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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 1, 2000
Commission File Number 000-29309
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MATRIXONE, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0372301
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Two Executive Drive
Chelmsford, Massachusetts 01824
(Address, including zip code, of principal executive offices)
(978) 322-2000
(Registrant's telephone number, including area code)
Securities Registered Pursuant To Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
------------------------------
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of September 8, 2000, there were 42,599,296 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by non-
affiliates of the registrant (based on the closing price for the Common Stock on
the Nasdaq National Market on September 8, 2000) was approximately
$1,040,753,981.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the registrant's
2000 annual meeting of stockholders, which is expected to be filed pursuant to
Regulation 14A within 120 days of the registrant's fiscal year ended July 1,
2000, are incorporated by reference into Part III of this Annual Report on Form
10-K.
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MATRIXONE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JULY 1, 2000
TABLE OF CONTENTS
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PART I
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Item 1: Business............................................................................ 1
Item 2: Properties.......................................................................... 9
Item 3: Legal Proceedings................................................................... 10
Item 4: Submission of Matters to a Vote of Security Holders................................. 10
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters............... 10
Item 6: Selected Financial Data............................................................. 11
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................... 13
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.......................... 32
Item 8: Financial Statements and Supplementary Data......................................... 33
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 55
PART III
Item 10: Directors and Executive Officers of the Registrant.................................. 55
Item 11: Executive Compensation.............................................................. 55
Item 12: Security Ownership of Certain Beneficial Owners and Management...................... 55
Item 13: Certain Relationships and Related Transactions...................................... 55
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 55
Signatures..................................................................................... 58
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PART I
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements that
involve risks and uncertainties. MatrixOne, Inc. makes such forward-looking
statements under the provision of the "Safe Harbor" section of the Private
Securities Litigation Reform Act of 1995. In this Annual Report on Form 10-K,
words such as "may," "will," "should," "could," "future," "estimates,"
"predicts," "potential," "believes," "anticipates," "plans," "expects,"
"intends," and similar expressions (as well as other words or expressions
referencing future events, conditions or circumstances) are intended to identify
forward-looking statements. Our actual results and the timing of certain events
may differ materially from the results discussed, projected, anticipated or
indicated in any forward-looking statements. Any forward-looking statement
should be considered in light of the factors discussed below in Item 7 under
"Cautionary Statements."
ITEM 1: BUSINESS
General
MatrixOne, Inc. is a provider of Internet business collaboration software,
which with the release of eMatrix 9, the latest version of our core software, we
now refer to as "Intelligent Collaborative Commerce(TM) solutions". Our eMatrix
suite of products serves as an Internet platform facilitating collaboration
among different departments and geographic locations of global organizations.
Our eMatrix software products also serve as a backbone for an enterprise to
collaborate through the Internet with its customers, suppliers and other
business partners. Enterprises use our eMatrix product line to integrate
different business processes and facilitate the exchange of information, ideas
and knowledge among parties collaborating on business activities, such as
conceptual planning for new products, product design, design for
manufacturability, plant resource utilization, new product introduction and
customer service and support. This collaboration allows our customers to quickly
and cost-effectively bring the right products and services to market.
Our eMatrix line of software products is based on an Internet architecture
utilizing open-standards and XML technology. This architecture allows our
platform to be highly scalable and to integrate with existing information
systems and software applications, thereby enabling our customers to continue to
use and build upon their information technology infrastructure investments. Our
eMatrix line of products contain dynamic access control and other security
features, can be rapidly implemented and facilitates the use of other best-of-
breed software applications. In addition, the dynamic business modeling
capabilities of our eMatrix product suite provide our customers the flexibility
to constantly adapt to a changing business environment by reconfiguring their
systems with minimal programming.
We offer a variety of services that complement our eMatrix product suite.
Our professional services personnel provide rapid and cost-effective
implementation, integration and other consulting services. These personnel
capture and model the specific business processes that reflect our customers'
planning, design, manufacturing, sales and service practices. We also provide
training, maintenance and customer support services to continuously enhance the
value of our eMatrix products to our customers. In addition, we have an
extensive global network of systems integrators who are experienced in providing
implementation and integration services to our customers. Many of our customers
also perform their own implementation and integration or use their preferred
systems integrators.
We incorporated in Delaware under the name Adra Systems, Inc. in July 1983.
In October 1997, we changed our name to MatrixOne, Inc., and in May 1998, we
sold our legacy design and manufacturing software business, Adra Systems, to
focus on our Internet suite of products. Our principal executive offices are
located at Two Executive Drive, Chelmsford, Massachusetts 01824, and our
telephone number is (978) 322-2000. Our Internet address is www.matrixone.com.
The information contained on our website is not incorporated by reference in
this Annual Report on Form 10-K.
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Principal Products
Our eMatrix Intelligent Collaborative Commerce(TM) solution allows
companies and electronic marketplaces and their partners and customers to
securely integrate business processes over the Internet and modify processes and
relationships to respond to changing business requirements.
Our eMatrix solution allows companies and electronic marketplaces to:
. adapt in real-time to changes in business requirements, which enables
them to formulate new supply chains to respond to customer demands,
integrate acquisitions or expedite product development;
. proactively deliver information to create smarter business processes,
which enables them to instantly inform partners of new product
requirements;
. use multi-layered security to extend collaborative business processes
over the Internet, so proprietary information and intellectual property
can be shared among value-chains using "need-to-know" access control;
and
. integrate new technologies without disrupting business operations.
Our eMatrix product line consists of a collaboration server, a suite of
applications, development tools and integration products for business
collaboration. Our customers typically acquire one or more server licenses
depending on the number of users and their geographic locations. Our customers
separately purchase applications, development tools and integration products
that simplify everyday business activities and connect their existing
applications to the eMatrix collaboration server. We charge our customers on a
concurrent user basis for our server and applications and on a per server or per
user basis for integration products.
eMatrix Collaboration Server
Our collaboration server enables users to define, store, secure, change,
find and replicate content and processes. It combines several elements: Web
front-end, business modeler, XML capabilities, collaboration services and a
system manager.
The Web front-end enables users to view and use an organization's content
and processes with minimal training using Microsoft Internet Explorer, Netscape
Communicator or other commercially available Web browsers, as well as hand-held
devices using Wireless Application Protocols (WAP). The business modeler allows
business managers to create models of their business processes using a
point-and-click visual interface. These models provide a representation of the
customer's business information and associated business rules. The business
modeler is dynamic, which permits real-time changes to the model without
impacting day-to-day user activities or incurring costly system interruptions.
The collaboration services add value to an organization's enterprise data by
applying process capabilities to it such as event triggers, access rights,
revision control, lifecycle management, workflow, security, vaulting and e-mail,
cell phone and pager notification. Through Java Server Pages (JSP) capabilities,
Web pages can be dynamically created to include content from our eMatrix
solution or any connected external sources to develop dynamic applications. XML
exchange enables customers to store, query, import and export their business
model, objects and files as XML messages. XML exchange enables companies to
compare business models and allows queries to the database that are easily
parsed and structured. XML exchange also allows XML messages to be mapped to
messages. The system manager, which speeds implementation and minimizes
maintenance time, provides for the administration of global storage and database
resources. The system manager provides a point-and-click visual interface for
managing database and file servers and their replication when necessary.
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The eMatrix collaboration server works with popular Web servers from Netscape,
Microsoft, IBM, BEA and other leading software providers.
eMatrix Applications
We provide a broad set of applications that automate common business
activities. They are focused on collaborative interactions with customers,
suppliers and employees of the enterprise. The applications plug directly into
the eMatrix collaboration server and can be easily tailored, thereby allowing
our customers to accelerate implementation times and minimize development costs.
eMatrix Development Tools
Our eMatrix Application Development Kit provides the tools and
documentation for our customers and systems integrators to create their own
collaborative Internet applications. We also offer an eMatrix Application
Library, which is a collection of widely used eMatrix application components
developed by our services organization. We continuously add new components to
this library, and we distribute this library quarterly to provide eMatrix
customers and systems integrators the benefit of our latest implemented
solutions.
eMatrix Integration Products
Our eMatrix integration products facilitate the exchange of information
between our eMatrix products and other software applications and allow our
customers to use their existing information technology infrastructures to
access, control and reuse information stored in enterprise applications. In
order to accelerate the market acceptance of our platform, we jointly developed
with third parties that had particular application or domain expertise the
majority of our integration products. Following the development of these
integration products, our partners generally assume responsibility for their
maintenance and support in exchange for a royalty.
In addition to our integration products, we provide tools for our customers
and business partners to create their own integrations to access information
contained in their proprietary or commercial off-the-shelf software
applications. For example, the eMatrix Adaplet Development Kit provides the
tools and documentation for the creation of object adaptors used for enterprise
application integration. Our integration products allow our customers to extend
the value of their existing information technology infrastructures and
applications and are designed to easily link with future applications.
Product Technology and Architecture
Our eMatrix product suite is based on an Internet architecture utilizing
open standards and XML technology and is enhanced by our patent-pending
technology for information integration and accelerated content delivery. An
enterprise can choose from a variety of popular Web server architectures to
deploy their solution with no change to their business logic and can base their
solution on any mix of distributed software architectures, including Enterprise
Java Beans (EJB), Remote Method Invocation (RMI) and Common Object Request
Broker Architecture (CORBA). Our eMatrix products also offer XML capabilities
that allow companies to exchange messages and content with collaborating
partners or industry exchanges. Messages can comply with the evolving standard
vocabularies such as RosettaNet, cXml or BizTalk or those independently defined.
The result is a scalable, flexible system that virtually eliminates the need for
complex custom software through lengthy in-house development, thereby resulting
in a low cost of ownership. The software consists of an Internet platform,
tailorable business process applications, reusable business process components,
integrations to third-party software and development tools.
At the center of our architecture is the eMatrix server, which runs on
Microsoft NT or UNIX operating systems. The server is the intermediary between
the eMatrix Web user interface and the
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database and provides the necessary security, access control and application
services to enable collaboration among multiple businesses. Mobile users can be
connected to the server through Wireless Application Protocol (WAP). The server
is compliant with hyper-text transport protocol (HTTP) and secure HTTP,
providing the business model and XML representations to HTML, Java and Wireless
Markup Language (WML) applications.
The Web user interfaces are Java-and HTML-based applications that can run
on Microsoft Internet Explorer, Netscape Communicator and other commercially
available Web browsers as well as other WAP-based devices. There are also
Windows and UNIX versions of our products for users who prefer to run the
applications on their desktop computers, rather than a Web browser interface. We
support numerous operating systems including Windows 95, Windows 98, Windows
2000, Windows NT, Digital UNIX, Hewlett Packard HP-UX, IBM AIX, SGI Irix and Sun
Solaris. We follow the Microsoft standards for Windows 95, 98 and 2000 and the
Internet standards for Java running with Microsoft Internet Explorer and
Netscape Communicator.
The storage layer includes support for multiple Oracle database servers and
multiple file servers using standard file transfer protocols. We also provide an
enterprise application integration capability that can exchange data with
virtually any Web, legacy or incumbent application.
We provide simultaneous support for multiple languages within the business
model, which means that users of our eMatrix products can work in different
languages at the same time. We typically distribute our products in a single
global release. Our products support Chinese, English, French, German, Italian,
Japanese, Korean, Spanish and Swedish, and we intend to provide localization for
additional languages as required.
We have entered into various platform alliances to ensure our products are
based on open industry standards and to enable us to take advantage of current
and emerging technologies. We are marketing partners with Oracle and Compaq,
Hewlett-Packard, IBM, Silicon Graphics and Sun Microsystems. To promote the
development, definition, adoption, implementation and growth of open standards,
we work with several industry standards organizations, such as the World Wide
Web Consortium, also known as W3C, Object Management Group, also known as OMG,
RosettaNet, and the National Institute of Standards and Technology, also known
as NIST, and a variety of industry-specific standards organizations.
Services
We offer professional services, training, maintenance and customer support
directly through our own services organization and indirectly through our third-
party network. Our services organization is committed to ensuring that our
customers successfully utilize our eMatrix products. We believe we have a high
customer satisfaction level as a result of a combination of our unique software
implementation methodology, our large, global partner network, and our
professional services, training, maintenance and customer support programs.
These programs are available globally and are designed to enable the rapid
implementation of our eMatrix line of products so our customers receive the
benefits from their investment quickly. Our services are also designed to make
our software easy to use and maintain, thus lowering ongoing costs to our
customers. In fiscal 2000, we increased our services organization from 86 to 139
employees, and we provide our various services in over 30 locations worldwide.
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Professional Services
Customers may choose to implement our eMatrix suite of products with
support from our professional services personnel or systems integrators or by
themselves. Although implementation times vary with the scope of applications,
the number of users and the number of geographic locations involved, specific
applications can be implemented in as little as two weeks.
We offer implementation of our eMatrix products through our services
organization on either a time and materials or a fixed-price basis. We provide
for the transfer of the skills and knowledge necessary to allow our customers to
assume responsibility for ongoing support and extensions of their
implementations of our software products.
We also offer a wide range of other professional services, including the
development of customized user interfaces for our customers, and their
suppliers, customers and other business partners. Our services organization
consists of experienced professionals, many of whom have come from our
customers' industries, which helps us to provide strong domain experience. We
also have personnel with strong backgrounds and skills in business process re-
engineering, data conversion, application integration, system architecture and
project management.
Training
We offer product training and education services to our customers and
partners at three different training centers in North America, at our offices
throughout Europe and at our customers' sites around the globe. These services
include business modeling, system administration, eMatrix customization, end-
user training and customized computer-based training.
Maintenance and Customer Support
We offer maintenance and support services to our customers, partners and
systems integrators over the Internet or by telephone. Our toll-free telephone
support is provided in multiple languages and is staffed by senior technical
support personnel. Customers receiving support over the Internet have access to
a full range of customer support services, including online problem solving,
technical tips, answers to frequently asked questions, and information about
recently released and upcoming versions of our software. We provide our
customers with personalized Web pages where they can access specific status
reports, exchange information, register online for training and access an
advanced knowledge base. Customers can also download new versions of our
software over the Internet.
Customers
We target large-to-medium size companies throughout the world in growth
industries. As of July 1, 2000, we had over 400 customers located in over 40
countries using our eMatrix line of business collaboration software products.
Our installed base of customers represents numerous industries, including
aerospace/defense, automotive, communications, consumer products, high
technology, machinery and medical equipment. No one customer accounted for more
than 10% of our revenues for fiscal 2000, 1999 or 1998.
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Foreign Operations
We have international offices in Austria, Canada, England, France, Germany,
Italy, Japan, and The Netherlands. At July 1, 2000 and July 3, 1999,
approximately 14.4% and 27.4%, respectively, of our total assets were located at
our international subsidiaries and approximately 39.2%, 26.1% and 26.1% of our
revenues and 25.8%, 21.5% and 17.2% of our expenses for fiscal 2000, 1999 and
1998, respectively, were from our operations outside North America. Export sales
from North America accounted for approximately 9.8% and 4.2% of our revenues in
fiscal 2000 and 1999, respectively. See Note 10 of Notes to Consolidated
Financial Statements.
Research and Development
We pursue research and development through our internal engineering
organization, third-party alliances and collaborative development efforts with
our customers. Our internal research and development organization is divided
into two product line groups, platform and application engineering, with common
support groups. The focus of these two product line groups is to broaden the
global appeal of our eMatrix products by improving our products' performance and
scalability, expanding the use of XML technology for data representation and
collaboration, adding application services, increasing our distribution and
replication alternatives and extending our strong Internet security
capabilities. The platform engineering group is responsible for the development
of Internet infrastructure products, such as our servers, dynamic business
modeling engine, database caching and application integration. This group
researches and develops advanced architectures and technologies and closely
follows industry developments and standards related to e-Business, the Internet,
operating systems and software technologies. The application engineering group
is responsible for the development of Internet applications for our customers.
This group works closely with our sales, services and product management
organizations and uses the application expertise, domain experience and
resources of our customers and partners to develop and sell applications.
Quality engineering, release engineering and documentation groups support both
of our product line groups and a contract offshore engineering group in India
provides additional engineering resources.
We maximize our research and development efforts by working closely with
our customers and business partners to develop software applications and
integration products. We jointly develop software applications with our
customers, and typically retain the right to generalize the application for use
with other customers. A critical focus of our research and development alliances
is to increase the number and scope of customer-facing, supplier-facing and
industry-specific applications. We have also established relationships with
third parties to develop the majority of our integration products pursuant to
which we typically pay the third party a royalty in connection with the license
of the integration products by our customers. These relationships allowed us to
increase the number of integration products we offer to customers. We market,
sell and support our application and integration products through our direct
sales organizations, alliance partners and distributors around the globe. We are
also working with our customers, systems integrators and complementary
technology vendors to extend our integration products to supply chain
management, customer relationship management, component supplier management and
additional product data management applications. Our research and development
expenses were $8.6 million, $5.8 million and $7.2 million for fiscal 2000, 1999
and 1998, respectively. We expect to significantly increase our internal
research and development efforts as well as our third-party research and
development based on alliances.
Selling and Marketing
We market and sell our eMatrix line of products through our direct sales
organization, distributors and other business alliances. As of July 1, 2000, our
direct sales organization consisted of 137 sales and marketing employees in over
30 locations around the world. We have 22 sales offices in greater metropolitan
areas of North America, 10 in Europe and one in Asia/Pacific. Our European,
Middle East and Africa, or EMEA, sales organization is headquartered in
Amsterdam
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with other offices in Birmingham, Cologne, Hamburg, London, Milan, Munich,
Paris, Salzburg and Stuttgart. Our Japanese headquarters is located in Tokyo. We
plan to significantly expand our direct sales organization and to establish
additional domestic and international sales offices.
Our sales process requires that we work closely with targeted customers to
identify short-term technical needs and long-term goals. Our sales team, which
includes both sales and technical professionals, works with the customer to
develop a proposal to address these needs. Our sales process often commences
with a rapid proof of concept or customer demonstration. Our sales cycle for our
eMatrix products ranges from one to nine months based on the customer's need to
rapidly implement a solution and whether the customer is new or is extending its
existing implementation.
Most sales of our eMatrix line of products in North America are made by our
direct sales organization. In EMEA and Asia/Pacific we market, sell and service
our products through our direct sales force and our network of approximately 20
international distributors.
