SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one):
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the quarter ended March 31, 1998
or
Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from _________________ to ____________________.
Commission File Number 000-22841
---------
MARCAM SOLUTIONS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3371621
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
95 Wells Avenue
Newton, Massachusetts 02159
- --------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (617) 965-0220
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, as of May 11, 1998, was 7,574,192 shares.
<PAGE>
MARCAM SOLUTIONS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at March 31, 1998 and
September 30, 1997
Consolidated Statements of Operations (unaudited) for the three
and six months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) for the six
months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE>
PART I.
ITEM 1. FINANCIAL STATEMENTS
MARCAM SOLUTIONS, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
--------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 24,760 $ 26,474
Short-term investments 7,530 11,503
Accounts receivable, net of allowances of $2,133 at March 31, 1998
and $2,037 at September 30, 1997 24,576 24,273
Prepaid expenses and other current assets 6,745 6,639
--------- ---------
Total current assets 63,611 68,889
--------- ---------
Property and equipment, net 6,446 6,224
Computer software costs, net 1,652 2,475
Other assets 214 281
--------- ---------
Total assets $ 71,923 $ 77,869
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,024 $ 4,142
Accrued expenses and other current liabilities 30,397 29,457
Deferred revenue 18,573 22,396
--------- ---------
Total current liabilities 53,994 55,995
--------- ---------
Long-term debt 244 318
Deferred income taxes 53 694
--------- ---------
Total liabilities 54,291 57,007
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized -- --
Common stock, $.01 par value; 30,000 shares authorized; 7,552 and 7,457
shares issued and outstanding at March 31, 1998 and September 30, 1997 76 75
Additional paid-in capital 143,317 142,766
Accumulated deficit (124,395) (121,072)
Cumulative translation adjustment (1,366) (907)
--------- ---------
Total stockholders' equity 17,632 20,862
--------- ---------
Total liabilities and stockholders' equity $ 71,923 $ 77,869
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
MARCAM SOLUTIONS, INC.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
License $ 14,171 $ 17,815 $ 25,645 $ 38,084
Services 16,878 25,989 33,512 51,467
---------- ---------- ---------- ----------
Total revenues 31,049 43,804 59,157 89,551
---------- ---------- ---------- ----------
Operating expenses:
Cost of license revenues 912 3,999 2,017 8,676
Cost of services revenues 11,667 14,533 23,421 29,118
Selling and marketing 9,312 18,395 18,848 36,757
Product development 7,901 8,115 15,385 15,679
General and administrative 1,568 2,363 3,094 4,316
---------- ---------- ---------- ----------
Total operating expenses 31,360 47,405 62,765 94,546
---------- ---------- ---------- ----------
Operating loss (311) (3,601) (3,608) (4,995)
Interest and other income 886 293 1,585 615
Interest and other expense (55) (1,013) (200) (2,035)
---------- ---------- ---------- ----------
Income (loss) before income tax expense 520 (4,321) (2,223) (6,415)
Income tax expense (500) (1,000) (1,100) (2,001)
---------- ---------- ---------- ----------
Net income (loss) $ 20 $ (5,321) $ (3,323) $ (8,416)
========== ========== ========== ==========
Basic and diluted income (loss) per share $ 0.00 $ (0.92) $ (0.44) $ (1.46)
========== ========== ========== ==========
Weighted average number of basic
shares outstanding 7,527 5,741 7,505 5,730
Weighted average number of diluted
shares outstanding 7,621 5,741 7,505 5,730
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
MARCAM SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,323) $ (8,416)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 2,705 9,074
Provision for bad debts 792 1,481
Deferred income taxes (23) 63
Changes in operating assets and liabilities:
Accounts receivable (1,289) 820
Prepaid expenses and other assets 31 155
Accounts payable 971 (2,677)
Accrued expenses and other current liabilities 298 (3,498)
Deferred revenue (3,480) 8,440
---------- ----------
Net cash provided by (used for) operating activities (3,318) 5,442
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (2,226) (2,149)
Additions to computer software costs -- (5,199)
Proceeds from sale of short-term investments 3,973 --
---------- ----------
Net cash provided by (used for) investing activities 1,747 (7,348)
---------- ----------
Cash flows from financing activities:
Principal payments on capital lease obligations (79) (263)
Proceeds from stock option exercises 375 240
Common stock issued under Employee Stock Purchase Plan 177 427
---------- ----------
Net cash provided by financing activities 473 404
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (616) (268)
---------- ----------
Net decrease in cash and cash equivalents (1,714) (1,770)
Cash and cash equivalents at beginning of period 26,474 21,817
---------- ----------
Cash and cash equivalents at end of period $ 24,760 $ 20,047
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
Marcam Solutions, Inc.
