<PAGE> 1
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 August 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 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: 28.9 million shares of common
stock, $.002 par value per share, as of October 13, 2000.
<PAGE> 2
MANUGISTICS GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
August 31, 2000 (Unaudited) and February 29, 2000 3
Condensed Consolidated Statements of Operations - Three and Six
months ended August 31, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows - Six months
ended August 31, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements -
August 31, 2000 (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
</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>
August 31, February 29,
2000 2000
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,758 $ 34,051
Marketable securities 11,091 17,496
Accounts receivable, net of allowance for doubtful
accounts of $2,486 and $1,875 at August 31, 2000 and
February 29, 2000, respectively 64,205 38,705
Other current assets 8,347 9,252
--------- ---------
Total current assets 107,401 99,504
--------- ---------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 14,382 14,157
NONCURRENT ASSETS:
Software development costs, net of accumulated amortization 16,484 16,514
Intangible assets, net of accumulated amortization 6,840 7,317
Deferred tax asset 17,669 12,776
Other non-current assets 3,736 2,160
--------- ---------
Total non-current assets 44,729 38,767
--------- ---------
TOTAL ASSETS $ 166,512 $ 152,428
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,932 $ 5,792
Accrued compensation 11,030 8,345
Other current liabilities 12,784 10,679
Deferred revenue 29,176 26,727
Current portion of restructuring accrual 2,381 5,130
Line of credit 6,000 6,000
--------- ---------
Total current liabilities 67,303 62,673
--------- ---------
LONG-TERM LIABILITIES 187 283
RESTRUCTURING ACCRUAL - LONG-TERM 2,415 2,754
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock, $0.002 par value per share; 100,000,000 shares
authorized; 29,533,294 and 29,047,162 shares issued, and
28,780,784 and 28,294,652 shares outstanding at August 31,
2000 and February 29, 2000, respectively 59 58
Additional paid-in capital 230,863 189,480
Accumulated deficit (123,038) (102,203)
Accumulated other comprehensive income 289 100
Treasury stock - 752,510 shares, at cost (717) (717)
Deferred Compensation - repriced stock options (10,849) -
--------- ---------
Total stockholders' equity 96,607 86,718
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 166,512 $ 152,428
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 4
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
License fees $ 28,510 $ 10,754 $ 54,483 $ 23,852
Services 16,572 12,247 28,539 27,163
Solution support 13,068 10,794 25,647 21,973
--------- --------- --------- ---------
Total revenues 58,150 33,795 108,669 72,988
--------- --------- --------- ---------
OPERATING EXPENSES:
Cost of license fees 4,336 3,053 9,593 5,910
Cost of consulting, solution support and other services 13,614 10,295 25,292 21,914
(Excluding $6,237 of non-cash stock compensation expense)
Sales and marketing costs 25,157 14,299 48,134 28,138
(Excluding $7,349 of non-cash stock compensation expense)
Product development expenses 8,445 7,467 16,215 14,461
(Excluding $5,343 of non-cash stock compensation expense)
General and administrative costs 5,306 3,900 10,310 7,840
(Excluding $1,782 of non-cash stock compensation expense)
Non-cash stock compensation expense 20,711 - 20,711 -
Restructuring costs - (764) - (682)
--------- --------- --------- ---------
Total operating expenses 77,569 38,250 130,255 77,581
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (19,419) (4,455) (21,586) (4,593)
OTHER INCOME - NET 432 517 715 874
--------- --------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES (18,987) (3,938) (20,871) (3,719)
PROVISION (BENEFIT) FOR INCOME TAXES 697 (503) (36) (673)
--------- --------- --------- ---------
NET LOSS $ (19,684) $ (3,435) $ (20,835) $ (3,046)
========= ========= ========= =========
BASIC NET LOSS PER SHARE $ (0.69) $ (0.13) $ (0.73) $ (0.11)
========= ========= ========= =========
DILUTED NET LOSS PER SHARE $ (0.69) $ (0.13) $ (0.73) $ (0.11)
========= ========= ========= =========
SHARES USED IN COMPUTATION:
BASIC 28,649 27,291 28,541 27,151
========= ========= ========= =========
DILUTED 28,649 27,291 28,541 27,151
========= ========= ========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 5
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended August 31,
2000 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(20,835) $ (3,046)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 9,166 10,520
Deferred tax asset (4,910) (449)
Tax benefit from stock options exercised 4,408 1,315
Non-cash stock compensation expense 20,711 -
Other 904 (93)
Changes in assets and liabilities:
Accounts receivable - net (25,500) 10,958
Other current assets 905 1,513
Other non-current assets (577) 15
Accounts payable and accrued expenses 4,930 (7,557)
Restructuring accrual (3,088) (8,110)
Deferred revenue 2,449 32
-------- --------
Net cash (used in) provided by operating activities (11,437) 5,098
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - net (3,582) (828)
Capitalization of software development costs (5,428) (2,553)
Purchase of software licenses (323) (204)
Investments and sales (purchases) of marketable securities - net 5,405 (1,248)
-------- --------
Net cash used in investing activities (3,928) (4,833)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt and capital lease obligations - net (96) 1
Proceeds from stock options and employee stock purchases 5,414 2,162
-------- --------
Net cash provided by financing activities 5,318 2,163
-------- --------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES (246) (721)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,293) 1,707
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,051 20,725
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,758 $ 22,432
======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE> 6
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Manugistics Group, Inc. ("the Company") 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 period presented herein are not necessarily
indicative of the results of operations for the entire fiscal year, which
ends on February 28, 2001.
These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto for the
fiscal year ended February 29, 2000 included in the Annual Report on Form
10-K of the Company for that year filed with the Securities and Exchange
Commission.
2. NET LOSS PER SHARE
Basic loss per share is computed using the weighted average number
of shares of common stock outstanding. Diluted loss 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 (in thousands)
from options of 3,264 shares, 3,232 shares, 1,377 shares, 784 shares,
respectively were excluded from the calculation of diluted loss per share
for the three and six month periods ended August 31, 2000 and 1999, as
including them would have been anti-dilutive. The following table sets
forth the computation of basic and diluted (loss) income per share for
such periods (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
August 31, August 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares 28,649 27,291 28,541 27,151
Dilutive potential common shares - - - -
----------- ----------- ----------- -----------
Shares used in diluted computation 28,649 27,291 28,541 27,151
=========== =========== =========== ===========
Net loss $ (19,684) $ (3,435) $ (20,835) $ (3,046)
=========== =========== =========== ===========
Basic loss per share $ (0.69) $ (0.13) $ (0.73) $ (0.11)
=========== =========== =========== ===========
Diluted loss per share $ (0.69) $ (0.13) $ (0.73) $ (0.11)
=========== =========== =========== ===========
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in disputes and
litigation in the ordinary course of business. The Company does not
believe that the outcome of any pending disputes or litigation will have
a material effect on the Company's business, operating results, financial
condition or cash flows. However, the ultimate outcome of these
proceedings, as with litigation generally, is inherently uncertain and it
is possible that these matters may be resolved adversely to the Company.
The adverse resolution of any one or more of these matters could have a
material effect on the Company's business, operating results, financial
condition or cash flows.
The Company has previously reported its legal proceedings with
Information Resources, Inc. ("IRI") arising from the acquisition of
certain assets. A dispute over revenue streams that IRI alleges it is
entitled to is being arbitrated. IRI seeks a total of $15,930,563 in
damages. The Company contends that the conditions to these amounts
becoming due have not been satisfied and that no amounts are due IRI,
because, among other reasons, of a failure of consideration in the
overall transaction. A related claim concerning the breach of a separate
Non-Competition and Non-Solicitation Agreement is proceeding in the
Circuit Court of Cook County, Illinois. There were no significant
developments in these matters during this quarter.
