MATRIXONE INC
10-Q, 2000-11-07
PREPACKAGED SOFTWARE
Previous: CIMETRIX INC, DEF 14A, 2000-11-07
Next: MATRIXONE INC, 10-Q, EX-10.1, 2000-11-07



<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                   _________________________________________

                                   FORM 10-Q


               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended September 30, 2000


                       Commission file number 000-29309
                   _________________________________________

                                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)
                   _________________________________________

     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  [ ]

     As of October 28, 2000, there were 42,870,113 shares of Common Stock
outstanding.
<PAGE>

                                MATRIXONE, INC.
                         QUARTERLY REPORT ON FORM 10-Q
                   FOR THE QUARTER ENDED SEPTEMBER 30, 2000

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                   <C>
PART I - FINANCIAL INFORMATION

     Item 1:  Financial Statements:

              Condensed Consolidated Balance Sheets as of September 30, 2000
                (unaudited) and July 1, 2000.................................................            1
              Condensed Consolidated Statements of Operations for the
                Three Months Ended September 30, 2000 and October 2, 1999 (unaudited)........            2
              Condensed Consolidated Statements of Cash Flows for the
                Three Months Ended September 30, 2000 and October 2, 1999 (unaudited)........            3
              Notes to Condensed Consolidated Financial Statements...........................            4

     Item 2:  Management's Discussion and Analysis of Financial Condition
                and Results of Operations....................................................            7
              Cautionary Statements..........................................................           13

     Item 3:  Quantitative and Qualitative Disclosures About Market Risk.....................           24

PART II - OTHER INFORMATION

     Item 2:  Changes in Securities and Use of Proceeds......................................           25

     Item 6:  Exhibits and Reports on Form 8-K...............................................           26

     Signatures..............................................................................           27
</TABLE>

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS

                                MATRIXONE, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                   September 30,         July 1,
                                                                                       2000               2000
                                                                                   -------------        ----------
                                                                                    (unaudited)
                                                  ASSETS
<S>                                                                                <C>                  <C>
CURRENT ASSETS:
   Cash and equivalents....................................................        $   158,518          $  153,455
   Accounts receivable, net................................................             24,825              21,388
   Prepaid expenses and other current assets...............................              4,580               3,993
                                                                                   -----------          ----------
       Total current assets................................................            187,923             178,836
PROPERTY AND EQUIPMENT, NET................................................              4,932               4,615
OTHER ASSETS...............................................................                397                 966
                                                                                   -----------          ----------
                                                                                   $   193,252          $  184,417
                                                                                   ===========          ==========
                                   LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable........................................................        $     8,724          $    5,921
   Accrued expenses........................................................             18,719              16,026
   Deferred revenues.......................................................             11,412              10,877
                                                                                   -----------          ----------
       Total current liabilities...........................................             38,855              32,824
                                                                                   -----------          ----------
STOCKHOLDERS' EQUITY:
   Convertible preferred stock, $.01 par value, 5,000 authorized and none                   --                  --
    issued and outstanding.................................................
   Common stock, $.01 par value, 100,000 shares authorized, 42,810 and                     428                 420
    41,978 shares issued and outstanding...................................
   Additional paid-in capital..............................................            205,953             205,344
   Notes receivable from stockholders......................................                 --                (738)
   Deferred stock-based consideration......................................            (12,467)            (14,088)
   Accumulated deficit.....................................................            (38,297)            (38,826)
   Accumulated other comprehensive loss....................................             (1,220)               (519)
                                                                                   -----------          ----------
       Total stockholders' equity..........................................            154,397             151,593
                                                                                   -----------          ----------
                                                                                   $   193,252          $  184,417
                                                                                   ===========          ==========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       1
<PAGE>

