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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997 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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.002
PAR VALUE PER SHARE
(Title of Class)
Name of each exchange on which registered: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 30, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $325 million. The pro forma
number of shares outstanding of the Registrant's common stock was approximately
21.7 million, after giving effect to the two-for-one stock split to be effected
by means of a 100% stock dividend that was authorized by the Registrant's Board
of Directors on May 9, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement relating to the 1997
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K. The Company anticipates that its Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days after the end of
the Company's fiscal year ended February 28, 1997.
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PART I
ITEM 1. BUSINESS.
GENERAL
Manugistics Group, Inc. ("Manugistics" or the "Company") develops,
markets and supports software products for synchronized supply chain management
and provides related services. Synchronized supply chain management refers to
managing the complex interactions involved in the flows of products through the
supply chain, and involves forecasting product demand and coordinating the
timing of distribution, manufacturing, procurement and transportation
activities to meet this demand, not only across an entire enterprise, but also
among an enterprise and its suppliers and customers. The Company believes it is
the only provider of an integrated suite of strategic, tactical and operational
supply chain planning tools including a high level optimizer and products that
address the four key operational areas of supply chain management: demand
planning, supply planning, manufacturing scheduling and transportation
management. The Company was incorporated in Delaware in 1986 and completed its
initial public offering in August 1993.
INDUSTRY BACKGROUND
Many companies have faced increased competition and more demanding
customer service requirements in recent years. Customers have had the leverage
to demand better service from suppliers partially because bargaining power has
shifted to retailers and consumers from manufacturers and distributors over the
past decade. This shift followed the consolidation of significant portions of
the retail industry into large, powerful department store chains, the advent of
"superstores" and specialty category stores, and the rapid proliferation in the
number and variety of products. Also, many companies have contended with
shorter product life cycles in recent years. During the short window of market
demand for a product, insufficient supply could result in lost sales, while
excess inventories after demand declines could result in write-downs. In
addition, manufacturing companies in a number of industries have incurred very
high costs to build, acquire, maintain and operate plants and equipment. Given
these significant costs and increased competition, many companies have sought
ways to increase the returns from their significant investments in
manufacturing assets.
Just as business conditions have become more challenging, the
processes for manufacturing products and bringing them to market have become
more complex. Many companies conduct manufacturing and distribution operations
at multiple sites around the world. Their supply chains frequently involve
suppliers, warehouses, plants and customers on different continents. These
operations have traditionally been managed by various functional departments,
and there has often been incomplete coordination among them. There has also
frequently been imperfect communication, both within a single enterprise and
among a company and its suppliers and customers.
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In response to these business conditions, and in an attempt to manage
the complexity of their own operations and supply chains, many companies are
seeking to improve customer service, lower operating costs and increase returns
on assets through more effective management of their supply chains. Some of the
first companies to recognize the need for effective supply chain management
were companies that were significantly affected by the increase in competition
and the shift in market power from manufacturers to retailers: consumer
packaged goods, food and beverage firms. In terms of their manufacturing and
business models, these companies generally make product to stock in inventory
("make to stock"). Many of these companies produce their finished goods using
process manufacturing, and sell their products through retail channels. Also,
because their customers had begun demanding better service and lower prices,
these consumer packaged goods and other companies began working more closely
with their own suppliers as part of their efforts to manage their supply
chains. Thus, suppliers to these consumer-oriented process manufacturers, such
as chemical companies, which generally use process manufacturing and sell to
industrial customers, have also been significantly affected by the changed
business environment.
Companies in the apparel and consumer electronics industries, among
others, have also contended with more difficult business conditions and have
been particularly affected by the shorter product life cycles and the
associated difficulty of forecasting product demand. Companies such as these
manufacture products for consumers in discrete or high volume repetitive
manufacturing environments, and generally make or assemble their products upon
receipt of a customer order ("make to order"). These companies, as well as
discrete manufacturers that sell to industrial customers, have begun to
recognize that they can provide better service to their customers, have lower
operating costs and increase their return on assets by effective management of
their supply chains.
According to a recent study of 225 chemical, computers/electronic
equipment, consumer packaged goods, semiconductor and other companies, the top
20% of these companies, as measured by several supply chain management
benchmarks, recovered as much as 7% of their annual revenues from managing
their supply chains more effectively. These top companies used 60% fewer days'
supply in inventory, had up to a 60% advantage in cash-to-cash cycle time
(i.e., from the payment of cash for raw materials until the receipt of cash for
finished goods) and spent 50% less on material acquisition. As the study shows,
companies in many different industries now recognize that effective supply
chain management is a source of competitive advantage and is critical to
delivering the right product to the right place at the right time at the lowest
possible cost. Since becoming aware of the significant benefits that are
potentially available from effective supply chain management, many companies
are seeking software that can help them achieve these benefits.
The advent of sophisticated software to address the complex issues of
supply chain management was preceded by software designed to address the
information needs of manufacturing and distribution companies, which first came
into widespread use in the 1970s. Many large manufacturers used Material
Requirements Planning ("MRP") and later Manufacturing Resource Planning
("MRP-II") systems in individual plants to initiate inventory withdrawals and
to generate the necessary manufacturing orders, for example. Distribution
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Resource Planning ("DRP") software managed the transactions involved in
ordering, receiving, warehousing and delivering goods. More recently,
Enterprise Resource Planning ("ERP") systems have evolved that connect the MRP,
MRP-II and DRP systems with purchasing, accounting, financial and human
resources systems. ERP systems provide managers with the ability to access, for
example, inventory levels and locations for a product throughout an enterprise.
Because ERP systems were specifically designed to generate and maintain
detailed records of transactions, however, they are limited in their ability to
assist managers in making supply chain planning and scheduling decisions.
The data created and maintained by these ERP systems can serve as
input for a variety of analytical tools contained in supply chain management
software, the development of which the Company helped pioneer. Supply chain
management software enables companies to plan their supply and manufacturing
activities to meet anticipated customer demand, while considering capacity and
material constraints and other factors. Supply chain software complements ERP
systems and provides companies with information not only about their own
enterprise, but also about demand from customers and other information relating
to suppliers and transportation providers. Because of the potential for
significant returns on investment from supply chain management software and the
rapid payback period relative to ERP systems, one industry research firm has
recently recommended that, rather than implementing ERP systems first,
companies should re-prioritize their supply chain planning and ERP projects and
implement these applications simultaneously or even implement their supply
chain planning solution first so that they can begin capturing the benefits of
managing their supply chains sooner.
As companies have pursued these benefits, they have increasingly
recognized that the information technology that they choose to support their
efforts must enable them to take into account the effects of various events,
such as an unexpected customer order, in real-time, so that they can instantly
adjust their distribution and manufacturing activities accordingly. Many
companies have also recognized that in order to capture the advantages of
effective supply chain management, it is critical that the chosen technology
provide capabilities covering all different levels of supply chain issues,
including strategic and operational, and that it contain functionality
addressing all of the key aspects of supply chain planning, including demand
forecasting, planning of supply and production activities, scheduling of
manufacturing operations and transportation management. In addition, many
companies have realized that the information technology that they choose as
their tool for supply chain management must provide users around the world with
current, common information, so that all planners throughout an enterprise are
basing their decisions on the same set of facts, rather than old or
inconsistent data. Lastly, companies have increasingly realized the advantages
of choosing best-in-class vendors for different types of applications and
integrating the applications of these various best-in-class vendors, rather
than selecting a single vendor to provide a wide range of generally less robust
functionality. In particular, for companies evaluating supply chain management
software, there are important benefits available if the supply chain planning
application contains technology enabling integration with ERP and other systems.
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THE MANUGISTICS SOLUTION
Manugistics develops, markets and supports software products for
synchronized supply chain management and provides related services.
Synchronized supply chain management refers to managing the complex
interactions involved in the flows of products through the supply chain, and
involves forecasting product demand and coordinating the timing of
distribution, manufacturing, procurement and transportation activities to meet
this demand, not only across an entire enterprise, but also among an enterprise
and its suppliers and customers. The Company's solutions consider and balance
relevant demand, customer service, production, constraint, cost and
profitability information, both within an enterprise and among an enterprise
and its suppliers and customers. Manugistics' integrated suite of supply chain
management software includes (i) strategic tools, such as Supply Chain
Navigator's functionality for determining the initial setup of a supply chain
network, (ii) tactical capabilities, such as Constrained Production Planning's
functionality for performing production planning across multiple facilities,
and (iii) operational capabilities, such as Advanced Manufacturing Scheduling's
functionality for producing specified quantities of product within given time
parameters. See "Products." The Company's solution provides the following key
benefits:
Synchronized Planning and Scheduling. The Company's software
immediately alerts planners of changes that occur along the supply chain,
enabling them to evaluate and incorporate the effects of the changes and to
rapidly adjust the relevant pieces of the supply chain planning process. This
software thus enables them to synchronize their companies' supply planning and
manufacturing scheduling activities with the revised forecast of customer
demand. For example, after an unexpected event leads to an increase in
anticipated product demand, Manugistics' supply chain software incorporates the
expected effect of the event into the forecast and assists planners to
instantly re-optimize the supply chain network and to coordinate the timing of
manufacturing and distribution operations to meet the revised demand forecast.
The software immediately updates inventory levels around the network and
revises manufacturing schedules.
End-to-End Supply Chain Functionality. Manugistics' integrated supply
chain software suite includes strategic, tactical and operational
decision-making tools and includes demand forecasting, supply planning,
manufacturing scheduling and transportation management capabilities. This
software provides planners with a picture of their company's entire supply
chain and its links to suppliers and customers. This picture of the whole
supply chain provides critical real-time information about all of the effects
of supply chain actions, which empowers users to make superior decisions.
Rapid Time-to-Benefit. The Company's supply chain management software
products frequently deliver cost savings and improvements in customer service
within one year after implementation. (Implementation typically requires three
to 12 months, depending on the products licensed and the complexity and
geographic scope of the project.) As a result, customers typically receive a
quick payback on their investment.
Constantly-Updated Supply Chain Information Common to All Users.
Manugistics' Supply Chain Architecture(TM) is a distributed client/server
architecture that enables users throughout a company,
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regardless of their location, to access the same, constantly-updated supply
chain information at the same time. This architecture connects the distributed
user interface (client) to the application server and to the database, enabling
global access, a single view of the supply chain and rapid communication of
information and decisions. The architecture can also enable users to take
advantage of the communication capabilities available through the Internet and
the World Wide Web, capabilities which the Company believes will foster more
collaborative supply chain activities. In addition, this architecture and the
Company's advanced integration technology extend the availability of a
company's view of the supply chain to its suppliers and customers, which is
becoming a critical component of effective inter-enterprise supply chain
management.
Tight Integration with Complementary ERP Systems. Because of
Manugistics' architecture, its object-oriented foundation (which enables
sophisticated communication between applications) and its mutual interest with
ERP vendors in enabling clients to derive the maximum benefits from both their
Manugistics and ERP systems, the Company offers tight integration to the ERP
systems of leading vendors. See "Strategy," "Products," and "Alliances and
Partnering." These integrated offerings enable customers to select the
Company's supply chain suite and leading ERP solutions with the knowledge that
there is a commercially-available integration between the products and
compatibility between future releases.
STRATEGY
The Company's objective is to be the leading provider of supply chain
management solutions to companies worldwide. The Company's strategy to achieve
its objective includes the following elements:
Provide comprehensive solutions. As more companies recognize the
potential for significant and rapidly achievable benefits from effective supply
chain management, Manugistics' strategy is to deliver comprehensive solutions
to enable customers to fully realize these benefits. The Company delivers a
robust supply chain planning software suite, and continuously seeks to expand
and enhance its product offerings. The Company also provides consulting and
implementation services, education and training, and product support and other
services. Through Manugistics' unique supply chain management experience and
its collaboration with customers in a variety of industries for more than a
decade, the Company has developed extensive knowledge of supply chain
management issues and solutions. Based on this knowledge, the Company is
continuing to define comprehensive supply chain solutions and is delivering
these solutions to the market.
At the core of these solutions is the Company's software, and the
Company has introduced, and plans to continue to introduce, new applications
and functionality in order to address specific aspects of supply chain planning
more completely. An important aspect of the Company's solutions is its ability
to rapidly deliver new features and functions to the market in response to
emerging market opportunities and requirements. During fiscal 1997, the Company
introduced Advanced Manufacturing Scheduling, which creates superior production
schedules for a wide variety of manufacturing environments, and Supply Chain
Navigator, a strategic and tactical optimizer to support decision-making about
the entire supply chain network, within 10 months
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after embarking on these development projects. The Company also emphasizes
reliability in its schedule of releases because of the importance of
predictability to customers. Based in part on its ISO 9001-certified product
development processes, the Company believes that it has a relatively high
degree of reliability in its schedule of planned releases. This reliability and
rapid product development ability are important aspects of the Company's
solutions.
Customers have increasingly demanded the services offered by the
Company. To reduce the need to hire additional professional services employees
necessary to meet maximum anticipated demand for services, the Company offers
an extensive education and training program to third-party consultants from
firms such as Andersen Consulting, Inc., Booz Allen & Hamilton, Inc., Ernst &
Young LLP and Price Waterhouse LLP. The availability of these third-party
consultants to provide implementation services will assist the Company to
ensure that, during periods of increased demand, customers will continue to
receive effective and timely professional services.
Capitalize on Leadership Position. The Company seeks to take advantage
of its leadership position in the market for supply chain management software
by expanding its business in the following areas: new geographic markets, new
industries and mid-sized companies.
New geographic markets. The Company believes that companies outside
North America face similar supply chain management issues as North American
companies, and, accordingly, the Company plans to take advantage of its
knowledge of these issues to provide solutions to companies in other geographic
markets. The Company believes that, although they trail their North American
counterparts in terms of their adoption of supply chain management practices,
companies in South America, Europe, Australia and Asia, as well as
international subsidiaries of North American companies, are increasingly
seeking the benefits of effective supply chain management. To position itself
to meet anticipated demand, the Company maintains offices in Australia, France,
Germany, Ireland, The Netherlands and the United Kingdom. The Company believes
that companies in these and other geographic markets will increasingly demand
supply chain management solutions.
New industries. The Company believes it can capitalize on its
experience with, and operational knowledge of, process manufacturing companies
that target consumers, such as consumer packaged goods, food and beverage
firms, and process manufacturers that target the industrial sector, such as
chemical companies, to further penetrate other industries, including discrete
and high-volume repetitive manufacturers that target consumers, such as firms
that make apparel and consumer durables, or such manufacturers that target the
industrial sector.
Mid-sized companies. In addition, the Company believes it can
capitalize on its supply chain management knowledge and the price/performance
profile of client/server products to provide solutions to mid-sized companies
that recognize the benefits available from effective supply chain management.
Client/server product offerings have enabled the Company to expand its target
market to include mid-sized companies with annual revenues ranging from $250
million to $1 billion.
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Expand product distribution through alliances and partnering. The
Company is building and maintaining strong working relationships with
organizations that the Company believes can play important roles in marketing
the Company's products. These include: (I) ERP system vendors, such as The Baan
Company, N.V. ("Baan"), Marcam Corporation ("Marcam"), Oracle Corporation
("Oracle") and SAP AG ("SAP"), whose solutions maintain the data used by the
Company's supply chain planning products; (ii) consulting firms, such as
Andersen Consulting, Inc., Booz Allen & Hamilton, Inc., Ernst & Young LLP and
Price Waterhouse LLP, that are active in the selection and implementation of
large information systems; (iii) point-of-sale data providers, such as
Information Resources, Inc. ("IRI"), whose current or planned products also
complement those of the Company; (iv) other complementary solution providers
such as Microsoft Corporation; and (v) hardware vendors, such as
Hewlett-Packard, IBM, Digital Equipment Corporation and Sun Microsystems, that
offer hardware products on which the Company's products run. See "Alliances and
Partnering."
The Company believes that these relationships will enable prospective
customers to select various hardware systems, operating environments, ERP or
transaction systems and databases that can be easily integrated and rapidly
implemented with the Company's products, and that these relationships will
provide benefits to customers, the Company and these partners, including
enhanced potential for increased market penetration.
Offer products based on Manugistics' supply chain business object
model, incorporating advanced decision sciences, with state-of-the-art user
interface and integration technology. Manugistics' technology strategy is to
offer products based on the Company's unique set of software objects developed
specifically to support the business processes involved in supply chain
planning and scheduling, which provide customers with highly accurate models of
their supply chains and superior flexibility, scalability and performance.
Manugistics' applications incorporate a variety of advanced decision sciences,
including constraint-based optimization, heuristics and linear programming,
providing customers with the most appropriate solver techniques for different
types of supply chain problems. The Company's user interface technology
provides a state-of-the-art "look and feel" to enhance user productivity and
support visualization of the supply chain. The Company's leading-edge
integration technology enables seamless interchange among Manugistics
applications, ERP systems, and suppliers and customers.
