1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-22154
MANUGISTICS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 52-1469385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2115 East Jefferson Street, Rockville, Maryland 20852
(Address of principal executive offices) (Zip code)
(301) 984-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO _________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 65.2 million (1) shares of
common stock, $.002 par value per share, as of December 20, 2000.
(1) Includes approximately 7.0 million shares issued in connection with the
acquisition of Talus Solutions, Inc.
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MANUGISTICS GROUP, INC.
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
November 30, 2000 (Unaudited) and February 29, 2000 3
Condensed Consolidated Statements of Operations - Three and Nine
months ended November 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows - Nine months
ended November 30, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements -
November 30, 2000 (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 27
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
NOVEMBER 30, FEBRUARY 29,
2000 2000
---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 25,779 $ 34,051
Marketable securities............................................. 254,995 17,496
Accounts receivable, net of allowance for doubtful................
accounts of $5,560 and $1,875 at November 30, 2000 and
February 29, 2000, respectively.................................. 72,094 38,705
Other current assets.............................................. 6,314 9,252
---------- ------------
Total current assets........................................ 359,182 99,504
---------- ------------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION ............ 14,529 14,157
NONCURRENT ASSETS:
Software development costs, net of accumulated amortization....... 16,046 16,514
Intangible assets, net of accumulated amortization................ 6,931 7,317
Deferred tax asset................................................ 26,165 12,776
Other noncurrent assets........................................... 11,279 2,160
---------- ------------
Total noncurrent assets..................................... 60,421 38,767
---------- ------------
TOTAL ASSETS.......................................................... $ 434,132 $ 152,428
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 5,613 $ 5,792
Accrued compensation.............................................. 12,761 8,345
Other current liabilities......................................... 18,902 10,679
Deferred revenue.................................................. 32,592 26,727
Current portion of restructuring accrual.......................... 1,674 5,130
Line of credit.................................................... - 6,000
---------- ------------
Total current liabilities................................... 71,542 62,673
---------- ------------
LONG-TERM DEBT...................................................... 250,116 283
RESTRUCTURING ACCRUAL - LONG-TERM................................... 2,254 2,754
COMMITMENTS AND CONTINGENCIES.......................................
STOCKHOLDERS' EQUITY:
Preferred stock................................................... - -
Common stock, $0.002 par value per share; 100,000,000
shares authorized; 58,926,306 and 57,341,814 shares
issued, and 58,173,796 and 56,589,304 shares outstanding
at November 30, 2000 and February 29, 2000, respectively......... 116 113
Additional paid-in capital........................................ 230,444 189,425
Accumulated deficit............................................... (113,614) (102,203)
Accumulated other comprehensive (loss) income..................... (858) 100
Treasury stock - 752,510 shares, at cost.......................... (717) (717)
Deferred compensation - repriced stock options.................... (5,151) -
---------- ------------
Total stockholders' equity.................................. 110,220 86,718
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $ 434,132 $ 152,428
========== ============
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
REVENUES: 2000 1999 2000 1999
---- ------ ---- ----
License fees............................................................. $ 35,807 $ 14,571 $ 90,290 $ 38,423
Services................................................................. 20,557 9,631 49,096 36,794
Solution support......................................................... 13,632 11,592 39,279 33,565
--------- --------- --------- ---------
Total revenues......................................................... 69,996 35,794 178,665 108,782
--------- --------- --------- ---------
OPERATING EXPENSES:
Cost of license fees..................................................... 4,772 3,686 14,365 9,596
Cost of consulting, solution support and other services 14,344 10,789 39,636 32,703
(Excluding ($1,373) and $4,864 of non-cash stock compensation (benefit)
expense for the three and nine month periods ended November 30, 2000,
respectively)..........................................................
Sales and marketing costs 30,710 15,074 78,844 43,212
(Excluding ($3,000) and $4,349 of non-cash stock compensation (benefit)
expense for the three and nine month periods ended November 30, 2000,
respectively)..........................................................
Product development expenses 8,964 7,516 25,179 21,977
(Excluding ($1,240) and $4,103 of non-cash stock compensation (benefit)
expense for the three and nine month periods ended November 30, 2000,
respectively)..........................................................
General and administrative costs 5,972 3,896 16,282 11,736
(Excluding ($460) and $1,322 of non-cash stock compensation (benefit)
expense for the three and nine month periods ended November 30, 2000,
respectively)..........................................................
Non-cash stock compensation (benefit) expense............................ (6,073) - 14,638 -
Restructuring costs...................................................... - (17) - (699)
--------- --------- --------- ---------
Total operating expenses............................................... 58,689 40,944 188,944 118,525
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS............................................... 11,307 (5,150) (10,279) (9,743)
OTHER INCOME - NET.......................................................... 306 360 1,021 1,235
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES........................................... 11,613 (4,790) (9,258) (8,508)
PROVISION (BENEFIT) FOR INCOME TAXES........................................ 2,190 15 2,154 (657)
--------- --------- --------- ---------
NET INCOME (LOSS)........................................................... $ 9,423 $ (4,805) $ (11,412) $ (7,851)
========= ========= ========= =========
BASIC NET INCOME (LOSS) PER SHARE........................................... $ 0.16 $ (0.09) $ (0.20) $ (0.14)
========= ========= ========= =========
DILUTED NET INCOME (LOSS) PER SHARE......................................... $ 0.14 $ (0.09) $ (0.20) $ (0.14)
========= ========= ========= =========
SHARES USED IN COMPUTATION:
BASIC..................................................................... 57,969 55,180 57,378 54,594
========= ========= ========= =========
DILUTED................................................................... 66,224 55,180 57,378 54,594
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (11,412) $ (7,851)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization............................................ 13,742 16,274
Deferred tax asset....................................................... (13,389) (657)
Tax benefit from stock options exercised................................. 11,970 -
Non-cash stock compensation expense...................................... 14,638 -
Other.................................................................... (38) (420)
Changes in assets and liabilities:
Accounts receivable - net................................................ (33,389) 10,895
Other current assets..................................................... 2,559 (302)
Other non-current assets................................................. (982) (15)
Accounts payable and accrued expenses.................................... 11,231 (9,383)
Restructuring accrual.................................................... (3,956) (9,809)
Income taxes payable/receivable.......................................... 2,051 2,903
Deferred revenue......................................................... 5,865 (1,235)
---------- ---------
Net cash (used in) provided by operating activities................ (1,110) 400
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................................... (5,542) (1,521)
Investment in unconsolidated subsidiaries................................ (1,000) -
Capitalization and purchases of software................................. (8,985) (3,919)
Investments and (purchases) sales of marketable securities .............. (237,500) 8,250
---------- ---------
Net cash (used in) provided by investing activities................ (253,027) 2,810
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt and capital lease obligations ................ (167) (133)
Proceeds from issuance of convertible debt - net of issuance costs....... 242,500 -
Net change in line of credit............................................. (6,000) 3,700
Proceeds from exercise of stock options and employee stock plan purchases 9,262 4,722
---------- ---------
Net cash provided by financing activities.......................... 245,595 8,289
---------- ---------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES..................................... 270 (227)
---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................... (8,272) 11,272
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................. 34,051 20,725
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................................... $ 25,779 $ 31,997
========== =========
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Manugistics Group, Inc. ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim reporting and in
accordance with the instructions to the Quarterly Report on Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal, recurring adjustments) which are
necessary for a fair presentation of the unaudited results for the interim
periods presented have been included. The results of operations for the
period presented herein are not necessarily indicative of the results of
operations for the entire fiscal year, which ends on February 28, 2001.
These financial statements should be read in conjunction with the
financial statements and notes thereto for the fiscal year ended February 29,
2000 included in the Annual Report on Form 10-K of the Company for that year
filed with the Securities and Exchange Commission.
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding. Diluted net income (loss) per
share is computed using the weighted average number of shares of common stock
and, when dilutive, common equivalent shares from options to purchase common
stock using the treasury stock method and the effect of the assumed
conversion of our convertible subordinated debt. Shares and per share amounts
have been restated to give effect to the Company's two-for-one stock split,
effective December 7, 2000 (see Note 9). Common equivalent shares (in
thousands) from options of 2,424 shares, 7,389 shares, and 1,844 shares,
respectively, were excluded from the calculation of diluted net loss per
share for the three month period ended November 30, 1999 and nine
month-periods ended November 30, 2000 and 1999, as including them would have
been anti-dilutive. The assumed conversion of the Company's convertible debt
was excluded from the computation of diluted net income (loss) per share for
the three and nine months ended November 30, 2000, since it was anti-dilutive
for both periods. The Company's convertible debt may be exchanged for up to
approximately 5.7 million shares in future periods. The following table sets
forth the computation of basic and diluted net income (loss) per share
(amounts in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
Weighted average common shares 57,969 55,180 57,378 54,594
Dilutive potential common shares 8,255 - - -
--------- -------- -------- -------
Shares used in diluted computation 66,224 55,180 57,378 54,594
========= ======== ======== =======
Net income (loss) $ 9,423 $ (4,805) $(11,412) $(7,851)
========= ======== ======== =======
Basic net income (loss) per share $ 0.16 $ (0.09) $ (0.20) $ (0.14)
========= ======== ======== =======
Diluted net income (loss) per share $ 0.14 $ (0.09) $ (0.20) $ (0.14)
========= ======== ======== =======
3. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in disputes and litigation in
the ordinary course of business. The Company does not believe that the
outcome of any pending disputes or litigation will have a material effect on
the Company's business, operating results, financial condition or cash flows.
However, the ultimate outcome of these proceedings, as with litigation
generally, is inherently uncertain and it is possible that these matters may
be resolved adversely to the Company. The adverse resolution of any one or
more of these matters could have a material effect on the Company's business,
operating results, financial condition or cash flows.
