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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, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22154
MANUGISTICS GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 52-1469385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2115 EAST JEFFERSON STREET, ROCKVILLE, MARYLAND 20852
(Address of principal executive offices) (Zip code)
(301) 984-5000
(Registrant's telephone number, including area code)
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 ____
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 May 22, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $531.1 million. As of that
date, the number of shares outstanding of the Registrant's common stock was
26.0 million, based on information provided by the Registrant's transfer agent.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement relating to the 1998
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, 1998.
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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(TM) and provides related services. Synchronized supply chain
management refers to managing the complex interactions involved in the flows of
products through the supply chain. It 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 provides an integrated suite of strategic, tactical and operational
supply chain planning software products, including a high-level optimizer, 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, completed its
initial public offering in August 1993 and completed another underwritten
offering of its common stock in August 1997.
BACKGROUND
In recent years, many companies have faced increased competition and
more demanding customer service requirements. Customers have had the leverage
to demand better service from suppliers, in part because bargaining power has
shifted to retailers and consumers from manufacturers and distributors
following such changes as the advent of "superstores" and specialty category
stores. Also, many companies have contended with shorter product life cycles
in recent years. 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 their returns from significant
investments in manufacturing assets.
Manufacturers, distributors, retailers and transportation providers
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 consumer packaged goods and food and beverage firms, which
generally make product to stock in inventory ("make to stock"). Many of these
companies produce their finished goods using process manufacturing, distribute
their products through complex networks, and sell their products through retail
channels. 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.
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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. Such companies 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.
Companies in many different industries now recognize that effective
supply chain management is a source of competitive advantage, and these
companies are seeking software that can help them deliver the right product to
the right place at the right time at the lowest possible cost. The Company's
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. Manugistics' supply chain
software complements Enterprise Resource Planning ("ERP") systems and provides
companies with information not only about their own enterprises, but also about
demand from customers and other information relating to suppliers and
transportation providers.
Manugistics' solutions consider and balance relevant demand, customer
service, production, constraints, cost and profitability information, both
within an enterprise and among an enterprise and its suppliers and customers.
The Company's 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 Supply 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. The Company's solution provides the
following 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,
transportation planning and manufacturing scheduling activities with the
revised forecast of customer demand.
End-to-End Supply Chain Functionality. Manugistics' software provides
planners with a single view of their company's entire supply chain and its
links to suppliers and customers. This single view of the whole supply chain
provides critical real-time information about all of the effects of supply
chain actions, which enables 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 3 to
12 months, depending on the products
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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' distributed client/server architecture enables users throughout a
company, regardless of their location, to access the same, constantly-updated
supply chain information at the same time. This architecture enables global
access, a single view of the supply chain and rapid communication of
information and decisions. It also enables users to take advantage of the
collaborative communication capabilities available through the Internet and the
World Wide Web and extends the availability of a company's view of the supply
chain to its suppliers and customers.
Tight Integration with Complementary ERP Systems. Because of the
Company's 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 with the ERP
systems of most leading vendors. In addition, the Company entered into an
agreement with CrossWorlds Software, Inc. ("CrossWorlds") in January 1998 to
jointly extend CrossWorlds' application integration technology to address the
integration between Manugistics' supply chain management software and other
enterprise software applications. See "Products" and "Alliances and
Partnering."
STRATEGY
The Company's objective is to be the leading provider of supply chain
management solutions to companies worldwide. The Company's strategy includes
the following elements:
Provide comprehensive solutions. As more companies recognize the
potential for significant and rapidly achievable benefits from effective supply
chain management, the Company's strategy is to deliver comprehensive solutions
to enable customers to fully realize these benefits. The Company delivers a
robust supply chain planning software solution, and continuously seeks to
expand and enhance its product offerings. The Company also provides consulting
and implementation services, education and training, product support and other
services. Through the Company's 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 1998, the Company
introduced NetWORKS(TM), a framework for collaborative planning and a full
suite of Internet
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applets designed to help companies manage inter-enterprise supply chain
coordination, and also acquired complementary supply planning capabilities for
manufacturers of complex products.
Customers have increasingly demanded the services offered by the
Company. In fiscal 1998 the Company acquired Synchronology Group Limited
("SGL"), a consulting company with significant domain expertise in
manufacturing processes and manufacturing planning and scheduling software. See
"Product Related Services". To help 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. ("Andersen
Consulting"), Computer Sciences Corporation ("CSC"), Ernst & Young LLP ("Ernst
& Young"), IBM Consulting, KPMG Peat Marwick LLP ("KPMG Peat Marwick"), and
Price Waterhouse LLP ("Price Waterhouse"). 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 consulting and implementation
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 will increasingly demand supply chain management solutions.
Accordingly, the Company plans to take advantage of its knowledge of these
issues to provide solutions to these companies. Although they trail their North
American counterparts in terms of their adoption of supply chain management
practices, the Company believes that companies in the South American, European,
and Asia/Pacific regions, as well as international subsidiaries of North
American companies, are increasingly seeking the benefits of effective supply
chain management. To meet anticipated demand, the Company maintains offices in
Australia, Belgium, Brazil, France, Germany, Ireland, Japan, the Netherlands,
Singapore and the United Kingdom. The Company believes that companies in these
and other geographic markets will increasingly demand supply chain management
solutions. See "Forward Looking Statements."
New industries. The Company is capitalizing on its experience with,
and operational knowledge of, process manufacturing companies that target
consumers, such as consumer packaged goods and food and beverage firms, and
process manufacturers that target the industrial sector, such as chemical
companies, to further penetrate other industries. These industries include
discrete and high-volume repetitive manufacturers that target consumers, such
as firms that make apparel, consumer durables and consumer electronics, and
manufacturers that target the industrial sector such as communications
equipment makers and motor vehicle and parts manufacturers.
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.
Client/server product offerings have enabled the
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Company to expand its target market to include mid-sized companies with annual
revenues ranging from $250 million to $1 billion.
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"), Glovia LLC, Marcam Solutions, Inc. ("Marcam"), Oracle
Corporation ("Oracle") and SAP AG ("SAP"), whose ERP systems maintain the data
used by the Company's supply chain planning products; (ii) consulting firms,
such as Andersen Consulting, CSC, Ernst & Young, IBM Consulting, KPMG Peat
Marwick, and Price Waterhouse, that are active in the selection and
implementation of large information systems; (iii) other complementary solution
providers such as Microsoft Corporation; and (iv) 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. The Company also believes that these
relationships will provide benefits to customers, the Company and the Company's
alliance 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, 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
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supply chains globally, the Company's distributed approach supports customers
in their global supply chain planning activities.
The Company's products incorporate standards-based technologies, which
provide a flexible foundation and leverage 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 fiscal 1998, the Company released several enhancements to
Manugistics5, the fifth version of its client/server software. The Company's
supply chain management software provides strategic, tactical and operational
supply chain planning products and includes the Supply Chain Navigator, four
major families (Demand Planning, Supply Planning, Manufacturing Scheduling and
Transportation Management), the Manugistics Integrator, and NetWORKS, a
framework for inter-enterprise collaborative planning that includes a suite of
Internet applets. 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 sourcing network and an
optimized plan for the ideal mix of products to be produced at each plant and
distributed to each warehouse and distribution center. SCN considers multiple
time periods to maximize the profitability of a portfolio of products or
minimize 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 implement immediately the strategic supply chain decisions
that SCN supports.
SCN 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 for specific 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.
DEMAND PLANNING. Manugistics Demand Planning addresses a key element
of successful supply chain planning: forecasting demand with a high degree of
accuracy. There are two products in the Demand Planning family: Demand Planning
and Demand Planning Extended Edition.
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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 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, the
effects of non-seasonal holidays and macro-economic factors. To improve
precision, DP/EE also recognizes both long-term and short-term trends in
product demand and selects appropriate techniques 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
electronics, in which product life cycles are short and life-cycle management
is crucial to the success of new products.
During fiscal 1998, the Company delivered new capabilities in its
Demand Planning product family that enable the software to incorporate
point-of-sale ("POS") checkout scanner data and to integrate with On-Line
Analytical Processing ("OLAP") software. As part of the agreements, which the
Company entered into with Information Resources, Inc. ("IRI") during the first
quarter of fiscal 1998, the Company enhanced its Demand Planning products to
use multiple sources of daily, store-level POS data, including that of IRI. The
Company believes that using these POS data will provide more accurate
forecasts, thereby helping companies make superior planning decisions,
particularly in demand-sensitive, consumer-oriented, process manufacturing
industries.
SUPPLY PLANNING. The higher, tactical level functionality in Supply
Planning facilitates effective management of production while considering
constraints such as capacity, raw materials, availability of components and
labor. Supply Planning enables managers to review planned manufacturing
activities at all manufacturing facilities for time periods up to several
years, and allows them to analyze the ability of their companies to meet demand
and supply requirements and customer service goals given aggregate capacity and
materials constraints.
At the operational level, Supply Planning provides managers with the
ability to plan supply activities across multiple plants and distribution
centers to meet demand requirements, and contains extensive Continuous
Replenishment Planning ("CRP") and Vendor Managed Inventory ("VMI")
capabilities. The software considers the interdependencies among 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 are reduced.
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Master Supply Plan. The higher, tactical level functionality in Supply
Planning is used for longer-term, aggregate planning across multiple facilities
and produces a master supply plan considering aggregate capacity and materials
constraints (as well as planning for a single plant, consistent with the master
plan). Supply Planning incorporates inputs from multiple sources, including the
planned orders that are the result of collaborative or VMI or CRP and customer
orders to develop a feasible master production plan (for multiple weeks or
months) that fits within capacity and materials constraints. This master
production plan then provides input for production planning and manufacturing
scheduling. If a product should be manufactured at an alternate plant to
relieve constraints, bottlenecks or both, appropriate adjustments are made
throughout the Manugistics solution. The software can also identify capacity
constraints and materials shortages likely to occur in the future, enabling
planners to take corrective action, such as leveling production load over time
or across lines, before problems develop.
Distribution Plan. The operational level functionality in 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.
Manufacturing Plan. 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
materials needs. In addition, this software assists managers in making
cost-effective decisions regarding the use of manufacturing and materials
resources.
Supply Planning produces a master schedule and translates that master
schedule into time-phased materials 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 sourcing or 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.
Industry-tailored Functionality. To more thoroughly address the needs
of discrete manufacturers of computer and communications equipment, industrial
vehicles and other complex products, Supply Planning includes functionality for
handling the issues that are critical in these vertical industries: scarce
materials and capacity and customers' demands for order promising in real-time
and for product design and engineering issues. These capabilities of
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Supply Planning use a constraint-based computational engine to create, analyze
and optimize the manufacturing plans of companies in these industries by
identifying all material, capacity and other resource bottlenecks and analyzing
the impact of each on individual orders and overall plan performance. The
software enables users to determine the mix of products to produce that
maximizes product or company profitability or minimizes costs based on
materials availability, substitution and configuration, and supplier
alternatives. The software also enables users to perform real-time order
promising, and if a material shortage is constraining delivery performance, it
identifies the problem part so that corrective action can be taken. In
addition, this software provides tools for unique/common parts analysis and
advanced bill of materials and inventory analysis, which assists in improving
product design and engineering.
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 process, high-volume repetitive and
discrete manufacturing environments, enabling schedulers to maximize customer
service and asset utilization, minimize cost and reduce cycle time.
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 in 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 or
production run. 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 the rescheduling capability of AMS provides users with greater
control, because the schedule remains stable, and greater speed, because the
software reschedules only the necessary portion of the entire schedule.
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.
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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. Transportation Management includes the 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. It 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 released the Manugistics Bulk
Distribution Planning product, which addresses the needs of the bulk chemical,
petroleum and industrial gas industries. Bulk Distribution Planning includes
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 NETWORKS. Manugistics NetWORKS enables planners to manage
some of their supply chain interactions with customers and suppliers via the
Internet and the World Wide Web. NetWORKS provides a standardized, open
framework and a set of user-friendly, customizable Internet applets that a
company can use to permit trading partners to place orders, check product
availability or verify materials needs according to the company's Manugistics
supply chain planning software, with which NetWORKS is integrated. Using
NetWORKS' Internet communication capabilities, companies can rapidly
incorporate current information from customers and suppliers to accelerate and
improve their supply chain decision-making.
Just as Manugistics' other supply chain planning products immediately
alert planners within a single company of changes along the supply chain, the
Supply Chain Broadcast feature of NetWORKS immediately alerts trading partners
of a change, enabling them to evaluate and incorporate the effects of the
change and to synchronize their activities accordingly. NetWORKS also contains
some Internet applets. NetWORKS/Demand provides users with remote access to
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forecast data, and enables them to update this information based on orders or
market intelligence. NetWORKS/ATP (available to promise) offers remote users
the ability to access availability, capability and delivery date information.
NetWORKS/Carrier provides some interactive functionality for tendering and
prioritizing loads. NetWORKS/Materials, like Supply Planning for intra-company
activities, enables manufacturers and suppliers to share production plans and
materials requirements, which enables these parties to identify potential
shortages and to take corrective action before production is affected.
MANUGISTICS INTEGRATOR. The Manugistics Integrator is a software
application that integrates the Company's supply chain planning products with
ERP applications, such as SAP's R/3(R). Initially developed jointly by
Manugistics and SAP, the Integrator enables customers to implement an
integrated Manugistics' supply chain software and an 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.
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.
