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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, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22154
MANUGISTICS GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1469385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2115 East Jefferson Street, Rockville, Maryland 20852
(Address of principal executive offices) (Zip code)
(301) 984-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.002 par value per share
(Title of Class)
Name of each exchange on which registered: None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of April 30, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1.8 billion. As of that
date, the number of shares outstanding of the Registrant's common stock was
approximately 67.2 million, based on information provided by the Registrant's
transfer agent.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive Proxy Statement relating to the 2001 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, 2001.
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PART I
Item 1. BUSINESS.
The disclosures set forth in this 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 report, and other cautionary statements set
forth elsewhere in this report.
Overview:
We are a leading global provider of Enterprise Profit Optimization(TM)
(EPO) solutions, which we believe is a new and important category of solutions
for enterprise management. We are also a leading provider of solutions for
supply chain management (SCM), pricing and revenue optimization (PRO) and
electronic marketplaces (eMarketplaces). Our solutions help companies lower
operating costs, 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 (supply chain management) and how they are sold
(pricing and revenue optimization). EPO solutions provide additional benefits by
combining the proven cost-reduction power of supply chain management solutions
and the revenue-enhancing capacity of pricing and revenue optimization
solutions.
We help our clients monitor and streamline their own core internal
operational processes involving the design, purchase, manufacture, storage,
transportation, pricing, marketing and selling of their goods and services. Our
solutions also help our clients integrate their own internal processes with
those of their customers and suppliers to assist in providing collaboration and
efficiencies across extended eMarketplaces. In addition, our solutions help our
clients improve customer service and the allocation of resources by providing
information and forecasts that allow them to make more effective operational
decisions. We also provide strategic consulting and implementation services to
our clients as part of our solutions.
Increasing global competition, shortening product life cycles and
developing eMarketplace initiatives 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. Our
first Internet ready products were commercially available in late 1997. We focus
the development of our technology on meeting the changing needs of companies in
the markets we serve, including the need to do business in new electronic
marketplaces. We offer solutions to companies in many industries including
agriculture, apparel, automotive, chemical, consumer durables, consumer packaged
goods, electronics & high technology, energy, food & beverage, government,
logistics, metals, pharmaceuticals, pulp & paper, retail, services and
transport, travel & hospitality. Our customer base of approximately 1,100
clients includes large, multinational enterprises such as 3Com; Cisco Systems
Inc.; Coca-Cola Bottling Co. Consolidated; Emerson Electric Co.; Ford Motor
Company; Fuji Photo Film, USA; Harley-Davidson, Inc.; Levi Strauss & Co.;
Marriott; Texas Instruments; The Limited; and Unilever Home & Personal Care,
USA; as well as mid-sized enterprises and emerging eMarketplaces.
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 and completed a secondary offering of common stock in 1997. We have
invested significant resources to develop new software, to enhance existing
software and to acquire additional software products and solutions through
acquisitions.
A summary of the our acquisitions over the past five years follows:
Acquired Company Date Solution
---------------- ---- --------
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 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
Avyx, Inc. May, 1996 Manufacturing scheduling software
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During fiscal 1999 and the first half of fiscal 2000, we experienced
operational difficulties resulting primarily from poor sales force execution,
increased competition and other factors. In response to our operational
difficulties, we decided to restructure our business, which included reducing
operating costs, hiring a new executive management team and aligning the direct
sales force by vertical market. For fiscal 2001, we reported revenue of $268.0
million or a 76.0% increase from fiscal 2000.
Fiscal 2001 Developments
Acquisition of STG Holdings, Inc.:
On January 16, 2001, we acquired STG Holdings, Inc., a Delaware
corporation ("STG") based in London, England for approximately $6.9 million. STG
is a leading developer of advanced strategic, tactical and operational planning,
scheduling and simulation software for single factory and multi-factory
enterprises. This acquisition was accounted for as a purchase transaction.
The purchase price consisted of cash payments of approximately $1.5
million, the issuance of 159,822 shares of our common stock valued at
approximately $4.5 million to certain STG stockholders and transaction costs of
approximately $0.9 million.
We also agreed to pay up to $27.9 million in additional consideration,
if certain revenue-based performance requirements are met during the 21-month
period to end October 31, 2002. This additional consideration, if any, would be
payable in cash or shares of our common stock.
Acquisition of Talus Solutions, Inc.:
On December 21, 2000, we acquired Talus Solutions, Inc. ("Talus"), a
Delaware corporation, in a stock-for-stock merger transaction. Talus,
headquartered in Atlanta, Georgia, was a leading provider of PRO software
products and services.
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. The acquisition-related costs consist
primarily of investment banking and legal fees.
Of the approximate 7.0 million shares of our common stock issued in
connection with the acquisition of Talus, approximately 6.0 million shares were
delivered to our exchange agent for direct transfer to the former Talus
stockholders following closing and approximately 1.0 million shares were
delivered to our escrow agent, to secure potential indemnification claims we may
have. To the extent that the escrowed shares are not subject to indemnification
claims, the escrowed shares will be released from escrow in two installments, on
October 31, 2001 and on July 2, 2002.
In addition, approximately 1.4 million shares have been reserved for
issuance upon exercise of Talus stock options and warrants assumed by us in
connection with the Talus acquisition.
Convertible Debt Offering:
In October and November 2000, the Company issued $250.0 million of 5%
convertible subordinated notes due 2007 (the "Notes"). Interest will be paid
semi-annually. The Notes are convertible into a total of approximately 5.7
million shares of our common stock at an initial conversion price of $44.06 per
share, subject to adjustment under certain conditions, at any time through
maturity, unless previously redeemed or repurchased. 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 our option. Redemption can be made on at least 30 days' notice
if the trading price or 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, will be as follows:
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%
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We are using the net proceeds from the issuance of the Notes for general
corporate purposes, including capital expenditures, research and development and
acquisitions of businesses, products and technologies that complement or expand
our 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 combine their optimized supply chains
with effective eMarketplace strategies 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 supply chain management
and our new pricing and revenue optimization strengths with our innovative
eMarketplace 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 and supply channels and a consolidated view
of client requirements, ultimately enabling the optimization of the extended
supply and demand network.
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, buy, make, store, move, price, market and sell. Our solutions are
focused on managing decisions, events and plans and have the flexibility to
adapt to the different forms a trading network may take. 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.
Strategy:
Our objective is to continue to be a leading global provider of SCM,
PRO, EPO and eMarketplace solutions for enterprises and for trading networks.
Our strategy to achieve our objective includes the following elements:
EXPAND OUR SOLUTIONS - We believe that we have significant experience
and expertise, enhanced by our relationships with clients, industry experts and
third-party alliances that will work to our advantage as we develop and expand
our solutions. We feel that we have first mover advantage in the emerging market
for EPO, which we believe, will be a large and important market. We believe that
there is a significant opportunity to apply PRO to manufacturing and non-service
industries. In the past, PRO has been used primarily in service and
reservation-based industries. We intend to extend the capabilities and scope of
our SCM and our eMarketplace solutions to help solve a broader range of business
challenges and to improve processes within and among companies in trading
networks.
PROVIDE ADVANCED TECHNOLOGICAL INNOVATION - Using our extensive
experience and domain expertise, plus our commitment of substantial resources to
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 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 and focus on markets in sectors such as aerospace,
agriculture, apparel, automotive, chemical, consumer durables, consumer packaged
goods, electronics & high technology, financial services, energy, food &
beverage, government, industrial products, logistics, metals, pharmaceuticals,
pulp & paper, retail, services, telecommunications and transport, travel &
hospitality. We also evaluate opportunities outside of our current vertical
markets as we expand the penetration of our SCM, PRO, EPO and eMarketplace
solutions.
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Products:
Our products are grouped in four categories: Manugistics NetWORKS
intelligent engines, Manugistics NetWORKS collaborative applications,
Manugistics WebConnect integration platform and Manugistics NetWORKS Marketplace
platform.
The Manugistics NetWORKS family of products is designed to coordinate,
optimize, measure and analyze across each of the key business processes -
design, buy, make, store, move, price, market and sell.
Manugistics NetWORKS includes the core optimization technologies and
algorithms of our SCM and PRO solutions, which incorporate many years of
research and development in advanced mathematical modeling. The 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 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 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 forecast projections and
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 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 transport, travel, hospitality and multi-family housing
industries. Our products are designed to optimize revenues and enhance profits
considering product perishability and capacity utilization.
NetWORKS SCHEDULING(TM) - NetWORKS Scheduling(TM) provides advanced
single site and multi-site production planning, detailed scheduling, production
sequencing and real-time communication with the plant floor based upon business
objectives and production goals.
NetWORKS SOURCING(TM) - NetWORKS Sourcing(TM) helps reduce expenses by
going beyond simple, catalog-based procurement to complex procurement of direct
materials. It streamlines the procurement of direct materials by using
integrated, strategic sourcing while taking advantage of the Internet to provide
the collaboration tools required for an effective eMarketplace.
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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 its 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.
NetWORKS SUPPLY(TM) - NetWORKS Supply(TM) provides tactical
functionality in supply planning. It 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.
NetWORKS VMI(TM) - NetWORKS VMI(TM) (Vendor Managed Inventory) enables
clients and their trading partners to have visibility into demand to improve the
flow of products, eliminate inefficiencies and lower costs. NetWORKS VMI creates
a demand forecast based on consumption, compares the forecast to inventory on
hand and in transit, develops requirements for inventory at the customer's sites
and recommends shipments.
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 a design of experiments to implement quality management in
individual locations throughout an enterprise or manufacturing plant.
Our collaborative applications provide collaboration and communication
that extend our intelligent engines into business processes that are created in
concert with trading partners. These proven products enable businesses to expand
their supply chains into true eMarketplace 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 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
operational monitoring, performance measurement, business process design and the
setting of network policy. Its multi-dimensional analyses increase the speed,
accuracy and efficiency of knowledge discovery and facilitate proactive
decision-making by providing analyses that are specific to business processes
and that are based on data from other Manugistics applications, enterprise
resource planning systems, financial systems, customer relationship management
systems and point-of-sale data providers.
NetWORKS VISIBILITY(TM) - NetWORKS Visibility(TM), from one central
web-based portal, provides real-time and historical 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.
WebConnect INTEGRATION PLATFORM - Our WebConnect integration platform
uses leading-edge enterprise application integration (EAI) technology and
provides pre-built connectors to common enterprise systems such as J.D. Edwards
& Company, Oracle Corporation and SAP AG. WebConnect provides automated data
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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.
NetWORKS MARKETPLACE(TM) PLATFORM - NetWORKS Marketplace 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.
We are continuing to develop more fully integrated EPO products that
utilize the capabilities of our SCM and PRO suite of products. We expect our
first integrated EPO products to be commercially released during our second
quarter of fiscal 2002.
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 services. These services include supply chain, pricing and
revenue and eMarketplace strategic consulting to help our clients maximize their
competitive advantage. Our 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
advantage of our solutions.
These 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 377 employees as
of February 28, 2001.
Client Support:
Our comprehensive solutions include on-going global support to clients.
Most of our clients enter into annual agreements for support. Support includes
product revisions and enhancements and access to a hotline and an electronic
bulletin board. Our client support operation also collects information that we
use to assist us in developing products and in identifying market demand. As of
February 28, 2001, our client support group consisted of 59 employees.
Product Development:
We direct our efforts in product development to new products,
enhancements of the capabilities in existing products, expansion of our
eMarketplace capabilities, enhancement of our products for use in different
countries and development of products tailored to the specific requirements of
particular industries and diverse languages. To date, most of our products,
including product documentation, have been developed by our internal staff and
occasionally 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 clients. 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 also established channels
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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, 2001, our product
development staff consisted of 423 employees.
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 these products. We continue
to make the expenditures for product development that we believe are necessary
for rapidly delivering new product 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; Mountain View, CA; San Mateo, CA; Ottawa,
Canada; Mexico City, Mexico; and Sao Paulo, Brazil. Our direct sales
organization focuses on licensing SCM, PRO, EPO and eMarketplace solutions to
large, multi-national enterprises, as well as to mid-sized enterprises with a
variety of supply chain, pricing and eMarketplace 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; Singapore; 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 2001,
approximately 31% of our total revenue came from sales made to clients outside
the United States.
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 an annual industry supply chain and eMarketplace event and
client "steering committees." 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 shows, 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.
As of February 28, 2001, we had 190 employees engaged in sales
activities, 50 employees engaged in marketing activities and 167 employees
engaged in business development consulting activities.
Alliances:
We have established business alliances with leading software companies,
consulting firms, resellers and other complementary vendors. We have recently
established alliances with Agile Software Corporation and Microsoft Corporation
and have agreements with a number of other prominent software companies such as
BEA Systems, Inc.; Extricity, Inc. (recently acquired by Peregrine Systems,
Inc.); Manhattan Associates; Moai Technologies, Inc.; NetVendor Inc.; Siebel
Systems, Inc.; Vastera, Inc.; Vignette Corporation; Xelus and webMethods, Inc.
To support these joint efforts, we will continue to enhance our WebConnect
framework to integrate our solutions with the software applications of the
companies named above and with other vendors of ERP systems, warehouse
management systems, manufacturing execution systems, customer relationship
management systems, configuration systems and other related applications.
We continue to develop relationships with leading consulting firms in
order to complement our own marketing efforts. We have formal relationships with
many multi-national and major regional consulting firms including Accenture, Cap
Gemini Ernst & Young, IBM Consulting, KPMG Consulting and others. In addition to
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participating in formal programs, we cooperate with other professional services
firms informally on a client-by-client basis.
Clients:
Our SCM, PRO and eMarketplace software solutions have been licensed by
organizations in industries such as agriculture, apparel, automotive, chemical,
consumer durables, consumer packaged goods, electronics & high technology,
energy, food & beverage, government, logistics, metals, pharmaceuticals, pulp &
paper, retail, services, and transport, travel & hospitality. We have licensed
various combinations of our software products to clients worldwide. 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."
Aerospace Consumer Packaged Goods
Boeing Eveready Battery
Revlon
Apparel Sweetheart Holdings
Levi Strauss & Co. Unilever Home & Personal Care, USA
Oxford Industries, Inc.
The Limited Electronics & High Technology
3Com Corporation
Automotive Analog Devices
Deere & Co. Cisco Systems, Inc.
Ford Motor Company Compaq Computer Corporation
Harley-Davidson, Inc. Emerson Electric Co.
Hewlett Packard
Chemicals, Petrochemicals and Process IBM
BP Amoco plc Lexmark
Fuji Photo Film, USA Philips Lighting B.V.
Rohm & Haas Texas Instruments Incorporated
eMarketplaces Transport, Travel & Hospitality
eConnections Marriott
Elemica Princess Cruises
GlobalNetXchange United Airlines
Food & Beverage Retail Drug/Mass Merchandise/Specialty Retail
Coca-Cola Bottling Co. Consolidated Canadian Tire Corp., Ltd.
