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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, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-27358
DOCUMENTUM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4261421
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5671 GIBRALTAR DRIVE, PLEASANTON, CALIFORNIA 94588-8547
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(Registrant's telephone number, including area code): (510) 463-6800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value
(TITLE OF CLASS)
Indicate by check mark whether the registrant has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on March 10,
1997 as reported on the Nasdaq National market, was approximately
$160,105,000. Shares of common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of outstanding shares of the registrant's Common Stock, par value
$.001 per share, was 14,169,816 on March 10, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 1997 Annual
Meeting of Stockholders to be held May 8, 1997 are incorporated by reference
in Part III of this Form 10-K.
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FORM 10-K
INDEX
PART I............................................................... Page 3
Item 1. Business.................................................. Page 3
Item 2. Properties................................................ Page 17
Item 3. Legal Proceedings......................................... Page 18
Item 4. Submission of Matters to a Vote of Security Holders....... Page 18
PART II.............................................................. Page 18
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...................................... Page 18
Item 6. Selected 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 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... Page 25
PART III............................................................. Page 25
Item 10. Directors and Executive Officers of the Registrant........ Page 25
Item 11. Executive Compensation.................................... Page 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... Page 25
Item 13. Certain Relationships and Related Transactions............ Page 25
PART IV.............................................................. Page 26
Item 14. Exhibits, Consolidated Financial Statements, Financial
Statement Schedules, and Reports on Form 8-K............. Page 26
SIGNATURES........................................................... Page 27
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PART I
ITEM 1. BUSINESS
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.
GENERAL
Documentum, Inc. ("Documentum" or the "Company") develops, markets and
supports a family of client/server and intranet software products that address
the specific challenges of managing business-critical documents effectively
across large enterprises. The Documentum Enterprise Document Management System
("EDMS") automates and accelerates the creation, modification and reuse of
business-critical documents and other unstructured data and the collaborative
efforts involved in these activities. The Documentum EDMS provides several key
business advantages. Companies can effectively manage all of the processes
involved in making business-critical documents available, keeping them
relevant and current, and tailoring them to make them useful for all
individuals. The Documentum EDMS extends the value of business-critical
documents through not only re-use, but re-purposing--the ability to assemble
and apply documents again and again for different purposes as the needs arise.
The Documentum EDMS is designed for enterprise-wide deployments, with a family
of client products that deliver appropriate information to different classes
of users in the appropriate format. Through Documentum's enterprise
scalability, companies can deploy solutions that not only meet the needs of
individual departments, but can scale to the entire enterprise--from hundreds
to thousands of users.
The Company was incorporated in Delaware in January 1990. The Company's
principal executive offices are located at 5671 Gibraltar Drive, Pleasanton,
California 94588. Its telephone number is (510) 463-6800. The Company's home
page can be located on the World Wide Web at http://www.documentum.com. As
used in this document, the "Company" and "Documentum" refer to Documentum,
Inc. and its subsidiaries.
INDUSTRY BACKGROUND
In today's highly competitive marketplace, a key component of corporate
success is the ability to leverage business-critical documents to help shorten
time to market, improve quality and enhance overall organizational
effectiveness. Business-critical documents contain corporate information,
employee knowledge and business processes. Global companies are increasingly
seeking innovative solutions to make optimal use of these documents.
According to some industry reports, up to 80 percent of corporate data is
unstructured--existing in the form of business-critical documents ranging from
text files, word processing documents and spreadsheets to CAD drawings,
graphics and images, Web pages, and even video or audio clips. In a typical
corporate environment, documents are created, modified, distributed and stored
using multiple software systems. These software applications run on a variety
of computing platforms that may be geographically dispersed, with little
compatibility or data sharing capability between systems.
Whatever their format and wherever their location, business-critical
documents such as product specifications, standard operating procedures,
technical manuals, regulatory submissions and project proposals
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represent the physical output of professionals and are essential to the key
processes of a company. However, today's information complexities have created
inefficiencies in document-related processes that hamper the productivity of
professionals both at the individual and team levels. Without an effective
means of searching for and reusing enterprise information, workers are often
forced to re-create documents from scratch, duplicating effort and increasing
the margin for error. The existence of multiple document versions creates
information integrity and accuracy problems. As a result, professionals are
spending a disproportionate amount of their time locating, processing, sharing
and assembling documents rather than engaging in higher-value activities.
Additional complexity is added by the document processes, which often require
group collaboration by teams of workers who are geographically dispersed and
use different client platforms.
Historically, companies have tried to address these document management
challenges either with costly and labor-intensive manual processes, or with
internally-developed systems based on proprietary technologies that are
difficult to implement, manage and maintain. The proliferation of productivity
tools such as word processors and spreadsheets has streamlined individual
document creation. However, these tools do not address productivity in
processes that require a number of individuals to collaborate and contribute
information across organizational and geographic barriers. A number of "point"
solutions have emerged that address certain aspects of document management,
such as imaging or text retrieval, but they do not provide a comprehensive
solution for the document management needs of the enterprise. Similarly, LAN-
based products that deliver simple library services are not engineered to
scale to the enterprise, and do not address the needs of business processes
because they overlook the issues of workflow and complex documents. Groupware
products enhance group productivity through ad hoc communications and project
discussions, but are not optimized to support collaboration on documents that
require formal version control and more robust enterprise security
capabilities. Likewise, many users are turning to new information delivery
vehicles such as World Wide Web browsers, but may require additional
capabilities such as collaboration on document creation and the ability to
control access to and ensure integrity and versioning of business-critical
documents.
Large organizations need enterprise-wide solutions to optimize the value of
their business-critical documents by automating all of the associated
procedures that take place between a document's creation and its use, re-use,
or re-purposing. These procedures range over the document's entire lifecycle--
from information capture to managing and controlling updates to the document,
automating its release and distribution, assembling document components, and
making the document easy for users to find and access. Business-critical
documents must easily integrate with the organization's existing business
processes and procedures, and the solution must scale effectively in a
heterogeneous computing environment. In addition, as companies make a stronger
commitment to the Web as a corporate computing infrastructure, they are
demanding technologies that improve the quality and usability of Web content
while at the same time reducing the costs of controlling and maintaining the
information.
DOCUMENTUM'S SOLUTION
Documentum was founded in 1990 to deliver document management software that
addresses the specific challenges of managing business-critical documents
effectively across the enterprise. The Company's solution is the Documentum
Enterprise Document Management System ("EDMS"), a family of object-oriented,
client/server and Web software products. The Documentum EDMS is based on the
idea that corporate customers need to manage ongoing changes in information to
stay effective. As a result, the EDMS provides an enterprise-scaleable
architecture that supports multiple networking configurations and user
environments. With the Documentum EDMS, companies can securely manage changes
to documents and document components at the object level, and they can
dynamically assemble documents based on their business procedures. In
addition, Documentum's family of client products enables all individuals in
the enterprise to access the documents they need, whether they're using Web
browsers, custom clients, or their own desktop applications.
Core Functionality
At the heart of the Documentum EDMS is the DocPage Server(TM), providing a
rich set of document and Web content management services for controlling and
managing business-critical information and processes
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throughout the enterprise. The DocPage Server supports capture, updating,
distribution, assembly, and access for all document types ranging from
traditional rich text and images to HTML, SGML, and multimedia objects. The
DocPage Server creates a dynamic document and Web page repository called a
Docbase(TM). Driven by business rules, the Docbase stores a document or Web
page as a Docobject(TM) that encapsulates the document's content together with
its attributes, including information about the document's relationships,
associated versions, renditions, formats, workflow, and security. Docobjects
can be infinitely combined and re-combined on demand to form Virtual
Documents--dynamic configurations of Docobjects that can come from any source
in the enterprise.
An extension of the DocPage Server, called Documentum RightSite(TM),
delivers powerful Web content management services for delivering high-quality,
business-critical information on an intranet. RightSite solves the complex
challenges of capturing, managing, and assembling frequently changing
information on corporate Web sites. RightSite makes Web applications cost-
effective by eliminating the laborious, manual tasks involved in tailoring
information and keeping it current. With RightSite, companies can ensure that
only the information relevant to a user's job function is delivered to the
desktop. Unlike first-generation, static Web solutions, RightSite dynamically
assembles Web pages "on the fly" according to business processes, enabling
companies to tailor Web content to users' unique needs.
The Documentum EDMS delivers the following key business benefits:
Heterogeneous Information Access. Users can access all the information they
need using their existing platforms, applications, and Web browsers, without
having to know where the information exists in the enterprise, how and when it
was created, or the information's type and format.
Support of Multiple Formats. Documentum enables users to work with multiple
formats or information types from text and data to complex formats such as
multi-file CAD drawings or multi-page fax images.
Workflow/Process Automation. Documentum's workflow effectively links
business-critical information with the processes involved in its capture,
creation and reuse. This enables companies to manage their information in the
context of best business practices, accelerating time to market and improving
professional productivity.
Reusability/Integrity. With Documentum, companies can re-use and re-purpose
documents and components of documents, eliminating duplication of effort and
reinforcing the accuracy and integrity of information. For instance, when a
business rule triggers a change in a component to reflect a new stage in a
business process, the change can instantly apply to all documents which
utilize that component. Users can then re-use that component and be assured
that it contains the correct information.
Tailorability. The Documentum EDMS is designed to be easily tailored by both
users and application developers, enabling customers to effectively develop
and deploy document management applications based on their unique business
processes. Developers can combine Documentum's embedded application
programming interfaces ("APIs") with a choice of languages to customize
applications and integrate them with the existing information infrastructure.
Enterprise Scalability. Companies can deploy solutions that not only meet
the needs of individual departments, but can scale to the entire enterprise--
from hundreds to thousands of users.
PRODUCTS
Within the enterprise, Documentum has identified three classes of document
management users: document coordinators, document contributors, and
information consumers. The Documentum EDMS is delivered via a range of client
products, each designed to deliver the appropriate DocPage Server and
RightSite functionality to a different class of user. Customers purchase
different combinations of seats of the products depending on the level of
functionality they choose to deliver to each user population.
5
Documentum products include:
Documentum WorkSpace(TM)
Through its own robust client environment or integration with familiar
desktop applications, WorkSpace gives document coordinators access to the full
power and features of the DocPage Server.
Documentum SmartSpace(TM)
SmartSpace provides an easy-to-use client environment for document
contributors to perform basic document management tasks. SmartSpace also
supports integration with familiar desktop applications. The Company also
offers SmartSpace(TM) Intranet, an extension of the Smartspace product to the
Web platform which enables users to contribute content and perform a range of
document management tasks over the Web.
Documentum ViewSpace(TM) Intranet and Documentum SiteSpace(TM)
Designed for information consumers, ViewSpace Intranet and SiteSpace extend
the services of the Documentum EDMS to the Web. ViewSpace Intranet enables Web
browser users to access and view documents in a Docbase. SiteSpace is an
anonymous, unnamed user license of ViewSpace Intranet which enables companies
to deliver public content to any user without requiring a login or password.
Documentum UnaLink(TM)
UnaLink integrates the Documentum EDMS with the groupware capabilities of
Lotus Notes, enabling Notes users to participate in the full document
lifecycle.
Documentum LeafConnect(TM)
LeafConnect enables users of the Interleaf publishing system to take full
advantage of the flexibility and power of the Documentum EDMS from within the
familiar Interleaf environment.
Documentum DocPage Builder(TM).
The DocPage Builder is a set of tools for integrating desktop systems and
building tailored document management applications.
Documentum DocLink for SAP(TM)
DocLink for SAP is an interface that provides seamless integration between
the Documentum EDMS and SAP's R/3 product. DocLink for SAP enables
corporations to use intranet and client/server technology to link their
knowledge chain with the SAP supply chain in a paperless, electronic
environment.