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CUSTOMERS
The Company's supply chain management software has been licensed by
large organizations in the process manufacturing industries, such as the
consumer packaged goods, food and beverage, chemicals, paper and pharmaceuticals
industries and by customers in the discrete and high-volume repetitive
industries, including the apparel, consumer durables, electronics/high
technology and motor vehicles and parts industries. The Company has licensed
various combinations of its supply chain management software products to more
than 600 companies worldwide. 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. During fiscal 1998, all
of these customers have either licensed software products from the Company or
its distributors or purchased maintenance, consulting or other services, or
both, from the Company. See "Sales and Marketing."
CONSUMER PACKAGED GOODS CHEMICALS AND PETROCHEMICALS
Eveready Battery Co., Inc. BASF Corporation
General Electric Company Dow Chemical Company, Limited
The 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 The Rohm & Haas Company
FOOD AND BEVERAGE CONSUMER ELECTRONICS/HIGH TECHNOLOGY
Ameriserve Food Distributors, Inc. (f/k/a PepsiCo., Inc.) Analog Devices, Inc.
Coors Brewing Company Hewlett-Packard Company
Frito-Lay, Inc. IBM Corporation
McDonald's Corporation Philips Consumer Electronics Company
Nabisco, Inc. Xilinx, Inc.
Ocean Spray Cranberries, Inc.
Starbucks Corporation MOTOR VEHICLES AND PARTS
Automotive Products plc
PHARMACEUTICALS BMW AG
Bristol-Myers Squibb Company General Motors Service Parts Operations
Eli Lilly and Company Harley-Davidson, Inc.
Glaxo Wellcome Inc. Deere & Co.
Schering-Plough HealthCare Products, Inc. Tenneco Automotive-Monroe Auto Equipment
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.
CVS, Inc. Russell Corporation
Rite Aid Corporation The Timberland Company
Staples, Inc.
Toys 'R' Us, Inc. PAPER
Wal-Mart Stores, Inc. Fort James Corporation
Mead Corporation
GROCERY Sweetheart Cup Company, Inc.
Food Lion, Inc.
Giant Eagle, Inc. OTHER
The Kroger Co. Baxter Healthcare Corporation
Richfood, Inc. Black & Decker, Inc.
Safeway Stores, Inc. Bridgestone/Firestone, Inc.
Winn-Dixie Stores, Inc. British Airways
Eastman Kodak Company
Owens & Minor Medical, Inc.
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 in order to achieve the benefits of the
Company's supply chain management solution, 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.
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In June 1997, the Company acquired all of the outstanding capital
stock of SGL, a closely held firm that provides manufacturing planning and
scheduling consulting services. SGL maintains offices at its headquarters in
the United Kingdom and in Belgium. SGL provides the Company with additional
domain knowledge about manufacturing planning and scheduling and additional
resources to serve clients in Europe and other regions.
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 360 employees as of
February 28, 1998.
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 from customers to assist in focusing future product development
efforts and in identifying market demand.
As of February 28, 1998, the Company's customer support and
maintenance staff consisted of 36 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 additional Internet 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, occasionally supplemented by acquisitions. 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 address their needs and 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.
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
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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, 1998, the Company's product development staff
consisted of 325 employees. The Company's gross development costs were
approximately $41.1 million, $24.2 million and $16.1 million for fiscal 1998,
1997 and 1996, representing 23.4%, 25.5% and 25.9%, respectively, of total
revenues. The Company's net product development expenses were approximately
$31.7 million, $17.4 million and $11.2 million for fiscal 1998, 1997 and 1996,
representing 18.0%, 18.3% and 18.0%, respectively, of total revenues. The
Company capitalized internally developed software costs of $9.4 million, $6.8
million and $4.9 million for fiscal 1998, 1997 and 1996, representing 23.9%,
28.3% and 30.4% of gross product development costs, respectively. The Company
amortizes its internally developed capitalized software 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, Charlotte, Chicago,
Cleveland, Columbus, Dallas, Denver, Detroit, Houston, Los Angeles, Milwaukee,
Ottawa, Philadelphia, San Francisco, Sao Paulo (Brazil) and Toronto
metropolitan areas. The Company's direct sales organization focuses on sales
of supply chain management software to large, multi-national 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, German, French,
Belgian and Dutch subsidiaries, located in Bracknell, England, Essen, Germany,
Paris, France, Brussels, Belgium and Utrecht, The Netherlands, respectively,
provide direct sales, support, or both, of supply chain management software,
primarily to customers located in continental Europe and the United Kingdom. In
fiscal 1998, the Company established a subsidiary in Tokyo, Japan to sell and
support its software in Japan. The Company also has subsidiaries in Australia
and Singapore for sales and support to customers in the Pacific Rim. The
Company adapts its software for use in international markets by addressing
different languages, different standards of weights and measures and other
operational considerations. In fiscal 1998, approximately 29.2% of the
Company's total revenues was attributable to sales outside the United States
and Canada. See Note 10 of Notes to Consolidated Financial Statements.
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The Company also uses 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 software products by leveraging the
installed base and prospective customers of these parties. In fiscal 1998, the
Company entered into agreement with Fujitsu Limited, under which Fujitsu has
agreed to distribute the Company's software in Japan and in other countries
where Japanese companies have operations. In fiscal 1998, the Company also
entered into an agreement with NEC Corporation to distribute the Company's
software in Japan. The Company participates in an initiative with 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. By participating in this initiative, the Company and the other
participating vendors 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 the consumer
packaged goods 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, the Council of Logistics Management (CLM) 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 advertising, direct
mail, public relations, seminars, telemarketing and ongoing customer
communication programs.
The Company had 149 employees engaged in sales activities, 61
employees engaged in marketing activities and 49 employees engaged in business
development consulting activities at February 28, 1998.
The Company sells its STATGRAPHICS product in the U.S. and in other
countries through independent distributors, national resellers and local
dealers.
ALLIANCES AND PARTNERING
The Company has established business alliances or partnerships with
leading software companies, consulting firms and other complementary vendors.
During fiscal 1997, the Company joined the Oracle initiative. See "Sales and
Marketing". 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. In support of these joint efforts, the
Manugistics Integrator product is being enhanced to integrate the Company's
supply
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chain management software with the software of Baan, Marcam, and other ERP
application vendors.
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 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 CSC, Ernst &
Young, IBM Consulting, KPMG Peat Marwick, and Price Waterhouse. Manugistics
products are installed in a CSC solution center in Cleveland, Ohio and at an
IBM demonstration facility in Lexington, Kentucky. In addition to formal
programs, the Company cooperates with other professional services firms
informally on a client-by-client basis, which involves cooperation at the field
level.
LICENSE AGREEMENTS AND PRICING
Software products license 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 are based primarily on
which products are licensed and on the number of users or locations. 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 ranges from 12% to 18% of the then-current license fee, depending on
the level of support and the size of the license fee. The support and
maintenance fee is generally billed 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 software is highly competitive.
Other applications software vendors and certain professional services
organizations, including such vendors as i2 Technologies, Inc., Logility,
Numetrix, Inc. and McHugh Freeman Warehouse System Group, Inc., offer products
that are directly competitive with some of the software applications marketed
by the Company. In addition, certain ERP vendors, most of which are
substantially larger than the Company, have acquired supply chain management
software companies, products or functionality, or have announced intentions to
develop and sell supply chain management solutions. Such ERP vendors include
Baan, PeopleSoft, Inc. and SAP.
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The principal competitive factors in the supply chain planning
software markets served by the Company include product functionality and
quality, product suite integration, ease of use, customer service and
satisfaction, ability to provide customer references, 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, its significant list of referenceable customers, its substantial
investment in product development, its client support and its extensive
knowledge of supply chain planning.
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,
confidentiality agreements with its employees, nondisclosure and other
contractual requirements imposed on its customers, consulting partners and
others, 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.
EMPLOYEES
As of February 28, 1998, the Company had 1,141 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
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 domestic and
international 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, the effects of marketing
pronouncements by competitors or potential competitors, changes in the
Company's strategy, the mix of direct and indirect sales, changes in operating
expenses, personnel changes and foreign currency exchange rate fluctuations. In
addition, the Company has experienced and might continue to experience from
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time to time very large, individual license sales which can cause significant
variations in quarterly license revenues.
The Company typically ships software products shortly after license
agreements are signed and, therefore, does not maintain any material contract
backlog. Furthermore, the 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 license revenues are also difficult to
forecast because the market for business application software products is
evolving rapidly, and the Company's sales cycles vary substantially from
customer to customer. Because the licensing of the Company's products generally
involves a significant capital expenditure by the customer, the Company's sales
process is subject to the delays and lengthy approval processes that are
typically involved in such expenditures. In addition, the Company expects that
sales derived through indirect channels will be harder to predict in timing and
size than for direct sales because there is less direct contact and influence
with the prospective customer. For these and other reasons, the sales cycle
associated with the licensing of the Company's products varies substantially
from customer to customer and typically lasts between 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 expense levels vary, at least in part, based on its
anticipated future revenues. A substantial portion of the Company's revenues
in any quarter is typically derived from a limited number of large contracts.
Therefore, if revenues in a period are below expectations, operating results
are likely to be adversely affected. 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 quarters, 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 (ending in May) than in the immediately preceding quarter. The Company
believes that these fluctuations are caused primarily by customer budgeting and
purchasing patterns and by the Company's sales commission policies, which
compensate personnel for meeting or exceeding annual and other performance
quotas.
Competition. The market for business applications software is highly
competitive and subject to rapid change. Many application software vendors
offer products that are directly competitive with some of the software products
marketed by the Company. Some of the Company's current and potential
competitors have significantly greater financial, marketing,
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technical and other competitive resources than the Company. As a result, they
may be able to adapt more quickly to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products than can the Company. In addition, certain
ERP system vendors have acquired supply chain management software companies,
products or functionality or have announced plans to develop new products or to
incorporate additional functionality into their current products that, if
successfully developed and marketed, could compete with the products offered by
the Company. Furthermore, current and potential competitors may make
acquisitions of other competitors or may establish cooperative relationships
among themselves or with third parties to increase the ability of their
products to address the supply chain management needs of the Company's
prospective customers. Accordingly, it is possible that new competitors may
emerge and rapidly acquire significant market share. If this were to occur, the
business, operating results, financial condition and cash flows of the Company
could be materially adversely affected.
Dependence on New Products and Rapid Technological Change; Risk of
Product Defects. The market for the Company's products is characterized by
rapidly changing technologies, frequent new product introductions, rapid
changes in customer requirements and evolving industry standards. The Company
believes that its future financial performance will depend in large part on its
ability to maintain and enhance its 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, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products, or that its new products and product enhancements
will adequately meet the requirements of prospective customers and achieve
market acceptance. If the Company is unable, for technological or other
reasons, to successfully develop and introduce new products or product
enhancements, the Company's business, operating results, financial condition
and cash flows would be materially adversely affected.
In addition, software products as complex as those offered by the
Company might contain undetected errors or failures when first introduced or
when new versions are released. There can be no assurance, despite testing by
the Company and by current and prospective customers, that errors will not be
found in new products or product enhancements after commercial release,
resulting in loss of or delay in market acceptance, which could have a material
adverse effect upon the Company's business, operating results, financial
condition and cash flows.
Year 2000 Compliance Issues. Many older computer systems and software
products that are still in use today were programmed to accept only two digit
entries in the date code field (i.e., "98" for "1998"). Systems and software
containing two digit date code fields need to be modified or upgraded to
distinguish 21st century dates (e.g., "2002") from 20th century dates (e.g.,
"1902"), in order to avoid the possibility of erroneous results or system
failures.
Many companies might need to modify or upgrade their information
systems to address this "Year 2000" issue. The effects of this issue and of the
efforts by companies to address it are
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unclear. The Company believes that the purchasing patterns of customers and
prospective customers might be affected by Year 2000 issues. Many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures might result in reduced
funds available to purchase software products such as those offered by the
Company. Additionally, Year 2000 problems inherent in a customer's other
software programs might significantly limit that customer's ability to realize
the intended benefits to be derived from the Company's supply chain management
software. These events could result in a material adverse effect on the
Company's business, operating results, financial condition and cash flows.
The Company utilizes other third party vendor equipment,
telecommunication products, and software products which may or may not be Year
2000 compliant. Although the Company is currently taking steps to address the
impact, if any, of the Year 2000 issue surrounding such third party products,
failure of any critical technology components to operate properly may have an
adverse impact on business operations or require the Company to incur
unanticipated expenses to remedy any problems.
Software products as complex as those offered by the Company might
contain undetected errors or failures when first introduced or when new
versions are released, including products intended to be Year 2000 compliant.
There can be no assurance that the Company's software products contain or will
contain all necessary date code changes or that errors will not be found in new
products or product enhancements after commercial release, resulting in loss of
or delay in market acceptance. In addition, the Company might experience
difficulties that could delay or prevent the continued successful development
and release of products that are Year 2000 compliant or that meet the Year 2000
requirements of customers. If the Company is unable or is delayed in its
efforts to make the necessary date code changes, there could be a material
adverse effect upon the Company's business, operating results, financial
condition and cash flows.
