UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2002 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)
9715 Key West Avenue, Rockville, Maryland 20850
(Address of principal executive offices) (Zip code)
(301) 255-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.002 par value per share
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 29, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1.1 billion. As of that
date, the number of shares outstanding of the Registrant's common stock was
approximately 69.5 million, based on information provided by the Registrant's
transfer agent.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive Proxy Statement relating to the 2002 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-K.
We anticipate that our Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal year ended
February 28, 2002.
PART I
ITEM 1. BUSINESS.
The disclosures set forth in this annual report are qualified by the sections
captioned "Forward-Looking Statements" and "Factors That May Affect Future
Results" in Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this annual report, and other cautionary
statements set forth elsewhere in this annual report.
OVERVIEW:
We are a leading global provider of Enterprise Profit Optimization(TM) (EPO)
solutions. We provide solutions for supply chain management (SCM), supplier
relationship management (SRM), pricing and revenue optimization (PRO) and
service & parts management (S&PM). Our solutions help companies lower operating
costs, improve customer service, increase revenues, enhance profitability and
accelerate revenue and earnings growth. They do this by creating efficiencies in
both how goods and services are brought to market (supplier relationship
management and supply chain management), how they are sold (pricing and revenue
optimization) and how they are serviced and maintained (S&PM). EPO solutions
provide additional benefits by combining the proven cost-reducing power of SRM,
SCM and S&PM solutions and the revenue-enhancing capacity of PRO solutions.
These solutions integrate pricing, forecasting, and operational planning and
execution to help companies enhance margins across the enterprise and the
extended trading network.
Our SCM solutions help enable companies to plan and execute their supply
chain processes. These processes include manufacturing, distribution and service
operations, and collaboration with a company's extended trading network of
suppliers and customers. Our SRM solutions help improve the activities required
to design, source, and procure goods and to collaborate more effectively with
key suppliers of direct materials. Our PRO solutions help optimize a company's
demand chain, including pricing and promotions to all customers through all
channels, with the aim of balancing the trade-offs between profitability and
other strategic objectives such as market share. Our S&PM solutions help
companies optimize and manage their service and parts operations by effectively
planning and scheduling maintenance programs, parts, materials, tools, manpower
and repair facilities to profitably provide the highest levels of customer
service. We also provide strategic consulting, implementation and customer
support services to our clients as part of our solutions.
Increasing global competition, shortening product life cycles and more
demanding customers have forced businesses to provide improved levels of
customer service while shortening the time it takes to bring their products and
services to market. We were an early innovator in solutions that allow
collaboration among our clients and their customers and suppliers. We focus the
development of our technology on addressing the changing needs of companies in
the markets we serve, including the need to do business in extended trading
networks. We offer solutions to companies in many industries including apparel;
automotive; chemical & energy; communications & high technology; consumer
packaged goods; financial services; food & agriculture; footwear & textiles;
government, aerospace & defense; industrials; life sciences; retail; third-party
logistics; transportation; and travel, transport & hospitality. Our customer
base of approximately 1,200 clients includes large, multinational enterprises
such as 3Com Corporation; Boeing Co.; BP; Brown & Williamson Tobacco Corp.;
Caterpillar Mexico S.A. de C.V.; Cisco Systems Inc.; Coca-Cola Bottling Co.
Consolidated; Compaq Computer Corporation; Delta Air Lines; DuPont; Fairchild
Semiconductor; Ford Motor Company; Harley-Davidson, Inc.; Hormel Foods Corp.;
Levi Strauss & Co.; Nestle; Staples Inc.; Texas Instruments Incorporated; and
Unilever Home & Personal Care, USA; as well as mid-sized enterprises.
The Company was incorporated in Delaware in 1986. Our fiscal year end is
February 28th or 29th. We completed our initial public offering of common stock
in 1993, completed a secondary public offering of common stock in 1997 and
completed a private placement of convertible subordinated notes in 2000. We have
invested significant resources to develop new software, to enhance existing
software and to acquire additional software products and solutions through
acquisitions.
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A summary of our acquisitions over the past five years follows:
COMPANY DATE DESCRIPTION
----------------------------------------- ------------ -----------------------------------------------------------------
Western Data Systems of Nevada, Inc. April 2002 Maintenance, repair and overhaul and make-to-order software
SpaceWorks Inc. (acquired technology only) July 2001 Order management software
PartMiner CSD, Inc. May 2001 Product design and sourcing software
One Release, LLC May 2001 Software development services
STG Holdings, Inc. January 2001 Advanced factory planning, scheduling and simulation software
Talus Solutions, Inc. December 2000 Pricing and revenue optimization software
TYECIN Systems, Inc. June 1998 Supply chain planning and simulation software for the semiconductor
industry
ProMIRA Software, Inc. February 1998 Supply chain planning software for complex industries, including high
technology, electronics, telecommunications and motor vehicle and
parts
Synchronology Group Ltd. June 1997 Manufacturing, planning and scheduling services
FISCAL 2002 AND 2003 ACQUISITIONS:
WESTERN DATA SYSTEMS OF NEVADA, INC. On April 26, 2002, we acquired certain
assets and assumed certain liabilities of Western Data Systems of Nevada, Inc.
("WDS"). WDS is a leading provider of application software and services to
commercial aerospace, defense and maritime industries and the military. The WDS
acquisition adds to our offering of S&PM solutions that address the complex
business operations inherent to asset intensive industries. WDS software
includes capabilities ranging from predictive system failure forecasting and
parts optimization, to finite capacity and labor resource scheduling, to
maintenance, repair and overhaul ("MRO") shop planning and execution, and direct
materials purchase management.
SPACEWORKS INC. On July 25, 2001, we acquired the intellectual property and
certain other assets of SpaceWorks, Inc. ("the SpaceWorks Transaction").
SpaceWorks, Inc. was a developer of software solutions that helped enable
companies to automate complex order-management related activities.
PARTMINER CSD, INC. On May 31, 2001, we acquired the collaborative sourcing
and design assets of PartMiner CSD, Inc., as well as related assets from its
parent, PartMiner, Inc. and its affiliates (the "CSD Acquisition"). PartMiner
CSD, Inc. was a developer of product design and sourcing software. The CSD
Acquisition included developed technology, existing customer contracts,
personnel and other intangible assets.
ONE RELEASE, LLC. On May 17, 2001, we acquired certain assets of One
Release, LLC and its affiliates (the "One Release Acquisition"), a software
development services and systems business.
INDUSTRY BACKGROUND:
An effective supply chain management and pricing and revenue optimization
strategy can make companies more competitive and profitable. In addition, we
believe that companies must pursue the further integration of the supply-side
and demand-side of their business in order to respond to increased global
competition, to differentiate themselves from their competitors and to increase
their share of their markets. We combine our traditional SCM and our PRO
strengths with our innovative SRM and S&PM solutions to enable effective
communication and collaboration in real time among global trading partners. Once
implemented, our solutions can provide our clients with greater access to
information, clearer visibility of what is taking place in their sales, service
and supply channels and a consolidated view of client requirements, ultimately
enabling the optimization of their extended supply and demand networks.
Clients are using our solutions to share information within their companies
and among their trading partners in their supply chains. The sharing of
information enables our clients to coordinate more effectively with their
trading partners, which helps our clients meet or exceed the rapidly changing
requirements of their customers. Our solutions encompass the supply chain needs
of enterprises and trading networks and address the business processes that
enable responsive and intelligent decision-making. These processes include
design, source, buy, make, store, move, price, market, sell and service. Our
solutions are focused on managing decisions, events and plans and have the
flexibility to adapt to the unique requirements of different industries. In
addition, our solutions allow companies to use the internet as a medium for
business collaboration and to monitor, measure and improve their business
processes over time.
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STRATEGY:
Our objective is to continue to be a leading global provider of SCM, SRM,
PRO, S&PM and EPO solutions for enterprises and for trading networks. Our
strategy to achieve our objective includes the following elements:
EXPAND AND DIFFERENTIATE OUR SOLUTIONS - We have significant experience and
expertise, enhanced by our relationships with clients, industry experts and
third-party alliances, which we believe will work to our advantage as we develop
and expand our solutions. In the emerging market for EPO solutions, which we
believe will be a large and important market, we feel that we have first mover
advantage and a significant lead, which differentiates us from our competitors.
We believe that there is a significant opportunity to apply PRO solutions to
manufacturing and non-reservation based industries, as evidenced by clients such
as Ford Motor Company; UPS; Staples Inc.; and Fairchild Semiconductor. In the
past, PRO has been used primarily in service and reservation-based industries
such as passenger airlines, hotels, media and entertainment and car rental. We
intend to extend the capabilities and scope of our SCM, SRM, PRO, S&PM and EPO
solutions to help solve a broader range of business challenges and to improve
processes within and among companies.
PROVIDE ADVANCED TECHNOLOGICAL INNOVATION - Using our extensive experience
and domain expertise, plus our commitment of substantial resources for research
and development, we develop advanced technological software solutions and offer
them to our clients. In addition, we will consider tactical and strategic
acquisitions of other companies and technologies in order to shorten the time it
takes us to bring solutions to market, further differentiate ourselves from our
competitors and to enhance or expand our existing offerings. See "-- Product
Development."
DEVELOP STRATEGIC ALLIANCES AND NEW BUSINESS RELATIONSHIPS - We focus our
resources on the development and enhancement of our core competencies and
combine them with the competencies of third parties, such as leading consulting
firms and technology providers, that provide advanced capabilities to complement
our core focus areas. This strategy permits us to offer our clients
industry-leading solutions that can better meet their needs. We continue to
expand and enhance our current solutions and our ability to implement them
through these alliances.
EXPAND CURRENT VERTICAL MARKETS AND EXPLORE NEW ONES - We continue to expand
our presence in and focus on markets in a broad range of sectors such as
apparel; automotive; chemical & energy; communications & high technology;
consumer packaged goods; financial services; food & agriculture; footwear &
textiles; government, aerospace & defense; industrials; life sciences; retail;
third-party logistics; transportation; and travel, transport & hospitality. This
strategy provides us with a diverse customer base and increases the number of
potential new customers in future periods. We believe our vertical market
diversification has been a key factor in our revenue growth over the past two
years and insulates us somewhat from adverse changes in macroeconomic
conditions. We also explore opportunities outside of our current vertical
markets as we expand the penetration of our SCM, SRM, PRO, S&PM and EPO
solutions.
PRODUCTS:
Our products are grouped in four categories: Manugistics NetWORKS
intelligent engines, Manugistics NetWORKS collaborative applications, NetWORKS
transaction management applications and Manugistics WebConnect integration
applications.
The Manugistics NetWORKS family of products is designed to coordinate,
optimize, measure and analyze across each of the key business processes -
design, source, buy, make, store, move, price, market, sell and service.
MANUGISTICS NETWORKS INTELLIGENT ENGINES.
Manugistics NetWORKS intelligent engines include the core optimization
technologies and algorithms of our SCM, SRM, PRO, S&PM and EPO solutions, which
incorporate many years of research and development in advanced mathematical
modeling. Our NetWORKS intelligent engines are designed to facilitate strategic,
tactical and operational decision-making. Strategic decisions typically consider
a time-frame of quarters to years. Tactical decisions typically consider a
time-frame of weeks to months. Operational decisions typically consider a
time-frame of minutes to days. Descriptions of the NetWORKS intelligent engines
follow:
NetWORKS ATTRIBUTE BASED PLANNING(TM) - NetWORKS Attribute Based
Planning(TM) optimizes production plans across multi-site manufacturing
environments, simultaneously considering the complex business constraints and
business goals of the unique client environment helping enable companies to
reduce manufacturing costs while maximizing customer service. It also provides
an intuitive decision-support system using advanced reporting capabilities to
help summarize key business metrics.
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NetWORKS COMMIT(TM) - NetWORKS Commit(TM) helps enable reliable, real-time
commitments for delivery of products by simultaneously performing checks on the
availability of resources, including inventory, production, materials,
manufacturing scheduling, distribution and transportation and then immediately
allocating appropriate resources needed to meet customer requests.
NetWORKS COMPONENT MANAGEMENT(TM) - NetWORKS Component Management(TM) helps
enable clients to create a comprehensive view of their component base by
consolidating component data that typically resides in various databases across
multiple divisions. This comprehensive view of the component base helps reduce
costs and increase productivity by quickly identifying part redundancies and
rationalizing the supply base.
NetWORKS DEMAND(TM) - NetWORKS Demand(TM) forecasts future customer demand
with a high degree of accuracy, alerting a company to potential supply problems
and finding patterns of demand that traditional forecasting solutions do not
detect.
NetWORKS FULFILLMENT(TM) - NetWORKS Fulfillment(TM) matches time-phased
storage and flow of supply to demand, enabling companies to minimize inventory
and reduce logistics costs while maximizing customer service.
NetWORKS MASTER PLANNING(TM) - NetWORKS Master Planning(TM) orchestrates
global, multi-site supply plans by allocating constrained resources such as
resource capacity, availability of raw materials, inflow and outflow
(throughput) of facilities, transportation and availability of components and
labor to improve customer service and increase profit margins.
NetWORKS PRECISION PRICING(TM) - NetWORKS Precision Pricing(TM) predicts the
responses of customer segments to a company's products and prices. Based on the
predicted customer response, the solution determines the optimal list price for
each product in each customer segment to enhance profit, increase market share,
or achieve other strategic goals.
NetWORKS PROCUREMENT(TM) - NetWORKS Procurement(TM) connects clients to
suppliers in real time to enable the client to share materials requirements with
suppliers, to request updates on outstanding orders and to request and
automatically select supplier bids based upon pre-defined business rules.
NetWORKS PRODUCTION PLANNING(TM) - NetWORKS Production Planning(TM) ,
through its advanced modeling techniques, reduces manufacturing cycle time by
enabling clients to coordinate purchasing and production with demand by
comprehensively synchronizing and optimizing the flow of materials through the
enterprise. NetWORKS Production Planning quickly identifies the operation's
constraints and provides planners with the tools to make optimal planning
decisions.
NetWORKS PRODUCTION SCHEDULING(TM) - NetWORKS PRODUCTION SCHEDULING(TM) uses
reality-based modeling and logical constraint-based algorithms to significantly
reduce manufacturing cycle time and improve customer service by identifying and
optimizing constrained resources and focusing on due-date delivery performance
and Just-In-Time (JIT) synchronization of material flow.
NetWORKS PROMOTIONS(TM) - NetWORKS Promotions(TM) predicts the impact of
proposed sales promotions using historical data and statistically-derived market
response models and recommends the appropriate promotion to meet business
objectives and enhance profit while considering product costs, cross-product
cannibalization, buy-forward dilution and cross-channel dilution.
NetWORKS REVENUE OPTIMIZATION APPLICATIONS - Manugistics revenue
optimization applications include NetWORKS Airline Revenue Optimizer(TM),
NetWORKS Cargo Revenue Optimizer(TM), NetWORKS Hospitality Revenue Optimizer(TM)
and NetWORKS Lease/Rent Optimizer(TM) . These applications are specifically
designed for the travel, transport and hospitality and multi-family housing
industries. Our products are designed to optimize revenues and enhance profits
considering product perishability and capacity utilization.
NetWORKS SEQUENCING(TM) - NetWORKS Sequencing(TM) optimizes single and
multi-site production environments by generating production schedules that
respect the complex rules of manufacturing operations. User-defined scheduling
objectives allow NetWORKS Sequencing to be configured to reflect the
manufacturing strategies at each location of use. It also considers
manufacturing cycle time reduction to minimize work-in-progress inventories and
increase output.
NetWORKS STRATEGY(TM) - NetWORKS Strategy(TM) enables enterprises and
extended trading networks to design supply chain networks. By modeling
end-to-end trading partner relationships, this product helps users determine the
most profitable supply chain strategy, including the optimal choice of trading
partners, optimal inventory levels, optimal lane volumes and appropriate
seasonal pre-builds and product mix. It also helps determine optimal production,
storage and distribution locations.
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NetWORKS SUPPLY(TM) - NetWORKS Supply(TM) helps facilitate the effective
management of the flow of material among trading partners on complex bills of
material, while simultaneously providing intelligent substitution and
configuration of materials that are in short supply or unavailable.
NetWORKS TARGET PRICING(TM) - NetWORKS Target Pricing(TM) systematically
integrates market information, cost information, customer information and
strategic goals to forecast the most profitable price quotation. In arriving at
a pricing recommendation, the solution uses advanced statistical methods to
balance the probability of winning a deal with its total contribution to profit.
NetWORKS TRANSPORT(TM)- NetWORKS Transport(TM) is designed to simultaneously
optimize transportation plans and execute all inbound, outbound and intercompany
transportation moves, including freight payment, tracking and reporting. With a
competitive advantage in multi-point to multi-point transportation planning,
NetWORKS Transport helps enable the sharing of optimized transportation plans
with carriers and manufacturers via the internet.
STATGRAPHICS(TM) - STATGRAPHICS(TM) contains a comprehensive set of
statistical tools to control, manage and improve the quality of production
processes in manufacturing companies. STATGRAPHICS uses statistical quality
control and design of experiments to implement quality management in individual
locations throughout an enterprise or manufacturing plant.
CompassCONTRACT(R) - CompassCONTRACT(R) is a plant operations and accounting
system foundation designed for commercial and military manufacturers throughout
the aerospace and defense supply chain. CompassCONTRACT improves customer
manufacturing operations throughput by leveraging and focusing on their current
organizational agility and operations, building on their current business
processes or by introducing new streamlined processes. It provides manufacturers
within the aerospace and defense supply chain with the information, planning
tools and management controls they need to maximize on-time customer delivery
performance to ensure customer satisfaction.
CompassENTERPRISE(R) - The CompassENTERPRISE(R) solution for maintenance,
repair and overhaul ("MRO") is a complete repair and overhaul operations
management and accounting system foundation designed for commercial and military
MRO facilities throughout the aerospace and defense supply chain.
CompassENTERPRISE improves customer repair and overhaul turn-around-time by
leveraging and focusing on their current organizational agility and operations,
building on their current business processes or by introducing new streamlined
processes and improved policies to achieve higher standards of customer service.
It provides manufacturers within the aerospace and defense supply chain with the
information, planning tools and management controls they need to maximize
on-time customer delivery performance to ensure customer satisfaction.
MANUGISTICS NETWORKS COLLABORATIVE APPLICATIONS.
Our collaborative applications provide collaboration and communication that
extend our intelligent engines into business processes that are created in
concert with trading partners. These products enable businesses to expand their
supply chains into true extended trading networks. Descriptions of our
collaborative applications follow:
NetWORKS COLLABORATE(TM) - NetWORKS Collaborate(TM) is a comprehensive tool
that enables clients to collaboratively plan, monitor and measure their trading
relationships. NetWORKS Collaborate is a business-to-business, eCommerce
application that ensures the creation and maintenance of joint business plans
with trading partners, monitors the execution of those plans and measures their
success.
NetWORKS MARKET MANAGER(TM) - NetWORKS Market Manager(TM) provides a global
view of all market activities for a product, location, or product family,
simplifying the process of coordinating market activity information related to
market promotions. Promotions, deals, discounts and coupons are used by NetWORKS
Market Manager(TM) to provide a global view into market activities throughout
the various stages of the market activity process.
NetWORKS MONITOR(TM) - NetWORKS Monitor(TM) allows clients to monitor and
manage their pre-defined critical planning and execution information and it
provides robust technology for alerting all appropriate trading partners when
problems occur. NetWORKS Monitor provides a web-based portal for all information
about problems (called exceptions) across the entire trading network, enables
role-based security for interaction with that data and provides recommendations
and automatic steps for resolving those exceptions.
NetWORKS ONEview(TM) - NetWORKS ONEview(TM) is based on industry-standard
online analytical processing (OLAP) technology that enables business reporting
and analysis and trading network performance measurement. Its multi-dimensional
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analyses increase the speed, accuracy and efficiency of knowledge discovery and
facilitate proactive decision-making by providing analyses that are specific to
business processes.
NetWORKS VISIBILITY(TM) - NetWORKS Visibility(TM), from one central
web-based portal, provides views of critical information on the supply pipeline
and the status of orders. Using role-based security, trading partners can view
orders and actions relevant to their responsibilities within the trading
network.
MANUGISTICS NETWORKS TRANSACTION MANAGEMENT APPLICATIONS.
Our transaction management applications support key business transactions
between trading partners. Descriptions of our transaction management
applications follow:
BUYING ADVANTAGE(TM) - Buying Advantage(TM) is an advanced internet-based
direct procurement solution designed for large aerospace and defense companies,
mid-sized suppliers and MRO facilities in industry and government. It enables
single-site or multi-site organizations to leverage the supplier community as a
strategic asset through aggregated sourcing and buying, increased buyer
efficiencies and through efficient collaboration and integration with suppliers.
This results in reduced lead-time and cost and improved responsiveness.
NetWORKS MARKETPLACE(TM) - NetWORKS Marketplace(TM) is an advanced,
configurable marketplace platform for integrated supply chains and eMarketplace
trading networks. NetWORKS Marketplace helps facilitate sustainable, real-time
trading environments and addresses key eMarketplace requirements to enable
critical collaboration activities with trading partners. Since it is designed to
enable recurring trade between many buyers and sellers, NetWORKS Marketplace
helps clients develop and benefit from complex, online business relationships.
NetWORKS Marketplace supports a variety of transaction capabilities, such as
auctions, negotiated eCommerce, dynamic pricing, procurement, track and trace
and order and pipeline visibility. In addition, it provides the underlying
foundation for these transactions, with capabilities such as content
aggregation, profile management and personalization, real-time alerts,
integration for financial clearinghouse functions and many-to-many data and
functional security. The open architecture of NetWORKS Marketplace enables a
modular eMarketplace platform that can be configured to fit each client's
existing technology and to integrate with other technology providers.
NetWORKS ORDER MANAGEMENT(TM) - NetWORKS Order Management(TM) is designed to
help manage the total life cycle of each customer order through a single order
management interface that brings together from the various systems the critical
information that is required for an effective online and offline order
management process. It allows the client to establish a direct selling site that
services customers through multiple online and traditional channels, and it
enables connectivity to backend distribution systems and partners.
NetWORKS PURCHASE MANAGEMENT(TM) - NetWORKS Purchase Management(TM)
consolidates the creation and collaboration of procurement transactions and
documents between buyers and suppliers. By connecting the supply chains of
trading partners, the enterprise can dramatically reduce operating costs and
improve profitability.
MANUGISTICS WEBCONNECT INTEGRATION APPLICATIONS.
Our Manugistics WebConnect integration applications help integrate disparate
systems across an enterprise and with external trading partners. A description
follows:
WebConnect INTEGRATION SUITE - Our WebConnect integration suite uses
leading-edge enterprise application integration (EAI), extract-transform-load
(ETL) and business-to-business (B2B) integration technology and provides
pre-built, configurable connectors to common enterprise systems provided by
companies such as SAP AG. WebConnect provides automated data transformation and
mapping between Manugistics and other systems along with graphical integration
tools that allow users to easily update and maintain these integrations.
WebConnect also coordinates business processes and messaging among disparate
systems and provides coordination and messaging for integration with external
trading partners and heterogeneous trading network environments.
Manugistics has a solutions-based approach to client delivery - selling
bundled sets of NetWORKS products that address an entire business process. This
approach helps ensure that Manugistics delivers maximum value to our clients.
These solutions typically consist of NetWORKS products spanning optimization,
order management, event management and analysis, and integration capabilities.
The following is the current set of solutions that Manugistics is focused on
commercializing or enhancing:
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SUPPLY CHAIN MANAGEMENT SOLUTIONS SUPPLIER RELATIONSHIP MANAGEMENT SOLUTIONS
--------------------------------- ------------------------------------------
Network Design and Optimization Collaborative Design
Sales and Operations Planning Collaborative Supply Planning
Collaborative Vendor Managed Inventory Spend Analysis and Optimization
Collaborative Planning, Forecasting & Strategic Sourcing and Contract Management
Replenishment Procurement Execution
Logistics Management
Global Logistics Management PRICING AND REVENUE OPTIMIZATION SOLUTIONS
Bulk Logistics Management ------------------------------------------
Fleet Management Price Quotation Optimization
Fulfillment Management Price List Optimization
Manufacturing Planning and Scheduling Profitable Promotions Management
Profitable Demand Management
Profitable Order Management SERVICE & PARTS MANAGEMENT SOLUTIONS
------------------------------------
Strategic Service and Parts Planning
Parts Optimization
Repair Shop Planning
Repair Shop Execution
Field Service Execution
CONSULTING SERVICES:
A key element of our business strategy is to provide clients with
comprehensive solutions for their internal and external supply chains and their
pricing and revenue optimization needs, by combining our products with
professional services. When implementing our solutions, clients typically make
many changes to their business processes and overall operations, including their
planning and pricing functions. To assist clients in making these changes, we
offer a wide range of consulting services. These services include supply chain,
supplier relationship, pricing and revenue and service & parts management
consulting services to help our clients maximize their competitive advantage.