The Company offers products for distributed, open systems enabling
customers to use the Company's supply chain management software with various
combinations of hardware systems, operating environments, complementary
software and databases. Open operating systems such as Windows NT and UNIX
enable customers to take advantage of portability, scalability and
interoperability of operating environments. Distributed computing such as that
associated with client/server architectures moves the Company's decision-making
capabilities closer to the user by providing a distributed user interface,
distributed processing (rather than more centralized processing) and
distributed database access. As more companies expand their operations and
supply chains globally, the Company's distributed approach supports customers
in their global supply chain planning activities.
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The Company's products incorporate standards-based technologies, which
provide a flexible foundation and leverages the technology investments of
customers. The Company's use of object-oriented technology for product
development enables it to develop new software program code with modular
components, which permits and encourages developers to re-use these components
and improves quality while shortening the time required to develop or enhance
products.
PRODUCTS
During the fourth quarter of fiscal 1997, the Company released the
fifth version of its client/server software, Manugistics5. The Company's supply
chain management software provides strategic, tactical and operational supply
chain planning tools and includes the Supply Chain Navigator, the Manugistics
Integrator for SAP(R) and four major families: Demand Planning, Supply
Planning, Manufacturing Scheduling and Transportation Management. (The Company
previously marketed portions of Supply Planning as its Distribution Planning
and Manufacturing Planning families.) The software operates in most major
environments and supports database software from leading relational database
software vendors.
SUPPLY CHAIN NAVIGATOR. Manugistics Supply Chain Navigator ("SCN")
features a graphical representation of a company's entire supply chain network
and enables executives to make longer-term business planning decisions about
the configuration of the supply chain network and network-wide capacity,
production, inventory and distribution, as well as shorter term tactical
planning decisions. SCN can produce an optimized network or an optimized plan
for the ideal mix of products to be produced at each plant and distributed to
each warehouse over multiple time periods that maximizes the profitability of a
portfolio of products or minimizes the costs of raw materials, manufacturing,
inventory and distribution. The strategic and tactical planning functionality
of SCN is fully integrated with the other tactical and operational products in
Manugistics' suite, giving users the ability to immediately implement the
strategic supply chain decisions that SCN supports. The Company introduced SCN
during the fourth quarter of fiscal 1997.
Supply Chain Navigator is a strategic and tactical optimizer of the
flows of materials through a supply chain which uses detailed, constraint-based
models. By simultaneously evaluating both manufacturing-related and
distribution-related constraints, and using powerful optimization routines, SCN
generates the optimal solution given user-defined goals (such as maximizing
product profitability or minimizing costs), and can be used to solve a wide
array of strategic and tactical supply chain problems.
For example, at the strategic level, SCN can be used to determine the
overall setup of a supply chain network or to rationalize an existing setup. By
either simultaneously constraining both manufacturing and distribution, or only
one, SCN can evaluate the addition, removal or relocation of a plant or
distribution center. SCN can also be used to rationalize capacity, including
the addition or removal of facilities space at a plant or distribution center,
the number of shifts, shipping capacity or the introduction or removal of new
suppliers. Another use of SCN is to generate the optimal allocation of capacity
during periods of severe shortage, including cost-
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minimized outsourcing, or to generate optimal sourcing, through dynamic
updating of sourcing relationships.
For tactical level issues, SCN can be used to choose the optimal
production method from among multiple choices, and can determine which machine
to use for which product. SCN can also optimize inventory levels and locations
given manufacturing, material and distribution constraints, and can optimize
inventory prebuilds based on constraints including product shelf life and
material expiration life.
DEMAND PLANNING. Manugistics Demand Planning addresses a key element
of successful supply chain planning: forecasting demand with as high a degree
of accuracy as possible. There are two products in the Demand Planning family,
Demand Planning and Demand Planning Extended Edition.
Demand Planning. Using advanced statistical techniques, Demand
Planning develops sophisticated demand forecasts for specific products at
specific locations. Users can adjust forecasts for market intelligence,
financial projections, sales promotion impact, or other information about
expected demand at any level of aggregation, and the software automatically
disaggregates this information to individual products. The resulting demand
forecasts are critical to meeting customers' service expectations and become
the basis for inventory, distribution, production and transportation plans. In
addition, the software provides the capability to track and manage forecast
accuracy.
Demand Planning Extended Edition. Demand Planning Extended Edition
("DP/EE") utilizes advanced forecasting methods developed at Manugistics'
Demand Management Center of Expertise in Essen, Germany to extend the
capabilities of the Company's Demand Planning product. DP/EE produces a
forecast that incorporates causal factors, such as the effects of changes in
price and the effects of non-seasonal holidays. To improve precision, DP/EE
also recognizes both long-term and short-term trends in product demand and
selects an appropriate technique to forecast demand more accurately. To
simplify forecasting demand for a new product over the course of its life
cycle, DP/EE can synthesize and analyze life-cycle information from other,
similar products to produce a forecast for the new product. This capability is
very important in industries that conduct some discrete and high volume
repetitive manufacturing operations, such as apparel or consumer durables, in
which product life cycles are short and life-cycle management is crucial to the
success of new products.
The Company is also developing a new capability in its Demand Planning
product family to incorporate point-of-sale ("POS") checkout scanner data. As
part of its agreements with Information Resources, Inc. ("IRI") signed during
the first quarter of fiscal 1998, the Company is working to enhance its Demand
Planning products to be able to use IRI's daily, store-level POS data. With its
exclusive rights among supply chain software vendors to this more detailed and
timely census data, the Company is seeking to enhance Demand Planning to
incorporate these data. The Company believes that using this POS data will
provide more accurate forecasts, thereby helping companies make superior
planning decisions, particularly companies in demand-sensitive,
consumer-oriented, process manufacturing industries.
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SUPPLY PLANNING. Manugistics Supply Planning provides managers with
the ability to plan supply activities across multiple facilities to meet demand
requirements, and contains extensive continuous replenishment and Vendor
Managed Inventory capabilities. The software considers the interdependencies
between distribution and manufacturing activities and uses this information as
the basis for decisions about stocking levels, sourcing, location, movement and
use of available materials and inventory. As a result, customer service can be
improved while inventories and cycle times can be reduced. The software also
facilitates effective management of production, considering constraints such as
capacity, raw materials, components and labor. Supply Planning enables managers
to review planned manufacturing activities at all manufacturing facilities for
time periods up to several years long, and allows them to analyze the ability
of their companies to meet demand and supply requirements and customer service
goals given aggregate capacity and material constraints.
Supply Planning synthesizes demand planning, inventory planning and
distribution network data to produce a distribution plan -- a schedule of
shipping requirements for each source and destination to meet the demand for
every product at every location in each planning period. Supply Planning
constructs a daily operational plan recommending a schedule of shipments to
implement the distribution plan that makes the best use of available inventory.
To satisfy the distribution plan, Supply Planning assists managers in
developing long-term and short-term enterprise-wide production plans and
detailed daily production schedules while calculating material needs. In
addition, this software assists managers in making cost-effective decisions
regarding the use of manufacturing and material resources.
The Supply Planning family includes Constrained Production Planning
("CPP"), a tool for longer term, aggregate planning across multiple facilities
that produces a master supply plan considering aggregate capacity and material
constraints. CPP uses inputs from several sources, including the unconstrained,
planned orders that are produced by Supply Planning, to develop a feasible
master production plan (for multiple weeks or months) that fits within capacity
and material constraints. This master production plan then provides input for
production planning and manufacturing scheduling. If CPP indicates that product
should be manufactured at an alternate plant, appropriate adjustments are made
throughout Supply Planning. CPP can also identify capacity constraints and
material shortages at times in the future, enabling planners to take corrective
action, such as leveling production load over time or across lines, before
problems develop.
During fiscal 1997, the Company released the critical material
allocation feature of Constrained Production Planning, which, for companies
such as personal computer makers, determines the highest profit or lowest cost
mix of products to produce based on longer term material availability. The
Company also released the critical constrained materials feature, which
addresses short term material shortages for process manufacturing companies
with restricted capacity or with projected material shortages in future
periods.
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Supply Planning links customer requirements and production
capabilities by producing a master schedule for each plant or contract producer
which best meets demand while considering multiple constraints, such as
capacity, materials and labor, and minimizing inventory levels. The software
translates that master schedule into time-phased material requirements
schedules for raw materials and intermediate or component products. The
software produces an enterprise-wide replenishment schedule of time-phased
requirements for each vendor, listing the planned and firm orders for each
item. In addition, the software can recommend the optimal source for raw
materials or components, and contains "available-to-promise" functionality
which provides managers who are responsible for supplying raw materials or
components (both within and outside an enterprise) with information about the
ability to satisfy production plans based on anticipated future levels of raw
materials or components. This capability enables these managers to work
proactively to find alternate materials or components or alternative production
cycles to minimize the effect of any anticipated shortages.
ADVANCED MANUFACTURING SCHEDULING. Manugistics Advanced Manufacturing
Scheduling ("AMS") delivers realistic, executable manufacturing schedules for
producing specified quantities of product within the time parameters contained
in the production plan. AMS is integrated with the rest of the Manugistics
supply chain planning software suite, giving users the same constantly updated
demand and supply information available to planners throughout an organization.
Correspondingly, planners elsewhere in the organization have current
information about manufacturing schedules. AMS optimizes production schedules
given certain user-defined constraints for several process, high-volume
repetitive and discrete manufacturing environments, enabling schedulers to
maximize customer service and asset utilization, minimize cost and reduce cycle
time. AMS incorporates the advanced manufacturing scheduling technologies
acquired from Avyx, Inc. during the first quarter of fiscal 1997. Users can
configure AMS to model the unique manufacturing environments of their
enterprises for various short to medium term time periods, including large,
complex processes, production of either small or large numbers of products, a
range of constraints including materials, labor, machine and storage capacity
and environmental restrictions. AMS generates a manufacturing schedule meeting
defined objectives while respecting constraints.
AMS enables users to employ a range of methods to respond to the
frequent changes to the manufacturing schedule, from regenerative scheduling to
incremental rescheduling. A key feature of AMS is its rescheduling capability.
AMS identifies the best location and time period to schedule a job. For
example, when a company receives a new order, AMS searches in real time for the
optimal plant and date to run the job, preserving the existing schedule and
enabling the scheduler to quote a delivery date immediately. AMS also addresses
floating capacity-constrained resources or bottlenecks, again by leveraging the
existing schedule, preserving the parts that are unaffected by the change and
revising other elements as necessary to meet the updated requirements. The
Company believes that the evolutionary nature of AMS's rescheduling capability
enables users to have greater control, because the schedule remains stable, and
greater speed, because the software reschedules only the necessary portion of
the entire schedule.
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TRANSPORTATION MANAGEMENT. Manugistics Transportation Management
provides managers with decision-making and optimization tools to determine how
to assign transportation resources so as to minimize costs while meeting
customer service requirements. This software allows for the coordination of
material and product movements on an enterprise-wide basis.
Transportation Management enables companies to plan and integrate
inbound, outbound and inter-company moves in a coordinated way and to build
feasible, cost-effective, consolidated loads that meet customer service and
business operating requirements and minimize enterprise-wide transportation
costs. This product also assists managers to determine the best available mix
of transportation modes and common carriers. In addition, Transportation
Management enables managers to integrate private fleet operations into the
shipment planning process to optimize transportation asset utilization and
customer service.
Communication among trading partners, particularly communication about
the status of transportation activities, is essential to effective supply chain
management. During fiscal 1997, the Company introduced Manugistics Intelligent
Messenger, which provides electronic commerce capabilities by collecting and
distributing supply chain data among trading partners. The Manugistics
Intelligent Messenger evaluates messages from the supply chain planning
applications, recognizes key business events, determines required action and
sends timely notification messages to appropriate decision makers. This product
was developed in partnership with Frontec AMT, Inc., a leading provider of
intelligent messaging solutions.
The Company's Transportation Management family also includes the
Routing and Scheduling product, which provides automated daily routing and is
designed for private fleet managers whose main concern is developing the best
possible distribution routes in order to maximize customer service and minimize
operating costs such as fuel, equipment and personnel.
During fiscal 1998, the Company anticipates commercial release of
Manugistics Bulk Distribution Planning, which is being developed specifically
to address the needs of the bulk chemical, petroleum and industrial gas
industries. Bulk Distribution Planning will include extensive transportation
management capabilities, as well as specialized demand planning, unique
inventory management features, and dynamic sourcing to meet demand, enabling
companies in these industries to improve customer service and reduce inventory
and transportation costs.
MANUGISTICS INTEGRATOR FOR SAP(R). During the third quarter of fiscal
1997, the Company released the Manugistics Integrator for SAP(R), a software
application that integrates SAP's R/3(R) ERP application with several
Manugistics supply chain planning products. Developed jointly by Manugistics
and SAP, the Integrator enables customers to implement an integrated supply
chain software and ERP solution that uses functionality from both applications
without the need to develop custom interface programming. The Integrator
reduces companies' integration costs, which can shorten the payback period on
their investments in supply chain planning and ERP systems, and it is fully
supported and maintained by Manugistics and SAP, which reduces the risk of
problems with forward compatiblity of future versions.
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Rather than simply transferring flat files, the Manugistics Integrator
for SAP facilitates true "communication" between the two applications about
what information each application needs and, when an event occurs, the effects
of the event. Using "publish/subscribe" object-based messaging, when a
triggering event occurs, data that are needed by both applications are
"published" by the source application using a message-based integration
architecture. The target application "subscribes" to events, processes the data
associated with them, and then publishes the results. For example, SAP's R/3(R)
stores information about items and stockkeeping units (SKUs) in the material
master tables. Additions, deletions and updates to the material master tables
can be communicated to Demand Planning for processing. Correspondingly,
Manugistics Supply Planning generates a feasible, cost-effective distribution
requirements plan, which is expressed as a set of planned orders. These orders
can be communicated to SAP's R/3(R) Production Planning as independent
requirements.
STATGRAPHICS SOFTWARE. Additionally, the Company markets and supports
STATGRAPHICS, a software application containing a comprehensive set of
statistical tools to control, manage and improve the quality of production
processes in manufacturing companies. It utilizes statistical quality control
and design of experiments to implement quality management in individual
locations throughout an enterprise or plant. In response to decreased demand,
the Company has decreased the resources dedicated to marketing STATGRAPHICS.
CUSTOMERS
The Company's supply chain management software historically has been
licensed by large organizations in the process manufacturing industries, such
as the consumer packaged goods, food, beverage, chemicals and pharmaceuticals
industries. More recently, the Company has licensed its software to customers
in the discrete and high-volume repetitive industries, including the paper,
apparel, electronics/high technology, automotive and consumer durables
industries. The Company has installed various combinations of its supply chain
management software products at hundreds of locations worldwide and has granted
more than 1,000 licenses for these products. The following customers are
representative of the Company's customer base in terms of their size and the
magnitude of revenues generated by their license agreements with the Company.
All of these customers have licensed software products from the Company (or
from Oracle pursuant to the Company's arrangement with Oracle) or these
customers have purchased maintenance, consulting or other services from the
Company within the last twelve months. See "Sales and Marketing."
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CONSUMER PACKAGED GOODS CHEMICALS AND PETROCHEMICALS
Eveready Battery Co. BASF Corporation
General Electric Company Dow Chemical Company, Limited
Gillette Company E. I. du Pont de Nemours and Company
Lever Brothers Company Exxon Company, International
The Procter & Gamble Company Mobil Oil Corporation
Revlon Consumer Products Corporation Rohm & Haas Company
FOOD & BEVERAGE CONSUMER ELECTRONICS/HIGH TECHNOLOGY
Frito-Lay, Inc. Analog Devices, Inc.
Nabisco Brands Inc. Hewlett-Packard Company
Ocean Spray Cranberries, Inc. International Business Machines Corporation
PepsiCo, Inc. Lucent Technologies, Inc.
Starbucks Corporation Xilinx, Inc.
PHARMACEUTICALS AUTOMOTIVE
Bristol-Myers Squibb Company Automobile Products plc
Eli Lilly and Company General Motors Service Parts Operations
Glaxo Wellcome Plc John Deere & Co.
Schering-Plough HealthCare Products, Inc. Tenneco Automotive
Warner Lambert Company
APPAREL
RETAIL DRUG/MASS MERCHANDISE/SPECIALTY RETAIL Fruit of the Loom, Inc.
Dayton Hudson Corporation Levi Strauss & Co.
Kmart Corporation Nike, Inc.
Revco D.S., Inc. Russell Corporation
Rite Aid Corporation The Timberland Company
Toys 'R' Us, Inc.
Wal-Mart Stores, Inc. PAPER
James River Corporation
GROCERY Mead Corp.
Food Lion, Inc. Sweetheart Cup Company, Inc.