Expansion of Indirect Channels. The Company is building and
maintaining significant working relationships with complementary vendors, such
as ERP system vendors and consulting firms, that the Company believes can play
important roles in marketing the Company's products. The Company is currently
investing, and intends to continue to invest, significant resources to develop
these relationships, which could adversely affect the Company's operating
margins. There can be no assurance that the Company will be able to attract
organizations that will be able to market the Company's products effectively or
that will be qualified to provide timely and cost-effective customer support
and service. In addition, difficulties experienced by these complementary
vendors in selling the Company's products and services may adversely affect the
Company's results of operations. Furthermore, the Company's arrangements with
these organizations are not exclusive and, in many cases, may be terminated by
either party without cause, and many of these organizations are also involved
with competing products. Certain ERP system vendors have acquired supply chain
management software companies, products or functionality or have announced
plans to develop new products or to incorporate additional functionality into
their current products that would compete with the Company's products.
Therefore, there can be no assurance that any organization will continue its
involvement with the Company and its products, and the loss of important
organizations could materially adversely
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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.
Management of Internal Growth. The Company has recently experienced a
period of rapid growth in revenues that has placed significant strains upon its
management systems and resources. The Company's ability to compete effectively
and to manage future growth, if any, will require the Company to continue to
improve its financial and management controls, reporting systems and procedures
on a timely basis. 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 increase significantly its total number of
employees and to train and manage its employee work force on a timely and
effective basis. There can be no assurance that the Company will be able to do
so successfully. The Company's failure to do so could have a material adverse
effect upon the Company's business, operating results, financial condition and
cash flows. See also "Risk Factors - Integration of Acquired Businesses."
Integration of Acquired Businesses. The Company investigates
potential candidates for acquisition, joint venture opportunities or other
relationships on an ongoing basis. The Company is currently involved in the
evaluation of, and discussions with, one or more such candidates. Acquisitions,
including the acquisition of ProMIRA in February 1998, involve the integration
of companies that have previously operated independently. There can be no
assurance that the Company will be able to integrate these or any future
employees or operations effectively or that the Company will realize the
expected benefits of these or any future transactions. In addition, there can
be no assurance that the Company will not experience the loss of key employees
of these or any future acquired operations. The process of integrating acquired
employees and operations into the Company might result in unanticipated
operational difficulties and expenditures. In addition, there can be no
assurance that the anticipated benefits of any specific acquisition will be
realized.
International Operations. The Company currently conducts operations
in a number of countries in Europe, Asia/Pacific and South America and plans to
conduct operations in additional regions outside the United States, which will
require significant management attention and financial resources and could
adversely affect the Company's operating margins. The Company plans to
accelerate the growth of, and increase its investment in, its international
operations. 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. The
majority of the Company's contracts are denominated in U.S. currency. Most of
the revenues from sales outside the United States have been denominated in
foreign currencies, typically the local currency of the Company's business
unit. The Company anticipates that the proportion of its revenues denominated
in foreign currencies will increase. A decrease in the value of foreign
currencies relative to the U.S. dollar could result in losses from foreign
currency translations. In connection with transactions denominated in foreign
currency,
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the Company has taken steps to minimize the risks associated with such foreign
currency in the past and might take such steps in similar circumstances in the
future. With respect to the Company's international sales that are U.S.
dollar-denominated, currency fluctuations could make the Company's products and
services less price competitive. The Company's international sales and
operations might be adversely affected by the imposition of government
controls, changes in financial currencies (such as the unified currency known
as the European Monetary Unit), political and economic instability,
difficulties in staffing and managing international operations and general
economic and currency exchange rate conditions in foreign countries.
Lack of Product Diversification. The Company's future results depend
on continued market acceptance of supply chain management software and services
as well as the Company's ability to continue to adapt and modify this software
to meet the evolving needs of its prospects and customers. Any reduction in
demand or increase in competition in the market for supply chain management
software products could have a material adverse effect on the Company's
business, operating results, financial condition and cash flows.
Dependence Upon Key Personnel. The loss of the services of one or
more of the Company's executive officers could have a material adverse effect
on the Company's business, operating results, cash flows and financial
condition. The Company does not have employment contracts with any of its
executive officers and does not maintain key person insurance. There can be no
assurance that the Company will be able to retain its key personnel. The
Company's future success also depends on its continuing ability to attract,
assimilate and retain highly qualified sales, technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can attract, assimilate or retain such personnel in
the future.
Intellectual Property and Proprietary Rights. The Company regards its
software as proprietary and relies on a combination of trade secret, copyright
and trademark laws, license agreements, confidentiality agreements with
employees, nondisclosure and other contractual requirements imposed on its
customers, consulting partners and others, technical measures and other methods
to protect its proprietary rights in its products. There can be no assurance
that these protections will adequately protect its proprietary rights or that
the Company's competitors will not independently develop products that are
substantially equivalent or superior to the Company's products. In addition,
the laws of certain countries in which the Company's products are or may be
licensed do not protect the Company's products and intellectual property rights
to the same extent as the laws of the United States. Although the Company
believes that its products, trademarks and other proprietary rights do not
infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company.
Possible Volatility of Stock Price. Factors such as announcements of
new products or technological innovations by the Company or its competitors, as
well as quarterly variations in the Company's operating results, have caused
and may cause the market price of the Company's common stock to fluctuate
significantly. In addition, the stock market in recent years has
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experienced price and volume fluctuations which have particularly affected the
market prices of many high technology stock issues and which have often been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations, as well as general economic conditions, may
adversely affect the market price of the Company's common stock.
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 office space under a lease
agreement which expires on April 30, 2002. The Company also leases
approximately 52,000 square feet of additional office space under a lease
agreement that expires on June 30, 2002. This space is located in a building a
few miles from the Company's headquarters facilities. In addition, the Company
leases approximately 41,000 square feet of additional office space under lease
agreements expiring on or before October 31, 1999. This space is located in a
complex adjacent to the Company's headquarters facilities. The Company also
leases office space for its 15 sales, service and product development offices
in the United States and its subsidiaries in North America, South America,
Europe and Asia/Pacific.
In order to consolidate the Company's three facilities located in the
Rockville, Maryland area, including its headquarters facility, and to provide
for the Company's long-term expansion needs, the Company entered into an
agreements effective as of March 26, 1998 with a commercial real estate
developer to lease a new office building of approximately 300,000 square feet
to be built at a site near its current headquarters in Rockville, Maryland. The
Company anticipates taking occupancy of the new facility in the spring of the
year 2000. Under the agreements, the Company has options, subject to certain
conditions, to lease up to an additional 550,000 square feet of office space
(increasing the total potential office space to 850,000 square feet) in two
additional phases. The options for additional office space, if not terminated
sooner pursuant to the agreements, expire in fiscal 2011 and 2013.
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 may have
contractual disagreements with certain customers concerning the Company's
products and services. The Company has established accruals related to such
matters that are probable and reasonably estimable. In management's opinion,
any liability that may ultimately result from the resolution of these matters
in excess of amounts provided would not be likely to have a material adverse
effect on the financial position of the Company. In communications with the
Company, a customer alleges that it has been damaged as a result of the breach
by the Company of a 1991 contract for development and installation of a custom
software system and misrepresentations made by the Company in connection
therewith. The customer has threatened to commence an action if the matter is
not resolved to the customer's satisfaction. The Company believes that there is
no merit to this customer's claims and that the Company has met its obligations
to this customer. (In recent years, custom software has constituted an
immaterial portion of the Company's product development efforts.) Although the
Company is seeking to resolve the claims by this customer, resolution of this
matter is subject to various uncertainties and it is possible that this matter
may be resolved unfavorably to the Company. However, the Company's management
believes that the ultimate resolution of this matter will not have a material
adverse effect on the financial position of the Company.
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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, 1998.
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 ................. 53 President, Chief Executive Officer and Chairman of
the Board of Directors
Joseph E. Broderick................ 53 Executive Vice President, Client Sales and Services
Kenneth S. Thompson................ 42 Executive Vice President, Supply Chain Products
Keith J. Enstice................... 47 Senior Vice President, Field Operations Division,
Americas
Mary Lou Fox....................... 55 Senior Vice President, Product and Industry
Marketing
Peter Q. Repetti................... 36 Senior Vice President and Chief Financial Officer
David M. Roth...................... 40 Senior Vice President, Marketing
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26
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 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, Product and Industry
Marketing since November 1997. From April 1993 to November 1997, she served as
Senior Vice President, Professional Services Division. 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 Senior Vice President and Chief Financial
Officer since November 1997. Prior thereto Mr. Repetti 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.
Mr. Roth has served as Senior Vice President, Marketing since November
1997 and as Vice President, Marketing from October 1994 to November 1997. Prior
to joining the Company, Mr. Roth served as Vice President of Marketing at
American Software, Inc., where he also worked in various other marketing and
consulting positions from 1989 to 1994.
26
27
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, $.002 par value per share, trades on The
Nasdaq Stock Market under the symbol "MANU".The following table sets forth the
high and low closing prices in dollars per share for the respective quarterly
periods over the last two fiscal years, as reported in published financial
sources. These prices reflect inter-dealer prices, without retail markup,
markdown or commission, and may not necessarily represent actual transactions.
All share prices provided below have been adjusted to reflect the stock split
effected on June 11, 1997, for stockholders of record on May 23, 1997.
Fiscal Year 1998 High Low
---------------- ---- ---
First Quarter 34 14 7/8
(ended May 31, 1997)
Second Quarter 49 3/4 30
(ended August 31, 1997)
Third Quarter 45 3/4 28 1/2
(ended November 30, 1997)
Fourth Quarter 48 1/2 35 7/8
(ended February 28, 1998)
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)
As of May 22, 1998, there were approximately 210 stockholders of
record and approximately 7,000 beneficial owners of the Company's 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, 1998, unless it is renewed. See "Management's
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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 its 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.
Recent Sale of Unregistered Securities
As previously reported by the Company in its Current Report on Form 8-K
dated February 13, 1998, on that date, the Company, through its indirect,
wholly-owned subsidiary, Manugistics Nova Scotia Company ("Manugistics Nova
Scotia"), a Nova Scotia unlimited liability company, acquired all of the then
outstanding capital stock of ProMIRA Software Incorporated ("ProMIRA"), a Nova
Scotia company (such transaction being referred to as the "Acquisition")
pursuant to a certain Stock Purchase Agreement (the "Stock Purchase Agreement")
which was privately negotiated among the parties thereto.
In connection with the purchase and sale of the ProMIRA capital stock and
the cancellation of outstanding options to purchase ProMIRA stock, Manugistics
Nova Scotia paid or delivered to or for the benefit of the holders of ProMIRA
capital stock and options (the "ProMIRA Sellers") the following: cash in the
aggregate amount of approximately $5,300,000 (Cdn. $7,633,330); and an
aggregate of 1,550,000 shares of the Company's Common Stock (the "Shares"). In
addition, the Company issued to ProMIRA Sellers options to purchase a total of
78,379 shares of the Company's Common Stock. The options were issued under the
Company's Employee Stock Option Plan and vest and become exercisable in
installments of 25% per year commencing twelve months after the date of the
grant of the option. Each option has an exercise price of $43.75 per share.
An aggregate of 561,533 of the Shares were issued to a total of 22 persons
then resident in the United States. Options to purchase an aggregate of 20,750
shares of Common Stock were issued to a total of 7 persons then resident in the
United States. Such Shares and options were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.
(The balance of the Shares and options were issued to persons then resident in
Canada or the United Kingdom and were not registered under the Securities Act
in reliance upon Regulation S thereunder.) The Stock Purchase Agreement and a
related Registration Rights Agreement imposed certain restrictions on the
resale and other transfers of the Shares necessary to make the Regulation D and
Regulation S exemptions available. No underwriters were involved in connection
with the sale of the Shares under the Stock Purchase Agreement. In accordance
with the terms of the Registration Rights Agreement, the Company subsequently
registered the Shares for resale on Form S-3 under the Securities Act.
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30
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, 1998 are set
forth below. This 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 Form 10-K.
Fiscal Year Ended February 28 or 29,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Software products $ 105,018 $ 51,186 $ 29,494 $ 24,758 $ 19,590
Consulting, maintenance
and other services 70,648 43,944 32,828 24,652 18,371
----------- --------- --------- --------- ---------
Total revenues 175,666 95,130 62,322 49,410 37,961
Operating expenses:
Cost of software sold 11,031 4,940 2,974 2,842 2,878
Cost of consulting, maintenance
and other services 32,652 19,101 14,614 12,990 9,518
Sales and marketing 64,194 32,909 21,365 16,580 13,374
Product development 31,665 17,380 11,229 7,550 5,011
General and administrative 13,959 8,817 6,080 5,130 3,714
Purchased research and development (1) 47,340 3,697 - - -
----------- --------- --------- --------- ---------
Total operating expenses 200,841 86,844 56,262 45,092 34,495
----------- --------- --------- --------- ---------
(Loss) income from operations (25,175) 8,286 6,060 4,318 3,466
Other income - net 2,828 1,016 1,097 643 146
----------- --------- --------- --------- ---------
(Loss) income before income taxes (22,347) 9,302 7,157 4,961 3,612
(Benefit) provision for income taxes (9,064) 4,960 2,709 1,740 1,460
----------- --------- --------- --------- ---------
Net (loss) income $ (13,283) $ 4,342 $ 4,448 $ 3,221 $ 2,152
=========== ========= ========= ========= =========
Basic (loss) income per share $ (0.57) $ 0.20 $ 0.22 $ 0.16 $ 0.13
=========== ========= ========= ========= =========
Shares used in basic share
computation (2) 23,151 21,324 20,602 19,677 16,867
=========== ========= ========= ========= =========
Diluted (loss) income per share $ (0.57) $ 0.19 $ 0.21 $ 0.16 $ 0.12
=========== ========= ========= ========= =========
Shares used in diluted share
computation (2) 23,151 22,826 21,628 20,575 18,441
=========== ========= ========= ========= =========
(1) During fiscal 1998 and 1997, the Company incurred non-recurring charges to
operations totaling $47.3 million ($28.6 million, net of $18.7 million tax
benefit) and $3.7 million, respectively, in connection with the write-off
of purchased research and development which had not yet reached
technological feasibility and had no alternative future use. The impact of
these charges on basic and diluted (loss) income per share was $1.24 and
$1.16, respectively, in fiscal 1998, and $.17 and $.16, respectively, in
fiscal 1997. Excluding the effect of these non-recurring, non-cash charges,
basic and diluted income per share would have been $.67 and $.59,
respectively, in fiscal 1998, and $.37 and $.35, respectively, in fiscal
1997.
