- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission File Number: 0-23999
MANHATTAN ASSOCIATES, INC.
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-2373424
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2300 WINDY RIDGE PARKWAY, SUITE 700 30339
Atlanta, Georgia (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 955-7070
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
------- ------
The number of shares of the issuer's class of capital stock as of November 12,
1998, the latest practicable date, is as follows: 23,719,174 shares of Common
Stock, $0.01 par value per share.
- --------------------------------------------------------------------------------
Page 1 of 20
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance
Sheets as of September 30, 1998
(unaudited) and December 31, 1997................... 3
Condensed Consolidated Statements
of Income for the three months
ended September 30, 1998 and
1997 (unaudited) and for the
nine months ended September 30,
1998 and 1997 (unaudited)........................... 4
Condensed Consolidated Statements
of Cash Flows for the nine
months ended September 30, 1998
and 1997 (unaudited)................................ 5
Notes to Condensed Consolidated
Financial Statements (unaudited).................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 10
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................... 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............. 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...................................... 18
ITEM 5. OTHER INFORMATION..................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 18
SIGNATURES..................................................... 19
Page 2 of 20
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents..................................................... $25,835 $ 3,194
Short-term investments........................................................ 9,005 --
Accounts receivable, net of allowance for doubtful accounts of $1,392 and
$970 at September 30, 1998 and December 31, 1997, respectively............... 17,839 9,242
Deferred taxes................................................................ 423 --
Prepaid expenses and other current assets..................................... 641 384
------------ ------------
Total current assets....................................................... 53,743 12,820
Property and equipment, net..................................................... 5,735 1,943
Deferred taxes.................................................................. 147 --
Intangible and other assets..................................................... 1,535 243
------------ ------------
Total assets............................................................... $61,160 $15,006
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities...................................... $ 7,458 $ 3,687
Note payable to stockholder................................................... -- 1,019
Deferred revenue.............................................................. 2,541 1,846
------------ ------------
Total current liabilities.................................................. 9,999 6,552
Stockholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized, no shares issued
or outstanding at September 30, 1998 and December 31, 1997................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized, 23,706,674 and
20,000,008 shares issued and outstanding at September 30, 1998 and
December 31, 1997, respectively.............................................. 237 200
Additional paid-in capital.................................................... 51,352 1,459
Retained earnings............................................................. 640 7,458
Accumulated foreign currency translation adjustment........................... (4) --
Deferred compensation......................................................... (1,064) (663)
------------ ------------
Total stockholders' equity................................................. 51,161 8,454
------------ ------------
Total liabilities and stockholders' equity............................... $61,160 $15,006
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3 of 20
Item 1. Financial Statements (continued)
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- ------------ --------------
Revenue:
Software license..................................... $ 3,898 $1,981 $ 8,899 $ 5,308
Services............................................. 9,830 3,820 22,283 9,795
Hardware............................................. 2,860 3,081 10,870 7,791
-------------- --------------- ------------ --------------
Total revenue..................................... 16,588 8,882 42,052 22,894
Cost of revenue:
Software license..................................... 372 122 612 316
Services............................................. 4,312 1,691 10,208 4,000
Hardware............................................. 2,038 2,230 8,042 5,827
-------------- --------------- ------------ --------------
Total cost of revenue............................. 6,722 4,043 18,862 10,143
-------------- --------------- ------------ --------------
Gross margin........................................... 9,866 4,839 23,190 12,751
Operating expenses:
Research and development............................. 2,058 791 5,280 1,881
Acquired research and development.................... -- -- 1,602 --
Sales and marketing.................................. 2,692 989 6,013 2,409
General and administrative........................... 1,884 981 4,381 1,968
-------------- --------------- ------------ --------------
Total operating expenses.......................... 6,634 2,761 17,276 6,258
-------------- --------------- ------------ --------------
Operating income....................................... 3,232 2,078 5,914 6,493
Other income, net...................................... 442 9 734 48
-------------- --------------- ------------ --------------
Income before income taxes............................. 3,674 2,087 6,648 6,541
Income tax expense (benefit)
Tax provision as a `C' Corporation.................... 1,361 -- 2,063 --