PROFESSIONAL SERVICES
In addition to the EDMS product family, Documentum offers a range of
technical support, training, and consulting services through its Professional
Services organization. The Company operates two Technical Support Centers, one
located at its U.S. headquarters in Pleasanton and one located at its European
headquarters in the United Kingdom. Both centers offer hotline technical
support, remote dial-in services for problem identification and access to
maintenance and patch releases for supported and purchased products. The
Documentum Education Center offers a curriculum of training courses on the
Documentum EDMS for end users, developers and system administrators. Training
is available at the Company's training centers in Pleasanton, Philadelphia,
and abroad in London, and can also be given at the customer's site. Finally,
Documentum's consulting group offers a range of services designed to
accelerate deployment and user acceptance of Documentum applications across
the enterprise, and to reduce the time and cost of deploying applications.
Documentum consultants become an integral part of a customer's implementation
team, assisting with design, implementation, and deployment of the
application.
6
STRATEGY
The Company's objective is to be the leading worldwide supplier of
enterprise document management software solutions. To achieve this objective,
the Company's strategy includes extending its technology leadership,
penetrating global industries vertically, leveraging its technology
partnerships, focusing on enterprise deployments and utilizing multiple
distribution channels.
Extend Technology Leadership. The Company's strategy is to continue to
enhance its existing server and client technologies, to add functionality to
its EDMS product family and to provide greater flexibility in terms of
information delivery, document repositories, and the number and variety of
supported client, server and relational database management system (RDBMS)
platforms. Documentum expects to enhance the features of its products by
making them compatible with new technologies as well as existing applications
and by responding to the unique needs of large organizations. The Company has
enhanced the architecture of its open, extensible server to support
distributed, heterogeneous document repositories across the enterprise.
Besides expanding the functionality of its own easy-to-use WorkSpace client
environment for document coordinators, Documentum has delivered new client
products for document contributors and consumers working in both Web and
client/server environments. Documentum has also provided support for other
information delivery vehicles such as SAP, Lotus Notes and the Interleaf
publishing product.
Penetrate Global Industries Vertically. Documentum has identified strategic
vertical markets with compelling business-critical needs for the Company's
EDMS, namely, industries where more efficient management of unstructured
information and intellectual capital results in an immediate and substantial
payback. Recently, the Company formed an internal Industry Solutions
organization to focus the Company's efforts on developing complete, whole-
product solutions for these targeted industries. Through its early focus on
research and development and regulatory processes within the pharmaceutical
industry, the Company has sold its EDMS products to many of the largest
pharmaceutical companies worldwide. The Company has leveraged this leadership
position by penetrating the manufacturing operations of pharmaceutical
companies and subsequently extending its customer base to include additional
process manufacturing companies in chemicals, petrochemicals and consumer
products. The Company has also replicated its vertical market strategy to
address key segments in discrete manufacturing, obtaining major customers in
the construction engineering, electronics and computer industries. In the
future, the Company intends to expand its customer base in additional markets,
such as financial services, telecommunications and government.
Leverage Technology Partnerships. The Company intends to accelerate the
development, introduction and acceptance of its EDMS solutions through
selected strategic technology partnerships. For example, the Company has
embedded in its software certain industry-standard features and functionality
licensed from Adobe, Microsoft and Verity. In addition, the Company integrates
its EDMS solutions with other business-critical applications from vendors
including Autodesk, Lotus and SAP. Finally, the Company conducts joint
marketing and sales activities with complementary strategic hardware and RDBMS
vendors, including Hewlett-Packard, IBM, Sun, Informix, Oracle and Sybase.
Focus on Enterprise Deployments. The Company has designed its products to
scale from focused business-critical applications consisting of hundreds of
user seats to enterprise-wide use consisting of multiple applications for
thousands of user seats at multiple sites. The Company believes that initial
customer success in capturing business-critical information by utilizing the
Company's EDMS family of products is an essential factor in the customer's
decision to deploy the Company's products throughout the enterprise. The
Company has a two-pronged strategy to drive towards enterprise deployment.
First, the Company provides targeted consulting and training services to its
customers and systems integrators. Second, the Company has established
strategic partnerships with major, or vertically focused, systems integrators,
including Andersen Consulting, Cap Gemini, Computer Sciences Corporation and
IBM/ISSC, which provide customization of the Company's EDMS products for
individual customer needs and integration with third-party applications. The
Company believes that migrating its customers from initial application usage
to enterprise-wide deployment provides a substantial growth opportunity.
7
Utilize Multiple Distribution Channels. The Company's strategy is to expand
its multiple distribution channels to reach the broadest customer base in its
targeted industries. The Company has historically generated the majority of
its revenues from its direct sales force. More recently, the Company has
focused on complementing its direct sales channel with indirect channels,
primarily consisting of systems integrators and distributors. The Company has
a strong channel relationship with Xerox and certain Xerox affiliates, who
have served as systems integrators, resellers, and distributors for the
Company's products. Documentum intends to focus increased efforts on growing
its indirect sales channels to include value-added resellers, and to expand
both direct and indirect distribution channels on a worldwide basis by hiring
additional sales persons and recruiting additional integrators, particularly
in vertical industries.
CUSTOMERS
The Company has directly or indirectly licensed its products to more than
200 end user customers in a broad range of industries worldwide, including
pharmaceutical, chemical, manufacturing, and engineering companies, as well as
governmental agencies. Examples of customers who are using the Documentum EDMS
to accelerate their business-critical processes include:
Pharmaceutical: Glaxo-Wellcome, a worldwide pharmaceutical manufacturer with
operations in 120 countries, is using the Documentum EDMS to accelerate its
time to market for new drugs. The new drug submission process takes many years
and involves people throughout the organization to document each drug's
development and testing. In addition, the submission must be customized for
each country in which the drug is to be marketed. At Glaxo-Wellcome, the
Documentum EDMS replaces manual processes and paper distribution lists by
providing an accurate, easily accessible repository of drug information that
can be used and reused for simultaneous submissions in multiple markets, as
well as consistent, rapid responses to government agency inquiries.
Engineering: Black & Veatch, a worldwide engineering firm providing
engineering, procurement, and construction services to clients in a wide
variety of industries including power generation and waste water treatment, is
using the Documentum EDMS to cut turnaround time on procurement specifications
from two weeks to two days. At Black & Veatch, a single power plant project
procurement specification can run 500 to 600 pages, consisting of design
drawings as well as text. The Documentum-based system replaces a largely
manual process that scattered procurement documents on hundreds of computer
disks throughout the company. Now, engineers and architects can use their
desktop computers to access, modify and circulate the latest version of a
specification. Any changes they make to a specification are automatically
reflected in all versions, wherever they reside on the network.
Manufacturing: Ericsson Telecom AB, a worldwide manufacturer of
sophisticated, build-to-order switches and other telephony products, is using
the Documentum EDMS to help speed products to market by eliminating redundancy
and accelerating production cycles. Many of Ericsson's products are built to
individual customers' specifications--each requiring its own custom set of
manuals. Documenting a switch's parts, assembly and repair is a complex,
ongoing process involving engineers, technicians, designers, writers, editors
and administrators across the organization. Once the manual has been created,
managing and reusing the information throughout the entire product lifecycle
presents a major document management challenge. Ericsson was able to take
advantage of the Documentum EDMS's client/server architecture and development
tools to build a document management system which automates these complex
processes, replacing Ericsson's existing mainframe and paper-based systems.
MARKETING AND SALES
The Company sells its products through its own direct sales force as well as
complementary indirect channels primarily consisting of systems integrators
and distributors. The Company has 12 sales offices in the United States and
four in Europe, five distributors in Europe, Canada, Japan, and Australia, and
strategic relationships with more than 30 systems integrators worldwide.
8
The Company targets global customers in key vertical markets. The Company's
field sales force conducts multiple presentations and demonstrations of the
Company's family of EDMS products to management and users at the customer site
as part of the direct sales effort. Sales cycles generally last from six to
twelve months. The direct sales force is responsible for local partner
support, joint sales efforts and management of multiple channels.
The Company's sales and marketing organization consisted of 109 employees as
of December 31, 1996. The sales staff is 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, Dallas, Denver, Detroit,
Houston, Los Angeles, New York, Philadelphia, San Francisco, and Seattle and
abroad in Frankfurt, Munich, London and Paris. To support its sales force, the
Company conducts comprehensive marketing programs, which include public
relations, telemarketing, seminars, trade shows, education and user group
conferences.
STRATEGIC PARTNERSHIPS
Through its technology partners, Documentum is offering comprehensive
document management solutions that integrate with industry-standard hardware
platforms, RDBMSs, and enterprise applications--particularly those targeted to
key vertical markets such as process manufacturing. These partnerships ensure
that customers will have a document management solution that supports their
existing computing infrastructure and that is tailored to the specific
requirements of their industry.
PRODUCT DEVELOPMENT
The Company has committed, and expects 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
supplements its product development efforts by reviewing customer feedback on
existing products and working with customers and potential customers to
anticipate future functionality requirements.
The Company expects to continue to enhance its existing products, develop
new products and augment its product base through acquisitions. As of December
31, 1996, the Company's research and development organization consisted of 74
full-time employees. During 1996, 1995 and 1994, research and development
expenses were $7.9 million, $4.5 million, and $2.5 million respectively.
Historically, the Company has expensed its software development costs as
incurred. The Company anticipates that it will continue to commit substantial
resources to research and development in the future.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and
technological developments, satisfy diverse and evolving customer requirements
and otherwise achieve market acceptance. There can be no assurance that the
Company will be successful in continuing to develop and market on a timely and
cost-effective basis fully functional product enhancements or new products
that respond to technological advances by others, or that its enhanced and new
products will achieve market acceptance. In addition, the Company has in the
past experienced delays in the development, introduction and marketing of new
or enhanced products, and there can be no assurance that the Company will not
experience similar delays in the future. Any failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
would have a material adverse effect on the Company's business, operating
results and financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success is heavily dependent upon proprietary technology. The
Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company presently has no
patents or patent applications pending. Despite the Company's efforts to
protect its proprietary
9
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. The Company is not aware that any of
its products infringes the proprietary rights of third parties. There can be
no assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products. The Company expects that
software product developers will increasingly be subject to infringement
claims as the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
In addition, the Company also relies on certain software that it licenses
from third parties, including software that is integrated with internally
developed software and used in the Company's products to perform key
functions. There can be no assurances that such firms will remain in business,
that they will continue to support their products or that their products will
otherwise continue to be available to the Company on commercially reasonable
terms. The loss or inability to maintain any of these software licenses could
result in delays or reductions in product shipments until equivalent software
can be developed, identified, licensed and integrated, which would adversely
affect the Company's business, operating results and financial condition.
INDUSTRY STANDARDS
Documentum is committed to providing comprehensive, open document management
solutions targeted to customers' unique business requirements. This is evident
in the Company's support of industry standards as well as its strategic
relationships with select technology partners. Documentum participates
actively in the two leading organizations which have taken the initiative to
define standards specifically for the document management arena. These include
the Open Document Management API ("ODMA") and the Document Management Alliance
("DMA"). ODMA is developing an API which will enable document management
capabilities to be integrated into a wide range of desktop applications. DMA
is proposing a specification for broader interoperability and connectivity
between heterogeneous document management services, repositories and
applications. In 1996, ODMA formally accepted Documentum's query extension
enabling desktop application users to simultaneously search document
repositories from different vendors.
RISK FACTORS
In evaluating the Company's business, prospective investors should carefully
consider the following factors in addition to the other information presented
in this report.