(2) Gives effect to (i) the issuance of 379,747 shares of Series B Convertible
Preferred Stock on June 7, 1993; and (ii) the automatic conversion of all
outstanding shares of Series A and B Convertible Preferred Stock into
shares of common stock during fiscal 1994.
February 28 or 29,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- --------
(in thousands)
BALANCE SHEET DATA:
Working capital $ 95,011 $ 32,499 $ 29,201 $ 30,484 $ 21,274
Total assets 222,501 84,323 60,431 49,759 34,665
Long-term debt, less current portion 235 220 182 337 528
Total stockholders' equity 172,079 53,593 42,942 36,512 24,899
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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
(TM) and provides related services. Synchronized supply chain management refers
to managing the complex interactions involved in the flows of products through
the supply chain. It 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 provides an
integrated suite of strategic, tactical and operational supply chain software
planning products, including a high-level optimizer, that address the four key
operational areas of supply chain management: demand planning, supply planning,
manufacturing scheduling and transportation management. The Company derived
approximately 98%, 96% and 91% of its revenues in fiscal 1998, 1997 and 1996,
respectively, from it's supply chain management software and services.
Additionally, the Company markets and supports the STATGRAPHICS personal
systems product, which provides statistical tools for quality management in
manufacturing companies.
RESULTS OF OPERATIONS
REVENUES:
Software products. The Company's software products license revenues
increased to approximately 60% and 54% of total revenues in fiscal 1998 and
1997, respectively, from 47% in fiscal 1996, primarily because the Company's
increased sales and marketing efforts for supply chain management were
effective, because of increased market acceptance of such products, and because
the Company increased its resources devoted to generating software products
license revenues more rapidly than its resources for producing services
revenues. See "Operating Expenses." Although the percentage of total revenues
represented by software products license revenues has varied in the past and is
likely to continue to vary, the Company anticipates that software products
license revenues are likely to represent 55% to 60% of total revenues for
fiscal 1999. See "Forward Looking Statements."
Fiscal year ended February 28 or 29,
------------------------------------------------------
1998 Change 1997 Change 1996
-------- --------- -------- -------- --------
(in thousands)
Supply chain management $102,255 112% $ 48,230 92% $ 25,070
Percentage of total revenues 58.2% 50.7% 40.2%
Personal systems and other $2,763 -7% $ 2,956 -33% $ 4,424
Percentage of total revenues 1.6% 3.1% 7.1%
---------- --------- ---------
Total software products revenues $105,018 105% $ 51,186 74% $ 29,494
Percentage of total revenues 59.8% 53.8% 47.3%
Supply chain management. Software products license revenues increased
in fiscal 1998 and 1997 because of increases in both the number of licenses and
the average license fee per transaction. This growth resulted from increases in
the Company's sales and marketing resources, increases in the Company's sales
productivity, higher contributions from the
31
32
Company's international operations (which grew to 26% and 24% of total software
revenues in fiscal 1998 and 1997, respectively, from 20% in 1996), and
expansion into new vertical industries. Software products license revenues also
increased because of increased market acceptance of the Company's products,
including its recently introduced products and the latest versions of
established products. This increased acceptance resulted in part from the
recognition by prospects and customers that they could rapidly realize
significant benefits from effective supply chain management, which led some
companies to license more of the Company's products or to amend their existing
licenses to permit a greater number of users.
The Company has historically derived the substantial majority of its
software products license revenues from direct sales. However, the Company has
embarked on a strategy of expanding its product distribution through alliances
with complementary vendors which also led to additional software products
license revenues during fiscal 1998 and 1997. This strategy of developing
alliances is still in its early stages and the number of software license
transactions involving complementary vendors has been relatively small and has
fluctuated. The Company anticipates that software products license revenues
derived from indirect sales by these complementary vendors will continue to
fluctuate. See "Risk Factors" and "Forward Looking Statements."
Personal systems. Software products license revenues decreased
slightly in fiscal 1998 primarily because the Company decreased the resources
dedicated to STATGRAPHICS and because many prospective customers selected
competing products. As a percentage of total revenues, personal systems
software products license revenues decreased to less than 2%. Software
products license revenues decreased in fiscal 1997 primarily because the
Company sold the assets of its APL-PLUS business in fiscal 1996. The Company
believes that demand for STATGRAPHICS will continue to decrease. See "Forward
Looking Statements."
Consulting, maintenance and other services. Revenues from consulting,
maintenance and other services increased in fiscal 1998 and 1997 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,
----------------------------------------------------
1998 Change 1997 Change 1996
-------- -------- -------- -------- ---------
(in thousands)
Supply chain management $ 69,911 62% $ 43,120 36% $ 31,629
Percentage of total revenues 39.8% 45.5% 50.8%
Personal systems and other $737 -11% $824 -31% $ 1,199
Percentage of total revenues 0.4% 0.9% 1.9%
-------- --------- ---------
Total consulting, maintenance
and other services revenues $ 70,648 61% $ 43,944 34% $ 32,828
Percentage of total revenues 40.2% 46.4% 52.7%
Supply chain management. Revenues from consulting and other services
increased in fiscal 1998 and 1997 because of: (1) new clients licensing
increased numbers of products and users, which generally leads to
implementation and other consulting services, and (2) established clients
licensing additional products and users, which also generates further demand
for consulting services. Consulting revenues also increased in fiscal 1998 due
to additional contributions from the Company's international operations,
including consulting services provided by employees who joined the Company in
June 1997 in connection with the Company's acquisition of Synchronology Group
Limited ("SGL"). See Note 4 of Notes to the Consolidated Financial Statements.
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33
Maintenance revenues increased in fiscal 1998 and 1997 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 in fiscal 1998 and 1997 because of a decline in maintenance revenues.
This decline followed the erosion of the installed base of STATGRAPHICS users,
which resulted from customers and prospective customers having selected
competing products, and the Company's sale of the assets of its APL-PLUS
business in fiscal 1996.
OPERATING EXPENSES:
General. In fiscal 1999, 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 vertical markets, 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. See "Forward
Looking Statements."
Fiscal year ended February 28 or 29,
-------------------------------------------------------
1998 Change 1997 Change 1996
---------- -------- -------- -------- ----------
(in thousands)
Cost of software sold $ 11,031 123% $ 4,940 66% $ 2,974
Percentage of total revenues 6.3% 5.2% 4.8%
Cost of consulting, maintenance
and other services $ 32,652 71% $ 19,101 31% $ 14,614
Percentage of total revenues 18.6% 20.1% 23.4%
Sales and marketing $ 64,194 95% $ 32,909 54% $ 21,365
Percentage of total revenues 36.5% 34.5% 34.3%
Product development $ 31,665 82% $ 17,380 55% $ 11,229
Percentage of total revenues 18.0% 18.3% 18.0%
General and administrative $ 13,959 58% $ 8,817 45% $ 6,080
Percentage of total revenues 7.9% 9.3% 9.8%
---------- ----------- ---------
Total operating expenses excluding
purchased research and development $ 153,501 85% $ 83,147 48% $ 56,262
Percentage of total revenues 87.3% 87.4% 90.3%
--------- ----------- ---------
Purchased research and development $ 47,340 $3,697 $ -
Percentage of total revenues 27.0% 3.9% -
--------- ----------- ---------
Total operating expenses $ 200,841 131% $ 86,844 54% $ 56,262
Percentage of total revenues 114.3% 91.3% 90.3%
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Cost of software sold. Cost of software sold includes: 1) amortization
of capitalized software development costs, and 2) cost of goods and other,
which includes royalty fees associated with third-party software included with
Manugistics software that is licensed to customers. The Company amortizes
internal computer software development costs over the product's estimated
economic life, generally two years, commencing when a product is first
available for general commercial release. The Company amortizes purchased
capitalized software development costs over a product's estimated economic
life, generally two to five years.
Fiscal year ended February 28 or 29,
----------------------------------------------------
1998 Change 1997 Change 1996
-------- -------- -------- -------- --------
(in thousands)
Amortization of capitalized software $ 7,560 113% $ 3,543 59% $ 2,228
Percentage of software products license revenues 7.2% 6.9% 7.6%
Cost of goods and other $ 3,471 148% $ 1,397 87% $ 746
Percentage of software products license revenues 3.3% 2.7% 2.5%
--------- --------- ---------
Cost of software sold $ 11,031 123% $ 4,940 66% $ 2,974
Percentage of software products license revenues 10.5% 9.6% 10.1%
The cost of software sold increased in fiscal 1998 and 1997 because
amortization increased following the general commercial release of additional
supply chain management software products for which costs had previously been
capitalized, and because cost of goods and other increased. The amortization of
capitalized software development costs has increased in recent years as the
Company has increased its gross product development expenditures for supply
chain management software. See "Product Development." Amortization also
increased because the Company wrote off approximately $1.9 million and $.3
million in fiscal 1998 and 1997, repectively, of capitalized costs relating to
the development of certain prior versions of its software products which the
Company determined exceeded the future net realizable value as a result of new
technologies developed by the Company or acquired in connection with
acquisitions. Cost of goods and other expenses increased in fiscal 1998 and
1997 primarily because of the increase in royalty fees as the number of
licenses to customers involving third party software increased.
Cost of consulting, maintenance and other services. The cost of
consulting, maintenance and other services increased in fiscal 1998 and 1997
primarily because the Company added personnel (including SGL employees) to meet
increased demand for its consulting and maintenance services which resulted
from the increased demand for the Company's software products. These additional
employees helped generate 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 increased in
fiscal 1998 mainly because of the amount of expenses associated with new
employees and because of the timing delays between the dates that these
employees began work and the dates they first become productive after training.
In fiscal 1997, the cost of consulting, maintenance and other services
decreased as a percentage of consulting, maintenance and other services
revenues largely because a portion of
34
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the increase in corresponding revenues was generated by product maintenance and
support, which can be provided more efficiently by serving a larger client
base, and because of improved utilization of the Company's consulting
employees.
Sales and marketing. Sales and marketing expenses increased in fiscal
1998 and 1997 primarily because the Company added sales and marketing resources
in North and South America, Europe and the Asia/Pacific region, and incurred
higher commissions as a result of increased software products license revenues.
In addition, the Company incurred costs to establish new offices or build up
its presence in certain foreign markets, and increased its marketing expenses
in connection with these new foreign markets and with its expanded product
offerings (See "Strategy"). As a percentage of total revenues, sales and
marketing expenses increased in fiscal 1998 and 1997 principally because these
expenses increased at a more rapid rate than total revenues. As it pursues its
strategy of expanding its business into new geographic markets, new industries
and expanded distribution channels, the Company is continuing to hire and train
additional sales and marketing employees and to make other sales and marketing
expenditures. See "Forward Looking Statements."
Product development. The Company records product development expenses
net of capitalized software development costs for products which have reached
technological feasibility.
Fiscal year ended February 28 or 29,
-------------------------------------------------
1998 Change 1997 Change 1996
--------- -------- -------- -------- --------
(in thousands)
Gross product development costs $ 41,053 69% $ 24,223 50% $16,144
Percentage of total revenues 23.4% 25.5% 25.9%
Less: Capitalized prod. dev. costs $ 9,388 37% $ 6,843 39% $ 4,915
Percentage of gross prod. dev. costs 22.9% 28.3% 30.4%
--------- --------- --------
Product development expenses $ 31,665 82% $ 17,380 55% $11,229
Percentage of total revenues 18.0% 18.3% 18.0%
Gross product development costs for fiscal 1998 and 1997 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. In fiscal 1998 and 1997, as
a percentage of total revenues, gross product development costs decreased
largely because these expenses did not increase as rapidly as total revenues.
The Company plans to continue to make significant product development
expenditures in fiscal 1999 as it pursues its strategy of rapidly developing
and delivering new products, features, functions and integration to software
products of other vendors. See "Forward Looking Statements."
General and administrative. General and administrative expenses
increased in fiscal 1998 and 1997 primarily because of increased expenses
associated with supporting an organization with more employees and a greater
geographic scope. As a percentage of total revenues, general and administrative
expenses decreased in fiscal 1998 and 1997 because these expenses did not
increase as rapidly as total revenues, in part because the Company was able to
leverage its base of administrative resources to support a larger
organizational structure.