Notes to Consolidated Financial Statements
(unaudited)
(1) Reporting Entity
----------------
On July 29, 1997, Marcam Corporation spun off in a tax-free distribution
the portion of its business relating to its PRISM, Protean and Avantis product
lines. In connection with the distribution, Marcam Corporation transferred to
Marcam Solutions, Inc. ("Marcam Solutions" or the "Company"), at that time a new
wholly owned subsidiary of Marcam Corporation, substantially all of the
business, assets and liabilities relating to its PRISM, Protean and Avantis
product lines and an aggregate of $39.0 million in cash in exchange for (i) the
assumption by Marcam Solutions of certain liabilities and obligations relating
to the business to be conducted by Marcam Solutions, (ii) a number of shares of
common stock of Marcam Solutions sufficient for Marcam Corporation to make the
distribution and (iii) warrants to purchase an aggregate of 500,000 shares of
common stock of Marcam Solutions. Marcam Corporation distributed all of its
ownership interest in Marcam Solutions by means of a distribution on July 29,
1997 to its stockholders of record on July 23, 1997 (the "Distribution"). In the
Distribution, each stockholder of Marcam Corporation received one share of
Marcam Solutions common stock for each two shares of Marcam Corporation common
stock held and five shares of Marcam Solutions common stock for each share of
Marcam Corporation preferred stock held. In connection with the Distribution,
Marcam Corporation changed its name from "Marcam Corporation" to "MAPICS, Inc."
("MAPICS").
Although the common stock of Marcam Solutions was distributed to Marcam
Corporation's shareholders, the Distribution was recorded for accounting
purposes as a disposal of the business conducted by MAPICS, due to the relative
significance of the business conducted by Marcam Solutions. The financial
statements of Marcam Solutions for reporting periods after the Distribution
reflect the Distribution as a disposal of the business conducted by MAPICS and
have not been restated to remove the effects of the prior operating results of
the MAPICS business. The financial statements of Marcam Solutions for periods
prior to the Distribution correspond to the historical consolidated financial
statements of Marcam Corporation.
Marcam Corporation and Marcam Solutions entered into various agreements
providing for the separation of the product lines and governing various ongoing
relationships between MAPICS and Marcam Solutions after the Distribution,
including a distribution agreement, a general services agreement and a tax
sharing agreement.
(2) Interim Financial Statements
----------------------------
The accompanying unaudited consolidated financial statements of Marcam
Solutions in this Form 10-Q have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"Commission"). As permitted by the rules of the Commission applicable to
quarterly reports on Form 10-Q, these notes are condensed and do not contain all
disclosures required by generally accepted accounting principles. In the opinion
of management, these financial statements contain all adjustments (consisting of
only normal, recurring adjustments) necessary to present fairly the Company's
financial position, results of operations and cash flows as of the dates and for
the periods indicated. While management believes that the disclosures presented
are adequate to make these financial statements not misleading, these financial
statements should be read in conjunction with Marcam Solutions' audited
financial statements and related notes included in the Marcam Solutions Annual
Report on Form 10-K for the fiscal year ended September 30, 1997.
The results of operations for the three and six months ended March 31,
1998 are not necessarily indicative of the results to be expected for the full
year.
6
<PAGE>
Marcam Solutions, Inc.
Notes to Consolidated Financial Statements
(unaudited)
(3) Basic and diluted earnings per share
------------------------------------
The Company computes basic and diluted earnings per share ("EPS") in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share", which the Company adopted on October 1, 1997. Basic earnings per
share is based upon the weighted average number of common shares outstanding
during the period. Diluted earnings per share is based upon the weighted average
number of common shares outstanding during the period plus additional weighted
average common equivalent shares outstanding during the period. Common
equivalent shares have been excluded from the computation of diluted loss per
share for the three- and six-month periods ended March 31, 1997 and the six-
month period ended March 31, 1998, respectively, as their effect would have been
anti-dilutive. Common equivalent shares result from the assumed exercise of
outstanding stock options and warrants, the proceeds of which are then assumed
to have been used to repurchase outstanding common stock using the treasury
stock method. The following table reconciles the numerator and denominator of
the basic and diluted earnings per share computations shown on the Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
March 31, March 31,
-------------------------- ------------------------
1998 1997 1998 1997
-------- --------- --------- --------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
BASIC EPS
Numerator:
Net income (loss) $ 20 $(5,321) $(3,323) $(8,416)
------ ------- ------- -------
Denominator:
Common shares outstanding 7,527 5,741 7,505 5,730
------ ------- ------- -------
Basic EPS $ 0.00 $ (0.92) $ (0.44) $ (1.46)
====== ======= ======= =======
DILUTED EPS
Numerator:
Net income (loss) $ 20 $(5,321) $(3,323) $(8,416)
------ ------- ------- -------
Denominator:
Common shares outstanding 7,527 5,741 7,505 5,730
Incremental shares from assumed
conversion of stock options 94 0 0 0
------ ------- ------- -------
Adjusted common shares
outstanding 7,621 5,741 7,505 5,730
------ ------- ------- -------
Diluted EPS $ 0.00 $ (0.92) $ (0.44) $ (1.46)
====== ======= ======= =======
</TABLE>
Options and warrants to purchase 218,036, 150,429 and 182,398 shares of
common stock outstanding during the three and six months ended March 31, 1997
and the six months ended March 31, 1998, respectively, and 1,625,000 common
shares issuable upon the conversion of preferred stock during the three and six
months ended March 31, 1997, were excluded from the calculation of diluted
earnings per share because the effect of their inclusion would have been
anti-dilutive. Options and warrants to purchase 2,189,946 shares of common stock
during the three months ended March 31, 1998 were excluded from the calculation
of diluted earnings per share because the exercise prices of those options and
warrants exceeded the average market price of common stock for the period
reported.
7
<PAGE>
Marcam Solutions, Inc.