Deferred tax adjustment............................... -- -- (316) --
-------------- -------------- ------------ --------------
Historical net income.................................. $ 2,313 $2,087 $ 4,901 $ 6,541
============== ============== ============ ==============
Historical basic net income per share.................. $ 0.10 $ 0.10 $0.22 $ 0.33
============== ============== ============ ==============
Historical diluted net income per share................ $ 0.09 $ 0.10 $0.19 $ 0.32
============== ============== ============ ==============
Income before pro forma income taxes................... 3,674 2,087 6,648 6,541
Pro forma income taxes................................. 1,361 757 2,978 2,372
-------------- -------------- ------------ --------------
Pro forma net income................................... $ 2,313 $1,330 $ 3,670 $ 4,169
============== ============== ============ ==============
Pro forma basic net income per share................... $ 0.10 $ 0.07 $0.17 $ 0.21
============== ============== ============ ==============
Pro forma diluted net income per share................. $ 0.09 $ 0.06 $0.14 $ 0.20
============== ============== ============ ==============
See accompanying Notes to Condensed Consolidated Financial Statements
Page 4 of 20
ITEM 1. Financial Statements (continued)
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------------------------------
1998 1997
---------------------- -----------------------
OPERATING ACTIVITIES:
Pro forma net income................................................. $ 3,670 $ 4,169
Adjustments to reconcile pro forma net income to net cash provided
by operating activities:
Pro forma income taxes............................................. 1,231 2,372
Depreciation and amortization...................................... 1,043 305
Stock compensation................................................. 204 75
Acquired research and development.................................. 1,602 --
Deferred income taxes.............................................. (528) --
Accrued interest on note payable to stockholder.................... 34 37
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... (8,503) (4,182)
Other assets...................................................... (501) (90)
Accounts payable and accrued liabilities.......................... 3,350 1,685
Deferred revenue.................................................. 490 757
---------------------- -----------------------
Net cash provided by operating activities............................ 2,092 5,128
INVESTING ACTIVITIES:
Purchase of property and equipment................................. (4,582) (889)
Purchase of short-term investments................................. (9,005) --
Payments in connection with the acquisition of Performance
Analysis Corporation, net of cash acquired....................... (1,351) --
---------------------- -----------------------
Net cash used in investing activities................................ (14,938) (889)
FINANCING ACTIVITIES:
Distributions to stockholders...................................... (11,720) (4,842)
Borrowings under note payable to stockholder....................... 900 --
Repayment of note payable to stockholder........................... (1,953) --
Proceeds from issuance of common stock............................. 48,258 --
---------------------- -----------------------
Net cash provided by (used in) financing activities.................. 35,485 (4,842)
Foreign currency impact on cash.................................... 2 --
---------------------- -----------------------
Net increase (decrease) in cash and cash equivalents................. 22,641 (603)
Cash and cash equivalents at beginning of period..................... 3,194 3,199
---------------------- -----------------------
Cash and cash equivalents at end of period........................... $ 25,835 $ 2,596
====================== =======================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Issuance of common stock in connection with acquisition of
Performance Analysis Corporation................................. $ 1,067 $ --
====================== =======================
Cash paid for income taxes......................................... $ 2,118 $ --
====================== =======================
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 5 of 20
MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1998
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
these consolidated financial statements contain all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the
financial position at September 30, 1998, the results of operations for the
three month and nine month periods ended September 30, 1998 and 1997 and changes
in cash flows for the nine month periods ended September 30, 1998 and 1997. The
interim results for the three month and nine month periods ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
year. These statements should be read in conjunction with the Company's
financial statements for the year ended December 31, 1997, as filed in its
Prospectus dated April 23, 1998.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
3. COMPLETION OF INITIAL PUBLIC OFFERING AND CONVERSION
On April 23, 1998, the Company completed its initial public offering (the
"Offering") of its $.01 par value per share common stock (the "Common Stock").
The Company sold 3,500,000 shares of Common Stock, excluding 525,000 shares sold
by certain selling stockholders as part of the underwriters' over-allotment, for
$52,500,000 less issuance costs of approximately $5,242,000.
In connection with the Offering, the assets and liabilities of Manhattan
Associates, LLC ("Manhattan LLC") were contributed to the Company in exchange
for Common Stock of the Company (the "Conversion"). Manhattan LLC then
distributed the Common Stock of the Company received to its stockholders. Prior
to the completion of the Offering, Manhattan LLC distributed all undistributed
earnings, calculated on a tax basis, to the stockholders of Manhattan LLC. The
amount distributed subsequent to December 31, 1997 and prior to completion of
the Offering was approximately $11,720,000.
