<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-22154
MANUGISTICS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1469385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2115 EAST JEFFERSON STREET, ROCKVILLE, MARYLAND 20852
(Address of principal executive offices) (Zip code)
(301) 984-5000
(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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 26,344,044 million shares of
common stock, $.002 par value per share, as of July 9, 1998.
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<PAGE> 2
MANUGISTICS GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -
May 31, 1998 (unaudited) and February 28, 1998 3
Condensed Consolidated Statements of Income -
Three months ended May 31, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Three months ended May 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements - May 31, 1998 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 5. Other Information
Supplemental Condensed Consolidated Financial Information
(unaudited) 16
Supplemental Condensed Consolidated Balance Sheets -
May 31, 1998 and February 28, 1998 (unaudited) 17
Supplemental Condensed Consolidated Statements of Income -
Three months ended May 31, 1998 and 1997 (unaudited) 18
Supplemental Condensed Consolidated Statements of Cash Flows -
Three months ended May 31, 1998 and 1997 (unaudited) 19
Supplemental Notes to Condensed Consolidated Financial
Statements - May 31, 1998 20
Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
May 31, February 28,
1998 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,211 $ 19,695
Marketable securities 57,078 62,246
Accounts receivable (net of allowance for uncollectible accounts -
May 31, 1998, $2,722; February 28, 1998, $2,089) 45,135 58,217
Other current assets 5,872 4,882
-------------- --------------
Total current assets 116,296 145,040
PROPERTY AND EQUIPMENT - NET 24,674 20,909
NONCURRENT ASSETS:
Software development costs - net 22,553 22,100
Intangibles - net 13,466 14,660
Deferred tax asset 22,970 17,923
Other noncurrent assets 2,365 1,869
-------------- --------------
TOTAL $ 202,324 $ 222,501
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,116 $ 8,830
Accrued compensation 5,130 12,419
Other accrued expenses 7,219 10,152
Deferred revenue 18,344 17,974
Income taxes payable - 655
-------------- --------------
Total current liabilities 35,809 50,030
LONG-TERM LIABILITIES 344 392
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock, $.002 par value; 100,000,000 shares authorized;
shares issued, 26,758,697 at May 31, 1998; 26,407,755 at February 28,
1998; shares outstanding, 26,006,187 at May 31,
1998; 25,655,245 at February 28, 1998 53 53
Additional paid-in capital 173,349 170,813
Retained (deficit) earnings (6,559) 1,687
Translation adjustment 45 375
Unrealized loss on marketable securities - (132)
Treasury stock - 752,510 shares, at cost (717) (717)
-------------- --------------
Total stockholders' equity 166,171 172,079
-------------- --------------
TOTAL $ 202,324 $ 222,501
============== ==============
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE> 4
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
May 31,
------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
REVENUES:
License fees $ 16,738 $ 20,119
Services 23,096 14,340
--------------- --------------
Total revenues 39,834 34,459
--------------- --------------
OPERATING EXPENSES:
Cost of license fees 2,825 2,460
Cost of services 11,417 6,571
Sales and marketing 22,812 13,152
Product development 11,380 6,225
General and administrative 5,564 3,054
--------------- --------------
Total operating expenses 53,998 31,462
--------------- --------------
(LOSS) INCOME FROM OPERATIONS (14,164) 2,997
OTHER INCOME - NET 1,051 324
--------------- --------------
(LOSS) INCOME BEFORE INCOME TAXES (13,113) 3,321
(BENEFIT) PROVISION FOR INCOME TAXES (4,867) 1,281
--------------- --------------
NET (LOSS) INCOME $ (8,246) $ 2,040
=============== ==============
BASIC (LOSS) INCOME PER SHARE $ (0.32) $ 0.09
=============== ==============
SHARES USED IN BASIC SHARE COMPUTATION 25,920 21,753
=============== ==============
DILUTED (LOSS) INCOME PER SHARE $ (0.32) $ 0.09
=============== ==============
SHARES USED IN DILUTED SHARE COMPUTATION 25,920 23,297
=============== ==============
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE> 5
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
May 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,246) $ 2,040
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 5,126 2,936
Deferred tax asset (5,047) -
Tax benefit from stock options exercised - 288
Other 132 3
Changes in assets and liabilities:
Accounts receivable 13,082 2,775
Other current assets (786) (276)
Other noncurrent assets (497) (36)
Accounts payable and accrued expenses (13,936) (1,367)
Deferred revenue 370 (2,769)
Income taxes payable (858) (946)
--------- ---------
Net cash (used in) provided by operating activities (10,660) 2,648
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions - (1,500)
Purchase of property and equipment (6,270) (2,986)
Capitalization of software development costs (2,146) (1,997)
Purchase of software licenses for resale (314) (120)
Sale of marketable securities - net 5,168 2,369
--------- ---------
Net cash used in investing activities (3,562) (4,234)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations - net (48) (31)
Proceeds from stock options and stock purchases 2,536 511
--------- ---------
Net cash provided by financing activities 2,488 480
--------- ---------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 250 50
--------- ---------
NET DECREASE IN CASH (11,484) (1,056)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,695 8,543
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,211 $ 7,487
========= =========
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE> 6
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 1998
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
reporting and in accordance with the instructions to the Quarterly
Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
only of normal, recurring adjustments) which are necessary for a fair
presentation of the unaudited results for the interim periods presented
have been included. The results of operations for the periods
presented herein are not necessarily indicative of the results of
operations for the entire fiscal year, which ends on February 28, 1999.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto for the
fiscal year ended February 28, 1998 included in the Annual Report on
Form 10-K of Manugistics Group, Inc. ("the Company") for that year.
2. Net (Loss) Income Per Share
Basic income per share is computed using the weighted average number of
shares of common stock outstanding. Diluted income per share is
computed using the weighted average number of shares of common stock
and, when dilutive, common equivalent shares from options to purchase
common stock using the treasury stock method. Potentially dilutive
common shares are excluded from the calculation of diluted loss per
share for the three months ended May 31, 1998, as they were
antidilutive. The following table sets forth the computation of basic
and diluted (loss) income per share:
<TABLE>
<CAPTION>
Three months ended May 31,
1998 1997
(in thousands,
except per share amounts)
<S> <C> <C>
Weighted average common shares 25,920 21,753
Dilutive potential common shares - 1,544
----------- -----------
Shares used in diluted share computation 25,920 23,297
=========== ===========
Net (loss) income ($8,246) $2,040
=========== ===========
Basic and diluted (loss) income per share ($0.32) $0.09
=========== ===========
</TABLE>
6
<PAGE> 7
3. Commitments and Contingencies
The Company has entered into an agreement with a third party under
which the Company has guaranteed certain revenue levels to the third
party in the aggregate amount of $16,500,000 over several years. In the
event that the activities performed by the Company do not meet the
minimum amounts, the Company may be obligated to pay the difference.
Certain issues have arisen between the Company and the third party
relating to the satisfaction of these contingencies. The Company
anticipates satisfactory resolution of these issues and believes it
will be able to meet the revenue levels. Accordingly the Company does
not expect to be obligated to make such payments.
