<PAGE>
================================================================================
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 NOVEMBER 30, 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: 26,566,419 million shares of
common stock, $.002 par value per share, as of January 8, 1999.
================================================================================
<PAGE>
MANUGISTICS GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
November 30, 1998 (unaudited) and February 28, 1998 3
Condensed Consolidated Statements of Income -
Three and nine months ended November 30, 1998 and 1997
(unaudited) 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended November 30, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements -
November 30, 1998 (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
November 30, February 28,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,655 $ 19,891
Marketable securities 28,310 62,246
Accounts receivable (net of allowance for uncollectible accounts -
November 30, 1998, $4,784; February 28, 1998, $2,099) 56,615 59,584
Current deferred tax asset 4,919 1,693
Other current assets 8,011 3,525
------------ ------------
Total current assets 103,510 146,939
PROPERTY AND EQUIPMENT - NET 26,388 21,142
NONCURRENT ASSETS:
Software development costs - net 23,190 22,986
Intangibles - net 11,280 14,660
Deferred tax asset 28,009 17,593
Other noncurrent assets 2,437 1,895
------------ ------------
TOTAL $194,814 $225,215
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,631 $ 8,918
Accrued compensation 6,554 12,419
Other accrued expenses 7,612 11,074
Deferred revenue 21,178 18,546
------------ ------------
Total current liabilities 39,975 50,957
LONG-TERM LIABILITIES 387 512
COMMITMENTS AND CONTINGENCIES (Note 3) - -
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock, $.002 par value; 100,000,000 shares authorized;
shares issued, 27,283,366 at November 30, 1998; 26,740,755 at
February 28, 1998; shares outstanding, 26,530,856 at November 30,
1998; 25,988,245 at February 28, 1998 54 53
Additional paid-in capital 178,045 171,075
Retained (deficit) earnings (22,184) 3,102
Treasury stock - 752,510 shares, at cost (717) (717)
Accumulated comprehensive income:
Translation adjustment (742) 365
Unrealized loss on marketable securities (4) (132)
------------ ------------
Total stockholders' equity 154,452 173,746
------------ ------------
TOTAL $194,814 $225,215
============ ============
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 30, November 30,
------------------------------ --------------------------
1998 1997 1998 1997
--------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
License fees $ 15,365 $ 23,014 $ 58,617 $ 65,675
Services 27,679 19,145 78,490 51,260
--------------- ------------ ------------ -----------
Total revenues 43,044 42,159 137,107 116,935
--------------- ------------ ------------ -----------
OPERATING EXPENSES:
Cost of license fees 3,349 2,652 9,635 7,771
Cost of services 13,219 8,677 37,733 22,951
Sales and marketing 25,262 14,520 73,334 42,521
Product development 11,712 7,831 37,506 21,501
General and administrative 4,686 3,365 15,753 9,888
Acquisition-related expenses - - 3,095 -
Restructuring costs 701 - 701 -
--------------- ------------ ------------ -----------
Total operating expenses 58,929 37,045 177,757 104,632
--------------- ------------ ------------ -----------
(LOSS) INCOME FROM OPERATIONS (15,885) 5,114 (40,650) 12,303
OTHER INCOME - NET 551 1,185 2,282 1,898
--------------- ------------ ------------ -----------
(LOSS) INCOME BEFORE INCOME TAXES (15,334) 6,299 (38,368) 14,201
(BENEFIT) PROVISION FOR INCOME TAXES (4,927) 2,504 (13,456) 5,493
NET (LOSS) INCOME $ (10,407) $ 3,795 $ (24,912) $ 8,708
=============== ============ ============ ===========
BASIC (LOSS) INCOME PER SHARE $ (0.39) $ 0.16 $ (0.95) $ 0.38
=============== ============ ============ ===========
SHARES USED IN BASIC SHARE COMPUTATION 26,520 24,228 26,285 23,101
=============== ============ ============ ===========
DILUTED (LOSS) INCOME PER SHARE $ (0.39) $ 0.14 $ (0.95) $ 0.34
=============== ============ ============ ===========
SHARES USED IN DILUTED SHARE COMPUTATION 26,520 26,940 26,285 25,956
=============== ============ ============ ===========
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
November 30,
----------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (24,912) $ 8,708
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 17,930 11,246
Deferred taxes (13,386) -
Write-off of purchased R&D 1,300 -
Tax benefit of stock options 2,223 -
Other 334 (4)
Changes in assets and liabilities:
Accounts receivable 2,084 (9,616)
Other current assets (2,773) (2,052)
Other noncurrent assets (844) (200)
Accounts payable and other accrued expenses (14,047) 1,251
Deferred revenue 2,689 (1,265)
Income taxes payable (1,868) -
--------- --------
Net cash (used in) provided by operating activities (31,270) 8,068
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions - (4,529)
Purchase of property and equipment (13,521) (10,724)
Capitalization of software development costs (8,462) (7,386)
Purchase of software licenses for resale (521) (393)
Sale (purchase) of marketable securities - net 33,936 (52,524)
Net change in cash due to conforming year ends 446 -
--------- --------
Net cash provided by (used in) investing activities 11,878 (75,556)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations 275 (176)
Proceeds from issuance of common stock - 62,339
Proceeds from employee stock purchase plan 1,352 -
Proceeds from exercise of stock options 3,422 3,268
--------- --------
Net cash provided by financing activities 5,049 65,431
--------- --------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 107 145
--------- --------
NET (DECREASE) INCREASE IN CASH (14,236) (1,912)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,891 8,834
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,655 $ 6,922
========= ========
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 30, 1998
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Manugistics
Group, Inc. ("the Company") have been prepared to give effect to the
acquisition by merger of TYECIN Systems, Inc. ("TYECIN") on June 1, 1998,
which has been accounted for as a pooling of interests ("pooling"). Prior
periods have been restated to give retroactive effect to the pooling. The
accompanying unaudited 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.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition,"
effective for fiscal periods beginning after December 15, 1997. The
Company's current revenue recognition policies and practices are consistent
with SOP 97-2.
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
the Company for that year.