Giant Eagle, Inc.
The Kroger Co. OTHER
Richfood, Inc. Baxter Healthcare Corporation
Safeway Stores, Inc. Black & Decker (U.S.) Inc.
Winn-Dixie Stores, Inc. Bridgestone/Firestone, Inc.
British Airways
Eastman Kodak Company
Owens & Minor Medical, Inc.
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PRODUCT-RELATED SERVICES
A key element of the Company's business is to provide clients with
comprehensive solutions to their supply chain planning problems by combining
software with professional services that enable clients to derive the maximum
benefit from Manugistics' supply chain products. Typically, a client will make
many changes to its overall operations, including its planning functions, while
implementing the Company's software. To assist clients in making these changes,
the Company offers a wide range of product-related services, including business
operations consulting, change management consulting, end-user and system
administrator education and training, and, in certain circumstances, software
product modification. These services help clients reengineer their operations
to take maximum advantage of the Company's software and of effective supply
chain management.
These product-related services generally are not included in the
Company's software license fees and are provided on a time and materials basis.
The Company's product-related services group consisted of 174 employees as of
February 28, 1997.
CUSTOMER SUPPORT
Another element of the Company's comprehensive solution is to provide
on-going support to existing customers. Substantially all of the Company's
supply chain management customers enter into annual product maintenance
agreements entitling them to receive product support, including access to a
hotline and an electronic bulletin board, and to receive product revisions and
enhancements. The Company also uses its customer support function to collect
information to assist in focusing future product development efforts and in
identifying market demand.
As of February 28, 1997, the Company's customer support and
maintenance staff consisted of 22 employees.
PRODUCT DEVELOPMENT
The Company directs its current product development efforts toward the
development of new, complementary products, the enhancement of the features and
functions of existing products (including new Internet/Intranet capabilities,
enhancements for use in foreign countries and foreign language translations),
and the development of products tailored to particular industries. To date,
most of the Company's supply chain products have been developed by its internal
staff. Product documentation is generally created internally.
In developing new products or enhancements, the Company works closely
with current and prospective customers, as well as with other industry leaders,
to determine their requirements. The Company believes that these collaborative
efforts will lead to improved software functionality and will result in
superior products likely to have greater market demand. The Company maintains
committees of users and developers for its products. Among other things, these
committees define and rank issues associated with products and discuss product
enhancement priorities and directions.
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Since its inception, the Company has made substantial investments in
product development. The Company believes that getting products to market
quickly, without compromising quality, is critical to the success of these
products. The Company is continuing to make significant product development
expenditures that it believes are necessary for it to rapidly deliver new
product features and functions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company conducts a Product Launch Program for new applications and
major enhancements which allows customers to review design specifications and
prototypes and participate in product testing. The Company has also established
channels for customer feedback which include periodic surveys and focus groups.
In addition, the Company's product development staff works closely with the
Company's marketing, sales, support and services groups to develop supply chain
management software products that meet the needs of its current and prospective
customers.
As of February 28, 1997, the Company's product development staff
consisted of 167 employees. The Company's research and development expenses
were approximately $17.4 million, $11.2 million and $7.6 million for fiscal
years 1997, 1996 and 1995, representing 18.3%, 18.0 and 15.4%, respectively, of
total revenues. In addition, the Company capitalized software development costs
of $6.8 million, $4.9 million and $2.4 million for fiscal years 1997, 1996 and
1995. The Company amortizes capitalized software development costs over a
product's estimated economic life, generally two years, commencing when a
product is available for general commercial release.
SALES AND MARKETING
The Company's supply chain management sales operation for North and
South America is headquartered at the Company's offices in Rockville, Maryland
and includes field sales personnel in the Atlanta, Boston, Charlotte, Chicago,
Cleveland, Columbus, Dallas, Houston, Los Angeles, Milwaukee, Philadelphia and
San Francisco metropolitan areas. The Company's direct sales organization
focuses on sales of supply chain management software to large, global
companies, as well as mid-sized companies with significant supply chain issues.
The Company markets its products in regions outside of North and South
America primarily through subsidiaries. The Company's British subsidiary, with
offices in the London and Dublin metropolitan areas, provides direct sales and
customer support primarily to customers and prospective customers in the United
Kingdom and Ireland. The Company's German, French and Dutch subsidiaries,
located in Essen, Germany, Paris, France, and Utrecht, The Netherlands,
respectively, provide direct sales of supply chain management software
primarily to customers located in continental Europe. The Company also
maintains offices in Australia for sales and support to customers in the
Pacific Rim and has recently established operations in Brazil. The Company
adapts its software for use in international markets by addressing different
languages, different standards of weights and measures and other operational
considerations.
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The Company has also begun using indirect sales channels, such as
complementary software vendors, third-party alliances and distributorships. See
"Alliances and Partnering." Using these channels, Manugistics seeks to increase
the market penetration of its supply chain management products by leveraging
the installed base and prospective customers of these parties. During fiscal
1997, the Company joined an initiative by Oracle Corporation, a large database
and enterprise application software vendor, under which Oracle has the
nonexclusive right to conduct marketing and sales activities on behalf of
Manugistics (and on behalf of a small number of other complementary vendors) to
potential customers in the consumer packaged goods industry. With this
initiative, these companies are seeking to provide a more complete offering
that incorporates many capabilities and satisfies many of the supply chain
planning, ERP and other needs of customers and prospective customers in that
industry.
The Company supports its supply chain management sales activities by
conducting a variety of marketing activities, including an annual clients'
conference, product "steering committees," appearances at industry conferences
such as those organized by the American Production and Inventory Control
Specialists (APICS) organization and the North American Wholesale Grocers
Association, client conferences hosted by complementary software vendors and
product demonstration seminars. In addition, the Company conducts lead
generation programs including public relations, direct mail, telemarketing,
advertising, seminars and ongoing customer and dealer communication programs.
The Company had 85 employees engaged in sales activities and 30
employees engaged in business development consulting activities at February 28,
1997.
The Company sells its STATGRAPHICS product in the U.S. and in other
countries through independent distributors, national resellers and local
dealers.
In fiscal 1997, approximately 23.4% of the Company's total revenues
were attributable to sales outside the United States and Canada. See Note 10 of
Notes to Consolidated Financial Statements.
ALLIANCES AND PARTNERING
The Company continues to implement its strategy of establishing
business alliances or partnering with leading software companies, consulting
firms and other complementary vendors. During fiscal 1997, in addition to
joining the Oracle initiative, the Company entered into an agreement with SAP,
a large ERP application software vendor. Manugistics and SAP have jointly
developed, and Manugistics has released, the Manugistics Integrator for SAP(R),
which enables customers to implement an integrated supply chain software
solution that uses functionality from both Manugistics' suite and SAP's R/3(R)
without the need to develop custom interface programming. See "Products."
The Company has also entered into joint marketing agreements with Baan
and Marcam, which generally provide that Manugistics and these companies will
conduct joint marketing activities.
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The Company continues to develop relationships with leading consulting
firms in order to provide marketing leverage to the Company's own marketing
efforts. For example, Andersen Consulting, Inc. in North America displays the
Company's supply chain management software at Logistics 2020, its logistics
Center of Excellence in Atlanta, Georgia, and at its SAP Center of Excellence
in Cincinnati, Ohio. Similarly, the Company works closely with Ernst & Young
LLP, Booz Allen & Hamilton, Inc. and Price Waterhouse LLP. In addition to
formal programs, the Company cooperates with professional services firms
informally on a client-by-client basis, which involves cooperation at the field
level.
LICENSE AGREEMENTS AND PRICING
Software product revenues consist principally of fees generated from
licenses of software products. In consideration of the payment of license fees,
the Company generally grants nonexclusive, nontransferable, perpetual licenses
which are primarily computer, site or user specific. License fee arrangements
vary depending upon the type of software product being licensed and the
computer environment. License fees generally are set based primarily on which
products are licensed and on the number of users or locations in the case of
client/server implementations and on a per CPU basis in the case of mainframe
installations. The United States list price for supply chain management
software products ranges from $200,000 for a single product to several million
dollars for the complete product suite.
Customers may obtain support services and maintenance for an annual
fee that is approximately 18% of the then-current license fee. The support and
maintenance fee is billed monthly or annually and is subject to changes in
software license list prices. The Company also provides pre-installation
assistance, systems administration, training and other product-related
services, generally on a time and materials basis. This allows the customer to
determine the level of support appropriate for its needs.
COMPETITION
The market for supply chain planning and scheduling software is highly
competitive. However, the Company believes that no single competitor markets an
integrated set of products that provides strategic, tactical and operational
capabilities and covers demand planning, supply planning, manufacturing
scheduling and transportation management like the Company. In certain
functional areas, other applications software vendors and certain professional
services organizations, including such vendors as American Software, Inc.,
InterTrans Logistics Solutions, i2 Technologies, Inc., Numetrix, Inc. and
Weseley Software Development Corp., offer products that are directly
competitive with some of the software applications marketed by the Company. The
principal competitive factors in the supply chain planning and scheduling
software markets served by the Company include product functionality and
quality, product suite integration, ease of use, customer service and
satisfaction, product support, product-related services, compliance with
industry standards, vendor reputation and, in international markets,
availability in foreign languages. The Company believes that it currently
competes favorably with respect to these factors, and that its principal
competitive advantages are its comprehensive, integrated solution,
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its substantial investment in product development, its client support and its
extensive knowledge of supply chain planning and scheduling.
PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies on a
combination of trade secret, copyright and trademark laws, license agreements,
nondisclosure and other contractual provisions and technical measures to
protect its proprietary rights in its products. The Company distributes its
supply chain management software under software license agreements which
typically grant customers nonexclusive, nontransferable licenses to the
Company's products and have perpetual terms unless terminated for breach.
Under these license agreements, the Company retains all rights to market its
products. Use of the licensed software is usually restricted to the customer's
internal operations on designated computers at specified sites unless the
customer obtains a site license for use of the software that is restricted to
designated users. Use is subject to terms and conditions prohibiting
unauthorized reproduction or transfer of the software. The Company also seeks
to protect the source code of its software as a trade secret and as an
unpublished, copyrighted work.
The Company is the owner, user and federal registrant of Manugistics,
the Manugistics Logo and the phrase "Working As One" in the United States. The
Company has been granted trademark and service mark registration for the mark
Manugistics in Australia, the Benelux region, Canada, France, Germany, Japan,
Mexico, Spain and the United Kingdom.
EMPLOYEES
As of February 28, 1997, the Company had 598 full-time regular
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are generally good. In addition, the Company utilizes consultants,
independent contractors and temporary employees to meet its staffing needs.
RISK FACTORS
The Company operates in a dynamic and rapidly changing environment
that involves numerous risks and uncertainties. The following section lists
some, but not all, of the risks and uncertainties which may have a material
adverse effect on the Company's business, operating results or financial
condition. This section should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited Consolidated Financial Statements and Notes thereto for the years
ended February 28, 1997, February 29, 1996 and February 28, 1995, including the
"Forward Looking Statements" section contained elsewhere in this Annual Report
on Form 10-K.
Potential Fluctuations in Quarterly Results; Seasonality. The
Company's quarterly operating results have varied in the past and might vary
significantly in the future because of factors such as business conditions or
the general economy, the timely availability and acceptance of the Company's
products, technological change, the effect of competitive products and pricing,
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changes in Company strategy, the mix of direct and indirect sales, changes in
operating expenses, personnel changes and foreign currency exchange rate
fluctuations. The Company typically ships software products shortly after
license agreements are signed, and, therefore, does not maintain any material
contract backlog. Furthermore, the Company has typically recognized a
substantial portion of its revenues in the last month of a quarter. As a
result, software products revenues in any quarter are substantially dependent
on orders booked and shipped in that quarter, and the Company cannot predict
software products revenues for any future quarter with any significant degree
of certainty.
The Company's software products revenues are also difficult to
forecast because the market for business application software products is
rapidly evolving, and the Company's sales cycles vary substantially from
customer to customer. Because the licensing of the Company's products generally
involves a significant capital expenditure by the customer, the Company's sales
process is subject to the delays and lengthy approval processes that are
typically involved in such expenditures. In addition, the Company expects that
sales derived through indirect channels, the timing of which is harder to
predict than for direct sales because there is less direct contact with the
prospective customer, will increase as a percentage of total revenues. For
these and other reasons, the sales cycle associated with the licensing of the
Company's products varies substantially from customer to customer and typically
lasts between four and six months, during which time the Company might devote
significant time and resources to a prospective customer, including costs
associated with multiple site visits, product demonstrations and feasibility
studies, and might experience a number of significant delays, over which the
Company has no control.
The Company's determines its expense levels based, at least in part,
on its expectations as to future revenues. If revenues in a period are below
expectations, operating results are likely to be adversely affected. Net income
might be disproportionately affected by a reduction in revenues because a
proportionately smaller amount of the Company's expenses varies directly with
revenues. As a result of the foregoing factors, it is likely that in some
quarter the Company's operating results will be below the published
expectations of financial research analysts. In that event, the price of the
Company's common stock would likely be materially adversely affected.
The Company has generally realized lower revenues in its first fiscal
quarter (May) than in the immediately preceding quarter. The Company believes
that these fluctuations are caused primarily by customer budgeting and
purchasing patterns and by the Company's sales commission policies, which
compensate sales personnel for meeting or exceeding annual performance quotas.
Competition. The market for business applications software is highly
competitive and subject to rapid change. Many application software vendors
offer products that are directly competitive with some of the software products
marketed by the Company. Some of the Company's current and potential
competitors have significantly greater financial, marketing, technical and
other competitive resources than the Company. As a result, they may be able to
adapt more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of their
products than can the Company. In addition, certain ERP system vendors have
announced plans to develop new products or to incorporate additional
functionality into their current products that, if successfully developed and
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marketed, could compete with the products offered by the Company. Furthermore,
current and potential competitors may make acquisitions of other competitors or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the supply chain
management needs of the Company's prospective customers. Accordingly, it is
possible that new competitors may emerge and rapidly acquire significant market
share. If this were to occur, the business, operating results and financial
condition of the Company could be materially adversely affected. See
"Competition."
Dependence on New Products and Rapid Technological Change; Risk of
Product Defects. The market for the Company's products is characterized by
rapidly changing technologies, frequent new product introductions, rapid
changes in customer requirements and evolving industry standards. The Company
believes that its future financial performance will depend in large part on its
ability to maintain and enhance its current product line, develop new products
that achieve market acceptance, maintain technological competitiveness and meet
an expanding range of customer requirements. There can be no assurance,
however, that the Company will be successful in developing and marketing new
products or product enhancements that respond to technological change or
evolving industry standards, or that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technological or
other reasons, to successfully develop and introduce new products or
enhancements, the Company's business, operating results and financial condition
would be materially adversely affected.
In addition, software products as complex as those offered by the
Company might contain undetected errors or failures when first introduced or
when new versions are released. There can be no assurance, despite testing by
the Company and by current and prospective customers, that errors will not be
found in new products or product enhancements after commercial release,
resulting in loss of or delay in market acceptance, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
Management of Growth. The Company has recently experienced a period of
significant growth in net revenues that has placed a significant strain upon
its management systems and resources. The Company's ability to compete
effectively and to manage future growth, if any, will require the Company to
continue to improve its financial and management controls, reporting systems
and procedures on a timely basis. The Company has recently hired a significant
number of employees, and in order to maintain its ability to grow in the
future, the Company will be required to significantly increase the total number
of employees and to train and manage its employee work force. There can be no
assurance that the Company will be able to do so successfully. The Company's
failure to do so could have a material adverse effect upon the Company's
business, operating results and financial condition.
International Operations. The Company is currently conducting
operations in a small number of countries in Europe, Asia and South America and
plans to conduct operations in additional regions outside the United States,
which will require significant management attention
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and financial resources and could adversely affect the Company's operating
margins. There can be no assurance that the Company will be able to generate,
maintain or increase demand for the Company's products in new geographic
markets. Certain risks are inherent in international operations. Although only
some of the revenues from sales outside of the United States were denominated
in foreign currencies, the Company anticipates that the proportion of its
revenues denominated in foreign currencies will increase. A decrease in the
value of foreign currencies relative to the U.S. dollar could result in losses
from foreign currency translations. With respect to the Company's international
sales that are U.S. dollar-denominated, such a decrease could make the
Company's products and services less price competitive. The Company's
international sales and operations may be adversely affected by the imposition
of government controls, political and economic instability, difficulties in
staffing and managing international operations and general economic conditions
in foreign countries.
