<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission File Number: 000-18674
MAPICS, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 04-2711580
------------------------------ -------------------
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
1000 Windward Concourse Parkway
Alpharetta, Georgia 30005
----------------------------------------
(Address of principal executive offices)
(678) 319-8000
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding at
August 7, 2000 was 18,095,376.
===============================================================================
<PAGE>
MAPICS, INC.
Quarterly Report On Form 10-Q
for the Quarterly Period Ended June 30, 2000
TABLE OF CONTENTS
Item Page
Number Number
------ ------
PART I - FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000
and September 30, 1999......................................... 3
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended June 30, 2000 and 1999............ 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 2000 and 1999............................ 5
Notes to Condensed Consolidated Financial Statements............. 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 15
3. Quantitative and Qualitative Disclosures About Market Risk....... 24
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K................................. 25
Signature........................................................ 26
Exhibit Index.................................................... 27
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
MAPICS, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
--------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 10,954 $ 21,351
Accounts receivable, net of allowances of $2,010 at
June 30, 2000 and $1,781 at September 30, 1999............ 25,966 30,804
Prepaid expenses and other current assets.................... 10,230 9,860
Deferred income taxes, net................................... 3,320 1,452
--------- ---------
Total current assets................................. 50,470 63,467
Property and equipment, net.................................. 6,356 6,019
Computer software costs, net................................. 18,792 19,902
Goodwill and other intangible assets, net.................... 48,295 3,776
Other non-current assets, net................................ 10,907 2,230
--------- ---------
Total assets......................................... $ 134,820 $ 95,394
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................ $ 9,100 $ --
Accounts payable............................................. 7,497 6,455
Accrued expenses and other current liabilities............... 25,275 21,526
Deferred revenue............................................. 32,510 28,999
--------- ---------
Total current liabilities............................ 74,382 56,980
Long-term debt............................................... 23,400 --
Other non-current liabilities................................ 2,613 155
--------- ---------
Total liabilities.................................... 100,395 57,135
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized:
Series D convertible preferred stock, 125 shares issued
and outstanding (liquidation preference of $9,419)
at June 30, 2000 and September 30, 1999................. 125 125
Series E convertible preferred stock, 50 shares issued
and outstanding (liquidation preference of $3,768) at
June 30, 2000 and September 30, 1999................... 50 50
Common stock, $.01 par value; 90,000 shares authorized;
20,357 shares issued and 18,094 shares outstanding at
June 30, 2000; 20,370 shares issued and 17,592
shares outstanding at September 30, 1999................ 204 204
Additional paid-in capital.................................. 63,423 61,899
Accumulated deficit......................................... (11,570) (1,667)
Unamortized restricted stock compensation................... (814) --
Treasury stock-at cost, 2,263 shares at June 30, 2000
and 2,778 shares at September 30, 1999.................. (16,993) (22,352)
--------- ---------
Total shareholders' equity.......................... 34,425 38,259
--------- ---------
Total liabilities and shareholders' equity.......... $ 134,820 $ 95,394
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
MAPICS, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
License........................................... $ 15,148 $ 15,997 $ 44,642 $ 53,367
Services and other................................ 21,342 16,068 56,894 47,422
--------- --------- --------- ---------
Total revenue............................. 36,490 32,065 101,536 100,789
--------- --------- --------- ---------
Operating expenses:
Cost of license revenue........................... 4,002 3,281 11,575 9,827
Cost of services and other revenue................ 8,161 4,895 22,571 13,742
Selling and marketing............................. 13,911 12,599 36,536 38,961
Product development............................... 4,130 3,940 12,281 12,138
General and administrative........................ 3,408 3,632 15,066 10,057
Amortization of goodwill.......................... 2,377 -- 4,681 --
Restructuring and acquisition costs............... (2,160) -- 8,918 --
--------- --------- --------- ---------
Total operating expenses.................. 33,829 28,347 111,628 84,725
--------- --------- --------- ---------
Income (loss) from operations....................... 2,661 3,718 (10,092) 16,064
Other:
Interest income................................... 246 236 809 981
Interest expense.................................. (1,007) (30) (1,926) (59)
--------- --------- --------- ---------
Income (loss) before income tax expense (benefit)... 1,900 3,924 (11,209) 16,986
Income tax expense (benefit)........................ 1,596 1,510 (1,728) 6,539
--------- --------- --------- ---------
Net income (loss)................................... $ 304 $ 2,414 $ (9,481) $ 10,447
========= ========= ========= =========
Net income (loss) per common share (basic).......... $ 0.02 $ 0.13 $ (0.53) $ 0.54
========= ========= ========= =========
Weighted average number of common shares
outstanding (basic)............................ 18,056 18,602 17,829 19,398
========= ========= ========= =========
Net income (loss) per common share (diluted)........ $ 0.02 $ 0.12 $ (0.53) $ 0.47
========= ========= ========= =========
Weighted average number of common shares and common
equivalent shares outstanding (diluted)........ 19,912 20,515 17,829 22,097
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
MAPICS, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ (9,481) $ 10,447
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.................................................. 2,258 1,724
Amortization of computer software costs....................... 5,313 5,329
Amortization of goodwill and other intangible assets.......... 5,245 387
Amortization of debt issuance costs........................... 206 --
Write-off of computer software costs.......................... 7,841 --
Provision for bad debts....................................... 632 999
Deferred income taxes......................................... (2,791) 3,555
Deferred lease obligation..................................... 167 221
Compensation payable in common stock.......................... (74) 10
Stock and options issued to non-employees..................... 89 98
Loss on disposal of property and equipment.................... 108 101
-------- --------
9,513 22,871
Changes in operating assets and liabilities:
Accounts receivable......................................... 6,833 4,763
Prepaid expenses and other current assets................... (157) (3,815)
Other non-current assets.................................... (454) --
Accounts payable............................................ (153) (1,784)
Accrued expenses and other current liabilities.............. (5,061) (4,782)
Deferred revenue............................................ 284 (2,907)
Other non-current liabilities............................... 2,291 --
-------- --------
Net cash provided by operating activities................ 13,096 14,346
-------- --------
Cash flows from investing activities:
Purchases of property and equipment......................... (1,975) (2,942)
Additions to computer software costs........................ (4,522) (4,285)
Purchases of computer software.............................. (1,322) (2,032)
Acquisitions, net of cash acquired.......................... (47,199) --
-------- --------
Net cash used for investing activities................... (55,018) (9,259)
-------- --------
Cash flows from financing activities:
Proceeds from stock options exercised....................... 2,709 1,263
Proceeds from employee stock purchases...................... 414 441
Acquisitions of treasury stock.............................. -- (24,266)
Proceeds from long-term debt................................ 40,000 --
Principal repayments of long-term debt...................... (10,220) --
Payment of debt issuance costs.............................. (1,378) --
-------- --------
Net cash provided by (used for) financing activities..... 31,525 (22,562)
-------- --------
Net decrease in cash and cash equivalents.......................... (10,397) (17,475)
Cash and cash equivalents at beginning of period................... 21,351 33,442
-------- --------
Cash and cash equivalents at end of period......................... $ 10,954 $ 15,967
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
Except for the balance sheet as of September 30, 1999, the accompanying
condensed consolidated financial statements are unaudited; however, in our
opinion, these condensed consolidated financial statements contain all
adjustments, consisting of only normal, recurring adjustments, necessary to
present fairly our consolidated financial position, results of operations and
cash flows as of the dates and for the periods indicated.
The accompanying condensed financial statements are consolidated and
consist of the condensed financial statements of MAPICS, Inc. and our wholly
owned subsidiaries. We eliminated all significant intercompany accounts and
transactions in the consolidation. We have reclassified certain amounts in the
September 30, 1999 condensed consolidated balance sheet to conform to the
presentation in the June 30, 2000 condensed consolidated balance sheet.
