycles generally last from six to 12
months, but are much shorter when delivering Web-based solutions. 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, Seoul, and Melbourne. 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 1999, 1998 and 1997, research and development
expenses were $25.8 million, $18.2 million, and $11.0 million respectively.
Historically, the Company has expensed its software development costs as
incurred.
With future releases of Documentum 4i, Documentum will extend the functionality
to offer robust new capabilities for content management. These include enhanced
publishing and delivery services that will scale content to Internet levels and
provide one-to-one delivery. Other new features will include enhanced XML
management services and business-to-business engagement services. XML services
will address the next generation of content interchange. Business-to-business
engagement services will extend engagements beyond a single session and delivery
to different
9
media. A new set of content management application services will allow site
developers to construct content and site management applications from standard
components.
In addition, Documentum is committed to developing a family of e-business
applications on top of the Documentum 4i platform targeting specific customer
requirements for making e-business connections with customers, business partners
and employees. The focus will be on developing solutions for managing content
vital to emerging e-business exchanges, virtual communities, and build-to-order
business collaboration. These applications will leverage Documentum's strengths
in content management, dynamic content assembly and delivery, workflow
technology and collaboration to create a "dynamic supply Web" that accelerates
the delivery of vital e-business content anytime, anywhere, to any device.
Industry Standards
Documentum is committed to providing an open, standards-based content management
platform and family of e-business applications targeted to customers' unique e-
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.
Documentum is the repository of choice for customers using XML or its parent
language SGML. Many of our most sophisticated customers use their content
repository today for this purpose, and search XML zones there to find the right
content at the right time. Throughout 2000, Documentum expects to continue to
expand its support for emerging XML business applications. XML will allow
businesses to transfer content seamlessly with other businesses, enabling
efficient business-to-business operations across the Internet and multiple
proprietary secure networks, and in all facets of e-business.
The Company has enhanced the architecture of its open, extensible server to
support industry-standard platforms, applications, multi-channel services (i.e.,
pagers, cellular phones and handheld devices) and networks including the Web.
For example, the Company is actively involved in the Wireless Access Protocol
(WAP) standard. Other industry-leading technologies that Documentum is actively
supporting include LDAP, OLE DB, COM/DCOM, Java, ASP, JSP, and J2EE. As Internet
standards emerge and tools to support those standards evolve, Documentum will
continue to take a leadership position in support of those standards. Documentum
has also provided support for other information delivery vehicles such as SAP,
Lotus Notes, CAD systems, and PeopleSoft.
As a result of its enterprise document management heritage, Documentum has
participated in the leading organization that has taken the initiative to define
standards specifically for the document management arena, the Open Document
Management API (ODMA). Documentum has also participated in the Document
Management Alliance (DMA), which has published a specification for broader
interoperability and connectivity between heterogeneous document management
services, repositories and applications. In addition, the Company is
participating in the Workflow Management Coalition (WfMC), which has established
widely accepted workflow standards. Documentum's workflow solutions are fully
compliant with the WfMC standard.
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;
10
. 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. For example, during the first
nine months of fiscal year 1999, the Company's revenue was significantly lower
than expected. As a result of the relatively fixed nature of the Company's
expenses, the Company experienced a net loss for that period. Based on the
preceding factors, we may experience a shortfall in revenue or earnings or
otherwise fail to meet public market expectations, which could materially harm
our business, financial condition and the market price of our common stock.
Fluctuations in Quarterly Operating Results. Our net revenue and operating
results may vary drastically from quarter to quarter because of numerous factors
largely beyond our control, including the following:
. the potential delay in recognizing revenue from license transactions;
. the discretionary nature of our customers' budget and purchase cycles;
. variations in our customers' fiscal or quarterly cycles;
. the size and complexity of our license transactions;
. the timing of new product releases;
. seasonal variations in operating results; and
. the tendency to realize a substantial amount of revenue in the last weeks, or
even days, of each quarter.
Each customer makes a discretionary decision to implement our products that is
subject to its resources and budget cycles. Additionally, our license sales
generally reflect a relatively high amount of revenue per order, and as a
result, the loss or delay of individual orders, could have a significant impact
on quarterly operating results and revenue. During the first half of 1999 we
had a number of customers delays orders, resulting in revenue below our
expectations. Furthermore, the timing of license revenue is difficult to predict
because of the length of our sales cycle, which typically ranges from six to 12
months from initial contact. Also, our strategy of providing customers with
complete content management solutions typically results in software licenses
being bundled with services. In these cases, the delivery of services may delay
recognition of license revenue. Because our operating expenses are based on
anticipated revenue trends and because a high percentage of these expenses is
relatively fixed, any shortfall from anticipated revenue or a delay in the
recognition of revenue from license transactions could cause significant
variations in operating results from quarter to quarter and could result in
operating losses. If these expenses precede, or are not followed by, increased
revenue, our operating results could be materially harmed.
As a result of the foregoing and other factors, operating results for any
quarter are subject to significant variation, and we believe that period-to-
period comparisons of our results of operations are not necessarily meaningful
in terms of their relation to future performance. You should not rely upon
these comparisons as indications of future performance. Furthermore, it is
likely that our future quarterly operating results from time to time will not
meet the expectations of public market analysts or investors, in which case
there would likely be a drop in the price of our common stock.
Lengthy Sales and Implementation Cycles. In general, the timing of the sales
and implementation of our products is lengthy and not predictable with any
degree of certainty. You should not rely on prior sales and implementation
cycles as an indication of future cycles.
The licensing of our software products is often an enterprise-wide decision by
prospective customers and generally requires us to engage in a lengthy sales
cycle (generally between six and 12 months) to provide a significant level of
education to prospective customers regarding the use and benefits of our
products. Additionally, the size and
11
complexity of any particular transaction can also cause delays in the sales
cycle. The implementation of our products can involve a significant commitment
of resources by customers over an extended period of time and is commonly
associated with substantial reengineering efforts by the customer. For these and
other reasons, the sales and customer implementation cycles are subject to a
number of significant delays over which we have little or no control. A delay in
the sale or customer implementation of even a limited number of license
transactions could harm our business, financial condition and operations and
cause our operating results to vary significantly from quarter to quarter.
Product Concentration. To date, substantially all of our revenue has been
attributable to sales of licenses of the Documentum EDMS and Documentum 4i
family of products and related services. We expect such products and related
services to continue to account for a substantial majority of our future
revenue. As a result, factors adversely affecting the pricing of or demand for
such products, such as competition or technological change, harm our business,
financial condition and results of operations.
New Versions, New Products and Rapid Technological Change. The content
management software and services market in which we compete is characterized by
(1) rapid technological change, (2) frequent introduction of new products and
enhancements, (3) changing customer needs, and (4) evolving industry standards.
The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable.
Accordingly, the life cycles of our products are difficult to estimate. To keep
pace with technological developments, evolving industry standards and changing
customer needs, we must support existing products and develop new products. Our
future success also depends in part on our abilities to execute on our strategy
of developing web content management and business-to-business solutions and to
maintain and enhance relations with technology partners, including RDBMS
vendors, in order to provide our customers with integrated product solutions.
We may not be successful in maintaining and enhancing the aforementioned
relationships or in developing, marketing and releasing new products or new
versions of our products that respond to technological developments, evolving
industry standards or changing customer requirements. We may also experience
difficulties that could delay or prevent the successful development,
introduction and sale of these enhancements. In addition, these enhancements
may not adequately meet the requirements of the marketplace and may not achieve
any significant degree of market acceptance. If we fail to successfully
maintain or enhance relationships with our technology partners or to execute on
our integrated product solution strategy, or if release dates of any future
products or enhancements are delayed, or if these products or enhancements fail
to achieve market acceptance when released, our business, operating results and
financial condition could be harmed. We have in the past experienced delays in
the release dates of enhancements to our products. While the delays we have
experienced to date have been minor (not exceeding six months), there can be no
assurance that we will not experience significant future delays in product
introduction.
Dependence on Emerging Markets. The market for content management software and
services is intensely competitive, highly fragmented and rapidly changing. Our
future financial performance will depend primarily on the continued growth of
the market for content management software and services and the adoption of our
products by organizations in this market. If the content management software
and services market fails to grow or grows more slowly than we currently
anticipate, our business, financial condition and operating results would be
harmed.
