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 December 31, 1997
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 February 10, 1998, was 7,499,693 shares.
<PAGE>
MARCAM SOLUTIONS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1997 and
September 30, 1997
Consolidated Statements of Operations for the three
months ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the three
months ended December 31, 1997 and 1996
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 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>
December 31, September 30,
1997 1997
--------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 18,644 $ 26,474
Short-term investments 11,503 11,503
Accounts receivable, net of allowances of $2,115 at December 31, 1997
and $2,037 at September 30, 1997 25,005 24,273
Prepaid expenses and other current assets 6,848 6,639
----------- -----------
Total current assets 62,000 68,889
----------- -----------
Property and equipment, net 6,108 6,224
Computer software costs, net 2,030 2,475
Other assets 240 281
----------- -----------
Total assets $ 70,378 $ 77,869
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,470 $ 4,142
Accrued expenses and other current liabilities 32,024 29,457
Deferred revenue 16,065 22,396
----------- -----------
Total current liabilities 52,559 55,995
----------- -----------
Long-term debt 250 318
Deferred income taxes 55 694
----------- -----------
Total liabilities 52,864 57,007
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares authorized -- --
Common stock, $.01 par value; 30,000 shares authorized; 7,498 and 7,457 shares
issued and outstanding at December 31, 1997 and September 30, 1997 75 75
Additional paid-in capital 143,018 142,766
Accumulated deficit (124,415) (121,072)
Cumulative translation adjustment (1,164) (907)
----------- -----------
Total stockholders' equity 17,514 20,862
----------- -----------
Total liabilities and stockholders' equity $ 70,378 $ 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 December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Revenues:
License $ 11,474 $ 20,269
Services 16,634 25,478
---------- ----------
Total revenues 28,108 45,747
---------- ----------
Operating expenses:
Cost of license revenues 1,105 4,677
Cost of services revenues 11,754 14,585
Selling and marketing 9,536 18,362
Product development 7,484 7,564
General and administrative 1,526 1,953
---------- ----------
Total operating expenses 31,405 47,141
---------- ----------
Operating loss (3,297) (1,394)
Interest and other income 699 322
Interest and other expense (145) (1,022)
---------- ----------
Loss before income tax expense (2,743) (2,094)
Income tax expense (600) (1,001)
---------- ----------
Net loss $ (3,343) $ (3,095)
========== ==========
Basic and diluted loss per share $ (0.45) $ (0.54)
========== ==========
Weighted average number of
shares outstanding 7,483 5,718
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
MARCAM SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,343) $ (3,095)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 1,376 4,668
Provision for bad debts 382 687
Deferred income taxes (25) 71
Changes in operating assets and liabilities:
Accounts receivable (1,213) 3,387
Prepaid expenses and other assets (48) 445
Accounts payable 391 (778)
Accrued expenses and other current liabilities 1,828 (4,797)
Deferred revenue (6,154) (1,030)
----------- ----------
Net cash used for operating activities (6,806) (442)
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (849) (1,041)
Additions to computer software costs -- (2,553)
----------- ----------
Net cash used for investing activities (849) (3,594)
----------- ----------
Cash flows from financing activities:
Principal payments on capital lease obligations (70) (35)
Proceeds from stock option exercises 252 66
----------- ----------
Net cash provided by financing activities 182 31
----------- ----------
Effect of exchange rate changes on cash and cash equivalents (357) 283
----------- ----------
Net decrease in cash and cash equivalents (7,830) (3,722)
Cash and cash equivalents at beginning of period 26,474 21,817
----------- ----------
Cash and cash equivalents at end of period $ 18,644 $ 18,095
=========== ==========
</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 months ended December 31, 1997 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 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, 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
December 31,
-------------------------------------
1997 1996
---------------- ---------------
(In thousands, except per share data)
<S> <C> <C>
BASIC EPS
Numerator:
Net loss $ (3,343) $ (3,095)
Denominator:
Common shares outstanding 7,483 5,718
-------- ---------
Basic EPS $ (0.45) $ (0.54)
======== =========
DILUTED EPS
Numerator:
Net loss $ (3,343) $ (3,095)
Denominator:
Common shares outstanding 7,483 5,718
-------- ---------
Diluted EPS $ (0.45) $ (0.54)
======== =========
</TABLE>
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.
7
<PAGE>
MARCAM SOLUTIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
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) Selected Pro Forma Financial Information
----------------------------------------
The following unaudited pro forma financial information for the three-month
period ended December 31, 1996 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-month
period ended December 31, 1997 have been presented for comparative purposes.