We have prepared these financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission. As permitted by the rules
of the SEC applicable to quarterly reports on Form 10-Q, we have condensed these
notes, and they do not contain all disclosures required by generally accepted
accounting principles. While we believe that the disclosures presented are
adequate to make these condensed consolidated financial statements not
misleading, you should read these condensed consolidated financial statements in
conjunction with our audited consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the fiscal year ended September
30, 1999 as filed with the SEC.
We operate on a fiscal year ending September 30th. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for a full year.
(2) Revenue Recognition
We recognize revenue from licensing our software and performing related
customer support, consulting, implementation and education services in
accordance with the guidance provided by Statement of Position 97-2, "Software
Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition," which we adopted on October 1, 1999. The adoption of SOP 98-9 did
not have a material impact on our financial position or results of operations.
During 1999, the American Institute of Certified Public Accountants issued
technical questions and answers on financial accounting and reporting issues
related to SOP 97-2 and may issue additional interpretations related to SOP 97-2
in the future.
We generate a significant portion of our total revenue from licensing
software, which is conducted principally through our global network of
independent affiliates. The affiliates provide the principal channel through
which we sell our products. However, the ultimate customer typically executes a
license agreement directly with us rather than the affiliate. We also sell some
of our products through a direct employee sales force. We generally recognize
revenue from licensing of our software upon:
(1) the signing of a license agreement between us and the ultimate
customer;
(2) delivery of the software to the customer or to a location designated
by the customer;
(3) fees being fixed and determinable; and
(4) determination that collection of the related receivable is probable.
We defer license revenue on all software arrangements in which there are
undelivered elements other than post-contract customer support; however,
typically, our software licenses do not include significant post-delivery
obligations to be fulfilled by us.
6
<PAGE>
When we license our software, we either receive (1) an initial license fee
and a periodic license fee or (2) a perpetual license fee and an optional
maintenance fee. We record initial license fees and perpetual license fees as
license revenue and typically recognize them upon delivery of the software to
the ultimate customer. We record periodic license fees and maintenance fees as
services revenue and recognize them ratably over the term of the periodic
license agreement or maintenance agreement. The periodic license fee, which is
typically paid annually in advance, entitles the customer to continue using the
software and to receive support services, as available. If a customer does not
renew its periodic license, it is no longer entitled to use our software. We
believe this licensing arrangement provides a source of recurring revenue from
our installed base of customers and enables our customers to take advantage of
new releases and enhancements of our software. The optional maintenance fee,
which is also typically paid annually in advance, entitles the customer to
receive similar support services, as available; however, it differs from the
periodic license fee in that it is not a "right to use" fee.
Under the terms of our license agreements where our customer is
responsible for installation and training, the affiliates generally provide our
customers with most of the consulting and implementation services relating to
our products. In those cases, we have no commitment to reimburse the affiliates
for any losses incurred.
We may also provide consulting and implementation services directly to our
customers, and we offer educational courses and training materials to our
customers and affiliates. Consulting, implementation and training services
generally are not essential to the functionality of our software products, are
separately priced and are available from a number of suppliers. We recognize
revenue from the consulting, implementation and training services that we
provide as we perform those services.
(3) Financial Instruments
Since April 4, 2000, we have used a variable-to-fixed interest rate swap
to manage our interest rate risk on our variable rate term loan with a syndicate
of banks. This interest rate swap is a derivative financial instrument and is
not presented on our balance sheet at June 30, 2000. See note (8) for more
information on our long-term debt and interest rate swap.
(4) Net Income (Loss) Per Common Share
We apply Statement of Financial Accounting Standards No. 128, "Earnings
Per Share," which requires us to present "basic" and "diluted" earnings per
share, or EPS, for all periods presented in the statements of operations. We
compute basic EPS, which excludes dilution, by dividing net income (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
would have occurred if holders of our preferred stock, common stock options and
common stock warrants converted or exercised their holdings into common stock
that then would have shared in our earnings.
7
<PAGE>
The following table presents the calculations of basic EPS and diluted
EPS:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------ ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ............................... $ 304 $ 2,414 $ (9,481) $ 10,447
======== ======== ======== ========
Denominator:
Weighted average number of common shares
outstanding (denominator for net income (loss)
per common share (basic)) .................... 18,056 18,602 17,829 19,398
Common share equivalents:
Convertible preferred stock .................. 1,750 1,750 -- 2,025
Common stock options ......................... 106 119 -- 380
Common stock warrants ........................ -- 44 -- 294
-------- -------- -------- --------
Weighted average number of common shares
and common equivalent shares outstanding
(denominator for net income (loss) per
common share (diluted)) ...................... 19,912 20,515 17,829 22,097
======== ======== ======== ========
Net income (loss) per common share (basic) ... $ 0.02 $ 0.13 $ (0.53) $ 0.54
======== ======== ======== ========
Net income (loss) per common share (diluted).. $ 0.02 $ 0.12 $ (0.53) $ 0.47
======== ======== ======== ========
</TABLE>
Because their inclusion would have an antidilutive effect on EPS, we
excluded the average number of common share equivalents listed below from the
computation of diluted EPS for the nine months ended June 30, 2000 (in
thousands):
Common share equivalents:
Convertible preferred stock...................... 1,750
Common stock options............................. 356
Common stock warrants............................ 200
-----
Total....................................... 2,306
=====
(5) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including some derivative instruments that are embedded in other contracts, and
for hedging activities. From time to time we may enter into forward exchange
contracts or purchase options to minimize the effect of changes in exchange
rates on our financial position, results of operations and cash flows. However,
these activities are not material. In addition, on April 4, 2000, we entered
into an interest rate swap arrangement with a bank. An interest rate swap is a
derivative financial instrument.
On October 1, 2000, we plan to adopt SFAS No. 133, as amended by SFAS No.
138. Upon adoption of SFAS No. 133 we will be required to reflect the fair value
of the interest rate swap on our balance sheet. At June 30, 2000, the interest
rate swap represented an off-balance sheet obligation with a fair value of
$29,000.
In December 1999, the SEC issued SAB No. 101, as amended by SAB No. 101A
and SAB No. 101B, which is effective no later than the fourth fiscal quarter of
our fiscal year ending September 30, 2001. SAB No. 101 provides guidance in
applying generally accepted accounting principles to revenue recognition in
financial statements. Although we do not currently expect the adoption of SAB
No. 101 to have a material impact on our licensing practices, financial position
or results of operations, we are still assessing the possible effects of SAB No.
101. Furthermore, we can provide no assurance that additional guidance
pertaining to revenue recognition will not result in unexpected modifications to
our current revenue recognition practices and will not materially adversely
8
<PAGE>
impact our future revenue, results of operations and financial condition.
In March 2000, the FASB released their Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25." This Interpretation provides guidance for certain issues that
arise in the application of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The provisions of this
Interpretation became effective on July 1, 2000. The adoption of Interpretation
No. 44 did not have a significant impact on our financial position or results of
operations.
(6) Acquisitions
Acquisition of Pivotpoint, Inc.
On January 12, 2000, we acquired Pivotpoint, Inc. for $48.0 million in
cash. Pivotpoint is a leading provider of extended enterprise applications, or
EEA, to mid-sized manufacturing and distribution companies. We accounted for the
acquisition as a purchase. Accordingly, the results of operations of Pivotpoint
for the period from January 12, 2000 are included in the accompanying condensed
consolidated financial statements.
We allocated the total purchase price to the net tangible assets and
intangible assets acquired based on our estimate of fair value at the date of
acquisition. We also allocated a portion of the total purchase price to in-
process research and development projects of the acquired Pivotpoint business,
which we expensed immediately following the acquisition. The allocation of the
total purchase price to the acquired technology, in-process research and
development costs and other intangible assets was based on an independent
appraisal. We allocated the balance of the total purchase price to goodwill. In
connection with the acquisition of Pivotpoint, we recorded restructuring and
acquisition charges of $8.9 million before income taxes, consisting primarily of
non-cash items. See note (7) for more information about these restructuring and
acquisition charges.