Page 6 of 20
4. REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted Statement of Position No.
97-2, "Software Revenue Recognition" ("SOP 97-2"), that supersedes Statement of
Position No. 91-1, "Software Revenue Recognition." Under SOP 97-2, the Company
recognizes software license revenue when the following criteria are met: (1) a
signed contract is obtained; (2) shipment of the product has occurred; (3) the
license fee is fixed and determinable; (4) collectibility is probable; and (5)
remaining obligations under the license agreement are insignificant. Consulting
services are generally billed on an hourly basis and revenue is recognized as
the work is performed. Maintenance revenue from ongoing customer support is
billed in advance for a one year period and recorded as revenue ratably over the
billing period. Hardware revenue is billed and recognized upon shipment. The
adoption of SOP 97-2 did not have a significant impact on the Company's
financial statements for the three month or nine month periods ended September
30, 1998.
5. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of "comprehensive income"
and its components. Comprehensive income for the Company consists of net income
and foreign currency translation adjustments. Total historical comprehensive
income (in thousands of dollars) was $2,309 and $2,087 for the three-month
periods ended September 30, 1998 and 1997, respectively. Total historical
comprehensive income (in thousands of dollars) was $4,897 and $6,541 for the
nine-month periods ended September 30, 1998 and 1997, respectively.
6. NOTE PAYABLE TO STOCKHOLDER
At December 31, 1997, the Company had approximately $1 million outstanding
under a Grid Promissory Note (the "Note") payable to the Company's majority
stockholder. In February 1998, the Company borrowed an additional $900,000
pursuant to the Note. The Company repaid the Note, together with accrued
interest of approximately $131,000 during the second quarter of 1998.
7. EARNINGS PER SHARE
Subsequent to the completion of the initial public offing, historical basic
net income per share is calculated using the weighted average number of shares
outstanding during the period. Historical diluted net income per share is
computed on the basis of the weighted average number of common shares
outstanding plus the dilutive effect of outstanding stock options using the
"treasury stock" method.
Prior to the completion of the initial public offering, pro forma basic net
income per share was computed using pro forma net income divided by (i) the
weighted average number of shares of Common Stock outstanding ("Weighted
Shares") for the period presented and (ii) pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin 1B.3, the number of shares that,
at the assumed public offering price, would yield proceeds in the amount
necessary to pay the stockholder distribution discussed in Note 3 that is not
covered by the earnings for the one year period through the date of distribution
("Distribution Shares"). Pro forma diluted net income per share was computed
using pro forma net income divided by (i) Weighted Shares, (ii) the Distribution
Shares and (iii) the treasury stock method effect of common equivalent shares
("CES's") outstanding for each period presented.
Page 7 of 20
No adjustment is necessary for historical and pro forma net income for net
income per share presentation. The following is a reconciliation of the shares
used in the computation of net income per share:
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
----------------------------------- --------------------------------
Basic Diluted Basic Diluted
--------------- --------------- -------------- --------------
Historical Historical
----------------------------------- --------------------------------
(in thousands)
Weighted Share............................ 23,707 23,707 20,000 20,000
Effect of CES's........................... -- 3,292 -- 583
--------------- --------------- -------------- --------------
23,707 26,999 20,000 20,583
=============== =============== ============== ==============
Basic Diluted Basic Diluted
--------------- --------------- -------------- --------------
Pro Forma Pro Forma
----------------------------------- --------------------------------
Weighted Shares........................... 23,707 23,707 20,000 20,000
Distribution Shares....................... -- -- 90 90
Effect of CES's........................... -- 3,292 -- 583
--------------- --------------- -------------- --------------
23,707 26,999 20,090 20,673
=============== =============== ============== ==============
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
----------------------------------- --------------------------------
Basic Diluted Basic Diluted
--------------- --------------- -------------- --------------
Historical Historical
----------------------------------- --------------------------------
(in thousands)
Weighted Share............................ 22,222 22,222 20,000 20,000
Effect of CES's........................... -- 3,284 -- 491
--------------- --------------- -------------- --------------
22,222 25,506 20,000 20,491
=============== =============== ============== ==============
Basic Diluted Basic Diluted
--------------- --------------- -------------- --------------
Pro Forma Pro Forma
----------------------------------- --------------------------------
Weighted Shares........................... 22,222 22,222 20,000 20,000
Shares to Minority Holder................. -- 17 -- --
Distribution Shares....................... -- 30 90 90
Effect of CES's........................... -- 3,284 -- 491
--------------- --------------- -------------- --------------
22,222 25,553 20,090 20,581
=============== =============== ============== ==============
Page 8 of 20
8. INCOME TAXES
Prior to the Conversion, the Company elected to report as a limited
liability company that was treated as a partnership for income tax purposes (see
Note 3), and as a result, the Company was not subject to federal and state
income taxes. After the Conversion, the Company became subject to federal and
state income taxes. In connection with the Conversion, the Company recognized a
one-time benefit in April 1998 of $316,000 by recording the asset related to the
future reduction of income tax payments due to temporary differences between the
recognition of income for financial statements and income tax regulations. Pro
forma net income amounts discussed herein include provisions for income taxes on
a pro forma basis as if the Company were liable for federal and state income
taxes as a taxable corporate entity throughout the periods presented. Pro forma
income tax provisions reflect the Company's anticipated effective annual tax
rate of 36% for the nine month period ended September 30, 1998 and the three and
nine month periods ended September 30, 1997. For the three month period ended
September 30, 1998, the pro forma income tax provision equals the historical
income tax provision. The historical income tax provision reflects the
Company's anticipated effective annual tax rate of 37% for the three month
period ended September 30, 1998.