6
<PAGE>
2. NET (LOSS) INCOME PER SHARE
Basic (loss) income per share is computed using the weighted average number
of shares of common stock outstanding. Diluted (loss) 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. Common equivalent shares from
options were excluded from the calculation of diluted loss per share for
the three and nine-month periods ended November 30, 1998, as including them
would be antidilutive. The following table sets forth the computation of
basic and diluted (loss) income per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 1997 1998 1997
------------ ------------ ---------- ------------
(in thousands, (in thousands,
except per share amounts) except per share amounts)
------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Weighted average common shares 26,520 24,228 26,285 23,101
Dilutive potential common shares - 2,712 - 2,855
------------ ------------ ---------- -----------
Shares used in diluted share computation 26,520 26,940 26,285 25,956
============ ============ ========== ===========
Net (loss) income $ (10,407) $ 3,795 $(24,912) $ 8,708
============ ============ ========== ===========
Basic (loss) income per share $ (0.39) $ 0.16 $ (0.95) $ 0.38
============ ============ ========== ===========
Diluted (loss) income per share $ (0.39) $ 0.14 $ (0.95) $ 0.34
============ ============ ========== ===========
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
The Company entered into agreements with a third party, Information
Systems, Inc. ("IRI"), under which the Company has guaranteed certain
revenue levels to IRI 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. As previously reported, certain issues have arisen between the
Company and IRI relating to the satisfaction of these contingencies. The
Company is currently attempting to satisfactorily resolve these issues with
IRI. However, at this time, there can be no assurances that these issues
will be resolved to the satisfaction of the Company; if such issues are not
so resolved, the ultimate resolution of this matter could have a material
adverse impact on the Company's financial position.
7
<PAGE>
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
A total of seven class action lawsuits were filed against the Company and a
certain number of its executive officers and directors commencing in June
1998 alleging certain disclosure violations under the federal securities
laws. Six of the class action lawsuits have been consolidated in the
District Court in Maryland, and the plaintiffs in the remaining action have
recently agreed to the transfer to and consolidation of the action in
Maryland. The plaintiffs have agreed to file a consolidated class action
complaint in the Maryland District Court within 45 days after the remaining
action has been transferred to Maryland. At the present time, all discovery
is stayed. 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 defend against the
lawsuits vigorously.
4. SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Cash paid for income taxes amounted to approximately $1,160,000 and
$3,341,000 for the nine months ended November 30, 1998 and 1997,
respectively.
5. COMPREHENSIVE (LOSS) INCOME
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and the display of
comprehensive income and its components in the Company's financial
statements. The adoption of this statement had no impact on the Company's
results of operations or stockholders' equity. SFAS No. 130 requires
unrealized gains and losses on the Company's available-for-sale securities
and foreign currency translation adjustments to be included in other
comprehensive income. Total comprehensive (loss) income, net of tax, for
the three and nine months ended November 30, 1998 and 1997 was:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 1997 1998 1997
--------- -------- --------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net (loss) income $(10,407) $ 3,795 $(24,912) $ 8,708
Other comprehensive (loss) income 238 207 (636) 102
--------- -------- --------- --------
Total comprehensive (loss) income $(10,169) $ 4,002 $(25,548) $ 8,810
========= ======== ========= ========
</TABLE>
8
<PAGE>
6. ACQUISITION
Effective June 1, 1998, the Company acquired TYECIN by merger and accounted
for the transaction as a pooling of interests. Accordingly, all financial
information included in these financial statements gives retroactive effect
to the combination for all periods presented. Under the terms of the
merger, the Company issued approximately 333,000 shares of common stock. In
addition, the Company assumed the outstanding TYECIN common stock options
and converted them to options to purchase a total of approximately 25,000
shares of the Company's common stock. During the second quarter of fiscal
1999, the Company recorded a non-recurring charge of approximately $3.1
million for certain expenses related to this transaction, including, among
other items, accounting, legal and severance fees.
Previously, TYECIN's year end was December 31, 1997. Effective March 1,
1998, TYECIN's year end was changed to February 28. During the two month
period January and February 1998, TYECIN recorded revenues of approximately
$609,000 and expenses of approximately $857,000. The resulting net loss of
approximately $248,000 is directly reflected in the retained earnings
(deficit) in the Company's condensed consolidated financial statements. The
net effect on the cash balances in the Company's statement of cash flows of
conforming year ends was an increase in cash of $446,000. The TYECIN net
cash flows during the two month period ended February 28, 1998 were
approximately $298,000, ($228,000) and $385,000 for operating, investing
and financing activities, respectively.
7. RESTRUCTURING
In September 1998, the Company restructured certain of its business
operations. In connection with the restructuring, the Company reduced
its workforce in all functional areas by a total of approximately 80
employees, or approximately six percent, as part of an overall expense
containment program. The Company recorded a non-recurring charge of
approximately $701,000 for the quarter ended November 30, 1998, to cover
costs related to the workforce reduction, primarily for severance packages.
At November 30, 1998, $115,000 of restructuring charges remained in accrued
liabilities, primarily related to the unpaid balance of severance packages.
9
<PAGE>
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 and related services, which enable
users to plan their activities around the needs of their various customers. The
Company's customer-centric solutions assist companies to organize and fine-tune
their production and distribution activities to 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.
The Company has experienced net operating losses in each of the three
quarters in fiscal 1999. As previously reported, the Company is evaluating
significant measures to restructure its operations further as part of its
continuing efforts to improve execution and efficiencies, better align expenses
with revenues, and enhance its sales and marketing activities to meet the
challenges of the marketplace. The Company is also conducting preliminary
discussions with other companies concerning a potential business combination.
See "Forward Looking Statements" and "Factors That May Affect Future Results."
RESULTS OF OPERATIONS
REVENUES:
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition,"
superceding SOP 91-1. According to SOP 97-2 (effective for transactions in
fiscal periods beginning after December 15, 1997), software license revenues
should be recognized when:
. a software license agreement has been executed;
. the software product has been shipped and delivery does not require
significant production, modification, or customization of software;
. the license fee is fixed or determinable; and
. collectibility is deemed probable by management.
The Company believes, based upon management's interpretation of SOP 97-2, that
its current revenue recognition policies and practices are consistent with SOP
97-2. For fiscal periods prior to February 28, 1998, the Company recognized
software license revenues in accordance with SOP 91-1.
10
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------- ----------------------------
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 Change 1997 1998 Change 1997
-------- -------- -------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
License fees 15,365 -33% 23,014 58,617 -11% 65,675
Percentage of total revenues 35.7% 54.6% 42.8% 56.2%
Services 27,679 45% 19,145 78,490 53% 51,260
Percentage of total revenues 64.3% 45.4% 57.2% 43.8%
-------- -------- -------- --------
Total revenues 43,044 2% 42,159 137,107 17% 116,935
Percentage of total revenues 100.0% 100.0% 100.0% 100.0%
</TABLE>
License fees. The Company's license fees consist primarily of software
license revenues from direct sales. The Company also earns license fees through
indirect channels, primarily through complementary software vendors, consulting
firms, distributors, and systems integrators.