6
<PAGE> 7
4. COMPREHENSIVE INCOME (LOSS)
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 the reporting and display
of comprehensive income (loss) and its components in the Company's
financial statements. 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
(loss). The following table sets forth the comprehensive loss for the
three and six month periods ended August 31, 2000 and 1999 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
August 31, August 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(19,684) $ (3,435) $(20,835) $ (3,046)
Other comprehensive income (loss) 422 (685) 189 (519)
-------- -------- -------- --------
Total comprehensive loss $(19,262) $ (4,120) $(20,646) $ (3,565)
======== ======== ======== ========
</TABLE>
5. RESTRUCTURING ACCRUAL
During the second half of fiscal 1999, the Company recorded
restructuring and unusual charges primarily associated with the
implementation of the Company's restructuring plan. This plan reorganized
the Company to focus on its core business of providing supply chain
solutions to companies with dynamic supply chains. The Company believes
that the reserves as of August 31, 2000 are adequate and that no further
revisions of estimates are necessary at this time. The following table
sets forth restructuring activity for the six month period ended August
31, 2000 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Beginning Cash Ending
Balance utilization Balance
March 1, 2000 of accrual August 31, 2000
------------- ------------- -----------------
<S> <C> <C> <C>
Severance costs $ 920 $ (819) $ 101
Lease obligations costs 6,964 (2,269) 4,695
------- ------- -------
Total $ 7,884 $(3,088) $ 4,796
======= ======= =======
</TABLE>
6. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999 the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), which provides the
SEC staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. The implementation date of SAB 101
is no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. Management does not believe the adoption of SAB
101 will have a material effect on the Company's consolidated financial
position or results of operations in fiscal 2001.
7. STOCK BASED COMPENSATION
FASB Interpretation No. 44 (FIN 44) "Accounting for Certain
Transactions Involving Stock Compensation" is effective July 1, 2000, but
certain conclusions in FIN 44 cover specific events that occurred after
December 15, 1998. In January 1999, the Company repriced employee stock
options to purchase a total of 1.52 million shares (which did not include
options held by executive officers or directors). The four year vesting
period restarted for all repriced options, subject to acceleration under
certain performance-related cirumstances. Under FIN 44, the 1.52 million
options are subject to variable plan accounting. Under variable plan
accounting, compensation cost is adjusted for increases or decreases in
the intrinsic value of the modified stock option awards until the award
is exercised, forfeited or expires.
7
<PAGE> 8
Under FIN 44, no adjustments are to be made upon initial application of
FIN 44 for periods prior to July 1, 2000.
In connection with the initial application of FIN 44 in the
quarter ended August 31, 2000, the Company recorded compensation charges
of approximately $20.7 million and deferred compensation of approximately
$10.8 million at August 31, 2000. The remaining vesting period of the
repriced stock options is approximately 2.5 years.
8. SUBSEQUENT EVENTS
Acquisition - Subsequent to August 31, 2000, the Company reached
agreement to acquire the outstanding common and preferred stock of Talus
Solutions Inc. The Company will issue approximately 3.5 million shares of
its common stock in exchange for the outstanding Talus common and
preferred stock. In addition, the Company will exchange stock options and
warrants for the purchase of approximately 714,000 shares of the
Company's common stock in exchange for outstanding Talus options and
warrants. The purchase price based on the estimated fair value of the
common stock, options and warrants to be exchanged is approximately $378
million. The number of the Company's shares of common stock and options
to be issued could be increased to approximately 4.2 million shares and
approximately 800,000 options based on certain provisions in the purchase
agreement. The acquisition is expected to be completed during the third
quarter or fourth quarter of fiscal year 2001.
Line of Credit - The Company has an unsecured revolving credit
facility with a commercial bank. As of August 31, 2000, $6.0 million was
outstanding on the revolving credit facility. This $6.0 million was
repaid in September 2000. Subsequent to August 31, 2000, the Company
renewed its revolving credit facility. The current agreement will expire
in September of 2001. Under its terms, the Company may request cash
advances, letters of credit or both in an aggregate amount of up to $20
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).
Convertible Note Offering - On October 10, 2000, the Company
announced its intention to issue up to $200,000,000 aggregate principal
amount of convertible subordinated notes through a private placement
offering with an option to issue up to an additional $50,000,000 of the
notes. The Company has commenced the offering and anticipates that the
terms of the Notes will be set and the offering will close in the near
future.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading global provider of supply chain optimization and
eBusiness solutions for enterprises and evolving trading networks. Our solutions
include infrastructure and application software products, solution support,
strategic consulting and implementation services. Our solutions help our clients
monitor and streamline their core internal operational processes involving the
design, purchase, manufacture, storage, transportation, marketing and selling of
their goods and services. Our solutions also help integrate clients'internal
processes with trading partners and provide the collaboration and optimization
required across extended eBusiness trading networks. Our solutions help our
clients improve resource allocation through more effective operational decisions
and improve customer service --driving costs lower and revenues higher.
Increasing global competition, shortening product life cycles and
developing eBusiness initiatives of new and existing competitors are driving
enterprises to provide greater levels of customer service while shortening their
time-to-market. We were an early innovator in trading partner collaboration,
with our first Internet-ready products commercially available in late 1997. Our
technology initiatives continue to focus on the changing needs of companies in
the markets we serve, as well as the requirements of the new eBusiness economy.
We have developed a web architecture for our Manugistics NetWORKS TM
collaborative solutions through our proprietary WebWORKS TM infrastructure and
have provided advanced integration to disparate systems through our WebConnect
products. Through our exchange platform ExchangeWORKS TM ,we are now addressing
the new eBusiness processes enabled by the Internet, such as auctions, dynamic
pricing, procurement, track and trace, and order and pipeline visibility.
We offer solutions to companies in a diverse array of industries
including agriculture, apparel, chemicals, consumer goods, electronics & high
technology, energy, food, government, healthcare, logistics, metals, motor
vehicles & parts, paper, pharmaceuticals and retail. Our customer base of over
900 clients includes large, multinational enterprises such as 3Com, Coca-Cola
Bottling, Cisco Systems, Compaq, DuPont, Fuji Photo Film USA, Harley-Davidson,
The Limited, Texas Instruments and Unilever, as well as medium-sized
enterprises and emerging eBusinesses.
RESULTS OF OPERATIONS
REVENUES:
Our revenues consist of software license fees, consulting revenues and
solution support revenues. Software license revenues are recognized upon
execution of a software license agreement, provided that the software product
has been shipped, there are no uncertainties surrounding product acceptance, the
license fees are fixed and determinable, collection is considered probable and
no significant production, modification or customization of the software is
required, in accordance with the American Institute of Certified Public
Accountants' ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition with respect to Certain Transactions," for fiscal periods subsequent
to December 31, 1997. Fees are allocated to the various elements of
software license agreements based on our historical fair value experience.
Consulting revenues are recognized as the services are performed. Solution
support revenues are recognized ratably over the support period defined in the
software license agreement. The following table sets forth revenues for the
three and six month periods ended August 31, 2000 and 1999 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
Three months ended August 31, Six months ended August 31,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
License fees $ 28,510 165.1% $ 10,754 $ 54,483 128.4% $ 23,852
Percentage of total revenues 49.0% 31.8% 50.1% 32.7%
Consulting services $ 16,572 35.3% $ 12,247 $ 28,539 5.1% $ 27,163
Percentage of total revenues 28.5% 36.2% 26.3% 37.2%
Solution support and other services $ 13,068 21.1% $ 10,794 $ 25,647 16.7% $ 21,973
Percentage of total revenues 22.5% 32.0% 23.6% 30.1%
---------- ---------- ---------- ----------
Total revenues $ 58,150 72.1% $ 33,795 $ 108,669 48.9% $ 72,988
Percentage of total revenues 100.0% 100.0% 100.0% 100.0%
</TABLE>
License fees. Our license fees consist primarily of software license
revenues from direct sales. We also earn license fees through indirect channels,
primarily through complementary software vendors, consulting firms, distributors
and systems integrators.
License fees increased for the three and six months ended August 31, 2000
compared to the same period in 1999, primarily because we fielded a more
effective and larger direct sales organization during the three and six month
period ended August 31, 2000. We also benefited from an improved market
environment for supply chain optimization solutions and the developing demand
for eBusiness trading networks. This resulted in an increase in both the number
of transactions closed and the average size of transactions
9
<PAGE> 10
during the three and six month period ended August 31, 2000 compared to the
comparable period in 1999.
Consulting services ("Services"). Services revenues primarily consist of
fees from software implementation engagements and the related training,
consulting and solution support revenues. Revenues from software implementation,
training and consulting engagements are primarily recognized as the services are
performed and are billed on a time and materials basis. The software
implementation process typically requires two to twelve months to complete,
depending on the complexity, scope of the project and client resources
available. Solution support revenues are recognized ratably over the solution
support term defined in the contract. Payments for solution support fees are
typically made annually in advance of the support period.
Consulting services revenues increased for the three and six months ended
August 31, 2000 as compared to 1999, primarily due to an increase in
implementation and customization services provided for software licensed in the
current and prior periods.