Expansion of Indirect Channels. The Company is building and
maintaining strong working relationships with ERP system vendors and consulting
firms that the Company believes can play important roles in marketing the
Company's products. The Company is currently investing, and intends to continue
to invest, significant resources to develop these relationships, which could
adversely affect the Company's operating margins. There can be no assurance
that the Company will be able to attract organizations that will be able to
market the Company's products effectively or that will be qualified to provide
timely and cost-effective customer support and service. In addition, the
Company's arrangements with these organizations are not exclusive and, in many
cases, may be terminated by either party without cause, and many of these
organizations are also involved with competing products. Therefore, there can
be no assurance that any organization will continue its involvement with the
Company and its products, and the loss of important organizations could
materially adversely affect the Company's results of operations. In addition,
if the Company is successful in selling products as a result of these
relationships, any material increase in the Company's indirect sales as a
percentage of total revenues would be likely to adversely affect the Company's
average selling prices and gross margins because of the lower unit prices that
the Company receives when selling through indirect channels.
Lack of Product Diversification. The Company's future results depend
on continued market acceptance of supply chain management software and services
as well as the Company's ability to continue to adapt and modify this software
to meet the evolving needs of its prospects and customers. Any reduction in
demand or increase in competition in the market for supply chain management
software products could have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence Upon Key Personnel. The loss of the services of one or more
of the Company's executive officers could have a material adverse effect on the
Company's business, operating results and financial condition. The Company does
not have employment contracts with any of its executive officers. There can be
no assurance that the Company will be able to retain its key personnel. The
Company's future success also depends on its continuing ability to attract,
assimilate and retain highly qualified sales, technical and managerial
personnel. Competition for
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such personnel is intense, and there can be no assurance that the Company can
attract, assimilate or retain such personnel in the future.
Intellectual Property and Proprietary Rights. The Company regards its
software as proprietary and relies on a combination of trade secret, copyright
and trademark laws, license agreements, nondisclosure and other contractual
provisions, technical measures and other methods to protect its proprietary
rights in its products. There can be no assurance that these protections will
be adequate to protect its proprietary rights or that the Company's competitors
will not independently develop products that are substantially equivalent or
superior to the Company's products. In addition, the laws of certain countries
in which the Company's products are or may be licensed do not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. Although the Company believes that its products,
trademarks and other proprietary rights do not infringe upon the proprietary
rights of third parties, there can be no assurance that third parties will not
assert infringement claims against the Company.
ITEM 2. PROPERTIES.
The Company's principal sales, marketing, product development, support
and administrative facilities are located in Rockville, Maryland, where the
Company leases approximately 116,000 square feet of space under a lease
agreement which expires on April 30, 2002. At February 28, 1997, the annual
base rent was approximately $1,867,000, subject to annual increases. The
Company also leases approximately 41,000 square feet of additional space under
lease agreements expiring on or before October 31, 1999. This space is located
in a building on a property very close to the Company's headquarters
facilities. The base rent is $764,000, subject to annual increases. The Company
also leases office space for its fourteen sales, service and product
development offices in the United States and its subsidiaries in Australia,
France, Germany, The Netherlands and the United Kingdom. The Company believes
that its facilities are adequate for its current needs and that suitable
additional space will be available on acceptable terms as required.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company is a party to legal
proceedings and claims. In addition, from time to time, the Company has
contractual disagreements with certain customers concerning the Company's
products and services. In the opinion of the Company's management, none of the
current matters or proceedings, when ultimately concluded, are likely to have a
material adverse effect on the results of operations or financial condition of
the Company and its subsidiaries taken as a whole.
As previously disclosed, the Company was named as a defendant in an
action filed by Weseley Software Development Corp. in the U.S. District Court
for the District of Connecticut. The plaintiff sought injunctive relief and
damages. In March 1997, the Company and the plaintiff settled this action and
the Company made no payment of damages to the plaintiff.
24
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 28, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and position held by each of the executive officers of
the Company or Manugistics, Inc., its principal operating subsidiary, are as
follows:
Name Age Position
- ---- --- --------
William M. Gibson . . . . . . . . 52 President, Chief Executive Officer and Chairman of the Board of Directors
Joseph E. Broderick. . . . . . . . 52 Executive Vice President, Client Sales and Services
Kenneth S. Thompson . . . . . . . . 41 Executive Vice President, Supply Chain Products
Keith J. Enstice . . . . . . . . . 46 Senior Vice President, Field Operations Division, Americas
Mary Lou Fox . . . . . . . . . 54 Senior Vice President, Consumer Products Marketing Division and Professional
Services Division
Peter Q. Repetti . . . . . . . . . 35 Vice President, Finance and Administration and Chief Financial Officer
Mr. Gibson has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since its formation in 1986.
From 1983 until 1986, when it was purchased by the Company, Mr. Gibson served
as President, Chief Executive Officer and Chairman of the Board of Directors of
STSC, Inc. (now Manugistics, Inc.). He joined STSC, Inc. as Executive Vice
President and Chief Operating Officer in 1982.
Mr. Broderick has served as Executive Vice President, Client Sales and
Services since December 1995. From 1991 to 1995, Mr. Broderick served as
President and Chief Operating Officer of Netwise, Inc., a communications
systems software company. From 1990 to 1991, Mr. Broderick served as Vice
President of Sales and Marketing for XA Systems, a productivity tools software
company.
Mr. Thompson has served as Executive Vice President, Supply Chain
Products, since January 1996. From 1990 to 1996, Mr. Thompson served as Senior
Vice President, Supply Chain Products. Mr. Thompson joined the Company in 1990
upon the Company's acquisition of The
25
26
ROVER Technology Company, a transportation software products and services
company, of which Mr. Thompson had served as Chief Executive Officer.
Mr. Enstice has served as Senior Vice President, Field Operations
Division, Americas, since October 1995. From 1994 to 1995, he served as Senior
Vice President, Channels and Alliances Division, and from 1991 to 1994, Mr.
Enstice served as Vice President, Worldwide Sales. From 1989 until 1991, he
served as Vice President, Marketing. Mr. Enstice joined STSC, Inc. in 1983.
Ms. Fox has served as Senior Vice President, Consumer Products
Marketing Division and Professional Services Division, since April 1993. She
joined the Company in 1982 as a Senior Systems Analyst and subsequently served
in various technical and professional services roles and as Vice President,
Professional Services, from March 1990 through March 1993.
Mr. Repetti has served as Vice President, Finance and Administration
and Chief Financial Officer since April 1996. From 1994 to 1996, Mr. Repetti
served as Vice President, Finance. From 1990 to 1994, he served as Director of
Financial Planning and Analysis for USAir Group, Inc.
There are no family relationships among any of the executive officers
or directors of the Company. Executive officers of the Company are elected by
the Board of Directors on an annual basis and serve at the discretion of the
Board of Directors.
26
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On May 9, 1997, the Company announced a two-for-one stock split after
the Board of Directors authorized a stock dividend of one share of common stock
for each share held, payable on June 11, 1997 to stockholders of record on May
23, 1997. All share prices provided below have been adjusted to reflect the
stock split.
The Company's common stock, $.002 par value per share, has traded on
The Nasdaq Stock Market under the symbol "MANU" since August 13, 1993. Prior to
the commencement of the Company's initial public offering on that date, there
was no public market for the Company's stock.
The following table sets forth, for the fiscal quarters indicated, the
high and low closing prices per share for the respective quarterly periods, as
reported in published financial sources and adjusted for the two-for-one stock
split disclosed above. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
Fiscal Year 1997 High Low
---------------- ---- ---
First Quarter 8 1/2 5 5/8
(ended May 31, 1996)
Second Quarter 14 1/2 7 1/4
(ended August 31, 1996)
Third Quarter 24 1/8 13 13/16
(ended November 30, 1996)
Fourth Quarter 26 7/8 15 5/8
(ended February 28, 1997)
Fiscal Year 1996 High Low
---------------- ---- ---
First Quarter 7 1/4 5 1/8
(ended May 31, 1995)
Second Quarter 8 1/4 5 3/8
(ended August 31, 1995)
Third Quarter 10 1/4 7
(ended November 30, 1995)
Fourth Quarter 8 3/4 4 3/4
(ended February 28, 1996)
27
28
As of April 30, 1997, there were approximately 108 stockholders of
record and approximately 4,000 beneficial owners of the Common Stock, according
to information provided by the Company's transfer agent.
The Company has never declared or paid any cash dividends on its
Common Stock and does not intend to do so in the foreseeable future. It is the
present intention of the Company to retain any future earnings to provide funds
for the operation and expansion of its business. In addition, the Company has
an unsecured committed revolving credit facility with a commercial bank that
will expire on September 30, 1997, unless it is renewed. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and Note 5 of Notes to Consolidated Financial
Statements. During the term of the facility, the Company is subject to a
covenant not to declare or pay cash dividends to holders of Common Stock.
Future payment of cash dividends, if any, will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements and such other factors
as the Board of Directors may deem relevant, and will be subject to the
covenants contained in the credit facility.
28
29
ITEM 6. SELECTED FINANCIAL DATA.
Selected consolidated financial data with respect to the Company for
each of the five fiscal years in the period ended February 28, 1997 are set
forth below. These data should be read in conjunction with the Consolidated
Financial Statements of the Company and related Notes thereto for the
corresponding periods which are contained in Part IV of this Annual Report on
Form 10-K. ON MAY 9, 1997, THE COMPANY'S BOARD OF DIRECTORS AUTHORIZED A STOCK
DIVIDEND OF ONE SHARE OF COMMON STOCK FOR EACH SHARE HELD, PAYABLE ON JUNE 11,
1997 TO STOCKHOLDERS OF RECORD AS OF MAY 23, 1997. ALL SHARE AND PER SHARE DATA
HAVE BEEN ADJUSTED TO REFLECT THIS TWO-FOR-ONE SPLIT.
29
30
Fiscal Year Ended February 28 or 29,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- -------------- -------------- --------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software products $ 50,778 $ 29,494 $ 24,758 $ 19,590 $ 14,731
Consulting, maintenance
and other services 43,944 32,828 24,652 18,371 13,553
--------------- --------------- -------------- -------------- --------------
Total revenues 94,722 62,322 49,410 37,961 28,284
Costs and operating expenses:
Cost of software sold 4,532 2,974 2,842 2,878 2,357
Cost of consulting, maintenance
and other services 19,101 14,614 12,990 9,518 7,850
Sales and marketing 32,909 21,365 16,580 13,374 10,538
Product development 17,380 11,229 7,550 5,011 4,097
General and administrative 8,817 6,080 5,130 3,714 3,437
Purchased research and development 3,697 - - - -
--------------- --------------- -------------- -------------- --------------
Total operating expenses 86,436 56,262 45,092 34,495 28,279
--------------- --------------- -------------- -------------- --------------
Income from operations 8,286 6,060 4,318 3,466 5
Other income (expense) 1,016 1,097 643 146 (92)
--------------- --------------- -------------- -------------- --------------
Net income (loss) before income taxes 9,302 7,157 4,961 3,612 (87)
Provision for income taxes 4,960 2,709 1,740 1,460 188
--------------- --------------- -------------- -------------- --------------
Net income (loss) $ 4,342 $ 4,448 $ 3,221 $ 2,152 $ (275)
=============== =============== ============== ============== ==============
Earnings (loss) per share $ 0.19 $ 0.21 $ 0.16 $ 0.12 $ (0.02)
=============== =============== ============== ============== ==============
Weighted average number of shares
outstanding (1) 22,964 21,628 20,574 18,442 14,926
Net income for fiscal 1997 included a non-recurring charge to operations
in the amount of $3,697,000 in connection with the write-off of purchased
in-process research and development costs. This charge was not deductible
for income tax purposes. Excluding this item, pro forma net income and
earnings per share would have been as follows:
Pro forma net income $ 8,039 $ 4,448 $ 3,221 $ 2,152 $ (275)
=============== =============== ============== ============== ==============
Pro forma earnings per share $ 0.35 $ 0.21 $ 0.16 $ 0.12 $ (0.02)
=============== =============== ============== ============== ==============
February 28 or 29,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- -------------- -------------- --------------
(in thousands)
BALANCE SHEET DATA:
Net working capital $ 32,499 $ 29,201 $ 30,484 $ 21,274 $ 240
Total assets 84,323 60,431 49,759 34,665 14,046
Long-term debt, less current portion 220 182 337 528 795
Redeemable preferred stock - - - - 1,000
Total stockholders' equity 53,593 42,942 36,512 24,899 1,374
Pro forma stockholders' equity (2) NA NA NA NA 2,374
----------------------------------------------
(1) Gives effect to (i) a two-for-one split of the Company's common stock
effected by means of a stock dividend authorized by the Company's Board of
Directors on May 9, 1997, (ii) the issuance of 379,747 shares of Series B
Convertible Preferred Stock on June 7, 1993; and (iii) the automatic
conversion of all outstanding shares of Series A and B Convertible
Preferred Stock into shares of common stock.
(2) For fiscal 1993, gives effect to the automatic conversion of all
outstanding shares of Series A and B Convertible Preferred Stock into
shares of common stock.
30
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Manugistics Group, Inc. ("Manugistics" or the "Company") develops,
markets and supports software products for synchronized supply chain management
and provides related services. Synchronized supply chain management refers to
managing the complex interactions involved in the flows of products through the
supply chain, and involves forecasting product demand and coordinating the
timing of distribution, manufacturing, procurement and transportation
activities to meet this demand, not only across an entire enterprise, but also
among an enterprise and its suppliers and customers. The Company believes it is
the only provider of an integrated suite of strategic, tactical and operational
supply chain planning tools including a high level optimizer and products that
address the four key operational areas of supply chain management: demand
planning, supply planning, manufacturing scheduling and transportation
management. Additionally, the Company markets and supports the STATGRAPHICS
personal systems product, which provides statistical tools for quality
management in manufacturing companies. The Company derived approximately 96%,
91%, and 84% of its revenues in fiscal 1997, 1996 and 1995, respectively, from
the Company's supply chain management software and services.
RESULTS OF OPERATIONS
REVENUES:
Software products. The Company's software products license revenues
increased in fiscal 1997 and fiscal 1996 because the Company's sales and
marketing efforts for supply chain management software products were effective,
and because of increased market acceptance of such products. These factors more
than offset decreased revenues from the personal systems software product. In
fiscal 1997, software products revenues increased to approximately 54% of total
revenues. This increase resulted from the Company's effective sales and
marketing and because the Company increased its resources devoted to generating
software products revenues more rapidly than its resources for producing
services revenues. See "Costs of Revenues and Operating Expenses." In fiscal
1996, software products revenues decreased to approximately 47% of total
revenues from approximately 50% in fiscal 1995, largely because consulting,
maintenance and other services revenues increased at a greater rate than
software products revenues. Although the percentage of total revenues
represented by software products revenues has varied in the past and is likely
to continue to vary, management of the Company anticipates that software
products revenues are likely to represent approximately 50% to 55% of total
revenues for fiscal 1998. See "Forward Looking Statements."
Fiscal year ended February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ----------- -------------- ---------- --------------
Supply chain management $ 47,820 91% $ 25,070 29% $ 19,505
Percentage of total revenues 50.5% 40.2% 39.5%
Personal systems $ 2,958 -33% $ 4,424 -16% $ 5,253
Percentage of total revenues 3.1% 7.1% 10.6%
-------------- -------------- --------------
Total software products revenues $ 50,778 72% $ 29,494 19% $ 24,758
Percentage of total revenues 53.6% 47.3% 50.1%
31
32
Supply chain management. Software products license revenues increased
in fiscal 1997 because of increases in the number of licenses and the average
license fee per transaction. These increases occurred largely because the
Company increased the number of its sales and marketing employees, the
Company's sales productivity initiatives generated results, contributions from
the Company's international operations increased significantly and Manugistics'
alliances with complementary software companies and consulting firms led to
additional revenues. In addition, revenues increased because of increased
market acceptance of the Company's products, including new product offerings
and new versions released during fiscal 1997, which resulted in part from the
recognition by prospects and customers that they could rapidly realize
significant benefits from effective supply chain management. These companies
licensed the Company's software to help them obtain these benefits.
In fiscal 1996, software products license revenues increased primarily
because of an increase in the number of licenses. This increase resulted from
increased market acceptance of the Company's products and from an increase in
the Company's sales and marketing efforts, which was made possible largely by
the addition of sales and marketing employees. In addition, the Company
generated a small amount of revenues during the fourth fiscal quarter through
its alliances with complementary firms.
In fiscal 1997, 1996 and 1995, the Company derived the substantial
majority of its software license revenues from direct sales. However, the
Company has embarked on a strategy of expanding its product distribution
through alliances with complementary software vendors. Consequently, the
Company anticipates that software license revenues derived from indirect sales
by these complementary vendors will increase as a proportion of software
license revenues. See "Forward Looking Statements."
Personal systems. Software products license revenues decreased in
fiscal 1997 and fiscal 1996 primarily because customers and prospective
customers selected competing products and because the Company sold the assets
of its APL*PLUS business for UNIX and personal computer systems effective
October 1, 1995. Following this disposition, the only personal systems product
that the Company has marketed is STATGRAPHICS and the Company has decreased the
resources dedicated to that product. Management of the Company believes that
demand for STATGRAPHICS will continue to decrease.
