<PAGE>
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UNITED STATES
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 quarterly period ended September 30, 1999
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: 0-23999
MANHATTAN ASSOCIATES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2373424
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2300 Windy Ridge Parkway, Suite 700
Atlanta, Georgia 30339
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (770) 955-7070
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 of the issuer's class of capital stock as of November 12,
1999, the latest practicable date, is as follows: 24,216,587 shares of Common
Stock, $0.01 par value per share.
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Form 10-Q
Page 1 of 21
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MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 1999
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Income for the
three months ended September 30, 1999 and 1998
(unaudited) and for the nine months ended September 30,
1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings. 20
Item 2. Changes in Securities and Use of Proceeds. 20
Item 3. Defaults Upon Senior Securities. 20
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 5. Other Information. 20
Item 6. Exhibits and Reports on Form 8-K. 20
Signatures. 21
Form 10-Q
Page 2 of 21
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------- ---------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $13,719 $27,751
Short-term investments........................................................ 19,450 5,012
Accounts receivable, net of allowance for doubtful accounts of $4,650 and
$1,600 at September 30, 1999 and December 31, 1998, respectively............ 23,816 20,806
Deferred income taxes......................................................... 1,251 622
Refundable income taxes....................................................... 413 342
Prepaid expenses and other current assets..................................... 1,026 1,328
------- -------
Total current assets....................................................... 59,675 55,861
Property and equipment, net..................................................... 9,486 7,431
Deferred taxes.................................................................. 285 155
Intangible and other assets..................................................... 4,111 4,328
------- -------
Total assets............................................................... $73,557 $67,775
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities...................................... $ 7,455 $ 8,196
Current portion of capital lease obligations.................................. 138 126
Deferred revenue.............................................................. 9,064 2,978
------- -------
Total current liabilities.................................................. 16,657 11,300
Long-term portion of capital lease obligations.................................. 841 840
Shareholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized, no shares issued
or outstanding at September 30, 1999 and December 31, 1998................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized, 24,131,587 and
23,937,874 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively.............................................. 242 239
Additional paid-in capital.................................................... 53,574 53,305
Retained earnings............................................................. 2,597 3,056
Accumulated foreign currency translation adjustment........................... 30 (7)
Deferred compensation......................................................... (384) (958)
------- -------
Total shareholders' equity................................................. 56,059 55,635
------- -------
Total liabilities and shareholders' equity............................... $73,557 $67,775
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
Form 10-Q
Page 3 of 21
<PAGE>
Item 1. Financial Statements (continued)
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software license....................................... $ 2,753 $ 3,898 $10,285 $ 8,899
Services............................................... 14,488 9,830 38,257 22,283
Hardware............................................... 2,814 2,860 9,502 10,870
------- ------- ------- -------
Total revenue....................................... 20,055 16,588 58,044 42,052
Cost of revenue:
Software license....................................... 599 372 1,175 612
Services............................................... 8,778 4,312 22,362 10,208
Hardware............................................... 2,174 2,038 7,218 8,042
------- ------- ------- -------
Total cost of revenue............................... 11,551 6,722 30,755 18,862
------- ------- ------- -------
Gross margin............................................. 8,504 9,866 27,289 23,190
Operating expenses:
Research and development............................... 2,265 2,058 8,066 5,280
Acquired research and development...................... -- -- -- 1,602
Sales and marketing.................................... 3,235 2,692 11,322 6,013
General and administrative............................. 3,225 1,884 9,499 4,381
------- ------- ------- -------
Total operating expenses............................ 8,725 6,634 28,887 17,276
------- ------- ------- -------
Operating income (loss).................................. (221) 3,232 (1,598) 5,914
Other income, net........................................ 323 442 856 734
------- ------- ------- -------
Income (loss) before income taxes........................ 102 3,674 (742) 6,648
Income tax expense (benefit):
Tax provision as a `C' Corporation...................... 41 1,361 (283) 2,063
Deferred tax adjustment................................. -- -- -- (316)
------- ------- ------- -------
Historical net income (loss)............................. $ 61 $ 2,313 $ (459) $ 4,901
======= ======= ======= =======
Historical basic net income (loss) per share............. $ 0.00 $ 0.10 $ (0.02) $0.22
======= ======= ======= =======
Historical diluted net income (loss) per share........... $ 0.00 $ 0.09 $ (0.02) $0.19
======= ======= ======= =======
Income (loss) before pro forma income taxes.............. 102 3,674 (742) 6,648
Pro forma income tax expense (benefit)................... 41 1,361 (283) 2,978
------- ------- ------- -------
Pro forma net income (loss).............................. $ 61 $ 2,313 $ (459) $ 3,670
======= ======= ======= =======
Pro forma basic net income (loss) per share.............. $ 0.00 $ 0.10 $ (0.02) $0.17
======= ======= ======= =======
Pro forma diluted net income (loss) per share............ $ 0.00 $ 0.09 $ (0.02) $0.14
======= ======= ======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
Form 10-Q
Page 4 of 21
<PAGE>
Item 1. Financial Statements (continued)