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Purchased research and development. During the fourth quarter of
fiscal 1998, the Company acquired all of the outstanding capital stock of
ProMIRA Software, Inc. ("ProMIRA"), a provider of supply chain planning
software for manufacturers of complex products in industries such as high
technology, electronics and motor vehicles and parts. In that quarter, the
Company recorded a non-recurring charge to operations totaling $47.3 million
($28.6 million, net of an income tax benefit of $18.7 million) to write off
purchased research and development which had not yet reached technological
feasibility and had no alternative future use. The impact on basic and diluted
income per share for fiscal 1998 was $1.24 and $1.16, respectively. In
addition, during the first quarter of fiscal 1997, the Company acquired all of
the outstanding capital stock of Avyx, Inc. ("Avyx"), a developer and services
provider of custom manufacturing scheduling software. The Company recorded a
non-recurring charge to operations of $3.7 million ($.17 and $.16 basic and
diluted income per share, respectively) to write off purchased research and
development which had not yet reached technological feasibility and had no
alternative future use. See Note 4 of Notes to Consolidated Financial
Statements.
(LOSS) INCOME FROM OPERATIONS:
Fiscal year ended February 28 or 29,
-------------------------------------------------------
1998 Change 1997 Change 1996
--------- -------- -------- ---------- ----------
(in thousands)
Income from operations excluding
purchased research and development $ 22,165 85% $ 11,983 98% $6,060
Percentage of total revenues 12.6% 12.6% 9.7%
Purchased research and development $(47,340) $ (3,697) $ -
Percentage of total revenues N/M N/M
---------- ---------- -------
(Loss) income from operations $(25,175) N/M $ 8,286 37% $6,060
Percentage of total revenues N/M 8.7% 9.7%
OTHER INCOME - NET:
Fiscal year ended February 28 or 29,
-------------------------------------------------
1998 Change 1997 Change 1996
------ -------- -------- ---------- -------
(in thousands)
Other income - net $2,828 178% $1,016 -7% $1,097
Percentage of total revenues 1.6% 1.1% 1.8%
Other income-net includes income from short term investments, interest
income and expense, foreign currency exchange gains or losses, and other gains
or losses. Other income increased in fiscal 1998 primarily due to greater
interest income generated from short-term investments following the investment
of the net proceeds of the public offering of common stock completed in August
1997. In future quarters, the investment of these proceeds will continue to
generate income, pending their application to other uses. Other income
decreased slightly in fiscal 1997 over 1996 because of slight changes in the
various components.
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37
PROVISION FOR INCOME TAXES:
The Company recorded a loss in fiscal 1998 as a result of the
write-off of purchased research and development associated with the acquisition
of ProMIRA. As a result of this non-recurring charge, the Company recorded an
income tax benefit of $18.7 million. In fiscal 1997, the effective tax rate
represented by the Company's provision for income taxes was approximately 53%,
primarily because the expenses associated with the Company's write-off of
purchased research and development from the purchase of Avyx were not
deductible for tax purposes. Excluding the effect of this write-off on taxable
income, the effective tax rate for fiscal 1997 would have been approximately
38%. Management of the Company believes that, in fiscal 1999, the effective
tax rate of the Company on a consolidated basis is likely to be approximately
39%, excluding non-recurring charges recorded 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 "Forward Looking Statements" and
Note 9 of Notes to Consolidated Financial Statements.
NET (LOSS) INCOME AND (LOSS) INCOME PER SHARE:
Fiscal year ended February 28 or 29,
--------------------------------------------------------
1998 Change 1997 Change 1996
---------- ---------- -------- -------- ----------
(in thousands)
Net income excluding purchased research
and development $ 15,370 $ 8,039 $ 4,448
Percentage of total revenues 8.7% 91% 8.5% 81% 7.1%
Less: Purchased research and development,
net of tax benefit in 1998 $(28,653) $(3,697) $ -
--------- -------- --------
Net (loss) income $(13,283) N/M $ 4,342 -2% $ 4,448
Percentage of total revenues N/M 4.6% 7.1%
========= ======== ========
Basic income per share, excluding purchased
research and development $ 0.67 81% $ 0.37 68% $ 0.22
Purchased research and development,
per basic share $ (1.24) $ (0.17) $ -
--------- -------- --------
Basic (loss) income per share $ (0.57) N/M $ 0.20 -9% $ 0.22
========= ======== ========
Shares used in basic share computation 23,151 21,324 20,602
========= ======== ========
Diluted (loss) income per share $ ($0.57) N/M $ 0.19 -10% $ 0.21
========= ======== ========
Shares used in diluted share computation 23,151 22,826 21,628
========= ======== ========
37
38
LIQUIDITY AND CAPITAL RESOURCES
February 28 or 29,
----------------------------------------------------------------
1998 Change 1997 Change 1996
----------- ---------- ----------- ---------- --------
(in thousands)
Working capital $ 95,011 192% $ 32,499 11% $ 29,201
Cash, cash equivalents
and marketable securities $ 81,941 270% $ 22,174 -6% $ 23,479
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, 1998 and 1997 resulted
principally from increases in (1) the Company's cash and marketable securities,
largely as a result of the Company's sale of 1.6 million shares of common stock
in August 1997, (2) the Company's cash flows from operations and (3) accounts
receivable, which resulted from the increases in software products and services
revenues, and which more than offset decreases resulting from the Company's
payments in connection with the agreement with IRI in March 1997, the
acquisition of SGL in June 1997 and the acquisition of ProMIRA in February
1998. See Note 4 of Notes to Consolidated Financial Statements.
The Company's operating activities provided cash of $29.6 million,
$14.2 million and $9.4 million in fiscal 1998, 1997 and 1996, respectively.
Operating cash flows increased in fiscal 1998 primarily because the increase in
operating income before non-cash expenses (including the write-off of purchased
research and development in connection with the acquisition of ProMIRA in
February 1998 and depreciation and amortization) and increases in accounts
payable, accrued liabilities and accrued compensation more than offset
increases in accounts receivable, non-cash expenses and deferred income taxes.
Operating cash flows increased in fiscal 1997 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 were not fully offset by increases in accounts
receivable.
At February 28, 1998, accounts receivable were $58.2 million, compared
to $37.1 million at February 28, 1997, primarily as a result of increases in
the number and size of software license transactions. Deferred revenue
increased from $13.8 million to $18.0 million, principally because of growth in
deferred maintenance revenue as a result of increased licensing activity. At
February 28,1997, accounts receivable were $37.1 million, compared to $19.3
million at February 29, 1996, primarily as a result of increases in the number
and size of software license transactions. Deferred revenue increased from $6.7
million to $13.8 million because of growth in software licensing activity and
increases in related services and maintenance revenue.
Investing activities used cash of $85.2 million, $13.5 million and
$9.6 million in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998,
investing activities used cash largely as a result of the purchase of
marketable securities using proceeds from the public offering of common stock
completed in August 1997. In fiscal 1998 and 1997, sales of marketable
securities provided cash, but the amounts provided were more than offset by
cash used for purchases of marketable securities, property and equipment,
capitalization of software development costs and acquisitions. The Company had
expenditures for property and equipment of approximately $15.9 million in
fiscal 1998. The Company anticipates expenditures for property and equipment
commensurate with its anticipated growth in fiscal 1999. See "Forward Looking
Statements." The Company also used cash to acquire ProMIRA and SGL, and to
enter into an agreement with IRI.
38
39
Financing activities provided cash of $66.7 million, $2.4 million and
$0.7 million, in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, cash
from financing activities was derived primarily from the sale of 1.6 million
shares of common stock in an underwritten public offering in August 1997, from
exercises of employee stock options and from the sale of shares pursuant to the
Company's employee stock purchase program. In fiscal 1997, cash from financing
activities was derived primarily from exercises of employee stock options and
from the sale of shares pursuant to the Company's employee stock purchase
program. See Note 6 of Notes to Consolidated Financial Statements.
In February 1998, the Company issued 1.55 million shares of common
stock, in connection with the acquisition of ProMIRA. The Company also paid
$5.3 million in cash. The Company accounted for the acquisition as a purchase
transaction and recognized a non-recurring, non-cash charge of $47.3 million to
write off purchased research and development. In June 1997, the Company
acquired all of the outstanding stock of SGL for $2.8 million in cash. The
Company accounted for the acquisition as a purchase transaction. In March 1997,
the Company entered into agreements with IRI (the "IRI Agreement") relating to
the Company's possible acquisition of certain assets of IRI and the development
of a solution that will incorporate IRI's point-of-sale scanner data into the
Company's supply chain management software. Under the agreements, the Company
paid $1.5 million to IRI.
Under the IRI Agreements, the Company agreed to market IRI's
point-of-sale data and received 10-year, exclusive rights among supply chain
software vendors in most geographic markets to incorporate these data. The
Company and IRI agreed to resell certain of each other's products, and the
Company might acquire certain additional assets of IRI (subject to the
satisfaction of certain contingencies).
As part of these agreements, the Company committed that it will
generate a minimum of $16.5 million in revenues for IRI from specified products
over several years, beginning after the occurrence of certain events. This
commitment is subject to the satisfaction of significant contingencies
specified in the agreements. Certain issues have arisen between the Company and
IRI relating to the satisfaction of these contingencies. The Company
currently anticipates satisfactory resolution of these issues and believes
that it will be able to produce a sufficient amount of qualifying revenues to
satisfy its commitment. However, if the Company is unable to generate the
minimum annual revenues, to the extent required under the 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 material decrease in working capital. See "Forward Looking
Statements."
39
40
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 will expire in September 1998, unless renewed. There were no amounts
outstanding under this facility at February 28, 1998.
The Company is continuing to take steps to ensure its products,
internal systems and infrastructure are Year 2000 compliant. The Company
released an enhancement (as part of its normal product development efforts) to
its supply chain management software products in the quarter ending May 31,
1998 that is the Company's Year 2000 compliant release. In addition, its
efforts have included testing, replacing and updating these systems. Based
upon actual experience to date, the Company continues to evaluate the estimated
costs associated with these efforts. While final cost estimates are not
complete, the Company presently believes that it will be able to manage its
total Year 2000 transition without any material adverse effect on its results
of operations or financial condition. The Company has expensed approximately
$200,000 of Year 2000 costs through fiscal 1998 and estimates that it will
incur $1,000,000 and $300,000 of additional expenses in fiscal 1999 and 2000,
respectively.
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.
40
41
The Company believes that inflation did not have a material effect on
its results of operations in fiscal 1998.
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 10-K contains certain forward looking statements that are subject to a
number of risks and uncertainties. In addition, the Company may publish or make
forward looking statements from time to time relating to such matters as
anticipated financial performance, business prospects and strategies, sales and
marketing strategies, markets, current and potential competition, technological
developments, new products, research and development activities, acquisition
activities, partnerships and alliances 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 results 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:
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 domestic and international business or
economic conditions or competitors' actions. A small variation in the timing of
software licensing transactions, particularly near the end of any quarter or
year, can cause significant variations in software products license revenues in
any period.
The Company believes that the market for supply chain management
software is expanding rapidly. However, if market demand for the Company's
products does not continue to grow rapidly, because of such factors as adverse
changes in domestic or international business and economic conditions or
foreign currency exchange rates, the timely availability and acceptance of the
Company's products, technological change or the effect of competitive products
and pricing, software license revenue growth and consulting, maintenance and
other services revenue growth, margins, or both could be adversely affected. If
competitors make acquisitions of other competitors or establish cooperative
relationships among themselves or with third parties to enhance the ability of
their products to address the supply chain management needs of prospects and
customers, or if certain ERP or other software vendors that have announced
plans to develop or incorporate functionality that could compete with the
Company's products successfully develop and market such functionality, software
license revenue growth could be adversely affected.
There can be no assurance that the Company will be able to attract
complementary software vendors, consulting firms or other organizations that
will be able to market the Company's products effectively or that will be
qualified to provide timely and cost-effective customer support and services.
In addition, there can be no assurance that any organization will continue its
involvement with the Company and its products, and the loss of relationships
with important organizations could materially adversely affect the Company's
results of operations.
41
42
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, which could materially
adversely affect the Company's results of operations.
The Company has recently hired a significant number of employees. In
order to maintain its ability to grow in the future, the Company will be
required to increase significantly its total number of employees, sometimes in
anticipation of increased revenues. There can be no assurance that it will be
able to do so successfully.
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 97-2, which supercedes SOP
91-1. SOP 97-2 addresses software revenue recognition and is effective for
transactions entered into for fiscal years beginning after December 15, 1997.
The Company believes, based upon its interpretation of SOP 97-2, that its
current revenue recognition policies and practices are materially consistent
with the SOP in all material respects. However, guidelines for implementation
of this SOP have not yet been issued, and the accounting profession is
discussing a wide range of possible interpretations of the requirements of SOP
97-2. Any such guidelines for implementation, if and when issued, could lead to
unanticipated changes in the Company's current revenue recognition policies and
practices. Such changes could materially adversely affect the Company's future
reported revenues and earnings. See Note 1 of Notes to Consolidated Financial
Statements.
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 44.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
42
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 1998 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, 1998) (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 Manugistics Group, Inc. 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."
43
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 F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows 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.
44
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, 10.11, 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
- ------ ----- -----------
3.1(a) (A) Amended and Restated Certificate of Incorporation of the Company.
3.1(b) (B) Certificate of Retirement and Elimination (relating to the Series
A and Series B preferred stock of the Company)
3.1(c) (C) Certificate of Amendment to Amended and Restated Certificate
of Incorporation of the Company (effective July 29, 1997)
3.2 (A) Amended and Restated By-Laws of the Company.
10.1 (I) Employee Incentive Stock Option Plan of the Company, as amended.
10.2 (I) Employee Stock Option Plan of the Company, as amended.
10.3 (A) Form of Notice of Grant of Option pursuant to the Director Stock Option Plan. (previously identified as
Exhibit 10.4)
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.