9. ACQUISITIONS
In September 1998, the Company entered into an agreement to acquire DCMS
(R), the Distribution Center Management Systems software product and related
assets from Kurt Salmon Associates for approximately $2.0 million and additional
consideration. The Company completed the DCMS acquisition in October 1998 and
the DCMS acquisition will be accounted for as a purchase.
Page 9 of 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company provides information technology solutions for distribution
centers that are designed to enable the efficient movement of goods through the
supply chain. The Company's solutions are designed to optimize the receipt,
storage and distribution of inventory and the management of equipment and
personnel within a distribution center, and to meet the increasingly complex
information requirements of manufacturers, distributors and retailers. The
Company's solutions consist of software, including PkMS, a comprehensive and
modular software system; services, including design, configuration,
implementation, training and support; and hardware. The Company currently
provides solutions to manufacturers, distributors and retailers primarily in the
apparel, consumer products, food service and grocery markets.
Effective January 1, 1998, the Company adopted Statement of Position No.
97-2, "Software Revenue Recognition" ("SOP 97-2"), that supersedes Statement of
Position No. 91-1, "Software Revenue Recognition." Under SOP 97-2, the Company
recognizes software license revenue when the following criteria are met: (1) a
signed contract is obtained; (2) shipment of the product has occurred; (3) the
license fee is fixed and determinable; (4) collectibility is probable; and (5)
remaining obligations under the license agreement are insignificant. Consulting
services are generally billed on an hourly basis and revenue is recognized as
the work is performed. Maintenance revenue from ongoing customer support is
billed in advance for a one year period and recorded as revenue ratably over the
billing period. Hardware revenue is billed and recognized upon shipment. The
adoption of SOP 97-2 did not have a significant impact on the Company's
financial statements for the three month period ended September 30, 1998.
Prior to the Conversion, the Company elected to report as a limited
liability company that was treated as a partnership for income tax purposes, and
as a result, the Company was not subject to federal and state income taxes. Pro
forma net income amounts discussed herein include additional provisions for
income taxes on a pro forma basis as if the Company was liable for federal and
state income taxes as a taxable corporate entity throughout the periods
presented. The pro forma tax provision is calculated by applying the Company's
statutory tax rate to pretax income, adjusted for permanent tax differences.
The Company's status as a limited liability company terminated immediately prior
to the effectiveness of the Offering, and the Company will thereafter be taxed
as a business corporation. See Notes to Condensed Consolidated Financial
Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997
Revenue
Total revenue increased 87% to $16.6 million for the three months ended
September 30, 1998 from $8.9 million for the three months ended September 30,
1997. Total revenue consists of software license revenue, revenue derived from
consulting, maintenance and other services and revenue from the sale of
hardware.
Software License. Software license revenue increased 97% to $3.9 million
for the three months ended September 30, 1998 from $2.0 million for the three
months ended September 30, 1997. The increase in revenue from software licenses
was primarily due to an increase in the number of licenses of the Company's PkMS
product.
Page 10 of 20
Services. Services revenue increased 157% to $9.8 million for the three
months ended September 30, 1998 from $3.8 million for the three months ended
September 30, 1997. The increase in revenue from services was principally due
to the increased demand for these services resulting from the increased demand
for the Company's PkMS product.
Hardware. Hardware revenue decreased 7% to $2.9 million for the three
months ended September 30, 1998 from $3.1 million for the three months ended
September 30, 1997. The decrease in revenue from hardware was principally a
result of a higher proportional demand for hardware products during the three
months ended September 30, 1997 as compared to the three months ended September
30, 1998.