Our consulting services also include business operations consulting, change
management consulting and end-user and system administrator education and
training. These services help clients redesign their operations to take full
advantage of our solutions.
These consulting services are generally provided separately from our
software products in our software license agreements and are provided primarily
on a time and materials basis. Our consulting services group consisted of 384
employees as of February 28, 2002.
GLOBAL CLIENT SUPPORT:
Our comprehensive solutions include global support to clients. Most of our
clients enter into annual solution support agreements for support and upgrades.
Support includes in-depth support services, product maintenance and a web-based
knowledge management tool for tips and techniques and online support. Upgrades
include new features and functionality as well as core technology enhancements.
Our global client support operation also collects information that we use to
assist us in developing new products, enhancing existing products and in
identifying market demand. As of February 28, 2002, our global client support
group consisted of 55 employees.
PRODUCT DEVELOPMENT:
We direct our efforts in product development to:
- the development of new products;
- enhancements of the capabilities of existing products;
- expansion of our extended trading networks;
- enhancement of our products for use in different languages;
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- increase scalability to address increasingly complex customer
challenges; and
- development of products tailored to the specific requirements of
particular industries.
To date, our products, including product documentation, have been
developed by our internal staff and supplemented by acquisitions and
complementary business relationships.
In developing new products or enhancements, we work closely with current and
prospective clients, as well as with other industry leaders, to make sure that
our products address the needs of the markets we serve. We believe that this
collaboration will lead to improved software and will result in superior
products and solutions that are likely to be in greater demand in the market. We
maintain committees of users, developers and marketers of our products, who,
among other things, define and rank issues associated with products and discuss
priorities and directions for their enhancement.
For new applications and major enhancements, we also conduct a launch
program, which allows clients to review design specifications and prototypes and
to participate in product testing. We have established channels for client
feedback, which include periodic surveys and focus groups. In addition, our
product development staff works closely with our marketing, sales, support and
services groups to develop products that meet the needs of our current and
prospective clients. As of February 28, 2002, our product development staff
consisted of 392 employees. Gross product development costs were $81.0 million,
$49.8 million and $34.6 million in fiscal 2002, 2001 and 2000, respectively.
Gross product development costs in total over the last five fiscal years were
$267.8 million.
Since our inception, we have made substantial investments in product
development. We believe that getting products to market quickly, without
compromising quality, is critical to the success of our business. We will
continue to make the expenditures for product development that we believe are
necessary for rapidly delivering new products, features and functions.
SALES AND MARKETING:
Our sales operation for North and South America is headquartered at our
offices in Rockville, MD and includes field offices in Atlanta, GA; Wayne, PA;
Itasca, IL; Irving, TX; Denver, CO; Calabasas, CA; San Carlos, CA; Mexico City,
Mexico; and Sao Paulo, Brazil. Our direct sales organization focuses on
licensing SCM, SRM, PRO, S&PM and EPO solutions to large, multi-national
enterprises, as well as to mid-sized enterprises with a variety of supply chain,
pricing and extended trading network issues.
We market our solutions in regions outside of North and South America
primarily through foreign subsidiaries. Our British, German, French, Belgian,
Dutch and Swedish subsidiaries, located in Bracknell, England; Ratingen,
Germany; Paris, France; Brussels, Belgium; Utrecht, The Netherlands; and
Stockholm, Sweden, respectively, provide direct sales, services and support
primarily to clients located in continental Europe and the United Kingdom. We
have established subsidiaries in Tokyo, Japan; Osaka, Japan; Singapore; Hong
Kong; and Sydney, Australia; and additional sales offices in Milan, Italy and
Taipei, Taiwan to license and support our solutions in those regions. We adapt
our solutions for use in international markets by addressing different
languages, different standards of weights and measures and other operational
considerations. In fiscal 2002, approximately 28% of our total revenue came from
sales made to clients outside the United States. Details of our geographic
operations are in Note 14 - "Segment Information" in the Notes to Consolidated
Financial Statements included elsewhere in this annual report.
We also use indirect sales channels to market our solutions - complementary
software vendors, third-party alliances and distributorships. See "--
Alliances." Using these channels, we seek to increase the market penetration of
our solutions through joint marketing and sales activities. These relationships
enhance our sales resources in target markets and expand our expertise in
bringing optimization solutions to prospects and clients. We also license our
STATGRAPHICS product in the U.S. and in other countries through independent
distributors, national resellers and local dealers.
We support our sales activities by conducting a variety of marketing
programs, including our global conference series called enVISION, which provides
a forum for executives and managers - from CEOs to operational vice presidents
to end-users - to exchange ideas and best practices regarding technological
innovations in SRM, SCM, PRO and S&PM. We also maintain client steering
committees to involve our clients in the ongoing development of our solutions.
We also participate in industry conferences such as those organized by the
American Production and Inventory Control Specialists (APICS) organization,
Supply Chain World, Retail Systems and Auto-Tech and in numerous pricing and
revenue optimization conferences, such as HITEC and PPS. In addition, we
participate in solution demonstration seminars and client conferences hosted by
complementary software vendors. We also conduct lead-generation programs
including advertising, direct mail, public relations, seminars, telemarketing
and ongoing client communication programs.
9
As of February 28, 2002, we had 391 employees engaged in sales, marketing
and business development consulting activities.
ALLIANCES:
Our alliance program is based on delivering maximum value to our global base
of clients. We ally ourselves with leading companies that provide consulting and
implementation services, software and technology and hardware that complement
our solutions.
We have strategic alliances with industry-leading software and technology
providers, including Acta Technology, Inc.; Agile Software; BEA Systems, Inc;
Centric Software; Chrome; Cybrant; Frictionless Commerce; Hewlett-Packard
Company; IBM Corp.; Informatica; Manhattan Associates; Microsoft Corp.; MXI;
Pointserve; Shipnow; Sun Microsystems, Inc.; Vastera, Inc.; Vendavo; Viacore;
Vignette Corporation; and webMethods, Inc.
We work with leading systems integrators and business strategy and
management consultancies that provide a wide range of consulting expertise such
as implementation of software solutions, process and change management and
strategic business services. We maintain close relationships with major
consulting firms worldwide to extend our delivery and solution capability for
our clients. We have also developed strategic alliances with world-class
consulting and system integration partners such as Accenture, AT Kearney, Cap
Gemini Ernst & Young, KPMG Consulting, PricewaterhouseCoopers and other leading
consultancies to provide implementation and business process assistance to our
clients. We have augmented this with several geographic and regional alliances
and cooperate with other professional services firms on a client-by-client
basis.
CLIENTS:
Various combinations of our SCM, SRM, PRO, S&PM and EPO software have been
licensed by organizations worldwide in industries such as apparel; automotive;
chemical & energy; communications & high technology; consumer packaged goods;
financial services; food & agriculture; footwear & textiles; government,
aerospace & defense; industrials; life sciences; retail; third-party logistics;
and transportation; travel, transport & hospitality. Here is a sample of some of
our clients who have either licensed software products from us or our
distributors, or purchased support, consulting, or other services or both. See
"-- Sales and Marketing."
APPAREL CONSUMER PACKAGED GOODS RETAIL
------- ----------------------- ------
Levi Strauss & Co. Brown & Williamson Tobacco Corp. Canadian Tire Corp., Ltd.
Oxford Industries, Inc. Eveready Battery Gebr. Heinemann KG
The Limited, Inc. Pfizer, Inc. HEB Grocery Company LP
Revlon Radioshack, Corporation
AUTOMOTIVE Sweetheart Holdings Spalding Sports Worldwide, Inc.
---------- Unilever Home & Personal Care, USA Staples, Inc.
Caterpillar Mexico S.A. de C.V. Target Corporation
Deere & Co. FOOD & AGRICULTURE Toys "R" Us, Inc.
Ford Motor Company ------------------
Harley-Davidson, Inc. Coca-Cola Bottling Co. Consolidated
Mistubishi Motor Sales of America Great Atlantic & Pacific Tea Company THIRD-PARTY LOGISTICS
Subaru of America, Inc. Hormel Foods Corp. ----------------------
Kraft Foods, Inc. Agora Europe S.A.
CHEMICAL & ENERGY Nestle DHL Aviation NV/SA
----------------- Ocean Spray PSA Logistics PTE Ltd.
BP Winn-Dixie Stores, Inc. Tronicus
DuPont United Parcel Service
Fuji Photo Film, USA GOVERNMENT, AEROSPACE & DEFENSE
Rohm & Haas ------------------------------- TRADING NETWORKS
Vulcan Materials Co. Boeing Co. ----------------
EDS (NAVTrans) ChemLogix LLC
COMMUNICATIONS & HIGH TECHNOLOGY Kaman Aerospace eConnections
-------------------------------- Elemica
3Com Corporation LIFE SCIENCES
Cisco Systems, Inc. ------------- TRAVEL, TRANSPORT & HOSPITALITY
Compaq Computer Corporation AstraZeneca --------------------------------
Emerson Continental Airlines
Fairchild Semiconductor Delta Air Lines
Hewlett Packard Company Harrah's Entertainment, Inc.
Lexmark Omni Hotels
Philips Lighting B.V. Princess Cruises
Texas Instruments Incorporated
Vodafone Ltd.
10
COMPETITION:
The markets for our solutions are highly competitive. Other application
software vendors offer products that compete directly with some of our products.
These include, but are not limited to such vendors as Adexa; Aspen Technology
Inc.; The Descartes Systems Group, Inc.; Global Logistics Technologies, Inc; i2
Technologies, Inc.; JDA Software, Inc.; Khimetrics; Logility Inc.;
Logistics.com; Mercia; Metreo; PROS Revenue Management; Retek, Inc.; Sabre Inc.;
SAP AG; SynQuest; and YieldStar Technology. In addition, certain ERP vendors, ,
all of which are substantially larger than Manugistics, have acquired or
developed supply chain planning software companies, products, or functionality
or have announced intentions to develop and sell supply chain planning
solutions. Such vendors include Invensys plc (which acquired Baan Company N.V.),
J.D. Edwards & Company; Oracle Corporation; PeopleSoft, Inc.; and SAP AG.
The principal competitive factors in the markets in which we compete include
product functionality and quality, domain expertise, product suite integration
and product-related services such as customer support and implementation
services. Other factors important to clients and prospects include:
- customer service and satisfaction;
- the ability to provide client references;
- compliance with industry standards and requirements;
- the ability of the solution to generate business benefits;
- vendor reputation;
- rapid return on investment;
- availability in foreign languages;
- financial stability; and
- to some extent, price.
We believe that our principal competitive advantages are our comprehensive,
integrated solutions, our list of referenceable clients, the ability of our
solutions to generate business benefits for clients, our substantial investment
in product development, our rapid implementations and returns on investment, our
client support services and our extensive knowledge of supply chain management,
supplier relationship management and pricing and revenue optimization solutions.
SOFTWARE LICENSE AND SOLUTION SUPPORT AGREEMENTS AND PRICING:
Software license fees consist principally of fees generated from licenses of
our software products. In consideration of the payment of license fees, we
generally grant nonexclusive, nontransferable, perpetual licenses, which are
primarily business unit and user-specific. Software license fee arrangements
vary depending upon the type of software product being licensed and the
customer's computer environment. Software license fees are based primarily on
which products are licensed, the complexity of the client's problem, the size of
the client's business and the number of users and locations. The amount of
software license fees may reach ten million dollars or more for initiatives that
are very large in scope.
Clients may obtain solution support for an annual fee. We have three levels
of support that our customers choose from to best accommodate their needs:
Standard, Premium and Signature. Support fees are calculated on an escalated
scale, based on the level of service chosen and the size of the related software
license fees. Support fees are generally billed annually and are subject to
changes in support list prices. We also provide pre-installation assistance,
systems administration, training and hosting of our software applications and
other related services, generally on a time and materials basis. This allows our
clients to determine the level of support or services appropriate for their
needs.
PROPRIETARY RIGHTS AND LICENSES:
We regard our software as proprietary and rely on a combination of trade
secret, patent, copyright and trademark laws, license agreements,
confidentiality and non-compete agreements with our employees and nondisclosure
and other contractual requirements imposed on our clients, consulting partners
and others to help protect proprietary rights in our products. We distribute our
SCM, SRM, PRO, S&PM and EPO software under software license agreements, which
typically grant clients nonexclusive, nontransferable licenses to our products
and have perpetual terms unless terminated for breach. Under such typical
license agreements, we retain all rights to market our products.
11
Use of our software is usually restricted to clients' internal operations
and to designated users. In sales to virtual service providers, the licensed
software is restricted to clients' internal operations and to designated users
and the processing of defined customers' client data. Use is subject to terms
and conditions that prohibit unauthorized reproduction or transfer of the
software. We also seek to protect the source code of our software as a trade
secret and as an unpublished, copyrighted work.
EMPLOYEES:
As of February 28, 2002, we had 1,384 full-time regular employees. None of
our employees are represented by a labor union. We have experienced no work
stoppages and believe that our employee relations are generally good. All of our
employees sign non-compete agreements as a condition of employment.
ITEM 2. PROPERTIES.
Our principal sales, marketing, product development, support and
administrative facilities are located in Rockville, MD, where we lease
approximately 280,000 square feet of office space under a lease agreement which
expires on June 30, 2012.
In addition, we lease office space for our 37 sales, service and product
development offices located in North America, South America, Europe and
Asia/Pacific.
ITEM 3. LEGAL PROCEEDINGS.
We are involved from time to time in disputes (including those described
below) and other litigation in the ordinary course of business. We do not
believe that the outcome of any pending disputes or litigation 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 dispute
resolution and 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.
We previously reported our legal proceedings with Grocery Logistics Limited
("Grocery Logistics"). Grocery Logistics had claimed that the implementation of
our software failed to meet the requirements of its contract for the supply of
software, support, maintenance and training services. Acting through our
insurance carrier, we recently settled the claim against us and our subsidiary,
Manugistics U.K. The carrier paid the full amount of the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and position held by each of the executive officers of
Manugistics Group, Inc. and Manugistics, Inc., its principal operating
subsidiary, are as follows:
NAME AGE POSITION
----------------------- ----- ---------------------------------------------------------
Gregory J. Owens....... 42 Chairman and Chief Executive Officer
Richard F. Bergmann.... 46 President
Terrence A. Austin..... 39 Executive Vice President and President, Europe, Middle East and Asia
Raghavan Rajaji........ 55 Executive Vice President and Chief Financial Officer
Andrew J. Hogenson..... 38 Senior Vice President, Pricing and Revenue Optimization
Jeffrey L. Holmes...... 52 Senior Vice President, Service & Parts Management and
Government, Aerospace and Defense
James J. Jeter......... 43 Senior Vice President, Global Marketing
Jeffrey L. McKinney..... 38 Senior Vice President, Supply Chain Management and Supplier
Relationship Management
12
NAME AGE POSITION
----------------------- ----- ---------------------------------------------------------
Jeffrey T. Hudkins 36 Vice President, Controller and Chief Accounting Officer
Mr. Owens has served as Chief Executive Officer and a member of our Board of
Directors since joining Manugistics in April 1999. He has served as Chairman of
the Board of Directors since February 2001. Mr. Owens also served as President
of the Company from April 1999 through November 2000. From 1993 to 1999, Mr.
Owens served as the Global Managing Partner for the Accenture Supply Chain
Practice.
Mr. Bergmann has served as President since December 2000. From June 1999
through November 2000, Mr. Bergmann served as Executive Vice President, Global
Sales and Services. From September 1990 to June 1999, he was a partner in the
Accenture Supply Chain Strategy Group.
Mr. Austin has served as Executive Vice President and President, Europe,
Middle East and Asia since September 2001. From June 1999 to August 2001, he
served as Executive Vice President, Electronics and High Technology. From August
1997 to June 1999, he was head of the Electronics and High Technology Sector of
Accenture's Global Supply Chain Practice and from October 1989 to June 1997, Mr.
Austin served as an Associate Partner with Accenture's Global Supply Chain
Practice.
Mr. Rajaji has served as Executive Vice President and Chief Financial
Officer since December 1999. From September 1995 to December 1999, he served as
Senior Vice President, Chief Financial Officer and Treasurer at BancTec, Inc.
Mr. Hogenson has served as Senior Vice President, Pricing and Revenue
Optimization since April 2002. From October 2000 to April 2002, Mr. Hogenson was
Senior Vice President, Product Development. From October 1999 through October
2000, he served as Vice President, Transportation, Products and Solutions. From
March 1997 to October 1999, he served as Senior Manager, and from 1995 to March
1997, he served as a Manager of the Accenture Strategy Practice Group.
Mr. Holmes has served as Senior Vice President, Service & Parts Management
and Government, Aerospace & Defense since April 2002. From September 1999
through April 2002, Mr. Holmes was Senior Vice President, Government and Public
Sector. From April 1999 to September 1999, he served as Senior Vice President,
North American Sales Operations. From October 1998 to April 1999, he served as
Vice President, Industry Solutions. From January 1997 to October 1998, he served
as Vice President, Consumer Products Industry.
Mr. Jeter has served as Senior Vice President, Global Marketing since August
1999. From July 1998 to August 1999, he served as Vice President and Managing
Director of European Operations for Iomega Corporation, a provider of personal
storage solutions for digital information. From December 1997 to July 1998, Mr.
Jeter served as Vice President, Managing Director of Iomega's Asia Pacific
operation. From July 1997 to December 1997, Mr. Jeter served as Vice President,
Worldwide Marketing at Iomega. From April 1997 to July 1997, Mr. Jeter served as
Senior Director, New Business Development at Iomega.
Mr. McKinney has served as Senior Vice President, Supply Chain Management
and Supplier Relationship Management since May 2002. From September 2001 through
April 2002, he served as Senior Vice President, Supply Chain Management. From
March 1998 to September 2001, he served as Senior Vice President, Global
Business Consulting. From May 1992 to March 1998, Mr. McKinney held various
Director and Managerial positions in Implementation, Pre-sales and Marketing.
Mr. Hudkins has served as Vice President and Controller since December 2000.
He has served as Chief Accounting Officer since April 2001. From January 2000 to
December 2000, Mr. Hudkins was Vice President, Controller and Chief Accounting
Officer for Talus Solutions, Inc., a privately held pricing and revenue
optimization software company acquired by Manugistics in December 2000. From May
1995 to December 1999, Mr. Hudkins served in various accounting and finance
positions with Magellan Health Services, Inc., a publicly held behavioral
healthcare company, including serving as Vice President, Controller and Chief
Accounting Officer from May 1998 to December 1999.
There are no family relationships among any of the executive officers or
directors of Manugistics Group, Inc. Executive officers of Manugistics Group,
Inc. are elected by the Board of Directors (the "Board") on an annual basis and
serve at the discretion of the Board.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock, $.002 par value per share, trades on The Nasdaq Stock
Market under the symbol "MANU". The following table sets forth the high and low
sales prices in dollars per share for the respective quarterly periods over the
last two fiscal years, as reported in published financial sources. These prices
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions. Prices have been restated to
give effect to the Company's two-for-one stock split, effective December 7,
2000.
FISCAL 2002 HIGH LOW
----------------------------- ------ -----
First Quarter 41.90 15.38
(ended May 31, 2001)
Second Quarter 42.38 11.65
(ended August 31, 2001)
Third Quarter 13.70 4.94
(ended November 30, 2001)
Fourth Quarter 22.70 11.07
(ended February 28, 2002)
FISCAL 2001 HIGH LOW
----------------------------- ------ -----
First Quarter 35.13 12.53
(ended May 31, 2000)
Second Quarter 46.66 11.25
(ended August 31, 2000)
Third Quarter 66.06 30.88
(ended November 30, 2000)
Fourth Quarter 64.38 26.94
(ended February 28, 2001)
As of April 29, 2002, there were approximately 321 stockholders of record of
our common stock, according to information provided by our transfer agent.
We have never declared or paid any cash dividends on our common stock and do
not intend to do so in the foreseeable future. It is our present intention to
retain any future earnings to provide funds for the operation and expansion of
our business. In addition, we have a one-year unsecured revolving credit
facility with a commercial bank that is scheduled to expire on February 28,
2003. However, as in prior years, we will seek to renew this credit facility
upon expiration. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and Note
5 to the Notes to Consolidated Financial Statements included elsewhere in this
annual report. During the term of the credit facility, we are subject to a
covenant not to declare or pay cash dividends to holders of our common stock.
Future payment of cash dividends, if any, will be at the discretion of the Board
and will be dependent upon our financial condition, results of operations,
capital requirements and such other factors as the Board may deem relevant and
will be subject to the covenants contained in any outstanding credit facility.
RECENT SALE OF UNREGISTERED SECURITIES:
IRI Settlement. As previously reported, in December 2001 the Company and
IRI Information Resources, Inc. ("IRI") settled a dispute arising from the
acquisition of certain assets from IRI in March 1997. The Company agreed to pay
to IRI an aggregate of approximately $8.6 million in various installments. The
payment obligation had two components. We made cash payments in the total amount
of $4.7 million in installments to IRI, the last of which was made on April 1,
2002. In addition, the Company issued 240,683 shares of its common stock to IRI
in payment of the remaining $3.9 million on February 27, 2002.
The shares were not registered under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon Section 4 (2) of the Securities Act.
The Settlement Agreement and a related Registration Rights Agreement imposed
certain restrictions on the resale or other transfer of the shares necessary for
the availability of the Section 4 (2) exemption. No underwriters were involved
in connection with the issuance and sale of the shares to IRI pursuant to the
settlement. In accordance with the terms of the settlement, we subsequently
registered the shares for resale by IRI on a registration statement on Form S-3
under the Securities Act.
14
ITEM 6. SELECTED FINANCIAL DATA.
Selected consolidated financial data with respect to us for each of the five
fiscal years in the period ended February 28, 2002 and each of our last eight
fiscal quarters are set forth below. This data should be read in conjunction
with our Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this annual report. The selected financial
data for each of the years in the three-year period ended February 28, 2002, and
as of February 28, 2002 and 2001, are derived from our consolidated financial
statements that have been included in this annual report. The selected financial
data as of February 28 or 29, 2000, 1999 and 1998, the years ended February 28,
1999 and 1998, and in each of our last eight fiscal quarters are derived from
consolidated financial statements that have not been included in this annual
report.