Great Atlantic & Pacific Tea Company Grupo Elektra
Nabisco, Inc. Kmart
Ocean Spray Rite Aid
Safeway Spalding Sports
Starbucks Corporation Target (Dayton Hudson Corporation)
Gebr. Heinemann KG
Toys R Us
We generally provide our software products to clients under
non-exclusive, non-transferable license agreements. To protect our intellectual
property rights we generally do not sell or transfer title of our products to
our clients. Under our current standard license agreement, licensed software may
be used solely for the client's internal operations. We are expanding our
products and services to provide solutions to emerging eMarketplaces, including
engaging in joint development efforts and providing generally non-exclusive
software licenses to enable trading exchanges.
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 companies targeting mainframe or mid-range clients and certain
professional services organizations, including such vendors as Adexa (which is
being acquired by
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FreeMarkets); Aspen Technology; The Descartes Systems Group, Inc.; i2
Technologies; Logility; Micros Systems, Inc.; PROS Revenue Management; Sabre
Inc.; SynQuest; and YieldStar Technology. In addition, certain ERP vendors,
certain of which are substantially larger than we are, 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 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 and, in international markets, availability in foreign languages. 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,
pricing and revenue optimization and eMarketplace solutions.
License and support agreements and pricing:
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. License fee arrangements vary depending upon
the type of software product being licensed and the computer environment.
License fees are based primarily on which products are licensed, the complexity
of the client's problem and the number of users and locations. The amount of
license fees may reach tens of millions of dollars for supply chain, pricing and
revenue and eMarketplace initiatives that are large in scope.
Clients may obtain support for an annual fee, depending on the level of
support and the size of the license fee. The support fee is generally billed
annually and is subject to changes in support list prices. We also provide
pre-installation assistance, systems administration, training and hosting of our
software applications and other product-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 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 supply
chain management, pricing and revenue optimization and eMarketplace 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.
Use of the licensed 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 of 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, 2001, we had 1,451 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.
Item 2. PROPERTIES.
Our principal sales, marketing, product development, support and
administrative facilities are located in Rockville, MD, where we lease
approximately 122,000 square feet of office space under a lease agreement which
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expires on April 30, 2002. We lease approximately 52,000 square feet of
additional office space in Rockville, MD, under a lease agreement that expires
on July 31, 2002. The leases for these facilities do not allow for expansion
which we expect to need in the future. The Company has leased approximately
210,000 square feet for its new headquarters in Gaithersburg, MD. We expect to
move into our new headquarters space during the second calendar quarter of 2002.
The new lease agreement is for an initial term of 10 years and includes an
option for the Company to lease additional space if needed. We are currently
under negotiations to lease approximately 72,000 additional square feet.
In addition, we lease office space for our 38 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
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 will not continue to report on disputes or proceedings which we do
not believe will have a material adverse effect on us, with the exception of the
proceedings involving Information Resources, Inc. ("IRI").
We have reported that, on March 7, 1997, we, as part of the acquisition
of certain assets of IRI, entered into several agreements with IRI, including a
Data Marketing and Guaranteed Revenue Agreement ("Agreement") and an Asset
Purchase Agreement ("Purchase Agreement"). The Agreement set forth the
obligations of the parties with regard to revenues to be paid to IRI from the
sale by us of specified products provided by IRI. Under the terms of the
Agreement, we guaranteed revenue to IRI in a total amount of $16.5 million over
a period of years following execution of the Agreement by way of three separate
revenue streams.
We made an initial payment of approximately $500,000 to IRI. In
addition, as part of our commitment, we agreed to guarantee revenues to IRI in a
total amount of $12.0 million over an initial three-year period beginning no
later than November 1, 1997 ("First Revenue Stream"). We asserted that our
ability to market the IRI products had been impaired, which, under the terms of
the Agreement, obligates the parties to restructure the payments and/or modify
the obligations with regard to the First Revenue Stream. IRI responded,
disagreeing that an impairment existed and, in the alternative, that any
impairment was corrected.
The parties discussed their disagreement over the impairment issue until
IRI filed a complaint in the Circuit Court of Cook County, IL on January 15,
1999. The complaint alleged breach of the Agreement and initially sought damages
of approximately $12.0 million for our failure to make guaranteed payments. The
complaint also alleged a breach of a separate Non-Competition and
Non-Solicitation Agreement executed at the same time as the Agreement and sought
damages in an amount in excess of $100,000. We filed a Motion to Stay
Proceedings and Compel Arbitration, which was granted as to the claim under the
Agreement and denied as to the claim under the Non-Competition and
Non-Solicitation Agreement. Arbitration proceedings have commenced under the
auspices of the American Arbitration Association.
In the arbitration, IRI seeks a total of approximately $15.9 million in
damages. The amount now sought by IRI includes amounts which it claims are due
under a second revenue stream under the Agreement, triggered by the resolution
of IRI's lawsuit with Think Systems Corporation. The second revenue stream
represents a total guaranteed revenue of $1.75 million for the first and second
year following the Think Systems settlement and $2.25 million for the third year
following the settlement. We contend that the conditions to these amounts
becoming due under the second revenue stream have not been satisfied and that no
amounts are due to IRI, because, among other reasons, of a failure of
consideration in the overall transaction. The arbitration is currently scheduled
to begin in early November. Discovery will be completed during the summer.
Disposition of the Cook County action awaits resolution of the arbitration.
The Company and Manugistics U.K. Limited have been named as defendants
in a claim filed by Grocery Logistics Limited in the High Court of Justice,
Queen's Bench Division, Technology & Construction Court, No. HT-00-384, on
October 19, 2000. The lawsuit arose from a dispute which the Company had
previously announced. The claim seeks damages of an amount between approximately
$6.7 million and $10.5 million, plus interest, arising out of a contract for the
supply of software, support, maintenance, consulting and training services. The
claimant alleges that the implementation of the software was a failure because
it did not meet the requirements of the contract. The Company filed an answer in
which it denied the allegations. The Company believes that its defense is
meritorious.
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Discovery has commenced and the trial is currently scheduled for January 15,
2002. The Company's insurance carriers have accepted coverage under a
reservation of rights.
On November 29, 2000, the Company filed a lawsuit against
VirtualFund.com, Inc., in the United States District Court for the District of
Maryland alleging that VirtualFund.com, Inc. is in anticipatory breach of its
obligations under a software license agreement among the Company and
VirtualFund.com, Inc. and its affiliates. The Company seeks at least $4.5
million in damages. VirtualFund.com, Inc. has counterclaimed that the contract
is invalid and seeks return of $2.5 million in license fees and other
unspecified damages. The court's current scheduling order provides that
discovery shall be completed on August 6, 2001.
In September 2000, one of our clients submitted to us a notice claiming
damages relating to a software implementation project. The client has requested
a price adjustment in the amount of $3.5 million, but has informally lowered its
request to $1.3 million. The client's claim arises from the performance of our
subcontractor on the project. We believe that the subcontractor has full
responsibility for our client's claim and have so notified that company. The
Company's insurance carrier has accepted coverage within the terms and
conditions of the policy.
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................... 41 Chairman and Chief Executive Officer
Richard F. Bergmann................ 45 President
Terrence A. Austin................. 38 Executive Vice President, Electronics and High Technology
Gregory C. Cudahy.................. 37 Executive Vice President, Pricing and Revenue Management
Raghavan Rajaji.................... 54 Executive Vice President and Chief Financial Officer
Andrew J. Hogenson................. 37 Senior Vice President, Product Development
Jeffrey L. Holmes.................. 51 Senior Vice President, Government and Public Sector
James J. Jeter..................... 42 Senior Vice President, Global Marketing
Dr. Robert L. Phillips............. 46 Senior Vice President, Chief Technology Officer
Thomas C. Ryan, Jr................. 39 Senior Vice President, Americas Sales
Timothy T. Smith................... 37 Senior Vice President, General Counsel and Secretary
Mr. Owens has served as Chief Executive Officer since joining
Manugistics in April 1999 and 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 (formerly known as Andersen Consulting)
Supply Chain Practice.
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Mr. Bergmann has served as President since December 2000. From June 1999
through November 2000, Mr. Bergmann served as the 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, Electronics and High
Technology since June 1999. From August 1997 to June 1999, he was head of
Accenture Electronics and High Technology Sector of its 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. Cudahy joined Manugistics as Executive Vice President, Pricing and
Revenue Management in October 2000. From September 1999 through October 2000,
Mr. Cudahy served as Partner-in-Charge of Accenture's North America Supply Chain
Management practice. He previously served as Associate Partner in the same
department from September 1996 through August 1999 and as Senior Manager from
June 1995 through August 1996.
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 our Senior Vice President, Product
Development since October 2000. From October 1999 through October 2000, Mr.
Hogenson served as our Vice President, Transportation, Products and Solutions.
From March 1997 to October 1999, he served as Senior Manager, and from 1995 to
March 1997, Mr. Hogenson served as a Manager, of Accenture Strategy Practice
Group.
Mr. Holmes has served as Senior Vice President, Government and Public
Sector (formerly Government Solutions and Alliances) since September 1999. From
April 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. He joined us in October 1996 as Director
of Marketing, Consumer Products. From 1995 to October 1996, Mr. Holmes served as
Logistics and Commercial Director for Mars Incorporated.
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. From
October 1991 to April 1997 he served as Director of Product Marketing of the new
products and technology division for Duracell, Inc.
Dr. Phillips has served as Senior Vice President, Chief Technology
Officer since December 2000. Prior to joining Manugistics, he served as the
Chief Technology Officer for Talus Solutions, Inc. (Talus) from May 1998 to
December 2000 and Chief Executive Officer (CEO) of Talus from November 1997 to
May 1998. Dr. Phillips served as CEO of Decision Focus Incorporated (DFI), a
predecessor to Talus, from 1995 to 1997.
Mr. Ryan has served as Senior Vice President, Americas Sales since March
2001 and as Senior Vice President, North America Sales for the PRO solutions
from December 2000 to March 2001. Prior to joining Manugistics, Mr. Ryan held
the position of Senior Vice President, North America Sales at Talus from July
2000 to December 2000. Mr. Ryan was Vice President, North America Regional Sales
at Cadence Software from July 1991 through June 2000.
Mr. Smith has served as Senior Vice President, General Counsel and
Secretary since January 2000. He served as Vice President and General Counsel
for automobile importer Land Rover North America, Inc. from June 1998 to
December 1999. He was Associate Corporate Counsel for retail holding company
Dart Group Corporation from May 1995 to May 1998.
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.
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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 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)
Fiscal 2000 High Low
----------- ---- ---
First Quarter 5.63 2.63
(ended May 31, 1999)
Second Quarter 8.00 4.34
(ended August 31, 1999)
Third Quarter 8.94 4.53
(ended November 30, 1999)
Fourth Quarter 29.06 8.50
(ended February 29, 2000)
As of April 17, 2001, there were approximately 363 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 September
30, 2001. 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 Consolidated Financial Statements. 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:
Acquisition of STG. As previously reported by the Company, the Company
acquired (the "Purchase") STG, pursuant to a certain Stock Purchase Agreement
dated as of December 22, 2000, by and among the Company, STG and certain other
persons (the "Purchase Agreement"). The Purchase Agreement was privately
negotiated among the parties thereto. In connection with the Purchase, which
became effective as of January 16, 2001, the Company issued to the nine holders
of STG capital stock (the "STG Shareholders") consideration valued at
approximately $6.9 million, consisting of cash payments of approximately $1.5
million, the issuance of an aggregate of 159,822 shares of the Company's Common
Stock (the "Shares") valued at approximately $4.5 million and transaction costs
of approximately $0.9 million. The Company also agreed to pay up to $27.9
million in additional consideration (the "Additional Consideration"), if certain
revenue-based performance requirements are met during the 21-month period ended
October 31, 2002. The Additional Consideration, if any, would be payable in cash
or in the form of shares of our common stock under limited circumstances. The
Additional Consideration would be allocated among certain of the former STG
shareholders and the holders of options and warrants exercisable for shares of
STG's capital stock
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outstanding at the time of the Purchase as agreed upon by the affected parties.
Additional Consideration paid, if any, will be recorded as goodwill and
amortized over the remaining life of the asset.
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 and Regulation S under the Securities Act. The Purchase 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 and the safe harbor afforded by Regulation S. No underwriters were
involved in connection with the issuance and sale of the Shares under the
Purchase Agreement. In accordance with the terms of the Registration Rights
Agreement, on February 5, 2001, the Company filed a registration statement on
Form S-3 under the Securities Act to register the Shares for resale by the
former STG shareholders. The registration statement was declared effective in
March 2001. If we issue additional shares of our common stock as Additional
Consideration, we are obligated to register them for resale on a Form S-3.
Talus Warrants. On December 21, 2000, the Company acquired Talus in a
stock for stock merger (the "Merger"), pursuant to a certain Agreement and Plan
of Merger dated as of September 21, 2000, by and among the Company, Manu
Acquisition Corp., a wholly owned subsidiary of the Company, Talus and certain
other persons (the "Merger Agreement"). Under the terms of the Merger
Agreement, the Company assumed the then outstanding warrants held by three
Talus warrantholders to purchase shares of the capital stock of Talus. Under
the terms of the Merger Agreement, these warrants were converted into warrants
to acquire a total of up to 65,000 shares of our common stock at prices ranging
from $0.07 to $16.08 per share. One of these warrants was converted into a
warrant to acquire 13,987 shares (the "Warrant Shares") of common stock of the
Company for an exercise price of $.0676 per share pursuant to the terms of the
Merger Agreement. On February 28, 2001, the holder of this warrant exercised
the warrant in full. Pursuant to the exercise of the warrant, the warrantholder
paid to the Company the aggregate exercise price of $945 by surrendering 31
shares issuable under the warrant, pursuant to the terms of the warrant, and
the Company issued 13,956 shares of the Company's common stock to the
warrantholder.
Neither the warrants nor the Warrant Shares were registered under the
Securities Act of 1933, as amended (the "Securities Act") in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act. The
exercised warrant imposed certain restrictions on the resale or other transfer
of the Warrant Shares necessary for the availability of the Section 4(2)
exemption. No underwriters were involved in connection with the issuance and
sale of the warrants or the Warrant Shares.
16
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, 2001 is set forth below. This
data should be read in conjunction with our Consolidated Financial Statements
and related notes thereto for the corresponding periods, which are contained in
Part IV of this Annual Report on Form 10-K.