Solution support. Solution support revenues increased following the
increase in the number of clients that have licensed our software products and
entered or renewed annual solution support contracts. Solution support revenues
tend to track software license fee transactions in prior periods. In the past
three fiscal years, a high percentage of customers with maintenance contracts
have renewed these contracts. There can be no assurance that this level of
renewal will continue in the future. See "Factors That May Affect Future
Results" and "Forward-Looking Statements."
OPERATING EXPENSES:
Other Operating Expenses -- Non-cash stock compensation. FASB
Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions Involving
Stock Compensation" is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after December 15, 1998. In January
1999, we repriced employee stock options, other than those held by executive
officers or directors. The effect of this repricing resulted in
approximately 1,520,000 options being repriced and the four year vesting period
starting over. Under FIN 44, the 1,520,000 options are subject to variable plan
accounting. Under variable plan accounting, compensation cost is adjusted for
increases or decreases in the intrinsic value of the modified stock option
awards until the award is exercised, is forfeited or expires.
Under FIN 44, no adjustments are to be made upon initial application of
FIN 44 for periods prior to July 1, 2000.
In connection with the initial application of FIN 44 in the quarter
ended August 31, 2000, we recorded compensation charges of approximately $20.7
million and deferred compensation of approximately $10.8 million at August 31,
2000. The remaining vesting period is approximately 2.5 years for the deferred
compensation.
The stock compensation expense is allocated to operating expenses as
follows (in thousands):
<TABLE>
<S> <C>
Cost of consulting, solution support and other services ........... $ 6,237
Sales and marketing costs ......................................... 7,349
Product development expenses ...................................... 5,343
General and administrative costs .................................. 1,782
-------
Total .......................................................... $20,711
=======
</TABLE>
There are no FIN 44 expenses related to prior periods. The amounts and
discussion below are based upon expense amounts excluding the non-cash stock
compensation expense. The following table sets forth operating expenses for the
six month periods ended August 31, 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three months ended August 31, Six months ended August 31,
2000 Change 1999 2000 Change 1999
---------- ---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cost of license fees $ 4,336 42.0% $ 3,053 $ 9,593 62.3% $ 5,910
Percentage of total revenues 7.5% 9.0% 8.8% 8.1%
Cost of consulting, solution
support and other services 13,614 32.2% 10,295 25,292 15.4% 21,914
Percentage of total revenues 23.4% 30.5% 23.3% 30.0%
Sales and marketing costs 25,157 75.9% 14,299 48,134 71.1% 28,138
Percentage of total revenues 43.3% 42.3% 44.3% 38.6%
Product development expenses 8,445 13.1% 7,467 16,215 12.1% 14,461
Percentage of total revenues 14.5% 22.1% 14.9% 19.8%
General and administrative costs 5,306 36.1% 3,900 10,310 31.5% 7,840
Percentage of total revenues 9.1% 11.5% 9.5% 10.7%
Restructuring costs - (100.0%) (764) - (100.0%) (682)
Percentage of total revenues 0.0% N/M 0.0% N/M
--------- --------- --------- ---------
Total operating expenses $ 56,858 48.6% $ 38,250 $ 109,544 41.2% $ 77,581
Percentage of total revenues 97.8% 113.2% 100.8% 106.3%
</TABLE>
10
<PAGE> 11
Cost of license fees. Cost of license fees consists of amortization of
capitalized software development costs, cost of goods and other expenses, which
includes royalty fees associated with third-party software included with our
licensed software and amortization of goodwill associated with certain
acquisitions. Capitalized software development costs and acquired research and
development costs are amortized at the greater of the amount computed using
either the straight-line method over the estimated economic life of the product,
commencing with the date the product is first available for general release, or
the ratio that current gross revenues from the product bears to the total
current and anticipated future gross revenues. Generally, an economic life of
two to five years is assigned to capitalized software development costs.
Goodwill is amortized over five years. The following table sets forth
amortization of capitalized software development costs, cost of goods and other
and cost of license fees for the three and six month periods ended August 31,
2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three months ended August 31, Six months ended August 31,
2000 Change 1999 2000 Change 1999
--------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Amortization of capitalized software
development costs $ 1,917 0.3% $ 1,911 $ 4,407 18.1% $ 3,732
Percentage of license fees 6.7% 17.8% 8.1% 15.7%
Cost of goods and other 2,419 111.8% 1,142 5,186 138.1% 2,178
Percentage of license fees 8.5% 10.6% 9.5% 9.1%
-------- -------- -------- -------- --------
Cost of license fees $ 4,336 42.0% $ 3,053 $ 9,593 62.3% $ 5,910
Percentage of license fees 15.2% 28.4% 17.6% 24.8%
</TABLE>
Cost of license fees increased for the three and six months ended August
31, 2000 compared to the comparable periods in 1999, primarily due to an
increase in amortization for the six month period of previously capitalized
software development costs and increases in the amount of royalties paid to
third parties as a result of the particular mix of products licensed in the
periods.
Cost of consulting, solution support and other services. Cost of
consulting, solution support and other services increased for the three and six
months ended August 31, 2000 compared to the comparable periods in 1999,
primarily due to an increase in the number of consultants.
Sales and marketing. Sales and marketing expenses consist primarily of
personnel costs, commissions, promotional events and advertising. Sales and
marketing expenses increased for the three and six months ended August 31, 2000
compared to the comparable periods in 1999, primarily due to increased sales and
marketing headcount, increase in marketing expenditures and increased
commissions due to increased software license fees.
Product development. We record product development expenses net of
capitalized software development costs for products that have reached
technological feasibility in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." The following table sets forth product
development costs for the three and six month periods ended August 31, 2000 and
1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three months ended August 31, Six months ended August 31,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Gross product development costs $ 10,861 28.0% $ 8,482 $ 20,746 21.9% $ 17,014
Percentage of total revenues 18.7% 25.1% 19.1% 23.3%
Less: Capitalized product development costs $ 2,416 138.0% $ 1,015 4,531 77.5% 2,553
Percentage of gross product development costs 22.2% 12.0% 21.8% 15.0%
-------- -------- -------- --------
Product development costs $ 8,445 13.1% $ 7,467 $ 16,215 12.1% $ 14,461
Percentage of total revenues 14.5% 22.1% 14.9% 19.8%
</TABLE>
Gross and net product development costs increased for the three and six
month periods ended August 31, 2000 compared to the comparable periods in 1999
primarily due to the increase of product development headcount during the second
half of fiscal year 2000 and the first quarter of fiscal year 2001.
General and administrative. General and administrative expenses consist
primarily of personnel costs, infrastructure expenses and the fees and expenses
associated with legal, accounting and other functions. General and
administrative expenses increased for the three and six month periods ended
August 31, 2000, compared to the comparable periods in 1999, primarily due to
the increase in headcount during the second half of fiscal year 2000 and the
first quarter of fiscal year 2001.
11
<PAGE> 12
Restructuring costs. In connection with the corporate-wide restructuring
plan instituted during fiscal 1999, we reduced previously recorded restructuring
charges by approximately $764,000 and $682,000, respectively, for the three and
six month periods ended August 31, 1999. The adjustments primarily relate to the
sub-lease of property that management had believed, at the time of the
restructuring, would not be sublet, and which adjustments were partially offset
by increases in the accrual for severance costs and impairment of long- lived
assets.
OTHER INCOME - NET:
The following table sets forth other income for the three and six month
periods ended August 31, 2000 and 1999 (amounts in thousands):
<TABLE>
<CAPTION>
Three months ended August 31, Six months ended August 31,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Other income $ 432 (16.4%) $ 517 $ 715 (18.2%) $ 874
Percentage of total revenues 0.7% 1.5% 0.7% 1.2%
</TABLE>
Other income includes interest income from short-term investments,
interest expense from borrowings, foreign currency exchange gains or losses and
other gains or losses. Other income decreased for the three and six months ended
August 31, 2000 compared to the comparable periods in 1999 primarily due to
decreased interest earned as a result of our investment balances being reduced
to fund operating and investing activities during the second half of fiscal year
2000 and the first quarter of fiscal year 2001.
PROVISION (BENEFIT) FOR INCOME TAXES:
The following table sets forth income tax provisions (benefits) for the
three and six month periods ended August 31, 2000 and 1999 (amounts in
thousands):
<TABLE>
<CAPTION>
Three months ended August 31, Six months ended August 31,
2000 Change 1999 2000 Change 1999
---- ------ ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Income tax provision (benefit) $ 697 N/M $ (503) $ (36) 94.7% $ (673)
Percentage of income (loss)
before income taxes (3.67%) 12.8% 0.2% 18.1%
</TABLE>
The income tax provisions (benefits) for the three and six months ended
August 31, 2000 were $697,000 and $(36,000), respectively.