Our marketing personnel assist in generating new sales opportunities by
creating various marketing programs, updating our web site and hosting or
sponsoring various events. We conduct joint seminars with key partners and
participate in a number of partner-sponsored trade shows and industry events. We
also provide speakers from our company and our customers to represent us in a
number of industry forums. We communicate regularly with our installed base via
newsletters and host a yearly customer conference. Our public relations plan is
designed to convey our messages to appropriate audiences and we reinforce this
through our ongoing communications with a number of key industry analysts and
press representatives.
Alliances
The principal goals of our alliances are to accelerate the global market
acceptance of our eMatrix suite of products, extend our global resources and
help our customers realize the benefits of our products quickly. Our alliance
partners are primarily systems integrators and complementary technology vendors.
Our alliances have resulted in opportunities to license our eMatrix line of
products to new industries, locations and customers. We seek to provide our
customers a total software and services solution that results in benefits to our
customers, us and our business partners.
Systems Integrators
We have established strategic relationships with a number of leading
systems integrators including Cap Gemini Ernst & Young, Fujitsu, Gedas, KPMG and
Nippon Steel. On a global basis, we have alliances with over 30 systems
integrators. These systems integrators combine our eMatrix products with their
existing solutions in their e-Business, c-Commerce, new product development and
enterprise resource planning practices. They also provide us with new
opportunities to license our eMatrix line of products to their installed
customer base and have developed the eMatrix domain expertise to quickly
implement our products and service our customers.
Complementary Technology Vendors
We intend to continue to broaden the functionality of our eMatrix line of
products by integrating with best-of-breed software applications and point
solutions for e-Business, collaboration, viewing, product content,
manufacturing, project scheduling, project costing, component reuse, enterprise
resource planning and other technologies. We intend to continue to establish
additional relationships with enterprise software companies to use our eMatrix
product suite to further enhance their software solution. We work closely with
Oracle, IONA Technologies, RSA Security and others to incorporate their core
technology into our eMatrix software product line.
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Competition
The market for software that enables Internet business collaboration is
new, intensely competitive, highly fragmented and changing rapidly. We compete
against different companies depending on the geographic region and the size of
the potential customer. We currently compete against:
. in-house development efforts by potential customers;
. emerging companies focused on enterprise application integration and
e-Business;
. vendors that focus on local markets; and
. vendors of engineering information management software such as Agile
Software, Dassault Systems, Parametric Technology and Structural
Dynamics Research Corporation.
We expect that competition will increase as a result of increased usage of
the Internet and software industry consolidation. Providers of enterprise class
software such as SAP and Oracle may seek to extend the functionality of their
products. Moreover, a number of enterprise software companies have announced
acquisitions of providers of point solutions to expand their product lines. Our
competitors may also bundle their products in a manner that may discourage users
from purchasing our eMatrix suite of products. Current and potential competitors
may establish cooperative relationships among themselves or with third parties
or adopt aggressive pricing policies to gain market share. Consolidation in the
industry also results in larger competitors that may have significant combined
resources with which to compete against us.
We believe that our ability to compete depends on many factors, both within
and beyond our control, including, without limitation:
. the performance, functionality, scalability and flexibility of our
eMatrix suite of products;
. the timing and market acceptance of new products and product
enhancements to the eMatrix suite of products;
. the effectiveness of our selling and marketing efforts; and
. the quality and performance of our services.
Although we believe that we currently compete favorably as to each of these
factors, we expect competition to persist and intensify and the market in which
we compete is rapidly changing. In addition, new competitors could emerge and
rapidly capture market share. Increased competition from existing or potential
competitors could result in reductions in price and revenues, reduced margins,
loss of customers and loss of market share, any one of which would negatively
impact our operating results.
Intellectual Property and Other Proprietary Rights
Our success and ability to compete are dependent upon our ability to
develop and maintain our intellectual property and proprietary technology and to
operate without infringing on the proprietary rights of others. Our continued
success will also depend in part upon our ability to share our proprietary
rights with our partners. Generally, when we develop applications or software in
conjunction with our customers or third parties, we retain non-exclusive rights
to the code that is created. Currently, we rely on a combination of copyright,
trademark and trade secret laws, as well as non-disclosure agreements with our
employees, customers, partners, consultants and systems integrators to protect
our proprietary rights. In the future, we also intend to rely on patents to
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protect our proprietary rights. We license our software pursuant to non-
exclusive license agreements that impose restrictions on customers' ability to
utilize the software. In addition, we seek to avoid disclosure of our trade
secrets by executing confidentiality agreements with anyone having access to our
proprietary information and restricting access to our source code. We also seek
to protect our software, documentation and other written materials under trade
secret and copyright laws.
We have three patent applications pending in the United States and have
filed two corresponding patent application internationally. It is possible that
no United States or foreign patents will issue from these applications. We also
pursue registration of some of our trademarks in the United States and have
various trademark applications pending. Registered trademarks may not issue from
these applications or may be contested.
Despite our efforts to protect our intellectual property and proprietary
rights, existing laws afford only limited protection. We operate throughout the
world and the protection available for our intellectual property may not be
available to the same extent protection is available in the United States or at
all. Others may be able to develop technologies that are superior or similar to
our technology. Attempts may be made to reverse engineer our products or to
obtain and use information that we regard as proprietary. Our customers,
partners, suppliers, and former employees may disclose our proprietary
information to parties that may use that information to compete against us.
Accordingly, we may not be able to protect our proprietary rights against
unauthorized third-party copying or use. Furthermore, policing the unauthorized
use of our intellectual property is difficult. Expensive litigation may be
necessary in the future to enforce our intellectual property rights.
We utilize technology provided from third parties that is integrated into
our products. These technologies may infringe another party's proprietary
rights. We attempt to obtain product infringement indemnification protection in
contracts when we integrate third-party products and technology into our
products. It is also possible that third parties will claim that we have
infringed their proprietary rights. We expect that software providers will
increasingly be subject to infringement claims as the number of products in
different industry segments increase and overlap. Any resulting claim or
litigation, even if successfully defended, could result in substantial costs and
diversion of resources and management time and could have a material negative
effect on our operating results.
Employees
As of July 1, 2000, we had a total of 366 employees. Of the total
employees, 55 were in product development, engineering or systems engineering,
137 in sales and marketing, 139 in services and 35 in operational, financial,
and administrative functions.
Our employees are not represented by a labor union and are not subject to a
collective bargaining agreement. We have never experienced a work stoppage. We
believe our relations with our employees are good.
ITEM 2: PROPERTIES
Our headquarters is located in a 50,000 square foot facility in Chelmsford,
Massachusetts, occupied under an office leases expiring through August 2004. We
lease office space in 15 states throughout the United States. We also lease
office space in Ontario and Quebec, Canada, Austria, England, France, Germany,
Italy, Japan and The Netherlands, under leases with terms expiring at various
times through July 2006. We believe that additional space will be required as
our business expands and will be available as required on acceptable terms.
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ITEM 3: LEGAL PROCEEDINGS
On August 10, 2000, SofTech, Inc. commenced an arbitration against us
before the American Arbitration Association in Boston, Massachusetts alleging
fraud, unfair and deceptive trade practices, and breach of contract in
connection with the sale of assets of Adra Systems to SofTech in 1998. SofTech
has claimed damages of between $1.0 and $5.0 million. We intend to vigorously
defend each claim asserted in the arbitration demand.
We may from time to time become a party to various other legal proceedings
arising in the ordinary course of our business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended July 1, 2000, through the solicitation
of proxies or otherwise.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"MONE" and public trading commenced on March 1, 2000. Prior to that time, there
was no public market for the Company's common stock. The price range per share
reflected in the table below is the high and low bid information for our common
stock as reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year ended July 1, 2000:
Third quarter (from March 1, 2000)................................... $84.438 $30.250
Fourth quarter....................................................... $45.188 $12.750
</TABLE>
On September 8, 2000, there were approximately 555 stockholders of record
of our common stock. This number does not include stockholders for whom shares
were held in a "nominee" or "street" name. On September 8, 2000, the last
reported sale price per share of our common stock on the Nasdaq National Market
was $39.25.
On March 6, 2000, we issued and sold 450,000 shares of our common stock to
G.E. Capital Equity Investments, Inc. at a price of $23.25 per share. These
shares of common stock were not registered under the Securities Act and no
underwriters were involved. This sale was made in reliance upon the exemption
from the registration provisions of the Securities Act provided by Sections 2(3)
and 4(2) thereof for transactions not involving a public offering. These shares
are deemed restricted securities for the purposes of the Securities Act.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion and
growth of our business and do not expect to pay any cash dividends in the
foreseeable future. Payment of future cash dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion. Our credit facility currently prohibits the
payment of cash dividends on our capital stock.
10
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
You should read the data set forth below in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
appearing elsewhere in this Annual Report on Form 10-K. The selected
consolidated statement of operations data set forth below for the fiscal years
ended July 1, 2000, July 3, 1999 and June 27, 1998 and the consolidated balance
sheet data as of July 1, 2000 and July 3, 1999 are derived from our consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere in this Annual Report
on Form 10-K. The selected consolidated statement of operations data for the
fiscal years ended June 28, 1997 and June 29, 1996 and the consolidated balance
sheet data as of June 27, 1998, June 28, 1997 and June 29, 1996 are derived from
our audited consolidated financial statements that are not included in this
Annual Report on Form 10-K. In May 1998, we sold our legacy design and
manufacturing software business, Adra Systems, to focus on our Internet suite of
products. The financial results of this divested business are reflected in our
consolidated financial statements as discontinued operations.
The shares used in computing pro forma basic and diluted net income (loss)
per share give effect to the conversion of all outstanding shares of our
convertible preferred stock into shares of common stock, as if the conversion
had occurred on the original date of issuance.
11
<PAGE>
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
July 1, July 3, June 27, June 28, June 29,
2000 1999 1998 1997 1996
--------- --------- --------- ---------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Software license.................................... $ 40,977 $21,851 $ 11,836 $ 8,450 $ 4,420
Service............................................. 33,734 19,495 9,343 3,825 1,710
---------- --------- ---------- ---------- ----------
Total revenues................................... 74,711 41,346 21,179 12,275 6,130
---------- --------- ---------- ---------- ----------
Cost of revenues:
Software license.................................... 4,424 3,323 1,237 725 359
Service............................................. 26,383 14,467 6,591 3,081 2,163
---------- --------- ---------- ---------- ----------
Total cost of revenues........................... 30,807 17,790 7,828 3,806 2,522
---------- --------- ---------- ---------- ----------
Gross profit..................................... 43,904 23,556 13,351 8,469 3,608
---------- --------- ---------- ---------- ----------
Operating expenses:
Selling and marketing............................... 35,765 20,611 15,369 6,883 4,944
Research and development............................ 8,553 5,792 7,242 4,267 4,953
General and administrative.......................... 5,487 4,479 3,592 1,723 346
Stock-based compensation............................ 3,593 622 -- -- --
---------- --------- ---------- ---------- ----------
Total operating expenses......................... 53,398 31,504 26,203 12,873 10,243
---------- --------- ---------- ---------- ----------
Loss from operations................................... (9,494) (7,948) (12,852) (4,404) (6,635)
Other income (expense), net............................ 3,041 244 48 (140) --
Benefit from income taxes.............................. -- -- 1,928 875 --
---------- --------- ---------- ---------- ----------
Net loss from continuing operations.................... (6,453) (7,704) (10,876) (3,669) (6,635)
Net income (loss) from discontinued operations......... -- -- 8,684 1,777 (319)
---------- --------- ---------- ---------- ----------
Net loss............................................... $ (6,453) $(7,704) $ (2,192) $ (1,892) $(6,954)
========== ========= ========== ========== ==========
Basic and diluted net income (loss) per share:
Continuing operations............................... $ (0.36) $ (1.74) $ (2.88) $ (0.98) $ (1.84)
Discontinued operations............................. -- -- 2.30 0.47 (0.09)
---------- --------- ---------- ---------- ----------
Net loss............................................ $ (0.36) $ (1.74) $ (0.58) $ (0.51) $ (1.93)
========== ========= ========== ========= =========
Shares used in computation.......................... 17,966 4,428 3,777 3,729 3,606
========== ========= ========== ========== ==========
Pro forma basic and diluted net income (loss) per share:
Continuing operations............................... $ (0.18) $ (0.28) $ (0.43) $ (0.19) $ (0.35)
Discontinued operations............................. -- -- 0.34 0.09 (0.02)
---------- --------- ---------- ---------- ----------
Net loss............................................ $ (0.18) $ (0.28) $ (0.09) $ (0.10) $ (0.37)
======== ======== ======== ======== ========
Shares used in computation.......................... 35,686 27,970 25,050 18,998 18,874
========== ========= ========= ========== ==========
<CAPTION>
As of
----------------------------------------------------------
July 1, July 3, June 27, June 28, June 29,
2000 1999 1998 1997 1996
--------- --------- --------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and equivalents................................... $153,455 $ 11,036 $ 8,123 $ 897 $ 1,089
Working capital (deficit).............................. 146,012 7,892 8,826 (848) 210
Total assets of continuing operations.................. 184,417 29,887 22,912 8,478 6,329
Long-term debt, net of current portion................. -- -- -- 248 302
Redeemable convertible preferred stock................. -- 17,015 11,015 -- --
Total stockholders' equity (deficit)................... 151,593 (6,042) 843 3,072 4,998
</TABLE>
12
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis together with our
consolidated financial statements and related notes and other financial
information appearing elsewhere in this Annual Report on Form 10-K. This Annual
Report on Form 10-K, including the following discussion, contains trend analysis
and other forward-looking statements within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Any statements in this Annual
Report on Form 10-K that are not statements of historical facts are forward-
looking statements. These forward-looking statements are based on a number of
assumptions and involve risks and uncertainties. Our actual results could differ
materially from those anticipated in such forward-looking statements due to
various factors, including, but not limited to, those set forth under
"Cautionary Statements" and elsewhere in this Annual Report on Form 10-K.
Overview
We are a provider of Internet business collaboration software, which with
the release of eMatrix 9, the latest version of our core software, we now refer
to as "Intelligent Collaborative Commerce(TM) solutions". Our eMatrix suite of
products serves as an Internet platform facilitating collaboration among
different departments and geographic locations of global organizations. Our
eMatrix software products also serve as a backbone for an enterprise to
collaborate through the Internet with its customers, suppliers and other
business partners. Enterprises use our eMatrix product line to integrate
different business processes and facilitate the exchange of information, ideas
and knowledge among parties collaborating on business activities, such as
conceptual planning for new products, product design, design for
manufacturability, plant resource utilization, new product introduction and
customer service and support. This collaboration allows our customers to quickly
and cost-effectively bring the right products and services to market.
We generate revenues from licensing our eMatrix software products and
providing professional services, training and maintenance and customer support
services through our offices in the United States, Austria, Canada, England,
France, Germany, Italy, Japan and The Netherlands and indirectly through our
partner network throughout Europe and Asia/Pacific. Revenues by geographic
region fluctuate each period based on the timing and size of transactions. We
expect revenues by geographic region to continue to fluctuate each period, and
we expect revenues from our international operations to increase as we continue
to expand our international sales and professional services organizations. No
single customer has accounted for more than 10% of our annual revenues in any of
the last three fiscal years.
We have incurred significant costs to develop our technology and products,
recruit, hire and train personnel for our engineering, selling and marketing and
services departments, and establish a corporate infrastructure. These costs have
historically exceeded total revenues. As a result, we have incurred net losses
from continuing operations in each of the past three years. As of July 1, 2000,
we had an accumulated deficit of approximately $38.8 million. We anticipate that
our operating expenses will substantially increase in future periods and may
exceed projected increases in revenues. We expect to expand our selling and
marketing and services organizations, develop new distribution channels for our
products and services, fund greater levels of research and development, and
improve our operational and financial systems. Accordingly, we may incur
significant net losses in the future.
MatrixOne was incorporated in July 1983 as Adra Systems, Inc. In October
1997, we changed our name to MatrixOne, Inc., and in May 1998, we sold our
legacy design and manufacturing software business, Adra Systems, to focus on our
Internet business collaboration suite of products. The financial results of this
divested business are reflected in our consolidated financial statements as
discontinued operations.
13
<PAGE>
Results of Operations
The following table sets forth consolidated statement of operations data
expressed as a percentage of total revenues for each period indicated. The
historical results are not necessarily indicative of results to be expected for
any future period.
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Software license............................................ 54.8% 52.8% 55.9%
Service..................................................... 45.2 47.2 44.1
------------ ------------ ------------
Total revenues........................................... 100.0 100.0 100.0
------------ ------------ ------------
Cost of revenues:
Software license............................................ 5.9 8.0 5.8
Service..................................................... 35.3 35.0 31.1
------------ ------------ ------------
Total cost of revenues................................... 41.2 43.0 36.9
------------ ------------ ------------
Gross profit................................................... 58.8 57.0 63.1
------------ ------------ ------------
Operating expenses:
Selling and marketing....................................... 47.9 49.9 72.6
Research and development.................................... 11.4 14.0 34.2
General and administrative.................................. 7.3 10.8 17.0
Stock-based compensation.................................... 4.8 1.5 --
------------ ------------ ------------
Total operating expenses................................. 71.4 76.2 123.8
------------ ------------ ------------
Loss from operations........................................... (12.6) (19.2) (60.7)
Other income, net.............................................. 4.0 0.6 0.2
Benefit from income taxes...................................... -- -- 9.1
------------ ------------ ------------
Net loss from continuing operations............................ (8.6) (18.6) (51.4)
Net income from discontinued operations........................ -- -- 41.1
------------ ------------ ------------
Net loss....................................................... (8.6)% (18.6)% (10.3)%
============ ============ ============
</TABLE>
Comparison of Fiscal Years Ended July 1, 2000 and July 3, 1999
Software license revenues. We derive our software license revenues
principally from the licensing of our eMatrix suite of products, including
software applications and integration products developed jointly with third
parties, and, to a lesser extent, from providing Oracle database licenses. We
recognize revenues from software licensing upon shipment or distribution over
the Internet to a customer.
Software license revenues increased 87.5% to $41.0 million for fiscal 2000
from $21.9 million for fiscal 1999. The increase was primarily due to increased
software licensing in Europe, North America and Japan of $9.5 million, $5.5
million and $4.1 million, respectively. The increase in software license
revenues in Europe was primarily due to an increase in software licensed to new
customers by our subsidiaries in Germany, France, The Netherlands and the United
Kingdom and software licensed by our newly formed subsidiaries in Italy and
Austria. The increase in North America software license revenues was primarily
due to software licensed to new customers and additional software licensed to
existing customers. Our subsidiary in Japan was formed in late fiscal 1999 and
recorded its first license revenues in fiscal 2000.