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Software $ 129,772 $ 139,316 $ 60,421 $ 73,802 $ 107,547
Services 106,522 73,333 46,516 65,212 46,347
Support 73,852 55,315 45,496 38,550 26,369
----------- ----------- ------------- ------------- ------------
Total revenue 310,146 267,964 152,433 177,564 180,263
----------- ----------- ---------- ---------- ----------
Operating expenses:
Cost of revenue:
Cost of software 21,144 19,146 11,811 11,661 11,102
Amortization of acquired technology 9,168 1,122 147 145 6
Cost of services and support 92,083 59,149 43,783 50,076 32,789
Sales and marketing 120,437 115,610 61,439 103,006 65,376
Product development 70,477 40,830 29,150 49,389 32,781
General and administrative 28,522 22,925 15,837 19,828 14,639
Amortization of intangibles 86,279 15,082 2,290 2,118 1,283
Purchased research and development and acquisition-
related expenses -- 9,724 -- 3,095 47,340
Restructuring expense (benefit) 6,612 -- (1,506) 33,775 --
Non-cash stock compensation (benefit) expense (3,111) 12,801 -- -- --
IRI settlement 3,115 -- -- -- --
----------- ----------- ---------- ---------- ----------
Total operating expenses 434,726 296,389 162,951 273,093 205,316
Loss from operations (124,580) (28,425) (10,518) (95,529) (25,053)
Other (expense) income - net (14,638) 2,899 1,389 2,362 2,863
------------ ----------- ---------- ---------- ----------
Loss before income taxes (139,218) (25,526) (9,129) (93,167) (22,190)
(Benefit from) provision for income taxes (24,060) 2,552 (184) 2,945 (9,025)
------------ ----------- ---------- ---------- ----------
Net loss $ (115,158) $ (28,078) $ (8,945) $ (96,112) $ (13,165)
=========== =========== ========== ========== ==========
Basic and diluted loss per share $ (1.69) $ (0.48) $ (0.16) $ (1.82) $ (0.28)
=========== =========== ========== ========== ==========
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities $ 233,060 $ 300,308 $ 51,547 $ 43,362 $ 82,137
Working capital 236,951 300,668 36,831 31,138 96,394
Goodwill and other intangible assets 336,102 394,178 7,317 9,382 14,660
Total assets 722,640 847,261 151,907 172,336 225,215
Long-term debt and capital leases 251,023 250,133 283 454 235
Total stockholders' equity 372,807 470,321 86,718 85,722 173,746
15
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
FISCAL 2002 (IN THOUSANDS, EXCEPT PER SHARE DATA)
----------- -------------------------------------
Revenue
Software $ 45,056 $ 24,809 $ 22,150 $ 37,757
Services 27,533 27,521 27,575 23,893
Support 17,221 18,634 19,020 18,977
-------------- -------------- -------------- --------------
Total Revenue 89,810 70,964 68,745 80,627
Cost of software 5,135 4,963 4,750 6,296
Cost of services and support 23,340 24,274 23,598 20,871
Sales and marketing 33,999 30,114 26,889 29,435
Product development 16,435 20,326 17,232 16,484
General and administrative 7,798 6,997 6,375 7,352
Other operating expenses (1) 27,415 14,370 33,065 27,213
Operating loss (24,312) (30,080) (43,164) (27,024)
Net loss (23,426) (21,664) (44,980) (25,088)
Basic and diluted loss per share ($0.35) ($0.32) ($0.66) ($0.36)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
FISCAL 2001 (IN THOUSANDS, EXCEPT PER SHARE DATA)
----------- -------------------------------------
Revenue
Software $ 25,973 $ 28,510 $ 35,807 $ 49,026
Services 11,968 16,572 20,557 24,237
Support 12,578 13,068 13,632 16,036
-------------- -------------- -------------- --------------
Total Revenue 50,519 58,150 69,996 89,299
Cost of software 4,785 3,872 4,307 6,182
Cost of services and support 11,538 13,477 14,198 19,936
Sales and marketing 22,977 25,157 30,710 36,766
Product development 7,770 8,445 8,964 15,651
General and administrative 5,004 5,306 5,972 6,643
Other operating expenses (1) 612 21,312 (5,462) 22,267
Operating (loss) income (2,167) (19,419) 11,307 (18,146)
Net (loss) income (1,151) (19,684) 9,423 (16,666)
Basic (loss) earnings per share ($0.02) ($0.34) $0.16 ($0.26)
Diluted (loss) earnings per share ($0.02) ($0.34) $0.14 ($0.26)
(1) Other operating expenses include amortization of intangibles and acquired
technology, non-cash stock compensation (benefit) expense, restructuring
expenses (benefits), purchased research and development expenses and the IRI
settlement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS:
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our consolidated financial
statements and the related notes and other financial information included
elsewhere in this annual report. The discussion and analysis contains
forward-looking statements and are made in reliance upon safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Our actual results may
differ materially from those anticipated in these forward-looking statements and
other forward-looking statements made elsewhere in this annual report as a
result of specified factors, including those set forth under the caption
"Factors that May Impact Future Results."
OVERVIEW:
We are a leading global provider of Enterprise Profit Optimization(TM) (EPO)
solutions. We provide solutions for supply chain management (SCM), supplier
relationship management (SRM), pricing and revenue optimization (PRO) and
service & parts management (S&PM). Our solutions help companies lower operating
costs, improve customer service, increase revenues, enhance profitability and
accelerate revenue and earnings growth. They do this by creating efficiencies in
how goods and services are brought
16
to market (supplier relationship management and supply chain management), how
they are sold (pricing and revenue optimization) and how they are serviced and
maintained (service & parts management). EPO solutions provide additional
benefits by combining the proven cost-reducing power of SRM, SCM and S&PM
solutions and the revenue-enhancing capacity of PRO solutions. These solutions
integrate pricing, forecasting, and operational planning and execution to help
companies enhance margins across the enterprise and the extended trading
network.
Our SCM solutions help enable companies to plan and execute their supply
chain processes. These processes include manufacturing, distribution and service
operations, and collaboration with a company's extended trading network of
suppliers and customers. Our SRM solutions help improve the activities required
to design, source, and procure goods and to collaborate more effectively with
key suppliers of direct materials. Our PRO solutions help optimize a company's
demand chain, including pricing and promotions to all customers through all
channels, with the aim of balancing the trade-offs between profitability and
other strategic objectives such as market share. Our S&PM solutions help
companies optimize and manage their service and parts operations by effectively
planning and scheduling maintenance programs, parts, materials, tools, manpower
and repair facilities to profitably provide the highest levels of customer
service. We also provide strategic consulting, implementation and customer
support services to our clients as part of our solutions.
Increasing global competition, shortening product life cycles and more
demanding customers are forcing businesses to provide improved levels of
customer service while shortening the time it takes to bring their products and
services to market. We were an early innovator in solutions that allow
collaboration among our clients and their customers and suppliers. We focus the
development of our technology on addressing the changing needs of companies in
the markets we serve, including the need to do business in extended trading
networks. We offer solutions to companies in many industries including apparel;
automotive; chemical & energy; communications & high technology; consumer
packaged goods; financial services; food & agriculture; footwear & textiles;
forest products; government, aerospace & defense; industrials; life sciences;
retail; third-party logistics; transportation; travel, transport & hospitality;
and utilities. Our customer base of approximately 1,200 clients includes large,
multinational enterprises such as 3Com Corporation; Boeing Co.; BP; Brown &
Williamson Tobacco Corp.; Caterpillar Mexico S.A. de C.V.; Cisco Systems Inc.;
Coca-Cola Bottling Co. Consolidated; Compaq Computer Corporation; Delta Air
Lines; DuPont; Fairchild Semiconductor; Ford Motor Company; Harley-Davidson,
Inc.; Hormel Foods Corp.; Levi Strauss & Co.; Nestle; Staples, Inc.; Texas
Instruments Incorporated; and Unilever Home & Personal Care, USA; as well as
mid-sized enterprises.
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
and a decline in revenue in fiscal 1999 and 2000, including significant declines
in software revenue. In response to these challenges, we implemented a
restructuring program. As part of this program, we hired a new Chief Executive
Officer and subsequently rebuilt the senior management team, enhanced our supply
chain optimization products and services, expanded the scope of our product and
service offerings to include supplier relationship management, service & parts
management and pricing and revenue optimization through strategic acquisitions.
We also improved our direct sales organization performance by expanding our
number of target markets, improving personnel, and adapting our sales approach
to better address customer challenges. As a result of these actions, we have
been able to nearly double our annual revenue between fiscal 2000 and 2002,
improve our working capital and liquidity through a $250.0 million convertible
debt offering in fiscal 2001 and improve our ability to compete.
During fiscal 2001, our revenue grew 75.8%. Although we reported a
significant increase in our net loss under generally accepted accounting
principles ("GAAP") (we reported a net loss of $28.1 million in fiscal 2001
compared to a net loss of $8.9 million in fiscal 2000), our adjusted net income
(1) was $8.0 million, an improvement of $16.4 million from fiscal 2000.
During fiscal 2002, the Company faced new challenges in its ability to grow
revenue, improve operating performance and expand market share as a result of
progressive weakening of global economic conditions. The weakening macroeconomic
environment included a recession in the United States economy that was fueled by
substantial reductions in capital spending by United States corporations,
especially information technology spending. Economic conditions deteriorated
more severely as a result of the terrorist attacks in the United States on
September 11, 2001, subsequent bioterrorism threats and resulting political and
military actions. During our second and third quarters of fiscal 2002, we
experienced delays in consummating software license transactions, especially
during the last few days of the quarter ended August 31, 2001. The delays were
caused primarily by prospects' concerns about committing to large capital
projects in the face of uncertain global economic conditions. We believe that
these concerns were heightened further by the terrorist attacks in the United
States on September 11, 2001 making it difficult for us to accurately forecast
our revenues while global economic conditions were uncertain. Late in our
quarter ended November 30, 2001, we began to see improvements in closure rates
on software license transactions. Our closure rates on software license
transactions continued to improve during our quarter ended February 28, 2002, as
evidenced by increases in software revenue as compared to our second and third
quarters of fiscal 2002.
17
In response to the downturn in the global economy during fiscal 2002, and
the related impact on our financial performance, we implemented several cost
containment measures during the second half of fiscal 2002 to reduce our
operating cost structure. We reduced our workforce, implemented a temporary
mandatory leave without pay program for all United States employees and a
voluntary leave without pay program in Europe, reduced the use of outside
contractors for product development initiatives and professional service
providers and reduced travel expenses. The mandatory leave without pay program
in the United States began on October 1, 2001 and was eliminated on March 17,
2002. The voluntary leave without pay program in Europe began on January 1, 2002
and is expected to last approximately six months.
Despite the challenges we faced during fiscal 2002, we were able to report
record annual revenue of $310.1 million, an increase of 15.7% compared to fiscal
2001. We reported a significant increase in our net loss under GAAP (we reported
a net loss of $115.2 million in fiscal 2002 compared to a net loss of $28.1
million in fiscal 2001) and our adjusted net loss (1) was $17.4 million, or a
$25.4 million decrease from fiscal 2001. Our successful implementation of cost
containment initiatives during the second half of fiscal 2002 better aligned our
operating cost structure with the anticipated reduction in revenue levels due to
the downturn in the global economy. As a result, we were able to reduce our
quarterly adjusted net loss (1) from $10.7 million during the quarter ended
August 31, 2001 to $1.3 million during the quarter ended February 28, 2002.
(1) Adjusted net income or loss is the internal measure of profitability used by
our management to judge operating performance. Adjusted net income or loss
equals net income or loss as determined under GAAP less (i) amortization of
intangibles and acquired technology, (ii) non-cash stock compensation
(benefit) expense, (iii) restructuring expenses (benefits), (iv) purchased
research and development expense and (v) the loss associated with our
investment in Converge Inc. and the IRI settlement, along with the related
income tax effects.
Adjusted net income or loss as measured by the Company is not determined in
accordance with GAAP, is not indicative of cash used by operating activities
and should not be considered in isolation or as an alternative to, or more
meaningful than, measures of operating performance determined in accordance
with GAAP. Additionally, our calculation of adjusted net income or loss may
not be comparable to similarly titled measures of other companies.
RESULTS OF OPERATIONS:
The following table includes the consolidated statements of operations data
for each of the years in the three-year period ended February 28, 2002 expressed
as a percentage of revenue:
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
2002 2001 2000
-------------- -------------- ---------
Revenue:
Software 41.9% 52.0% 39.6%
Services 34.3% 27.4% 30.5%
Support 23.8% 20.6% 29.8%
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Cost of software 6.8% 7.2% 7.8%
Amortization of acquired technology 3.0% 0.4% 0.1%
Cost of services and support 29.7% 22.1% 28.7%
Sales and marketing 38.8% 43.1% 40.3%
Product development 22.7% 15.2% 19.1%
General and administrative 9.2% 8.6% 10.4%
Amortization of intangibles 27.8% 5.6% 1.5%
Purchased research and development
and acquisition-related expenses -- 3.6% --
Restructuring expenses (benefits) 2.1% -- (1.0)%
Non-cash stock compensation (benefit)
expense (1.0)% 4.8% --
IRI settlement 1.0% -- --
------ ------ ------
Total operating expenses 140.1% 110.6% 106.9%
------ ------ ------
Loss from operations (40.1)% (10.6)% (6.9)%
Other (expense) income - net (4.7)% 1.1% 0.9%
------- ------ ------
Loss before income taxes (44.8)% (9.5)% (6.0)%
(Benefit) provision for income taxes (7.8)% 1.0% (0.1)%
------- ------ ------
Net loss (37.0)% (10.5)% (5.9)%
====== ====== ======
18
The percentages shown above for cost of services and support, sales and
marketing, product development and general and administrative expenses have been
calculated excluding non-cash stock compensation (benefit) expense as follows
(in thousands):
FISCAL YEAR ENDED
2002 2001 2000
---- ---- ----
Cost of services and support $ 52 $ 4,579 $ -
Sales and marketing (1,794) 3,262 -
Product development (1,310) 3,694 -
General and administrative (59) 1,266 -
---------- --------- -------
$ (3,111) $ 12,801 $ -
========== ========= -------
See Operating Expenses: "Non-Cash Stock Compensation (Benefit) Expense" for
further detail.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The accompanying discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires that we make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from the
estimates made by management with respect to these and other items that require
management's estimates.
We have identified the accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management's judgments and estimates. These significant accounting policies
relate to revenue recognition, allowance for doubtful accounts, capitalized
software, valuation of long-lived assets, including intangible assets and
goodwill, and deferred income taxes. These policies, and our procedures related
to these policies, are described in detail below. In addition, please refer to
Note 1 in the Notes to Consolidated Financial Statements included elsewhere in
this annual report for further discussion of our accounting policies.
Revenue Recognition
Our revenue consists of software revenue, services revenue and support
revenue. Software revenue is generally recognized upon execution of a software
license agreement and shipment of the software, provided the fees are fixed and
determinable and collection is considered probable in accordance with the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2, "Software Revenue Recognition", as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions," and Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition". Fees are allocated to the
various elements of software license agreements based on historical fair value
experience. If a software license agreement contains an undelivered element, the
fair value of the undelivered element is deferred and the revenue recognized
once the element is delivered. In addition, if a software license contains
customer acceptance criteria or a cancellation right, the software revenue is
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period or cancellation right. Typically, payments for software
licenses are due within twelve months from the agreement date. Where software
license agreements call for payment terms of twelve months or more from the
agreement date, revenue is recognized as payments become due and all other
conditions for revenue recognition have been satisfied. When we provide services
that are considered essential to the functionality of software products sold or
if software sold requires significant production, modification or customization,
we account for the software and services revenue in accordance with SOP 81-1,
"Accounting for Performance of Construction Type and Certain Production Type
Contracts", which requires us to use the percentage-of-completion method of
revenue recognition. In these cases, software revenue is recognized based on
labor hours incurred to date compared to total estimated labor hours for the
contract.
Implementation services are separately priced, are generally available from
a number of suppliers and are typically not essential to the functionality of
our software products. Implementation services, which include project
management, system planning, design and implementation, customer configurations,
and training, are typically billed on an hourly basis (time and materials) and
sometimes under fixed price contracts. Implementation services billed on an
hourly basis are recognized as the work is performed. On fixed price
19
contracts, services revenue is recognized using the percentage-of-completion
method of accounting by relating hours incurred to date to total estimated hours
at completion.
Support revenue includes post-contract support and the rights to unspecific
software upgrades and enhancements. Maintenance revenues from customer support
services are generally billed annually with the revenue being deferred and
recognized ratably over the maintenance period.
Allowance for Doubtful Accounts
For each of the three years in the period ended February 28, 2002, our
provision for doubtful accounts has ranged between approximately 1% and 3% of
total revenues. We initially record the provision for doubtful accounts based on
our historical experience of write-offs and adjust our allowance for doubtful
accounts at the end of each reporting period based on a detailed assessment of
our accounts receivable and related credit risks. In estimating the allowance
for doubtful accounts, management considers the age of the accounts receivable,
our historical write-offs, the credit worthiness of the customer, the economic
conditions of the customer's industry and general economic conditions, among
other factors. Should any of these factors change, the estimates made by
management will also change, which could affect the level of the Company's
future provision for doubtful accounts.
Capitalized Software
We capitalize the development cost of software, other than internal use
software, in accordance with Statement of Financial Accounting Standards No. 86
("SFAS 86"), "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed." Software development costs are expensed as incurred
until technological feasibility has been established, at which time such costs
are capitalized until the product is available for general release to clients.
Software development costs are amortized at the greater of the amount computed
using either: (a) 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 (b) the ratio that current gross revenue bears to the total current
and anticipated future gross revenue. Generally, an economic life of two years
is assigned to capitalized software development costs.
Valuation of Long-Lived Assets, Including Intangible Assets and Goodwill
We assess the impairment of long-lived assets, including intangible assets,
whenever events or changes in circumstances indicate that the carrying value may
not be fully recoverable. When we determine that the carrying value of such
assets may not be recoverable, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model.
Goodwill and other intangible assets, including acquired technology, are
amortized over periods ranging from two to seven years.
We will adopt Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" as of March 1, 2002, and, as a result,
we will no longer amortize goodwill. We will perform an initial impairment
review of our goodwill during the first quarter of fiscal 2003 and additional
impairment reviews annually and whenever an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting
unit below its carrying amount. Upon completion of our initial impairment
review, we do not expect to record an impairment charge. However, there can be
no assurance that at the time the review is completed a material impairment
charge will not be recorded.
Deferred Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." We assess the
likelihood that our deferred tax assets will be recovered from our future
taxable income and to the extent we believe that recovery is not likely, we
establish a valuation allowance. We consider future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the amount of the
valuation allowance. However, adjustments could be required in the future if we
determine that the amount to be realized is greater or less than the amount we
have recorded.
REVENUE:
Software Revenue. Software revenue decreased 6.9%, or $9.5 million, in
fiscal 2002 and increased 130.6%, or $78.9 million, in fiscal 2001. The decrease
in software revenue and software revenue as a percentage of total revenue in
fiscal 2002 was primarily due to economic uncertainty and a related decline in
information technology spending, including software, which resulted in a
decrease in the number of completed software license transactions and average
selling price ("ASP"). The increases in software revenue and software revenue as
a percentage of total revenue in fiscal 2001 was primarily due to increased
demand and market acceptance for our
20
software products, increased selling activities resulting from a larger and more
effective sales force, increased ASP and number of completed transactions and
enhanced product offerings. The following table summarizes our software
transactions for fiscal 2002, 2001 and 2000:
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
2002 2001 2000
--------- --------- ---------
Significant Software Transactions (1)
-------------------------------------
Number of transactions 111 114 93
Average selling price (in thousands) $ 1,118 $ 1,187 $ 581
(1) Significant software transactions are those with a value of $100,000 or
greater recognized within the fiscal year.
The following table summarizes the number of software transactions of $1.0
million or greater:
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
2002 2001 2000
--------- ---------- ----------
Software transactions $1.0 million - $2.49 million 27 34 13
Software transactions $2.5 million - $4.9 million 5 10 1
Software transactions $5.0 million or greater 6 3 0
--------- ---------- ----------
Total software transactions $1.0 million or greater 38 47 14
We believe the reduction in software transactions of $1.0 million or greater
in fiscal 2002 is primarily the result of companies becoming more cautious and
deliberate regarding commitments to large capital expenditures due to the
uncertain global economic conditions. The increase in software transactions of
$1.0 million or greater in fiscal year 2001 was primarily the result of
increased demand and market acceptance of our software products and our expanded
and enhanced product offerings.
Services Revenue. Services revenue increased 45.3%, or $33.2 million, in
fiscal 2002 and increased 57.7%, or $26.8 million, in fiscal 2001. The increase
in services revenue in fiscal 2002 and fiscal 2001 were due to an increased
number of implementations, an increased customer base desiring training,
consulting and implementation services and the Talus acquisition. We believe
that, as a result of the decrease in the number of completed software license
transactions in fiscal 2002, services revenue growth in fiscal 2003 will be
lower than we have experienced in the past two fiscal years. Services revenue
tends to track software license revenue in prior periods. See "Forward Looking
Statements" and "Factors That May Effect Future Results".
Support Revenue. Support revenue increased 33.5%, or $18.5 million, in
fiscal 2002 and increased 21.6%, or $9.8 million, in fiscal 2001. The increase
in support revenue in fiscal 2002 and fiscal 2001 was due to the increase in the
number of clients that have licensed our software products and entered into
annual support arrangements coupled with renewals of annual support agreements
by our existing client base. In the past, we have experienced high rates of
renewed annual support contracts. There can no assurance that this renewal rate
will continue. See "Forward Looking Statements" and "Factors That May Effect
Future Results".
International Revenue. We market and sell our software and services
internationally primarily in Europe, Asia, Canada and Latin America. Revenue
outside of the United States increased 6.5%, or $5.4 million, to $87.7 million
in fiscal 2002 and increased 34.8%, or $21.3 million, to $82.3 million in fiscal
2001. Revenue outside of the United States as a percentage of total revenue was
28.3% in fiscal 2002 and 30.7% and 40.1%, in fiscal 2001 and 2000, respectively.
The increases in our international revenue resulted from our efforts to expand
our presence and selling efforts outside of the United States. We believe
increasing international revenue is critical to our growth in both revenue and
profitability and may lower our overall exposure to unfavorable economic
conditions in specific regions.
21
OPERATING EXPENSES:
Cost of Software. Cost of software consists primarily of amortization of
capitalized software development costs and royalty fees associated with
third-party software either embedded in our software or resold by us. The
following table sets forth amortization of capitalized software development
costs and other costs of software for the three fiscal years ended February 28
or 29, 2002, 2001 and 2000 (in thousands):
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
2002 2001 2000
-------------- -------------- -------------
Amortization of capitalized software $ 11,382 $ 9,486 $ 9,006
Percentage of software revenue 8.8% 6.8% 14.9%
Other costs of software 9,762 9,660 2,805
Percentage of software revenue 7.5% 6.9% 4.6%
--------- --------- ---------
Total cost of software $ 21,144 $ 19,146 $ 11,811
Percentage of software revenue 16.3% 13.7% 19.5%
The increase in cost of software in fiscal 2002 was primarily due to
increased amortization of capitalized software resulting from an increase in the
number of product development initiatives. Cost of software increased in fiscal
2001 primarily as a result of increases in royalties paid to third parties as a
result of the mix of software sold and an increase in software revenue.
Amortization of Acquired Technology. In connection with our acquisitions of
the CSD division of Partminer and SpaceWorks intellectual property during fiscal
2002, and Talus and STG during fiscal 2001, and certain previous acquisitions,
we acquired developed technology that we offer as part of our integrated
solutions. Acquired technology is amortized over periods ranging from four to
six years.
Cost of Services and Support. Cost of services and support includes
primarily personnel and third-party contractor costs. Cost of services and
support as a percentage of related revenue was 51.1% in fiscal 2002, 46.0% in
fiscal 2001 and 47.6% in fiscal 2000. Cost of services and support increased
55.7%, or $32.9 million, in fiscal 2002 and increased 35.1%, or $15.4 million,
in fiscal 2001. The increase in absolute dollars in cost of services and support
during fiscal 2002 and 2001 was attributable to adding the personnel necessary
to support the growth in services and support revenue and installed customer
base, as well as the Talus acquisition in December 2000. The increase in cost of
services and support in fiscal 2002 as a percentage of related revenue reflects
(i) increased use of outside contractors needed to support the increased demand
of implementation services during our first three quarters in fiscal 2002 and
(ii) an increase in the proportion of this revenue derived from implementation
services, which historically realize lower margins than maintenance services.
Sales and Marketing. Sales and marketing expense consists primarily of
personnel costs, sales commissions, promotional events such as trade shows and
technical conferences, advertising and public relations programs. Sales and
marketing expense as a percentage of total revenue was 38.8% in fiscal 2002,
43.1% in fiscal 2001 and 40.3% in fiscal 2000. Sales and marketing expense
increased 4.2%, or $4.8 million in fiscal 2002, and increased 88.2%, or $54.2
million in fiscal 2001. The increase in absolute dollars in fiscal 2002 was
primarily due to increased personnel costs resulting from an increase in the
average number of sales, marketing and business development employees to 420 in
fiscal 2002 compared to 339 in fiscal 2001, partially offset by lower sales
commissions resulting from decreased software sales. The decrease in sales and
marketing expense as a percentage of total revenue in fiscal 2002 was primarily
due to the combination of lower sales commissions due to decreased software
revenue, flat promotional spending and higher revenues in fiscal 2002 as
compared to fiscal 2001. The increase in fiscal 2001 was due to increased
personnel costs resulting from an increase in the average number of sales,
marketing and business development employees from 232 in fiscal 2000, increased
sales commissions due to higher software revenue, and increases in promotional
spending, advertising and public relations spending to rebrand and reposition
our solutions in the marketplace.
Product Development. Product development expenses include expenses
associated with the development of new software products, enhancements of
existing products and quality assurance activities, net of capitalized software
development costs. Such costs are primarily from personnel and third party
contractors. The following table sets forth product development costs for the
three fiscal years ended February 28, 2002 (in thousands):
22
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
2002 2001 2000
----------- ----------- --------
Gross product development costs $80,956 $49,750 $34,585
Percentage of total revenue 26.1% 18.6% 22.7%
Less: Capitalized software
development costs 10,479 8,920 5,435
Percentage of total revenue 3.4% 3.3% 3.6%
------- ------- -------
Product development costs, as
reported $70,477 $40,830 $29,150
Percentage of total revenue 22.7% 15.2% 19.1%
Gross product development costs increased 62.7%, or $31.2 million, in fiscal
2002 and increased 43.8%, or $15.2 million, in fiscal 2001. Net product
development costs increased 72.6%, or $29.6 million, in fiscal 2002 and
increased 40.1%, or $11.7 million, in fiscal 2001. The increases in fiscal 2002
were due to:
- an increase in the average number of product development employees to
413 in fiscal 2002 compared to 296 in fiscal 2001;
- acquisitions during the first six months of fiscal 2002 and fourth
quarter of fiscal 2001; and
- an increased number of product development initiatives.