See Note 6 regarding certain shareholder class action lawsuits.
4. Supplemental Information of Noncash Investing and Financing Activities
Cash paid for income taxes amounted to approximately $891,000 and
$1,935,000 for the three months ended May 31, 1998 and 1997,
respectively.
5. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income" during the quarter ended
May 31, 1998. Comprehensive income includes changes in the balances of
items that are reported directly in a separate component of
stockholders' equity on the consolidated balance sheets, such as
foreign currency translation adjustments and unrealized gains or losses
on available-for-sale securities. On this basis, these nonowner
changes resulted in other comprehensive income, including net income,
of approximately ($8,218,000) and $2,271,000 in the first quarter of
1998 and 1997, respectively.
6. Subsequent Events
In June 1998, the Company acquired TYECIN Systems, Inc. by merger for
approximately 333,000 shares of common stock and assumed options which
were converted to options to purchase shares totaling approximately
25,000 shares. The Company has accounted for the merger as a pooling
of interests. The condensed consolidated financial statements do not
give retroactive effect to the merger.
A number of shareholder class action lawsuits were filed against the
Company and certain of its executive officers and directors commencing
in June 1998 alleging certain disclosure violations under the federal
securities laws. The ultimate outcome of these lawsuits, as with
litigation generally, is inherently uncertain and it is possible that
one or more of these matters may be resolved adversely to the Company.
The adverse resolution of one or more of these lawsuits could have a
material adverse effect on the Company's business, operating results,
financial condition and cash flows. Management believes that the
lawsuits are without merit and the Company and the other defendants
intend to vigorously defend against the lawsuits.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Manugistics Group, Inc. (the "Company") develops, markets and
supports supply chain optimization software products, which enable users to plan
their activities around the needs of their various customers, and provides
related services. The Company's customer-centric solutions assist companies to
organize and fine-tune their production and distribution activities to greatly
enhance the movements of products throughout a supply chain. The Company's
software assists companies with demand forecasting, acquiring raw materials or
components and planning production, distribution and transportation to meet the
requirements of different customers, not only within a single enterprise, but
also among an enterprise and its trading partners.
RESULTS OF OPERATIONS
REVENUES:
<TABLE>
<CAPTION>
Three months ended
--------------------------------------
May 31, May 31,
1998 Change 1997
---------- -------- ------------
<S> <C> <C> <C>
License fees $ 16,738 -17% $ 20,119
Percentage of total revenues 42.0% 58.4%
Services $ 23,096 61% $ 14,340
Percentage of total revenues 58.0% 41.6%
----------- ------------
Total revenues $ 39,834 16% $ 34,459
Percentage of total revenues 100.0% 100.0%
</TABLE>
License fees. The Company's license fees consist of software product
license revenues. Licensee fees decreased for the quarter ended May 31, 1998
because the Company experienced difficulties managing the transition of its
sales organization from fiscal 1998 to 1999. As previously reported, the Company
did not achieve an appropriate balance between longer-term initiatives and
short-term sales execution in the quarter, and also did not successfully manage
the rapid growth of the sales organization. License fees decreased to
approximately 42% of total revenues primarily because of the reduced amount of
revenues generated from license fees and the increase in the amount of services
revenue during the quarter. Although the percentage of total revenues
represented by license fees has varied in the past and is likely to continue to
vary, management of the Company anticipates that license fees are likely to
represent approximately 50% to 60% of total revenues for fiscal 1999. See
"Forward Looking Statements."
The Company derives a majority of its license fees from direct
sales. However, the Company has a strategy of expanding its product distribution
through alliances with complementary software vendors, which may lead to
additional license fees. This strategy of developing alliances is still in its
early stages, and is, therefore, difficult to predict its effectiveness. The
number of license fee transactions involving complementary vendors has been
relatively small and has fluctuated. See "Forward Looking Statements."
8
<PAGE> 9
Services. Revenues from services, which consist of revenues from
consulting and maintenance services, increased principally as a result of
increased demand for supply chain management consulting and maintenance services
from a growing base of customers that have licensed the Company's supply chain
management software. Revenues from consulting and other services increased
primarily in both North America and Europe because of new and existing clients
licensing increased numbers of products and users in recent quarters, which
generally leads to implementation and other consulting services. Maintenance
revenues have increased following the increase in the installed base of
customers that have licensed the Company's software products and entered into
annual maintenance contracts. Maintenance revenues tend to track software
products sold in prior periods. In the past three fiscal years, approximately
90% to 95% of customers with maintenance contracts have renewed these contracts.
OPERATING EXPENSES:
General. The Company bases its expense levels on anticipated future
revenues. In fiscal 1999, the Company anticipates that it will continue to
increase its expenditures inlcuding sales and marketing and product
development, as it pursues its strategies of expanding its business into new
geographic and vertical markets, expanding its distribution through alliances,
and rapidly developing and delivering new product features and functions.
Because the Company experienced a decrease in license fee revenues in the first
quarter of fiscal 1999, it has undertaken measures that it anticipates will
result in a slower rate of growth in operating expenses in the second quarter
than in recent quarters.
<TABLE>
<CAPTION>
Three months ended
------------------------------------------
May 31, May 31,
1998 Change 1997
------------- ------------ -------------
<S> <C> <C> <C>
Cost of license fees $ 2,825 15% $ 2,460
Percentage of total revenues 7.1% 7.1%
Cost of services $ 11,417 74% $ 6,571
Percentage of total revenues 28.7% 19.1%
Sales and marketing $ 22,812 73% $ 13,152
Percentage of total revenues 57.3% 38.2%
Product development $ 11,380 83% $ 6,225
Percentage of total revenues 28.6% 18.1%
General and administrative $ 5,564 82% $ 3,054
Percentage of total revenues 14.0% 8.9%
------------- -------------
Total operating expenses $ 53,998 72% $ 31,462
Percentage of total revenues 135.6% 91.3%
</TABLE>
Cost of license fees. Cost of license fees includes 1) amortization
of capitalized software development costs, and 2) cost of goods and other,
which includes royalty fees associated with third-party software included with
Manugistics software that is licensed to customers and includes amortization of
goodwill associated with recent acquisitions. The Company amortizes capitalized
software development costs over the product's estimated economic life,
generally two years (and generally two to five years for purchased capitalized
software), commencing when a product is first available for general commercial
release.
9
<PAGE> 10
<TABLE>
<CAPTION>
May 31, May 31,
1998 Change 1997
------------- ------------ -------------
<S> <C> <C> <C>
Amortization of capitalized software $ 1,579 9% $ 1,453
Percent of license fees 9.4% 7.2%
Cost of goods and other $ 1,246 24% $ 1,007
Percent of license fees 7.4% 5.0%
------------- -------------
Cost of license fees $ 2,825 15% $ 2,460
Percent of license fees 16.9% 12.2%
</TABLE>
The cost of license fees increased because amortization increased
following the general commercial release of additional supply chain management
software products for which costs had been previously capitalized, and because
cost of goods and other increased. The amortization of capitalized software
development costs has increased in recent years as the Company has increased its
gross product development expenditures for supply chain management software. See
"Product Development." Cost of goods and other expenses increased primarily
because of amortization of goodwill associated with the acquisition of ProMIRA
Software, Inc. in the fourth quarter of fiscal 1998.