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As previously reported on the Company's Form 10-K for the year ended
February 29, 2000, one of the Company's clients submitted to the Company by
letter a claim for damages based on alleged breaches of a software license
agreement entered into with one of the Company's foreign subsidiaries in
fiscal 1997. On October 19, 2000, this client named the Company and
Manugisitcs U.K. Limited as defendants in a claim. The client claims damages
of an amount between $6.7 million and $10.5 million, plus interest, arising
out of a contract for the supply of software, support, maintenance,
consulting and training services. The claimant alleges that the
implementation of the software was a failure because it did not meet the
requirements of the contract. The Company denies the allegations and believes
that its defense is meritorious. The Company's insurance carriers have
accepted coverage under a reservation of rights.
4. COMPREHENSIVE INCOME (LOSS)
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income (loss) and its components in the Company's financial statements. SFAS
No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities and foreign currency translation adjustments to
be included in other comprehensive income (loss). The following table sets
forth the comprehensive income (loss) for the three and nine month periods
ended November 30, 2000 and 1999 (dollar amounts in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
Net income (loss) $ 9,423 $ (4,805) $(11,412) $ (7,851)
Other comprehensive income (loss) (1,147) 804 (958) 285
--------- -------- --------- --------
Total comprehensive income (loss) $ 8,276 $ (4,001) $(12,370) $ (7,566)
======== ======== ========= =========
5. RESTRUCTURING ACCRUAL
During the second half of fiscal 1999, the Company recorded restructuring
and unusual charges primarily associated with the implementation of the
Company's restructuring plan. This plan reorganized the Company to focus on
its core business of providing supply chain solutions to companies with
dynamic supply chains. The Company believes that the reserves as of November
30, 2000 are adequate and that no further revisions of estimates are
necessary at this time. The following table sets forth restructuring activity
for the nine month period ended November 30, 2000 (dollar amounts in
thousands):
BEGINNING CASH ENDING
BALANCE UTILIZATION BALANCE
MARCH 1, 2000 OF ACCRUAL NOVEMBER 30, 2000
------------- ---------- -----------------
Severance costs $ 920 $ 825 $ 95
Lease obligations costs 6,964 3,131 3,833
------ -------- -------
Total $7,884 $ 3,956 $ 3,928
====== ======== =======
6. LONG-TERM DEBT
Convertible subordinated notes - In October and November 2000, the
Company issued an aggregate principal amount of $250 million of 5%
convertible subordinated notes due 2007 (the "Notes"). Interest is paid
semiannually. The Notes were issued and sold to Deutsche Bank Securities Inc,
and Banc of America Securities LLC, as the initial purchasers in reliance on
the exemption from registration under Rule 144A of the Securities Act of
1933, as amended. The Notes are convertible into a total of approximately 5.7
million shares of common stock at a conversion price of $44.0625 per share at
any time on or after 90 days following the last date of original issuance,
through maturity, unless previously redeemed or repurchased. The Company may
redeem some or all of the notes at any time on or after November 7, 2003. The
redemption price, expressed as a percentage of the principal amount, will be
as follows:
REDEMPTION
REDEMPTION PERIOD PRICE
----------------- -----
November 7, 2003 through October 31, 2004 103%
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November 1, 2004 through October 31, 2005 102%
November 1, 2005 through October 31, 2006 101%
November 1, 2006 through maturity 100%
Line of credit - The Company has an unsecured revolving credit facility
with a commercial bank. The current agreement will expire in September of
2001. Under its terms, the Company may request cash advances, letters of
credit or both in an aggregate amount of up to $20.0 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). As of November 30, 2000, the Company did not have any
borrowings outstanding under its line of credit.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivatives and Hedging Activities." In May 1999, the FASB
voted to defer the implementation of SFAS No. 133 for one year. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as: (a) a hedge of the exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm
commitment; (b) a hedge of the exposure to variable cash flows of a
forecasted transaction; or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment,
an available-for-sale security or a foreign-currency-denominated forecasted
transaction. For a derivative not designated as a hedging instrument,
changes in the fair value of the derivative are recognized in earnings in
the period of change. This statement is to be effective for all annual and
interim periods beginning after June 15, 2000. Management does not
presently believe the adoption of SFAS No. 133 will have a material effect
on the Company's consolidated financial position or results of operations
in fiscal 2001.
In December 1999 the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), which provides the SEC
staff's views in applying generally accepted accounting principles to
selected revenue recognition issues. SAB No. 101 must be implemented no later
than the fourth fiscal quarter of fiscal years beginning after December 15,
1999. Management does not believe the adoption of SAB No. 101 will have a
material effect on the Company's consolidated financial position or results
of operations in fiscal 2001.
8. STOCK-BASED COMPENSATION
Financial Accounting Standards Board ("FASB") Interpretation No. 44 ("FIN
44"), "Accounting for Certain Transactions Involving Stock Compensation"
became effective July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occurred after December 15, 1998. In January 1999, the
Company repriced employee stock options to purchase a total of 3.0 million
shares (which did not include options held by executive officers or
directors). The four-year vesting period restarted for all repriced options,
subject to acceleration under certain performance-related circumstances.
Under FIN 44, the 3.0 million options are subject to variable plan
accounting. Under variable plan accounting, compensation expense is adjusted
for increases or decreases in the fair market value based on the changes in
the stock price from the value at July 1, 2000, of the modified stock option
awards until the award is exercised, forfeited or expires.
Under FIN 44, no adjustments are to be made upon initial application of FIN
44 for periods prior to July 1, 2000.
In connection with the application of FIN 44 in the three month and nine
month periods ended November 30, 2000, the Company recorded compensation
(benefit) expense of approximately ($6.1) million and $14.6 million,
respectively. The remaining vesting period of the repriced stock options is
approximately 2.25 years. In each future quarter, the Company will record
the additional expense or benefit related to the repriced stock options
still outstanding based on the respective increase or decrease in the
Company's common stock price as compared to the prior quarter.
9. STOCK SPLIT
On November 7, 2000, 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 December 7, 2000, to shareholders of record
as of November 20, 2000. 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 split.
10. SUBSEQUENT EVENTS
Acquisition - On December 21, 2000, the Company completed the acquisition of
Talus Solutions, Inc., ("Talus"), a leading provider of pricing and revenue
optimization products and services. The Company issued approximately 7.0 million
shares of its common stock, which have an approximate value of $340.0 million
for financial reporting purposes. This value is based on the Company's average
stock price for a few days before and after September 21, 2000, the date the
acquisition terms were agreed to and
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announced. The measurement date is September 21, 2000, since the final
application of the acquisition agreement formula did not result in a change in
the number of shares or other consideration issued.
The 7.0 million shares were issued as follows: a) approximately 6.0 million
shares were delivered to the Company's exchange agent for direct transfer to the
former Talus stockholders and b) approximately 1.1 million will be delivered to
State Street Bank and Trust Company, as escrow agent, to secure potential
indemnification claims of the Company. To the extent that the escrowed shares
are not subject to indemnification claims on the various release dates when
distribution is to occur, the escrowed shares will be delivered to the former
Talus stockholders in two installments, commencing on October 31, 2001, with the
last installment due to be distributed on July 2, 2002. In addition, a total of
approximately 1.4 million shares of common stock have been reserved for issuance
upon exercise of outstanding Talus stock options and warrants assumed by the
Company in connection with the acquisition. In connection with non-vested
Manugistics' stock options to be exchanged for non-vested Talus stock options,
the Company anticipates recording deferred compensation of approximately
$22.8 million, which will be amortized over the vesting period of approximately
4 years.
Certain former Talus stockholders holding a total of approximately 5.5
million shares of the Company's common stock, including escrowed shares, have
agreed not to resell such shares prior to three staged release dates which are
as follows: January 18, 2001, May 31, 2001, and no later than October 31, 2001.
All remaining shares shall be released at this time.
Lease of Facility - The Company has agreed to lease approximately 210,000
square feet for its new headquarters in Rockville, Maryland starting in the
spring of 2002. This move will allow the Company to bring its current Rockville
operations into a single location as the leases for its existing facilities
expire in early 2002, and will allow for future expansion as required. The new
leasing agreement is for an initial term of 10 years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a global provider of Enterprise Profit Optimization TM solutions - the
combination of supply chain management and pricing and revenue optimization
solutions - and eBusiness solutions for enterprises and eMarketplaces. Our
solutions include infrastructure and application software products, solution
support, strategic consulting and implementation services. Our solutions help
our clients monitor and streamline their core internal operational processes
involving the design, purchase, manufacture, storage, transportation, marketing
and selling of their goods and services. Our solutions also help integrate
clients' internal processes with trading partners and provide the collaboration
and optimization required across extended eMarketplaces. Our solutions help our
clients improve resource allocation through more cost-effective and efficient
operational decisions and improve customer service - driving costs lower and
revenues higher.
Increasing global competition, shortening product life cycles and developing
eBusiness initiatives of new and existing competitors are driving enterprises to
provide greater levels of customer service while shortening their
time-to-market. We were an early innovator in trading partner collaboration,
with our first Internet-ready products commercially available in late 1997. Our
technology initiatives continue to focus on the changing needs of companies in
the markets we serve, as well as the requirements of the new eBusiness economy.
We have developed a web architecture for our Manugistics NetWORKS TM
collaborative solutions through our proprietary WebWORKS TM infrastructure and
have provided advanced integration to disparate systems through our WebConnect
products. Through our exchange platform ExchangeWORKS TM, we are now addressing
the new eBusiness processes enabled by the Internet, such as auctions, dynamic
pricing, procurement, track and trace, and order and pipeline visibility.
We offer solutions to companies in a diverse array of industries including
agriculture, apparel, chemicals, consumer goods, electronics & high technology,
energy, food, government, healthcare, logistics, metals, motor vehicles & parts,
paper, pharmaceuticals and retail. Our customer base of approximately 1,000
clients includes large, multinational enterprises such as 3Com, Coca-Cola
Bottling, Cisco Systems, Astec Power Division of Emerson, Levi Strauss & Co.,
Fuji Photo Film USA, Ford, Harley-Davidson, Marriott, The Limited, Texas
Instruments and Unilever, as well as medium-sized enterprises and emerging
eBusinesses.