Intense Competition. Our products target the emerging market for Web-based and
client/server software solutions. This market is intensely competitive, rapidly
changing and significantly affected by new product introductions and other
market activities of industry participants. We encounter direct competition
from a number of public and private companies that offer a variety of products
and services addressing this market. These companies include FileNet, OpenText,
Interwoven and Vignette. Additionally, several other enterprise software
vendors, such as Microsoft, Oracle and Lotus (a division of IBM) are potential
competitors in the future. Many of these current and potential competitors have
longer operating histories, significantly greater financial, technical,
marketing and other resources, significantly greater name recognition and a
larger installed base of customers than we do. In addition, several of these
companies, including Microsoft, Oracle, Lotus and others, have well-established
relationships with our current and potential customers and strategic partners,
as well as extensive resources and knowledge of the enterprise software industry
that may enable them to more easily offer a single-vendor solution. As a
result, these
12
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products, than we can.
We also face indirect competition from systems integrators. We rely on a number
of systems consulting and systems integration firms for implementation and other
customer support services, as well as for recommendations of our products during
the evaluation stage of the purchase process. Although we seek to maintain
close relationships with these service providers, many of them have similar, and
often more established, relationships with our competitors. If we are unable to
develop and maintain effective, long-term relationships with these third
parties, our competitive position would be materially and adversely affected.
Further, many of these third parties possess industry-specific expertise and
have significantly greater resources than we do, and may market software
products that compete with us in the future.
There are many factors that may increase competition in the market for Web-based
and client/server software solutions, including (1) entry of new competitors,
(2) alliances among existing competitors and (3) consolidation in the software
industry. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could harm our business,
financial condition and operating results. If we cannot compete successfully
against current and future competitors or overcome competitive pressures, our
business, operating results and financial condition may be harmed.
End-User Customer and Industry Concentration. Our success depends on
maintaining relationships with our existing customers. A relatively small
number of customers have accounted for a significant percentage of our revenue.
For 1999, 1998, and 1997 sales to our five largest customers accounted for 19%,
17% and 25% of license revenue, respectively. Additionally, our customers are
somewhat concentrated in the process and discrete manufacturing, pharmaceutical
and architectural engineering and construction industries. We expect that sales
of our products to a limited number of customers and industry segments will
continue to account for a significant percentage of revenue for the foreseeable
future. The loss of a small number of customers or any reduction or delay in
orders by any such customer, or our failure to market successfully our products
to new customers and new industry segments could harm our business, financial
condition and operating results.
Reliance on Certain Relationships. We have established strategic relationships
with a number of organizations that we believe are important to our sales,
marketing and support activities and the implementation of our products. We
believe that our relationships with these organizations, including indirect
channel partners and other consultants, provide marketing and sales
opportunities for our direct sales force, expand the distribution of our
products and broaden our product offerings through product bundling. These
relationships allow us to keep pace with the technological and marketing
developments of major software vendors and provide us with technical assistance
for our product development efforts. Our failure to maintain these
relationships, or to establish new relationships in the future, could harm our
business, financial condition and results of operations.
Dependence on Key Personnel. Our future performance depends in significant part
on the continued service of our key technical, sales and senior management
personnel, none of whom is bound by an employment agreement with us. The loss
of services of one or more of our executive officers or key technical personnel
could harm our business, operating results and financial condition.
Our future success also depends on our continuing ability to attract and retain
highly qualified technical, sales and managerial personnel. Competition for
such personnel is intense, and there can be no assurance that we can retain key
employees or that we can attract, assimilate or retain other highly qualified
personnel in the future.
International Operations. Our revenue is primarily derived from large multi-
national companies. To service the needs of these companies, we must provide
worldwide product support services. The Company has offices in London, Paris,
Munich, Tokyo, Melbourne and Seoul. The Company operates its international
technical support operations in the London, Munich and Melbourne offices. We
have expanded, and intend to continue expanding, our international operations
and enter additional international markets. This will require significant
management attention and financial resources that could adversely affect our
operating margins and earnings. We may not be able to maintain or increase
international market demand for our products. If we do not, our international
sales will be limited, and our business, operating results and financial
condition could be harmed.
13
Our international operations are subject to a variety of risks, including (1)
foreign currency fluctuations, (2) economic or political instability, (3)
shipping delays, (4) various trade restrictions, (5) our limited experience in,
and the costs of, localizing products for foreign countries, (6) longer accounts
receivable payment cycles and (7) difficulties in managing international
operations, including, among other things, the burden of complying with a wide
variety of foreign laws.
Dependence on Proprietary Technology and Risks of Infringement. We rely
primarily on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We also believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential to
establishing and maintaining a technology leadership position. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our products is difficult,
and while we are unable to determine the extent to which piracy of our products
exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. Our means of protecting
our proprietary rights in the United States or abroad may not be adequate.
Additionally, our competition may independently develop similar technology.
Although we do not believe that we are infringing any proprietary rights of
others, third parties may claim that we have infringed their intellectual
property rights. Furthermore, former employers of our former, current or future
employees may assert claims that such employees have improperly disclosed to us
the confidential or proprietary information of such former employers. Any such
claims, with or without merit, could (1) be time-consuming to defend, (2) result
in costly litigation, (3) divert management's attention and resources, (4) cause
product shipment delays, and (5) require us to pay money damages or enter into
royalty or licensing agreements. A successful claim of intellectual property
infringement against us and our failure or inability to license or create a
workaround for such infringed or similar technology may harm our business,
operating results and financial condition.
We license certain software from third parties, including software that is
integrated with internally developed software and used in our products to
perform key functions. These third-party software licenses may not continue to
be available to us on acceptable terms. The loss of, or inability to maintain,
any of these software licenses could result in shipment delays or reductions.
This could harm our business, operating results and financial condition.
Product Liability. Our license agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in our license agreements may not be effective under the laws of certain
jurisdictions. A successful product liability claim brought against us could
harm our business, financial condition and results of operations.
Risk of Product Defects. Software products frequently contain errors or
failures, especially when first introduced or when new versions are released.
Also, new products or enhancements may contain undetected errors, or "bugs," or
performance problems that, despite testing, are discovered only after a product
has been installed and used by customers. Errors or performance problems could
cause delays in product introduction and shipments or require design
modifications, either of which could lead to a loss in or delay in recognition
of revenue.
Our products are typically intended for use in applications that may be critical
to a customer's business. As a result, we expect that our customers and
potential customers will have a greater sensitivity to product defects than the
market for software products generally. Despite extensive testing by us and by
current and potential customers, errors may be found in new products or releases
after commencement of commercial shipments, resulting in loss of revenue or
delay in market acceptance, damage to our reputation, diversion of development
resources, the payment of monetary damages or increased service or warranty
costs, any of which could harm our business, operating results and financial
condition.
14
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
harm our business and financial results.
Possible Volatility of Stock Price. The trading price of our common stock is
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant orders, changes in earning
estimates by analysts, announcements of technological innovations or new
products by us or our competitors, general conditions in the software and
computer industries and other events or factors. In addition, the stock market
in general has experienced extreme price and volume fluctuations which have
affected the market price for many companies in industries similar or related to
ours and which have been unrelated to the operating performance of these
companies. These market fluctuations may decrease the market price of our
common stock.
Effects of Certain Charter Document Provisions that may Prevent Certain
Corporate Actions. Our Board of Directors is authorized to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further approval by our stockholders. The preferred stock
could be issued with voting, liquidation, dividend and other rights superior to
those of the common stock. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of our outstanding voting stock. We have
instituted a classified Board of Directors in our Amended and Restated
Certificate of Incorporation. We have also implemented a Share Purchase Plan (or
"Rights Plan") under which all stockholders of record as of February 24, 1999
received rights to purchase shares of a new series of preferred stock. The
rights are exercisable only if a person or group acquires 20% or more of our
common stock or announces a tender offer for 20% or more of the common stock.
These provisions and certain other provisions of our Amended and Restated
Certificate of Incorporation and certain provisions of our Amended and Restated
Bylaws and of Delaware law, could delay or make more difficult a merger, tender
offer or proxy contest.
Executive Officers
As of March 1, 2000, the executive officers of the Company and their ages are as
follows:
NAME AGE POSITION
- --------------------- ------------ ----------------------------------------------------------------------
Jeffrey A. Miller 50 President, Chief Executive Officer and Director
Russell A. Harris 44 Executive Vice President, Worldwide Field Operations
Thomas P. Heydler 43 Vice President and General Manager, eBusiness Applications
Howard I. Shao 43 Executive Vice President, Founder and Chief Technology Officer
David DeWalt 36 Executive Vice President and General Manager, eBusiness Operations
Kathleen M. Crusco 35 Acting Chief Financial Officer
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. 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
15
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.
Russell A. Harris joined the Company as Vice President of Worldwide Sales in
July 1999. In November 1999, Mr. Harris was promoted to the position of
Executive Vice President Field Operations in charge of Worldwide Sales and
Consulting Organizations. Prior to joining the Company, Mr. Harris held a
number of different sales management positions at Electronic Data Systems
("EDS"), a consulting services company, including Sales Vice President of its
Hi-Tech Business Unit from 1990 to 1999. Prior to that, Mr. Harris held
positions at Cummins Engine Co. and Miles Laboratories managing data center
operations and systems development projects, programming and system analysis.