License fees decreased for the quarter and nine months ended November 30,
1998 because of sales execution issues and certain external factors. The
Company's direct sales execution suffered from: the rapid sales force expansion
that occurred in the fourth quarter of fiscal 1998 and the first quarter of
fiscal 1999, which resulted in delays in the new sales employees becoming
productive; the major sales territory re-alignment that resulted from the rapid
sales force expansion and changing to a market vertical organization of the
sales force; and issues with the integration of the products and operations of
ProMIRA Software, Inc. ("ProMIRA") and TYECIN.
In addition, the Company's operating results during the nine months ended
November 30, 1998 has raised concerns with customers and prospects about the
Company's viability. The Company believes that these concerns may have adversely
affected the Company's ability to generate license fee revenues. The Company
also believes that its announcement on December 22, 1998 that the Company was
then engaged in preliminary discussions (which discussions are continuing) with
other companies concerning a potential business combination has caused
substantial delays in the negotiation and closing of licensing transactions as
many customers and prospects await further announcement by the Company about its
strategic direction.
The external factors that affected the Company's ability to general license
fee revenues included new competitive forces and issues affecting its clients
and prospects, such as the Year 2000 problem and concerns with global economic
conditions, resulting in postponements of licensing decisions. Although there
has been variation in license fees as a percentage of total revenues over the
past few quarters, the Company's management anticipates that license fees are
likely to represent approximately 40% to 45% of total revenues for fiscal 1999.
See "Forward Looking Statements and "Factors That May Affect Future Results."
The Company's strategy of developing indirect channels is still in its
early stages and is, therefore, difficult to predict its effectiveness. The
number of license fee transactions involving indirect channels has been
relatively small and has fluctuated.
Services. Services revenues primarily consist of fees from software
implementations and the related training and maintenance revenues. Revenues
from software implementations are recognized as the services are performed.
Maintenance revenues are recognized ratably over the maintenance contract. The
software implementation process typically requires three to twelve months to
complete, depending on the complexity, scope of the project and client resources
available. The increase in services revenues for the quarter and nine months
ended November 30, 1998 is primarily related to the continuation of customer
implementations from the license fee transactions in the fourth quarter of
fiscal 1998 and the first two quarters of fiscal 1999. The
11
<PAGE>
Company typically begins to recognize services revenues in the months following
initiation of the implementation services, which generally occurs within a few
weeks after completion of the license agreement. In addition, the increase in
the installed customer base over time has resulted in additional training and
other consulting services revenues.
Maintenance revenues increased following the increase of customers that
have licensed the Company's software products and entered into annual
maintenance contracts. Maintenance revenues tend to track software license fee
transactions in prior periods. In the past three fiscal years, approximately
97% of customers with maintenance contracts have renewed these contracts.
OPERATING EXPENSES:
General. In fiscal 1999, the Company has incurred and anticipates that it
will continue to incur relatively high levels of expenditures for both sales and
marketing and product development as it pursues its strategies of:
. expanding its business in certain geographic markets,
. expanding its indirect distribution channels through alliances with
complementary software vendors as well as consulting and implementation
organizations, and
. rapidly developing and delivering new products as well as new features and
functions for existing products.
The Company bases its expense levels upon anticipated future revenues.
Since actual revenues were below those anticipated in the first and second
quarters, the Company expanded its efforts to contain expense growth in the
quarter ended November 30, 1998. (See "Operating Expenses--Restructuring
Costs.") As previously reported, the Company is evaluating significant measures
to restructure its operations further as part of its continuing efforts to
improve execution and efficiencies, better align expenses with revenues, and
enhance its sales and marketing activities to meet the challenges of the
marketplace.
12
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------------- ---------------------------------------
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
Operating expenses 1998 Change 1997 1998 Change 1997
------------ ----------- -------- ---------- ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cost of license fees 3,349 26% 2,652 9,635 24% 7,771
Percentage of total revenues 7.8% 6.3% 7.0% 6.6%
Cost of services 13,219 52% 8,677 37,733 64% 22,951
Percentage of total revenues 30.7% 20.6% 27.5% 19.6%
Sales and marketing 25,262 74% 14,520 73,334 72% 42,521
Percentage of total revenues 58.7% 34.4% 53.5% 36.4%
Product development 11,712 50% 7,831 37,506 74% 21,501
Percentage of total revenues 27.2% 18.6% 27.4% 18.4%
General and administrative 4,686 39% 3,365 15,753 59% 9,888
Percentage of total revenues 10.9% 8.0% 11.5% 8.5%
Acquisition-related expenses - N/M - 3,095 N/M -
Percentage of total revenues 0.0% 0.0% 2.3% 0.0%
Restructuring costs 701 N/M - 701 N/M -
Percentage of total revenues 1.6% 0.0% 0.5% 0.0%
------------ -------- ---------- -----------
Total operating expenses 58,929 37,045 177,757 104,632
Percentage of total revenues 136.9% 87.9% 129.7% 89.5%
</TABLE>
Cost of license fees. Cost of license fees consists of 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 the
Company's licensed software, and amortization of goodwill associated with
certain recent acquisitions. The Company amortizes capitalized software
development costs over the product's estimated economic life, generally two
years (two to five years for purchased capitalized software), upon general
commercial release of the software to customers. Goodwill is amortized over
five years.
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------------ ------------------------------------
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 Change 1997 1998 Change 1997
---------- ----------- ----------- ---------- ----------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Amortization of capitalized
software 2,416 12% 2,156 6,275 17% 5,380
Percentage of license fees 15.7% 9.4% 10.7% 8.2%
Cost of goods and other 933 88% 496 3,360 41% 2,391
Percentage of license fees 6.1% 2.2% 5.7% 3.6%
---------- ----------- ---------- --------
Cost of license fees 3,349 26% 2,652 9,635 24% 7,771
Percentage of license fees 21.8% 11.6% 16.4% 11.8%
</TABLE>
The increase in cost of license fees for the quarter and nine months ended
November 30, 1998, is largely due to additional amortization expense of
capitalized software costs following the general commercial release of new
supply chain management software products. In addition, amortization of goodwill
associated with the acquisition of ProMIRA in the fourth quarter of fiscal 1998
and royalties paid for third-party software included with the Company's licensed
software has also increased the cost of license fees.