                                MATRIXONE, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                           Three Months Ended
                                                                                    -------------------------------
                                                                                    September 30,        October 2,
                                                                                        2000                1999
                                                                                    -------------     -------------
<S>                                                                                 <C>                 <C>
REVENUES:
   Software license........................................................         $   18,110          $    7,460
   Service.................................................................             10,438               6,421
                                                                                    ----------          ----------
       Total revenues......................................................             28,548              13,881
                                                                                    ----------          ----------
COST OF REVENUES:
   Software license........................................................              1,796               1,005
   Service (1).............................................................              7,952               5,027
                                                                                    ----------          ----------
       Total cost of revenues..............................................              9,748               6,032
                                                                                    ----------          ----------
GROSS PROFIT...............................................................             18,800               7,849
                                                                                    ----------          ----------
OPERATING EXPENSES:
   Selling and marketing (1)...............................................             13,681               6,171
   Research and development (1)............................................              3,578               1,480
   General and administrative (1)..........................................              2,219               1,082
   Stock-based compensation (1)............................................              1,046                 633
                                                                                    ----------          ----------
       Total operating expenses............................................             20,524               9,366
                                                                                    ----------          ----------
LOSS FROM OPERATIONS.......................................................             (1,724)             (1,517)
                                                                                    ----------          ----------
OTHER INCOME (EXPENSE):
   Interest income.........................................................              2,462                 108
   Other income (expense), net.............................................                 41                 (10)
                                                                                    ----------          ----------
       Total other income (expense)........................................              2,503                  98
                                                                                    ----------          ----------
INCOME (LOSS) BEFORE INCOME TAXES..........................................                779              (1,419)
PROVISION FOR INCOME TAXES.................................................                250                  --
                                                                                    ----------          ----------
NET INCOME (LOSS)..........................................................         $      529          $   (1,419)
                                                                                    ==========          ==========

BASIC NET INCOME (LOSS) PER SHARE..........................................         $     0.01          $    (0.27)
                                                                                    ==========          ==========
DILUTED NET INCOME (LOSS) PER SHARE........................................         $     0.01          $    (0.27)
                                                                                    ==========          ==========
SHARES USED IN COMPUTING:
   Basic net income (loss) per share.......................................             42,258               5,203
                                                                                    ==========          ==========
   Diluted net income (loss) per share.....................................             50,384               5,203
                                                                                    ==========          ==========

PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE.............................                             $    (0.04)
                                                                                                        ==========
SHARES USED IN COMPUTING:
   Pro forma basic and diluted net loss per share..........................                                 31,965
                                                                                                        ==========
------------------------------------------------------------------------------------------------------------------
(1) The following summarizes the departmental allocation of stock-based
compensation:

Cost of service revenues...................................................         $      252          $      129
Selling and marketing......................................................                320                 221
Research and development...................................................                203                 118
General and administrative.................................................                271                 165
                                                                                    ----------          ----------
       Total stock-based compensation......................................         $    1,046          $      633
                                                                                    ==========          ==========
</TABLE>

  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       2
<PAGE>

                                MATRIXONE, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                          Three Months Ended
                                                                                   -------------------------------
                                                                                   September 30,        October 2,
                                                                                       2000                1999
                                                                                   -------------        ----------
<S>                                                                                <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)........................................................          $     529           $  (1,419)
 Adjustments to reconcile net income (loss) to net cash provided by
  operating activities:
   Depreciation...........................................................                434                 333
   Stock-based consideration..............................................              1,523                 633
   Provision for doubtful accounts........................................                 80                  50
   Changes in assets and liabilities:
     Accounts receivable..................................................             (3,531)                236
     Prepaid expenses and other current assets............................               (842)               (946)
     Accounts payable.....................................................              1,855                (742)
     Accrued expenses.....................................................              3,143                 727
     Deferred revenues....................................................              1,068               1,703
                                                                                    ---------           ---------
       Net cash provided by continuing operations.........................              4,259                 575
                                                                                    ---------           ---------
       Net cash used in discontinued operations...........................                 --                (287)
                                                                                    ---------           ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property and equipment......................................               (806)               (488)
 Other assets.............................................................                525                  (8)
 Collection of notes receivable from stockholders.........................                738                  --
                                                                                    ---------           ---------
       Net cash provided by (used in) investing activities................                457                (496)
                                                                                    ---------           ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Repayments of lines of credit............................................                 --              (3,050)
 Proceeds from stock option exercises.....................................                715                  72
                                                                                    ---------           ---------
     Net cash provided by (used in) financing activities..................                715              (2,978)
                                                                                    ---------           ---------
EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS..........................               (368)               (256)
                                                                                    ---------           ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS...........................              5,063              (3,442)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD.................................            153,455              11,036
                                                                                    ---------           ---------
CASH AND EQUIVALENTS, END OF PERIOD.......................................          $ 158,518           $   7,594
                                                                                    =========           =========