Uncertainty of Future Operating Results; Fluctuations in Quarterly Operating
Results. Prior growth rates in the Company's revenue and operating results
should not be considered indicative of future growth, if any, or of future
operating results. Future operating results will depend upon many factors,
including the demand for the Company's products, the level of product and
price competition, the length of the Company's sales cycle, the size and
timing of individual license transactions, the delay or deferral of customer
implementations, the budget cycles of the Company's customers, the Company's
success in expanding its direct sales force and indirect distribution
channels, the timing of new product introductions and product enhancements by
the Company and its competitors, 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, the ability
of the Company
10
to develop and market new products and control costs and general domestic and
international economic and political conditions. In addition, the operating
results of many software companies reflect seasonal trends, and the Company's
business, operating results and financial condition may be affected by such
trends in the future. The Company's sales generally reflect a relatively high
amount of revenues per order. The loss or delay of individual orders,
therefore, could have a significant impact on the revenues and quarterly
results of the Company. Moreover, the timing of license revenue is difficult
to predict because of the length of the Company's sales cycle, which is
typically six to twelve months from the initial contact. Because the Company's
operating expenses are based on anticipated revenue trends and because a high
percentage of the Company's expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of license transactions could
cause significant variations in operating results from quarter to quarter and
could result in losses. To the extent such expenses precede increased
revenues, the Company's operating results would be materially adversely
affected. As a result of these factors, operating results for any quarter are
subject to significant variation, and the Company believes that period-to-
period comparisons of its results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance.
Furthermore, due to all of the foregoing factors, it is likely that in some
future quarter the Company's operating results will be below the expectations
of public market analysts and investors. In such event, the price of the
Company's common stock would likely be materially adversely affected.
Lengthy Sales and Implementation Cycles. The license of the Company's
software products is often an enterprise-wide decision by prospective
customers and generally requires the Company to engage in a lengthy sales
cycle (typically between six and twelve months) to provide a significant level
of education to prospective customers regarding the use and benefits of the
Company's products. Additionally, the size of the transaction and the
complexity of the arrangement can also cause delays in the sales cycle. The
implementation by customers of the Company's products involves a significant
commitment of resources by such customers over an extended period of time and
is commonly associated with substantial reengineering efforts. For these and
other reasons, the sales and customer implementation cycles are subject to a
number of significant delays over which the Company has little or no control.
Delay in the sale or customer implementation of a limited number of license
transactions could have a material adverse effect on the Company's business
and operations and cause the Company's operating results to vary significantly
from quarter to quarter. Therefore, the Company believes that its quarterly
operating results are likely to vary in the future.
Product Defects. Due to the complexity and sophistication of the Company's
software products, the Company's products from time to time contain defects or
"bugs" which can be difficult to correct. Furthermore, as the Company
continues to develop and enhance its products, there can be no assurance that
the Company will be able to identify and correct defects in such a manner as
will permit the timely introduction of such products. Moreover, despite
extensive testing, the Company has from time to time discovered defects only
after its systems have been used by many customers. There can be no assurance
that software defects will not cause delays in product introductions and
shipments, result in increased costs, require design modifications, or impair
customer satisfaction with the Company's products. Any such event could
materially adversely affect the Company's business, operating results and
financial condition.
Product Concentration. To date, substantially all of the Company's revenues
have been attributable to sales of licenses of the Documentum EDMS family of
products and related services. The Company currently expects the Documentum
EDMS family of products, and related services, to account for substantially
all of its future revenues. As a result, factors adversely affecting the
pricing of or demand for the Documentum EDMS products such as competition or
technological change could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced versions
of the Documentum EDMS family of products. There can be no assurance that the
Company will continue to be successful in developing and marketing the
Documentum EDMS products.
End User Customer and Industry Concentration. A relatively small number of
end user customers account for a significant percentage of the Company's
revenues. In 1994, Glaxo-Wellcome accounted for approximately
11
34% of license revenues. In addition, licenses to end users in the
pharmaceutical industry for 1996, 1995,and 1994, including Glaxo-Wellcome,
accounted for 21%, 31% and 71%, respectively, of license revenues. Certain of
these revenues were the result of sales by the Company's indirect channel
partners, including Xerox and certain Xerox affiliates. The Company expects
that sales of its products to a limited number of customers and industry
segments will continue to account for a high percentage of revenue for the
foreseeable future. In addition, the future success of the Company will depend
on its ability to obtain orders from new customers and its ability to
successfully market its products in industries other than the pharmaceutical
industry. The loss of a major customer or any reduction or delay in orders by
such customers, or the failure of the Company to successfully market its
products outside existing targeted industry segments would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Reliance on Certain Relationships. The Company has established strategic
relationships with a number of organizations that it believes are important to
its worldwide sales, marketing and support activities. The Company's
relationships with indirect channel partners and other consultants provide
marketing and sales opportunities for the Company's direct sales force, expand
the distribution of its products and broaden its product offerings through
product bundling. These relationships also assist the Company in keeping pace
with the technological and marketing developments of major vendors, and in
certain instances, provide the Company with technical assistance for the
Company's product development efforts. In particular, the Company has strategic
relationships with Xerox and certain Xerox affiliates, including various
distribution arrangements. In 1996, 1995 and 1994, license revenues associated
with these relationships accounted for approximately $5.3 million, $6.1 million
and $0.7 million, respectively, representing 15%, 30% and 8% of the Company's
license revenues, respectively. There can be no assurance that any customer,
systems integrator or distributor will continue to market or to purchase the
Company's products. The failure by the Company to maintain these relationships,
particularly with Xerox and its affiliates, or to establish new relationships
in the future, could have a material adverse effect on the Company's business,
results of operations and financial condition.
New Products and Rapid Technological Change. The document management software
market is characterized by rapid technological change, changes in customer
requirements, frequent new product introductions and enhancements and emerging
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 the Company's products are
difficult to estimate. The Company's future success will depend in part upon
its ability to enhance current products and to develop and introduce new
products that respond to evolving customer requirements and keep pace with
technological developments and emerging industry standards, such as new
operating systems, hardware platforms, user interfaces and relational database
management system ("RDBMS") software. The Company's future success will also
depend in part on its ability to execute on its strategy to develop whole-
product solutions in certain target vertical industries. In addition, the
Company's future success will depend in part upon its ability to maintain and
enhance relationships with its technology partners, such as RDBMS vendors, in
order to provide its customers with integrated product solutions. There can be
no assurance that the Company will be successful in maintaining these
relationships or in developing and marketing product enhancements or new
products that respond to technological change, updates and enhancements to
third party products used in conjunction with the Company's products, changes
in customer requirements or emerging industry standards; that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and enhancements; or
that any new products or enhancements that the Company may introduce will
adequately meet the requirements of the marketplace and achieve market
acceptance. Moreover, the Company has in the past experienced delays in the
release dates of enhancements to its EDMS products. If release dates of any
future EDMS enhancements are delayed or, if when released, fail to achieve
market acceptance, the Company's business, financial condition and results of
operations could be materially adversely affected. To date, the delays the
Company has experienced have been minor in nature and are often the result of
adding enhancements or functionality based upon customer feedback during beta
product versions. These delays have generally not exceeded three months in
duration from the Company's scheduled internal release dates, however, there
can be no assurance that the Company may not experience future delays in
product introduction. The inability of the
12
Company, for technological or other reasons, to develop and introduce new
products or enhancements in a timely manner in response to changing customer
requirements, technological change or emerging industry standards, would have
a material adverse effect on the Company's business, results of operations and
financial condition.
Emerging Markets. The client/server application software market is a
relatively new market and is intensely competitive, highly fragmented and
subject to rapid change. The Company markets its products solely to customers
who have migrated their enterprise computing systems to client/server
computing environments. The Company's future financial performance will depend
in large part on continued growth in the number of organizations adopting
client/server computing environments. There can be no assurance that the
client/server market will maintain its current level of growth or continue at
all. If the client/server market fails to grow or grows more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition would be materially adversely affected.
Similarly, the market for document management software is intensely
competitive, highly fragmented and subject to rapid change. The Company's
future financial performance will depend primarily on growth in the number of
document management applications developed for use in client/server
environments. There can be no assurance that the market for document
management software will continue to grow or that, if it does grow,
organizations will adopt the Company's products. The Company has spent, and
intends to continue to spend, significant resources educating potential
customers about the benefits of its products. However, there can be no
assurance that such expenditures will enable the Company's products to achieve
any additional degree of market acceptance, and if the document management
software market fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, operating results and financial condition
would be materially adversely affected.
In addition, the commercial market for products and services designed for
use with the Internet and the World Wide Web has only recently begun to
develop, and the success of the Company's products may depend, in part, on
their continued compatibility with the Internet and the Web. It is difficult
to predict with any assurance whether the Internet will prove to be a viable
commercial marketplace or whether the demand for Internet-related products and
services will increase or decrease in the future. The increased commercial use
of the Internet could require substantial modification and customization of
the Company's products and services and the continued introduction of new
products and services.
Intense Competition. The market for the Company's products is intensely
competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for open, client/server
software solutions, and the Company's competitors offer a variety of products
and services to address this market. The Company currently encounters direct
competition from a number of public and private companies such as Saros, a
FileNet Company, PC DOCS, Novasoft, OpenText, and Metaphase. Several of these
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 the Company.
In addition, RDBMS vendors, such as Oracle, may compete with the Company in
the future. For example, Oracle has recently announced products that may
compete with the Company's products. Like the Company's current competitors,
many of these companies have longer operating histories, significantly greater
resources and name recognition and a larger installed base of customers than
the Company. Oracle and other potential competitors have well-established
relationships with current and potential customers and strategic partners of
the Company, have extensive knowledge of the relational database industry and
have the resources to enable them to more easily offer a single vendor
solution. As a result, these competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products, than can the Company.
The Company also faces indirect competition from systems integrators. The
Company relies on a number of systems consulting and systems integration firms
for implementation and other customer support services, as
13
well as recommendations of its products during the evaluation stage of the
purchase process. Although the Company seeks to maintain close relationships
with these service providers, many of these third parties have similar, and
often more established, relationships with the Company's principal
competitors. If the Company is unable to develop and retain effective, long-
term relationships with these third parties, the Company's competitive
position would be materially adversely affected. Further, there can be no
assurance that these third parties, many of which have significantly greater
resources than the Company, will not market software products in competition
with the Company in the future or will not otherwise reduce or discontinue
their relationships with or support of the Company and its products.
It is also possible that new competitors such as Microsoft, or alliances
among competitors may emerge and rapidly acquire significant market share. The
Company also expects that competition will increase as a result of software
industry consolidations. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business, operating results
and financial condition. There can be no assurance that the Company will be
able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition.
Management of Growth; Dependence Upon Key Personnel. The Company's ability
to compete effectively and to manage future anticipated growth, will require
the Company to expand, train and manage its employee work force. The Company's
plans include hiring a significant number of highly-qualified technical, sales
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to attract assimilate or
retain such key employees.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success is heavily dependent upon proprietary technology. The Company relies
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which
afford only limited protection. The Company presently has no patents or patent
applications pending. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to as great an extent as do the laws of the
United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. The Company is
not aware that any of its products infringe the proprietary rights of third
parties. There can be no assurance, however, that third parties will not claim
infringement by the Company with respect to current or future products. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
In addition, the Company also relies on certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There
can be no assurances that such firms will remain in business, that they will
continue to support their products or that their products will otherwise
continue to be available to the Company on commercially reasonable terms. The
loss or inability to maintain any of these software licenses could result in
delays or
14
reductions in product shipments until equivalent software can be developed,
identified, licensed and integrated, which would adversely affect the
Company's business, operating results and financial condition.