Cost of services. The cost of services increased primarily because
the Company added personnel in both North America and Europe to meet anticipated
increased demand for its consulting and maintenance services which resulted from
the increased demand in recent quarters for the Company's software products. As
a percentage of services revenues, the cost of services increased mainly because
of expenses associated with new employees, and because of the timing delays
between the dates that these employees began work and the dates they first
become productive after training.
Sales and marketing. Sales and marketing expenses increased
primarily because the Company added sales and marketing resources in North and
South America, Europe and the Asia/Pacific region. In addition, the Company
incurred costs to establish new offices or enhance its presence in certain
foreign markets, and increased its marketing expenses in connection with these
new foreign markets and with its expanded product offerings. As a percentage of
total revenues, sales and marketing expenses increased principally because these
expenses increased at a more rapid rate than total revenues. As it pursues its
strategy of expanding its business into new geographic markets, new industries
and expanded distribution channels, the Company is continuing to hire and train
additional sales and marketing employees and to make other sales and marketing
expenditures. See "Forward Looking Statements."
Product development. The Company records product development
expenses net of capitalized software development costs for products which have
reached technological feasibility.
10
<PAGE> 11
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------
May 31, May 31,
1998 Change 1997
------------- ------------- -------------
<S> <C> <C> <C>
Gross product development costs $ 13,526 65% $ 8,222
Percentage of total revenues 34.0% 23.9%
Less: Capitalized prod. dev. costs $ 2,146 7% $ 1,997
Percentage of gross prod. dev. costs 15.9% 24.3%
------------- -------------
Product development expenses $ 11,380 83% $ 6,225
Percentage of total revenues 28.6% 18.1%
</TABLE>
Gross product development costs increased primarily because the
Company employed additional developers of supply chain management software. The
Company hired these developers to develop new software products and new versions
of existing products, and to incorporate new technologies into the Company's
product offerings. As a percentage of total revenues, net product development
expenses increased largely because these expenses increased more rapidly than
total revenues. The Company plans to continue to make significant product
development expenditures in fiscal 1999 as it pursues its strategy of rapidly
developing and delivering new products, features, functions and integration to
software products of other vendors. See "Forward Looking Statements."
General and administrative. General and administrative expenses
increased primarily because of increased expenses associated with supporting an
organization with more employees and a greater geographic scope. As a percentage
of total revenues, general and administrative expenses increased because these
expenses increased more rapidly than total revenues.
OTHER INCOME:
<TABLE>
<CAPTION>
May 31, May 31,
1998 Change 1997
------------ ---------- ----------
<S> <C> <C> <C>
Other income $ 1,051 224% $ 324
Percentage of total revenues 2.6% .09%
</TABLE>
Other income includes income from short term investments, interest
income and expense, foreign currency exchange gains or losses, and other gains
or losses. Other income increased primarily due to greater interest income
generated from short-term investments following the investment of the net
proceeds of the public offering of common stock completed in August 1997.
11
<PAGE> 12
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
Three months ended
----------------------------------------
May 31, May 31,
1998 Change 1997
------------ ---------- ------------
<S> <C> <C> <C>
Income tax (benefit) provision $ (4,867) N/M $ 1,281
Percentage of (loss) income before taxes 37.1% 38.6%
Percentage of total revenues N/M 3.7%
</TABLE>
The effective tax rate represented by the Company's benefit for
income taxes was approximately 37%. Management of the Company believes that, in
fiscal 1999, the effective tax rate of the Company on a consolidated basis is
likely to be approximately 39%, excluding one-time charges taken in connection
with acquisitions or other transactions. This estimate is based on current
domestic and foreign tax law and the actual effective tax rate may differ.
NET (LOSS) INCOME AND (LOSS) INCOME PER SHARE:
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------
May 31, May 31,
1998 Change 1997
-------------- ---------- ------------
<S> <C> <C> <C>
Net (loss) income $ (8,246) N/M $ 2,040
Percentage of total revenues N/M 5.9%
Net (loss) income per share -
basic and diluted $ (0.32) N/M $ 0.09
============== ============
Shares used in basic share computation 25,920 21,753
============== ============
Shares used in diluted share computation 25,920 23,297
============== ============
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
As of
-------------------------------------
May 31, February 28,
1998 Change 1998
--------- ---------- ------------
<S> <C> <C> <C>
Working capital $80,487 -15% $95,010
Cash, cash equivalents
and marketable securities $65,289 -20% $81,941
</TABLE>
The Company has historically financed its growth primarily through
funds generated from operations and through proceeds from offerings of capital
stock. The decrease in working capital at May 31, 1998 from February 28, 1998
resulted principally from decreases in cash, cash equivalents and marketable
securities and in accounts payable and accrued expenses, which more than offset
the decrease in accounts receivable.
The Company's operating activities used cash of $10.7 million.
Operating cash flows decreased largely because the cash outflows resulting in a
net loss before non cash expenses and the reduction in accounts payable and
accrued expenses were only partially offset by decreases in
12
<PAGE> 13
accounts receivable. At May 31, 1998, accounts receivable were $45.1 million,
compared to $58.2 million at February 28, 1998, primarily as a result of lower
revenues generated for the quarter and due to the timing of license fee
transactions and collections.
Investing activities used cash of $3.6 million. Sales of marketable
securities provided cash, but the amounts provided were more than offset by cash
used for purchases of property and equipment and capitalization of software
development costs. Financing activities provided cash of $2.5 million, primarily
from the exercise of employee stock options.
In June 1998, the Company issued approximately 333,000 shares of
common stock in connection with the acquisition of TYECIN Systems, Inc. The
Company accounted for the acquisition as a pooling of interests. The Company
expects to record a non-recurring charge of approximately $3 million in certain
expenses related to this transaction, including, among other items,
severance, legal and accounting fees during the Company's second fiscal quarter
ending in August 1998.
In March 1997, the Company entered into agreements with Information
Resources, Inc. ("IRI" and the "IRI Agreement") relating to the development of a
solution that will incorporate IRI's point-of-sale scanner data into the
Company's supply chain management software. Under the IRI Agreement, the Company
agreed to market IRI's point-of-sale data and received 10-year, exclusive rights
among supply chain software vendors in most geographic markets to incorporate
these data. The Company and IRI agreed to resell certain of each other's
products, and the Company might acquire certain additional assets of IRI
(subject to the satisfaction of certain contingencies).