NET LOSS AND NET LOSS PER SHARE:
The following table sets forth net loss for the three and six month
periods ended August 31, 2000 and 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
August 31, August 31,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $(19,684) $ (3,435) $(20,835) $ (3,046)
Basic loss per share $ (0.69) $ (0.13) $ (0.73) $ (0.11)
Diluted loss per share $ (0.69) $ (0.13) $ (0.73) $ (0.11)
Shares used in basic computation 28,649 27,291 28,541 27,151
======== ======== ======== ========
Shares used in diluted computation 28,649 27,291 28,541 27,151
======== ======== ======== ========
</TABLE>
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES:
The following table sets forth liquidity and capital resources as of
August 31, 2000 and February 28, 2000 (dollar amounts in thousands):
<TABLE>
<CAPTION>
As of As of
August 31, 2000 Change February 29, 2000
--------------- ------ ------------------
<S> <C> <C> <C>
Working capital $ 40,098 8.9% $ 36,831
</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, through short-term borrowings under a revolving credit
facility. The increase in working capital at August 31, 2000 as compared to
February 29, 2000 primarily resulted from an increase in the accounts receivable
balance.
Operating activities used cash of approximately $11.4 million for the six
months ended August 31, 2000. Operating cash flows decreased for the period
primarily because the net loss for the period and the net changes in the
accounts receivable and restructuring accrual balances were only partially
offset by the change in non-cash operating items, such as the non-cash stock
compensation and depreciation and amortization.
Investing activities used cash of $3.9 million for the six months ended
August 31, 2000, primarily consisting of investments and purchases of marketable
securities, the capitalization of software development costs and the purchase of
fixed assets and software licenses.
Financing activities provided cash of approximately $5.3 million for the
six months ended August 31, 2000, primarily consisting of proceeds from the
exercise of employee stock options and purchases of our common stock through our
employee stock purchase plan.
We believe that our allowance for doubtful accounts as of August 31, 2000
is adequate to cover any forseeable difficulties with the collection of our
accounts receivable balance. However, a significant portion of our accounts
receivable are a result of the sales of large software licenses. Therefore,
there can be no assurance that the allowance will be adequate to cover any
receivables that are later deemed to be uncollectible.
We have a one-year committed unsecured revolving credit facility with a
commercial bank. The current agreement will expire in September of 2001. Under
its terms, we may request cash advances, letters of credit or both in an
aggregate amount of up to $20 million. We 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.) As of August 31, 2000,
$6.0 million was outstanding under the revolving credit facility. In September
2000, we repaid all of the $6.0 million outstanding on the revolving credit
facility.
On October 10, 2000, the Company announced its intention to issue up to
$200,000,000 aggregate principal amount of convertible subordinated notes
through a private placement offering with an option to issue up to an
additional $50,000,000 of the notes. The Company has commenced the offering and
anticipates that the terms of the Notes will be set and the offering will close
in the near future.
We believe that our existing cash balances and marketable securities,
funds generated from operations and amounts available under our revolving credit
facility will be sufficient to meet our anticipated liquidity and working
capital requirements for the near future. In the event that the pending Note
offering is completed we will be able to meet our anticipated liquidity and
working capital requirements for the forseeable future. In light of our
operating results for fiscal 2000 and the first six months of fiscal 2001, the
cost of any additional funds that we could obtain might be greater than the cost
of funds available to us under the Notes or our existing revolving credit
facility. In the event that we require additional financing and are unable to
obtain it on terms satisfactory to us, our liquidity, results of operations and
financial condition may be materially adversely affected. We believe that
inflation did not have a material effect on our results of operations in the
three and six month periods ended August 31, 2000.
Certain information regarding commitments and contingencies, including
pending litigation, which may have an adverse impact on our liquidity and
financial condition is set forth below under "Factors That May Affect Future
Results" and under "Legal Proceedings" in Part II of this Quarterly Report
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Quarterly Report on Form
10-Q, the following factors and those previously reported should be considered
in evaluating us and our business. Our operating results have varied in the past
and might vary significantly in the future because of factors such as domestic
and international business conditions, the timely availability and acceptance of
our products, technological change, the effect of competitive products and
pricing, the effects of marketing pronouncements by competitors or potential
competitors, changes in our strategy, the mix of direct and indirect sales, the
effectiveness of our sales and marketing organization, changes in operating
expenses, personnel changes and foreign currency exchange rate fluctuations.
Furthermore, clients may defer or cancel their purchases of our products if they
experience a downturn in their business
13
<PAGE> 14
or if there is a downturn in the general economy. For a more thorough discussion
of these and other factors that may affect our business and future results, see
the discussion under the caption "Factors That May Affect Future Results" in our
Annual Report on Form 10-K filed for the year ended February 29, 2000.
WE HAVE RECENTLY RESTRUCTURED OUR BUSINESS AND, AS A RESULT, YOU MAY HAVE
DIFFICULTY EVALUATING OUR PROSPECTS BASED ON OUR PAST OPERATING RESULTS.
We experienced operational difficulties in fiscal 1999 and the first half
of fiscal 2000. Problems with our direct sales operation and intense
competition, among other factors, contributed to net losses of $96.1 million in
fiscal 1999 and $8.9 million in fiscal 2000. We have also reported net losses of
$20.8 million for the first half of fiscal 2001. In response to our problems, we
hired a new executive management team, enhanced our supply chain optimization
and eBusiness products and services and improved our direct sales organization.
Our ability to continue to achieve operational improvements and improve our
financial performance will be subject to a number of risks and uncertainties,
including the following:
- slower growth in the market for supply chain and eBusiness software;
- our ability to introduce new software products and services to respond to
technological and client needs;
- our ability to manage our anticipated growth;
- our ability to hire, integrate and deploy our direct sales force effectively;
- our ability to expand our distribution capability through indirect sales
channels;
- our ability to respond to competitive developments and pricing; and
- our dependence on our current executive officers and key employees.
If we fail to successfully address these risks and uncertainties, our business
could be harmed and we could continue to incur significant losses.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES. IF WE DO NOT ACHIEVE OR
MAINTAIN PROFITABILITY IN THE FUTURE, OUR STOCK PRICE MAY DECLINE.
We have recently incurred significant losses, including net losses of
$20.8 million for the first half of fiscal 2001, $8.9 million in fiscal 2000 and
$96.1 million in fiscal 1999. We cannot assure you that our revenues will grow
or that we will achieve or maintain profitability in the future. Our ability to
increase revenues and achieve profitability will be affected by the other risks
and uncertainties described in this section. Our failure to achieve
profitability could cause our stock price to decline, and our ability to finance
our operations could be impaired.
OUR OPERATING RESULTS FLUCTUATE, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS IN ANY PERIOD, OUR STOCK PRICE COULD DECLINE
SIGNIFICANTLY.
Our revenues and operating results are difficult to predict, and we
believe that period-to-period comparisons of our operating results will not
necessarily be meaningful or indicative of future performance. The factors that
may cause fluctuations of our quarterly operating results include the following:
- the size, timing and contractual terms of sales of our products and services;
- the potentially long and unpredictable sales cycle for our products;
- technical difficulties in our software that could delay the introduction of
new products or increase their costs;
- introductions of new products or new versions of existing products by us or
our competitors;
- changes in prices or the pricing models for our products and services or those
of our competitors;
- changes in the mix of our software license revenues, consulting revenues and
solution support revenues; and
- changes in the mix of sales channels through which our products and services
are sold.
Due to fluctuations from quarter to quarter, our operating results may not meet
the expectations of securities analysts or investors. If this occurs, the price
of our common stock could decline significantly.
VARIATIONS IN THE TIME IT TAKES US TO SELL OUR SOLUTIONS MAY CAUSE FLUCTUATIONS
IN OUR OPERATING RESULTS.
The time it takes to sell our solutions to prospective clients varies
substantially, but typically ranges between six and twelve months. Variations in
the length of our sales cycles could cause our revenues to fluctuate widely from
period to period. Because we typically recognize a substantial portion of our
license revenues in the last month of a quarter, any delay in the sale of our
products could cause significant variations in our revenues from quarter to
quarter. Furthermore, because our operating expenses are relatively fixed over
the short term and we devote significant time and resources to prospective
clients, these fluctuations could cause our operating results to suffer in some
future periods. The length of our sales cycle depends on a number of factors,
including the following:
- the breadth of the solution required by the client, including the technical,
organizational and geographic scope of the license;
14
<PAGE> 15
- the evaluation and approval process employed by the client;
- the sales channel through which the solution is sold; and
- any other delays arising from factors beyond our control.