Consulting, maintenance and other services. Revenues from consulting,
maintenance and other services increased in fiscal 1997 and fiscal 1996
principally as a result of increased demand for supply chain management
consulting and maintenance services from a growing base of customers that have
licensed the Company's supply chain management software.
Fiscal year ended February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ----------- -------------- ---------- --------------
Supply chain management $ 43,120 36% $ 31,629 42% $ 22,205
Percentage of total revenues 45.5% 50.8% 44.9%
Personal systems $ 824 -31% $ 1,199 -51% $ 2,447
Percentage of total revenues 0.9% 1.9% 5.0%
-------------- -------------- --------------
Total consulting, maintenance
and other services revenues $ 43,944 34% $ 32,828 33% $ 24,652
Percentage of total revenues 46.4% 52.7% 49.9%
32
33
Supply chain management. Revenues from consulting and other services
increased in both the Americas and Europe in conjunction with (1) increases in
the number and average value of licenses of software products by new and
existing clients, which generally involve implementation and other consulting
services, and (2) the purchase of additional consulting services by established
clients.
Maintenance revenues have increased following the increase in the
installed base of customers that have licensed the Company's software products
and entered into maintenance contracts. Maintenance revenues tend to track
software products sold in prior periods. In the past three fiscal years,
approximately 90% to 95% of customers with maintenance contracts have renewed
these contracts.
Personal systems. Consulting, maintenance and other services revenues
decreased because of declines in maintenance and services revenues, which
decreased largely because the Company, consistent with its decision to focus on
its supply chain management business and in response to decreased demand for
personal systems products, disposed of the assets of its APL*PLUS business for
UNIX and personal computer systems in October 1995.
COSTS OF REVENUES AND OPERATING EXPENSES:
General. In fiscal 1998, the Company plans to continue to incur
relatively high levels of both sales and marketing expenditures and product
development expenditures as it pursues its strategies of expanding its business
into new geographic and other markets and expanding its distribution through
alliances and rapidly developing and delivering new product features and
functions. The percentage of revenues represented by these items may vary
because the Company's total quarterly and annual revenues have varied in the
past and are likely to continue to vary. Also, the percentages of revenues
represented by sales and marketing expenses, product development and the cost
of services can be affected by the total amount of expenses associated with new
employees and by the timing delays between the dates that these employees begin
work and the dates they first become productive after training.
33
34
Fiscal year ended February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ----------- -------------- ---------- --------------
Cost of software sold $ 4,532 52% $ 2,974 5% $ 2,842
Percentage of total revenues 4.8% 4.8% 5.7%
Cost of consulting, maintenance
and other services $ 19,101 31% $ 14,614 13% $ 12,990
Percentage of total revenues 20.2% 23.4% 26.3%
Sales and marketing $ 32,909 54% $ 21,365 29% $ 16,580
Percentage of total revenues 34.7% 34.3% 33.6%
Product development $ 17,380 55% $ 11,229 49% $ 7,550
Percentage of total revenues 18.3% 18.0% 15.3%
General and administrative $ 8,817 45% $ 6,080 19% $ 5,130
Percentage of total revenues 9.3% 9.8% 10.4%
-------------- -------------- --------------
Total operating expenses excluding
purchased research and development $ 82,739 47% $ 56,263 25% $ 45,092
Percentage of total revenues 87.3% 90.3% 91.3%
-------------- -------------- --------------
Purchased research and development $ 3,697 $ - $ -
Percentage of total revenues 3.9%
-------------- -------------- --------------
Total operating expenses $ 86,436 54% $ 56,262 25% $ 45,092
Percentage of total revenues 91.2% 90.3% 91.3%
Cost of software sold. Cost of software sold includes 1) amortization
of capitalized software development costs and 2) cost of goods. The Company
amortizes capitalized software development costs over a product's estimated
economic life, generally two years, commencing when a product is available for
general commercial release.
Fiscal year ended February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ----------- -------------- ---------- --------------
Amortization of capitalized software $ 3,543 59% $ 2,228 18% $ 1,884
Percentage of software products revenues 7.0% 7.6% 7.6%
Cost of goods $ 989 33% $ 746 -22% $ 958
Percentage of software products revenues 1.9% 2.5% 3.9%
-------------- -------------- --------------
Cost of software sold $ 4,532 52% $ 2,974 5% $ 2,842
Percentage of software products revenues 8.9% 10.1% 11.5%
The cost of software sold increased in fiscal 1997 because
amortization increased following the general commercial release of additional
supply chain management software products for which costs had previously been
capitalized. The amount of capitalized software development costs has increased
in recent years as the Company has increased its gross product development
expenditures for supply chain management software. See "Results of Operations
- -- Product development." Cost of goods expenses increased in fiscal 1997 mainly
because of a write-off of obsolete and slow-moving inventory.
The cost of software sold decreased as a percentage of software
products revenues in fiscal 1997 from fiscal 1996 largely because software
products revenues increased more rapidly than the cost of software sold.
34
35
The cost of software sold increased in fiscal 1996 because the amount
of the increase in amortization was more than the amount of the decrease in
cost of goods. Cost of goods expenses decreased in fiscal 1996 because of
decreases in the number of units of personal systems products that were sold
and decreases in the per-unit costs of certain personal systems products.
The cost of software sold decreased as a percentage of software
products revenues in fiscal 1996 from fiscal 1995 because software products
revenues increased at a greater rate than the cost of software sold and because
supply chain management products, which generally have a proportionately lower
cost of goods per product, constituted a higher proportion of total software
products revenues. Cost of software sold increased less rapidly than software
products revenues because of the decrease in the cost of goods component.
Cost of consulting, maintenance and other services. The cost of
consulting, maintenance and other services increased in fiscal 1997 primarily
because the Company added personnel in both North America and Europe to provide
the consulting and maintenance services that generated the corresponding
increase in supply chain management revenues from consulting, maintenance and
other services.
As a percentage of consulting, maintenance and other services
revenues, the cost of consulting, maintenance and other services decreased in
fiscal 1997 largely because a portion of the increase in corresponding revenues
was generated by maintenance and product support, which can be provided more
efficiently by serving a larger client base, and because of improved
utilization of the Company's consulting employees.
In fiscal 1996, the cost of consulting, maintenance and other services
increased primarily because the Company added consulting personnel, primarily
in North America. The increase in the cost of consulting services was partially
offset by a decrease in the cost of maintenance. Maintenance expenses decreased
in part because the Company created a smaller, more focused group to provide
maintenance services and because of improved software quality. In addition, the
engineering resources devoted to maintenance decreased because the quality of
the Company's software products increased as a result of the Company's
effective design and development processes, for which Manugistics' headquarters
office received ISO 9001 certification in December 1994.
As a percentage of consulting, maintenance and other services
revenues, the cost of consulting, maintenance and other services decreased in
fiscal 1996 principally because a portion of the increase in the corresponding
revenues was generated by maintenance and product support, the cost of which
decreased and which can be provided more efficiently by serving a larger client
base.
Sales and marketing. Sales and marketing expenses increased in fiscal
1997 and fiscal 1996 because the Company increased its sales and marketing
resources in the U.S. and Europe and increased its marketing expenses in
connection with expanded product offerings. The Company also incurred increased
commission expenses as a result of greater software products license revenues.
As a percentage of total revenues, sales and marketing expenses increased in
fiscal 1997 principally because these expenses increased at a more rapid rate
than total revenues. The Company is continuing to hire and train additional
employees and to make other expenditures as it pursues its strategy of
expanding its business into new geographic and other markets and expanding its
distribution through alliances. As a percentage of fiscal 1996 revenues, sales
and
35
36
marketing expenses increased largely because the Company hired several new
sales employees late in the year.
Product development. The Company records product development expenses
net of capitalized software development costs.
Fiscal year ended February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ----------- -------------- ---------- --------------
Gross product development costs $ 24,223 50% $ 16,144 63% $ 9,900
Percentage of total revenues 25.6% 25.9% 20.0%
Less: Capitalized prod. dev. costs $ 6,843 39% $ 4,915 109% $ 2,350
Percentage of gross prod. dev. costs 28.3% 30.4% 23.7%
-------------- -------------- --------------
Product development expenses $ 17,380 55% $ 11,229 49% $ 7,550
Percentage of total revenues 18.3% 18.0% 15.3%
Gross product development costs for fiscal 1997 and fiscal 1996
increased primarily because the Company employed more developers of supply
chain management software. The Company hired these developers to develop new
software products and new versions of existing products, and to incorporate new
technologies into the Company's product offerings. As a percentage of total
revenues, net product development expenses increased in fiscal 1997 and fiscal
1996 largely because these expenses increased at a greater rate than total
revenues. In fiscal 1998, the Company plans to continue to incur significant
product development expenditures as it pursues its strategy of rapidly
developing and delivering new products and new product features and functions.
See "Forward Looking Statements."
General and administrative. General and administrative expenses
increased in fiscal 1997 and fiscal 1996 primarily because of expenses
associated with supporting an organization with more employees and a greater
geographic scope. As a percentage of total revenues, general and administrative
expenses decreased in fiscal 1997 and fiscal 1996 because the Company was able
to use its base of administrative resources to support a larger organizational
structure.
Purchased research and development. During the first quarter of fiscal
1997, the Company acquired by merger all of the outstanding capital stock of
Avyx, Inc., a developer and services provider of custom manufacturing
scheduling systems. The Company incurred a non-recurring charge to operations
of $3.7 million ($.16 per share) in connection with the write-off of purchased
in-process research and development costs. This one-time charge affected the
Company's operating performance for fiscal 1997. See Note 4 of Notes to
Consolidated Financial Statements.
36
37
INCOME FROM OPERATIONS:
Fiscal year ended February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ----------- -------------- ---------- --------------
Income from operations excluding $ 11,983 98% $ 6,060 40% $ 4,318
purchased research and development
Percentage of total revenues 12.7% 9.7% 8.7%
Purchased research and development $ 3,697 $ - $ -
Percentage of total revenues 3.9%
Income from operations $ 8,286 37% $ 6,060 40% $ 4,318
Percentage of total revenues 8.7% 9.7% 8.7%
OTHER INCOME:
Fiscal year ended February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ----------- -------------- ---------- --------------
Other income (expense) $ 1,016 -7% $ 1,097 71% $ 643
Percentage of total revenues 1.1% 1.8% 1.3%
Other income (expense) includes income from short term investments,
interest expense, foreign currency exchange gains or losses, and other gains or
losses. Other income decreased in fiscal 1997 because of slight changes in the
various components. Other income increased in fiscal 1996 because income from
short term investments increased.
PROVISION FOR INCOME TAXES:
Fiscal year ended February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ----------- -------------- ---------- --------------
Pro forma income taxes $ 3,555 31% $ 2,709 56% $ 1,740
Percentage of income before taxes 38.2% 37.9% 35.1%
Percentage of total revenues 3.8% 4.3% 3.5%
Income tax related to
purchased research and development $ 1,405 $ - $ -
Income taxes $ 4,960 83% $ 2,709 56% $ 1,740
Percentage of income before taxes 53.3% 37.9% 35.1%
Percentage of total revenues 5.2% 4.3% 3.5%
The effective tax rate represented by the Company's provision for
income taxes in fiscal 1997 was approximately 53%, primarily because the
expenses associated with the Company's write-off of purchased research and
development costs during the first quarter of fiscal 1997 were not deductible
for tax purposes. Excluding the effect of this write-off on taxable income, the
pro forma effective tax rate would have been approximately 38%. Management of
the Company believes that, in fiscal 1998, the effective tax rate of the
Company on a consolidated basis is likely to be approximately 39%, excluding
one-time charges taken in connection with acquisitions or other transactions.
This estimate is based on current domestic and foreign tax law and is thus
subject to change. See Note 9 of Notes to Consolidated Financial Statements.
37
38
The effective tax rate represented by the Company's provision for
income taxes in fiscal 1996 was approximately 38%, largely because of a
reduction of a valuation allowance associated with net operating losses of the
Company's Germany subsidiary, which more than offset higher marginal tax rates
applicable to certain income generated by the Company's foreign subsidiaries.
NET INCOME AND EARNINGS PER SHARE:
Fiscal year ended February 28 or 29,
------------------------------------------------
1997 Change 1996 Change 1995
------ ------- ------ ------ ------
Net income excluding $8,039 81% $4,448 38% $3,221
purchased research and development
Percentage of total revenues 8.5% 7.1% 6.5%
Purchased research and development $3,697
------ ------ ------
Net income $4,342 -2% $4,448 38% $3,221
Percentage of total revenues 4.6% 7.1% 6.5%
====== ====== ======
Earnings per share excluding $0.35 67% $0.21 31% $0.16
purchased research and development
Purchased research and development $0.16
------ ------ ------
Earnings per share $0.19 10% $0.21 31% $0.16
====== ====== ======
Weighted average common shares
and equivalent shares outstanding 22,964 21,628 20,574
====== ====== ======
LIQUIDITY AND CAPITAL RESOURCES
February 28 or 29,
-----------------------------------------------------------------------------
1997 Change 1996 Change 1995
-------------- ---------- ------------- ---------- --------------
Working capital $ 32,499 11% $ 29,201 -4% $ 30,484
Cash, cash equivalents
and marketable securities $ 22,174 -6% $ 23,479 -6% $ 24,965
The Company has historically financed its growth primarily through
funds generated from operations and through proceeds from offerings of capital
stock. The increase in working capital at February 28, 1997 from February 29,
1996 resulted principally from increases in the Company's accounts receivable
and cash balances, which more than offset a decrease in marketable securities
resulting from the Company's payments in May 1996 in connection with the
acquisition of Avyx, Inc. See Note 4 of Notes to Consolidated Financial
Statements.
The Company's operating activities provided cash of $14.2 million,
$9.4 million and $6.6 million in fiscal 1997, 1996 and 1995, respectively.
Operating cash flows increased largely because the cash flows resulting from
net income were augmented by increases in non-cash expenses and increases in
deferred revenues, accrued compensation, other accrued liabilities and income
taxes payable, and offset by increases in accounts receivable. At fiscal 1997
year end, accounts receivable were $37.1 million, compared to $19.3 million at
fiscal 1996 year end, primarily as a result of increases in the number and size
of software license transactions. Deferred
38
39
revenue increased from $6.7 million to $14.0 million because of growth in
software licensing activity and increases in related services and maintenance
revenues.
Investing activities used cash of $13.5 million, $9.6 million and
$10.8 million in fiscal 1997, 1996 and 1995, respectively. Sales of marketable
securities provided cash, but the amounts provided were more than offset by
cash used for purchases of property and equipment, capitalization of software
development costs, purchases of marketable securities and acquisitions. In
accordance with its strategies for positioning itself to be able to meet
anticipated demand for supply chain management software and of rapidly
delivering new product features and functions, the Company used cash to acquire
computer and other equipment, to expand its facilities and to expand its
product development efforts.
Financing activities provided cash of $2.4 million, $0.7 million and
$6.8 million in fiscal 1997, 1996 and 1995, respectively. In fiscal 1997, cash
from financing activities was derived primarily from the exercise of stock
options and the issuance of stock under stock purchase plans. See Note 6 of
Notes to Consolidated Financial Statements. In fiscal 1995, the Company
received approximately $6.8 million from the private placement of 490,000
newly-issued shares of common stock.
The Company has an unsecured committed revolving credit facility with
a commercial bank. Under the terms of the facility, the Company may request
advances in the aggregate amount of up to $10 million. The Company may make
borrowings under the facility for short-term working capital purposes or for
acquisitions. (Acquisition-related borrowings are limited to $7.5 million per
acquisition.) The facility contains certain financial covenants that the
Company believes are typical for a facility of this nature and amount. This
facility succeeds a similar facility that the Company maintained with two
commercial banks, one of which is the lender under the current facility, and
will expire in September 1997, unless renewed. There were no amounts
outstanding under this facility at February 28, 1997.
During the first quarter of fiscal 1998, the Company and Information
Resources, Inc. ("IRI") entered into agreements relating to the Company's
development of a supply chain planning solution that will incorporate IRI's
point-of-sale scanner data into the Company's supply chain management software.
Under the agreements, the Company paid $1.5 million to IRI and the Company will
market IRI's point-of-sale data and will have l0-year, exclusive rights among
supply chain software vendors in most geographic markets to incorporate IRI's
data, the Company and IRI will resell certain of each other's products, and the
Company might acquire certain other products of IRI (subject to the
satisfaction of certain contingencies).