Cost of Revenue
Cost of Software License. Cost of software license revenue consists of the
costs of software reproduction and delivery, media, packaging, documentation and
other related costs and the amortization of purchased software. Cost of
software license revenue increased to $372,000, or 10% of software license
revenue, for the three months ended September 30, 1998 from $122,000, or 6% of
software license revenue, for the three months ended September 30, 1997. Cost
of software license revenue increased principally due to the amortization of
purchased software from the PAC acquisition and due to an increase in royalties
associated with the sale of certain products developed by third parties.
Cost of Services. Cost of services revenue consists primarily of
consultant salaries and other personnel-related expenses incurred in system
implementation projects and software support services. Cost of services revenue
increased to $4.3 million, or 44% of services revenue, for the three months
ended September 30, 1998 from $1.7 million, or 44% of services revenue, for the
three months ended September 30, 1997. The increase in cost of services revenue
was primarily due to increased personnel as a result of the increased demand for
services.
Cost of Hardware. Cost of hardware revenue decreased to $2.0 million, or
71% of hardware revenue, for the three months ended September 30, 1998 from $2.2
million, or 72% of hardware revenue, for the three months ended September 30,
1997. The decrease in the cost of hardware as a percentage of hardware revenue
is principally due to an increase in the percentage of hardware products sold
with relatively higher gross margins during the three month period ended
September 30, 1998 as compared to sales during the three month period ended
September 30, 1997.
Operating Expenses
Research and Development. Research and development expenses principally
consist of salaries and other personnel-related costs. The Company's research
and development expenses increased by 160% to $2.1 million, or 12% of total
revenue, for the three months ended September 30, 1998 from $791,000, or 9% of
total revenue, for the three months ended September 30, 1997. The increase in
research and development expenses resulted from an increase in the number of
research and development personnel during the three months ended September 30,
1998 as compared to the three months ended September 30, 1997. Significant
product development efforts include the continued development of PkMS, the
development of a client/server version of PkMS and, to a lesser extent, the
continued development of SLOT-IT and the development of the Windows NT based
version of SLOT-IT. The Company believes that a continued commitment to product
development will be required for the Company to remain competitive and expects
the dollar amount of research and development expenses to continue to increase
in the near future.
Page 11 of 20
Sales and Marketing. Sales and marketing expenses include salaries,
commissions and other personnel-related costs, travel expenses, advertising
programs and other promotional activities. Sales and marketing expenses
increased by 172% to $2.7 million, or 16% of total revenue, for the three months
ended September 30, 1998 from $989,000, or 11% of total revenue, for the three
months ended September 30, 1997. The increase in sales and marketing expenses
was the result of additional sales and marketing personnel and expanded
marketing program activities.
General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs of executive, financial
and human resources and administrative personnel, as well as facilities, legal,
insurance, accounting and other administrative expenses. General and
administrative expenses increased by 92% to $1.9 million, or 11% of total
revenue, for the three months ended September 30, 1998 from $981,000, or 11% of
total revenue, for the three months ended September 30, 1997. The increase in
general and administrative expenses was principally due to increased personnel
and other administrative expenses necessary to support the Company's growth.
Income Taxes
Pro Forma Provision for Income Taxes. The pro forma provision for income
taxes was $1.4 million for the three months ended September 30, 1998, as
compared to $757,000 for the three months ended September 30, 1997. The
increase in the pro forma provision for income taxes is a result of an increase
in income before income taxes for the three months ended September 30, 1998
compared to the income for the three months ended September 30, 1997.
Earnings per Share
Pro Forma Net Income per Share. Pro forma net income was $2.3 million, or
$0.09 per diluted share, for the three months ended September 30, 1998, compared
to pro forma net income of $1.3 million, or $0.06 per diluted share, for the
three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenue
Total revenue increased 84% to $42.1 million for the nine months ended
September 30, 1998 from $22.9 million for the nine months ended September 30,
1997. Total revenue consists of software license revenue, revenue derived from
consulting, maintenance and other services and revenue from the sale of
hardware.
Software License. Software license revenue increased 68% to $8.9 million
for the nine months ended September 30, 1998 from $5.3 million for the nine
months ended September 30, 1997. The increase in revenue from software licenses
was primarily due to an increase in the number of licenses of the Company's PkMS
product and, to a lesser extent, new license revenue as a result of the
acquisition of PAC.
Services. Services revenue increased 127% to $22.3 million for the nine
months ended September 30, 1998 from $9.8 million for the nine months ended
September 30, 1997. The increase in revenue from services was principally due
to the increased demand for these services resulting from the increased demand
for the Company's PkMS product.
Hardware. Hardware revenue increased 40% to $10.9 million for the nine
months ended September 30, 1998 from $7.8 million for the nine months ended
September 30, 1997. The increase in revenue from hardware was principally due
to the increased demand for the Company's PkMS product.