RESULTS OF OPERATIONS
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REVENUES:
Our revenues consist of software license fees, consulting revenues and
solution support revenues. Software license revenues are recognized upon
execution of a software license agreement, provided that the software product
has been shipped, there are no uncertainties surrounding product acceptance, the
license fees are fixed and determinable, collection is considered probable and
no significant production, modification or customization of the software is
required, in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition with respect to Certain Transactions". Fees are allocated to the
various elements of software license agreements based on our historical fair
value experience. Consulting revenues are recognized as the services are
performed. Solution support revenues are recognized ratably over the support
period defined in the software license agreement. The following table sets forth
revenues for the three and nine month periods ended November 30, 2000 and 1999
(dollar amounts in thousands):
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
2000 CHANGE 1999 2000 CHANGE 1999
---- ------ ---- ---- ------ ----
License fees $35,807 146% $ 14,571 $ 90,290 135% $ 38,423
Percentage of total revenues 51% 41% 51% 35%
Consulting services $20,557 113% $9,631 $ 49,096 33% $ 36,794
Percentage of total revenues 29% 27% 27% 34%
Solution support and other services $13,632 18% $ 11,592 $ 39,279 17% $ 33,565
Percentage of total revenues 20% 32% 22% 31%
-------- -------- --------- --------
Total revenues $69,996 96% $ 35,794 $178,665 64% $108,782
======== ======== ========= ========
Percentage of total revenues 100% 100% 100% 100%
License fees. Our license fees consist primarily of software license revenues
from direct sales. We also earn license fees through indirect channels,
primarily through complementary software vendors, consulting firms, distributors
and systems integrators.
License fees increased for the three and nine months ended November 30, 2000
compared to the same period in 1999, primarily because we fielded a more
effective and larger direct sales organization during the three and nine month
period ended November 30, 2000. We also benefited from an improved market
environment for supply chain optimization solutions and the developing demand
for eBusiness trading networks. This resulted in an increase in both the number
of transactions closed and the average size of transactions during the three and
nine month period ended November 30, 2000 compared to the comparable period in
1999.
Consulting services ("Services"). Services revenues primarily consist of fees
from software implementation engagements and the related training, consulting
and solution support revenues. Revenues from software implementation, training
and consulting engagements are primarily recognized as the services are
performed and are billed on a time and materials basis. The software
implementation process typically requires two to twelve months to complete,
depending on the complexity, scope of the project and client resources
available.
Consulting services revenues increased for the three and nine months ended
November 30, 2000 as compared to the comparable period in 1999, primarily due to
an increase in implementation services provided for software licensed in the
current and prior periods.
Solution support. Solution support revenues are recognized ratably over the
solution support term defined in the contract. Payments for solution support
fees are typically made annually in advance of the support period. Solution
support revenues increased following the increase in the number of clients that
have licensed our software products and entered or renewed annual solution
support contracts. Solution support revenues tend to track software license fee
transactions in prior periods. In the past three fiscal years, a high percentage
of customers with maintenance contracts have renewed these contracts. There can
be no assurance that this level of renewal will continue in the future. See
"Factors That May Affect Future Results" and "Forward-Looking Statements."
OPERATING EXPENSES:
Other operating expenses - Non-cash stock compensation. FASB Interpretation
No. 44 ("FIN 44") "Accounting for Certain Transactions Involving Stock
Compensation" became effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after December 15, 1998. In January 1999, we
repriced employee stock options, other than those held by executive officers or
directors. The effect of this repricing resulted in approximately 3.0 million
options being repriced and the four-year vesting period starting over. Under FIN
44, the 3.0 million options are subject to variable plan accounting. Under
variable plan accounting, compensation cost is adjusted for increases or
decreases in the fair market value of the modified stock option awards until the
award is exercised, is forfeited or expires.
Under FIN 44, no adjustments are to be made upon initial application of FIN
44 for periods prior to July 1, 2000.
In connection with the application of FIN 44 during the three months and nine
months ended November 30, 2000, we recorded a compensation (benefit) expense of
approximately ($6.1) million and $14.6 million, respectively. The remaining
vesting period is approximately 2.25 years for the deferred compensation. In
each future quarter, the Company will record the additional expense or benefit
related to the repriced stock options still outstanding based on the respective
increase or decrease in Manugistics' common stock price as compared to the prior
quarter.
The stock compensation (benefit) expense is allocated to operating expenses as
follows (in thousands):
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
2000 2000
---- ----
Cost of consulting, solution support and other services $ (1,373) 4,864
Sales and marketing costs (3,000) 4,349
Product development expenses (1,240) 4,103
General and administrative costs (460) 1,322
--------- --------
Cost of consulting, solution support and other services $ (6,073) $ 14,638
========= ========
The amounts and discussion below are based upon expense amounts excluding
non-cash stock compensation (benefit) expense. The following table sets forth
operating expenses for the three and nine month periods ended November 30, 2000
and 1999 (dollar amounts in thousands):
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
2000 CHANGE 1999 2000 CHANGE 1999
---- ------ ---- ---- ------ ----
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Cost of license fees $ 4,772 29% $ 3,686 $ 14,365 50% $ 9,596
Percentage of total revenues 7% 10% 8% 9%
Cost of consulting, solution
support and other services 14,344 33% 10,789 39,636 21% 32,703
Percentage of total revenues 20% 30% 21% 30%
Sales and marketing costs 30,710 104% 15,074 78,844 83% 43,212
Percentage of total revenues 44% 42% 44% 40%
Product development expenses 8,964 19% 7,516 25,179 15% 21,977
Percentage of total revenues 13% 21% 14% 20%
General and administrative costs 5,972 53% 3,896 16,282 39% 11,736
Percentage of total revenues 9% 11% 9% 11%
Restructuring costs - (100%) (17) - (100%) (699)
Percentage of total revenues 0% N/M 0% 1%
---------- --------- --------- -------
Total operating expenses $64,762 58% $ 40,944 $ 174,306 47% $118,525
========== ======== ========= ========
Percentage of total revenues 93% 114% 98% 109%
Cost of license fees. Cost of license fees consist primarily of amortization
of capitalized software development costs and royalty fees associated with
third-party software included with our licensed software. Capitalized software
development costs are amortized at the greater of the amount computed using
either the straight-line method over the estimated economic life of the product,
commencing with the date the product is first available for general release, or
the ratio that current gross revenues from the product bears to the total
current and anticipated future gross revenues. Generally, an economic life of
two to five years is assigned to capitalized software development costs. The
following table sets forth amortization of capitalized software development
costs, and other cost of license fees for the three and nine month periods ended
November 30, 2000 and 1999 (dollar amounts in thousands):
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
2000 CHANGE 1999 2000 CHANGE 1999
---- ------ ---- ---- ------ ----
Amortization of capitalized
software development costs $ 2,322 (13)% $ 2,654 $ 6,867 8% $ 6,387
Percentage of license fees 7% 18% 8% 17%
Other costs of license fees 2,450 137% 1,032 7,498 134% 3,209
Percentage of license fees 7% 7% 8% 8%
------ ------ ------ ------
Cost of license fees $ 4,772 30% $ 3,686 $14,365 50% $ 9,596
======= ======= ======= =======
Percentage of license fees 13% 25% 16% 25%
Cost of license fees increased for the three and nine months ended November
30, 2000 compared to the comparable periods in 1999, primarily due to an
increase in the amount of royalties paid to third parties as a result of the
particular mix of products licensed in the comparative periods.
Cost of consulting, solution support and other services. Cost of consulting,
solution support and other services increased for the three and nine months
ended November 30, 2000 compared to the comparable periods in 1999, primarily
due to an increase in the number of consultants.
Sales and marketing. Sales and marketing expenses consist primarily of
personnel costs, commissions, promotional events and advertising. Sales and
marketing expenses increased for the three and nine months ended November 30,
2000 compared to the comparable periods in 1999, primarily due to increased
commissions due to increased software license fees, increased sales and
marketing headcount, and increased marketing expenditures.
Product development. We record product development expenses net of
capitalized software development costs for products that have reached
technological feasibility in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." The following table sets forth product
development costs for the three and nine month periods ended November 30, 2000
and 1999 (dollar amounts in thousands):
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
2000 CHANGE 1999 2000 CHANGE 1999
---- ------ ---- ---- ------ ----
Gross product development costs $11,193 29% $ 8,676 $31,939 24% 25,690
Percentage of total revenues 16% 24% 18% 24%
Less: Capitalized product development costs $ 2,229 92% $ 1,160 6,760 82% 3,713
Percentage of gross product development costs 20% 13% 21% 15%
----- ------ ----- ---
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Net product development costs $ 8,964 19% $ 7,516 $25,179 15% $21,977
======= ======= ======= =======
Percentage of total revenues 13% 21% 14% 20%
Gross and net product development costs increased for the three and nine
month periods ended November 30, 2000 compared to the comparable periods in 1999
primarily due to the increase of product development headcount during that
period.
General and administrative. General and administrative expenses consist
primarily of personnel costs, infrastructure expenses and the fees and expenses
associated with legal, accounting and other functions. General and
administrative expenses increased for the three and nine month periods ended
November 30, 2000, compared to the comparable periods in 1999, primarily due to
the increase in headcount during that period.
Restructuring costs. In connection with the corporate-wide restructuring plan
instituted during fiscal 1999, we reduced previously recorded restructuring
charges by approximately $17,000 and $699,000, respectively, for the three and
nine month periods ended November 30, 1999. The adjustments primarily relate to
the sub-lease of property that management had believed, at the time of the
restructuring, would not be sublet, and which adjustments were partially offset
by increases in the accrual for severance costs and impairment of long-lived
assets.