THE SIZE AND SCOPE OF OUR CONTRACTS WITH CLIENTS ARE INCREASING, WHICH MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS.
Our clients and prospective clients are seeking to solve increasingly
complex supply chain and eBusiness problems. Further, we are now focusing on
providing total solutions to our clients, as opposed to only licensing software.
As the size and scope of our contracts with clients increase, our operating
results could fluctuate due to the following factors:
- contractual terms may vary widely, which is likely to result in differing
methods of accounting for revenue from each contract;
- losses of, or delays in, larger contracts could have a proportionately greater
effect on our revenues for a particular period; and
- the sales cycle related to larger contracts is likely to be longer and subject
to greater delays.
Any of these factors could cause our revenues to decline or fluctuate
significantly in any quarter and could cause a decline in our stock price.
WE HAVE EXPERIENCED DIFFICULTIES INTEGRATING ACQUISITIONS IN THE PAST AND MAY
EXPERIENCE PROBLEMS WITH FUTURE ACQUISITIONS THAT COULD MATERIALLY HARM OUR
BUSINESS.
Acquisitions involve the integration of companies that have previously
operated independently. In connection with any acquisition, there can be no
assurance that we will:
- effectively integrate employees, operations, products and systems;
- realize the expected benefits of the transaction;
- retain key employees;
- retain and develop key technologies and proprietary know-how;
- avoid conflicts with our clients that are competitors or clients of the
acquired company;
- avoid unanticipated operational difficulties or expenditures; and
- effectively operate our existing business lines, given the significant
diversion of resources and management attention to acquisitions.
In 1998, we experienced difficulties with the integration of the products and
operations of ProMIRA Software, Inc. (ProMIRA), which we acquired in February
1998, and TYECIN Systems, Inc. (TYECIN), which we acquired in June 1998. These
difficulties included problems integrating the prior ProMIRA sales forces and
the delayed releases of the in-process technology acquired as part of the
transaction. In addition, as a result of the poor financial performance we
experienced in fiscal 1999, the technology acquired in conjunction with the
TYECIN acquisition was not integrated into our solutions and, therefore,
revenues generated from this technology have been nominal. Difficulties like
those experienced with ProMIRA and TYECIN and as outlined above could materially
and adversely affect our business, results of operations and financial
condition.
WE MAY ENCOUNTER PROBLEMS EFFECTIVELY INTEGRATING TALUS SOLUTIONS IF THE
ACQUISITION IS COMPLETED, OR WE MAY FAIL TO COMPLETE OUR ACQUISITION OF TALUS
SOLUTIONS.
On September 21, 2000, we signed an agreement to acquire Talus Solutions,
a privately-held company that provides pricing and revenue optimization products
and services. This acquisition is substantially larger than all of our prior
acquisitions, not all of which have been successful. In addition to the risks
described above in connection with acquisitions generally, the ultimate success
of our acquisition of Talus Solutions is dependent on the following factors:
- our ability to complete the commercial release of Talus
Solutions'custom-developed solutions;
- our ability to protect and maintain Talus Solutions' intellectual property
rights;
- our ability to successfully market the products Talus Solutions has developed
and is developing for commercial release;
- our ability to successfully integrate Talus Solutions' technologies;
- our ability to retain and incentivize Talus Solutions' employees;
- market acceptance of the products Talus Solutions has commercially released to
date;
- our ability to fulfill our strategic plan for the acquisition of Talus
Solutions by integrating our supply chain and eBusiness capabilities and
products with Talus Solutions' pricing and revenue optimization products and
services;
- market acceptance of our combined supply chain, eBusiness and pricing and
revenue optimization products;
- our ability, together with Talus Solutions, to cross-sell products and
services into our respective markets; and
- the outcome of current disputes and litigation arising in the ordinary course
of business.
We have not yet completed our acquisition of Talus Solutions. The closing of the
transaction is subject to a number of conditions and the shares of our common
stock to be issued must be registered under the Securities Act of 1933. If we do
not close the transaction, we will:
15
<PAGE> 16
- be required to pay a termination fee of approximately $9.2 million under
certain circumstances;
- lose the potential strategic and other benefits of the transaction, including
access to Talus Solutions' products and clients;
- suffer potential adverse publicity and negative perceptions by analysts and
investors;
- fail to realize any benefits from the significant allocation of resources and
management attention and significant expenses incurred in connection with the
acquisition; and
- suffer from diminished expectations of our ability to grow our business, which
could adversely affect our stock price.
A failure to complete the acquisition of Talus Solutions in a timely manner or
at all could therefore have a material adverse effect on our business, results
of operations and financial condition.
OUR ACQUISITION OF TALUS SOLUTIONS WILL ADVERSELY AFFECT OUR COMBINED FINANCIAL
RESULTS.
We will incur substantial dilution to our earnings per share in
accordance with generally accepted accounting principles for the foreseeable
future as a result of the Talus Solutions acquisition. In connection with the
acquisition, we will amortize approximately $23.8 million of deferred
compensation over three years. Further, we will incur an annual amortization
charge of approximately $91.5 million related to goodwill and intangible assets
over the next four years.
WE DEPEND ON SALES OF OUR SUPPLY CHAIN OPTIMIZATION AND EBUSINESS SOLUTIONS, AND
OUR BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED IF THE MARKET FOR THESE
PRODUCTS DOES NOT CONTINUE TO GROW.
Substantially all of our software license fees, consulting revenues and
solution support revenues have arisen from, or are related directly to, our
supply chain optimization and eBusiness solutions. We expect to continue to be
dependent upon these products in the future, and any factor adversely affecting
the products or the market for supply chain and eBusiness solutions, in general,
would materially and adversely affect our ability to generate revenues. While we
believe the market for supply chain and eBusiness solutions will continue to
expand, it may grow more slowly than in the past. If the market for our products
does not grow as rapidly as we expect, revenue growth, operating margins or both
could be adversely affected.
OUR MARKET IS EXTREMELY COMPETITIVE, AND WE MAY NOT BE ABLE TO EFFECTIVELY
COMPETE.
The market for our solutions is intensely competitive. The intensity of
competition in our market has significantly increased and is expected to
increase in the future, particularly in the eBusiness software applications
market. Our current and potential competitors may make acquisitions of other
competitors and may establish cooperative relationships among themselves or with
third parties. Further, our current or prospective clients and partners may
become competitors in the future. Increased competition is likely to result in
price reductions, lower gross margins, longer sales cycles and the loss of
market share. Each of these developments could materially and adversely affect
our growth and operating performance.
MANY OF OUR COMPETITORS HAVE SIGNIFICANTLY MORE RESOURCES THAN WE DO AND
THEREFORE WE MAY BE AT A DISADVANTAGE IN ATTEMPTING TO COMPETE WITH THEM.
We directly compete with other application software vendors including:
Adexa, Inc., Aspen Technology, Inc., The Descartes Systems Group Inc., i2
Technologies, Inc., Logility, Inc. and SynQuest, Inc. Some eBusiness software
companies that do not currently offer competitive products or solutions, such as
Ariba, Inc. and Commerce One, may begin to compete directly with us. In
addition, some enterprise resource planning (ERP) companies such as Invensys plc
(which acquired Baan Company N.V.), J.D. Edwards & Company, Oracle Corporation,
PeopleSoft, Inc., and SAP AG have acquired or developed supply chain planning
software products. Some of our current and potential competitors, particularly
the ERP vendors, have significantly greater financial, marketing, technical and
other competitive resources than us, as well as greater name recognition and a
larger installed base of clients. In addition, many of our competitors
havewell-established relationships with our current and potential clients and
have extensive knowledge of our industry. As a result, they may be able to adapt
more quickly to new or emerging technologies and changes in client requirements
or to devote greater resources to the development, promotion and sale of their
products than we can. Any of these factors could materially impair our ability
to compete and adversely affect our revenue growth and operating performance.
IF WE FAIL TO DEVELOP NEW PRODUCTS AND SERVICES IN THE FACE OF OUR INDUSTRY'S
RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE MATERIALLY AND ADVERSELY
AFFECTED.
The market for supply chain optimization and eBusiness solutions is
subject to rapid technological change, changing client needs, frequent new
product introductions and evolving industry standards that may render existing
products and services obsolete. Our growth and future operating results will
depend, in part, upon our ability to enhance existing applications and develop
and introduce new applications or components that:
16
<PAGE> 17
- meet or exceed technological advances in the marketplace;
- meet changing client requirements;
- comply with changing industry standards;
- achieve market acceptance;
- integrate third-party software effectively; and
- respond to competitive products.