The calculation of the total purchase price was as follows (in thousands):
Consideration paid in cash..................... $48,000
Direct transaction costs....................... 2,038
-------
Total purchase price........................ $50,038
=======
Direct transaction costs include fees paid or accrued for professional
services performed in connection with the acquisition of Pivotpoint. This amount
may be revised as actual fees are paid. Any increase or decrease in the total
purchase price will cause a corresponding increase or decrease in goodwill.
9
<PAGE>
The following allocation of the total purchase price reflects our
preliminary estimate of fair value for the assets acquired and liabilities
assumed and is subject to adjustment when additional information concerning
asset and liability valuations is finalized. Any increase or decrease in the net
assets acquired will cause a corresponding decrease or increase in goodwill.
(In thousands)
Cash and cash equivalents ........................ $ 2,939
Accounts receivable, net ......................... 2,544
Prepaid expenses and other current assets ........ 193
Property and equipment ........................... 663
Computer software costs (a) ...................... 6,200
Goodwill and other intangible assets (b) ......... 47,813
Other non-current assets ......................... 5,550
Current portion of long-term debt ................ (2,720)
Accounts payable ................................. (1,156)
Accrued expenses and other current liabilities.... (8,809)
Deferred revenue ................................. (3,179)
--------
$ 50,038
========
------------
(a) Includes acquired technology of $4,800 and in-process research and
development costs of $1,400. We wrote off all of the in-process
research and development costs immediately after consummating the
acquisition. The write-off is included under the caption
"Restructuring and acquisition charges" in the condensed
consolidated statements of operations.
(b) Includes $400, $1,900 and $45,513 for assembled workforce, customer
base and goodwill, respectively. These amounts are being amortized
over periods ranging from five to seven years.
The following pro forma information presents our results of operations as
if the acquisition of Pivotpoint had taken place on October 1, 1998:
Nine Months Ended
June 30,
------------------------
2000 1999
---- ----
(In thousands)
Total revenue.......................... $108,281 $118,289
Net loss............................... (6,274) (6,284)
EPS (basic)............................ (0.35) (0.32)
EPS (diluted).......................... (0.35) (0.32)
These pro forma results of operations include adjustments to the
historical financial statements of the combined companies and have been prepared
for comparative purposes only. These pro forma results do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisition occurred on the date indicated or which may result in the
future.
Other Acquisition
On March 1, 2000, we acquired an education business for $2.0 million.
Total consideration included the issuance of 106,668 shares of restricted common
stock and cash of $103,000 for transaction costs. The total purchase price was
allocated almost entirely to goodwill, which we are amortizing over five years.
10
<PAGE>
(7) Restructuring and Acquisition Charges and Subsequent Event
Restructuring and Acquisition Charges
In connection with the acquisition of Pivotpoint, we recorded
restructuring and acquisition charges of $11.1 million during the three months
ended March 31, 2000. Of that amount, $9.7 million represented restructuring
charges and $1.4 million represented the write-off of in-process research and
development costs.
Prior to the acquisition of Pivotpoint, we were engaged in product
development activities to re-engineer our XA applications to the Windows NT
server platform. We made the decision to discontinue our NT development effort
for the XA applications because Pivotpoint's EEA, Point.Man, runs on multiple
platforms, including Windows NT, UNIX and Linux. Accordingly, we wrote off
computer software costs related to our NT development, and we accrued costs for
contractual obligations arising from the termination of a technology alliance
with a third party. We settled these obligations on July 31, 2000 for an amount
that was $2.2 million less than the amount stipulated in the contract. See the
discussion below under "Subsequent Event."
Following the acquisition of Pivotpoint, we had two APS solutions among
our product offerings: (1) Wisdom and (2) Thru-Put. After an extensive
evaluation of both products, we selected Thru-Put as our APS solution because of
the product's e-business capabilities, quick implementation, return on
investment for customers, ease of use and best-of-breed functionality.
Furthermore, we established plans to migrate existing Wisdom customers to Thru-
Put. Accordingly, we wrote off computer software costs and other assets related
to the Wisdom product, and we accrued costs for contractual obligations arising
from the termination of a related technology alliance with a third party.
The major components of the restructuring charges and the remaining
accrual at June 30, 2000 were as follows (in thousands):
<TABLE>
<CAPTION>
Accrued
Restructuring
Charge Amounts Utilized Costs
------ ---------------- -------------
<S> <C> <C> <C>
Employee severance costs ................ $ 150 $ (150) $ --
Exit costs (for terminated contracts).... 3,100 (2,160) 940
Non-cash asset write-offs ............... 6,450 (6,450) --
------- ------- -------
$ 9,700 $(8,760) $ 940
======= ======= =======
</TABLE>
During the three months ended June 30, 2000, we paid employee severance
costs of approximately $150,000. We have no additional severance costs in
connection with restructuring activities related to the acquisition of
Pivotpoint. As of the date of this report, we expect to pay approximately
$940,000 within the next 12 months for obligations under the terminated
contracts.
Subsequent Event
On July 31, 2000, we signed a settlement agreement with a third party for
obligations under a cancelled technology alliance. The terms of the settlement
were such that we will pay an amount that is approximately $2.2 million less
than the amount stipulated in the contract. The settlement of this estimated
liability occurred subsequent to the balance sheet date but prior to the
issuance of our quarterly financial statements and has been reflected in these
financial statements. The effect of the adjustment after income taxes increased
our results by $1.3 million or $0.08 per common share (diluted).
(8) Long-term Debt
Bank Credit Facility
On January 12, 2000, in conjunction with our acquisition of Pivotpoint, we
borrowed $40.0 million under a new bank credit facility to finance a portion of
the purchase price. This new borrowing arrangement replaced our previous bank
credit facility and consists of a $40.0 million term loan and a $20.0 million
revolving credit facility with a syndicate of banks.
The term loan requires us to make quarterly installment payments in
varying amounts of principal from July 1, 2000 through December 31, 2002, the
maturity date of the term loan. In addition, we must make quarterly payments of
interest based on the lender's
11
<PAGE>
base rate or LIBOR plus a predetermined margin. However, we may be required
under certain circumstances, based on our cash flows, to prepay all or a portion
of the outstanding balance. Alternatively, we may at our discretion elect,
subject to some limitations, to prepay all or a portion of the outstanding
balance without penalty. From inception of the term loan through June 30, 2000,
we made principal repayments of $7.5 million, including voluntary principal
prepayments of $5.3 million. The variable interest rate on our term loan is
adjusted quarterly based on LIBOR. At June 30, 2000, the interest rate on our
term loan, including the lender's margin, was 9.8%.
Aggregate scheduled principal repayments under our term loan are as
follows (in thousands):
July 1, 2000 through September 30, 2000 ...... $ --
Fiscal year ending September 30, 2001 ........ 12,133
Fiscal year ending September 30, 2002 ........ 13,433
Fiscal year ending September 30, 2003 ........ 6,934
--------
Total future principal payments ........... 32,500
Less current portion of long-term debt..... (9,100)
--------
Long-term debt ............................ $ 23,400
========
We can borrow, subject to limitations, up to $20.0 million under the
revolving credit portion of the bank credit facility. Availability of revolving
credit loans and the rate of interest that the lender charges vary depending
upon our ability to maintain specific financial ratios. All borrowings
outstanding under the revolving credit facility mature on January 12, 2004. In
addition, we must pay a commitment fee for the unused portion of the revolving
credit facility. At June 30, 2000, no amount was outstanding under the revolving
credit portion of the bank credit facility.
Substantially all of our assets are pledged as collateral for any
obligations under the bank credit facility. The bank credit facility, as
amended, contains covenants which, among other things, require us to maintain
specific financial ratios and impose limitations or prohibitions on us with
respect to:
. incurrence of indebtedness, liens and capital leases;
. the payment of dividends on and the redemption or repurchase of our
capital stock;
. investments and acquisitions;
. mergers and consolidations; and
. the disposition of any of our properties or assets outside the
ordinary course of business.