Fiscal Year Ended February 28 or 29
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue:
Software $ 139,316 $ 60,421 $ 73,802 $ 107,547 $ 54,342
Services 73,333 46,516 65,212 46,347 28,111
Support 55,315 45,496 38,550 26,369 17,754
--------- --------- --------- --------- ---------
Total revenue 267,964 152,433 177,564 180,263 100,207
--------- --------- --------- --------- ---------
Operating expenses(3):
Cost of software 19,146 11,811 11,661 11,102 5,011
Cost of services and support 59,149 43,783 50,076 32,789 19,618
Sales and marketing 115,610 61,439 103,006 65,376 34,322
Product development 40,830 29,150 49,389 32,781 18,879
General and administrative 22,925 15,837 19,828 14,639 9,344
Amortization of intangibles 16,204 2,437 2,263 1,289 649
Purchased research and development and acquisition-
related expenses (1) 9,724 -- 3,095 47,340 3,697
Restructuring (benefit) expense (2) -- (1,506) 33,775 -- --
Non-cash stock compensation expense(3) 12,801 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses 296,389 162,951 273,093 205,316 91,520
(Loss) income from operations (28,425) (10,518) (95,529) (25,053) 8,687
Other income - net 2,899 1,389 2,362 2,863 1,047
--------- --------- --------- --------- ---------
(Loss) income before income taxes (25,526) (9,129) (93,167) (22,190) 9,734
Provision (benefit) for income taxes 2,552 (184) 2,945 (9,025) 5,077
--------- --------- --------- --------- ---------
Net (loss) income $ (28,078) $ (8,945) $ (96,112) $ (13,165) $ 4,657
========= ========= ========= ========= =========
Basic (loss) income per share $ (0.48) $ (0.16) $ (1.82) $ (0.28) $ 0.11
========= ========= ========= ========= =========
Diluted (loss) income per share $ (0.48) $ (0.16) $ (1.82) $ (0.28) $ 0.10
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities(4) $ 300,308 $ 51,547 $ 43,362 $ 82,137 $ 22,465
Working capital(4) 300,668 36,831 31,138 96,394 31,138
Goodwill and other intangible assets(5) 394,178 7,317 9,382 14,660 2,130
Total assets(4) (5) 847,261 151,907 172,336 225,215 86,306
Long-term debt (4) 250,133 283 454 235 220
Total stockholders' equity (5) 470,321 86,718 85,722 173,746 54,873
(1) During fiscal 2001, we incurred non-recurring charges to operations
relating to the write-off of purchased research and development, which
had not yet reached technological feasibility and had no alternative
future use. The charge consists of $8.6 million related to the
acquisition of Talus Solutions, Inc. and $1.1 million related to the
acquisition of STG Holdings, Inc., which were both accounted for under
the purchase method of accounting. During fiscal 1999, we incurred a
non-recurring charge to operations totaling $3.1 million for certain
acquisition-related expenses in connection with the business combination
involving TYECIN Systems, Inc ("TYECIN"), which was accounted for as a
pooling of interests. During fiscal 1998 and 1997, we incurred
non-recurring charges to operations totaling $47.3 million and $3.7
million, respectively, in connection with the write-off of purchased
research and development which had not yet reached technological
feasibility and had no alternative future. These charges relate to the
acquisitions of ProMIRA Software, Inc. and AVYX, Inc., respectively,
which were both accounted for under the purchase method of accounting.
(2) During fiscal 1999, we incurred charges to operations totaling $33.8
million for certain restructuring costs related to management's plan to
reduce costs and improve operating efficiencies. The restructuring
charge was reduced by $1.5 million during fiscal 2000 due to changes in
estimates related to better than expected success in subleasing
abandoned and excess office space offset by higher than expected
severance costs.
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(3) During fiscal 2001, we incurred non-cash stock compensation charges of
$12.8 million primarily comprised of $11.1 million related to the
repricing of stock options and $1.2 million related to the amortization
of unvested stock options assumed in the acquisition of Talus. The
amounts shown above for cost of services and support, sales and
marketing, product development and general and administrative expense
exclude non-cash stock compensation expense as follows:
Cost of services and support $ 4,579
Sales and marketing 3,262
Product development 3,694
General and administrative 1,266
-------
$12,801
=======
(4) During fiscal 2001 we issued $250.0 million in 5% convertible
subordinated notes due in November 2007.
(5) The increase in intangible assets, total assets and stockholders' equity
in fiscal 2001 is primarily due to the acquisitions of Talus Solutions,
Inc. and STG Holdings, Inc.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview:
We are a leading global provider of Enterprise Profit Optimization(TM)
(EPO) solutions, which we believe is a new and important category of solutions
for enterprise management. We are also a leading provider of solutions for
supply chain management (SCM), pricing and revenue optimization (PRO) and
electronic marketplaces (eMarketplaces). Our solutions help companies lower
operating costs, 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 (supply chain management) and how they are sold
(pricing and revenue optimization). EPO solutions provide additional benefits by
combining the proven cost-reduction power of supply chain management solutions
and the revenue-enhancing capacity of pricing and revenue optimization
solutions.
We help our clients monitor and streamline their own core internal
operational processes involving the design, purchase, manufacture, storage,
transportation, pricing, marketing and selling of their goods and services. Our
solutions also help our clients integrate their own internal processes with
those of their customers and suppliers to assist in providing collaboration and
efficiencies across extended eMarketplaces. In addition, our solutions help our
clients improve customer service and the allocation of resources by providing
information and forecasts that allow them to make more effective operational
decisions. We also provide strategic consulting and implementation services to
our clients as part of our solutions.
Increasing global competition, shortening product life cycles and
developing eMarketplace initiatives 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. Our
first Internet ready products were commercially available in late 1997. We focus
the development of our technology on meeting the changing needs of companies in
the markets we serve, including the need to do business in new electronic
marketplaces. We offer solutions to companies in many industries including
agriculture, apparel, automotive, chemical, consumer durables, consumer packaged
goods, electronics & high technology, energy, food & beverage, government,
logistics, metals, pharmaceuticals, pulp & paper, retail, services and
transport, travel & hospitality. Our customer base of approximately 1,100
clients includes large, multinational enterprises such as 3Com; Cisco Systems
Inc.; Coca-Cola Bottling Co. Consolidated; Emerson Electric Co.; Ford Motor
Company; Fuji Photo Film, USA; Harley-Davidson, Inc.; Levi Strauss & Co.;
Marriott; Texas Instruments; The Limited; and Unilever Home & Personal Care,
USA; as well as mid-sized enterprises and emerging eMarketplaces.
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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, 2001 expressed as
a percentage of revenue:
Fiscal Year Ended February 28 or 29
2001 2000 1999
------ ------ ------
Revenue:
Software 52.0% 39.6% 41.6%
Services 27.4% 30.5% 36.7%
Support 20.6% 29.8% 21.8%
------ ------ ------
Total revenue 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Cost of software 7.2% 7.8% 6.6%
Cost of services and support 22.1% 28.7% 28.2%
Sales and marketing 43.1% 40.3% 58.0%
Product development 15.2% 19.1% 27.8%
General and administrative 8.6% 10.4% 11.2%
Amortization of intangibles 6.0% 1.6% 1.3%
Purchased research and development
and acquisition-related expenses 3.6% -- 1.7%
Restructuring (benefit) expense -- (1.0)% 19.0%
Non-cash stock compensation expense 4.8% -- --
------ ------ ------
Total operating expenses 110.6% 106.9% 153.8%
------ ------ ------
Loss from operations (10.6)% (6.9)% (53.8)%
Other income - net 1.1% 0.9% 1.3%
------ ------ ------
Loss before income taxes (9.5)% (6.0)% (52.5)%
Provision (benefit) for income taxes 1.0% (0.1)% 1.7%
------ ------ ------
Net loss (10.5)% (5.9)% (54.2)%
====== ====== ======
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 expense as follows (in
thousands):
Cost of services and support $ 4,579
Sales and marketing 3,262
Product development 3,694
General and administrative 1,266
-------
$12,801
=======
See "Non-Cash Stock Compensation Expense" for further detail.
Revenue:
General. Our revenue consists of software revenue, services revenue and
support revenue. Software revenue is generally recognized upon execution of a
software licensing 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. We generate the majority of our software revenue from our direct
sales force with lesser amounts coming through indirect sales channels such as
complementary software vendors, consulting firms, systems integrators and
resellers. Services revenue is recognized as the services are performed. Support
revenue is recognized ratably over the support period defined in the software
license agreement.
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
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Production Type Contracts", which requires us to use the
percentage-of-completion method of revenue recognition. Revenue is recognized
based on labor hours incurred to date compared to total estimated labor hours
for the contract.
Total revenue increased 75.8% in fiscal 2001 and decreased by 14.2 % in
fiscal 2000. The increase in fiscal 2001 revenue primarily resulted from
increased demand and market acceptance for our products and services, increased
selling activities resulting from a larger and more effective sales force,
increased average selling price ("ASP") for our software and, to a lesser
extent, the acquisitions of Talus and STG. The decrease in total revenue in
fiscal 2000 resulted primarily from fielding a smaller direct sales force and a
decrease in ASP during the first half of fiscal 2000 versus fiscal 1999. No
individual customer accounted for 10% or more of total revenue in fiscal 2001,
2000 or 1999
Software. Software revenue increased 130.6%, or $78.9 million, in fiscal
2001 and decreased 18.1%, or $13.4 million, in fiscal 2000. Software revenue as
a percentage of total revenue was 52.0% in fiscal 2001, 39.6% in fiscal 2000 and
41.6% in fiscal 1999. The increases in software revenue and software revenue as
a percentage of total revenue in fiscal 2001 were primarily due to:
- increased demand and market acceptance for our software products,
- increased selling activities resulting from a larger and more
effective sales force,
- increased ASP and number of completed transactions,
- expanded and enhanced product offerings, and
- the acquisition of Talus.
The number of our significant software license transactions was 114 in
fiscal 2001 compared to 93 and 115 in fiscal 2000 and 1999, respectively. The
average size of our significant software transactions increased to $1.2 million
in fiscal 2001 compared to $0.6 million in both fiscal 2000 and 1999.
Significant transactions are those with a value of over $100,000. The number of
software transactions of $1.0 million or greater increased to 47 in fiscal 2001
compared to 14 and 19 in fiscal 2000 and 1999, respectively.
The decreases in software revenue and software revenue as a percentage
of total revenue in fiscal 2000 were primarily due to:
- a smaller direct sales force and poor sales force productivity
during the first half of 2000,
- transitioning the sales force to a vertical market focus,
- decreased number of completed transactions,
- difficulties integrating products and operations from prior
acquisitions, competition,
- year 2000 concerns delaying client buying decisions and
- market awareness of our execution problem experienced in the prior
year.
Services. Services revenue increased 57.7%, or $26.8 million, in fiscal
2001 and decreased 28.6%, or $18.6 million, in 2000. Services revenue as a
percentage of total revenue was 27.4% in fiscal 2001, 30.5% in fiscal 2000 and
36.7% in fiscal 1999. The increase in services revenue in fiscal 2001 was due to
an increased number of software transactions and related implementations, an
increased customer base desiring training, consulting and implementation
services and the Talus acquisition. Services revenue tends to track software
license transactions in prior periods.
The decrease in service revenue in fiscal 2000 primarily resulted from
the decrease in software revenue during fiscal 2000 and fiscal 1999, a smaller
services workforce and greater utilization of systems integrators to provide
these services.
Support. Support revenue increased 21.6%, or $9.8 million, in fiscal
2001 and increased 17.8 %, or $6.9 million, in 2000. Support revenue as a
percentage of total revenue was 20.6% in fiscal 2001, 29.8% in fiscal 2000 and
21.8 % in fiscal 1999. The increase in support revenue in fiscal 2001 and 2000
was due to the increase in the number of clients that have licensed our software
products and entered into annual support arrangements. Support revenue tends to
track software license transactions in prior periods. In the past, we have
experienced a high rate 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".
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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 was 30.7% of total revenue, or $82.3 million, in
fiscal 2001; decreasing from 40.1%, or $61.1 million, in fiscal 2000 and 33.9%
or $60.1 million, in fiscal 1999. The increases in this 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 growth in
both revenue and profitability and may lower our overall exposure to unfavorable
economic conditions in specific regions.
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 included in our software. The following table sets forth
amortization of capitalized software development costs and other costs of
license fees for the three years in the period ended February 28, 2001 (in
thousands):
Fiscal Year Ended February 28 or 29
2001 2000 1999
--------- --------- -------
Amortization of capitalized software $ 9,486 $ 9,006 $ 8,704
Percentage of software revenue 6.8% 14.9% 11.8%
Other costs of software 9,660 2,805 2,957
Percentage of sotfware revenue 6.9% 4.6% 4.0%
--------- --------- -------
Total cost of software $ 19,146 $ 11,811 $11,661
Percentage of software revenue 13.7% 19.6% 15.8%
The increase in cost of software in fiscal 2001 was primarily a result
of increases in royalties paid to third parties as a result of the mix of
software sold and the increase in software revenue. Cost of software revenue was
relatively unchanged in fiscal 2000 as compared to fiscal 1999.
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 46.0% in fiscal 2001, 47.6% in
fiscal 2000 and 48.3% in fiscal 1999. Cost of services and support increased
35.1%, or $15.4 million, in fiscal 2001 and decreased 12.6%, or $6.3 million, in
fiscal 2000. The increase in cost of services and support during fiscal 2001 was
attributable to adding the personnel necessary to support the growth in revenue
and installed customer base. The decrease in cost of services and support during
fiscal 2000 was attributable to the reduction of personnel associated with
restructuring activities in fiscal 1999 and the overall decline in revenue in
fiscal 2000.
Sales and Marketing. Sales and marketing expense consist 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 43.1% in fiscal 2001,
40.3% in fiscal 2000 and 58.0% in fiscal 1999. Sales and marketing expense
increased 88.2%, or $54.2 million in fiscal 2001 and decreased 40.4%, or $41.6
million, in fiscal 2000. The increase in fiscal 2001 was primarily due to:
- increasing the number of direct sales representatives and sales
management to 155 at February 28, 2001 compared to 91 at February
29, 2000, or an increase of 70.3%; and increasing the overall sales,
marketing and business development employees to 407 at February 28,
2001 compared to 258 at February 29, 2000, or an increase of 57.8%,
- 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.
We expect sales and marketing expense to increase in dollars in fiscal
2002 and remain the same or decrease as a percentage of total revenue as our
revenue grows. See "Forward Looking Statements" and "Factors That May Effect
Future Results."
The decrease in sales and marketing expenses in fiscal 2000 was
primarily a result of reductions in personnel associated with restructuring
activities in fiscal 1999 and the decrease in total revenue.
Product Development. Product development expenses include expenses
associated with the development of new software products, enhancements of
existing products and quality assurance activities. Such costs are primarily
from personnel and third party contractors. We record product development costs
net of capitalized software development costs for products that have reached
technological feasibility in accordance with SFAS No. 86,
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"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". The following table sets forth product development costs for the
three fiscal years ended February 28, 2001 (in thousands):
Fiscal Year Ended February 28 or 29
2001 2000 1999
--------- --------- ---------
Gross product development costs $ 49,750 $ 34,585 $ 59,464
Percentage of total revenue 18.6% 22.7% 33.5%
Less: Capitalized product development costs 8,920 5,435 10,075
Percentage of total revenue 3.3% 3.6% 5.7%
--------- --------- ---------
Product development costs, as reported $ 40,830 $ 29,150 $ 49,389
Percentage of total revenue 15.2% 19.1% 27.8%
Gross product development costs increased 43.9%, or $15.2 million, in
fiscal 2001 and decreased 41.8%, or $24.9 million in fiscal 2000. Net product
development costs increased 40.1%, or $11.7 million, in fiscal 2001 and
decreased 41.0%, or $20.2 million, in fiscal 2000. The increases in fiscal 2001
were due to:
- Increasing the number of product development employees to 423 at
February 28, 2001 compared to 232 at February 29, 2000, or an
increase of 82.3%
- Increasing the number of product development contractors to 188 at
February 28, 2001 compared to approximately 39 at February 29, 2000,
or an increase of 382.1%
- Increased number of product development initiatives.