As part of these agreements, the Company committed that it will
generate a minimum of $16.5 million in revenues for IRI from specified products
over several years, beginning after the occurrence of certain events. This
commitment is subject to the satisfaction of significant contingencies specified
in the agreements. Certain issues have arisen between the Company and IRI
relating to the satisfaction of these contingencies. The Company currently
anticipates satisfactory resolution of these issues and believes that it will be
able to produce a sufficient amount of qualifying revenues to satisfy its
commitment. However, if the Company is unable to generate the minimum annual
revenues, to the extent required under the IRI Agreement, it will be obligated
to pay to IRI from its own funds an amount equal to the difference between the
qualifying revenues generated and the required minimum, which could result in a
material decrease in working capital. See "Forward Looking Statements."
The Company has an unsecured committed revolving credit facility with
a commercial bank. Under the terms of the facility, the Company may request
advances in the aggregate amount of up to $10 million. The Company may make
borrowings under the facility for short-term working capital purposes or for
acquisitions (acquisition-related borrowings are limited to $7.5 million per
acquisition). The facility contains certain financial covenants that the Company
believes are generally typical for a facility of this nature and amount. This
facility will expire in September 1998, unless renewed. There were no amounts
outstanding under this facility at May 31, 1998.
The Company investigates potential candidates for acquisition, joint
venture opportunities or other relationships from time to time. Depending on
certain factors, including
13
<PAGE> 14
the amount, nature, method and timing of the consideration to be paid by the
Company, any such acquisitions, transactions or relationships might result in a
decrease in working capital.
A number of lawsuits have been filed alleging certain disclosure
violations under the federal securities laws against the Company and certain of
its executive officers and directors commencing in June 1998, arising from
alleged omissions and misrepresentations by the Company and those individuals
regarding the Company's business, operations and financial condition. The
ultimate outcome of these lawsuits, as with litigation generally, is inherently
uncertain, and it is possible that one or more of these matters may be resolved
adversely to the Company. The adverse resolution of one or more of these
lawsuits could have a material adverse effect on the Company's business,
operating results, financial condition and cash flows. However, management
believes that the lawsuits are without merit, and the Company and the other
defendants intend to vigorously defend against the lawsuits.
The Company believes that existing cash balances, marketable
securities, funds generated from operations and amounts available under the
revolving credit facility will be sufficient to meet its anticipated liquidity
and working capital requirements for the next 12 to 18 months. If the Company
decides to expand its operations more rapidly, to broaden or enhance its
products more rapidly, to acquire businesses or technologies or to make other
significant expenditures to respond to market opportunities or competitive
pressures, then the Company may need additional funds at an earlier time.
FORWARD LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of this Quarterly Report on Form 10-Q contains
certain forward looking statements that are subject to a number of risks and
uncertainties. In addition, the Company may publish forward looking statements
from time to time relating to such matters as anticipated financial performance,
business prospects and strategies, sales and marketing efforts, technological
developments, new products, research and development activities, consulting
services and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements in this Quarterly Report or elsewhere. The risks and
uncertainties that may affect the business, operating results or financial
condition of the Company include those set forth in the Company's Annual Report
on Form 10-K for the year ended February 28, 1998 and the Company's preliminary
Prospectus dated July 1, 1998, such as the following:
Revenues for any period depend on the volume, timing and size of
license agreements. The Company typically ships software products shortly after
license agreements are signed, and, therefore, does not maintain any material
contract backlog. The volume of licensing agreements depends in part of the
ability of the Company to hire and thereafter to train, integrate and deploy its
sales force effectively. The timing of license agreements is difficult to
forecast because software sales cycles are affected by the nature of the
transactions, including the breadth of the solution to be licensed and the
organizational and geographic scope of the licenses. In addition, the timing of
license agreements also may be effected by certain external factors such as
domestic and international business or economic conditions or competitors'
actions. A small
14
<PAGE> 15
variation in the timing of software licensing transactions, particularly near
the end of any quarter or year, can cause significant variations in software
products license revenues in any period.
The Company believes that the market for supply chain management
software is expanding rapidly. However, if market demand for the Company's
products does not continue to grow rapidly, because of such factors as adverse
changes in domestic or international business and economic conditions or foreign
currency exchange rates, the timely availability and acceptance of the Company's
products, technological change or the effect of competitive products and
pricing, license fee and services revenue growth, margins, or both could be
adversely affected. If competitors make acquisitions of other competitors or
establish cooperative relationships among themselves or with third parties to
enhance the ability of their products to address the supply chain management
needs of prospects and customers, or if certain ERP or other software vendors
that have announced plans to develop or incorporate functionality that could
compete with the Company's products successfully develop and market such
functionality, license fee revenue growth could be adversely affected.
There can be no assurance that the Company will be able to attract
complementary software vendors, consulting firms or other organizations that
will be able to market the Company's products effectively or that will be
qualified to provide timely and cost-effective customer support and services. In
addition, there can be no assurance that any organization will continue its
involvement with the Company and its products, and the loss of relationships
with important organizations could materially adversely affect the Company's
results of operations.
15
<PAGE> 16
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sale of Unregistered Securities. As previously reported by the Company,
the Company, through its direct, wholly-owned subsidiary, TYECIN Acquisition,
Inc. ("TYECIN Acquisition"), acquired all of the capital stock of TYECIN
Systems, Inc. ("TYECIN"), based in Los Altos California (such transaction being
referred to as the "Merger"), pursuant to a certain Agreement and Plan of Merger
dated as of June 1, 1998, by and among the Company, TYECIN Acquisition, Randall
A. Hughes and Richard Zuanich (the "Merger Agreement"). The Merger Agreement was
privately negotiated among the parties thereto.
In connection with the Merger, which became effective as of June 1, 1998, the
Company issued to the 39 holders of TYECIN common stock (the "TYECIN
Shareholders") an aggregate of approximately 333,000 shares of the Company's
Common Stock (the "Shares"). In addition, the Company assumed the then
outstanding options to purchase common stock of TYECIN held by a total of 47
persons, which were converted to options to purchase approximately 24,500 Shares
of the Company's Common Stock (the "Options").
The Shares and Options were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon the exemption from registration
provided by Section 4 (2) of the Securities Act. The Merger Agreement and
related documents imposed certain restrictions on the resale or other transfer
of the Shares necessary for the availability of the Section 4 (2) exemption. No
underwriters were involved in connection with the issuance and sale of the
Shares under the Merger Agreement. In accordance with the terms of the Merger
Agreement, on July 1, 1998, the Company filed a registration statement on Form
S-3 under the Securities Act to register the Shares for resale by the former
TYECIN Shareholders. The Company also intends to file a registration statement
on Form S-8 under the Securities act with respect to the shares of Common Stock
issuable upon exercise of the Options.
ITEM 5. OTHER INFORMATION
SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On June 1, 1998, the Company acquired TYECIN by merger and accounted for the
transaction as a pooling of interests. Accordingly, the following supplemental
condensed consolidated financial information gives retroactive effect to the
merger and includes the combined operations of the Company and TYECIN for all
periods presented. Generally accepted accounting principles proscribe giving
effect to a merger or business combination accounted for as a pooling in
financial statements that do not include the date of consummation. Although
these supplemental condensed consolidated financial statements do not extend
through the date of consummation, they will become the Company's historical
consolidated condensed financial statements after condensed financial statements
including the consummation date are issued.