OTHER INCOME - NET:
The following table sets forth other income for the three and nine month
periods ended November 30, 2000 and 1999 (dollar amounts in thousands):
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
2000 CHANGE 1999 2000 CHANGE 1999
---- ------ ---- ---- ------ ----
Other income $ 306 (15%) $ 360 $1,021 (17%) $1,235
Percentage of total revenues 1% 1% 1% 1%
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Other income includes interest income from short-term investments, interest
expense from borrowings, foreign currency exchange gains or losses and other
gains or losses. Other income decreased for the three and nine months ended
November 30, 2000 compared to the comparable periods in 1999 primarily due to
increased foreign currency exchange losses.
PROVISION (BENEFIT) FOR INCOME TAXES:
The following table sets forth income tax provisions (benefits) for the three
and nine month periods ended November 30, 2000 and 1999 (amounts in thousands):
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
2000 CHANGE 1999 2000 CHANGE 1999
---- ------ ---- ---- ------ ----
Income tax provision (benefit) $2,190 145% $ 15 $2,154 228% $ (657)
Percentage of income (loss)
before income taxes 19% (0.3)% (23)% 8%
The Company's effective tax rate for three and nine months ended November 30,
2000, was significantly impacted by non-cash stock compensation (benefit)
expense that did not result in income tax expense or benefit for financial
reporting purposes. Excluding the effect of non-cash stock compensation
(benefit) expense, the Company's effective tax rate was 39.5% and 40.0% for the
three and nine months ended November 30, 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
The following table sets forth liquidity and capital resources as of November
30, 2000 and February 29, 2000 (dollar amounts in thousands):
AS OF AS OF
NOV. 30, 2000 CHANGE FEBRUARY 29, 2000
------------- ------ -----------------
Working capital $ 287,640 681% $ 36,831
Cash, cash equivalents and marketable securities $ 280,774 445% $ 51,547
The Company has historically financed its growth primarily through funds
generated from operations, through proceeds from offerings of capital stock and
convertible debt, and to a lesser extent, through short-term borrowings under a
revolving credit facility. The increase in working capital and cash, cash
equivalents and marketable securities at November 30, 2000 as compared to
February 29, 2000 primarily resulted from an increase in the marketable
securities balance as a result of the Company's $250 million convertible debt
offering which was consummated during the nine months ended November 30, 2000.
Operating activities used cash of approximately $1.1 million for the nine
months ended November 30, 2000. Operating cash flows decreased for the period
primarily because the net loss for the period and the net changes in the
accounts receivable and deferred tax asset balances were only partially offset
by the change in non-cash operating items, such as the non-cash stock
compensation and depreciation and amortization.
Investing activities used cash of $253.0 million for the nine months ended
November 30, 2000, primarily consisting of purchases of marketable securities,
the capitalization of software development costs and the purchase of fixed
assets and software for internal use.
Financing activities provided cash of approximately $245.6 million for the
nine months ended November 30, 2000, primarily consisting of proceeds from the
issuance of 5% convertible subordinated notes in October and November 2000, and
the exercise of employee stock options and purchases of our common stock through
our employee stock purchase plan.
We believe that our allowance for doubtful accounts as of November 30, 2000
is adequate to cover any foreseeable difficulties with the collection of our
accounts receivable balances. However, a significant portion of our accounts
receivable resulted from the sales of large software licenses. Therefore, there
can be no assurance that the allowance will be adequate to cover any receivables
that are later deemed to be uncollectible.
We have a one-year committed unsecured revolving credit facility with a
commercial bank. The current agreement will expire in September of 2001. Under
its terms, we may request cash advances, letters of credit or both in an
aggregate amount of up to $20
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million. We may make borrowings under the facility for short-term working
capital purposes or for acquisitions (acquisition-related borrowings are limited
to $7.5 million per acquisition.)
In October and November 2000, the Company issued the Notes. Interest is paid
semiannually. The Notes were issued and sold to Deutsche Bank Securities Inc.,
and Banc of America Securities LLC, as the initial purchasers in reliance on the
exemption from registration under Rule 144A of the Securities Act of 1933, as
amended. In connection with this transaction, each of the initial purchasers
represented that it was a qualified "institutional buyer" as such term is
defined in the Securities and Exchange Act of 1934 as amended. The Notes are
convertible into approximately $5.7 million shares of common stock at a
conversion price of $44.06 per share at any time on or after 90 days following
the last of original issuance, through maturity, unless previously redeemed or
repurchased. The Company may redeem some or all of the Notes at any time on or
after November 7, 2003. The redemption price, expressed as a percentage of the
principal amount, will be as follows:
REDEMPTION
REDEMPTION PERIOD PRICE
----------------- -----
November 7, 2003 through October 31, 2004 103%
November 1, 2004 through October 31, 2005 102%
November 1, 2005 through October 31, 2006 101%
November 1, 2006 through maturity 100%
We believe that our existing cash balances and marketable securities, funds
generated from operations and amounts available under our revolving credit
facility will be sufficient to meet our anticipated liquidity and working
capital requirements for the foreseeable future. We believe that inflation did
not have a material effect on our results of operations in the three and nine
months ended November 30.
Certain information regarding commitments and contingencies, including
pending litigation, which may have an adverse impact on our liquidity and
financial condition is set forth below under "Factors That May Affect Future
Results" and under "Legal Proceedings" in Part II of this Quarterly Report.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Quarterly Report on Form 10-Q,
the following factors and those previously reported should be considered in
evaluating us and our business. Our operating results have varied in the past
and might vary significantly in the future because of factors such as domestic
and international business conditions, the timely availability and acceptance of
our products, technological change, the effect of competitive products and
pricing, the effects of marketing announcements by competitors or potential
competitors, changes in our strategy, the mix of direct and indirect sales, the
effectiveness of our sales and marketing organization, changes in operating
expenses, personnel changes and foreign currency exchange rate fluctuations.
Furthermore, clients may defer or cancel their purchases of our products if they
experience a downturn in their business or financial condition or if there is a
downturn in the general economy.
AS A RESULT OF RECENT SIGNIFICANT CHANGES IN OUR MANAGEMENT, PERSONNEL AND
PRODUCTS, YOU MAY HAVE DIFFICULTY EVALUATING OUR PROSPECTS BASED ON OUR
SIGNIFICANT LOSSES IN RECENT FISCAL YEARS.
We experienced operational difficulties in fiscal 1999 and the first half of
fiscal 2000. Problems with our direct sales operation and intense competition,
among other factors, contributed to net losses in fiscal 1999 and fiscal 2000,
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and for the nine months ended November 30, 2000. In response to our problems,
we hired a new executive management team, enhanced our supply chain optimization
and eBusiness products and services and improved our direct sales organization.
Our ability to continue to achieve operational improvements and improve our
financial performance will be subject to a number of risks and uncertainties,
including the following:
- slower growth in the market for supply chain and eBusiness software;
- our ability to introduce new software products and services to respond to
technological and client needs;
- our ability to manage our anticipated growth;
- our ability to hire, integrate and deploy our direct sales force effectively;
- our ability to expand our distribution capability through indirect sales
channels;
- our ability to respond to competitive developments and pricing;
- our dependence on our current executive officers and key employees; and
- changes in rules relating to revenue recognition or in interpretations of
these rules
If we fail to successfully address these risks and uncertainties, our business
could be harmed and we could continue to incur significant losses.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES IN RECENT FISCAL YEARS. OUR FUTURE
RESULTS WILL BE ADVERSELY AFFECTED BY SEVERAL TYPES OF NON-CASH CHARGES. IF WE
DO NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE, OUR STOCK PRICE MAY
DECLINE.
We have recently incurred significant losses, including net losses of $11.4
million for the nine months ended November 30, 2000, $8.9 million in fiscal 2000
and $96.1 million in fiscal 1999. We will incur significant non-cash charges in
the future related to the amortization of intangibles and non-cash compensation
expenses associated with our acquisition of Talus. In addition, we may incur
non-cash compensation charges related to our stock option repricing. We cannot
assure you that our revenues will grow or that we will achieve or maintain
profitability in the future. Our ability to increase revenues and achieve
profitability will be affected by the other risks and uncertainties described in
this section. Our failure to achieve profitability could cause our stock price
to decline, and our ability to finance our operations could be impaired.
OUR OPERATING RESULTS FLUCTUATE, AND IF WE FAIL TO MEET THE EXPECTATIONS OF THE
INVESTMENT COMMUNITY IN ANY PERIOD, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY.
Our revenues and operating results are difficult to predict, and we believe
that period-to-period comparisons of our operating results will not necessarily
be indicative of future performance. The factors that may cause fluctuations of
our quarterly operating results include the following:
- the size, timing and contractual terms of licenses and sales of our products
and services;
- the potentially long and unpredictable sales cycle for our products;
- technical difficulties in our software that could delay the introduction of
new products or increase their costs;
- introductions of new products or new versions of existing products by us or
our competitors;
- changes in prices or the pricing models for our products and services or
those of our competitors;
- changes in the mix of our software license revenues, consulting revenues and
solution support revenues;
- changes in the mix of sales channels through which our products and services
are sold; and
- changes in rules relating to revenue recognition or in interpretations of
these rules.
Due to fluctuations from quarter to quarter, our operating results may not meet
the expectations of securities analysts or investors. If this occurs, the price
of our common stock could decline significantly.
VARIATIONS IN THE TIME IT TAKES US TO SELL OUR SOLUTIONS MAY CAUSE FLUCTUATIONS
IN OUR OPERATING RESULTS.
The time it takes to sell our solutions to prospective clients varies
substantially, but typically ranges between six and twelve months. Variations in
the length of our sales cycles could cause our revenues to fluctuate widely from
period to period. Because we typically recognize a substantial portion of our
license revenues in the last month of a quarter, any delay in the sale of our
products could cause significant variations in our revenues from quarter to
quarter. Furthermore, because our operating expenses are relatively fixed over
the short term and we devote significant time and resources to prospective
clients, these fluctuations could cause our operating results to suffer in some
future periods. The length of our sales cycle depends on a number of factors,
including the following:
- the complexities of the supply chain and e-Business problems our solutions
address;
- the breadth of the solution required by the client, including the technical,
organizational and geographic scope of the license;
- the evaluation and approval process employed by the client;
- the sales channel through which the solution is sold; and
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- any other delays arising from factors beyond our control.