The increase in gross and net product development costs in fiscal 2001 was
primarily the result of an increase in the average number of product development
employees, an increase in the usage of outside contractors and an increase in
the number of product development initiatives.
The increase in product development expenses as a percentage of total
revenue in fiscal 2002 is primarily the result of the increased number of new
product development initiatives commenced by the Company, the expected time
taken to fully integrate the technologies and product development personnel of
the companies we acquired and lower growth in total revenue. We expect to
continue to expend significant resources on product development in future
periods. See "Forward Looking Statements" and "Factors That May Effect Future
Results."
General and Administrative. General and administrative expenses include
personnel and other costs of our legal, finance, accounting, human resources,
facilities and information systems functions. General and administrative
expenses increased 24.4%, or $5.6 million, in fiscal 2002 and 44.8%, or $7.1
million, in fiscal 2001. The increases in fiscal 2002 and 2001 were due
primarily to an increase in personnel to support our growth.
Amortization of Intangibles. Our acquisitions of the CSD division of
Partminer and One Release during fiscal 2002 and Talus and STG during fiscal
year 2001 and certain previous acquisitions were accounted for under the
purchase method of accounting. As a result, we recorded goodwill and other
intangible assets that represent the excess of the purchase price paid over the
fair value of the net tangible assets acquired. Goodwill and other intangible
assets (other than acquired technology) are amortized over periods ranging from
two to seven years. Details of our acquisitions are included in Note 11 -
"Acquisitions" in the Notes to our Consolidated Financial Statements included
elsewhere in this annual report.
Purchased Research and Development and Acquisition-Related Expenses. Our
acquisitions of Talus and STG included the purchase of technology that has not
yet been determined to be technologically feasible and has no alternative future
use in its then-current stage of development. Accordingly, in fiscal 2001, the
portion of the purchase price for Talus and STG allocated to purchased research
and development of $9.7 million, in aggregate, was expensed immediately in
accordance with generally accepted accounting principles. Details of our
acquisitions are included in Note 11 - "Acquisitions" in the Notes to our
Consolidated Financial Statements included elsewhere in this annual report.
Restructuring Expenses (Benefits). During our second and third quarters of
fiscal 2002, we adopted two restructuring plans. As a result, we incurred
restructuring expenses of $6.6 million in fiscal 2002. The costs were primarily
attributable to remaining lease obligations, severance and related benefits and
employee relocation costs.
During fiscal 2000, we reduced a previously reported restructuring charge by
$1.5 million due to changes in estimates related to better than expected success
in subleasing abandoned and excess office space which was offset in part by
higher than expected severance costs. Details of our restructuring charges
(benefits) are included in Note 13 - "Restructuring" in the Notes to our
Consolidated Financial Statements included elsewhere in this annual report.
Non-Cash Stock Compensation (Benefit) Expense. We recognized non-cash stock
compensation (benefit) expense of $(3.1) million in fiscal 2002 and $12.8
million in fiscal 2001 associated with stock options that were repriced in
January 1999, net of unvested stock options assumed in the Talus acquisition.
These amounts are included as a separate component of stockholders' equity
23
and are amortized by charges to operations in accordance with FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation".
Repriced Options:
In January 1999, we repriced certain employee stock options, other than
those held by executive officers or directors. This resulted in approximately
3.0 million options being repriced and the four-year vesting period starting
over. Under FIN 44, repriced options are subject to variable plan accounting,
which requires compensation cost or benefit to be recorded each period based on
changes in the Company's stock price until the repriced options are exercised,
forfeited or expire. This resulted in a benefit of $8.0 million in fiscal 2002
and an expense of $11.1 million in fiscal 2001. No adjustments were made upon
initial application of FIN 44 for periods prior to July 1, 2000. The initial
fair value used to measure the ongoing stock compensation charge or benefit was
$22.19 based on the closing price of our common stock on June 30, 2000. As of
February 28, 2002, approximately 1.0 million repriced options were still
outstanding with a remaining vesting period of approximately one year. In future
periods, we will record additional charges or benefits related to the repriced
stock options still outstanding based on the change in our common stock price
compared to the last reporting period. If our stock price at the beginning and
end of any reporting period is below $22.19, no charge or benefit will be
recorded.
Unvested Stock Options -Talus Acquisition:
As part of the Talus acquisition, we assumed all outstanding stock options,
which were converted into our stock options. Options to purchase approximately
631,000 shares of our common stock were unvested at the acquisition date. FIN 44
requires the acquiring company to measure the intrinsic value of unvested stock
options assumed at the acquisition date in a purchase business combination and
record a compensation charge over the remaining vesting period of those options
to the extent those options remain outstanding. This resulted in a charge of
$4.8 million in fiscal 2002 and $1.2 million during fiscal 2001. As of February
28, 2002, approximately 187,000 of these options remained unvested with
remaining vesting periods up to 2.75 years.
IRI Settlement. The IRI settlement charge of $3.1 million in fiscal 2002
represents the amount in excess of a liability accrued in prior years for the
resolution of a dispute between the Company and Information Resources, Inc.
("IRI"). Details of the IRI settlement are included in Note 6 - "Commitments and
Contingencies" in the Notes to Consolidated Financial Statements included
elsewhere in this annual report.
OTHER (EXPENSE) INCOME, NET
Other (expense) income, net, includes interest income from cash equivalents
and marketable securities, interest expense from borrowings, foreign currency
exchange gains or losses and other gains or losses. Other expense, net was $14.6
million in fiscal 2002 compared to other income, net of $2.9 million and $1.4
million in fiscal 2001 and 2000, respectively. The change in fiscal 2002 relates
primarily to an impairment loss we recorded of approximately $10.2 million
relating to an other-than-temporary decline in the fair value of our equity
investment in Converge, Inc. (see Note 12 - "Investments in Businesses" in Notes
to Consolidated Financial Statements) and higher interest expense as a result of
the issuance of $250.0 million in convertible debt during the quarter ended
November 30, 2000, partially offset by higher interest income in fiscal 2002 as
a result of higher levels of invested cash and marketable securities. The
increase in fiscal 2001 relates primarily to an increase in interest income due
to higher investment levels in fiscal 2001 offset by higher interest expense,
both as a result of the issuance of $250.0 million of convertible debt during
the quarter ended November 30, 2000.
(BENEFIT FROM) PROVISION FOR INCOME TAXES
We recorded an income tax benefit of $(24.1) million in fiscal 2002, an
income tax provision of $2.6 million in fiscal 2001 and an income tax benefit of
$(0.2) million in fiscal 2000. The effective tax rate in fiscal 2002 differed
from the U.S statutory rate primarily due to non-deductible goodwill
amortization along with non-cash stock compensation (benefit) expense and
impairment loss on the Converge, Inc. investment that did not result in an
income tax benefit or expense for financial reporting purposes. Excluding the
effect of amortization of intangibles and developed technology, non-cash stock
compensation (benefit), the Converge, Inc. investment impairment, the IRI
settlement and restructuring costs, our effective tax rate was approximately
35.6% for fiscal 2002. As of February 28, 2002, we had net operating loss
carryforwards ("NOLs") for federal, state and foreign tax purposes of $283.8
million, in aggregate. These carryforwards expire in various years between 2002
and 2022. We recorded deferred tax asset valuation allowances against NOLs where
it is more likely than not that we will not be able to utilize these future tax
benefits.
24
As of February 28, 2002, we had net deferred tax assets of $20.4 million.
Realization of our net deferred tax assets is dependent upon the Company having
sufficient taxable income in future periods to utilize our net operating loss
carryforwards before they expire from 2002 to 2022. Continuing losses for tax
purposes combined with a reduction in our anticipated taxable income in future
periods could cause a portion of our net operating loss carryforwards to expire
with a corresponding loss of the related deferred tax asset. Management believes
that an appropriate valuation allowance was recorded at February 28, 2002 based
upon the Company's estimates. Management will continue to monitor its estimates
of future profitability based on evolving business conditions.
NET (LOSS) INCOME
We reported a net loss of $115.2 million, $28.1 million and $8.9 million for
fiscal years ending February 28 or 29, 2002, 2001 and 2000, respectively. The
increased net loss in fiscal 2002 compared to fiscal 2001 is primarily due to
amortization of intangibles directly attributable to our acquisitions in the
fourth quarter of fiscal 2001 and in fiscal 2002, the Converge, Inc. investment
impairment, the IRI settlement, restructuring costs and an increased operating
loss (excluding non-cash charges), offset by the favorable effect of non-cash
stock compensation (benefit) expense. The increased net loss in fiscal 2001
compared to fiscal 2000 is primarily due to the write-off of purchased research
and development and intangible amortization directly attributable to our
acquisitions of Talus and STG and charges for non-cash stock compensation,
offset by an increase in operating income, excluding these non-cash items.
Adjusted net (loss) income was $(17.4) million, $8.0 million and $(8.4) million
in fiscal 2002, 2001 and 2000, respectively.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share are computed in accordance with SFAS No.
128, "Earnings Per Share," which requires dual presentation of basic and diluted
earnings per common share for entities with complex capital structures. Basic
earnings (loss) per common share is based on net income divided by the
weighted-average number of common shares outstanding during the period. Diluted
earnings or loss per common share include, when dilutive, (i) the effect of
stock options and warrants granted using the treasury stock method, (ii) the
effect of contingently issuable shares earned during the period, and (iii)
shares issuable under the conversion feature of our convertible notes using the
if-converted method. Future weighted-average shares outstanding calculations
will be impacted by the following factors:
- the ongoing issuance of common stock associated with stock option
and warrant exercises;
- the issuance of common shares associated with our employee stock
purchase plan;
- any fluctuations in our stock price, which could cause changes in
the number of common stock equivalents included in the diluted
earnings per common share calculations;
- the issuance of common stock to effect business combinations should
we enter into such transactions;
- assumed or actual conversions of our convertible debt into common
stock;
- the potential issuance of common stock related to contingent
consideration from the STG acquisition (see "Liquidity and
Capital Resources"); and
- the potential issuance of common stock related to the WDS
acquisition (see "Liquidity and Capital Resources").
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital
expenditure requirements primarily through cash flows provided from operations,
long-term borrowings and sales of equity securities. Our cash, cash equivalents
and marketable securities in aggregate decreased $67.2 million during fiscal
2002 to $233.1 million as of February 28, 2002. Working capital decreased $63.7
million to $237.0 million at February 28, 2002. The decrease in cash, cash
equivalents, marketable securities and working capital resulted primarily from
cash payments for the Partminer CSD, Inc. and SpaceWorks, Inc. acquisitions, the
Converge, Inc. investment, two semi-annual interest payments on our convertible
debt, as well as losses from operations and severance and lease payments related
to our restructuring plans.
Cash flows (used in) provided by operating activities was $(15.9) million,
$15.5 million and $12.3 million in fiscal 2002, 2001 and 2000, respectively. The
change in operating cash flows of $31.4 million in fiscal 2002 resulted
primarily from (i) the Company's operating loss before non-cash items in fiscal
2002 and (ii) increased cash paid for interest on our convertible debt offset by
increased interest income. Days sales outstanding ("DSO") in accounts
receivable, which is calculated based on our fourth quarter revenue, increased
to 85 days as of February 28, 2002 versus 82 days as of February 28, 2001.
25
Cash provided by (used in) investing activities was $36.6 million, $(117.3)
million and $(7.2) million in fiscal 2002, 2001 and 2000, respectively.
Investing activities consist primarily of the sales and purchases of marketable
securities, purchases of property and equipment, purchases and capitalization of
software and acquisitions and investments in businesses. Sales of marketable
securities, net of purchases, were $101.0 million in fiscal 2002. Total
purchases of property, equipment and software, including capitalized software,
were $23.7 million in fiscal 2002. We expect purchases of property and equipment
to increase in fiscal 2003 as we complete the build out of our new corporate
headquarters space. Acquisitions and investments in businesses, net of cash
acquired, of $41.1 million, in aggregate, during fiscal 2002, relate primarily
to the Partminer CSD, Inc., and SpaceWorks, Inc. acquisitions and the Converge,
Inc. investment.
Cash provided by financing activities was $12.4 million, $256.2 million and
$5.0 million in fiscal 2002, 2001 and 2000, respectively. Cash provided by
financing activities in fiscal 2002 consisted primarily of proceeds from the
exercise of stock options and employee stock plan purchases. Cash provided by
financing activities in fiscal 2001 consisted primarily of proceeds from our
convertible debt offering in November 2000 and proceeds from the exercise of
stock options and employee stock plan purchases, partially offset by payments
made against our line of credit. We had no borrowings outstanding under our line
of credit at February 28, 2002.
As of February 28, 2002, we had $250.0 million in 5% convertible
subordinated notes outstanding ("the Notes"). The Notes bear interest at 5.0%
per annum, which is payable semi-annually. The Notes mature in November 2007 and
are convertible into approximately 5.7 million shares of our common stock at a
conversion price of $44.06 per share, subject to adjustment under certain
conditions. On or after November 7, 2003, we may redeem the Notes in whole, or
from time to time, in part, at our option. Redemption can be made on at least 30
days' notice if the trading price of our common stock for 20 trading days in a
period of 30 consecutive days ending on the day prior to the mailing of notice
of redemption exceeds 120% of the conversion price of the Notes. The redemption
price, expressed as a percentage of the principal amount, is:
REDEMPTION PERIOD REDEMPTION 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%
On February 28, 2002, we renewed a one-year unsecured revolving credit
facility with a commercial bank for $20.0 million. Under its terms, we may
request cash advances, letters of credit, or both. We may make borrowings under
the facility for short-term working capital purposes or for acquisitions. The
facility requires us to comply with various operating performance and liquidity
covenants, restricts us from declaring or paying cash dividends and limits the
size of acquisition-related borrowings. As of February 28, 2002, we had $15.9
million in letters of credit outstanding under this line primarily to secure our
lease obligations for office space. We were in compliance with all financial
covenants as of February 28, 2002.
The following summarizes our lease obligations as of February 28, 2002 and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods (in thousands):
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Capital leases $ 2,035 $ 1,536 $ 4 $ -- $ -- $ -- $ 3,575
Operating leases 21,018 20,161 16,978 15,737 15,055 46,881 135,830
------ ------ ------ ------ ------ ------ -------
Total lease obligations $23,053 $ 21,697 $16,982 $15,737 $15,055 $46,881 $139,405
In December 2000, we entered into a ten-year lease agreement for a new
headquarters facility in Rockville, MD for approximately 210,000 square feet to
replace expiring leases in our existing Maryland facilities. This lease was
amended in June 2001 to add approximately 70,000 square feet. We began moving
into our new headquarters space in March 2002 and expect to be completely moved
into the new space by the end of the second calendar quarter of 2002. The
operating lease term commenced in May 2002 and ends in June 2012. We expect to
incur an additional $6.0 million in capital expenditures for leasehold
improvements in the new headquarters space during the first half of fiscal 2003.
We will also procure approximately $8.0 million of furniture and
telecommunications equipment for the new headquarters space under capital lease
agreements, of which $2.4 million has been recorded as of February 28, 2002. We
expect to commit to the remaining balance during the first quarter of fiscal
2003. Details of our
26
capital and operating lease commitments are in Note 6 - "Commitments and
Contingencies" in the Notes to Consolidated Financial Statements included
elsewhere in this annual report.
On January 16, 2001, we acquired STG. We may be required to make additional
contingent payments to the former stockholders of STG of up to $27.9 million
during fiscal 2003 if certain revenue-based performance criteria are met during
the 21-month period ending October 31, 2002. The additional contingent payments,
if any, would be payable in cash, or in limited circumstances, in common stock
at our sole election.
On April 26, 2002, we acquired certain assets and assumed certain
liabilities of WDS for $26.2 million. Approximately $2.6 million of the purchase
price was paid in cash at closing. The remaining purchase price of $23.6 million
is payable in shares of our common stock, cash, or a combination thereof at our
election. We have agreed to register for resale by WDS shares of our common
stock issued as payment of the purchase price. If we elect to pay some or all of
the remaining purchase price in shares of our common stock, the number of shares
to be issued will be determined by dividing the remaining $23.6 million (the
"Negotiated Value") by the average closing price of our common stock for the two
consecutive trading days ending on the second trading day prior to the shares
becoming registered for resale. If a registration statement for the shares is
not declared effective within 180 days of the filing thereof, we would be
required to pay the Negotiated Value in cash.
If, at the close of the ten trading day period beginning after the
registration for resale of the shares becomes effective, the aggregate value of
the shares issued to WDS (the "Trading Value"), using the average closing price
of our common stock during such ten trading day period (the "Trading Price"), is
less than 95% of the Negotiated Value, we will be required to pay the difference
between the Negotiated Value and the Trading Value (not to exceed $8.26 million)
to WDS in cash, shares of our common stock or a combination thereof at our
election. If we elect to pay the difference in shares of our common stock, the
number of shares to be issued will be determined by dividing the difference
between the Negotiated Value and the Trading Value by the Trading Price. If, at
the close of such ten trading day period, the Trading Value is more than 105% of
the Negotiated Value, WDS will return shares to us in an amount determined in
the same manner. Details are included in Note 17 - "Subsequent Events" in the
Notes to our Consolidated Financial Statements included elsewhere in this annual
report.
In the future, we may pursue acquisitions of complementary businesses and
technologies. In addition, we may make strategic investments in businesses and
enter into joint ventures that complement our existing business. Any future
acquisition or investment may result in a decrease to our liquidity and working
capital to the extent we pay with cash.
We believe that our existing liquidity and expected cash flows from
operations will satisfy our capital requirements for the foreseeable future. We
believe that the combination of cash and cash equivalents, marketable securities
and anticipated cash flows from operations will be sufficient to satisfy our
potential cash requirements for the STG contingent consideration, the WDS
acquisition and expected capital expenditures and capital lease obligations for
the next twelve months. However, weakening economic conditions or weakening
demand for application software in future periods would negatively impact our
future operating results and liquidity. See "Forward Looking Statements" and
"Factors That May Effect Future Results."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
On March 1, 2001, we adopted Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 137 and 138. SFAS 133 requires all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. Adoption of this standard did not have a material impact on
our financial statements.
In June, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations." and
Statement of Financial Accounting Standards No. 142 ("SFAS 142") "Goodwill and
Other Intangible Assets." SFAS 141 establishes new standards for accounting and
reporting requirements for business combinations and requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS 142 requires goodwill and certain intangible assets to remain on
the balance sheet and not be amortized. In addition, SFAS 142 requires assembled
workforce to be reclassified as goodwill. On an annual basis, and when there is
reason to suspect that their values have been impaired, these assets must be
tested for impairment and write-downs may be necessary. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. SFAS 142 will also
require recognized intangible assets with finite lives to be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No 121 ("SFAS 121")
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be
27
Disposed Of." Any recognized intangible asset determined to have an indefinite
useful life will not be amortized, but instead tested for impairment in
accordance with the Standard until its life is determined to no longer be
indefinite.
In connection with the goodwill impairment evaluation, SFAS 142 will require
the Company to perform an assessment of whether there is an indication that
goodwill is impaired at the date of adoption. To accomplish this, we will
identify our reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including existing goodwill and
intangible assets, to those reporting units as of the date of adoption and
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and we must perform the second step of the impairment test. In the
second step, we must compare the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all of its
assets and liabilities in a manner similar to a purchase price allocation in
accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. Any impairment loss will be recognized as
the cumulative effect of a change in accounting principle in our statement of
operations.
We will adopt the provisions of SFAS 141 and SFAS 142 as of March 1, 2002,
with the exception of the immediate requirement to use the purchase method of
accounting for all business combinations initiated after June 30, 2001. Early
adoption and retroactive application of these Standards are not permitted.
However, any goodwill and any intangible asset determined to have an indefinite
useful life that was acquired in a business combination initiated after June 30,
2001 is not amortized. Goodwill and intangible assets acquired in business
combinations initiated before July 1, 2001 were amortized until February 28,
2002. Effective March 1, 2002, we stopped amortizing goodwill, but will continue
amortizing other intangible assets with finite lives. We will perform the
initial goodwill impairment test required by SFAS 142 during our first quarter
of fiscal 2003. Although we have not yet completed our analysis, we do not
expect an impairment loss to be recognized upon the adoption of SFAS 142. We
will continue to test for impairment on an annual basis, coinciding with our
fiscal year end, or on an interim basis if circumstances change that would more
likely than not reduce the fair value of our reporting unit. We believe that
upon adoption of the non-amortization provisions of SFAS 142, our amortization
of intangibles and acquired technology will decrease to approximately $13.6
million in fiscal 2003 from $95.4 million in fiscal 2002 before considering the
impact of the WDS acquisition.
In August 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of SFAS 121
for (i) recognition/measurement of impairment of long-lived assets to be held
and used and (ii) measurement of long-lived assets to be disposed of by sale.
SFAS 144 also supersedes the accounting and reporting provisions of Accounting
Principles Board's No. 30 ("APB 30"), "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of but retains APB 30's requirement to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. We adopted the provisions of SFAS 144 effective March
1, 2002, and do not expect adoption of this standard to have any material impact
on our financial statements.
In November 2001, the Financial Accounting Standards Board issued Staff
Announcement Topic No. D-103 "Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred", which was
subsequently incorporated in Emerging Issues Task Force No. 01-14 ("EITF
01-14"). EITF 01-14 establishes that reimbursements received for "out-of-pocket"
expenses such as airfare, hotel stays and similar costs should be characterized
as revenue in the income statement. We adopted the guidance effective March 1,
2002 with the resulting effect of increased services revenue and increased
operating expenses. We currently record "out-of-pocket" expense reimbursements
as a reduction of cost of services. We will be required to reclassify these
amounts to revenue in our comparative financial statements beginning in our
first quarter of fiscal 2003. Application of EITF 01-14 will not result in any
net impact to operating or net income in any past periods or future periods.
FACTORS THAT MAY AFFECT FUTURE RESULTS:
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating us and our business. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties that we do not presently know or that we currently deem
immaterial, may also impair our business, results of operations and financial
condition.
28
RISKS RELATED TO OUR BUSINESS
THE TERRORIST ATTACKS THAT TOOK PLACE IN THE UNITED STATES ON SEPTEMBER 11, 2001
WERE UNPRECEDENTED EVENTS THAT HAVE CREATED MANY ECONOMIC AND POLITICAL
UNCERTAINTIES, SOME OF WHICH MAY HARM OUR BUSINESS AND PROSPECTS AND OUR ABILITY
IN GENERAL TO CONDUCT BUSINESS IN THE ORDINARY COURSE.
The terrorist attacks that took place in the United States on September 11,
2001, and thereafter in the United States and elsewhere in the world have
adversely affected many businesses, including the Company, in multiple ways. The
national and global responses to these terrorist attacks, some of which are
still being formulated, may materially adversely affect us in ways we cannot
predict at present. Some of the possible material adverse impacts to our
business include, but are not limited to:
- the reduced ability to do business in the ordinary course as it is
customarily conducted, resulting from a variety of factors, including
changes or disruptions in movement and sourcing of materials, goods and
components or the possible interruption in the flow of information or
monies;
- a lengthening of our sales cycles and implementations, which might
result from a number of factors, including among others changes in
security measures for passenger air travel and reductions in available
commercial flights which may make it more difficult for our sales force
to schedule face-to-face meetings with prospects and to negotiate and
consummate transactions;
- increased credit and business risk for customers in industries that were
severely impacted by the attacks, including passenger airlines and other
travel and hospitality industries; and
- possible reductions, delays or postponements, in capital expenditures as
a result of changes in priorities and approval processes.
AS A RESULT OF OUR SIGNIFICANT LOSSES IN RECENT FISCAL YEARS AND SIGNIFICANT
CHANGES IN OUR PRODUCTS AND SERVICES, YOU MAY HAVE DIFFICULTY EVALUATING OUR
FUTURE PROSPECTS.
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 and a decline in revenue in fiscal 2000. Late in our second quarter
of fiscal 2002 and into our third quarter of fiscal 2002, we again experienced a
decline in revenue, due to weakening economic conditions and the affects
resulting from the terrorist attacks of September 11, 2001. Since April 1999, we
enhanced our supply chain optimization products and services, expanded the scope
of our product and service offerings to include supplier relationship
management, service & parts management and pricing and revenue optimization and
improved our direct sales organization. Our ability to continue to improve our
financial performance and maintain financial stability will be subject to a
number of risks and uncertainties, including the following:
- weakening economic conditions which adversely impacted our operating
performance during the quarters ended August 31, and November 30, 2001
and may continue into the future;
- slower growth in the markets for SRM, SCM, PRO & S&PM solutions than
expected;
- our ability to introduce new software products and services to respond
to technological and client needs;
- our ability to manage through difficult economic and political
environments;
- 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 contain or reduce operating costs without adversely
impacting revenue growth;
- our ability to respond to competitive developments and pricing; and
- our dependence on our current executive officers and key employees.