International Operations. The Company's sales are primarily to large
multinational companies. To service the needs of such companies, both
domestically and internationally, the Company and its support partners must
provide worldwide product support services. As a result, the Company intends
to continue expanding its existing international operations and enter
additional international markets, which will require significant management
attention and financial resources and could adversely affect the Company's
operating margins and earnings, if any. The Company opened an office in London
in April 1994, in Frankfurt in December 1994, in Paris in November 1994 and in
Munich in October 1996. Certain Xerox affiliates were responsible for
substantially all of the Company's product support in Europe during 1994 and
1995. In 1996, the Company established its own European technical support
operation, located in the London office. For 1996, 1995 and 1994,
international license revenues amounted to $10.0 million, $5.2 million, and
$0.7 million, respectively, representing 29%, 26% and 8% of the Company's
license revenues, respectively. In order to successfully expand international
sales, the Company must establish additional foreign operations, hire
additional personnel and develop relationships with additional international
vendors. To the extent that the Company is unable to do so in a timely manner,
the Company's growth, if any, in international sales will be limited, and the
Company's business, operating results and financial condition could be
materially adversely affected. In addition, there can be no assurance that the
Company will be able to maintain or increase international market demand for
its products.
Additional risks inherent in the Company's international business activities
generally include currency fluctuations, unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs of and the Company's
limited experience in localizing products for foreign countries, lack of
acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
potentially adverse tax consequences including restrictions on the
repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. To date, substantially all of the Company's international
revenues have been denominated in U.S. dollars. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in the currency exchange rates in the future will not have a
material adverse impact on revenues from direct international sales and thus
the Company's business, operating results or financial condition. There can be
no assurance that such factors will not have a material adverse effect on the
Company's future international operations and, consequently, the Company's
results of operations.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the
limitation of liability provisions contained in the Company's license
agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may entail the risk of such
claims, and there can be no assurance that the Company will not be subject to
such claims in the future. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
Risk of Product Defects. Software products as complex as those offered by
the Company frequently contain errors or failures, especially when first
introduced or when new versions are released. Although the Company conducts
extensive product testing, the Company has in the past released products that
contain defects, and has discovered software errors in certain of its new
products and enhancements after their introduction. For example, the Company
experienced certain technical problems in the December 1994 release of its
product that were corrected in its June 1995 release. The Company could in the
future lose or delay recognition of revenues as a result of software errors or
defects. The Company's products are typically intended for use in applications
that may be critical to a customer's business. As a result, the Company
expects that its customers and potential customers have a greater sensitivity
to product defects than the market for software products generally. Although
the Company's business has not been adversely affected by any such errors to
date, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new
15
products or releases after commencement of commercial shipments, resulting in
loss of revenue or delay in market acceptance, diversion of development
resources, damage to the Company's reputation, or increased service and
warranty costs, any of which could have a material adverse effect upon the
Company's business, operating results and financial condition.
Control By Existing Stockholders. The Company's executive officers,
directors and affiliated entities together beneficially own approximately
39.8% of the outstanding shares of Common Stock. In particular, Xerox owns
approximately 26% of the outstanding shares of Common Stock. As a result,
these stockholders are effectively able to exercise control over matters
requiring stockholder approval, including the election of directors, and
mergers, consolidations and sales of all or substantially all of the assets of
the Company. This may prevent or discourage tender offers for the Company's
Common Stock or changes in the control of the Company unless the terms are
approved by such stockholders.
Possible Volatility of Stock Price. The trading price of the Company's
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 the Company or its 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 that of the Company and which
have been unrelated to the operating performance of these companies. These
market fluctuations may adversely affect the market price of the Company's
Common Stock.
Effect of Certain Charter Provisions: Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has
the authority 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 vote or action by
the 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 have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue any shares of Preferred
Stock. Further, certain provisions of the Company's Amended and Restated
Certificate of Incorporation, including provisions that create a classified
board of directors, and certain provisions of the Company's Amended and
Restated Bylaws and of Delaware law could delay or make more difficult a
merger, tender offer or proxy contest involving the Company.
EXECUTIVE OFFICERS
The following is a list of the Company's executive officers as of February
28, 1997:
NAME AGE POSITION
---- --- --------
Jeffrey A. Miller.... 45 President, Chief Executive Officer, and Director
Mark S. Garrett...... 39 Vice President, Chief Financial Officer and Secretary
Robert K. Reid....... 46 Vice President, Industry Solutions
Howard I. Shao....... 41 Vice President, Product Development
Paul J. Hoffman...... 46 Vice President, Worldwide Sales
Jeffrey A. Miller has served as the Company's President, Chief Executive
Officer and member of the Board of Directors since July 1993. From April 1991
to March 1993, Mr. Miller was a division president at Cadence Design Systems,
Inc., a supplier of electronic design automation software ("Cadence"). From
February 1983 to April 1991, Mr. Miller was Vice President and General Manager
and Vice President of Marketing of Adaptec, Inc., a supplier of computer
input/output controllers. From 1976 to 1983, Mr. Miller held various positions
at Intel Corporation, a manufacturer of semiconductor components. Mr. Miller
received his M.B.A. and B.S. in Electrical Engineering and Computer Science
from the University of Santa Clara.
16
Mark A. Garrett has served the Company's Vice President, Chief Financial
Officer and Secretary since January 1997. From February 1995 through December
1996, Mr. Garrett was Vice President of Worldwide Corporate Financial Planning
and Analysis at Cadence Design Systems, Inc., a supplier of electronic design
automation software ("Cadence"). From August 1994 to February 1995, Mr.
Garrett served as Finance Group Director for the Spectrum Services division at
Cadence. From January 1993 to July 1994, Mr. Garrett was Finance Group
Director for Technology Development at Cadence. From June 1991 to December
1992, Mr. Garrett was Division Controller and Finance Director for the Systems
and CAE Divisions of Cadence. From June 1979 to May 1991, Mr. Garrett held
various financial positions at IBM Corporation. Mr. Garrett received his
M.B.A. from Marist College and his B.S. and B.A. from Boston University.
Robert K. Reid has served the Company as Vice President of Industry
Solutions since January 1997. Prior to that, Mr. Reid was the Company's Vice
President of Marketing since August 1993. From 1988 to August 1993, Mr. Reid
was Vice President of Marketing for Octel Communications Corp., a voicemail
company. From 1983 to 1988, Mr. Reid was Vice President of Marketing for NBI,
Inc., an office systems company. From 1980 to 1983, Mr. Reid was Vice
President of Marketing for Zenith Data Systems Corp., a personal computer
company. Mr. Reid received his B.S. in Communications from the University of
Tennessee.
Howard I. Shao, a founder of the Company, has served as Vice President,
Engineering of the Company since June 1990. From 1984 to June 1990, Mr. Shao
held a variety of management positions at Ingres Corporation, a relational
database company ("Ingres"), including Director Product Development. From 1981
to 1984, Mr. Shao was the Manager of Department Database Processor at
TTI/Citicorp, a software division of Citicorp. Mr. Shao was a co-founder of
Transtech International, a software company. Mr. Shao received his M.B.A. from
Pepperdine University and a B.S. in Computer Science from the Massachusetts
Institute of Technology.
Paul J. Hoffman has served as the Company's Vice President, Worldwide Sales
since September of 1996. From September 1994 to September 1996, Mr. Hoffman
was Vice President, Worldwide Operations for Oracle Corporation ("Oracle"), a
relational database software company. From June 1992 until September 1994 he
served as Vice President, Direct Marketing Division, USA for Oracle and from
June 1990 until June 1992 he served as Area Vice President, West for Oracle.
Mr. Hoffman received his B.S. in Finance from Fairfield University.
EMPLOYEES
As of December 31, 1996, the Company employed 281 persons, including 109 in
sales and marketing, 37 in its consulting and training services organization,
23 in customer support, 74 in research and development and 38 in finance and
administration. Of these, 46 are located in Europe and the remainder are
located in North America. None of the Company's employees is represented by a
labor union. The Company has experienced no work stoppages and believes its
relationship with its employees is good. Competition for qualified personnel
in the Company's industry is intense. The Company believes that its future
success will depend in part on its continued ability to attract, hire and
retain qualified personnel.
ITEM 2. PROPERTIES
As of December 31, 1996 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.......... 61,200 October, 2001 Corporate HQ, Development,
Sales, Marketing, Services and
support
Chicago, IL............. 9,624 July, 2001 Sales, Marketing, Services
Munich, Germany......... 7,000 October, 2001 Sales, Services
Stockley Park, England.. 5,073 December, 1999 Sales, Marketing, Services
17
The Company's principal administrative, engineering, manufacturing,
marketing and sales facilities total approximately 61,200 square feet and are
located in two buildings in Pleasanton, California under a lease which expires
in October, 2001. In addition, the Company leases offices for sales, marketing
and customer service activities in or near Atlanta, Georgia; Burlington,
Massachusetts; Southfield, Michigan; Saddlebrook, New Jersey; Chicago,
Illinois; Willow Grove, Pennsylvania; Irvine, California; Denver, Colorado;
Dallas, Texas; Houston, Texas; Bellevue, Washington; and outside of the United
States in Stockley Park, England; Paris, France and Munich, Germany.
In December of 1996, the Company signed a lease for approximately an
additional 30,000 square feet in Pleasanton, California beginning in March of
1997 and expiring in February, 2006. In 1997, the Company anticipates
expanding existing facilities depending upon the availability of suitable
additional space. Recently, commercial building vacancy rates have
significantly dropped in many of the markets where the Company has significant
operations. As a result, the Company could experience difficulty in obtaining
additional space for expansion. Failure to obtain space or to obtain it on
reasonably attractive commercial terms may inhibit the Company's ability to
grow, or otherwise adversely effect the Company's operations and financial
results.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
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. In February 1996, the Company completed its
initial public offering of 2,058,000 shares of its common stock at an initial
offering price of $24.00 per share. The following table lists the high and low
sales price for each quarter of 1996 as reported by Nasdaq.
HIGH LOW
------- -------
1996
Fourth quarter................................................. $41.500 $30.500
Third quarter.................................................. $33.000 $22.250
Second quarter................................................. $46.500 $29.875
First quarter (Subsequent to February 5)....................... $40.000 $28.000
The trading price of the Company's Common Stock is subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of new products by the Company or its competitors, announcements
of technological innovations, as well as other events or factors. In addition,
the stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price of many high
technology companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
effect the market price of the Company's Common Stock.
As of December 31, 1996, the approximate number of common stockholders of
record was 386.
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.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Licenses....................... $34,630 $20,377 $ 8,919 $ 1,557 $ 364
Services....................... 10,672 5,079 1,454 507 142
------- ------- ------- ------- -------
Total revenues............... 45,302 25,456 10,373 2,064 506
------- ------- ------- ------- -------
Cost of revenues:
Licenses....................... 1,923 1,188 518 134 3
Services....................... 6,845 3,324 1,304 283 67
------- ------- ------- ------- -------
Total cost of revenues....... 8,768 4,512 1,822 417 70
------- ------- ------- ------- -------
Gross profit..................... 36,534 20,944 8,551 1,647 436
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............ 19,909 12,513 6,254 1,595 179
Research and development....... 7,880 4,512 2,523 1,750 1,661
General and administrative..... 4,114 2,430 1,738 1,134 226
------- ------- ------- ------- -------
Total operating expenses..... 31,903 19,455 10,515 4,479 2,066
------- ------- ------- ------- -------
Income (loss) from operations.... 4,631 1,489 (1,964) (2,832) (1,630)
------- ------- ------- ------- -------
Interest and other income
(expense), net.................. 2,268 239 75 9 (31)
------- ------- ------- ------- -------
Income (loss) before income tax
provision....................... 6,899 1,728 (1,889) (2,823) (1,661)
Provision for income taxes....... (2,415) (468) -- -- --
------- ------- ------- ------- -------
Net income(loss)................. $ 4,484 $ 1,260 $(1,889) $(2,823) $(1,661)
======= ======= ======= ======= =======
Net income per common share(1)... $ 0.30 $ 0.10
======= =======
Shares used in per share
computation(1).................. 14,747 12,934
======= =======
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........ $ 5,369 $ 5,978 $ 6,289 $ 3,658 $ --
Short-term investments........... 46,803 -- -- -- --
Working capital (deficit)........ 51,821 4,624 5,256 3,630 (141)
Total assets..................... 74,944 16,501 10,916 5,368 182
Long-term obligations............ 211 691 544 542 911
Mandatorily redeemable
convertible preferred stock..... -- 13,391 13,391 8,940 --
Stockholders' equity (deficit)... 59,332 (5,746) (7,286) (5,479) (948)
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income per share.