13
<PAGE>
Cost of services. The increase in cost of services for the quarter and nine
months ended November 30, 1998 primarily resulted from hiring additional
consultants, increasing product support and training personnel in both domestic
and foreign locations. As a percentage of total revenues, the cost of services
increased for the quarter and nine months ended November 30, 1998, mainly
because of timing delays between the dates new employees began work and the
dates they first became productive after training.
Sales and marketing. Sales and marketing expenses consist primarily of
personnel costs, commissions, promotional events, and advertising. Sales and
marketing expenses increased for the quarter and nine months ended November 30,
1998, primarily because the Company added new personnel in both its domestic and
foreign locations. The Company also incurred costs to establish new offices and
enhance its presence in foreign locations. As a result of the Company's efforts
to hire and train quality individuals, broaden its global presence, and promote
its products, sales and marketing expenses increased as a percentage of total
revenues for the quarter and nine months ended November 30, 1998. See "Forward
Looking Statements" and "Factors That May Affect Future Results."
Product development. The Company records product development expenses net
of capitalized software development costs for products which have reached
technological feasibility in accordance with Financial Accounting Standard No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed."
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------------- --------------------------------------
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 Change 1997 1998 Change 1997
---------- ---------- -------- --------- ---------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross product development costs 14,857 40% 10,644 45,778 58% 28,887
Percentage of total revenues 34.5% 25.2% 33.4% 24.7%
Less: Capitalized product
development costs 3,145 12% 2,813 8,272 12% 7,386
Percentage of gross product
development costs 21.2% 26.4% 18.1% 25.6%
---------- --------- --------- ----------
Product development expenses 11,712 50% 7,831 37,506 74% 21,501
Percentage of total revenues 27.2% 18.6% 27.4% 18.4%
</TABLE>
Gross product development costs increased for the quarter and nine months
ended November 30, 1998, primarily because the Company hired additional
developers of supply chain management software. The Company hired these
individuals to develop new software products, new versions of existing products,
and to incorporate new technologies and capabilities into the Company's product
offerings. As a percentage of total revenues, net product development expenses
increased for the quarter and nine months ended November 30, 1998, largely
because the Company has made and expects to continue to make product development
expenditures as it pursues its strategy of rapidly developing and delivering new
products and new capabilities as well as ongoing efforts to ensure integration
with software products of other vendors. See "Forward Looking Statements" and
"Factors That May Affect Future Results."
14
<PAGE>
General and administrative. General and administrative expenses consist
primarily of personnel, infrastructure expenses, and the fees and expenses
associated with legal, accounting, and other services. As a percentage of total
revenues, general and administrative expenses increased for the quarter and nine
months ended November 30, 1998, because their growth outpaced revenue growth.
Acquisition-related expenses. As stated above, the Company acquired by
merger TYECIN in June 1998. The Company accounted for the acquisition as a
pooling of interests and recorded a non-recurring charge of approximately $3.1
million for certain expenses related to this transaction, including, among other
items, accounting, legal and severance fees during the second quarter of fiscal
1999.
Restructuring costs. In September 1998, the Company restructured certain of
its business operations. In connection with the restructuring, the Company
reduced its workforce in all functional areas by a total of approximately 80
employees, or approximately six percent, as part of an overall expense
containment program. The Company recorded a non-recurring charge of
approximately $701,000 for the quarter ended November 30, 1998, to cover costs
related to the workforce reduction, primarily for severance packages.
OTHER INCOME:
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------------------- ---------------------------------------
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 Change 1997 1998 Change 1997
---------- ------------ -------- -------- ------------ --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Other Income 551 -54% 1,185 2,282 20% 1,898
Percentage of total revenues 1.3% 2.8% 1.7% 1.6%
</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 decreased compared to November 30, 1997 primarily because
of greater interest income generated from short-term investments following the
investment of the net proceeds of the public offering of the Company's common
stock completed in August 1997. In addition, the Company has sold investments in
the current year to cover operating activities. As a result, income from
investments decreased.
15
<PAGE>
PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------------- ----------------------------------------
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 Change 1997 1998 Change 1997
--------- ------------ --------- --------- ------------ ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income taxes (4,927) N/M 2,504 (13,456) N/M 5,493
Percentage of income before taxes 32.1% 39.8% 35.1% 38.7%
Percentage of total revenues N/M 5.9% N/M 4.7%
</TABLE>
The effective tax rate represented by the Company's benefit for income
taxes for the third quarter was approximately 32%. 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 35%, excluding one-time charges
taken in connection with acquisitions or other transactions. This estimate is
based on current domestic and foreign tax law, which may change, and the actual
effective tax rate may differ.
NET (LOSS) INCOME AND (LOSS) INCOME PER SHARE:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------------- ---------------------------------------
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
1998 Change 1997 1998 Change 1997
--------- ----------- --------- --------- ------------ ---------
(in thousands, (in thousands,
except per share amounts) except per share amounts)
------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (10,407) N/M 3,795 (24,912) N/M 8,708
Percentage of total revenues N/M 9.0% N/M 7.4%
Net (loss) income per share - basic (0.39) N/M 0.16 (0.95) N/M 0.38
Net (loss) income per share - diluted (0.39) N/M 0.14 (0.95) N/M 0.34
Shares used in basic computation 26,520 24,228 26,285 23,101
======= ====== ======= =======
Shares used in diluted computation 26,520 26,940 26,285 25,956
======= ====== ======= =======
</TABLE>
Net (loss) income is derived by taking total revenues less total operating
expenses, determining the effect of other income-net, taking the resulting
(loss) income before taxes and subtracting the income tax provision. The pro
forma net loss for the quarter and nine months ended November 30, 1998,
excluding the impact of a non-recurring charges of $3.1 million for certain
acquisition-related expenses in connection with the business combination
involving TYECIN and $701,000 related to restructuring costs, would have been
$9.9 million and $22.4 million, respectively.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
<TABLE>
<CAPTION>
As of
------------------------------------
Nov. 30, Feb. 28,
1998 1998
------------- -------------
(in thousands)
<S> <C> <C>
Working Capital $63,535 $95,982
Cash, cash equivalents,
and marketable securities $33,965 $82,137
</TABLE>
The Company has historically financed its growth primarily through funds
generated from operations, through proceeds from offerings of capital stock, and
to a lesser extent, short-term borrowings under a revolving credit facility. The
decrease in working capital at November 30, 1998 from February 28, 1998 resulted
principally from decreases in cash, cash equivalents and marketable securities
and decreases in accounts payable and accrued expenses.