Notes to Consolidated Financial Statements
(unaudited)
For purposes of computations of basic and diluted earnings per share, the
distribution of one share of Marcam Solutions common stock for each two shares
of Marcam Corporation common stock in connection with the Distribution was
reflected as a 2-for-1 reverse stock split occurring on July 29, 1997.
Accordingly, historical basic and diluted loss per share and the corresponding
weighted average shares outstanding have been restated to present this stock
split.
(4) Commitments and Contingencies
-----------------------------
The Company is subject to legal proceedings and claims which arise in the
normal course of business. While the outcome of these matters cannot be
predicted with certainty, management does not believe the outcome of any of
these legal matters will have a material adverse effect on the Company's future
financial position or results of operations.
Pursuant to the tax sharing agreement between Marcam Solutions and Marcam
Corporation (renamed MAPICS, Inc.), Marcam Solutions is generally responsible
for certain state and local non-income taxes and certain foreign income taxes
for periods ending on or before the date of the Distribution. MAPICS is
responsible for all other taxes for such periods, including any taxes arising
out of the Distribution.
(5) Recently Enacted Accounting Standards
-------------------------------------
In March 1998, Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was
issued which provides guidance on applying generally accepted accounting
principles in accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998, and will result in the
capitalization of certain qualifying costs incurred in the development of
software for internal use. The Company will adopt the guidelines of SOP 98-1 as
of October 1, 1999 and its adoption is not expected to have a material impact on
the Company's financial position and results of operations.
(6) Selected Pro Forma Financial Information
----------------------------------------
The following unaudited pro forma financial information for the three- and
six-month periods ended March 31, 1997 reflects how the disposition of the
MAPICS business (see Note 1) might have affected the statement of operations if
the disposition had occurred on October 1, 1996. The pro forma financial
information is presented as if Marcam Solutions had been operated as a separate
entity, principally by deducting the operating results of MAPICS from the
historical consolidated operating results of Marcam Corporation. The pro forma
data is for informational purposes only and may not necessarily reflect future
results of operations or what the results of operations would have been had
Marcam Solutions been operated as a separate entity. Actual results for the
three- and six-month periods ended March 31, 1998 have been presented for
comparative purposes.
8
<PAGE>
Marcam Solutions, Inc.
Notes to Consolidated Financial Statements
(unaudited)
Pro Forma Results of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
---------- ---------- ---------- ---------
Actual Pro Forma Actual Pro Forma
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
License $ 14,171 $ 6,764 $ 25,645 $ 12,756
Services 16,878 16,254 33,512 32,630
---------- ---------- ---------- --------
Total revenues 31,049 23,018 59,157 45,386
---------- ---------- ---------- --------
Operating expenses:
Cost of license revenues 912 2,428 2,017 4,547
Cost of services revenues 11,667 11,081 23,421 22,510
Selling and marketing 9,312 10,639 18,848 20,310
Product development 7,901 5,634 15,385 10,710
General and administrative 1,568 1,616 3,094 2,876
---------- ---------- ---------- --------
Total operating expenses 31,360 31,398 62,765 60,953
---------- ---------- ---------- --------
Operating loss (311) (8,380) (3,608) (15,567)
Other income (expense), net 831 (720) 1,385 (1,420)
---------- ---------- ---------- --------
Income (loss) before income tax expense 520 (9,100) (2,223) (16,987)
Income tax expense (500) (832) (1,100) (1,712)
---------- ---------- ---------- --------
Net income (loss) $ 20 $ (9,932) $ (3,323) $(18,699)
========== ========== ========== ========
Basic and diluted income (loss) per share $ 0.00 $ (1.73) $ (0.44) $ (3.26)
========== ========== ========== ========
Weighted average number of basic
shares outstanding 7,527 5,741 7,505 5,730
Weighted average number of diluted
shares outstanding 7,621 5,741 7,505 5,730
</TABLE>
Historical weighted average shares outstanding and loss per share have been
restated for the Distribution, which has been presented, in part for accounting
purposes, as a 2-for-1 reverse stock split occurring on July 29, 1997 (see
Note 3).
9
<PAGE>
PART I.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, fluctuations
in quarterly results, particularly resulting from lengthy sales cycles, the
variable size and timing of the Company's transactions with customers and
relatively fixed expenses in the short term; successful development and
enhancement of the Company's products; demand for and market acceptance of the
Company's products; availability of funds for the continued financing of the
Company's operations and development activities; the proportion of revenues
attributable to license fees versus services fees; and the highly competitive
nature of the Company's markets. Further information on potential factors that
could affect the Company's financial results are included in filings made by the
Company from time to time with the Securities and Exchange Commission, included
in the section entitled "Factors Affecting Future Performance" contained in the
Marcam Solutions, Inc. Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (File No. 0-22841).
Overview
- --------
On July 29, 1997, Marcam Corporation spun off in a tax-free distribution
the portion of its business relating to its PRISM, Protean and Avantis product
lines. In connection with the distribution, Marcam Corporation transferred to
Marcam Solutions, Inc. ("Marcam Solutions"), at that time a wholly owned
subsidiary of Marcam Corporation, substantially all of the business, assets and
liabilities relating to its PRISM, Protean and Avantis product lines and an
aggregate of $39.0 million in cash in exchange for (i) the assumption by Marcam
Solutions of certain liabilities and obligations relating to the business to be
conducted by Marcam Solutions, (ii) a number of shares of common stock of Marcam
Solutions sufficient for Marcam Corporation to make the distribution and (iii)
warrants to purchase an aggregate of 500,000 shares of common stock of Marcam
Solutions. Marcam Corporation distributed all of its ownership interest in
Marcam Solutions by means of a distribution on July 29, 1997 to its stockholders
(the "Distribution"). In connection with the Distribution, Marcam Corporation
changed its name from "Marcam Corporation" to "MAPICS, Inc." ("MAPICS").