45
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, 1995 between the Company and East Jefferson Associates.
10.7(e) (K) Fifth Amendment to Lease Agreement dated September 6, 1996 between the State of Maryland
and the Company
10.7(f) (K) Sixth Amendment to Lease Agreement dated October 10, 1996 between the State of Maryland
and the Company
10.7(g) (K) Seventh Amendment to Lease Agreement dated April 25, 1997 between the State of Maryland
and the Company
10.8 Lease Agreement dated March 26, 1998 between Manugistics, Inc. and Washingtonian North Associates
Limited Partnership
10.11 (D) Outside Directors Non-Qualified Stock Option Plan
10.12 (D) Executive Incentive Stock Option Plan
10.15 (F) Employee Stock Purchase Plan of the Company (previously identified as Exhibit
10.14)
10.17 (G) Sublease dated May 5, 1995 between the Company and NationsBank, N.A., as amended
10.18 (H) Agreement and Plan of Merger dated May 24, 1996 between Avyx, Inc., Manugistics
Acquisition, Inc. and the Company
10.19 (H) Consulting Agreement dated May 24, 1996 between The Kendall Group, Inc. and the Company
46
47
10.20 (H) Confidentiality, Non-Competition and Non-Solicitation Agreement dated May 24, 1996 between the Company and
John K. Willoughby and JoAnne Gardner
10.21 (J) Financing Agreement dated as of September 30, 1996 by and among the Company and
NationsBank, N.A.
10.22 (J) Form of Revolving Promissory Note dated September 30, 1996 by the Company in favor of
NationsBank, N.A.
10.23 (K) Sublease Agreement between CTA Incorporated and the Company dated May 23, 1996
10.24 (K)(i) Data Marketing and Guaranteed Revenue Agreement dated March 7, 1997 between the Company
and Information Resources, Inc.
10.25 (K)(i) Asset Purchase Agreement dated March 7, 1997 between Manugistics, Inc., Manugistics
Services, Inc., IRI Logistics, Inc. and Information Resources, Inc.
10.26 (L) Sale and Purchase Agreement dated 7th June 1997 between M.C. Harrison, J.E. Harrison,
Manugistics U.K. Limited and Manugistics Group, Inc.
10.27 (M) Stock Purchase Agreement dated February 13, 1998 between Manugistics Nova Scotia
Company and ProMIRA Software Incorporated, et al.
21 Subsidiaries of the Company
23 Independent Auditors' Consent
27 Financial Data Schedule and Certain Restated Financial Data Schedules
(A) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (NO. 33-65312).
(B) INCORPORATED BY REFERENCE TO EXHIBIT 4.1(a) TO THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-3 (REG. NO. 333-31949)
(C) INCORPORATED BY REFERENCE TO EXHIBIT 4.1(b) TO THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-3 (REG. NO. 333-31949)
(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 ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 29, 1996.
47
48
(H) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1996.
(I) 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.
(J) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1996.
(K) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997.
(L) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1997.
(M) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S CURRENT
REPORT ON FORM 8-K DATED MARCH 2, 1998
(i) CONFIDENTIAL TREATMENT PREVIOUSLY GRANTED FOR CERTAIN PORTIONS OF THIS
EXHIBIT.
(b) Reports on Form 8-K
1. On March 2, 1998, the Company filed a Current Report on Form 8-K,
describing the acquisition of assets resulting from the acquisition of
ProMIRA Software, Inc.
2. On March 19, 1998, the Company filed a Current Report on Form 8-K
following its issuance of a press release on February 12, 1998
announcing that the Company was negotiating the final terms of a
definitive agreement to acquire ProMIRA Software, Inc., and following
its issuance of a press release on February 13, 1998 announcing that
the Company had completed the acquisition of ProMIRA Software, Inc.
3. On March 27, 1998, the Company filed a Current Report on Form 8-K
following its issuance of a press release on March 26, 1998 announcing
the Company's earnings figures for the fourth quarter and the fiscal
year ended February 28, 1998.
4. On May 22, 1998 the Company filed a Current Report on Form 8-K
following its issuance of a press release dated May 21, 1998 which
provided certain information regarding revenues and earnings for the
Company's first quarter.
5. On Friday, May 22, 1998 the Company filed a Current Report on Form 8-K
following its issuance of a press release dated May 22, 1998 which
expanded on information contained in a press release previously issued
by the Company on Thursday, May 21, 1998 regarding anticipated
revenues and earnings for its first fiscal quarter.
(c) Exhibits
See the response to Item 14(a)(3) above.
48
49
(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.
49
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 29, 1998.
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 29, 1998.
/s/William M. Gibson /s/Peter Q. Repetti
- ---------------------- ---------------------
William M. Gibson Peter Q. Repetti
President, Chief Executive Officer and Senior Vice President and Chief Financial Officer
Chairman of the Board of Directors (Principal financial officer and
(Principal executive officer) 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
50
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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended February 28, 1998.
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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended February 28, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 24, 1998 (except Note 13 as to which the date is March 26, 1998)
F-1
52
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
FEBRUARY 28,
ASSETS 1998 1997
---- -------
CURRENT ASSETS:
Cash and cash equivalents $19,695 $8,543
Marketable securities 62,246 13,631
Accounts receivable (net of allowance for
uncollectible accounts - 1998, $2,089;
1997,$1,215) 58,217 37,093
Other current assets 4,882 2,275
--------- --------
Total current assets 145,040 61,542
PROPERTY AND EQUIPMENT - NET 20,909 10,355
NONCURRENT ASSETS:
Software development costs (net of accumulated
amortization - 1998, $14,651; 1997, $6,375) 22,100 9,932
Intangibles (net of accumulated amortization -
1998, $2,971; 1997, $1,943) 14,660 2,130
Deferred tax asset 17,923 -
Other non-current assets 1,869 364
--------- --------
TOTAL $222,501 $84,323
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $8,830 $4,244
Accrued compensation 12,419 6,403
Other accrued liabilities 10,152 3,362
Deferred revenue 17,974 13,808
Income taxes payable 655 1,226
--------- --------
Total current liabilities 50,030 29,043
LONG-TERM LIABILITIES 392 220
DEFERRED TAXES - 1,467
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock - $.002 par value; 100,000,000 shares
authorized; shares issued, 26,407,755 in 1998;
22,429,414 in 1997; shares outstanding,
25,655,245 in 1998; 21,676,904 in 1997 53 44
Additional paid-in capital 170,813 38,837
Retained earnings 1,687 14,970
Translation adjustment 375 459
Unrealized loss on marketable securities (132) -
Treasury stock - 752,510 shares at cost (717) (717)
--------- --------
Total stockholders' equity 172,079 53,593
--------- --------
TOTAL $222,501 $84,323
========= ========
See notes to consolidated financial statements.
F-2
53
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
----------- ---------- ---------
REVENUES:
Software products $105,018 $ 51,186 $ 29,494
Consulting, maintenance and other services 70,648 43,944 32,828
----------- ---------- ---------
Total revenues 175,666 95,130 62,322
----------- ---------- ---------
OPERATING EXPENSES:
Cost of software sold 11,031 4,940 2,974
Cost of consulting, maintenance and other services 32,652 19,101 14,614
Sales and marketing 64,194 32,909 21,365
Product development 31,665 17,380 11,229
General and administrative 13,959 8,817 6,080
Purchased research and development 47,340 3,697 -
----------- ---------- ---------
Total operating expenses 200,841 86,844 56,262
----------- ---------- ---------
(LOSS) INCOME FROM OPERATIONS (25,175) 8,286 6,060
----------- ---------- ---------
OTHER INCOME - NET 2,828 1,016 1,097
----------- ---------- ---------
(LOSS) INCOME BEFORE INCOME TAXES (22,347) 9,302 7,157
(BENEFIT) PROVISION FOR INCOME TAXES (9,064) 4,960 2,709
----------- ---------- ---------
NET (LOSS) INCOME ($13,283) $ 4,342 $ 4,448
=========== ========== =========
BASIC (LOSS) INCOME PER SHARE ($0.57) $0.20 $0.22
=========== ========== =========
SHARES USED IN BASIC SHARE COMPUTATION 23,151 21,324 20,602
=========== ========== =========
DILUTED (LOSS) INCOME PER SHARE ($0.57) $0.19 $0.21
=========== ========== =========
SHARES USED IN DILUTED SHARE COMPUTATION 23,151 22,826 21,628
=========== ========== =========
See notes to consolidated financial statements.
F-3
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MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
COMMON STOCK
--------------------------
PAR PAID-IN RETAINED TRANSLATION TREASURY
SHARES VALUE CAPITAL EARNINGS ADJUSTMENT STOCK OTHER TOTAL
BALANCE, MARCH 1, 1995 10,532 $21 $30,949 $6,180 $145 ($771) ($12) $36,512
Issuance of common stock 42 - 377 - - - - 377
Exercise of stock options 273 1 538 - - - - 539
Tax benefit of options exercised - - 1,056 - - - - 1,056
Issuance of treasury stock - - 211 - - 27 - 238
Amortization of deferred
compensation - - - - - - 12 12
Translation adjustment - - - - (240) - - (240)
Net income - - - 4,448 - - - 4,448
---------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 29, 1996 10,847 22 33,131 10,628 (95) (744) - 42,942
Issuance of common stock 50 - 733 - - - - 733
Exercise of stock options 318 - 1,907 - - - - 1,907
Tax benefit of options exercised - - 2,591 - - - - 2,591
Fair value of options issued - - 217 - - - - 217
Compensation expense - - 69 - - - - 69
Issuance of treasury stock - - 211 - - 27 - 238
Translation adjustment - - - - 554 - - 554
Net income - - - 4,342 - - - 4,342
Two-for-one stock split 11,214 22 (22) - - - - -
---------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1997 22,429 44 38,837 14,970 459 (717) - 53,593
Issuance of common stock, net of
issuance costs of $652 3,131 7 119,883 - - - - 119,890
Issuance of stock options in
connection with acquisition - - 1,081 - - - - 1,081
Exercise of stock options 848 2 3,334 - - - - 3,336
Tax benefit of options exercised - - 7,678 - - - - 7,678
Translation adjustment - - - - (84) - - (84)
Unrealized loss on marketable
securities - - - - - - (132) (132)
Net loss - - - (13,283) - - - (13,283)
---------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1998 26,408 $53 $170,813 $1,687 $375 ($717) ($132) $172,079
=============================================================================================
See notes to consolidated financial statements
F-4
55
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (13,283) $ 4,342 $ 4,448
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 15,999 7,986 4,543
Write-off of purchased research and development 47,340 3,697 -
Allowances for doubtful accounts 1,510 2,529 732
Deferred income taxes (19,952) 237 340
Tax benefit from stock options exercised 7,678 2,591 1,056
Other (133) 108 126
Changes in assets and liabilities (net of
the effects of acquisitions):
Accounts receivable (20,876) (20,171) (4,828)
Other current assets (1,919) 137 (408)
Other noncurrent assets (497) 97 32
Accounts payable and accrued liabilities 5,567 205 2,641
Accrued compensation 6,016 4,878 (534)
Deferred revenue 2,467 7,047 863
Income taxes payable (280) 504 412
------------ ----------- -----------
Net cash provided by operating activities 29,637 14,187 9,423
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (Note 4) (9,637) (3,582) (1,068)
Sale of marketable securities 46,865 7,933 5,570
Purchase of marketable securities and long-term investments (96,947) (3,006) (3,662)
Purchase of property and equipment (15,880) (7,130) (5,126)
Capitalization of software development costs (9,388) (6,843) (4,915)
Purchase of software licenses (816) (878) (382)
------------ ----------- -----------
Net cash used in investing activities (85,203) (13,506) (9,583)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under long-term obligations (192) (273) (187)
Net proceeds from sale of common stock 63,543 733 377
Proceeds from exercise of stock options 3,334 1,907 538
------------ ----------- -----------
Net cash provided by financing activities 66,685 2,367 728
------------ ----------- -----------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 33 574 (246)
------------ ----------- -----------
NET INCREASE IN CASH 11,152 3,622 322
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,543 4,921 4,599
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $19,695 $8,543 $4,921
============ =========== ===========
See notes to consolidated financial statements.
F-5
56
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED FEBRUARY 28, 1998
Manugistics Group, Inc. (the "Company") develops, markets and supports software
products for synchronized supply chain management(TM) and provides related
services. Synchronized supply chain management refers to managing the complex
interactions involved in the flows of products through the supply chain. It
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 provides an integrated suite of
strategic, tactical and operational supply chain software planning products,
including a high-level optimizer, that address the four key operational areas
of supply chain management: demand planning, supply planning, manufacturing
scheduling and transportation management.
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. The Company's fiscal year ends on the
last day of February.
Use of Estimates - The preparation of consolidated 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
consolidated financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results may
differ from these estimates.
Revenue Recognition - The Company's revenues consist primarily of
software license revenues, consulting service revenues and maintenance
revenues. The Company recognizes revenues in accordance with the
provisions of the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 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, the license fee is
fixed and 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.
Consulting service revenues are recognized when the services are
provided, generally on a time and materials basis. Consulting service
revenues consist primarily of implementation and training services
related to the installation of the Company's products and do not include
significant customization to or development of the underlying software
code. Maintenance revenues are deferred and recognized ratably over the
term of the maintenance contract, typically 12 months.