As part of these agreements, the Company has committed that it will
generate a minimum of $16.5 million in revenues for IRI from specified products
over periods of approximately one to three years, beginning after the
occurrence of certain events. This commitment is subject to the satisfaction
of significant contingencies specified in the agreements. Although the Company
currently anticipates that it will be able to produce a sufficient amount of
qualifying revenues to satisfy its commitment, if the Company is unable to
generate the minimum annual revenues set forth in the agreements, it will be
obligated to pay to IRI from its own funds an amount equal to the difference
between the qualifying revenues generated and the required minimum, which could
result in a decrease in working capital.
39
40
The Company investigates potential candidates for acquisition, joint
venture opportunities or other relationships on an ongoing basis. Depending on
certain factors, including the amount, nature, method and timing of the
consideration to be paid by the Company, any such acquisitions, transactions or
relationships might result in a decrease in working capital.
The Company believes that existing cash balances, marketable
securities, funds generated from operations and amounts available under the
revolving credit facility will be sufficient to meet its anticipated liquidity
and working capital requirements for the next 12 to 18 months. If the Company
decides to expand its operations more rapidly, to broaden or enhance its
products more rapidly, to acquire businesses or technologies or to make other
significant expenditures to respond to market opportunities or competitive
pressures, then the Company may need additional funds at an earlier time.
FORWARD LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section and the "Business" section of this Annual Report
on Form l0-K contain certain forward looking statements that are subject to a
number of risks and uncertainties. In addition, the Company may publish forward
looking statements from time to time relating to such matters as anticipated
financial performance, business prospects and strategies, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of l995 provides a safe
harbor for forward looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated or other expectations expressed in the Company's forward looking
statements in this Annual Report or elsewhere in the future. The risks and
uncertainties that may affect the business, operating results or financial
condition of the Company include those set forth above under "Risk Factors" and
the following:
The Company believes that the market for supply chain management
software is expanding rapidly. If market demand for the Company's products does
not continue to grow rapidly, because of such factors as adverse changes in
domestic or international business and economic conditions, the timely
availability and acceptance of the Company's products, technological change or
the effect of competitive products and pricing, software license revenue growth
could be adversely affected.
Revenues for any period depend on the volume, timing and size of
license agreements. The Company typically ships software products shortly after
license agreements are signed, and, therefore, does not maintain any material
contract backlog. The timing of license agreements is difficult to forecast
because software sales cycles are affected by the size of transactions and
other external factors such as general business or economic conditions or
competitors' actions. A small variation in the timing of software licensing
transactions, particularly at or near the end of any quarter or year, can cause
significant variations in software products license revenues in any period.
There can be no assurance that the Company will be able to attract
complemenatary software vendors, consulting firms or other organizations that
will be able to market the Company's products effectively or that will be
qualified to provide timely and cost-effective customer support and service. In
addition, there can be no assurance that any
40
41
organization will continue its involvement with the Company and its products,
and the loss of important organizations could materially adversely affect the
Company's results of operations.
The timing of releases of the Company's software products can be
affected by client needs, marketplace demands and technological advances.
Development plans frequently change, and it is difficult to predict with
accuracy the release dates for products in development.
41
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and supplementary
data, together with the report of Deloitte & Touche LLP, independent auditors,
are included in Part IV of this Form 10-K. Reference is made to the "Index to
Consolidated Financial Statements" on page 41.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
41
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the information set forth in the definitive Proxy
Statement relating to the 1997 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year ended February 28, 1997) (the "Proxy Statement") under
the caption "Election of Directors," and to the information set forth in Part I
of this Annual Report on Form 10-K regarding executive officers under the
caption "Item 4A. Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the information set forth in the Proxy Statement
under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the information set forth in the Proxy Statement
under the caption "Ownership of Common Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information set forth in the Proxy Statement
under the caption "Certain Business Relationships."
42
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report:
(1) Financial Statements:
Page Number
In This Report
--------------
Report of Independent Auditors F-1
Consolidated Balance Sheets as of February 28, 1997
and February 29, 1996 F-2
Consolidated Statements of Operations for Each of the Three Years in
the Period Ended February 28, 1997 F-3
Consolidated Statements of Stockholders' Equity for Each of the Three
Years in the Period Ended February 28, 1997 F-4
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period Ended February 28, 1997 F-5
Notes to Consolidated Financial Statements F-6
The financial statements listed above and the financial statement schedule listed below are
filed as part of this Annual Report on Form 10-K.
(2) Financial Statement Schedule:
(A) Schedule II - Valuation and Qualifying Accounts S-2
Schedules other than the one listed above are omitted because they are
not required or are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto contained in this Annual
Report on Form 10-K.
43
45
(3) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed below
and are filed or incorporated by reference as part of this Annual Report on
Form 10-K. Exhibits 10.1, 10.2, 10.3, 10.11, 10.12 and 10.15 are compensatory
plans required to be filed as exhibits pursuant to Item 14(c) of this report.
Number Notes Description
- ------ ----- -----------
2.1 (B)(i) Asset Purchase Agreement dated as of the 19th of
May, 1994 by and among Manugistics (Deutschland)
GmbH, Societe de Traitments et de Services
Conversationnels S.A., Dr. Rudolf Lewandowski,
sole proprietor of Marketing Systems SP, Marketing
Systems S.A.R.L. and Dr. Rudolf Lewandowski, as
amended.
2.2 (B) Shareholders' Agreement dated May 19, 1994 between
Manugistics Group, Inc. and Dr. Rudolf Lewandowski,
individually and d/b/a Marketing Systems SP.
2.3 (B) Guaranty dated May 19, 1994 by the Company in favor
of Marketing Systems SP.
3.1 (A) Certificate of Incorporation of the Company, as amended.
3.2 (A) Amended and Restated By-Laws of the Company.
10.1 (J) Employee Incentive Stock Option Plan of the Company,
as amended.
10.2 (J) Employee Stock Option Plan of the Company, as amended.
10.3 (A) Merger Stock Option Plan of the Company, as amended.
10.4 (A) Form of Notice of Grant of Option pursuant to the
Director Stock Option Plan.
10.7 (A) Lease Agreement dated May 1, 1992 between the Company
and GTE Realty Corporation.
10.7(a) (E) First Amendment to Lease Agreement dated July 19, 1993
between the Company and GTE Realty Corporation.
10.7(b) (E) Second Amendment to Lease Agreement dated April 13,
1994 between the Company and East Jefferson Associates.
44
46
10.7(c) (E) Third Amendment to Lease Agreement dated May 1, 1994
between the Company and East Jefferson Associates.
10.7(d) (E) Fourth Amendment to Lease Agreement dated February 27,
1996 between the Company and East Jefferson
Associates.
10.7(e) Fifth Amendment to Lease Agreement dated September 6,
1996 between the State of Maryland and the Company
10.7(f) Sixth Amendment to Lease Agreement dated October 10,
1996 between the State of Maryland and the Company
10.7(g) Seventh Amendment to Lease Agreement dated April 25,
1997 between the State of Maryland and the Company
10.10 Agreement dated July 26, 1994 between the Company and
The Dun & Bradstreet Corporation, as amended
10.11 (D) Outside Directors Non-Qualified Stock Option Plan
10.12 (D) Executive Incentive Stock Option Plan
10.13 (H) Financing Agreement dated as of April 24, 1996 by and
among the Company, NationsBank, N.A. and Silicon
Valley Bank, N.A.
10.14 (H) Form of Revolving Promissory Note dated April 24, 1996
by the Company in favor of NationsBank, N.A.
10.15 (F) Employee Stock Purchase Plan of the Company
(previously identified as Exhibit 10.14)
10.16 (G)(i) Purchase Agreement dated November 20, 1995 by and
among Manugistics, Inc., Dr. Rudolf Lewandowski and
Marketing Systems S.A.R.L.
10.17 (H) Sublease dated May 5, 1995 between the Company and
NationsBank, N.A., as amended
10.18 (I) Agreement and Plan of Merger dated May 24, 1996
between Avyx, Inc., Manugistics Acquisition, Inc. and
the Company
10.19 (I) Consulting Agreement dated May 24, 1996 between The
Kendall Group, Inc. and the Company
45
47
10.20 (I) Confidentiality, Non-Competition and Non-Solicitation
Agreement dated May 24, 1996 between the Company and
John K. Willoughby and Jo Anne Gardner
10.21 (K) Financing Agreement dated as of September 30, 1996 by
and among the Company and NationsBank, N.A.
10.22 (K) Form of Revolving Promissory Note dated September 30,
1996 by the Company in favor of NationsBank, N.A.
10.23 Sublease Agreement between CTA Incorporated and the
Company dated May 23, 1996
10.24 (ii) Data Marketing and Guaranteed Revenue Agreement dated
March 7, 1997 between the Company and Information
Resources, Inc.
10.25 (ii) Asset Purchase Agreement dated March 7, 1997 between
Manugistics, Inc., Manugistics Services, Inc., IRI
Logistics, Inc. and Information Resources, Inc.
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Company
23 Independent Auditors' Consent
27 Financial Data Schedule
46
48
(A) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (NO. 33-65312).
(B) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1994.
(C) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S CURRENT
REPORT ON FORM 8-K DATED JULY 27, 1994.
(D) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1994.
(E) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995.
(F) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1995.
(G) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1995.
(H) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 29, 1996.
(I) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1996.
(J) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S
DEFINITIVE PROXY STATEMENT RELATING TO THE 1996 ANNUAL MEETING OF SHAREHOLDERS
DATED JUNE 20, 1996.
(K) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1996.
(i) CONFIDENTIAL TREATMENT PREVIOUSLY GRANTED FOR CERTAIN PORTIONS OF THIS
EXHIBIT.
(ii) CONFIDENTIAL TREATMENT REQUESTED FOR CERTAIN PORTIONS OF THIS EXHIBIT.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended
February 28, 1997.
46
49
(c) Exhibits
See the response to Item 14(a)(3) above.
(d) Financial Statement Schedules
The financial statement schedule required to be filed is listed in the
response to Item 14(a)(2) above, and appears on page S-2 of this
report.
47
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on May 28, 1997.
MANUGISTICS GROUP, INC.
(Registrant)
By:/s/William M. Gibson
----------------------
William M. Gibson
President, Chief Executive Officer
and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 28, 1997.
/s/William M. Gibson /s/Peter Q. Repetti
---------------------- -----------------------
William M. Gibson Peter Q. Repetti
President, Chief Executive Officer and Vice President, Finance and Administration
Chairman of the Board of Directors and Chief Financial Officer
(Principal executive officer) (Principal financial officer and
principal accounting officer)
/s/Jack A. Arnow /s/Joseph H. Jacovini
---------------------- -----------------------
Jack A. Arnow Joseph H. Jacovini
Director Director
/s/J. Michael Cline /s/William G. Nelson
---------------------- -----------------------
J. Michael Cline William G. Nelson
Director Director
/s/ Lynn C. Fritz /s/Thomas A. Skelton
---------------------- -----------------------
Lynn C. Fritz Thomas A. Skelton
Director Director
47
51
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Manugistics Group, Inc.:
We have audited the accompanying consolidated balance sheets of Manugistics
Group, Inc. (the Company) and its subsidiaries as of February 28, 1997 and
February 29, 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended February 28, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries
at February 28, 1997 and February 29, 1996, and the results of their operations
and their cash flows for each of the three years in the period ended February
28, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 12 to the consolidated financial statements, on May 9,
1997, the Directors of the Company declared a two-for-one stock split to be
paid in the form of a stock dividend effective June 11, 1997 to shareholders of
record as of May 23, 1997. All applicable share and per share amounts have
been adjusted to reflect the stock split.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 28, 1997 (except Note 12 as to which the date is May 9, 1997)
F-1
52
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
ASSETS 1997 1996
--------------------------------------
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents $ 8,543 $ 4,921
Marketable securities 13,631 18,558
Accounts receivable (net of allowance for returns and
uncollectible accounts - 1997, $1,215; 1996, $711) 37,093 19,281
Prepaid expenses and other current assets 1,221 1,354
Deferred taxes 1,054 809
-------------- ---------------
Total current assets 61,542 44,923
PROPERTY AND EQUIPMENT - Net 10,355 6,046
OTHER NONCURRENT ASSETS:
Software development costs (net of accumulated
amortization - 1997, $6,375; 1996, $2,956) 9,932 6,084
Intangibles (net of accumulated amortization -
1997, $1,943; 1996, $992) 2,130 2,927
Other noncurrent assets 364 451
-------------- ---------------
TOTAL $ 84,323 $ 60,431
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,244 $ 3,282
Accrued compensation 6,181 1,727
Other accrued expenses 3,393 3,184
Deferred revenue 13,808 6,652
Current portion of long-term debt 191 155
Income taxes payable 1,226 722
-------------- ---------------
Total current liabilities 29,043 15,722
LONG-TERM DEBT 220 182
DEFERRED TAXES 1,467 1,585
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock - $.002 par value; 30,000,000 shares
authorized; shares issued, 22,429,414 in 1997;
10,846,502 in 1996; shares outstanding,
21,676,904 in 1997; 10,456,247 in 1996 44 22
Additional paid-in capital 38,837 33,131
Retained earnings 14,970 10,628
Translation adjustment 459 (95)
Treasury stock - shares at cost, 752,510 in 1997; 390,255 in 1996 (717) (744)
-------------- ---------------
Total stockholders' equity 53,593 42,942
-------------- ---------------
TOTAL $ 84,323 $ 60,431
============== ===============
See notes to consolidated financial statements.
F-2
53
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED FEBRUARY 28 OR 29,
---------------------------------------------
1997 1996 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Software products $ 50,778 $ 29,494 $ 24,758
Consulting, maintenance and other services 43,944 32,828 24,652
--------- --------- ---------
Total revenues 94,722 62,322 49,410
--------- --------- ---------
OPERATING EXPENSES:
Cost of software sold 4,532 2,974 2,842
Cost of consulting, maintenance and other services 19,101 14,614 12,990
Sales and marketing 32,909 21,365 16,580
Product development 17,380 11,229 7,550
General and administrative 8,817 6,080 5,130
Purchased research and development 3,697 - -
--------- --------- ---------
Total operating expenses 86,436 56,262 45,092
--------- --------- ---------
INCOME FROM OPERATIONS 8,286 6,060 4,318
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 1,201 1,204 717
Interest expense (58) (91) (59)
Other (127) (16) (15)
--------- --------- ---------
Other income - net 1,016 1,097 643
--------- --------- ---------
INCOME BEFORE INCOME TAXES 9,302 7,157 4,961
PROVISION FOR INCOME TAXES 4,960 2,709 1,740
--------- --------- ---------
NET INCOME $ 4,342 $ 4,448 $ 3,221
========= ========= =========
EARNINGS PER SHARE $0.19 $0.21 $0.16
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENT SHARES OUTSTANDING
22,964 21,628 20,574
========= ========= =========
See notes to consolidated financial statements.
F-3
54
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 and FEBRUARY 28, 1995
(In thousands)
COMMON STOCK
-------------------------------------------
PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS
BALANCE, MARCH 1, 1994 9,853 $ 20 $ 22,819 $ 2,959
Issuance of common stock 490 1 6,837 -
Tax benefit of options exercised - - 1,065 -
Exercise of stock options 189 - 228 -
Amortization of deferred compensation - - - -
Translation adjustment - - - -
Net income - - - 3,221
------------- ------ ----------- ----------
BALANCE, FEBRUARY 28, 1995 10,532 21 30,949 6,180
Issuance of common stock 42 - 377 -
Tax benefit of options exercised - - 1,056 -
Exercise of stock options 273 1 538 -
Issuance of treasury stock - - 211 -
Amortization of deferred compensation - - - -
Translation adjustment - - - -
Net Income - - - 4,448
------------- ------ ----------- ----------
BALANCE, FEBRUARY 29, 1996 10,847 22 33,131 10,628
Issuance of common stock 50 - 733 -
Tax benefit of options exercised - - 2,591 -
Exercise of stock options 318 - 1,907 -
Fair value of options issued - - 217 -
Compensation expense - - 69 -
Issuance of treasury stock - - 211 -
Translation adjustment - - - -
Net Income - - - 4,342
Two-for-one stock split 11,214 22 (22) -
------------- ------ ----------- ----------
BALANCE, FEBRUARY 28, 1997 22,429 $44 $ 38,837 $ 14,970
============= ====== =========== ==========
TRANSLATION TREASURY DEFERRED
ADJUSTMENT STOCK COMPENSATION TOTAL
BALANCE, MARCH 1, 1994 $ (86) $ (771) $ (42) $24,899
Issuance of common stock - - - 6,838
Tax benefit of options exercised - - - 1,065
Exercise of stock options - - - 228
Amortization of deferred compensation - - 30 30
Translation adjustment 231 - - 231
Net income - - - 3,221
--------------- ----------- ----------------- --------
BALANCE, FEBRUARY 28, 1995 145 (771) (12) 36,512
Issuance of common stock - - - 377
Tax benefit of options exercised - - - 1,056
Exercise of stock options - - - 539
Issuance of treasury stock - 27 - 238
Amortization of deferred compensation - - 12 12
Translation adjustment (240) - - (240)
Net Income - - - 4,448
--------------- ----------- ----------------- --------
BALANCE, FEBRUARY 29, 1996 (95) (744) - 42,942
Issuance of common stock - - - 733
Tax benefit of options exercised - - - 2,591
Exercise of stock options - - - 1,907
Fair value of options issued - - - 217
Compensation expense - - - 69
Issuance of treasury stock - 27 - 238
Translation adjustment 554 - - 554
Net Income - - - 4,342
Two-for-one stock split - - - -
--------------- ----------- ----------------- --------
BALANCE, FEBRUARY 28, 1997 $ 459 $ (717) - $ 53,593
=============== =========== ================= ========
See notes to consolidated financial statements.