Although the common stock of Marcam Solutions was distributed to Marcam
Corporation's shareholders, the Distribution was recorded for accounting
purposes as a disposal of the business conducted by MAPICS, due to the relative
significance of the business conducted by Marcam Solutions. The financial
statements of Marcam Solutions for reporting periods after the Distribution
reflect the Distribution as a disposal of the business conducted by MAPICS and
were not restated to remove the effects of the prior operating results of the
MAPICS business. The financial statements of Marcam Solutions for periods prior
to the Distribution correspond to the historical consolidated financial
statements of Marcam Corporation.
Marcam Solutions develops, globally markets, implements and supports
enterprise resource planning software components designed for process plant
operations. The Company's mission is to provide process manufacturing companies
with specialized, agile, business solutions that enable them to continuously
improve their plant operations while realizing low total cost of ownership. The
Company's products offer comprehensive business planning and control solutions
to customers' production, logistics, asset management and financial
requirements.
The Company's revenues have historically been derived from licensing its
Protean, PRISM, Avantis and MAPICS product lines. The Protean product line,
which utilizes advanced object technology, tools and databases, is platform
independent. The PRISM and MAPICS product lines provide customer solutions on
the IBM AS/400 platform. The Avantis product line provides customer solutions on
both the IBM AS/400 and open systems, utilizing object technology.
10
<PAGE>
Marcam Solutions also derives revenues from the sale of product support and
related services. Product support is offered to license customers generally
based on agreements that are billed annually, with revenues recognized on a
ratable basis during the contract period. Services include assisting with
customer implementation of licensed software, providing custom programming and
system integration services, and providing educational material and instruction
in the use of licensed software.
For the quarter ended March 31, 1998, the Company recorded net income of
$20,000, with an operating loss of $311,000. These results represent progress
made during recent quarters to increase revenues while holding expenses
relatively steady, as discussed further below. The Company's expenditures during
the quarter, particularly the continued investment in Protean development and
the Company's sales and marketing channels, continued to be higher than the
related revenue generated, resulting in the small operating loss for the
quarter.
On a pro forma basis, excluding the results of the MAPICS business which
for accounting purposes was divested on July 29, 1997, revenues for the three
months ended March 31, 1998 increased 34.9% compared to the same period in 1997,
driven by a 109.5% increase in license revenues. While operating expenses
remained flat during the comparable periods, the resulting operating loss for
the three months ended March 31, 1998 was $311,000, compared to a pro forma
operating loss of $8,380,000 for the same period in 1997.
The Company is maintaining its focus on the cost control measures put in
place over the past several quarters. These efforts have resulted in reduced
costs throughout the Company. In addition to these cost controls, the Company
continues to undertake a number of actions designed to increase revenues,
including introducing enhanced versions of its Protean and Avantis.Pro products
designed to make them more competitive and refocusing its sales and marketing
efforts. The Company continues to invest in distribution channel and marketing
capabilities by hiring new sales and marketing personnel. In addition, the
Company is investing not only in the translation of its software into additional
foreign languages, but also in the integration of its software with a number of
third-party software packages. Management expects this investment will result in
additional markets for the Company's products. While the Company has seen
incremental increases in revenues over the past several quarters, management
believes continued increases in license revenues, especially Protean license
revenues, are required to offset the costs of growing the distribution channel
and funding development, translation and integration activities related to the
Protean product line. There can be no assurances these actions will result in
increased revenues or, when combined with cost control measures, they will
result in operating profitability or positive cash flows from operations.
Failure to achieve operating profitability or to generate positive cash flows
from operations would materially and adversely affect Marcam Solutions'
financial condition.
11
<PAGE>
Results of Operations
- ---------------------
Except for the information provided under the caption "Selected Pro Forma
Results of Operations" which gives effect to the Distribution, the following
discussion and analysis includes historical results relating to the MAPICS
business for the three and six months ended March 31,1997. Only the selected
pro forma information reflects Marcam Solutions as if it had been operated as a
separate entity during those periods.
Revenues
- --------
Total revenues decreased 29.1% to $31,049,000 for the three-month period
ended March 31, 1998, as compared to $43,804,000 for the three-month period
ended March 31, 1997. For the six-month period ended March 31, 1998, total
revenues decreased 33.9% to $59,157,000, as compared to $89,551,000 in the same
period of 1997. License revenues decreased 20.4% to $14,171,000 for the three-
month period ended March 31, 1998, as compared to $17,815,000 for the three-
month period ended March 31, 1997. For the six-month period ended March 31,
1998, license revenues decreased 32.7%, to $25,645,000, as compared to
$38,084,000 for the same period in 1997. The decrease in license revenues for
the three- and six-month periods ended March 31, 1998, as compared to the same
periods in 1997, was primarily due to the absence of MAPICS license revenues for
the three and six months ended March 31, 1998, as compared to $11,051,000 and
$25,328,000 in MAPICS license revenues for the three and six months ended March
31, 1997, respectively. This decrease was partially offset by significantly
increased license revenue from the Protean product line, and to a lesser extent,
increases in revenue from the PRISM and Avantis product lines.