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. See "Risk Factors" in Item I, "Business", of this
document.
OVERVIEW
Documentum, which was formed in 1990, provides object-oriented,
client/server software solutions that enable large organizations to
effectively manage and optimize the use of their unstructured business-
critical information. From its inception through December 1992, the Company's
activities consisted primarily of developing its products, establishing its
infrastructure and conducting market research. The Company shipped the first
commercial version of its Documentum Server product in late 1992, and since
then substantially all of the Company's revenues have been from licenses of
its family of enterprise document management system ("EDMS") 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. During 1996, the
Company introduced and shipped (i) Release 3.0 of Documentum EDMS, an update
to the Company's core product with a range of new features; (ii) products for
delivering document management functionality to the World Wide Web, as well as
for Microsoft NT; (iii) and new intergration for users of Lotus Notes,
Interleaf users and SAP users. The Company expects that EDMS-related revenue
will continue to account for substantially all of the Company's revenues for
the foreseeable future. As a result, the Company's future operating results
are dependent upon continued market acceptance of EDMS and enhancements
thereto.
Since inception, the Company has invested significant resources in
developing its EDMS software, as well as building its sales, marketing and
general administrative organizations. As a result, since inception the
Company's operating expenses have increased in absolute dollar amounts and are
expected to continue to increase.
Although the Company has experienced significant revenue growth in recent
years, the Company does not believe that such growth rates are sustainable.
Accordingly, the rate at which the Company has grown in the past should not be
considered to be indicative of future revenue growth, if any, or future
operating results. There can be no assurance that the Company will remain
profitable on a quarterly basis. The Company's limited operating history makes
the prediction of future operating results difficult, if not impossible.
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,
---------------------------
1996 1995 1994
------- ------- -------
Revenues:
Licenses........................................ 76.4% 80.0% 86.0%
Services........................................ 23.6% 20.0% 14.0%
------- ------- -------
Total revenues................................ 100.0% 100.0% 100.0%
------- ------- -------
Cost of revenues:
Licenses........................................ 4.3% 4.7% 5.0%
Services........................................ 15.1% 13.0% 12.6%
------- ------- -------
Total cost of revenues........................ 19.4% 17.7% 17.6%
------- ------- -------
Gross profit...................................... 80.6% 82.3% 82.4%
------- ------- -------
Operating expenses:
Sales and marketing............................. 43.9% 49.2% 60.3%
Research and development........................ 17.4% 17.7% 24.2%
General and administrative...................... 9.1% 9.6% 16.8%
------- ------- -------
Total operating expenses...................... 70.4% 76.5% 101.3%
------- ------- -------
Income (loss) from operations..................... 10.2% 5.8% (18.9%)
------- ------- -------
Interest and other income (expense), net.......... 5.0% 1.0% 0.7%
------- ------- -------
Income (loss)before income tax provision.......... 15.2% 6.8% (18.2%)
Provision for income taxes........................ (5.3%) (1.8%) 0.0%
------- ------- -------
Net income (loss)................................. 9.9% 5.0% (18.2%)
======= ======= =======
Revenues
The Company's revenues are derived from perpetual licenses for its document
management software and related services, which include maintenance and
support, training and consulting services. License revenues are recognized
upon shipment of the product if no significant vendor obligations remain and
collection of the resulting receivable is probable. In instances where a
significant vendor obligation exists, revenue recognition is deferred until
the obligation has been satisfied. Allowances for estimated future returns are
provided upon shipment. Annual maintenance and support revenues are recognized
for providing ongoing support and product updates and are recognized ratably
over the term of the contract. Renewals of maintenance contracts are recorded
when collectibility is deemed probable. Revenues from training and consulting
are recognized when the services are performed and collectibility is deemed
probable.
License revenues increased by 70% to $34.6 million in 1996, by 128% to $20.4
in 1995 and by 473% to $8.9 million in 1994, representing 76%, 80% and 86% of
total revenues in the respective periods. The growth in license revenues was
due primarily to an increase in the number of licenses sold, reflecting
increased acceptance of the Company's EDMS family of products, new products
released during the year, and the expansion of the Company's sales
organization. Although the Company's customer base has grown as revenues have
increased, a relatively small number of end user customers have historically
accounted for a significant percentage of the Company's revenues. In 1996,
1995 and 1994 license revenues from Xerox and certain Xerox affiliates, as
systems integrators, a VAR and a distributor for the Company's products,
accounted for 15%, 30% and 8% of total license revenues respectively. In 1994,
license revenues from Glaxo-Wellcome accounted for 34% of total license
revenues. The loss of a major customer or any reduction or delay in orders by
such customers would have a material adverse effect on the Company's business,
operating results and financial condition.
21
Service revenues increased by 110% to $10.7 million in 1996, by 249% to $5.1
million in 1995, and by 187% to $1.5 million in 1994, representing 24%, 20%
and 14% of total revenues in the respective periods. The increase in both
service revenue dollars and in service revenues as a percent of total revenues
was attributable to an increased demand for services as well as a larger
installed base of customers receiving ongoing maintenance, training and
support services and increases in the Company's professional services
consulting staff.
The Company markets its products through its direct sales force and its
indirect channel partners. Historically, the Company has generated the
majority of its revenues from its direct sales force. However, the Company has
also focused on complementing its direct sales channel with indirect channels,
consisting of systems integrators and distributors. Revenues from all indirect
channel partners comprised 32%, 36% and 18% of license revenues in 1996, 1995
and 1994 respectively. The increase in indirect channel revenues as a percent
of total license revenues in 1995 is due to two large transactions from Xerox
and certain Xerox affiliates which each exceeded 10% of total Company license
revenues for the year. License revenues from indirect channels include
revenues from Xerox and certain Xerox affiliates, who have acted as systems
integrators, a VAR and a distributor for the Company's products. In 1996, 1995
and 1994, revenues from Xerox and certain Xerox affiliates accounted for 47%,
84% and 43% of the indirect channel partner revenues, respectively. Xerox
owned approximately 26% of the Company's outstanding common shares as of
December 31, 1996. Management believes that the revenues, gross profit and
costs and expenses relating to transactions with Xerox are indicative of
amounts which would have been incurred or realized from nonrelated parties.
Revenues for any period from indirect partners including Xerox and affiliates
are subject to significant variations. As a result, the Company believes that
period to period comparisons of indirect revenues are not necessarily
meaningful and should not be relied upon as indications of future performance.
There can be no assurance that Xerox or the Company's other indirect channel
partners will elect or be able to continue to market or support EDMS
effectively, or that economic conditions or industry demand will not adversely
affect these partners.
International revenues represented 29%, 26% and 8% of license revenues in
1996, 1995 and 1994 respectively. The increase in international revenues as a
percent of license revenues for the year ended December 31, 1996 is due to the
expansion of the Company's sales force in Europe. A significant portion of the
international revenues are derived from the Company's indirect channel
partners, which include Xerox and certain Xerox affiliates. International
revenues are subject to significant variations. The Company classifies license
revenue as domestic or international based upon the billing location of the
customer. In many instances, especially with large purchases from
multinational companies, the customer has the right to deploy the licenses
anywhere in the world. Thus, the percentages discussed herein represent where
licenses were sold, and may or may not represent where the products are used.
As a result, the Company believes that period to period comparisons of
international revenues are not necessarily meaningful and should not be relied
upon as indications of future performance.
While the Company believes that large multinational organizations represent
a significant opportunity for revenue growth and the Company intends to
continue expansion of its international sales operations, there can be no
assurance that the Company will be successful in meeting the requirements of
these large organizations or that the Company will be able to effectively
support this international expansion. Both the Company's direct and indirect
international sales are primarily denominated in United States dollars and the
Company does not currently engage in hedging activities. Although exposure to
currency fluctuations to date has been insignificant, there can be no
assurance that fluctuations in the currency exchange rates in the future will
not have a material adverse impact on revenues from direct international sales
and thus the Company's business, operating results and financial condition.
Cost of revenues
Cost of license revenues consists primarily of the royalties paid to third-
party vendors. It also includes product costs such as packaging,
documentation, production and freight. Cost of license revenues increased by
62% to $1.9 million in 1996, by 129% to $1.2 million in 1995 and by 287% to
$518,000 in 1994, representing approximately 6% of the related license
revenues in 1996, 1995 and 1994. The increase in cost of license
22
revenues was principally related to the increase in the number of software
licenses sold. The Company expects that the cost of license revenues will
continue to increase in dollar amount.
Cost of services revenues consists primarily of personnel-related costs
incurred in providing telephone support, consulting services and training to
customers. Cost of services revenues increased by 106% to $6.8 million in
1996, by 155% to $3.3 million in 1995 and by 361% to $1.3 in 1994,
representing 64%, 65% and 90% of the related services revenues in 1996, 1995
and 1994 respectively. The increase in cost of services revenues was a result
of increased personnel-related costs as the Company expanded its customer
support and training operations to support its increased installed customer
base in both the US and Europe, as well as payments to third parties for
support.
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 59% to $19.9 million in
1996, by 100% to $12.5 million in 1995 and by 292% to $6.3 million in 1994
representing 44%, 49% and 60% of total revenues for 1996, 1995 and 1994,
respectively. The increase in dollar amount was primarily due to the expansion
of the Company's sales force, related equipment and facility expenditures,
investment in building a European direct sales force and increased marketing
activities including public relations and promotional expenses. The decrease
as a percentage of revenues is primarily due to economies of scale realized as
certain expenses, such as management compensation and facilities, grew
proportionately less than revenues. The Company is in the process of
increasing its direct sales and marketing expenditures to address certain
international and vertical markets and expects that sales and marketing
expenses will increase in dollar amount to support the Company's anticipated
revenue growth.
Research and development. Research and development expenses consist
primarily of salaries and benefits for software developers, contracted
development efforts and related facilities costs. Research and development
expenses increased by 75% to $7.9 million in 1996, by 79% to $4.5 million in
1995 and by 44% to $2.5 million in 1994, representing 17%, 18%, and 24% of
total revenues in 1996, 1995 and 1994 respectively. The increase in dollar
amount reflects the expansion of the Company's engineering staff and related
costs required to support the development of new products and the enhancement
of existing products. Based on the Company's research and development process,
costs incurred between the establishment of technological feasibility and
general release have not been material and therefore have not been capitalized
in accordance with Financial Accounting Standards No. 86. The Company expects
research and development costs will continue to increase in dollar amount in
order to support increased development efforts to both existing products and
new products.
General and administrative. General and administrative expenses consist
primarily of personnel costs for finance, management information systems,
legal, human resources and general management and outside professional
services. General and administrative expenses increased by 69% to $4.1 million
in 1996, by 40% to $2.4 million in 1995 and by 53% to $1.7 million in 1994,
representing 9%, 10% and 17% of total revenues in 1996, 1995 and 1994
respectively. The increase in dollar amount is primarily due to increased
staffing and professional fees necessary to manage and support the Company's
growth. The Company expects general and administrative expenses to increase in
order to support the growing needs of the Company.