F-4
55
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED FEBRUARY 28 OR 29,
----------------------------------------------
1997 1996 1995
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,342 $ 4,448 $ 3,221
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,986 4,543 3,432
Write-off of purchased research and development 3,697 - -
Other 345 466 (135)
Changes in assets and liabilities (net of the
effects of acquisitions):
Accounts receivable (17,642) (4,096) (4,033)
Prepaid expenses and other current assets 137 (408) 373
Other noncurrent assets 97 32 (86)
Accounts payable and accrued expenses 629 2,276 740
Accrued compensation 4,454 (169) 598
Deferred revenue 7,047 863 1,136
Income taxes payable 3,095 1,468 1,347
------------ ------------- ------------
Net cash provided by operating activities 14,187 9,423 6,593
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities 7,933 5,570 2,635
Purchase of marketable securities (3,006) (3,662) (7,435)
Purchase of property and equipment (7,130) (5,126) (1,803)
Acquisition of Avyx, Inc. and Marketing Systems GmbH (Note 4) (3,582) (1,068) (1,505)
Purchase of treasury stock - - (334)
Capitalization of computer software development costs (6,843) (4,915) (2,350)
Purchase of software licenses for resale (878) (382) (50)
------------ ------------- ------------
Net cash used in investing activities (13,506) (9,583) (10,842)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under line of credit 1,000 - -
Payments under line of credit (1,000) - -
Payments under long-term obligations (273) (188) (250)
Proceeds from sale of common stock 733 377 6,838
Proceeds from exercise of stock options 1,907 539 228
------------ ------------- ------------
Net cash provided by financing activities 2,367 728 6,816
------------ ------------- ------------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 574 (246) 35
------------ ------------- ------------
NET INCREASE IN CASH 3,622 322 2,602
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,921 4,599 1,997
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,543 $ 4,921 $ 4,599
============ ============= ============
See notes to consolidated financial statements.
F-5
56
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED FEBRUARY 28, 1997
Manugistics Group, Inc. has the following operating subsidiaries: Manugistics,
Inc.; Manugistics Colorado, Inc.; Manugistics Canada Ltd.; Manugistics U.K.
Ltd.; Manugistics (Deutschland) GmbH; and Manugistics France S.A.;
(collectively, the "Company"). The Company develops, markets and supports
software products for synchronized supply chain management and provides related
services. Synchronized supply chain management refers to managing the complex
interactions involved in the flows of products through the supply chain, and
involves forecasting product demand and coordinating the timing of
distribution, manufacturing, procurement, and transportation activities to meet
this demand, not only across an entire enterprise, but also among an enterprise
and its suppliers and customers. The Company believes it is the only provider
of an integrated suite of strategic, tactical and operational supply chain
planning tools including a high level optimizer and products that address the
four key operational areas of supply chain management: demand planning, supply
planning, manufacturing scheduling and transportation management. Additionally,
the Company markets and supports the STATGRAPHICS personal systems product,
which provides statistical tools for quality management in manufacturing
companies.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Manugistics Group, Inc. and its subsidiaries, all
of which are wholly-owned. All significant intercompany transactions and
balances have been eliminated.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition - The Company recognizes revenue in accordance with
the provisions of the AICPA's Statement of Position 91-1, "Software
Revenue Recognition." Software license revenues from supply chain
management products are recognized upon the customer's execution of a
noncancellable license agreement and shipment of the software, provided
that no significant vendor obligations remain outstanding, amounts are
due within one year and collection is considered probable by management.
Software license revenues from the sale of personal systems products are
recognized upon the Company's shipment of the software.
Revenues from consulting services are recognized when the services are
provided. Revenues from maintenance and other support services are
deferred and recognized on a straight-line basis over the term of the
agreement.
Amounts received in advance of revenue recognition are classified as
deferred revenue.
Cash and Cash Equivalents - The Company considers cash on hand, deposits
in banks, and highly liquid investments with an original maturity of
three months or less as cash and cash equivalents.
F-6
57
Marketable Securities - The Company has classified its short-term
marketable securities as available-for-sale. At February 28, 1997 and
February 29, 1996, marketable securities consisted of investments in
municipal bonds and other short-term investments, and cost approximated
market value.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
investments in marketable securities and accounts receivable. The
Company has investment policies that limit investments to investment
grade securities and that limit the amount of credit exposure to any one
issuer. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for potential losses, but does not require
collateral. The Company's credit risk is also further mitigated as its
customer base is diversified, geographically and by industry.
Fair Values of Financial Instruments - The carrying values of cash and
cash equivalents, marketable securities, accounts receivable, and
accounts payable approximate fair value due to the short maturities of
such instruments. The carrying value of long-term debt approximates fair
value based on current rates offered to the Company for debt with similar
collateral and guarantees, if any, and maturities.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, ranging from three to ten years.
Software Development Costs - Certain software development costs are
capitalized upon establishment of technological feasibility. Costs
incurred prior to establishing technological feasibility are charged to
product development expense as incurred. Capitalized costs are amortized
over the estimated economic life of the product, generally two years,
commencing with the date the product is available for general release.
Intangibles - Intangibles include intellectual property, customer lists
and goodwill. Intellectual property and goodwill are amortized on a
straight-line basis and customer lists are amortized using the double
declining balance method. The amortization period for these assets is
five years or less, commencing on the date of acquisition (see Note 4).
Impairment of Long-Lived Assets - The Company reviews its long-lived
assets, including property and equipment and intangibles, for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. In the event an
evaluation of recoverability is required, the estimated future
undiscounted net cash flows of the assets would be compared to the
assets' carrying amount to determine if a write down is required.
Income Taxes - The provision for income taxes is based on income
recognized for financial reporting purposes and includes the effects of
temporary differences between such income and income recognized for
income tax purposes. Deferred income taxes reflect the net tax effects
of temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Foreign Currency Translation - Assets and liabilities denominated in
foreign currencies are translated at the exchange rate on the balance
sheet date. The related revenues and expenses are translated at the
prevailing exchange rate during the reporting period. Translation
adjustments related to this process are charged to stockholders' equity.
Earnings Per Share - Earnings per share data are computed using the
weighted average number of shares of common stock outstanding and common
equivalent shares; common equivalent shares include dilutive stock
options and are calculated using the treasury stock method. Fully
diluted earnings per
F-7
58
share have been excluded since they are approximately the same as primary
earnings per share. See Note 12, "Subsequent Events".
Stock-Based Compensation Plans - Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), was issued in October 1995 and is effective for the Company's 1997
fiscal year. As permitted by SFAS 123, the Company has elected to
continue to account for stock-based compensation to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and has made the pro forma
disclosure required by SFAS 123 in Note 6.
New Accounting Pronouncements - In February 1997, Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") was issued
and will be effective for the Company's 1998 fiscal year. This statement
replaces the presentation of primary earnings per share with basic
earnings per share and requires a reconciliation of basic earnings per
share to fully diluted earnings per share. Fully diluted earnings per
share is computed similarly to the previous requirements. The Company's
computation of basic earnings per share under SFAS No. 128, which
excludes the dilutive effect of stock options, would have been $0.21,
$0.22, and $0.17 in 1997, 1996 and 1995, respectively.
Reclassification of Account Balances - Certain prior year amounts have
been reclassified for comparability with the current year's financial
statement presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following amounts as of February
28, 1997 and February 29, 1996:
1997 1996
----------------------------
(IN THOUSANDS)
Computer equipment and software $12,205 $7,278
Office furniture and equipment 4,165 2,876
Leasehold improvements 2,192 1,011
------------ -------------
Total 18,562 11,165
Less accumulated depreciation and amortization (8,207) (5,119)
------------ -------------
Property and equipment - net $10,355 $6,046
============ =============
Depreciation expense during fiscal years 1997, 1996, and 1995 was
$3,031,000, $1,631,000, and $1,062,000 respectively.
3. SOFTWARE DEVELOPMENT COSTS
The Company has capitalized purchased software costs during fiscal years
1997, 1996 and 1995 of approximately $878,000, $382,000 and $50,000,
respectively, which are being amortized on a straight-line basis over
useful lives of up to three years. Amortization expense of $331,000,
$51,000 and $30,000 was recorded during fiscal years 1997, 1996, and
1995, respectively.
During fiscal years 1997, 1996, and 1995, the Company capitalized
internal computer software development costs of $6,843,000, $4,915,000
and $2,350,000 respectively. Such costs are being amortized on a
straight-line basis over the estimated life of the products, which is
generally two years.
F-8
59
Amortization expense of $3,230,000, $2,228,000 and $1,884,000 was
recorded for fiscal years 1997, 1996, and 1995, respectively.
In addition, during fiscal year 1997, the Company wrote off approximately
$312,000 of internally capitalized computer software development costs.
These capitalized costs were deemed to exceed their future net realizable
value as a result of new technologies acquired in conjunction with the
purchase of Avyx, Inc. (Note 4).
4. ACQUISITION OF ASSETS
Avyx, Inc.
On May 24, 1996, the Company acquired by merger Avyx, Inc., a custom
developer and services provider of manufacturing scheduling software,
based in Colorado. The total purchase price was $3,799,000, primarily
comprised of cash, assumed liabilities, and acquisition costs.
The acquisition was accounted for as a purchase. Accordingly, the
purchase price was allocated among the identifiable tangible assets and
liabilities based on their respective fair market values. In addition,
the purchase price was also allocated to certain intangible assets, such
as existing software products which had reached technological
feasibility, and in-process software development efforts which had not
reached technological feasibility ("purchased research and development").
The write-off of purchased research and development, resulted in a
one-time charge in the Company's operating results, and reduced net
income for fiscal year 1997 by $3,697,000, or $0.16 per share. The excess
of purchase price over these estimated fair values of the net assets
acquired was accounted for as goodwill. Amounts allocated to existing
software products and goodwill are being amortized on a straight-line
basis over five years.
Consolidated pro forma revenues, income, and earnings per share would not
have been materially different from the reported amounts for the fiscal
years ended February 28, 1997 and February 29, 1996, excluding the
one-time charge for purchased research and development costs. Such pro
forma amounts are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisition had
been effective at the beginning of fiscal year 1996.
In addition, the Company entered into a three-year non-compete agreement
with two of the principals of Avyx, Inc., who did not become employees of
the Company, in exchange for an option to purchase 60,000 shares of the
Company's common stock. The agreement was valued at $217,000, which
represented the estimated fair value of the stock options issued, and is
being amortized over the life of the agreement, which is three years.
Marketing Systems GmbH
Effective June 1, 1994, the Company acquired certain assets of a division
of Marketing Systems GmbH, a closely-held German company. Under the
acquisition agreement, the Company made an initial cash payment of
approximately $1,000,000 and delivered 100,000 unregistered shares of the
Company's common stock to the seller. The original agreement provided
that the Company would make additional annual payments if revenues
generated in connection with acquired assets exceeded certain performance
objectives. The Company allocated the initial payment to the tangible
and intangible property acquired.
Subsequent to the acquisition, the Company determined that the "causal
analysis" capability and other functionality contained in the acquired
intellectual property assets could be incorporated into the Demand
Planning product family (later named "Demand Planning Extended Edition"),
thereby
F-9
60
generating greater potential value to the Company. Consequently, the
performance objectives contained in the original purchase agreement were
no longer relevant. In view of the foregoing, a new agreement was
entered into in November 1995 to increase the initial acquisition cost
and payment to the seller by approximately $2,000,000. The additional
payment, consisting of approximately $1,000,000 in cash and 112,000
unregistered shares of the Company's common stock, represented the
remaining balance of management's estimated value of the assets acquired.
The total value of the cash and stock was recorded as goodwill. Under
the agreement, the Company commenced delivering the shares of stock in
four equal quarterly installments in November 1995. At February 28,
1997, all shares had been issued pursuant to the agreement. Under the
terms of the November 1995 agreement, the Company may be required to make
certain additional annual cash payments, subject to the achievement of
certain revenue-based performance objectives for Demand Planning Extended
Edition. No payments have been made under this agreement at February 28,
1997.
Had the acquisition been completed as of March 1, 1994, fiscal year 1995
revenue, net income and earnings per share would have been $50,110,000,
$2,886,000 and $0.14 per share, respectively, (unaudited). The unaudited
pro forma information is not necessarily indicative either of results of
operations that would have occurred had the purchase been made on March
1, 1994, or future results of combined operations.
5. DEBT
Long-term debt and other borrowings consisted of the following amounts as
of February 28, 1997 and February 29, 1996:
1997 1996
----------------
(IN THOUSANDS)
Treasury stock notes payable $ 182 $ 250
Capital lease obligations (see Note 8) 229 87
----- -------
Total 411 337
Less - current portion (191) (155)
----- -------
Total long-term debt $ 220 $ 182
====== =======
Treasury Stock Notes Payable - The Company has a total of three notes
outstanding to former employees which were issued as partial
consideration for common stock repurchased from these individuals upon
their termination of employment with the Company. The notes accrue
interest at 1.5% below the prime rate of interest. The interest rate at
February 28, 1997 and February 29, 1996 was 6.75%. A fixed portion of
the principal balance of the notes and the interest thereon is payable in
annual installments. The notes mature over varying terms ranging from
one to four years.
Principal repayment requirements under the notes payable and capital
lease obligations for each of the four succeeding years beginning March
1, 1997 are as follows: $191,000 for 1997, $176,000 for 1998, $22,000
for 1999 and $22,000 for 2000.
Line of Credit - The Company has an unsecured committed revolving credit
facility with a commercial bank. Under the terms of the facility, the
Company may request advances in an aggregate amount of up to $10,000,000.
The Company may make borrowings under the facility for short-term working
capital purposes or for acquisitions. (Acquisition-related borrowings
are limited to $7,500,000 per acquisition). For the interest rate on
borrowings, the Company may select either the prime rate of the lender or
either the three-month or six-month London Interbank Offered Rate (LIBOR)
plus one and
F-10
61
one-half percent. The facility contains certain financial covenants that
the Company believes are typical for a facility of this nature and
amount, and the Company is subject to a covenant not to pay or declare
cash dividends. This facility succeeds a similar facility that the
Company maintained with two commercial banks, one of which is the lender
under the current facility, and will expire in September 1997, unless
renewed. There were no outstanding amounts under the credit facility at
February 28, 1997.
6. STOCKHOLDERS' EQUITY
Preferred Stock - All of the Company's shares of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock were retired
when such shares were automatically converted into shares of Common Stock
upon the closing of the Company's underwritten offering during fiscal
1994. Such shares cannot be reissued. During fiscal 1997, the Company
formally eliminated the Series A and Series B Convertible Preferred
Stock, reducing the number of shares of the Company's authorized $.01 par
value preferred stock by 1,129,747 shares, from 5,750,000 shares to
4,620,253 shares. As of February 28, 1997, no preferred shares were
outstanding.
Common Stock - The Company has authorized 30,000,000 shares of $.002 par
value common stock. No cash dividends on common stock have been declared
or paid in any of fiscal years 1997, 1996, or 1995.
Employee Stock Purchase Plan - In October 1994, the Company adopted an
employee stock purchase plan ("ESPP") that authorizes the Company to sell
up to 500,000 shares of common stock to employees through voluntary
payroll withholdings. The stock price to employees is equal to 85% or
95% of the market price on the lower of either the first or last day of
each six-month withholding period. Payroll deductions may not exceed 10%
of a participant's base salary and stock purchased may not exceed $25,000
per year. The Company has sold 100,818 shares and 84,404 shares in
fiscal 1997 and 1996, respectively. The weighted average fair value of
shares sold in 1997 and 1996 was $14.09 and $7.13, respectively.
Stock Options
The Company has an employee stock option plan under which non-qualified
options of up to 5,564,238 shares may be granted to employees to purchase
common stock at prices not less than the fair market value at the time of
grant. Under the plan, prior to 1994, options vested and became
exercisable four years from the date of grant. In 1994, the Company
amended the plan such that options granted after the amendment vest and
become exercisable ratably over a four-year period from the date of
grant. The right to exercise the vested options expires upon the earlier
of either ten years (or for options granted prior to 1994, eleven years)
from the date of grant, or within thirty days of termination of
employment. As of February 28, 1997, the Company has granted options on
4,801,386 shares.