Services revenues decreased 35.1% to $16,878,000 for the three-month period
ended March 31, 1998, as compared to $25,989,000 for the three-month period
ended March 31, 1997. Service revenues for the six-month period ended March 31,
1998 decreased 34.9% to $33,512,000 in 1998, as compared to $51,467,000 for the
same period in 1997. The decrease in services revenues was primarily due to the
lack of MAPICS service revenues for the three and six months ended March 31,
1998, as compared to MAPICS service revenues of $9,735,000 and $18,837,000 for
the three and six months ended March 31, 1997, respectively. Total customer
support revenues and implementation consulting and customization revenues for
all non-MAPICS product lines for the three and six months ended March 31, 1998
was slightly higher than related revenues during the same period in 1997.
Cost of License Revenues
- ------------------------
Cost of license revenues represented 6.4% and 7.9% of license revenues for
the three- and six-month periods ended March 31, 1998, respectively, as
compared to 22.4% and 22.8% for the same periods in 1997, respectively. The
decrease in cost of license revenues as a percentage of license revenues for the
three- and six-month periods ended March 31, 1998, as compared to the same
periods in 1997, was primarily due to decreased amortization of capitalized
software translation costs and decreased amortization of capitalized software
development costs related to the MAPICS and Protean products. In the third
quarter of fiscal 1997, capitalized software assets related to the Protean and
Avantis.Pro product lines were written-off as a result of an assessment of net
realizable value. Management expects amortization costs for the remainder of
fiscal 1998 to be lower than in comparable prior periods. In addition to the
decrease in amortization costs, a portion of the percentage decrease in cost of
license revenues was attributable to a decrease in product royalties as a result
of the absence of MAPICS revenues following the Distribution.
Cost of Services Revenues
- -------------------------
Cost of services revenues represented 69.1% and 69.9% of services revenues
for the three- and six-month periods ended March 31, 1998, respectively, as
compared to 55.9% and 56.6% for the same periods in 1997, respectively. The
increase in cost of services revenues as a percentage of services revenues for
the three- and six-month periods ended March 31, 1998, as compared to the same
period in 1997, was the result of a decrease in the proportion of support
revenues as a percentage of total services revenues, as support revenues
typically provide better margins than the Company's other services.
12
<PAGE>
Selling and Marketing
- ---------------------
Selling and marketing expenses decreased $9,083,000, or 49.4%, for the
three-month period ended March 31, 1998, as compared to the same period in 1997.
These expenses decreased $17,909,000, or 48.7%, for the six-month period ended
March 31, 1998, as compared to the same period in 1997. These decreases were
primarily related to the lack of MAPICS related expenses in the three and six
months ended March 31, 1998.
Product Development
- -------------------
Gross research and product development expenditures for the three-month
period ended March 31, 1998 were $7,901,000 as compared to $10,759,000 for the
same period in 1997. These expenditures were $15,385,000 for the six months
ended March 31, 1998, as compared to $20,878,000 for the six months ended March
31, 1997. The decrease in gross research and product development expenditures
for the three and six months ended March 31, 1998, as compared to the same
periods in 1997, was due to the lack of expenses related to the MAPICS product
line, and a decrease in spending on the PRISM product line. The decrease in
gross research and development spending was partially offset by an increase in
development costs for the Protean product line and costs incurred to integrate
the Company's products with various third-party software products.
No computer software development costs were capitalized during the three-
and six-month periods ended March 31, 1998. Computer software costs capitalized
during the three- and six-month periods ended March 31, 1997 totaled $2,644,000
and $5,199,000, respectively, representing 24.6% and 24.9% of gross research and
development expenditures, respectively. Capitalization of Protean and
Avantis.Pro development and translation costs ceased during the third fiscal
quarter of 1997, as discussed above.
As a result, product development expenses were $7,901,000 and $15,385,000
for the three- and six-month periods ended March 31, 1998, respectively,
representing 25.4% and 26.0% of total revenues, respectively. For the three- and
six-month periods ended March 31, 1997, product development expenses were
$8,115,000 and $15,679,000, respectively, representing 18.5% and 17.5% of total
revenues, respectively. The increase in product development expenses as a
percentage of revenues, as compared to the same periods in 1997, was primarily
related to the continuing investment in the Company's Protean product lines and
having no costs qualifying for capitalization. The percentage increase in
product development expenses as a percentage of revenues was also attributable
to the decrease in total revenues for the three- and six-month periods ended
March 31, 1998, as compared to the same periods in 1997.
General and Administrative
- --------------------------
General and administrative expenses, which include the Company's finance,
accounting and corporate administrative functions, decreased by $795,000 and
$1,222,000 for the three- and six-month periods ended March 31, 1998,
respectively, as compared to the same periods in 1997. The decrease was due to
the absence of expenses related to the MAPICS business in the three and six
months ended March 31, 1998.
Interest and Other Income
- -------------------------
Interest and other income increased $593,000 and $970,000 for the three-
and six-month periods ended March 31, 1998, respectively, as compared to the
same periods in 1997. This increase was primarily related to interest earned on
significantly higher cash and short-term investment balances during the 1998
periods as compared to the 1997 periods, as well as gains resulting from
beneficial changes in foreign currency rates.