29
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 YEARS. OUR FUTURE RESULTS WILL
BE ADVERSELY AFFECTED BY SEVERAL TYPES OF NON-CASH CHARGES WHICH COULD IMPAIR
OUR ABILITY TO ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
We have recently incurred significant losses, including net losses of
$115.2 million during fiscal 2002, $28.1 million in fiscal 2001 and $8.9 million
in fiscal 2000. As a result of the WDS acquisition in April 2002, we will likely
incur a non-cash charge in our first quarter of fiscal 2003 related to purchased
research and development which has not yet been determined to be technologically
feasible and has no alternative future use in its current stage of development.
We will incur non-cash charges in the future related to the amortization of
intangible assets, including acquired technology and non-cash stock compensation
expenses associated with our acquisition of Talus Solutions, Inc. (Talus). We
will also incur non-cash charges related to the amortization of certain
intangible assets, including acquired technology, relating to the acquisition of
WDS, STG Holdings, Inc., PartMiner Inc.'s CSD business and SpaceWorks Inc. In
addition, we have incurred and may in the future incur non-cash stock
compensation charges related to our stock option repricing. During fiscal 2002,
we announced that we were required to write off our investment in Converge,
Inc., which resulted in a pre-tax charge of $10.2 million. We may also incur
non-cash charges in future periods related to impairments of long-lived assets.
We cannot assure you that our revenue will grow or that we will achieve
profitability in the future. Our ability to increase revenue 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.
OUR OPERATING RESULTS FLUCTUATE, AND IF WE FAIL TO MEET THE EXPECTATIONS OF THE
INVESTMENT COMMUNITY IN ANY PERIOD, OUR STOCK PRICE COULD SUFFER FURTHER
SIGNIFICANT DECLINES.
Our revenue and operating results are difficult to predict and have become
more difficult to predict since global economic uncertainties and political
instability increased in fiscal 2002. 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;
- customer financial constraints and credit-worthiness;
- 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;
- delay or deferral of customer purchases and implementations of our
solutions due to weakening economic conditions which adversely impacted
our operating performance during the quarters ended August 31, 2001 and
November 30, 2001;
- increased economic uncertainty and political instability world-wide
following the terrorist attacks which began in the United States on
September 11, 2001;
- changes in prices or the pricing models for our products and services or
those of our competitors;
- changes in the mix of our software, services and support revenue;
- changes in the mix of software products we sell and related impact on
third-party royalty payments;
- 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 those rules.
30
Due to fluctuations from quarter to quarter, our operating results may not
meet the expectations of securities analysts or investors, as was the case for
the quarter ended August 31, 2001. If this occurs, the price of our common stock
could suffer further significant declines.
VARIATIONS IN THE TIME IT TAKES US TO LICENSE OUR SOFTWARE MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS.
The time it takes to license our software to prospective clients varies
substantially, but typically has ranged historically between four and twelve
months. Variations in the length of our sales cycles could cause our revenue to
fluctuate widely from period to period. Because we typically recognize a
substantial portion of our software revenue in the last month of a quarter, any
delay in the license of our products could cause significant variations in our
revenue from quarter to quarter. These delays have occurred on a number of
occasions in the past, including, most recently, in our quarters ended August
31, 2001 and November 30, 2001. Furthermore, these fluctuations could cause our
operating results to suffer in some future periods because our operating
expenses are relatively fixed over the short term and we devote significant time
and resources to prospective clients. The length of our sales cycle depends on a
number of factors, including the following:
- the complexities of the SRM, SCM, PRO and S&PM 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 processes employed by the clients and
prospects;
- the sales channel through which the solution is sold;
- the economic conditions in the United States and abroad;
- increased economic uncertainty and political instability world-wide
following the terrorist attacks which began in the United States on
September 11, 2001; and
- any other delays arising from factors beyond our control.
THE SIZE AND SCOPE OF OUR LARGEST CONTRACTS WITH CLIENTS HAVE INCREASED, WHICH
MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS.
Our clients and prospective clients are seeking to solve increasingly
complex SRM, SCM, PRO and S&PM problems. Further, we are focused on providing
more comprehensive solutions for our clients, as opposed to only licensing
software. As the complexities of the problems our clients seek to solve
increases, the size and scope of our contracts with clients increase, as
evidenced by the increase in the number of software transactions of $5.0 million
or greater in fiscal 2002 and 2001. We recorded six software transactions of
$5.0 million or greater in fiscal 2002 as compared to three and zero software
transactions of $5.0 million or greater in fiscal 2001 and 2000, respectively.
As a result, our operating results could fluctuate due to the following factors:
- the complexities of the contracting processes of our clients and
prospects;
- contractual terms may vary widely, which may result in differing methods
of accounting for revenue from each contract;
- the sales cycles related to larger contracts may be longer and subject
to greater delays; and
- losses of, or delays in, concluding larger contracts could have a
proportionately greater effect on our revenue for a particular period.
Any of these factors could cause our revenue to decline or fluctuate
significantly in any quarter and could cause a decline in our stock price.
A PORTION OF OUR REVENUE IS DERIVED FROM SOLUTION SUPPORT CONTRACTS. A REDUCTION
IN THE RENEWAL RATE OF ANNUAL SUPPORT CONTRACTS COULD MATERIALLY HARM OUR
BUSINESS.
31
Our support revenue includes post-contract support and the rights to
unspecified software upgrades and enhancements. Support revenue as a percentage
of total revenue was 23.8%, 20.6% and 29.8% in fiscal 2002, 2001 and 2000,
respectively. Support contracts are generally renewable annually at the option
of our customers. In the past, we have experienced high rates of renewed annual
support contracts from our customers. If our customers fail to renew their
maintenance agreements at historical rates, our support revenues could
materially decline 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 and business partners that have
commercial relationships or compete with the acquired company;
- avoid unanticipated operational difficulties or expenditures or both; and
- effectively operate our existing business lines, given the significant
diversion of resources and management attention required to successfully
integrate acquisitions.
In addition, future acquisitions may result in a dilution to existing
shareholders and to earnings per share to the extent we issue shares of our
common stock as consideration. This could negatively affect our stock price.
WE DEPEND ON SALES OF OUR SRM, SCM, PRO AND S&PM SOLUTIONS, AND OUR BUSINESS
WILL BE MATERIALLY AND ADVERSELY AFFECTED IF THE MARKET FOR OUR PRODUCTS DOES
NOT CONTINUE TO GROW.
Substantially all of our software, service and support revenue have arisen
from, or are related directly to, our SRM, SCM, PRO and S&PM solutions. We
expect to continue to be dependent upon these solutions in the future, and any
factor adversely affecting the solutions or the markets for SRM, SCM, PRO and
S&PM solutions, in general, would materially and adversely affect our ability to
generate revenue. While we believe the markets for SRM, SCM, PRO and S&PM
solutions will continue to expand, they may grow more slowly than in the past.
If the markets for our solutions do not grow as rapidly as we expect, revenue
growth, operating margins, or both, could be adversely affected.
COMPANIES ARE RE-EVALUATING THEIR SUPPLIER AND CLIENT RELATIONSHIPS AND SOME ARE
ADJUSTING THEIR SERVICE LEVELS AND OTHER SUPPLY CHAIN MANAGEMENT SETTINGS AND
LEVELS IN A MANNER THAT MAY HAVE AN ADVERSE AFFECT ON OUR ABILITY TO SELL OUR
SRM, SCM, PRO AND S&PM SOLUTIONS.
Since September 11, 2001, companies are re-evaluating the nature of their
relationships with suppliers and clients. Some are adjusting their service
levels and other supply chain management settings and levels to address risks
arising out of the terrorists attacks and the resulting increased economic and
political uncertainties in ways that may adversely affect the benefits
historically achieved through use of our solutions, which could have a material
adverse affect on our ability to market and sell our SRM, SCM, PRO and S&PM
solutions.
OUR MARKETS ARE VERY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The markets for our solutions are very competitive. The intensity of
competition in our markets has significantly increased, and we expect it to
increase in the future. Our current and potential competitors may make
acquisitions of other competitors and may establish
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cooperative relationships among themselves or with third parties. Some
competitors are offering enterprise application software that compete with our
applications at no charge as components of bundled products. Further, our
current or prospective clients and partners may become competitors in the
future. Increased competition could 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 CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER
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., Global
Logistics Technologies, Inc., i2 Technologies, Inc., JDA Software, Inc.,
Khimetrics, Logility, Inc., Logisitics.com, Mercia, Metreo, PROS Revenue
Management, Retek, Inc., Sabre, Inc., SAP AG, SynQuest and YieldStar Technology.
In addition, some 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 developing SCM, SRM, PRO and S&PM
solutions. Some of our current and potential competitors, particularly the ERP
vendors, have significantly greater financial, marketing, technical and other
competitive resources than us, as well as greater name recognition and a larger
installed base of clients. In addition, many of our competitors have
well-established relationships with our current and potential clients and have
extensive knowledge of our industry. Some of our competitors are offering
enterprise application software at no charge as components of bundled products.
As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in client requirements or to devote greater resources
to the development, promotion and sale of their products than we can. Any of
these factors could materially impair our ability to compete and adversely
affect our revenue growth and operating performance.
IF THE DEVELOPMENT OF OUR PRODUCTS AND SERVICES FAILS TO KEEP PACE WITH OUR
INDUSTRY'S RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE MATERIALLY AND
ADVERSELY AFFECTED.
The markets for SRM, SCM, PRO and S&PM solutions are 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.
Our product development and testing efforts have required, and are expected
to continue to require, substantial investments. 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 REVENUE OR DELAYS IN THE
MARKET ACCEPTANCE OF OUR SOLUTIONS.
Our software is complex and is frequently integrated with a wide variety of
third-party software. This integration process can be complex, time consuming
and expensive and may cause delays in the development of our products. As a
result, some customers may have difficulty or be unable to implement our
products successfully or otherwise achieve the benefits attributable to our
products. We may license software that contains undetected errors or failures
when new software is first introduced or as new versions are released.
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We may not discover errors in our software until our customers install and use a
given product or until the volume of services that a product provides increases.
These problems may result in claims for damages suffered by our clients, a loss
of, or delays in, the market acceptance of our solutions, client dissatisfaction
and potentially lost revenue and collection difficulties during the period
required to correct these errors.
WE ARE DEPENDENT ON THIRD-PARTY SOFTWARE THAT WE INCORPORATE INTO AND INCLUDE
WITH 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 and include third-party software into and with our products
and solutions. We are likely to incorporate and include additional third-party
software into and with 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 or ability to license
the software to others. Any impairment in our relationship with these third
parties could adversely impact our business, results of operations and financial
condition.
WE ARE SUBSTANTIALLY DEPENDENT ON THIRD PARTIES TO INTEGRATE OUR SOFTWARE WITH
OTHER SOFTWARE PRODUCTS AND PLATFORMS. IF ANY COMPANY THAT WE USE TO INTEGRATE
OUR SOFTWARE PRODUCTS SHOULD CEASE TO PROVIDE INTEGRATION SERVICES TO US, OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY
ADVERSELY AFFECTED.
We depend on companies such as Acta Technology, Inc., Peregrine Systems,
Inc., Vignette Corporation, and webMethods, Inc. 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, WHICH COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR BUSINESS.
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 important roles in
marketing our products and solutions. 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 which 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 business, results of operations and
financial condition.
WE HAVE ONLY RECENTLY ENTERED INTO CONTRACTS WITH GOVERNMENTAL AGENCIES. THESE
CONTRACTS OFTEN INVOLVE LONG PURCHASE CYCLES AND COMPETITIVE PROCUREMENT
PROCESSES. IF WE FAIL TO MANAGE THESE CYCLES TO TIMELY CONCLUSIONS, THEY COULD
HAVE A MATERIAL ADVERSE AFFECT ON OUR FINANCIAL PERFORMANCE.
We have recently begun providing our solutions to government agencies and
expect that a significant portion of our future revenue may be derived from
government agency clients. Our acquisition of WDS in April 2002 will increase
the amount of revenue and customer relationships derived from government
agencies. Obtaining government contracts may involve long purchase cycles,
competitive bidding, qualification requirements, congressional appropriations,
delays in funding, budgetary constraints and extensive specification development
and price negotiations. In order to facilitate the sales of our commercial
software and services to the federal
34
government we hold a Government Services Administration Federal Supply Services
Schedule for Information Technology (IT) and Management Organizational and
Business Improvement Services (MOBIS). 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 revenue could decline as a result
of these government procurement processes. Government agencies also may require
us to reimburse the Government for the difference in prices they paid for our
products if we subsequently sell the same products at discounts to other
customers. 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
may require us to estimate the total project cost based on preliminary
projections of the project's requirements. The financial viability of any given
project depends in large part on our ability to estimate such costs accurately
and to 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 re-negotiation 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 FIELD AN EFFECTIVE SALES ORGANIZATION, OUR ABILITY TO GROW WILL BE
LIMITED, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
We have recently reduced our sales force as a result of global economic
uncertainties and political instability. In order to grow our revenue, our
existing sales force will have to be more productive and we will have to expand
our sales force in future periods. Our past efforts to expand our sales
organization have required significant resources. New sales personnel require
training and may take a long time to achieve full productivity. 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 our products
could limit our growth and adversely affect our financial 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, including those for business methods and processes. We have no way
of knowing what patent applications third parties have filed until the
application is filed or until a patent is issued. Patent applications are often
published within 18 months of filing but it can take as long as three years or
more 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.
OUR INTERNATIONAL OPERATIONS POSE RISKS FOR OUR BUSINESS AND FINANCIAL
CONDITION.
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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;
- foreign currency risk;
- legal uncertainties regarding liability, ownership and protection of
intellectual property;
- tariffs and other trade barriers;
- seasonal reductions in business activities;
- potentially adverse tax consequences; and
- increased economic uncertainty and political instability following the
terrorist attacks in the United States on September 11, 2001.
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.
CHANGES IN THE VALUE OF THE U.S. DOLLAR, AS COMPARED TO THE CURRENCIES OF
FOREIGN COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR OPERATING RESULTS.
In fiscal 2002, 28.3% of our total revenue was derived from outside the
United States. Our international revenue and expenses are denominated in foreign
currencies, typically the local currency of the selling business unit.
Therefore, changes in the value of the U.S. Dollar as compared to these other
currencies may adversely affect our operating results. As our international
operations expand, we expect to use an increasing number of foreign currencies,
causing our exposure to currency exchange rate fluctuations to increase. We
generally do not implement hedging programs to mitigate our exposure to currency
fluctuations affecting international accounts receivable, cash balances and
intercompany accounts, and we do not hedge our exposure to currency fluctuations
affecting future international revenues and expenses and other commitments. For
the foregoing reasons, currency exchange rate fluctuations have caused, and
likely will continue to cause, variability in our foreign currency denominated
revenue streams and our cost to settle foreign currency denominated liabilities,
which could have a material adverse effect on our business and operating
results.
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 executive 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 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.
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EXPENSES ARISING FROM OUR PRIOR 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, the prior executive management team offered to reprice employee
stock options, other than those held by our executive officers or directors,
effective January 29, 1999, to bolster employee retention. As a result of our
offer, options to acquire approximately 3.0 million shares were repriced, of
which options to purchase a total of approximately 1.0 million shares are
currently outstanding as of February 28, 2002. In addition, the four-year
vesting period of the repriced options started 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 market price of these options. The
changes in our common stock market price since the FASB-mandated measurement
date of July 1, 2000 resulted in a non-cash stock benefit of $8.0 million during
fiscal 2002 and an expense of $11.1 million being recorded in fiscal 2001. In
each future quarter, we will record the additional expense or benefit related to
the repriced stock options still outstanding, to the extent that our stock price
is greater than $22.19, based on the change in our common stock price as
compared to the measurement date. As a result, the repricing may continue to
have a material adverse impact on reported financial results and could therefore
negatively affect our stock price.
WE MAY BE SUBJECT TO FUTURE 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.
RISKS RELATED TO OUR INDUSTRY
LACK OF GROWTH OR DECLINE IN INTERNET USAGE COULD BE DETRIMENTAL TO OUR FUTURE
OPERATING RESULTS.
The growth of the Internet has increased demand for EPO, SRM, SCM, PRO and
S&PM 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 medium. The continued success of the
Internet as a viable commercial medium may be adversely affected 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
remain a viable commercial medium, our business, financial condition and results
of operations could be materially and adversely affected.
NEW LAWS OR REGULATIONS AFFECTING THE INTERNET OR COMMERCE IN GENERAL COULD
REDUCE OUR REVENUE AND ADVERSELY AFFECT OUR GROWTH.
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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, operating results and
financial condition could suffer.
RISKS RELATED TO OUR INDEBTEDNESS
OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
In November 2000, we completed a convertible debt offering of $250.0
million in 5% subordinated convertible notes that are due November 2007. 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 flows from
operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of capital to fund our
growth strategy, working capital, capital expenditures, acquisitions
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 the 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.
RISKS RELATED TO OUR COMMON STOCK
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;
- weakening economic conditions;
- increased economic and political uncertainty following the terrorist
attacks in the United States on September 11, 2001;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the market for EPO, SRM, SCM, PRO and S&PM
solutions;
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- changes in the performance and/or market valuations of our current and
potential competitors 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;
- adverse or unfavorable publicity regarding our competitors, including
their products and implementation efforts;
- additions or departures of key personnel;
- our sales or anticipated sales of additional equity securities; and
- other events or factors that may be beyond our control.
In addition, the stock markets in general, The Nasdaq National Market and
the equity markets for software companies in particular, have recently
experienced extraordinary price and volume volatility in recent years. Such
volatility has adversely affected the stock prices for 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.
SCHEDULED SALES OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK BY OUR EXECUTIVE
OFFICERS MAY CAUSE OUR STOCK PRICE TO DECLINE.
Certain of our executive officers have entered into pre-established trading
plans pursuant to which they sold a total of approximately 515,000 shares of our
common stock in January 2001, approximately 253,000 shares in April 2001,
approximately 318,000 shares in the three months ended August 31, 2001.
Commencing in September 2001, some of these executive officers terminated their
trading plans. Approximately 24,000 shares were sold under the remaining plans
in the three months ended February 28, 2002. Our executive officers who
presently maintain trading plans are scheduled to sell shares in future
quarters, subject to the terms of their trading plans, which terms include price
floors below which no shares or a reduced amount of shares will be sold. The
quarterly sales will continue until the trading plans are modified or
terminated. Certain of our other executive officers and directors may establish
similar plans to sell shares on a quarterly basis. The sale of these shares may
cause the market price of our stock 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. 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.
ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Foreign Currency Risk. We are subject to risk from changes in foreign
exchange rates for our subsidiaries which use a foreign currency as their
functional currency and are translated into U.S. dollars. Such changes could
result in cumulative translation gains or losses that are included in
shareholders' equity. Revenue outside of the United States was 28.3%, 30.7% and
40.1% in fiscal 2002, 2001 and 2000, respectively, derived from operations in
Australia, Belgium, Brazil, Canada, China, France, Germany, Italy, Japan,
Mexico, Netherlands, Singapore, Spain, Sweden, Taiwan and the United Kingdom.
Exchange rate fluctuations between the U.S. dollar and the currencies of these
countries result in positive or negative fluctuations in the amounts relating to
foreign operations reported in
39
our consolidated financial statements. None of the components of our financial
statements were materially affected by exchange rate fluctuations in fiscal
2002, 2001 and 2000. We generally do not use foreign currency options and
forward contracts to hedge against the earnings effects of such fluctuations.
While we do not expect to incur material losses as a result of this currency
risk, there can be no assurance that losses will not result.
Interest Rate Risk. Our marketable securities and certain cash equivalents
are subject to interest rate risk. We manage this 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
variable rate and fixed rate obligations of corporations and national, state and
local governments and 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 was $4.3 million at February
28, 2002 and $103.9 million at February 28, 2001.
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 deposits of the local bank. Such operating
cash balances held at banks outside of the United States are denominated in the
local currency.
The United States Federal Reserve Board influences the general market rates
of interest. During calendar 2001, the Federal Reserve Board decreased the
federal funds rate several times, by 475 basis points, to 1.75%. These actions
have led to a general market decline in interest rates during calendar 2001.
The weighted average yield on interest-bearing investments held as of
February 28, 2002 and 2001 was approximately 2.1% and 5.5%, respectively. Based
on our investment holdings at February 28, 2002, a 100 basis point decline in
the average yield would reduce our annual interest income by $2.3 million.
Credit Risk. Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments in marketable securities and trade accounts receivable. We have
policies that limit investments to investment grade securities and the amount of
credit exposure to any one issuer. We perform ongoing credit evaluations of our
customers and maintain an allowance for potential credit losses. We do not
require collateral or other security to support clients' receivables since most
of our customers are large, well-established companies. Our credit risk is also
mitigated because our customer base is diversified both by geography and
industry and no single customer accounts for more than 10% our consolidated
revenue. We generally do not use foreign exchange contracts to hedge the risk in
receivables denominated in foreign currencies. We do not hold or issue
derivative financial instruments for trading or speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements and supplementary data, together with
the reports of Deloitte & Touche LLP, independent auditors, are included in Part
IV of this annual report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the information to be set forth in the definitive Proxy
Statement relating to the 2002 Annual Meeting of Stockholders (which we
anticipate will be filed with the Securities and Exchange Commission within 120
days after the end of our fiscal year ended February 28, 2002) (the "Proxy
Statement") under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" and to the information set forth in
Part I of this annual report on Form 10-K regarding executive officers under the
caption "Item 4A. Executive Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the information to be set forth in the Proxy Statement
under the caption "Executive Compensation."
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the information to be set forth in the Proxy Statement
under the caption "Ownership of Manugistics Group, Inc. Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information to be set forth in the Proxy Statement
under the caption "Certain Business Relationships."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this annual report:
(1) FINANCIAL STATEMENTS: PAGE NUMBER
IN THIS REPORT
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations and Comprehensive Loss F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
The financial statements listed above and the financial statement schedules
listed below are filed as part of this annual report on Form 10-K.
(2) Financial Statement Schedules:
(A) Independent Auditors' Report on Schedule S-1
(B) Schedule II - Valuation and Qualifying Accounts S-2
Schedules other than the ones listed above are omitted because they are not
required or are not applicable or the required information is shown in the
consolidated financial statements or notes thereto contained in this annual
report on Form 10-K.
(3) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed below and are
filed or incorporated by reference as part of this annual report on Form 10-K.
Exhibits 10.1, 10.2, 10.11, 10.12, 10.13, 10.14, 10.16 through 10.28, 10.30 and
10.33 are management contracts or compensatory plans or arrangements required to
be filed as exhibits pursuant to Item 14(C) of this annual report.
NUMBER NOTES DESCRIPTION
------------ ----- -----------------------------------------------------------------------------------------------------
2.1 (N) Agreement and Plan of Merger dated June 1, 1998, among the Company, TYECIN Acquisition, Inc., TYECIN
Systems, Inc. and certain other persons
2.2 (Q) Agreement Plan of Merger by and among Manugistics Group, Inc., Talus Solutions, Inc. and Manu
Acquisition Corp. dated September 21, 2000
2.3 (U) Form of Executed Stock Purchase Agreement between Manugistics Group, Inc., Manugistics, Inc., STG
Holdings, Inc., each of the stockholders of STG Holdings, Inc. and Strathdon Investments Limited
dated December 22, 2000
2.4 (J) Stock Purchase Agreement dated February 13, 1998 between Manugistics Nova Scotia Company and ProMIRA
Software Incorporated, et al.
2.5 (I) Sale and Purchase Agreement dated 7th June 1997 between M.C. Harrison, J.E. Harrison, Manugistics
U.K. Limited and the Company
41
NUMBER NOTES DESCRIPTION
------------ ----- -----------------------------------------------------------------------------------------------------
3.1(a) (A) Amended and Restated Certificate of Incorporation of the Company
3.1(b) (B) Certificate of Retirement and Elimination (relating to the Series A and Series B preferred stock of
the Company)
3.1(c) (C) Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company
(effective July 29, 1997)
3.2 Amended and Restated By-Laws of the Company (adopted January 29, 2002)
4.1 (Q) Purchase Agreement dated October 16, 2000, between Deutsche Bank Securities, Inc.,(as representative
of the initial purchasers) and Manugistics Group, Inc.