16
<PAGE> 17
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
May 31, February 28,
1998 1998
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,588 $ 19,891
Marketable securities 57,078 62,246
Accounts receivable (net of allowance for uncollectible accounts -
May 31, 1998, $2,745; February 28, 1998, $2,099) 46,292 59,584
Other current assets 6,221 5,218
-------- --------
Total current assets 118,179 146,939
PROPERTY AND EQUIPMENT - NET 24,906 21,142
NONCURRENT ASSETS:
Software development costs - net 23,847 22,986
Intangibles - net 13,467 14,660
Deferred tax asset 22,970 17,593
Other noncurrent assets 2,091 1,895
-------- --------
TOTAL $205,460 $225,215
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,254 $ 8,918
Accrued compensation 5,185 12,419
Other accrued expenses 8,436 10,834
Deferred revenue 18,951 18,546
Income taxes payable - 240
-------- --------
Total current liabilities 37,826 50,957
LONG-TERM LIABILITIES 453 512
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock, $.002 par value; 100,000,000 shares authorized;
shares issued, 27,091,697 at May 31, 1998; 26,740,755 at February 28,
1998; shares outstanding, 26,339,187 at May 31,
1998; 25,988,245 at February 28, 1998 53 53
Additional paid-in capital 173,630 171,075
Retained (deficit) earnings (5,812) 3,102
Translation adjustment 27 365
Unrealized loss on marketable securities - (132)
Treasury stock - 752,510 shares, at cost (717) (717)
-------- --------
Total stockholders' equity 167,181 173,746
-------- --------
TOTAL $205,460 $225,215
======== ========
See accompanying notes to the financial statements.
</TABLE>
17
<PAGE> 18
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
May 31,
----------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
REVENUES:
License fees $ 17,481 $20,765
Services 23,642 14,948
-------- -------
Total revenues 41,123 35,713
-------- -------
OPERATING EXPENSES:
Cost of license fees 2,841 2,481
Cost of services 11,647 6,748
Sales and marketing 23,298 13,553
Product development 11,926 6,551
General and administrative 5,836 3,202
-------- -------
Total operating expenses 55,548 32,535
-------- -------
(LOSS) INCOME FROM OPERATIONS (14,425) 3,178
OTHER INCOME - NET 1,091 329
-------- -------
(LOSS) INCOME BEFORE INCOME TAXES (13,334) 3,507
(BENEFIT) PROVISION FOR INCOME TAXES (4,795) 1,319
-------- -------
NET (LOSS) INCOME $ (8,539) $ 2,188
======== =======
BASIC (LOSS) INCOME PER SHARE $ (0.33) $ 0.09
======== =======
SHARES USED IN BASIC SHARE COMPUTATION 26,253 22,086
======== =======
DILUTED (LOSS) INCOME PER SHARE $ (0.33) $ 0.09
======== =======
SHARES USED IN DILUTED SHARE COMPUTATION 26,253 23,630
======== =======
</TABLE>
See accompanying notes to the financial statements.
18
<PAGE> 19
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
May 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,539) $ 2,188
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 5,168 2,973
Deferred tax asset (5,047) -
Tax benefit from stock options exercised - 288
Other 132 3
Changes in assets and liabilities:
Accounts receivable 12,407 2,946
Other current assets (373) (264)
Other noncurrent assets (497) (36)
Accounts payable and accrued expenses (13,970) (1,242)
Deferred revenue 463 (2,745)
Income taxes payable (858) (946)
-------- -------
Net cash (used in) provided by operating activities (11,114) 3,165
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions - (1,500)
Purchase of property and equipment (6,305) (3,029)
Capitalization of software development costs (2,359) (2,246)
Purchase of software licenses for resale (314) (120)
Sale of marketable securities - net 5,168 2,369
-------- -------
Net cash used in investing activities (3,810) (4,526)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on long-term debt and capital lease
obligations - net 341 (31)
Proceeds from stock options and stock purchases 2,582 861
-------- -------
Net cash provided by financing activities 2,923 830
-------- -------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 251 40
-------- -------
NET DECREASE IN CASH (11,750) (491)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,338 8,945
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,588 $ 8,454
======== =======
</TABLE>
See accompanying notes to the financial statements.
19
<PAGE> 20
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1998
1. Basis of Presentation
The unaudited supplemental consolidated financial statements have
been prepared to give retroactive effect to the acquisition of
TYECIN Systems, Inc. on March 1, 1998, which has been accounted for
as a pooling of interests ("pooling"). Generally accepted
accounting principles proscribe giving effect to a merger or
business combination accounted for as a pooling in financial
statements that do not include the date of consummation. Although,
these supplemental consolidated financial statements do not extend
through the date of consummation, they will become the Company's
historical consolidated financial statements after financial
statements including the consummation date are issued. The
accompanying unaudited supplemental condensed consolidated financial
statements have also been prepared in accordance with the
instructions to the Quarterly Report on Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal, recurring
adjustments) which are necessary for a fair presentation of the
unaudited results for the interim periods presented have been
included. The results of operations for the periods presented herein
are not necessarily indicative of the results of operations for the
entire fiscal year, which ends on February 28, 1999.
These supplemental condensed consolidated financial statements should
be read in conjunction with the financial statements and notes thereto
for the fiscal year ended February 28, 1998 included in the Annual
Report on Form 10-K of Manugistics Group, Inc. ("the Company") for
that year.
2. Net (Loss) Income Per Share
Basic income per share is computed using the weighted average number
of shares of common stock outstanding. Diluted income per share is
computed using the weighted average number of shares of common stock
and, when dilutive, common equivalent shares from options to purchase
common stock using the treasury stock method. Potentially dilutive
common shares are excluded from the calculation of diluted loss per
share for the three months ended May 31, 1998, as they were
antidilutive. The following table sets forth the computation of
basic and diluted (loss) income per share:
<TABLE>
<CAPTION>
Three months ended May 31,
1998 1997
(in thousands, except per share amounts)
<S> <C> <C>
Weighted average common shares 26,253 22,086
Dilutive potential common shares - 1,544
--------- ---------
Shares used in diluted share computation 26,253 23,630
========= =========
Net (loss) income ($8,539) $2,188
========= =========
Basic and diluted (loss) income per share ($0.33) $0.09
========= =========
</TABLE>
20
<PAGE> 21
3. Commitments and Contingencies
The Company has entered into an agreement with a third party under
which the Company has guaranteed certain revenue levels to the third
party in the aggregate amount of $16,500,000 over several years. In
the event that the activities performed by the Company do not meet
the minimum amounts, the Company may be obligated to pay the
difference. Certain issues have arisen between the Company and the
third party relating to the satisfaction of these contingencies. The
Company anticipates satisfactory resolution of these issues and
believes it will be able to meet the revenue levels. Accordingly the
Company does not expect to be obligated to make such payments.
See Note 6 regarding certain shareholder class action lawsuits.
4. Supplemental Information of Noncash Investing and Financing
Activities
Cash paid for income taxes amounted to approximately $891,000 and
$1,935,000 for the three months ended May 31, 1998 and 1997,
respectively.
5. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income" during the quarter
ended May 31, 1998. Comprehensive income includes changes in the
balances of items that are reported directly in a separate component
of stockholders' equity on the consolidated balance sheets, such as
foreign currency translation adjustments and unrealized gains or
losses on available-for-sale securities. On this basis, these
nonowner changes resulted in other comprehensive income, including net
income the resulting approximately ($8,522,000) and $2,330,000 in the
first quarter of 1998 and 1997, respectively.
6. Subsequent Events
In June 1998, the Company acquired TYECIN Systems, Inc. by merger for
approximately 333,000 shares of common stock and assumed options which
were converted to options to purchase shares totaling approximately
25,000 shares. The Company has accounted for the merger as a pooling
of interests. Accordingly, the supplemental condensed consolidated
financial statements give retroactive effect to the merger and include
the combined operations of the Company and TYECIN for all periods
presented. Previously, TYECIN's year end was December 31, 1997. During
the two month period January and February 1998, TYECIN recorded
revenues of approximately $609,000 and expenses of approximately
$859,000 the resulting net loss of approximately $250,000 is directly
reflected in retained earnings in the supplemental condensed
consolidated financial statements and the effect on the cash balances
in the statement of cashflows of conforming year ends was an increase
of cash of $447,000.
21
<PAGE> 22
A number of shareholder class action lawsuits were filed against the
Company and certain of its executive officers and directors
commencing in June 1998 alleging certain disclosure violations under
the federal securities laws. The ultimate outcome of these lawsuits,
as with litigation generally, is inherently uncertain and it is
possible that one or more of these matters may be resolved adversely
to the Company. The adverse resolution of one or more of these
lawsuits could have a material adverse effect on the Company's
business, operating results, financial condition and cash flows.
Management believes that the lawsuits are without merit and the
Company and the other defendants intend to vigorously defend against
the lawsuits.
22
<PAGE> 23
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Manugistics Group, Inc. (the "Company") develops, markets and supports
supply chain optimization software products, which enable users to plan their
activities around the needs of their various customers, and provides related
services. These customer-centric solutions assist companies to organize and
fine-tune their production and distribution activities to greatly enhance the
movements of products throughout a supply chain. The Company's software assists
companies with demand forecasting, acquiring raw materials or components and
planning production, distribution and transportation to meet the requirements of
different customers, not only within a single enterprise, but also among an
enterprise and its trading partners.
RESULTS OF OPERATIONS
REVENUES:
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------
May 31, May 31,
1998 Change 1997
------------- -------- ------------
<S> <C> <C> <C>
License fees $ 17,481 -16% $ 20,765
Percentage of total revenues 42.5% 58.1%
Services $ 23,642 58% $ 14,948
Percentage of total revenues 57.5% 41.9%
------------- ------------
Total revenues $ 41,123 15% $ 35,713
Percentage of total revenues 100.0% 100.0%
</TABLE>
License fees. The Company's license fees consist of software product
license revenues. Licensee fees decreased for the quarter ended May 31, 1998
because the Company experienced difficulties managing the transition of its
sales organization from fiscal 1998 to 1999. As previously reported, the
Company did not achieve an appropriate balance between longer-term initiatives
and short-term sales execution in the quarter, and also did not successfully
manage the rapid growth of the sales organization. License fees decreased to
approximately 43% of total revenues primarily because of the reduced amount of
revenues generated from license fees and the increase in the amount of services
revenue during the quarter. Although the percentage of total revenues
represented by license fees has varied in the past and is likely to continue to
vary, management of the Company anticipates that license fees are likely to
represent approximately 50% to 60% of total revenues for fiscal 1999. See
"Forward Looking Statements."
The Company derives a majority of its license fees from direct sales.
However, the Company has a strategy of expanding its product distribution
through alliances with complementary software vendors, which may lead to
additional license fees. This strategy of developing alliances is still in its
early stages, and is, therefore, difficult to predict its effectiveness. The
number of license fee transactions involving complementary vendors has been
relatively small and has fluctuated. See "Forward Looking Statements."
Services. Revenues from services, which consist of revenues from
consulting and maintenance services, increased principally as a result of
increased demand for supply chain
23
<PAGE> 24
management consulting and maintenance services from a growing base of customers
that have licensed the Company's supply chain management software. Revenues
from consulting and other services increased primarily in both North America
and Europe because of new and existing clients licensing increased numbers of
products and users in recent quarters, which generally leads to implementation
and other consulting services. Maintenance revenues have increased following
the increase in the installed base of customers that have licensed the
Company's software products and entered into annual maintenance contracts.
Maintenance revenues tend to track software products sold in prior periods. In
the past three fiscal years, approximately 90% to 95% of customers with
maintenance contracts have renewed these contracts.
OPERATING EXPENSES:
General. The Company bases its expense levels on anticipated future
revenues. In fiscal 1999, the Company anticipates that it will continue to
increase itsexpenditures including sales and marketing and product development,
as it pursues its strategies of expanding its business into new geographic and
vertical markets, expanding its distribution through alliances, and rapidly
developing and delivering new product features and functions. Because the
Company experienced a decrease in license fee revenues in the first quarter of
fiscal 1999, it has undertaken measures that it anticipates will result in a
slower rate of growth in operating expenses in the second quarter than in
recent quarters.
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------
May 31, May 31,
1998 Change 1997
-------------- -------- ------------
<S> <C> <C> <C>
Cost of license fees $ 2,841 15% $ 2,481
Percentage of total revenues 6.9% 6.9%
Cost of services $ 11,647 73% $ 6,748
Percentage of total revenues 28.3% 18.9%
Sales and marketing $ 23,298 72% $ 13,553
Percentage of total revenues 56.7% 37.9%
Product development $ 11,926 82% $ 6,551
Percentage of total revenues 29.0% 18.3%
General and administrative $ 5,836 82% $ 3,202
Percentage of total revenues 14.2% 9.0%
-------------- ------------
Total operating expenses $ 55,548 71% $ 32,535
Percentage of total revenues 135.1% 91.1%
</TABLE>
Cost of license fees. Cost of license fees includes 1) amortization of
capitalized software development costs, and 2) cost of goods and other, which
includes royalty fees associated with third-party software included with
Manugistics software that is licensed to customers and includes amortization of
goodwill associated with recent acquisitions. The Company amortizes
capitalized software development costs over the product's estimated economic
life, generally two years already made (and generally two to five years for
purchased capitalized software), commencing when a product is first available
for general commercial release.
24
<PAGE> 25
<TABLE>
<CAPTION>
Three months ended
---------------------------------------
May 31, May 31,
1998 Change 1997
----------- -------- -----------
<S> <C> <C> <C>
Amortization of capitalized software $ 1,579 9% $ 1,453
Percent of license fees 9.0% 7.0%
Cost of goods and other $ 1,262 23% $ 1,028
Percent of license fees 7.2% 5.0%
----------- -----------
Cost of license fees $ 2,841 15% $ 2,481
Percent of license fees 16.3% 11.9%
</TABLE>
The cost of license fees increased because amortization increased
following the general commercial release of additional supply chain management
software products for which costs had been previously capitalized, and because
cost of goods and other increased. The amortization of capitalized software
development costs has increased in recent years as the Company has increased
its gross product development expenditures for supply chain management
software. See "Product Development." Cost of goods and other expenses increased
primarily because of amortization of goodwill associated with the acquisition
of ProMIRA Software, Inc. in the fourth quarter of fiscal 1998.