Interest and other income (expense), net
Interest and other income (expense), net consists primarily of interest
income earned on the Company's cash and cash equivalents and short term
investments, and other items including foreign exchange gains and losses and
interest expense. Interest and other income (expense), net increased by 849%
to $2.3 million in 1996, by 219% to $239,000 in 1995 and by 733% to $75,000 in
1994. The increase in dollar amount is primarily due to higher cash balances
resulting from the completion of the Company's initial public offering of
common stock completed in February 1996. To date, the Company's international
sales have been generally denominated in US
23
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-US dollar denominated contracts. Unexpected changes in the
exchange rates for these foreign currencies could result in significant
fluctuation in the foreign currency translation gains and losses in future
periods.
Provision for income taxes
The Company's effective tax rates for 1996 and 1995 were 35% and 27%,
respectively. The Company incurred a loss in 1994 and consequently recorded no
provision for income taxes. These rates differ from the statutory rate
primarily due to state and foreign taxes, as well as the utilization of tax
loss and credit carryforwards and the impact of releasing the previously
established valuation allowance. In accordance with Financial Accounting
Standards No. 109, "Accounting for Income Taxes", the Company provides a
valuation allowance for deferred tax assets when it is more likely than not,
based on available evidence, that some portion or all of the deferred assets
will not be realized. Based on a revaluation of the realizability of future
tax benefits based on income earned in 1996, creating available tax
carrybacks, the Company released the previously established valuation
allowance during 1996. Accordingly, the Company valued its deferred tax asset
at $1.3 million at December 31, 1996. The Company anticipates that its
effective tax rate will not increase significantly in 1997.
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, and its common stock began
trading on the Nasdaq National Market under the symbol DCTM. Through the
offering, the Company sold 2,058,000 shares of its common stock, and received
net proceeds of approximately $45 million cash, which has been invested in
investment grade securities.
The Company's cash and investments totaled $52.2 million at December 31,
1996 representing 70% of total assets. The Company has invested the Company's
cash in excess of current operating requirements in investment grade
securities. The investments have variable and fixed interest rates and short
term and long term maturities. In accordance with SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities" such investments are
classified as "available for sale".
Net cash provided by operating activities was $4.6 million and $1.5 million
in 1996 and 1995, respectively. Cash used in operating activities in 1994 was
$759,000. For the year ended December 31, 1996, the cash generated by
operations was primarily attributable to net income of $4.5 million, growth in
accrued liabilities of $3.4 million and deferred revenue of $2.8 million,
offset by the increase in accounts receivable of $8.1 million. In 1996,
capital expenditures of $5.2 million were primarily for computer equipment,
fixed assets and leasehold improvements acquired in conjunction with the
Company's expansion to new facilities.
The Company has a current line of credit facility which allows for
borrowings of up to $5.0 million at the bank's prime rate. This facility
expires in November, 1997 and the Company presently anticipates that it will
be able to renew the line of credit. At December 31, 1996, the Company had no
outstanding borrowings under its line of credit.
At December 31, 1996, the Company had $406,000 outstanding under a term note
payable to a bank. The balance of the term note is repayable in 10 equal
monthly payments of approximately $41,000 together with interest at the Bank's
prime rate plus 0.75%. The Company also had $371,000 outstanding under a
second term note payable to a bank. The balance of the term note is repayable
in 23 equal monthly payments of approximately $16,000 together with interest
at the Bank's prime rate plus 0.50%.
In addition, the Company may borrow up to an additional $1.5 million through
November 1997. Interest only is payable on such additional borrowings at the
Bank's prime rate plus 0.25% through November 1997 after
24
which any outstanding balance is due in 24 equal installments. All obligations
shall bear interest, from and after the occurrence of an event of default, at
a rate equal to 5% points above the interest rate applicable immediately prior
to the occurrence of the event of default. Borrowings under the loan agreement
are secured by substantially all of the assets of the Company.
The Company currently has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and capital leases.
The Company believes that its existing cash balances, its available bank
financing and the cash flows generated from operations, if any, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. A portion of the Company's cash
could be used to acquire or invest in complementary businesses or products or
obtain the right to use complementary technologies. The Company is currently
evaluating, in the ordinary course of business, potential investments such as
businesses, products or technologies. The Company has no current
understandings, commitments or agreements with respect to any material
acquisition of other businesses, products or technologies.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in Part IV Item 14.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
PART III
Certain information required by Part III is omitted from this Report and
will be included in the Registrant's definitive Proxy Statement which will be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers--See the section titled "Executive Officers" in Part
I, Item 1 hereof.
(b) Directors--The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions."
25
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT'S, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
PAGE NUMBER
-----------
1. Consolidated Financial Statements
Report of Independent Accountants........................ F-1
Consolidated Balance Sheets as of December 31, 1996 and
1995..................................................... F-2
Consolidated Statement of Operations For the three years
ended December 31, 1996.................................. F-3
Consolidated Statement of Cash Flows For the three years
ended December 31, 1996.................................. F-4
Consolidated Statement of Changes in Stockholders'
Equity(Deficit) For the three years ended December 31,
1996..................................................... F-5
Notes to Consolidated Financial Statements............... F-6
2. Financial Statement Schedules For the three years ended
December 31, 1996
Schedule II--Valuation and Qualifying Accounts........... S-1
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
None.
26
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 21ST DAY OF MARCH, 1997.
Documentum, Inc.
/s/ Mark S. Garrett
By: _________________________________
MARK S. GARRETT
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints jointly and severally, Jeffrey A. Miller
and Mark S. Garrett, and each one of them, his or her attorneys-in-fact, each
with the power of substitution, for him or her in any way and all capacities,
to sign any and all amendments to this Annual Report (Form 10-K) and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each said attorneys-in-fact, or his substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 21st day of March, 1997.
SIGNATURE TITLE
/s/ Jeffrey A. Miller President, Chief Executive Officer
- ------------------------------------- and Direct (Principal Executive
JEFFREY A. MILLER Officer)
/s/ Mark S. Garrett Vice President and Chief Financial
- ------------------------------------- Officer (Principal Financial and
MARK S. GARRETT Accounting Officer)
/s/ Robert V. Adams Chairman
- -------------------------------------
ROBERT V. ADAMS
/s/ Kathryn C. Gould Director
- -------------------------------------
KATHRYN C. GOULD
/s/ Colin J. O'Brien Director
- -------------------------------------
COLIN J. O'BRIEN
/s/ John L. Walecka Director
- -------------------------------------
JOHN L. WALECKA
/s/ Edward J. Zander Director
- -------------------------------------
EDWARD J. ZANDER
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Documentum, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 26 present fairly, in all
material respects, the financial position of Documentum, Inc. and its
subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
January 24, 1997
F-1
DOCUMENTUM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
----------------
1996 1995
------- -------
ASSETS
Current assets:
Cash....................................................... $ 5,369 $ 5,978
Short-term investments..................................... 46,803 --
Accounts receivable, net of allowances of $1,069 and $647.. 13,531 6,073
Other current assets....................................... 1,519 738
------- -------
Total current assets..................................... 67,222 12,789
Property and equipment, net.................................. 6,339 3,201
Other assets................................................. 1,383 511
------- -------
$74,944 $16,501
======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 1,488 $ 564
Accrued liabilities........................................ 8,124 4,693
Deferred revenue........................................... 4,956 2,164
Current portion of capital lease obligations............... 234 257
Current portion of term loans payable...................... 599 487
------- -------
Total current liabilities................................ 15,401 8,165
------- -------
Long term obligations:
Capital lease obligations, less current portion............ 33 286
Term loans payable, less current portion................... 178 405
------- -------
Total long-term obligations.............................. 211 691
------- -------
Mandatorily redeemable convertible preferred stock........... -- 13,391
------- -------
Commitments (Note 8)
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000 and 60,000 shares
authorized, none issued and outstanding
Common stock, $0.001 par value; 35,000 and 100,000 shares
authorized; 14,187 and 1,880 shares issued and outstanding
.......................................................... 14 2
Additional paid-in capital................................. 61,450 966
Cumulative translation adjustment.......................... 43 (55)
Accumulated deficit........................................ (2,175) (6,659)
------- -------
Total stockholders' equity (deficit)..................... 59,332 (5,746)
------- -------
$74,944 $16,501
======= =======
See accompanying notes to consolidated financial statements.
F-2
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Revenues:
License (including $5,323, $6,104 and $698 from
a stockholder and its affiliates)............. $ 34,630 $ 20,377 $ 8,919
Services....................................... 10,672 5,079 1,454
-------- -------- --------
Total revenues............................... 45,302 25,456 10,373
-------- -------- --------
Cost of revenues:
License........................................ 1,923 1,188 518
Services....................................... 6,845 3,324 1,304
-------- -------- --------
Total cost of revenues....................... 8,768 4,512 1,822
-------- -------- --------
Gross profit..................................... 36,534 20,944 8,551
-------- -------- --------
Operating expenses:
Sales and marketing............................ 19,909 12,513 6,254
Research and development....................... 7,880 4,512 2,523
General and administrative..................... 4,114 2,430 1,738
-------- -------- --------
Total operating expenses..................... 31,903 19,455 10,515
-------- -------- --------
Income (loss) from operations.................... 4,631 1,489 (1,964)
Interest and other income (expense), net......... 2,268 239 75
-------- -------- --------
Income (loss) before income tax provision........ 6,899 1,728 (1,889)
Provision for income taxes....................... (2,415) (468) --
-------- -------- --------
Net income (loss)................................ $ 4,484 $ 1,260 $ (1,889)
======== ======== ========
Net income per share............................. $ .30 $ .10
======== ========
Shares used to compute net income per share(Note
2).............................................. 14,747 12,934
======== ========
See accompanying notes to consolidated financial statements.
F-3
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- --------
Cash flows from operating activities:
Net income (loss)................................ $ 4,484 $ 1,260 $ (1,889)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................. 2,064 921 336
Provision for doubtful accounts................ 672 243 337
Deferred tax asset............................. (1,273) -- --
Changes in assets and liabilities:
Accounts receivable.......................... (8,130) (3,501) (1,820)
Other current assets and other assets........ (379) (809) (420)
Accounts payable............................. 924 110 297
Accrued liabilities.......................... 3,431 2,217 1,940
Deferred revenue............................. 2,792 1,063 460
------- ------- --------
Net cash provided by (used in) operating
activities................................ 4,585 1,504 (759)
------- ------- --------
Cash flows from investing activities:
Purchases of investments......................... (92,303) -- --
Sales of investments............................. 45,500
Purchases of property and equipment.............. (5,202) (2,750) (463)
------- ------- --------
Net cash used by investing activities...... (52,005) (2,750) (463)
------- ------- --------
Cash flows from financing activities:
Issuance of common stock......................... 47,105 335 82
Proceeds from term loan.......................... 387 973 --
Repayments on capital lease obligations.......... (276) (237) (107)
Repayment on term loan........................... (503) (81) --
Issuance of Series C preferred stock............. -- -- 3,878
------- ------- --------
Net cash provided by financing activities.. 46,713 990 3,853
------- ------- --------
Effect of exchange rate on changes in cash......... 98 (55) --
------- ------- --------
Net increase (decrease) in cash and cash equiva-
lents............................................. (609) (311) 2,631
Cash and cash equivalents at beginning of period... 5,978 6,289 3,658
------- ------- --------
Cash and cash equivalents at end of period......... $ 5,369 $ 5,978 $ 6,289
======= ======= ========
Supplemental schedule of noncash transactions:
Bridge financing, notes payable and accrued in-
terest exchanged for mandatorily redeemable con-
vertible preferred stock........................ $ -- $ -- $ 573
Capital lease obligations incurred............... $ -- $ -- $ 887
Common stock issued for notes receivable......... $ -- $ 116 $ 114
Supplemental schedule of cash flow information:
Interest paid.................................... $ 127 $ 101 $ 67
Income taxes paid................................ $ 2,776 $ 181 $ --
See accompanying notes to consolidated financial statements.