The decrease in product development expenses as a percentage of total
revenue reflects our ability to leverage resources over a larger revenue base.
We expect to continue to expend significant resources on product development in
future periods and invest similar amounts as a percentage of revenue in future
periods. See "Forward Looking Statements" and "Factors That May Effect Future
Results."
The decrease in gross and net product development costs in fiscal 2000
was primarily a result of reductions in personnel associated with restructuring
activities in fiscal 1999.
General and Administrative. General and administrative expenses include
personnel and other costs of our legal, finance, accounting, human resources and
information systems functions. General and administrative expenses increased
44.8%, or $7.1 million in fiscal 2001 and decreased 20.1%, or $4.0 million in
fiscal 2000. The increase in fiscal 2001 is due to increased personnel to
support our growth. The decrease in general and administrative expense as a
percentage of total revenue reflects our ability to spread this expense over a
larger revenue base. The decrease in general and administrative expenses in
fiscal 2000 was primarily a result of reductions in personnel associated with
restructuring activities in fiscal 1999.
Amortization of Intangibles. Our acquisitions of 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 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 report.
Amortization of intangibles related to the acquisitions referenced above
was $16.2 million, $2.4 million and $2.3 million in fiscal years 2001, 2000 and
1999, respectively. We expect to record approximately $86.0 million of
amortization expense in fiscal year 2002.
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, 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. In fiscal 1999, we acquired TYECIN
Systems, Inc., which was accounted for as a pooling of interests. Accordingly,
we recorded a non-recurring charge of $3.1 million for certain expenses related
to the transaction, including accounting, legal and severance costs. Details of
our acquisitions are included in Note 11 - "Acquisitions" in the Notes to our
Consolidated Financial Statements included elsewhere in this report.
Restructuring Expenses (Benefits). During fiscal 1999, we announced and
implemented a restructuring plan intended to reduce costs and improve
profitability. The restructuring plan was required due to poor financial
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performance throughout fiscal 1999 that resulted from a variety of factors. As a
result of the restructuring, we recorded charges of $33.8 million in fiscal
1999. The components of the charge are as follows (in thousands):
Severance and related benefits $ 4,094
Lease obligations and terminations 20,200
Impairment of long-lived assets 9,115
Other 366
-------
Total $33,775
=======
During fiscal 2000, we reduced our 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. As of February 28, 2001,
all severance obligations related to the restructuring had been paid and the
remaining lease obligations were $3.4 million.
Non-Cash Stock Compensation Expense. We recognized non-cash stock
compensation of $12.8 million in fiscal 2001 primarily associated with stock
options that were repriced in January 1999 and unvested stock options assumed in
the Talus acquisition. These amounts are included as a separate component of
stockholders' equity 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 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 charge 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, 2001, 1.2 million repriced
options were still outstanding with a remaining vesting period of approximately
two years. 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 $1.2 million during fiscal 2001. As of February 28,
2001, approximately 514,000 of these options remained unvested with remaining
vesting periods up to 3.75 years.
Other Income, Net:
Other 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 income increased to
$2.9 million in fiscal 2001 from $1.4 million and $2.4 million in fiscal 2000
and 1999, respectively. These increases relate 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.
Provision (benefit) from income taxes
We recorded income tax expense of $2.6 million in fiscal 2001 despite
our loss before income taxes, resulting in a negative effective tax rate. The
effective tax rate in fiscal 2001 differed from the U.S statutory rate primarily
due to non-deductible goodwill and in-process research and development along
with non-cash stock compensation expense that did not result in an income tax
benefit for financial reporting purposes. Excluding the
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effect of amortization of intangibles, purchased research and development and
non-cash stock compensation expense, our effective tax rate was approximately
39% for fiscal 2001.
As of February 28, 2001, we had net operating loss carryforwards
("NOLs") for federal, state and foreign tax purposes of $211.0 million, in
aggregate. These carryforwards expire in various years between 2001 and 2021. 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.
Net Loss
We reported a net loss of $28.1 million, $8.9 million and $96.1 million
for the period ending February 28 or 29, 2001, 2000, 1999, respectively. Our
fiscal year 2001 results include operations related to the acquisitions of Talus
Solutions, Inc. and STG Holdings, Inc. 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. The
decrease in net loss in fiscal 2000 compared to fiscal 1999 is due to an
increase in income from operations in fiscal 2000, including a decrease in
restructuring charge and acquisition-related expenses recorded in fiscal 1999.
Without the impact of these non-recurring items, and the related tax effect, we
would have reported net income of $8.0 million for the period ending February
28, 2001, a net loss of $8.4 million and $59.1 million for the period ending
February 29, 2000,and February 28, 1999, respectively.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities in aggregate
increased $248.8 million during fiscal 2001 to $300.3 million as of February 28,
2001. Working capital increased $263.8 million to $300.7 million at February 28,
2001. The increase in cash, cash equivalents, marketable securities and working
capital was primarily the result of receiving $242.2 million in net proceeds
related to completing our $250.0 million convertible debt offering during the
third quarter of fiscal 2001 and receiving proceeds of $20.2 million from stock
option exercises during fiscal 2001.
Cash provided by (used in) operations was $15.5 million, $12.3 million
and $(27.8) million in fiscal 2001, 2000 and 1999, respectively. The increase in
cash provided by operations in fiscal 2001 resulted primarily from (i) revenue
growth and increased profits from operations before non-cash charges of
approximately $19.9 million, (ii) an increase in interest income of $5.8
million, (iii) reduction in cash paid for restructuring costs of $7.0 million
offset by net increases in working capital to support our revenue growth.
Excluding the effect of acquisitions, accounts receivable and deferred revenue
increased $38.8 million and $9.4 million, respectively, in fiscal 2001, while
days sales outstanding in accounts receivable increased to 82 days as of
February 28, 2001 versus 80 days as of February 29, 2000. These increases
reflect the impact of our revenue growth in fiscal 2001.
Cash (used in) provided by investing activities was $(117.3) million,
$(7.2) million and $23.0 million in fiscal 2001, 2000 and 1999, respectively.
Investing activities consist primarily of the sales and purchases of marketable
securities, purchases of property and equipment and purchases and capitalization
of software. Purchases of marketable securities, net of sales, was $92.4 million
in fiscal 2001 primarily as a result of investing the proceeds from our
convertible debt offering. Total purchases of property, equipment and software,
including capitalized software, were $20.3 million in fiscal 2001. We expect
this amount to increase in fiscal 2002 and 2003 as we support our growth and
build out our new corporate headquarters space.
Cash provided by financing activities was $256.2 million, $5.0 million
and $16.5 million in fiscal 2001, 2000 and 1999, respectively. Cash provided by
financing activities consist primarily of proceeds from our convertible debt
offering in fiscal 2001, proceeds from the exercise of stock options and
employee stock plan purchases and changes in our line of credit. We had no
balance outstanding under our line of credit at February 28, 2001.
As of February 28, 2001, we had $250.0 million in convertible
subordinated debentures 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, 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 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
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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, will be as follows:
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%
We have a one-year committed unsecured revolving credit facility with a
commercial bank for $20.0 million. The current agreement is scheduled to expire
in September 2001. 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. (Acquisition-related borrowings are
limited to $7.5 million per acquisition.)
In December 2000, we entered into a ten-year lease agreement for a new
headquarters facility in Gaithersburg, MD. We expect to incur $14.0 to $15.0
million in capital expenditures for leasehold improvements and furniture for the
new space. We expect to move into our new headquarters space during the second
calendar quarter of 2002.
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.
We are actively pursuing 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 cash, cash equivalents and marketable
securities, available borrowings under our credit facility and our anticipated
cash flows from operations in future periods will satisfy our existing liquidity
and capital requirements for the foreseeable future.
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.
Risks related to our business
AS RESULT OF RECENT SIGNIFICANT CHANGES IN OUR MANAGEMENT, PERSONNEL AND
PRODUCTS, YOU MAY HAVE DIFFICULTY EVALUATING OUR PROSPECTS BASED ON OUR
SIGNIFICANT LOSSES IN RECENT FISCAL YEARS.
We experienced operational difficulties in fiscal 1999 and the first
half of fiscal 2000. Problems with our direct sales operation and intense
competition, among other factors, contributed to net losses in fiscal 1999 and
fiscal 2000 and a decline in revenue in fiscal 2000. Since April 1999, we hired
a new executive management team, enhanced our supply chain optimization and
eMarketplace products and services, expanded the scope of our product and
service offerings to include pricing and revenue optimization and improved our
direct sales organization. Our ability to continue to achieve operational
improvements and improve our financial performance will be subject to a number
of risks and uncertainties, including the following:
- slower growth in the market for supply chain management, pricing/revenue
optimization and eMarketplace solutions;
- weakening economic conditions;
- our ability to introduce new software products and services to respond to
technological and client needs;
- our ability to manage our anticipated growth;
- our ability to hire, integrate and deploy our direct sales force
effectively;
- our ability to expand our distribution capability through indirect sales
channels;
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- our ability to respond to competitive developments and pricing; and
- our dependence on our current executive officers and key employees.
If we fail to successfully address these risks and uncertainties, our
business could be harmed and we could continue to incur significant losses.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES IN RECENT FISCAL YEARS. OUR FUTURE
RESULTS WILL BE ADVERSELY AFFECTED BY SEVERAL TYPES OF NON-CASH CHARGES. IF WE
DO NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE, OUR STOCK PRICE MAY
DECLINE.
We have recently incurred significant losses, including net losses of
$28.1 million for the year ended February 28, 2001, $8.9 million in fiscal 2000
and $96.1 million in fiscal 1999. We will incur non-cash charges in the future
related to the amortization of intangible assets and non-cash stock compensation
expenses associated with our acquisition of Talus. We will also incur non-cash
charges related to the amortization of intangible assets relating to our
acquisition of STG Holdings Inc. In addition, we may incur non-cash stock
compensation charges related to our stock option repricing as discussed in more
detail in the Notes to the Financial Statements (see Note 7). We cannot assure
you that our revenue will grow or that we will achieve or maintain 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, and our
ability to finance our operations could be impaired.
OUR OPERATING RESULTS FLUCTUATE, AND IF WE FAIL TO MEET THE EXPECTATION OF THE
INVESTMENT COMMUNITY IN ANY PERIOD, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY.
Our revenue and operating results are difficult to predict, and we
believe that period-to-period comparisons of our operating results will not
necessarily be indicative of future performance. The factors that may cause
fluctuations of our quarterly operating results include the following:
- the size, timing and contractual terms of licenses and sales of our products
and services;
- 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;
- 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 sales channels through which our products and services
are sold; and
- changes in rules relating to revenue recognition or in interpretations of
those rules.
Due to fluctuations from quarter to quarter, our operating results may
not meet the expectations of securities analysts or investors. If this occurs,
the price of our common stock could decline significantly.
VARIATIONS IN THE TIME IT TAKES US TO LICENSE OUR SOLUTIONS MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS.
The time it takes to license our solutions to prospective clients varies
substantially, but typically ranges 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. Furthermore, because our operating expenses are relatively fixed over
the short term and we devote significant time and resources to prospective
clients, these fluctuations could cause our operating results to suffer in some
future periods. The length of our sales cycle depends on a number of factors,
including the following:
- the complexities of the supply chain, pricing/revenue and eMarketplace
problems our solutions address;
- the breadth of the solution required by the client, including the technical,
organizational and geographic scope of the license;
- the evaluation and approval process employed by the client;
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- the sales channel through which the solution is sold; and
- any other delays arising from factors beyond our control.
THE SIZE AND SCOPE OF OUR CONTRACTS WITH CLIENTS ARE INCREASING, WHICH MAY CAUSE
FLUCTUATION IN OUR OPERATING RESULTS.
Our clients and prospective clients are seeking to solve increasingly
complex supply chain, pricing/revenue and eMarketplace problems. Further, we are
focused on providing more comprehensive solutions for our clients, as opposed to
only licensing software. As the complexity of the problems our clients seek to
solve increases, the size and scope of our contracts with clients increase. As a
result, our operating results could fluctuate due to the following factors:
- the complexities of the contracting process of our clients;
- contractual terms may vary widely, which may result in differing methods of
accounting for revenue from each contract;
- losses of, or delays in concluding larger contracts could have a
proportionately greater effect on our revenue for a particular period; and
- the sales cycles related to larger contracts may be longer and subject to
greater delays.
Any of these factors could cause our revenue to decline or fluctuate
significantly in any quarter and could cause a decline in our stock price.
WE HAVE EXPERIENCED DIFFICULTIES INTEGRATING ACQUISITIONS IN THE PAST AND MAY
EXPERIENCE PROBLEMS WITH FUTURE ACQUISITIONS THAT COULD MATERIALLY HARM OUR
BUSINESS.
Acquisitions involve the integration of companies that have previously
operated independently. In connection with any acquisition, there can be no
assurance that we will:
- effectively integrate employees, operations, products and systems;
- realize the expected benefits of the transaction;
- retain key employees;
- effectively develop and protect key technologies and proprietary know-how;
- avoid conflicts with our clients 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, including the acquisition of Talus in December 2000.
We experienced significant difficulties with the integration of the
products and operations of ProMIRA Software, Inc. (ProMIRA) and TYECIN, which we
acquired in fiscal 1998 and 1999 respectively. These difficulties included
problems integrating the prior ProMIRA sales forces and the delayed releases of
the in-process technology acquired as part of the transaction. In addition, as a
result of the poor financial performance we experienced in fiscal 1999, the
technology acquired in conjunction with the TYECIN acquisition was not
integrated into our solutions and, therefore, revenue generated from this
technology have been nominal. Similar difficulties with future acquisitions
could materially and adversely affect our business, results of operations and
financial condition.
WE MAY ENCOUNTER PROBLEMS EFFECTIVELY INTEGRATING TALUS.
On December 21, 2000, we completed the acquisition of Talus, a
privately-held company that provides pricing and revenue optimization products
and services. This acquisition is substantially larger than all of our prior
acquisitions, not all of which have been successful. In addition to the risks
described above in connection with acquisitions generally, the ultimate success
of our acquisition of Talus is dependent on factors which include the following:
- our ability to complete the commercial releases of our pricing and revenue
optimization solutions;
- our ability to protect and maintain Talus' intellectual property rights;
- our ability to successfully market and license the products Talus has
developed and is developing for commercial release;
- our ability to successfully integrate Talus' technologies;
- our ability to retain and motivate Talus' employees;
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- market acceptance of the products Talus has commercially developed to date;
- our ability to fulfill our strategic plan for the acquisition of Talus by
integrating our supply chain and eMarketplace capabilities and products with
Talus' pricing and revenue optimization products;
- market acceptance of EPO solutions;
- our ability, together with Talus, to cross-sell products and services into
our respective markets; and
- the outcome of disputes and litigation which have arisen in the ordinary
course of business.