NONCASH FINANCING ACTIVITY:
 Issuance of common stock in exchange for notes receivable from
  stockholders............................................................          $      --           $     245
                                                                                    =========           =========
</TABLE>


  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       3
<PAGE>

                                MATRIXONE, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                   (In thousands, except per share amounts)


Note 1.  Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

     The accompanying condensed consolidated financial statements of MatrixOne,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles. These accounting principles were applied on a basis
consistent with those of the consolidated financial statements contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission ("SEC"). The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
contained in the Company's Annual Report on Form 10-K. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal, recurring
adjustments) necessary for a fair presentation. The operating results for the
three month period ended September 30, 2000 may not be indicative of the results
expected for any succeeding quarter or the entire fiscal year ending June 30,
2001.

     The Company operates on a 52-to-53 week fiscal year that ends on the
Saturday closest to June 30/th/. The Company operates on thirteen week fiscal
quarters that end on the Saturday closest to September 30/th/, December 31/st/
and March 31/st/. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

     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 financial statements. Actual
results may differ from those estimates.

Concentrations of Credit Risk

     Revenues from one customer were approximately 15.1% of the Company's total
revenues for the three months ended September 30, 2000, and accounts receivable
from this customer represented approximately 10.3% of the Company's accounts
receivable at September 30, 2000.  Revenues from another customer were
approximately 11.9% of the Company's total revenues for the three months ended
September 30, 2000, and accounts receivable from a different customer
represented approximately 10.5% of the Company's accounts receivable at
September 30, 2000.

     Revenues from two customers were approximately 23.8% and 10.1% of the
Company's total revenues for the three months ended October 2, 1999.

                                       4
<PAGE>

Note 2.  Stockholders Equity

     In connection with the exercise of stock options during fiscal 2000 and
1999, the Company issued shares of common stock in exchange for notes receivable
from stockholders. During the three months ended September 30, 2000, the Company
received payments of notes receivable aggregating $738.

     In connection with certain stock option grants to employees in fiscal 2000
and 1999, the Company recorded deferred stock-based compensation totaling
$17,654. Deferred stock-based compensation represents the difference between the
option exercise 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. 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 $1,046 and $633 for the three months
ended September 30, 2000 and October 2, 1999, respectively.

     During fiscal 2000, the Company issued a warrant to purchase 200 shares of
common stock.  In connection with the issuance of the warrant, the Company
recorded a charge of $1,788, which represented the fair value of the warrant.
This charge is included in deferred stock-based consideration, which is reported
as a component of stockholders' equity and is amortized through charges to
reduce revenues as the elements in the arrangement are delivered.  During the
three months ended September 30, 2000, the Company recorded a charge to reduce
revenues of $477 related to the warrant.

Note 3.  Basic and Diluted and Pro Forma Basic and Diluted 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 antidilutive.

     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 for the three months ended October 2, 1999
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.