Page 12 of 20
Cost of Revenue
Cost of Software License. Cost of software license revenue consists of the
costs of software reproduction and delivery, media, packaging, documentation and
other related costs and the amortization of purchased software. Cost of
software license revenue increased to $612,000, or 7% of software license
revenue, for the nine months ended September 30, 1998 from $316,000, or 6% of
software license revenue, for the nine months ended September 30, 1997. Cost of
software license revenue increased principally due to the amortization of
purchased software from the PAC acquisition and due to an increase in royalties
associated with the sale of certain products developed by third parties.
Cost of Services. Cost of services revenue consists primarily of
consultant salaries and other personnel-related expenses incurred in system
implementation projects and software support services. Cost of services revenue
increased to $10.2 million, or 46% of services revenue, for the nine months
ended September 30, 1998 from $4.0 million, or 41% of services revenue, for the
nine months ended September 30, 1997. The increase in cost of services revenue
was primarily due to increased personnel as a result of increased demand for
services. The increase in cost of services revenue as a percentage of services
revenue is principally due to increased training and other costs related to the
increase in services personnel.
Cost of Hardware. Cost of hardware revenue increased to $8.0 million, or
74% of hardware revenue, for the nine months ended September 30, 1998 from $5.8
million, or 75% of hardware revenue, for the nine months ended September 30,
1997. The decrease in the cost of hardware as a percentage of hardware revenue
is principally due to an increase in the percentage of hardware products sold
with relatively higher gross margins as compared to the nine months ended
September 30, 1997.
Operating Expenses
Research and Development. Research and development expenses principally
consist of salaries and other personnel-related costs. The Company's research
and development expenses increased by 181% to $5.3 million, or 13% of total
revenue, for the nine months ended September 30, 1998 from $1.9 million, or 8%
of total revenue, for the nine months ended September 30, 1997. The increase in
research and development expenses resulted from an increase in the number of
research and development personnel during the nine months ended September 30,
1998 as compared to the nine months ended September 30, 1997.
Acquired Research and Development. In February 1998, the Company purchased
all of the outstanding stock of PAC for approximately $2.2 million in cash and
106,666 shares of the Company's Common Stock valued at $10.00 per share. The
acquisition has been accounted for as a purchase. In connection with this
acquisition, approximately $1.6 million of the purchase price was allocated to
acquired research and development and expensed during the first quarter of 1998.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions and other personnel-related costs, travel expenses, advertising
programs and other promotional activities. Sales and marketing expenses
increased by 150% to $6.0 million, or 14% of total revenue, for the nine months
ended September 30, 1998 from $2.4 million, or 11% of total revenue, for the
nine months ended September 30, 1997. The increase in sales and marketing
expenses was the result of additional sales and marketing personnel and expanded
marketing program activities.
Page 13 of 20
General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs of executive, financial
and human resources and administrative personnel, as well as facilities, legal,
insurance, accounting and other administrative expenses. General and
administrative expenses increased by 123% to $4.4 million, or 10% of total
revenue, for the nine months ended September 30, 1998 from $2.0 million, or 9%
of total revenue, for the nine months ended September 30, 1997. The increase in
general and administrative expenses was principally due to increased personnel
and other administrative expenses necessary to support the Company's growth.
Income Taxes
Pro Forma Provision for Income Taxes. The pro forma provision for income
taxes was $3.0 million for the nine months ended September 30, 1998, as compared
to $2.4 million for the nine months ended September 30, 1997.
Earnings per Share
Pro Forma Net Income per Share. Pro forma net income, excluding the effect
of a one-time acquired research and development charge of $1.6 million, was $5.3
million, or $0.21 per diluted share, for the nine months ended September 30,
1998, compared to pro forma net income of $4.2 million, or $0.20 per diluted
share, for the nine months ended September 30, 1997. Including the effect of
the one-time acquired research and development charge, the Company's pro forma
net income was $3.7 million, or $0.14 per diluted share, for the nine months
ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
cash generated from operations and an initial public offering in April 1998 (the
"Offering"). In addition, the Company has also borrowed money from its majority
stockholder. As of September 30, 1998, the Company had $34.8 million in cash,
cash equivalents and short-term investments.
The Company's operating activities provided cash of $2.1 million for the
nine months ended September 30, 1998 and $5.1 million for the nine months ended
September 30, 1997. Cash from operating activities arose principally from the
Company's profitable operations and was utilized for working capital purposes,
principally increases in accounts receivable. The increase in accounts
receivable was primarily the result of the Company's continued revenue growth.