F-4
DOCUMENTUM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
-------------- PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY (DEFICIT)
------ ------ ---------- ----------- ----------- ----------------
Balance as of December
31, 1993............... -- $-- $ 551 $-- $ (6,030) $ (5,479)
Common stock options
exercised.............. 880 1 81 -- -- 82
Net loss................ -- -- -- -- (1,889) (1,889)
------ ---- -------- ---- -------- --------
Balance as of December
31, 1994............... 880 1 632 -- (7,919) (7,286)
Common stock options
exercised.............. 1,000 1 303 -- -- 304
Stock compensation...... -- -- 31 -- -- 31
Foreign currency
translation
adjustment............. -- -- -- (55) -- (55)
Net income.............. -- -- -- -- 1,260 1,260
------ ---- -------- ---- -------- --------
Balance as of December
31, 1995............... 1,880 2 966 (55) (6,659) (5,746)
Common stock options
exercised.............. 324 -- 647 -- -- 647
Employee stock purchase
plan................... 60 -- 1,252 -- -- 1,252
Warrants exercised...... 73 -- -- -- -- --
Stock repurchases....... (12) -- (5) -- -- (5)
Mandatorily preferred
conversion............. 9,804 10 13,381 -- -- 13,391
Issuance of common stock
in public offering net
of issuance costs...... 2,058 2 45,038 -- -- 45,040
Stock compensation...... -- -- 72 -- -- 72
Payments on shareholder
notes.................. -- -- 99 -- -- 99
Foreign currency
translation
adjustment............. -- -- -- 98 -- 98
Net income.............. -- -- -- -- 4,484 4,484
------ ---- -------- ---- -------- --------
Balance as of December
31, 1996............... 14,187 $ 14 $ 61,450 $ 43 $ (2,175) $ 59,332
====== ==== ======== ==== ======== ========
See accompanying notes to consolidated financial statements.
F-5
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF THE COMPANY:
Description of business
Documentum, Inc. (the "Company") was incorporated in the state of Delaware
in January 1990 to develop, market and support a family of client/server and
worldwide Web software products that specifically address the challenges of
managing business-critical documents effectively across large enterprises. The
Documentum Enterprise Document Management System ("EDMS") automates and
accelerates the creation, modification and reuse of business-critical
documents and other unstructured data and the collaborative efforts involved
in these activities.
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., in the
United States, and Documentum Software Europe Ltd., in the United Kingdom. All
significant inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Foreign currency
The functional currency of the Company's United Kingdom subsidiary is the
local currency. Balance sheet accounts are translated into United States
dollars at exchange rates prevailing at balance sheet dates. Revenues, costs
and expenses are translated into United States dollars at average rates for
the period. Gains and losses resulting from translation are accumulated as a
component of stockholders' equity (deficit). Net gains and losses resulting
from foreign exchange transactions are included in the consolidated statement
of operations and were not significant during any of the periods presented. To
date, the company does not engage in hedging activities.
Revenue recognition
The Company's revenues are derived from perpetual licenses for its document
management software and related services, which include maintenance and
support, training and consulting services. License revenues are recognized
upon shipment of the product if no significant vendor obligations remain and
collection of the resulting receivable is probable. In instances where a
significant vendor obligation exists, revenue recognition is delayed until the
obligation has been satisfied. Allowances for estimated future returns, which
to date have been immaterial, are provided upon shipment. Annual maintenance
and support revenues consist of ongoing support and product updates and are
recognized ratably over the term of the contract. Revenues from training and
consulting are recognized when the services are performed. Payments received
in advance of revenue recognition are recorded as deferred revenue. The
Company has recognized revenues, for all periods presented, in accordance with
Statement of Position 91-1, "Software Revenue Recognition."
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
F-6
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial investments
The company has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115") which requires investment securities to be classified as either held to
maturity, trading or available-for-sale. The adoption of SFAS 115 did not have
a material impact on the Company's financial condition or results of
operations.
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's short-term investments, all of
which are classified as available-for-sale, are managed by a single financial
institution.
At December 31, 1996, the fair value of these short-term investments
approximated amortized cost with contractual maturities ranging from December
15, 1997 to December 1, 2029. The following table details the Company's short-
term investments at December 31, 1996:
COST
-------
Cash............................................................. $ 5,369
Certificates of deposit.......................................... 6,000
Medium term notes................................................ 15,088
U.S. Government agencies......................................... 6,914
Municipal bonds and notes........................................ 7,274
Corporate bonds and notes........................................ 4,655
Foreign debt securities.......................................... 2,042
Market auction preferred stock................................... 4,000
-------
$51,342
=======
The carrying value of all other financial instruments approximated their
respective fair value at December 31, 1996. Securities with a maturity date of
one year or less, and securities in which management intends to sell in 1997,
are classified as short-term investments.
Concentration of credit risk
The Company generally does not require collateral for its accounts
receivable and maintains reserves for potential credit losses.
Sales to Xerox and affiliated entities accounted for 15% and 30% of 1996 and
1995 license revenues, respectively. Sales to a single customer accounted for
34% of 1994 license revenues.
At December 31, 1996, two customers comprised 26% of accounts receivable. At
December 31, 1995, two customers, including Xerox and affiliated entities
comprised 21% of accounts receivable. Revenues from export sales, primarily to
Europe, were approximately 29%, 26% and 8% of license revenues for the years
ended December 31, 1996, 1995 and 1994, respectively. Included in export sales
in 1996 (as a percentage of license revenues) are export sales to customers in
Europe for approximately 94%. Included in export sales in 1995 (as a
percentage of license revenues) are export sales to customers in Europe for
approximately 22%.
Property and equipment
Property and equipment, including leasehold improvements, are recorded at
cost. Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the assets, three to six years, or the life
of the lease, whichever is shorter.
F-7
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Income taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109).
Under SFAS No. 109, deferred income tax liabilities and assets are determined
based on the difference between the financial reporting amounts and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates in effect for the years in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.
Equity-Based Compensation Plans
Effective for transactions entered into in fiscal years beginning after
December 15, 1995, SFAS No. 123, Accounting for Stock-Based Compensation under
a fair value based method is required. The Company, as allowed by SFAS No.
123, has elected to continue to measure compensation costs for its plans using
the intrinsic value base method of accounting for stock issued to employees.
However, as required by SFAS No. 123, pro forma disclosures of net income and
earnings per share are reflected in the notes to the financial statements as
if the fair value based method of accounting was adopted.
Net income per share
Net income per share is computed using the weighted average number of common
stock and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the if
converted method) and stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if their
effect is antidilutive. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletins, common and common equivalents shares, options and
warrants issued by the Company during the 12-month period prior to the
Company's initial public offering have been included in the calculation as if
they were outstanding for all periods prior to and including February 5, 1996.
Earnings per share prior to fiscal 1995 have not been presented since such
amounts are not deemed meaningful due to the significant change in the
Company's capital structure that will occur in connection with the initial
public offering.
Stockholders Equity
Common Stock as of December 31, 1996 reflects the sale of 2,058,000 shares
of common stock issued in the Company's initial public offering completed on
February 5, 1996. Aggregate net proceeds to the Company were $45,000,000. In
addition, Common Stock also reflects the conversion of all the Mandatorily
Redeemable Convertible Preferred Stock outstanding into an aggregate of
9,803,975 shares of common stock based on the shares of Mandatorily Redeemable
Convertible Preferred Stock outstanding as of December 31, 1995.
F-8
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon the closing of the Offering, the Company amended and restated its
Certificate of Incorporation reducing the authorized number of shares of
Common Stock to 35,000,000 and the authorized number of shares of Preferred
Stock to 5,000,000.
NOTE 3--RELATED PARTY TRANSACTIONS:
Xerox and affiliated entities
The Company has distribution agreements with Xerox and affiliated entities
which provide Xerox or its affiliates with the non-exclusive rights to sell
the Company's products in specified territories. The agreements have initial
terms of 18 to 24 months; however certain agreements may be renewed. In
addition, the Company has an agreement with Rank Xerox (UK) Limited; for Rank
Xerox (UK) Limited to provide support services to specified customers. This
agreement was terminated in July 1996. For the years ended December 31, 1996,
1995 and 1994, the Company recognized license revenues from Xerox and
affiliated entities of $5,323,000, $6,104,000 and $698,000, respectively, and
incurred expenses primarily for support services provided by Xerox and
affiliated entities of $410,000, $283,000, and $144,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. The net amount due from Xerox
and affiliated entities was $737,000 and $622,000 at December 31, 1996 and
1995, respectively. Management believes that the revenues, gross profit and
costs and expenses relating to these transactions are indicative of amounts
which would have been incurred or realized from nonrelated parties. At
December 31, 1996, Xerox owned approximately 26% of the Company's outstanding
common shares.
Notes receivable from stockholders
The Company has allowed certain employees to exercise stock options in
exchange for promissory notes. These notes generally bear interest at between
6.76% and 7.92% per annum payable annually in arrears, are secured by the
shares issued and are due five years after issuance; however, all amounts are
due and payable upon the employee's termination from the Company. At December
31, 1996 and 1995 the Company had $109,000 and $240,000 in note receivables,
respectively, due from stockholders which were included in additional paid in
capital.
NOTE 4--BALANCE SHEET COMPONENTS:
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
Property and equipment:
Computer equipment....................................... $ 5,466 $ 3,003
Office equipment......................................... 989 448
Furniture and fixtures................................... 1,396 561
Leasehold improvements and other......................... 2,004 641
------- -------
9,855 4,653
Accumulated depreciation and amortization................ (3,516) (1,452)
------- -------
$ 6,339 $ 3,201
======= =======
At December 31, 1996 the Company had $882,000 of equipment under capital
leases, net of accumulated amortization of $794,000. At December 31, 1995 the
Company had $887,000 of equipment under capital leases, net of accumulated
amortization of $588,000.
F-9
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
Accrued liabilities:
Compensation and related benefits.......................... $3,617 $1,975
Taxes...................................................... 1,103 461
Other...................................................... 3,404 2,257
------- -------
$8,124 $4,693
======= =======
NOTE 5--LINE OF CREDIT AND TERM LOAN:
At December 31, 1996, the Company has an unused bank line of credit (the
"Line of Credit") which provides for maximum borrowings up to $5,000,000,
bears interest at the bank's prime rate (8.25% at December 31, 1996) and is
secured by substantially all of the Company's assets. The Line of Credit,
which expires in November 1997, is subject to certain financial covenants.
At December 31, 1996, the Company has $406,000 outstanding under a term note
payable to a bank. The balance of the Term Loan is repayable in 10 equal
monthly payments of approximately $41,000 together with interest at the Bank's
prime rate plus 0.75%.
At December 31, 1996, the Company has $371,000 outstanding under a term note
payable to a bank. The balance of the Term Loan is repayable in 23 equal
monthly payments of approximately $16,000 together with interest at the Bank's
prime rate plus 0.5%.
In addition, the Company may borrow up to an additional $1,500,000 through
November 1997. Interest only is payable on such additional borrowings at the
Bank's prime rate plus 0.25% through November 1997 after which any outstanding
balance is due in 24 equal installments. All obligations shall bear interest,
from and after the occurrence of an event of default, at a rate equal to 5%
points above the interest rate applicable immediately prior to the occurrence
of the event of default. Borrowings under the Term Loan are secured by
substantially all of the assets of the Company.