OUR ACQUISITION OF TALUS WILL ADVERSELY AFFECT OUR COMBINED FINANCIAL RESULTS.
We will incur substantial dilution to our earnings per share in
accordance with generally accepted accounting principles for the foreseeable
future as a result of the Talus acquisition. In connection with the acquisition,
we will amortize approximately $22.8 million of deferred compensation related to
unvested stock options over four years. Further, we will initially incur an
annual amortization charge of approximately $82 million related to goodwill and
intangible assets.
WE DEPEND ON SALES OF OUR SUPPLY CHAIN MANAGEMENT, PRICING/REVENUE OPTIMIZATION
AND EMARKETPLACE 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 revenue, service revenue and support
revenue have arisen from, or are related directly to, our supply chain
management, pricing/revenue optimization and eMarketplace 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 supply chain management,
pricing/revenue optimization and eMarketplace solutions, in general, would
materially and adversely affect our ability to generate revenue. While we
believe the markets for supply chain management, pricing/revenue optimization
and eMarketplace 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.
OUR MARKETS ARE VERY COMPETITIVE, AND WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE.
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 cooperative relationships
among themselves or with third parties. 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 MORE RESOURCES
THAN WE DO AND, THEREFORE, WE MAY BE AT A DISADVANTAGE IN COMPETING WITH THEM.
We directly compete with other application software vendors including:
Adexa, Inc. (to be acquired by FreeMarkets, Inc.), Aspen Technology, Inc., The
Descartes Systems Group Inc., i2 Technologies, Inc., Logility, Inc.; Micros
Systems, Inc., PROS Revenue Management, Sabre, Inc., SynQuest and YieldStar
Technology. Some eMarketplace software companies that do not currently offer
directly competitive products or solutions, such as Ariba, Inc. and Commerce
One, may begin to compete directly with us. 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 supply chain planning, pricing/revenue optimization or
eMarketplace 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. 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 supply chain management, pricing/revenue optimization
and eMarketplace 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
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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 solutions are complex and are frequently integrated with a
wide variety of third-party software. We may license solutions that contain
undetected errors or failures when new solutions are first introduced or as new
versions are released. We may also be unable to meet client expectations in
implementing our solutions. These problems may result in claims for damages
suffered by our clients, a loss of, or delays in, the market acceptance of our
solutions, client dissatisfaction and potentially lost revenue 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.
We depend on companies such as Extricity, Inc. (recently acquired by
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.
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
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be unable to develop relationships with organizations that will be able to
market our products effectively. Our arrangements with these organizations are
not exclusive and, in many cases, may be terminated by either party without
cause. Many of the organizations with whom we are developing or maintaining
marketing relationships have commercial relationships with our competitors.
Therefore, there can be no assurance that any organization will continue its
involvement with us and our products. The loss of relationships with important
organizations could materially and adversely affect our 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.
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. Obtaining government contracts may involve long
purchase cycles, competitive bidding, qualification requirements, performance
bond requirements, delays in funding, budgetary constraints and extensive
specification development and price negotiations. In order to facilitate doing
business with the federal government, we have submitted a schedule of prices for
our products and services to the General Services Administration. We are
permitted to update our schedule of prices only on an annual basis. Each
government agency maintains its own rules and regulations with which we must
comply and which can vary significantly among agencies. Government agencies also
often retain a significant portion of fees payable upon completion of a project
and collection of such fees may be delayed for several months. Accordingly, our
revenue could decline as a result of these government procurement processes. In
addition, it is possible that, in the future, some of our government contracts
may be fixed price contracts which may prevent us from recovering costs incurred
in excess of our budgeted costs. Fixed price contracts 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 complete the
project on a timely basis. In the event our actual costs exceed the fixed
contract cost, we will not be able to recover the excess costs. If we fail to
properly anticipate costs on fixed price contracts, our profit margins will
decrease. Some government contracts are also subject to termination or
renegotiation at the convenience of the government, which could result in a
large decline in revenue in any given quarter. Multi-year contracts are
contingent on overall budget approval by Congress and may be terminated due to
lack of funds.
INCREASED SALES THROUGH INDIRECT CHANNELS MAY ADVERSELY AFFECT OUR OPERATING
PERFORMANCE.
Even if our marketing efforts through indirect channels are successful
and result in increased sales, our average selling prices and operating margins
could be adversely affected because of the lower unit prices that we receive
when selling through indirect channels.
IF WE FAIL TO EFFECTIVELY EXPAND OUR SALES ORGANIZATION, OUR ABILITY TO GROW
WILL BE LIMITED.
Our continuing efforts to expand our sales organization will require
significant resources. New sales personnel will require training and may take a
long time to achieve full productivity. Further, the competition for qualified
sales personnel is intense, and there is no assurance that we can attract and
retain qualified sales people at levels sufficient to support our growth. Any
failure to adequately sell and support our products could limit our growth and
adversely affect our performance.
THE LIMITED ABILITY OF LEGAL PROTECTIONS TO SAFEGUARD OUR INTELLECTUAL PROPERTY
RIGHTS COULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of confidentiality procedures, contractual provisions, patent,
copyright, trademark and trade secret laws. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products or
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult and, although we are unable to determine the
extent to which piracy of our software products exists, we expect software
piracy to be a problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as the laws of the United
States. Furthermore, our competitors may independently develop technology
similar to ours.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO INCUR UNEXPECTED COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.
The number of intellectual property claims in our industry may increase
as the number of competing products grows and the functionality of products in
different industry segments overlaps. In recent years, there has been a tendency
by software companies to file substantially increasing numbers of patent
applications, including
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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.
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
- economic and political instability.
Any of the above factors could adversely affect the success of our
international operations. One or more of these factors could have a material
adverse effect on our business and operating results.
IF WE LOSE OUR KEY PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER.
Our success depends significantly on the continued service of our
executive officers. We do not have fixed-term employment agreements with any of
our executive officers, and we do not maintain key person life insurance on our
executive officers. The loss of services of any of our officers for any reason
could have a material adverse effect on our business, operating results,
financial condition and cash flows.
THE FAILURE TO HIRE AND RETAIN QUALIFIED PERSONNEL WOULD HARM OUR BUSINESS.
We believe that our success also will depend significantly on our
ability to attract, integrate, motivate and retain additional highly skilled
technical, managerial, sales, marketing and services personnel. Competition for
skilled personnel is intense, and there can be no assurance that we will be
successful in attracting, motivating and retaining the personnel required to
grow and operate profitably. In addition, the cost of hiring and retaining
skilled employees is high, and this reduces our profitability. Failure to
attract and retain highly skilled personnel could materially and adversely
affect our business. An important component of our employee compensation is
stock options. A decline in our stock price could adversely affect our ability
to attract and retain employees, as it has in the past.
WE HAVE RECENTLY EXPERIENCED SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM
AND THERE IS NO ASSURANCE THE TEAM WILL WORK TOGETHER EFFECTIVELY.
Commencing in the first quarter of fiscal 2000, we have completely
changed our senior management team. Gregory J. Owens, our Chief Executive
Officer, joined us in April 1999. With one exception, all of our other present
executive officers joined us after Mr. Owens. Our success depends on the ability
of our management team to work together effectively. Our business, revenue and
financial condition will be materially and adversely affected if our senior
management team does not manage our company effectively or if we are unable to
retain our senior management.
EXPENSES ARISING FROM OUR STOCK OPTION REPRICING HAVE HAD AND MAY HAVE IN THE
FUTURE A MATERIAL ADVERSE IMPACT ON PERFORMANCE.
In response to the poor performance of our stock price between May 1998
and January 1999, we offered to reprice employee stock options, other than those
held by our executive officers or directors, effective January 29, 1999, to
bolster employee retention. The effect of this repricing resulted in options to
acquire approximately
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3.0 million shares being repriced and the four-year vesting period starting
over. The recently adopted FASB Interpretation No. 44 of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," requires us to
record compensation expense or benefit associated with the change in the market
price of these options. The increase in our common stock market price since the
FASB-mandated measurement date of July 1, 2000 resulted in a non-cash stock
compensation expense of $11.1 million being recorded for the year ended February
28, 2001. This non-cash stock compensation expense caused what would otherwise
have been reported as net loss for the year ended of $17.8 million, or $0.30 per
basic and diluted share, to be reported as a net loss of $28.1 million, or $0.48
per basic and diluted share. In each future quarter, we will record the
additional expense or benefit related to the repriced stock options still
outstanding, 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 OR ELECTRONIC MARKETPLACES COULD BE
DETRIMENTAL TO OUR FUTURE OPERATING RESULTS.
The growth of the Internet has increased demand for supply chain
management, pricing/revenue optimization and eMarketplace 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
medium for electronic marketplaces. The Internet may not succeed in becoming a
viable marketplace for a number of reasons, including:
- potentially inadequate development of network infrastructure or delayed
development of enabling technologies and performance improvements;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of internet activity;
- concerns that may develop among businesses and consumers about
accessibility, security, reliability, cost, ease of use and quality of
service;
- increased taxation and governmental regulation; or
- changes in, or insufficient availability of, communications services to
support the Internet, resulting in slower Internet user response times.
The occurrence of any of these factors could require us to modify our
technology and our business strategy. Any such modifications could require us to
expend significant amounts of resources. In the event that the Internet does not
become and remain a viable commercial marketplace, our business, financial
condition and results of operations could be materially and adversely affected.
NEW LAWS OR REGULATIONS AFFECTING THE INTERNET, ELECTRONIC MARKETPLACES OR
COMMERCE IN GENERAL COULD REDUCE OUR REVENUE AND ADVERSELY AFFECT OUR GROWTH.
Congress and other domestic and foreign governmental authorities have
adopted and are considering legislation affecting the use of the Internet,
including laws relating to the use of the Internet for commerce and
distribution. The adoption or interpretation of laws regulating the Internet, or
of existing laws governing such things as consumer protection, libel, property
rights and personal privacy, could hamper the growth of the Internet and its use
as a communications and commercial medium. If this occurs, companies may decide
not to use our products or services, and our business, operating results and
financial condition could suffer.
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THE VIABILITY OF ELECTRONIC MARKETPLACES IS UNCERTAIN.
Electronic marketplaces that allow collaboration over the Internet among
trading partners are relatively new and unproven. There can be no assurance that
trading partners will adopt electronic marketplaces as a method of doing
business. Trading partners may fail to participate in electronic marketplaces
for a variety of reasons, including:
- concerns about the confidentiality of information provided electronically to
electronic marketplaces;
- the inability of technological advances to keep pace with the volume of
information processed by electronic marketplaces; and
- regulatory issues, including antitrust issues that may arise when trading
partners collaborate through electronic marketplaces.
Any of these factors could limit the growth of electronic marketplaces
as an accepted means of commerce. Slower growth or the abandonment of the
electronic marketplace concept in one or more industries could have a material
adverse affect on our results of operations and financial condition.
Risks related to the Notes
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. 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 these Notes fully prohibit us from doing so. If a significant amount of
new debt is added to our current levels, the related risks described above could
intensify.
WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS.
We will be required to generate cash sufficient to pay all amounts due
on the Notes and to conduct our business operations. We have net losses, and we
may not be able to cover our anticipated debt service obligations. This may
materially hinder our ability to make principal and interest payments on the
Notes. Our ability to meet our future debt service obligations will be dependent
upon our future performance, which will be subject to financial, business and
other factors affecting our operations, many of which are beyond our control.
Risks related to the sale of our common stock
RESALES OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK ISSUED IN CONNECTION WITH THE
ACQUISITION OF TALUS MAY CAUSE OUR STOCK PRICE TO DECLINE.
In connection with the acquisition of Talus, we issued approximately 7.0
million new shares of our common stock. Of these shares, a total of
approximately 6.0 million shares were delivered to Manugistics' exchange agent
for direct transfer to the former Talus stockholders and approximately 1.0
million shares were delivered to State Street Bank and Trust Company, as escrow
agent, to secure potential indemnification claims of Manugistics. To the extent
that the escrowed shares are not subject to indemnification claims, the escrowed
shares will be released, subject to existing claims, in two installments, on
October 31, 2001 and July 2, 2002. Of the 6.0 million shares delivered to the
exchange agent, approximately 1.3 million shares were freely tradable upon
completion of the acquisition. The remaining approximately 4.7 million shares
are subject to share transfer restrictions and will become available for sale in
three stages in accordance with the terms of the share transfer restriction
agreements signed by certain principals of Talus Solutions, Inc. The first
release date was January 18, 2001, at which time approximately 1.4 million
shares were released. The balance of these shares will be released, in
accordance with the terms of the share transfer restriction agreements, on May
31, 2001 and October 31, 2001.
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In addition, at closing, a total of approximately 1.4 million shares
were reserved for issuance upon exercise of outstanding Talus' stock options and
warrants which were assumed by Manugistics. Options to purchase a total of
approximately 700,000 shares were exercisable at the time of completion of the
acquisition. In addition, a total of approximately 370,000 of these shares were
subject to share transfer restrictions which expired January 18, 2001.
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 and approximately 253,000 shares in
April 2001. They are scheduled to sell up to approximately 300,000 shares per
quarter after each of the first, second and third quarters of fiscal 2002
pursuant to these trading plans. The quarterly sales will continue until the
trading plans are modified or terminated. Certain of our other executive
officers and directors are considering establishing similar plans to sell shares
on a quarterly basis. The sale of these shares may cause the market price of our
stock to decline.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE
A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
Our charter and our bylaws, in conjunction with Delaware law, contain
provisions that could make it more difficult for a third party to obtain control
of us even if doing so would be beneficial to stockholders. For example, our
bylaws provide for a classified board of directors and allow our board of
directors to expand its size and fill any vacancies without stockholder
approval. In addition, our bylaws require a two-thirds vote of stockholders to
remove a director from office. Furthermore, our board has the authority to issue
preferred stock and to designate the voting rights, dividend rate and privileges
of the preferred stock all of which may be greater than the rights of common
stockholders.
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and is likely to be
highly volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
- actual or anticipated variations in quarterly operating results;
- weakening economic conditions;
- 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, SCM, PRO and eMarketplace
solutions;
- 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;
- additions or departures of key personnel;
- our 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 and a significant
cumulative decline in recent months. Such volatility and decline have 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.
-33-
34
Item7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Foreign Currency Risk. Revenue outside of the United States was 30.7%, 40.1% and
33.9% in fiscal 2001, 2000 and 1999, respectively. International sales are
usually made by our foreign subsidiaries in local currencies and the expenses
incurred by foreign subsidiaries are also denominated in local currencies.
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
taxable and tax-advantaged variable rate and fixed rate obligations of
corporations, municipalities and national, state and local government agencies,
in accordance with an investment policy approved by our Board of Directors.
These instruments are denominated in U.S. dollars. The fair market value of
marketable securities held at February 28, 2001 was $103.9 million and $9.7
million at February 29, 2000.
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 has
decreased the discount rate several times to 4.0%. These actions have led to a
general market decline in interest rates recently.
The weighted average yield on interest-bearing investments held as of
February 28, 2001 was approximately 5.5%. Based on our investment holdings at
February 28, 2001, a 100 basis point decline in the average yield would reduce
our annual interest income by $2.7 million.
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.
-34-
35
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 2001 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, 2001) (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."
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 Report:
(1) Financial Statements: Page Number
In This Report
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
The financial statements listed above and the financial statement
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
-35-
36
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, 10.15, 10.28
through 10.32, 10.35 through 10.48 and 10.50 are management contracts or
compensatory plans or arrangements required to be filed as exhibits
pursuant to Item 14(C) of this report.
Number Notes Description
------ ----- -----------
2.1 (S) Agreement and Plan of Merger dated June 1, 1998, among the
Company, TYECIN Acquisition, Inc., TYECIN Systems, Inc. and
certain other persons
2.2 (V) Agreement Plan of Merger by and among Manugistics Group,
Inc., Talus Solutions, Inc. and Manu Acquisition Corp. dated
September 21, 2000.
2.3 (AA) 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.
3.1(a) (A) Amended and Restated Certificate of Incorporation of the
Company
3.1(b) (B) Certificate of Retirement and Elimination (relating to the
Series A and Series B preferred stock of the Company)
3.1 (c) (C) Certificate of Amendment to Amended and Restated Certificate
of Incorporation of the Company (effective July 29, 1997)
3.2 (A) Amended and Restated By-Laws of the Company
4.1 (V) Purchase Agreement dated October 16, 2000, between Deutsche
Bank Securities,Inc.,(as representative of the initial
purchasers) and Manugistics Group, Inc.
4.2 (V) Indenture dated as of October 20, 2000, between Manugistics
Group, Inc., and State Street Bank and Trust Company.
4.3 (V) Registration Rights Agreement dated as of October 20, 2000,
and Deutsche Bank Securities Inc., and Banc of America
Securities LLC.4
4.4 (Y) Form of Note for Manugistics Group, Inc.'s 5% Convertible
Subordinated Notes due November 1, 2007.
4.5 (AA) 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 (I) Employee Incentive Stock Option Plan of the Company, as
amended
10.2 (I) 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
-36-
37
Number Notes Description
------ ----- -----------
Plan (previously identified as Exhibit 10.4)
10.7 (A) Lease Agreement dated May 1, 1992 between the Company and
GTE Realty Corporation
10.7(a) (E) First Amendment to Lease Agreement dated July 19, 1993
between the Company and GTE Realty Corporation
10.7(b) (E) Second Amendment to Lease Agreement dated April 13, 1994
between the Company and East Jefferson Associates
10.7(c) (E) Third Amendment to Lease Agreement dated May 1, 1994 between
the Company and East Jefferson Associates
10.7(d) (E) Fourth Amendment to Lease Agreement dated February 27, 1995
between the Company and East Jefferson Associates
10.7(e) (K) Fifth Amendment to Lease Agreement dated September 6, 1996
between the State of Maryland and the Company
10.7(f) (K) Sixth Amendment to Lease Agreement dated October 10, 1996
between the State of Maryland and the Company
10.7(g) (K) Seventh Amendment to Lease Agreement dated April 25, 1997
between the State of Maryland and the Company
10.8 (N) Lease Agreement date March 26, 1998 Manugistics, Inc. and
Washingtonian North Associates Limited Partnership
10.11 (D) Outside Directors Non-Qualified Stock Option Plan
10.12 (D) Executive Incentive Stock Option Plan
10.13 Amended and Restated 1998 Stock Option Plan of the Company
10.15 (F) Employee Stock Purchase Plan of the Company
10.17 (G) Sublease dated May 5, 1995 between the Company, as amended
and NationsBank, N.A.
10.18 (H) Agreement and Plan of Merger dated May 24, 1996 between
Avyx, Inc., Manugistics Acquisition, Inc. and the Company
10.19 (H) Consulting Agreement dated May 24, 1996 between The Kendall
Group, Inc. and the Company
10.20 (H) Confidentiality, Non-Competition and Non-Solicitation
Agreement dated May 24, 1996 between the Company and John K.
Willoughby and JoAnne Gardner
10.21 (J) Financing Agreement dated as of September 30, 1996 by and
among the Company and NationsBank, N.A.
10.22 (J) Form of Revolving Promissory Note dated September 30, 1996
by the Company in favor of NationsBank, N.A.
-37-
38
Number Notes Description
------ ----- -----------
10.23 (K) Sublease Agreement between CTA Incorporated and the Company
dated May 23, 1996
10.24 (K)(i) Data Marketing and Guaranteed Revenue Agreement dated March
7, 1997 between the Company and Information Resources, Inc.
10.25 (K)(i) Asset Purchase Agreement dated March 7, 1997 between
Manugistics, Inc., Manugistics Services, Inc., IRI
Logistics, Inc. and Information Resources, Inc.
10.26 (L) Sale and Purchase Agreement dated 7th June 1997 between M.C.
Harrison, J.E. Harrison, Manugistics U.K. Limited and the
Company
10.27 (M) Stock Purchase Agreement dated February 13, 1998 between
Manugistics Nova Scotia Company and ProMIRA Software
Incorporated, et al.
10.28 (O) Employment Agreement dated April 25, 1999 among the Company,
Manugistics, Inc. and with Gregory J. Owens, Chief Executive
Officer and President
10.29 (O) Termination of Employment Agreement dated November 18, 1998,
between Manugistics, Inc. and David Roth
10.30 (O) Termination of Employment Agreement dated January 27, l999,
between Manugistics, Inc. and Keith Enstice
10.31 (O) Termination of Employment Agreement dated February 10, 1999,
between Manugistics, Inc. and Joseph Broderick
10.32 (P) Termination of Employment Agreement dated May 26, 1999,
between Manugistics, Inc. and Kenneth S. Thompson
10.33 (P) Termination Agreement dated June 16, 1999 by and among
Manugistics, Inc. Boston Properties Limited Partnership and
certain other parties
10.34 (P) Letter Agreement dated June 16, 1999, between Manugistics,
Inc. and Himes Associates, Ltd.
10.35 (Q) Employment Agreement dated June 3, 1999 between Manugistics,
Inc. and Richard F. Bergmann, as amended
10.36 (Q) Employment Agreement dated June 7, 1999 between Manugistics,
Inc. and Terrance A. Austin, as amended
10.37 (Q) Employment Agreement dated August 25, 1999 between
Manugistics, Inc. and James J. Jeter, as amended
10.38 (Q) Termination of Employment Agreement dated July 23, 1999
between Manugistics, Inc. and Peter Q. Repetti
10.39 (Q) Termination of Employment Agreement dated August 25, 1999
between Manugistics, Inc. and Mary Lou Fox
10.40 (R) Employment Agreement dated December 6, 1999 between
Manugistics, Inc. and Raghavan Rajaji
-38-
39
Number Notes Description
------ ----- -----------
10.41 (T) Employment Agreement dated December 6, 1999 between
Manugistics, Inc. and Timothy T. Smith
10.42 (T) Employment Agreement dated January 19, 1999 between
Manugistics, Inc. and Daniel Stoks
10.43(a) (T) Stock Option Agreement dated April 27, 1999, between the
Company and Gregory J. Owens
10.43(b) (T) Stock Option Agreement dated December 1, 1999, between the
Company and Gregory J. Owens
10.43(c) (T) Stock Option Agreement dated December 17, 1999, between the
Company and Gregory J. Owens
10.44(a) (T) Stock Option Agreement dated December 6, 1999, between the
Company and Richard F. Bergmann
10.44(b) (T) Stock Option Agreement dated June 16, 1999, between the
Company and Richard F. Bergmann
10.44(c) (U) Stock Option Agreement dated December 16, 1999, between the
Company and Richard F. Bergmann
10.45 (T) Stock Option Agreement dated June 7, 1999, between the
Company and Terrence A. Austin
10.46 (W) Offer letter dated November 21, 2000, between Manugistics,
Inc. and Dr. Robert Phillips
10.47 (X) Employment Agreement dated October 16, 2000, between the
Company and Gregory Cudahy.
10.48 (W) Stock Option Agreement dated October 16, 2000, between the
Company and Gregory Cudahy.
10.49 (W) Lease Agreement dated December 19, 2000, between the Company
and DANAC Corporation.
10.50 Employment Agreement dated November 30, 2000, between the
Company and Thomas Ryan.
10.51 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.
10.52 (Z) 2000 Non-Qualified Stock Option Plan of the Company
21 Subsidiaries of the Company
23.1 Independent Auditors' Consent
-39-
40
(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 annual report
on form 10-K for the fiscal year ended February 28, 1995.
(F) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended August 31, 1995.
(G) Incorporated by reference from the exhibits to the Company's annual report
on form 10-K for the fiscal year ended February 29, 1996.
(H) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended May 31, 1996.
(I) Incorporated by reference from the exhibits to the Company's definitive
proxy statement relating to the 1996 annual meeting of shareholders dated
June 20, 1996.
(J) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended November 30, 1996.
(K) Incorporated by reference from the exhibits to the Company's annual report
on form 10-K for the fiscal year ended February 28, 1997.
(L) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended May 31, 1997.
(M) Incorporated by reference from the exhibits to the Company's current report
on form 8-K dated March 2, 1998
(N) Incorporated by reference from the exhibits to the Company's annual report
on form 10-K for the fiscal year ended February 28, 1998.
(O) Incorporated by reference from the exhibits to the Company's annual report
on Form 10-K for fiscal year ended February 28, 1999.
(P) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended May 31, 1999.
(Q) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended August 31, 1999.
(R) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended November 30, 1999.
(S) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended August 31, 1998.
(T) Incorporated by reference from the exhibits to the Company's annual report
on Form 10-K for fiscal year ended February 29, 2000.
(U) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended May 31, 2000.
(V) Incorporated by reference from the exhibits to the Company's current report
on form 8-K/A dated October 11, 2000.
Incorporated by reference from the exhibits to the Company's current report on
Form 10-Q for the quarter ended November 30, 2000.
(X) Incorporated by reference to the Company's registration statement Form S-8
filed by the Company on December 22, 2000.
(Y) Incorporated by reference from the exhibits to the Company's registration
statement on form S-3/A (NO. 333-53918).
(Z) Incorporated by reference from the exhibits to the Company's registration
statement on form S-8 (NO. 333-52630).
(AA)Incorporated by reference from the exhibits to the Company's registration
statement on form S-3/A (333-55010).
(i). Confidential treatment previously granted for certain portions of this
exhibit.
(b). Reports on Form 8-K
-40-
41
1. On December 7, 2000, we filed a Current Report on Form 8-K reporting our
issuance of a press release on December 6, 2000, announcing that Richard F.
Bergmann had been named as President of the Company.
2. On December 8, 2000, we filed a Current Report on Form 8-K reporting our
issuance of a press release on December 7, 2000. We announced that on
November 29, 2000, we filed a lawsuit against VirtualFund.com, Inc.,
alleging that VirtualFund.com is in anticipatory breach of its obligations
under a software license agreement among the Company and VirtualFund.com
Inc. and its affiliates.
3. On December 21, 2000, we filed a Current Report on Form 8-K reporting our
issuance of our regularly scheduled press release on December 19, 2000,
announcing earnings for the three month and nine month periods ended
November 30, 2000. In addition, the company announced that the then pending
acquisition of Talus Solutions, Inc., was scheduled to close on December 21,
2000.
4. On December 22, 2000, we filed a Current Report on Form 8-K reporting our
issuance of a press release on December 22, 2000, reporting the completion
of its previously announced acquisition of Talus Solutions, Inc. The Company
also announced the appointment of Esther Dyson as a Class I director of the
Company and the appointment of Steven A. Denning as a Class II director of
the Company.
5. On January 4, 2001, we filed a Current Report on Form 8-K reporting the
acquisition (previously reported on December 21, 2000) of the then
outstanding capital stock of Talus Solutions, Inc.
6. On January 16, 2001, we filed a Current Report on Form 8-K/A reporting the
amendment of the Form 8-K filed on December 22, 2000.
7. On January 18, 2001, we filed a Current Report on Form 8-K filing
supplemental information relating to the acquisition of Talus Solutions,
Inc.
(c) Exhibits
See the response to Item 14(a)(3) above.
-41-
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on May 25, 2001.
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 report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on May 25, 2001.
/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
-42-
43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Manugistics Group, Inc.:
We have audited the accompanying consolidated balance sheets of Manugistics
Group, Inc. (the Company) and its subsidiaries as of February 28, 2001 and
February 29, 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended February 28, 2001. 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 the Company and its subsidiaries at
February 28, 2001 and February 29, 2000, and the results of their operations and
their cash flows for each of the three years in the period ended February 28,
2001 in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
McLean, VA
March 26, 2001
F-1
44
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
February 28 or 29
--------------------------
2001 2000
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 196,362 $ 41,803
Marketable securities 103,946 9,744
Accounts receivable, net of allowance for doubtful accounts of $5,604 and
$1,875 at February 28, 2001 and February 29, 2000, respectively 84,211 36,345
Deferred tax asset 9,175 2,306
Other current assets 12,536 8,785
--------- ---------
Total current assets 406,230 98,983
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 19,275 14,157
NONCURRENT ASSETS:
Software development costs, net of accumulated amortization 15,709 16,514
Goodwill, net of accumulated amortization 335,651 6,959
Other intangible assets, net of accumulated amortization 58,527 358
Deferred tax asset -- 12,776
Other non-current assets 11,869 2,160
--------- ---------
TOTAL ASSETS $ 847,261 $ 151,907
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,923 $ 5,792
Accrued compensation 19,539 8,345
Line of credit -- 6,000
Deferred revenue 41,729 26,727
Current portion of restructuring accrual 1,003 5,130
Other current liabilities 33,368 10,158
--------- ---------
Total current liabilities 105,562 62,152
NONCURRENT LIABILITIES:
Long-term debt 250,133 283
Deferred tax liabilities 16,062 --
Other 2,746 --
Long-term restructuring accrual 2,437 2,754
--------- ---------
Total non-current liabilites 271,378 3,037
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock, $.002 par value per share; 100,000 shares authorized;
67,518 and 57,342 shares issued and 66,765 and 56,589 shares outstanding at
February 28, 2001 and February 29, 2000, respectively 135 115
Additional paid-in capital 621,824 189,423
Treasury stock - 753 shares, at cost (717) (717)
Deferred compensation (19,316) --
Accumulated other comprehensive income (loss) (1,324) 100
Accumulated deficit (130,281) (102,203)
--------- ---------
Total stockholders' equity 470,321 86,718
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 847,261 $ 151,907
========= =========
See accompanying notes to consolidated financial statements.
F-2
45
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
February 28 or 29
2001 2000 1999
---- ---- ----
REVENUE:
Software $ 139,316 $ 60,421 $ 73,802
Services 73,333 46,516 65,212
Support 55,315 45,496 38,550
--------- --------- ---------
Total revenue 267,964 152,433 177,564
--------- --------- ---------
OPERATING EXPENSES:
Cost of software 19,146 11,811 11,661
Cost of services and support 59,149 43,783 50,076
Non-cash stock compensation expense for services and support 4,579 -- --
--------- --------- ---------
Total cost of services and support 63,728 43,783 50,076
Sales and marketing 115,610 61,439 103,006
Non-cash stock compensation expense for sales and marketing 3,262 -- --
--------- --------- ---------
Total cost of sales and marketing 118,872 61,439 103,006
Product development 40,830 29,150 49,389
Non-cash stock compensation expense for product development 3,694 -- --
--------- --------- ---------
Total cost of product development 44,524 29,150 49,389
General and administrative 22,925 15,837 19,828
Non-cash stock compensation expense for general and administrative 1,266 -- --
--------- --------- ---------
Total cost of general and administrative 24,191 15,837 19,828
Amortization of intangibles 16,204 2,437 2,263
Purchased research and development and acquisition-related expenses 9,724 -- 3,095
Restructuring (benefit) expenses -- (1,506) 33,775
--------- --------- ---------
Total operating expenses 296,389 162,951 273,093
--------- --------- ---------
LOSS FROM OPERATIONS (28,425) (10,518) (95,529)
--------- --------- ---------
OTHER INCOME - NET 2,899 1,389 2,362
--------- --------- ---------
LOSS BEFORE INCOME TAXES (25,526) (9,129) (93,167)
PROVISION (BENEFIT) FOR INCOME TAXES 2,552 (184) 2,945
--------- --------- ---------
NET LOSS $ (28,078) $ (8,945) $ (96,112)
========= ========= =========
BASIC AND DILUTED LOSS PER SHARE $ (0.48) $ (0.16) $ (1.82)
========= ========= =========
SHARES USED IN BASIC AND DILUTED SHARE COMPUTATION 58,955 54,972 52,804
========= ========= =========
COMPREHENSIVE LOSS:
Net loss $ (28,078) $ (8,945) $ (96,112)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (815) 487 (701)
Unrealized (losses) gains on securities (609) (33) 114
--------- --------- ---------
Total other comprehensive income (loss) (1,424) 454 (587)
--------- --------- ---------
TOTAL COMPREHENSIVE LOSS $ (29,502) $ (8,491) $ (96,699)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
46
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock
------------
Par Paid-in Treasury Deferred
Shares Value Capital Stock Compensation
------ ----- ------- ----- ------------
BALANCE, FEBRUARY 28, 1998 52,687 105 171,023 (717) --
TYECIN conforming year end
Adjustments -- -- -- -- --
Issuance of common stock 388 1 2,744 -- --
Exercise of stock options 1,583 3 4,247 -- --
Tax benefit of options exercised -- -- 1,928 -- --
Translation adjustment -- -- -- -- --
Unrealized gain on
marketable securities -- -- -- -- --
Net loss -- -- -- -- --
------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 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 -- -- -- -- --
Unrealized 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 -- -- -- -- --
Unrealized loss on marketable
securities -- -- -- -- --
Net loss -- -- -- -- --
------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 2001 67,518 $ 135 $ 621,824 $ (717) $ (19,316)
==============================================================================
Accumulated
Other Accumulated
Comprehensive Earnings
Income (Loss) (Deficit) Total
------------- --------- -----
BALANCE, FEBRUARY 28, 1998 233 3,102 173,746
TYECIN conforming year end
Adjustments -- (248) (248)
Issuance of common stock -- -- 2,745
Exercise of stock options -- -- 4,250
Tax benefit of options exercised -- -- 1,928
Translation adjustment (701) -- (701)
Unrealized gain on
marketable securities 114 -- 114
Net loss -- (96,112) (96,112)
----------------------------------------------
BALANCE, FEBRUARY 28, 1999 (354) (93,258) 85,722
Issuance of common stock -- -- 1,420
Exercise of stock options -- -- 8,067
Translation adjustment 487 -- 487
Unrealized loss on marketable
securities (33) -- (33)
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)
Unrealized loss on marketable
securities (609) -- (609)
Net loss -- (28,078) (28,078)
----------------------------------------------
BALANCE, FEBRUARY 28, 2001 $ ( 1,324) $(130,281) $ 470,321
==============================================
See accompanying notes to consolidated financial statements.
F-4
47
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
February 28 or 29
-------------------------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (28,078) $ (8,945) $ (96,112)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 32,684 21,850 24,321
Amortization of debt issuance costs 403 -- --
Restructuring (benefit) expense -- (1,506) 33,775
Purchased research and development 9,724 -- --
Deferred income taxes 1,077 (936) 5,140
Tax benefit of stock options exercised -- -- 1,928
Non-cash stock compensation expense 12,801 -- --
Other 278 443 1,481
Changes in assets and liabilities:
Accounts receivable (38,825) 12,438 8,597
Other current assets (2,812) 2,728 (5,831)
Other non-current assets 619 22 (287)
Accounts payable 1,847 (2,350) (776)
Accrued compensation 6,096 530 (4,604)
Other current liabilities 14,788 (2,548) 2,851
Deferred revenue 9,356 2,017 6,164
Restructuring accrual (4,444) (11,491) (4,442)
--------- --------- ---------
Net cash provided by (used in) operating activities 15,514 12,252 (27,795)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (2,909) -- --
Sales of marketable securities 35,850 21,054 59,562
Purchases of marketable securities (128,244) (19,286) (8,827)
Purchase of property and equipment (8,623) (3,242) (16,402)
Investments in unconsolidated subsidiaries (1,732) -- --
Capitalization and purchases of software (11,670) (5,764) (10,850)
Net change in cash due to conforming year-ends -- -- (450)
--------- --------- ---------
Net cash (used in) provided by investing activities (117,328) (7,238) 23,033
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit (repayments) borrowings (6,000) (3,500) 9,500
Proceeds from issuance of convertible debt, net of issuance costs 242,207 -- --
Payments on long-term debt (150) (939) (246)
Proceeds from exercise of stock options and employee
stock plan purchases 20,181 9,487 7,219
--------- --------- ---------
Net cash provided by financing activities 256,238 5,048 16,473
--------- --------- ---------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 135 (110) 249
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 154,559 9,952 11,960
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 41,803 31,851 19,891
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 196,362 $ 41,803 $ 31,851
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
48
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. and subsidiaries ("the Company"), is a leading
global provider of Enterprise Profit Optimization(TM)(EPO) software and
solutions. The Company provides software, strategic consulting, implementation
services and software support to clients.
The Company was incorporated in Delaware in 1986. The Company completed
its initial public offering of common stock in 1993 and completed a secondary
offering of common stock in 1997.
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 and potential litigation, claims
and settlements (see Note 6).
Cash and Cash Equivalents
Cash and cash equivalents are comprised principally of amounts in
operating accounts, money market investments and other short-term instruments,
stated at cost, which approximates market value, with original maturities of
three months or less.
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, 2001 and
February 29, 2000, marketable securities consisted of investments in corporate
debt, municipal bonds and other short-term investments which generally 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 support
clients' receivables since most of its customers are large, well-established
companies. The Company's credit risk is also mitigated because its customer
F-6
49
base is diversified both by geography and industry and no single customer
accounts for more than 10% of consolidated revenue.
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
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 and is
being amortized on a straight-line basis 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 two to seven
years. Developed technology and other intangibles are amortized on a
straight-line basis over two to five years.
Internally Developed Software
Effective fiscal 1999, certain costs to develop or obtain internal use
software are capitalized 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. In performing an evaluation of recoverability, the estimated future
undiscounted net cash flows of the assets are compared to the assets' carrying
amount to determine if a write-down is required.
Other Non-Current Assets
Other non-current assets include deferred financing fees of $7.8 million
which is being amortized over the life of the related long-term debt.
Fair Values of Financial Instruments
The carrying values of cash and cash equivalents, marketable securities,
accounts receivable and accounts payable approximate fair value due to the short
maturities of such instruments. The fair value of the long-term debt was $237.8
million on February 28, 2001.
F-7
50
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 instability.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
AICPA Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue
Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition with respect to Certain Transactions," which provide guidance in
applying GAAP in recognizing revenue on software transactions, and SEC Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition". SOP 97-2 requires that the
Company deliver the software, have an executed software license agreement, the
license fee be fixed and determinable and collection be deemed probable by
management in order to record software license revenue. SOP 97-2 also requires
revenue earned on software arrangements involving multiple elements to be
allocated to each element based on vendor specific objective evidence of the
relative fair values of the elements.
Consulting service revenue is recognized when the services are provided,
generally on a time and materials basis. When the Company provides services that
are considered essential to the functionality of software products sold, or if
software sold requires significant production, modification or customization,
the Company accounts for the software and services revenue in accordance with
SOP 81-1, "Accounting for Performance of Construction Type and Certain
Production Type Contracts." SOP 81-1 requires the use of the
percentage-of-completion method of revenue recognition. In these cases, revenue
is recognized based on labor hours incurred to date compared to total estimated
labor hours for the contract.
Consulting service revenue consists primarily of implementation and
training services related to the installation of the Company's products and
typically do not include significant customization to or development of the
underlying software code. Support revenue is deferred and recognized ratably
over the term of the support contract, typically twelve months.
Advertising
Advertising costs are expensed as incurred. Advertising expense is
included in sales and marketing expense and amounted to $13.2 million, $4.8
million and $7.2 million in fiscal 2001, 2000 and 1999, respectively.
Provision (Benefit) for Income Taxes
The provision (benefit) 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 and diluted loss per share is computed using the weighted average
number of shares of common stock outstanding. Diluted loss per share excludes
common shares from options and warrants to purchase common stock
F-8
51
using the treasury stock method and the effect of the assumed conversion of the
Company's convertible subordinated debt, since the impact is 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).
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 is not expected to
have a material impact on the Company's financial statements.
In December 1999, the SEC issued SAB 101, which provides the SEC staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues. The Company adopted SAB 101 on December 1, 2000. SAB 101 did
not have an effect on the Company's consolidated financial position or results
of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
February 28 or 29
------------------------
2001 2000
---- ----
Computer equipment and software $ 27,312 $ 26,118
Office furniture and equipment 10,986 6,526
Leasehold improvements 9,107 7,959
-------- --------
Total 47,405 40,603
Less: accumulated depreciation (28,130) (26,446)
-------- --------
Total property and equipment $ 19,275 $ 14,157
======== ========
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.
F-9
52
The Company capitalized software development costs of $8,920, $5,435 and
$10,075 and recorded related amortization expense of $9,486, $9,006 and $8,704
for fiscal 2001, 2000 and 1999, respectively. The Company capitalized purchased
licensed software and internally developed software costs, excluding amounts
acquired, of $2,750, $329 and $775 and related amortization of $497, $799 and
$885 for fiscal 2001, 2000 and 1999, respectively.
The total amortization expense amounts for fiscal 2001, 2000 and 1999
include write-offs totaling approximately $428, $366 and $1,432, 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
Intangibles consists of the following (in thousands):
February 28 or 29
2001 2000
---- ----
Goodwill $ 354,297 $ 12,135
Accumulated amortization (18,646) (5,176)
--------- ---------
Goodwill, net $ 335,651 $ 6,959
========= =========
Customer lists 22,484 214
Developed technology 25,570 750
Assembled workforce 11,759 --
Other 2,529 567
--------- ---------
Total 62,342 1,531
Accumulated amortization (3,815) (1,173)
--------- ---------
Total intangibles $ 58,527 $ 358
========= =========
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 on February 28, 2001
was $237.8 million. 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,
will be as follows:
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 will expire in September of 2001. Under
its terms, the Company may request cash advances, letters of credit or both in
an aggregate amount of up to $20.0 million. The Company may make borrowings
under the facility for short-term working capital purposes or for acquisitions
(acquisition-related borrowings are limited to $7.5 million per acquisition).
The facility contains certain financial covenants that the Company believes are
typical for a facility
F-10
53
of this nature and amount. As of February 28, 2001, the Company did not have any
borrowings outstanding under its line of credit.
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
$1,261 and $828 at February 28, 2001 and February 29, 2000, respectively, and
has been included in computer equipment and software (Note 2). Total accumulated
amortization relating to these leases was $950 and $806 as of February 28, 2001
and February 29, 2000, respectively.
Rent expense for operating leases for fiscal 2001, 2000 and 1999, was
approximately $17,158, $9,712 and $16,020, respectively. The future minimum
lease payments under these capital and operating leases for each of the
succeeding fiscal years beginning March 1, 2001 are as follows (in thousands):
Capital Operating
Leases Leases
------ ------
2002 $ 182 $ 20,654
2003 111 17,657
2004 448 15,833
2005 3 13,498
2006 -- 12,390
Thereafter -- 50,587
--------- ---------
Total minimum lease payments 744 130,619
Less sublease income (2) (2,820)
--------- ---------
Present value of net minimum lease payments $ 742 $ 127,799
========= =========
The Company has agreed to lease approximately 210,000 square feet for
its new headquarters in Rockville, starting in May of 2002. The new leasing
agreement is for an initial term of ten years.
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. A dispute over revenue streams that IRI alleges it is entitled to is
being arbitrated. IRI seeks a total of $15.9 million in damages. The Company
contends that the conditions to these amounts becoming due have not been
satisfied and that no amounts are due IRI, because, among other reasons, of a
failure of consideration in the overall transaction. A related claim concerning
the breach of a separate Non-Competition and Non-Solicitation Agreement is
proceeding in the Circuit Court of Cook County, Illinois.
The Company and Manugistics U.K. Limited have been named as defendants
in a claim filed by Grocery Logistics Limited in the High Court of Justice,
Queen's Bench Division, Technology & Construction Court, No. HT-00-384, filed
October 19, 2000. The lawsuit arose from a dispute, which the company had
previously announced. The claim seeks damages of an amount between approximately
$6.7 million and $10.5 million, plus interest, arising out of a contract for the
supply of software, support, maintenance, consulting and training services. The
claimant alleges that the implementation of the software was a failure because
it did not meet the requirements of the contract. The Company filed an answer in
which it denied the allegations. The Company believes that its defense is
meritorious. Discovery has commenced and the trial is currently scheduled for
January 15, 2002. The Company's insurance carrier has accepted coverage under a
reservation of rights.
F-11
54
On November 29, 2000, the Company filed a lawsuit against
VirtualFund.com, Inc., in the United States District Court for the District of
Maryland alleging that VirtualFund.com is in anticipatory breach of its
obligations under a software license agreement among the Company and Virtual
Fund, Inc. and its affiliates. The Company seeks at least $4.5 million in
damages. VirtualFund.com has counterclaimed that the contract is invalid and
seeks return of $2.5 million in fees and other unspecified damages. The court's
scheduling order provides that discovery shall be completed on August 6, 2001.
In September 2000, one of the Company's clients submitted to us a notice
claiming damages relating to a software implementation project. The client has
requested a price adjustment in the amount of $3.5 million, but has informally
lowered its request to $1.3 million. The client's claim arises from the
performance of the Company's subcontractor on the project. The Company believes
that the subcontractor has full responsibility for our client's claim and have
so notified that company. The Company's insurance carrier has accepted coverage
within the terms and conditions of the policy.
7. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has authorized 9,240,506 shares of $.01 par value preferred
stock. As of February 28, 2001, no preferred shares were outstanding.
Common Stock
The Company has authorized 100,000,000 shares of $.002 par value common
stock. No cash dividends on common stock have been declared or paid in 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. The warrants are
all exercisable and have exercise prices ranging from $0.07 to $16.08 and expire
between January 2003 and June 2005.
The terms of certain of these warrants gave the holder the right and
option to put the warrants back to the Company for cash for a period of 30 days
immediately prior to their expiration at a price equal to the fair market value
of the shares of common stock issuable to the holder upon exercise, as defined.
The holder exercised these warrants on February 28, 2001.
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, of $1.9 million will be reflected as a
reduction of revenue in future periods.
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 7.6 million, 3.8 million and 2.6 million shares has not been
considered in the computation of diluted loss per share in fiscal 2001, 2000 and
1999, 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 2001 since it was anti-dilutive.
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
F-12
55
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
totaled 103,003 shares, 246,986 shares and 388,026 shares in fiscal 2001, 2000
and 1999, respectively. The weighted average fair value of shares purchased in
fiscal 2001, 2000 and 1999 was $40.44, $6.67 and $8.31, 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 Stock
Option Plan ("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. 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, 2001, the Company has cumulatively
granted options on 3.5 million shares under the 2000 Plan, 9.8 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. 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 as 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 expense or benefit, 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, 2001, the Company had approximately 1.2 million repriced
options outstanding. During fiscal 2001, the Company recognized $11.1 million in
compensation expense related to repriced stock options.
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-13
56
February 28 or 29
2001 2000 1999
---- ---- ----
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 15,970 $ 6.83 8,846 $ 5.95 8,842 $ 8.39
Options assumed in acquisition 1,345 7.50
Options granted at market value 7,835 35.67 9,760 5.92 6,182 7.92
Options granted greater than market value -- -- 2,200 11.68 30 18.87
Exercised (2,887) 6.23 (2,408) 3.34 (1,502) 2.97
Cancelled (1,315) 11.74 (2,428) 7.89 (4,706) 14.40
--------- --------- ---------
Outstanding at end of year 20,948 $ 17.49 15,970 $ 6.83 8,846 $ 5.95
--------- --------- ---------
Exercisable at end of year 4,603 $ 8.26 2,852 $ 6.23 2,606 $ 5.08
========= ========= ========= ========= ========= =========
The weighted average fair value of options granted in fiscal 2001, 2000
and 1999 was $35.16, $6.98 and $7.97 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, 2001 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 2/28/01 Life Price at 2/28/01 Price
$0.46 - $3.91 4,151 7.84 $3.82 1,537 $3.68
3.92 - 4.88 3,918 7.70 4.66 1,232 4.63
4.95 - 13.20 3,248 8.61 8.49 774 8.57
13.22 - 21.16 3,033 8.61 15.81 839 16.37
21.34 - 40.50 4,001 9.40 34.49 200 26.86
41.31 - 61.03 2,597 9.78 45.73 21 44.16
------------- -------- ------ -------- ------- -------
$0.46 - $61.03 20,948 8.58 $17.49 4,603 $8.26
============== ======== ====== ======== ======= =======
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
2001 2000 1999
---- ---- ----
Net loss $(75,314) $(24,211) $(105,188)
Basic and diluted loss per share $(1.28) $(0.44) $(1.99)
F-14
57
Fiscal 2001, 2000 and 1999 pro forma amounts include $736, $567 and
$964, 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
------- ----
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Risk-free interest rates 5.95 % 5.63 % 5.15 - 5.52 % 5.97% 4.87% 5.17%
Expected term 3.26 yrs. 3.83 yrs. 3.09 yrs. 6 mos. 6 mos. 6 mos.
Volatility .7690 .7216 .6051-.6800 .7531 .7000 0.6259
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 $1,774, $1,595 and $1,669, for
fiscal 2001, 2000 and 1999, respectively.
9. INCOME TAXES
Income Tax Provision. The components of the income tax provision (benefit) are
as follows (in thousands):
February 28 or 29
2001 2000 1999
---- ---- ----
Current:
Federal $ 257 $ 69 $(2,392)
State 286 9 (231)
Foreign 1,165 674 428
------- ------- -------
Total current $ 1,708 $ 752 $(2,195)
======= ======= =======
Deferred:
Federal $ 2,889 (936) 3,976
State 387 -- --
Foreign (2,432) -- 1,164
------- ------- -------
Total deferred $ 844 $ (936) $ 5,140
======= ======= =======
Total provision (benefit) for income taxes $ 2,552 $ (184) $ 2,945
======= ======= =======
Net income tax benefits of $1,928 related to the exercise of stock
options were allocated to additional paid-in-capital in 1999.
Loss before income taxes includes losses from foreign operations of
approximately $20.1 million, $20.6 million and $29.4 million in fiscal 2001,
2000 and 1999, respectively.
F-15
58
Deferred Income Taxes The components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
February 28 or 29
2001 2000
---- ----
Deferred Tax Assets:
Bad debt reserve/sales returns $ 1,766 $ 594
Accrued expenses 5,458 2,508
Operating loss carryforwards:
Domestic 58,435 24,505
Foreign 21,485 13,928
Restructuring charges 3,160 5,166
Tax credit carryforwards 4,706 2,592
Stock-based transactions 4,533 --
Depreciation and amortization 18,912 22,261
Other temporary differences 1,385 314
--------- ---------
Deferred tax assets 119,840 71,868
Less: valuation allowance (97,643) (52,933)
--------- ---------
Total deferred tax assets 22,197 18,935
Deferred tax liabilities:
Software development costs (4,805) (2,743)
Deferred revenue -- (1,036)
Accrued commissions -- (74)
Acquired intangibles (22,203) --
Stock-based transactions (754) --
Other (1,322) --
--------- ---------
Total deferred tax liabilities (29,084) (3,853)
--------- ---------
Net deferred tax assets/(liabilities) $ (6,887) $ 15,082
========= =========
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 historic taxable income, when
adjusted for non-recurring items, net operating loss carryback potential and
estimates of future profitability, management has concluded that operating
income will more likely than not be insufficient to cover all of the deferred
tax assets.
Deferred tax assets of approximately $31.9 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 2001 are as follows (in
thousands):
Balance, February 29, 2000 $ 52,933
Stock option exercises 22,606
NOLS - Talus and STG acquisitions 16,532
Stock-based compensation 4,360
Other 1,212
--------
Balance $ 97,643
========
At February 28, 2001, the Company had a total of approximately $148.0
million of U.S. federal and $63.0 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 2021. Approximately
F-16
59
$27.8 million of the foreign net operating losses expire during the calendar
years 2001 to 2011, 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 $3.2 million of research and development tax credit
carryforwards which expire between 2011 and 2021 and $1.3 million of foreign tax
credit carryforwards which expire between 2002 and 2006.
Statutory Rate Reconciliation. The difference between the reported amount of
income tax expense (benefit) 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
2001 2000 1999
---- ---- ----
(Benefit) for income taxes computed at statutory rate $ (8,934) $ (3,193) $(32,608)
Increase (reduction) in taxes resulting from:
State and foreign taxes, net of federal benefit 1,482 (388) (45)
Net change in valuation allowance 4,888 3,256 36,812
Goodwill amortization 3,989 -- --
Purchased research and development 3,403 -- --
Meals, entertainment and other non-deductible expenses (2,195) 545 --
Tax-exempt income (28) (85) (417)
Other (53) (319) (797)
-------- -------- --------
Provision (benefit) for income taxes $ 2,552 $ (184) $ 2,945
======== ======== ========
10. OTHER INCOME
Other Income - Other income consists of the following (in thousands):
February 28 or 29
2001 2000 1999
---- ---- ----
Interest income $ 7,832 $ 1,989 $ 3,294
Interest expense (4,458) (104) (225)
Other (475) (496) (707)
------- ------- -------
Total other income $ 2,899 $ 1,389 $ 2,362
======= ======= =======
11. ACQUISITIONS
Fiscal 2001 Business Combinations
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 2 years for assembled workforce,
4 years for developed technology and 7 years for customer lists. Goodwill is
amortized over 5 years.
F-17
60
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 was expensed in the period the transaction was consummated.
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 $1.2 million in fiscal year 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 2,760
Deferred taxes (18,286)
Transaction costs (3,500)
Severance costs and office closure (2,730)
Goodwill 340,786
------------
Total $ 402,020
============
Senior management of the Company expects to finalize its plan to
integrate all Talus business functions, vendor relationships and office
locations with existing Company operations no later than May 31, 2001. The
Company has eliminated 28 positions in the integration plan, primarily affecting
former senior management of Talus and certain administrative functions such as
legal, human resources, marketing and finance. The Company also plans to vacate
the Talus leased office space in the United Kingdom (UK) later in fiscal year
2002 and also expects to terminate some existing vendor contracts as a result.
The remaining lease obligation associated with the UK office closure has been
reflected in the purchase price allocation. The following table provides a
rollforward of liabilities as a result of the integration plan (in thousands):
F-18
61
INITIAL
PURCHASE PRICE
TYPE OF COST ALLOCATION PAYMENTS FEBRUARY 28, 2001
Severance and related benefits $ 1,268 $ 355 $ 913
Lease obligations - UK office
closure 1,391 -- 1,391
Contract terminations and relocation 71 5 66
------- ------- -------
Total $ 2,730 $ 360 $ 2,370
======= ======= =======
The following unaudited pro forma summary presents the Company's
consolidated results of operations for the years ended February 28, 2001 and
February 29, 2000 as if the Talus acquisition had been consummated on March 1,
1999. 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 years ended February 28 or 29 are as follows
(in thousands, except per share data):
2001 2000
---- ----
Revenue $ 297,073 $ 190,283
Net loss (114,600) (112,033)
Net loss per basic and diluted share (1.77) (1.81)
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 does not
expect to incur significant costs associated with elimination of redundant
positions or office consolidations.
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 shares of the Company's common stock.
Additional Consideration paid, if any, would be recorded as goodwill and
amortized over the life of the asset.
Fiscal 1999 Business Combination
TYECIN Systems, Inc.
On June 1, 1998, the Company acquired TYECIN Systems, Inc. ("TYECIN")
and accounted for this transaction as a pooling of interests. Under the terms of
the merger agreement, the Company issued approximately 666,000 shares of common
stock to the stockholders of TYECIN and assumed outstanding TYECIN stock
options, which converted into approximately 50,000 options to purchase the
Company's common stock. During fiscal year
F-19
62
1999, the Company recorded a non-recurring charge of approximately $3.1 million
for certain expenses related to this transaction, including accounting and legal
fees and severance costs.
12. RESTRUCTURING OF OPERATIONS
During fiscal 1999, the Company announced and implemented a
restructuring plan intended to reduce costs and improve profitability. The
restructuring plan was required due to poor financial performance throughout
fiscal 1999 that resulted from a variety of factors. As a result of the
restructuring, the Company recorded charges of $33.8 million in fiscal 1999. The
components of the charge are as follows (in thousands):
Severance and related benefits $4,094
Lease obligations and terminations 20,200
Write-down of property, equipment and leasehold improvements 6,418
Write-down capitalized software development costs 1,343
Write-down goodwill 1,354
Other 366
-------
Total restructuring charge $33,775
=======
During fiscal 2000, the previously reported restructuring charge was
reduced by $1.5 million due to changes in estimates related to better than
expected success in subleasing abandoned and excess office space offset by
higher than expected severance costs.
The following table depicts the restructuring activity through February
28, 2001 (in thousands):
FY FY Balance Balance
Initial 1999 2000 February 29, Utilization February 28,
Charge Activity Activity 2000 of Cash 2001
-------- -------- -------- ------------ ----------- ------------
Severance costs $ 4,094 $ (2,942) $ (232) $ 920 $ (920) $ --
Lease obligation costs 20,200 (1,286) (11,950) 6,964 (3,524) 3,440
Impairment of Long-lived assets 9,115 (7,406) (1,709) -- -- --
Other 366 (214) (152) -- -- --
-------- -------- -------- -------- -------- --------
Total $ 33,775 $(11,848) $(14,043) $ 7,884 $ (4,444) $ 3,440
======== ======== ======== ======== ======== ========
13. 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 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 desegregated 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 2001, 2000 and 1999:
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63
February 28 or 29
2001 2000 1999
---- ---- ----
(in thousands)
Revenue:
United States $ 185,615 $ 91,344 $ 117,419
Europe 49,856 41,271 48,358
Asia/Pacific 13,698 14,901 7,995
Other 18,795 4,917 3,792
----------- ---------- -----------
$ 267,964 $ 152,433 $ 177,564
=========== ========== ===========
Long-lived Assets:
United States $ 418,604 $ 34,996
Europe 12,683 4,197
Asia/Pacific 2,214 2,092
Other 7,530 11,639
----------- ----------
$ 441,031 $ 52,924
=========== ==========
No single customer accounted for 10% or more of the Company's revenue in
fiscal 2001, 2000 or 1999.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest amounted to approximately $460, $104 and $227 in
fiscal 2001, 2000 and 1999, respectively. Cash paid for income taxes amounted to
approximately $1,939, $96 and $1,400, in fiscal 2001, 2000 and 1999,
respectively.
Supplemental information of non-cash investing and financing activities
is as follows:
In connection with the acquisition of Talus in fiscal 2001, 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. In
connection with the acquisition of STG, we issued common stock valued at
approximately $4.5 million.
In fiscal 2001, a warrant for the purchase of 13,987 shares was
exercised by the holder electing to surrender 31 shares.
Net income tax benefits of $1,928 related to the exercise of stock
options were allocated to additional paid-in-capital in 1999.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly consolidated financial information for fiscal 2001
and 2000 follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2001 (in thousands, except per share data)
----
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
Dilutive (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
2000
----
Total revenue $ 39,193 $ 33,795 $ 35,794 $ 43,651
Operating loss (138) (4,455) (5,150) (775)
Net income (loss) 389 (3,435) (4,805) (1,094)
Basic income (loss) per share $ 0.01 $ (0.06) $ (0.09) $ (0.02)
Shares used in basic share computation 54,022 54,582 55,180 56,102
Dilutive income (loss) per share $ 0.01 $ (0.06) $ (0.09) $ (0.02)
Shares used in diluted share computation 54,558 54,582 55,180 56,102
Included in the second, third and fourth quarters of fiscal 2001 are non-cash
stock compensation charges (benefits) related to the repricing of stock options
and 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).
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64
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of Manugistics Group, Inc.:
We have audited the consolidated financial statements of Manugistics
Group, Inc. (the Company) and its subsidiaries as of February 28, 2001 and
February 29, 2000, and for each of the three years in the period ended February
28, 2001, and have issued our report thereon dated March 26, 2001; 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 herein.
/s/ DELOITTE & TOUCHE LLP
McLean, VA
March 26, 2001
S-1
65
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
and sales returns
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
Year ended February 28,1999 2,099 6,940 (2,740) -- 6,299
(1) Allowance for doubtful accounts assumed in acquisitions.
S-2