Interest and Other Expense
- --------------------------
Interest and other expense decreased $958,000 and $1,835,000 for the three-
and six-month periods ended March 31, 1998, respectively, as compared to the
same periods in 1997. This decrease was due to the repayment of all of the
Company's long-term debt during the fourth quarter of fiscal 1997.
13
<PAGE>
Provision for Income Taxes
- --------------------------
The income tax expense for the three- and six-month periods ended March
31, 1998 was $500,000 and $1,100,000, respectively. The income tax expense for
the three- and six-month periods ended March 31, 1997 was $1,000,000 and
$2,001,000, respectively. The expense in each period was primarily due to
foreign withholding taxes and income taxes on income generated in foreign
jurisdictions, for which U.S. tax credit utilization is currently uncertain.
There was no tax benefit recorded for losses generated in the U.S. during
applicable periods due to the uncertainty of realizing such benefits.
Liquidity and Capital Resources
- -------------------------------
Prior to the Distribution, the Company funded its activities primarily from
cash generated from operations, from borrowings and from equity financings.
Since the time of the Distribution, the Company has funded its activities with
the capital contribution from MAPICS, as described above.
Current assets decreased $5,278,000 during the six-month period ended March
31, 1998, from $68,889,000 at September 30, 1997 to $63,611,000 at March 31,
1998. This decrease was primarily due to lower cash and short-term investment
balances. The decrease in cash is attributable to cash used to fund operating
losses and investments in fixed assets.
Current liabilities decreased $2,001,000 during the six-month period, from
$55,995,000 at September 30, 1997 to $53,994,000 at March 31, 1998. The decrease
was primarily due to the decrease in deferred revenue, which was partially
offset by an increase in accounts payable and accrued expenses. The decrease in
deferred revenues was caused by several factors. The prepayment of certain
license revenues in the fourth quarter of fiscal 1997 caused an increase in
deferred revenues at September 30, 1997. These prepayments have since been
partially recognized as revenue, resulting in a decrease in deferred revenues at
March 31, 1998. This decrease in deferred revenues was partially offset by the
timing of maintenance contract periods, many of which end with the calendar
year. Maintenance contracts for PRISM, Protean and Avantis products typically
run from January to December, with the billing occurring in January. The
revenues from these maintenance contracts are deferred and recognized ratably
over the contract period, resulting in higher deferred revenue balances at March
31, 1998 than at September 30, 1997. The increase in accounts payable is the
result of the timing of cash disbursements at the end of each period, resulting
in additional payments at the end of September as compared to at the end of
March. The increase in accrued expenses was primarily caused by increased
commissions incurred at the end of the quarter related to increased license
revenues. As a result of the decrease in current assets and a smaller decrease
in current liabilities, the Company's working capital surplus decreased by
$3,277,000, from $12,894,000 at September 30, 1997 to $9,617,000 at March 31,
1998.
During the six-month period ended March 31, 1998, operating activities used
approximately $3,318,000 of cash. The use of cash from operating activities
included a decrease in deferred revenues of $3,480,000, a majority of which
resulted from a decrease in advance payments received for license contracts from
September 30, 1997 to March 31, 1998. During the same period, investing
activities provided $3,973,000 from the sale of short-term investments, and used
approximately $2,226,000 of cash for the purchase of fixed assets. Financing
activities during the same period provided $473,000 of cash primarily from
proceeds received from the sale of stock to employees, partially offset by
payments made on capitalized leases.
In fiscal years 1997 and 1996, the Company recorded restructuring and other
charges of $19,175,000 and $10,600,000 respectively. At March 31, 1998, a
balance of $2,744,000 associated with these charges remained in accrued expenses
and is expected to result in cash expenditures. Management believes the
remaining balance is adequate to cover future expenditures associated with these
restructuring charges and expects that the restructuring actions will be
complete by the end of fiscal 1998.
14
<PAGE>
There can be no assurance that the Company will be profitable in the future
or that operating profitability, if achieved, will be sustained. In order to
support the anticipated growth of its business, the Company expects to keep
investing in its marketing, sales and product development activities. The
Company's expenses for these and other activities are based on expectations
regarding future revenues and are fixed to a large extent in the short-term. The
Company may be unable to adjust its spending in a timely manner to compensate
for any unexpected revenue shortfalls.
The Company has used cash during fiscal years 1998, 1997 and 1996 to fund
strategic investments, in particular substantial expenditures for marketing and
selling activities and for new product development, and operating losses. For
the first half of fiscal 1998 and for fiscal years 1997 and 1996 (which included
development expenditures related to the MAPICS product line), the Company's
gross product development expenditures were $15,385,000, $41,864,000, and
$39,913,000, respectively. During the remainder of fiscal year 1998, the Company
intends to continue to make investments in selling and marketing activities and
product development. The Company's objective is to fund these investments
primarily with cash from improved operations and existing cash resources. The
Company's timely ability to generate cash from operations depends upon, among
other things, revenue growth, completion and market acceptance of new products,
success in enhancing and selling its current AS/400-based families of products,
improvements in operating productivity, and payment terms and collection of
accounts receivable.
There can be no assurances that the Company's operations will generate
sufficient cash to finance these activities. Until operations improve to meet
its cash requirements, the Company will need to rely on existing cash resources.