Service revenues. We provide services to our customers and systems
integrators consisting of professional services, training and maintenance and
customer support. Our professional services, which include implementation and
consulting services, are provided on a time and materials or on a fixed-price
basis. We recognize professional service revenues as the services are performed,
on percentage-of-completion basis, or upon customer acceptance. We also offer
training services to our customers, distributors and systems integrators either
in our offices throughout the world or at customer locations. We recognize
revenues from training services as the services are provided. Customers that
license our products generally purchase annually renewable maintenance
contracts, which provide customers with the right to receive unspecified
software upgrades and technical
14
<PAGE>
support over the term of the contract. Revenues from maintenance contracts are
recognized over the term of the contract on a straight-line basis. Revenues from
maintenance and support services contracts are expected to increase in absolute
dollars and as a percentage of service revenues due to the expansion of our
customer base and increases in software licenses.
Service revenues increased 73.0% to $33.7 million for fiscal 2000 from
$19.5 million for fiscal 1999. The increase was primarily due to a 67.7%
increase in professional services revenues and a 101.9% increase in maintenance
revenues from new and renewed maintenance contracts. Maintenance revenues
represented 26.1% and 22.3% of service revenues for fiscal 2000 and 1999,
respectively.
Cost of software licenses. Cost of software licenses consists of royalties
paid to Oracle for Oracle database licenses and to other third parties for
integration products and applications licensed to our customers. Cost of
software licenses also includes the cost of manuals and product documentation,
production media used to deliver our products, shipping costs and related labor.
Our cost of software licenses fluctuates from period to period due to changes in
the mix of software licensed and the extent to which we pay royalties to third
parties on integration products and applications.
Cost of software licenses increased 33.1% to $4.4 million for fiscal 2000
from $3.3 million for fiscal 1999. The increase in cost of software licenses was
primarily due to an increase in the licensing of third-party software.
Cost of services. Cost of services includes salaries and related expenses
for services personnel and costs of contracting with systems integrators to
provide consulting services. Typically, our customers reimburse us for the
majority of our out-of-pocket expenses incurred during the course of a project,
which are recorded as a reduction in cost of services. Cost of services
fluctuates based on the mix of internal professional services personnel and more
expensive systems integrators used for professional services projects.
Cost of services increased 82.4% to $26.4 million for fiscal 2000 from
$14.5 million for fiscal 1999 primarily due to increased personnel costs to
support the growth in our professional services organization. We also increased
both the use of systems integrators to provide consulting services for our
customers and the amount of training we provided these systems integrators in an
effort to increase the number of systems integrators with relevant eMatrix
expertise.
Gross profit. Gross profit increased 86.4% to $43.9 million for fiscal 2000
from $23.6 million for fiscal 1999. Gross profit as a percentage of total
revenues, or gross margin, increased to 58.8% for fiscal 2000 from 57.0% for
fiscal 1999. The increase in gross margin was primarily attributable to higher
margin software license revenues growing faster than services revenues. Gross
margin on software licenses increased to 89.2% for fiscal 2000 from 84.8% for
fiscal 1999 due to a decrease in the relative proportion of software we licensed
from third parties. Gross margin on services decreased to 21.8% for fiscal 2000
from 25.8% for fiscal 1999 due to the increased use in the fiscal 2000 period of
systems integrators to provide consulting services and increased costs
associated with training both new personnel in our services organization and
systems integrators.
Selling and marketing. Selling and marketing expenses include marketing
costs, such as public relations and advertising, trade shows, marketing
materials and customer user group meetings, and selling costs such as sales
training events and commissions. Selling and marketing costs may fluctuate based
on the timing of trade shows and user group events and the amount of sales
commissions, which vary based on revenues.
Selling and marketing expenses increased 73.5% to $35.8 million for fiscal
2000 from $20.6 million for fiscal 1999 due to higher commission expense related
to the growth in our revenues and increased personnel costs related to the
expansion of our worldwide sales organization. Selling and
15
<PAGE>
marketing expenses as a percentage of total revenues decreased to 47.9% for
fiscal 2000 from 49.9% for fiscal 1999 primarily due to increased productivity
of our sales organization and a larger revenues base.
Research and development. Research and development expenses include costs
incurred to develop our intellectual property and are charged to expense as
incurred. To date, software development costs have been charged to expense as
incurred, because the costs incurred from the attainment of technological
feasibility to general product release have not been significant. Research and
development costs may fluctuate based on the utilization of domestic and foreign
third-party contractors, which are generally more expensive than our internal
engineering personnel, and the use of third parties to develop specific software
applications and integration products.
Research and development expenses increased 47.7% to $8.6 million for
fiscal 2000 from $5.8 million for fiscal 1999 due to increased personnel costs
related to the expansion of our research and development organization and an
increase in the use of third-party contractors to assist in the development of
our software. Research and development expenses as a percentage of total
revenues decreased to 11.4% for fiscal 2000 from 14.0% for fiscal 1999 due to a
larger revenues base.
General and administrative. General and administrative expenses consist
primarily of compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and an allocation of
related facility expenses.
General and administrative expenses increased 22.5% to $5.5 million for
fiscal 2000 from $4.5 million for fiscal 1999 due to an increase in personnel
costs to support the growth in our business. General and administrative expenses
as a percentage of total revenues decreased to 7.3% for fiscal 2000 from 10.8%
for fiscal 1999 primarily due to a larger revenues base.
Stock-based compensation. Stock-based compensation relates to the issuance
of stock options with exercise prices below the deemed fair value of our common
stock on the date of grant. In connection with certain stock option grants
during fiscal 2000 and 1999, we recorded deferred stock-based compensation
totaling approximately $17.7 million. Deferred stock-based compensation
represents the difference between the option exercise price and the deemed fair
value of our common stock on the date of grant and is reported as deferred
stock-based consideration, a component of stockholders' equity (deficit).
Deferred stock-based compensation is amortized through charges to operations
over the vesting period of the options, which is generally four years. Stock-
based compensation was $3.6 million and $0.6 million for fiscal 2000 and 1999,
respectively. We expect to record stock-based compensation of $4.2 million, $4.2
million, $3.6 million and $0.7 million in fiscal 2001, 2002, 2003 and 2004,
respectively, relating to certain stock option grants during fiscal 2000 and
1999.
Other income (expense), net. Other income (expense), net fluctuates based
on the amount of cash available for investment, borrowings under our line of
credit, interest expense related to our term loan and realized and unrealized
gains and losses on foreign currency transactions. Other income, net increased
$2.8 million to $3.0 million for fiscal 2000 from $0.2 million for fiscal 1999.
The increase was due to a $2.8 million increase in interest income from higher
levels of cash available for investment, as a result of the receipt of the
proceeds from our initial public offering of common stock and concurrent private
placement.
Income taxes. No provision for income taxes has been recorded for either
fiscal 2000 or 1999 due to accumulated net losses. We did not record any tax
benefits relating to these losses or other tax benefits due to the uncertainty
surrounding the timing of the realization of these future tax benefits, which
were $14.5 million in the aggregate at July 1, 2000.
16
<PAGE>
Comparison of Fiscal Years Ended July 3, 1999, and June 27, 1998
Software license revenues. Software license revenues increased 84.6% to
$21.9 million for fiscal 1999 from $11.8 million for fiscal 1998. Software
license revenues in North America increased 79.6% to $16.3 million for fiscal
1999 from $9.1 million in 1998. The increase in North American software license
revenues is primarily due to software licensed to several new customers and
additional software licensed to existing customers, as a result of increased
market acceptance of our products. International software license revenues
increased 101.1% to $5.6 million for fiscal 1999 from $2.8 million in fiscal
1998. The increase in international software license revenues is due to 134.1%
growth in software licensed by our German subsidiary and software licensed by
our newly formed subsidiaries in the United Kingdom and The Netherlands.
Service revenues. Service revenues increased 108.7% to $19.5 million in
fiscal 1999 from $9.3 million in fiscal 1998. The increase was primarily due to
an 85.9% increase in professional services revenues in fiscal 1999 relating to
consulting services and a 170.0% increase in maintenance revenues in fiscal 1999
for new and renewed maintenance contracts. Maintenance revenues represented
22.3% and 17.3% of service revenues in fiscal 1999 and 1998, respectively.
Cost of software licenses. Cost of software licenses increased 168.6% to
$3.3 million in fiscal 1999 from $1.2 million in fiscal 1998. The increase in
cost of software licenses in fiscal 1999 was primarily due to a 277.8% increase
in aggregate royalties from increased licensing of third-party software. We
began licensing a significant amount of Oracle and third-party integration
software during fiscal 1999.
Cost of services. Cost of services increased 119.5% to $14.5 million in
fiscal 1999 from $6.6 million in fiscal 1998. The increase in cost of services
was primarily due to increased personnel costs to support the growth in our
services organization. We also increased both the use of systems integrators to
provide consulting services for our customers and the amount of training we
provide these systems integrators in an effort to increase the number of systems
integrators with relevant eMatrix expertise.
Gross profit. Gross profit increased 76.4% to $23.6 million in fiscal 1999
from $13.4 million in fiscal 1998. Gross margin was 57.0% and 63.1% in fiscal
1999 and 1998, respectively. The decrease in gross margin was primarily
attributable to lower margin service revenues growing faster than software
license revenues. Gross margin on software licenses was 84.8% and 89.5% in
fiscal 1999 and 1998, respectively. The decrease in gross margin on software
licenses was due to an increase in the relative proportion of software licensed
from third parties. Gross margin on services decreased to 25.8% in fiscal 1999
from 29.5% in fiscal 1998 due to our increased use of systems integrators to
provide consulting services to our customers.
Selling and marketing. Selling and marketing expenses increased 34.1% to
$20.6 million in fiscal 1999 from $15.4 million in fiscal 1998. The increase in
selling and marketing expenses was primarily due to increased personnel costs
relating to the growth in our worldwide sales organization and higher commission
expense related to the growth in our revenues. Selling and marketing expenses as
a percentage of total revenues decreased to 49.9% in fiscal 1999 from 72.6% in
fiscal 1998 due primarily to a larger revenues base.
Research and development. Research and development expenses decreased 20.0%
to $5.8 million in fiscal 1999 from $7.2 million in fiscal 1998. Research and
development expenses as a percentage of total revenues decreased to 14.0% in
fiscal 1999 from 34.2% in fiscal 1998. The decrease was primarily due to our
replacement of outside domestic contractors with our internal engineering
organization, the increased use of partners to more efficiently develop
applications and integration products and the replacement of some third-party
contractors with a contract research and development group in India in fiscal
1999.
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<PAGE>
General and administrative. General and administrative expenses increased
24.7% to $4.5 million in fiscal 1999 from $3.6 million in fiscal 1998. The
increase in general and administrative expenses was primarily due to increases
in personnel costs to support the growth in our business and additional
provisions for accounts receivable. General and administrative expenses as a
percentage of total revenues decreased to 10.8% in fiscal 1999 from 17.0% in
fiscal 1998 due primarily to a larger revenues base.
Stock-based compensation. Stock-based compensation was $0.6 million for
fiscal 1999.
Other income (expense), net. Other income, net increased to $0.2 million in
fiscal 1999 from $48,000 in fiscal 1998 due to higher cash balances available
for investment and related interest income.
Discontinued operations. During fiscal 1998, we decided to focus our
business on our eMatrix suite of software products and services. On May 7, 1998,
we sold substantially all of the net assets of our legacy design and
manufacturing software business, Adra Systems, to SofTech, Inc. The purchase
price consisted of $7.0 million of cash, a $4.4 million promissory note that was
paid in full in July 1998, and contingent payments of up to $2.2 million based
on SofTech's revenues after the acquisition. SofTech has notified us that no
contingent payments were due. We recorded a $6.7 million gain on the sale of the
net assets of Adra Systems, comprised of the cash and promissory note proceeds
of $11.4 million less estimated transaction costs of $2.3 million, income taxes
of $1.5 million and net assets sold of $0.9 million. The transaction costs
consisted principally of investment banking, legal and accounting fees and bonus
and severance arrangements with some employees. During fiscal 1999, revenues
from Adra Systems were approximately $12.4 million for the period through May 7,
1998. At July 1, 2000 and July 3, 1999, accrued transaction costs relating to
the sale of the net assets of Adra Systems, included in accrued expenses, were
$0.6 million and $1.0 million, respectively.
Income taxes. No provision for income taxes was recorded in fiscal 1999 or
1998 due to accumulated net losses. We did not record any tax benefits relating
to these losses or other tax benefits due to the uncertainty surrounding the
timing of the realization of these future tax benefits, which were $9.9 million
in the aggregate at July 3, 1999.
Liquidity and Capital Resources
We have primarily financed our operations through the sale of convertible
preferred stock and common stock, borrowings under our lines of credit, cash
generated from our legacy design and manufacturing business, Adra Systems, and
the cash proceeds from the sale of Adra Systems in fiscal 1998.
As of July 1, 2000, we had cash and equivalents of $153.5 million, an
increase of $142.4 million from July 3, 1999. On March 6, 2000, we completed our
initial public offering of 5,750,000 shares of common stock at a purchase price
of $25.00 per share and a concurrent private placement of 450,000 shares of
common stock at a purchase price of $23.25 per share. The net proceeds from
these sales of our common stock were approximately $142.2 million. Our working
capital was $146.0 million and $7.9 million as of July 1, 2000 and July 3, 1999,
respectively. The increase in working capital was primarily attributable to the
net proceeds received from our initial public offering and concurrent private
placement.
We have a $7.0 million line of credit that bears interest at the bank's
prime rate plus 0.5% and expires December 28, 2000. Borrowings under this line
of credit are limited to 80% of eligible accounts receivable from customers in
the United States less amounts reserved for foreign currency contracts. In
addition, we have a $1.0 million working capital line of credit that bears
interest at the bank's prime rate plus 0.5% and expires on December 28, 2000.
Borrowings under this working capital line of credit are limited to 90% of
eligible foreign accounts receivable billed and
18
<PAGE>
collected in the United States. As of July 1, 2000, we had no borrowings
outstanding under these lines of credit and $6.0 million available. These lines
of credit are collateralized by all of our assets and have financial and other
covenants. We were in compliance with these financial and other covenants as of
July 1, 2000.
Our German subsidiary also has a working capital line of credit of 0.5
million DM ($0.2 million), which was available for borrowing at July 1, 2000.
Borrowings under this line of credit are limited to 100% of accounts receivable
of the German subsidiary and bear interest at 10.25%.
Net cash provided by continuing operations for fiscal 2000 was $6.8 million
resulting from an increase in deferred revenues, accrued expenses and accounts
payable offset by our net loss from continuing operations and increases in
accounts receivable and prepaid expenses and other current assets. Net cash used
in continuing operations was $8.3 million in fiscal 1999 due to the net loss
incurred from the expansion of our operations and the increase in our accounts
receivable.
Net cash used in discontinued operations was $0.3 million and $1.1 million
for fiscal 2000 and 1999, respectively, and reflects payments of the severance
and legal and accounting fees incurred in connection with the sale of our legacy
design and manufacturing business.
Net cash used in investing activities was $3.7 million for fiscal 2000 and
reflects our investments in computer hardware, computer software and other
technology, leasehold improvements and office equipment. Net cash provided by
investing activities was $3.1 million in fiscal 1999 and included a $4.4 million
payment of a promissory note from the sale of assets of Adra Systems, offset in
part by capital expenditures. We expect that capital expenditures for the next
12 months will be approximately $4.5 million, primarily for the acquisition of
computer hardware, computer software and other technology, leasehold
improvements and office equipment.
Net cash provided by financing activities was $140.0 million for fiscal
2000 and reflects the net proceeds received from our initial public offering and
concurrent private placement of approximately $142.2 million and the repayments
of our lines of credit. Net cash provided by financing activities was $9.2
million in fiscal 1999 and consisted of the sale of $6.0 million of redeemable
convertible preferred stock and $3.1 million of net borrowings from our lines of
credit.
We currently anticipate that our cash and equivalents and available credit
facilities will be sufficient to fund our anticipated cash requirements for
working capital and capital expenditures for at least the next 12 months. We may
need to raise additional funds, however, in order to fund more rapid expansion
of our business, develop new and enhance existing eMatrix products and services,
or acquire complementary products, businesses or technologies. If additional
funds are raised through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders may be reduced, our stockholders
may experience additional dilution, and such securities may have rights,
preferences or privileges senior to those of our stockholders. Additional
financing may not be available on terms favorable to us, or at all. If adequate
funds are not available or are not available on acceptable terms, our ability to
fund our expansion, take advantage of unanticipated opportunities or develop or
enhance our services or products would be significantly limited.
Income Taxes
As of July 1, 2000, we had net operating loss carryforwards in the U.S. of
$20.3 million and research and development tax credit carryforwards in the U.S.
of $0.7 million. These net operating loss and tax credit carryforwards will
begin to expire at various dates beginning in fiscal 2001, if not utilized. The
Tax Reform Act of 1986 imposes substantial restrictions on the utilization of
net operating loss and tax credit carryforwards in the event of an ownership
change of a corporation. Our ability to utilize net operating loss and tax
credit carryforwards on an annual basis could be limited as a result of an
ownership change as defined by Section 382 of the Internal Revenue Code. We have
completed several financings and believe that we have incurred ownership
changes,
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which we do not believe will have a material impact on our ability to utilize
our net operating loss and tax credit carryforwards.
As of July 1, 2000, we also had net operating loss carryforwards in various
countries in which our subsidiaries operate aggregating $11.7 million. Certain
of these net operating loss carryforwards begin to expire in fiscal 2002.
Because of the uncertainty regarding our ability to use our U.S. and
foreign net operating loss and tax credit carryforwards, we have provided a full
valuation allowance on these and all other deferred tax assets.
Year 2000 Readiness Disclosure Statement
We executed a plan designed to make our products, information technology
systems and equipment Year 2000 compliant. To date, we have experienced no
significant problems in our products, business interruptions or material adverse
effects from the Year 2000 issue. However, we could still experience material
unanticipated problems and costs caused by undetected errors or defects from the
Year 2000 issue. We cannot guarantee that our Year 2000 readiness plan has been
successfully implemented, and our actual results could still differ materially
from our plan.