Pro Forma Results of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
-------------- ---------------
Actual Pro Forma
-------------- ---------------
<S> <C> <C>
Revenues:
License $ 11,474 $ 5,992
Services 16,634 16,376
--------- ----------
Total revenues 28,108 22,368
--------- ----------
Operating expenses:
Cost of license revenues 1,105 2,119
Cost of services revenues 11,754 11,429
Selling and marketing 9,536 9,671
Product development 7,484 5,076
General and administrative 1,526 1,260
--------- ----------
Total operating expenses 31,405 29,555
--------- ----------
Operating loss (3,297) (7,187)
Other income (expense), net 554 (700)
--------- ----------
Loss before income tax expense (2,743) (7,887)
Income tax expense (600) (880)
--------- ----------
Net loss $ (3,343) $ (8,767)
========= ==========
Basic and diluted loss per share $ (0.45) $ (1.53)
========= ==========
Weighted average number of
shares outstanding 7,483 5,718
</TABLE>
8
<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.
9
<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 December 31, 1997, the Company recorded a net loss of
$3,343,000. 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.
On a pro forma basis, excluding the results of the MAPICS business which
for accounting purposes was divested from the Company on July 29, 1997, revenues
for the period increased compared to the same period in 1996, driven by a 91.5%
increase in license revenues. While operating expenses also increased during the
three months ended December 31, 1997, as compared to the same period during
1996, the resulting pro forma operating loss for the three months ended December
31, 1997 was $3,297,000, compared to $7,187,000 for the same period in 1996.
Overall, on a pro forma basis, the Company's revenues were higher and net
operating loss was lower for the three months ended December 31, 1997 than in
any quarter during fiscal 1997.
Cost controls during the fourth quarter of fiscal 1997 and the first
quarter of fiscal 1998 have resulted in benefits and the Company expects to
continue to scrutinize all expenses. 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, including the
expected hiring of several new sales and marketing positions. Management
believes increases in all license revenues, especially Protean license revenues,
are required to offset the costs of maintaining the distribution channel and
development activities related to the Protean product line. There can be no
assurances that these actions will result in increased revenues or that, when
combined with cost controls, they will result in profitability or positive cash
flows from operations. Failure to achieve profitability or positive cash flows
from operations would materially and adversely affect Marcam Solutions'
financial condition.
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 results relating to the MAPICS business for the
three months ended December 31, 1996. Only the selected pro forma information
reflects Marcam Solutions as if it had been operated as a separate entity.
Revenues
- --------
Total revenues decreased 38.6% to $28,108,000 for the three-month period
ended December 31, 1997, as compared to $45,747,000 for the three-month period
ended December 31, 1996. License revenues decreased 43.4% to $11,474,000 for the
three-month period ended December 31, 1997, as compared to $20,269,000 for the
three-month period ended December 31, 1996. The decrease in license revenues for
the three-month period ended December 31, 1997, as compared to the same period
in 1996, was primarily due to the absence of MAPICS license revenues for the
three months ended December 31, 1997, as compared to $14,277,000 in MAPICS
license revenues for the three months ended December 31, 1996. This decrease was
partially offset by increased license revenues from the PRISM, Protean and
Avantis product lines.
Services revenues decreased 34.7% to $16,634,000 for the three-month period
ended December 31, 1997, as compared to $25,478,000 for the three-month period
ended December 31, 1996. The decrease in services revenues was primarily due to
the lack of MAPICS service revenues for the three months ended December 31,
1997, as compared to MAPICS service revenues of $9,102,000 for the three months
ended December 31, 1996. Total customer support revenues and implementation
consulting and customization revenues for all non-MAPICS product lines for the
three-months ended December 31, 1997 was slightly higher than related revenues
during the same period in 1996.
10
<PAGE>
Cost of License Revenues
- ------------------------
Cost of license revenues represented 9.6% of license revenues for the
three-month period ended December 31, 1997, as compared to 23.1% for the same
period in 1996. The decrease in cost of license revenues as a percentage of
license revenues for the three-month period ended December 31, 1997, as compared
to the same period in 1996, was due to decreased amortization of capitalized
software translation costs relating to non-U.S. markets 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 is 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 70.7% of services revenues for the
three-month period ended December 31, 1997, as compared to 57.2% for the same
period in 1996. The increase in cost of services revenues as a percentage of
services revenues for the three-month period ended December 31, 1997, as
compared to the same period in 1996, was the result of a change in the
proportion of support revenues as a percentage of total services revenues.