Mr. Harris holds a B.S. in Accounting from Indiana University.
Thomas Heydler is General Manager and Vice President, responsible for overseeing
Documentum's eBusiness application group and overall business-to-business E-
business initiative. Prior to this role he was responsible for overseeing
Documentum's global market industry development. From 1996 to 1998, Mr. Heydler
was Vice President and General Manager of Documentum Europe/Asia/Middle East.
From 1992 to 1996, Mr. Heydler was President and general manager of Cadence
Design Systems, Europe. Mr. Heydler held several management positions in his
seven years with Siemens AG, Munich. Mr. Heydler has a BS in Electrical
Engineering from Technical University of Munich.
David DeWalt joined Documentum in August 1999 as Executive Vice President and
General Manager, eBusiness Unit. From August 1997 to December 1998 Mr. DeWalt
was founding principal and vice president of Eventus Software, a web content
software company, where he was responsible for sales and marketing, consulting
services and support, product management and business development. Following
Eventus' 1998 acquisition by Segue Software, Mr. DeWalt served as vice
president, North American sales for Segue. From July 1995 to July 1997 Mr.
DeWalt held the position of vice president of sales and marketing at Quest
Software. Mr. DeWalt also held various positions in sales management at Oracle
Corporation from August 1989 to July 1995. Mr. DeWalt holds a Computer Science
and Electrical Engineering Degree from the University of Delaware and conducted
graduate work in Finance at the University of California, Berkeley.
Howard I. Shao, a founder of the Company, has served as Chief Technology Officer
since 1999. From 1997 to 1999, Mr. Shao was the Company's Vice President,
Product Development. 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 Department Manager of Database Processor at TTI/Citicorp, a software
division of Citicorp. Mr. Shao held various software development and management
positions at Transtech International and Digital Equipment Corporation. Mr.
Shao received his M.B.A. from Pepperdine University and a B.S. in Computer
Science from the Massachusetts Institute of Technology.
Kathleen M. Crusco has served as Acting Chief Financial Officer since November
1999. From April 1999 to November 1999, she served as the Company's Corporate
Controller. From July 1997 to April 1999, Ms. Crusco served as Director of
Corporate Accounting at Adaptec Inc. From July 1987 to July 1997, she held
various positions at Price Waterhouse LLP, a public accounting firm, including
Senior Audit Manager from 1995 to 1997. Ms. Crusco holds a B.S. in Accounting
from the California State University Chico.
Employees
As of December 31, 1999, the Company employed 660 persons, including 228 in
sales and marketing, 107 in its consulting and training services organization,
60 in customer technical support, 161 in research and development and 104 in
finance and administration. Of these, 163 are located in Europe, 9 are located
in Asia Pacific and the remainder are 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.
16
ITEM 2. PROPERTIES
As of December 31, 1999 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 ............ 185,000 May, 2005 and March, Corporate HQ, Development, Sales,
2006 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
Burlington, MA ............ 4,089 September, 2004 Sales, Services
Paris, France.............. 12,941 February, 2007 Sales, Services
Tokyo, Japan .............. 14,696 August, 2000 Sales, Services
Munich, Germany ............ 15,710 March, 2002 Sales, Services, Support
Uxbridge, England .......... 35,520 April, 2013 Sales, Marketing, Services and
The Company's headquarters, which contains the principal administrative,
engineering, marketing and sales facilities, total approximately 185,000 square
feet in two buildings in Pleasanton, California under two leases which expire in
May 2005 and March 2006. 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 original facility located in Pleasanton, California, in
January 2000, the Company signed an amendment to one of the existing Pleasanton,
California leases for approximately 37,138 square feet of space beginning July
2000, and expiring in March 2006. The Company currently anticipates that its
facilities are sufficient to support the Company's projected growth; however,
should the Company grow more rapidly than anticipated, the Company could
experience difficulty finding adequate space for expansion. Failure 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 1999.
17
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 1998:
First Quarter $54.38 $32.74
Second Quarter 59.63 40.88
Third Quarter 54.50 34.75
Fourth Quarter 54.00 16.75
Fiscal 1999:
First Quarter $54.13 $14.38
Second Quarter 19.13 9.38
Third Quarter 24.50 12.19
Fourth Quarter 63.50 21.25
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 decrease the market price of the
Company's Common Stock.
As of December 31, 1999, the number of common stockholders of record was 295.
The Company believes that the number of beneficial holders of its common stock
is in excess of 5,000.
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.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
-----------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
Consolidated Statement of Operations Data:
Revenues:
Licenses $ 72,007 $ 80,546 $ 54,536 $34,630 $20,377
Services 55,957 43,283 21,099 10,672 5,079
-----------------------------------------------------------------------------
Total revenues 127,964 123,829 75,635 45,302 25,456
-----------------------------------------------------------------------------
Cost of revenues:
Licenses 5,497 4,179 2,453 1,923 1,188
Services 32,118 25,684 12,327 6,845 3,324
-----------------------------------------------------------------------------
Total cost of revenues 37,615 29,863 14,780 8,768 4,512
-----------------------------------------------------------------------------
Gross profit 90,349 93,966 60,855 36,534 20,944
-----------------------------------------------------------------------------
Operating expenses:
Sales and marketing 61,486 50,425 35,084 19,909 12,513
Research and development 25,832 18,181 10,986 7,880 4,512
General and administrative 19,549 10,255 5,976 4,114 2,430
Acquisition related costs - 2,171 - - -
Purchased in process research and development - 34,622 - - -
-----------------------------------------------------------------------------
Total operating expenses 106,867 115,654 52,046 31,903 19,455
-----------------------------------------------------------------------------
Income (loss) from operations (16,518) (21,688) 8,809 4,631 1,489
Interest and other income, net 3,773 4,395 2,333 2,268 239
-----------------------------------------------------------------------------
Income (loss) before income tax provision (benefit) (12,745) (17,293) 11,142 6,899 1,728
Provision for (benefit from) income taxes (4,333) 6,231 3,788 2,415 468
-----------------------------------------------------------------------------
Net income (loss) $ (8,412) $(23,524) $ 7,354 $ 4,484 $ 1,260
=============================================================================
Net income (loss) per
basic common share (1) $(0.50) $(1.45) $0.51 $0.33 $0.73
=============================================================================
Shares used in basic per
share computation (1) 16,691 16,221 14,463 13,790 1,731
=============================================================================
Net income (loss) per diluted
common share (1) $(0.50) $(1.45) $0.49 $0.30 $0.10
=============================================================================
Shares used in diluted per
share computation (1) 16,691 16,221 15,098 14,734 12,934
=============================================================================
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 18,286 $ 16,240 $ 14,236 $ 5,369 $ 5,978
Short-term investments 64,258 84,203 78,895 46,803 -
Working capital 76,760 97,544 91,697 51,821 4,624
Total assets (2) 169,002 156,195 127,203 74,944 16,501
Long-term obligations 73 - - 211 691
Mandatorily redeemable convertible
preferred stock - - - - 13,391
Stockholders' equity (deficit) 110,979 116,813 102,033 59,332 (5,746)
(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.
(2) Certain prior year balances have been reclassified to conform to current
year's presentation.
19
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 an open,
standards-based content management platform and applications suite for managing
complex processes, as well as any content type, in a collaborative environment,
enabling trusted content to be delivered to the right person at the right time
on any information device, regardless of its origin or location. Documentum's
adaptable collaboration and content management solutions enable corporate
developers and Internet Systems Integrators to implement robust e-business
applications with the reliability, scalability, and interoperability required by
today's 24x7 Internet economy. 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 internet-scale content 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 products
to support content management for customers, partners, and employees. 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. In 1999, the Company introduced Documentum 4i, the next
generation open, standards-based content management platform. This platform
allows for the creation, delivery, management and personalization of all content
and the delivery of that content to any information device, including the Web,
cellular phone, pager, fax machine, printer, CD or PDA device. The Company
expects that license and service revenues from EDMS 98 and Documentum 4i and
newer product offerings including the Documentum Innovation Applications, 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 these products.
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. See "Risk Factors - Uncertainty of Future Operating Results"
and " Fluctuations in Quarterly Operating Results."