THE SIZE AND SCOPE OF OUR CONTRACTS WITH CLIENTS ARE INCREASING, WHICH MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS.
Our clients and prospective clients are seeking to solve increasingly complex
supply chain and eBusiness problems. Further, we are now focusing on providing
total solutions to our clients, as opposed to only licensing software. As the
complexity of the problems our clients seek to solve increases, the size and
scope of our contracts with clients increase. As a result, our operating results
could fluctuate due to the following factors:
- the complexity of our contracts;
- contractual terms may vary widely, which may result in differing
methods of accounting for revenue from each contract;
- losses of, or delays in concluding, larger contracts could have a
proportionately greater effect on our revenues for a particular period; and
- the sales cycles related to larger contracts may be longer and
subject to greater delays.
Any of these factors could cause our revenues to decline or fluctuate
significantly in any quarter and could cause a decline in our stock price.
WE HAVE EXPERIENCED DIFFICULTIES INTEGRATING ACQUISITIONS IN THE PAST AND MAY
EXPERIENCE PROBLEMS WITH FUTURE ACQUISITIONS THAT COULD MATERIALLY HARM OUR
BUSINESS.
Acquisitions involve the integration of companies that have previously
operated independently. In connection with any acquisition, there can be no
assurance that we will:
- effectively integrate employees, operations, products and systems;
- realize the expected benefits of the transaction;
- retain key employees;
- effectively develop and protect key technologies and proprietary know-how;
- avoid conflicts with our clients with home commercial relationships or compete
with the acquired company;
- avoid unanticipated operational difficulties or expenditures; and
- effectively operate our existing business lines, given the significant
diversion of resources and management attention required to successfully
integrate acquisitions, including the acquisition of Talus in December 2000.
We experienced significant difficulties with the integration of the products and
operations of ProMIRA Software, Inc. (ProMIRA), and TYECIN Systems, Inc.
(TYECIN), which we acquired in the first half of calender 1998. These
difficulties included problems integrating the prior ProMIRA sales forces and
the delayed releases of the in-process technology acquired as part of the
transaction. In addition, as a result of the poor financial performance we
experienced in fiscal 1999, the technology acquired in conjunction with the
TYECIN acquisition was not integrated into our solutions and, therefore,
revenues generated from this technology have been nominal. Similar difficulties
with future acquisitions could materially and adversely affect our business,
results of operations and financial condition.
WE MAY ENCOUNTER PROBLEMS EFFECTIVELY INTEGRATING TALUS.
On December 21, 2000, we completed the acquisition of Talus, a privately held
company that provides pricing and revenue optimization products and services.
This acquisition is substantially larger than all of our prior acquisitions, not
all of which have been successful. In addition to the risks described above in
connection with acquisitions generally, the ultimate success of our acquisition
of Talus is dependent on factors which include the following:
- our ability to complete the commercial release of Talus' custom-developed
products;
- our ability to protect and maintain Talus' intellectual property rights;
- our ability to successfully market and license the products Talus has
developed and is developing for commercial release;
- our ability to successfully integrate Talus' technologies;
- our ability to retain and motivate Talus' employees;
- market acceptance of the products Talus has commercially developed to date;
- our ability to fulfill our strategic plan for the acquisition of Talus by
integrating our supply chain and eBusiness capabilities and products with Talus'
pricing and revenue optimization products and services;
- market acceptance of our combined supply chain, eBusiness and pricing and
revenue optimization products;
- our ability, together with Talus, to cross-sell products and services into our
respective markets; and
- the outcome of disputes and litigation which have arisen in the ordinary
course of business.
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OUR ACQUISITION OF TALUS WILL ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS.
We will incur substantial dilution to our earnings per share in accordance
with generally accepted accounting principles for the foreseeable future as a
result of the Talus acquisition. In connection with the acquisition, we will
amortize approximately $23 million of deferred compensation related to unvested
stock options over four years. Further, we will incur an annual amortization
charge of approximately $90 million related to goodwill and intangible assets
over the next four years.
WE DEPEND ON SALES OF OUR SUPPLY CHAIN OPTIMIZATION AND eBUSINESS SOLUTIONS, AND
OUR BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED IF THE MARKET FOR OUR
PRODUCT DOES NOT CONTINUE TO GROW.
Substantially all of our software license fees, consulting revenues and
solution support revenues have arisen from, or are related directly to, our
supply chain optimization and eBusiness solutions. We expect to continue to be
dependent upon these products in the future, and any factor adversely affecting
the products or the market for supply chain and eBusiness solutions, in general,
would materially and adversely affect our ability to generate revenues. While we
believe the market for supply chain and eBusiness solutions will continue to
expand, it may grow more slowly than in the past. If the market for our products
does not grow as rapidly as we expect, revenue growth, operating margins or both
could be adversely affected.
OUR MARKET IS VERY COMPETITIVE, AND WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
The market for our solutions is very competitive. The intensity of
competition in our markets has significantly increased and we expect to increase
in the future, particularly in the eBusiness software applications market. Our
current and potential competitors may make acquisitions of other competitors and
may establish cooperative relationships among themselves or with third parties.
Further, our current or prospective clients and partners may become competitors
in the future. Increased competition is likely to result in price reductions,
lower gross margins, longer sales cycles and the loss of market share. Each of
these developments could materially and adversely affect our growth and
operating performance.
MANY OF OUR COMPETITORS HAVE SIGNIFICANTLY MORE RESOURCES THAN WE DO AND,
THEREFORE, WE MAY BE AT A DISADVANTAGE IN COMPETING WITH THEM.
We directly compete with other application software vendors including: Adexa,
Inc., Aspen Technology, Inc., The Descartes Systems Group Inc., i2 Technologies,
Inc., Logility, Inc. and SynQuest, Inc. Some eBusiness software companies that
do not currently offer competitive products or solutions, such as Ariba, Inc.
and Commerce One, may begin to compete directly with us in the future as their
business models evolve. In addition, some enterprise resource planning (ERP)
companies such as Invensys plc (which acquired Baan Company N.V.), J.D. Edwards
& Company, Oracle Corporation, PeopleSoft, Inc., and SAP AG have acquired or
developed and are continuing to develop supply chain planning software products
that compete directly with those offered by Manugistics. Some of our current and
potential competitors, particularly the ERP vendors, have significantly greater
financial, marketing, technical and other competitive resources than us, as well
as greater name recognition and a larger installed base of clients in their core
ERP areas. In addition, many of our competitors have well-established
relationships with our current and potential clients and have extensive
knowledge of our industry. As a result, they may be able to adapt more quickly
to new or emerging technologies in response to client requirements and changes
in client requirements or to devote greater resources to the development,
promotion and sale of their products resulting in increased direct competition
with Manugistics. Any of these factors could materially impair our ability to
compete and adversely affect our revenue growth and operating performance.
IF WE FAIL TO DEVELOP NEW PRODUCTS AND SERVICES IN THE FACE OF OUR INDUSTRY'S
RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE MATERIALLY AND ADVERSELY
AFFECTED.
The market for supply chain optimization and eBusiness solutions is subject
to rapid technological change, changing client needs, frequent new product
introductions and evolving industry standards that may render existing products
and services obsolete. Our growth and future operating results will depend, in
part, upon our ability to enhance existing applications and develop and
introduce new applications or capabilities that:
- meet or exceed technological advances in the marketplace;
- meet changing client requirements;
- comply with changing industry standards;
- achieve market acceptance;
- integrate third-party software effectively; and
- respond to competitive offerings.
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Our product development and testing efforts have required, and are expected to
continue to require, substantial investment. We may not possess sufficient
resources to continue to make the necessary investments in technology. In
addition, we may not successfully identify new software opportunities or develop
and bring new software to market in a timely and efficient manner. If we are
unable, for technological or other reasons, to develop and introduce new and
enhanced software in a timely manner, we may lose existing clients and fail to
attract new clients, which may adversely affect our performance.
DEFECTS IN OUR SOFTWARE OR PROBLEMS IN THE IMPLEMENTATION OF OUR SOFTWARE COULD
LEAD TO CLAIMS FOR DAMAGES BY OUR CLIENTS, LOSS OF REVENUES OR DELAYS IN THE
MARKET ACCEPTANCE OF OUR PRODUCTS.
Our software products are complex and are frequently integrated with a wide
variety of third-party software. We may license products that contain undetected
errors or failures when new products are first introduced or as new versions are
released. We may also be unable to meet client expectations in implementing our
solutions. These problems may result in claims for damages suffered by our
clients or a loss of, or delays in, the market acceptance of our products. In
the past, we have discovered software errors in our new releases and new
products after their introduction. In the event that we experience significant
software errors in future releases, we could experience claims for damages,
delays in product releases, client dissatisfaction and potentially lost revenues
during the period required to correct these errors. In the future, we may
discover errors or limitations in new releases or new products after the
commencement of commercial shipments. Any of these errors, defects or delays
could materially harm our business.
WE ARE DEPENDENT ON THIRD-PARTY SOFTWARE INCORPORATED IN OUR PRODUCTS AND
SOLUTIONS, AND IMPAIRED RELATIONS WITH THESE THIRD PARTIES, DEFECTS IN
THIRD-PARTY SOFTWARE OR THE INABILITY TO ENHANCE THEIR SOFTWARE OVER TIME
COULD HARM OUR BUSINESS.
We incorporate third-party software into our products and solutions. We are
likely to incorporate additional third-party software into our products and
solutions as we expand our product offerings. The operation of our products
would be impaired if errors occur in the third-party software that we utilize.