Amounts received in advance of revenue recognition are classified as
deferred revenues.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue
Recognition," which provides guidance in applying generally accepted
accounting principles in recognizing revenues on software transactions
and supercedes SOP 91-1. The provisions of SOP 97-2 are effective for
the Company for transactions entered into after February 28, 1998. SOP
97-2 requires revenues earned on software arrangements involving multiple
elements to be allocated to each element based on vendor specific
F-6
57
objective evidence of the relative fair values of the elements. If a
vendor does not have evidence of the fair value for all elements in a
multiple-element arrangement, all revenue from the arrangement is
deferred until such evidence exists or until all elements are delivered.
In addition, SOP 97-2 requires that the Company have an executed software
license agreement, the license fee be fixed and determinable and
collection deemed probable by management in order to record software
license revenue. The Company currently believes the adoption of SOP 97-2
will not have a material impact on its consolidated results of operations
or financial position; however, because implementation guidelines for
this standard have not yet been issued and a wide range of potential
interpretations are being discussed by the accounting profession, there
can be no assurance that SOP 97-2 will not have a material impact on the
Company's consolidated results of operations or financial position. In
March 1998, the AICPA issued SOP 98-4 which defers the effective date of
a provision of SOP 97-2. This provision currently has no impact to the
Company.
Cash and Cash Equivalents - The Company considers cash on hand, deposits
in banks, and highly liquid overnight investments as cash and cash
equivalents.
Marketable Securities - The Company has classified its short-term
marketable securities as "available-for-sale." These securities are
recorded at fair value, with gross unrealized gains and losses reported
as a component of stockholders' equity. At February 28, 1998 and 1997,
marketable securities consisted of investments in municipal bonds and
other short-term investments which generally mature in one year or less.
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 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 two to ten years.
Leasehold improvements are amortized over the shorter of the lease term
or the useful life of the asset.
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 performing an
evaluation of recoverability, the estimated future undiscounted net cash
flows of the assets are 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
F-7
58
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.
Net (Loss) Income Per Share - As of February 28, 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 requires the presentation of basic
income per share and, for companies with potentially dilutive securities,
such as options, diluted income per share. Basic income per share is
computed using the weighted average number of shares of common stock
outstanding. Diluted income per share is computed using the weighted
average number of shares of common stock and, when dilutive, common
equivalent shares from options to purchase common stock using the
treasury stock method. The following table sets forth the computation of
basic and diluted income per share:
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands, except per share amounts)
Weighted average common shares 23,151 21,324 20,602
Dilutive potential common shares - 1,502 1,026
--------- --------- ---------
Shares used in diluted share computation 23,151 22,826 21,628
--------- --------- ---------
Net (loss) income ($13,283) $4,342 $4,448
========= ========= =========
Basic (loss) income per share ($0.57) $0.20 $0.22
========= ========= =========
Diluted (loss) income per share ($0.57) $0.19 $0.21
========= ========= =========
The dilutive effect of options for approximately 3.8 million shares has
not been considered in the computation of diluted loss per share in
fiscal 1998 because such shares would be anti-dilutive.
Stock-Based Compensation Plans - The Company accounts for its stock-based
compensation plans in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and has made
the pro forma disclosures required by SFAS 123, "Accounting for
Stock-Based Compensation" in Note 6.
New Accounting Pronouncements - In June 1997, SFAS No. 130, "Reporting
Comprehensive Income" was issued and requires that all items which meet
the definition of comprehensive income be reported for the period in
which they are recognized. Comprehensive income includes changes in the
balances of items that are reported directly in a separate component of
stockholders' equity on the consolidated balance sheets, such as foreign
currency translation adjustments and unrealized gains or losses on
available-for-sale securities. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and the Company will make the
disclosures required by SFAS No. 130 in the first quarter of fiscal 1999.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued and requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is
required to be reported on the basis used internally for evaluating
segment performance and resource allocation. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997; however, disclosure
is not required in interim financial statements in the initial year of
adoption. Accordingly, the Company will make the required disclosures
for the fiscal year ending February 28, 1999. The Company is still
F-8
59
determining the effect of adopting SFAS No. 131; however, management does
not anticipate that it will have a material impact.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The
provisions of SOP 98-1 require that certain costs to develop or obtain
internal use software be capitalized. SOP 98-1 is effective for fiscal
years beginning after December 1998 and will be effective for the Company
beginning March 1999. The Company is still determining the effect of
adopting SOP 98-1; however, management does not anticipate that it will
have a material impact on the Company's consolidated results of
operations or financial position.
Reclassification of Account Balances - Certain prior year amounts have
been reclassified for comparability with the current year's financial
statement presentation.
2. FINANCIAL STATEMENT DETAILS
Property and Equipment - Property and equipment consists of the following:
FEBRUARY 28,
1998 1997
-------- ---------
(in thousands)
Computer equipment and software $21,511 $12,205
Office furniture and equipment 6,569 4,165
Leasehould improvements 6,872 2,192
-------- --------
Total 34,952 18,562
Less accumulated depreciation and
amortization (14,043) (8,207)
-------- --------
Property and equipment - net $20,909 $10,355
======== ========
Other Income - Net - Other income - net, consisted of the following:
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
--------- --------- ----------
(in thousands)
Interest Income $ 2,772 $ 1,201 $ 1,204
Interest Expense (110) (58) (91)
Other 166 (127) (16)
--------- --------- ----------
Other income - Net $ 2,828 $ 1,016 $ 1,097
========= ========= ==========
3. SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs incurred in the development of its software
products. Software development costs include certain internally
developed costs, software costs purchased from third parties in
connection with acquisitions if the related software product under
development has reached technological feasibility or if there are
alternative future uses for the purchased software, provided the
capitalized amounts will be realized over a period not exceeding five
years, and purchased software license costs for products used in the
development of the Company's products. Costs incurred prior to
establishing technological feasibility are charged to product development
expense as incurred. Software development costs are amortized on a
straight line basis over the estimated economic life of the product,
generally two to five years, commencing with the date the product is
first available for general release.
F-9
60
The Company capitalized internally developed software costs of
$9,388,000, $6,843,000, and $4,915,000, and recorded amortization expense
of $7,560,000, $3,543,000, and $2,228,000 for fiscal 1998, 1997, and
1996, respectively. Fiscal 1998 balances reflect $9,940,000 in purchased
software development costs capitalized in connection with the acquisition
of ProMIRA Software Inc. (see Note 4). The Company capitalized
approximately $1,116,000, $878,000 and $382,000 and recorded amortization
expense of $717,000, $331,000 and $51,000 in fiscal 1998, 1997 and 1996,
respectively, relating to purchased software license product costs.
The amortization expense amounts for fiscal 1998 and 1997 include
write-offs totaling approximately $1,897,000 and $312,000, respectively,
of previously capitalized internal software development costs. These
capitalized costs were deemed to exceed their future net realizable value
as a result of new technologies developed by the Company and acquired in
connection with acquisitions.
4. ACQUISITIONS
During fiscal 1998 and 1997, the Company made three acquisitions which
have been accounted for under the purchase method. Accordingly, the
purchase prices were allocated to certain assets and liabilities based on
their respective fair market values. The excess of the purchase price
over the estimated fair market value of the net assets acquired under
each transaction was accounted for as goodwill. Amounts allocated to
certain intangibles, including goodwill, are being amortized on a
straight-line basis over five years. The consolidated financial
statements include the operating results of each acquisition from the
date of the acquisition.
Fiscal 1998 acquisitions
In February 1998, the Company acquired ProMIRA Software, Inc.
("ProMIRA"), a provider of supply chain planning software for
manufacturers of complex products in industries such as high technology,
electronics and motor vehicles and parts. The total purchase price was
approximately $64,500,000, comprised of cash, 1,550,000 shares of common
stock and options to purchase 78,379 shares of common stock valued at
$57.8 million, and acquisition costs. The purchase price was allocated
based on a fair value appraisal obtained from a nationally recognized
independent appraisal firm, and included allocations 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 non-recurring charge to the Company's operating results,
and reduced net income for fiscal 1998 by $28,653,000 ($47,340,000,
inclusive of income tax benefits of $18,687,000), or $1.24 basic and
$1.16 diluted income per share.
In June 1997, the Company acquired Synchronology Group Limited, a
closely-held company which provides manufacturing planning and scheduling
consulting services. In March 1997, the Company entered into a
definitive agreement to acquire certain assets of Information Resources,
Inc. ("IRI"). The total purchase prices of these acquisitions were
approximately $3,200,000 and $1,900,000, respectively, and consisted
primarily of cash, assumed liabilities, and acquisition costs.
Had the acquisitions made in fiscal 1998 been completed as of March 1,
1996, unaudited pro forma results would have been as follows:
F-10
61
YEAR ENDED FEBRUARY 28,
1998 1997
------------------ -------------
(in thousands)
Revenues $184,296 $98,795
Net income before write-off of purchased research and development 10,207 (687)
Write-off of purchased research and development 28,653 28,653
Net (loss) income (18,446) (29,340)
Basic and diluted (loss) income per share (0.80) (1.38)
Such unaudited pro forma amounts are not necessarily indicative of what
the actual consolidated results of operations might have been had the
acquisitions been effective at the beginning of each period presented.
Fiscal 1997 acquisition
In fiscal 1997, the Company acquired Avyx, Inc. ("Avyx"), a custom
developer and services provider of manufacturing scheduling software.
The total purchase price was approximately $3,799,000, primarily
comprised of cash, assumed liabilities and acquisition costs. The
purchase price allocation included allocations to certain intangible
assets, such as existing software products and in-process software
development efforts which had not reached technological feasibility. The
Company's write-off of the purchased research and development resulted in
a non-recurring charge to the Company's operating results, and reduced
net income for fiscal 1997 by $3,697,000, or $0.17 basic and $0.16
diluted income per share. The fiscal 1997 consolidated financial
statements include the operating results of Avyx from the date of the
acquisition. The results of operations of Avyx prior to the acquisition
were not material to the consolidated financial statements.
In addition, the Company entered into a three-year non-compete agreement
with two of the principals of Avyx, 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.
5. DEBT AND LONG-TERM LIABILITIES
Long-term obligations consisted of the following:
FEBRUARY 28,
1998 1997
----------------- --------------
(in thousands)
Notes payable $249 $182
Capital lease obligations (see Note 8) 230 229
----------------- --------------
Total 479 411
Less - current portion (244) (191)
----------------- --------------
Subtotal 235 220
Other long-term liabilities 157 -
----------------- --------------
Total $392 $220
================= ==============
F-11
62
Notes Payable - The Company has several outstanding notes payable which
accrue interest at rates ranging from 1.93% to 7.0% at February 28, 1998.
Principal repayment requirements for each of the five succeeding years
beginning March 1, 1998 are as follows: $244,000 for 1998, $187,000 for
1999, $32,000 for 2000, $9,000 for 2001 and $7,000 for 2002.
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 one-half percent. The facility contains certain financial
covenants that the Company believes are typical for a facility of this
nature and amount, including a covenant not to pay or declare cash
dividends. This facility will expire in September 1998, unless renewed.
There were no outstanding amounts under the credit facility at February
28, 1998.
6. STOCKHOLDERS' EQUITY
Preferred Stock - The Company has authorized 4,620,253 shares of $.01 par
value preferred stock. As of February 28, 1998, no preferred shares were
outstanding.
Common Stock - The Company has authorized 100,000,000 shares of $.002 par
value common stock. No cash dividends on common stock have been declared
or paid in fiscal 1998, 1997, or 1996. On August 18, 1997, the Company
completed an underwritten offering of 1,600,000 newly issued shares of
common stock. The proceeds to the Company were approximately
$61,985,000, net of related offering expenses.
Stock Split - On May 9, 1997, the Board of Directors of the Company
declared a two-for-one stock split on the Company's common stock, which
was paid in the form of a 100% stock dividend on 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.
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 the
lesser of 10% of a participant's compensation or $25,000 per year. The
number of shares purchased under this plan by employees totaled 69,113
shares, 100,818 shares, and 84,404 shares in fiscal 1998, 1997, and 1996,
respectively. The weighted average fair value of shares purchased in
fiscal 1998, 1997, and 1996 was $44.88, $14.09, and $7.13, respectively.
Stock Options
The Company has an employee stock option plan under which non-qualified
options of up to 6,564,238 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, 1998, the Company has granted options on
5,969,260 shares.
F-12
63
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
280,000 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, 1998, the Company has granted
options on 192,500 shares.
In January 1996, the Company amended its Employee Incentive Stock Option
Plan, whereby the Company may grant options 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 grant and expire ten years from the date of grant. All options
granted vest in accordance with plan terms. As of February 28, 1998, the
Company has granted options on 1,650,000 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 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,
1998, the Company has granted options on 145,750 shares.