4.2 (Q) Indenture dated as of October 20, 2000, between Manugistics Group, Inc., and State Street Bank and
Trust Company
4.3 (Q) Registration Rights Agreement dated as of October 20, 2000, and Deutsche Bank Securities Inc., and
Banc of America Securities LLC.4
4.4 (T) Form of Note for Manugistics Group, Inc.'s 5% Convertible Subordinated Notes due November 1, 2007
4.5 (U) Form of Executed Registration Rights Agreement by and among Manugistics Group, Inc., STG Holdings,
Inc., each of the stockholders of STG Holdings, Inc., and Strathdon Investments Limited dated as of
January 16, 2001
10.1 (G) Employee Incentive Stock Option Plan of the Company, as amended
10.2 (G) Fifth Amended and Restated Stock Option Plan of the Company
10.3 (A) Form of Notice of Grant of Option pursuant to the Director Stock Option Plan (previously identified
as Exhibit 10.4)
10.11 (D) Outside Directors Non-Qualified Stock Option Plan
10.12 (D) Executive Incentive Stock Option Plan
10.13 Second Amended and Restated 1998 Stock Option Plan of the Company (effective January 29, 2002)
10.14 (E) Employee Stock Purchase Plan of the Company
10.16 (K) Employment Agreement dated April 25, 1999 among the Company, Manugistics, Inc. and with Gregory J.
Owens, Chief Executive Officer and President
10.17 (L) Employment Agreement dated June 3, 1999 between Manugistics, Inc. and Richard F. Bergmann, as amended
10.18 (L) Employment Agreement dated June 7, 1999 between Manugistics, Inc. and Terrance A. Austin, as amended
10.19 (L) Employment Agreement dated August 25, 1999 between Manugistics, Inc. and James J. Jeter, as amended
10.20 (M) Employment Agreement dated December 6, 1999 between Manugistics, Inc. and Raghavan Rajaji
10.21 (O) Employment Agreement dated December 6, 1999 between Manugistics, Inc. and Timothy T. Smith
(As of February 28, 2002, Mr. Smith was no longer an executive of the Company.)
10.22 (O) Employment Agreement dated January 19, 1999 between Manugistics, Inc. and Daniel Stoks
10.23(a) (O) Stock Option Agreement dated April 27, 1999, between the Company and Gregory J. Owens
10.23(b) (O) Stock Option Agreement dated December 1, 1999, between the Company and Gregory J. Owens
10.23(c) (O) Stock Option Agreement dated December 17, 1999, between the Company and Gregory J. Owens
10.24(a) (O) Stock Option Agreement dated December 6, 1999, between the Company and Richard F. Bergmann
10.24(b) (O) Stock Option Agreement dated June 16, 1999, between the Company and Richard F. Bergmann
10.24(c) (P) Stock Option Agreement dated December 16, 1999, between the Company and Richard F. Bergmann
10.25 (O) Stock Option Agreement dated June 7, 1999, between the Company and Terrence A. Austin
42
NUMBER NOTES DESCRIPTION
------------ ----- -----------------------------------------------------------------------------------------------------
10.26 (R) Offer letter dated November 21, 2000, between Manugistics, Inc. and Dr. Robert Phillips (As of
October 14, 2001, Dr. Phillips was no longer an executive of the Company.)
10.27 (S) Employment Agreement dated October 16, 2000, between the Company and Gregory Cudahy.
10.28 (R) Stock Option Agreement dated October 16, 2000, between the Company and Gregory Cudahy.
10.29 (a) (R) Lease Agreement dated December 19, 2000, between the Company and DANAC Corporation.
10.29(b) (W) First amendment dated June 2001 to lease agreement dated December 19, 2000, between the Company and
DANAC Corporation.
10.30 (V) Employment Agreement dated November 30, 2000, between the Company and Thomas Ryan.(As of
November 30, 2001, Mr. Ryan was no longer an executive of the Company.)
10.31 (a) (V) Amended and Restated Financing Agreement and Form of Revolving Promissory Note dated December 29,
2000 by the Company in favor of Bank of America, N.A.
10.31 (b) Amended and Restated Financing Agreement and Form of Revolving Promissory Note dated February 28,
2002 by the Company in favor of Bank of America, N.A.
10.32 Second Amended and Restated 2000 Stock Option Plan of the Company (effective January 29, 2002)
10.33 Employment Agreement dated November 21, 2000, between the Company and Jeffrey Hudkins
21 Subsidiaries of the Company
23.1 Independent Auditors' Consent
(A) Incorporated by reference from the exhibits to the Company's registration
statement on form S-1 (NO. 333-65312).
(B) Incorporated by reference to 4.1(A) to the Company's registration statement
on form S-3 (REG. NO. 333-31949).
(C) Incorporated by reference to exhibit 4.1 (b) to the Company's registration
statement on form S-3 (REG. NO. 333-31949).
(D) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended August 31, 1994.
(E) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended August 31, 1995.
(G) Incorporated by reference from the exhibits to the Company's definitive
proxy statement relating to the 1996 annual meeting of shareholders dated
June 20, 1996.
(I) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended May 31, 1997.
(J) Incorporated by reference from the exhibits to the Company's current report
on form 8-K dated March 2, 1998
(K) Incorporated by reference from the exhibits to the Company's annual report
on Form 10-K for fiscal year ended February 28, 1999.
(L) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended August 31, 1999.
(M) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended November 30, 1999.
(N) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended August 31, 1998.
43
(O) Incorporated by reference from the exhibits to the Company's annual report
on Form 10-K for fiscal year ended February 29, 2000.
(P) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended May 31, 2000.
(Q) Incorporated by reference from the exhibits to the Company's current report
on form 8-K/A dated October 11, 2000.
(R) Incorporated by reference from the exhibits to the Company's current report
on Form 10-Q for the quarter ended November 30, 2000.
(S) Incorporated by reference to the Company's registration statement Form S-8
filed by the Company on December 22, 2000.
(T) Incorporated by reference from the exhibits to the Company's registration
statement on form S-3/A (NO. 333-53918).
(U) Incorporated by reference from the exhibits to the Company's registration
statement on form S-3/A (333-55010).
(V) Incorporated by reference from the exhibits to the Company's annual report
on Form 10-K for the fiscal year ended February 28, 2001.
(W) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended May 31, 2001.
(b). Reports on Form 8-K
1. On December 21, 2001, we filed a Current Report on Form 8-K reporting our
issuance of our regularly scheduled press release on December 20, 2000,
announcing earnings for the three month and nine month periods ended November
30, 2001
(c) Exhibits
See the response to Item 14(a)(3) above.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 17, 2002.
MANUGISTICS GROUP, INC.
(Registrant)
/s/ Gregory J. Owens
--------------------
Gregory J. Owens
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on May 17,
2002.
/s/ Gregory J. Owens
--------------------
Gregory J. Owens
Chairman of the Board and Chief Executive Officer
(Principal executive officer)
/s/ Raghavan Rajaji
--------------------
Raghavan Rajaji
Executive Vice President and
Chief Financial Officer
(Principal financial officer)
/s/ Jeffrey T. Hudkins
--------------------
Jeffrey T. Hudkins
Vice President, Controller and
Chief Accounting Officer
(Principal accounting officer)
/s/ J. Michael Cline /s/ Steven A. Denning
-------------------- ---------------------
J. Michael Cline Steven A. Denning
Director Director
/s/ Esther Dyson /s/ Lynn C. Fritz
---------------------- ---------------------
Esther Dyson Lynn C. Fritz
Director Director
/s/ Joseph H. Jacovini /s/ William G. Nelson
---------------------- ---------------------
Joseph H. Jacovini William G. Nelson
Director Director
/s/ Thomas A. Skelton /s/ Hau L. Lee
--------------------- --------------
Thomas A. Skelton Hau L. Lee
Director Director
45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Manugistics Group, Inc.
Rockville, MD
We have audited the accompanying consolidated balance sheets of Manugistics
Group, Inc. and its subsidiaries (the Company) as of February 28, 2002 and 2001,
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for each of the three years in the period
ended February 28, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Manugistics Group, Inc. and its
subsidiaries at February 28, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended February
28, 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
McLean, VA
March 26, 2002
(April 26, 2002 as to Note 17)
F-1
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
FEBRUARY 28,
------------
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 228,801 $ 196,362
Marketable securities 4,259 103,946
Accounts receivable, net of allowance for doubtful accounts of $8,308 and
$5,604 at February 28, 2002 and February 28, 2001, respectively 76,443 84,211
Deferred tax assets 9,061 9,175
Other current assets 11,471 12,536
--------- ---------
Total current assets 330,035 406,230
NON-CURRENT ASSETS:
Property and equipment, net of accumulated depreciation 22,872 19,275
Software development costs, net of accumulated amortization 14,506 15,709
Goodwill, net of accumulated amortization 269,998 335,651
Other intangible assets, net of accumulated amortization 66,104 58,527
Deferred tax assets 11,289 --
Other non-current assets 7,836 11,869
--------- ---------
TOTAL ASSETS $ 722,640 $ 847,261
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,009 $ 9,923
Accrued compensation 12,720 19,539
Deferred revenue 43,578 41,729
Other current liabilities 27,777 34,371
--------- ---------
Total current liabilities 93,084 105,562
NON-CURRENT LIABILITIES:
Long-term debt and capital leases 251,023 250,133
Deferred tax liabilities -- 16,062
Other 5,726 5,183
--------- ---------
Total non-current liabilities 256,749 271,378
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock, $.002 par value per share; 300,000 and 100,000 shares authorized
at February 28, 2002 and February 28, 2001, respectively; 69,042 and
67,518 shares issued and 69,042 and 66,765 shares outstanding at February
28, 2002 and February 28, 2001, respectively 138 135
Additional paid-in capital 629,861 621,824
Treasury stock - 0 shares and 753 shares, at cost, as of February 28, 2002 and -- (717)
February 28, 2001, respectively
Deferred compensation (9,049) (19,316)
Accumulated other comprehensive loss (2,704) (1,324)
Accumulated deficit (245,439) (130,281)
--------- ---------
Total stockholders' equity 372,807 470,321
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 722,640 $ 847,261
========= =========
See accompanying notes to consolidated financial statements.
F-2
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FEBRUARY 28 OR 29,
2002 2001 2000
--------- --------- ---------
REVENUE:
Software $ 129,772 $ 139,316 $ 60,421
Services 106,522 73,333 46,516
Support 73,852 55,315 45,496
--------- --------- ---------
Total revenue 310,146 267,964 152,433
--------- --------- ---------
OPERATING EXPENSES:
Cost of revenue:
Cost of software 21,144 19,146 11,811
Amortization of acquired technology 9,168 1,122 147
Cost of services and support 92,083 59,149 43,783
Non-cash stock compensation expense for services and support 52 4,579 --
--------- --------- ---------
Total cost of services and support 92,135 63,728 43,783
Sales and marketing 120,437 115,610 61,439
Non-cash stock compensation (benefit) expense for sales and marketing (1,794) 3,262 --
--------- --------- ---------
Total cost of sales and marketing 118,643 118,872 61,439
Product development 70,477 40,830 29,150
Non-cash stock compensation (benefit) expense for product development (1,310) 3,694 --
--------- --------- ---------
Total cost of product development 69,167 44,524 29,150
General and administrative 28,522 22,925 15,837
Non-cash stock compensation (benefit) expense for general and
administrative (59) 1,266 --
--------- --------- ---------
Total cost of general and administrative 28,463 24,191 15,837
Amortization of intangibles 86,279 15,082 2,290
Purchased research and development and acquisition-related expenses -- 9,724 --
Restructuring expenses (benefit) 6,612 -- (1,506)
IRI settlement 3,115 -- --
--------- --------- ---------
Total operating expenses 434,726 296,389 162,951
--------- --------- ---------
LOSS FROM OPERATIONS (124,580) (28,425) (10,518)
--------- --------- ---------
OTHER (EXPENSE) INCOME - NET (14,638) 2,899 1,389
--------- --------- ---------
LOSS BEFORE INCOME TAXES (139,218) (25,526) (9,129)
(BENEFIT FROM) PROVISION FOR INCOME TAXES (24,060) 2,552 (184)
--------- --------- ---------
NET LOSS $(115,158) $ (28,078) $ (8,945)
========= ========= =========
BASIC AND DILUTED LOSS PER SHARE $ (1.69) $ (0.48) $ (0.16)
========= ========= =========
SHARES USED IN BASIC AND DILUTED SHARE COMPUTATION 67,986 58,955 54,972
========= ========= =========
COMPREHENSIVE LOSS:
Net loss $(115,158) $ (28,078) $ (8,945)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (2,036) (815) 487
Unrealized gains (losses) on securities 656 (609) (33)
--------- --------- ---------
Total other comprehensive (loss) income (1,380) (1,424) 454
--------- --------- ---------
TOTAL COMPREHENSIVE LOSS $(116,538) $ (29,502) $ (8,491)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
ADDITIONAL
PAR PAID-IN TREASURY DEFERRED
SHARES VALUE CAPITAL STOCK COMPENSATION
--------- --------- ------------- ----------- --------------
BALANCE, March 1, 1999 54,658 $ 109 $ 179,942 $ (717) $ --
Issuance of common stock 248 1 1,419 -- --
Exercise of stock options 2,436 5 8,062 -- --
Translation adjustment -- -- -- -- --
Net change in unrealized gain / loss on -- -- -- -- --
marketable securities
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
BALANCE, FEBRUARY 29, 2000 57,342 115 189,423 (717) --
Issuance of common stock 103 -- 1,732 -- --
Issuance of common stock and
assumption of stock options and
warrants - Talus acquisition 7,026 14 398,506 -- --
Issuance of common stock - STG
acquisition 160 -- 4,553 -- --
Exercise of stock options 2,887 6 18,443 -- --
Stock option repricing -- -- 13,805 -- (13,805)
Stock-based compensation charge -- -- -- -- 12,801
Deferred stock-based compensation
related to acquisitions -- -- (5,071) -- (18,312)
Exercise of warrant -- -- 433 -- --
Translation adjustment -- -- -- -- --
Net change in unrealized gain / loss on -- -- -- -- --
marketable securities
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
BALANCE, FEBRUARY 28, 2001 67,518 $ 135 $ 621,824 $ (717) $ (19,316)
--------- --------- --------- --------- ---------
Issuance of common stock 113 -- 2,337 -- --
Issuance of common stock - One Release
acquisition 136 -- 4,343 -- --
Exercise of stock options and other 1,787 4 10,561 -- --
Issuance of common stock - IRI settlement 241 1 3,874 -- --
Retirement of treasury shares, net (753) (2) (715) 717 --
purchases
Stock option repricing -- -- (10,176) -- 10,176
Stock-based compensation benefit -- -- -- -- (3,111)
Deferred stock-based compensation
related to acquisitions -- -- (2,187) -- 3,202
Translation adjustment -- -- -- -- --
Net change in unrealized gain / loss on -- -- -- -- --
marketable securities
Net loss -- -- -- -- --
--------- --------- --------- --------- ---------
BALANCE, FEBRUARY 28, 2002 69,042 $ 138 $ 629,861 $ -- $ (9,049)
========= ========= ========= ========= =========
ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
INCOME (LOSS) (DEFICIT) TOTAL
-------------- ------------ ---------
BALANCE, March 1, 1999 $ (354) $ (93,258) $ 85,722
Issuance of common stock -- -- 1,420
Exercise of stock options -- -- 8,067
Translation adjustment 487 -- 487
Net change in unrealized gain / loss on (33) -- (33)
marketable securities
Net loss -- (8,945) (8,945)
--------- --------- ---------
BALANCE, FEBRUARY 29, 2000 100 (102,203) 86,718
Issuance of common stock -- -- 1,732
Issuance of common stock and
assumption of stock options and
warrants - Talus acquisition -- -- 398,520
Issuance of common stock - STG
acquisition -- -- 4,553
Exercise of stock options -- -- 18,449
Stock option repricing -- -- --
Stock-based compensation charge -- -- 12,801
Deferred stock-based compensation
related to acquisitions -- -- (23,383)
Exercise of warrant -- -- 433
Translation adjustment (815) -- (815)
Net change in unrealized gain / loss on (609) -- (609)
marketable securities
Net loss -- (28,078) (28,078)
--------- --------- ---------
BALANCE, FEBRUARY 28, 2001 $ (1,324) $(130,281) $ 470,321
--------- --------- ---------
Issuance of common stock -- -- 2,337
Issuance of common stock - One Release
acquisition -- -- 4,343
Exercise of stock options and other -- -- 10,565
Issuance of common stock - IRI settlement -- -- 3,875
Retirement of treasury shares, net -- -- --
purchases
Stock option repricing -- -- --
Stock-based compensation benefit -- -- (3,111)
Deferred stock-based compensation
related to acquisitions -- -- 1,015
Translation adjustment (2,036) -- (2,036)
Net change in unrealized gain / loss on 656 -- 656
marketable securities
Net loss -- (115,158) (115,158)
--------- --------- ---------
BALANCE, FEBRUARY 28, 2002 $ (2,704) $(245,439) $ 372,807
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FEBRUARY 28 OR 29,
------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(115,158) $ (28,078) $ (8,945)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 116,592 32,684 21,850
Amortization of debt issuance costs 1,141 403 --
Restructuring expenses (benefit) 6,612 -- (1,506)
Purchased research and development -- 9,724 --
Deferred income taxes (28,168) 1,077 (936)
Non-cash stock compensation (benefit) expense (3,111) 12,801 --
Loss on investments 10,561 -- --
Other 1,552 278 443
Changes in assets and liabilities:
Accounts receivable 9,134 (38,825) 12,438
Other current assets 850 (2,812) 2,728
Other non-current assets 1,289 619 22
Accounts payable (3,791) 1,847 (2,350)
Accrued compensation (6,973) 6,096 530
Other liabilities (4,127) 14,788 (2,548)
Deferred revenue 2,015 9,356 2,017
Restructuring accrual (4,317) (4,444) (11,491)
--------- --------- ---------
Net cash (used in) provided by operating activities (15,899) 15,514 12,252
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses and acquired technology, net of cash (30,951) (2,909) --
acquired
Sale of investment 367 -- --
Sales of marketable securities 102,387 35,850 21,054
Purchases of marketable securities (1,350) (128,244) (19,286)
Purchase of property and equipment (10,179) (8,623) (3,242)
Investments in unconsolidated subsidiaries (10,150) (1,732) --
Capitalization and purchases of software (13,547) (11,670) (5,764)
--------- --------- ---------
Net cash provided by (used in) investing activities 36,577 (117,328) (7,238)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit repayments -- (6,000) (3,500)
Proceeds from issuance of convertible debt, net of issuance costs (180) 242,207 --
Payments on long-term debt and capital lease obligations (310) (150) (939)
Proceeds from exercise of stock options and employee
stock plan purchases 12,902 20,181 9,487
--------- --------- ---------
Net cash provided by financing activities 12,412 256,238 5,048
--------- --------- ---------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES (651) 135 (110)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 32,439 154,559 9,952
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 196,362 41,803 31,851
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 228,801 $ 196,362 $ 41,803
========= ========= =========
See Note 15 for supplemental cash flow information
See accompanying notes to consolidated financial statements.
F-5
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Manugistics Group, Inc. (the Company) is a leading global provider of
Enterprise Profit Optimization(TM) (EPO) solutions. The Company provides
solutions for supply chain management (SCM), supplier relationship management
(SRM), pricing and revenue optimization (PRO) and service and parts management
(S&PM). Our solutions help companies lower operating costs, improve customer
service, increase revenues, enhance profitability and accelerate revenue and
earnings growth.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Manugistics Group, Inc. and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain prior year
amounts have been reclassified for comparability with the current year's
financial statement presentation.
On December 7, 2000, the Company completed a two-for-one stock split
through the issuance of a 100% stock dividend to shareholders of record as of
November 20, 2000. The accompanying consolidated financial statements, shares
outstanding, weighted average shares, amounts per share and all other references
to common stock have been restated to give effect to the stock split.
USE OF ESTIMATES
The preparation of consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America
("GAAP"), requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results may differ from these estimates. Significant
items subject to such estimates and assumptions include the carrying amount of
long-lived assets, valuation allowances for accounts receivable and deferred tax
assets, the valuation of financial instruments, sublease income associated with
the restructuring plans, estimates to complete fixed price service arrangements
and potential litigation, claims and settlements (see Note 6).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of amounts in operating
accounts, money market investments and other short-term, highly liquid
investments with maturities of three months or less. Each is recorded at cost,
which approximates market value. The Company's policy is to record short-term,
highly liquid investments as cash and cash equivalents. The balance at February
28, 2002 is comprised of $36.4 million in operating accounts, $83.4 million,
with a maturity of three months or less, in money market investments and $109.0
million in debt securities. The balance at February 28, 2001 is comprised of
$29.3 million in operating accounts, $130.8 million in money market investments
and $36.2 million in debt securities.
MARKETABLE SECURITIES
The Company's short-term marketable securities are classified as
"available-for-sale." These securities are recorded at fair value with
unrealized gains and losses reported as a component of stockholders' equity and
comprehensive loss. Realized gains and losses on available-for-sale securities
are computed using the specific identification method. On February 28, 2002 and
February 28, 2001, marketable securities consisted of investments in corporate
debt, municipal bonds and other short-term investments which mature in one year
or less.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments in marketable securities and trade accounts receivable. The Company
has policies that limit investments to investment grade securities and the
amount of credit exposure to any one issuer. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential credit
losses. The Company does not require collateral or other security to
F-6
support clients' receivables since most of its customers are large,
well-established companies. The Company's credit risk is also mitigated because
its customer base is diversified both by geography and industry and no single
customer accounts for more than 10% of consolidated revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company initially records the provision for doubtful accounts based
on historical experience of write-offs and adjusts the allowance for doubtful
accounts at the end of each reporting period based on a detailed assessment of
accounts receivable. In estimating the allowance for doubtful accounts,
management considers the age of the accounts receivable, the Company's
historical write-offs, the credit worthiness of the customer, the economic
conditions of the customer's industry and general economic conditions, among
other factors. Should any of these factors change, the estimates made by the
management will also change, which could affect the level of the Company's
future provision for doubtful accounts.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Furniture and fixtures are
depreciated on a straight-line basis over three to ten years. Computer equipment
and software are depreciated on a straight-line basis over two years. Leasehold
improvements are amortized over the shorter of the lease term or the useful life
of the improvements.
CAPITALIZED SOFTWARE
The Company capitalizes the development cost of software, other than
internal use software, in accordance with Statement of Financial Accounting
Standards No. 86 ("SFAS 86"), "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed." Software development costs are expensed
as incurred until technological feasibility has been established, at which time
such costs are capitalized until the product is available for general release to
clients. Software development costs are amortized at the greater of the amount
computed using either: (a) 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 (b) the ratio that current gross revenue bears to the total
current and anticipated future gross revenue. Generally, an economic life of two
years is assigned to capitalized software development costs.
INTANGIBLES
Intangibles include goodwill, customer lists, developed technology and
other items. Goodwill, which is equal to the fair value of consideration paid in
excess of the fair value of the net assets purchased, has been recorded in
conjunction with several of the Company's purchase business combinations.
Goodwill recorded in business combinations prior to June 30, 2001 has been
amortized on a straight-line basis through February 28, 2002 over five years
(see Note 11). Customer lists acquired in conjunction with certain of the
Company's purchase business combinations are amortized using the straight-line
method over seven years. Acquired technology and other intangibles are amortized
on a straight-line basis over two to six years. In accordance with a new
accounting standard issued in July 2001, we will no longer amortize goodwill,
effective March 1, 2002. See "New Accounting Pronouncements."
INTERNALLY DEVELOPED SOFTWARE
The Company capitalizes certain costs to develop or obtain internal use
software in accordance with American Institute of Certified Public Accountants
("AICPA") Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." These capitalized
costs are amortized on a straight-line basis over a period of two to five years
after completion or acquisition of the software.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including property and
equipment and intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. When the Company determines that the carrying value of such assets
may not be recoverable, it measures any impairment based on a projected
discounted cash flow method using a discount rate determined by management to be
commensurate with the risk inherent in the Company's current business model.
F-7
OTHER NON-CURRENT ASSETS
Other non-current assets include deferred financing fees, net of
accumulated amortization, of $6.4 million that are being amortized over the life
of the related long-term debt.
OTHER CURRENT LIABILITIES
Other current liabilities consist primarily of accrued interest, accrued
royalty fees and income taxes payable. No individual amounts exceed five percent
of total current liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, marketable securities,
accounts receivable and accounts payable approximate fair value due to the short
maturities of such instruments. The fair value of our convertible debt was
$176.9 million on February 28, 2002 and $237.8 million on February 28, 2001.
FOREIGN CURRENCY TRANSLATION AND OPERATIONS
Assets and liabilities of the Company's foreign subsidiaries are
translated at the exchange rate in effect on the balance sheet date. The related
revenue and expenses are translated using the average exchange rate in effect
during the reporting period. Foreign currency translation adjustments are
disclosed as a separate component of stockholders' equity and comprehensive
loss.