Our product development and testing efforts have required, and are expected to
continue to require, substantial investment. We may not possess sufficient
resources to continue to make the necessary investments in technology. In
addition, we may not successfully identify new software opportunities or develop
and bring new software to market in a timely and efficient manner. If we are
unable, for technological or other reasons, to develop and introduce new and
enhanced software in a timely manner, we may lose existing clients and fail to
attract new clients, which would result in a decline in revenues.
SOFTWARE DEFECTS OR PROBLEMS IN THE IMPLEMENTATION OF SOFTWARE COULD LEAD TO
CLAIMS FOR DAMAGES BY OUR CLIENTS, LOSS OF REVENUES OR DELAYS IN THE MARKET
ACCEPTANCE OF OUR PRODUCTS.
Our software products are complex and are frequently integrated with a
wide variety of third-party software. We may sell products that contain
undetected errors or failures when new products are first introduced or as new
versions are released. We may also be unable to meet client expectations in
implementing our solutions. These problems may result in claims for damages
suffered by our clients or a loss of, or delays in, the market acceptance of our
products. In the past, we have discovered software errors in our new releases
and new products after their introduction. In the event that we experience
significant software errors in future releases, we could experience claims for
damages, delays in product releases, client dissatisfaction and potentially lost
revenues during the period required to correct these errors. In the future, we
may discover errors or limitations in new releases or new products after the
commencement of commercial shipments. Any of these errors or defects could
materially harm our business.
WE ARE DEPENDENT ON THIRD-PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS AND
SOLUTIONS, AND IMPAIRED RELATIONS WITH THESE THIRD PARTIES, ERRORS IN
THIRD-PARTY SOFTWARE OR INABILITY TO ENHANCE THE SOFTWARE OVER TIME COULD HARM
OUR BUSINESS.
We incorporate third-party software into our products and solutions. We
are likely to incorporate additional third-party software into our products and
solutions as we expand our product offerings. The operation of our products
would be impaired if errors occur in the third-party software that we license.
It may be more difficult for us to correct any errors in third-party software
because the software is not within our control. Accordingly, our business could
be adversely affected in the event of any errors in this software. There can be
no assurance that these third parties will continue to invest the appropriate
levels of resources in their products and services to maintain and enhance the
software capabilities. Furthermore, it may be difficult for us to replace any
third-party software if a vendor seeks to terminate our license to the software.
Any impairment in our relationship with these third parties could adversely
impact our business and financial condition.
WE ARE SUBSTANTIALLY DEPENDENT ON THIRD PARTIES TO INTEGRATE OUR SOFTWARE WITH
OTHER SOFTWARE PRODUCTS AND PLATFORMS.
We depend on companies such as Extricity, Inc. and Vignette Corporation
to integrate our software with software and platforms developed by third
parties. If these companies are unable to develop or maintain software that
effectively integrates our software and is free from errors, our ability to
license our products and provide solutions could be impaired. Further, we rely
on these companies to maintain relationships with the companies that provide the
external software that is vital to the functioning of our products and
solutions. The loss of any company that we use to integrate our software
products could adversely affect our business, results of operations and
financial condition.
OUR EFFORTS TO DEVELOP RELATIONSHIPS WITH VENDORS SUCH AS SOFTWARE
COMPANIES,CONSULTING FIRMS, RESELLERS AND OTHERS TO IMPLEMENT AND PROMOTE OUR
SOFTWARE PRODUCTS MAY FAIL.
We are developing and maintaining significant working relationships with
complementary vendors, such as software companies, consulting firms, resellers
and others that we believe can play an important role in marketing our products.
We are currently investing, and intend to continue to invest, significant
resources to develop these relationships, which could adversely affect our
operating margins. We may be unable to develop relationships with organizations
that will be able to market our products effectively. Our arrangements with
these organizations are not exclusive and, in many cases, may be terminated by
either party without cause. Many of the organizations with whom we are
developing or maintaining marketing relationships are also involved with
competing products. Therefore, there can be no assurance that any organization
will continue its involvement with us and our products. The loss of
relationships with important organizations could materially and adversely affect
our results of operations.
17
<PAGE> 18
WE HAVE LIMITED EXPERIENCE WITH GOVERNMENT CONTRACTS, WHICH OFTEN INVOLVE LONG
PURCHASE CYCLES AND COMPETITIVE PROCUREMENT PROCESSES.
We have recently begun providing our solutions to government agencies and
expect that a significant portion of our future revenues may be derived from
government agency clients. Obtaining government contracts may involve long
purchase cycles, competitive bidding, qualification requirements, performance
bond requirements, delays in funding, budgetary constraints and extensive
specification development and price negotiations. Each government agency
maintains its own rules and regulations with which we must comply and which can
vary significantly among agencies. Government agencies also often retain a
significant portion of fees payable upon completion of a project and collection
of such fees may be delayed for several months. Accordingly, our revenues could
decline as a result of these government procurement processes. In addition, our
government contracts are fixed price contracts which may prevent us from
recovering costs incurred in excess of our budgeted costs. Fixed price contracts
may require us to estimate the total project cost based on preliminary
projections of the project's requirements. The financial viability of any given
project depends in large part on our ability to estimate such costs accurately
and complete the project on a timely basis. In the event our actual costs exceed
the fixed contract cost, we will not be able to recover the excess costs. If we
fail to properly anticipate costs on fixed price contracts, our profit margins
will decrease. Some government contracts are also subject to termination or
renegotiation at the convenience of the government, which could result in a
large decline in revenue in any given quarter. Multi-year contracts are
contingent on overall budget approval by Congress and may be terminated due to
lack of funds.
INCREASED SALES THROUGH INDIRECT CHANNELS MAY ADVERSELY AFFECT OUR OPERATING
PERFORMANCE.
Even if our marketing efforts through indirect channels are successful
and result in increased sales, our average selling prices and operating margins
would be adversely affected because of the lower unit prices that we receive
when selling through indirect channels.
IF WE FAIL TO EFFECTIVELY EXPAND OUR SALES ORGANIZATION, OUR GROWTH WILL BE
LIMITED.
Our continuing efforts to expand our sales organization will require
significant resources. New sales personnel will require training and may take a
long time to achieve full productivity. Further, the competition for qualified
sales personnel is intense, and there is no assurance that we can attract and
retain sales people at levels sufficient to support our growth. Any failure to
adequately sell and support our products could limit our growth and adversely
affect our results of operations and financial condition.
THE LIMITED ABILITY OF LEGAL PROTECTIONS TO SAFEGUARD OUR INTELLECTUAL PROPERTY
RIGHTS COULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of confidentiality procedures, contractual provisions, patent,
copyright, trademark and trade secret laws. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products or
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult and, although we are unable to determine the
extent to which piracy of our software products exists, we expect software
piracy to be a problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as the laws of the United
States. Furthermore, our competitors may independently develop technology
similar to ours.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO INCUR UNEXPECTED COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.
The number of intellectual property claims in our industry may increase
as the number of competing products grows and the functionality of products in
different industry segments overlaps. In recent years, there has been a tendency
by software companies to file substantially increasing numbers of patent
applications. We have no way of knowing what patent applications third parties
have filed until a patent is issued. It can take as long as three years for a
patent to be granted after an application has been filed. Although we are not
aware that any of our products infringe upon the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to current or future products. Any of these
claims, with or without merit, could be time-consuming to address, result in
costly litigation, cause product shipment delays or require us to enter into
royalty or license agreements. These royalty or license agreements might not be
available on terms acceptable to us or at all, which could materially
andadversely affect our business.
OUR INTERNATIONAL OPERATIONS POSE RISKS FOR OUR BUSINESS AND FINANCIAL
CONDITION.
18
<PAGE> 19
We currently conduct operations in a number of countries around the
world. These operations require significant management attention and financial
resources and subject us to risks inherent in doing business internationally,
such as:
- regulatory requirements;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- different accounting practices;
- problems in collecting accounts receivable;
- legal uncertainty regarding liability, ownership and protection of
intellectual property;
- tariffs and other trade barriers;
- seasonal reductions in business activities;
- potentially adverse tax consequences; and
- political instability.
Any of the above factors could adversely affect the success of our international
operations. One or more of these factors could have a material adverse effect on
our business and operating results.