Interest Rate Swap Arrangement
We are obligated under the terms of the bank credit facility to maintain
an interest rate protection arrangement on half of our outstanding balance under
the term loan. On April 4, 2000, we entered into an interest rate swap
arrangement with a bank. The purpose of the interest rate swap arrangement is to
reduce our exposure to interest rate fluctuations by converting variable rate
interest payments to fixed rate interest payments on a portion of the
outstanding balance under our term loan. Under the terms of the interest rate
swap arrangement, we have agreed to pay the bank a fixed rate of 7.0% on a
notional principal amount in exchange for a variable rate payment based on
LIBOR, which at June 30, 2000 was 6.8%.
On the last day of each March, June, September and December, we settle the
swap arrangement with the bank and the variable rate is adjusted based on LIBOR.
We recognize any differences paid or received on the interest rate swap
arrangement as an adjustment to interest expense. Giving consideration to the
effect of the interest rate swap, the effective annual interest rate on our term
loan for the three months ended June 30, 2000 was 9.9%.
12
<PAGE>
The notional amount is adjusted periodically as we make scheduled
principal repayments such that it will equal at least 50% of our outstanding
balance under the term loan. However, the notional amount may, at times, exceed
50% of our outstanding principal balance if we make unscheduled principal
repayments. Notional amounts do not quantify risk or represent our assets or
liabilities, but are used in the determination of cash settlements under the
swap arrangement. We are exposed to credit losses from counterparty
nonperformance, but we do not anticipate any such loss because our arrangement
is with a major financial institution. At June 30, 2000, our swap arrangement
had a notional principal amount of $16.4 million. The swap arrangement expires
on December 31, 2001.
Debt Issuance Costs
We incurred debt issuance costs of $1.4 million to establish the new bank
credit facility. We capitalized these costs and are recognizing them as an
adjustment to interest expense over the lives of the underlying term loan and
revolving credit loan.
(9) Income Taxes
The actual income tax expense (benefit) for the three months and nine
months ended June 30, 2000 differs from the expected income tax expense
(benefit) calculated by applying the federal statutory rate of 35.0% to our
income (loss) before income tax expense (benefit) due principally to the effect
of amortization of goodwill and other intangible assets that is not deductible
for income tax purposes. We are amortizing goodwill and other intangible assets
from the acquisition of Pivotpoint over periods ranging from five to seven
years. Accordingly, we expect our effective tax rate to differ from the federal
statutory rate while we record amortization of goodwill and other intangible
assets that is not deductible for income tax purposes. Other principal items
that affect our effective tax rate include tax credits and state and foreign
income taxes.
(10) Unamortized Restricted Stock Compensation
On March 31, 2000, we granted performance accelerated restricted stock, or
PARS, to certain officers and employees pursuant to our 1998 Long-Term Incentive
Plan. PARS are shares of common stock granted outright without cost to the
officer or employee. The shares, however, are restricted in that they may not be
sold or otherwise transferred by the officer or employee until they vest,
generally after the end of three years. If the officer or employee leaves our
company prior to the vesting date for any reason other than death or retirement,
the PARS shares generally will be forfeited by the officer or employee and will
be returned to us. Once the PARS have vested, they become unrestricted and may
be transferred and sold like any other shares of our common stock.
We recognize compensation expense over the performance period based on the
grant date fair value of the PARS shares issued to officers and employees. We
recorded compensation expense of $75,000 for these PARS during the three months
ended June 30, 2000. Unamortized restricted stock compensation, which represents
compensation expense attributable to future periods, is presented as a separate
component of shareholders' equity.
13
<PAGE>
(11) Operating Segments and Geographic Information
The following table includes interim financial information for the three
months and nine months ended June 30, 2000 and 1999 related to our operating
segments and geographic areas. The information presented below may not be
indicative of results if the geographic areas were independent organizations.
<TABLE>
<CAPTION>
North
America EMEA LAAP Corporate Total
------- ---- ---- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Three Months Ended June 30, 2000:
Revenue from unaffiliated customers.... $ 27,846 $ 6,376 $ 2,268 $ 36,490
======== ======== ======== ========
Income (loss) from operations ......... 3,456 863 133 $ (1,791) 2,661
======== ======== ======== ========
Interest income ....................... 246
Interest expense ...................... (1,007)
---------
Income before income tax expense ...... $ 1,900
========
Three Months Ended June 30, 1999:
Revenue from unaffiliated customers.... $ 23,331 $ 6,361 $ 2,373 $ 32,065
======== ======== ======== =========
Income (loss) from operations ......... 4,179 813 (243) $ (1,031) 3,718
======== ======== ======== ========
Interest income ....................... 236
Interest expense ...................... (30)
---------
Income before income tax expense ...... $ 3,924
=========
North
America EMEA LAAP Corporate Total
------- ---- ---- --------- -----
(In thousands)
Nine Months Ended June 30, 2000:
Revenue from unaffiliated customers.... $ 76,018 $ 18,443 $ 7,075 $ 101,536
========= ======== ======== =========
Income (loss) from operations ......... 11,126 1,544 202 $(22,964) (10,092)
========= ======== ======== ========
Interest income ....................... 809
Interest expense ...................... (1,926)
---------
Loss before income tax benefit ........ $ (11,209
=========
Nine Months Ended June 30, 1999:
Revenue from unaffiliated customers.... $ 69,349 $ 22,428 $ 9,012 $ 100,789
========== ======== ======== =========
Income (loss) from operations ......... 14,734 3,551 575 $ (2,796) 16,064
========== ======== ======== ========
Interest income ....................... 981
Interest expense ...................... (59)
---------
Income before income tax expense ...... $ 16,986
=========
</TABLE>
On January 12, 2000, we acquired Pivotpoint, whose operations are
conducted predominantly in the United States. Accordingly, our results of
operations in North America for the three months and nine months ended June 30,
2000 include the results of the acquired Pivotpoint business from the date of
acquisition.
The corporate results for the three months and nine months ended June 30,
2000 include goodwill amortization of $2.4 million and $4.7 million,
respectively. In addition, we reduced corporate expenses for the three months
ended June 30, 2000 by $2.2 million as a result of the favorable settlement of
certain contractual obligations as discussed in note (7). Corporate results for
the nine months ended June 30, 2000 include restructuring and acquisition
charges of $8.9 million (including the $2.2 million reduction discussed in the
previous sentence) and special charges related to the write-off of technology-
related assets and other special items of $4.9 million.
14
<PAGE>
(12) Supplemental Cash Flow Information
Non-cash investing and financing activities are summarized below:
Nine Months
Ended June 30,
----------------------
2000 1999
------ -------
(In thousands)
Liabilities and debt assumed in
acquisitions......................... $15,951 $ --
Restricted common stock issued in an
acquisition.......................... 1,931 --
Expense for stock-based awards ............ 15 108
Tax benefit associated with exercise
of stock options and stock awards..... 578 279
Conversion of preferred stock ............. -- 150
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis in conjunction with
the condensed consolidated financial statements and notes contained in "Item 1.
Financial Statements" in Part 1 of this report. This discussion contains
forward-looking statements relating to our future financial performance,
business strategy, financing plans and other future events that involve
uncertainties and risks. Our actual results could differ materially from the
results anticipated by these forward-looking statements as a result of many
known and unknown factors, including, but not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting Future Performance" contained in
our Annual Report on Form 10-K for the fiscal year ended September 30, 1999 as
filed with the SEC. The cautionary statements made in that Form 10-K are
applicable to all related forward-looking statements wherever they appear in
this report.
Results of Operations
Acquisition of Pivotpoint, Inc.