                                       5
<PAGE>

     The calculation of basic and diluted and pro forma basic and diluted net
income (loss) per share is as follows:

<TABLE>
<CAPTION>
                                                                                                   Three Months Ended
                                                                                            --------------------------------
                                                                                            September 30,         October 2,
                                                                                                2000                 1999
                                                                                            -------------         ----------
<S>                                                                                         <C>                   <C>
Net income (loss):....................................................................        $     529           $  (1,419)
                                                                                              =========           =========
Shares used in computing basic and diluted and pro forma basic and diluted
 net income (loss) per share:
       Weighted average shares outstanding used in computing basic net
        income (loss) per share.......................................................           42,258               5,203
       Dilutive effect of stock options...............................................            8,082                  --
       Dilutive effect of warrant.....................................................               44                  --
                                                                                              ---------           ---------
       Shares used in computing diluted net income (loss) per share...................           50,384               5,203
                                                                                              =========
       Adjustment to reflect the effect of the conversion of preferred stock..........                               26,762
                                                                                                                  ---------
       Shares used in computing pro forma basic and diluted net loss per share........                               31,965
                                                                                                                  =========
Basic and diluted and pro forma basic and diluted net income (loss) per share:
       Basic net income (loss) per share..............................................        $    0.01           $   (0.27)
                                                                                              =========           =========
       Diluted net income (loss) per share............................................        $    0.01           $   (0.27)
                                                                                              =========           =========
       Pro forma basic and diluted net loss per share.................................                            $   (0.04)
                                                                                                                  =========
</TABLE>

     Potentially dilutive common stock options and warrants aggregating 47 and
12,951 shares for the periods ended September 30, 2000 and October 2, 1999,
respectively, have been excluded from the computation of basic and diluted and
pro forma basic and diluted net loss per share because their inclusion would be
antidilutive.

Note 4.  Comprehensive Income (Loss)

     Comprehensive income (loss) includes net income (loss) as well as other
changes in stockholders' equity, except for stockholders' investments and
distributions and deferred stock-based consideration. The components of
comprehensive income (loss) are as follows:


                                                    Three Months Ended
                                               ----------------------------
                                               September 30,     October 2,
                                                   2000             1999
                                               -------------     ----------

Net income (loss)............................     $   529        $   (1,419)
Foreign currency translation adjustments.....        (701)               46
                                                  -------        ----------
Comprehensive loss...........................     $  (172)       $   (1,373)
                                                  =======        ==========


Note 5.  Related Party Transactions

     During the three months ended September 30, 2000 and fiscal 2000, the
Company issued an executive officer of the Company notes receivable aggregating
3,338 Guilder ($1,336) to provide short-term liquidity to satisfy tax
obligations incurred upon the vesting of the executive officer's stock options.
The notes receivable are full recourse to the executive officer and are
additionally collateralized by the underlying shares of common stock. The notes
receivable bear interest at 6.0% and mature August 31, 2001.

                                       6
<PAGE>

Note 6.  Recently Issued Accounting Pronouncements

     In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities.  Under SFAS
No. 140, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.  SFAS No. 140 also provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.  SFAS No. 140 is effective for certain
transactions occurring after March 31, 2001 and certain disclosures for the
fiscal year ending June 30, 2001.  The Company is currently evaluating the
impact of SFAS No. 140 on its financial statements and related disclosures, but
does not expect that any impact will be material.

ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are subject to a number of risks and uncertainties.
These forward-looking statements are typically denoted in this Report by the
phrases "anticipates," "believes," "expects," "plans" and similar phrases (as
well as other words or expressions referencing future events, conditions or
circumstances). Our actual results could differ materially from those projected
in the forward-looking statements as a result of various factors, including the
factors set forth in "Cautionary Statements" beginning on page 13 of this
Quarterly Report on Form 10-Q. This discussion should be read in conjunction
with the condensed consolidated financial statements and related notes for the
periods specified. Further reference should be made to the Company's Annual
Report on Form 10-K for the fiscal year ended July 1, 2000.