FLUCTUATIONS IN FOREIGN CURRENCIES COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Although the majority of our contracts are denominated in U.S. dollars,
most of the revenues from sales outside the United States have been denominated
in foreign currencies, typically the local currency of our selling business
unit. We anticipate that the proportion of our 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 fluctuations.
With respect to our international sales that are U.S. dollar-denominated, an
increase in the value of the U.S. dollar relative to the value of foreign
currencies could make our products and services less competitive with respect to
price.
IF WE LOSE OUR KEY PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER.
Our success depends significantly on the continued service of our
executive officers. We do not have fixed-term employment agreements with any of
our executive officers, and we do not maintain key person life insurance on our
executive officers. The loss of services of any of our officers for any reason
could have a material adverse effect on our business, operating results,
financial condition and cash flows.
THE FAILURE TO HIRE AND RETAIN QUALIFIED PERSONNEL WOULD HARM OUR BUSINESS.
We believe that our success also will depend significantly on our ability
to attract, integrate, motivate and retain additional highly skilled technical,
managerial, sales, marketing and services personnel. Competition for skilled
personnel is intense, and there can be no assurance that we will be successful
in attracting, motivating and retaining the personnel required to grow and
operate profitably. In addition, the cost of hiring and retaining skilled
employees is high, and this reduces our profitability. Failure to attract and
retain highly skilled personnel could materially and adversely affect our
business. An important component of our employee compensation is stock options.
A decline in our stock price could adversely affect our ability to attract and
retain employees, as it has in the past.
WE RECENTLY HIRED OUR SENIOR MANAGEMENT TEAM AND THERE IS NO ASSURANCE THEY WILL
WORK TOGETHER EFFECTIVELY.
We significantly changed our senior management team during fiscal 2000.
As a result, our senior management team has worked together at Manugistics for
less than 18 months. Gregory J. Owens, our Chief Executive Officer, joined us in
April 1999. With one exception, all of our other present executive officers
joined us after Mr. Owens. Our success depends on the ability of our management
team to work together effectively. Our business, revenues and financial
condition will be materially and adversely affected if our senior management
team does not manage our company effectively or if we are unable to retain our
senior management.
EXPENSES ARISING FROM OUR STOCK OPTION REPRICING MAY HAVE A MATERIAL ADVERSE
IMPACT ON FUTURE FINANCIAL PERFORMANCE.
19
<PAGE> 20
In response to the poor performance of our stock price between May 1998
and January 1999, we offered to reprice employee stock options, other than those
held by our executive officers or directors, effective January 29, 1999, to
bolster employee retention. The effect of this repricing resulted in options to
acquire approximately 1,520,000 shares being repriced and the four-year vesting
period starting over. The recently adopted FASB Interpretation No. 44 of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," requires us to record compensation expense associated with the
change in the price of these options. In September 2000, we announced that the
increase in our common stock market price since the FASB-mandated measurement
date of July 1, 2000 resulted in a non-cash stock compensation expense of $20.7
million being recorded for the six months ended August 31, 2000. This non-cash
stock compensation expense caused what would otherwise have been reported as a
net loss for the six months of $124,000, or $0.00 per basic and diluted share,
to be reported as a net loss of $20.8 million, or $0.73 per basic and diluted
share. In each future quarter, we will record the additional expense or benefit
related to the repriced stock options still outstanding based on the change in
our common stock price as compared to the measurement date. As a result, the
repricing may continue to have a material adverse impact on reported financial
results and could therefore negatively affect our stock price.
WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS, AND OUR COMPANY'S AND
PRODUCTS' REPUTATIONS MAY SUFFER.
Many of our implementations involve projects that are critical to the
operations of our clients' businesses and provide benefits that may be difficult
to quantify. Any failure in a client's system could result in a claim for
substantial damages against us, regardless of our responsibility for the
failure.We have entered into and plan to continue to enter into agreements with
software vendors, consulting firms, resellers and others whereby they market our
solutions. If these vendors fail to meet their clients' expectations or cause
failures in their clients' systems, the reputation of our company and products
could be materially and adversely affected even if our software products perform
in accordance with their functional specifications.
LACK OF GROWTH OR DECLINE IN INTERNET USAGE OR EBUSINESS COULD BE DETRIMENTAL TO
OUR FUTURE OPERATING RESULTS.
The growth of the Internet has increased demand for supply chain
optimization and eBusiness solutions, as well as created markets for new and
enhanced product offerings. Therefore, our future sales and profits are
substantially dependent upon the Internet as a viable commercial marketplace.
The Internet may not succeed in becoming a viable marketplace for a number of
reasons, including:
- potentially inadequate development of network infrastructure or delayed
development of enabling technologies and performance improvements;
- delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity;
- concerns that may develop among businesses and consumers about accessibility,
security, reliability, cost, ease of use and quality of service;
- increased taxation and governmental regulation; or
- changes in, or insufficient availability of, communications services to
support the Internet, resulting in slower Internet user response times.
The occurrence of any of these factors could require us to modify our technology
and our business strategy. Any such modifications could require us to expend
significant amounts of resources. In the event that the Internet does not become
and remain a viable commercial marketplace, our business, financial condition
and results of operations could be materially and adversely affected.
NEW LAWS OR REGULATIONS AFFECTING THE INTERNET, EBUSINESS OR COMMERCE IN GENERAL
COULD REDUCE OUR REVENUES AND ADVERSELY AFFECT OUR GROWTH.
Congress and other domestic and foreign governmental authorities have
adopted and are considering legislation affecting the use of the Internet,
including laws relating to the use of the Internet for commerce and
distribution. The adoption or interpretation of laws regulating the Internet, or
of existing laws governing such things as consumer protection, libel, property
rights and personal privacy, could hamper the growth of the Internet and its use
as a communications and commercial medium. If this occurs, companies may decide
not to use our products or services, and our business and operating results
could suffer.
THE VIABILITY OF ELECTRONIC EXCHANGES IS UNCERTAIN.
Electronic exchanges that allow collaboration over the Internet among
trading partners are relatively new and unproven. There can be no assurance that
trading partners will adopt exchanges as a method of doing business. Trading
partners may fail to participate in exchanges for a variety of reasons,
including:
- concerns about the confidentiality of information provided electronically to
exchanges;
- the inability of technological advances to keep pace with the volume of
information processed by exchanges; and
20
<PAGE> 21
- regulatory issues, including antitrust issues, that may arise when trading
partners collaborate through exchanges.
Any of these factors could limit the growth of exchanges as an accepted means of
commerce. Slower growth or the abandonment of the exchange concept in one or
more industries could have a material adverse affect on our results of
operations and financial condition.
OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION; WE MAY INCUR
SUBSTANTIALLY MORE DEBT.
If we complete the Note offering, we will have approximately $250.0 million of
indebtedness outstanding. Our indebtedness could have important consequences to
you. For example, it could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain additional financing;
- require the dedication of a substantial portion of our cash flow from
operations to the payment of principal of,and interest on, our
indebtedness,thereby reducing the availability of such cash flow to fund our
growth strategy,working capital,capital expenditures and other general corporate
purposes;
-,limit our flexibility in planning for,or reacting to,changes in our business
and the industry;and
- place us at a competitive disadvantage relative to our competitors with less
debt.
We may incur substantial additional debt in the future. The terms of our credit
facility do not, and the terms of these Notes will not, fully prohibit us from
doing so. If new debt is added to our current levels,the related risks described
above could intensify.
WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS.
If we complete the Note offering, we will be required to generate cash
sufficient to pay all amounts due on the Notes and to conduct our business
operations. We have net losses, and we may not be able to cover our anticipated
debt service obligations. This may materially hinder our ability to make
payments on the Notes. Our ability to meet our future debt service obligations
will be dependent upon our future performance, which will be subject to
financial, business and other factors affecting our operations, many of which
are beyond our control.
SALES OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK TO BE ISSUED IN CONNECTION WITH
THE PROPOSED ACQUISITION OF TALUS SOLUTIONS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
We may issue up to 5,000,000 new shares of our common stock in connection with
the Talus Solutions acquisition. Upon closing of the acquisition and
effectiveness of certain registration statements, which we have agreed to file
by October 31, 2000, up to approximately 900,000 of these shares will be freely
tradable. Additionally, approximately 3,500,000 of the shares to be issued in
connection with the acquisition, which are subject to transfer restrictions,
will become available for sale in stages with respect to various amounts of
shares beginning on the earlier of:
- March 31,2001;or
- 90 days after the completion of any public offering of shares of our common
stock or securities convertible into our common stock,in which the gross
proceeds we receive exceed $25.0 million.