The Company generates revenue from sales outside the United States which
are denominated in foreign currencies, typically the local currency of the
selling business unit. There are certain economic, political, technological and
regulatory risks associated with operating in foreign countries. Foreign sales
and operations may be adversely affected by the imposition of governmental
controls, foreign currency exchange rate fluctuations and economic and political
instability.
REVENUE RECOGNITION
Our revenue consists of software revenue, services revenue and support
revenue. Software revenue is generally recognized upon execution of a software
license agreement and shipment of the software, provided the fees are fixed and
determinable and collection is considered probable in accordance with the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 97-2, "Software Revenue Recognition", as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions," and Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition." Fees are allocated to the
various elements of software license agreements based on historical fair value
experience. If a software license agreement contains an undelivered element, the
fair value of the undelivered element is deferred and the revenue recognized
once the element is delivered. In addition, if a software license contains
customer acceptance criteria or a cancellation right, the software revenue is
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period or cancellation right. Typically, payments for software
licenses are due within twelve months from the agreement date. Where software
license agreements call for payment terms of twelve months or more from the
agreement date, revenue is recognized as payments become due and all other
conditions for revenue recognition have been satisfied. When we provide services
that are considered essential to the functionality of software products sold or
if software sold requires significant production, modification or customization,
we account for the software and services revenue in accordance with SOP 81-1,
"Accounting for Performance of Construction Type and Certain Production Type
Contracts", which requires us to use the percentage-of-completion method of
revenue recognition. In these cases, software revenue is recognized based on
labor hours incurred to date compared to total estimated labor hours for the
contract.
Implementation services are separately priced, are generally available
from a number of suppliers and are typically not essential to the functionality
of our software products. Implementation services, which include project
management, system planning, design and implementation, customer configurations,
and training, are typically billed on an hourly basis (time and materials) and
sometimes under fixed price contracts. Implementation services billed on an
hourly basis are recognized as the work is performed. On fixed price contracts,
services revenue is recognized using the percentage-of-completion method of
accounting by relating hours incurred to date to total estimated hours at
completion.
Support revenue includes post contract support and the rights to
unspecific software upgrades and enhancements. Maintenance revenues from
customer support services are generally billed annually with the revenue being
deferred and recognized ratably over the maintenance period.
F-8
ADVERTISING
Advertising and promotional costs are expensed as incurred. Advertising
and promotional expense is included in sales and marketing expense and amounted
to $13.2 million, $13.2 million and $4.8 million in fiscal 2002, 2001 and 2000,
respectively.
(BENEFIT FROM) PROVISION FOR INCOME TAXES
The (benefit from) provision for income taxes is the total of the
current year income tax due or refundable and the change in deferred tax assets
and liabilities. The Company uses the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets are recognized
for deductible temporary differences, along with net operating loss
carryforwards and credit carryforwards if it is more likely than not that the
tax benefits will be realized. To the extent a deferred tax asset cannot be
recognized under the preceding criteria, allowances must be established.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled.
NET LOSS PER SHARE
Basic net 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, potential common shares from options and warrants to purchase common
stock using the treasury stock method and the effect of the assumed conversion
of the Company's convertible subordinated debt. The dilutive effect of options
and warrants of 5.6 million, 7.6 million and 3.8 million shares has not been
considered in the computation of diluted loss per share in fiscal 2002, 2001 and
2000, respectively, because including these shares would be anti-dilutive due to
the Company's reported net loss. The assumed conversion of the Company's
convertible debt was excluded from the computation of diluted net loss per share
for fiscal 2002 and 2001 since it was anti-dilutive.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations using the intrinsic
value based method of accounting. The Company has made the pro-forma net income
and earnings per share disclosures in Note 7, calculated as if the Company
accounted for its stock-based compensation plan using the fair value based
method of accounting in accordance with the provisions as required by Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation."
The Company adopted FASB Interpretation No. 44 ("FIN 44") effective July
1, 2000. In accordance with FIN 44, repriced stock options are accounted for as
compensatory options using variable accounting treatment (see Note 7). In
addition, deferred compensation is recorded for the intrinsic value of unvested
stock options exchanged in a purchase business combination (see Note 11) and
amortized over the vesting period.
NEW ACCOUNTING PRONOUNCEMENTS
On March 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS 137 and 138. SFAS 133 requires all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. Adoption of this standard did not have a
material impact on the Company's financial statements.
In June, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations."
and Statement of Financial Accounting Standards No. 142 ("SFAS 142") "Goodwill
and Other Intangible Assets." SFAS 141 establishes new standards for accounting
and reporting requirements for business combinations and requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 142 requires goodwill and certain intangible assets
with indefinite useful lives to remain on the balance sheet and not be
amortized. In addition, SFAS 142 requires assembled workforce to be reclassified
as goodwill. On an annual basis, and when there is reason to suspect that their
values have been impaired, these assets must be tested for impairment and
write-downs may be necessary. SFAS 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill
F-9
recorded in past business combinations, will cease upon adoption of this
statement. SFAS 142 will also require recognized intangible assets with finite
lives to be amortized over their respective estimated useful lives and reviewed
for impairment in accordance with Statement of Financial Accounting Standards No
121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Any recognized intangible asset determined
to have an indefinite useful life will not be amortized, but instead tested for
impairment in accordance with the Standard until its life is determined to no
longer be indefinite.
In connection with the goodwill impairment evaluation, SFAS 142 will
require the Company to perform an assessment of whether there is an indication
that goodwill is impaired at the date of adoption. To accomplish this, the
Company will identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including existing
goodwill and intangible assets, to those reporting units as of the date of
adoption and determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS 141, to its carrying amount,
both of which would be measured as of the date of adoption. Any impairment loss
will be recognized as the cumulative effect of a change in accounting principle
in the Company's statement of operations.
The Company will adopt the provisions of SFAS 141 and SFAS 142 as of
March 1, 2002, with the exception of the immediate requirement to use the
purchase method of accounting for all business combinations initiated after June
30, 2001. Early adoption and retroactive application of these Standards are not
permitted. However, any goodwill and any intangible asset determined to have an
indefinite useful life that was acquired in a business combination initiated
after June 30, 2001 is not amortized. Goodwill and intangible assets acquired in
business combinations initiated before July 1, 2001 continued to be amortized
until February 28, 2002. Effective March 1, 2002, the Company stopped amortizing
goodwill, but will continue amortizing other intangible assets with finite
lives. The Company will perform the initial goodwill impairment test required by
SFAS 142 during its first quarter of fiscal 2003. Although it has not yet
completed its analysis, the Company is not expecting an impairment loss to be
recognized upon the adoption of SFAS 142. We will continue to test for
impairment on an annual basis, coinciding with our fiscal year end, or on an
interim basis if circumstances change that would more likely than not reduce the
fair value of our reporting unit.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes SFAS 121 but retains the fundamental provisions of
SFAS 121 for (i) recognition/measurement of impairment of long-lived assets to
be held and used and (ii) measurement of long-lived assets to be disposed of by
sale. SFAS 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board's No. 30 ("APB 30"), "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
segments of a business to be disposed of but retains APB 30's requirement to
report discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company adopted the provisions of SFAS 144
effective March 1, 2002, and does not expect adoption of this standard to have
any material impact on the Company's financial statements.
In November 2001, the Financial Accounting Standards Board issued Staff
Announcement Topic No. D-103 "Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred", which was
subsequently incorporated in Emerging Issues Task Force No. 01-14 ("EITF
01-14"). EITF 01-14 establishes that reimbursements received for "out-of-pocket"
expenses such as airfare, hotel stays and similar costs should be characterized
as revenue in the income statement. The Company adopted the guidance effective
March 1, 2002 with the resulting effect of increased services revenue and
increased operating expenses. The Company currently records "out-of-pocket"
expense reimbursements as a reduction of cost of services. The Company will be
required to reclassify these amounts to revenue in our comparative financial
statements beginning in its first quarter of fiscal 2003. Application of EITF
01-14 will not result in any net impact to operating or net income in any past
periods or future periods.
F-10
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
FEBRUARY 28,
USEFUL LIVES 2002 2001
------------ ---------- ----------
Computer equipment and software Two years $ 36,277 $ 27,312
Office furniture and equipment Three to ten years 13,508 10,986
Leasehold improvements Shorter of lease term or 9,777 9,107
useful life of the ---------- ----------
improvements
Total 59,562 47,405
Less: accumulated depreciation (36,690) (28,130)
---------- ----------
Total property and equipment $ 22,872 $ 19,275
========== ==========
Depreciation expense for fiscal 2002, 2001 and 2000 was approximately
$9.8 million, $7.0 million and $10.4 million, respectively.
3. SOFTWARE DEVELOPMENT COSTS (in thousands)
The Company capitalizes costs incurred in the development of its
software products for commercial availability. Software development costs
include certain internal development costs and purchased software license costs
for products used in the development of the Company's products. Costs incurred
prior to establishing technological feasibility are charged to product
development expense as incurred. Software development costs are amortized at the
greater of the amount computed using either: (a) 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 (b) the ratio that current gross
revenue bears to the total current and anticipated future gross revenue.
Generally, an economic life of two years is assigned to capitalized software
development costs.
The Company capitalized software development costs of $10,479, $8,920
and $5,435 and recorded related amortization expense of $11,382, $9,486 and
$9,006 for fiscal 2002, 2001 and 2000, respectively, in accordance with SFAS 86.
The Company capitalized purchased licensed software and internally developed
software costs, excluding amounts acquired, of $3,068, $2,750 and $329 and
recorded related amortization of $981, $497 and $799 for fiscal 2002, 2001 and
2000, respectively, in accordance with SOP 98-1.
The total amortization expense amounts for fiscal 2002, 2001 and 2000
include write-offs totaling approximately $1,516, $428 and $366, respectively,
of previously capitalized software development costs. These capitalized costs
were deemed to exceed their future net realizable value as a result of new
technologies developed by the Company and acquired in connection with
acquisitions.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
FEBRUARY 28,
2002 2001
--------- ---------
Goodwill $ 359,849 $ 354,297
Less: accumulated amortization (89,851) (18,646)
--------- ---------
Goodwill, net $ 269,998 $ 335,651
========= =========
Customer lists 22,438 22,484
Acquired technology 46,639 25,570
Assembled workforce 19,469 11,759
Other 5,783 2,529
--------- ---------
Total 94,329 62,342
Less: accumulated amortization (28,225) (3,815)
--------- ---------
Other intangibles, net $ 66,104 $ 58,527
========= =========
Total intangibles $ 336,102 $ 394,178
========= =========
F-11
In accordance with SFAS 142, the assembled workforce intangible asset
will be reclassified to goodwill and the Company will no longer amortize
goodwill effective March 1, 2002.
5. LONG-TERM DEBT
5% Convertible Subordinated Notes. The Company completed a private
placement of $250.0 million of 5% convertible subordinated notes (the "Notes")
in October and November 2000. The Notes bear interest at 5.0% per annum which is
payable semi-annually. The fair market value of the Notes was $176.9 million and
$237.8 million on February 28, 2002 and February 28, 2001, respectively. The
Notes mature in November 2007 and are convertible into approximately 5.7 million
shares of the Company's common stock at a conversion price of $44.06, subject to
adjustment under certain conditions. At any time on or after November 7, 2003,
the Company may redeem the Notes in whole, or from time to time, in part, at the
Company's option. Redemption can be made on at least 30 days' notice if the
trading price or the Company's common stock for 20 trading days in a period of
30 consecutive days ending on the day prior to the mailing of notice of
redemption exceeds 120% of the conversion price of the Notes. The redemption
price, expressed as a percentage of the principal amount, is:
REDEMPTION PERIOD REDEMPTION 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%
Line of Credit - The Company has an unsecured revolving credit facility
with a commercial bank. The current agreement expires in February of 2003. 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.
The facility requires us to comply with various operating performance and
liquidity covenants, restricts us from declaring or paying cash dividends and
limits the size of acquisition-related borrowings. As of February 28, 2002, the
Company was in compliance with all of its financial covenants, did not have any
borrowings outstanding under its line of credit and had $15.9 million in letters
of credit outstanding, primarily to secure our lease obligations for office
space.
6. COMMITMENTS AND CONTINGENCIES
Commitments - The Company leases office space, office equipment and
automobiles under operating leases and various computers and other equipment
under capital leases. Property acquired through capital leases amounted to
$4,138 and $1,261 at February 28, 2002 and February 28, 2001, respectively, and
has been included in computer equipment and software (Note 2). Total accumulated
amortization relating to these leases was $1,262 and $950 as of February 28,
2002 and February 28, 2001, respectively.
Rent expense for fiscal 2002, 2001 and 2000, was approximately $23,624,
$17,158 and $9,712, respectively. The future minimum lease payments under these
capital and operating leases for each of the succeeding fiscal years beginning
March 1, 2002 are as follows (in thousands):
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------ ------
2003 $ 2,035 $ 21,018
2004 1,536 20,161
2005 4 16,978
2006 -- 15,737
2007 -- 15,055
Thereafter -- 46,881
----------- ----------
Total minimum lease payments 3,575 135,830
Less amounts representing interest (199) --
Less sublease income -- (2,904)
----------- -----------
Present value of net minimum lease payments $ 3,376 (1) $ 132,926
=========== ===========
(1) Approximately $1.9 million and $1.5 million is included in other
current liabilities and long-term debt and capital leases, respectively, in the
consolidated balance sheet as of February 28, 2002.
F-12
Contingencies - The Company is involved in disputes and litigation in
the normal course of business. The Company does not believe that the outcome of
any of these disputes or litigation will have a material effect on the Company's
financial condition or results of operations. The Company has established
accruals related to such matters that are probable and reasonably estimable.
However, an unfavorable outcome of some or all of these matters could have a
material effect on the Company's business, operating results, financial
condition and cash flows.
The Company has previously reported its legal proceedings with
Information Resources, Inc. ("IRI") arising from the acquisition of certain
assets from IRI in March 1997. IRI's claims involving revenue streams was
submitted to arbitration. IRI sought a total of $15.9 million in damages. The
Company contended that the conditions to these amounts becoming due have never
been satisfied and that no amounts were due to IRI, because, among other
reasons, of a failure of consideration in the overall transaction.
In December 2001, the Company and IRI settled their dispute. The Company
agreed to pay to IRI an aggregate of approximately $8.6 million in various
installments. The payment obligation had two components. The Company made cash
payments totaling approximately $4.7 million in installments to IRI, the last of
which was made on April 1, 2002. In addition, the Company issued 240,683 shares
of its common stock to IRI in payment of the remaining $3.9 million on February
27, 2002.
The Company had recorded a liability of approximately $5.5 million in
prior years related to this matter. Such amount was included in other accrued
liabilities in the consolidated balance sheet as of February 28, 2001. The $3.1
million difference between the $5.5 million accrued as of February 28, 2001 and
the total settlement of $8.6 million was expensed in the third quarter of fiscal
2002.
The Company previously reported our legal proceedings with Grocery
Logistics Limited ("Grocery Logistics"). Grocery Logistics had claimed that the
implementation of our software failed to meet the requirements of its contract
for the supply of software, support, maintenance and training services. Acting
through our insurance carrier, we recently settled the claim against us and our
subsidiary, Manugistics U.K. The carrier paid the full amount of the settlement.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized 9,240,506 shares of $.01 par value preferred
stock. As of February 28, 2002, no preferred shares were outstanding.
COMMON STOCK
The Company has authorized 300,000,000 shares of $.002 par value common
stock. No cash dividends on common stock have been declared or paid in any of
the fiscal years presented.
WARRANTS AND CUSTOMER STOCK ISSUANCES
In connection with the acquisition of Talus Solutions, Inc. ("Talus")
(see Note 11), the Company assumed warrants issued to purchase up to 65,000
shares of the Company's voting stock for certain past services rendered by
outside consultants and the issuance of certain notes payable. On February 28,
2001, warrants to purchase 49,096 shares were exercised. As of February 28,
2002, warrants to purchase up to 15,904 shares were exercisable and have
exercise prices ranging from $6.83 to $16.90 and expire between July 2004 and
June 2005.
Talus issued common stock to a customer at a price below fair value
prior to the acquisition date. The fair value of the common stock issued by
Talus, net of proceeds received, on December 21, 2000, the date of the Talus
acquisition, was $1.9 million. This $1.9 million is being recognized as a
reduction in revenue in proportion with the revenue recognized under the
contract. The Company reduced revenue by $1.0 million in fiscal year 2002.
EMPLOYEE STOCK PURCHASE PLAN
In October 1994, the Company adopted an employee stock purchase plan
("ESPP") that authorizes the Company to sell up to 3,000,000 shares of common
stock to employees through voluntary payroll withholdings. The stock price to be
paid by employees is equal to 85% or 95% of the lower of the average market
price as reported on the National Association of Securities Dealers Automated
Quotation System for either the first or last day of each six-month withholding
period. Payroll deductions may not exceed the lesser of 10% of a participant's
compensation or $25 per year. The number of shares purchased under this plan by
employees
F-13
totaled 113,137 shares, 103,003 shares and 246,986 shares in fiscal 2002, 2001
and 2000, respectively. The weighted average fair value of shares purchased in
fiscal 2002, 2001 and 2000 was $23.84, $40.44 and $6.67, respectively.
STOCK OPTIONS
Effective September 13, 2000, the Company adopted the 2000 Non-Qualified
Stock Option Plan ("2000 Plan") under which non-qualified stock options may be
granted to officers, directors and employees to purchase a total of up to 8.0
million new shares of common stock at prices not less than fair market value at
the time of grant. Effective July 24, 1998, the Company adopted the 1998 Plan
under which incentive and non-qualified stock options may be granted to
officers, directors and employees to purchase a total of up to 10.5 million new
shares of common stock at prices not less than the fair market value at the time
of grant. In April 2001, the Board of Directors of the Company adopted a
proposed amendment to the 1998 Stock Option Plan ("1998 Plan") to increase the
number of shares of Common Stock reserved for issuance to 20,475,800. In
addition, the Board of Directors approved the termination of the 2000 Plan. The
terms of the 2000 Plan remain in effect for options outstanding at the
termination date. Prior to the adoption of the 1998 Plan, the Company had
additional plans under which it granted stock options including the 1994
Employee Stock Option Plan ("1994 Plan"), the 1994 Outside Directors
Non-qualified Stock Option Plan ("1994 Director Plan"), the 1994 Executive
Incentive Stock Option Plan ("1994 Executive Plan") and the 1996 Employee
Incentive Stock Option Plan ("1996 Plan"). No new options will be granted under
these additional stock option plans, which will remain in effect with respect to
options outstanding under such plans until such options are exercised,
terminated or expire. As of February 28, 2002, the Company has cumulatively
granted options on 4.4 million shares under the 2000 Plan, 13.2 million shares
under the 1998 Plan, 12.3 million shares under the 1994 plan, 763,000 shares
under the 1994 Director Plan, 369,332 shares under the 1994 Executive Plan and
3.3 million shares under the 1996 Plan.
Under the 2000 Plan and the 1998 Plan, the vesting period for new
options issued is in accordance with the Incentive and Non-Qualified Stock
Option Policy approved by the Compensation Committee of the Board of Directors.
Options outstanding under the plans vest over various terms, ranging from
immediate vesting to annual vesting over a four-year period from the date of
grant. The right to exercise the vested options expires upon the earlier of
either ten years (or for options granted prior to 1994, eleven years) from the
date of grant or, generally, within thirty days of termination of employment.
During fiscal 2001 and 2000, the Company granted non-qualified stock
options in the amount of 770,000 and 7.3 million shares, respectively, to
several of the Company's executive officers and employees. None were granted
during fiscal 2002. These stock option grants were approved by the Company's
Board of Directors and were not granted under any of the above-mentioned stock
option plans. These shares vest and become exercisable over periods ranging from
immediate vesting to monthly vesting over a period of five years from the date
of grant.
Effective January 29, 1999, the Company completed a stock option
repricing program in which options to purchase a total of approximately 3.0
million shares of the Company's common stock were repriced. Under the repricing
program, which was approved by the shareholders of the Company, outstanding
options (other than those held by executive officers and directors) surrendered
for repricing were exchanged for an equivalent number of repriced options. The
exercise price of the repriced options is $4.38 per share (the fair market value
of the common stock at that date) and the four-year vesting schedule of each
option restarted on February 1, 1999. In conjunction with the Company's
restructuring, the vesting period for the first two years was accelerated as
previously provided for in the plan and approved by the Compensation Committee
of the Board of Directors, pursuant to authority granted to it under the related
option plans, due to certain earnings milestones being met in fiscal 2001 and
2000.
Under FASB Interpretation No. 44 ("FIN 44"), which is retroactive to
option repricings effected after December 15, 1998, companies are required to
treat repriced options as compensatory options accounted for using variable
accounting treatment. As a result, the Company will record non-cash stock
compensation (benefit) expense, over the term of the option, based upon changes
in the market price of its common stock over the market price at July 1, 2000.
As of February 28, 2002, the Company had approximately 1.0 million repriced
options outstanding. The Company recorded a benefit of $(8.0) million during
fiscal 2002 and a charge of $11.1 million in fiscal 2001 related to repriced
stock options.
As part of the Talus acquisition (see Note 11), the Company assumed all
outstanding stock options, which were converted into Manugistics' stock options.
Options to purchase approximately 631,000 shares of Manugisitcs' common stock
were unvested at the acquisition date. FIN 44 requires the acquiring company to
measure the intrinsic value of unvested stock options assumed at the acquisition
date in a purchase business combination and record a compensation charge over
the remaining vesting period of those options to the extent those options remain
outstanding. This resulted in a charge of $4.8 million in fiscal 2002 and $1.2
million during fiscal 2001.
A summary of the status of the Company's stock option plans and changes
during the fiscal years is presented below with share amounts in thousands:
F-14
FEBRUARY 28 OR 29,
------------------
2002 2001 2000
---- ---- ----
OPTIONS TO OPTIONS TO OPTIONS TO
PURCHASE WTD. AVG. PURCHASE WTD. AVG. PURCHASE WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
------ ------- ------ ------- ----- -------
Outstanding at beginning of year 20,948 $ 17.49 15,970 $ 6.83 8,846 $ 5.95
Options assumed in acquisition -- -- 1,345 7.50 -- --
Options granted at market value 5,407 10.91 7,835 35.67 9,760 5.92
Options granted greater than market value -- -- -- -- 2,200 11.68
Exercised (1,683) 6.27 (2,887) 6.23 (2,408) 3.34
Cancelled (2,312) 28.15 (1,315) 11.74 (2,428) 7.89
------- ------- -------
Outstanding at end of year 22,360 $ 16.16 20,948 $ 17.49 15,970 $ 6.83
------- ------- -------
Exercisable at end of year 7,665 $ 13.76 4,603 $ 8.26 2,852 $ 6.23
======= ======= =======
The weighted average fair value of options granted in fiscal 2002, 2001
and 2000 was $5.97, $35.16 and $6.98 per share, respectively. A summary of the
weighted average remaining contractual life and the weighted average exercise
price of options outstanding as of February 28, 2002 is presented below with
share amounts in thousands:
WEIGHTED AVG.
NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG.
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 2/28/02 LIFE PRICE AT 2/28/02 PRICE
$0.50 - $4.38 4,705 6.61 $ 3.96 2,463 $ 3.94
4.44 - 6.38 5,750 8.64 5.59 1,236 5.12
6.55 - 17.36 4,940 7.96 11.90 2,190 11.72
17.44 - 40.50 4,917 8.60 32.13 1,246 31.77
40.59 - 61.03 2,048 8.78 45.81 530 45.77
-------- -------
$0.50 - $61.03 22,360 8.07 $ 16.16 7,665 $ 13.76
======== =======
STOCK-BASED COMPENSATION
As permitted under SFAS No. 123, the Company continues to account for
stock-based compensation to employees in accordance with APB Opinion No. 25,
under which no compensation expense is recognized, since the exercise price of
options granted is equal to or greater than the fair market value of the
underlying security on the grant date. Pro forma information regarding net
income and income per share is required by SFAS No. 123, which uses the fair
value method. The fair value of the Company's stock-based awards to employees
was estimated as of the date of grant using the Black-Scholes option pricing
model. Limitations on the effectiveness of the Black-Scholes option pricing
model include that it was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable and
that the model requires the use of highly subjective assumptions including
expected stock price volatility. Because the Company's stock-based awards to
employees have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock-based awards.
Had compensation cost for these plans been recorded, the Company's net
loss and loss per basic and diluted share amounts would have been as follows, in
thousands except per share amounts:
FEBRUARY 28 OR 29,
2002 2001 2000
---------- ---------- ----------
Net loss $ (182,217) $ (75,314) $ (24,211)
Basic and diluted loss per share $ (2.68) $ (1.28) $ (0.44)
F-15
Fiscal 2002, 2001 and 2000 pro forma amounts include $945, $736 and
$567, respectively, related to the purchases under the employee stock purchase
plan.