     Overview

     We are a provider of 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 from our international operations to increase as we continue to
expand our international sales and professional services organizations.
Revenues from our international operations represented 21.0% and 51.2% of our
total revenues for the three months ended September 30, 2000 and October 2,
1999, respectively.  Although we license our eMatrix software products to
numerous customers, certain customers may represent more than 10% of our
quarterly revenues.  Revenues from two customers were approximately 15.1% and
11.9% of our total revenues for the three months ended September 30, 2000, and
revenues from two different customers were approximately 23.8% and 10.1% of the
Company's total revenues for

                                       7
<PAGE>

the three months ended October 2, 1999. However, no single customer has
represented 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 of September 30, 2000, we had an
accumulated deficit of approximately $38.3 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.  In view of the rapidly changing nature of our market, we
believe that period-to-period comparisons of our revenues and other operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance. Our historic revenue growth rates are not
necessarily sustainable or indicative of our future growth.

Results of Operations

     The following table sets forth certain statements of operations data as a
percentage of total revenues for the periods indicated. The data has been
derived from the unaudited condensed consolidated financial statements contained
in this Quarterly Report on Form 10-Q. The operating results for any period
should not be considered indicative of results for any future period. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report on Form 10-
K for the fiscal year ended July 1, 2000.


                                                  Three Months Ended
                                            -----------------------------
                                            September 30,      October 2,
                                                2000              1999
                                            -------------      ----------
Revenues:
   Software license....................         63.4%              53.7%
   Service.............................         36.6               46.3
                                               -----             ------
       Total revenues..................        100.0              100.0
                                               -----             ------
Cost of Revenues:
   Software license....................          6.3                7.3
   Service.............................         27.8               36.2
                                               -----             ------
       Total cost of revenues..........         34.1               43.5
                                               -----             ------
Gross profit...........................         65.9               56.5
                                               -----             ------
Operating Expenses:
   Selling and marketing...............         47.9               44.4
   Research and development............         12.5               10.7
   General and administrative..........          7.8                7.8
   Stock-based compensation............          3.7                4.6
                                               -----             ------
       Total operating expenses........         71.9               67.5
                                               -----             ------
Loss from Operations...................         (6.0)             (11.0)
Other Income (Expense).................          8.8                0.8
                                               -----             ------
Income (Loss) Before Income Taxes......          2.8              (10.2)
Provisions for Income Taxes............          0.9                 --
                                               -----             ------
Net Income (Loss)......................          1.9%             (10.2)%
                                               =====             ======

                                       8
<PAGE>

Comparison of Three Months Ended September 30, 2000 and October 2, 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 142.8% to $18.1 million for the three
months ended September 30, 2000 from $7.5 million for the three months ended
October 2, 1999. The increase was primarily due to a $12.5 million increase in
software license revenues in North America, offset by a decline in software
license revenues from our international operations.

     Service revenues.  We provide services to our customers and systems
integrators, consisting of professional services, training and maintenance and
customer support services. Our professional services, which include
implementation and consulting services, are provided on a time and materials or
fixed-price basis.  We recognize professional service revenues as the services
are performed, on a 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 support over the term of the
contract.  Revenues from maintenance contracts are recognized over the term of
the contract on a straight-line basis.

     Service revenues increased 62.6% to $10.4 million for the three months
ended September 30, 2000 from $6.4 million for the three months ended October 2,
1999. The increase was primarily due to a 30.3% increase in professional
services revenues and a 131.9% increase in maintenance revenues from new and
renewed maintenance contracts. Maintenance revenues represented 34.8% and 24.2%
of service revenues for the three months ended September 30, 2000 and October 2,
1999, respectively.