It may be more difficult for us to correct any defects in third-party software
because the software is not within our control. Accordingly, our business could
be adversely affected in the event of any errors in this software. There can be
no assurance that these third parties will continue to invest the appropriate
levels of resources in their products and services to maintain and enhance the
software capabilities. Furthermore, it may be difficult for us to replace any
third-party software if a vendor seeks to terminate our license to the software.
Any impairment in our relationship with these third parties could adversely
impact our business and financial condition.
WE ARE SUBSTANTIALLY DEPENDENT ON THIRD PARTIES TO INTEGRATE OUR SOFTWARE WITH
OTHER SOFTWARE PRODUCTS AND PLATFORMS.
We depend on companies such as Extricity, Inc. and Vignette Corporation to
integrate our software with software and platforms developed by third parties.
If these companies are unable to develop or maintain software that effectively
integrates our software and is free from errors, our ability to license our
products and provide solutions could be impaired. Further, we rely on these
companies to maintain relationships with the companies that provide the external
software that is vital to the functioning of our products and solutions. The
loss of any company that we use to integrate our software products could
adversely affect our business, results of operations and financial condition.
OUR EFFORTS TO DEVELOP RELATIONSHIPS WITH VENDORS SUCH AS SOFTWARE COMPANIES,
CONSULTING FIRMS, RESELLERS AND OTHERS TO IMPLEMENT AND PROMOTE OUR SOFTWARE
PRODUCTS MAY FAIL.
We are developing, maintaining and enhancing significant working
relationships with complementary vendors, such as software companies, consulting
firms, resellers and others that we believe can play an important role in
marketing our products. We are currently investing, and intend to continue to
invest significant resources to develop and enhance these relationships, which
could adversely affect our operating margins. We may be unable to develop
relationships with organizations that will be able to market our products
effectively. Our arrangements with these organizations are not exclusive and, in
many cases, may be terminated by either party without cause. Many of the
organizations with whom we are developing or maintaining marketing relationships
have commercial relationships with our competitors. Therefore, there can be no
assurance that any organization will continue its involvement with us and our
products. The loss of relationships with important organizations could
materially and adversely affect our results of operations.
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WE HAVE ONLY RECENTLY ENTERED INTO CONTRACTS WITH GOVERNMENTAL AGENCIES. THESE
CONTRACTS OFTEN INVOLVE LONG PURCHASE CYCLES AND COMPETITIVE PROCUREMENT
PROCESSES.
We have recently begun providing our solutions to government agencies and
expect that a significant portion of our future revenues may be derived from
government agency clients. Obtaining government contracts may involve long
purchase cycles, competitive bidding, qualification requirements, performance
bond requirements, delays in funding, budgetary constraints and extensive
specification development and price negotiations. In order to facilitate doing
business with the federal government, we submit a schedule of prices for our
products and services to the General Services Administration. We are permitted
to update our schedule of prices only on an annual basis. Each government
agency maintains its own rules and regulations with which we must comply and
which can vary significantly among agencies. Government agencies also often
retain a significant portion of fees payable upon completion of a project and
collection of such fees may be delayed for several months. Accordingly, our
revenues could decline as a result of these government procurement processes.
In addition, it is possible that, in the future, some of our government
contracts may be fixed price contracts which may prevent us from recovering
costs incurred in excess of our budgeted costs. Fixed price contracts require
us to estimate the total project cost based on preliminary projections of the
project's requirements. The financial viability of such projects depends in
large part on our ability to estimate such costs accurately and complete the
project on a timely basis. In the event our actual costs exceed the fixed
contract cost, we will not be able to recover the excess costs. If we fail to
properly anticipate costs on fixed price contracts, our profit margins will
decrease. Some government contracts are also subject to termination or
renegotiation at the convenience of the government, which could result in a
large decline in revenue in any given quarter. Multi-year contracts are
contingent on overall budget approval by Congress and may be terminated due to
lack of funds.
INCREASED SALES THROUGH INDIRECT CHANNELS MAY ADVERSELY AFFECT OUR OPERATING
PERFORMANCE.
Even if our marketing efforts through indirect channels are successful and
result in increased sales, our average selling prices and operating margins
could be adversely affected because of the lower unit prices that we receive
when selling through indirect channels.
IF WE FAIL TO EFFECTIVELY EXPAND OUR SALES ORGANIZATION, OUR ABILITY TO GROW
WILL BE LIMITED.
Our continuing efforts to expand our sales organization will require
significant resources. New sales personnel will require training and may take a
long time to achieve full productivity. Further, the competition for qualified
sales personnel is intense, and there is no assurance that we can attract and
retain qualified sales people at levels sufficient to support our growth. Any
failure to adequately sell and support our products could limit our growth and
adversely affect our performance.
THE LIMITED ABILITY OF LEGAL PROTECTIONS TO SAFEGUARD OUR INTELLECTUAL PROPERTY
RIGHTS COULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of confidentiality procedures, contractual provisions, patent,
copyright, trademark and trade secret laws. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products or
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult and, although we are unable to determine the
extent to which piracy of our software products exists, we expect software
piracy to be a problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as the laws of the United
States. Furthermore, our competitors may independently develop technology
similar to ours.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO INCUR UNEXPECTED COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.
The number of intellectual property claims in our industry may increase as
the number of competing products grows and the functionality of products in
different industry segments overlaps. In recent years, there has been a tendency
by software companies to file substantially increasing numbers of patent
applications. We have no way of knowing what patent applications third parties
have filed until a patent is issued. It can take as long as three years for a
patent to be granted after an application has been filed. Although we are not
aware that any of our products infringe upon the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to current or future products. Any of these
claims, with or without merit, could be time-consuming to address, result in
costly litigation, cause product shipment delays or require us to enter into
royalty or license agreements. These royalty or license agreements might not be
available on terms acceptable to us or at all, which could materially and
adversely affect our business.
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OUR INTERNATIONAL OPERATIONS POSE RISKS FOR OUR BUSINESS AND FINANCIAL
CONDITION.
We currently conduct operations in a number of countries around the world.
These operations require significant management attention and financial
resources and subject us to risks inherent in doing business internationally,
such as:
- regulatory requirements;
- difficulties in staffing and managing foreign operations;
- longer collection cycles;
- different accounting practices;
- problems in collecting accounts receivable;
- legal uncertainty regarding liability, ownership and protection of
intellectual property;
- tariffs and other trade barriers;
- seasonal reductions in business activities;
- potentially adverse tax consequences; and
- political instability.
Any of the above factors could adversely affect the success of our international
operations. One or more of these factors could have a material adverse effect on
our business and operating results.
FLUCTUATIONS IN FOREIGN CURRENCIES COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Although the majority of our contracts are denominated in U.S. dollars, most
of the revenues from licenses with customers outside the United States have been
denominated in foreign currencies, typically in the local currency of our
selling business unit. We anticipate that the proportion of our revenues
denominated in foreign currencies will increase. A decrease in the value of
foreign currencies relative to the U.S. dollar could result in losses from
foreign currency fluctuations. With respect to our international sales that are
U.S. dollar-denominated, an increase in the value of the U.S. dollar relative to
the value of foreign currencies could make our products and services less
competitive with respect to price.
IF WE LOSE OUR KEY PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER.
Our success depends significantly on the continued service of our executive
officers. We do not have fixed-term employment agreements with any of our
executive officers, and we do not maintain key person life insurance on our
executive officers. The loss of services of any of our officers for any reason
could have a material adverse effect on our business, operating results,
financial condition and cash flows.
THE FAILURE TO HIRE AND RETAIN QUALIFIED PERSONNEL WOULD HARM OUR BUSINESS.
We believe that our success also will depend significantly on our ability to
attract, integrate, motivate and retain additional highly skilled technical,
managerial, sales, marketing and services personnel. Competition for skilled
personnel is intense, and there can be no assurance that we will be successful
in attracting, motivating and retaining the personnel required to grow and
operate profitably. In addition, the cost of hiring and retaining skilled
employees is high, and this reduces our profitability. Failure to attract and
retain highly skilled personnel could materially and adversely affect our
business. An important component of our employee compensation is stock options.
A decline in our stock price could adversely affect our ability to attract and
retain employees, as it has in the past.
WE HAVE RECENTLY EXPERIENCED SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM
AND THERE IS NO ASSURANCE THE TEAM WILL WORK TOGETHER EFFECTIVELY.
Commencing in the first quarter of fiscal 2000, we have completely changed
our senior management team. Gregory J. Owens, our Chief Executive Officer,
joined us in April 1999. With one exception, all of our other present executive
officers joined us after Mr. Owens. Our success depends on the ability of our
management team to work together effectively. Our business, revenues and
financial condition will be materially and adversely affected if our senior
management team does not manage our company effectively or if we are unable to
retain our senior management.
EXPENSES ARISING FROM OUR STOCK OPTION REPRICING MAY HAVE A MATERIAL ADVERSE
IMPACT ON FUTURE PERFORMANCE.
In response to the poor performance of our stock price between May 1998 and
January 1999, we offered to reprice employee stock options, other than those
held by our executive officers or directors, effective January 29, 1999, to
bolster employee retention. The effect of this repricing resulted in options to
acquire approximately 3.0 million shares being repriced and the four-year
vesting period starting over. The recently adopted FASB Interpretation No. 44 of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," requires us to record compensation expense or benefit associated
with the change in the price of these options. The increase in our common stock
market price since the FASB-mandated measurement date of July 1, 2000 resulted
in a non-cash stock compensation expense of $14.6 million being recorded for the
nine months ended November 30, 2000. This non-cash stock compensation expense
caused what would otherwise have been reported as net income for the nine months
of $3.2 million, or $0.05 per basic and diluted share, to be reported as a net
loss of $11.4 million, or $0.20 per basic and diluted share. In each future
quarter, we will record the additional expense or benefit related to the
repriced stock options still outstanding based on the change in our common stock
price as compared to the measurement date. As a result, the repricing may
continue to have a material adverse
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impact on reported financial results and could therefore negatively affect our
stock price.