Cash used for investing activities was approximately $14.9 million for the
nine months ended September 30, 1998 and $889,000 for the nine months ended
September 30, 1997. The Company's use of cash for the nine months ended
September 30, 1998 was primarily for the purchase of short term investments, the
acquisition of PAC, and the purchase of capital equipment, such as computer
equipment and furniture and fixtures, to support the Company's growth.
Cash provided by financing activities was approximately $35.5 million for
the nine months ended September 30, 1998. Cash used for financing activities
was approximately $4.8 million for the nine months ended September 30, 1997.
The principal source of cash provided by financing activities for the nine
months ended September 30, 1998 was additional borrowings under a Grid
Promissory Note with the majority stockholder and proceeds from the issuance of
Common Stock, partially reduced by distributions to the Company's stockholders
prior to the Offering and the repayment of the note payable to the majority
stockholder.
Page 14 of 20
The Company entered into a line of credit with Silicon Valley Bank to fund
its distribution to the Company's stockholders prior to the Offering and to fund
its continuing working capital needs. The line of credit does not contain any
conditions or restrictive covenants that would materially affect the Company's
business, financial condition or results of operations. In April 1998, the
Company borrowed approximately $7 million under the line of credit. The Company
repaid the borrowings and accrued interest with the proceeds from the Offering.
In April 1998, the Company completed the Offering, in which the Company
received net proceeds of approximately $47.3 million after deducting
underwriting discounts and offering expenses. The Company applied a portion of
the net proceeds to repay all of the Company's outstanding indebtedness to
Silicon Valley Bank ($7.0 million) and a note payable to the Company's Chairman
of the Board, Chief Executive Officer and President ($1.9 million). Prior to
the Offering, the Company made payments of $11.7 million in distributions to
stockholders. The balance of the net proceeds of the Offering (approximately
$34 million) have been and will continue to be utilized for general corporate
purposes. Such purposes may also include possible acquisitions of, or
investments in, businesses and technologies that are complementary to those of
the Company. There can be no assurance that the remaining net proceeds from the
Offering will be sufficient to pay for future acquisitions, planned research and
development projects or other growth-oriented activities, which could require
the Company to incur additional debt or other financing that could impose
restrictive covenants and other terms having a material adverse effect on the
Company's business, financial condition and results of operations.
The Company anticipates that existing cash and cash equivalents will be
adequate to meet its cash requirements for the next twelve months.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded to
accept only two digit entries in date code fields. Beginning in the year 2000,
many of these systems will need to be modified to accept four digit entries or
otherwise distinguish twenty-first century dates from twentieth century dates.
As a result, over the next year and one quarter, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements.
In September 1998, the Company formed its Year 2000 Readiness Committee to
oversee the Company's Year 2000 Readiness Assessment Program, which includes
establishing the Company's standard for Year 2000 Readiness, designing test
parameters for its products, IT and non-IT systems, overseeing the Company's
remediation program, including establishing priorities for remediation and
allocating available resources, overseeing the communication of the status of
the Company's efforts to its customers, and establishing contingency plans in
the event the Company experiences Year 2000 disruptions.
The Company describes its products as "Year 2000 Ready" when they have been
successfully tested using the procedure proscribed in its Readiness Assessment
Program. This procedure defines the criteria used to design tests that seek to
determine the Year 2000 readiness of a product. Under the Company's criteria, a
software product is Year 2000 Ready if it: (i) will completely and accurately
address, present (in a two-digit format), produce, store and calculate data
involving dates beginning with January 1, 2000 and will not produce abnormally
ending or incorrect results involving such dates as used in any forward or
regression date based functions; and (ii) will provide that all "date"-related
functionalities and data fields include the indication of century and
millennium, whether shown on-screen or internally noted, and will perform
calculations which involve a four-digit year field, provided that the data input
into the Company's software from any other source has the same Year 2000
capabilities and is in a format which is compatible with the Company's software.
Page 15 of 20
Because the latest versions of the Company's products are designed to be Year
2000 compliant, the Company's Year 2000 remediation efforts with respect to its
products have focused on determining the compliance of the Company's earlier
software products as implemented in the Company's installed customer base, as
well as the impact of any non-compliance on the Company and its customers. The
Company offers its customers the alternatives of implementing a modification to
non-compliant legacy versions of its software or migrating to a later version of
the software which is Year 2000 Ready. Because the Company's software is often
marketed as an integrated system which includes hardware and operating or
interface software from third parties over which it can assert little control,
the Year 2000 Readiness Committee is evaluating the Year 2000 Readiness of such
systems and their vendors and the risks associated with the failure of such
third parties to adequately address the Year 2000 issue.