NOTE 6--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
WARRANTS:
Preferred stock
At December 31, 1994 and 1995, the Company had 49,020,000 shares or
$13,391,000 of Mandatorily Redeemable Convertible Preferred Stock (the
"Preferred Stock") outstanding which was comprised of: 15,999,000 shares
designated, issued, and outstanding of Series A for $2,002,000; 27,396,000
shares designated, issued, and outstanding of Series B for $6,938,000; and
5,625,000 shares designated, issued, and outstanding of Series C for
$4,451,000.
On February 5, 1996, upon the closing of the offering, all of the
Mandatorily Redeemable Convertible Preferred Stock outstanding was
automatically converted into an aggregate of 9,803,975 shares of common stock
based on the Mandatorily Redeemable Convertible Preferred Stock that was
outstanding as of December 31, 1995:
Preferred stock warrants
In connection with a lease line of credit in March 1994, the Company granted
the lessor warrants to purchase 295,636 shares of the Company's Series B
Mandatorily Redeemable Convertible Preferred Stock. These warrants were fully
exercised on a net basis on December 18, 1996 and converted into 57,158 common
shares.
F-10
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 31, 1994, the Company granted the bank warrants to purchase
87,500 shares of the Company's Series C Mandatorily Redeemable Convertible
Preferred Stock, in connection with a line of credit and term note. These
warrants were fully exercised on a net basis on October 25, 1996 and converted
into 15,425 common shares.
NOTE 7--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 3,800,000 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. The fair market
value of the Company's common stock is determined by the Board of Directors or
a committee thereof.
Options granted under the Plan are exercisable at the date of grant and are
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 1996, 1995 and 1994 the Company issued 571,900, 701,300, and 692,400
options under the Plan, respectively. At December 31, 1996, 360,000 shares
were subject to repurchase by the Company.
Non-employee Directors' Stock Option Plan
In November 1995, the Board of Directors adopted the 1995 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for the issuance of up to 150,000 nonstatutory stock options to non-
employee directors of the Company. Each non-employee director of the Company
will automatically be granted a nonstatutory option to purchase 15,000 shares
of Common Stock upon the later of the effective date of the initial public
offering or upon the date on which such person first becomes a director.
Thereafter, beginning June 30, 1997 each non-employee director of the Company
will be granted an annual option to purchase 5,000 shares of common stock
provided such person, on June 30th of each year, has served continuously as a
non-employee director for at least six months prior to such date. 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 1996, the Company issued 75,000 options under the Directors' Plan.
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 600,000 shares have been
authorized for issuance.
F-11
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options may be granted at an exercise price at the date of grant of not less
than 85% of the fair market value per share for nonstatutory stock options,
stock bonuses and restricted stock purchases as determined by the Board of
Directors. Options granted under the Incentive Plan are exercisable only upon
vesting.
In 1996, the Company issued 142,301 options under the Incentive Plan.
A summary of activity under all the plans is as follows:
OPTIONS OUTSTANDING
-----------------------
SHARES PRICE
--------- ------------
Outstanding as of December 31,1993.................. 1,694,913 $0.16-$ 0.31
=========
Granted........................................... 692,400 $0.16-$ 0.31
Exercised......................................... (879,562) $0.16-$ 0.31
Canceled.......................................... (20,057) $ 0.31
---------
Outstanding as of December 31, 1994................. 1,487,694 $0.16-$ 0.31
=========
Granted........................................... 701,300 $1.00-$ 9.00
Exercised......................................... (999,899) $0.16-$ 6.20
Canceled.......................................... (29,834) $0.31-$ 3.70
---------
Outstanding as of December 31, 1995................. 1,159,261 $0.16-$ 9.00
=========
Granted........................................... 789,201 $9.00-$46.00
Exercised......................................... (324,591) $0.31-$ 9.00
Canceled.......................................... (119,845) $0.31-$42.25
---------
Outstanding as of December 31, 1996................. 1,504,026 $0.16-$46.00
=========
At December 31, 1996 options to purchase 270,226 shares were vested and
842,065 shares were available for future grant under all the plans.
During the year ended December 31, 1996, the Company had granted certain
options for the purchase of common stock on which the Company will amortize
approximately $73,000 annually of compensation expense over the four-year
vesting period of the options.
The following table summarizes information regarding stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------------
WEIGHTED-
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE
AT CONTRACTUAL AVERAGE AT WEIGHTED-
DECEMBER 31, LIFE EXERCISE DECEMBER 31, AVERAGE
RANGE OF EXERCISES PRICES 1996 (YEARS) PRICE 1996 EXERCISE PRICE
- ------------------------- ------------ ----------- -------- ------------ --------------
$ 0.3121-$ 1.0000....... 311,463 7.39 $ 0.4762 311,463 $ 0.4762
$ 1.5000-$ 3.7500....... 317,155 8.51 2.3962 317,155 2.3962
$ 4.2500-$24.3125....... 409,258 8.65 17.5289 359,258 16.6283
$24.5000-$36.7500....... 340,800 9.55 32.3086 274,900 32.2263
$37.0000-$46.0000....... 125,350 9.68 40.0116 50,450 41.5946
--------- ---------
$ 0.3121-$46.0000....... 1,504,026 8.65 $16.0292 1,313,226 $13.5846
========= =========
Options outstanding and options exercisable above do not include shares
subject to repurchase by the company at December 31, 1996.
F-12
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
350,000 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 1996, approximately 60,000 common shares were purchased under the
Employee Stock Purchase Plan.
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 No. 123, Accounting for Stock-Based Compensation, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1996 1995
------ ------
Net income (in thousands):
As reported................................................ $4,484 $1,260
Pro forma.................................................. $2,015 $1,159
Earnings Per Share:
As reported................................................ $ 0.30 $ 0.10
Pro forma.................................................. $ 0.14 $ 0.09
Earnings per share was computed using the method describe in note 2.
The fair value of each stock option grant on the date of grant was estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions:
1996 1995
------ -----
Volatility.................................................... 62.90% 62.90%
Risk-free interest rate....................................... 6.0% 5.96%
Dividend yield................................................ -- --
Expected lives................................................ 4 4
Weighted Average fair value................................... $31.57 $2.87
The fair value of the shares granted under the Purchase Plan was estimated
using the Black-Scholes model with the following assumptions:
1996
------
Volatility........................................................ 62.90%
Risk-free interest rate........................................... 6.0%
Dividend yield.................................................... --
Expected lives.................................................... 2
Weighted Average fair value....................................... $31.57
The pro forma effect on net income for 1996 and 1995 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to January 1, 1995.
F-13
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 8--COMMITMENTS:
Leases
The Company is obligated under non-cancelable operating leases for office
space and non-cancelable capital leases for equipment which expire at various
times through 1999. 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 at December 31, 1996 are as follows (in thousands):
LEASES
------
Year ending December 31,
1997............................................................. $1,956
1998............................................................. 1,812
1999............................................................. 1,698
2000............................................................. 1,418
2001............................................................. 1,212
Thereafter....................................................... 1,806
------
$9,902
======
Included in the above table for 1997 and 1998 are $247,000 and $34,000,
respectively, for future minimum lease commitments under capital lease
obligations which include $14,000 for interest. Total rent expense was
approximately $1,278,000, $696,000, $316,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
F-14
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES:
For the year ended December 31, 1994, the Company incurred losses and
consequently had no provision for income taxes. The provision for income taxes
for the year ended December 31, 1996 and December 31, 1995 is as follows (in
thousands):
YEARS ENDED
DECEMBER 31,
--------------
1996 1995
------- -----
Current:
Federal..................................................... $ 2,262 $ 217
State....................................................... 531 92
Foreign..................................................... 895 159
------- -----
3,688 468
------- -----
Deferred:
Federal..................................................... (1,144) --
State....................................................... (129) --
------- -----
(1,273) --
------- -----
$ 2,415 $ 468
======= =====
The components of income (loss) before income tax provision are as follows
(in thousands):
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
------------------------
Domestic income (loss)............................ $5,190 $1,281 $(1,924)
Foreign income.................................... 1,709 447 35
------- ------- --------
Income (loss) before provision for income taxes... $6,899 $1,728 $(1,889)
======= ======= ========
The tax provision is reconciled to the amount computed using the federal
statutory rate is as follows (in thousands):
DECEMBER 31,
---------------------
1996 1995 1994
------- ----- -----
Federal statutory tax provision (benefit)............. $ 2,345 $ 588 $(642)
State taxes, net of federal benefit................... 397 60 --
Future benefits not currently recognized.............. (1,100) 491 642
Utilization of tax loss and credit carryforward....... (130) (710) --
Foreign taxes......................................... 596 -- --
Other................................................. 307 39 --
------- ----- -----
$ 2,415 $ 468 $ --
======= ===== =====
F-15
DOCUMENTUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based on available evidence, that some portion or all
of the deferred assets will not be realized. Based on a revaluation of the
realizability of future tax benefits based on income earned in 1996, creating
available tax carrybacks, the Company released $944,000 of the previously
established valuation allowance during 1996. The significant components of the
Company's deferred tax assets, that were included in current other assets and
other assets on the Balance Sheet, are as follows (in thousands):
DECEMBER 31,
------------
1996 1995
------ -----
Deferred tax assets:
Reserves and accruals........................................ $1,067 $ 944
Tax credit carryforwards..................................... 206 --
------ -----
1,273 944
Less deferred tax asset valuation allowance.................... -- (944)
------ -----
$1,273 $ --
====== =====
F-16
DOCUMENTUM, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts (in thousands):
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- -------------- ---------
Year Ended December 31, 1994.... $180 $337 $ 6 $ 511
Year Ended December 31, 1995.... $511 $243 $107 $ 647
Year Ended December 31, 1996.... $647 $672 $250 $1,069
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
(1)3.1 Registrant's Amended and Restated Certificate of Incorporation
(2)3.2 Registrant's Amended and Restated Bylaws.
4.1 Reference is made to Exhibits 3.1 and 3.2
(2)4.2 Specimen stock certificate
(2)4.3 Amended and Restated Investor Rights Agreement, dated September 20,
1994, between the Registrant and certain investors.
(2)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.
(1)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 June 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.
(2)10.10 Business Loan Agreement, dated December 23, 1993, between the
Registrant and Silicon Valley Bank.
(2)10.11 Promissory Note and Loan modification Agreement, dated October 21,
1994 between the Registrant and Silicon Valley Bank.
(2)10.12 Loan Modification Agreement, dated July 27, 1995, between the
Registrant and Silicon Valley Bank.
Y(2)10.13 International Distributor Agreement, dated December 8, 1993, between
the Registrant and Xerox Canada Ltd.
Y(2)10.14 Agreement for the Supply of Services, dated April 5, 1995, between
the Registrant and Rank Xerox Limited.
(2)10.15 Series C Stock Purchase Agreement, dated September 20, 1994, between
the Registrant and certain other parties named therein.
(2)10.16 Promissory Note and Loan Modification Agreement, dated November 10,
1995, between the Registrant and Silicon Valley Bank.
Y(3)10.17 Services Partner Agreement, dated April 1, 1996, between the
Registrant and Xerox Corporation.
(4)10.18 Registrant's 1996 Non-Officer Equity Incentive Plan.
10.19 Letter of Agreement, dated December 9, 1996 between the Registrant
and Mark S. Garrett.
10.20 Lease agreement between Registrant and Britannia Hacienda IV Limited
Partnership.
11.1 Statement Regarding computation of Earnings Per Share.
(2)22.1 List of Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney. Reference is made to the Signature page.
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.