Selling and Marketing
- ---------------------
Selling and marketing expense decreased $8,826,000, or 48.1%, for the
three-month period ended December 31, 1997, as compared to the same period in
1996. This decrease was primarily related to the lack of MAPICS related expenses
in the three months ended December 31, 1997.
Product Development
- -------------------
Gross research and product development expenditures for the three-month
period ended December 31, 1997 were $7,484,000, as compared to $10,117,000 for
the same period in 1996. The decrease in gross research and product development
expenses for the three months ended December 31, 1997 as compared to the same
periods in 1996 was due to the lack of expenses related to the MAPICS product
line. This decrease in gross research and development spending was partially
offset by an increase in development costs for the Protean product line.
No computer software development costs were capitalized during the
three-month period ended December 31, 1997. Computer software costs capitalized
during the three-month period ended December 31, 1996 totaled $2,553,000,
representing 25.2% of gross research and development expenditures.
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 $7,484,000 for the
three-month period ended December 31, 1997, representing 26.6% of total
revenues. For the three-month period ended December 31, 1996, product
development expenses were $7,564,000, representing 16.5% of total revenues. The
increase in product development expenses as a percentage of revenues, as
compared to the same period in 1996, was primarily related to the continuing
investment in all of the Company's 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-month period ended December 31, 1997 as compared to the same
periods in 1996.
General and Administrative
- --------------------------
General and administrative expenses, which include the Company's finance,
accounting and corporate administrative functions, decreased by $427,000 for the
three-month period ended December 31, 1997, as compared to the same period in
1996. The decrease was due to the absence of expenses related to the MAPICS
business in the three months ended December 31, 1997.
11
<PAGE>
Interest and Other Income
- -------------------------
Interest and other income increased $377,000 for the three-month period
ended December 31, 1997, as compared to the same periods in 1996. This increase
was primarily related to interest earned on significantly higher cash and
short-term investment balances during the 1997 period as compared to the 1996
period.
Interest and Other Expense
- --------------------------
Interest and other expense decreased $877,000 for the three-month period
ended December 31, 1997, as compared to the same period in 1996. This decrease
was due to the repayment of all of the Company's long-term debt during the
fourth quarter of 1997.
Provision for Income Taxes
- --------------------------
The income tax expense for the three-month period ended December 31, 1997
was $600,000. The income tax expense for the three-month period ended December
31, 1996 was $1,001,000. 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.
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 $6,889,000 during the three-month period ended
December 31, 1997, from $68,889,000 at September 30, 1997 to $62,000,000 at
December 31, 1997. This decrease was primarily due to lower cash balances,
partially offset by an increase in accounts receivable. The decrease in cash is
attributable to cash used to fund operating losses and investments in fixed
assets. The increase in accounts receivable is primarily related to increased
license revenues generated late in the first quarter of fiscal 1998 as compared
to the fourth quarter of fiscal 1997.
Current liabilities decreased $3,436,000 during the three-month period,
from $55,995,000 at September 30, 1997 to $52,559,000 at December 31, 1997. The
decrease was primarily due to the decrease in deferred revenue, which was
partially offset by an increase in 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 recognized as
revenue, resulting in a decrease in deferred revenues at December 31, 1997. In
addition, the decrease in deferred revenues also resulted from 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 lower deferred revenue balances at December 31,
1997 than at September 30, 1997. The increase in accrued expenses was primarily
caused by increased commissions accrued 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, working capital surplus decreased by
$3,453,000, from $12,894,000 at September 30, 1997 to $9,441,000 at December 31,
1997.
During the three-month period ended December 31, 1997, operating activities
used approximately $6,806,000 of cash for operating activities and restructuring
and spin-off related expenditures. The use of cash from operating activities
included a decrease in advance payments received for support services and
license contracts of approximately $6,154,000 from September 30, 1997 to
December 31, 1997. During the same period, investing activities used
approximately $849,000 of cash for the purchase of fixed assets. Financing
activities during the same period provided $182,000 of cash primarily from
proceeds received from the sale of stock to employees, partially offset by
payments made on capitalized leases.
12
<PAGE>
In fiscal years 1997 and 1996, the Company recorded restructuring charges
of $19,175,000 and $10,600,000 respectively. At December 31, 1997, a balance of
$3,025,000 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.
There can be no assurance that the Company will be profitable in the future
or that 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 quarter of fiscal 1998 and for fiscal years 1997 and 1996, the
Company's gross product development expenditures were $7,484,000, $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 Marcam Solutions. 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-month period ended December 31, 1996 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 25.7% to $28,108,000 for the three-month period
ended December 31, 1997, as compared to $22,368,000 for the three-month period
ended December 31, 1996. License revenues increased 91.5% to $11,474,000 for the
three-month period ended December 31, 1997, as compared to $5,992,000 for the
three-month period ended December 31, 1996. The increase in license revenues for
the three-month period ended December 31, 1997 as compared to the same period in
1996 was primarily due to increased license revenue from the Protean product
line, and to a lesser extent, to increases in revenue from the PRISM and Avantis
product lines.
13
<PAGE>
Services revenues increased 1.6% to $16,634,000 for the three-month period
ended December 31, 1997, as compared to $16,376,000 for the three-month period
ended December 31, 1996. Customer support revenues and implementation consulting
and customization revenues for the three-month period ended December 31, 1997
were consistent with revenues during the same period in 1996.
Cost of License Revenues
- ------------------------
Cost of license revenues represented 9.6% of license revenues for the
three-month period ended December 31, 1997, as compared to 35.4% for the same
period in 1996. The decrease in cost of license revenues as a percentage of
license revenues for the three-month period ended December 31, 1997 as compared
to the same period in 1996, was due to decreased amortization of capitalized
software translation costs relating to non-U.S. markets 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.
Cost of Services Revenues
- -------------------------
Cost of services revenues represented 70.7% of services revenues for the
three-month period ended December 31, 1997, as compared to 69.8% for the same
period in 1996. 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 expense decreased $135,000, or 1.4%, for the
three-month period ended December 31, 1997, as compared to the same period in
1996. The decrease was primarily related to cost controls, which were partially
offset by increased sales commissions related to increased revenues in the
quarter.
Product Development
- -------------------
Gross research and product development expenditures for the three-month
period ended December 31, 1997 were $7,484,000, as compared to $6,433,000 for
the same period in 1996. The increase in gross research and product development
expenses for the three-months ended December 31, 1997, as compared to the same
period in 1996, is primarily due to increased development costs for the Protean
product line.
No computer software development costs were capitalized for the three-month
period ended December 31, 1997. Computer software costs capitalized during the
three-month period ended December 31, 1996 were $1,357,000, representing 21.1%
of gross research and development expenditures. 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 $7,484,000 for the
three-month period ended December 31, 1997, representing 26.6% of total
revenues. For the three-month period ended December 31, 1996, product
development expenses were $5,076,000, representing 22.7% of total revenues. The
increase in product development expenses as a percentage of revenues, as
compared to the same period in 1996, was primarily related to the continuing
investment in all of the Company's product lines, 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.
General and Administrative
- --------------------------
General and administrative expenses, which include the Company's finance,
accounting and corporate administrative functions, increased by $266,000 for the
three-month period ended December 31, 1997, as compared to the same period in
1996. The increase in the three-month period ended December 31, 1997 was
primarily 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.
14
<PAGE>
Other Income (Expense), net
- ---------------------------
The net income of other income and other (expense) increased $1,254,000 for
the three-month period ended December 31, 1997, as compared to the same period
in 1996, from a net expense of $700,000 for the three-month period ended
December 31, 1996, to a net income of $554,000 in the three-month period ended
December 31, 1997. This increase was primarily related to interest earned on
significantly higher cash and short-term investment balances during the 1997
period as compared to the 1996 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.
Provision for Income Taxes
- --------------------------
The income tax expense for the three-month period ended December 31, 1997
was $600,000. The income tax expense for the three-month period ended December
31, 1996 was $880,000. 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.
15
<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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
16
<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.
February 12, 1998 /s/ Denis E. Liptak
- ----------------------- -------------------
Date Denis E. Liptak
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
<PAGE>
EXHIBIT INDEX
- -------------
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 18,644
<SECURITIES> 11,503
<RECEIVABLES> 27,120
<ALLOWANCES> 2,115
<INVENTORY> 0
<CURRENT-ASSETS> 62,000
<PP&E> 23,193
<DEPRECIATION> 17,085
<TOTAL-ASSETS> 70,378
<CURRENT-LIABILITIES> 52,559
<BONDS> 250
0
0
<COMMON> 75
<OTHER-SE> 17,439
<TOTAL-LIABILITY-AND-EQUITY> 70,378
<SALES> 11,474
<TOTAL-REVENUES> 28,108
<CGS> 1,105
<TOTAL-COSTS> 12,859
<OTHER-EXPENSES> 7,484
<LOSS-PROVISION> 382
<INTEREST-EXPENSE> 145
<INCOME-PRETAX> (2,743)
<INCOME-TAX> 600
<INCOME-CONTINUING> (3,343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,343)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