The Company's operating activities used cash of $31.3 million for the nine
months ended November 30, 1998. Operating cash flows decreased largely because
of the net loss before non-cash expenses. Additionally, the decreases in
accounts payable and accrued expenses and increase in deferred taxes exceeded
increases in depreciation and amortization expense and the decrease in accounts
receivable.
Investing activities provided cash of $11.9 million for the nine months
ended November 30, 1998. The purchases of property and equipment and
capitalization of software development costs were more than offset by the sales
of marketable securities. Financing activities provided cash of $5.0 million for
the nine months ended November 30, 1998, primarily from the exercise of employee
stock options and purchases of the Company's common stock under the Company's
Employee Stock Purchase Plan.
The Company has an unsecured committed revolving credit facility with a
commercial bank. Under the terms of the facility, the Company may request cash
advances, letters of credit or both 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 1999,
unless renewed. There were no amounts outstanding under this facility at
November 30, 1998.
Through the nine month period ended November 30, 1998, the Company did not
generate sufficient cash to cover its operating expenses. As noted above, the
Company restructured certain of its business operations during the third quarter
of fiscal 1999 to reduce operating expenses. As previously reported, the Company
is evaluating significant measures to restructure its operations further as part
of its continuing efforts to improve execution and efficiencies, better align
expenses with revenues, and enhance its sales and marketing activities to meet
the challenges of the marketplace. The Company is also conducting preliminary
discussions with other companies concerning a potential business combination.
The Company can give no assurance that its existing cash balances and marketable
securities, anticipated funds generated from operations and amounts available
under its revolving credit facility and other possible sources of funding will
be sufficient to meet its anticipated liquidity and working capital requirements
in the near term. The Company anticipates that, in light of its operating
results in the first nine months of fiscal 1999, the cost of any additional
funds, which the Company should need to obtain, would likely be greater than the
cost of funds available to the Company under its existing revolving credit
facility or otherwise. In the event that the Company is unable to obtain
additional financing, if needed, on terms satisfactory to the Company, its
liquidity, results of operations, and financial condition would be materially
adversely affected.
17
<PAGE>
Certain information regarding commitments and contingencies, including
pending litigation, which may have an adverse impact on the Company's liquidity
and financial condition is set forth below under "Factors That May Affect Future
Results."
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, the Quarterly Reports on Form
10-Q for the quarters ended May 31, 1998 and August 31, 1998, the Current Report
on Form 8-K dated December 23, 1998 and the Company's Prospectus dated August 7,
1998.
Revenues for any period depend on the number, size and timing of
license agreements. The number, size and timing of license agreements depends in
part on the ability of the Company to hire and thereafter to train, integrate
and deploy its sales force effectively. The size and 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 number, size and timing of license agreements also may be affected
by certain external factors such as general domestic and international business
or economic conditions, including the effects of such conditions on the
Company's customers and prospects, or competitors' actions. A small variation in
the timing of software licensing transactions, particularly near the end of any
quarter or year, can cause significant variations in software product license
revenues in any period.
The Company believes that the market for supply chain management
software continues to expand, although more slowly than in prior periods. .
However, if market demand for the Company's products does not grow as rapidly as
the Company expects, 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 Enterprise Resource Planning ("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, 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
18
<PAGE>
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.
Statements regarding the Company's or Management's beliefs or estimates
as to the adequacy and effectiveness of the Company's Year 2000 efforts when the
various phases or components of its Year 2000 efforts will be completed, and the
costs of such efforts, are based upon management's best estimates, which were
derived using certain assumptions, including the continued availability of
resources, adequacy and timeliness of third party modification or replacement
plans and other factors. Specific factors that might cause differences between
the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, the ability to locate
and correct all relevant computer code, timely responses to and corrections by
suppliers and other third parties, the ability to implement interfaces between
the new systems and the systems not being replaced and similar uncertainties.
Due to the general uncertainty inherent in the Year 2000 problem resulting from
the possible risks described in "Factors That May Affect Future Results-Year
2000 Compliance" below, there can be no assurance that the Company will be able
to timely and cost-effectively resolve problems associated with the Year 2000
issue that may affect its operations and business or expose it to third party
liability.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a dynamic and competitive environment that
involves numerous risks and uncertainties which are, at times, beyond the
Company's control and may affect future results of operations. The following
section highlights some, but not all, of the possible risks that may have a
material adverse affect on the Company's business, financial conditions or
results of operations.
Recent Operating Losses and Recent Discussions Regarding Potential Business
Combinations
The Company's operating results during the nine months ended November
30, 1998 has raised concerns with customers and prospects about the Company's
viability. The Company believes that these concerns may have adversely affected
the Company's ability to generate license fees. The Company also believes that
its announcement on December 22, 1998 that the Company was then engaged in
preliminary discussions (which discussions are continuing) with other companies
concerning a potential business combination has caused substantial delays in the
negotiations and closing of licensing transactions as many customers and
prospects await further announcement by the Company about its strategic
direction.
Commitments and Contingencies
In March 1997, the Company entered into agreements with Information
Resources, Inc. ("IRI") and the ("IRI Agreements") 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
19
<PAGE>
received 10-year, exclusive rights among supply chain software vendors in most
geographic markets to incorporate these data. The Company and IRI also 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. As previously reported, certain issues have arisen between
the Company and IRI relating to the satisfaction of these contingencies. The
Company is currently attempting to satisfactorily resolve these issues with IRI.
However, at this time, there can be no assurances that these issues will be
resolved to the satisfaction of the Company. 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.
Litigation
A total of seven class action lawsuits were filed against the Company
and a certain number of its executive officers and directors commencing in June
1998 alleging certain disclosure violations under the federal securities laws.
Six of the class action lawsuits have been consolidated in the District Court in
Maryland, and the plaintiffs in the remaining action have recently agreed to the
transfer to and consolidation of the action in Maryland. The plaintiffs have
agreed to file a consolidated class action complaint in the Maryland District
Court within 45 days after the remaining action has been transferred to
Maryland. At the present time, all discovery is stayed. 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 defend against the
lawsuits vigorously.