20
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
------------------------------------------------
1999 1998 1997
------------------------------------------------
Revenues:
Licenses 56% 65% 72%
Services 44% 35% 28%
---------- ---------- --------------
Total revenues 100% 100% 100%
--------- ---------- --------------
Cost of revenues:
Licenses 4% 3% 3%
Services 25% 21% 16%
--------- ---------- --------------
Total cost of revenues 29% 24% 19%
--------- ---------- --------------
Gross profit 71% 76% 81%
--------- ---------- --------------
Operating expenses:
Sales and marketing 48% 41% 46%
Research and development 20% 15% 15%
General and administrative 15% 8% 8%
Acquisition and related costs 0% 2% 0%
Purchased in process research and development 0% 28% 0%
--------- ---------- ---------------
Total operating expenses 83% 94% 69%
--------- ---------- ---------------
Income (loss) from operations (12%) (18%) 12%
Interest and other income, net 3% 4% 3%
--------- ---------- --------------
Income (loss) before income tax provision (benefit) (9%) (14%) 15%
Provision for (benefit from) income taxes (3%) 5% 5%
----------------------------------------------
Net income (loss) (6%) (19%) 10%
========= ========== ==============
As a percentage of related revenues:
Cost of license revenue 8% 5% 4%
Cost of service revenue 57% 59% 58%
Revenues
The Company's revenues are derived from the sale of licenses for its internet-
scale content management solutions and related services, which include
maintenance and support, consulting and training services. Revenues from license
arrangements are recognized upon contract execution, provided all shipment
obligations have been met, fees are fixed or determinable, and collection is
probable. If an ongoing vendor obligation exists under the license arrangement,
revenue is deferred based on vendor-specific objective evidence of the
undelivered element. If vendor-specific objective evidence does not exist for
all undelivered elements, all revenue is deferred until sufficient evidence
exists or all elements have been delivered. Allowances for estimated future
returns are provided upon shipment. Payments received in advance of revenue
recognition are recorded as deferred revenue. Revenues from annual maintenance
and support are deferred and recognized ratably over the term of the contract.
Revenues from consulting and training are deferred and recognized when the
services are performed and collectibility is deemed probable. Beginning January
1, 1998, the Company has recognized revenue in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition," as amended. Prior to 1998,
the Company recognized revenues in accordance with SOP 91-1, "Software Revenue
Recognition."
License revenues decreased by 11% to $72.0 million in 1999, increased by 48% to
$80.5 million in 1998, and by 57% to $54.5 million in 1997, representing 56%,
65%, and 72% of total revenues in the respective periods. In 1999,
21
license revenue was adversely impacted by a general industry slowdown in
customer license sales for enterprise software applications. In addition, the
Company experienced a weakness in customer demand and difficulty in closing
large license contracts with customers in the first half of 1999. The growth in
license revenues from 1997 to 1998 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 decreases in license revenues as a percentage of total
revenues in both 1999 and 1998 are due to increased service revenue, as
discussed below. For the years ended December 31, 1999, 1998, and 1997 license
revenue from Xerox and certain Xerox affiliates, as systems integrators,
accounted for 1%, 12%, and 6% 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.
Service revenues increased by 29% to $56.0 million in 1999, by 105% to $43.3
million in 1998, and by 98% to $21.1 million in 1997, representing 44%, 35%, and
28%, of total revenues in the respective periods. The increase in absolute
dollars was attributable to a larger installed base of customers receiving
ongoing maintenance, training and support services and increases in the
Company's professional services staff in conjunction with the Company's focus to
expand solution offerings to customers. The increase in service revenue as a
percent of total revenue was mainly due to a decrease in total license revenue.
The Company markets its products through its direct sales force and its indirect
channel partners. While historically the Company has generated the majority of
its revenue from its direct sales force, the Company has also focused on
complementing its direct sales channel with indirect channels, consisting of
systems integrators and distributors. Revenue from all indirect channel partners
comprised 30%, 31%, and 23%, of license revenues in 1999, 1998, and 1997,
respectively. Revenue from indirect partners for any period is subject to
significant variations. As a result, the Company believes that period to period
comparisons of indirect revenue are not necessarily meaningful and should not be
relied upon as an indication of future performance.
International revenue represented 48%, 32%, and 33%, of license revenues in
1999, 1998, and 1997, respectively. The increase in international revenue as a
percent of license revenue in 1999, was primarily due to an enterprise wide sale
to a single global customer in the amount of $4.5 million in Europe, as well as
a decrease in overall domestic license revenue. In addition, sales in Asia
continue to grow as a result of growth in the sales force, resulting in
increased revenue from Asia as a percentage of total international revenue. The
Company classifies license revenue as domestic or international based upon the
billing location of the customer. In many instances, especially with large
purchases from multinational companies, the customer has the right to deploy the
licenses anywhere in the world. Thus, the percentages discussed herein
represent where licenses were sold, and may or may not represent where the
products are used. As a result, the Company believes that period to period
comparisons of international revenue are not necessarily meaningful and should
not be relied upon as an indication of future performance.
Cost of revenues
Cost of license revenues consists primarily of the royalties paid to third-party
vendors, packaging, documentation, production and freight costs. Royalties,
which are paid to third-parties for selected products, include both fixed fees
and variable fees. Cost of license revenues increased by 32% to $5.5 million in
1999, by 70% to $4.2 million in 1998, and by 28% to $2.5 million in 1997,
representing 8%, 5%, and 4% of the related license revenues in 1999, 1998, and
1997, respectively. The increase in cost of license revenue was related to a
continued shift in the mix of products being sold. The Company currently
carries more third party products and is selling a greater number of those
products than it had in the same periods in the prior year. Thus, royalty
expenses associated with the increase in sales of third party products have
increased over 1998. The Company expects the cost of license revenue to
fluctuate in absolute dollar amount as the related license revenue fluctuates.
Cost of services revenue consists primarily of personnel-related costs incurred
in providing consulting services, training to customers, and maintenance
services, which includes telephone support. Cost of services revenues increased
by 25% to $32.1 million in 1999, 108% to $25.7 million in 1998, and by 80% to
$12.3 million in 1997, representing 57%, 59%, and 58% of the related services
revenues in 1999, 1998, and 1997, respectively. The increase in cost of service
revenue in absolute dollar amount was a result of increased personnel-related
costs as the
22
Company expanded its consulting, training, and maintenance operations to support
its larger installed customer base, as well as an increase in solutions offered
to customers. The decrease in cost of service revenues as a percentage of
service revenues in 1999 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 absolute dollar amount as the related service revenues 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 22% to $61.5 million in
1999, by 44% to $50.4 million in 1998, and 76% to $35.1 million in 1997,
representing 48%, 41%, and 46%, of total revenues for 1999, 1998, and 1997,
respectively. The increase in absolute dollar amount over both periods and as a
percentage of revenue for 1999 was the result of the Company's strategy to
continue to invest in its sales and marketing infrastructure, including an
increase in the number of sales teams and marketing programs over the comparable
period. Additionally, in 1999, costs were incurred in an effort to rebrand the
Company. These costs included the design and development of the Company's new
logo. 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 expense will continue to
increase in absolute dollar amount.
Research and development. Research and development expenses consist primarily of
salaries and benefits for software developers, contracted development efforts
and related facilities costs. Research and development expenses increased by 42%
to $25.8 million in 1999, 65% to $18.2 million in 1998, and by 39% to $11.0
million in 1997, representing 20%, 15%, and 15% of total revenues in 1999,
1998, and 1997, respectively. The increase in absolute dollar amount and as a
percentage of revenue for all periods reflects the expansion of the Company's
engineering staff and related costs required to support the development of new
products, including Documentum 4i - the next generation internet-scale content
management platform, which was introduced in the second quarter of 1999, and
enhancements to existing products. Based on the Company's research and
development process, costs incurred between the establishment of technological
feasibility and general release have been insignificant and therefore have been
expensed as incurred. The Company expects research and development costs will
continue to increase in absolute dollar amount in order to support increased
development efforts to both existing and new products.
General and administrative. General and administrative expenses consist
primarily of personnel costs for finance, information technology, legal, human
resources and general management as well as outside professional services.
General and administrative expenses increased by 91% to $19.5 million, by 72% to
$10.3 million in 1998, and by 45% to $6.0 million in 1997, respectively,
representing 15%, 8%, and 8% of total revenues in 1999, 1998, and 1997,
respectively. The increase in absolute dollar amount in 1999 and 1998 and the
increase as a percentage of revenue in 1999, is primarily due to increased
staffing and professional fees necessary to manage and support the Company's
planned growth, as well as consulting costs associated with changes to the
Company's information systems. The Company expects general and administrative
expenses to increase in absolute dollar amount in order to support the growing
needs of the Company.
Acquistions and related costs. 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 was 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. The Company believes this had an immaterial
effect on the Company's financial statements taken as a whole. Therefore, the
Company did not restate the results of its operations for fiscal years prior to
1998. In the first quarter of 1998, the Company recorded merger expenses of $2.2
million, primarily for accounting and legal fees and other related transactions
costs, in connection with the acquisition.