Cost of services. The cost of services increased primarily because the
Company added personnel in both North America and Europe to meet anticipated
increased demand for its consulting and maintenance services which resulted
from the increased demand in recent quarters for the Company's software
products. As a percentage of services revenues, the cost of services increased
mainly because of expenses associated with new employees, and because of the
timing delays between the dates that these employees began work and the dates
they first become productive after training.
Sales and marketing. Sales and marketing expenses increased primarily
because the Company added sales and marketing resources in North and South
America, Europe and the Asia/Pacific region. In addition, the Company incurred
costs to establish new offices or enhance its presence in certain foreign
markets, and increased its marketing expenses in connection with these new
foreign markets and with its expanded product offerings. As a percentage of
total revenues, sales and marketing expenses increased principally because
these expenses increased at a more rapid rate than total revenues. As it
pursues its strategy of expanding its business into new geographic markets, new
industries and expanded distribution channels, the Company is continuing to
hire and train additional sales and marketing employees and to make other sales
and marketing expenditures. See "Forward Looking Statements."
Product development. The Company records product development expenses
net of capitalized software development costs for products which have reached
technological feasibility.
25
<PAGE> 26
<TABLE>
<CAPTION>
Three months ended
---------------------------------------
May 31, May 31,
1998 Change 1997
----------- -------- -----------
<S> <C> <C> <C>
Gross product development costs $ 14,285 62% $ 8,797
Percentage of total revenues 34.7% 24.6%
Less: Capitalized prod. dev. costs $ 2,359 5% $ 2,246
Percentage of gross prod. dev. costs 16.5% 25.5%
----------- -----------
Product development expenses $ 11,926 82% $ 6,551
Percentage of total revenues 29.0% 18.3%
</TABLE>
Gross product development costs increased primarily because the Company
employed additional developers of supply chain management software. The Company
hired these developers to develop new software products and new versions of
existing products, and to incorporate new technologies into the Company's
product offerings. As a percentage of total revenues, net product development
expenses increased largely because these expenses increased more rapidly than
total revenues. The Company plans to continue to make significant product
development expenditures in fiscal 1999 as it pursues its strategy of rapidly
developing and delivering new products, features, functions and integration to
software products of other vendors. See "Forward Looking Statements."
General and administrative. General and administrative expenses
increased primarily because of increased expenses associated with supporting an
organization with more employees and a greater geographic scope. As a
percentage of total revenues, general and administrative expenses increased
because these expenses increased more rapidly than total revenues.
OTHER INCOME:
<TABLE>
<CAPTION>
Three months ended
------------------------------------
May 31, May 31,
1998 Change 1997
----------- ---------- ----------
<S> <C> <C> <C>
Other income $ 1,091 232% $ 329
Percentage of total revenues 2.7% 0.9%
</TABLE>
Other income includes income from short term investments, interest
income and expense, foreign currency exchange gains or losses, and other gains
or losses. Other income increased primarily due to greater interest income
generated from short-term investments following the investment of the net
proceeds of the public offering of common stock completed in August 1997.
26
<PAGE> 27
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
May 31, May 31,
1998 Change 1997
------------ -------- -----------
<S> <C> <C> <C>
Income tax (benefit) provision $ (4,795) N/M $ 1,319
Percentage of (loss) income before taxes 35.9% 37.6%
Percentage of total revenues N/M 3.7%
</TABLE>
The effective tax rate represented by the Company's benefit for income
taxes was approximately 37%. Management of the Company believes that, in fiscal
1999, the effective tax rate of the Company on a consolidated basis is likely
to be approximately 39%, excluding one-time charges taken in connection with
acquisitions or other transactions. This estimate is based on current domestic
and foreign tax law and the actual effective tax rate may differ.
NET (LOSS) INCOME AND (LOSS) INCOME PER SHARE:
<TABLE>
<CAPTION>
Three months ended
---------------------------------------
May 31, May 31,
1998 Change 1997
------------ ---------- ----------
<S> <C> <C> <C>
Net (loss) income $ (8,539) N/M $ 2,188
Percentage of total revenues N/M 6.1%
Net (loss) income per share -
basic and diluted $ (0 .33) N/M $ 0.09
============ ==========
Shares used in basic share computation 26,253 22,086
============ ==========
Shares used in diluted share computation 26,253 23,630
============ ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
As of
-----------------------------------------
May 31, February 28,
1998 Change 1998
---------- -------- --------------
<S> <C> <C> <C>
Working capital $80,353 -16% $95,982
Cash, cash equivalents
and marketable securities $65,666 -20% $82,137
</TABLE>
The Company has historically financed its growth primarily through funds
generated from operations and through proceeds from offerings of capital stock.
The decrease in working capital at May 31, 1998 from February 28, 1998 resulted
principally from decreases in cash, cash equivalents and marketable securities
and in accounts payable and accrued expenses, which more than offset the
decrease in accounts receivable.
The Company's operating activities used cash of $11.1 million. Operating
cash flows decreased largely because the cash outflows resulting in a net loss
before non cash expenses and the reduction in accounts payable and accrued
expenses were only partially offset by decreases in
27
<PAGE> 28
accounts receivable. At May 31, 1998, accounts receivable were $46.3 million,
compared to $59.6 million at February 28, 1998, primarily as a result of lower
revenues generated for the quarter and due to the timing of license fee
transactions and collections.
Investing activities used cash of $3.8 million. Sales of marketable
securities provided cash, but the amounts provided were more than offset by
cash used for purchases of property and equipment and capitalization of
software development costs. Financing activities provided cash of $2.9 million,
primarily from the exercise of employee stock options.
In June 1998, the Company issued approximately 333,000 shares of common
stock in connection with the acquisition of TYECIN Systems, Inc. The Company
accounted for the acquisition as a pooling of interests. The Company expects
to record a non-recurring charge of approximately $3 million in certain
expenses related to this transaction, including, among other items,
severance, legal and accounting fees during the Company's second fiscal quarter
ending in August 1998.
In March 1997, the Company entered into agreements with Information
Resources, Inc. ("IRI" and the "IRI Agreement") relating to the development of
a solution that will incorporate IRI's point-of-sale scanner data into the
Company's supply chain management software. Under the IRI Agreement, the
Company agreed to market IRI's point-of-sale data and received 10-year,
exclusive rights among supply chain software vendors in most geographic markets
to incorporate these data. The Company and IRI agreed to resell certain of each
other's products, and the Company might acquire certain additional assets of
IRI (subject to the satisfaction of certain contingencies).