WE MAY BE SUBJECT TO FUTURE LIABILITY CLAIMS, AND OUR COMPANY'S AND PRODUCTS'
REPUTATION MAY SUFFER.
Many of our implementations involve projects that are critical to the
operations of our clients' businesses and provide benefits that may be difficult
to quantify. Any failure in a client's system could result in a claim for
substantial damages against us, regardless of our responsibility for the
failure. We have entered into and plan to continue to enter into agreements with
software vendors, consulting firms, resellers and others whereby they market our
solutions. If these vendors fail to meet their clients' expectations or cause
failures in their clients' systems, the reputation of our company and products
could be materially and adversely affected even if our software products perform
in accordance with their functional specifications.
LACK OF GROWTH OR DECLINE IN INTERNET USAGE OR eBUSINESS COULD BE DETRIMENTAL TO
OUR FUTURE OPERATING RESULTS.
The growth of the Internet has increased demand for supply chain optimization
and eBusiness solutions, as well as created markets for new and enhanced product
offerings. Therefore, our future sales and profits are substantially dependent
upon the Internet as a viable commercial marketplace. The Internet may not
succeed in becoming a viable marketplace for a number of reasons, including:
- potentially inadequate development of network infrastructure or delayed
development of enabling technologies and performance improvements;
- delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity;
- concerns that may develop among businesses and consumers about accessibility,
security, reliability, cost, ease of use and quality of service;
- increased taxation and governmental regulation; or
- changes in, or insufficient availability of, communications services to
support the Internet, resulting in slower Internet user response times.
The occurrence of any of these factors could require us to modify our technology
and our business strategy. Any such modifications could require us to expend
significant amounts of resources. In the event that the Internet does not become
and remain a viable commercial marketplace, our business, financial condition
and results of operations could be materially and adversely affected.
NEW LAWS OR REGULATIONS AFFECTING THE INTERNET, eBUSINESS OR COMMERCE IN GENERAL
COULD REDUCE OUR REVENUES AND ADVERSELY AFFECT OUR GROWTH.
Congress and other domestic and foreign governmental authorities have adopted
and are considering legislation affecting the use of the Internet, including
laws relating to the use of the Internet for commerce and distribution. The
adoption or interpretation of laws regulating the Internet, or of existing laws
governing such things as consumer protection, libel, property rights and
personal privacy, could hamper the growth of the Internet and its use as a
communications and commercial medium. If this occurs, companies may decide not
to use our products or services, and our business and operating results could
suffer.
THE VIABILITY OF ELECTRONIC EXCHANGES IS UNCERTAIN.
Electronic exchanges that allow collaboration over the Internet among trading
partners are relatively new and unproven. There can be no assurance that trading
partners will adopt exchanges as a method of doing business. Trading partners
may fail to participate in exchanges for a variety of reasons, including:
- concerns about the confidentiality of information provided electronically to
exchanges;
- the inability of technological advances to keep pace with the volume of
information processed by exchanges; and
- regulatory issues, including antitrust issues that may arise when trading
partners collaborate through exchanges.
Any of these factors could limit the growth of exchanges as an accepted means of
commerce. Slower growth or the abandonment of the exchange concept in one or
more industries could have a material adverse affect on our results of
operations and financial condition.
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OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION, SUBSTANTIALLY
MORE DEBT.
In November 2000 we completed a debt offering of $250 million in 5% subordinated
convertible notes. Our indebtedness could have important consequences for
investors. For example, it could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain additional financing;
- require the dedication of a substantial portion of our cash flow from
operations to the payment of principal of, and interest on, our indebtedness,
thereby reducing the availability of such cash flow to fund our growth strategy,
working capital, capital expenditures and other general corporate purposes;
-limit our flexibility in planning for, or reacting to, changes in our business
and the industry; and
- place us at a competitive disadvantage relative to our competitors with less
debt.
Although we have no present plans to do so, we may incur substantial additional
debt in the future. Neither the terms of our credit facility nor the terms of
these notes fully prohibit us from doing so. If a significant amount of new
debt is added to our current levels, the related risks described above could
intensify.
WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS.
We will be required to generate cash sufficient to pay all amounts due on the
Notes and to conduct our business operations. We have net losses, and we may not
be able to cover our anticipated debt service obligations. This may materially
hinder our ability to make principal and interest payments on the Notes. Our
ability to meet our future debt service obligations will be dependent upon our
future performance, which will be subject to financial, business and other
factors affecting our operations, many of which are beyond our control.
RESALES OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK ISSUED IN CONNECTION WITH THE
ACQUISITION OF TALUS SOLUTIONS MAY CAUSE OUR STOCK PRICE TO DECLINE.
In connection with the acquisition of Talus Solutions, Inc., we issued
approximately 7.0 million new shares of our common stock. Of these shares, a
total of approximately 6.0 million shares are being delivered to Manugistics'
exchange agent for direct transfer to the former Talus stockholders and a total
of approximately 1.1 million shares were delivered to State Street Bank and
Trust Company, as escrow agent, to secure potential indemnification claims of
Manugistics. Of the approximately 6.0 million shares delivered to the exchange
agent, approximately 1.3 million shares were freely tradable upon completion of
the acquisition. The remaining approximately 4.6 million shares are subject to
share transfer restrictions and will become available for sale in three stages
in accordance with the terms of the share transfer restriction agreements signed
by certain principals of Talus Solutions, Inc. The first release date is January
18, 2001, at which time approximately 1.2 million shares will be released. The
balance of these shares will be released, in accordance with the terms of the
share transfer restriction agreements, on May 31, 2001 and October 31, 2001. The
escrowed shares will be released, subject to existing claims, in two stages, the
first of which is October 31, 2001.
In addition, at closing, a total of approximately 1.4 million shares were
reserved for issuance upon exercise of outstanding Talus Solution's stock
options and warrants which were assumed by Manugistics. Of these shares, a total
of approximately .70 million shares were exercisable at the time of completion
of the acquisition. In addition, a total of approximately .38 million of these
shares are subject to share transfer restrictions which expire January 18, 2001.
SALES OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK BY OUR EXECUTIVE OFFICERS AND
DIRECTORS MAY CAUSE OUR STOCK PRICE TO DECLINE.
Certain of our executive officers have entered into pre-established trading
plans to sell up to a total of approximately 515,000 shares of our common stock
in January 2001 and thereafter, in amounts ranging from approximately 271,000
to 296,000 shares per fiscal quarter. These quarterly sales will continue
indefinitely until the trading plans are modified or terminated. Certain of our
other executive officers and directors are considering establishing similar
plans to sell shares on a quarterly basis. The sale of these shares may cause
the market price of our stock price to decline.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE
A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
Our charter and our bylaws, in conjunction with Delaware law, contain
provisions that could make it more difficult for a third party to obtain control
of us even if doing so would be beneficial to stockholders. For example, our
bylaws provide for a classified board of directors and allow our board of
directors to expand its size and fill any vacancies without stockholder
approval. In addition, our bylaws require a two-thirds vote of stockholders to
remove a director from office. Furthermore, our board has the authority to issue
preferred stock and to designate the voting rights, dividend rate and privileges
of the preferred stock all of which may be greater than the rights of common
stockholders.
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
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- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the supply chain and eBusiness software industry;
- changes in the performance and/or market valuations of other supply
chain and eBusiness companies and the software industry in general;
- our announcement of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
- adoption of industry standards and the inclusion of our technology in, or
compatibility of our technology with, such standards;
- adverse or unfavorable publicity regarding us or our products;
- additions or departures of key personnel;
- our sales of additional capital stock; and
- other events or factors that may be beyond our control.
In addition, the stock markets in general, The Nasdaq National Market and the
market for software companies in particular, have recently experienced extreme
price and volume volatility and a significant cumulative decline in recent
months. Such volatility and decline have affected many companies irrespective of
or disproportionately to the operating performance of these companies. These
broad market and industry factors may materially and adversely further affect
the market price of our common stock, regardless of our actual operating
performance.
FORWARD-LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Quarterly Report on Form 10-Q contains certain
forward-looking statements that are subject to a number of risks and
uncertainties. In addition, we may publish forward-looking statements from time
to time relating to such matters as anticipated financial performance, business
prospects and strategies, sales and marketing efforts, technological
developments, new products, research and development activities, consulting
services, employee recruiting and retention efforts and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, we note that a variety of factors could cause our actual results and
experience to differ materially from the anticipated results or other
expectations expressed in our forward-looking statements in this Quarterly
Report or elsewhere. The risks and uncertainties that may affect our business,
operating results or financial condition include those set forth above under
"Factors That May Affect Future Results" and in the information found
elsewhere in this report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency. In the three and nine months ended November 30, 2000, we
generated approximately 43% and 30%, respectively, of our revenues outside the
United States and Canada. International sales usually are made by our foreign
subsidiaries in local currencies and the expenses incurred by foreign
subsidiaries are denominated in local currencies.
In certain circumstances, we enter into foreign currency contracts with
banking institutions to protect large foreign currency receivables against
currency fluctuations. When the foreign currency receivable is collected, the
contract is liquidated and the foreign currency receivable is converted to U.S.
dollars.
Interest rates. We manage our interest rate risk by maintaining an investment
portfolio of available-for-sale instruments with high credit quality and
relatively short average maturities. These instruments include, but are not
limited to, commercial paper, money-market instruments, bank time deposits and
taxable and tax-advantaged variable rate and fixed rate obligations of
corporations, municipalities and national, state and local government agencies,
in accordance with an investment policy approved by our Board of Directors.
These instruments are denominated in U.S. dollars. The fair market value of
marketable securities held at November 30, 2000 was approximately $255 million.
We also hold cash balances in accounts with commercial banks in the United
States and foreign countries. These cash balances represent operating balances
only and are invested in short-term time deposits of the local bank. Such
operating cash balances held at banks outside the United States are denominated
in the local currency.