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
23
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. As of May 31, 1998, Relevance had no
revenues and had gross assets of approximately $3.6 million 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 spent $2.4 million in additional research and development during 1998 in
an effort to further develop the technology to produce a 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 1999, 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, the gain on sale of fixed
assets, and interest expense. Interest and other income, net decreased by 14% to
$3.8 million in 1999, increased by 88% to $4.4 million in 1998, and increased by
3% to $2.3 million in 1997. The decrease in 1999 from 1998 and the increase in
1998 over 1997 in interest and other income was primarily due to interest income
earned on higher cash and investment balances in 1998. To date, the Company's
international sales have been generally denominated in U.S. dollars and the
Company has not engaged in hedging activities as the exposure to currency
fluctuations has been insignificant. In the future, as the Company expands its
international operations, the Company expects to have an increased amount of
non-U.S. dollar denominated contracts. Unexpected changes in the exchange rates
for these foreign currencies could result in significant fluctuation in the
foreign currency translation gains and losses in future periods.
Income taxes
The Company's effective tax rate for 1999, 1998 and 1997 was 34%. In 1999, the
Company recorded a tax benefit of $4.3 million, which it believes is fully
recoverable for income tax purposes based on carryback potential against taxes
previously paid. 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.
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, cash equivalents and short-term investments totaled $82.5
million at December 31, 1999 representing 49% of total assets. The Company has
invested its cash in excess of current operating requirements in investment
grade securities. The investments have variable and fixed interest rates and
primarily short-term maturities. In accordance with SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities" such investments are
classified as "available-for-sale."
24
Net cash provided by operating activities was $2.7 million, $11.5 million, and
$14.0 million in 1999, 1998 and 1997, respectively. For the year ended December
31, 1999, the cash generated by operations was primarily attributable to a net
loss of $8.4 million, adjusted for depreciation and amortization of $8.3
million, provision for doubtful accounts of $0.9 million, an increase in
deferred revenue of $8.4 million, accrued liabilities of $8.1 million, and
accounts payable of $2.5 million, offset by an increase in accounts receivable
of $10.2 million, other assets of $3.5 million, and deferred tax assets of $3.3
million. 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 $10.3 million, and deferred revenue of $6.2
million, offset by an increase in accounts receivable of $14.1 million and in
other assets of $9.0 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 $7.6 million, depreciation and
amortization of $3.4 million, provision for doubtful accounts of $1.5 million,
and deferred revenue of $3.3 million, offset by the increase in accounts
receivable of $7.9 million, deferred tax asset of $0.9 million, and other assets
of $0.4 million. In 1999, capital expenditures were primarily for computer
equipment, office furniture and leasehold improvements related to the new office
facility described below. In 1998, capital expenditures were primarily for
computer equipment, fixed assets and leasehold improvements acquired in
conjunction with the Company's expansion to new facilities.
On April 15, 1999, the Board of Directors approved the repurchase of up to $20
million of the Company's common stock on the open market or in private
transactions. During 1999, the Company repurchased and retired 696,300 shares
of its common stock for approximately $10.1 million.
During 1999, the Company received $9,174,000 and $2,782,000 in proceeds from
employee options exercises and employee stock purchase plan purchases,
respectively.
In August 1999, the Company entered into an unsecured revolving line of credit
agreement with a new bank (the "Facility"). The Facility allows for borrowings
of up to $20 million bearing interest at the Company's option of either: (1) the
bank's prime rate or (2) the LIBOR rate plus 1.50%. This line of credit expires
on July 30, 2001. The Company must comply with certain financial covenants and
conditions as described in the Facility. The Company did not have any
borrowings outstanding under this line of credit as of December 31, 1999.
On January 15, 1998, the Company entered into an unsecured revolving credit
agreement. The agreement allowed for borrowings of up to $10 million bearing
interest at the Company's option of either: (1) the bank's prime rate minus
0.5%; (2) the LIBOR plus 1.0%; or (3) at the bank's competitive bid rate. The
Company terminated this line of credit effective in June 1999.
In June 1998, the Company signed and made a deposit of $2.5 million to lease
approximately 122,000 square feet and 63,000 square feet in Pleasanton,
California beginning in June 1999 and November 1999, respectively, and expiring
in May 2005 and March 2006, respectively. In January 2000, the Company signed
an amendment to the existing leases, which provides for the rental of an
additional 37,138 square feet of space, beginning July, 2000 and expiring in
March 2006. The Pleasanton, California space serves as the Company's
headquarters and contains the principal administrative, engineering, marketing
and sales facilities. The Company has made and will continue to make
significant capital purchases related to leasehold improvements and office
furniture for new facilities. The Company currently has no other significant
capital spending or purchase commitments other than normal purchase commitments
and commitments under facilities and capital leases.
In 1999, the Company entered into two capital lease agreements, under a sale-
leaseback arrangement, for the rental of computer equipment in the amount of
$292,000 and $171,000. The lease agreements require quarterly principal and
interest payments in the amount of $37,000 and $22,000, respectively. The leases
have interest rates of 1.66% and 2.605% and maturity dates of July, 2001 and
September, 2001, respectively. As of December 31, 1999, the Company has made
payments in the amount of $158,000 related to these capital lease and has
recorded current and long-term portions of capital lease obligations in the
amounts of $232,000 and $73,000, respectively.
The Company believes that its existing cash, cash equivalents and short-term
investment balances, its available bank financing and the cash flows generated
from operations, if any, will be sufficient to meet its anticipated cash needs
for working capital and capital expenditures for at least the next twelve
months. A portion of the Company's cash
25
could be used to acquire or invest in complementary businesses or products or
obtain the right to use complementary technologies. The Company periodically
evaluates, in the ordinary course of business, potential investments such as
businesses, products or technologies. See "Risk Factors - Risks Associated with
Acquisitions".
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
hedging activities, and exposure definition. SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not expect the adoption of SFAS No. 133 to have a material
impact on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company will adopt SAB
101 as required in the second quarter of 2000 and is evaluating the effect that
such adoption may have on its consolidated results of operations and financial
position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - INTEREST
RATE RISK
As of December 31, 1999 the Company's investment portfolio includes $42.5
million of short-term corporate and municipal bonds which are subject to no
interest rate risk when held to maturity but may increase or decrease in value
if interest rates change prior to maturity. The remaining $21.8 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.
The following table details the Company's short-term investments at December 31,
1999:
(in thousands)
Municipal bonds $33,512
U.S. Government Agencies 16,979
Corporate bonds and notes 8,960
Medium term notes 2,807
Preferred stock 2,000
-------
$64,258
=======
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
(i) On September 27, 1999, PricewaterhouseCoopers L.L.P. resigned as the
independent public accountants of Documentum, Inc. (the "Company").
Effective October 22, 1999, the Company appointed Arthur Andersen L.L.P.
as its independent public accountants.
(ii) The reports of PricewaterhouseCoopers L.L.P. on the financial statements
of the Company for each of the past two fiscal years contained no
adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
(iii) The resignation of PricewaterhouseCoopers L.L.P. as the independent
public accountants of the Company was approved by the Company's audit
committee.
(iv) During the Company's two most recent fiscal years and through September
27, 1999, the Company has had no disagreements with
PricewaterhouseCoopers L.L.P. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers L.L.P. would have caused it to make reference to
the subject matter of the disagreement in its report on the financial
statements of the Company for such years.
(v) During the Company's two most recent years and through September 27,
1999, the Company has had no reportable events (as defined in Item 304
(a)(1)(v) of Regulation S-K).
(vi) The Company has provided PricewaterhouseCoopers L.L.P. with a copy of
the disclosures contained in the report and requested that
PricewaterhouseCoopers L.L.P. furnish the Company with a letter
addressed to the Securities and Exchange Commission stating whether or
not it agrees with the statements made in subsections (i), (ii), (iv)
and (v) above. A copy of such letter, dated September 28, 1999, was
filed as Exhibit 16.1 to form 8-K, dated October 1, 1999.
26
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."
27
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
Reports of Independent Public Accountants .................................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 ................. F-3
Consolidated Statement of Operations for the three years ended
December 31, 1999 ............................................................ F-4
Consolidated Statement of Cash Flows for the three years ended
December 31, 1999 ............................................................ F-5
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1999 ................................................ F-6
Notes to Consolidated Financial Statements ................................... F-7
2. Financial Statement Schedules for the three years ended December 31, 1999
Schedule II, Valuation and Qualifying Accounts Schedule F-21
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 26, 1999 announcing the appointment
of Arthur Andersen LLP as the Company's independent public accountants,
effective October 22, 1999.
28
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, 2000.
Documentum, Inc.