The fair value of options granted was estimated assuming no dividends
and using the following weighted-average assumptions for each of the fiscal
years presented:
OPTIONS ESPP
------- ----
2002 2001 2000 2002 2001 2000
----------- ----------- ----------- ------------ ------------ -------------
Risk-free interest rates 3.63% 5.95% 5.63% 3.35% 5.97% 4.87%
Expected term 3.11 years 3.26 years 3.83 years 6 months 6 months 6 months
Volatility .8282 .7690 .7216 .8268 .7531 .7000
8. RETIREMENT PLANS (IN THOUSANDS)
The Company has two defined contribution retirement savings plans (one
in the U.S. and another in the U.K.) under the terms of which the Company
matches a percentage of the employees' qualified contributions. New employees
are eligible to participate in the plans upon completing one month of service.
The Company's contribution to the plans totaled $2,202, $1,774 and $1,595 for
fiscal 2002, 2001 and 2000, respectively.
9. INCOME TAXES
Income Tax Provision. The components of the income tax (benefit)
provision are as follows (in thousands):
FEBRUARY 28 OR 29,
2002 2001 2000
-------- -------- --------
Current:
Federal $ -- $ 257 $ 69
State 100 286 9
Foreign 1,332 1,165 674
-------- -------- --------
Total current $ 1,432 $ 1,708 $ 752
======== ======== ========
Deferred:
Federal $(21,973) $ 2,889 (936)
State (2,938) 387 --
Foreign (581) (2,432) --
-------- -------- --------
Total deferred $(25,492) $ 844 $ (936)
======== ======== ========
Total (benefit) provision for income taxes $(24,060) $ 2,552 $ (184)
======== ======== ========
Loss before income taxes includes losses from foreign operations of
approximately $15.6 million, $20.1 million and $20.6 million in fiscal 2002,
2001 and 2000, respectively.
Deferred Income Taxes. The components of the Company's deferred tax
assets and liabilities are as follows (in thousands):
FEBRUARY 28,
2002 2001
--------- ---------
Deferred Tax Assets:
Bad debt reserve/sales returns $ 1,812 $ 1,766
Accrued expenses 4,152 5,458
Operating loss carryforwards:
Domestic 82,429 58,435
Foreign 25,182 21,485
Restructuring charges 4,131 3,160
Tax credit carryforwards 6,041 4,706
Stock-based transactions 3,073 4,533
Investment losses 4,186 --
Depreciation and amortization 20,327 18,912
Other temporary differences 3,967 1,385
--------- ---------
Deferred tax assets 155,300 119,840
Less: valuation allowance (112,469) (97,643)
--------- ---------
Total deferred tax assets 42,831 22,197
F-16
Deferred tax liabilities:
Software development costs (5,097) (4,805)
Acquired intangibles (16,210) (22,203)
Stock-based transactions (337) (754)
Other (837) (1,322)
--------- ---------
Total deferred tax liabilities (22,481) (29,084)
--------- ---------
Net deferred tax assets (liabilities) $ 20,350 $ (6,887)
========= =========
Management regularly evaluates the realizability of its deferred tax
assets given the nature of its operations and the tax jurisdictions in which it
operates. The Company adjusts its valuation allowance from time to time based on
such evaluations. Based upon the Company's historical taxable income, when
adjusted for non-recurring items, net operating loss carryback potential and
estimates of future profitability, management has concluded that future income
will more likely than not be insufficient to cover all of its deferred tax
assets. Management believes that an appropriate valuation allowance has been
established at February 28, 2002 based upon the Company's estimates. Management
will continue to monitor its estimates of future profitability based on evolving
business conditions. The Company's valuation allowance related primarily to
federal, state and foreign net operating loss carryforwards and tax credits
where management has determined that it is more likely than not that these
future tax benefits will not be utilized.
Deferred tax assets of approximately $45.5 million pertain to certain
net operating loss carryforwards resulting from the exercise of employee stock
options. The Company has provided a valuation allowance on these deferred tax
assets. The valuation allowance on these deferred tax assets will be reduced in
the period in which the Company realizes a benefit on its tax return from a
reduction of income tax payable stemming from the utilization of these losses.
When realized, the tax benefits of these credits and losses will be accounted
for as a credit to stockholders equity rather than as a reduction of the income
tax provision.
Changes in the valuation allowance during fiscal 2002 are as follows (in
thousands):
Balance, February 28, 2001 $ 97,643
Stock option exercises 13,579
Stock-based compensation (1,287)
Other 2,534
---------
Balance, February 28, 2002 $ 112,469
=========
At February 28, 2002, the Company had a total of approximately $207.7
million of U.S. federal and $76.1 million of foreign net operating losses
available to offset future taxable income in those respective taxing
jurisdictions. The federal net operating losses expire during the fiscal years
2011 to 2022. Approximately $25.5 million of the foreign net operating losses
expire during the calendar years 2002 to 2012, while the remaining foreign net
operating losses are available in perpetuity. The Company considers the earnings
of foreign subsidiaries to be permanently reinvested outside of the United
States. Accordingly, no United States income tax on these earnings has been
provided.
The Company also has $4.5 million of research and development tax credit
carryforwards, which expire between 2011 and 2022, and $1.3 million of foreign
tax credit carryforwards that expire between 2002 and 2006.
Statutory Rate Reconciliation. The difference between the reported
amount of income tax (benefit) expense and the amount of income tax expense that
would result from applying statutory U.S. federal tax rate of 35% is summarized
as follows (in thousands):
FEBRUARY 28 OR 29,
2002 2001 2000
-------- -------- --------
Benefit for income taxes computed at statutory rate $(48,726) $ (8,934) $ (3,193)
(Reduction) increase in taxes resulting from:
State and foreign taxes, net of federal benefit (562) 1,482 (388)
Net change in valuation allowance (1,894) 4,888 3,256
Goodwill amortization 24,020 3,989 --
Purchased research and development -- 3,403 --
Meals, entertainment and other non-deductible expenses 421 (2,195) 545
Other 2,681 (81) (404)
-------- -------- --------
(Benefit) provision for income taxes $(24,060) $ 2,552 $ (184)
======== ======== ========
F-17
10. OTHER (EXPENSE) INCOME
Other (expense) income consists of the following (in thousands):
FEBRUARY 28 OR 29,
2002 2001 2000
-------- -------- --------
Interest income $ 9,345 $ 7,832 $ 1,989
Interest expense (12,614) (4,458) (104)
Converge, Inc. investment loss (see Note 12) (10,150) -- --
Other (1,219) (475) (496)
-------- -------- --------
Total other (expense) income $(14,638) $ 2,899 $ 1,389
======== ======== ========
11. ACQUISITIONS
During the three years ended February 28, 2002, we completed the
following transactions:
SPACEWORKS, INC.
On July 25, 2001, the Company acquired the intellectual property and
certain other assets of SpaceWorks, Inc. ("the SpaceWorks Transaction") for $8.3
million in cash. SpaceWorks, Inc. software provided solutions that helped enable
companies to automate complex order-management related activities. The
SpaceWorks Transaction was accounted for as a purchase of developed technology,
which is included in other intangible assets, net of accumulated amortization in
the consolidated balance sheet as of February 28, 2002.
PARTMINER CSD, INC.
On May 31, 2001, the Company acquired the collaborative sourcing and
design assets of PartMiner CSD, Inc., as well as related assets from its parent,
PartMiner, Inc. and its affiliates (the "CSD Acquisition") for $20.0 million in
cash. PartMiner CSD, Inc. was a developer of product design and sourcing
software. The CSD Acquisition included developed technology, existing customer
contracts, personnel and other intangible assets. The CSD Acquisition was
accounted for using the purchase method of accounting. The purchase price has
been allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. Intangible assets related to the
CSD Acquisition include developed technology and goodwill. Contemporaneously, in
a separate transaction, the Company entered into a software license agreement
with Partminer, Inc. for various products for use in PartMiner's electronic
components procurement and sourcing business.
ONE RELEASE, LLC.
On May 17, 2001, the Company acquired certain assets of One Release, LLC
and its affiliates (the "One Release Acquisition"), a software engineering
services and systems business, for $4.3 million of common stock (135,793
shares). The Company may also pay up to an additional $1.0 million in shares of
the Company's common stock as contingent consideration if certain performance
criteria are attained during the first year after the acquisition date.
Additional consideration, if any, would be recorded as goodwill. The One Release
Acquisition was accounted for using the purchase method of accounting. The
results of operations for One Release have been included in the Company's
operations since the acquisition date. The Company allocated approximately $7.4
million to assembled workforce, which is included in other intangible assets,
net of accumulated amortization, in the consolidated balance sheet as of
February 28, 2002.
TALUS SOLUTIONS, INC.
General
On December 21, 2000, the Company acquired Talus, a leading provider of
pricing and revenue optimization software products and services. The Talus
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the acquisition
date. The results of operations for Talus have been included in the Company's
financial statements since the acquisition date. The fair value of identifiable
intangible assets was determined by a valuation using a combination of methods,
including an income approach for developed technology and customer lists and a
cost approach for assembled workforce. Identifiable intangible assets are being
amortized over their estimated useful lives of four years for developed
technology and seven years for customer lists.
F-18
Determination and Allocation of Purchase Price
The purchase price of approximately $402.0 million consisted of the
issuance of approximately 7.0 million shares of the Company's common stock with
a fair value of approximately $340.0 million, the assumption of stock options
and warrants with a fair value of approximately $58.5 million and
acquisition-related costs of $3.5 million, consisting primarily of investment
banking and legal fees. The value of the common stock issued in the transaction
was based on the Company's average stock price for a few days before and after
September 21, 2000, the date the terms of the acquisition were agreed to and
publicly announced. The value of the stock options and warrants assumed in the
transaction was determined by using the Black-Scholes method of option
valuation.
There were several in-process research and development projects at the
time of the Talus acquisition. The efforts required to complete acquired
in-process research and development include planning, designing, testing and
other activities necessary to establish that the product or enhancement to
existing products can be produced to meet desired functionality and technical
performance requirements.
The value of the purchased in-process research and development was
computed using discount rates ranging from 30% to 40% on the anticipated income
stream of the related product revenue. The discounted cash flows was based on
management's forecast of future revenue, costs of revenue and operating expenses
related to the products and technologies purchased from Talus. The determined
value was then adjusted to reflect only the value creation efforts of Talus
prior to the close of the acquisition. At the time of the acquisition, the
products and enhancements were 12.5% to 37.5% complete. The resulting value of
purchased in-process research and development was further reduced by the
estimated value of core technology. The purchased research and development
charge of $8.6 million was expensed in fiscal 2001.
The Company recorded a reduction of stockholders' equity of
approximately $22.8 million for the intrinsic value of unvested stock options
("Deferred Compensation") assumed in the transaction as required by FIN 44.
Deferred Compensation is being amortized by charges to operations over the
vesting period of the options. Non-cash stock-based compensation associated with
the Talus acquisition was approximately $4.8 million in fiscal 2002 and $1.2
million during fiscal 2001.
The following is a summary of the allocation of the purchase price in
the Talus acquisition (in thousands):
Identifiable intangible assets:
Developed technology $ 22,000
Customer lists 19,200
Assembled workforce 10,400
Purchased research and development 8,600
Deferred compensation 22,790
Net assets acquired 1,310
Deferred taxes (17,435)
Transaction costs (3,500)
Severance costs and office closure (2,548)
Goodwill 341,203
-----------
Total $ 402,020
===========
The Company eliminated 28 positions in the acquisition integration plan,
primarily affecting former senior management of Talus and certain administrative
functions such as legal, human resources, marketing and finance.
The following unaudited pro forma summary presents the Company's
consolidated results of operations for the year ended February 28, 2001 as if
the Talus acquisition had been consummated on March 1, 2000. The pro forma
consolidated results of operations include certain pro forma adjustments
including amortization of intangibles, amortization of deferred compensation and
the elimination of the charge for purchased research and development and
transaction costs incurred by Talus prior to the consummation of the
acquisition. The pro forma consolidated results of operations do not reflect any
cost savings associated with the integration plan noted above.
PRO FORMA FINANCIAL INFORMATION
Pro forma results for the year ended February 28, 2001 is as follows (in
thousands, except per share data):
2001
-----------
Revenue $ 297,073
Net loss (106,970)
Net loss per basic and diluted share (1.65)
F-19
The pro forma results are not necessarily indicative of those that would
have actually occurred had the Talus acquisition taken place at the beginning of
the periods presented.
STG HOLDINGS, INC.
On January 16, 2001, the Company acquired STG Holdings, Inc. ("STG"), a
leading developer of advanced planning, scheduling and simulation software for
single factory and multi-factory enterprises. The STG acquisition was accounted
for using the purchase method of accounting and, accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values on the acquisition date. The results of operations of STG
have been included in the Company's financial statements since the acquisition
date.
The initial purchase price of approximately $6.9 million consisted of
common stock of approximately $4.5 million, cash of approximately $1.5 million
and transaction costs of approximately $0.9 million. Approximately $6.7 million
of the purchase price was allocated to identifiable intangible assets and
approximately $1.1 million to purchased research and development charge was
expensed in the period the transaction was consummated.
The Company may be required to make additional contingent payments of up
to $27.9 million if certain revenue-based performance criteria are met during
the 21-month period ended October 31, 2002. The additional contingent payments,
if any, would be payable in cash or, in limited circumstances, shares of the
Company's common stock. Additional consideration paid, if any, would be recorded
as goodwill.
12. INVESTMENTS IN BUSINESS
On May 30, 2001, the Company purchased approximately $10.2 million of
preferred stock of Converge, Inc. (the "Converge Investment"). Converge, Inc. is
a private marketplace exchange for components used by electronics and high
technology manufacturers. Founding investors in Converge, Inc. include Agilent
Technologies, Inc., Compaq Computer Corporation and Hewlett-Packard Company,
among others. The Converge Investment is accounted for under the cost method of
accounting for investments. In a separate transaction approximately two weeks
prior to the Converge Investment, the Company entered into a software license
agreement with Converge, Inc. for various products for use in its marketplace
exchange business.
During the third quarter of fiscal 2002, the Company recorded an
impairment loss of approximately $10.2 million relating to an
other-than-temporary decline in the fair value of its equity investment in
Converge, Inc. The impairment was recorded to reflect the investment at fair
value. As of February 28, 2002, the Company's recorded basis in the Converge
Investment was reduced to $0 due to concerns about the ability of Converge to
continue funding its operations in light of current market conditions in the
high technology sector. The impairment loss is included in other (expense)
income in the consolidated statements of operations and comprehensive loss for
the fiscal year ended February 28, 2002 (see Note 10).
13. RESTRUCTURING OF OPERATIONS
Fiscal 2002 Restructuring Plans. During June 2001, the Company adopted a
restructuring plan in order to centralize certain of its product development
functions in Rockville, MD from two remote offices. This resulted in the closure
of one office and reduction of space occupied in another office, as well as the
relocation and termination of approximately 10 and 40 employees, respectively.
As a result, the Company recorded a restructuring charge related to the product
development consolidation of approximately $2.4 million during fiscal 2002.
During October 2001, the Company announced and implemented an additional
restructuring plan designed to reduce expenses as a result of expected reduction
in revenues caused primarily by client concerns about committing to large
capital projects in the face of weakening global economic conditions. Actions
taken included a reduction in the Company's workforce and a reduction in the
amount of office space to be used in certain of the Company's leased facilities.
Involuntary employee terminations totaled 123 across most business functions and
geographic regions in fiscal 2002. All terminated employees were notified in
fiscal 2002 and one was still employed by the company as of February 28, 2002.
The Company recorded a charge for severance and related benefits of
approximately $1.9 million during fiscal 2002. The Company recorded a facility
charge of approximately $2.3 million during fiscal 2002 resulting from
approximately $0.7 million related to the abandonment of leased office space in
two offices as well as approximately $1.6 million from the expected loss of
sublease rental income on office space closed in fiscal 1999. These costs
include management's best estimates of the remaining lease obligations and loss
of sublease rental income.
F-20
Fiscal 1999 Restructuring Plan. During the third and fourth quarters of
fiscal 1999, the Company implemented a restructuring plan ("1999 Plan") aimed at
reducing costs and returning the Company to profitability. The 1999 Plan
resulted in (i) a reduction of the Company's total workforce by 412 positions,
across all divisions, primarily located in the United States, (ii) the
abandonment of future lease commitments on office facilities that were closed as
part of the 1999 Plan, and (iii) write-downs of operating assets, goodwill and
capitalized software made in accordance with SFAS 121.
The following table sets forth a summary of the restructuring charges,
payments made against those charges and the remaining liabilities as of February
28, 2002 (in thousands):
Balance as Utilization Balance as Utilization Accrual Balance
of Feb 29, of cash of Feb 28, Charges of cash Non-Cash as of Feb
2000 FY01 2001 FY02 FY02 FY02 28, 2002
------- ------- ------- ------- ------- ------- -------
Lease obligations and terminations $ 6,964 $(3,524) $ 3,440 $ 3,653 $(1,617) $ - $ 5,476
Severance and related benefits 920 (920) - 2,318 (2,074) - 244
Relocation - - - 497 (482) - 15
Write-down of leasehold - - - 144 - (144) -
improvements
------- ------- ------- ------- ------- ------- -------
Total $ 7,884 $(4,444) $ 3,440 $ 6,612 $(4,173) $ (144) $ 5,735 (1)
======= ======= ======= ======= ======= ======= =======
(1) $1.6 million and $4.1 million is included in other accrued current
liabilities and other non-current liabilities, respectively, in the consolidated
balance sheet as of February 28, 2002.
14. SEGMENT INFORMATION
The Company and its subsidiaries are principally engaged in the design,
development, marketing, licensing and support and implementation of an
integrated suite of supply chain planning, supplier relationship management and
pricing and revenue optimization software products. Substantially all revenue
results from the licensing of the Company's software products and related
consulting and support services. The Company's chief operating decision maker
reviews financial information, presented on a consolidated basis, accompanied by
disaggregated information about revenue by geographic region for purposes of
making operating decisions and assessing financial performance. Accordingly, the
Company considers itself to be in a single industry segment.
Revenue is attributable to geographic regions based on the location of
the Company's customers. The following table presents total revenue and total
long-lived assets by geographic region for fiscal 2002, 2001 and 2000:
FEBRUARY 28 OR 29,
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Revenue:
United States $222,470 $185,615 $ 91,344
Europe 61,288 49,856 41,271
Asia/Pacific 20,720 13,698 14,901
Other 5,668 18,795 4,917
-------- -------- --------
$310,146 $267,964 $152,433
======== ======== ========
Long-lived Assets:
United States $383,231 $418,604 $ 34,996
Europe 3,625 12,683 4,197
Asia/Pacific 2,086 2,214 2,092
Other 3,663 7,530 11,639
-------- -------- --------
$392,605 $441,031 $ 52,924
======== ======== ========
No single customer accounted for 10% or more of the Company's revenue in
fiscal 2002, 2001 or 2000.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest amounted to approximately $12,614, $460 and $104
in fiscal 2002, 2001 and 2000, respectively. Cash paid for income taxes amounted
to approximately $1,638, $1,939 and $96, in fiscal 2002, 2001 and 2000,
respectively.
Supplemental information of non-cash operating activities is as follows:
F-21
Fiscal 2002.
- In connection with the IRI settlement, we issued common stock with a
fair value of approximately $3.9 million (see Note 6).
Supplemental information of non-cash investing activities is as follows:
Fiscal 2002.
- In connection with the acquisition of One Release, we issued common
stock with a fair value of approximately $4.3 million (see Note 11).
Fiscal 2001.
- In connection with the acquisition of Talus, we issued common stock with
a fair value of approximately $340.0 million and assumed stock options
and warrants with a fair value of approximately $58.5 million (see Note
11); and
- in connection with the acquisition of STG, we issued common stock valued
at approximately $4.5 million (see Note 11).
Supplemental information of non-cash financing activities is as follows:
Fiscal 2002.
- We retired all of our 754,107 treasury shares during fiscal 2002; and
- we recorded approximately $2.5 million in capital leases (see Note 6).
Fiscal 2001.
- A warrant for the purchase of 13,987 shares was exercised by a holder
electing to surrender 31 shares.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly consolidated financial information for fiscal 2002
and 2001 follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
FISCAL 2002
-----------
Total revenue $ 89,810 $ 70,964 $ 68,745 $ 80,627
Operating loss (24,312) (30,080) (43,164) (27,024)
Net loss (23,426) (21,664) (44,980) (25,088)
Basic and diluted loss per share $ (0.35) $ (0.32) $ (0.66) $ (0.36)
Shares used in basic and diluted share 67,041 67,884 68,142 68,750
computation
FISCAL 2001
-----------
Total revenue $ 50,519 $ 58,150 $ 69,996 $ 89,299
Operating (loss) income (2,167) (19,419) 11,307 (18,146)
Net (loss) income (1,151) (19,684) 9,423 (16,666)
Basic (loss) income per share $ (0.02) $ (0.34) $ 0.16 $ (0.26)
Shares used in basic share computation 56,866 57,298 57,969 64,420
Diluted (loss) income per share $ (0.02) $ (0.34) $ 0.14 $ (0.26)
Shares used in diluted share computation 56,866 57,298 66,224 64,420
Included in the second and third quarters of fiscal 2002 are
restructuring charges (see Note 13) and included in the third quarter of fiscal
2002 is the IRI settlement charge (see Note 6) and the Converge, Inc. investment
impairment (see Note 12). Included in all quarters of fiscal 2002 and the
second, third and fourth quarters of fiscal 2001 is non-cash stock compensation
(benefits) charges related to the repricing of stock options (see Note 7),
included in the fourth quarter of fiscal 2001 and all quarters of fiscal 2002 is
the amortization of unvested stock options assumed in the acquisition of Talus
(see Note 7). Included in the fourth quarter of fiscal 2001 are non-recurring
charges for purchased research and development related to the acquisition of
Talus and STG (see Note 11).
F-22
17. SUBSEQUENT EVENT
On April 26, 2002, the Company acquired certain assets of Western Data Systems
of Nevada, Inc. ("WDS") for $26.2 million. WDS is a leading provider of
application software and services to commercial aerospace, defense and maritime
industries and the military. Approximately $2.6 million of the purchase price
was paid in cash at closing. The remaining purchase price of $23.6 million is
payable in shares of our common stock, cash, or a combination thereof at the
Company's election. We have agreed to register for resale by WDS shares of our
common stock issued as payment of the purchase price. If the Company elects to
pay some or all of the remaining purchase price in shares of Manugistics' common
stock, the number of shares to be issued will be determined by dividing the
remaining $23.6 million (the "Negotiated Value") by the average closing price of
Manugistics' common stock for the two consecutive trading days ending on the
second trading day prior to the shares becoming registered for resale. If a
registration statement for the shares is not declared effective within 180 days
of the filing thereof, the Company would be required to pay the Negotiated
Value in cash.
If, at the close of the ten trading day period beginning after the
registration for resale of the shares becomes effective, the aggregate value of
the shares issued to WDS (the "Trading Value"), using the average closing price
of Manugistics' common stock during such ten trading day period (the "Trading
Price"), is less than 95% of the Negotiated Value, the Company will be required
to pay the difference between the Negotiated Value and the Trading Value (not to
exceed $8.26 million) to WDS in cash, shares of Manugistics' common stock or a
combination thereof at the Company's election. If the Company elects to pay the
difference in shares of Manugistics' common stock, the number of shares to be
issued will be determined by dividing the difference between the Negotiated
Value and the Trading Value by the Trading Price. If, at the close of such ten
trading day period, the Trading Value is more than 105% of the Negotiated Value,
WDS will return shares to the Company in an amount determined in the same
manner.
F-23
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of Manugistics Group, Inc.
Rockville, MD
We have audited the consolidated financial statements of Manugistics
Group, Inc. and its subsidiaries (the Company) as of February 28, 2002 and 2001,
and for each of the three years in the period ended February 28, 2002, and have
issued our report thereon dated March 26, 2002 (April 26, 2002 as to Note 17);
such financial statements and report are included elsewhere in this Form 10-K.
Our audits also included the consolidated financial statement schedule of
Manugistics Group, Inc., listed in Item 14. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
McLean, VA
March 26, 2002
(April 26, 2002, as to Note 17)
S-1
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
OF PERIOD EXPENSES WRITE-OFFS ACCOUNTS (1) OF PERIOD
--------- -------- ---------- ------------ ---------
Allowance for doubtful accounts
Year ended February 28, 2002 $5,604 $7,096 $(5,365) $ 973 $8,308
Year ended February 28, 2001 1,875 7,448 (4,740) 1,021 5,604
Year ended February 29, 2000 6,299 1,251 (5,675) -- 1,875
(1) Allowance for doubtful accounts assumed in acquisitions.
S-2