We are currently not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt obligations since our
long-term debt obligation is at a fixed rate. We are exposed to interest rate
risk, as additional financing may be required. The interest rate that we will
be able to obtain on additional financing will depend on market conditions at
that time, and may differ from the rates we have secured on our current debt.
We do not currently anticipate entering into interest rate swaps and/or similar
instruments.
The carrying value of our cash and cash equivalents, accounts receivable,
accounts payable, marketable securities - available-for-sale, accrued expenses
and notes payable is a reasonable approximation of their fair value. On
November 30, 2000, the fair value of our long-term debt (excluding capital lease
obligation) was estimated to be $264.2 million based on the maturity date of
November 1, 2007 and the 5% interest rate on our convertible subordinated notes
compared to terms and rates currently available in long-term financing markets.
Market risk is estimated as the potential decrease in fair value of our
long-term debt resulting from a hypothetical increase of 50 basis points in
interest rates (ten percent of our borrowing rate). Such an increase in
interest rates would result in approximately a $7.2 million decrease in fair
value of our long-term debt.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As disclosed in our Quarterly Report on Form 10-Q for the three months ended
November 30, 1999, we reached an agreement for the settlement of the class
action federal securities litigation in which we, our Chairman of the Board of
Directors (the "Board") and our former Chief Financial Officer were defendants
(the "Defendants"). As reported by us in our Current Report on Form 8-K dated
August 17, 1999, the United States District Court for the District of Maryland
had issued an order dismissing the consolidated class action complaint against
the Defendants. The plaintiffs then filed an appeal of the ruling. During the
pendency of the appeal, the parties reached a settlement in principle to resolve
the matter, the parties subsequently entered into a definitive settlement
agreement, subject to the approval of the District Court. On July 24, 2000 the
District Court issued an order for settlement proceedings outlining the details
for providing the appropriate notices to class members. Class members had until
October 2, 2000 to opt out of the class and until November 11, 2000 to file
proofs of claim. The settlement was approved at a hearing October 13, 2000. The
amounts to be paid by Defendants pursuant to the settlement were funded by our
insurer, and thus settlement will not have a material adverse effect on us.
The Company and Manugistics U.K. Limited have been named as defendants in a
claim filed by Grocery Logistics Limited in the High Court of Justice, Queen's
Bench Division, Technology & Construction Court, No. HT-00-384, filed October
19, 2000. The lawsuit arose from a dispute, which the company had previously
announced. The claim seeks damages of an amount between approximately $6.7
million and $10.5 million, plus interest, arising out of a contract for the
supply of software, support, maintenance, consulting and training services. The
claimant alleges that the implementation of the software was a failure because
it did not meet
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the requirements of the contract. The Company denies the allegations and
believes that its defense is meritorious. The Company's insurance carriers have
accepted coverage under a reservation of rights.
On November 29, 2000, the Company filed a lawsuit against VirtualFund.com,
Inc., in the United States District Court for the District of Maryland alleging
that VirtualFund.com is in anticipatory breach of its obligations under a
software license agreement among the Company and Virtual Fund, Inc. and its
affiliates. The Company seeks at least $4.5 million in damages.
We are involved from time to time in disputes and other litigation in the
ordinary course of business. We do not believe that the outcome of any pending
disputes or litigation, including matters we have previously reported, will have
a material adverse effect on our business, operating results, financial
condition and cash flows. However, the ultimate outcome of these matters, as
with litigation generally, is inherently uncertain and it is possible that some
of these matters may be resolved adversely to us. The adverse resolution of any
one or more of these matters could have a material adverse effect on our
business, operating results, financial condition and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended November 30, 2001, we issued a total of $250,000,000
principal amount of 5% convertible subordinated notes due 2007 (the "Notes"), as
follows: $200,000,000 principal amount on October 20, 2000, and $50,000,000
principal amount on November 2, 2000. We issued and sold these Notes to Deutsche
Bank Securities Inc., and Banc of America Securities LLC, as the initial
purchasers (the "Initial Purchasers"), in reliance on the exemption from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). We sold the Notes to the Initial Purchasers at a discount of
three percent, for an aggregate discount of $7.5 million. Each of the Initial
Purchasers represented to us that it was a "qualified institutional buyer" (as
such term is defined in Rule 144A under the Securities Act). The Notes are
convertible into approximately 5.7 million shares of our common stock at a
conversion price of $44.06 per share at any time on or after 90 days following
the date of original issuance, through maturity, unless previously redeemed or
repurchased.
The Initial Purchasers advised us that they proposed to resell the Notes (1)
in the United States only to "qualified institutional buyers" in reliance on the
exemption from registration under Rule 144A and (2) outside the United States to
certain non-United States persons in offshore transactions in reliance on Rule
904 of Regulation S under the Securities Act. The Notes and the shares of common
stock issuable upon conversion constitute "restricted securities" within the
meaning of Rule 144. Our Confidential Offering Memorandum and related offering
documents and agreements imposed certain restrictions on the resale or other
transfer of the Notes and shares necessary for the availability of the
exemptions from registration under the Securities Act referred to above. In
accordance with the terms of the Note Purchase Agreement, the Company intends to
file not later than January 18, 2001, a registration statement on Form S-3 under
the Securities Act to register the Notes and shares for resale by the holders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement Plan of Merger by and among Manugistics Group, Inc., Talus
Solutions, Inc. and Manu Acquisition Corp. dated September 21, 2000.
(Incorporated by reference to the current report on Form 8-K/A filed by
the Company on October 11, 2000).
4.1 Purchase Agreement dated October 16, 2000, between Deutsche Bank
Securities,Inc.,(as representative of the initial purchasers) and
Manugistics Group, Inc.
4.2 Indenture dated as of October 20, 2000, between Manugistics Group, Inc.,
and State Street Bank and Trust Company.
4.3 Registration Rights Agreement dated as of October 20, 2000, and Deutsche
Bank Securities Inc., and Banc of America Securities LLC.
10.46 Offer letter dated November 21, 2000, between Manugistics, Inc. and Dr.
Robert Phillips.
10.47 Employment Agreement dated October 16, 2000, between the Company and
Gregory Cudahy (Incorporated by reference to the Company's registration
statement Form S-8 filed by the Company on December 22, 2000).
10.48 Stock Option Agreement dated October 16, 2000, between the Company and
Gregory Cudahy.
10.49 Lease Agreement dated December 19, 2000, between the Company and DANAC
Corporation.
(b) Reports on Form 8-K
1. On September 22, 2000 we filed a Current Report on Form 8-K reporting our
issuance of a press release on September 21, 2000 announcing that we had
signed an agreement to acquire Talus Solutions, Inc. in a tax-free
stock-for-stock merger.
2. On October 10, 2000 we filed a Current Report on Form 8-K/A setting forth
certain additional information relating to the acquisition of Talus
Solutions, Inc.
3. On October 11, 2000, we filed a Current Report on Form 8-K to report that
we had announced our intent to issue convertible subordinated notes due
2007 in a private placement.
4. On October 11, 2000 we filed a Current Report on Form 8-K/A including the
merger agreement between the Company and Talus Solutions, Inc.
5. On October 20, 2000, we filed a Current Report on Form 8-K reporting our
issuance of two press releases. On October 17, 2000, we announced the
placement of $200 million of its 5% convertible subordinated notes due
2007. On October 20, 2000, we announced the completion of the private
placement of the notes.
6. On November 1, 2000, we filed a Current Report on Form 8-K to report our
issuance of a press release on October 31, 2000, announcing that we had
issued an additional $50 million of 5% convertible subordinated notes due
2007.
7. On November 2, 2000, we filed a Current Report on Form 8-K to report the
share transfer restriction agreements with principals of Talus Solutions,
Inc.
8. On November 8, 2000, we filed a Current Report on Form 8-K reporting our
issuance of a press release on November 8, 2000, announcing that our Board
of Directors had approved a two-for-one split of the Company's outstanding
shares of common stock.
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9. On November 28, 2000, we filed a Current Report on Form 8-K reporting our
issuance of a press release on November 21, 2000, announcing that the our
founder and Chairman of our Board of Directors, William M. Gibson, plans
to retire at the end of the Company's fiscal year, February 28, 2001.
10. On December 7, 2000, we filed a Current Report on Form 8-K reporting our
issuance of a press release on December 6, 2000, announcing that Richard
F. Bergmann had been named as President of the Company.
11. On December 8, 2000, we filed a Current Report on Form 8-K reporting our
issuance of a press release on December 7, 2000, announcing that on
November 29, 2000, we filed a lawsuit against VirtualFund.com, Inc.,
alleging that VirtualFund.com is in anticipatory breach of its obligations
under a software license agreement among the Company and VirtualFund.com
Inc. and its affiliates.
12. On December 21, 2000, we filed a Current Report on Form 8-K reporting our
issuance of our regularly scheduled press release on December 19, 2000,
announcing earnings for the three month and nine month periods ended
November 30, 2000. In addition, the company announced that the then
pending acquisition of Talus Solutions, Inc., was scheduled to close on
December 21, 2000.
13. On December 22, 2000, we filed a Current Report on Form 8-K reporting our
issuance of a press release on December 22, 2000, reporting the completion
of its previously announced acquisition of Talus Solutions, Inc. The
Company also announced the appointment of Esther Dyson as a Class I
director of the Company and the appointment of Steven A. Denning as a
Class II director of the Company.
14. On January 4, 2001, we filed a Current Report on Form 8-K reporting the
acquisition (previously reported on December 21, 2000) of the then
outstanding capital stock of Talus Solutions, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Manugistics
Group, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MANUGISTICS GROUP, INC.
(Registrant)
Date: January 16, 2001 By: /s/ Gregory J. Owens
---------------------
Gregory J. Owens
Chief Executive Officer
/s/ Raghavan Rajaji
-------------------
Raghavan Rajaji
Executive Vice President
and Chief Financial Officer
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