By: /s/ Jeffrey A. Miller
------------------------------------------------
President and Chief Executive Officer
By: /s/ Kathleen M. Crusco
------------------------------------------------
Acting Chief Financial Officer and Corporate
Controller
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 Kathleen M. Crusco, 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.
29
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 2000.
Signature Title
--------- -----
/s/ Jeffrey A. Miller President, Chief Executive Officer and Director
- ---------------------------
Jeffrey A. Miller (Principal Executive Officer)
/s/ Kathleen M. Crusco Acting Chief Financial Officer and Corporate Controller
- ---------------------------
(Principal Financial and Accounting Officer)
/s/ Robert V. Adams Chairman
- ---------------------------
Robert V. Adams
/s/ Michael Pehl Director
- ---------------------------
Michael Pehl
/s/ Gary Banks Director
- ---------------------------
Gary Banks
/s/ Edward J. Zander Director
- ---------------------------
Edward J. Zander
/s/ Geoffrey A. Moore Director
- ---------------------------
Geoffrey A. Moore
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Documentum, Inc.
We have audited the accompanying consolidated balance sheet of Documentum, Inc.
(a Delaware Corporation) and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, cash flows and stockholders'
equity for the year then ended. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Documentum, Inc. and subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed under Item 14(a) is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 25, 2000
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Documentum, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Documentum,
Inc. and its subsidiaries at December 31, 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with principles generally accepted in the
United States. 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 in the
United States, 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-2
DOCUMENTUM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------
(in thousands, except per share data) 1999 1998
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,286 $ 16,240
Short-term investments 64,258 84,203
Accounts receivable, net of allowances of $1,829
and $2,496, respectively 37,492 28,177
Other current assets 14,674 8,306
----------------------------
Total current assets 134,710 136,926
----------------------------
Property and equipment, net 28,030 13,426
Other assets 6,262 5,843
----------------------------
$ 169,002 $ 156,195
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,645 $ 3,176
Accrued liabilities 33,783 26,284
Deferred revenue 18,290 9,922
Current portion of capital lease obligation 232 -
----------------------------
Total current liabilities 57,950 39,382
----------------------------
Long-term capital lease obligation 73 -
----------------------------
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; 16,840 and 16,707
shares issued and outstanding, respectively 17 17
Additional paid-in capital 138,546 135,849
Accumulated other comprehensive income (loss) (67) 52
Accumulated deficit (27,517) (19,105)
----------------------------
Total stockholders' equity 110,979 116,813
----------------------------
$ 169,002 $ 156,195
============================
See accompanying notes to consolidated financial statements.
F-3
DOCUMENTUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------
(in thousands, except per share data) 1999 1998 1997
-------------------------------------------
Revenues:
Licenses $ 72,007 $ 80,546 $ 54,536
Services 55,957 43,283 21,099
------------------------------------------
Total revenues 127,964 123,829 75,635
------------------------------------------
Cost of revenues:
Licenses 5,497 4,179 2,453
Services 32,118 25,684 12,327
------------------------------------------
Total cost of revenues 37,615 29,863 14,780
------------------------------------------
Gross profit 90,349 93,966 60,855
------------------------------------------
Operating expenses:
Sales and marketing 61,486 50,425 35,084
Research and development 25,832 18,181 10,986
General and administrative 19,549 10,255 5,976
Acquisition and related costs - 2,171 -
Purchased in process research and development - 34,622 -
------------------------------------------
Total operating expenses 106,867 115,654 52,046
------------------------------------------
Income (loss) from operations (16,518) (21,688) 8,809
Interest and other income, net 3,773 4,395 2,333
------------------------------------------
Income (loss) before income tax provision (benefit) (12,745) (17,293) 11,142
Provision for (benefit from) income taxes (4,333) 6,231 3,788
------------------------------------------
Net income (loss) $ (8,412) $ (23,524) $ 7,354
==========================================
Basic earnings (loss) per share $ (0.50) $ (1.45) $ 0.51
==========================================
Diluted earnings (loss) per share $ (0.50) $ (1.45) $ 0.49
==========================================
Shares used to compute basic earnings (loss) per share 16,691 16,221 14,463
==========================================
Shares used to compute diluted earnings (loss) per share 16,691 16,221 15,098
==========================================
See accompanying notes to consolidated financial statements.
F-4
DOCUMENTUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
(in thousands) 1999 1998 1997
---------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (8,412) $ (23,524) $ 7,354
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on sale of fixed assets (143) - -
Depreciation and amortization 8,330 5,543 3,425
Provision for doubtful accounts 891 1,459 1,488
In process research and development write-off - 34,622 -
Deferred tax asset
(3,297) (1,236) (900)
Changes in assets and liabilities:
Accounts receivable (10,206) (14,088) (7,953)
Other current assets and other assets (3,490) (8,963) (437)
Accounts payable 2,469 1,119 233
Accrued liabilities 8,136 10,313 7,550
Deferred revenue 8,368 6,237 3,268
--------------------------------------------
Net cash provided by operating activities 2,646 11,482 14,028
--------------------------------------------
Cash flows from investing activities:
Purchases of short-term investments (84,118) (104,661) (97,255)
Sales of short-term investments 104,064 99,352 65,163
Purchases of property and equipment (22,791) (8,326) (6,923)
Cash used in acquisition - (1,461) -
--------------------------------------------
Net cash used by investing activities (2,845) (15,096) (39,015)
--------------------------------------------
Cash flows from financing activities:
Issuance of common stock 12,122 5,575 33,889
Repurchases of common stock (10,063) - -
Proceeds on capital lease obligations,net 305 - -
--------------------------------------------
Net cash provided by financing activities 2,364 5,575 33,889
--------------------------------------------
Effect of exchange rate on changes in cash (119) 43 (35)
Net increase in cash and cash equivalents 2,046 2,004 8,867
Cash and cash equivalents at beginning of year 16,240 14,236 5,369
--------------------------------------------
Cash and cash equivalents at end of year $ 18,286 $ 16,240 $ 14,236
============================================
Supplemental schedule of cash flow information:
Interest paid $ 69 $ 26 $ 39
Income taxes paid $ 500 $ 3,687 $ 2,364
See accompanying notes to consolidated financial statements.
F-5
DOCUMENTUM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Stock Paid-in Comprehensive Accumulated Stockholders' Comprehensive
(in thousands) Shares Amount Capital Income Deficit Equity Income (Loss)
------------------------------------------------------------------------------------------
Balance as of December 31, 1996 14,187 $ 14 $ 61,450 $ 43 $ (2,175) $ 59,332
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 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)
--------
Repurchases of common stock (696) (1) (10,062) - - (10,063) -
Common stock options exercised 647 1 9,173 - - 9,174 -
Employee stock purchase plan 176 - 2,782 - - 2,782 -
Tax benefit - - 638 - - 638 -
Foreign currency translation
adjustment - - - (119) - (119) $ (119)
Other 6 - 166 - - 166 -
Net loss - - - - (8,412) (8,412) (8,412)
-----------------------------------------------------------------------------------------
Balance as of December 31, 1999 16,840 $ 17 $ 138,546 $ (67) $ (27,517) $ 110,979 $ (8,531)
=========================================================================================
See accompanying notes to consolidated financial statements.
F-6
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 an
open, standards-based content management platform and applications suite for
managing complex processes, as well as any content type, in a truly
collaborative environment, enabling trusted content to be delivered to the right
person at the right time on any information device, regardless of its origin or
location. Documentum's highly adaptable collaboration and content management
solutions enable corporate developers and Internet Systems Integrators to
quickly implement robust e-business applications with the reliability,
scalability, and interoperability required by today's 24x7 Internet economy.
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, Documentum Software Europe Ltd.,
in the United Kingdom, and Documentum GmbH, in Germany. All significant
intercompany 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
The functional currency of a foreign operation is deemed to be the local
country's currency. Consequently, 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. 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.
Deferred revenue
Deferred revenue primarily relates to support agreements which have been paid
for by customers prior to the performance of those services.
Revenue recognition
The Company's revenues are derived from the sale of licenses for its internet-
scale content management solutions and related services, which include
maintenance and support, consulting and training services. Revenues from license
arrangements are recognized upon contract execution, provided all shipment
obligations have been met, fees are fixed or determinable, and collection is
probable. If an ongoing vendor obligation exists under the license arrangement,
revenue is deferred based on vendor-specific objective evidence of the
undelivered element. If vendor-specific objective evidence does not exist for
all undelivered elements, all revenue is deferred until sufficient evidence
exists or all elements have been delivered. Allowances for estimated future
returns are provided upon shipment. Payments received in advance of revenue
recognition are recorded as deferred revenue. Revenues from annual maintenance
and support are deferred and recognized ratably over the term of the contract.