A summary of the status of the Company's stock option plans and changes
during the fiscal years is presented below:
FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
Options to Options to Options to
Purchase Wtd. Avg. Purchase Wtd. Avg. Purchase Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------------------------------------------------------------------
(share amounts in thousands)
Outstanding at Beginning of Year 3,786 $6.78 3,324 $4.20 2,840 $2.56
Options Granted at Fair Value 1,472 36.64 1,290 11.54 1,182 6.67
Options Granted Greater Than Fair Value 45 26.47 24 8.01 - -
Exercised (767) 4.34 (636) 3.00 (546) 1.00
Cancelled (162) 16.85 (216) 5.19 (152) 4.45
---------- ---------- ----------
Outstanding at end of year 4,374 $16.77 3,786 $6.78 3,324 $4.20
========== ========== ==========
Exercisable at end of year 1,309 1,082 942
========== ========== ==========
The weighted average fair value of options granted in fiscal 1998, 1997,
and 1996 was $16.48, $5.19, and $3.51 per share, respectively. A summary
of the weighted average remaining contractual life and the weighted
average exercise price of options outstanding as of February 28, 1998 is
presented below:
F-13
64
NUMBER WEIGHTED AVG. NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING WEIGHTED AVG. EXERCISABLE AVG. EXERCISE
EXERCISE PRICES AT 2/28/98 CONTRACTUAL LIFE EXERCISE PRICE AT 2/28/98 PRICE
---------------- ------------- ---------------- --------------- ------------ ---------------
(share amounts in thousands)
$0.52-$4.50 879 5.34 $2.84 745 $2.60
4.63-7.56 1,030 7.53 6.53 319 6.74
7.63-17.53 922 8.44 10.82 211 10.36
17.69-42.31 1,335 9.19 33.65 34 21.83
42.63-47.13 208 9.71 44.10 - -
---------------- -------- --------- ---------- --------- ---------
$0.52-$47.13 4,374 7.89 $16.77 1,309 $5.37
======== =========
Stock-Based Compensation
As permitted under SFAS No. 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 income per share is required by SFAS
No. 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 include 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 income per share amounts would have been as follows:
FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands, except per share amounts)
Net (loss) income $(19,301) $2,606 $3,785
Basic (loss) income per share $ (0.83) $ 0.12 $ 0.18
Diluted (loss) income per share $ (0.83) $ 0.11 $ 0.18
The increase in the fair value of stock options granted in 1998 resulted
primarily from a significant increase in the price of the Company's
common stock during fiscal 1998 from fiscal 1997. 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
fiscal 1998, 1997, and 1996 pro forma amounts include $435,000, and
$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:
F-14
65
OPTIONS ESPP
------------------------------------------------------ ----------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Risk-free interest rates 6.20-6.59% 5.44 - 5.73% 6.68-7.08% 5.65% 5.67% 6.44%
Expected term 2.62-7.69 yrs 1.54 - 4.51 yrs 1.54-4.77 yrs 6 mos 6 mos 6 mos
Volatility 0.6038 0.6358 0.6910 0.6044 0.6562 0.6910
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
$1,045,000, $535,000 and $337,000 for fiscal 1998, 1997 and 1996,
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 $884,000 and $830,000 at February 28, 1998 and 1997,
respectively, and has been included in computer equipment and software
(Note 2). Total accumulated amortization relating to these leases was
$716,000 and $576,000 as of February 28, 1998 and 1997, respectively.
Rent expense for operating leases for fiscal 1998, 1997 and 1996 was
approximately $7,448,000, $4,439,000, and $3,610,000, respectively. The
future minimum lease payments under these capital and operating leases
for each of the succeeding years beginning March 1, 1998 are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ----------
(in thousands)
1999 $195 $7,798
2000 32 5,982
2001 9 4,079
2002 9 3,336
2003 7 840
------- ---------
Total minimum lease payments $252 $22,035
=========
Less amount representing interest (22)
-------
Present value of net minimum lease payments $230
=======
The Company has collaborative arrangements with various parties relating
to product development and joint marketing programs. The Company has
also entered into an agreement with a third party under which the Company
has guaranteed certain revenue levels to the third party in the aggregate
amount of $16,500,000 over several years. In the event that the activities
performed by the Company do not meet the minimum amounts, the Company may
be obligated to pay the difference. Certain issues have arisen between
the Company and the third party relating to the satisfaction of these
contingencies. The Company anticipates satisfactory resolution of these
issues and believes it will be able to meet the revenue levels.
Accordingly, the Company does not expect to be obligated to make such
payments.
F-15
66
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. The Company has
established accruals related to such matters that are probable and
reasonably estimable. In management's opinion, any liability that may
ultimately result from the resolution of these matters in excess of
amounts provided will not have a material adverse effect on the results
of operations, financial condition or cash flows of the Company. The
Company has been in discussions with a customer to resolve a certain
claim under an agreement. While the Company believes there is no merit to
such claim, this matter is subject to various uncertainties and may be
resolved unfavorably to the Company.
9. INCOME TAXES
Income Tax Provision - The components of the (benefit) provision for
income taxes are as follows:
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands)
Current:
Federal $ 7,861 $ 3,475 $ 1,433
State 2,069 348 339
Foreign 710 901 597
--------- -------- -------
Total current provision 10,640 4,724 2,369
--------- -------- -------
Deferred:
Federal (20,104) 177 792
State (53) 40 4
Foreign 453 19 (456)
--------- -------- -------
Total deferred (benefit) provision (19,704) 236 340
--------- -------- -------
Total (benefit) provision for income taxes $ (9,064) $ 4,960 $ 2,709
========= ======== =======
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 $7,678,000, $2,591,000, and $1,056,000,
for fiscal 1998, 1997, and 1996, respectively.
Deferred Income Taxes - The components of the Company's deferred tax
assets and liabilities are as follows:
F-16
67
FEBRUARY 28,
1998 1997
---- ----
(in thousands)
Deferred tax assets:
Uncollectible receivables and sales returns $810 $434
Rent accruals 205 207
Operating loss carryforwards:
Domestic 617 657
Foreign 2,507 1,353
Software revenue recognition 41 183
Depreciation and amortization 1,322 691
Accrued commissions 694 -
Purchased research and development write-off 18,774 -
Other temporary differences 515 193
Total deferred tax assets 25,485 3,718
Less: valuation allowance (1,786) (734)
--------- --------
Total deferred tax assets 23,699 2,984
Deferred tax liabilities:
Software development costs (3,800) (3,313)
Deferred revenue (331) -
Other temporary differences (30) (84)
--------- --------
Total deferred tax liabilities (4,161) (3,397)
--------- --------
Net deferred tax assets (liabilities) $19,538 ($413)
========= ========
At February 28, 1998, the Company had $1,340,400 of federal, $879,700 of
state and $8,120,000 of foreign net operating loss carryforwards ("NOLs")
available to offset future taxable income in those respective taxing
jurisdictions. Federal and state NOLs arose from acquisitions and are
subject to limitations. The federal NOLs expire in the years 2006 and
2011 while the state NOLs expire during fiscal 1999. Approximately
$3,467,100 of the foreign NOLs expire during the fiscal years 2000 to
2003 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-17
68
FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands)
(Benefit) provision computed at federal statutory rate ($7,821) $3,163 $2,434
Increase (reduction) in taxes resulting from:
State and foreign taxes, net of federal benefit (788) 387 417
Change in valuation allowance 1,052 291 (31)
Benefit of net operating loss carry forwards and
tax credits (1,050) - (55)
Foreign items (202) - -
Purchased research and development write-off - 1,257 -
Tax exempt income (349) (163) (257)
Other 94 25 201
--------- -------- -------
(Benefit) Provision for income taxes $ (9,064) $ 4,960 $ 2,709
========= ======== =======
10. SEGMENT INFORMATION
The Company operates in two industry segments. The Company develops,
markets, and supports software products for synchronized supply chain
management(TM) and provides related services. The Company also markets
and supports the STATGRAPHICS product within its personal systems
segment, which provides statistical tools for quality management in
manufacturing companies.
FEBRUARY 28 OR 29,
Industry Segments 1998 1997 1996
---- ---- ----
(in thousands)
Revenues:
Supply chain management $ 172,166 $ 91,350 $ 56,699
Personal systems 3,500 3,780 5,623
----------- ----------- -----------
$ 175,666 $ 95,130 $ 62,322
=========== =========== ===========
(Loss) Income from operations:
Supply chain management 344 15,156 10,554
Personal systems 1,778 1,032 1,184
Corporate (27,297) (7,902) (5,678)
----------- ----------- -----------
$ (25,175) $ 8,286 $ 6,060
=========== =========== ===========
Identifiable assets:
Supply chain management $132,451 $ 58,052 $ 32,144
Personal systems 848 1,014 1,375
Corporate 89,202 25,257 26,912
----------- ----------- -----------
$ 222,501 $ 84,323 $ 60,431
=========== =========== ===========
F-18
69
FEBRUARY 28 OR 29,
Industry Segments 1998 1997 1996
----------- ----------- ---------
(in thousands)
Capital expenditures:
Supply chain management $10,408 $6,528 $2,756
Personal systems 19 24 172
Corporate 6,269 1,456 2,580
----------- ----------- ---------
$16,696 $8,008 $5,508
=========== =========== =========
Depreciation and amortization:
Supply chain management $14,124 $ 7,077 $ 3,646
Personal systems 16 24 426
Corporate 1,859 885 471
----------- ----------- ---------
$15,999 $ 7,986 $ 4,543
=========== =========== =========
FEBRUARY 28 OR 29,
Geographic Areas 1998 1997 1996
---------- ---------- ----------
(in thousands)
Revenues:
Americas $ 148,366 $ 82,892 $ 56,401
Europe 35,708 18,273 7,625
Asia 4,978 - -
Eliminations (13,386) (6,035) (1,704)
---------- ---------- ----------
$ 175,666 $ 95,130 $ 62,322
========== ========== ==========
(Loss) income from operations:
Americas ($23,341) $ 7,666 $ 9,047
Europe 9,595 6,655 (1,283)
Asia 1,957 - -
Eliminations (13,386) (6,035) (1,704)
---------- ---------- ----------
($25,175) $ 8,286 $ 6,060
========== ========== ==========
Identifiable assets:
Americas $287,231 $ 86,229 $ 56,911
Europe 22,932 12,161 7,421
Asia 2,345 - -
Eliminations (90,007) (14,067) (3,901)
---------- ---------- ----------
$222,501 $ 84,323 $ 60,431
========== ========== ==========
(1) (Loss) income from operations includes non-recurring write-offs of
purchased research and development of $47,340,000 and $3,697,000 in
fiscal 1998 and 1997, respectively. Such amounts relate to the
supply chain management segment in the Americas.
Domestic and export sales for fiscal 1998, 1997 and 1996 are as follows:
F-19
70
FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands)
United States $119,619 $69,075 $46,996
Europe 36,170 19,821 9,423
Pacific Rim 6,467 1,359 -
Japan 4,982 - -
Canada 4,682 3,853 3,886
South America 3,537 - -
Other 209 1,022 2,017
---------- --------- --------
$175,666 $95,130 $62,322
========== ========= ========
No customer accounted for 10% or more of the Company's net sales in
fiscal 1998, 1997 or 1996.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest amounted to approximately $110,000, $55,000 and
$78,000 in fiscal 1998, 1997 and 1996, respectively. Cash paid for
income taxes amounted to approximately $3,428,000, $1,223,000, and
$924,000 in fiscal 1998, 1997 and 1996, respectively.
Supplemental information of non-cash investing and financing activities
is as follows:
During fiscal 1998, 1997 and 1996, the Company received income tax
benefits of $7,678,000, $2,591,000, and $1,056,000, respectively,
relating to the exercise of stock options. The benefits were recorded as
an increase to additional paid-in capital. During fiscal 1997, the fair
value of treasury stock issued was $238,000. Also during fiscal 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 fiscal 1996, a $294,000 note receivable was recorded relating to
an asset divestiture, a $714,000 liability was recorded related to the
fair value of stock to be issued, and the fair value of treasury stock
issued was $238,000.
12 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly consolidated financial information for fiscal 1998
and 1997 follows:
F-20
71
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(in thousands, except per share data)
1998
Total revenues $34,459 $37,865 $41,268 $62,074
Purchased research and development costs - - - 47,340
Operating income (loss) 2,997 3,911 5,357 (37,439)
Net income (loss) 2,040 2,637 4,005 (21,965)
Basic income (loss) per share $0.09 $0.12 $0.17 ($0.90)
Shares used in basic share computation 21,753 22,657 23,895 24,300
Dilutive income (loss) per share $0.09 $0.11 $0.15 ($0.90)
Shares used in diluted share computation 23,297 24,710 26,608 24,300
1997
Total revenues $18,441 $21,005 $23,688 $31,996
Purchased research and development costs 3,697 - - -
Operating (loss) income (2,070) 2,124 2,890 5,342
Net (loss) income (2,578) 1,447 1,947 3,526
Basic (loss) income per share ($0.12) $0.07 $0.09 $0.16
Shares used in basic share computation 20,979 21,206 21,477 21,633
Diluted (loss) income per share ($0.12) $0.06 $0.08 $0.15
Shares used in diluted share computation 20,979 22,378 23,181 23,350
Included in the fourth quarter of fiscal 1998 and the first quarter of
fiscal 1997 are non-recurring charges of $47,340,000 and $3,697,000,
respectively, for write-offs of purchased research and development costs
in connection with acquisitions (see Note 4).
13. SUBSEQUENT EVENT
On March 26, 1998, the Company entered into a lease agreement with a
commercial real estate developer to lease a new office building that will
commence in fiscal 2001 with a lease term of 15 years.
* * * * *
F-21
72
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, 1998 and 1997, and for
each of the three years in the period ended February 28, 1998, and have issued
our report thereon dated March 24, 1998 (except Note 13 as to which the date is
March 26, 1998); such report is 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 24, 1998 (except Note 13 as to which the date is March 26, 1998)
73
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, 1998 $1,215 $1,510 ($636) $2,089
Year ended February 28, 1997 711 2,529 (2,025) 1,215
Year ended February 29, 1996 833 732 (854) 711