As part of these agreements, the Company committed that it will generate
a minimum of $16.5 million in revenues for IRI from specified products over
several years, beginning after the occurrence of certain events. This
commitment is subject to the satisfaction of significant contingencies
specified in the agreements. Certain issues have arisen between the Company and
IRI relating to the satisfaction of these contingencies. The Company currently
anticipates satisfactory resolution of these issues and believes that it will
be able to produce a sufficient amount of qualifying revenues to satisfy its
commitment. However, if the Company is unable to generate the minimum annual
revenues, to the extent required under the IRI Agreement, it will be obligated
to pay to IRI from its own funds an amount equal to the difference between the
qualifying revenues generated and the required minimum, which could result in a
material decrease in working capital. See "Forward Looking Statements."
The Company has an unsecured committed revolving credit facility with a
commercial bank. Under the terms of the facility, the Company may request
advances in the aggregate amount of up to $10 million. The Company may make
borrowings under the facility for short-term working capital purposes or for
acquisitions (acquisition-related borrowings are limited to $7.5 million per
acquisition). The facility contains certain financial covenants that the
Company believes are generally typical for a facility of this nature and
amount. This facility will expire in September 1998, unless renewed. There were
no amounts outstanding under this facility at May 31, 1998.
The Company investigates potential candidates for acquisition, joint
venture opportunities or other relationships from time to time. Depending on
certain factors, including
28
<PAGE> 29
the amount, nature, method and timing of the consideration to be paid by the
Company, any such acquisitions, transactions or relationships might result in a
decrease in working capital.
A number of lawsuits have been filed alleging certain disclosure
violations under the federal securities laws against the Company and certain of
its executive officers and directors commencing in June 1998, arising from
alleged omissions and misrepresentations by the Company and those individuals
regarding the Company's business, operations and financial condition. The
ultimate outcome of these lawsuits, as with litigation generally, is inherently
uncertain, and it is possible that one or more of these matters may be resolved
adversely to the Company. The adverse resolution of one or more of these
lawsuits could have a material adverse effect on the Company's business,
operating results, financial condition and cash flows. However, management
believes that the lawsuits are without merit, and the Company and the other
defendants intend to vigorously defend against the lawsuits.
The Company believes that existing cash balances, marketable securities,
funds generated from operations and amounts available under the revolving
credit facility will be sufficient to meet its anticipated liquidity and
working capital requirements for the next 12 to 18 months. If the Company
decides to expand its operations more rapidly, to broaden or enhance its
products more rapidly, to acquire businesses or technologies or to make other
significant expenditures to respond to market opportunities or competitive
pressures, then the Company may need additional funds at an earlier time.
FORWARD LOOKING STATEMENTS
This supplemental "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this Quarterly Report on Form
10-Q contains certain forward looking statements that are subject to a number of
risks and uncertainties. In addition, the Company may publish forward looking
statements from time to time relating to such matters as anticipated financial
performance, business prospects and strategies, sales and marketing efforts,
technological developments, new products, research and development activities,
consulting services and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward looking statements. In
order to comply with the terms of the safe harbor, the Company notes that a
variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's forward looking statements in this Quarterly Report or
elsewhere. The risks and uncertainties that may affect the business, operating
results or financial condition of the Company include those set forth in the
Company's Annual Report on Form 10-K for the year ended February 28, 1998 and
the Company's preliminary Prospectus dated July 1, 1998, such as the following:
Revenues for any period depend on the volume, timing and size of license
agreements. The Company typically ships software products shortly after license
agreements are signed, and, therefore, does not maintain any material contract
backlog. The volume of licensing agreements depends in part of the ability of
the Company to hire and thereafter to train, integrate and deploy its sales
force effectively. The timing of license agreements is difficult to forecast
because software sales cycles are affected by the nature of the transactions,
including the breadth of the solution to be licensed and the organizational and
geographic scope of the licenses. In addition, the timing of license agreements
also may be effected by certain external factors such as domestic and
international business or economic conditions or competitors' actions. A small
29
<PAGE> 30
variation in the timing of software licensing transactions, particularly near
the end of any quarter or year, can cause significant variations in software
products license revenues in any period.
The Company believes that the market for supply chain management
software is expanding rapidly. However, if market demand for the Company's
products does not continue to grow rapidly, because of such factors as adverse
changes in domestic or international business and economic conditions or
foreign currency exchange rates, the timely availability and acceptance of the
Company's products, technological change or the effect of competitive products
and pricing, license fee and services revenue growth, margins, or both could be
adversely affected. If competitors make acquisitions of other competitors or
establish cooperative relationships among themselves or with third parties to
enhance the ability of their products to address the supply chain management
needs of prospects and customers, or if certain ERP or other software vendors
that have announced plans to develop or incorporate functionality that could
compete with the Company's products successfully develop and market such
functionality, license fee revenue growth could be adversely affected.
There can be no assurance that the Company will be able to attract
complementary software vendors, consulting firms or other organizations that
will be able to market the Company's products effectively or that will be
qualified to provide timely and cost-effective customer support and services.
In addition, there can be no assurance that any organization will continue its
involvement with the Company and its products, and the loss of relationships
with important organizations could materially adversely affect the Company's
results of operations.
30
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.8 Lease Agreement date March 26, 1998 between Manugistics,
Inc.and Washingtonian North Associates Limited
Partnership (1)
27.1 Financial Data Schedule
27.2 Supplemental Financial Data Schedule
(1) Incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended February 28,
1998.
(b) Reports on Form 8-K
1. On March 2, 1998, the Company filed a Current Report on Form 8-K,
describing the acquisition of assets resulting from the acquisition
of ProMIRA Software, Inc.
2. On March 19, 1998, the Company filed a Current Report on Form 8-K
following its issuance of a press release on February 12, 1998
announcing that the Company was negotiating the final terms of a
definitive agreement to acquire ProMIRA Software, Inc., and following
its issuance of a press release on February 13, 1998 announcing that
the Company had completed the acquisition of ProMIRA Software, Inc.
3. On March 27, 1998, the Company filed a Current Report on Form 8-K
following its issuance of a press release on March 26, 1998
announcing the Company's earnings figures for the fourth quarter and
the fiscal year ended February 28, 1998.
4. On May 22, 1998 the Company filed a Current Report on Form 8-K
following its issuance of a press release dated May 21, 1998 which
provided certain information regarding revenues and earnings for the
Company's first quarter.
5. On May 22, 1998 the Company filed a Current Report on Form
8-K following its issuance of a press release dated May 22, 1998
which expanded on information contained in a press release previously
issued by the Company on Thursday, May 21, 1998 regarding anticipated
revenues and earnings for its first fiscal quarter.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Manugistics Group, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MANUGISTICS GROUP, INC.
(Registrant)
Date: July 15, 1998 By: /s/ William M. Gibson
---------------------
William M. Gibson
President, Chief Executive Officer and
Chairman of the Board of Directors
Date: July 15, 1998 By:/s/ Peter Q. Repetti
--------------------
Peter Q. Repetti
Senior Vice President, Chief Financial
Officer
(Principal Financial Officer and
Principal
Accounting Officer)
32
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