Potential for Significant Fluctuations in Quarterly Results; Seasonality
The Company's quarterly operating results have varied in the past and
might vary significantly in the future because of factors such as domestic and
international business conditions or the general economy, the timely
availability and acceptance of the Company's products, technological change,
issues with the Year 2000 problem faced by customers and prospects, the effect
of competitive products and pricing, the effects of marketing pronouncements by
competitors or potential competitors, changes in the Company's strategy, the mix
of direct and indirect sales, changes in operating expenses, personnel changes
and foreign currency exchange rate fluctuations. In addition, the Company has
experienced and might continue to experience from time to time very large,
individual license sales which can cause significant variations in quarterly
license revenues.
The Company typically ships software products shortly after license
agreements are signed and, therefore, does not maintain any material contract
backlog. Furthermore, the
20
<PAGE>
Company has typically recognized a substantial portion of its revenues in the
last month of a quarter. As a result, license fee revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter, and the
Company cannot predict license fee revenues for any future quarter with any
significant degree of certainty.
The Company's license fee revenues are also difficult to forecast
because the market for business application software products is evolving
rapidly, and the Company's sales cycles vary substantially from customer to
customer. The sales cycles depend, in part, on the nature of the transactions,
including the breadth of the solution to be licensed and the organizational and
geographic scope of the licenses. Because the licensing of the Company's
products generally involves a significant capital expenditure by the customer,
the Company's sales process is subject to the delays and lengthy approval
processes that are typically involved in such expenditures. In addition, the
Company expects that sales derived through indirect channels will be harder to
predict in timing and size than for direct sales because there is less direct
contact and influence with the prospective customer. For these and other
reasons, the sales cycle associated with the licensing of the Company's products
varies substantially from customer to customer and typically lasts between six
and twelve months, during which time the Company might devote significant time
and resources to a prospective customer, including costs associated with
multiple site visits, product demonstrations and feasibility studies, and might
experience a number of significant delays, over which the Company has no
control.
The Company bases its expense levels upon anticipated future revenues.
A substantial portion of the Company's revenues in any quarter is typically
derived from a limited number of large contracts. Therefore, if revenues in a
period are below expectations, operating results are likely to be adversely
affected, which occurred in the first nine months of fiscal 1999. Net income
might be disproportionately affected by a reduction in revenues because a
proportionately smaller amount of the Company's expenses varies directly with
revenues. The Company has generally realized lower revenues in its first fiscal
quarter (ending in May) than in the immediately preceding quarter. The Company
believes that these fluctuations are caused primarily by customer budgeting and
purchasing patterns and by the Company's sales commission policies, which
compensate personnel for meeting or exceeding annual and other performance
quotas.
Competition
The market for business applications software is highly competitive
and subject to rapid change. Many application software vendors offer products
that are directly competitive with the software products marketed by the
Company. Some of the Company's current and potential competitors have
significantly greater financial, marketing, technical and other competitive
resources than the Company. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products than can the Company. In addition, certain ERP system vendors have
acquired supply chain management software companies, products or functionality
or have announced plans to develop new products or to incorporate additional
functionality into their current products that, if successfully developed and
marketed, could compete with the products offered by the Company. Furthermore,
current and potential competitors may make acquisitions of other competitors or
may establish cooperative
21
<PAGE>
relationships among themselves or with third parties to increase the ability of
their products to address the supply chain management needs of the Company's
prospective customers. Accordingly, it is possible that new competitors may
emerge and rapidly acquire significant market share. If this were to occur, the
business, operating results, financial condition and cash flows of the Company
could be materially adversely affected.
Dependence on New Products and Rapid Technological Change; Risk of Product
Defects
The market for the Company's products is characterized by rapidly
changing technologies, frequent new product introductions, rapid changes in
customer requirements and evolving industry standards. The Company believes that
its future financial performance will depend in large part on its ability to
maintain and enhance its products, develop new products that achieve market
acceptance, maintain technological competitiveness and meet an expanding and
evolving range of customer requirements. There can be no assurance, however,
that the Company will be successful in developing and marketing new products or
product enhancements that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of prospective customers and achieve market acceptance. If the
Company is unable, for technological or other reasons, to successfully develop
and introduce new products or product enhancements, the Company's business,
operating results, financial condition and cash flows would be materially
adversely affected.
In addition, software products as complex as those offered by the
Company might contain undetected errors or failures when first introduced or
when new versions are released. There can be no assurance, despite testing by
the Company and by current and prospective customers, that errors will not be
found in new products or product enhancements after commercial release,
resulting in loss of or delay in market acceptance, which could have a material
adverse effect upon the Company's business, operating results, financial
condition and cash flows.
Expansion of Indirect Channels
The Company is building and maintaining significant working
relationships with complementary vendors, such as ERP system vendors and
consulting firms, that the Company believes can play important roles in
marketing the Company's products. The Company is currently investing, and
intends to continue to invest, significant resources to develop these
relationships, which could adversely affect the Company's operating margins.
There can be no assurance that the Company will be able to attract 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 service. In
addition, difficulties experienced by these complementary vendors in selling the
Company's products and services may adversely affect the Company's results of
operations. Furthermore, the Company's arrangements with these organizations are
not exclusive and, in many cases, may be terminated by either party without
cause, and many of these organizations are also involved with competing
products. Certain ERP system vendors have acquired supply chain management
software companies, products or functionality or have announced plans to develop
new products or to incorporate additional functionality into their current
products that would compete with the Company's products. Therefore, there can be
no
22
<PAGE>
assurance that any organization will continue its involvement with the Company
and its products, and the loss of important organizations could materially
adversely affect the Company's results of operations. In addition, if the
Company is successful in selling products as a result of these relationships,
any material increase in the Company's indirect sales as a percentage of total
revenues would be likely to adversely affect the Company's average selling
prices and operating margins because of the lower unit prices that the Company
receives when selling through indirect channels.