The Company anticipates that cash from operations and its available cash will be
sufficient to fund operations through at least the next twelve months. If,
however, such sources prove insufficient in 1998, or over the longer term, the
Company will be required to make changes in operations or seek additional debt
or equity financing. Management believes that the Company's potential borrowing
capacity is limited to revolving lines of credit with borrowing availability
based on qualifying accounts receivable. There can be no assurances that such a
revolving line of credit or any other additional debt or equity financing will
be available or available with terms acceptable to the Company. The continued
incurrence of operating losses by Marcam Solutions would have a material adverse
affect on Marcam Solutions' business, financial condition and results of
operations.
Selected Pro Forma Results of Operations
- ----------------------------------------
The following discussion and analysis relates to Marcam Solutions on a pro
forma basis, giving effect to the Distribution. The unaudited pro forma
financial information for the three- and six-month periods ended March 31, 1997
is presented as if Marcam Solutions had been operated as a separate entity,
principally by deducting the operating results of MAPICS from the historical
consolidated operating results of Marcam Corporation. The pro forma data is for
informational purposes only and may not necessarily reflect future results of
operations or what the actual results of operations would have been had Marcam
Solutions been operated as a separate entity.
Revenues
- --------
Total revenues increased 34.9% to $31,049,000 for the three-month period
ended March 31, 1998, as compared to $23,018,000 for the three-month period
ended March 31, 1997. Total revenues increased 30.3% to $59,157,000 for the six-
month period ended March 31, 1998, as compared to $45,386,000 for the same
period in 1997. License revenues increased 109.5% to $14,171,000 for the three-
month period ended March 31, 1998, as compared to $6,764,000 for the three-month
period ended March 31, 1997. License revenues increased 101.0% to $25,645,000
for the six-month period ended March 31, 1998, as compared to $12,756,000 for
the same period in 1997. The increase in license revenues for the three- and
six-month periods ended March 31, 1998 as compared to the same periods in 1997,
was primarily due to significantly increased license revenue from the Protean
product line, and to a lesser extent, increases in revenue from the PRISM and
Avantis product lines. The three-month period ended March 31, 1998 was the first
quarter in which license revenues from the Company's Protean products exceeded
revenues derived from it AS/400-based products.
15
<PAGE>
Services revenues increased 3.8% to $16,878,000 for the three-month period
ended March 31, 1998, as compared to $16,254,000 for the three-month period
ended March 31, 1997. Service revenues for the six-month period ended March 31,
1998 increased 2.7% to $33,512,000 in 1998, as compared to $32,630,000 for the
same period in 1997. Customer support revenues and implementation consulting and
customization revenues for the three- and six-month periods ended March 31, 1998
were nearly consistent with revenues during the same period in 1997.
Cost of License Revenues
- ------------------------
Cost of license revenues represented 6.4% and 7.9% of license revenues for
the three- and six-month periods ended March 31, 1998, respectively, as compared
to 35.9% and 35.6% for the same periods in 1997, respectively. The decrease in
cost of license revenues as a percentage of license revenues for the three- and
six-month periods ended March 31, 1998, as compared to the same periods in 1997,
was due to decreased amortization of capitalized software translation costs and
decreased amortization of capitalized software development costs related to the
Protean products. In the third quarter of fiscal 1997, capitalized software
assets related to the Protean and Avantis.Pro product lines were written-off as
a result of an assessment of net realizable value. Management expects
amortization costs for the remainder of fiscal 1998 will be lower than in
comparable prior periods. In addition, the royalty rates associated with
third-party software decreased as a percent of license revenue, due to an
increase in the proportion of Protean license revenues to the overall license
revenues.
Cost of Services Revenues
- -------------------------
Cost of services revenues represented 69.1% and 69.9% of services revenues
for the three- and six-month periods ended March 31, 1998, respectively, as
compared to 68.2% and 69.0% for the same periods in 1997, respectively. This
minor deterioration was primarily related to increased investments in the
Company's service delivery capabilities, primarily related to Protean.
Selling and Marketing
- ---------------------
Selling and marketing expenses decreased $1,327,000, or 12.5%, for the
three-month period ended March 31, 1998, as compared to the same period in 1997.
These expenses decreased $1,462,000, or 7.2%, for the six months ended March 31,
1998, as compared to the same period in 1997. The decrease was primarily related
to the cost controls discussed above, which were partially offset by increased
sales commissions related to increased revenues during the periods.
Product Development
- -------------------
Gross research and product development expenditures for the three-month
period ended March 31, 1998 were $7,901,000, as compared to $7,089,000 for the
same period in 1997. These expenditures were $15,385,000 for the six months
ended March 31, 1998, as compared to $13,522,000 for the six months ended March
31, 1997. The increase in gross research and product development expenditures
for the three and six months ended March 31, 1998, as compared to the same
periods in 1997, is primarily due to increased development costs for the Protean
product line and costs incurred to integrate the Company's products with various
third-party software products.
No computer software development costs were capitalized for the three- and
six-month periods ended March 31, 1998. Computer software costs capitalized
during the three- and six-month periods ended March 31, 1997 were $1,455,000
and $2,812,000, respectively, representing 20.5% and 20.8% of gross research and
development expenditures, respectively. Capitalization of Protean and
Avantis.Pro development and translation costs ceased during the third fiscal
quarter of 1997.