In 1994, the Company adopted the 1994 Outside Directors Non-Qualified
Stock Option Plan, which provides for the grant of stock options of up
to 200,000 shares to the Company's non-employee directors. Under this
plan, non-qualified options are granted annually at the fair market value
of the Company's common stock on the date of grant. The number of
options granted annually to each non-employee director is fixed by the
plan. Options become fully exercisable on the first anniversary of the
date of grant. Under this plan, options may be granted over a ten year
period through May 23, 2004. As of February 28, 1997, the Company has
granted options on 132,500 shares.
In January 1996, the Company amended its Employee Incentive Stock Option
Plan, whereby the Company may grant options of up to 1,805,950 shares to
certain key executive employees. Options are granted at an exercise
price equal to or greater than the fair market value of the stock on the
date of
F-11
62
grant and expire ten years from the date of grant. All options granted
vest in accordance with plan terms. As of February 28, 1997 the Company
has granted options on 1,610,000 shares.
In 1994, the Company adopted the 1994 Executive Incentive Stock Option
Plan, whereby the Company may grant options to certain key executive
officers of the Company of up to 1,750,000 shares. Options are granted
at an exercise price equal to or greater than the fair market value of
the stock on the date of grant and expire ten years from the date of
grant. Options will vest ratably over a four-year period. As of
February 28, 1997 the Company has granted options on 57,654 shares.
A summary of the status of the Company's stock option plans at February
28, 1997, February 29, 1996, and February 28, 1995, and changes during
the years then ended is presented below:
1997 1996 1995
--------------------------- ------------------------- --------------------------
(SHARE AMOUNTS IN THOUSANDS)
Option to Option to Option to
Purchase Wtd Avg Purchase Wtd Avg Purchase Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
--------------------------- ------------------------- --------------------------
Outstanding at Beginning of Year 3,324 $ 4.20 2,840 $ 2.56 $ 2,556 $ 1.67
Options Granted at Fair Value 1,290 11.54 1,182 6.67 946 4.14
Options Granted Greater Than Fair Value 24 8.01 - - - -
Exercised (636) 3.00 (546) 1.00 (378) 0.61
Cancelled (216) 5.19 (152) 4.45 (284) 2.41
--------------- -------------- --------------
Outstanding at end of year 3,786 $ 6.78 3,324 $ 4.20 2,840 $ 2.56
=============== ============== ==============
Exercisable at end of year 1,082 942 854
=============== ============== ==============
The weighted average fair value of options granted in 1997 and 1996 was
$5.19 and $3.51, respectively. A summary of the weighted average
remaining contractual life and the weighted average exercise price of
options outstanding as of February 28, 1997 is presented below (share
amounts in thousands):
WEIGHTED AVG
NUMBER REMAINING NUMBER WEIGHTED AVG
RANGE OF OUTSTANDING AT CONTRACTUAL WEIGHTED AVG EXERCISABLE EXERCISE
EXERCISE PRICES 2/28/97 LIFE EXERCISE PRICE AT 2/28/97 PRICE
- ---------------------------------------------------------------------------------------------------
$ 0.22 - $ 3.00 668 4.33 $1.38 662 $ 1.37
3.28 - 5.25 1,028 7.77 4.41 262 4.45
5.38 - 7.57 958 8.48 6.93 148 7.40
7.63 - 9.75 828 9.33 9.35 10 8.57
9.82 - 25.57 304 9.80 19.09 - 9.82
---------- ---------- ----------- ------------- ---------
$ 0.22 - $ 25.57 3,786 7.85 $6.78 1,082 $ 3.00
========== ==============
Stock-Based Compensation
As permitted under SFAS 123, the Company continues to account for
stock-based compensation to employees in accordance with APB Opinion No.
25, under which no compensation expense is recognized, since the exercise
price of options granted is equal to or greater than the fair market
value of the underlying security on the grant date. Pro forma
information regarding net income and earnings
F-12
63
per share is required by SFAS 123, which uses the fair value method. The
fair value of the Company's stock-based awards to employees was estimated
as of the date of grant using the Black-Scholes option pricing model.
Limitations on the effectiveness of the Black-Scholes option valuation
model are that it was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully
transferable and that the model requires the use of highly subjective
assumptions including expected stock price volatility. Because the
Company's stock-based awards to employees have characteristics
significantly different from those of traded options and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based
awards.
Had compensation cost for these plans been recorded, the Company's net
income and earnings per_share would have been $2,606,000 and $0.11 in
fiscal year 1997 and $3,785,000 and $0.17 in fiscal year 1996,
respectively. The increase in the fair value of stock options granted in
1997 resulted primarily from a significant increase in the price of the
Company's common stock during fiscal year 1997 from fiscal year 1996.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to March 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. Additionally, the 1997 and 1996 pro forma amounts include
$279,000 and $173,000, respectively, related to the purchase discount
offered under the employee stock purchase plan.
The fair value of options granted was estimated assuming no dividends
and using_the following weighted-average assumptions:
OPTIONS ESPP
------- ----
1997 1996 1997 1996
---- ---- ---- ----
Risk-free interest rates 5.44% - 5.73% 6.68% - 7.08% 5.67% 6.44%
Expected term 1.54 - 4.51 years 1.54 - 4.77 years 6 months 6 months
Volatility .6358 .6910 .6562 .6910
7. RETIREMENT PLANS
The Company has two defined contribution retirement savings plans (one in
the U.S. and another in the U.K.) under the terms of which the Company
matches a percentage of the employees' qualified contributions. New
employees are eligible to participate in the plans upon completing one
month of service. The Company's contribution to the plans totaled
$535,000, $337,000, and $226,000 for the fiscal years 1997, 1996 and
1995, respectively.
The Company is not obligated under any other post-retirement benefit
plans.
8. COMMITMENTS AND CONTINGENCIES
Commitments - The Company leases office space, office equipment, and
automobiles under operating leases and various computer and other
equipment under capital leases. Property acquired through capital leases
amounted to $830,000 at February 28, 1997 and $429,000 at February 29,
1996, and has been included in computer equipment and software (Note 2).
Total accumulated amortization relating to these leases was $576,000 and
$349,000 as of February 28, 1997 and February 29, 1996, respectively.
F-13
64
Rent expense for operating leases for the fiscal years 1997, 1996 and
1995 was approximately $4,439,000, $3,610,000, and $2,714,000,
respectively. The future minimum lease payments under these capital and
operating leases for each of the succeeding years beginning March 1, 1997
are as follows:
CAPITAL OPERATING
LEASES LEASES
------ ------
(IN THOUSANDS)
1997 $132 $4,669
1998 109 4,008
1999 - 3,090
2000 - 2,273
2001 - 2,280
Thereafter - 421
---- -------
Total minimum lease payments 241 $16,741
=======
Less amount representing interest (12)
----
Present value of net minimum lease payments $229
====
The Company has collaborative arrangements with various parties relating
to product development and joint marketing programs. In March 1997, the
Company entered into agreements with a third-party which include future
commitments of the Company. See Note 12 ,"Subsequent Events."
Contingencies - In the ordinary course of business, the Company may be a
party to legal proceedings and claims. In addition, from time to time,
the Company may have contractual disagreements with certain customers
concerning the Company's products and services. In management's
opinion, the future settlements of such claims are not likely to have a
material adverse effect on the results of operations or financial
position of the Company and its subsidiaries taken as a whole.
9. INCOME TAXES
Income Tax Provision - The components of the provision for income taxes
for the years ended February 28, 1997, February 29, 1996, and February
28, 1995 are as follows:
1997 1996 1995
---------------------------------
(IN THOUSANDS)
Current:
Federal $3,475 $ 1,433 $ 1,450
State 348 339 459
Foreign 901 597 36
------- -------- ----------
Total current provision 4,724 2,369 1,945
------- -------- ----------
Deferred:
Federal 177 792 34
State 40 4 11
Foreign 19 (456) (250)
------- -------- ----------
Total deferred provision (benefit) 236 340 (205)
------- -------- ----------
Total provision for income taxes $ 4,960 $ 2,709 $ 1,740
======= ======== ==========
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65
The income tax benefits related to the exercise of stock options reduce
taxes currently payable and are credited to additional paid-in capital.
Such amounts were approximately $ 2,591,000, $1,056,000, and $1,065,000
for 1997, 1996, and 1995, respectively.
Deferred Income Taxes - The components of the Company's deferred tax
assets and liabilities are as follows:
1997 1996
--------------------
(IN THOUSANDS)
Deferred tax assets:
Uncollectible receivables and sales returns $ 434 $ 206
Rent accruals 207 186
Operating loss carryforwards:
Domestic 657 151
Foreign 1,353 1,088
Software revenue recognition 183 152
Depreciation and amortization 691 338
Other temporary differences 193 22
-------- --------
Total deferred tax assets 3,718 2,143
Less: valuation allowance (734) (450)
-------- --------
Total deferred tax assets 2,984 1,693
Deferred tax liabilities:
Software development costs (3,313) (2,248)
Other temporary differences (84) (221)
-------- --------
Total deferred tax liabilities (3,397) (2,469)
-------- --------
Net deferred tax liabilities $ (413) $ (776)
======== ========
At February 28, 1997, the Company had $1,463,000 of federal, $2,448,000
of state and $3,389,000 of foreign net operating loss carryforwards
(NOLs) available to offset future taxable income in those respective
taxing jurisdictions. The federal NOLs expire in the years 2006 and 2011
while the state NOLs expire during 1997, 1998 and 2011. Approximately
$1,954,000 of the foreign NOLs expire during the years 2000 to 2002 while
the remaining NOLs are available in perpetuity. The Company considers
the earnings of foreign subsidiaries to be permanently reinvested outside
the United States. Accordingly, no United States income tax on these
earnings has been provided.
Effective and Statutory Rate Reconciliation - The difference between the
income tax provision and the amount computed by applying the federal
statutory income tax rate to pretax accounting income is summarized as
follows:
F-15
66
1997 1996 1995
-------------------------------
(IN THOUSANDS)
Provision computed at federal statutory rate $ 3,163 $ 2,434 $ 1,687
Increase (reduction) in taxes resulting from:
State and foreign taxes, net of federal benefit 387 417 327
Change in valuation allowance 291 (31) 121
Purchased research and development write-off 1,257 - -
Tax exempt income (163) (257) (142)
Other 25 146 (253)
------- -------- ----------
Provision for income taxes $ 4,960 $ 2,709 $ 1,740
======= ======== ==========
10. SEGMENT INFORMATION
The Company operates in two industry segments. The Company develops,
markets, and supports a set of business operations planning software for
supply chain management. The Company also markets and supports the
STATGRAPHICS product within its personal systems segment.
Industry Segments 1997 1996 1995
-------------------------------
(IN THOUSANDS)
Revenues:
Supply chain management $ 90,951 $ 56,698 $ 41,710
Personal systems 3,771 5,624 7,700
-------- -------- ---------
$ 94,722 $ 62,322 $ 49,410
======== ======== =========
Income from operations:
Supply chain management $ 15,156 $ 10,554 $ 9,000
Personal systems 1,032 1,184 132
-------- -------- ---------
$ 16,188 $ 11,738 $ 9,132
Corporate (7,902) (5,678) (4,814)
-------- -------- ---------
$ 8,286 $ 6,060 $ 4,318
======== ======== =========
Identifiable assests:
Supply chain management $ 58,052 $ 32,144 $ 18,329
Personal systems 1,014 1,375 4,925
Corporate 25,257 26,912 26,505
-------- -------- ---------
$ 84,323 $ 60,431 $ 49,759
======== ======== =========
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Industry Segments 1997 1996 1995
--------------------------------------------------
(IN THOUSANDS)
Capital expenditures:
Supply chain management $ 6,528 $ 2,756 $ 1,523
Personal systems 24 172 55
Corporate 1,456 2,580 275
------------ ------------ ------------
$ 8,008 $ 5,508 $ 1,853
============ ============ ============
Depreciation and amortization:
Supply chain management $ 7,077 $ 3,646 $ 2,417
Personal systems 24 426 848
Corporate 885 471 167
------------ ------------ ------------
$ 7,986 $ 4,543 $ 3,432
============ ============ ============
Geographic Areas 1997 1996 1995
--------------------------------------------------
(IN THOUSANDS)
Revenues:
North America $ 82,484 $ 56,401 $ 44,425
Europe 18,273 7,625 6,613
Eliminations (6,035) (1,704) (1,628)
------------ ------------ ------------
$ 94,722 $ 62,322 $ 49,410
============ ============ ============
Income from operations:
North America $ 7,666 $ 9,047 $ 6,369
Europe 6,655 (1,283) (423)
Eliminations (6,035) (1,704) (1,628)
------------ ------------ ------------
$ 8,286 $ 6,060 $ 4,318
============ ============ ============
Identifiable assets:
North America $ 86,229 $ 56,911 $ 45,871
Europe 12,161 7,421 7,286
Eliminations (14,067) (3,901) (3,398)
------------ ------------ ------------
$ 84,323 $ 60,431 $ 49,759
============ ============ ============
Domestic and export sales for fiscal years 1997, 1996 and 1995 are as
follows:
1997 1996 1995
---------------------------------------
(IN THOUSANDS)
United States $ 68,667 $ 46,996 $ 39,500
Europe 19,821 9,423 8,710
Canada 3,853 3,886 495
Other 2,381 2,017 705
---------- ----------- -----------
$ 94,722 $ 62,322 $ 49,410
========== =========== ===========
No customer accounted for 10% or more of the Company's net sales in 1997,
1996 and 1995.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest amounted to approximately $55,000, $78,000, and
$55,000 in 1997, 1996 and 1995, respectively. Cash paid for income taxes
amounted to approximately $1,223,000, $924,000 and $17,000 in 1997, 1996
and 1995, respectively.
Supplemental information of non-cash investing and financing activities is
as follows:
During fiscal years 1997, 1996 and 1995, the Company received an income
tax benefit of $2,591,000, $1,056,000 and $1,065,000, respectively,
relating to the exercise of stock options. The benefit was recorded as an
increase to additional paid in capital. During 1997, the fair value of
treasury stock issued was $238,000. Also during 1997 options valued at
$217,000 were granted under a non-compete agreement and $345,000 relating
to a leased asset and obligation was capitalized. During 1996, a
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68
$294,000 note receivable was recorded relating to an asset divestiture.
During 1996, the fair value of treasury stock issued was $238,000 and a
$714,000 liability was recorded related to the fair value of stock to be
issued. (see Note 4).
12. SUBSEQUENT EVENTS
In March 1997, the Company entered into a reseller and marketing agreement
with Information Resources, Inc. ("IRI"), of which the Company guarantees
certain revenue levels to IRI in the amount of $16,500,000 over several
years. In the event that the activities performed by the Company through
joint marketing arrangements with IRI do not meet the minimum amounts, the
Company may be obligated to pay the difference. The Company plans to meet
the revenue levels and accordingly does not expect to be obligated to make
such payments.
In addition, the Company entered into a definitive agreement to acquire
certain assets of IRI. The total purchase price was approximately
$1,900,000, primarily comprised of cash, assumed liabilities, and
acquisition costs. The transaction is being accounted for under the
purchase method.
Consolidated pro forma revenue, income and earnings per share would not
have been materially different from the reported amounts for the year
ended February 28, 1997. Such pro forma amounts are not necessarily
indicative of what the actual consolidated results of operations might
have been if the acquisition had been effective at the beginning of fiscal
year 1997.
On May 9, 1997, the Directors of the Company declared a two-for-one stock
split on the Company's common stock, to be paid in the form of a stock
dividend effective June 11, 1997 to shareholders of record as of May 23,
1997. The shares outstanding, weighted average shares, amounts per share,
and all other references to shares of common stock reported have been
restated to give effect to the stock dividend.
* * * * * *
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69
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Stockholders and Board of Directors of
Manugistics Group, Inc.:
We have audited the consolidated financial statements of Manugistics Group,
Inc. (the Company) and its subsidiaries as of February 28, 1997 and February
29, 1996, and for each of the three years in the period ended February 28,
1997, and have issued our report thereon dated March 28, 1997 (except Note 12
as to which the date is May 9, 1997); such consolidated financial statements
and report are included elsewhere in this Form 10-K. Our audit also included
the consolidated financial statement schedule listed in Item 14 of this Form
10-K. This consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 28, 1997 (except Note 12 as to which the date is May 9, 1997)
70
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------------------------------------------------------------------------------------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND SALES RETURNS
Year Ended February 28, 1997 711 2,529 (2,025) 1,215
Year ended February 29, 1996 833 732 (854) 711
Year ended February 28, 1995 410 1,059 (636) 833
S-2