Management of Internal Growth
In the last fiscal year, the Company experienced a period of rapid
growth in revenues that placed significant strains upon its management systems
and resources. The Company's ability to compete effectively and to manage future
growth, if any, will require the Company to continue to improve its financial
and management controls, reporting systems and procedures on a timely basis. In
the recent past, the Company hired a significant number of employees, and in
order to maintain its ability to grow in the future, the Company will be
required to train and manage its employee work force on a timely and effective
basis. There can be no assurance that the Company will be able to do so
successfully. The Company's failure to do so could have a material adverse
effect upon the Company's business, operating results, financial condition and
cash flows. See also " Certain Risks Associated with Acquisitions"
Certain Risks Associated with Acquisitions
The Company investigates potential candidates for acquisition, joint
venture opportunities, business combinations, or other relationships on an
ongoing basis. From time to time, the Company engages in the evaluation of, and
discussions with, one or more such candidates. Acquisitions involve the
integration of companies that have previously operated independently. There can
be no assurance that the Company will be able to integrate these or any future
employees or operations effectively or that the Company will realize the
expected benefits of these or any future transactions or business combination.
In addition, there can be no assurance that the Company will not experience the
loss of key employees of these or any future acquired operations. The process of
integrating acquired employees and operations into the Company might result in
unanticipated operational difficulties and expenditures. As mentioned above, the
Company has experienced issues with the integration of the products and
operations of ProMIRA and TYECIN.
International Operations
The Company currently conducts operations in a number of countries in
Europe, Asia/Pacific and South America which requires significant management
attention and financial resources. If these operations are unable to generate,
maintain, or increase demand for the Company's products, then the Company's
operating results could be adversely affected. Certain risks are inherent in
international operations. The majority of the Company's contracts are
denominated in U.S. currency. Most of the revenues from sales outside the United
States have been denominated in foreign currencies, typically the
23
<PAGE>
local currency of the Company's business unit. The Company anticipates that the
proportion of its revenues denominated in foreign currencies will increase. A
decrease in the value of foreign currencies relative to the U.S. dollar could
result in losses from foreign currency translations. In connection with
transactions denominated in foreign currency, the Company has taken steps to
minimize the risks associated with such foreign currency in the past and might
take such steps in similar circumstances in the future. With respect to the
Company's international sales that are U.S. dollar-denominated, currency
fluctuations could make the Company's products and services less price
competitive. The Company's international sales and operations might be adversely
affected by the imposition of government controls, changes in financial
currencies (such as the unified currency known as the European Monetary Unit),
political and economic instability, difficulties in staffing and managing
international operations and general economic and currency exchange rate
conditions in foreign countries.
Lack of Product Diversification
The Company's future results depend on continued market acceptance of
supply chain management software and services as well as the Company's ability
to continue to adapt and modify this software to meet the evolving needs of its
prospects and customers. Any reduction in demand or increase in competition in
the market for supply chain management software products could have a material
adverse effect on the Company's business, operating results, financial condition
and cash flows.
Dependence Upon Key Personnel
The loss of the services of one or more of the Company's executive
officers could have a material adverse effect on the Company's business,
operating results, cash flows and financial condition. The Company does not have
employment contracts with any of its executive officers and does not maintain
key person insurance. There can be no assurance that the Company will be able to
retain its key personnel. The Company's future success also depends on its
continuing ability to attract, assimilate and retain highly qualified sales,
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company can attract, assimilate or retain
such personnel in the future.
Intellectual Property and Proprietary Rights
The Company regards its software as proprietary and relies on a
combination of trade secret, copyright and trademark laws, license agreements,
confidentiality agreements with employees, nondisclosure and other contractual
requirements imposed on its customers, consulting partners and others, technical
measures and other methods to protect its proprietary rights in its products.
There can be no assurance that these protections will adequately protect its
proprietary rights or that the Company's competitors will not independently
develop products that are substantially equivalent or superior to the Company's
products. In addition, the laws of certain countries in which the Company's
products are or may be licensed do not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. Although the Company believes that its products, trademarks and other
proprietary rights do not infringe upon the proprietary rights of third parties,
there can be no assurance that third parties will not assert infringement claims
against the Company.
24
<PAGE>
Possible Volatility of Stock Price
Factors such as announcements of new products or technological
innovations by the Company or its competitors, as well as quarterly variations
in the Company's operating results, have caused and may cause the market price
of the Company's common stock to fluctuate significantly. In addition, the stock
market in recent years has experienced price and volume fluctuations which have
particularly affected the market prices of many high technology stock issues and
which have often been unrelated or disproportionate to the operating performance
of such companies. These broad market fluctuations, as well as general economic
conditions, have at certain times adversely affected the market price of the
Company's common stock.
Real Estate Commitments
The Company has committed to real estate projects and long-term leases
and may commit to additional real estate projects or long-term leases to support
its operations in both domestic and foreign locations based on anticipated
growth. There can be no assurances that the growth projections will be realized;
therefore, the Company may be subject to increased fixed costs, which could have
a material adverse affect upon the Company's business, operating results and
cash flows.
Year 2000 Compliance
General. Many older computer systems, software products and embedded
chips that are in use today were programmed to accept two digit entries in the
date code field (e.g., "98" for "1998"). These systems, software and embedded
chips need to be modified or upgraded to distinguish twenty-first century dates
(e.g., "2002") from twentieth century dates (e.g., "1902"), in order to avoid
the possibility of erroneous results or systems failures.
The Company has established a vigorous, comprehensive effort under
executive leadership which continues to evaluate and update its formal program
to address any potential Year 2000 compliance issues relating to its 1) internal
operating systems, 2) vendors, facilities and other third parties and 3)
software products that it licenses to customers. The Company believes that it
has allocated adequate resources for this purpose and expects its Year 2000
compliance program to be completed on a timely basis. While the Company believes
that it has tested and modified the products it currently actively markets, the
Company does not intend to test or modify all prior versions of its software
products or certain software products that the Company plans to replace with
either new software products or Year 2000 compliant releases by the end of 1999.
The Information Technology Association of America ("ITAA") has recently
certified the Company's software development processes as part of the Company's
comprehensive effort to address the Year 2000 problem.
Corporate Infrastructure State of Readiness. The Company believes that
its identification of Year 2000 compliance issues is complete. The Company also
believes that it has completed its assessment of Year 2000 issues with respect
to the Company's internal operating systems. The Company has determined the
systems that are not affected and determined which systems need replacement or
modification. The Company believes that all
25
<PAGE>
identified systems that are at risk will be fixed, i.e., made Year 2000
compliant, or replaced before their potential "failure date." The Company
expects that its business critical systems that have date sensitivity will be
completely fixed, tested and in place before fiscal year 2000. The Company
believes that it has communicated with all its vendors, suppliers, landlords and
other third parties regarding Year 2000 compliance of embedded processors in
computers and facilities, software and other information technology, and other
products and services which the Company obtains from such third parties. The
Company anticipates that embedded processors in computers, which are not yet
compliant, will be made compliant before the end of the century. Most of the
Company's landlords have provided guarantees of compliance or descriptions of
the work they are doing to achieve compliance with their facilities and
operations. Although the Company has completed its assessment of the Year 2000
compliance issues with respect to many of the products, facilities and services
which it obtains from third parties, the Company continues to assess Year 2000
issues relating to such products, facilities and services.
The Company intends to test all business critical systems, whether
warranted compliant by the manufacturer or remediated to address Year 2000
issues. The testing environment has been established and test development is
ongoing. Test execution is expected to begin at the end of October 1998 and be
finished, for business critical systems, by the end of February 1999.
Contingency plans for the various business areas of the Company will be
developed in the first part of calendar year 1999.
Costs. The Company has expensed approximately $300,000 as of November
30, 1998 in its Year 2000 compliance program, mainly for consulting services and
hardware costs. Approximately twenty percent (20%) of the costs were for
identification and assessment of the Year 2000 issue, approximately fifty
percent (50%) of the costs were for modification and replacement, and thirty
percent (30%) were for testing. The Company currently estimates that it will
cost an additional $1 million, budgeted under its Information Technology and
Engineering divisions, prior to January 1, 2000, to modify its in-house
information systems, other systems and internally developed software products
affected by the Year 2000 issue; the portion of this amount attributable to
fiscal 1999 constitutes approximately eight percent (8%) of the information
technology budget for fiscal 1999. The Company estimates that of the remaining
costs, forty percent (40%) will be for modification and replacement and sixty
percent (60%) will be for testing. The Company does not separately track the
internal costs for its Year 2000 compliance project; such costs consist
principally of the related payroll costs for its employees working on the
project. See "Forward Looking Statements" above.
Risks. Software products as complex as those offered by the Company
might contain undetected errors or failures when first introduced or when new
versions are released, including products intended to be Year 2000 compliant.
While the Company believes that it has assessed, corrected and tested its
products to address the Year 2000 issue, there can be no assurances that the
Company's software products contain or will contain all necessary date code
changes or that errors will not be found in new products or product enhancements
after commercial release, resulting in loss of or delay in market acceptance. In
addition, the Company might experience difficulties that could delay or prevent
the continued successful development and release of products that are Year 2000
compliant or that meet the Year 2000 requirements of customers. If the Company
is unable or is delayed in its efforts to make the necessary date code changes,
there could be a material adverse effect upon the Company's business, operating
results, financial condition and cash flows.
26
<PAGE>
The Company utilizes third party vendor equipment, telecommunications
products, and software products. The Company is currently taking steps to
address the impact, if any, of the Year 2000 issue surrounding such third party
products. The Company has been communicating with such third parties about their
plans and progress in addressing the Year 2000 problem, and the Company has
requested assurances that such equipment, products and services will be Year
2000 compliant. The Company has received such assurances from certain of the
third party vendors and is waiting to receive such assurances from the remaining
vendors. However, such third parties' Year 2000 compliance efforts are not
within the control of the Company. In the event that such additional assurances
are not timely received, the Company will switch to another vendor or take such
other action as the Company shall then deem appropriate. The failure of any
critical technology components to operate properly may have a material impact on
business operations or require the Company to incur unanticipated expenses to
remedy any problems.
The most substantial operational risks continue to be those that are
beyond the Company's control, including the progress of government agencies at
all levels and compliance efforts of utility companies. It is possible that
interruptions in vital services in late calendar year 1999 and early calendar
year 2000 will interfere with normal business operations. Such failures could
materially and adversely effect the Company's results of operations.
Many companies might need to modify or upgrade their information systems
to address this Year 2000 issue. The effects of this issue and of the efforts by
companies to address it are unclear. The Company believes that Year 2000 issues
might affect the purchasing patterns of customers and prospective customers.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures might
result in reduced resources available to license software products and utilize
the implementation services such as those offered by the Company. Additionally,
Year 2000 problems inherent in a customer's other software programs might
significantly limit that customer's ability to realize the intended benefits to
be derived from the Company's supply chain management software. Due to the
general uncertainty inherent in the Year 2000 problem resulting, in part from,
the possible risks described above, the Company is unable at this time to
determine whether the consequences of the Year 2000 failures will have a
material impact on the Company's operating results, financial conditions and
cash flows.
27
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A total of seven class action lawsuits were filed against the Company and a
certain number of its executive officers and directors commencing in June 1998
alleging certain disclosure violations under the federal securities laws. Six of
the class action lawsuits have been consolidated in the District Court in
Maryland, and the plaintiffs in the remaining action have recently agreed to the
transfer to and consolidation of the action in Maryland. The plaintiffs have
agreed to file a consolidated class action complaint in the Maryland District
Court within 45 days after the remaining action has been transferred to
Maryland. At the present time, all discovery is stayed. 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 defend against the
lawsuits vigorously.
ITEM 5. OTHER INFORMATION
The Company's By-laws provide that shareholder proposals which are not
submitted for inclusion in the Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders must be received by the Secretary of the Company: (i) 60
days in advance of such meeting if the meeting is to be held on a day which is
within 30 days preceding the anniversary of the previous year's annual meeting,
or (ii) 90 days in advance of such meeting if the meeting is to be held on a day
which is on or after the anniversary of the previous year's annual meeting. The
1998 Annual Meeting of Shareholders was held on July 24, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
_________________________
(b) Reports on Form 8-K
1. On September 25, 1998, the Company filed a Current Report on Form 8-K
following its issuance of a press release on September 24, 1998 announcing
a restructuring of its business together with a reduction in its work force
of approximately six percent, as part of an overall expense containment
program.
2. On September 28, 1998, the Company filed a Current Report on Form 8-K to
report the unaudited condensed consolidated financial results of the third
and fourth quarters of fiscal year ended February 28, 1998, giving
retroactive effect to the Merger.
28
<PAGE>
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: January 13, 1998 By: /s/ William M. Gibson
--------------------------------------
William M. Gibson
President, Chief Executive Officer and
Chairman of the Board of Directors
Date: January 13, 1998 By: /s/ Peter Q. Repetti
--------------------------------------
Peter Q. Repetti
Senior Vice President, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
29
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
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IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-END> NOV-30-1998
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<CURRENT-ASSETS> 103,510
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<INTEREST-EXPENSE> (76)
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