As a result, product development expenses were $7,901,000 and $15,385,000
for the three- and six-month periods ended March 31, 1998, respectively,
representing 25.4% and 26.0% of total revenues, respectively. For the three- and
six-month periods ended March 31, 1997, product development expenses were
$5,634,000 and $10,710,000, representing 24.5% and 23.6% of total revenues,
respectively. The increase in product development expenses as a percentage of
revenues, as compared to the same periods in 1997, was primarily related to the
continuing investment in the Company's Protean product line, as well as the
discontinuance of capitalization of Protean and Avantis.Pro development and
translation costs (as described above) during the third fiscal quarter of 1997.
16
<PAGE>
General and Administrative
- --------------------------
General and administrative expenses, which include the Company's finance,
accounting and corporate administrative functions, decreased by $48,000 for the
three-month period ended March 31, 1998, as compared to the same period in 1997,
and increased $218,000 for the six-month period ended March 31, 1998, as
compared to the same period in 1997. The decrease in the three month period
ended March 31, 1998 was primarily related to head count reductions compared to
the three-month period ended March 31, 1997. The increase during the six-month
period ended March 31, 1998 was related to the fact that certain general and
administrative functions were previously shared between the Company and MAPICS.
As a result, a portion of these costs were previously allocated to MAPICS. Upon
the Distribution, the Company had to maintain most of these previously shared
functions and no longer realized the economies of scale that resulted from being
able to share the functions.
Other Income (Expense), net
- ---------------------------
The net income of other income and other (expense) increased from a net
expense of $720,000 for the three months ended March 31, 1997, to a net income
of $831,000 for the three months ended March 31, 1998. The net income of other
income and other (expense) also increased from a net expense of $1,420,000 for
the six months ended March 31, 1997, to a net income of $1,385,000 for the six
months ended March 31, 1998. These increases were primarily related to interest
earned on significantly higher cash and short-term investment balances during
the 1998 period as compared to the 1997 period, as well as lower interest
expense as the result of the repayment of all of the Company's long-term debt
during the fourth quarter of fiscal 1997, and to a lesser extent, from gains
resulting from beneficial changes in foreign currency rates.
Provision for Income Taxes
- --------------------------
The income tax expense for the three- and six-month periods ended March 31,
1998 was $500,000 and $1,100,000, respectively. The income tax expense for the
three- and six-month periods ended March 31, 1997 was $832,000 and $1,712,000,
respectively. The expense in each period was primarily due to foreign
withholding taxes and income taxes on income generated in foreign jurisdictions,
for which U.S. tax credit utilization is currently uncertain. There was no tax
benefit recorded for losses generated in the U.S. during these periods due to
the uncertainty of realizing such benefits.
17
<PAGE>
PART II.
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
normal course of business. While the outcome of these matters cannot be
predicted with certainty, management does not believe the outcome of any of
these other legal matters will have a material adverse effect on the Company's
future financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on February 25, 1998. Present
in person or by proxy were 6,724,373 shares out of the 7,499,043 shares of the
Common Stock issued and outstanding as of the close of business on the record
date. At such meeting, William O. Grabe and Joseph M. Henson were elected as
Class I directors to the Board of Directors to each serve a three-year term. The
voting for Mr. Grabe was 6,664,163 shares in favor of his election, and 60,210
abstentions. The voting for Mr. Henson was 6,664,508 shares in favor of his
election, and 59,865 abstentions. John Campbell and Paul A. Margolis are Class
II Directors whose term will expire in 1999, and Jonathan C. Crane, Michael J.
Quinlan and Franchon M. Smithson are Class III Directors whose term will expire
in 2000.
The proposal to amend the 1997 Stock Plan to increase the number of shares
of Common Stock which may be issued pursuant to the Plan from 2,500,000 to
2,750,000 was ratified by the stockholders. The vote was 6,189,857 shares voting
in favor of amending the Plan with 508,979 shares voting against amending the
Plan and 25,537 abstentions.
The selection of Coopers & Lybrand L.L.P. by the Board of Directors as the
Company's auditors for the fiscal year ending September 30, 1998 was ratified by
the stockholders. The vote was 6,716,720 shares in favor of their selection and
2,389 shares voting against their selection and 5,264 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
18
<PAGE>
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.
MARCAM SOLUTIONS, INC.
May 15, 1998 /s/ Denis E. Liptak
- ------------ ---------------------
Date Denis E. Liptak
Chief Financial Officer
(Principal Financial and Accounting
Officer)
19
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 24,760
<SECURITIES> 7,530
<RECEIVABLES> 26,709
<ALLOWANCES> 2,133
<INVENTORY> 0
<CURRENT-ASSETS> 63,611
<PP&E> 24,224
<DEPRECIATION> 17,778
<TOTAL-ASSETS> 71,923
<CURRENT-LIABILITIES> 53,994
<BONDS> 244
0
0
<COMMON> 76
<OTHER-SE> 17,556
<TOTAL-LIABILITY-AND-EQUITY> 71,923
<SALES> 25,645
<TOTAL-REVENUES> 59,157
<CGS> 2,017
<TOTAL-COSTS> 25,438
<OTHER-EXPENSES> 15,385
<LOSS-PROVISION> 792
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> (2,223)
<INCOME-TAX> 1,100
<INCOME-CONTINUING> (3,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,323)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