     Cost of software licenses.  Cost of software licenses consists of royalties
paid to third parties for integration products and applications licensed to our
customers and to Oracle for Oracle database licenses. 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 78.7% to $1.8 million for the three
months ended September 30, 2000 from $1.0 million for the three months ended
October 2, 1999. The increase in cost of software licenses was primarily due to
a $1.3 million increase in royalties resulting from increased licensing of
third-party software, offset by a decrease in licensing of Oracle database
licenses.

     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. Our gross
profit may fluctuate based on the actual costs incurred to provide professional
services.

                                       9
<PAGE>

     Cost of services increased 58.2% to $8.0 million for the three months ended
September 30, 2000 from $5.0 million for the three months ended October 2, 1999
primarily due to increased personnel costs to support the growth in our services
organization offset by a decrease in the use of and cost for systems
integrators. We also increased the amount of training we provided systems
integrators in an effort to increase the number of systems integrators with
eMatrix expertise.

     Gross profit.  Gross profit increased 139.5% to $18.8 million for the three
months ended September 30, 2000 from $7.8 million for the three months ended
October 2, 1999. Gross profit as a percentage of total revenues, or gross
margin, increased to 65.9% for the three months ended September 30, 2000 from
56.5% for the three months ended October 2, 1999.  The increase in gross margin
was primarily attributable to higher margin software license revenues growing
faster than service revenues and a decrease in the use of and cost for systems
integrators.  Gross margin on software licenses increased to 90.1% for the three
months ended September 30, 2000 from 86.5% for the three months ended October 2,
1999 due to a decrease in the relative proportion of software we licensed from
third parties. Gross margin from services increased to 23.8% for the three
months ended September 30, 2000 from 21.7% for the three months ended October 2,
1999 due to the decreased use of systems integrators to provide professional
services during the three months ended September 30, 2000.

     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 121.7% to $13.7 million for the
three months ended September 30, 2000 from $6.2 million for the three months
ended October 2, 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 marketing expenses as a percentage of
total revenues increased to 47.9% for the three months ended September 30, 2000
from 44.4% for the three months ended October 2, 1999 primarily due to the
factors previously discussed.

     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 141.8% to $3.6 million for the
three months ended September 30, 2000 from $1.5 million for the three months
ended October 2, 1999 primarily due to increased personnel costs 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
increased to 12.5% for the three months ended September 30, 2000 from 10.7% for
the three months ended October 2, 1999 due to the factors previously discussed.

     General and administrative.  General and administrative expenses consist
primarily of compensation of executive, finance, human resource and
administrative personnel, legal and accounting services and allocation of
related facility expenses.

                                       10
<PAGE>

     General and administrative expenses increased 105.1% to $2.2 million for
the three months ended September 30, 2000 from $1.1 million for the three months
ended October 2, 1999 primarily due to an increase in personnel costs to support
the growth in our business. General and administrative expenses as a percentage
of total revenues were 7.8% for each of the three months ended September 30,
2000 and October 2, 1999.

     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 the option grant and is reported as
deferred stock-based consideration, a component of stockholders' equity.
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 $1.0 million and $0.6 million for the three months ended
September 30, 2000 and October 2, 1999, respectively. We presently 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.

     Other income (expense). Other income (expense) fluctuates based on the
amount of cash available for investment, borrowings under our lines of credit
and realized and unrealized gains and losses on foreign currency transactions.
Other income was $2.5 million for the three months ended September 30, 2000 and
$0.1 million for the three months ended October 2, 1999. The increase was
primarily due to a $2.4 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.

     Provision for income taxes. A provision for income taxes of $0.3 million
was recorded during the three months ended September 30, 2000 based on the
Company's estimate of income taxes expected to be due in certain states and
foreign countries. No provision for income taxes was recorded for the three
months ended October 2, 1999 due to accumulated net losses. To date, we have not
recorded any tax benefits relating to our historical losses or other tax
benefits due to the uncertainty surrounding the timing of the realization of
these future tax benefits.