We acquired Pivotpoint on January 12, 2000 for $48.0 million in cash. This
strategic business combination enabled us to immediately expand our integrated
manufacturing solutions across multiple platforms, including Windows NT, UNIX,
Linux and AS/400. In addition to MAPICS XA, our flagship EEA, we now provide the
following advanced business systems to mid-sized manufacturers and distribution
companies:
. Point.Man, a powerful suite of EEA designed to streamline
business processes for manufacturing, customer service and
financial reporting across multiple sites, business lines and
countries. Point.Man combines the speed, Internet
accessibility and tight integration that mid-sized
manufacturers expect with broad functionality that can be
implemented as required to meet the needs of rapidly growing
companies;
. Thru-Put, an advanced planning and scheduling, or APS, system;
and
. Maincor, an enterprise asset management, or EAM, system.
Following our acquisition of Pivotpoint, we have more than 3,000 customers
worldwide who have implemented our solutions.
Since the date of acquisition, our management team, sales force and
affiliates have focused a significant portion of their efforts on integrating
the Pivotpoint business. We believe the focus on integration has been a
significant distraction for our selling channel. Although we expect our results
of operations to benefit from increased revenue resulting from the transaction,
on-going efforts to integrate the business could likewise have a negative impact
on our future sales.
15
<PAGE>
The acquisition of Pivotpoint has modified our business model. Generally,
our cost structure is designed so that a significant portion of our operating
expenses varies in direct relation to our license revenue. These variable
expenses include product royalties, which are included in cost of license
revenue, and commissions paid to affiliates, which are included in selling and
marketing expenses. Moreover, our affiliates, rather than our employees,
typically provide the majority of the implementation, consulting and application
integration services for our customers. Prior to the acquisition of Pivotpoint,
we generally did not record the service revenue associated with implementation
and consulting work or the costs associated with maintaining a consulting force.
As a result of our acquisition of the Pivotpoint business, services
revenue and costs of services have become more significant, and our methods of
selling our products have changed.
. The mix of revenue between license revenue and services
revenue changed from the date of acquisition through June 30,
2000. Services revenue increased as a percentage of total
revenue and may continue to increase as a percentage of total
revenue in future periods because we now have a group of
employee consultants that perform implementation and
customization services. Accordingly, we now record services
revenue for implementation and customization services as they
are performed.
. The cost of services revenue increased from the date of
acquisition through June 30, 2000 and may continue to increase
in future periods. Prior to the acquisition of Pivotpoint, our
cost of services revenue principally included the costs of
providing customer support. Following the acquisition, our
cost of services revenue includes these costs plus (1) the
additional costs of providing customer support for Point.Man,
Thru-Put, Maincor and other products of the acquired
Pivotpoint business and (2) the costs associated with
maintaining a group of employee consultants.
. Selling costs increased from the date of acquisition through
June 30, 2000 and may continue to increase in future periods.
In addition to our affiliates who sell our products on
commission, we now employ a direct sales force. Although we
are working to integrate the activities of our direct sales
force and our affiliates, a higher proportion of our total
selling costs are now fixed.
Furthermore, our results of operations from the date of acquisition
through June 30, 2000 were, and future periods may be, negatively affected by
the following items related to our acquisition of Pivotpoint:
. A significant portion of the total purchase price was
allocated to goodwill and other intangible assets that will
negatively impact future operating results through the
recognition of additional amortization expense. Amortization
of goodwill is presented on a separate line in the statement
of operations while amortization of acquired technology and
other intangible assets is included in cost of license
revenue;
. We financed a portion of the total purchase price with
borrowings from a syndicate of banks in the amount of $40.0
million. Interest expense and principal repayments associated
with these borrowings has had and will continue to have a
negative impact on our earnings and cash flows while the debt
is outstanding; and
. We have incurred and will continue to incur incremental
operating expenses associated with the acquired Pivotpoint
business.
We filed a Current Report on Form 8-K with the SEC dated January 12, 2000,
as amended by a Form 8-K/A filed with the SEC on March 27, 2000, reporting,
pursuant to Items 2 and 7, our acquisition of Pivotpoint. The amended report
included the historical financial statements of Pivotpoint and pro forma
financial information of the combined entities to the extent required.
Three Months and Nine Months Ended June 30, 2000 Compared to Three Months
and Nine Months Ended June 30, 1999
Summary. Our results of operations for the three months and nine months
ended June 30, 2000 include the results of operations of Pivotpoint from January
12, 2000. Because we accounted for this business combination as a purchase, our
results for periods prior to the acquisition date, including those for the three
months and nine months ended June 30, 1999, do not include the results of
Pivotpoint. Additionally, during the nine months ended March 31, 2000, we
recorded restructuring and acquisition charges of $8.9 million before income
taxes, including the write-off of in-process research and development costs of
$1.4 million. We also recorded
16
<PAGE>
charges of $4.9 million before income taxes in the three months ended March 31,
2000 for the write-off of some technology-related assets and other special
items. Of the $13.8 million of combined special charges, $12.3 million were non-
cash items.
For the three months ended June 30, 2000, we reported net income of
$304,000, or $0.02 per share (diluted), while we reported a net loss of $9.5
million, or $0.53 per share for the nine months ended June 30, 2000. Before the
aforementioned special charges and amortization of goodwill, our results for the
three months and nine months ended June 30, 2000 were income after income taxes
of $1.3 million, or $0.07 per share (diluted), and $4.5 million, or $0.22 per
share (diluted), respectively. For the three months and nine months ended June
30, 1999, we reported net income of $2.4 million, or $0.12 per share (diluted),
and $10.4 million, or $0.47 per share (diluted), respectively.
The following table shows a reconciliation of our income before special
charges and amortization of goodwill to our net income (loss) as reported in the
statements of operations for the three months and nine months ended June 30,
2000:
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
June 30, 2000 June 30, 2000
------------- -------------
(In thousands)
<S> <C> <C>
Income before special charges and amortization of goodwill .... $ 1,306 $ 4,468
-------- --------
Less special charges and amortization of goodwill
before income taxes:
Amortization of goodwill .............................. (2,377) (4,681)
Restructuring charges ................................. 2,160 (7,518)
Acquisition charges (in process research and
development costs) ............................... -- (1,400)
Write-off of technology-related assets and other
special items .................................... -- (4,923)
-------- --------
Total special charges and amortization of goodwill
before income taxes ...................................... (217) (18,522)
======== ========
Special charges and amortization of goodwill after income
taxes..................................................... (1,002) (13,949)
======== ========
Net income (loss) ............................................. $ 304 $ (9,481)
======== ========
</TABLE>
The following table presents our statements of operations data as a
percentage of total revenue for the three months and nine months ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue:
License ............................................... 41.5% 49.9% 44.0% 52.9%
Services .............................................. 58.5 50.1 56.0 47.1
----- ----- ----- -----
Total revenue ....................................... 100.0 100.0 100.0 100.0
===== ===== ===== =====
Operating expenses:
Cost of license revenue ............................... 11.0 10.2 11.4 9.8
Cost of services revenue .............................. 22.4 15.3 22.2 13.6
Selling and marketing ................................. 38.1 39.3 36.0 38.7
Product development ................................... 11.3 12.3 12.1 12.0
General and administrative ............................ 9.3 11.3 14.8 10.0
Amortization of goodwill .............................. 6.5 -- 4.6 --
Restructuring and acquisition charges ................. (5.9) -- 8.8 --
----- ----- ----- -----
Total operating expenses ............................ 92.7 88.4 109.9 84.1
----- ----- ----- -----
Income (loss) from operations ............................ 7.3 11.6 (9.9) 15.9
Interest income .......................................... 0.7 0.7 0.8 1.0
Interest expense ......................................... (2.8) (0.1) (1.9) 0.0
----- ----- ----- -----
Income (loss) before income tax
expense (benefit) ..................................... 5.2 12.2 (11.0) 16.9
Income tax expense (benefit) ............................. 4.4 4.7 (1.7) 6.5
----- ----- ----- -----
Net income (loss) ........................................ 0.8% 7.5% (9.3)% 10.4%
===== ===== ===== =====
</TABLE>
17
<PAGE>
License Revenue. The following table shows information about our license
revenue during the three months and nine months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
License revenue ....................... $ 15,148 $ 15,997 (5.3)% $ 44,642 $53,367 (16.3)%
As a percentage of total revenue....... 41.5% 49.9% 44.0% 52.9%
</TABLE>
The decrease in license revenue during the three months and nine months
ended June 30, 2000 resulted from a lower volume of product sales to new and
existing XA customers offset by additional license revenue from the sale of
Point.Man, Thru-Put, Maincor and other products of the acquired Pivotpoint
business. We believe, the increasingly evident potential of e-business is
continuing to cause our manufacturing customers to further delay difficult IT
purchasing decisions and thus lengthen the sales cycle for our extended
enterprise applications and e-business offerings.
Our operations are conducted principally in (1) North America, (2) the
Europe, Middle East and Africa region, or EMEA, and (3) the Latin America and
the Asia Pacific regions, or LAAP. The conditions in the marketplace and the
demand for our products, as described in the preceding paragraph, generally have
negatively impacted results in each of our primary geographic markets. For the
three months and nine months ended June 30, 2000, license revenue decreased in
most of our geographic markets despite the additional revenue generated from
sales of Point.Man, Thru-Put, Maincor and other products of the acquired
Pivotpoint business. Point.Man, Thru-Put, Maincor and other products of the
acquired Pivotpoint business are primarily sold in North America, although we
have recorded several sales of Thru-Put in our international territories. We
expect international sales of Point.Man and Thru-Put to increase as we translate
and localize these products for foreign markets.
The following table shows license revenue contributed by each of our
primary geographic markets for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
North America.......................... $11,218 $12,013 (6.6)% $32,953 $35,632 (7.5)%
EMEA .................................. 2,894 2,797 3.5 8,360 11,960 (30.1)
LAAP .................................. 1,036 1,187 (12.7) 3,329 5,775 (42.4)
------- ------- ------- -------
Total............................ $15,148 $15,997 (5.3)% $44,642 $53,367 (16.3)%
======= ======= ======= =======
</TABLE>
The following table shows the percentage of total license revenue
contributed by each of our primary geographic markets for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------- --------------------
2000 1999 2000 1999
------ ------ ------ -----
<S> <C> <C> <C> <C>
North America.......................... 74.1% 75.1% 73.8% 66.8%
EMEA................................... 19.1 17.5 18.7 22.4
LAAP................................... 6.8 7.4 7.5 10.8
----- ----- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Additional information about our operations in these geographic areas is
presented in note (11) of the notes to our condensed consolidated financial
statements contained in "Item 1. Financial Statements" in Part I of this report.
18
<PAGE>
Services Revenue. The following table shows information about our services
revenue during the three months and nine months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Services revenue........................ $21,342 $16,068 32.8% $56,894 $47,422 20.0%
As a percentage of total revenue........ 58.5% 50.1% 56.0% 47.1%
</TABLE>
Services revenue increased during the three months and nine months ended
June 30, 2000 due principally to additional maintenance, consulting and other
services revenue generated by the acquired Pivotpoint business.
Cost of License Revenue. The following table shows information about our
cost of license revenue during the three months and nine months ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cost of license revenue................. $4,002 $3,281 22.0% $11,575 $9,827 17.8%
As a percentage of license revenue...... 26.4% 20.5% 25.9% 18.4%
As a percentage of total revenue........ 11.0% 10.2% 11.4% 9.8%
</TABLE>
Cost of license revenue increased during the three months and nine months
ended June 30, 2000 principally as a result of an increase in product royalty
expense due to a change in the mix of products sold, including a higher
percentage of products developed by third parties to whom we pay a royalty.
Product royalties as a percentage of license revenue increased to 14.2% and
12.0% for the three months and nine months ended June 30, 2000, respectively,
from 7.7% and 7.1% for the same periods last year, respectively. We expect that
cost of license revenue will vary from period to period based on the mix of
products licensed between internally developed products and third party-
developed products.
Overall, amortization of computer software costs and other intangible
assets remained relatively unchanged during the three months and nine months
ended June 30, 2000 from the same periods a year ago. Amortization of acquired
technology and other intangible assets from the acquisition of Pivotpoint was
$328,000 and $656,000 during the three months and nine months ended June 30,
2000. Furthermore, during the three months ended March 31, 2000, we recorded
accelerated amortization of $327,000 on capitalized software translations costs
that we believed were unrecoverable. These increases were offset primarily by
decreases in amortization of software translation costs during both the three-
month and nine-month periods ended June 30, 2000.
Cost of Services Revenue. The following table shows information about our
cost of services revenue during the three months and nine months ended June 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cost of services revenue................ $8,161 $4,895 66.7% $22,571 $13,742 64.2%
As a percentage of services revenue..... 38.2% 30.5% 39.7% 29.0%
As a percentage of total revenue........ 22.4% 15.3% 22.2% 13.6%
</TABLE>
The increase in cost of services revenue is principally attributable to
(1) the additional costs of providing customer support for Point.Man, Thru-Put,
Maincor and other products of the acquired Pivotpoint business and (2) the costs
associated with maintaining a larger consulting staff.
19
<PAGE>
Selling and Marketing Expenses. The following table shows information
about our selling and marketing expenses during the three months and nine months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Selling and marketing expenses.......... $13,911 $12,599 10.4% $36,536 $38,961 (6.20)%
As a percentage of total revenue........ 38.1% 39.3% 36.0% 38.7%
</TABLE>
Selling and marketing expenses increased during the three months ended
June 30, 2000 due to (1) an increase in spending on marketing programs to
promote the combined operations of MAPICS and Pivotpoint and (2) an increase in
payroll and related for personnel associated with the selling and marketing
functions of the acquired Pivotpoint business. Affiliate fees during the three
months ended June 30, 2000 decreased approximately $400,000 principally due to
the decrease in license revenue.
During the nine months ended June 30, 2000, selling and marketing expenses
decreased due to a $3.9 million decrease in affiliate fees resulting from the
decrease in license revenue offset by an increase during the nine month period
for selling and marketing personnel and marketing programs.
Product Development Expenses. The following table shows information about
our product development expenses during the three months and nine months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Product development costs .................. $ 5,052 $ 5,019 0.7% $ 14,973 $ 14,733 1.6%
Software translation costs ................. 816 375 117.6 1,830 1,690 8.3
-------- -------- -------- --------
Total spending ....................... 5,868 5,394 8.8 16,803 16,423 2.3
-------- -------- -------- --------
Less:
Capitalized product development costs ...... (1,378) (1,096) 25.7 (3,546) (2,823) 25.6
Capitalized software translation costs ..... (360) (358) 0.6 (976) (1,462) (33.2)
-------- -------- -------- --------
Total capitalization ................. (1,738) (1,454) 19.5 (4,522) (4,285) 5.5
-------- -------- -------- --------
Product development expenses ......... $ 4,130 $ 3,940 4.8% $ 12,281 $ 12,138 1.2%
======== ======== ======== ========
Total spending as a percentage of
total revenue ........................... 16.1% 16.8% 16.5% 16.3%
Product development expense as
a percentage of total revenue ........... 11.3% 12.3% 12.1% 12.0%
</TABLE>
Spending on product development activities increased only slightly during
the three months and nine months ended June 30, 2000. In connection with the
acquisition of Pivotpoint, we discontinued our product development efforts to
re-engineer our XA software applications to the Windows NT server platform. Cost
savings from discontinuing these efforts were offset by the added costs of our
new development organization for the products acquired from Pivotpoint. Software
translation costs, which increased during the three months and nine months ended
June 30, 2000, are typically project related, and the timing of those
expenditures is subject to change from period to period. Software capitalization
rates are generally affected by the nature and timing of development activities
and vary from period to period.
20
<PAGE>
General and Administrative Expenses. The following table shows information
about our general and administrative expenses during the three months and nine
months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
General and administrative expenses..... $ 3,408 $ 3,632 $ 15,066 $ 10,057
Less:
Special charges ........................ -- -- (4,596) --
-------- -------- -------- ---------
General and administrative expenses
before special charges .............. $ 3,408 $ 3,632 (6.20)% $ 10,470 $ 10,057 4.1%
======== ======== ======== =========
As a percentage of total revenue ....... 9.3% 11.3% 10.3% 10.0%
======== ======== ======== =========
</TABLE>
During the three months ended June 30, 2000, general and administrative
expenses before special charges decreased as a result of a $500,000 decrease in
our provision for bad debts from the prior year period. This decrease was offset
by an incremental increase in general and administrative costs of the acquired
Pivotpoint business. For the nine months ended June 30, 2000, general and
administrative expenses before special charges increased as a result of the
added costs of the acquired Pivotpoint business offset by a $367,000 reduction
in bad debt expense from the prior year period.
General and administrative expenses for the nine months ended June 30, 2000
include the following special charges:
. $4.1 million for the write-off of non-productive technology-related
assets. These assets largely represent prepaid royalties for
technology that we believe will not be recovered through future
sales of the related products; and
. $500,000 for compensation expense recorded in connection with the
acquisition of Pivotpoint.
Amortization of Goodwill. We completed two acquisitions during the three
months ended March 31, 2000, both of which were treated as purchase business
combinations for accounting purposes. Total goodwill recorded in these
transactions was $47.5 million, which we are amortizing over five years.
Goodwill amortization for the three months and nine months ended June 30, 2000
was $2.4 million and $4.7, respectively.
Restructuring and Acquisition Charges. In connection with the acquisition
of Pivotpoint, we recorded restructuring and acquisition charges of $11.1
million during the three months ended March 31, 2000. On July 31, 2000, we
signed a settlement agreement with a third party for obligations under a
cancelled technology alliance. The terms of the settlement were such that we
will pay an amount that is approximately $2.2 million less than the amount
stipulated in the contract. The settlement of this estimated liability occurred
subsequent to the balance sheet date but prior to the issuance of our quarterly
financial statements and has been reflected in these financial statements. The
effect of the adjustment after income taxes increased our results by $1.3
million or $0.08 per common share (diluted). As of the date of this report, we
expect to pay approximately $940,000 within the next 12 months for obligations
under the terminated contracts.
Interest Income and Interest Expense. The following table shows
information about our interest income and interest expense during the three
months and nine months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- Change From -------------------- Change From
2000 1999 Prior Year 2000 1999 Prior Year
---- ---- ----------- ---- ---- -----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income ................... $ 246 $ 236 4.2 % $ 809 $ 981 (17.5)%
Interest expense .................. (1,007) (30) (greater than)100.0 % (1,926) (59) (greater than)100.0 %
------- ------- ------- -------
Interest income (expense), net..... $ (761) $ 206 $(1,117) $ 922
======= ======= ======= =======
As a percentage of total revenue... (2.1)% 0.6 % (1.1)% 1.0%
======= ======= ======= =======
</TABLE>
21
<PAGE>
Interest income during the three months and nine months ended June 30,
2000 differed from that recorded during the prior year periods principally due
to changes in the average balance of cash and cash equivalents offset by an
increase in interest rates. Interest income will continue to fluctuate as the
average balance of cash and cash equivalents changes from period to period and
as interest rates fluctuate.
Interest expense increased significantly beginning in the three months
ended March 31, 2000 as a result of borrowings under the term loan portion of
our new bank credit facility. Interest expense principally includes (1) interest
on our term loan based on our lender's base rate or LIBOR plus a predetermined
margin, (2) the difference between interest paid and interest received under our
swap arrangement, (3) commitment fees on the unused portion of our revolving
credit facility and (4) amortization of debt issuance costs. Giving
consideration to the effect of the interest rate swap, the effective annual
interest rate on our term loan for the three months ended June 30, 2000 was
9.9%.
Income Tax Expense (Benefit). The following table shows information about
our income tax expense (benefit) during the three months and nine months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Income (loss) before income tax
expense (benefit)....................... $1,900 $3,924 $(11,209) $16,986
Income tax expense (benefit)............... 1,596 1,510 (1,728) 6,539
As a percentage of total revenue........... 4.4% 4.7% (1.7)% 6.5%
Effective income tax rate.................. 84.0% 38.5% (15.4)% 38.5%
</TABLE>
The actual income tax expense (benefit) for the three months and nine
months ended June 30, 2000 differs from the expected income tax expense
(benefit) calculated by applying the federal statutory rate of 35.0% to our
income (loss) before income tax expense (benefit) due principally to the effect
of amortization of goodwill and other intangible assets that is not deductible
for income tax purposes. We are amortizing goodwill and other intangible assets
from the acquisition of Pivotpoint over periods ranging from five to seven
years. Accordingly, we expect our effective tax rate to be higher than the
federal statutory rate while we record amortization of goodwill and other
intangible assets that is not deductible for income tax purposes. Other items
that affected our effective tax rate during the three months and nine months
ended June 30, 2000 and 1999 include principally tax credits and state and
foreign income taxes.
Liquidity and Capital Resources
The following tables show information about our cash flows during the nine
months ended June 30, 2000 and 1999 and selected balance sheet data as of June
30, 2000 and September 30, 1999. You should read these tables and the discussion
that follows in conjunction with our condensed consolidated statements of cash
flows and balance sheets contained in "Item 1. Financial Statements" in Part I
of this report and in our Annual Report on Form 10-K for the fiscal year ended
September 30, 1999 as filed with the SEC.
<TABLE>
<CAPTION>
Summary of Cash Flows
-------------------------
Nine Months Ended
June 30,
-------------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Net cash provided by operating activities before
changes in operating assets and liabilities................................. $9,513 $ 22,871
Increase (decrease) in operating assets and liabilities........................ 3,583 (8,525)
--------- --------
Net cash provided by operating activities...................................... 13,096 14,346
Net cash used for investing activities......................................... (55,018) (9,259)
Net cash provided by (used for) financing activities........................... 31,525 (22,562)
--------- --------
Net decrease in cash and cash equivalents...................................... $ (10,397) $(17,475)
========= =========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data
---------------------------
June 30, September 30,
2000 1999
---- -----
(In thousands)
<S> <C> <C>
Cash and cash equivalents...................................................... $ 10,954 $21,351
Working capital (deficit)...................................................... (23,912) 6,487
Working capital, excluding deferred revenue.................................... 8,598 35,486
Total assets................................................................... 134,820 95,394
Total shareholders' equity..................................................... 34,425 38,259
</TABLE>
Operating Activities
We have funded our operations and capital expenditures primarily with cash
generated from operating activities. The changes in net cash provided by
operating activities generally reflect the changes in net income (loss) plus the
effects of changes in working capital. Changes in working capital, especially
trade accounts receivable, trade accounts payable and accrued expenses, are
generally the result of timing differences between collection of fees billed and
payment of operating expenses.
We generated positive cash flows from operating activities of $13.1
million and $14.3 million during the nine months ended June 30, 2000 and 1999,
respectively. Although we recorded a net loss of $9.5 million for the nine
months ended June 30, 2000, a significant portion of that loss was comprised of
non-cash items, including the write-off of computer software costs in the amount
of $7.8 million and depreciation and amortization of computer software costs,
goodwill and other intangible assets in the combined amount of $12.8 million.
For the nine months ended June 30, 1999, we recorded net income of $10.4
million, including depreciation and amortization of computer software costs and
other intangible assets in the combined amount of $7.4 million. Income taxes
also had a significant effect on the reconciliation of net income (loss) to cash
flows provided by operating activities. In the nine months ended June 30, 2000,
deferred income taxes increased $2.8 million; whereas in the nine months ended
June 30, 1999, deferred income taxes decreased $3.6 million. Net cash provided
by operating activities before changes in operating assets and liabilities was
$9.5 million for the nine months ended June 30, 2000 compared to $22.9 million
for the year earlier period, reflecting the effect of the license revenue
shortfall on our operating cash flows.
During the nine months ended June 30, 2000, we made significant efforts to
collect outstanding accounts receivable from our customers. These efforts
resulted in a $6.8 million reduction in accounts receivable, and our days sales
outstanding ratio on a trailing three-month basis dropped from 85 days at June
30, 1999 to 65 days at June 30, 2000. Other significant changes in operating
assets and liabilities during the nine months ended June 30, 2000 include (1) a
$5.2 million decrease in accounts payable and accrued expenses and other current
liabilities resulting primarily from a decrease in accrued affiliate fees and
(2) a $2.3 million increase in non-current liabilities for obligations under
certain technology arrangements. The decrease in accounts payable and accrued
expenses and other current liabilities during the nine months ended June 30,
1999 resulted from the timing of payments to vendors and other service providers
and accelerated payments of commissions to affiliates.
Investing and Financing Activities
The nature and amounts of net cash flows from investing and financing
activities during the nine months ended June 30, 2000 were comparable to those
in the prior year period, except as follows:
On January 12, 2000, we acquired Pivotpoint for $48.0 in cash. In
addition, we paid transaction costs of $2.0 million. We borrowed $40.0 million
under a new term loan and revolving credit facility to finance a portion of the
purchase price. We funded the remainder of the purchase price and costs related
to the transaction with available cash. This new borrowing arrangement, for
which we paid $1.4 million in debt issuance costs during the nine months ended
June 30, 2000, replaced our previous bank credit facility and consists of a
$40.0 million term loan and a $20.0 million revolving credit facility with a
syndicate of banks.
The term loan requires us to make quarterly installment payments in
varying amounts of principal from July 1, 2000 through December 31, 2002, the
maturity date of the term loan. In addition, we must make quarterly payments of
interest based on the lender's base rate or LIBOR plus a predetermined margin.
However, we may be required under certain circumstances, based on our cash
23
<PAGE>
flows, to prepay all or a portion of the outstanding balance without penalty.
Alternatively, we may at our discretion elect, subject to some limitations, to
prepay all or a portion of the outstanding balance. In addition, while amounts
are outstanding under the term loan portion of the bank credit facility, we are
required to hedge a portion of our interest rate risk by maintaining an interest
rate protection arrangement. From inception of the term loan through June 30,
2000, we made principal repayments of $7.5 million, including voluntary
principal prepayments of $5.3 million. In addition, we made a principal
repayment of $2.7 million on debt assumed in the acquisition of Pivotpoint.
We can borrow, subject to some limitations, up to $20.0 million under the
revolving credit portion of the bank credit facility. All borrowings outstanding
under the revolving credit facility mature on January 12, 2004. In addition, we
must pay a commitment fee for the unused portion of the revolving credit
facility. At June 30, 2000, no amount was outstanding under the revolving credit
portion of the bank credit facility.
During the nine months ended June 30, 1999, we spent $24.3 million to
acquire 2.9 million shares of our common stock. We did not repurchase any shares
during the nine months ended June 30, 2000. Furthermore, we are generally
prohibited under our term loan agreement from repurchasing shares of our stock
without the lenders' permission.
In connection with the acquisition of Pivotpoint, we obtained some
favorable income tax attributes, principally net operating loss carryforwards,
or NOLs, of $15.2 million and tax credits of $700,000. We believe we will be
able to use these additional NOLs and tax credits in future periods to reduce
income taxes payable on our earnings. However, our utilization of these NOLs and
tax credits may be limited on an annual basis. The IRS is currently examining
Pivotpoint's tax returns for 1994 and 1995, and we established a reserve for any
possible adjustments to these NOLs and tax credits.
We believe that cash and cash equivalents on hand as of June 30, 2000,
together with cash flows from operating activities and available borrowings
under the revolving credit facility, will be sufficient for us to make the
scheduled payments of principal and interest on borrowings outstanding under the
term loan portion of our bank credit facility and to maintain our operations for
at least the next 12 months.
Year 2000 Issue
We believe that during fiscal 1998 and the first quarter of fiscal 1999,
the Year 2000 issue may have driven increased demand for our Year 2000 enabled
products. However, we currently believe that both existing customers and
potential new customers have deferred and may continue to defer purchase
decisions for our products as they evaluate the potential of e-business. In
addition, once companies have replaced their existing systems that were not Year
2000 enabled, they may no longer demand our products. We are unable to quantify
the effect that the demand for Year 2000 enabled products has had on our past or
current business, financial condition and results of operations and cannot
predict the effect that any increase or decrease in demand will have on us in
the future.
Inflation
To date, we believe inflation has not had a material impact on our
operations.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rate Sensitivity
Our foreign operations, primarily those in Western Europe, involve
financial transactions that are denominated in foreign currencies. From time to
time, we may enter into forward exchange contracts or purchase options to
minimize the effect of changes in exchange rates on our financial position,
results of operations and cash flows. We did not enter into any forward exchange
contracts or purchase options during the three months and nine months ended June
30, 2000 and 1999 nor did we have any open forward exchange contracts or options
at June 30, 2000 or September 30, 1999.
Interest Rate Sensitivity
The table below presents information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates at June 30, 2000, including our long-term debt obligation and our
interest rate swap arrangement. For our
24
<PAGE>
long-term debt obligation, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates based on the
scheduled principal payments. For our interest rate swap arrangement, the table
presents average notional principal amounts and weighted average interest rates
by expected contractual maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the interest rate swap
arrangement. Weighted average variable rates are based on implied forward rates
in the Eurodollar futures curve for three-month LIBOR at the reporting date.
<TABLE>
<CAPTION>
Fiscal Year of Maturity
-------------------------------------------------------
2000 2001 2002 2003 Total Fair Value
---- ---- ---- ---- ----- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Liabilities
-----------
Long-term debt .......................... $ -- $12,133 $13,433 $6,934 $32,500 $32,500
Average variable interest rate .......... 6.72% 6.82% 6.87% 6.91%
Interest Rate Swap
------------------
Average notional principal amount........ $16,400 $12,588 $ 8,750 $29
Fixed pay interest rate ................. 7.0 % 7.0 % 7.0 %
Average receive variable interest rate... 6.72% 6.82% 6.87%
</TABLE>
We believe that the fair value of our long-term debt is equal to its book
value because our long-term debt is with a bank and not publicly-traded and
because the underlying variable interest rate is adjusted every three months.
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports On Form 8-K
(a) Exhibits
Exhibit
No. Description
------- -----------
10.1 Amended and Restated Revolving Credit and Term Loan Agreement
dated as of January 12, 2000 among MAPICS, Inc., Fleet
National Bank (formerly known as BankBoston, N.A.) and the
other lending institutions listed on Schedule 1 to the Credit
Agreement, Fleet National Bank as agent for the banks and
FleetBoston Robertson Stephens Inc. as arranger
27.1 Financial Data Schedule for the nine months ended June 30,
2000 (for SEC use only)
(b) Reports On Form 8-K
None.
25
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 11, 2000.
MAPICS, Inc.
By: /s/ William J. Gilmour
--------------------------------------
William J. Gilmour
Vice President of Finance and
Chief Financial and Accounting Officer
26
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
10.1 Amended and Restated Revolving Credit and Term Loan Agreement
dated as of January 12, 2000 among MAPICS, Inc., Fleet
National Bank (formerly known as BankBoston, N.A.) and the
other lending institutions listed on Schedule 1 to the Credit
Agreement, Fleet National Bank as agent for the banks and
FleetBoston Robertson Stephens Inc. as arranger
27.1 Financial Data Schedule for the nine months ended June 30,
2000 (for SEC use only)
27