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net loss or pro forma net income.................................... $ (459) $ 3,670
Adjustments to reconcile net loss or pro forma net income to net
cash provided by operating activities:
Pro forma income taxes........................................... -- 1,231
Depreciation and amortization.................................... 3,529 1,043
Stock compensation............................................... 124 204
Gain on sale of equipment........................................ (22) --
Acquired research and development................................ -- 1,602
Deferred income taxes............................................ (759) (528)
Accrued interest on note payable to shareholder.................. -- 34
Changes in operating assets and liabilities:
Accounts receivable, net........................................ (2,967) (8,503)
Other assets.................................................... 132 (501)
Accounts payable and accrued liabilities........................ (884) 3,350
Deferred revenue................................................ 6,083 490
-------- --------
Net cash provided by operating activities........................... 4,777 2,092
Investing activities:
Purchase of property and equipment............................... (4,073) (4,582)
Proceeds from the sale of equipment.............................. 22 --
Capitalized software development costs........................... (909) --
Purchase of short-term investments, net.......................... (14,438) (9,005)
Payments in connection with the acquisition of Performance
Analysis Corporation, net of cash acquired..................... -- (1,351)
-------- --------
Net cash used in investing activities............................ (19,398) (14,938)
Financing activities:
Distributions to shareholders.................................... -- (11,720)
Payment of capital lease obligations............................. (138) --
Borrowings under note payable to shareholder..................... -- 900
Repayment of note payable to shareholder......................... -- (1,953)
Proceeds from issuance of common stock........................... 722 48,258
-------- --------
Net cash provided by financing activities............................ 584 35,485
Foreign currency impact on cash.................................. 5 2
-------- --------
Net increase (decrease) in cash and cash equivalents................. (14,032) 22,641
Cash and cash equivalents at beginning of period..................... 27,751 3,194
-------- --------
Cash and cash equivalents at end of period........................... $ 13,719 $ 25,835
======== ========
Supplemental cash flow disclosures:
Issuance of common stock in connection with acquisition of
Performance Analysis Corporation.............................. $ -- $ 1,067
======== ========
Assets acquired under capital lease................................ $ 151 $ --
======== ========
Cash paid for income taxes, net.................................... $ 253 $ 2,118
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
Form 10-Q
Page 5 of 21
<PAGE>
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
these consolidated financial statements contain all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the
financial position at September 30, 1999, the results of operations for the
three and nine month periods ended September 30, 1999 and 1998 and changes in
cash flows for the nine month periods ended September 30, 1999 and 1998. The
interim results for the three month and nine month periods ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year. These statements should be read in conjunction with the Company's
financial statements for the year ended December 31, 1998.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
3. Completion of Initial Public Offering and Conversion
On April 23, 1998, the Company completed its initial public offering (the
"Offering") of its $.01 par value per share common stock (the "Common Stock").
The Company sold 3,500,000 shares of Common Stock, excluding 525,000 shares sold
by certain selling shareholders as part of the underwriters' over-allotment, for
$52,500,000 less issuance costs of approximately $5,242,000.
In connection with the Offering, the assets and liabilities of Manhattan
Associates, LLC ("Manhattan LLC") were contributed to the Company in exchange
for Common Stock (the "Conversion"). Manhattan LLC then distributed the Common
Stock received to its shareholders. Prior to the completion of the Offering,
Manhattan LLC distributed all undistributed earnings, calculated on a tax basis,
to the shareholders of Manhattan LLC. The amount distributed subsequent to
December 31, 1997 and prior to completion of the Offering was approximately
$11,720,000.
Form 10-Q
Page 6 of 21
<PAGE>
4. Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement
of Position No. 98-9, "Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9"). Under SOP 97-2, the Company recognizes software
license revenue when the following criteria are met: (1) a signed contract is
obtained; (2) shipment of the product has occurred; (3) the license fee is fixed
and determinable; (4) collectibility is probable; and (5) remaining obligations
under the license agreement are insignificant. SOP 98-9 requires recognition of
revenue using the "residual method" when (1) there is vendor-specific objective
evidence of the fair values of all undelivered elements in a multiple-element
arrangement that is not accounted for using long-term contract accounting; (2)
vendor-specific objective evidence of fair value does not exist for one or more
of the delivered elements in the arrangement; and (3) all revenue-recognition
criteria in SOP 97-2 other than the requirement for vendor-specific objective
evidence of the fair value of each delivered element of the arrangement are
satisfied. SOP 98-9 was effective for transactions entered into after March 15,
1999, and the Company adopted the residual method for such arrangements at that
time. For those contracts which contain significant future obligations, license
revenue is recognized under the percentage of completion method.
Consulting services are generally billed on an hourly basis and revenue is
recognized as the work is performed. Maintenance revenue from ongoing customer
support is billed in advance for a one year period and recorded as revenue
ratably over the billing period. Hardware revenue is billed and recognized upon
shipment to the customer.
5. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and display of "comprehensive income" and its components. Comprehensive income
for the Company consists of net income and foreign currency translation
adjustments. Total historical comprehensive income was $147,000 for the three
month period ended September 30, 1999 and the historical comprehensive loss was
$422,000 for the nine month period ended September 30, 1999. Total historical
comprehensive income was $2.3 million and $4.9 million for the three month and
nine month periods ended September 30, 1998, respectively.
6. Earnings Per Share
Subsequent to the completion of the Offering, pro forma and historical
basic net income per share is calculated using the weighted average number of
shares outstanding during the period. Pro forma and historical diluted net
income per share is computed on the basis of the weighted average number of
common shares outstanding plus the dilutive effect of outstanding stock options
using the "treasury stock" method.
Prior to the completion of the Offering, pro forma basic net income per
share was computed using pro forma net income divided by (i) the weighted
average number of shares of Common Stock outstanding ("Weighted Shares") for the
period presented and (ii) pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin 1B.3, the number of shares that, at the assumed public
offering price, would yield proceeds in the amount necessary to pay the
shareholder distribution discussed in Note 3 that is not covered by the earnings
for the one year period through the date of distribution ("Distribution
Shares"). Pro forma diluted net income per share was computed using pro forma
net income divided by (i) the Weighted Shares, (ii) the Distribution Shares and
(iii) the treasury stock method effect of common equivalent shares ("CES's")
outstanding for each period presented.
Form 10-Q
Page 7 of 21
<PAGE>
No adjustment is necessary for historical and pro forma net income for net
income per share presentation. The following is a reconciliation of the shares
used in the computation of net income per share:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
----------------------------------- --------------------------------
Basic Diluted Basic Diluted
--------------- --------------- -------------- --------------
Historical Historical
----------------------------------- --------------------------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Weighted Shares........................... 24,112 24,112 23,707 23,707
Effect of CES's........................... -- 1,594 -- 3,292
------ ------ ------ ------
24,112 25,706 23,707 26,999
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Basic Diluted Basic Diluted
--------------- --------------- -------------- --------------
Pro Forma Pro Forma
----------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Weighted Shares........................... 24,112 24,112 23,707 23,707
Effect of CES's........................... -- 1,594 -- 3,292
------ ------ ------ ------
24,112 25,706 23,707 26,999
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
----------------------------------- --------------------------------
Basic Diluted Basic Diluted
--------------- --------------- -------------- --------------
Historical Historical
----------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Weighted Shares........................... 24,042 24,042 22,222 22,222
Effect of CES's........................... -- -- -- 3,284
------ ------ ------ ------
24,042 24,042 22,222 25,506
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Basic Diluted Basic Diluted
--------------- --------------- -------------- --------------
Pro Forma Pro Forma
----------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Weighted Shares........................... 24,042 24,042 22,222 22,222
Shares to Minority Holder................. -- -- -- 17
Distribution Shares....................... -- -- -- 30
Effect of CES's........................... -- -- -- 3,284
------ ------ ------ ------
24,042 24,042 22,222 25,553
====== ====== ====== ======
</TABLE>
Form 10-Q
Page 8 of 21
<PAGE>
7. Income Taxes
Prior to the Conversion, the Company elected to report as a limited
liability company that was treated as a partnership for income tax purposes (see
Note 3), and as a result, the Company was not subject to federal and state
income taxes. After the Conversion, the Company became subject to federal and
state income taxes. In connection with the Conversion, the Company recognized a
one-time benefit in April 1998 of $316,000 by recording the asset related to the
future reduction of income tax payments due to temporary differences between the
recognition of income for financial statements and income tax regulations. Pro
forma net income amounts discussed herein include provisions for income taxes on
a pro forma basis as if the Company were liable for federal and state income
taxes as a taxable corporate entity throughout the periods presented. Pro forma
income tax provisions reflect the Company's anticipated effective annual tax
rate of 36% for the three month and nine month periods ended September 30, 1998.
For the three month and nine month periods ended September 30, 1999, the pro
forma income tax provision equals the historical income tax provision.
8. Acquisition
On February 16, 1998, the Company purchased all of the outstanding stock of
Performance Analysis Corporation ("PAC") for $2,200,000 in cash and 106,666
shares of the Company's common stock valued at $10.00 per share (the "PAC
Acquisition"). PAC is a developer of distribution center slotting software.
The PAC Acquisition has been accounted for as a purchase.
The purchase price of approximately $3,300,000 has been allocated to the
assets acquired and liabilities assumed of $490,000, acquired research and
development of $1,602,000, purchased software of $500,000, and other intangible
assets of $750,000. Purchased software will be amortized over an estimated two-
year useful life and other intangible assets will be amortized over a seven-year
useful life. In connection with the PAC Acquisition, the Company recorded a
charge to income of $1,602,000 in the first quarter of 1998 for acquired
research and development.
Form 10-Q
Page 9 of 21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company provides information technology solutions for distribution
centers that are designed to enable the efficient movement of goods through the
supply chain. The Company's solutions are designed to optimize the receipt,
storage and distribution of inventory and the management of equipment and
personnel within a distribution center, and to meet the increasingly complex
information requirements of manufacturers, distributors and retailers. The
Company's solutions consist of software, including PkMS, a comprehensive and
modular software system; services, including design, configuration,
implementation, training and support; and hardware. The Company's solutions
operate on the AS/400, UNIX and Distributed N-Tier platforms. The Company
currently provides solutions to manufacturers, distributors and retailers
primarily in the e-commerce, retail, apparel/footwear, consumer products
manufacturing, food/grocery and third-party logistics markets.
The Company recognizes revenue in accordance with Statement of Position
No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement
of Position No. 98-9, "Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9"). Under SOP 97-2, the Company recognizes software
license revenue when the following criteria are met: (1) a signed contract is
obtained; (2) shipment of the product has occurred; (3) the license fee is fixed
and determinable; (4) collectibility is probable; and (5) remaining obligations
under the license agreement are insignificant. SOP 98-9 requires recognition of
revenue using the "residual method" when (1) there is vendor-specific objective
evidence of the fair values of all undelivered elements in a multiple-element
arrangement that is not accounted for using long-term contract accounting;
(2) vendor-specific objective evidence of fair value does not exist for one or
more of the delivered elements in the arrangement; and (3) all revenue-
recognition criteria in SOP 97-2 other than the requirement for vendor-specific
objective evidence of the fair value of each delivered element of the
arrangement are satisfied. SOP 98-9 was effective for transactions entered into
after March 15, 1999, and the Company adopted the residual method for such
arrangements at that time. For those contracts which contain significant future
obligations, license revenue is recognized under the percentage of completion
method.
Consulting services are generally billed on an hourly basis and revenue is
recognized as the work is performed. Maintenance revenue from ongoing customer
support is billed in advance for a one year period and recorded as revenue
ratably over the billing period. Hardware revenue is billed and recognized upon
shipment to the customer.
Prior to the Conversion, the Company elected to report as a limited
liability company that was treated as a partnership for income tax purposes, and
as a result, the Company was not subject to federal and state income taxes. Pro
forma net income amounts discussed herein include additional provisions for
income taxes on a pro forma basis as if the Company was liable for federal and
state income taxes as a taxable corporate entity throughout the periods
presented. The pro forma tax provision is calculated by applying the Company's
statutory tax rate to pre-tax income, adjusted for permanent tax differences.
The Company's status as a limited liability company terminated immediately prior
to the effectiveness of the Offering, and the Company was thereafter taxed as a
business corporation. See Notes to Condensed Consolidated Financial Statements.
Form 10-Q
Page 10 of 21
<PAGE>
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Revenue
Total revenue increased 21% to $20.1 million for the three months ended
September 30, 1999 from $16.6 million for the three months ended September 30,
1998. Total revenue consists of software license revenue, revenue derived from
consulting, maintenance and other services and revenue from the sale of
hardware. The increase in total revenue was due to an increase in revenue from
services.
Software License. Software license revenue decreased 29% to $2.8 million
for the three months ended September 30, 1999 from $3.9 million for the three
months ended September 30, 1998. The decrease in revenue from software licenses
was primarily due to lower demand for the Company's products during the three
months ended September 30, 1999 as compared to the three months ended
September 30, 1998.
Services. Services revenue increased 47% to $14.5 million for the three
months ended September 30, 1999 from $9.8 million for the three months ended
September 30, 1998. The increase in revenue from services was principally due
to an increase in the number of customers and a related increase in services
personnel working on maintenance and billable projects.
Hardware. Hardware revenue decreased 2% to $2.8 million for the three
months ended September 30, 1999 from $2.9 million for the three months ended
September 30, 1998.
Cost of Revenue
Cost of Software License. Cost of software license revenue consists of the
costs of software reproduction and delivery, media, packaging, documentation and
other related costs and the amortization of purchased software and capitalized
research and development costs. Cost of software license revenue increased to
$599,000, or 22% of software license revenue, for the three months ended
September 30, 1999 from $372,000, or 10% of software license revenue, for the
three months ended September 30, 1998. Cost of software license revenue
increased primarily due to an increase in the amortization of capitalized
research and development expenses. In addition, approximately $292,000 of
purchased software and capitalized research and development costs relating to
discontinued projects was expensed during the three months ended September 30,
1999.
Cost of Services. Cost of services revenue consists primarily of consultant
salaries and other personnel-related expenses incurred in system implementation
projects, training and software support services. Cost of services revenue
increased to $8.8 million, or 61% of services revenue, for the three months
ended September 30, 1999 from $4.3 million, or 44% of services revenue, for the
three months ended September 30, 1998. The increase in cost of services revenue
was primarily due to increased personnel. The increase in cost of services
revenue as a percentage of revenue was primarily due to a decrease in the
percentage of billable time per services employee as well as increased training
and other costs related to the increase in services personnel.
Cost of Hardware. Cost of hardware revenue increased to $2.2 million, or
77% of hardware revenue, for the three months ended September 30, 1999 from $2.0
million, or 71% of hardware revenue, for the three months ended September 30,
1998. The increase in the cost of hardware as a percentage of hardware revenue
is principally due to an increase in the percentage of hardware products sold
with relatively lower gross margins during the three month period ended
September 30, 1999 as compared to hardware sales during the three month period
ended September 30, 1998.
Form 10-Q
Page 11 of 21
<PAGE>
Operating Expenses
Research and Development. Research and development expenses principally
consist of salaries and other personnel-related costs. The Company's research
and development expenses increased by 10% to $2.3 million, or 11% of total
revenue, for the three months ended September 30, 1999 from $2.1 million, or 12%
of total revenue, for the three months ended September 30, 1998. The increase
in research and development expenses resulted from an increase in the number of
research and development personnel during the three months ended September 30,
1999 as compared to the three months ended September 30, 1998. Significant
product development efforts during the three months ended September 30, 1999
included the continued development of the N-Tier version of PkMS, the continued
development of PkMS and, to a lesser extent, the development of the Windows
based version of SLOT-IT and the continued development of SLOT-IT.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions and other personnel-related costs, travel expenses, advertising
programs and other promotional activities. Sales and marketing expenses
increased by 20% to $3.2 million, or 16% of total revenue, for the three months
ended September 30, 1999 from $2.7 million, or 16% of total revenue, for the
three months ended September 30, 1998. The increase in sales and marketing
expenses was the result of additional sales and marketing personnel and expanded
marketing program activities.
General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs of executive, financial
and human resources and administrative personnel, as well as facilities, legal,
insurance, accounting and other administrative expenses. General and
administrative expenses increased by 71% to $3.2 million, or 16% of total
revenue, for the three months ended September 30, 1999 from $1.9 million, or 11%
of total revenue, for the three months ended September 30, 1998. The increase
in general and administrative expenses was primarily due to increased personnel,
recruiting expenses, rent and other administrative expenses necessary to support
the Company's growth.
Operating Income (Loss). Operating income (loss) decreased to an operating
loss of $0.2 million for the three months ended September 30, 1999 from $3.2
million of operating income for the three months ended September 30, 1998. The
decrease in operating income (loss) was primarily due to increased payroll and
related costs. The Company had 577 full-time employees at September 30, 1999
compared to 407 full-time employees at September 30, 1998. During the quarter
ended September 30, 1999, the number of full-time employees decreased by 58
full-time employees from 635 full-time employees at June 30, 1999.
Income Taxes
Provision for Income Taxes. The provision for income taxes for the three
months ended September 30, 1999 was $41,000 as compared to a provision for
income taxes of $1.4 million for the three months ended September 30, 1998.
Net Income per Share
Net Income per Share. Net income was $61,000, or $0.00 per diluted share,
for the three months ended September 30, 1999, compared to net income of $2.3
million, or $0.09 per diluted share, for the three months ended September 30,
1998.
Form 10-Q
Page 12 of 21
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Revenue
Total revenue increased 38% to $58.0 million for the nine months ended
September 30, 1999, from $42.1 million for the nine months ended September 30,
1998. Total revenue consists of software license revenue, revenue derived from
consulting, maintenance and other services and revenue from the sale of
hardware.
Software License. Software license revenue increased 16% to $10.3 million
for the nine months ended September 30, 1999 from $8.9 million for the nine
months ended September 30, 1998. The increase in revenue from software licenses
was primarily due to an increase in the number of licenses of the Company's
products.
Services. Services revenue increased 72% to $38.3 million for the nine
months ended September 30, 1999 from $22.3 million for the nine months ended
September 30, 1998. The increase in revenue from services was principally due
to an increase in the number of customers and a related increase in services
personnel working on maintenance and billable projects.
Hardware. Hardware revenue decreased 13% to $9.5 million for the nine
months ended September 30, 1999 from $10.9 million for the nine months ended
September 30, 1998. The decrease in revenue from hardware was principally a
result of a higher demand for hardware products during the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1999.
Cost of Revenue
Cost of Software License. Cost of software license revenue consists of the
costs of software reproduction and delivery, media, packaging, documentation and
other related costs and the amortization of purchased software and capitalized
research and development costs. Cost of software license revenue increased to
$1.2 million, or 11% of software license revenue, for the nine months ended
September 30, 1999 from $600,000, or 7% of software license revenue, for the
nine months ended September 30, 1998. Cost of software license revenue
increased principally due to an increase in the amortization of purchased
software from the PAC Acquisition and the amortization of capitalized research
and development expenses. In addition, approximately $472,000 of purchased
software and capitalized research and development costs relating to discontinued
projects was expensed during the nine months ended September 30, 1999.
Cost of Services. Cost of services revenue consists primarily of consultant
salaries and other personnel-related expenses incurred in system implementation
projects, training and software support services. Cost of services revenue
increased to $22.4 million, or 59% of services revenue, for the nine months
ended September 30, 1999 from $10.2 million, or 46% of services revenue, for the
nine months ended September 30, 1998. The increase in cost of services revenue
was primarily due to increased personnel. The increase in cost of services
revenue as a percentage of revenue was primarily due to a decrease in the
percentage of billable time per services employee as well as increased training
and other costs related to the increase in services personnel.
Form 10-Q
Page 13 of 21
<PAGE>
Cost of Hardware. Cost of hardware revenue decreased to $7.2 million, or
76% of hardware revenue, for the nine months ended September 30, 1999 from $8.0
million, or 74% of hardware revenue, for the nine months ended September 30,
1998. The increase in the cost of hardware as a percentage of hardware revenue
is principally due to an increase in the percentage of hardware products sold
with relatively lower gross margins during the nine month period ended
September 30, 1999 as compared to hardware sales during the nine month period
ended September 30, 1998.
Operating Expenses
Research and Development. Research and development expenses principally
consist of salaries and other personnel-related costs. The Company's research
and development expenses increased by 53% to $8.1 million, or 14% of total
revenue, for the nine months ended September 30, 1999 from $5.3 million, or 13%
of total revenue, for the nine months ended September 30, 1998. The increase in
research and development expenses resulted from an increase in the number of
research and development personnel during the nine months ended September 30,
1999 as compared to the nine months ended September 30, 1998. Significant
product development efforts during the nine months ended September 30, 1999
included the continued development of the N-Tier version of PkMS, the continued
development of PkMS and, to a lesser extent, the development of the Windows
based version of SLOT-IT and the continued development of SLOT-IT. During the
nine months ended September 30, 1999, the Company capitalized $909,000 of
research and development expenses. Those capitalized costs will be amortized
over three years commencing upon the availability of the anticipated products.
Acquired Research and Development. In February 1998, the Company purchased
all of the outstanding stock of PAC for approximately $2.2 million in cash and
106,666 shares of the Company's common stock valued at $10.00 per share. The
acquisition was accounted for as a purchase. In connection with this
acquisition, approximately $1.6 million of the purchase price was allocated to
acquired research and development and expensed during the first quarter of 1998.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions and other personnel-related costs, travel expenses, advertising
programs and other promotional activities. Sales and marketing expenses
increased by 88% to $11.3 million, or 20% of total revenue, for the nine months
ended September 30, 1999 from $6.0 million, or 14% of total revenue, for the
nine months ended September 30, 1998. The increase in sales and marketing
expenses was the result of additional sales and marketing personnel and expanded
marketing program activities.
General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs of executive, financial
and human resources and administrative personnel, as well as facilities, legal,
insurance, accounting and other administrative expenses. General and
administrative expenses increased by 117% to $9.5 million, or 16% of total
revenue, for the nine months ended September 30, 1999 from $4.4 million, or 10%
of total revenue, for the nine months ended September 30, 1998. The increase in
general and administrative expenses was principally due to increased personnel,
recruiting expenses, rent and other administrative expenses necessary to support
the Company's growth.
Operating Income (Loss). Operating income (loss) decreased to an operating
loss of $1.6 million for the nine months ended September 30, 1999 from $5.9
million of operating income for the nine months ended September 30, 1998. The
decrease in operating income (loss) was primarily due to increased payroll and
related costs. The Company had 577 full-time employees at September 30, 1999
compared to 407 full-time employees at September 30, 1998.
Form 10-Q
Page 14 of 21
<PAGE>
Income Taxes
Provision for Income Taxes. The provision for income taxes for the nine
months ended September 30, 1999 was a benefit of $283,000 as compared to a
provision for income taxes of $1.7 million, net of a one-time benefit of
$316,000, for the nine months ended September 30, 1998.
Prior to the Offering, the Company's predecessor, Manhattan Associates
Software, LLC, was treated as a partnership and was not subject to federal
income taxes. The income or loss of Manhattan Associates Software, LLC was
included in the owners' individual federal and state tax returns. In connection
with the conversion of Manhattan Associates, LLC to Manhattan Associates, Inc.
in April 1998, the Company recognized a one-time benefit of $316,000 by
recording the asset related to the future reduction of income tax payments due
to temporary differences between the recognition of income for financial
statements and income tax regulations.
Pro Forma Provision for Income Taxes. The pro forma provision for income
taxes for the nine months ended September 30, 1998 was $3.0 million. For the
nine month period ended September 30, 1999, the pro forma income tax provision
equals the historical income tax provision.
Net Income (Loss) per Share
Net Income (Loss) per Share. Net loss was $459,000, or $0.02 per diluted
share, for the nine months ended September 30, 1999 compared to pro forma net
income, excluding the effect of a one-time acquired research and development
charge of $1.6 million, of $5.3 million, or $0.21 per diluted share, for the
nine months ended September 30, 1998. Including the effect of the one-time
acquired research and development charge, the Company's pro forma net income
was $3.7 million, or $0.14 per diluted share, for the nine months ended
September 30, 1998.
Liquidity and Capital Resources
Since inception, the Company has funded its operations primarily through
cash generated from operations and the Offering. In addition, the Company
previously borrowed money from its majority shareholder, which it has
subsequently repaid. As of September 30, 1999, the Company had $33.2 million in
cash, cash equivalents and short-term investments.
The Company's operating activities provided cash of $4.8 million for the
nine months ended September 30, 1999 and $2.1 million for the nine months ended
September 30, 1998. Cash from operating activities arose principally from an
increase in deferred revenue of approximately $6.1 million, partially reduced by
an increase in accounts receivable and decrease in accounts payable and accrued
liabilities.
Cash used for investing activities was approximately $19.4 million for the
nine months ended September 30, 1999 and $14.9 million for the nine months ended
September 30, 1998. The use of cash for the nine months ended September 30,
1999 was primarily for the purchase of short-term investments and the purchase
of capital equipment, such as computer equipment and furniture and fixtures, to
support the Company's growth. In addition, the Company capitalized $909,000 of
research and development costs during the nine months ended September 30, 1999.
Cash provided by financing activities was approximately $584,000 for the
nine months ended September 30, 1999 and $35.5 million for the nine months ended
September 30, 1998. The principal source of cash provided by financing
activities for the nine months ended September 30, 1999 was the proceeds from
the issuance of Common Stock pursuant to the exercise of stock options,
partially reduced by the payments under capital lease obligations.
Form 10-Q
Page 15 of 21
<PAGE>
In April 1998, the Company completed the Offering, in which the Company
received net proceeds of approximately $47.3 million after deducting
underwriting discounts and offering expenses. The Company applied a portion of
the net proceeds to repay all of the Company's outstanding indebtedness to
Silicon Valley Bank ($7.0 million) and a note payable to the Company's Chairman
of the Board, Chief Executive Officer and President ($1.9 million). Prior to
the Offering, the Company made payments of $11.7 million in distributions to its
shareholders. The balance of the net proceeds of the Offering (approximately
$34.0 million) has been and will continue to be utilized for general corporate
purposes. Such purposes may also include possible acquisitions of, or
investments in, businesses and technologies that are complementary to those of
the Company. There can be no assurance that the remaining net proceeds from the
Offering will be sufficient to pay for future acquisitions, planned research and
development projects or other growth-oriented activities, which could require
the Company to incur additional debt or other financing that could impose
restrictive covenants and other terms having a material adverse effect on the
Company's business, financial condition and results of operations.
The Company anticipates that existing cash and cash equivalents will be
adequate to meet its cash requirements for the next twelve months.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded
to accept only two digit entries in date code fields. Beginning in the year
2000, many of these systems will need to be modified to accept four digit
entries or otherwise distinguish twenty-first century dates from twentieth
century dates. As a result, over the next few months, many companies will need
to upgrade their computer systems and software products to comply with these
"Year 2000" requirements.
In September 1998, the Company formed its Year 2000 Readiness Committee to
oversee the Company's Year 2000 Readiness Assessment Program, which includes the
following tasks:
. establishing a standard for Year 2000 Readiness;
. designing test parameters for the Company's products, information
technology ("IT") and non-IT systems;
. overseeing the remediation program, including establishing priorities for
remediation and allocating available resources;
. overseeing the communication of the status of the Company's efforts to
its customers; and
. establishing contingency plans in the event that the Company experiences
Year 2000 disruptions.
Form 10-Q
Page 16 of 21
<PAGE>
The Company describes its products as "Year 2000 Ready" when they have been
successfully tested using the procedure prescribed in the Readiness Assessment
Program. This procedure defines the criteria used to design tests that seek to
determine the Year 2000 readiness of a product. Under the Company's criteria, a
software product is Year 2000 Ready if it:
. will completely and accurately address, present (in a two-digit format),
produce, store and calculate data involving dates beginning January 1,
2000 and will not produce abnormally ending or incorrect results
involving such dates as used in many forward or regression date based
functions;
. will provide that all "date" related functionalities and data fields
include the indication of century and millennium, whether shown on-screen
or internally noted; and
. will perform calculations that involve a four-digit year field, provided
that the data input into the software from any other source has the same
Year 2000 capabilities and is in a format that is compatible with the
Company's software.
Because the latest versions of the Company's products are designed to be
Year 2000 compliant, the Year 2000 remediation efforts with respect to the
Company's products have focused on determining the compliance of the Company's
earlier software products as implemented in the Company's installed customer
base, as well as the impact of any non-compliance on the Company and its
customers. The Company offers its customers the alternatives of implementing a
modification to their non-compliant versions of the software or migrating to a
later version of the software that is Year 2000 Ready. Because the Company's
software is often marketed as an integrated system that includes hardware and
operating or interface software from third parties over which the Company can
assert little control, the Year 2000 Readiness Committee is evaluating the Year
2000 Readiness of such systems and the risks associated with the failure of such
third parties to adequately address the Year 2000 issue. The Company makes no
representation with respect to third party hardware or software.
The Company's Year 2000 Readiness Committee is also addressing Year 2000
readiness with respect to both IT and non-IT systems on which the Company's
operations rely. As a result of the Company's recent rapid growth, it has, or
expects it will have by the end of 1999, replaced or significantly upgraded
substantially all of the core IT systems, including those related to sales,
customer service, human resources, finance and other enterprise resource
planning functions. The Company believes that the upgraded systems are all Year
2000 Ready, and it has received assurances from the vendors of these systems to
that effect. The Company continues to review its remaining IT systems for Year
2000 Readiness and expects to modify, replace or discontinue the use of non-
compliant systems before the end of 1999. In addition, the Company is in the
process of evaluating its Year 2000 readiness with respect to non-IT systems,
including systems embedded in its communications and office facilities. In many
cases these facilities have been recently upgraded or are scheduled to be
upgraded before year-end 1999 as a result of the Company's recent growth.
Finally, because the Company relies upon relationships with third parties, such
as providers of telecommunications and similar infrastructure services, over
which it can assert little control, the Year 2000 Readiness Committee is also
assessing the risks associated with the failure of these third parties to
adequately address Year 2000 issues.
Form 10-Q
Page 17 of 21
<PAGE>
The Company does not currently believe that the effects of any Year 2000
non-compliance in its installed base of software will result in a material
adverse effect on its business, financial condition or results of operations.
However, the Company's investigation has not been completed, and the Company may
be exposed to potential claims resulting from system problems associated with
the century change. There can also be no assurance that the Company's software
products that are designed to be Year 2000 compliant contain all necessary date
code changes. In addition, Year 2000 non-compliance in the Company's internal
IT systems or certain non-IT systems on which the Company's operations rely or
by the Company's business partners may have an adverse impact on the Company's
business, financial condition or results of operations.
The majority of the work performed for the Company's Year 2000 Readiness
Assessment Program has been completed by the Company's staff. The total costs
for completing the Year 2000 Readiness Assessment Program, including
modifications to the Company's software products, is estimated to be between
$0.5 million and $1.0 million, funded through the Company's internal operating
cash flows. This cost does not include the cost of new software, or for
modifications to existing software, or the Company's core IT and non-IT systems,
as these projects were not accelerated due to the Year 2000 issue.
The Company's evaluation of Year 2000 issues includes the development of
contingency plans for business functions that are most susceptible to a
substantive risk of disruption resulting from a Year 2000 related event.
Because the Company has not yet identified any business function that is
materially at risk of Year 2000 related disruptions, the Company has not yet
developed detailed contingency plans specific to Year 2000 events for any
business function. The Company is prepared for the possibility, however, that
it may identify risks in certain business functions, and it will develop
contingency plans for these business functions when and if it identifies them as
being at risk.
Forward Looking Statements
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including but not limited to statements related to plans for future
business development activities, anticipated costs of revenues, product mix and
service revenues, research and development and selling, general and
administrative activities, and liquidity and capital needs and resources. Such
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements. For further
information about these and other factors that could affect the Company's future
results, please see Exhibit 99.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. Investors are cautioned that any forward
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements.
Form 10-Q
Page 18 of 21
<PAGE>
Item 3. Quantitative and Qualitative Disclaimers About Market Risk.
Foreign Exchange
During 1998, the Company commenced operations in the United Kingdom.
Total revenues for the United Kingdom were approximately 6% of the Company's
total revenues for the three months ended September 30, 1999.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially adversely impacted
by changes in these or other factors. The effect of foreign exchange rate
fluctuations on the Company during the third quarter of 1999 was not material.
Interest Rates
The Company invests its cash in a variety of financial instruments,
including taxable and tax-advantaged variable rate and fixed rate obligations of
corporations, municipalities, and local, state and national governmental
entities and agencies. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies overseas are operating balances.
Interest income on the Company's investments is carried in "Other income,
net" on the Company's Consolidated Financial Statements. The Company accounts
for its investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). All of the cash equivalents and short-term
investments are treated as available-for-sale under SFAS 115.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment
income may fall short of expectations due to changes in interest rates, or the
Company may suffer losses in principal if forced to sell securities which have
seen a decline in market value due to changes in interest rates. The weighted-
average interest rate on investment securities at September 30, 1999 was
approximately 5%. The fair value of securities held at September 30, 1999 was
$26.8 million.
Form 10-Q
Page 19 of 21
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
No events occurred during the quarter covered by the report that would
require a response to this item.
Item 2. Changes in Securities and Use of Proceeds.
No events occurred during the quarter covered by the report that would
require a response to this item.
Item 3. Defaults Upon Senior Securities.
No events occurred during the quarter covered by the report that would
require a response to this item.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A Special Meeting of Shareholders (the "Special Meeting") of the
Company was held on July 24, 1999. There were present at the Special Meeting,
in person or by proxy, holders of 16,945,661 shares (or 70%) of the Common Stock
entitled to vote.
(b) The sole proposal considered at the Special Meeting was to increase
the number of shares available for issuance under the Company's 1998 Stock
Incentive Plan from 7,000,000 shares to 9,000,000 shares, an increase of
2,000,000 shares. This proposal was approved with 16,943,761 affirmative votes
cast, 1,900 negative votes cast and zero abstentions. The affirmative vote of
the holders of a majority of the outstanding shares of Common Stock represented
at the annual meeting was required to approve the amendment.
Item 5. Other Information.
On October 18, 1999, the Company announced the appointment of Richard M.
Haddrill as president and chief executive officer, effective January 1, 2000.
Mr. Haddrill will serve as a consultant in the interim. On October 26, 1999,
the Company announced the election of Richard M. Haddrill to the board of
directors. On October 26, 1999, the Company announced the resignation of
Michael J. Casey, chief financial officer.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibit is filed with this Report:
Exhibit 27.1 Financial Data Schedule.
(b) Reports to be filed on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
Form 10-Q
Page 20 of 21
<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.
MANHATTAN ASSOCIATES, INC.
Date: November 15, 1999 /s/ Alan J. Dabbiere
-------------------------------------
Alan J. Dabbiere
Chairman of the Board,
Chief Executive Officer and
President
(Principal Executive Officer)
Date: November 15, 1999 /s/ Michael J. Casey
-------------------------------------
Michael J. Casey
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
Form 10-Q
Page 21 of 21
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