Revenues from consulting and training are deferred and recognized when the
services are performed and collectibility is deemed probable. Beginning January
1, 1998, the Company has recognized revenue in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition, as amended. Prior to 1998,
the Company recognized revenues in accordance with SOP 91-1, "Software Revenue
Recognition."
F-7
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.
Concentrations of credit risk
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 generally does not require collateral for its accounts receivable
and maintains reserves for potential credit losses. At December 31, 1999, no
customer comprised 10% or more of accounts receivable. At December 31, 1998, two
customers, including Xerox and affiliated entities comprised 13% of accounts
receivable.
Investments
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, 1999,
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, 1999 and 1998:
(in thousands) December 31,
1999 1998
---------------------------------
Municipal bonds $33,512 $51,493
U.S. government agencies 16,979 4,000
Corporate bonds and notes 8,960 14,273
Medium term notes 2,807 -
Preferred stock 2,000 7,020
International bonds and notes - 5,418
Commercial paper - 1,999
---------------------------------
$64,258 $84,203
=================================
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 seven 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 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.
F-8
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equity-based compensation plans
In accordance with the provisions of SFAS No. 123, the Company has elected to
continue to measure compensation costs for its plans using the intrinsic value
method of accounting for stock issued to employees, in accordance with
Accounting Principals Board Opinion 25. However, as required by SFAS No. 123,
pro forma disclosures of net income and earnings per share are reflected in the
notes to the financial statements (see Note 9) as if the fair value based method
of accounting was adopted.
Comprehensive income (loss)
Comprehensive income is comprised of net income (loss) and other comprehensive
earnings such as foreign currency translation gain/loss and unrealized gains or
losses on available-for-sale marketable securities. The Company's unrealized
gains and losses on available-for-sale marketable securities have been
insignificant for all periods presented.
Reclassifications
Certain prior period balances have been reclassified to conform to current
year's presentation.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
hedging activities, and exposure definition. SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments as fair value. SFAS No. 133, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not expect the adoption of SFAS No. 133 to have a material
impact on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company will adopt SAB
101 as required in the second quarter of 2000 and is evaluating the effect that
such adoption may have on its consolidated results of operations and financial
position.
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 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. 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 1998:
Year ended December 31,
----------------------
(Dollars in thousands) 1998
----------------------
Total Revenue $123,829
Net Income (loss) ($26,293)
F-9
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--BALANCE SHEET COMPONENTS: (in thousands)
December 31,
--------------------------------
Other current assets: 1999 1998
--------------------------------
Short-term deferred tax asset $ 9,901 $ 3,516
Miscellaneous other current assets 4,773 4,790
--------------------------------
$ 14,674 $ 8,306
================================
December 31,
--------------------------------
1999 1998
--------------------------------
Property and equipment:
Computer equipment and software $ 27,969 $ 17,581
Office equipment
2,485 2,217
Furniture and fixtures
3,918 2,368
Capital lease assets
463 -
Leasehold improvements and other
11,510 3,742
--------------------------------
46,345 25,908
Accumulated depreciation and amortization (18,315) (12,482)
--------------------------------
$ 28,030 $ 13,426
================================
December 31,
--------------------------------
1999 1998
--------------------------------
Accrued liabilities:
Compensation & related benefits $ 17,512 $ 10,219
Taxes payable 3,946 6,056
Other current liabilities 12,325 10,009
--------------------------------
$ 33,783 $ 26,284
================================
NOTE 5--CAPITAL LEASE OBLIGATION:
In 1999, the Company entered into two capital lease agreements, under a sale-
leaseback arrangement, for the rental of computer equipment in the amounts of
$292,000 and $171,000. The lease agreements require quarterly principal and
interest payments in the amounts of $37,000 and $22,000, respectively. The
leases have interest rates of 1.66% and 2.605% and maturity dates of July, 2001
and September, 2001, respectively. As of December 31, 1999, the Company has made
payments in the amount of $158,000 related to these capital leases and has
recorded current and long-term portions of capital lease obligations in the
amounts of $232,000 and $73,000, respectively.
F-10
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--LINE OF CREDIT:
In August 1999, the Company entered into an unsecured revolving line of credit
agreement with a new bank. The agreement allows for borrowings of up to $20
million bearing interest at the Company's option of either: (1) the bank's prime
rate or (2) the LIBOR rate plus 1.50%. This line of credit expires on July 30,
2001. The Company must comply with certain financial covenants and conditions
as described in the agreement. At December 31, 1999 the Company was in
compliance with its financial covenants. The Company did not have any borrowings
outstanding under this line of credit as of December 31, 1999
On January 15, 1998, the Company entered into an unsecured revolving credit
agreement (the "Facility") with a bank. The Facility allowed 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. In June 1999, the Company terminated this line of credit. There were
no borrowings outstanding at the time of termination.
NOTE 7--STOCKHOLDERS' EQUITY:
Stock Repurchase
On April 15, 1999, the Board of Directors approved the repurchase of up to $20
million of the Company's common stock on the open market or in private
transactions. During 1999, the Company repurchased and retired 696,300 shares
of common stock for approximately $10.1 million.
Rights Plan
On February 3, 1999, the Company adopted a Share Purchase Plan ("Rights Plan")
under which all stockholders of record as of February 24, 1999 received 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.
NOTE 8--BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share is computed using the weighted average number
of shares of common stock. Diluted net income (loss) per share is computed using
the weighted average number of shares of common stock and common equivalent
shares outstanding during the period. Common equivalent shares consist of stock
options (using the treasury stock method). Common equivalent shares are excluded
from the computation if their effect is anti-dilutive.
F-11
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the computation for basic and diluted net
income (loss) per share:
Year Ended December 31,
----------------------------------------------------
(in thousands, except per share data) 1999 1998 1997
----------------------------------------------------
Net income (loss) $ (8,412) $ (23,524) $ 7,354
====================================================
Shares calculation
Weighted average basic shares outstanding 16,691 16,221 14,463
Dilutive options - - 635
Total shares used to compute
diluted income (loss) per share 16,691 16,221 15,098
====================================================
Income (loss) per basic share $ (0.50) $ (1.45) $ 0.51
====================================================
Income (loss) per diluted share $ (0.50) $ (1.45) $ 0.49
====================================================
Options to purchase 3,417,629 and 1,307,735 shares of common stock at prices
ranging from $0.31 to $53.44 and $0.31 to $59.63 per share were outstanding
during the year ended December 31, 1999 and 1998, respectively, but were not
included in the computation of diluted EPS because either the option's exercise
price was greater than the average market price of the common shares 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 5,800,138 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 1999, 1998,
and 1997 the Company issued 450,943, 1,123,074, and 880,000, options under the
Plan, respectively. At December 31, 1999, 40 shares were subject to repurchase
by the Company.
F-12
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 20,000 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 7,500 shares of common stock that will be granted on June 30 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 1999, 1998 and 1997, the Company issued 50,000, 57,500, and 25,000 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 4,335,000 shares have been authorized for
issuance.
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 1999, 1998 and 1997, the Company issued 2,522,570, 3,229,958, and 813,150
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, 1999, 6,247 shares were subject to repurchase by the Company.
F-13
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of activity under all the plans is as follows:
Options Outstanding
--------------------------------------
Weighted
Average
Shares Exercise Price
------------------ ------------------
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
Granted 3,023,513 $ 16.31
Exercised (646,828) $ 14.11
Canceled (1,224,563) $ 22.30
------------------
Outstanding as of December 31, 1999 4,913,237 $ 20.05
==================
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 on 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, 1999, options to purchase 1,746,382 shares were vested and
2,159,862 shares were available for future grant under all the plans.
F-14
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information regarding stock options outstanding
at December 31, 1999:
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 Exercise Prices 1999 Life (Years) Price 1999 Price
- ---------------------------- ---------------- -------------- ------------- ---------------- --------------
$ 0.3121 - $9.0000 136,222 6.00 $ 4.0110 126,997 $ 4.1282
$9.5000 - $12.5630 1,391,511 9.29 12.5331 592,732 12.5630
$12.6880 - $16.0000 630,867 9.37 15.0069 43,647 15.2180
$16.1250 - $24.5000 389,069 8.82 21.7208 77,080 21.3639
$24.6250 1,919,255 7.61 24.6250 919,308 24.6250
$24.8750 - $48.000 433,813 9.51 33.4908 57,542 40.2225
$49.125 - $53.4375 12,500 9.08 50.7850 625 50.7500
---------------- ----------------
$ 0.3121 - $53.4375 4,913,237 8.53 $ 20.0389 1,817,931 $ 19.3989
================ ================
Options outstanding and options exercisable above do not include 6,287 shares
subject to repurchase by the Company at December 31, 1999.
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
900,000 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
1999, 1998 and 1997, approximately 176,000, 43,000, and 81,000 common shares
were purchased under the Purchase Plan, respectively.