These transfer restrictions expire as to all shares on October 31,2001. If Talus
Solutions' stockholders sell significant amounts of our common stock received in
the acquisition, our stock price may decline.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE
A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
Our charter and our bylaws, in conjunction with Delaware law, contain
provisions that could make it more difficult for a third party to obtain control
of us even if doing so would be beneficial to stockholders. For example, our
bylaws provide for a classified board of directors and allow our board of
directors to expand its size and fill any vacancies without stockholder
approval. In addition, our bylaws require a two-thirds vote of stockholders to
remove a director from office. Furthermore, our board has the authority to issue
preferred stock and to designate the voting rights, dividend rate and privileges
of the preferred stock all of which may be greater than the rights of common
stockholders.
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE.
21
<PAGE> 22
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the supply chain and eBusiness software industry;
- changes in the economic performance and/or market valuations of other supply
chain and eBusiness companies and the software industry in general;
- our announcement of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
- adoption of industry standards and the inclusion of our technology in, or
compatibility of our technology with, such standards;
- adverse or unfavorable publicity regarding us or our products;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors that may be beyond our control.
In addition, the stock markets in general, The Nasdaq National Market and the
market for software companies in particular, have experienced extreme price and
volume volatility and a significant cumulative decline in recent months. Such
volatility and decline have affected many companies irrespective of or
disproportionately to the operating performance of these companies. These broad
market and industry factors may materially and adversely further affect the
market price of our common stock, regardless of our actual operating
performance.
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, we 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, employee recruiting and retention efforts 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, we note that a variety of factors could cause our actual results and
experience to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements in this Quarterly
Report or elsewhere. The risks and uncertainties that may affect our business,
operating results or financial condition include those set forth above under
"Factors That May Affect Future Results" and the following:
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
our ability to hire and thereafter to train, integrate and deploy our 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 our customers and
prospects, alliance partners 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.
We believe that the market for supply chain planning software solutions
and eCommerce initiatives continues to expand. However, if market demand for our
products does not manifest itself or grow as rapidly as we expect, revenue
growth, margins or both could be adversely affected. If competitors make
acquisitions of other competitors or establish relationships among themselves or
with third parties to enhance the ability of their products to address the
supply chain planning needs of prospects and customers or other software vendors
that have announced plans to develop or incorporate functionality that could
compete with our products successfully develop and market such functionality,
our revenue growth, margins or both could be adversely affected.
There can be no assurance that we will be able to attract complementary
software vendors, consulting firms or other organizations that will be able to
market our 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 a sufficient number of organizations will continue their
involvement with us and our products and the loss of current relationships with
important organizations could materially adversely affect our results of
operations.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency. In the three and six months ended August 31, 2000, we
generated approximately 18.9% and 19.9%, respectively, of our revenues outside
the United States and Canada. International sales usually are made by our
foreign subsidiaries in the local currencies and the expenses incurred by
foreign subsidiaries are denominated in the local currencies.
In certain circumstances, we enter into foreign currency contracts with
banking institutions to protect large foreign currency receivables against
currency fluctuations. When the foreign currency receivable is collected, the
contract is liquidated and the foreign currency receivable is converted to U.S.
dollars.
Interest rates. We manage our interest rate risk by maintaining an
investment portfolio of available-for-sale instruments with high credit quality
and relatively short average maturities. These instruments include, but are not
limited to, commercial paper, money-market instruments, bank time deposits and
taxable and tax-advantaged variable rate and fixed rate obligations of
corporations, municipalities and national, state and local government agencies,
in accordance with an investment policy approved by our Board of Directors.
These instruments are denominated in U.S. dollars. The fair market value of
securities held at August 31, 2000 was approximately $11.1 million.
We also hold cash balances in accounts with commercial banks in the
United States and foreign countries. These cash balances represent operating
balances only and are invested in short-term time deposits of the local bank.
Such operating cash balances held at banks outside the United States are
denominated in the local currency.
Many of our investments carry a degree of interest rate risk. When
interest rates fall, our income from investments in variable-rate securities
declines. When interest rates rise, the fair market value of our investments in
fixed-rate securities declines. We attempt to mitigate interest rate risk by
holding fixed-rate securities to maturity. However, should our liquidity needs
force us to sell fixed-rate securities prior to maturity, we may experience a
loss of principal.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have previously reported our legal proceedings with Information
Resources, Inc. ("IRI") arising from the acquisition of certain assets. A
dispute over revenue streams that IRI alleges it is entitled to is being
arbitrated. IRI seeks a total of $15,930,563 in damages. We contend that the
conditions to these amounts becoming due have not been satisfied and that no
amounts are due IRI, because, among other reasons, of a failure of consideration
in the overall transaction. A related claim concerning the breach of a separate
Non-Competition and Non-Solicitation Agreement is proceeding in the Circuit
Court of Cook County, Illinois. There were no significant developments in these
matters during this quarter.
As disclosed in our Quarterly Report on Form 10-Q for the three months
ended November 30, 1999, we reached an agreement for the settlement of the class
action federal securities litigation in which we, our Chairman of the Board of
Directors (the"Board") and our former Chief Financial Officer were defendants
(the "Defendants"). As reported by us in our Current Report on Form 8-K dated
August 17, 1999, the United States District Court for the District of Maryland
had issued an order dismissing the consolidated class action complaint against
the Defendants. The plaintiffs then filed an appeal of the ruling. During the
pendency of the appeal, the parties reached a settlement in principle to resolve
the matter, the parties subsequently entered into a definitive settlement
agreement, subject to the approval of the District Court. On July 24, 2000 the
District Court issue an order for settlement proceedings outlining the details
for providing the appropriate notices to class members. Class members had until
October 2, 2000 to opt out of the class and until November 11, 2000 to file
proofs of claim. The settlement was approved at a hearing October 13, 2000. The
amounts to be paid by Defendants pursuant to the settlement are being funded by
our insurer and thus settlement, will not have a material adverse effect on us.
In September 2000, one of our clients submitted to us a notice claiming
damages relating to a software implementation project. The client has requested
a price adjustment in the amount of $3.5 million, but has informally lowered its
request to $1.3 million. The client's claim arises from the performance of our
subcontractor on the project. We believe that the subcontractor has full
responsibility for our client's claim and have so notified that company.
We are involved from time to time in disputes and other litigation in the
ordinary course of business. We do not believe that the outcome of any pending
disputes or litigation (including matters we have previously reported) will have
a material adverse effect on our business, operating results, financial
condition and cash flows. However, the ultimate outcome of these matters, as
with litigation generally, is inherently uncertain and it is possible that some
of these matters may be resolved adversely to us. The adverse resolution of any
one or more of these matters could have a material adverse effect on our
business, operating results, financial condition and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 28, 2000, the Company held its 2000 Annual Meeting of
Shareholders. At the meeting, the shareholders elected as Class II directors,
with terms expiring in 2003, Gregory J. Owens (with 21,013,169 affirmative
votes and 48,724 votes against), Joseph H. Jacovini (with 20,821,920 affirmative
votes and 239,973 votes against), and Thomas A. Skelton (with 21,011,845
affirmative votes and 50,048 votes against). No other matters were submitted to
shareholders for action at the Annual Meeting.
24
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1. Agreement and Plan of Merger dated as of September 21, 2000, by and among
Manugistics Group, Inc., Talus Solutions, Inc. and Manu Acquisition Corp.
(We previously filed this exhibit in the Current Report on Form 8-K/A
which we filed on October 11, 2000.)
27 Financial Data Schedule
(b) Reports on Form 8-K
1. On September 22, 2000 we filed a Current Report on Form 8-K reporting our
issuance of a press release on September 21, 2000 announcing that
we had signed an agreement to acquire Talus Solutions, Inc. in a tax-free
stock-for-stock merger.
2. On October 10, 2000 we filed a Current Report on Form 8-K/A setting
forth certain additional information relating to the acquisition of Talus
Solutions, Inc.
3. On October 11, 2000, we filed a Current Report on Form 8-K to report
that we had announced our intent to issue convertible subordinated notes
due 2007 in a private placement.
4. On October 11, 2000 we filed a Current Report on Form 8-K/A including
the merger agreement between the Company and Talus Solutions, Inc.
25
<PAGE> 26
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: October 16, 2000 By:
--
/s/ Gregory J. Owens
--------------------
Gregory J. Owens
President and Chief Executive Officer
/s/ Raghavan Rajaji
-------------------
Raghavan Rajaji
Executive Vice-President
and Chief Financial Officer
26