The Company's Year 2000 Readiness Committee is also addressing the Company's
Year 2000 readiness with respect to both information technology ("IT") and non-
IT systems on which the Company's operations rely. As a result of its recent
rapid growth, the Company has within the last 18 months or expects to prior to
year-end 1999 replace or significantly upgrade substantially all of its core IT
systems, including those related to sales, customer service, human resources,
finance and other enterprise resource planning functions. The Company believes
that the upgraded systems are all Year 2000 Ready and has received assurances
from the vendors of such systems to that effect. The Company is reviewing its
remaining IT systems for Year 2000 Readiness, and expects to modify, replace or
discontinue the use of non-compliant systems before the end of 1999. In
addition, the Company is in the process of evaluating its Year 2000 readiness
with respect to non-IT systems, including systems embedded in the Company's
communications and office facilities. In many cases these facilities have been
recently upgraded or are scheduled to be upgraded before year-end 1999 as a
result of the Company's recent growth. Finally, because the Company relies upon
relationships with third parties such as providers telecommunications and
similar infrastructure services which it can assert little control, the Year
2000 Readiness Committee is also assessing the risks associated with the
failure of such third parties to adequately address Year 2000 issues.
The Company does not currently believe that the effects of any Year 2000 non-
compliance in the Company's installed base of software will result in a material
adverse effect on the Company's business, financial condition or results of
operations. However, the Company's investigation is in its preliminary stages,
and no assurance can be given that the Company will not be exposed to potential
claims resulting from system problems associated with the century change. There
can also be no assurance that the Company's software products that are designed
to be Year 2000 compliant contain all necessary date code changes. In addition,
Year 2000 non-compliance in the Company's internal IT systems or certain non-IT
systems on which its operations rely or by the Company's business partners may
have an adverse impact on the Company's business, financial condition or results
of operations.
The majority of the work performed for the Company's Year 2000 Readiness
Assessment Program has been completed by the Company's staff. The total costs
for completing the Year 2000 Readiness Assessment Program, including
modifications to the Company's software products, is estimated to be between
$0.5 million and $1.0 million, funded through the Company's internal operating
cash flows. This cost does not include the cost for new software, or for
modifications to existing software, for the Company's core IT and non-IT
systems, as these projects were not accelerated due to the Year 2000 issue.
The Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues in a variety of ways. Many
companies are expending significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products such as those offered by
the Company. Potential
Page 16 of 20
customers may also choose to defer purchasing Year 2000 compliant products until
they believe it is absolutely necessary, thus potentially resulting in stalled
market sales within the industry. Conversely, Year 2000 issues may cause other
companies to accelerate purchases, thereby causing an increase in short-term
demand and a consequent decrease in long-term demand for software products.
Additionally, Year 2000 issues could cause a significant number of companies,
including current Company customers, to reevaluate their current software needs
and as a result switch to other systems or suppliers. Any of the foregoing
could result in a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's evaluation of its Year 2000 issue includes the development of
contingency plans for business functions that are susceptible to a substantive
risk of disruption resulting from a Year 2000 related event. Because the
Company has not yet identified any business function that is materially at risk
of Year 2000 related disruption, it has not yet developed detailed contingency
plans specific to Year 2000 events for any business function. The Company is
prepared for the possibility, however, that certain business functions may be
hereafter identified as at risk and will develop contingency plans for such
business functions when and if such determinations are made.
FORWARD LOOKING STATEMENTS
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including but not limited to statements related to plans for future
business development activities, anticipated costs of revenues, product mix and
service revenues, research and development and selling, general and
administrative activities, and liquidity and capital needs and resources. Such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements. For further
information about these and other factors that could affect the Company's future
results, please see Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998. Investors are cautioned that any forward
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements.
Page 17 of 20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 5. OTHER INFORMATION.
No events occurred during the quarter covered by the report that would
require a response to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed with this Report:
Exhibit 10.1 Executive Employment Agreement by and among the Company
and Robert Bearden, effective as of August 12, 1998.
Exhibit 27.1 Financial Data Schedule.
(b) Reports to be filed on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
30, 1998.
Page 18 of 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANHATTAN ASSOCIATES,INC.
Date: November 12, 1998 /s/ Alan J. Dabbiere
--------------------
Alan J. Dabbiere
Chairman of the Board, Chief Executive
Officer and President
(Principal Executive Officer)
Date: November 12, 1998 /s/ Michael J. Casey
--------------------
Michael J. Casey
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
Page 19 of 20