F-15
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (loss) and earnings (loss) per share
would have been adjusted to the pro forma amounts indicated below:
Year Ended December 31,
------------------------------------
(in thousands) 1999 1998 1997
------------------------------------
Net income (loss):
As reported $ (8,412) $(23,524) $7,354
Pro forma $ (24,677) $(35,150) $2,856
Basic earnings (loss) per share:
As reported $ (0.50) $ (1.45) $0.51
Pro forma $ (1.48) $ (2.17) $0.20
Diluted earnings (loss) per share:
As reported $ (0.50) $ (1.45) $0.49
Pro forma $ (1.48) $ (2.17) $0.19
Earnings (loss) per share was computed as described in Note 2.
The fair value of each stock option grant on the date of grant and the fair
value of the shares granted under the Purchase Plan were estimated using the
Black-Scholes option pricing model with the following average assumptions:
Year Ended December 31,
-----------------------------------
1999 1998 1997
-----------------------------------
Volatility 83.99% 72.77% 63.67%
Risk-free interest rate 5.63% 5.04% 6.00%
Dividend yield - - -
Expected lives 4 4 4
Weighted average fair value $ 23.03 $43.64 $28.23
The pro forma effects on net income for 1999, 1998 and 1997 are not
representative of the pro forma effect on net income in future years for the
following reasons: i) the number of future shares to be issued under these plans
is unknown, and ii) the assumptions do not take into consideration pro forma
compensation expense related to grants made prior to January 1, 1995.
F-16
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:
Operating 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,
2000 $ 7,973
2001 8,003
2002 7,774
2003 7,657
2004 6,939
Thereafter 15,056
----------
$53,402
==========
Total rent expense was approximately $5,628,000, $3,845,000, and $2,432,000, for
the years ended December 31, 1999, 1998, and 1997, respectively.
NOTE 11--INCOME TAXES:
The provision (benefit) for income taxes for the years ended December 31, 1999,
1998 and 1997 is as follows:
Year Ended December 31,
--------------------------------------
(in thousands) 1999 1998 1997
Current:
Federal $ (3,064) $ 5,021 $ 3,336
State 252 1,421 632
Foreign 1,569 1,230 720
--------------------------------------
(1,243) 7,672 4,688
--------------------------------------
Deferred:
Federal (1,984) (1,325) (768)
State (1,106) (116) (132)
--------------------------------------
(3,090) (1,441) (900)
--------------------------------------
$ (4,333) $ 6,231 $ 3,788
======================================
F-17
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of income (loss) before income (loss) tax provision (benefits)
are as follows:
Year Ended December 31,
------------------------------------------
(in thousands) 1999 1998 1997
------------------------------------------
Domestic income (loss) $ (16,063) $(20,655) $ 9,442
Foreign income 3,318 3,362 1,700
------------------------------------------
Income (loss) before provision for (benefit from) income taxes $ (12,745) $(17,293) $ 11,142
==========================================
The tax provision is reconciled to the amount computed using the federal
statutory rate as follows:
Year Ended December 31,
--------------------------------------
(in thousands) 1999 1998 1997
--------- ----------- ----------
Federal statutory tax provision $ (4,461) $ (6,052) $ 3,900
State taxes, net of federal benefit (855) 808 411
Change in valuation allowance 416 - -
Foreign taxes - rate differential/unbenefited taxes 649 53 176
Foreign sales corporation benefit - (239) (132)
Tax exempt interest (591) (574) (406)
Purchased in process research and development - 12,446 -
Other 509 (211) (161)
-------- ----------- ----------
$ (4,333) $ 6,231 $ 3,788
======== =========== ==========
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. The net valuation allowance increased
by $2,641,000 in 1999. The increase is primarily attributable to net operating
loss carryforwards and tax credit carryforwards resulting from the tax benefit
associated with employee stock plans. The majority of the valuation allowance,
if realizable, will be credited to additional paid-in capital and will not be
available to offset future provision for income taxes. The significant
components of the Company's deferred tax assets are $6,270,000 and $3,516,000 in
other current assets as of December 31, 1999 and 1998, respectively and
$2,046,000 and $1,503,000 in other assets as of December 31, 1999 and 1998,
respectively are detailed as follows:
Year Ended December 31,
-----------------------------
(in thousands) 1999 1998
-----------------------------
Deferred tax assets:
Reserves and accruals $ 4,325 $ 4,044
Tax credit & loss carryforwards 6,632 975
-----------------------------
Total deferred assets 10,957 5,019
Valuation allowance (2,641) --
-----------------------------
Total net deferred tax assets $ 8,316 $ 5,019
=============================
F-18
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--SEGMENT INFORMATION
The Company adopted SFAS No. 131 in fiscal 1998. SFAS No. 131 established
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also established standards for
related disclosures about products and services, geographic areas and
significant customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. The
Company's chief operating decision maker is the Chief Executive Officer of the
Company.
The Company's management considers its business activities to be focused on the
license of its products and related services to customers. Since management's
primary form of internal reporting is aligned with the offering of products and
services, the Company believes it operates in one segment. The Company markets
its products in the United States and in other foreign countries through its
direct sales force, worldwide system integrators and distributors.
There were no customers that comprised 10% or more of the Company's revenue in
1999, 1998 or 1997.
Percentage of revenue by country was as follows:
Year Ended December 31,
1999 1998 1997
------------ ------------ ------------
United States 66% 73% 75%
Europe 30% 24% 24%
Asia 3% - -
Other countries 1% 3% 1%
NOTE 13--RELATED PARTY TRANSACTIONS:
The Company has distribution agreements with Xerox and its affiliated entities,
which provide Xerox, or its affiliates with the non-exclusive rights to sell the
Company's products in specified territories. For the years ended December 31,
1999, 1998 and 1997, the Company recognized license revenues from Xerox and its
affiliated entities of $738,000, $9,573,000, and $3,340,000, respectively, and
incurred expenses primarily for support services provided by Xerox and its
affiliated entities of $64,000, $8,000, and $49,000, respectively. The net
amount due from Xerox and its affiliated entities was $2,920,000 and $2,485,000
at December 31, 1999 and 1998, respectively. As of December 31, 1998, Xerox
owned approximately 10% of the Company's outstanding common shares; however, on
September 29, 1999, Xerox sold a majority of its holdings and on October 6,
1999, Xerox completely divested all of their remaining holdings in the Company.
NOTE 14--SUBSEQUENT EVENT (UNAUDITED):
In January 2000, the Company signed an amendment to its existing operating lease
for the rental of additional office space in Pleasanton, California. The
amendment provides for an additional 37,138 square feet of space, beginning July
2000 and expiring March 2006, with monthly rental payments of $147,000. This
operating lease is included in the future minimum lease payment schedule at Note
10.
F-19
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:
Summarized quarterly supplemental consolidated financial information for 1999
and 1998 is as follows:
(in thousand, except
Quarter ended
--------------------------------------------------------------
per share data; unaudited) March 31, June 30, September 30, December 31,
--------------------------------------------------------------
1999
Total revenues $ 24,005 $ 29,230 $ 33,776 $ 40,953
Gross profit 15,252 19,901 24,694 30,502
Operating loss (7,677) (5,321) (2,918) (602)
Net income (loss) (4,429) (2,742) (1,392) 151
Basic earnings (loss) per share $ (0.26) $ (0.16) $ (0.08) $ 0.01
Diluted earnings (loss) per share $ (0.26) $ (0.16) $ (0.08) $ 0.01
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
F-20
SCHEDULE II
Documentum, Inc.
Valuation and Qualifying Schedule
Balance at Additional Write-Offs and
Beginning of Charges to Other Balance at End
Classification Period Operations Deductions of Period
- -------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts,
year ended:
December 31, 1997 $1,069,000 $1,488,000 $(20,000) $2,537,000
====================================================================
December 31, 1998 2,537,000 1,459,000 (1,500,000) 2,496,000
====================================================================
December 31, 1999 $2,496,000 $ 891,000 $ (1,558,000) $ 1,829,000
====================================================================
F-21
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.
(6)4.3 Registration Rights Agreement, dated July 16, 1998 between
the Registrant and certain stockholders.
(8)4.4 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)10.11 Services Partner Agreement, dated April 1, 1996, between
the Registrant and Xerox Corporation.
(6)10.12 Registrant's 1996 Non-Officer Equity Incentive Plan as
amended.
(5)10.13 Lease agreement between Registrant and Britannia Hacienda
IV Limited Partnership.
(9)16.1 Letter from Pricewaterhouse Coopers L.L.P. dated September
28, 1999.
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
23.2 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.
(9) Filed as an exhibit to Registrant's current report on Form 8-K dated
October 1, 1999.