     Liquidity and Capital Resources

     As of September 30, 2000, we had cash and equivalents of $158.5 million, an
increase of $5.1 million from July 1, 2000.  Our working capital was $149.1
million and $146.0 million as of September 30, 2000 and as of July 1, 2000,
respectively.  The increase in working capital was primarily attributable to
cash generated from operations and cash received from option exercises and
repayments of notes receivable.

     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 collected in the United States.
As of September 30, 2000, we had no borrowings outstanding under these lines of
credit and $8.0 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 September 30, 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 September 30,
2000. Borrowings under this line of credit are limited to 100% of accounts
receivable and bear interest at 11.25%.

                                       11
<PAGE>

     Net cash provided by continuing operations for the three months ended
September 30, 2000 was $4.3 million resulting from our net income and increases
in accounts payable, accrued expenses and deferred revenues, offset by increases
in accounts receivable and prepaid expenses and other current assets. Net cash
provided by continuing operations was $0.6 million for the three months ended
October 2, 1999 due to an increase in deferred revenues and accrued expenses,
offset by our net loss and a decrease in accounts payable and an increase in
prepaid expenses and other current assets.

     Net cash used by discontinued operations was $0.3 million for the three
months ended October 2, 1999 and reflects payments of the severance and legal
and accounting fees incurred in connection with the sale of Adra Systems, our
legacy design and manufacturing business.

     Net cash provided by investing activities was $0.5 million for the three
months ended September 30, 2000 and includes the collection of notes receivable
and changes in other assets, offset by our investments in computer hardware,
computer software and other technology, leasehold improvements and office
equipment to support our growth. Net cash used by investing activities was $0.5
million for the three months ended October 2, 1999 due to our investments in
computer hardware, computer software and other technology, leasehold
improvements and office equipment. We expect that capital expenditures for the
next 12 months will be approximately $5.0 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 $0.7 million for the three
months ended September 30, 2000 and includes the proceeds from stock option
exercises.  Net cash used by financing activities was $3.0 million for the three
months ended October 2, 1999 and consisted of $3.1 million of repayments of our
lines of credit, offset by the proceeds from stock option exercises.

     We currently anticipate that our current 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.

Year 2000 Disclosure Statement

     We executed a plan designed to make the Company's products, information
technology systems and equipment Year 2000 ready. To date, the Company has
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 actual results could still
differ materially from our plan.

                                       12
<PAGE>

Recently Issued Accounting Pronouncements

     In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities.  Under SFAS
No. 140, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.  SFAS No. 140 also provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.  SFAS No. 140 is effective for certain
transactions occurring after March 31, 2001 and certain disclosures for the
fiscal year ending June 30, 2001.  The Company is currently evaluating the
impact of SFAS No. 140 on its financial statements and related disclosures, but
does not expect that any impact will be material.

Cautionary Statements

     This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following cautionary statements and elsewhere
in this Quarterly Report on Form 10-Q. If any of the following risks were to
occur, our business, financial condition or results of operations would likely
suffer. In that event, the trading price of our common stock would decline.

     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

                                       13
<PAGE>

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.

     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
     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 September 30, 2000, we had an
accumulated deficit of approximately $38.3 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 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 though we were profitable during the three months ended September
30, 2000, we may not be able to sustain or increase profitability in the future
on a quarterly or annual basis. Failure to sustain profitability or achieve the
level of profitability expected by investors and securities analysts 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 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

                                       14
<PAGE>

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 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.

                                       15
<PAGE>

     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. During the three months ended September 30, 2000 two customers
represented approximately 15.1% and 11.9% of our total 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.

                                       16
<PAGE>

     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:

     .    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.

                                       17
<PAGE>

     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 21.0% of our
revenues for the three months ended September 30, 2000 and 39.2% and 26.1% of
our revenues in fiscal 2000 and 1999, respectively. Export sales from North
America accounted for approximately 2.2% of our revenues for the three months
ended September 30, 2000 and 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
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.

                                       18
<PAGE>

     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 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.