Conversion to the Euro
We have arranged for the necessary modifications of our internal
information technology and other systems to accommodate Euro-denominated
transactions. Our European subsidiaries currently process Euro-denominated
transactions. In addition, our products support the Euro currency symbol. We are
also assessing the business implications of the conversion to the Euro,
including long-term competitive implications and the effect of market risk with
respect to financial instruments. Based on the foregoing, we do not believe the
Euro will have a significant effect on our business, financial position, cash
flows or results of operations. We will continue to assess the impact of Euro
conversion issues as the applicable accounting, tax, legal and regulatory
guidance evolves.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133, as amended by SFAS No. 137 and No. 138, will be
effective for our financial reporting beginning in the first quarter of fiscal
2001. SFAS No. 133 will require us to recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for gains and losses from changes in
the fair value of a particular derivative will depend on the intended use of the
derivative. We do not expect the adoption of SFAS No. 133 to have a material
impact on our results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, disclosure and
presentation of revenue in financial statements. We will adopt the provisions of
SAB 101 for all transactions during fiscal 2002. We are currently evaluating the
impact of SAB 101 on our financial statements and related disclosures, but we do
not expect that any impact will be material.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - An Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the definition of employees for
purposes of applying APB Opinion No. 25, the criteria for determining whether a
plan qualifies as a non-compensatory plan, the accounting consequences of
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various modifications to the terms of a previously fixed stock option or award
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occurred after either December 15,
1998 or January 12, 2000. We do not expect that the adoption of FIN 44 will have
a material effect on our results of operations or financial position.
Cautionary Statements
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. Our actual results could differ materially from
those anticipated or projected in any forward-looking statements, as a result of
certain factors, including without limitation, those set forth in the following
cautionary statements and elsewhere in this Annual Report on Form 10-K. In
addition to the other information in this Annual Report on Form 10-K, the
following cautionary statements should be carefully considered in evaluating
MatrixOne and its business.
Risks Related to Our Business
Our Future Success Is Uncertain Because We Have Significantly Changed Our
Business
We commercially shipped the first version of our business collaboration
software in November 1993, released our first Internet business collaboration
software product in March 1997 and released the current version of our eMatrix
product line in September 2000. In May 1998, we sold our legacy design and
manufacturing software business, Adra Systems, to focus on our eMatrix suite of
products. To date, our customers have used our eMatrix suite of products
primarily for linking geographically dispersed departments and divisions within
their organizations. Our strategy is to add new customers and have our current
customers expand their use of our eMatrix product line. Our new business focus
and strategy may not be successful. In addition, because we have only recently
begun to focus our business on the development, sale and marketing of our
eMatrix line of products, we may have limited insight into trends that may
emerge and affect our business. We face the many challenges, risks and
difficulties frequently encountered by companies transitioning to a new product
line and using a new business strategy in a rapidly evolving market. If we are
unable to successfully implement our business strategy, our operating results
will suffer.
We May Not Achieve Anticipated Revenues if Market Acceptance of Our eMatrix
Line of Software Products Is Not Forthcoming
We believe that revenues from licenses of our eMatrix suite of products,
together with revenues from related professional services, training and
maintenance and customer support services, will account for substantially all of
our revenues for the foreseeable future. Our future financial performance will
depend on market acceptance of our eMatrix line of products, including our
integration products, and any upgrades or enhancements that we may make to our
products in the future. As a result, if our eMatrix line of products does not
achieve widespread market acceptance, we may not achieve anticipated revenues.
In addition, if our competitors release new products that are superior to our
eMatrix line of products, demand for our products may not accelerate and could
decline. If we are unable to increase the number and scope of our integration
products or ship or implement any upgrades or enhancements to our products when
planned, or if the introduction of upgrades or enhancements causes customers to
defer orders for our existing products, we also may not achieve anticipated
revenues.
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The Market for Our eMatrix Software Products Is Newly Emerging and Demand
for Business Collaboration Software May Not Evolve and Could Decline
The market for Internet business collaboration software is newly emerging.
We cannot be certain that this market will continue to develop and grow or that
companies will choose to use our eMatrix products rather than attempting to
develop alternative platforms and applications internally or through other
sources. If we fail to establish a significant base of customer references, our
ability to market and license our eMatrix product suite successfully may be
reduced. Companies that have already invested substantial resources in other
methods of sharing information during the design, manufacturing and supply
process may be reluctant to adopt new technology or infrastructures that may
replace, limit or compete with their existing systems or methods. We expect that
we will continue to need to pursue intensive marketing and selling efforts to
educate prospective customers about the uses and benefits of our eMatrix product
line. Therefore, demand for and market acceptance of our software products is
subject to a high level of uncertainty.
We Have a History of Losses, May Incur Losses in the Future and May Not
Achieve or Maintain Profitability
We have incurred substantial net losses from continuing operations in each
of the past three fiscal years. We incurred net losses from continuing
operations of approximately $6.5 million, $7.7 million and $10.9 million for
fiscal 2000, 1999 and 1998, respectively. As of July 1, 2000, we had an
accumulated deficit of approximately $38.8 million. We expect to substantially
increase our selling and marketing and research and development expenses, and as
a result, we may incur net losses in future periods. We will need to generate
significant increases in revenues to achieve and maintain profitability, and we
may not be able to do so. If our revenues grow more slowly than we anticipate or
if our operating expenses increase more than we expect or cannot be reduced in
the event of lower revenues, our business will be significantly and adversely
affected. Even if we achieve profitability in the future on a quarterly or
annual basis, we may not be able to sustain or increase profitability. Failure
to become profitable within the time frame expected by investors or to sustain
profitability may adversely affect the market price of our common stock.
If We Are Unable to Obtain Additional Capital as Needed in the Future, Our
Business May Be Adversely Affected and the Market Price for Our Common
Stock Could Significantly Decline
We have historically been unable to run our operations by cash generated
from our business operations and have financed our operations principally
through the sale of securities. We may need to raise additional debt or equity
capital to fund the rapid expansion of our operations, to enhance our products
and services, or to acquire or invest in complementary products, services,
businesses or technologies. If we raise additional funds through further
issuances of equity or convertible debt or equity securities, our existing
stockholders could suffer significant dilution, and any new equity securities we
issue could have rights, preferences and privileges superior to those of holders
of our common stock. In addition, we may not be able to obtain additional
financing on terms favorable to us, if at all. If adequate funds are not
available on terms favorable to us, our business may be adversely affected and
the market price for our common stock could significantly decline.
Our Quarterly Revenues and Operating Results Are Likely to Fluctuate and if
We Fail to Meet the Expectations of Securities Analysts or Investors, Our
Stock Price Could Decline
Our quarterly revenues and operating results are difficult to predict, have
varied significantly in the past and are likely to fluctuate significantly in
the future. We typically realize a significant percentage of our revenues for a
fiscal quarter in the second half of the third month of the quarter.
Accordingly, our quarterly results may be difficult or impossible to predict
prior to the end of the quarter. Any inability to obtain sufficient orders or to
fulfill shipments in the period immediately preceding the end of any particular
quarter may cause the results for that quarter to fall short of our
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revenues targets. In addition, we base our current and future expense levels in
part on our estimates of future revenues. Our expenses are largely fixed in the
short term. We may not be able to adjust our spending quickly if our revenues
fall short of our expectations. Accordingly, a revenues shortfall in a
particular quarter would have an adverse effect on our operating results for
that quarter.
In addition, our quarterly operating results may fluctuate for many
reasons, including, without limitation:
. changes in demand for our eMatrix products and services, including
seasonal differences;
. changes in the mix of our software licensing and services;
. variability in the mix of professional services performed by us and
systems integrators;
. the amount of training we provide to systems integrators and other
business partners related to our eMatrix product line and its
implementation;
. the level of royalty payments on licensed, third-party software and our
integration products and applications; and
. our ability to accurately estimate costs associated with fixed-price
professional services projects.
For these reasons, you should not rely on period-to-period comparisons of
our financial results to forecast our future performance. It is likely that in
some future quarter or quarters our operating results will be below the
expectations of securities analysts or investors. If a shortfall in revenues
occurs, the market price of our common stock may decline significantly.
Our Lengthy and Variable Sales Cycle Makes it Difficult for Us to Predict
When or if Sales Will Occur and Therefore We May Experience an Unplanned
Shortfall in Revenues
Our products have a lengthy and unpredictable sales cycle that contributes
to the uncertainty of our operating results. Customers view the purchase of our
eMatrix line of Internet business collaboration software as a significant and
strategic decision. As a result, customers generally evaluate our software
products and determine their impact on existing infrastructure over a lengthy
period of time. Our sales cycle has historically ranged from approximately one
to nine months based on the customer's need to rapidly implement a solution and
whether the customer is new or is extending an existing implementation. The
license of our software products may be subject to delays if the customer has
lengthy internal budgeting, approval and evaluation processes. We may incur
significant selling and marketing expenses during a customer's evaluation
period, including the costs of developing a full proposal and completing a rapid
proof of concept or custom demonstration, before the customer places an order
with us. Customers may also initially purchase a limited number of server and
user licenses before expanding their implementations. Larger customers may
purchase our software products as part of multiple simultaneous purchasing
decisions, which may result in additional unplanned administrative processing
and other delays in the recognition of our license revenues. If revenues
forecasted from a specific customer for a particular quarter are not realized or
are delayed to another quarter, we may experience an unplanned shortfall in
revenues, which could significantly and adversely affect our operating results.
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We May Not Achieve Our Anticipated Revenues if Large Software and Service
Orders Expected in a Quarter Are Not Placed or Are Delayed
Although we license our eMatrix software products to numerous customers in
any quarter, a single customer often represents more than 10% of our quarterly
revenues. We expect that revenues from large orders will continue to account for
a large percentage of our total revenues in future quarters. A customer may
determine to increase its number of licenses and expand its implementation of
our eMatrix product suite throughout its organization and to its customers,
suppliers and other business partners only after a successful initial
implementation. Therefore, the timing of these large orders is often
unpredictable. If any large order anticipated for a particular quarter is not
realized or is delayed to another quarter, we may experience an unplanned
shortfall in revenues, which could significantly and adversely affect our
operating results.
We Will Not Succeed Unless We Can Compete in Our Markets
The markets in which we offer our eMatrix line of software products and
services are intensely competitive and rapidly changing. Furthermore, we expect
competition to intensify given the newly emerging nature of the market for
Internet business collaboration software and consolidation in the software
industry in general. We will not succeed if we cannot compete effectively in
these markets. Competitors vary in size and in the scope and breadth of the
products and services they offer. Many of our actual or potential competitors
have significant advantages over us, including, without limitation:
. larger and more established selling and marketing capabilities;
. significantly greater financial and engineering personnel and other
resources;
. greater name recognition and a larger installed base of customers; and
. well-established relationships with our existing and potential
customers, systems integrators, complementary technology vendors and
other business partners.
As a result, our competitors may be in a stronger position to respond quickly to
new or emerging technologies and changes in customer requirements. Our
competitors may also be able to devote greater resources to the development,
promotion and sale of their products and services than we can. Accordingly, we
may not be able to maintain or expand our revenues if competition increases and
we are unable to respond effectively.
As competition in the business collaboration software market intensifies,
new solutions will come to market. Our competitors may bundle their products in
a manner that may discourage users from purchasing our eMatrix products. Also,
current and potential competitors may establish cooperative relationships among
themselves or with third parties. Increased competition could result in
reductions in price and revenues, lower profit margins, loss of customers and
loss of market share. Any one of these factors could materially and adversely
affect our business and operating results.
If We Are Not Successful in Developing New Products and Services that Keep
Pace with Technology, Our Operating Results Will Suffer
The market for our eMatrix product line is new and emerging, and is
characterized by rapid technological advances, changing customer needs and
evolving industry standards. Accordingly, to realize our expectations regarding
our operating results, we depend on our ability to:
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. develop, in a timely manner, new software products and services that
keep pace with developments in technology;
. meet evolving customer requirements; and
. enhance our current product and service offerings and deliver those
products and services through appropriate distribution channels.
We may not be successful in developing and marketing, on a timely and cost-
effective basis, either enhancements to our eMatrix line of software products or
new products that respond to technological advances and satisfy increasingly
sophisticated customer needs. If we fail to introduce new products, our
operating results will suffer. In addition, if new industry standards emerge
that we do not anticipate or adapt to, our software products could be rendered
obsolete and our business could be materially harmed.
If Our Existing Customers Do Not License Additional Software Products From
Us, We May Not Achieve Growth in Our Revenues
Our customers' initial implementations of our eMatrix line of software
products often include a limited number of server and user licenses. Customers
may subsequently add server and user licenses as they expand the implementations
of our products throughout their enterprises or add software applications
designed for specific functions. Therefore, it is important that our customers
are satisfied with their initial product implementations. If we do not increase
licenses to existing customers, we may not be able to achieve anticipated growth
in our revenues.
Our Revenues Could Decline if We Do Not Develop and Maintain Successful
Relationships with Systems Integrators and Complementary Technology Vendors
We pursue business alliances with systems integrators and complementary
technology vendors to endorse our eMatrix line of software products, implement
our software, provide customer support services, promote and resell products
that integrate with our products and develop industry-specific software
products. These alliances provide an opportunity to license our eMatrix products
to our partners' installed customer bases. In many cases, these parties have
established relationships with our existing and potential customers and can
influence the decisions of these customers. We rely upon these companies for
recommendations of our eMatrix line of products during the evaluation stage of
the purchasing process, as well as for implementation and customer support
services. A number of our competitors have stronger relationships with these
systems integrators and complementary technology vendors who, as a result, may
be more likely to recommend our competitors' products and services. In addition,
some of our competitors have relationships with a greater number of these
systems integrators and complementary technology vendors and, therefore, have
access to a broader base of enterprise customers. If we are unable to establish,
maintain and strengthen these relationships, we will have to devote
substantially more resources to the selling and marketing, implementation and
support of our products. Our efforts may not be as effective as these systems
integrators and complementary technology vendors, which could significantly harm
our operating results.
Our International Operations and Planned Expansion Expose Us to Business
Risks Which Could Cause Our Operating Results to Suffer
Operations outside North America accounted for approximately 39.2%, 26.1%
and 26.1% of our revenues in fiscal 2000, 1999 and 1998, respectively. Export
sales from North America accounted for approximately 9.8% and 4.2% of our
revenues in fiscal 2000 and 1999, respectively. Many of our customers have
operations in numerous locations around the globe. In order to attract, retain
and service multi-national customers, we have to maintain strong direct and
indirect sales and support organizations in Europe and Asia. Our ability to
penetrate Asian markets may be
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impaired by resource constraints and the ability to hire qualified personnel in
Asian countries. We face a number of risks associated with conducting business
internationally, which could negatively impact our operating results, including,
without limitation:
. difficulties relating to the management and administration of a
globally-dispersed business;
. longer sales cycles associated with educating foreign customers on the
benefits of our products and services;
. difficulties in providing customer support for our products in multiple
time zones;
. currency fluctuations and exchange rates;
. limitations on repatriation of earnings of our foreign operations;
. the burdens of complying with a wide variety of foreign laws;
. reductions in business activity during the summer months in Europe and
certain other parts of the world;
. multiple and possibly overlapping tax structures;
. language barriers;
. the need to consider numerous international product characteristics;
. different accounting practices;
. changes in import/export duties, quotas and controls;
. complex and inflexible employment laws;
. economic or political instability in some international markets; and
. conflicting international business practices.
We believe that expansion of our international operations will be necessary
for our future success. Therefore, a key aspect of our strategy is to continue
to expand our presence in foreign markets. We may not succeed in our efforts to
enter new international markets and expand our international operations. If we
fail to do so, we may not be able to achieve anticipated growth in our revenues.
This international expansion may be more difficult or time-consuming than we
anticipate. It is also costly to establish international facilities and
operations and promote our eMatrix products internationally. Thus, if revenues
from international activities do not offset the expenses of establishing and
maintaining foreign operations, our operating results will suffer.
We Depend on Licensed Third-Party Technology, the Loss of Which Could
Result in Increased Costs of or Delays in Licenses of Our Products
We license technology from several companies on a non-exclusive basis that
is integrated into our eMatrix product suite, including database technology from
Oracle, CORBA from IONA Technologies, and security and encryption technology
software from RSA Security. We also license from third parties our eMatrix
integration products and applications. We anticipate that we will continue to
license technology from third parties in the future. This software may not
continue to be available on commercially reasonable terms, or at all. Some of
the software we license from third parties would be difficult and time-consuming
to replace. The loss of any of these technology
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licenses could result in delays in the licensing of our eMatrix software
products until equivalent technology, if available, is identified, licensed and
integrated. In addition, the effective implementation of our products may depend
upon the successful operation of third-party licensed products in conjunction
with our products, and therefore any undetected errors in these licensed
products may prevent the implementation or impair the functionality of our
products, delay new product introductions and/or injure our reputation.
If Systems Integrators Are Not Available or Fail to Perform Adequately, Our
Customers May Suffer Implementation Delays and a Lower Quality of Customer
Service, and We May Incur Increased Expenses
Systems integrators often are retained by our customers to implement our
eMatrix line of software products. If experienced systems integrators are not
available to implement our eMatrix products, we will be required to provide
these services internally, and we may not have sufficient resources to meet our
customers' implementation needs on a timely basis. Use of our professional
services personnel to implement our eMatrix product line would also increase our
expenses. In addition, we cannot control the level and quality of service
provided by our current and future implementation partners. If these systems
integrators do not perform to the satisfaction of our customers, our customers
could become dissatisfied with our products, which could adversely affect our
business and operating results.
We May Not Be Able to Increase Revenues if We Do Not Expand Our Sales and
Distribution Channels
We will need to significantly expand our direct and indirect global sales
operations in order to increase market awareness and acceptance of our eMatrix
line of products and generate increased revenues. We market and license our
products directly through our sales organization and indirectly through our
global partner and distributor network. Our ability to increase our global
direct sales organization will depend on our ability to recruit, train and
retain sales personnel with advanced sales skills and technical knowledge.
Competition for qualified sales personnel is intense in our industry. In
addition, it may take up to nine months for a new sales person to become fully
productive. If we are unable to hire or retain qualified sales personnel, or if
newly hired sales personnel fail to develop the necessary skills or reach
productivity more slowly than anticipated, we may have difficulty licensing our
eMatrix software products, and we may experience a shortfall in anticipated
revenues.
In addition, we believe that our future success is dependent upon expansion
of our indirect global distribution channel, which consists of our relationships
with a variety of systems integrators, complementary technology vendors and
distributors. We cannot be certain that we will be able to maintain our current
relationships or establish relationships with additional distribution partners
on a timely basis, or at all. Our distribution partners may not devote adequate
resources to promoting or selling our eMatrix line of products and may not be
successful. In addition, we may also face potential conflicts between our direct
sales force and third-party reselling efforts. Any failure to expand our
indirect global distribution channel or increase the productivity of this
distribution channel could result in lower than anticipated revenues.
We Currently Perform Some Consulting Projects on a Fixed-Price Basis, Which
Could Cause a Decline in Our Gross Margins
We currently perform some consulting projects on a fixed-price basis. Prior
to performing a consulting project, we estimate the amount of work involved. We
may from time to time underestimate the amount of time or resources required. If
we do not correctly estimate the amount of time or resources required, our gross
margins could decline.
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Our Rapid Growth Is Placing a Significant Strain on Our Resources, and Our
Business Will Suffer if We Fail to Manage Our Growth Properly
We have rapidly expanded our revenues and operations over the past five
years, which has placed a significant strain on our resources. We have
substantially increased, and plan to further increase, both the number of our
employees and the geographic scope of our operations. In addition, we have hired
several of our key executives in the last several years. Our management team has
had limited experience managing a rapidly growing company. We expect our
anticipated growth will further strain our management, operational and financial
resources. Moreover, our ability to successfully offer our eMatrix line of
software products and services and implement our business strategy in a new and
rapidly evolving market requires effective planning and management. To
accommodate our growth, we must:
. improve existing and implement new management, information, operational
and financial systems, procedures and controls;
. hire, train, manage, retain and motivate qualified personnel; and
. effectively manage relationships with our customers, suppliers and
other business partners.
We may not be able to install and implement additional management,
information, operational and financial systems, procedures and controls in an
efficient and timely manner to support our future operations. The difficulties
associated with installing and implementing these new systems, procedures and
controls may place a significant burden on our management and our internal
resources. In addition, if we continue to grow internationally, we will have to
expand our worldwide operations and enhance our communications infrastructure.
Any delay in the implementation of, or any disruption in the transition to, new
or enhanced systems, procedures or controls could adversely affect our ability
to accurately forecast sales demand, manage our partner relationships, and
record and report financial and management information on a timely and accurate
basis. If we cannot manage our expanding operations, we may not be able to
continue to grow or we may grow at a slower pace. Furthermore, our operating
costs may escalate faster than planned, which would negatively impact our
operating results.
We Depend on Our Key Personnel to Manage Our Business Effectively, and if
We Are Unable to Retain Key Personnel, Our Ability to Compete Could Be
Harmed
Our ability to implement our business strategy and our future success
depends largely on the continued services of our executive officers and other
key engineering, sales, marketing and support personnel who have critical
industry or customer experience and relationships. None of our key personnel,
other than Johannes T.J. Ruigrok, our Senior Vice President of Worldwide Sales
and Marketing, is bound by an employment agreement. We do not have key-man life
insurance on any of our employees. The loss of the technical knowledge and
management and industry expertise of any of these key personnel could result in
delays in product development, loss of customers and sales and diversion of
management resources, which could materially and adversely affect our operating
results. In addition, our future performance depends upon our ability to attract
and retain highly qualified sales, engineering, marketing, services and
managerial personnel, and there is intense competition for such personnel. If we
do not succeed in retaining our personnel or in attracting new employees, our
business could suffer significantly.
Future Acquisitions May Negatively Affect Our Ongoing Business Operations
and Our Operating Results
We may expand our operations or market presence by acquiring or investing
in complementary businesses, products or technologies that complement our
business, increase our market coverage,
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enhance our technical capabilities or otherwise offer opportunities for growth.
These transactions create risks such as:
. difficulty assimilating the operations, technology, products and
personnel we acquire;
. disruption of our ongoing business;
. diversion of management's attention from other business concerns;
. one-time charges and expenses associated with amortization of goodwill
and other purchased intangible assets; and
. potential dilution to our stockholders.
Our inability to address these risks could negatively impact our operating
results. Moreover, any future acquisitions, even if successfully completed, may
not generate any additional revenues or provide any benefit to our business.
Our Products May Contain Defects that Could Harm Our Reputation, Be Costly
to Correct, Delay Revenues and Expose Us to Litigation
Despite testing by us, our partners and our customers, errors may be found
in our products after commencement of commercial shipments. We and our customers
have from time to time discovered errors in our software products. In the
future, there may be additional errors and defects in our software. If errors
are discovered, we may not be able to successfully correct them in a timely
manner or at all. Errors and failures in our products could result in loss of or
delay in market acceptance of our products and damage to our reputation and our
ability to convince commercial users of the benefits of our products. In
addition, we may need to make significant expenditures of capital resources in
order to eliminate errors and failures. Since our products are used by customers
for mission-critical applications, errors, defects or other performance problems
could also result in financial or other damages to our customers, who could
assert warranty and other claims for substantial damages against us. Although
our license agreements with our customers typically contain provisions designed
to limit our exposure to potential product liability claims, it is possible that
such provisions may not be effective or enforceable under the laws of certain
jurisdictions. In addition, our insurance policies may not adequately limit our
exposure with respect to such claims. A product liability claim, even if
unsuccessful, would be costly and time-consuming to defend and could harm our
business.
Risks Related to Legal Uncertainty
Failure to Protect Our Intellectual Property Could Harm Our Name
Recognition Efforts and Ability to Compete Effectively
Currently, we rely on a combination of trademarks, copyrights and common
law safeguards including trade secret protection. To protect our intellectual
property rights in the future, we intend to rely on a combination of patents,
trademarks, copyrights and common law safeguards, including trade secret
protection. We also rely on restrictions on use, confidentiality and
nondisclosure agreements and other contractual arrangements with our employees,
affiliates, customers, alliance partners and others. The protective steps we
have taken may be inadequate to deter misappropriation of our intellectual
property and proprietary information. A third party could obtain our proprietary
information or develop products or technology competitive with ours. We may be
unable to detect the unauthorized use of, or take appropriate steps to enforce,
our intellectual property rights. We have registered some of our trademarks in
the United States and have other trademark and patent applications pending.
Effective patent, trademark, copyright and trade secret protection may not be
available in every country in which we offer or intend to offer
29
<PAGE>
our products and services to the same extent as in the United States. Failure to
adequately protect our intellectual property could harm or even destroy our
brands and impair our ability to compete effectively. Further, enforcing our
intellectual property rights could result in the expenditure of significant
financial and managerial resources and may not prove successful.
We Could Incur Substantial Costs Defending Our Intellectual Property from
Claims of Infringement
The software industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. We may be subject to
future litigation based on claims that our products infringe the intellectual
property rights of others or that our own intellectual property rights are
invalid. We expect that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in our industry
grows and the functionality of products overlaps. Claims of infringement could
require us to reengineer or rename our products or seek to obtain licenses from
third parties in order to continue offering our products. Licensing or royalty
agreements, if required, may not be available on terms acceptable to us or at
all. Even if successfully defended, claims of infringement could also result in
significant expense to us and the diversion of our management and technical
resources.
We May Be Adversely Impacted by the Year 2000 Problem
We continue to believe that all versions of our eMatrix line of products
after Version 6.0.3, including the versions of our products that we currently
ship, when configured and used in accordance with the related documentation, are
Year 2000 compliant, but that prior versions of our software are not Year 2000
compliant. We have notified our customers that versions of our software prior to
Version 6.0.4 are not Year 2000 compliant and encouraged them to upgrade to the
latest version. We have not been informed of any Year 2000 related problems.
There is, however, still a small number of our customers' using a non-Year 2000
compliant version of our software products. While we believe that third-party
software incorporated in the current versions of our products is Year 2000
compliant, we have not been able to obtain assurances from all our vendors.
Despite testing by us, our products may contain still as yet undetected errors
or defects associated with Year 2000 date compliance. Errors or defects in our
products caused by Year 2000 issues could result in delays or loss of revenues,
diversion of development resources, damage to our reputation, increased service
and warranty costs, or liability to our customers, any of which could
significantly and negatively impact our operating results.
Risks Related to Our Common Stock
Our Stock Price Has Been and May Continue to be Volatile Which May Lead to
Losses by Stockholders
The trading price of our common stock has been highly volatile and has
fluctuated significantly in the past. In fiscal 2000, our stock price has
fluctuated between a low of $12.750 per share and a high of $84.438 per share.
We believe that the price of our common stock may continue to fluctuate
significantly in the future in response to a number of events and factors
relating to our company, our competitors, and the market for our products and
services, many of which are beyond our control, such as:
. variations in our quarterly operating results;
. changes in financial estimates and recommendations by securities
analysts;
. changes in market valuations of Internet-related companies;
30
<PAGE>
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major customer or failure to complete significant business
transactions;
. additions or departures of key personnel;
. sales of common stock or other securities by us in the future; and
. news relating to trends in our markets.
In addition, the stock market in general, and the market for technology
companies in particular, has experienced extreme volatility. This volatility has
often been unrelated to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the market price of
our common stock, regardless of our operating performance.
Our Business May be Adversely Affected by Securities Class Action
Litigation Due to Our Stock Price Volatility
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the price of its
securities. Due to the volatility of our stock price, we may be the target of
securities litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources from our
business, which could have a material adverse effect on our business and
operating results.
Our Executive Officers, Directors and Major Stockholders Have Significant
Control, Which May Lead to Conflicts with Other Stockholders over Corporate
Governance Matters
Executive officers, directors and holders of 5% or more of our outstanding
common stock own, in the aggregate, approximately 37.8% of our outstanding
common stock. These stockholders are able to significantly influence all matters
requiring approval of our stockholders, including the election of directors and
the approval of significant corporate transactions. This concentration of
ownership may also delay, deter or prevent a change in our control and may make
some transactions more difficult or impossible to complete without the support
of these stockholders.
31
<PAGE>
Anti-Takeover Provisions in Our Organizational Documents and Delaware Law
Could Prevent or Delay a Change in Control of Our Company
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that stockholders may
consider favorable. These provisions may also prevent changes in our management.
These provisions include, without limitation:
. authorizing the issuance of undesignated preferred stock;
. providing for a classified board of directors with staggered, three-
year terms;
. requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings.
Certain provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us.
Future Sales by Existing Stockholders Could Depress the Market Price of Our
Common Stock
Sales of a substantial number of shares of our common stock in the public
market by existing stockholders, or the threat that substantial sales might
occur, could cause the market price of our common stock to decrease. These
factors could also make it difficult for us to raise capital by selling
additional equity securities.
ITEM 7A: Qualitative and Quantitative Disclosures About Market Risk
We have international offices in Austria, Canada, England, France, Germany,
Italy, Japan and The Netherlands. At July 1, 2000 and July 3, 1999,
approximately 14.4% and 27.4%, respectively, of our total assets were located at
our international subsidiaries and approximately 39.2%, 26.1% and 26.1% of our
revenues and 25.8%, 21.5% and 17.2% of our expenses for fiscal 2000, 1999 and
1998, respectively, were from our operations outside North America. These
subsidiaries transact business in local currency or the Euro, but transact
business with the U.S. parent in U.S. dollars. Therefore, we are exposed to
foreign currency exchange risks and fluctuations in foreign currencies, along
with economic and political instability in the foreign countries in which we
operate, all of which could adversely impact our results of operations and
financial condition.
We use forward contracts to reduce our exposure to foreign currency risk
due to fluctuations in exchange rates underlying the value of accounts
receivable and accounts payable denominated in foreign currencies, primarily
European and Asian, held until such receivables are collected and payables are
disbursed. A forward contract obligates us to exchange predetermined amounts of
specified foreign currencies at specified exchange rates on specified dates or
to make an equivalent U.S. dollar payment equal to the value of such exchange.
These forward contracts, to qualify as hedges of existing assets or liabilities,
are denominated in the same currency in which the underlying foreign currency
receivables or payables are denominated and bear a contract value and maturity
date that approximate the value and expected settlement date, respectively, of
the underlying transactions. For contracts that are designated and effective as
hedges, unrealized gains
32
<PAGE>
and losses on open contracts at the end of each accounting period, resulting
from changes in the spot exchange rate, are recognized in earnings in the same
period as gains and losses on the underlying foreign denominated receivables or
payables are recognized and generally offset.
We do not enter into or hold derivatives for trading or speculative
purposes, and we only enter into contracts with highly rated financial
institutions. At July 1, 2000, we had two forward contracts denominated in
Japanese yen. The outstanding forward contracts as of July 1, 2000 are presented
in the table below. The table presents the notional amounts, at contract
exchange rates, and the contractual foreign currency exchange rates. Notional
exchange rates are quoted using market conventions where the currency is
expressed in currency units per U.S. dollar.
Table of Forward Contracts:
<TABLE>
<CAPTION>
Notional
Functional Currency Maturity Date Notional Amount Exchange Rate
------------------- ------------- --------------- -------------
<S> <C> <C> <C>
Japanese Yen 07/31/00 $911,985 103.66
Japanese Yen 08/31/00 $177,283 103.21
</TABLE>
We plan to increase our use of forward contracts and other instruments in
the future to reduce our exposure to exchange rate fluctuations from accounts
receivable and accounts payable and intercompany accounts receivable and
intercompany accounts payable denominated in foreign currencies, and we may not
be able to do this successfully. Accordingly, we may experience economic loss
and a negative impact on earnings and equity as a result of foreign currency
exchange rate fluctuations. Also, as we continue to expand our operations
outside of the United States our exposure to fluctuations in currency exchange
rates could increase.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, and to a lesser extent, interest rates in Europe and Japan,
particularly since the majority of our investments are in short-term
instruments. We deposit our cash in highly rated financial institutions in North
America, Europe and Japan and invest in diversified money market investments,
U.S. Treasury and Agency Securities, and Commercial Paper of U.S. Corporations
with remaining maturities of less than 90 days. Due to the short-term nature of
our investments, we believe that we have minimal market risk.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and the related notes
thereto of MatrixOne, Inc. and the Report of Independent Public Accountants
thereon are filed as a part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants............................................... 34
Consolidated Balance Sheets as of July 1, 2000 and July 3, 1999........................ 35
Consolidated Statements of Operations for the years ended July 1, 2000, July 3, 1999
and June 27, 1998...................................................................... 36
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the years ended July 1, 2000, July
3, 1999 and June 27, 1998.............................................................. 37
Consolidated Statements of Cash Flows for the years ended July 1, 2000, July 3, 1999
and June 27, 1998...................................................................... 38
Notes to Consolidated Financial Statements............................................. 39
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MatrixOne, Inc.:
We have audited the accompanying consolidated balance sheets of MatrixOne,
Inc. (a Delaware corporation) as of July 1, 2000 and July 3, 1999 and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for each of the three
years in the period ended July 1, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MatrixOne, Inc. and its
subsidiaries as of July 1, 2000 and July 3, 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
July 1, 2000, in conformity with accounting principles generally accepted in the
United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
July 24, 2000
34
<PAGE>
MATRIXONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
July 1, July 3,
2000 1999
------------ ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents....................................................... $ 153,455 $ 11,036
Accounts receivable, less allowance for doubtful accounts of
$927 and $772.............................................................. 21,388 14,670
Prepaid expenses and other current assets.................................. 3,993 1,100
------------ ----------
Total current assets................................................... 178,836 26,806
PROPERTY AND EQUIPMENT, NET.................................................. 4,615 2,973
OTHER ASSETS................................................................. 966 108
------------ ----------
$ 184,417 $ 29,887
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit............................................................. $ -- $ 3,050
Accounts payable........................................................... 5,921 3,968
Accrued expenses........................................................... 16,026 7,270
Deferred revenue........................................................... 10,877 4,626
------------ ----------
Total current liabilities.............................................. 32,824 18,914
------------ ----------
REDEEMABLE CONVERTIBLE PREFERRED STOCK....................................... -- 17,015
------------ ----------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $.01 and $1.00 par value, 5,000 and 3,552
shares authorized, 0 and 3,547 shares issued, 0 and 3,393 shares
outstanding............................................................. -- 3,393
Common stock, $.01 par value; 100,000 shares authorized; 41,978 and 5,004
shares issued and outstanding........................................... 420 50
Additional paid-in capital................................................. 205,344 26,637
Notes receivable from stockholders......................................... (738) (117)
Deferred stock-based consideration......................................... (14,088) (3,458)
Accumulated deficit........................................................ (38,826) (32,373)
Accumulated other comprehensive loss....................................... (519) (174)
------------ ----------
Total stockholders' equity (deficit)................................... 151,593 (6,042)
------------ ----------
$ 184,417 $ 29,887
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
MATRIXONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
July 1, July 3, June 27,
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
REVENUES:
Software license........................................................ $ 40,977 $ 21,851 $ 11,836
Service................................................................. 33,734 19,495 9,343
--------- -------- --------
Total revenues....................................................... 74,711 41,346 21,179
--------- -------- --------
COST OF REVENUES:
Software license........................................................ 4,424 3,323 1,237
Service(1).............................................................. 26,383 14,467 6,591
--------- -------- --------
Total cost of revenues............................................... 30,807 17,790 7,828
--------- -------- --------
Gross profit......................................................... 43,904 23,556 13,351
--------- -------- --------
OPERATING EXPENSES:
Selling and marketing(1)................................................ 35,765 20,611 15,369
Research and development(1)............................................. 8,553 5,792 7,242
General and administrative(1)........................................... 5,487 4,479 3,592
Stock-based compensation(1)............................................. 3,593 622 --
--------- -------- --------
Total operating expenses............................................. 53,398 31,504 26,203
--------- -------- --------
Loss from operations................................................. (9,494) (7,948) (12,852)
--------- -------- --------
OTHER INCOME (EXPENSE):
Interest income......................................................... 3,180 346 178
Interest expense........................................................ (46) (109) (109)
Other income (expense), net............................................. (93) 7 (21)
--------- -------- --------
Total other income (expense)......................................... 3,041 244 48
--------- -------- --------
Loss from continuing operations before income taxes.................. (6,453) (7,704) (12,804)
BENEFIT FROM INCOME TAXES -- -- 1,928
--------- -------- --------
Net loss from continuing operations..................................... (6,453) (7,704) (10,876)
--------- -------- --------
DISCONTINUED OPERATIONS (NOTE 3):
Income from discontinued operations (net of income taxes of $439
in 1998)................................................................ -- -- 1,973
Gain on sale of discontinued operations (net of income taxes of
$1,489 in 1998)......................................................... -- -- 6,711
--------- -------- --------
Net income from discontinued operations.............................. -- -- 8,684
--------- -------- --------
NET LOSS................................................................... $ (6,453) $ (7,704) $ (2,192)
========= ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Continuing operations................................................... $ (0.36) $ (1.74) $ (2.88)
Discontinued operations................................................. -- -- $ 2.30
--------- -------- --------
Net loss................................................................ $ (0.36) $ (1.74) $ (0.58)
--------- -------- --------
Shares used in computing basic and diluted net income (loss) per share.. 17,966 4,428 3,777
========= ======== ========
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE:
Continuing operations................................................... $ (0.18) $ (0.28) $ (0.43)
Discontinued operations................................................. -- -- 0.34
--------- -------- --------
Net loss................................................................ $ (0.18) $ (0.28) $ (0.09)
========= ======== ========
Shares used in computing pro forma basic and diluted net loss
per share............................................................... 35,686 27,970 25,050
========= ======== ========
---------------------------------------------------------------------------------------------------------------------
(1) The following summarizes the departmental allocation of stock-based
compensation:
Cost of service revenues................................................... $ 816 $ 221 $ --
Selling and marketing...................................................... 1,154 234 --
Research and development................................................... 708 103 --
General and administrative................................................. 915 64 --
--------- -------- --------
Total stock-based compensation.......................................... $ 3,593 $ 622 $ --
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
MatrixOne, Inc.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Redeemable Convertible
Convertible Preferred Common
Preferred Stock Stock Stock
---------------------- ---------------------- ---------------------
Number Number Number Additional
of of of Paid-in
Shares Amount Shares Amount Shares Amount Capital
--------- ---------- ---------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 28, 1997.................... -- $ -- 3,547 $ 3,547 3,798 $ 38 $ 22,466
Comprehensive loss:
Foreign currency translation adjustments.. -- -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- -- --
Comprehensive loss........................ -- -- -- -- -- -- --
Stock option exercises.................... -- -- -- -- 18 -- 6
Issuance of Series G redeemable
convertible preferred stock, net of
offering costs of $102.................. 1,899 11,015 -- -- -- -- (102)
------- ---------- ---------- -------- --------- -------- -------------
BALANCE, JUNE 27, 1998.................... 1,899 11,015 3,547 3,547 3,816 38 22,370
Comprehensive loss:
Foreign currency translation adjustments.. -- -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- -- --
Comprehensive loss........................ -- -- -- -- -- -- --
Retirement of treasury stock.............. -- -- (154) (154) (15) -- (287)
Stock option exercises.................... -- -- -- -- 861 9 360
Issuance of common stock in exchange for
notes receivable....................... -- -- -- -- 342 3 114
Deferred stock-based compensation......... -- -- -- -- -- -- 4,080
Stock-based compensation.................. -- -- -- -- -- -- --
Issuance of Series H redeemable
convertible preferred stock............. 750 6,000 -- -- -- -- --
------- ---------- ---------- -------- --------- -------- -------------
BALANCE, JULY 3, 1999..................... 2,649 17,015 3,393 3,393 5,004 50 26,637
Comprehensive loss:
Foreign currency translation adjustments.. -- -- -- -- -- -- --
Net loss.................................. -- -- -- -- -- -- --
Comprehensive loss........................ -- -- -- -- -- -- --
Stock option exercises.................... -- -- -- -- 1,767 17 841
Conversion of preferred stock into common
stock................................... (2,649) (17,015) (3,393) (3,393) 26,763 268 20,140
Issuance of common stock, net of offering
cost of $11,987......................... -- -- -- -- 6,200 62 142,163
Cashless exercise of warrant.............. -- -- -- -- 168 2 (2)
Issuance of common stock in exchange for
notes receivable........................ -- -- -- -- 2,076 21 895
Repayment of notes receivable............. -- -- -- -- -- -- --
Deemed fair value of warrant issued to a
customer................................ -- -- -- -- -- -- 1,788
Amortization of warrant to reduce revenues -- -- -- -- -- -- --
Deferred stock-based compensation......... -- -- -- -- -- -- 13,574
Stock-based compensation.................. -- -- -- -- -- -- --
Reversal of stock-based compensation from
stock option cancellations.............. -- -- -- -- -- -- (692)
------- ---------- ---------- -------- --------- -------- -------------
BALANCE, JULY 1, 2000..................... -- $ -- -- $ -- 41,978 $ 420 $ 205,344
======= ========== ========== ======== ========= ======== =============
<CAPTION>
Treasury
Stock Notes
------------------
Number Receivable Deferred
of from Stock-Based Accumulated Comprehensive
Shares Cost Stockholders Consideration Deficit Loss
--------- ------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 28, 1997.................... 169 $(441) $ -- $ -- $ (22,477)
Comprehensive loss:
Foreign currency translation adjustments.. -- -- -- -- -- $ 59
Net loss.................................. -- -- -- -- (2,192) (2,192)
---------------
Comprehensive loss........................ -- -- -- -- -- $ (2,133)
===============
Stock option exercises.................... -- -- -- -- --
Issuance of Series G redeemable
convertible preferred stock, net of
offering costs of $102.................. -- -- -- -- --
--------- ------- -------------- --------------- -------------
BALANCE, JUNE 27, 1998.................... 169 (441) -- -- (24,669)
Comprehensive loss:
Foreign currency translation adjustments.. -- -- -- -- -- $ (172)
Net loss.................................. -- -- -- -- (7,704) (7,704)
---------------
Comprehensive loss........................ -- -- -- -- -- (7,876)
===============
Retirement of treasury stock.............. (169) 441 -- -- --
Stock option exercises.................... -- -- -- -- --
Issuance of common stock in exchange for
notes receivable....................... -- -- (117) -- --
Deferred stock-based compensation......... -- -- -- (4,080) --
Stock-based compensation.................. -- -- -- 622 --
Issuance of Series H redeemable
convertible preferred stock............. -- -- -- -- --
--------- ------- -------------- --------------- -------------
BALANCE, JULY 3, 1999..................... -- -- (117) (3,458) (32,373)
Comprehensive loss:
Foreign currency translation adjustments.. -- -- -- -- -- $ (345)
Net loss.................................. -- -- -- -- (6,453) (6,453)
---------------
Comprehensive loss........................ -- -- -- -- -- (6,798)
===============
Stock option exercises.................... -- -- -- -- --
Conversion of preferred stock into common
stock................................... -- -- -- -- --
Issuance of common stock, net of offering
cost of $11,987......................... -- -- -- -- --
Cashless exercise of warrant.............. -- -- -- -- --
Issuance of common stock in exchange for
notes receivable........................ -- -- (916) -- --
Repayment of notes receivable............. -- -- 295 -- --
Deemed fair value of warrant issued to a
customer................................ -- -- -- (1,788) --
Amortization of warrant to reduce revenues -- -- -- 447 --
Deferred stock-based compensation......... -- -- -- (13,574) --
Stock-based compensation.................. -- -- -- 3,593 --
Reversal of stock-based compensation from
stock option cancellations.............. -- -- -- 692 --
--------- ------- -------------- --------------- -------------
BALANCE, JULY 1, 2000..................... -- $ -- $ (738) $ (14,088) $ (38,826)
========= ======= ============== =============== =============
<CAPTION>
Accumulated Total
Other Stockholders'
Comprehensive Equity
Income (Loss) (Deficit)
----------------- --------------
<S> <C> <C>
BALANCE, JUNE 28, 1997.................... $ (61) $ 3,072
Comprehensive loss:
Foreign currency translation adjustments.. 59 59
Net loss.................................. -- (2,192)
Comprehensive loss........................ -- --
Stock option exercises.................... -- 6
Issuance of Series G redeemable
convertible preferred stock, net of
offering costs of $102.................. -- (102)
----------------- --------------
BALANCE, JUNE 27, 1998.................... (2) 843
Comprehensive loss:
Foreign currency translation adjustments.. (172) (172)
Net loss.................................. -- (7,704)
Comprehensive loss........................ -- --
Retirement of treasury stock.............. -- --
Stock option exercises.................... -- 369
Issuance of common stock in exchange for
notes receivable........................ -- --
Deferred stock-based compensation......... -- --
Stock-based compensation.................. -- 622
Issuance of Series H redeemable
convertible preferred stock............. -- --
----------------- --------------
BALANCE, JULY 3, 1999..................... (174) (6,042)
Comprehensive loss:
Foreign currency translation adjustments.. (345) (345)
Net loss.................................. -- (6,453)
Comprehensive loss........................ -- --
Stock option exercises.................... -- 858
Conversion of preferred stock into common
stock................................... -- 17,015
Issuance of common stock, net of offering
cost of $11,987......................... -- 142,225
Cashless exercise of warrant.............. -- --
Issuance of common stock in exchange for
notes receivable........................ -- --
Repayment of notes receivable............. -- 295
Deemed fair value of warrant issued to a
customer................................ -- --
Amortization of warrant to reduce revenues -- 447
Deferred stock-based compensation......... -- --
Stock-based compensation.................. -- 3,593
Reversal of stock-based compensation from
stock option cancellations.............. -- --
----------------- --------------
BALANCE, JULY 1, 2000..................... $ (519) $ 151,593
================= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
MATRIXONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------
July 1, July 3, June 27,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................. $ (6,453) $ (7,704) $ (2,192)
Net income from discontinued operations................................ -- -- (8,684)
----------- ----------- -----------
Net loss from continuing operations.................................... (6,453) (7,704) (10,876)
Adjustments to reconcile net loss from continuing operations to net
cash provided by (used in) continuing operations:....................
Depreciation....................................................... 1,454 1,257 834
Stock-based consideration.......................................... 4,040 622 --
Provision for doubtful accounts.................................... 404 689 496
Deferred income tax benefit........................................ -- -- (1,928)
Changes in assets and liabilities:
Accounts receivable.............................................. (7,336) (8,648) (1,957)
Prepaid expenses and other current assets........................ (3,783) 62 (229)
Accounts payable................................................. 2,050 1,277 541
Accrued expenses................................................. 9,300 1,226 2,307
Deferred revenue................................................. 7,081 2,877 625
----------- ----------- -----------
Net cash provided by (used in) continuing operations.......... 6,757 (8,342) (10,187)
----------- ----------- -----------
Net cash provided by (used in) discontinued operations........ (340) (1,056) 3,611
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................... (3,139) (1,306) (1,527)
Other assets........................................................... (898) (32) (25)
Collection of notes receivable......................................... 295 4,400 --
Net proceeds from sale of discontinued operations...................... -- -- 6,668
----------- ----------- -----------
Net cash provided by (used in) investing activities........... (3,742) 3,062 5,116
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt..................................................... -- (221) (292)
Proceeds from lines of credit.......................................... 2,263 4,000 1,250
Repayments of lines of credit.......................................... (5,313) (950) (3,250)
Proceeds from issuance of common stock, net............................ 142,225 -- --
Proceeds from issuance of redeemable convertible preferred stock, net.. -- 6,000 10,913
Proceeds from stock option exercises................................... 858 369 6
----------- ----------- -----------
Net cash provided by financing activities..................... 140,033 9,198 8,627
----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS.......................... (289) 51 59
----------- ----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS...................................... 142,419 2,913 7,226
CASH AND EQUIVALENTS, BEGINNING OF YEAR................................... 11,036 8,123 897
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR......................................... $ 153,455 $ 11,036 $ 8,123
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................. $ 46 $ 109 $ 109
========== =========== ===========
NONCASH FINANCING ACTIVITY:
Issuance of common stock in exchange for notes receivable from
stockholders......................................................... $ 916 $ 117 $ --
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1: Description of the Company and Summary of Significant Accounting
Policies
Description of the Company
MatrixOne, Inc. (the "Company") is a provider of Internet business
collaboration software designed to enable interactive collaboration over the
Internet among geographically dispersed departments and divisions within an
enterprise and with an enterprise's customers, suppliers and other business
partners. The Company licenses its software both directly to end users and
through a network of domestic and international systems integrators and
distributors. The Company has its headquarters in the United States ("U.S."),
with offices in Austria, Canada, England, France, Germany, Italy, Japan and The
Netherlands and throughout the U.S.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Basis of Presentation and Principles of Consolidation
The Company operates on a 52-to-53 week fiscal year that ends on the
Saturday closest to June 30th. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
The functional currency of each subsidiary is the local currency. Assets
and liabilities of foreign subsidiaries are translated at the rates in effect at
the balance sheet date, while stockholders' equity (deficit) is translated at
historical rates. Statements of operations and cash flow amounts are translated
at the average rate for the period. Translation adjustments are included as a
component of accumulated other comprehensive loss. Foreign currency gains and
losses arising from transactions are reflected in the loss from operations and
were not significant in fiscal years 1999 or 1998. During fiscal 2000, realized
and unrealized foreign currency transaction losses aggregated $93 and were
included in other income (expense), net.
Derivative Financial Instruments
The Company uses forward contracts to reduce its exposure to foreign
currency risk due to fluctuations in exchange rates underlying the value of
accounts receivable and payable denominated in foreign currencies (primarily
European and Asian currencies) until such receivables are collected and payables
are disbursed. A forward contract obligates the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates or to make an equivalent U.S. dollar payment equal to
the value of such exchange. These foreign currency forward exchange contracts,
to qualify as hedges of existing assets or liabilities, are denominated in the
same currency in which the underlying foreign currency receivables or payables
are denominated and bear a contract value and maturity date that approximate the
value and expected settlement date, respectively, of the underlying
transactions. For contracts that are designated and effective as hedges,
discounts or premiums (the difference between the spot exchange rate and the
forward exchange rate
39
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
at inception of the contract) are accreted or amortized to other income
(expense) over the life of the contract using the straight-line method, while
unrealized gains and losses on open contracts at the end of each accounting
period, resulting from changes in the spot exchange rate, are recognized in
earnings in the same period as gains and losses on the underlying foreign
denominated receivables or payables are recognized and generally offset. The
Company does not enter into or hold derivatives for trading or speculative
purposes and only enters into contracts with highly rated financial
institutions. At July 1, 2000, the Company had two forward contracts denominated
in Japanese yen, which mature at various dates through August 2000 and
aggregated $1,089. Unrealized losses from these contracts offset the related
unrealized gains from the hedged accounts receivable. The deferred gains
resulting from these contracts were not material.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in
stockholders' equity (deficit), except stockholders' investments and
distributions and deferred stock-based consideration.
Revenue Recognition
The Company generates revenues from licensing its software and providing
professional services, training and maintenance and customer support services.
The Company executes separate contracts that govern the terms and conditions of
each software license and maintenance arrangement and each professional services
arrangement. These contracts may be an element in a multiple-element
arrangement. Revenues under multiple-element arrangements, which may include
several different software products or services sold together, are allocated to
each element based on the residual method in accordance with Statement of
Position 98-9, "Software Revenue Recognition, with Respect to Certain
Arrangements."
The Company uses the residual method when fair value does not exist for one
of the delivered elements in an arrangement. Under the residual method, the fair
value of the undelivered elements is deferred and subsequently recognized. The
Company has established sufficient vendor specific objective evidence for
professional services, training and maintenance and customer support services
based on the price charged when these elements are sold separately. Accordingly,
software license revenue is recognized under the residual method in arrangements
in which software is licensed with professional services, training and
maintenance and customer support services.
The Company recognizes software license revenues upon execution of a signed
license agreement, delivery of the software to a customer and determination that
collection of a fixed license fee is probable. For delivery over the Internet,
the software is considered to have been delivered upon confirmation by the
customer of the file transfer. Since the Company has no obligation to an end
user of a distributor, software license revenues from distributors are
recognized upon delivery to the distributor. The Company provides for sales
returns at the time of delivery on an estimated basis.
Service revenues include professional services, training and maintenance
and customer support fees. Professional services are not essential to the
functionality of the other elements in an arrangement and are accounted for
separately. Professional services revenues are recognized as the services are
performed for time and material contracts or on a percentage-of-completion basis
for fixed-price contracts. If conditions for acceptance are required,
professional services revenues are recognized upon customer acceptance. Training
revenues are recognized as the services are provided. Maintenance and customer
support fees include the right to unspecified upgrades on a when-and-if-
40
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
available basis and ongoing technical support. Maintenance and customer support
fees are recognized ratably over the term of the contract on a straight-line
basis. When a maintenance and customer support fee is included with a software
license fee, the Company allocates a portion of the software license fee to
maintenance and customer support fees based on the renewal rate of the
maintenance and customer support fees.
Cash Equivalents
The Company considers all time deposits and short-term investments with
original maturities of 90 days or less to be cash equivalents. The Company's
cash equivalents are primarily comprised of money market mutual funds, which are
reported at cost, and U.S. Treasury and Agency Securities and Commercial Paper
of U.S. Corporations, which are reported at amortized cost. The reported value
of the Company's cash equivalents approximates market value.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, notes receivable and debt instruments. The book values of these
financial instruments approximated their respective fair values as of each
balance sheet presented due to their short-term maturities.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash, cash equivalents and
accounts receivable. Concentration of credit risk with respect to cash and cash
equivalents is limited because the Company deposits its cash in highly rated
financial institutions and invests in diversified money market investments. The
Company only invests in A1/P1 rated Commercial Paper and limits its investment
in any one issuer to $5,000 and, therefore, believes credit risk related to its
investments in Commercial Paper is limited.
Concentration of credit risk with respect to accounts receivable is limited
to certain customers to whom the Company makes substantial sales. To reduce its
credit risk, the Company routinely assesses the financial strength of its
customers. The Company maintains an allowance for potential credit losses but
historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area.
No one customer accounted for more than 10% of the Company's total revenues
during fiscal years 2000, 1999 or 1998, and no one customer represented greater
than 10% of the Company's accounts receivable at July 1, 2000 or July 3, 1999.
Property and Equipment
Property and equipment are recorded at cost. Internal and external costs
incurred to develop and install computer software for internal use are
capitalized. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets (computer equipment and software, two to
five years; furniture and fixtures, four to 10 years; office equipment, three to
five years; leasehold improvements, shorter of useful life or remaining lease
term). Maintenance and repair expenditures are charged to operations when
incurred, and additions and improvements are capitalized. The Company reviews
its property and equipment whenever events or changes in circumstances may
indicate that the carrying amount of certain assets may not be recoverable and
41
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
recognizes an impairment loss when it is probable that the estimated cash flows
are less than the carrying value of these assets. Property and equipment to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Stock-Based Compensation
The Company records stock-based compensation issued to employees using the
intrinsic value method and stock-based compensation issued to non employees
using the fair value method. Stock-based compensation is recognized on options
issued to employees if the option exercise price is less than the market price
of the underlying stock on the date of grant.
Research and Development and Software Development Costs
Research and development costs are charged to expense as incurred. Software
development costs are included in research and development and are charged to
expense as incurred. After technological feasibility is established, material
software development costs are capitalized. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or in the
ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving technological feasibility, which
the Company has defined as when beta testing commences, and the general
availability of such software has been minimal, and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs for the periods presented.
Income Taxes
The Company accounts for income taxes under the asset and liability method,
which recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their financial statement reported amounts. The Company records
a valuation allowance against deferred tax assets when it is more likely than
not that such assets will not be realized.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the shares used in the calculation of basic net income (loss) per share plus the
dilutive effect of common stock equivalents, such as stock options, warrants and
convertible preferred stock, using the treasury stock method. Common stock
equivalents are excluded from the computation of dilutive net income (loss) per
share if their effect is anti-dilutive.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133, as amended by SFAS No. 137 and No. 138, will be
effective for the Company's financial reporting beginning in the first quarter
of fiscal 2001. SFAS No. 133 will require the Company to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for gains
and losses
42
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
from changes in the fair value of a particular derivative will depend on the
intended use of the derivative. The Company does not expect the adoption of SFAS
No. 133 to have a material impact on the results of its operations or financial
position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, disclosure and
presentation of revenue in financial statements. The Company will adopt the
provisions of SAB 101 for all transactions during fiscal 2002. The Company is
currently evaluating the impact of SAB 101 on its financial statements and
related disclosures but does not expect that any impact will be material.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - An Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the definition of employees for
purposes of applying APB Opinion No. 25, the criteria for determining whether a
plan qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company does not expect the
adoption of FIN 44 to have a material effect on its results of operations or
financial position.
Note 2: Details of Financial Statement Components
<TABLE>
<CAPTION>
As of
----------------------------
July 1, July 3,
2000 1999
--------- ---------
<S> <C> <C>
Cash and Equivalents:
Cash................................................................ $ 762 $ 1,633
U.S. Treasury and agency securities................................. 82,159 --
Money market mutual funds........................................... 35,785 9,403
Commercial paper.................................................... 34,749 --
------------ ------------
$ 153,455 $ 11,036
============ ============
Property and Equipment:
Computer equipment and software..................................... $ 6,005 $ 3,845
Leasehold improvements.............................................. 1,027 942
Furniture and fixtures.............................................. 357 156
Office equipment.................................................... 392 122
------------ ------------
7,781 5,065
Accumulated depreciation............................................ (3,166) (2,092)
------------ ------------
$ 4,615 $ 2,973
============ ============
Accrued Expenses:
Compensation........................................................ $ 10,547 $ 3,629
Discontinued operations............................................. 610 950
Royalties........................................................... 925 1,280
Taxes............................................................... 2,021 275
Other .............................................................. 1,923 1,136
------------ ------------
$ 16,026 $ 7,270
============ ============
</TABLE>
43
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Note 3: Discontinued Operations
In 1998, the Company decided to focus its business on its eMatrix software
suite of products and services. On May 7, 1998, the Company sold substantially
all of the net assets of its legacy design and manufacturing business, which had
been operated as a wholly-owned subsidiary of the Company under the name Adra
Systems, Inc. ("Adra Systems"), to SofTech, Inc. The purchase price consisted of
$7,000 of cash, a $4,400 promissory note, which accrued interest at 7% and was
collected on July 2, 1998, and contingent payments of up to $2,200 based on
SofTech's revenues after the acquisition. SofTech has notified the Company that
no contingent payments were due.
The Company recorded a $6,711 gain on the sale of the net assets of Adra
Systems, comprised of the cash and promissory note proceeds of $11,400 less
estimated transaction costs of $2,338, income taxes of $1,489 and net assets
sold of $862. The transaction costs consisted principally of investment banking,
legal and accounting fees, and bonus and severance arrangements with certain
employees. The net assets sold consisted of the following:
<TABLE>
<S> <C>
Current assets.................................................................. $ 3,598
Property and equipment, net..................................................... 725
----------
Total assets.................................................................... 4,323
Current liabilities............................................................. (3,461)
----------
Net assets sold............................................................. $ 862
=========
</TABLE>
The consolidated financial statements of the Company have been restated to
reflect the financial results of Adra Systems as a discontinued operation.
Reported revenues, expenses and cash flows exclude the operating results of Adra
Systems. During fiscal 1999, revenues from Adra Systems were approximately
$12,434 for the period through May 7, 1998. At July 1, 2000 and July 3, 1999,
accrued transaction costs relating to the sale of the net assets of Adra
Systems, included in accrued expenses, were $610 and $950, respectively.
Note 4: Income Taxes
At July 1, 2000, the Company had available U.S. federal and state net
operating loss ("NOL") carryforwards of approximately $20,310 and approximately
$680 of available U.S. federal and state tax credits to reduce future U.S.
income taxes. The NOLs and tax credit carryforwards expire commencing in fiscal
2001. Use of these NOLs and tax credits may be limited due to certain changes in
ownership.
The Company also has NOLs in certain foreign countries aggregating
approximately $11,740 that are also subject to certain limitations. These NOLs
expire commencing in fiscal 2002.
The Company has recorded a valuation allowance against its deferred tax
asset due to the uncertainty surrounding the timing of the realization of these
tax benefits. Realization of these tax benefits is dependent on generating
sufficient taxable income.
44
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
As of
------------------------
July 1, July 3,
2000 1999
--------- ---------
<S> <C> <C>
Net operating loss carryforwards............................................... $ 11,531 $ 7,170
Deferred revenue............................................................... 928 1,163
Tax credits.................................................................... 680 658
Accrued liabilities............................................................ 981 563
Allowance for doubtful accounts................................................ 345 289
Depreciation................................................................... 45 71
----------- -----------
Total deferred tax assets.................................................. 14,510 9,914
Valuation allowance............................................................ (14,510) (9,914)
----------- -----------
Net deferred tax asset..................................................... $ -- $ --
========== ==========
</TABLE>
During fiscal 1998, the Company recognized an income tax benefit from
continuing operations of $1,928 to offset the income taxes related to
discontinued operations.
The reconciliation between the statutory federal income tax rate and the
Company's effective tax rate for continuing operations is as follows:
<TABLE>
<CAPTION>
Year Ended
-----------------------------------
July 1, July 3, June 27,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate.................................................... 35% 35% 35%
State tax, net of federal tax benefit..................................... 6 6 6
Income tax benefit used to offset income taxes from discontinued
operations................................................................ -- -- (15)
Provision for valuation allowance......................................... (41) (41) (41)
-------- -------- --------
--% --% (15)%
======== ======== ========
</TABLE>
The effective tax rate for discontinued operations was 18% for fiscal 1998.
Note 5: Line of Credit and Debt
On December 28, 1999, the Company extended its line of credit of $7,000
through December 28, 2000. Borrowings under the line of credit are limited to
80% of eligible accounts receivable from customers in the United States, less
amounts reserved for foreign currency contracts. In addition, on January 21,
2000, the Company obtained a working capital line of credit of $1,000, which
expires December 28, 2000. Borrowings under the working capital line of credit
are limited to 90% of eligible foreign accounts receivable billed and collected
in the United States. These lines of credit are collateralized by all of the
Company's assets, have financial and other covenants and bear interest at the
bank's prime rate (9.5% at July 1, 2000) plus 0.5%. As of July 1, 2000, there
were no borrowings under these lines of credit and $6,006 available.
45
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
On April 3, 2000, the Company's wholly-owned subsidiary in Germany obtained
a 500 DM ($244) line of credit. Borrowings under this line of credit are limited
to 100% of accounts receivable and bear interest at 10.25%.
The Company had a term loan that was payable in 33 equal installments of
$21 that commenced on October 31, 1996. The term loan was paid in full during
fiscal 1999.
Note 6: Commitments and Contingencies
Commitments
The Company leases its facilities, automobiles and certain office equipment
under various operating leases that expire through fiscal 2006. Certain of the
facility leases require the Company to pay its proportionate share of building
expenses and provide the Company with the option to renew its lease for an
extended period. Aggregate rental expense under operating leases was
approximately $2,123, $1,616 and $1,187 for fiscal 2000, 1999 and 1998,
respectively.
Future minimum lease commitments, by fiscal year, as of July 1, 2000 are as
follows:
<TABLE>
<CAPTION>
Autos and
Facilities Equipment Total
------------- ----------------- ------------
<S> <C> <C> <C>
2001......................................................... $ 1,478 $ 373 $ 1,851
2002......................................................... 1,023 320 1,343
2003......................................................... 694 127 821
2004......................................................... 487 44 531
2005......................................................... 11 2 13
Thereafter................................................... 11 -- 11
------------- ------------- -------------
$ 3,704 $ 866 $ 4,570
============ =========== ===========
</TABLE>
During fiscal 1999, the Company entered into an agreement for
telecommunication services at favorable pricing based on minimum purchase
requirements of approximately $325 each year through fiscal 2001.
Contingencies
On August 10, 2000, SofTech, Inc. commenced an arbitration against the
Company before the American Arbitration Association in Boston, Massachusetts
alleging fraud, unfair and deceptive trade practices, and breach of contract in
connection with the sale of assets of Adra to SofTech in 1998. The Company
intends to vigorously defend each claim asserted in the arbitration demand.
The Company may from time to time become a party to various other legal
proceedings arising in the ordinary course of our business.
Management believes that the outcomes of these proceedings will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
46
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Note 7: Redeemable Convertible Preferred Stock
As of the closing of the Company's initial public offering of common stock,
each share of Class G and Class H redeemable convertible preferred stock was
converted into 4.275 and 4.5 shares, respectively, of common stock and all the
rights, preferences and privileges of the Class G and H redeemable convertible
preferred stock terminated.
On June 17, 1999, the Company sold 750 shares of Class H redeemable
convertible preferred stock at $8.00 per share for $6,000. On October 1, 1997,
the Company sold 1,899 shares of Series G redeemable convertible preferred stock
at $5.80 per share for $11,015.
As of July 3, 1999, redeemable convertible stock was comprised of the
following:
<TABLE>
<CAPTION>
Shares Shares Shares Redemption
Authorized Issued Outstanding Value
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Class G, $1.00 par value.................... 2,000 1,899 1,899 $ 11,015
Class H, $1.00 par value.................... 750 750 750 6,000
------------ ------------ ------------ ------------
2,750 2,649 2,649 $ 17,015
============ ============ ============ ============
</TABLE>
Note 8: Stockholders' Equity (Deficit)
Common Stock
On August 10, 1999, the Board of Directors (the "Board") voted to approve a
3-for-2 stock split, effected as a 50% stock dividend, provide for a single
class of common stock, eliminate the Class B common stock and increase the
number of authorized shares of common stock from 12,000 to 40,000. On December
9, 1999, the Board voted to approve a 3-for-1 stock split, which was effected as
a 200% stock dividend on February 23, 2000. The consolidated financial
statements for all periods presented have been restated to reflect both stock
splits.
On December 9, 1999, the Board approved, effective upon the closing of the
initial public offering, a change in the total number of shares which the
Company is authorized to issue to 105,000 shares, of which 100,000 shares are
common stock and 5,000 shares are preferred stock. As of July 1, 2000, 20,175
shares of common stock had been authorized for issuance pursuant to the exercise
of stock options and other stock rights.
On February 1, 2000, the Company entered into software license and
maintenance agreements and a professional services agreement with a customer. In
connection with these agreements, a party related to this customer agreed to
purchase 450 shares of common stock in a private placement. The sale price was
the initial public offering price less underwriters' discounts and commissions,
or $23.25 per share. The sale occurred contemporaneously with the Company's
initial public offering of common stock. The proceeds from the private placement
were $10,462.
On March 6, 2000, the Company completed its initial public offering of
5,750 shares of common stock, which included the exercise of the underwriters'
over-allotment option of 750 shares, at $25.00 per share. The proceeds from the
initial public offering were $131,763, after deducting the underwriters'
discounts and commissions and offering expenses of $11,987.
47
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Preferred Stock
As of the closing of the Company's initial public offering, each share of
Class A through F convertible preferred stock was converted into 4.5 shares of
common stock and all the rights, preferences and privileges of the Class A
through Class F convertible preferred stock terminated.
As of July 3, 1999, convertible preferred stock was comprised of the
following:
<TABLE>
<CAPTION>
Shares Shares Shares
Authorized Issued Outstanding Amount
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Class A, $1.00 par value........................ 615 615 512 $ 512
Class B, $1.00 par value........................ 492 491 444 444
Class C, $1.00 par value........................ 1,195 1,194 1,194 1,194
Class D, $1.00 par value........................ 683 680 676 676
Class E, $1.00 par value........................ 167 167 167 167
Class F, $1.00 par value........................ 400 400 400 400
------------ ------------ ------------ ------------
3,552 3,547 3,393 $ 3,393
============ ============ ============ ===========
</TABLE>
Notes Receivable from Stockholders
In connection with the exercise of stock options during fiscal 2000 and
1999, the Company issued 2,076 and 342 shares of common stock, respectively, in
exchange for notes receivable from stockholders with principal balances
aggregating $916 and $117, respectively. These notes are full recourse to the
stockholders and are additionally collateralized by the underlying shares of
common stock. The notes receivable are payable in full on varying dates through
December 27, 2002 and bear interest at 8%. During fiscal 2000, the Company also
received payment of notes receivable aggregating $295. These notes receivable
have been reported as a reduction to stockholders' equity.
Warrants
In May 1997, the Company issued a warrant to purchase 169 shares of common
stock in conjunction with its line of credit. The warrants had an exercise price
of $0.44 and were to expire in May 2002. No value has been ascribed to these
warrants as the amount would not be material to the financial statements. In
March 2000, the holder of the warrants executed a cashless exercise and received
168 shares of common stock.
On February 1, 2000, the Company issued the purchaser of the common stock
issued in the private placement a warrant to purchase 200 shares of common
stock, which became exercisable following the closing of the initial public
offering (March 6, 2000) for a term of 18 months at an exercise price of $31.25
per share. In connection with the issuance of the warrant, the Company recorded
a charge of $1,788, which represents the fair value of the warrant using the
Black-Scholes option-pricing model. This charge is included in deferred stock-
based consideration, which is reported as a component of stockholders' equity
(deficit). This deferred consideration will be amortized through charges to
reduce revenues as the elements in the arrangement are delivered. During fiscal
2000, the Company recorded a charge to reduce revenues of $447 related to the
warrant.
48
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
2000 Employee Stock Purchase Plan
In December 1999, the Board adopted the 2000 Employee Stock Purchase Plan
(the "Purchase Plan") to be effective upon the completion of the Company's
initial public offering. The Company has reserved a total of 1,350 shares of
common stock for issuance under the Purchase Plan. Eligible employees may
purchase common stock under the Purchase Plan at 85% of the lesser of the
average market price of the Company's common stock on the first or last day of
the applicable six month payment period. No common stock was purchased under the
Purchase Plan during fiscal 2000.
Stock Option Plans
In January 2000, the Board adopted the 1999 Stock Plan (the "1999 Plan") to
be effective upon the completion of the Company's initial public offering. The
Company has reserved a total of 1,500 shares of common stock for issuance under
the 1999 Plan, which provides for the grant of incentive and nonqualified stock
options, stock issuances and opportunities to make direct purchases of stock to
employees, officers or consultants of the Company.
In fiscal 1996, the Company adopted a stock plan (the "1996 Plan") pursuant
to which 13,950 shares of the Company's common stock are reserved for issuance.
The 1996 Plan provides for the granting of both incentive stock options,
nonqualified stock options and other stock rights. Options may be granted at not
less than the fair market value of the Company's common stock on the date of
grant, as determined by the Board.
The Company's 1987 Stock Option Plan (the "1987 Plan") has been terminated;
however, options issued under the 1987 Plan remain outstanding. The 1987 Plan
provided for the granting of both incentive stock options and nonqualified stock
options. Incentive stock options were granted at the fair market value of the
common stock on the date of grant, as determined by the Board.
Options granted under the 1999, 1996 and 1987 Plans generally vest over
four years and expire no later than ten years from the date of the grant. There
were 2,205 shares available for future grant under the 1999 and 1996 Plans at
July 1, 2000.
The following is a summary of the status of the Company's stock options as
of July 1, 2000, July 3, 1999 and June 27, 1998 and the stock option activity
for all stock option plans during the years ending on those dates:
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999 June 27, 1998
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING:
Beginning balance...... 11,742 $ 0.45 10,125 $ 0.43 5,619 $ 0.42
Granted................ 2,802 $ 5.07 4,806 $ 0.46 5,832 $ 0.44
Exercised.............. (3,843) $ 0.46 (1,203) $ 0.40 (18) $ 0.43
Canceled............... (383) $ 1.04 (1,986) $ 0.42 (1,308) $ 0.43
------------ ----------- ---------- ---------- ----------- ----------
Ending balance......... 10,318 $ 1.67 11,742 $ 0.45 10,125 $ 0.43
============ =========== ========== ========== =========== ==========
Exercisable.............. 4,377 $ 0.66 5,157 $ 0.43 4,479 $ 0.41
============ =========== ========== ========== =========== ==========
</TABLE>
49
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Information regarding options outstanding as of July 1, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Price Shares Life (Years) Price Shares Price
---------------------- -------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
$0.33 - $0.44......... 7,292 7.17 $ 0.43 3,973 $ 0.43
$0.67 - $1.11......... 1,958 9.05 $ 1.02 298 $ 1.02
$3.33................. 131 9.24 $ 3.33 24 $ 3.33
$6.67 - $8.00......... 548 9.44 $ 7.73 62 $ 7.71
$13.00 - $19.38....... 210 9.63 $ 13.18 13 $ 13.00
$21.00 - $27.81....... 133 9.65 $ 22.03 7 $ 21.00
$32.13 - $69.50....... 46 9.48 $ 37.15 -- $ --
-------- -------- ------- -------- --------
10,318 7.76 $ 1.67 4,377 $ 0.66
======== ======== ======== ======== ========
</TABLE>
In connection with certain stock option grants to employees, the Company
recorded deferred stock-based compensation of $13,574 and $4,080 for fiscal 2000
and 1999, respectively. Deferred stock-based compensation represents the
difference between the option price and the deemed fair value of the Company's
common stock on the date of grant and is reported as stock-based consideration,
a component of stockholders' equity (deficit). Deferred stock-based compensation
is amortized through charges to operations over the vesting period of the
options, which is generally four years. Stock-based compensation was $3,593 and
$622 for fiscal 2000 and 1999, respectively.
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
The fair value of options granted in fiscal 2000, 1999 and 1998 have been
determined using the Black-Scholes option pricing model. The assumptions used
are as follows:
<TABLE>
<CAPTION>
July 1, July 3, June 27,
2000 1999 1998
------------- ----------- ----------
<S> <C> <C> <C>
Risk-free interest rate................................ 5.80 - 6.50% 5.10% 5.70%
Expected dividend yield................................ None None None
Expected lives......................................... 5 years 5 years 5 years
Expected volatility (85% after January 1, 2000)........ 85% -- --
</TABLE>
50
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The weighted average fair value of options granted in fiscal 2000, 1999 and
1998 were $7.44, $0.95 and $0.11 per share, respectively.
Had compensation expense for stock options been determined based on fair
value as proscribed by SFAS No. 123, the Company's pro forma net loss would have
been as follows:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
July 1, July 3, June 27,
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
NET LOSS:
As reported.................................................... $ (6,453) $ (7,704) $ (2,192)
Pro forma...................................................... $ (7,500) $ (8,027) $ (2,411)
BASIC AND DILUTED NET LOSS PER SHARE:
As reported.................................................... $ (0.36) $ (1.74) $ (0.58)
Pro forma...................................................... $ (0.42) $ (1.81) $ (0.64)
</TABLE>
Because the method proscribed by SFAS No. 123 has not been applied to stock
options granted prior to June 30, 1995 and no expected volatility factor has
been used to value any stock options granted prior to January 1, 2000, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
Note 9: Employee Benefit Plans
Eligible employees of the Company's North American offices may elect to
participate in the Company's 401(k) plan. The Company does not make
contributions to the 401(k) plan. Employees of certain of the Company's
subsidiaries are provided with savings plans to which the Company and the
employee contribute. The Company's contributions to these plans were not
material.
51
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Note 10: Segment and Geographic Information
The Company measures operating results as a single reportable segment. The
Company reports revenue in the geographic region of the customer at the time of
the license. However, the customer has the right to redeploy licenses anywhere
in the world. The Company does report, for internal purposes, operating results
by subsidiary, which operate in specific countries. Revenues and property and
equipment by significant geographic region are as follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
------------ ------------ -------------
<S> <C> <C> <C>
REVENUES:
North America......................................... $ 45,398 $ 30,557 $ 15,644
------------ ------------ -------------
Germany............................................... 9,519 6,048 2,573
France................................................ 6,162 2,243 2,144
Asia/Pacific.......................................... 4,870 -- --
Europe (excluding Germany and France)................. 8,762 2,498 818
------------ ------------ -------------
Total international............................... 29,313 10,789 5,535
------------ ------------ -------------
$ 74,711 $ 41,346 $ 21,179
============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
As of
--------------------------------
July 1, July 3,
2000 1999
----------- ----------
<S> <C> <C>
PROPERTY AND EQUIPMENT:
North America...................................................... $ 3,844 $ 2,498
----------- -----------
Germany............................................................ 202 123
France............................................................. 178 166
Asia/Pacific....................................................... 87 --
Europe (excluding Germany and France).............................. 304 186
------------- -------------
Total international........................................... 771 475
------------- -------------
$ 4,615 $ 2,973
=========== ===========
</TABLE>
Note 11: Net Income (Loss) Per Share
The Company's historical capital structure is not indicative of its
prospective capital structure due to the conversion of all shares of convertible
preferred stock into common stock concurrent with the closing of the Company's
initial public offering in March 2000. Accordingly, pro forma basic and diluted
net loss per share has been presented assuming the conversion of all outstanding
shares of convertible preferred stock into common stock, as if the conversion
had occurred on the original date of issuance.
52
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The calculation of basic and diluted and pro forma basic and diluted net income
(loss) per share is as follows:
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
July 1, July 3, June 27,
2000 1999 1998
----------- ---------- ------------
<S> <C> <C> <C>
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Net loss from continuing operations.................................... $ (6,453) $ (7,704) $ (10,876)
Net income from discontinued operations................................ -- -- 8,684
---------- --------- ----------
Net loss............................................................... $ (6,453) $ (7,704) $ (2,192)
Basic and diluted net loss per share from continuing operations........ $ (0.36) $ (1.74) $ (2.88)
Basic and diluted net income per share from discontinued operations.... -- -- $ 2.30
---------- --------- ----------
Basic and diluted net loss per share................................... $ (0.36) (1.74) $ (0.58)
========== ========= ==========
Shares used in computing basic and diluted net income (loss) per
share............................................................... 17,966 4,428 3,777
========== ========= ==========
PRO FORMA BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Shares used in computing basic and diluted net income (loss) per
share............................................................... 17,966 4,428 3,777
Adjustment to reflect the effect of the conversion of preferred
stock............................................................... 17,720 23,542 21,273
---------- --------- ----------
Shares used in computing pro forma basic and diluted net income
(loss) per share.................................................... 35,686 27,970 25,050
========== ========= ==========
Pro forma basic and diluted net loss per share from continuing
operations.......................................................... $ (0.18) $ (0.28) $ (0.43)
Pro forma basic and diluted net income per share from discontinued
operations.......................................................... -- -- 0.34
---------- --------- ----------
Pro forma basic and diluted net loss per share......................... $ (0.18) $ (0.28) $ (0.09)
========== ========= ==========
</TABLE>
Potentially dilutive common stock options and warrants aggregating 10,518,
11,910 and 10,293 for fiscal 2000, 1999 and 1998, respectively, have been
excluded from the computation of basic and dilutive net income (loss) per share
because their inclusion would be anti-dilutive.
53
<PAGE>
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Note 12: Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
Year Ended July 1, 2000
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 13,881 $ 16,167 $ 19,837 $ 24,826 $ 74,711
Gross profit.............................. $ 7,849 $ 9,075 $ 11,554 $ 15,426 $ 43,904
Net loss.................................. $ (1,419) $ (2,079) $ (2,915) $ (40) $ (6,453)
Basic and diluted net loss per share...... $ (0.27) $ (0.35) $ (0.15) $ (0.00) $ (0.36)
Shares used in computing basic and diluted
net loss per share.................... 5,203 5,868 18,907 41,888 17,966
Pro forma basic and diluted net loss per
share................................. $ (0.04) $ (0.06) $ (0.08) $ (0.00) $ (0.18)
Shares used in computing pro forma basic
and diluted net loss per share........ 31,965 32,630 36,258 41,888 35,686
</TABLE>
<TABLE>
<CAPTION>
Year Ended July 3, 1999
-------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 8,200 $ 9,531 $ 10,468 $ 13,147 $ 41,346
Gross profit............................... $ 4,760 $ 5,373 $ 5,488 $ 7,935 $ 23,556
Net loss................................... $ (2,039) $ (2,107) $ (2,591) $ (967) $ (7,704)
Basic and diluted net loss per share....... $ (0.53) $ (0.50) $ (0.54) $ (0.20) $ (1.74)
Shares used in computing basic and diluted
net loss per share..................... 3,829 4,234 4,773 4,926 4,428
Pro forma basic and diluted net loss per
share.................................. $ (0.07) $ (0.08) $ (0.09) $ (0.03) $ (0.28)
Shares used in computing pro forma basic
and diluted net loss per share......... 27,217 27,621 28,162 28,936 27,970
</TABLE>
54
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Anything herein to the contrary notwithstanding, in no event are the
sections entitled "Stock Performance Graph", "Compensation Committee Report on
Executive Compensation" and "Audit Committee Report" to be incorporated by
reference herein from the Company's definitive proxy statement for the Company's
2000 annual meeting of stockholders.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning the directors and executive officers of the
Company is incorporated by reference herein from the information contained in
the section entitled "Occupations of Directors and Executive Officers" in
MatrixOne's definitive proxy statement (the "Definitive Proxy Statement") for
the 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the end of MatrixOne, Inc.'s fiscal
year ended July 1, 2000.
The information concerning compliance with Section 16(a) of the Exchange
Act required under this item is incorporated herein by reference from the
information contained in the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Definitive Proxy Statement.
ITEM 11: EXECUTIVE COMPENSATION
Certain information concerning executive compensation is incorporated by
reference herein from the information contained in the section entitled "
Compensation and Other Information Concerning Directors and Officers" in the
Definitive Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the information
contained in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Definitive Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information concerning certain relationships and related
transactions is incorporated by reference herein from the information contained
in the section entitled "Certain Relationships and Related Transactions" in the
Definitive Proxy Statement.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the
Registrant are filed as part of this report:
Report of Independent Public Accountants
55
<PAGE>
Consolidated Balance Sheets as of July 1, 2000 and July 3,
1999
Consolidated Statements of Operations for the years ended
July 1, 2000, July 3, 1999 and June 27, 1998
Consolidated Statements of Redeemable Convertible Preferred
Stock and of Stockholders' Equity (Deficit) for the
years ended July 1, 2000, July 3, 1999 and June 27,
1998
Consolidated Statements of Cash Flows for the years ended
July 1, 2000, July 3, 1999 and June 27, 1998
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of MatrixOne,
Inc. for each of the years ended July 1, 2000, July 3, 1999 and
June 27, 1998 is filed as part of this report and should be read
in conjunction with the Consolidated Financial Statements and
related notes thereto of MatrixOne, Inc.
<TABLE>
<S> <C>
Page Number
-----------
Schedule II-Valuation and Qualifying Accounts and Reserves S-II
</TABLE>
Schedules other than those listed above have been omitted
since they are either not required, not applicable, or the
information has otherwise been included.
(3) INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated By-laws
4.1(1) Specimen certificate representing the common stock
10.1(1) Amended and Restated 1987 Stock Option Plan
10.2(1) Amended and Restated 1996 Stock Plan
10.3(1) 1999 Stock Plan
10.4(1) 2000 Employee Stock Purchase Plan
10.5(1) Asset Purchase Agreement dated May 7, 1998 by and among SofTech,
Inc., Adra Systems, Inc. and the registrant
10.6(1) Amended and Restated Registration Rights, Restricted Stock and
Stock Option Agreement by and among the registrant and certain
stockholders of registrant dated as of October 11, 1988
10.7(1) Amendment No. 1 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
registrant and certain stockholders of registrant dated as of
June 26, 1991
10.8(1) Amendment No. 2 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
registrant and certain stockholders of registrant dated as of
August 19, 1991
10.9(1) Amendment No. 3 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
registrant and certain stockholders of registrant dated as of
October 1, 1997
10.10(1) Amendment No. 4 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
registrant and certain stockholders of registrant dated as of
June 17, 1999
10.11(1) Amended and Restated Stockholders Agreement by and among the
registrant and the stockholders listed therein dated as of June
17, 1999
56
<PAGE>
10.12(1) Office Lease by and between the registrant and New Boston
Chelmsford Limited Partnership dated March 2, 1994
10.13(1) Loan and Security Agreement between the registrant and Silicon
Valley Bank dated as of December 29, 1998
10.14(1) Employment Agreement with James F. Morgan dated as of April 14,
1998
10.15(1) Letter Agreement between the registrant and Maurice L. Castonguay
dated as of January 11, 1999
10.16(1) Agreement between the registrant and Oracle Corporation dated as
of May 22, 1996
10.17(1) Employment Agreement between the registrant and Johannes T. J.
Ruigrok dated as of July 15, 1998
10.18(1) Letter Agreement between the registrant and Brian M. Gallagher
dated as of June 3, 1999
10.19(1) Letter Agreement between the registrant and Stephen P. Dunn dated
as of December 5, 1997
10.20(1) Loan Modification Agreement between the registrant and Silicon
Valley Bank dated as of September 28, 1999
10.21(1) Loan Modification Agreement between the registrant and Silicon
Valley Bank dated as of December 28, 1999
10.22(1) Borrower Agreement between the registrant and Export-Import Bank
of the United States dated as of January 21, 2000
10.23(1) Loan and Security Agreement between the registrant and Export-
Import Bank of the United States dated as of January 21, 2000
10.24(1) Common Stock Purchase Agreement between the registrant and GE
Capital Equity Investments, Inc. dated as of February 1, 2000
10.25(1) Warrant issued by registrant to GE Capital Equity Investments,
Inc. dated as of February 1, 2000
10.26 Loan Modification Agreement between the registrant and Silicon
Valley Bank dated as of August 18, 2000
21.1 Subsidiaries of the registrant
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (see page 58)
27.1 Financial Data Schedule
___________________________________
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 333-92731).
(b) REPORTS ON FORM 8-K
Not applicable.
(c) EXHIBITS
The Company hereby files as part of this Annual Report on Form 10-K
the exhibits listed in Item 14(a)(3) above. Exhibits which are
incorporated herein by reference can be inspected and copied at the
public reference facilities maintained by the Commission, 450 Fifth
Street NW, Room 1024, Washington, D.C. and at the Commission's regional
offices at 219 South Dearborn Street, Room 1204, Chicago, Illinois; 76
Federal Plaza, Room 1102, New York, New York and 5757 Wilshire Boulevard,
Suite 1710, Los Angeles, California. Copies of such material can also be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, NW, Washington, D.C. 20549, at prescribed rates.
(d) FINANCIAL STATEMENT SCHEDULES
The Company hereby files as part of this Annual Report on Form 10-K
the consolidated financial statement schedules listed in Item 14(a)(2)
above.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MATRIXONE, INC.
Date: September 22, 2000
By: /s/ MARK F. O'CONNELL
----------------------------------------
Mark F. O'Connell
President and Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
The undersigned officers and directors of MatrixOne, Inc. hereby constitute
and appoint Mark F. O'Connell and Maurice L. Castonguay, and each of them
singly, with full power of substitution, our true and lawful attorneys-in-fact
and agents to sign for us in our names in the capacities indicated below any and
all amendments to this Annual Report on Form 10-K and to file same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Mark F. O'Connell President, Chief Executive September 22, 2000
----------------------------------------
Mark F. O'Connell Officer and Director
(principal executive officer)
/s/ Maurice L. Castonguay Chief Financial Officer, September 22, 2000
----------------------------------------
Maurice L. Castonguay Vice President of Finance and
Administration and Treasurer
(principal financial and
accounting officer)
/s/ Ellen Carnahan Director September 22, 2000
----------------------------------------
Ellen Carnahan
/s/ Daniel J. Holland Director September 22, 2000
----------------------------------------
Daniel J. Holland
/s/ James F. Morgan Director September 22, 2000
----------------------------------------
James F. Morgan
/s/ Charles R. Stuckey, Jr. Director September 22, 2000
----------------------------------------
Charles R. Stuckey, Jr.
</TABLE>
58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To MatrixOne, Inc.:
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of MatrixOne, Inc.
included in this Annual Report on Form 10-K and have issued our report thereon
dated July 24, 2000. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule listed in Item
14(a)(2) is the responsibility of the Company's management and is presented for
purposes of complying with Securities and Exchange Commission's rules and is not
a part of the basic financial statements and, in our opinion, fairly states, in
all material respects, the financial data required to be set forth therein, in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 24, 2000
S-I
<PAGE>
Schedule II
MATRIXONE, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End
Description Period Expenses Accounts Deductions of Period
----------- --------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
July 1, 2000......................... $ 772 $ 404 $ -- $ (249) $ 927
July 3, 1999......................... $ 511 $ 689 $ -- $ (428) $ 772
June 27, 1998........................ $ 172 $ 496 $ -- $ (157) $ 511
Reserve for Discontinued Operations:
July 1, 2000......................... $ 950 $ -- $ -- $ (340) $ 610
July 3, 1999......................... $ 2,006 $ -- $ -- $ (1,056) $ 950
June 27, 1998........................ $ -- $ -- $ 2,338(1) $ (332) $ 2,006
</TABLE>
------------------
(1) Addition to the reserve for discontinued operations includes transaction
costs consisting principally of investment banking, legal and accounting
fees, and bonus and severance arrangements with certain employees, which
were charged against the gain on sale of discontinued operations.
S-II
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated By-laws
4.1(1) Specimen certificate representing the common stock
10.1(1) Amended and Restated 1987 Stock Option Plan
10.2(1) Amended and Restated 1996 Stock Plan
10.3(1) 1999 Stock Plan
10.4(1) 2000 Employee Stock Purchase Plan
10.5(1) Asset Purchase Agreement dated May 7, 1998 by and among
SofTech, Inc., Adra Systems, Inc. and the registrant
10.6(1) Amended and Restated Registration Rights, Restricted Stock and
Stock Option Agreement by and among the registrant and certain
stockholders of registrant dated as of October 11, 1988
10.7(1) Amendment No. 1 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
registrant and certain stockholders of registrant dated as of
June 26, 1991
10.8(1) Amendment No. 2 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
registrant and certain stockholders of registrant dated as of
August 19, 1991
10.9(1) Amendment No. 3 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
registrant and certain stockholders of registrant dated as of
October 1, 1997
10.10(1) Amendment No. 4 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
registrant and certain stockholders of registrant dated as of
June 17, 1999
10.11(1) Amended and Restated Stockholders Agreement by and among the
registrant and the stockholders listed therein dated as of June
17, 1999
10.12(1) Office Lease by and between the registrant and New Boston
Chelmsford Limited Partnership dated March 2, 1994
10.13(1) Loan and Security Agreement between the registrant and Silicon
Valley Bank dated as of December 29, 1998
10.14(1) Employment Agreement with James F. Morgan, dated as of April
14, 1998
10.15(1) Letter Agreement between the registrant and Maurice L.
Castonguay dated as of January 11, 1999
10.16(1) Agreement between the registrant and Oracle Corporation dated
as of May 22, 1996
10.17(1) Employment Agreement between the registrant and Johannes T. J.
Ruigrok dated as of July 15, 1998
10.18(1) Letter Agreement between the registrant and Brian M. Gallagher
dated as of June 3, 1999
10.19(1) Letter Agreement between the registrant and Stephen P. Dunn
dated as of December 5, 1997
10.20(1) Loan Modification Agreement between the registrant and Silicon
Valley Bank dated as of September 28, 1999
10.21(1) Loan Modification Agreement between the registrant and Silicon
Valley Bank dated as of December 28, 1999
10.22(1) Borrower Agreement between the registrant and Export-Import
Bank of the United States dated as of January 21, 2000
10.23(1) Loan and Security Agreement between the registrant and Export-
Import Bank of the United States dated as of January 21, 2000
10.24(1) Common Stock Purchase Agreement between the registrant and GE
Capital Equity Investments, Inc. dated as of February 1, 2000
<PAGE>
10.25(1) Warrant issued by registrant to GE Capital Equity Investments,
Inc. dated as of February 1, 2000
10.26 Loan Modification Agreement between the registrant and Silicon
Valley Bank dated as of August 18, 2000
21.1 Subsidiaries of the registrant
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (see page 58)
27.1 Financial Data Schedule
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(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 333-92731).