                                       19
<PAGE>

     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.

     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, 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.

                                       20
<PAGE>

     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 Mark F. O'Connell, our President and Chief Executive Officer, and
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, 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

                                       21
<PAGE>

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.

     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 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.

                                       22
<PAGE>

     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.  During the three months ended September
30, 2000 our stock price fluctuated between a lows of $23.875 per share and a
high of $49.375 per share.  During fiscal 2000, our stock price 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;

     .    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

     As of September 8, 2000, executive officers, directors and holders of 5% or
more of our outstanding common stock owned, 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.

                                       23
<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 3:  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

     We have international offices in Austria, Canada, England, France, Germany,
Italy, Japan and The Netherlands.  At September 30 and July 1, 2000,
approximately 12.1% and 14.4%, respectively, of our total assets were located at
our international subsidiaries. Approximately 21.0%, 39.2% and 26.1% of our
revenues and 26.5%, 25.8% and 21.5% of our expenses for the three months ended
September 30, 2000 and fiscal 2000 and fiscal 1999, 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

                                       24
<PAGE>

contracts that are designated and effective as hedges, 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.

     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 September 30, 2000, we had one forward contract denominated in
Japanese yen outstanding. This outstanding forward contract is presented in the
table below. The table presents the notional amount, at the contract exchange
rate, and the contractual foreign currency exchange rate. The notional exchange
rate is quoted using market conventions where the currency is expressed in
currency units per U.S. dollar.

Table of Forward Contracts:

                                                                   Notional
     Functional Currency    Maturity Date   Notional Amount      Exchange Rate
     -------------------    -------------   ---------------      -------------
        Japanese Yen           12/28/00         $172,617             106.00

     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.

PART II - OTHER INFORMATION

ITEM 2:   CHANGES IN SECURITIES AND USE OF PROCEEDS

     On February 29, 2000, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-92731), relating
to the initial public offering of our common stock, and we did a concurrent
private placement of common stock.  We expect to use the net proceeds from the
initial public offering and the concurrent private placement for general
corporate purposes, including to expand our selling and marketing services
organizations, develop new distribution channels, expand our research and
development efforts, improve our operational and financial systems and for other
working capital purposes. We may also use a portion of the net proceeds to
acquire or invest in complementary businesses, products or technologies.
Currently, we have no specific understandings, commitments or agreements with
respect to any such acquisition or investment. We have not allocated any portion
of the net proceeds for any specific purpose. Our actual use of the net proceeds
from the initial public offering and the concurrent private placement may differ
from the uses we have identified. Pending these uses, the net proceeds of the
offering and the concurrent private placement will be invested in short-term,
interest-bearing, investment-grade securities.  Except for the payment of the
offering expenses, we have not used any of the proceeds from the initial public
offering or concurrent private placement.

                                       25
<PAGE>

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

         (a) Index to Exhibits:

               Exhibit No.              Description
               -----------              -----------
                  10.1                  Employment Agreement dated
                                        November 1, 2000 between the
                                        Company and Mark F. O'Connell

                  27.1                  Financial Data Schedule

         (b) Reports on Form 8-K

             No Reports on Form 8-K were filed by the Company during the three
             months ended September 30, 2000.

                                       26
<PAGE>

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

                                        MATRIXONE, INC.


Dated:  November 7, 2000                By:  /s/ Maurice L. Castonguay
                                        ------------------------------
                                        Maurice L. Castonguay
                                        Chief Financial Officer,
                                        Vice President of Finance
                                        and Administration and
                                        Treasurer (principal financial
                                        and accounting officer)

                                       27
<PAGE>

                                 EXHIBIT INDEX


               Exhibit No.              Description
               -----------              -----------

                  10.1                  Employment Agreement dated
                                        November 1, 2000 between the
                                        Company and Mark F. O'Connell

                  27.1                  Financial Data Schedule



© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission