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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 29, 2002
Commission File Number 000-29309
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MATRIXONE, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0372301
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
210 Littleton Road
Westford, Massachusetts 01886
(Address, including zip code, of principal executive offices)
(978) 589-4000
(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, $0.01 par value
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [X]
As of September 23, 2002, there were 47,161,378 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the registrant (based on the closing price for the Common
Stock on the NASDAQ National Market on September 23, 2002) was approximately
$3.80.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the registrant's
2002 annual meeting of stockholders, which is expected to be filed pursuant to
Regulation 14A within 120 days of the registrant's fiscal year ended June 29,
2002, are incorporated by reference into Part III of this Annual Report on Form
10-K.
MATRIXONE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 29, 2002
TABLE OF CONTENTS
Page
PART I ----
Item 1: Business................................................................. 1
Item 2: Properties............................................................... 15
Item 3: Legal Proceedings........................................................ 15
Item 4: Submission of Matters to a Vote of Security Holders...................... 16
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.... 16
Item 6: Selected Financial Data.................................................. 17
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 19
Item 7A: Quantitative and Qualitative Disclosures About Market Risk............... 44
Item 8: Financial Statements and Supplementary Data.............................. 45
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 72
PART III
Item 10: Directors and Executive Officers of the Registrant....................... 72
Item 11: Executive Compensation................................................... 73
Item 12: Security Ownership of Certain Beneficial Owners and Management........... 73
Item 13: Certain Relationships and Related Transactions........................... 73
Item 14: Controls and Procedures.................................................. 73
PART IV
Item 15: Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 74
Signatures.......................................................................... 78
Certifications...................................................................... 79
PART I
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements that
involve risks and uncertainties. MatrixOne, Inc. makes such forward-looking
statements under the provision of the "Safe Harbor" section of the Private
Securities Litigation Reform Act of 1995. In this Annual Report on Form 10-K,
words such as "may," "will," "should," "could," "future," "estimates,"
"predicts," "potential," "believes," "anticipates," "plans," "expects,"
"intends," and similar expressions (as well as other words or expressions
referencing future events, conditions or circumstances) are intended to identify
forward-looking statements. Our actual results and the timing of certain events
may differ materially from the results discussed, projected, anticipated or
indicated in any forward-looking statements. Any forward-looking statement
should be considered in light of the factors discussed in Item 7 under
"Cautionary Statements."
ITEM 1: BUSINESS
General
MatrixOne, Inc. is a provider of collaborative product lifecycle management
("PLM") solutions. Our solutions enable companies from a broad range of
industries to accelerate product innovation and time-to-market by
collaboratively developing, building, and managing products. Our interoperable
solutions bring together people, processes, content, and systems throughout
global value chains of employees, customers, suppliers, and partners to achieve
a competitive advantage by bringing the right products and services to market
cost-effectively. By unifying and streamlining processes across the product
lifecycle, companies can easily work on projects within and outside of their
enterprises. In addition, our technology enables companies to adapt and scale
quickly to address their ever-changing business requirements.
Our collaborative PLM solutions are based on our suite of software
products. Our three major software product groups are the eMatrix(TM) product
collaboration platform, the MatrixOne Value Chain Portfolio(TM) of applications
and enterprise interoperability products. These products address three specific
business issues:
o global program management that enables companies to manage product
development programs across global teams;
o collaborative product development that enables companies to share
product related information across their organization and value
chains; and
o supplier relationship management that enables companies to accelerate
strategic sourcing and integrate supplier management business
processes earlier into the product lifecycle.
We offer a variety of services that complement our PLM solutions. Our
professional services personnel provide rapid and cost-effective implementation,
integration and other consulting services. These personnel capture and model the
specific business processes that reflect our customers' planning, design,
manufacturing, sales and service practices. We also provide training,
maintenance and customer support services to continuously enhance the value of
our products to our customers. In addition, we have a global network of systems
integrators who are experienced in providing implementation and integration
services to our customers. Many of our customers use their preferred systems
integrators or perform their own implementation.
1
We incorporated in Delaware under the name Adra Systems, Inc. in July 1983.
In October 1997, we changed our name to MatrixOne, Inc., and in May 1998, we
sold our legacy design and manufacturing software business, Adra Systems, to
focus on our PLM solutions. Our principal executive offices are located at 210
Littleton Road, Westford, Massachusetts 01886, and our telephone number is (978)
589-4000. Our Internet address is www.matrixone.com. The information contained
on our website is not incorporated by reference in this Annual Report on Form
10-K.
Principal Products
Our three major software product groups are the eMatrix product
collaboration platform, Value Chain Portfolio of applications and enterprise
interoperability products. Our collaborative PLM solutions are based on certain
combinations of these software products.
MatrixOne Suite of Software Products
eMatrix Product Collaboration Platform
The eMatrix product collaboration platform is the foundation for all
MatrixOne collaborative PLM solutions. This core technology provides all of the
essential functionality that empowers our customers to deliver better products
to market, in a shorter time frame, and at a lower cost. Some of the key
components of the eMatrix product collaboration platform include:
o a business modeler offering a graphical and dynamic modeling
capability enabling our customers to create and change business
information, content, definitions, and processes;
o a web navigator that is a Java-based, general-purpose browser, giving
our customers access to all information in the eMatrix database;
o support for web server architectures, enabling our customers to use
common platforms with other enterprise applications in their
environment; and
o XML services including business-to-business process integration,
support for standard messaging protocols for
application-to-application exchange and interoperability tools.
The eMatrix product collaboration platform enables companies to automate
and expedite business processes across employees, partners, suppliers, and
customers. In addition, our customers are given an easy way to receive and find
information, carry out tasks, and communicate, whether from desktops, Web
browsers or wireless devices. The eMatrix product collaboration platform also
provides protection against intruders and firewall-friendly, role-based access
to only the most up-to-date and approved information.
The eMatrix product collaboration platform captures product and related
process information simultaneously. Our customers can link and classify items,
assign properties and provide role-based behavior. Unlike the URL approach, the
eMatrix product collaboration platform's objects contain detailed associations
and services. The eMatrix product collaboration platform handles many data
sources, such as computer-aided design, product data management, enterprise
resource planning ("ERP"), customer order, visualization and other applications.
The eMatrix product collaboration platform also provides the flexibility needed
to model and improve business processes dynamically, without disrupting business
operations, and adapt to ever-changing requirements, suppliers, partners,
acquisitions, technology and product direction in real time.
2
The eMatrix product collaboration platform and the MatrixOne Application
Exchange Framework ("AEF") together form the intermediary between the MatrixOne
Value Chain Portfolio of applications or the eMatrix Web user interface and the
database and provides the necessary security, access control and application
services to enable collaboration among multiple businesses. The AEF is the
foundation for the MatrixOne Value Chain Portfolio of applications and provides
an extensible definition of information types and business processes in addition
to other utilities and reusable components. The AEF ensures data and business
process consistency among applications so that the same information can be
exposed in many different contexts with complete business process and data
integrity. As a result, all current and future packaged MatrixOne and
third-party applications can be integrated.
The AEF offers the benefits of standardization while eliminating the
rigidity that usually accompanies standards. Extensions and specializations of
data types, security, or business processes can be made to satisfy unique
business situations without losing the ability to interoperate with systems both
within and outside of the enterprise. Changes to the AEF data and process
definitions can be made using standard eMatrix product collaboration platform
tools. As a result of the characteristic dynamic update capability inherent to
MatrixOne products, these changes appear automatically in all of the
applications they affect.
Configurable user interface ("UI") components also ensure a consistent view
within the AEF. The UI components share any data, security, or process
definition updates with the other MatrixOne Value Chain Portfolio applications,
so companies can easily define user processes and permissions across all
MatrixOne Value Chain Portfolio applications working with the AEF. The UI
components also enable companies to adjust users' views so that each user is
presented only with the functions appropriate to his or her role within the
company.
Our Application Development Kit enables application developers to create
and deliver customized eMatrix applications. We also offer an eMatrix
Application Library, which is a collection of widely used eMatrix application
components developed by our services organization. We continuously add new
components to this library, and we distribute this library quarterly to provide
our customers and systems integrators the benefit of our latest implemented
solutions.
3
MatrixOne Value Chain Portfolio of Applications
Our MatrixOne Value Chain Portfolio of applications address specific
business needs at crucial points in the product lifecycle. Companies can start
with any one of our applications and add additional applications at any later
time without interrupting their business operations. The MatrixOne Value Chain
Portfolio of applications are easily configured and customized to fit a
company's existing processes and business. Together, these applications enable
our customers' users across divisions and companies to contribute to the
successful delivery of products and services. They also address the challenges
of global program management, collaborative product development and supplier
relationship management.
The MatrixOne Value Chain Portfolio of applications include the following
software applications:
o MatrixOne Configurator Central(TM) maximizes the value of option and
feature definitions across the entire development and sales process,
ensuring accurate and timely configuration and delivery of customer
orders;
o MatrixOne DocuManagement Central(TM) ties documents tightly into
product collaboration processes saving time, increasing accuracy, and
reducing the costs of document management. This application enables
users throughout the value chain to organize, find, control, approve,
and share the critical files needed to complete their tasks;
o MatrixOne Engineering Central(TM) provides product engineering
information management capabilities combined with a rich set of
engineering best practices designed to leverage the power of global
engineering value chains;
o MatrixOne Program Central(TM) enables companies to effectively and
efficiently manage complex programs and projects that depend on
extensive collaboration across global value chains. This application
minimizes time spent on administrative tasks and provides users with
real time access to the most up-to-date information;
o MatrixOne Software Central(TM) promotes the hardware/software
integration necessary to deliver complex products. This application
provides global teams role-based access to product data and processes;
o MatrixOne Sourcing Central(TM) is a strategic sourcing, negotiation,
and quote management application. This application enables companies
to use part and bill of material data to build complex requests for
quotations and improve time-to-market and sourcing of standard
components;
o MatrixOne Supplier Central(TM) provides the ability to work with
suppliers in a single virtual organization. This application enables
authorized users, both within the enterprise and at other companies,
to communicate time-critical information and facilitate collaborative
supply processes; and
o MatrixOne Team Central(TM) establishes collaborative virtual
workspaces that facilitate information exchange and collaboration
across dynamic, global cross-functional project teams. This
application empowers companies to leverage expertise and innovation
across their entire value chain.
4
Enterprise Interoperability Products
MatrixOne provides a broad spectrum of integration products that offer
application-to-application interoperability and provide simultaneous access to
real time data. These integration products give users cross-application control
of information and processes on both sides of their firewall.
We offer approximately 50 packaged point-to-point integrations that unite
MatrixOne software products with other business solutions to expedite
information exchange and processes throughout the product development lifecycle.
These integration software products run over the Web to exchange data anywhere.
These integration software products unite MatrixOne software products with
mechanical computer-aided design ("MCAD"), electronic computer-aided design
("ECAD") and computer-aided software engineering ("CASE") applications and
enterprise applications such as ERP, supply chain management and customer
relationship management.
The MatrixOne Adaplet Tool Kit technology applies patent-pending Enterprise
Application Integration methodologies to drive both ready-to-use and custom
solutions that integrate MatrixOne with other products.
MatrixOne Collaborative Product Lifecycle Management Solutions
In fiscal year 2002, we further simplified the process of solving business
problems for our customers by providing three PLM solutions. Each solution is
comprised of our eMatrix product collaboration platform, unique combinations of
our Value Chain Portfolio applications, and specific enterprise interoperability
software. Each of these three solutions is specifically targeted to meet the
major requirements of highly effective PLM strategies.
Global Program Management
Our global program management solution enables companies that need to
manage cross-enterprise product development to manage and track programs and
documents across globally dispersed teams. In today's fast-paced market, project
teams often work in disparate locations with a variety of technologies.
Therefore, projects are difficult to track and often result in the use of
outdated information as well as unnecessary wasted time and money.
Our global program management solution includes the eMatrix product
collaboration platform, the MatrixOne AEF, the MatrixOne Program Central,
MatrixOne Team Central and MatrixOne DocuManagement Central applications, a
selection of enterprise interoperability products, and other MatrixOne Value
Chain Portfolio applications.
Our global program management solution provides a virtual environment where
companies are able to standardize, repeat, and refine product lifecycle
processes that specify what to do, who should do it, and what information to do
it with. Team members can automatically update project status so that managers
can view in real time the risks, highlights, resources, and financial
information related to the project at a glance. Managers are able to instantly
determine which projects are ahead of schedule, which are at risk, and which
need immediate action.
5
With our global program management solution, project teams are easily able
to collaborate even though they may be in different global locations using
varying technologies. Using automated and standardized processes, team members
can be assured that they are working on up-to-date documents that include the
most recent changes and information. This solution enables team members to drive
their own portions of the project, which enables management to step in only if
action is necessary. Ultimately, organizations are able to build on the success
of each project by improving and reusing information, thereby consistently
reducing both costs and time-to-market.
Collaborative Product Development
Our collaborative product development solution enables companies to meet
the challenges of managing product information and development processes across
their organization and their global value chains. The coordination and
management of organizational information, responsibilities, schedules,
deliverables, product information, and business processes is increasingly
complex as outsourcing and globalization increase the number of value chain
participants and the scope of their respective product development
responsibilities. Our solution enables companies to accelerate the
decision-making process of global value chains of trusted employees, partners,
suppliers, and customers to gain a competitive market advantage.
Our collaborative product development solution includes the eMatrix product
collaboration platform, the MatrixOne AEF, the MatrixOne Engineering Central,
MatrixOne Software Central and MatrixOne Configurator Central applications, a
selection of enterprise interoperability products, such as MCAD, ECAD, and CASE
integration products, and other MatrixOne Value Chain Portfolio applications.
Using our collaborative product development solution, companies are able to
move iterative product change decisions to the inexpensive front-end of the
development process and provide all project participants with easy, secure
navigation to managed engineering data and change processes. In addition,
companies are able to facilitate comprehensive, real-time in-process data
sharing, provide a straightforward transition from ad-hoc creative work to
formal change control, and ensure the validity of configured products across a
business. With our collaborative product development solution, virtual teams can
be assembled quickly and managed easily across an entity's global value chain,
resulting in an enhanced development process with increased collaboration, speed
of innovation and agility to manage change.
Supplier Relationship Management
Our supplier relationship management solution enables companies to
integrate strategic sourcing into the design phase of product development
lifecycles and to identify, manage, monitor, and optimize relationships with
their best suppliers from the earliest stages of product development.
Our supplier relationship management solution includes the eMatrix product
collaboration platform, the MatrixOne AEF, the MatrixOne Sourcing Central,
MatrixOne Supplier Central, and MatrixOne Team Central applications, and a
selection of interoperability products.
6
Using our solution for supplier relationship management, companies have
real-time, Web-based visibility to product data and processes across the value
chain, ensuring that everyone is using complete and up-to-date information. By
enabling communication and creating virtual collaborative teams for both the
buyer and supplier functions, companies are able to generate high-quality ideas
that improve product innovation and reduce costs. In addition, companies are
able to automate and shorten the quote and change order processes and ensure
consistency in the process and representation of information from both the buyer
and supplier point of view. In addition, companies are able to track, manage,
control, and synchronize the history and changes in the overall strategic
sourcing process, thereby reducing overall costs and time-to-market.
Product Technology and Architecture
Our PLM software is based on an Internet architecture utilizing open
standards and Extensible Mark-up Language ("XML") technology and is enhanced by
our proprietary technology for information integration and accelerated content
delivery. An enterprise can choose from a variety of web application server
architectures, such as BEA WebLogic, IBM WebSphere and SunOne Web Server, to
deploy their solution with no change to their business logic. In addition, an
enterprise can base its solution on any mix of Java-based distributed software
architectures, including Enterprise Java Beans, Remote Method Invocation and
Common Object Request Broker Architecture. Our eMatrix product collaboration
platform also offers XML capabilities that allow companies to exchange messages
and content with collaborating partners or industry exchanges. Messages can
comply with the evolving standard vocabularies such as RosettaNet, cXML or
BizTalk or independently defined vocabularies. The result is a scalable,
flexible environment that virtually eliminates the need for lengthy in-house
development of complex custom software, thereby resulting in a lower cost of
ownership. The software consists of an Internet platform, tailorable business
process applications, reusable business process components, integrations to
third-party software and development tools.
At the center of our architecture is the eMatrix product collaboration
platform, which runs on Microsoft or UNIX operating systems. The eMatrix product
collaboration platform and the AEF together form the intermediary between the
MatrixOne Value Chain Portfolio of applications or the eMatrix Web user
interface and the database and provides the necessary security, access control
and application services to enable collaboration among multiple businesses.
Mobile users can be connected to the server through the wireless application
protocol ("WAP"). The eMatrix product collaboration platform is compliant with
hypertext transport protocol ("HTTP") and secure HTTP, providing the business
model and XML representations to HTML, Java and Wireless Markup Language
applications.
The Web user interfaces are Java and HTML based applications that can run
on Microsoft Internet Explorer, Netscape Communicator and other commercially
available Web browsers, as well as WAP based devices. There are also Windows and
UNIX versions of our products for users who prefer to run the applications on
their desktop computers, rather than through a Web browser interface. We support
numerous operating systems including Windows 95, Windows 98, Windows 2000,
Windows XP, Windows NT, Hewlett Packard HP-UX, IBM AIX and Sun Solaris. We
follow the Microsoft standards for Windows 95, Windows 98 and Windows 2000 and
the Internet standards for Java running with Microsoft Internet Explorer and
Netscape Communicator.
The storage layer includes support for multiple Oracle database servers and
multiple file servers using standard file transfer protocols. In addition, we
plan to provide support for the IBM DB2 database. We also provide an enterprise
application integration capability that allows data exchange with Web, legacy or
incumbent applications.
7
We provide simultaneous support for multiple languages within the business
model, which means that users of our PLM software can work in different
languages at the same time. We typically distribute our products in a single
global release. Our products generally support Chinese, English, French, German,
Italian, Japanese and Korean, and we intend to provide localization for
additional languages as required.
We have entered into various platform alliances to ensure our products are
based on open industry standards and to enable us to take advantage of current
and emerging technologies. We are marketing partners with Oracle,
Hewlett-Packard, IBM and Sun Microsystems. To promote the development,
definition, adoption, implementation and growth of open standards, we work with
several industry standards organizations, such as the World Wide Web Consortium,
also known as W3C, RosettaNet, and the National Institute of Standards and
Technology, also known as NIST, and a variety of industry-specific standards
organizations.
Services
We offer professional services, training, maintenance and customer support
directly through our own services organization and indirectly through our
third-party network. Our services organization is committed to ensuring that our
customers successfully utilize our products. We believe we have a high customer
satisfaction level as a result of a combination of our unique software
implementation methodology, our large, global partner network, and our
professional services, training, maintenance and customer support programs.
These programs are available globally and are designed to enable the rapid
implementation of our products so our customers receive the benefits from their
investment quickly. Our services are also designed to make our software easy to
use and maintain, thus lowering ongoing costs to our customers. As of June 29,
2002, our services organization consisted of 206 employees.
Professional Services
Customers may choose to implement our products by utilizing our
professional services personnel or systems integrators or by themselves.
Although implementation times vary with the scope of the software being
implemented, the number of users and the number of geographic locations
involved, certain applications can be implemented in as little as two weeks.
We offer implementation of our products through our services organization
primarily on a time and materials basis. We provide for the transfer of the
skills and knowledge necessary to allow our customers to assume responsibility
for ongoing support and extensions of their implementations of our software
products.
We also offer a wide range of other professional services, including the
development of customized user interfaces for our customers, and their
suppliers, customers and other business partners. Our services organization
consists of experienced professionals, many of whom have come from our
customers' industries, which helps us to provide strong domain experience. We
also have personnel with strong backgrounds and skills in business process
re-engineering, data conversion, application integration, system architecture
and project management.
8
Training
Our educational services organization offers Web-based courses and training
at our facilities located around the world or at customer locations. Our
Customer Success Center, located at our corporate headquarters in Westford,
Massachusetts, provides a comprehensive training facility. We also offer the
eMatrix Certified Professional program to systems integrators to assure our
customers that their implementation teams include professionals who have
demonstrated success in implementing MatrixOne software solutions.
Maintenance and Customer Support
We offer maintenance and support services to our customers, alliance
partners and systems integrators over the Internet or by telephone. Our
toll-free telephone support is provided in multiple languages and is staffed by
senior technical support personnel at several locations globally. Customers
receiving support over the Internet have access to a full range of customer
support services, including on-line problem solving, technical tips, answers to
frequently asked questions, and information about recently released and upcoming
versions of our software. We provide our customers with personalized Web pages
where they can access specific status reports, exchange information, register
on-line for training and access an advanced knowledge base. Customers can also
download new versions of our software over the Internet.
Customers
We target large-to-medium size organizations throughout the world in growth
industries. As of June 29, 2002, we had over 625 customers. Our installed base
of customers represents numerous industries, including aerospace and defense,
automotive, consumer products, high technology, life sciences, machinery and
process industries. During fiscal 2001, approximately 11.3% of our revenues were
from Applied Materials, Inc. No one customer accounted for more than 10% of our
revenues in fiscal 2002 or 2000.
Foreign Operations
We have international offices in Canada, England, France, Germany, Italy,
Japan, Korea, Singapore, Taiwan and the Netherlands. At June 29, 2002 and June
30, 2001, approximately 27.8% and 18.8%, respectively, of our total assets were
located at our international subsidiaries. Approximately 33.9%, 26.9% and 38.5%
of our total revenues for fiscal 2002, 2001 and 2000, respectively, were from
our operations outside of North America and approximately 23.7%, 24.8% and 25.4%
of our expenses for fiscal 2002, 2001 and 2000, respectively, were from our
operations outside the United States. Export sales from the United States
accounted for approximately 3.5%, 3.9% and 9.6% of our total revenues for fiscal
2002, 2001 and 2000, respectively. See Note 12 of Notes to Consolidated
Financial Statements for additional information regarding our foreign
operations.
9
Research and Development
We pursue research and development through our internal engineering
organization, third-party alliances and collaborative development efforts with
our customers. Our internal research and development organization is divided
into three product groups, platform, application and integration engineering,
with common support groups. The focus of these three product groups is to
broaden the global appeal of our products by improving our products' performance
and scalability, expanding the use of XML technology for data representation and
collaboration, adding application services, increasing our distribution and
replication alternatives, expanding our ability to integrate our technology with
other applications used by our customers, and extending our Internet security
capabilities. The platform engineering group is responsible for the development
of Internet infrastructure products, such as our servers, dynamic business
modeling engine, database caching and application integration. The platform
engineering group researches and develops advanced architectures and
technologies and closely follows industry developments and standards related to
e-Business, the Internet, operating systems and software technologies. The
application engineering group develops Internet applications for our customers.
The integration engineering group develops Internet applications that enable
customers to link commercial and proprietary applications and legacy systems
with our products. The application and integration engineering groups work
closely with our sales, services and product management organizations and use
the application expertise, domain experience and resources of our customers and
alliance partners to develop and license applications and integrations. Quality
engineering, release engineering and documentation groups support all three of
our product groups and contract engineering companies provide additional
engineering resources.
We maximize our research and development efforts by working closely with
our alliance partners and customers to develop software applications and
integration products. We have relationships with third parties to develop
several of our applications, either through joint royalty relationships or on a
subcontract basis. We also jointly develop software applications with our
customers and typically retain the right to generalize the application for use
with other customers. A critical focus of our research and development alliances
is to increase the number and scope of customer-facing, supplier-facing and
industry-specific applications. We have also established relationships with
third-parties to develop several of our application products and the majority of
our integration products pursuant to which we typically pay the third party a
royalty in connection with the license of these products by our customers. These
relationships have allowed us to increase the number of application and
integration products we offer to customers. We market, license and support our
application and integration products through our direct sales organizations,
alliance partners and distributors around the globe. We also work with our
customers, systems integrators and complementary technology vendors to extend
our integration products to supply chain management, customer relationship
management, component supplier management and additional product data management
applications. Our research and development expenses were $25.4 million, $19.7
million and $8.6 million for fiscal 2002, 2001 and 2000, respectively. We expect
to increase our internal research and development efforts, as well as our
third-party research and development.
10
Selling and Marketing
We market and license our collaborative PLM solutions through our direct
sales organization, distributors and other business alliances. As of June 29,
2002, our direct sales organization consisted of 179 sales and marketing
employees in 37 locations around the world. We have 25 sales offices in North
America, eight in Europe and four in Asia/Pacific. Our European, Middle East and
Africa, or EMEA, sales organization is headquartered in Amsterdam with other
offices in Coventry, Cologne, Lyon, Milan, Munich, Paris, and Stuttgart. Our
Asia/Pacific offices are located in Seoul, Singapore, Taipei and Tokyo. We plan
to expand our direct sales organization, build an indirect sales organization in
North America, and establish additional domestic and international sales
offices.
Most of the licensing of our collaborative PLM solutions in North America
is made by our direct sales organization. We are also building our indirect
sales channels to reach additional markets in North America. In EMEA, we market,
license and service our products through both our direct sales force and
distributors, while in Asia/Pacific, we rely primarily on our network of
distributors and resellers, with assistance from our direct sales force. Our
EMEA and Asia/Pacific network of international distributors and resellers
comprises over 20 companies.
Our direct sales strategy targets named accounts and customers in selected
geographic regions and vertical markets. Increasingly, we are focusing on
targeted vertical markets such as automotive, high technology and consumer
products, where we believe our value proposition gives us the greatest market
opportunity. We also target and have customers in the aerospace and defense,
life sciences, machinery and process industries. We also work closely with our
indirect distribution channels of resellers and distributors in these selected
geographic regions and target markets.
Our sales team, which includes both our direct sales and technical
professionals as well as our alliance partners, works closely with the customer
to identify its short-term needs and long-term goals and then to develop a
proposal to address its PLM requirements. Our sales process often commences with
a rapid proof of concept or product demonstration. The sales cycle for our
products ranges from one to nine months based on the customer's need to rapidly
implement a PLM solution and whether the customer is new or is extending its
existing implementation.
To support our global sales efforts, we opened a Customer Success Center at
our corporate headquarters in Westford, Massachusetts in April 2002. Our
Customer Success Center provides the facilities necessary to help customers and
prospective customers more easily outline their goals and achieve their
objectives through proximity to MatrixOne executives and resources. Our Customer
Success Center is open to all MatrixOne customers and prospective customers for
strategy and technical meetings, as well as for training.
To accelerate the sales cycle by illustrating the value of our
collaborative PLM solutions, we offer to our customers and prospective customers
the MatrixOne Business Value Program(TM), which is based on extensive primary
research conducted by the University of Texas at Dallas and the Hurwitz Group on
the real-world results of PLM implementations at more than 35 leading companies.
The program provides methodologies, tools and benchmarks that our customers can
use to successfully plan, fund and implement comprehensive PLM programs that are
designed to result in measurable benefits, reduced costs and improved bottom
line performance.
11
Our marketing personnel assist in generating new sales opportunities by
creating various marketing programs, creating press and industry analyst
interest and support, updating our Web site, and hosting or sponsoring various
events. Our marketing efforts are primarily focused on our targeted vertical
industries. We conduct joint seminars with key alliance partners and participate
in a number of alliance partner-sponsored trade shows and industry events. We
also provide speakers from our company and our customers to represent us in a
number of industry forums. We communicate regularly with our installed customer
base via newsletters and by hosting various customer conferences. Our public
relations strategy is designed to convey our messages to appropriate audiences,
and we reinforce this through our ongoing communications with a number of key
industry analysts and press representatives.
Alliances
The principal goals of our alliance program are to accelerate the global
market acceptance of our collaborative PLM solutions, extend our global
resources and help our customers realize the benefits of our collaborative PLM
solutions quickly. Together with these alliance partners, we leverage our mutual
strengths in the marketplace to deliver total PLM solutions. We form alliances
with industry-leading software, platform and services companies for enhanced
service delivery, joint sales, marketing, distribution, design and development.
Systems Integrators
We have established strategic relationships with over 20 global and
regional systems integration partners that provide expertise in a number of
areas including MatrixOne solution implementations, solution selection, business
consulting, business process re-engineering, development of best practices and
business processes, solution integration, and specific industries. Our systems
integration partners include Accenture, Cap Gemini Ernst & Young, Deloitte &
Touche, Fujitsu, Gedas, IBM Global Services, KPMG, Nippon Steel and
PricewaterhouseCoopers.
Independent Software Vendors (ISVs)
Our ISV partners, who include application developers and solution
providers, extend our collaborative PLM solutions with their suite of additional
integrations and associated applications.
Original Equipment Manufacturers (OEMs)
We work with OEM partners to deliver the power of our collaboration PLM
solutions as part of their own products. OEMs offer vertical solutions for a
specific industry or market and add our products to their own solutions, or
embed MatrixOne technology into their software.
Platform Partners
Our Platform partners enable our customers to take advantage of
technological advances and simultaneously extend the value of their investments
in existing infrastructure and information systems. Our close relationships with
major hardware vendors assures our customers that their MatrixOne solutions will
deliver maximum stability, security, performance, and scalability regardless of
their chosen computers, networks and storage devices. In addition, our
relationships with database, middleware, operating systems, and networking
software companies enable our collaborative PLM solutions to run in diverse and
rapidly evolving software environments and enhance the open architecture of
MatrixOne software, thereby enabling interoperable collaboration capabilities.
12
Resellers
We work with two types of reseller to deliver, implement, and support our
collaborative PLM solutions:
o Value added resellers ("VARs") work in a certain geographical region
or market segment, providing a total solution of software,
implementation services, and their own added-value products and
services. Our customers use VARs for industry-specific solutions,
particular professional services expertise, or the ability to leverage
third-party systems.
o Distributors provide a sales and services channel for our customers in
geographic areas where we may not have local coverage. Distributors
license, implement, extend, and support our solutions and may also
offer specific industry, application or technical know-how.
Competition
The market for collaborative PLM software is relatively new, intensely
competitive, highly fragmented and changing rapidly. We compete against
different companies depending on the geographic region, the size of the
potential customer, and the scope of the proposed solution. We currently compete
against:
o in-house development efforts by potential customers;
o vendors with CAD/CAM product backgrounds such as Dassault Systems,
Parametric Technology and EDS;
o vendors with enterprise application backgrounds such as Oracle and
SAP;
o vendors providing some aspects of PLM functionality such as Agile
Software;
o emerging companies focused on enterprise application integration and
eBusiness; and
o vendors that focus on local markets.
We expect that competition will increase as a result of continued increased
usage of the Internet and software industry consolidation. Moreover, a number of
enterprise software companies have acquired providers of point solutions to
expand their product lines and vendors with various product backgrounds continue
to enter the PLM market. Our competitors may also package their products in a
manner that may discourage customers from licensing our software. Current and
potential competitors may establish cooperative relationships among themselves
or with third parties or adopt aggressive pricing policies to gain market share.
Consolidation in the industry also results in larger competitors that may have
significant combined resources with which to compete against us.
13
We believe that our ability to compete depends on many factors, both within
and beyond our control, including, without limitation:
o performance, functionality, scalability, flexibility and business
value of our solutions for global program management, supplier
relationship management, and collaborative product development; our
eMatrix product collaboration platform; our Value Chain Portfolio of
applications; and our suite of enterprise interoperability products;
o timing and market acceptance of new products and product enhancements;
o effectiveness of our selling and marketing efforts; and
o quality and performance of our services.
Although we believe that we currently compete favorably as to each of these
factors, we expect competition to persist and intensify, and the market in which
we compete is rapidly changing. In addition, new competitors could emerge and
rapidly capture market share. Increased competition from existing or potential
competitors could result in reductions in price and revenues, reduced margins,
loss of customers and loss of market share, any one of which would negatively
impact our operating results.
Intellectual Property and Other Proprietary Rights
Our success and ability to compete are dependent upon our ability to
develop and maintain our intellectual property and proprietary technology and to
operate without infringing on the proprietary rights of others. Our continued
success will also depend in part upon our ability to share our proprietary
rights with our alliance partners. Generally, when we develop applications or
software in conjunction with our customers or third parties, we retain
non-exclusive rights to the code that is created. Currently, we rely on a
combination of copyright, trademark and trade secret laws, as well as
non-disclosure agreements with our employees, customers, alliance partners,
consultants and systems integrators to protect our proprietary rights. In the
future, we also intend to rely on patents to protect our proprietary rights. We
license our software pursuant to non-exclusive license agreements that impose
restrictions on our customers' ability to utilize the software. In addition, we
seek to avoid disclosure of our trade secrets by executing confidentiality
agreements with anyone having access to our proprietary information and
restricting access to our source code. We also seek to protect our software,
documentation and other written materials under trade secret and copyright laws.
We have one patent application pending in the United States. It is possible
that no patent will issue from this application. We have three registered
trademarks and three pending trademark registrations in the United States. In
addition, we have two registered trademarks and three pending trademark
applications in various foreign countries. Registered trademarks may not issue
from these United States and foreign applications or the applications may be
contested.
Despite our efforts to protect our intellectual property and proprietary
rights, existing laws afford only limited protection. We operate throughout the
world and the protection available for our intellectual property may not be
available to the same extent protection is available in the United States or at
all. Others may be able to develop technologies that are superior or similar to
our technology. Attempts may be made to reverse engineer our products or to
obtain and use information that we regard as proprietary. Our customers,
alliance partners, suppliers, and former employees may disclose our proprietary
information to parties that may use that information to compete against us.
Accordingly, we may not be able to protect our proprietary rights against
unauthorized third party copying or use. Furthermore, policing the unauthorized
use of our intellectual property is difficult. Expensive litigation may be
necessary in the future to enforce our intellectual property rights.
14
We utilize technology that is provided by third parties and integrated into
our products. These technologies may infringe another party's proprietary
rights. We attempt to obtain product infringement indemnification protection in
contracts when we integrate third-party products and technology into our
products. It is also possible that third parties will claim that we have
infringed their proprietary rights. We expect that software providers will
increasingly be subject to infringement claims as the number of products in
different industry segments increase and overlap. Any resulting claim or
litigation, even if successfully defended, could result in substantial costs and
diversion of resources and management time and could have a material negative
effect on our operating results.
Employees
As of June 29, 2002, we had a total of 568 employees. Of the total
employees, 128 were in product development, engineering or systems engineering,
179 in sales and marketing, 206 in services and 55 in operational, financial and
administrative functions.
Our employees are not represented by a labor union and are not subject to a
collective bargaining agreement. We have never experienced a work stoppage. We
believe our relations with our employees are good.
ITEM 2: PROPERTIES
Our headquarters is located in a 52,000 square foot facility in Westford,
Massachusetts, which we occupy under an office lease expiring in December 2010.
We lease office space in 15 states throughout the United States. We also lease
office space in Canada, England, France, Germany, Italy, Japan, Korea,
Singapore, Taiwan and the Netherlands, under leases with terms expiring at
various times through fiscal 2010. We believe that additional space will be
required as our business expands and will be available as required on acceptable
terms.
ITEM 3: LEGAL PROCEEDINGS
On April 19, 2002, a consolidated amended class action complaint was filed
in the United States District Court for the Southern District of New York. The
complaint, which supersedes five virtually identical complaints that had been
filed from July 24, 2001 to September 5, 2001, names as defendants the Company,
two of our officers, and certain underwriters involved in our initial public
offering of common stock ("IPO"). The complaint is allegedly brought on behalf
of purchasers of our common stock during the period from February 29, 2000 to
December 6, 2000 and asserts, among other things, that our IPO prospectus and
registration statement violated federal securities laws because they contained
material misrepresentations and/or omissions regarding the conduct of our IPO
underwriters in allocating shares in our IPO to the underwriters' customers, and
that the Company and the two named officers engaged in fraudulent practices with
respect to this underwriters' conduct. The action seeks damages, fees and costs
associated with the litigation, and interest. We understand that various
plaintiffs have filed substantially similar lawsuits against over three hundred
other publicly traded companies in connection with the underwriting of their
initial public offerings. We and our officers and directors believe that the
allegations in the complaint are without merit and intend to contest them
vigorously. The Company, along with the 300-plus other publicly-traded companies
that have been named in substantially similar lawsuits, filed a motion to
dismiss the complaint on July 15, 2002. The litigation process is inherently
uncertain and unpredictable, however, and there can be no guarantee as to the
ultimate outcome of this pending lawsuit.
We may from time to time become a party to various other legal proceedings
arising in the ordinary course of our business.
15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended June 29, 2002, through the solicitation
of proxies or otherwise.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the NASDAQ National Market under the symbol
"MONE". The price range per share reflected in the table below is the high and
low bid information for our common stock as reported by NASDAQ for the periods
indicated.
High Low
------ -----
Fiscal year ended June 29, 2002:
First quarter ............................. $21.76 $5.25
Second quarter ............................ $13.97 $4.00
Third quarter ............................. $16.93 $8.48
Fourth quarter ............................ $ 9.70 $4.87
Fiscal year ended June 30, 2001:
First quarter ............................. $49.00 $17.19
Second quarter ............................ $39.63 $ 6.75
Third quarter ............................. $36.00 $13.25
Fourth quarter ............................ $27.49 $10.19
On September 10, 2002, there were approximately 503 stockholders of record
of our common stock. This number does not include stockholders for whom shares
were held in a "nominee" or "street" name. On September 10, 2002, the last
reported sale price per share of our common stock on the NASDAQ National Market
was $4.57.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion and
growth of our business and do not expect to pay any cash dividends in the
foreseeable future. Payment of future cash dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion. Our credit facility currently prohibits the
payment of cash dividends on our capital stock.
16
On February 29, 2000, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-92731), relating
to the initial public offering of our common stock, and we did a concurrent
private placement of common stock. We expect to use the net proceeds from the
initial public offering and the concurrent private placement for general
corporate purposes, including to expand our selling and marketing services
organizations, develop new distribution channels, expand our research and
development efforts, improve our operational and financial systems and for other
working capital purposes. We may also use a portion of the net proceeds to
acquire or invest in complementary businesses, products or technologies.
Currently, we have no specific understandings, commitments or agreements with
respect to any such acquisition or investment. Except as set forth below, we
have not allocated any portion of the net proceeds for any specific purpose. Our
actual use of the net proceeds from the initial public offering and the
concurrent private placement may differ from the uses we have identified.
Pending these uses, the net proceeds of the offering and the concurrent private
placement will be invested in short-term, interest-bearing, investment-grade
securities. Through June 29, 2002, we have used the proceeds from the initial
public offering and concurrent private placement to pay for the offering
expenses, fund approximately $6.8 million in investments in leasehold
improvements, computer hardware and software and office furniture and to fund
approximately $2.2 million of working capital to support our operations.
See Part III, Item 12 for information regarding securities authorized for
issuance under equity compensation plans.
ITEM 6: SELECTED FINANCIAL DATA
You should read the data set forth below in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", Item 7A, "Quantitative and Qualitative Disclosures About Market
Risk" and our consolidated financial statements and related notes appearing
elsewhere in this Annual Report on Form 10-K. The selected consolidated
statement of operations data set forth below for the fiscal years ended June 29,
2002, June 30, 2001 and July 1, 2000 and the consolidated balance sheet data as
of June 29, 2002 and June 30, 2001 are derived from our audited consolidated
financial statements that are included elsewhere in this Annual Report on Form
10-K. The selected consolidated statement of operations data for the fiscal
years ended July 3, 1999 and June 27, 1998 and the consolidated balance sheet
data as of July 1, 2000, July 3, 1999 and June 27, 1998 are derived from our
audited consolidated financial statements that are not included in this Annual
Report on Form 10-K. In May 1998, we sold our legacy design and manufacturing
software business, Adra Systems, to focus on our PLM solutions. The financial
results of this divested business are reflected in our consolidated financial
statements as discontinued operations.
17
Year Ended
----------------------------------------------------------
June 29, June 30, July 1, July 3, June 27,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues:
Software license .................................... $ 47,443 $ 84,290 $ 40,977 $ 21,851 $ 11,836
Service ............................................. 74,020 61,100 35,474 20,505 9,603
--------- --------- --------- --------- ---------
Total revenues ................................... 121,463 145,390 76,451 42,356 21,439
--------- --------- --------- --------- ---------
Cost of revenues:
Software license .................................... 5,927 8,212 4,424 3,323 1,237
Service ............................................. 54,478 45,737 28,123 15,477 6,851
--------- --------- --------- --------- ---------
Total cost of revenues ........................... 60,405 53,949 32,547 18,800 8,088
--------- --------- --------- --------- ---------
Gross profit ..................................... 61,058 91,441 43,904 23,556 13,351
--------- --------- --------- --------- ---------
Operating expenses:
Selling and marketing ............................... 48,166 56,273 35,765 20,611 15,369
Research and development ............................ 25,374 19,749 8,553 5,792 7,242
General and administrative .......................... 12,814 10,406 5,487 4,479 3,592
Stock-based compensation ............................ 3,910 4,142 3,593 622 --
Restructuring charges ............................... 2,812 -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses ......................... 93,076 90,570 53,398 31,504 26,203
--------- --------- --------- --------- ---------
Income (loss) from operations .................... (32,018) 871 (9,494) (7,948) (12,852)
Other income (expense), net ............................ 3,313 8,940 3,041 244 48
Benefit from (provision for) income taxes .............. -- (1,465) -- -- 1,928
--------- --------- --------- --------- ---------
Income (loss) from continuing operations ............ (28,705) 8,346 (6,453) (7,704) (10,876)
Income from discontinued operations .................... -- 500 -- -- 8,684
--------- --------- --------- --------- ---------
Net income (loss) ...................................... $ (28,705) $ 8,846 $ (6,453) $ (7,704) $ (2,192)
========= ========= ========= ========= =========
Basic net income (loss) per share:
Continuing operations ............................... $ (0.62) $ 0.19 $ (0.36) $ (1.74) $ (2.88)
Discontinued operations ............................. -- 0.01 -- -- 2.30
--------- --------- --------- --------- ---------
Net income (loss) ................................... $ (0.62) $ 0.20 $ (0.36) $ (1.74) $ (0.58)
========= ========= ========= ========= =========
Shares used in computation .......................... 46,147 43,543 17,966 4,428 3,777
========= ========= ========= ========= =========
Diluted net income (loss) per share:
Continuing operations ............................... $ (0.62) $ 0.17 $ (0.36) $ (1.74) $ (2.88)
Discontinued operations ............................. -- 0.01 -- -- 2.30
--------- --------- --------- --------- ---------
Net income (loss) ................................... $ (0.62) $ 0.18 $ (0.36) $ (1.74) $ (0.58)
========= ========= ========= ========= =========
Shares used in computation .......................... 46,147 50,357 17,966 4,428 3,777
========= ========= ========= ========= =========
As of
----------------------------------------------------------
June 29, June 30, July 1, July 3, June 27,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents ................................... $139,642 $156,349 $153,455 $11,036 $ 8,123
Working capital ........................................ 131,617 154,193 146,012 7,892 8,826
Total assets ........................................... 200,948 217,626 184,417 29,887 22,912
Redeemable convertible preferred stock.................. -- -- -- 17,015 11,015
Total stockholders' equity (deficit) ................... 149,090 169,316 151,593 (6,042) 843
18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis together with our
consolidated financial statements and related notes and other financial
information appearing elsewhere in this Annual Report on Form 10-K. This Annual
Report on Form 10-K, including the following discussion, contains trend analysis
and other forward-looking statements within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Any statements in this Annual
Report on Form 10-K that are not statements of historical facts are
forward-looking statements. These forward-looking statements are based on a
number of assumptions and involve risks and uncertainties. Our actual results
could differ materially from those anticipated in such forward-looking
statements due to various factors, including, but not limited to, those set
forth under "Cautionary Statements" and elsewhere in this Annual Report on Form
10-K.
Overview
MatrixOne, Inc. is a provider of collaborative PLM solutions. Our solutions
enable companies from a broad range of industries to accelerate product
innovation and time-to-market by collaboratively developing, building, and
managing products. Our interoperable solutions bring together people, processes,
content, and systems throughout global value chains of employees, customers,
suppliers, and partners to achieve a competitive advantage by bringing the right
products and services to market cost-effectively. By unifying and streamlining
processes across the product lifecycle, companies can easily work on projects
within and outside of their enterprises. In addition, our technology enables
companies to adapt and scale quickly to address their ever-changing business
requirements.
We generate revenues from licensing our software and providing professional
services, training and maintenance and customer support services through our
offices in the United States, Canada, England, France, Germany, Italy, Japan,
Korea, Singapore, Taiwan and the Netherlands and indirectly through our alliance
partner network throughout Europe and Asia/Pacific. Revenues by geographic
region fluctuate each period based on the timing and the size of transactions.
We expect revenues by geographic region to continue to fluctuate each period,
and we expect revenues from our international operations to increase as we
expand our international sales and professional services organizations. No
single customer accounted for more than 10% of our annual revenues in fiscal
2002 or fiscal 2000. However, during fiscal 2001, approximately 11.3% of our
revenues were from Applied Materials, Inc.
As a result of unfavorable global economic conditions and a reduction in
information technology spending around the world, in October 2001 we implemented
a restructuring program to reduce expenses to align our operations and cost
structure with market conditions. The restructuring program included a reduction
in the number of employees across all functions and locations, a reduction in
the use of independent contractors across all functions and locations,
termination of certain contracts, and closure of excess facilities.
We have incurred significant costs to develop our technology and products,
recruit, hire and train personnel for our engineering, selling and marketing and
services departments, and establish a corporate infrastructure. These costs have
historically exceeded total revenues. As of June 29, 2002, we had an accumulated
deficit of approximately $58.7 million. We anticipate that our operating
expenses in fiscal 2003 will exceed projected revenues. Accordingly, we expect
to incur a net loss in fiscal 2003. In addition, if our operating expenses are
higher than we anticipate or our revenues are lower than projected, we may incur
significant net losses in fiscal 2003 and in the future.
19
MatrixOne was incorporated in July 1983 as Adra Systems, Inc. In October
1997, we changed our name to MatrixOne, Inc., and in May 1998, we sold our
legacy design and manufacturing software business, Adra Systems, to focus on our
PLM solutions. The financial results of this divested business are reflected in
our consolidated financial statements as discontinued operations.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments, which we evaluate on an on-going basis, that affect the
reported amounts of assets, liabilities, revenues and expenses. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable at that time under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates and judgments under different assumptions or
conditions.
We believe the following critical accounting policies affect the more
significant estimates and judgments used in the preparation of our consolidated
financial statements.
Revenue Recognition
We generate revenues from licensing our software and providing professional
services, training and maintenance and customer support services. We execute
separate contracts that govern the terms and conditions of each software license
and maintenance arrangement and each professional services arrangement. These
contracts may be an element in a multiple-element arrangement. Revenues under
multiple-element arrangements, which may include several different software
products or services sold together, are allocated to each element using the
residual method.
We use the residual method when fair value does not exist for one of the
delivered elements in an arrangement. Under the residual method, the fair value
of the undelivered elements is deferred and subsequently recognized. We have
established sufficient vendor specific objective evidence for professional
services, training and maintenance and customer support services based on the
price charged when these elements are sold separately. Accordingly, software
license revenue is recognized under the residual method in arrangements in which
software is licensed with professional services, training and maintenance and
customer support services.
We recognize software license revenues upon execution of a signed license
agreement, delivery of the software to a customer and determination that
collection of a fixed license fee is probable. For delivery over the Internet,
the software is considered to have been delivered upon confirmation by the
customer of the file transfer. Since we have no obligation to an end user of a
distributor, software license revenues from distributors are recognized upon
delivery to the distributor.
We recognize revenue from software subscription arrangements ratably over
the term of the contract on a straight-line basis. Fees from revenue sharing,
royalty and subscriber arrangements with and through third-parties are
recognized as revenue when they are fixed and determinable, generally upon
receipt of a statement from the third-party.
20
Service revenues include professional services, training, maintenance and
customer support fees and reimbursements received for out-of-pocket expenses
incurred. Professional services are not essential to the functionality of the
other elements in an arrangement and are accounted for separately. Professional
services revenues are primarily derived from time and material contracts and are
recognized as the services are performed. Professional services revenues for
fixed-price contracts are recognized on a percentage-of-completion basis. If
conditions for acceptance are required, professional services revenues are
recognized upon customer acceptance. Our customers generally reimburse us for
the majority of our out-of-pocket expenses incurred during the course of a
project. We do not mark-up or add additional fees to the actual out-of-pocket
expenses we incur. Training revenues are recognized as the services are
provided.
Maintenance and customer support fees include the right to unspecified
upgrades on a when-and-if-available basis and ongoing technical support.
Maintenance and customer support fees are recognized ratably over the term of
the contract, generally one year, on a straight-line basis. When a maintenance
and customer support fee is included with a software license fee, we allocate a
portion of the software license fee to maintenance and customer support fees
based on the renewal rate of maintenance and customer support fees.
Allowance for Doubtful Accounts
We periodically assess the collectibility of customer accounts receivable.
We maintain an allowance for estimated losses resulting from uncollectible
customer accounts receivable. In estimating this allowance, we consider factors
such as historical collection experience, a customer's current credit
worthiness, customer concentrations, age of the receivable and general economic
conditions that may affect a customer's ability to pay. Actual customer
collections could materially differ from our estimates. The use of different
estimates or assumptions could produce a materially different allowance. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Prepaid Software License Fees
Prepaid software license fees, which are included in prepaid expenses and
other current assets, are paid to third-party software developers under
contractual arrangements for technology integrated into certain of our
application and integration products. Amortization of prepaid license fees
commences when the software is available for general release. We amortize
prepaid license fees to cost of software license revenues based on the greater
of the actual royalties incurred to date or the straight-line method of
amortization over the estimated useful life of the software product, which is
generally three years. Management regularly reviews the valuation of each
prepaid software license fee in order to determine if events and circumstances
may require a change in such valuation to reflect the estimated recoverable
amount. A reduction in the license or discontinuation of software for which we
have prepaid license fees, may result in additional charges to cost of software
license revenues.
Property and Equipment
We estimate the useful lives of our property and equipment, and we record
depreciation on a straight-line basis over the estimated useful lives of our
property and equipment. We regularly review our estimate of the useful lives and
net book value of our property and equipment in order to determine if events and
circumstances, such as changes in technology, product obsolescence and changes
in our business, may require a change in the estimated useful lives of our
property and equipment, which would increase our operating expenses or
recognition of an impairment loss.
21
Accounting for Income Taxes
We record a valuation allowance to reduce our deferred tax assets to the
estimated amount that is more likely than not to be realized. During our
assessment of the valuation allowance, we consider future taxable income and
ongoing tax planning strategies on a consolidated basis and in the tax
jurisdictions in which we operate. We have recorded a valuation allowance
against our deferred tax asset due to the fact it is more likely than not that
the deferred tax asset will not be realized. We regularly evaluate the
realizability of our deferred tax assets and may adjust the valuation allowance
based on such analysis.
Professional Services Warranty
We provide for an estimate of professional services warranty based on
historical activity. Warranty expense is included in cost of services. If actual
warranty activities differ from our estimates, revisions to the estimated
warranty liability would be required and result in additional charges to cost of
services.
Results of Operations
The following table sets forth consolidated statement of operations data
expressed as a percentage of total revenues for each period indicated. These
historical results are not necessarily indicative of results to be expected for
any future period.
Year Ended
-----------------------------
June 29, June 30, July 1,
2002 2001 2000
------- ------ -------
Revenues:
Software license ........................... 39.1% 58.0% 53.6%
Service .................................... 60.9 42.0 46.4
----- ----- -----
Total revenues .......................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Software license ........................... 4.8 5.6 5.8
Service .................................... 44.9 31.5 36.8
----- ----- -----
Total cost of revenues .................. 49.7 37.1 42.6
----- ----- -----
Gross profit ............................ 50.3 62.9 57.4
----- ----- -----
Operating expenses:
Selling and marketing ...................... 39.7 38.7 46.8
Research and development ................... 20.9 13.6 11.2
General and administrative ................. 10.5 7.1 7.2
Stock-based compensation ................... 3.2 2.8 4.6
Restructuring charges ...................... 2.3 -- --
----- ----- -----
Total operating expenses ................ 76.6 62.2 69.8
----- ----- -----
Income (loss) from operations ........... (26.3) 0.7 (12.4)
Other income, net ............................. 2.7 6.1 4.0
Provision for income taxes .................... -- (1.0) --
----- ----- -----
Income (loss) from continuing operations ... (23.6) 5.8 (8.4)
Gain on sale of discontinued operations ....... -- 0.3 --
----- ----- -----
Net income (loss) ............................. (23.6)% 6.1% (8.4)%
===== ===== =====
Comparison of Fiscal Years Ended June 29, 2002 and June 30, 2001
Software license revenues. We derive our software license revenues
principally from licensing our enterprise software including our eMatrix product
collaboration platform, Value Chain Portfolio applications and interoperability
products.
22
Software license revenues decreased 43.7% to $47.4 million for fiscal 2002
from $84.3 million for fiscal 2001. The decrease was primarily due to the
weakening of the global economy and a decrease in information technology
spending. In addition, new customers are starting new information technology
projects with smaller initial software license investments. Accordingly, the
average deal size of our software license transactions decreased and software
licensed to new customers decreased during fiscal 2002. Software license
revenues decreased $35.0 million in North America, $0.7 million in Europe and
$1.1 million in Asia/Pacific due to the factors previously discussed.
Service revenues. We provide services to our customers and systems
integrators consisting of professional services, training and maintenance and
customer support services. Our professional services, which include
implementation and consulting services, are primarily provided on a time and
materials basis. Typically, our customers reimburse us for the majority of our
out-of-pocket expenses incurred during the course of a project. During fiscal
2002, we adopted the provisions of Emerging Issues Task Force Issue No. 01-14
("EITF 01-14") relating to the accounting for reimbursements received for
out-of-pocket expenses incurred and reclassified such amounts in all previous
period financial statements. Accordingly, our service revenues include
reimbursements for out-of-pocket expenses incurred, which had been previously
reported as a reduction to cost of services to offset the costs incurred. We do
not mark-up or add additional fees to the actual out-of-pocket expenses we
incur. We also offer training services to our customers, distributors and
systems integrators either in our offices throughout the world or at customer
locations. Customers that license our products generally purchase annually
renewable maintenance contracts, which provide customers with the right to
receive unspecified software upgrades and technical support over the term of the
contract.
Service revenues increased 21.1% to $74.0 million for fiscal 2002 from
$61.1 million for fiscal 2001. The increase was primarily due to an $8.4 million
increase in maintenance revenues from new and renewed maintenance contracts and
a $5.2 million increase in professional services revenues from implementation
and consulting projects for new customers and continuation or expansion of
implementation and consulting projects for existing customers. During fiscal
2002, there was also an increase in the average number of professional services
employees providing billable implementation and consulting services and an
increase in the billable utilization of our professional services personnel.
Reimbursements received for out-of-pocket expenses incurred were $3.2 million
for both fiscal 2002 and fiscal 2001. Maintenance revenues represented 37.7% and
32.0% of service revenues for fiscal 2002 and fiscal 2001, respectively.
Cost of software licenses. Cost of software licenses primarily consists of
royalties paid to third parties for certain application and integration products
licensed to our customers. Cost of software licenses also includes the cost of
manuals and product documentation, production media used to deliver our products
and shipping costs. Our cost of software licenses fluctuates from period to
period due to changes in the mix of software licensed and the extent to which we
pay royalties to third parties on application and integration products.
Cost of software licenses decreased 27.8% to $5.9 million for fiscal 2002
from $8.2 million for fiscal 2001. The decrease in cost of software licenses was
primarily due to a $4.5 million decrease in royalties on integration software as
a result of decreased licensing of third-party integration software, offset by a
$2.0 million increase in royalties on application software as a result of
increased licensing of third-party application software and amortization of
certain prepaid royalties.
Cost of services. Cost of services includes salaries and related expenses
for internal services personnel and costs of contracting with independent
systems integrators to provide consulting services. Cost of services fluctuates
based on the mix of internal professional services personnel and more expensive
independent systems integrators used for professional services projects. Our
gross margins may fluctuate based on the actual costs incurred to provide
professional services.
23
Cost of services increased 19.1% to $54.5 million for fiscal 2002 from
$45.7 million for fiscal 2001 due to a $3.4 million increase in internal
services personnel costs due to an increase in the average number of services
personnel employed during the year, a $4.2 million increase in consulting and
contractor costs due to an increase in the use of independent systems
integrators, and an increase in rent, depreciation and other costs.
Gross profit. Gross profit decreased 33.2% to $61.1 million for fiscal 2002
from $91.4 million for fiscal 2001. Gross profit as a percentage of total
revenues, or gross margin, decreased to 50.3% for fiscal 2002 from 62.9% for
fiscal 2001. The decrease in gross margin was primarily attributable to a
decrease in higher margin software license revenues and an increase in the
relative proportion of our total revenues derived from lower margin service
revenues. Gross margin on software licenses decreased to 87.5% for fiscal 2002
from 90.3% for fiscal 2001 primarily due to an increase in the relative
proportion of third-party application software licensed, which are subject to
royalties. During fiscal 2002, we adopted the provisions of EITF No. 01-14
relating to the accounting for reimbursements received for out-of-pocket
expenses incurred. Accordingly, our service revenues include reimbursements
received for out-of-pocket expenses incurred, which had been previously reported
as a reduction to cost of services to offset the costs incurred. This
reclassification of out-of-pocket expenses incurred did not affect the amount of
our gross profit but did decrease our gross margin. Gross margin on services
increased to 26.4% for fiscal 2002 from 25.1% for fiscal 2001 primarily due to
an increase in maintenance revenues.
Selling and marketing. Selling and marketing expenses include marketing
costs, such as public relations and advertising, trade shows, marketing
materials and customer user group meetings, and selling costs such as sales
training events and commissions. Selling and marketing costs may fluctuate based
on the timing of trade shows and user group events and the amount of sales
commissions, which vary based upon revenues.
Selling and marketing expenses decreased 14.4% to $48.2 million for fiscal
2002 from $56.3 million for fiscal 2001 primarily due to an $8.4 million
decrease in commission and other compensation expenses due to lower software
license revenues, offset by a slight increase in personnel and related costs.
Selling and marketing expenses as a percentage of total revenues increased
slightly to 39.7% for fiscal 2002 from 38.7% for fiscal 2001 due to a lower
revenues base.
Research and development. Research and development expenses include costs
incurred to develop our intellectual property and are charged to expense as
incurred. To date, software development costs have been charged to expense as
incurred because the costs incurred from the attainment of technological
feasibility to general product release have not been significant. Research and
development costs may fluctuate based on the utilization of domestic and foreign
third-party contractors, which are generally more expensive than our internal
engineering personnel, and the use of third parties to develop specific
application and integration products.
Research and development expenses increased 28.5% to $25.4 million for
fiscal 2002 from $19.7 million for fiscal 2001 primarily due to a $4.4 million
increase in personnel costs due to an increase in the number of research and
development personnel, a $0.4 million increase in outsourced translation
services and an increase in rent, depreciation and other costs. We have
increased our research and development organization in order to further improve
our existing products, bring additional products to market, such as additional
Value Chain Portfolio applications, and invest in our strategic relationship
with IBM. Research and development expenses as a percentage of total revenues
increased to 20.9% for fiscal 2002 from 13.6% for fiscal 2001 due to the factors
previously discussed and a lower revenues base.
General and administrative. General and administrative expenses consist
primarily of compensation of executive, finance, investor relations, human
resource and administrative personnel, legal and accounting services, and
provisions for doubtful accounts.
24
General and administrative expenses increased 23.1% to $12.8 million for
fiscal 2002 from $10.4 million for fiscal 2001 primarily due to a $1.2 million
increase in personnel and related costs, a $0.7 million increase in the
provision for doubtful accounts, due to increased credit risk as a result of the
weakening global economy, and an increase in professional fees. General and
administrative expenses as a percentage of total revenues increased to 10.5% for
fiscal 2002 from 7.1% for fiscal 2001 due to the factors previously discussed
and a lower revenues base.
Stock-based compensation. Stock-based compensation relates to the issuance
of stock options to employees with exercise prices below the deemed fair value
of our common stock on the date of grant. In connection with certain stock
option grants to employees during fiscal 2000 and 1999, we recorded deferred
stock-based compensation totaling approximately $17.7 million. Deferred
stock-based compensation represents the difference between the option exercise
price and the deemed fair value of our common stock on the date of the option
grant and is reported as deferred stock-based consideration, a component of
stockholders' equity. Deferred stock-based compensation is amortized through
charges to operations over the vesting period of the options, which is generally
four years. Stock-based compensation was $3.9 million and $4.1 million for
fiscal 2002 and fiscal 2001, respectively. The decrease in stock-based
compensation expense reflects lower amortization due to cancellation of stock
options upon employee terminations. We presently expect to record stock-based
compensation of $3.3 million and $0.6 million in fiscal 2003 and fiscal 2004,
respectively.
Restructuring charges. As a result of unfavorable global economic
conditions and a reduction in information technology spending around the world,
in October 2001 we implemented a restructuring program to reduce expenses to
align our operations and cost structure with market conditions. The
restructuring program included a reduction in the number of employees across all
functions and locations, a reduction in the use of independent contractors
across all functions and locations, termination of certain contracts and closure
of excess facilities.
The restructuring program included a reduction in workforce of 75
employees, consisting of 22 employees in cost of service revenues, 32 employees
in selling and marketing, 13 employees in research and development and 8
employees in general and administration. The costs related to the reduction in
workforce include severance and fringe benefits. In the restructuring program,
we also terminated the services of 34 independent contractors. There were no
incremental costs to us related to the termination of the services of these
independent contractors.
The restructuring program also included facility and lease costs related to
the closure of certain excess facilities and activities that we exited and the
termination of certain automotive lease contracts.
As a result of the restructuring program, we canceled certain contracts
related to terminated activities and programs that were either noncancelable or
cancelable with penalty provisions. The costs related to the negotiated
termination of these contracts are included in the restructuring charge as
contract terminations.
25
As a result of the restructuring program, we recorded a restructuring
charge of $3.2 million in October 2001. The restructuring charge consisted of
costs related to the following statement of operations classifications: $0.6
million in cost of service revenues, $2.3 million in selling and marketing, $0.2
million in research and development and $0.1 million in general and
administrative. During the three months ended June 29, 2002, we recorded a $0.4
million adjustment to the restructuring charge as a result of the settlement of
certain employee severance, lease and other contractual arrangements.
The significant components of the restructuring charge, non-cash
adjustments, cash payments and the remaining accrual at June 29, 2002 are as
follows:
Employee
Severance
and Facilities
Fringe and Contract
(In millions) Benefits Leases Terminations Total
---------- ---------- ------------ -------
Restructuring charges .............................. $ 2.5 $ 0.5 $ 0.2 $ 3.2
Non-cash adjustments ............................... (0.1) (0.2) (0.1) (0.4)
---------- ---------- ------------ -------
Adjusted restructuring charges ..................... 2.4 0.3 0.1 2.8
Cash payments ...................................... (1.7) (0.3) (0.1) (2.1)
---------- ---------- ------------ -------
Remaining accrual at June 29, 2002 ................. $ 0.7 $ -- $ -- $ 0.7
========== ========== ============ =======
The restructuring program was substantially completed during fiscal 2002.
The remaining cash payments are expected to be paid through January 31, 2003.
Other income (expense). Other income (expense) fluctuates based on interest
income earned on our investments and the amount of cash available for
investment, interest expense related to borrowings under our credit facilities,
realized and unrealized gains and losses on foreign currency transactions and
gains and losses on sales and disposals of fixed assets.
Other income decreased 62.9% to $3.3 million for fiscal 2002 from $8.9
million for fiscal 2001. The decrease in other income was primarily due to a
$5.6 million decrease in interest income from lower yields on our investments
resulting from a significant decrease in market interest rates and slightly
lower levels of cash available for investment.
Provision for income taxes. No provision for income taxes was recorded for
fiscal 2002 due to our accumulated net losses. A provision for income taxes of
$1.5 million was recorded during fiscal 2001 based on our estimate of income
taxes expected to be due in certain states and foreign countries.
Comparison of Fiscal Years Ended June 30, 2001 and July 1, 2000
Software license revenues. Software license revenues increased 105.7% to
$84.3 million for fiscal 2001 from $41.0 million for fiscal 2000. The increase
was due to revenues from new customers as well as additional software licensed
to existing customers. We introduced our Value Chain Portfolio applications in
the second quarter of fiscal 2001 and expanded our integration product offerings
resulting in a 256.3% increase in the licensing of our integration products.
Software license revenues in North America and Japan increased $40.7 million and
$3.9 million, respectively, due to the factors previously discussed. Software
license revenues in Europe decreased approximately $1.3 million due to a
decrease in software licensed to both new and existing customers as a result of
increased competition and a general weakening of the European economy.
26
Service revenues. Service revenues increased 72.2% to $61.1 million for
fiscal 2001 from $35.5 million for fiscal 2000. The increase was primarily due
to a 121.8% increase in maintenance revenues from new and renewed maintenance
contracts, a 51.0% increase in professional services revenues as a result of an
increase in the number of professional services employees providing billable
implementation and consulting services and a 112.3% increase in training
revenues from an increase in the number of customers and users utilizing our
software. Maintenance revenues represented 32.0% and 24.8% of service revenues
for fiscal 2001 and 2000, respectively.
Cost of software licenses. Cost of software licenses increased 85.6% to
$8.2 million for fiscal 2001 from $4.4 million for fiscal 2000. The increase in
cost of software licenses was primarily due to a $5.1 million increase in
royalties resulting from increased licensing of third-party integration
software, offset by a $0.7 million decrease in royalties for Oracle database
licenses.
Cost of services. Cost of services increased 62.6% to $45.7 million for
fiscal 2001 from $28.1 million for fiscal 2000 primarily due to increased
personnel costs to support the growth in our professional services organization.
We also increased both the use of systems integrators to provide consulting
services for our customers and the amount of training we provided these systems
integrators in an effort to increase the number of systems integrators with
relevant eMatrix expertise.
Gross profit. Gross profit increased 108.3% to $91.4 million for fiscal
2001 from $43.9 million for fiscal 2000. Gross profit as a percentage of total
revenues, or gross margin, increased to 62.9% for fiscal 2001 from 57.4% for
fiscal 2000. The increase in gross margin was primarily attributable to higher
margin software license revenues growing faster than services revenues. Gross
margin on software licenses increased to 90.3% for fiscal 2001 from 89.2% for
fiscal 2000 due to a decrease in the relative proportion of software we licensed
from third parties, primarily Oracle database licenses. Gross margin on services
increased to 25.1% for fiscal 2001 from 20.7% for fiscal 2000 primarily due to
an increase in maintenance revenues and an increase in gross margin on
professional services due to operational efficiencies.
Selling and marketing. Selling and marketing expenses increased 57.3% to
$56.3 million for fiscal 2001 from $35.8 million for fiscal 2000 due to higher
commission expense due to an increase in software license revenues, increased
personnel costs related to the expansion of our worldwide sales and marketing
organization and an increase in our marketing programs and events. Selling and
marketing expenses as a percentage of total revenues decreased to 38.7% for
fiscal 2001 from 46.8% for fiscal 2000 primarily due to operational efficiencies
of our sales organization and a larger revenues base.
Research and development. Research and development expenses increased
130.9% to $19.7 million for fiscal 2001 from $8.6 million for fiscal 2000 due to
increased personnel costs related to the expansion of our research and
development organization and an increase in the use of third-party contractors
to assist in the development of our software. Research and development expenses
as a percentage of total revenues increased to 13.6% for fiscal 2001 from 11.2%
for fiscal 2000 due to the factors previously discussed.
General and administrative. General and administrative expenses increased
89.6% to $10.4 million for fiscal 2001 from $5.5 million for fiscal 2000
primarily due to an increase in personnel costs to support the growth in our
business and provisions for doubtful accounts due to a larger revenues base.
General and administrative expenses as a percentage of total revenues decreased
to 7.1% in fiscal 2002 from 7.2% for fiscal 2001 primarily due to a larger
revenues base.
Stock-based compensation. Stock-based compensation was $4.1 million and
$3.6 million for fiscal 2001 and 2000, respectively.
27
Other income (expense), net. Other income, net increased $5.9 million to
$8.9 million for fiscal 2001 from $3.0 million for fiscal 2000 primarily due to
an increase in interest income from higher levels of cash available for
investment as a result of the receipt of the proceeds from our initial public
offering of common stock and concurrent private placement in March 2000.
Income taxes. During fiscal 2001, we provided for income taxes at an
effective rate of approximately 14% of income before income taxes. This
effective tax rate differs from the statutory rate primarily due to certain
nondeductible expenses and the change in the valuation allowance for our
deferred tax asset. No provision for income taxes was recorded in fiscal 2000
due to our accumulated net losses.
Discontinued operations. During fiscal 2001, we settled a dispute relating
to the May 1998 sale of Adra Systems, Inc., our legacy design and manufacturing
software business, and recognized a gain of $0.5 million, representing the
difference between the amount we originally accrued and the settlement amount.
Liquidity and Capital Resources
As of June 29, 2002, we had cash and equivalents of $139.6 million, a
decrease of $16.7 million from June 30, 2001. Our working capital was $131.6
million and $154.2 million as of June 29, 2002 and June 30, 2001, respectively.
The decrease in working capital was primarily attributable to a decrease in cash
and equivalents due to our loss from operations and cash payments related to our
restructuring program and a decrease in accounts receivable resulting from
decreased revenues.
We have a $10.0 million line of credit that bears interest at the bank's
prime rate plus 0.5% per annum on any outstanding balances and expires December
28, 2002. Borrowings under this line of credit are limited to 80% of eligible
accounts receivable from customers in the United States. As of June 29, 2002, we
had no borrowings outstanding under this line of credit and $9.6 million
available. This line of credit is collateralized by all of our assets and has
financial and other covenants. We were in compliance with these financial and
other covenants as of June 29, 2002.
Net cash used in operating activities for fiscal 2002 was $13.8 million
resulting from our net loss and an increase in prepaid expenses and other
current assets, due to prepayment of software license fees, and a decrease in
accrued expenses, offset by an increase in deferred maintenance revenues and a
decrease in accounts receivable due to lower revenues. Net cash provided by
continuing operations for fiscal 2001 was $10.8 million resulting from our net
income and increases in accounts payable, accrued expenses and deferred
revenues, offset by increases in accounts receivable due to higher revenues, and
prepaid expenses and other current assets due to prepayment of software license
fees.
The net cash used in discontinued operations in fiscal 2001 includes a
payment of $0.3 million to settle a dispute relating to the May 1998 sale of
Adra Systems, Inc., our legacy design and manufacturing software business.
Net cash used in investing activities was $6.6 million for fiscal 2002 and
reflects our investments in leasehold improvements, computer hardware and
software and office furniture and equipment. Net cash used in investing
activities was $11.2 million for fiscal 2001 and includes our investments in
computer hardware, computer software and other technology, leasehold
improvements and office equipment, and a $1.9 million security deposit for our
new corporate offices and customer success center, offset in part by the
collection of notes receivable from stockholders. We expect that capital
expenditures for the next 12 months will be approximately $7.0 million,
primarily for the acquisition of computer hardware, computer software and other
technology.
28
Net cash provided by financing activities was $2.2 million and $4.1 million
for fiscal 2002 and fiscal 2001, respectively, and consisted of the proceeds
from stock option exercises and purchases of common stock under our employee
stock purchase plan.
Our principal source of liquidity is our current cash and cash equivalents
and the cash generated from our operations. Our ability to generate cash from
operations is dependent upon our ability to generate revenue from licensing our
software and providing related services, as well as our ability to manage our
operating costs. A decrease in the demand for our software and related services
or unanticipated increases in our operating costs would likely have an adverse
effect on cash generated from operations. During fiscal 2002, our cash and
equivalents decreased primarily due to our loss from operations and cash
payments related to our restructuring program. We currently expect to incur
losses from operations for fiscal 2003. Accordingly, we expect our liquidity to
continue to decrease in fiscal 2003.
We currently anticipate that our current cash and equivalents and available
credit facilities will be sufficient to fund our anticipated cash requirements
for working capital and capital expenditures for at least the next 12 months.
However, we may need to raise additional funds in order to fund a more rapid
expansion of our business, develop new products, enhance existing products and
services, or acquire complementary products, businesses or technologies. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders may be reduced, our
stockholders may experience additional dilution, and such securities may have
rights, preferences or privileges senior to those of our stockholders.
Additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our expansion, take advantage of unanticipated opportunities
or develop or enhance our services or products would be significantly limited.
Commitments and Contractual Obligations
Our commitments and contractual obligations primarily consist of operating
leases for facilities, automobiles and office equipment and product development
agreements under which we pay software license fees to third parties for
development or assistance in development of certain application and integration
software. Our commitments and contractual obligations consisted of the following
as of June 29, 2002:
Fiscal
-----------------------------------
Commitment 2003 2004 2005 Thereafter
---------------------------------------- --------- --------- --------- ----------
Leases.................................. $ 4.8 $ 4.0 $ 3.0 $ 11.0
Development agreements.................. 1.2 -- -- --
--------- --------- --------- ----------
$ 6.0 $ 4.0 $ 3.0 $ 11.0
========= ========= ========= ==========
Recently Issued Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
addresses the accounting and reporting for the impairment of long-lived assets
and for long-lived assets to be disposed of. We will be required to adopt SFAS
144 no later than the fiscal year beginning on June 30, 2002. We do not expect
the adoption of SFAS 144 to have a material effect on our financial condition or
results of operations.
29
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS 146 addresses the accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." We will be required to adopt SFAS 146 for any exit or
disposal activities that are initiated after December 31, 2002. We are not
required to restate any of the components of the restructuring charges recorded
during fiscal 2002 as a result of the issuance of SFAS 146.
Income Taxes
As of June 29, 2002, we had net operating loss carryforwards in the United
States of $106.1 million, which include deductions of approximately $83.7
million related to the exercise of stock options, and research and development
tax credit carryforwards in the United States of $0.3 million. These net
operating loss and tax credit carryforwards will expire in varying amounts
commencing in fiscal 2003 through fiscal 2022, if not utilized. The Tax Reform
Act of 1986 imposes substantial restrictions on the utilization of net operating
loss and tax credit carryforwards in the event of an ownership change of a
corporation. Our ability to utilize net operating loss and tax credit
carryforwards on an annual basis could be limited as a result of an ownership
change as defined by Section 382 of the Internal Revenue Code. We have completed
several financings and believe that we have incurred ownership changes, which we
do not believe will have a material impact on our ability to utilize our net
operating loss and tax credit carryforwards.
As of June 29, 2002, we also had net operating loss carryforwards in
various countries in which our subsidiaries operate aggregating $26.8 million,
which include deductions of approximately $11.9 million related to the exercise
of stock options. Certain of these net operating loss carryforwards will expire
in varying amounts commencing in fiscal 2003 through fiscal 2007, if not
utilized.
Because of the uncertainty regarding our ability to use our United States
and foreign net operating losses and tax credit carryforwards, we have provided
a full valuation allowance on these and all other deferred tax assets as of June
29, 2002.
30
Cautionary Statements
This Annual Report on Form 10-K contains forward-looking statements within
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties. Our actual results could differ
materially from those anticipated or projected in these forward-looking
statements as a result of certain factors, including those set forth in the
following cautionary statements and elsewhere in this Annual Report on Form
10-K. If any of the following risks were to occur, our business, financial
condition or results of operations would likely suffer. In that event, the
trading price of our common stock would decline. Any forward-looking statements
should be considered in light of the factors discussed below.
We Have a History of Losses, Expect to Incur Losses in the Future and May
Not Achieve or Maintain Profitability
We have incurred substantial net losses in the past, and we expect to incur
net losses in future periods. For fiscal 2002, we incurred a net loss of
approximately $28.7 million, and in fiscal 2000, we incurred a net loss of
approximately $6.5 million. As of June 29, 2002, we had an accumulated deficit
of approximately $58.7 million. We will need to generate significant increases
in revenues to achieve and maintain profitability, and we may not be able to do
so. If our revenues grow more slowly than we anticipate or if our operating
expenses increase more than we expect or cannot be reduced in the event of lower
revenues, our business will be significantly and adversely affected. Although we
implemented a restructuring program in October 2001 to better align our
operations and cost structure with market conditions, this program may not be
sufficient for us to achieve profitability in any future period. Even if we
achieve profitability in the future on a quarterly or annual basis, we may not
be able to sustain or increase profitability. Failure to achieve profitability
or achieve and sustain the level of profitability expected by investors and
securities analysts may adversely affect the market price of our common stock.
The Weak Worldwide Economic Conditions and Computer Software Market May
Result in Decreased Revenues and Operating Losses
The revenue growth and profitability of our business depends on the overall
demand for computer software and services, particularly in the market segments
in which we compete. Because our sales are primarily to major corporations, our
business also depends on general economic and business conditions. A softening
of demand for computer software and services caused by the current weak global
economy may result in decreased revenues and operating losses. In this weak
economy, we may not be able to effectively promote future growth in our software
and services revenues, achieve the revenue levels expected by investors and
securities analysts in any given period or achieve profitability.
31
Our Quarterly Revenues and Operating Results Are Likely to Fluctuate and if
We Fail to Meet the Expectations of Securities Analysts or Investors, Our
Stock Price Could Decline
Our quarterly revenues and operating results are difficult to predict, have
varied significantly in the past and are likely to fluctuate significantly in
the future. We typically realize a significant percentage of our revenues for a
fiscal quarter in the second half of the third month of the quarter.
Accordingly, our quarterly results may be difficult or impossible to predict
prior to the end of the quarter. Any inability to obtain sufficient orders or to
fulfill shipments in the period immediately preceding the end of any particular
quarter may cause the results for that quarter to fall short of our revenues
targets. Any disruption in our ability to conduct our business which occurs,
especially in the third month of a quarter as was the case in the first quarter
of fiscal 2002 due to the events of September 11, 2001, will likely have a
material adverse effect on our operating results for that quarter. In addition,
we base our current and future expense levels in part on our estimates of future
revenues. Our expenses are largely fixed in the short term. We may not be able
to adjust our spending quickly if our revenues fall short of our expectations.
Accordingly, a revenues shortfall in a particular quarter would have an adverse
effect on our operating results for that quarter.
In addition, our quarterly operating results may fluctuate for many
reasons, including, without limitation:
o changes in demand for our products and services, including seasonal
differences;
o changes in the mix of our software licensing and services revenues;
o changes in the mix of domestic and international revenues;
o variability in the mix of professional services performed by us and
systems integrators;
o the amount of royalty payments due to third-parties on our application
and integration software products; and
o the amount of training we provide to systems integrators and alliance
partners related to our products and their implementation.
For these reasons, you should not rely on period-to-period comparisons of
our financial results to forecast our future performance. It is likely that in
some future quarter or quarters our operating results will be below the
expectations of securities analysts or investors. If a shortfall in revenues
occurs, the market price of our common stock may decline significantly.
32
Our Lengthy and Variable Sales Cycle Makes it Difficult for Us to Predict
When or if Sales Will Occur and Therefore We May Experience an Unplanned
Shortfall in Revenues
Our products have a lengthy and unpredictable sales cycle that contributes
to the uncertainty of our operating results. Customers view the purchase of our
software as a significant and strategic decision. As a result, customers
generally evaluate our software products and determine their impact on existing
infrastructure over a lengthy period of time. Our sales cycle has historically
ranged from approximately one to nine months based on the customer's need to
rapidly implement a solution and whether the customer is new or is extending an
existing implementation. The license of our software products may be subject to
delays if the customer has lengthy internal budgeting, approval and evaluation
processes. We may incur significant selling and marketing expenses during a
customer's evaluation period, including the costs of developing a full proposal
and completing a rapid proof of concept or custom demonstration, before the
customer places an order with us. Customers may also initially purchase a
limited number of licenses before expanding their implementations. Larger
customers may purchase our software products as part of multiple simultaneous
purchasing decisions, which may result in additional unplanned administrative
processing and other delays in the recognition of our license revenues. If
revenues forecasted from a specific customer for a particular quarter are not
realized or are delayed to another quarter, we may experience an unplanned
shortfall in revenues, which could significantly and adversely affect our
operating results.
We May Not Achieve Our Anticipated Revenues if Large Software and Service
Orders Expected in a Quarter Are Not Placed or Are Delayed
Although we license our software to numerous customers in any quarter, a
single customer often represents more than 10% of our quarterly revenues. We
expect that revenues from large orders will continue to account for a large
percentage of our total revenues in future quarters. A customer may determine to
increase its number of licenses and expand its implementation of our software
throughout its organization and to its customers, suppliers and other business
partners only after a successful initial implementation. Therefore, the timing
of these large orders is often unpredictable. If any large order anticipated for
a particular quarter is not realized, delayed to another quarter or
significantly reduced, we may experience an unplanned shortfall in revenues,
which could significantly and adversely affect our operating results and prevent
us from achieving the revenue levels expected by investors and securities
analysts in any given period.
If Our Existing Customers Do Not License Additional Software Products From
Us, We May Not Achieve Growth in Our Revenues
Our customers' initial implementations of our software often include a
limited number of licenses. Customers may subsequently add licenses as they
expand the implementations of our products throughout their enterprises or add
software applications designed for specific functions. Therefore, it is
important that our customers are satisfied with their initial product
implementations. If we do not increase licenses to existing customers, we may
not be able to achieve growth in our revenues.
33
Our Future Success Is Uncertain Because We Have Significantly Changed Our
Product Line
We shipped the first application within our Value Chain Portfolio of
applications in October 2000, and we recently began to offer three targeted PLM
solutions. Our strategy is to develop new applications for use in product
lifecycle management and to combine them with our eMatrix product collaboration
platform, MatrixOne AEF and enterprise interoperability products to create PLM
solutions. Our new business focus and strategy may not be successful. In
addition, because we have only recently begun to focus our business on the
development, license and marketing of our application software and PLM
solutions, we may have limited insight into trends that may emerge and affect
our business. We face the many challenges, risks and difficulties frequently
encountered by companies transitioning to a new product line and using a new
business strategy in a rapidly evolving market. If we are unable to successfully
implement our business strategy, our operating results will suffer.
We May Not Achieve Anticipated Revenues if Market Acceptance of Our
Software Does Not Continue
We believe that revenues from licenses of our software, together with
revenues from related professional services, training and maintenance and
customer support services, will account for substantially all of our revenues
for the foreseeable future. Our future financial performance will depend on
market acceptance of our software, including our application and integration
products, and any upgrades or enhancements that we may make to our products in
the future. As a result, if our software does not achieve and maintain
widespread market acceptance, we may not achieve anticipated revenues. In
addition, if our competitors release new products that are superior to our
software, demand for our products may not accelerate and could decline. If we
are unable to increase the number and scope of our integration and application
products or ship or implement any upgrades or enhancements to our products when
planned, or if the introduction of upgrades or enhancements causes customers to
defer orders for our existing products, we also may not achieve anticipated
revenues.
The Market for Our PLM Software Is Newly Emerging and Rapidly Changing and
Demand for PLM Software May Not Evolve and Could Decline
The market for PLM software is rapidly changing. We cannot be certain that
this market will continue to develop and grow or that companies will choose to
use our products rather than attempting to develop alternative platforms and
applications internally or through other sources. If we fail to establish a
significant base of customer references, our ability to market and license our
products successfully may be reduced. Companies that have already invested
substantial resources in other methods of sharing information during the design,
manufacturing and supply process may be reluctant to adopt new technology or
infrastructures that may replace, limit or compete with their existing systems
or methods. We expect that we will continue to need to pursue intensive
marketing and selling efforts to educate prospective customers about the uses
and benefits of our products. Therefore, demand for and market acceptance of our
software products is subject to a high level of uncertainty.
34
If We Are Not Successful in Developing New Products and Services that Keep
Pace with Technology, Our Operating Results Will Suffer
The market for our software is characterized by rapid technological
advances, changing customer needs and evolving industry standards. Accordingly,
to realize our expectations regarding our operating results, we depend on our
ability to:
o develop, in a timely manner, new software products and services that
keep pace with developments in technology;
o meet evolving customer requirements; and
o enhance our current product and service offerings and deliver those
products and services through appropriate distribution channels.
We may not be successful in developing and marketing, on a timely and
cost-effective basis, either enhancements to our products or new products that
respond to technological advances and satisfy increasingly sophisticated
customer needs. If we fail to introduce new products, our operating results will
suffer. In addition, if new industry standards emerge that we do not anticipate
or adapt to, our software products could be rendered obsolete and our business
could be materially harmed.
Due to the Weak Global Economy, our Customers May Experience Financial
Difficulties and May Represent a Credit Risk
Due to the weak global economy and the uncertainty relating to the
prospects for near-term global economic growth, some of our customers may
experience financial difficulties and may represent a credit risk to us. If our
customers, especially those with limited operating histories and limited access
to capital, experience financial difficulties or fail to experience commercial
success, we may have difficulty collecting our accounts receivable.
We Will Not Succeed Unless We Can Compete in Our Markets
The markets in which we offer our software and services are intensely
competitive and rapidly changing. Furthermore, we expect competition to
intensify, given the newly emerging nature of the market for PLM software and
consolidation in the software industry in general. We will not succeed if we
cannot compete effectively in these markets. Competitors vary in size and in the
scope and breadth of the products and services they offer. Many of our actual or
potential competitors have significant advantages over us, including, without
limitation:
o larger and more established selling and marketing capabilities;
o significantly greater financial and engineering personnel and other
resources;
o greater name recognition and a larger installed base of customers; and
o well-established relationships with our existing and potential
customers, systems integrators, complementary technology vendors and
alliance partners.
35
As a result, our competitors may be in a stronger position to respond
quickly to new or emerging technologies and changes in customer requirements.
Our competitors may also be able to devote greater resources to the development,
promotion and sale of their products and services than we can. Accordingly, we
may not be able to maintain or expand our revenues if competition increases and
we are unable to respond effectively.
As competition in the PLM software market intensifies, new solutions will
come to market. Our competitors may package their products in a manner that may
discourage customers from licensing our software. Also, current and potential
competitors may establish cooperative relationships among themselves or with
third parties or adopt aggressive pricing policies to gain market share.
Consolidation in the industry also results in larger competitors that may have
significant combined resources with which to compete against us. Increased
competition could result in reductions in price and revenues, lower profit
margins, loss of customers and loss of market share. Any one of these factors
could materially and adversely affect our business and operating results.
Our Revenues Could Decline if We Do Not Develop and Maintain Successful
Relationships with Systems Integrators and Complementary Technology Vendors
We pursue business alliances with systems integrators and complementary
technology vendors to endorse our software, implement our software, provide
customer support services, promote and resell products that integrate with our
products and develop industry-specific software products. These alliances
provide an opportunity to license our products to our alliance partners'
installed customer bases. In many cases, these parties have established
relationships with our existing and potential customers and can influence the
decisions of these customers. We rely upon these companies for recommendations
of our products during the evaluation stage of the purchasing process, as well
as for implementation and customer support services. A number of our competitors
have strong relationships with these systems integrators and complementary
technology vendors who, as a result, may be more likely to recommend our
competitors' products and services. In addition, some of our competitors have
relationships with a greater number of these systems integrators and
complementary technology vendors and, therefore, have access to a broader base
of enterprise customers. If we are unable to establish, maintain and strengthen
these relationships, we will have to devote substantially more resources to the
selling and marketing, implementation and support of our products. Our efforts
may not be as effective as these systems integrators and complementary
technology vendors, which could significantly harm our operating results.
36
Our International Operations and Planned Expansion Expose Us to Business
Risks Which Could Cause Our Operating Results to Suffer
Our operations outside North America accounted for approximately 33.9%,
26.9% and 38.5% of our total revenues for fiscal 2002, 2001 and 2000,
respectively. Export sales from the United States accounted for approximately
3.5%, 3.9% and 9.6% of our total revenues for fiscal 2002, 2001 and 2000,
respectively. Many of our customers have operations in numerous locations around
the globe. In order to attract, retain and service multi-national customers, we
have to maintain strong direct and indirect sales and support organizations in
Europe and Asia/Pacific. Our ability to penetrate international markets may be
impaired by resource constraints and our ability to hire qualified personnel in
foreign countries. We face a number of risks associated with conducting business
internationally, which could negatively impact our operating results, including,
without limitation:
o difficulties relating to the management, administration and staffing
of a globally-dispersed business;
o longer sales cycles associated with educating foreign customers on the
benefits of our products and services;
o longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
o difficulties in providing customer support for our products in
multiple time zones;
o currency fluctuations and exchange rates;
o limitations on repatriation of earnings of our foreign operations;
o the burdens of complying with a wide variety of foreign laws;
o reductions in business activity during the summer months in Europe and
certain other parts of the world;
o multiple and possibly overlapping tax structures;
o negative tax consequences such as withholding taxes and employer
payroll taxes;
o language barriers;
o the need to consider numerous international product characteristics;
o different accounting practices;
o import/export duties and tariffs, quotas and controls;
o complex and inflexible employment laws;
o economic or political instability in some international markets; and
o conflicting international business practices.
37
We believe that expansion of our international operations will be necessary
for our future success. Therefore, a key aspect of our strategy is to continue
to expand our presence in foreign markets. We may not succeed in our efforts to
enter new international markets and expand our international operations. If we
fail to do so, we may not be able to achieve growth in our revenues. This
international expansion may be more difficult or time-consuming than we
anticipate. It is also costly to establish international facilities and
operations and promote our products internationally. Thus, if revenues from
international activities do not offset the expenses of establishing and
maintaining foreign operations, our operating results will suffer.
Future Acquisitions May Negatively Affect Our Ongoing Business Operations
and Our Operating Results
We may expand our operations or market presence by acquiring or investing
in complementary businesses, products or technologies that complement our
business, increase our market coverage, enhance our technical capabilities or
otherwise offer opportunities for growth. These transactions create risks such
as:
o difficulty assimilating the operations, technology, products and
personnel we acquire;
o disruption of our ongoing business;
o diversion of management's attention from other business concerns;
o one-time charges and expenses associated with amortization of
purchased intangible assets; and
o potential dilution to our stockholders.
Our inability to address these risks could negatively impact our operating
results. Moreover, any future acquisitions, even if successfully completed, may
not generate any additional revenues or provide any benefit to our business.
We Depend on Licensed Third-Party Technology, the Loss of Which Could
Result in Increased Costs of or Delays in Licensing Our Products
We license technology from several companies on a non-exclusive basis that
is integrated into many of our products. We also license certain application and
integration products from third parties. We anticipate that we will continue to
license technology from third parties in the future. This software may not
continue to be available on commercially reasonable terms, or at all. Some of
the software we license from third parties would be difficult and time-consuming
to replace. The loss of any of these technology licenses could result in delays
in the licensing of our products until equivalent technology, if available, is
identified, licensed and integrated. In addition, the effective implementation
of our products may depend upon the successful operation of third-party licensed
products in conjunction with our products, and therefore any undetected errors
in these licensed products may prevent the implementation or impair the
functionality of our products, delay new product introductions or injure our
reputation.
38
If Systems Integrators Are Not Available or Fail to Perform Adequately, Our
Customers May Suffer Implementation Delays and a Lower Quality of Customer
Service, and We May Incur Increased Expenses
Systems integrators often are retained by our customers to implement our
products. If experienced systems integrators are not available to implement our
products, we will be required to provide these services internally, and we may
not have sufficient resources to meet our customers' implementation needs on a
timely basis. Use of our professional services personnel to implement our
products would also increase our expenses. In addition, we cannot control the
level and quality of service provided by our current and future implementation
partners. If these systems integrators do not perform to the satisfaction of our
customers, our customers could become dissatisfied with our products, which
could adversely affect our business and operating results.
We May Not Be Able to Increase Revenues if We Do Not Expand Our Sales and
Distribution Channels
We will need to expand our direct and indirect global sales operations in
order to increase market awareness and acceptance of our software and generate
increased revenues. We market and license our products directly through our
sales organization and indirectly through our global alliance partner and
distributor network. Our ability to increase our global direct sales
organization will depend on our ability to recruit, train and retain sales
personnel with advanced sales skills and technical knowledge. Competition for
qualified sales personnel is intense in our industry. In addition, it may take
up to nine months for a new sales person to become fully productive. If we are
unable to hire or retain qualified sales personnel, or if newly hired sales
personnel fail to develop the necessary skills or reach productivity more slowly
than anticipated, we may have difficulty licensing our products, and we may
experience a shortfall in anticipated revenues.
In addition, we believe that our future success is dependent upon expansion
of our indirect global distribution channel, which consists of our relationships
with a variety of systems integrators, complementary technology vendors and
distributors. We cannot be certain that we will be able to maintain our current
relationships or establish relationships with additional distribution partners
on a timely basis, or at all. Our distribution partners may not devote adequate
resources to promoting or selling our products and may not be successful. In
addition, we may also face potential conflicts between our direct sales force
and third-party reselling efforts. Any failure to expand our indirect global
distribution channel or increase the productivity of this distribution channel
could result in lower than anticipated revenues.
We Depend on Our Key Personnel to Manage Our Business Effectively, and if
We Are Unable to Retain Key Personnel, Our Ability to Compete Could Be
Harmed
Our ability to implement our business strategy and our future success
depends largely on the continued services of our executive officers and other
key engineering, sales, marketing and support personnel who have critical
industry or customer experience and relationships. None of our key personnel,
other than Mark F. O'Connell, our President and Chief Executive Officer, is
bound by an employment agreement. We do not have key-man life insurance on any
of our employees. The loss of the technical knowledge and management and
industry expertise of any of these key personnel could result in delays in
product development, loss of customers and sales and diversion of management
resources, which could materially and adversely affect our operating results. In
addition, our future performance depends upon our ability to attract and retain
highly qualified sales, engineering, marketing, services and managerial
personnel, and there is intense competition for such personnel. If we do not
succeed in retaining our personnel or in attracting new employees, our business
could suffer significantly.
39
If We Are Unable to Obtain Additional Capital as Needed in the Future, Our
Business May Be Adversely Affected and the Market Price for Our Common
Stock Could Significantly Decline
We have been unable to fund our operations using cash generated from our
business operations and have financed our operations principally through the
sale of securities. We may need to raise additional debt or equity capital to
fund the expansion of our operations, to enhance our products and services, or
to acquire or invest in complementary products, services, businesses or
technologies. If we raise additional funds through further issuances of equity
or convertible debt securities, our existing stockholders could suffer
significant dilution, and any new equity securities we issue could have rights,
preferences and privileges superior to those of holders of our common stock. In
addition, we may not be able to obtain additional financing on terms favorable
to us, if at all. If adequate funds are not available on terms favorable to us,
our business may be adversely affected and the market price for our common stock
could significantly decline.
Our Products May Contain Defects that Could Harm Our Reputation, Be Costly
to Correct, Delay Revenues and Expose Us to Litigation
Despite testing by us, our alliance partners and our customers, errors may
be found in our products after commencement of commercial shipments. We and our
customers have from time to time discovered errors in our software products. In
the future, there may be additional errors and defects in our software. If
errors are discovered, we may not be able to successfully correct them in a
timely manner or at all. Errors and failures in our products could result in
loss of or delay in market acceptance of our products and damage to our
reputation and our ability to convince commercial users of the benefits of our
products. In addition, we may need to make significant expenditures of capital
resources in order to eliminate errors and failures. Since our products are used
by customers for mission-critical applications, errors, defects or other
performance problems could also result in financial or other damages to our
customers, who could assert warranty and other claims for substantial damages
against us. Although our license agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability claims,
it is possible that such provisions may not be effective or enforceable under
the laws of certain jurisdictions. In addition, our insurance policies may not
adequately limit our exposure with respect to such claims. A product liability
claim, even if unsuccessful, would be costly and time-consuming to defend and
could harm our business.
40
Our Business May be Adversely Affected by Securities Class Action
Litigation
On April 19, 2002, a consolidated amended complaint was filed in the United
States District Court for the Southern District of New York. The complaint,
which supersedes five virtually identical complaints that had been filed from
July 24, 2001 to September 5, 2001, names as defendants the Company, two of our
officers, and certain underwriters involved in our initial public offering of
common stock ("IPO"). The complaint is allegedly brought on behalf of purchasers
of our common stock during the period from February 29, 2000 to December 6, 2000
and asserts, among other things, that our IPO prospectus and registration
statement violated federal securities laws because they contained material
misrepresentations and/or omissions regarding the conduct of our IPO
underwriters in allocating shares in our IPO to the underwriters' customers, and
that the Company and the two named officers engaged in fraudulent practices with
respect to this underwriters' conduct. The action seeks damages, fees and costs
associated with the litigation, and interest. We understand that various
plaintiffs have filed substantially similar lawsuits against over three hundred
other publicly traded companies in connection with the underwriting of their
initial public offerings. We and our officers and directors believe that the
allegations in the complaint are without merit and intend to contest them
vigorously. The litigation process is inherently uncertain and unpredictable,
however, and there can be no guarantee as to the ultimate outcome of this
pending lawsuit. Even if successfully defended, this lawsuit could result in
significant expense to us and the diversion of our management and technical
resources, which may have a material adverse effect on our operating results.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the price of its
securities. Due to the volatility of our stock price, we may be the target of
securities litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources from our
business, which could have a material adverse effect on our business and
operating results.
Failure to Protect Our Intellectual Property Could Harm Our Name
Recognition Efforts and Ability to Compete Effectively
Currently, we rely on a combination of trademarks, copyrights and common
law safeguards, including trade secret protection to protect our intellectual
property rights. To protect our intellectual property rights in the future, we
intend to rely on a combination of patents, trademarks, copyrights and common
law safeguards, including trade secret protection. We also rely on restrictions
on use, confidentiality and nondisclosure agreements and other contractual
arrangements with our employees, affiliates, customers, alliance partners and
others. The protective steps we have taken may be inadequate to deter
misappropriation of our intellectual property and proprietary information. A
third party could obtain our proprietary information or develop products or
technology competitive with ours. We may be unable to detect the unauthorized
use of, or take appropriate steps to enforce, our intellectual property rights.
We have registered some of our trademarks in the United States and abroad and
have other trademark and patent applications pending or in preparation.
Effective patent, trademark, copyright and trade secret protection may not be
available in every country in which we offer or intend to offer our products and
services to the same extent as in the United States. Failure to adequately
protect our intellectual property could harm or even destroy our brands and
impair our ability to compete effectively. Further, enforcing our intellectual
property rights could result in the expenditure of significant financial and
managerial resources and may not prove successful.
41
We Could Incur Substantial Costs Defending Our Intellectual Property from
Claims of Infringement
The software industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. We may be subject to
future litigation based on claims that our products infringe the intellectual
property rights of others or that our own intellectual property rights are
invalid. We expect that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in our industry
grows and the functionality of products overlaps. Claims of infringement could
require us to reengineer or rename our products or seek to obtain licenses from
third parties in order to continue offering our products. Licensing or royalty
agreements, if required, may not be available on terms acceptable to us or at
all. Even if successfully defended, claims of infringement could also result in
significant expense to us and the diversion of our management and technical
resources.
Our Stock Price Has Been and May Continue to be Volatile Which May Lead to
Losses by Stockholders
The trading price of our common stock has been highly volatile and has
fluctuated significantly in the past. During fiscal 2002, our stock price has
fluctuated between a low bid price of $4.00 per share and a high bid price of
$21.76 per share. During fiscal 2001, our stock price fluctuated between a low
bid price of $6.75 per share and a high bid price of $49.00 per share. We
believe that the price of our common stock may continue to fluctuate
significantly in the future in response to a number of events and factors
relating to our company, our competitors, the market for our products and
services and the global economy, many of which are beyond our control, such as:
o variations in our quarterly operating results;
o changes in financial estimates and recommendations by securities
analysts;
o changes in market valuations of software companies;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o loss of a major customer or failure to complete significant business
transactions;
o additions or departures of key personnel;
o sales of a substantial number of shares of our common stock in the
public market by existing shareholders;
o sales of common stock or other securities by us in the future; and
o news relating to trends in our markets.
In addition, the stock market in general, and the market for technology
companies in particular, has experienced extreme volatility. This volatility has
often been unrelated to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the market price of
our common stock, regardless of our operating performance.
42
Anti-Takeover Provisions in Our Organizational Documents and Delaware Law
Could Prevent or Delay a Change in Control of Our Company
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that stockholders may
consider favorable. These provisions may also prevent changes in our management.
These provisions include, without limitation:
o authorizing the issuance of undesignated preferred stock;
o providing for a classified board of directors with staggered,
three-year terms;
o requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
Certain provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us.
43
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
We have international offices in Canada, England, France, Germany, Italy,
Japan, Korea, Singapore, Taiwan and the Netherlands. At June 29, 2002 and June
30, 2001, approximately 27.8% and 18.8%, respectively, of our total assets were
located at our international subsidiaries. Approximately 33.9%, 26.9% and 38.5%
of our total revenues for fiscal 2002, 2001 and 2000, respectively, were from
our operations outside North America. In addition, approximately 23.7%, 24.8%
and 25.4% of our expenses for fiscal 2002, 2001 and 2000, respectively, were
from our operations outside the United States. These subsidiaries transact
business in both local and foreign currency. Therefore, we are exposed to
foreign currency exchange risks and fluctuations in foreign currencies, along
with economic and political instability in the foreign countries in which we
operate, all of which could adversely impact our results of operations and
financial condition.
We use forward contracts to reduce our exposure to foreign currency risk
and variability in operating results due to fluctuations in exchange rates
underlying the value of accounts receivable and accounts payable and
intercompany accounts receivable and intercompany accounts payable denominated
in foreign currencies held until such receivables are collected and payables are
disbursed. A forward contract obligates us to exchange predetermined amounts of
specified foreign currencies at specified exchange rates on specified dates.
These forward contracts are denominated in the same currency in which the
underlying foreign currency receivables or payables are denominated and bear a
contract value and maturity date that approximate the value and expected
settlement date, respectively, of the underlying transactions. Unrealized gains
and losses on open contracts at the end of each accounting period, resulting
from changes in the fair value of these contracts, are recognized in earnings in
the same period as gains and losses on the underlying foreign denominated
receivables or payables are recognized and generally offset. Gains and losses on
forward contracts and foreign denominated receivables and payables are included
in other income (expense), net.
We do not enter into or hold derivatives for trading or speculative
purposes, and we only enter into forward contracts with highly rated financial
institutions. At June 29, 2002, we had two forward contracts outstanding, which
are presented in the table below. The notional exchange rate is quoted using
market conventions where the currency is expressed in currency units per U.S.
dollar.
Notional Fair Market
Maturity Notional Exchange Value as of
Currency Position Date Amount Rate June 29, 2002
- ------------------ ------------ ------------- -------------- ---------------- ------------------
Euro Purchase 7/17/02 4,709,940 1.131 $4,650,124
Euro Sell 7/17/02 4,709,940 1.061 $4,650,124
We plan to increase our use of forward contracts and other instruments in
the future to reduce our exposure to exchange rate fluctuations from accounts
receivable and accounts payable and intercompany accounts receivable and
intercompany accounts payable denominated in foreign currencies, and we may not
be able to do this successfully. Accordingly, we may experience economic loss
and a negative impact on earnings and equity as a result of foreign currency
exchange rate fluctuations. Also, as we continue to expand our operations
outside of the United States, our exposure to fluctuations in currency exchange
rates could increase.
44
We deposit our cash in highly rated financial institutions in North
America, Europe and Asia/Pacific. We invest in diversified United States and
international money market mutual funds and United States Treasury and agency
securities. At June 29, 2002, we had $113.4 million, $0.6 million, $13.7 million
and $2.6 million invested in the United States, Canada, Continental Europe and
England, respectively. Due to the short-term nature of our investments, we
believe we have minimal market risk.
Our investments are subject to interest rate risk. All of our investments
have remaining maturities of three months or less. If these short-term assets
were reinvested in a declining interest rate environment, we would experience an
immediate negative impact on other income. The opposite holds true in a rising
interest rate environment. Since January 1, 2001, the United States Federal
Reserve Board, European Central Bank and Bank of England have significantly
decreased certain benchmark interest rates, which has led to a general decline
in market interest rates. This decline in market interest rates has resulted in
a significant decrease in our interest income.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and the related notes
thereto of MatrixOne, Inc. and the Report of Independent Auditors and Report of
Independent Public Accountants thereon are filed as a part of this Annual Report
on Form 10-K:
Page
----
Report of Independent Auditors ..................................... 46
Report of Independent Public Accountants ........................... 47
Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001 .. 48
Consolidated Statements of Operations for the years ended
June 29, 2002, June 30, 2001 and July 1, 2000 ...................... 49
Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit) for the years ended
June 29, 2002, June 30, 2001 and July 1, 2000 ...................... 50
Consolidated Statements of Cash Flows for the years ended June 29,
2002, June 30, 2001 and July 1, 2000 ............................... 51
Notes to Consolidated Financial Statements ......................... 52
45
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of MatrixOne, Inc.:
We have audited the accompanying consolidated balance sheet of MatrixOne,
Inc. as of June 29, 2002 and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit) and
cash flows for the year ended June 29, 2002. Our audit also included the
financial statement schedule for the year ended June 29, 2002 listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit. The
financial statements of MatrixOne, Inc. as of June 30, 2001 and July 1, 2000 and
for the two years ended June 29, 2001 were audited by other auditors who have
ceased operations and whose report dated July 26, 2001 expressed an unqualified
opinion on those statements
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MatrixOne, Inc. at June 29,
2002 and the results of its operations and its cash flows for the year ended
June 29, 2002, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements takes as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 26, 2002, except for Note 11,
as to which the date is September 9, 2002
46
This is a copy of the audit report previously issued by Arthur Andersen LLP
in connection with the financial statements of MatrixOne, Inc. as of June 30,
2001 and July 1, 2000 and the years then ended included in the Annual Report on
Form 10-K of MatrixOne, Inc. for the fiscal year ended June 30, 2001. This audit
report has not been reissued by Arthur Andersen LLP in connection with the
filing of this Annual Report on Form 10-K for the fiscal year ended June 29,
2002. The consolidated balance sheet as of July 1, 2000 and the consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for the year ended July 3, 1999
related to this audit report have not been included in the financial statements
in this Annual Report on Form 10-K for the fiscal year ended June 29, 2002. See
Exhibit 23.2 included in this Annual Report on Form 10-K for further discussion.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MatrixOne, Inc.:
We have audited the accompanying consolidated balance sheets of MatrixOne,
Inc. (a Delaware corporation) as of June 30, 2001 and July 1, 2000 and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for each of the three
years in the period ended June 30, 2001. These financial statements are the
responsibility of MatrixOne, Inc.'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. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of MatrixOne, Inc. and its
subsidiaries as of June 30, 2001 and July 1, 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
July 26, 2001
47
MATRIXONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 29, June 30,
2002 2001
---------- ---------
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................................................ $ 139,642 $156,349
Accounts receivable, less allowance for doubtful accounts of $2,371
and $1,387 ................................................................ 35,794 42,619
Prepaid expenses and other current assets ................................... 8,039 3,535
--------- ---------
Total current assets .................................................... 183,475 202,503
PROPERTY AND EQUIPMENT, NET ................................................... 14,784 12,291
OTHER ASSETS .................................................................. 2,689 2,832
--------- ---------
$ 200,948 $217,626
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 10,583 $ 9,966
Accrued expenses ............................................................ 20,663 21,125
Deferred revenue ............................................................ 20,612 17,219
--------- ---------
Total current liabilities ............................................... 51,858 48,310
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000 shares authorized, 0 shares
issued and outstanding ................................................... -- --
Common stock, $0.01 par value; 100,000 shares authorized; 47,030
and 45,194 shares issued and outstanding ................................. 470 452
Additional paid-in capital .................................................. 210,788 209,065
Deferred stock-based consideration .......................................... (3,898) (8,297)
Accumulated deficit ......................................................... (58,685) (29,980)
Accumulated other comprehensive income (loss) ............................... 415 (1,924)
--------- ---------
Total stockholders' equity .............................................. 149,090 169,316
--------- ---------
$ 200,948 $ 217,626
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
48
MATRIXONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
---------------------------------------
June 29, June 30, July 1,
2002 2001 2000
----------- ----------- -----------
REVENUES:
Software license ..................................................... $ 47,443 $ 84,290 $ 40,977
Service .............................................................. 74,020 61,100 35,474
----------- ----------- -----------
Total revenues .................................................... 121,463 145,390 76,451
----------- ----------- -----------
COST OF REVENUES:
Software license ..................................................... 5,927 8,212 4,424
Service(1) ........................................................... 54,478 45,737 28,123
----------- ----------- -----------
Total cost of revenues ............................................ 60,405 53,949 32,547
----------- ----------- -----------
Gross profit ...................................................... 61,058 91,441 43,904
----------- ----------- -----------
OPERATING EXPENSES:
Selling and marketing(1) ............................................. 48,166 56,273 35,765
Research and development(1) .......................................... 25,374 19,749 8,553
General and administrative(1) ........................................ 12,814 10,406 5,487
Stock-based compensation(1) .......................................... 3,910 4,142 3,593
Restructuring charges ................................................ 2,812 -- --
----------- ----------- -----------
Total operating expenses .......................................... 93,076 90,570 53,398
----------- ----------- -----------
Income (loss) from operations ..................................... (32,018) 871 (9,494)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income ...................................................... 3,557 9,120 3,180
Interest expense ..................................................... -- -- (46)
Other income (expense), net .......................................... (244) (180) (93)
----------- ----------- -----------
Total other income ................................................ 3,313 8,940 3,041
----------- ----------- -----------
Income (loss) from continuing operations before income taxes ...... (28,705) 9,811 (6,453)
PROVISION FOR INCOME TAXES .............................................. -- (1,465) --
----------- ----------- -----------
Income (loss) from continuing operations .......................... (28,705) 8,346 (6,453)
GAIN ON SALE OF DISCONTINUED OPERATIONS ................................. -- 500 --
----------- ----------- -----------
NET INCOME (LOSS) ....................................................... $ (28,705) $ 8,846 $ (6,453)
=========== =========== ===========
BASIC NET INCOME (LOSS) PER SHARE:
Continuing operations ................................................ $ (0.62) $ 0.19 $ (0.36)
Discontinued operations .............................................. -- 0.01 --
----------- ----------- -----------
Net income (loss) .................................................... $ (0.62) $ 0.20 $ (0.36)
=========== =========== ===========
Shares used in computing basic net income (loss) per share ........... 46,147 43,543 17,966
=========== =========== ===========
DILUTED NET INCOME (LOSS) PER SHARE:
Continuing operations ................................................ $ (0.62) $ 0.17 $ (0.36)
Discontinued operations .............................................. -- 0.01 --
----------- ----------- -----------
Net income (loss) .................................................... $ (0.62) $ 0.18 $ (0.36)
=========== =========== ===========
Shares used in computing diluted net income (loss) per share ......... 46,147 50,357 17,966
=========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------
(1) The following summarizes the allocation of stock-based compensation:
Cost of service revenues ........................................... $ 968 $ 999 $ 816
Selling and marketing .............................................. 1,136 1,263 1,154
Research and development ........................................... 789 801 708
General and administrative ......................................... 1,017 1,079 915
----------- ----------- -----------
Total stock-based compensation .................................. $ 3,910 $ 4,142 $ 3,593
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
49
MatrixOne, Inc.
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)
(In thousands)
Redeemable
Convertible Preferred
Preferred Stock Stock Common Stock
---------------------- ---------------------- ----------------------
Number Number Number Additional
of of of Paid-in
Shares Amount Shares Amount Shares Amount Capital
---------- ----------- ---------- ----------- ----------- ---------- -----------
BALANCE, JULY 3, 1999 .............................. 2,649 $ 17,015 3,393 $ 3,393 5,004 $ 50 $ 26,637
Comprehensive loss:
Foreign currency translation adjustments ......... -- -- -- -- -- -- --
Net loss ......................................... -- -- -- -- -- -- --
Comprehensive loss .................................
Stock option exercises ............................. -- -- -- -- 1,767 17 841
Conversion of preferred stock into common stock .... (2,649) (17,015) (3,393) (3,393) 26,763 268 20,140
Issuance of common stock, net of offering cost of
$11,987 .......................................... -- -- -- -- 6,200 62 142,163
Cashless exercise of warrant ....................... -- -- -- -- 168 2 (2)
Issuance of common stock in exchange for notes
receivable ....................................... -- -- -- -- 2,076 21 895
Repayment of notes receivable ...................... -- -- -- -- -- -- --
Deemed fair value of warrant issued to a customer .. -- -- -- -- -- -- 1,788
Amortization of warrant to reduce revenues ......... -- -- -- -- -- -- --
Deferred stock-based compensation .................. -- -- -- -- -- -- 13,574
Stock-based compensation ........................... -- -- -- -- -- -- --
Reversal of stock-based compensation from stock
option cancellations ............................. -- -- -- -- -- -- (692)
---------- ----------- ---------- ----------- ----------- ---------- -----------
BALANCE, JULY 1, 2000 .............................. -- -- -- -- 41,978 420 205,344
Comprehensive income:
Foreign currency translation adjustments ......... -- -- -- -- -- -- --
Net income ....................................... -- -- -- -- -- -- --
Comprehensive income ...............................
Stock option exercises ............................. -- -- -- -- 3,141 31 2,341
Purchases under employee stock purchase plan ....... -- -- -- -- 75 1 1,688
Repayment of notes receivable ...................... -- -- -- -- -- -- --
Amortization of warrant to reduce revenues ......... -- -- -- -- -- -- --
Stock-based compensation ........................... -- -- -- -- -- --
Reversal of stock-based compensation from stock
option cancellations ............................. -- -- -- -- -- -- (308)
---------- ----------- ---------- ----------- ----------- ---------- -----------
BALANCE, JUNE 30, 2001 ............................. -- -- -- -- 45,194 452 209,065
Comprehensive loss:
Foreign currency translation adjustments ......... -- -- -- -- -- -- --
Net loss ......................................... -- -- -- -- -- -- --
Comprehensive loss .................................
Stock option exercises ............................. -- -- -- -- 1,607 16 1,149
Purchases under employee stock purchase plan ....... -- -- -- -- 229 2 1,063
Stock-based compensation ........................... -- -- -- -- -- -- --
Reversal of stock-based compensation from stock
option cancellations ............................. -- -- -- -- -- -- (489)
---------- ----------- ---------- ----------- ----------- ---------- -----------
BALANCE, JUNE 29, 2002 ............................. -- $ -- -- $ -- 47,030 $ 470 $210,788
========== =========== ========== =========== =========== ========== ===========
Notes Accumulated Total
Receivable Deferred Other Stockholders'
from Stock-Based Accumulated Comprehensive Stockholders' Equity
Stockholder Consideration Deficit Income (Loss) Income (Loss) (Deficit)
----------- ------------- ------------ ------------- ------------- -----------
BALANCE, JULY 3, 1999 .............................. $ (117) $ (3,458) $(32,373) $ (174) $ (6,042)
Comprehensive loss:
Foreign currency translation adjustments ......... -- -- -- $ (345) (345) (345)
Net loss ......................................... -- -- (6,453) (6,453) -- (6,453)
-----------
Comprehensive loss ................................. $ ( 6,798)
===========
Stock option exercises ............................. -- -- -- -- 858
Conversion of preferred stock into common stock .... -- -- -- -- 17,015
Issuance of common stock, net of offering cost of
$11,987 .......................................... -- -- -- -- 142,225
Cashless exercise of warrant ....................... -- -- -- -- --
Issuance of common stock in exchange for notes
receivable ....................................... (916) -- -- -- --
Repayment of notes receivable ...................... 295 -- -- -- 295
Deemed fair value of warrant issued to a customer .. -- (1,788) -- -- --
Amortization of warrant to reduce revenues ......... -- 447 -- -- 447
Deferred stock-based compensation .................. -- (13,574) -- -- --
Stock-based compensation ........................... -- 3,593 -- -- 3,593
Reversal of stock-based compensation from stock
option cancellations ............................. -- 692 -- -- --
----------- ------------- ------------ ------------- -----------
BALANCE, JULY 1, 2000 .............................. (738) (14,088) (38,826) (519) 151,593
Comprehensive income:
Foreign currency translation adjustments ......... -- -- -- $ (1,405) (1,405) (1,405)
Net income ....................................... -- -- 8,846 8,846 -- 8,846
-------------
Comprehensive income ............................... $ 7,441
=============
Stock option exercises ............................. -- -- -- -- 2,372
Purchases under employee stock purchase plan ....... -- -- -- -- 1,689
Repayment of notes receivable ...................... 738 -- -- -- 738
Amortization of warrant to reduce revenues ......... -- 1,341 -- -- 1,341
Stock-based compensation ........................... -- 4,142 -- -- 4,142
Reversal of stock-based compensation from stock
option cancellations ............................. -- 308 -- -- --
----------- ------------- ------------ ------------- -----------
BALANCE, JUNE 30, 2001 ............................. -- (8,297) (29,980) (1,924) 169,316
Comprehensive loss:
Foreign currency translation adjustments ......... -- -- -- $ 2,339 2,339 2,339
Net loss ......................................... -- -- (28,705) (28,705) -- (28,705)
-------------
Comprehensive loss ................................. $ (26,366)
=============
Stock option exercises ............................. -- -- -- -- 1,165
Purchases under employee stock purchase plan ....... -- -- -- -- 1,065
Stock-based compensation ........................... -- 3,910 -- -- 3,910
Reversal of stock-based compensation from stock
option cancellations ............................. -- 489 -- -- --
----------- ------------- ------------ ------------- -----------
BALANCE, JUNE 29, 2002 ............................. $ -- $ (3,898) $(58,685) $ 415 $ 149,090
=========== ============= ============ ============= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
50
MATRIXONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
--------------------------------------
June 29, June 30, July 1,
2002 2001 2000
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ (28,705) $ 8,846 $(6,453)
Gain on sale of discontinued operations ................................... -- (500) --
--------- --------- --------
Net income (loss) from continuing operations .............................. (28,705) 8,346 (6,453)
Adjustments to reconcile net income (loss) from continuing operations to
net cash provided by (used in) continuing operations:
Depreciation .......................................................... 4,513 2,207 1,454
Stock-based consideration ............................................. 3,910 5,483 4,040
Provision for doubtful accounts ....................................... 1,351 667 404
Changes in assets and liabilities:
Accounts receivable ................................................. 7,279 (22,639) (7,336)
Prepaid expenses and other current assets ........................... (4,226) (994) (3,783)
Accounts payable .................................................... 382 3,217 2,050
Accrued expenses .................................................... (1,256) 7,763 9,300
Deferred revenue .................................................... 2,916 6,735 7,081
--------- --------- --------
Net cash provided by (used in) continuing operations ............. (13,836) 10,785 6,757
--------- --------- --------
Net cash used in discontinued operations ......................... -- (292) (340)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....................................... (6,820) (10,017) (3,139)
Other assets .............................................................. 171 (1,958) (898)
Collection of notes receivable ............................................ -- 738 295
--------- --------- --------
Net cash used in investing activities ............................ (6,649) (11,237) (3,742)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit ............................................. -- -- 2,263
Repayments of lines of credit ............................................. -- -- (5,313)
Proceeds from issuance of common stock, net ............................... -- -- 142,225
Proceeds from stock option exercises ...................................... 1,165 2,372 858
Proceeds from purchases of common stock under employee stock purchase
plan .................................................................... 1,065 1,689 --
--------- --------- --------
Net cash provided by financing activities ........................ 2,230 4,061 140,033
--------- --------- --------
EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS ............................. 1,548 (423) (289)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .............................. (16,707) 2,894 142,419
CASH AND EQUIVALENTS, BEGINNING OF YEAR ...................................... 156,349 153,455 11,036
--------- --------- --------
CASH AND EQUIVALENTS, END OF YEAR ............................................ $ 139,642 $ 156,349 $153,455
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest .................................................... $ -- $ -- $ 46
========= ========= ========
Cash paid for income taxes ................................................ $ 409 $ 289 $ --
========= ========= ========
NON-CASH FINANCING ACTIVITY:
Issuance of common stock in exchange for notes receivable from
stockholders ............................................................ $ -- $ -- $ 916
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
51
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1: Description of the Company and Summary of Significant Accounting
Policies
Description of the Company
MatrixOne, Inc. (the "Company") is a provider of collaborative product
lifecycle management ("PLM") solutions that enable companies from a broad range
of industries to accelerate product innovation and time-to-market by
collaboratively developing, building, and managing products. The Company
licenses its software both directly to end users and through a network of
domestic and international distributors. The Company generates its revenues from
licensing its software and providing professional services, training and
maintenance and customer support services. The Company has its headquarters in
the United States ("U.S."), with offices in Canada, England, France, Germany,
Italy, Japan, Korea, Singapore, Taiwan and the Netherlands and throughout the
U.S.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and judgments, which are evaluated on an on-going basis, that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Management bases its estimates on historical experience and on various other
assumptions that it believes are reasonable at that time under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates. In particular,
significant estimates and judgments include those related to revenue
recognition, allowance for doubtful accounts, valuation of prepaid software
license fees, useful lives of property and equipment, valuation of deferred tax
assets and professional services warranty.
Basis of Presentation and Principles of Consolidation
The Company operates on a 52-to-53 week fiscal year that ends on the
Saturday closest to June 30th. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Foreign Currency Translation and Transactions
The functional currency of each subsidiary is the local currency. Assets
and liabilities of foreign subsidiaries are translated at the rates in effect at
the balance sheet date, while stockholders' equity (deficit) is translated at
historical rates. Statements of operations and cash flow amounts are translated
at the average rate for the period. Translation adjustments are included as a
component of accumulated other comprehensive loss. During fiscal 2002, 2001 and
2000, realized and unrealized foreign currency transaction gains (losses)
aggregated $150, $225 and ($93), respectively, and were included in other income
(expense), net.
52
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Derivative Financial Instruments
The Company uses forward contracts to reduce its exposure to foreign
currency risk and variability in operating results due to fluctuations in
exchange rates underlying the value of accounts receivable and accounts payable
and intercompany accounts receivable and accounts payable denominated in foreign
currencies (primarily European and Asian currencies) until such receivables are
collected and payables are disbursed. A forward contract obligates the Company
to exchange predetermined amounts of specified foreign currencies at specified
exchange rates on specified dates. These foreign currency forward exchange
contracts are denominated in the same currency in which the underlying foreign
currency receivables or payables are denominated and bear a contract value and
maturity date that approximate the value and expected settlement date,
respectively, of the underlying transactions. The Company does not designate its
forward contracts as hedges and, accordingly, unrealized gains and losses on
open contracts at the end of each accounting period, resulting from changes in
the fair value of these contracts, are recognized in earnings in the same period
as gains and losses on the underlying foreign denominated receivables or
payables are recognized and generally offset. Gains and losses on forward
contracts and foreign denominated receivables and payables are included in other
income (expense), net. The Company does not enter into or hold derivatives for
trading or speculative purposes and only enters into contracts with highly rated
financial institutions.
At June 29, 2002, the Company had two forward contracts outstanding, which
are presented in the table below. The notional exchange rate is quoted using
market conventions where the currency is expressed in currency units per U.S.
dollar.
Notional Fair Market
Maturity Notional Exchange Value as of
Currency Position Date Amount Rate June 29, 2002
- ------------------ ------------ ------------- -------------- ---------------- ------------------
Euro Purchase 7/17/02 4,709,940 1.131 $4,650,124
Euro Sell 7/17/02 4,709,940 1.061 $4,650,124
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) as well as other
changes in stockholders' equity (deficit), except stockholders' investments and
distributions and deferred stock-based consideration.
Revenue Recognition
The Company generates revenues from licensing its software and providing
professional services, training and maintenance and customer support services.
The Company executes separate contracts that govern the terms and conditions of
each software license and maintenance arrangement and each professional services
arrangement. These contracts may be an element in a multiple-element
arrangement. Revenues under multiple-element arrangements, which may include
several different software products or services sold together, are allocated to
each element using the residual method.
53
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The Company uses the residual method when fair value does not exist for one
of the delivered elements in an arrangement. Under the residual method, the fair
value of the undelivered elements is deferred and subsequently recognized. The
Company has established sufficient vendor specific objective evidence for
professional services, training and maintenance and customer support services
based on the price charged when these elements are sold separately. Accordingly,
software license revenue is recognized under the residual method in arrangements
in which software is licensed with professional services, training and
maintenance and customer support services.
The Company recognizes software license revenues upon execution of a signed
license agreement, delivery of the software to a customer and determination that
collection of a fixed license fee is probable. For delivery over the Internet,
the software is considered to have been delivered upon confirmation by the
customer of the file transfer. Since the Company has no obligation to an end
user of a distributor, software license revenues from distributors are
recognized upon delivery to the distributor.
The Company recognizes revenue from software subscription arrangements
ratably over the term of the contract on a straight-line basis. Fees from
revenue sharing, royalty and subscriber arrangements with and through
third-parties are recognized as revenue when they are fixed and determinable,
generally upon receipt of a statement from the third-party.
Service revenues include professional services, training, maintenance and
customer support fees and reimbursements received for out-of-pocket expenses
incurred. Professional services are not essential to the functionality of the
other elements in an arrangement and are accounted for separately. Professional
services revenues are primarily derived from time and material contracts and are
recognized as the services are performed. Professional services revenues for
fixed-price contracts are recognized on a percentage-of-completion basis. If
conditions for acceptance are required, professional services revenues are
recognized upon customer acceptance. Customers generally reimburse the Company
for the majority of its out-of-pocket expenses incurred during the course of a
project. The Company does not mark-up or add additional fees to the actual
out-of-pocket expenses incurred. Training revenues are recognized as the
services are provided.
Maintenance and customer support fees include the right to unspecified
upgrades on a when-and-if-available basis and ongoing technical support.
Maintenance and customer support fees are recognized ratably over the term of
the contract, generally one year, on a straight-line basis. When a maintenance
and customer support fee is included with a software license fee, the Company
allocates a portion of the software license fee to maintenance and customer
support fees based on the renewal rate of maintenance and customer support fees.
Cash Equivalents
The Company considers all time deposits and short-term investments with an
original maturity of 90 days or less at the date of purchase to be cash
equivalents. The Company's cash equivalents are primarily comprised of
diversified U.S. and international money market mutual funds, which are reported
at cost, and U.S. Treasury and agency securities and commercial paper registered
and traded in the U.S., which are reported at amortized cost. The reported value
of the Company's cash equivalents approximates market value.
54
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents. The book values of these financial instruments approximated their
respective fair values as of each balance sheet presented due to their
short-term maturities.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are principally cash, cash equivalents and
accounts receivable. Concentration of credit risk with respect to cash and cash
equivalents is limited because the Company deposits its cash in highly rated
financial institutions and invests in diversified money market mutual funds. The
Company only invests in A1/P1 rated commercial paper registered and traded in
the U.S. and limits its investment in any one issuer to $5,000 and, therefore,
believes credit risk related to its investments in commercial paper is limited.
Concentration of credit risk with respect to accounts receivable is limited
to certain customers to whom the Company makes substantial sales. The Company
maintains an allowance for potential credit losses but historically has not
experienced any significant losses related to individual customers or groups of
customers in any particular industry or geographic area.
One customer represented approximately 11.3% of the Company's total
revenues during fiscal 2001 and approximately 10.7% of the Company's accounts
receivable at June 30, 2001. No one customer accounted for more than 10% of the
Company's total revenues during fiscal 2002 or fiscal 2000 or more than 10% of
the Company's accounts receivable at June 29, 2002.
Prepaid Software License Fees
Prepaid software license fees are paid to third-party software developers
under contractual arrangements for technology integrated into certain of our
application and integration products. Amortization of prepaid license fees
commences when the software is available for general release. The Company
amortizes prepaid license fees to cost of software license revenues based on the
greater of the actual royalties incurred to date or the straight-line method of
amortization over the estimated useful life of the software product, which is
generally three years. The Company regularly reviews the valuation of each
prepaid software license fee in order to determine if events and circumstances
may require a change in such valuation to reflect the estimated recoverable
amount. Prepaid software license fees aggregated $4,336 and $525 at June 29,
2002 and June 30, 2001, respectively, and were included in prepaid expenses and
other current assets.
55
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Property and Equipment
Property and equipment are recorded at cost. Internal and external costs
incurred to develop, implement and install computer software for internal use
are capitalized. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets (computer equipment and software, two
to five years; furniture and fixtures, five to 10 years; office equipment, three
to five years; leasehold improvements, shorter of useful life or remaining lease
term). Maintenance and repair expenditures are charged to operations when
incurred, and additions and improvements are capitalized. The Company reviews
its property and equipment whenever events or changes in circumstances may
indicate that the carrying amount of certain assets may not be recoverable and
recognizes an impairment loss when it is probable that the estimated cash flows
are less than the carrying value of these assets. Property and equipment to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. During fiscal 2002 and 2001, net losses on disposals and
impairment of property and equipment were $309 and $293, respectively, and were
included in other income (expense), net.
Professional Services Warranty
The Company records an estimate of professional services warranty based on
historical activity. Warranty expense is included in cost of services and the
related liability is included in accrued liabilities.
Shipping and Handling Costs
The Company records shipping and handling costs related to the distribution
of its software as cost of software license revenues.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
were approximately $308, $270 and $11 for fiscal 2002, 2001 and 2000,
respectively.
Research and Development and Software Development Costs
Research and development costs are charged to expense as incurred. Software
development costs are included in research and development and are charged to
expense as incurred. After technological feasibility is established, material
software development costs are capitalized. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or in the
ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving technological feasibility, which
the Company has defined as when beta testing commences, and the general
availability of such software has been minimal, and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs for the periods presented.
56
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Stock-Based Compensation
The Company records stock-based compensation issued to employees using the
intrinsic value method and stock-based compensation issued to non-employees
using the fair value method. Stock-based compensation is recognized on options
issued to employees if the option exercise price is less than the market price
of the underlying stock on the date of grant.
Income Taxes
The Company accounts for income taxes under the asset and liability method,
which recognizes deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their financial statement reported amounts. The Company records
a valuation allowance against deferred tax assets when it is more likely than
not that such assets will not be realized.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the shares used in the calculation of basic net income (loss) per share plus the
dilutive effect of common stock equivalents, such as stock options, warrants and
convertible preferred stock, using the treasury stock method. Common stock
equivalents are excluded from the computation of dilutive net income (loss) per
share if their effect is anti-dilutive.
Recently Adopted Accounting Pronouncements
During fiscal 2002, the Company adopted Emerging Issues Task Force Issue
No. 01-14 ("EITF 01-14"), "Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred", and reclassified such amounts in
the financial statements for all periods presented. In accordance with EITF
01-14, reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the statement of operations. The Company had
historically accounted for reimbursements received for out-of-pocket expenses
incurred as a reduction to cost of service revenues in the statement of
operations to offset the costs incurred. Reimbursements received for
out-of-pocket expenses incurred were $3,238, $3,246 and $1,740 for fiscal 2002,
2001 and 2000, respectively.
57
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Recently Issued Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
addresses the accounting and reporting for the impairment of long-lived assets
and for long-lived assets to be disposed of. The Company will be required to
adopt SFAS 144 no later than the fiscal year beginning on June 30, 2002. The
Company does not expect the adoption of SFAS 144 to have a material effect on
its financial condition or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS 146 addresses the accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." The Company will be required to adopt SFAS 146 for any
exit or disposal activities that are initiated after December 31, 2002. The
Company is not required to restate any of the components of the restructuring
charges recorded during fiscal 2002 as a result of the issuance of SFAS 146.
Note 2: Details of Financial Statement Components
As of
----------------------------
June 29, June 30,
2002 2001
---------- ----------
CASH AND EQUIVALENTS:
Cash ................................... $ 9,378 $ 5,950
U.S. Treasury and agency securities .... 71,706 78,155
Money market mutual funds .............. 58,558 37,393
Commercial paper ....................... -- 34,851
---------- ----------
$ 139,642 $ 156,349
========== ==========
PROPERTY AND EQUIPMENT, NET:
Computer equipment and software ........ $ 12,486 $ 12,849
Furniture and fixtures ................. 3,373 1,976
Leasehold improvements ................. 5,020 1,923
Office equipment ....................... 1,317 836
---------- ----------
22,196 17,584
Accumulated depreciation ............... (7,412) (5,293)
---------- ----------
$ 14,784 $ 12,291
========== ==========
ACCRUED EXPENSES:
Compensation ........................... $ 12,902 $ 13,356
Royalties .............................. 2,566 1,985
Taxes .................................. 2,265 3,239
Other .................................. 2,251 2,545
Restructuring .......................... 679 --
---------- ----------
$ 20,663 $ 21,125
========== ==========
58
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Note 3. Restructuring Charges
As a result of unfavorable global economic conditions and a reduction in
information technology spending around the world, in October 2001 the Company
implemented a restructuring program to reduce expenses to align its operations
and cost structure with market conditions. The restructuring program included a
reduction in the number of employees across all functions and locations, a
reduction in the use of independent contractors across all functions and
locations, termination of certain contracts and closure of excess facilities.
The restructuring program included a reduction in workforce of 75
employees, consisting of 22 employees in cost of service revenues, 32 employees
in selling and marketing, 13 employees in research and development and 8
employees in general and administration. The costs related to the reduction in
workforce include severance and fringe benefits. In the restructuring program,
the Company also terminated the services of 34 independent contractors. There
were no incremental costs to the Company related to the termination of the
services of these independent contractors.
The restructuring program also included facility and lease costs related to
the closure of certain excess facilities and activities that the Company has
exited and the termination of certain automotive lease contracts.
As a result of the restructuring program, the Company canceled certain
contracts related to terminated activities and programs that were either
noncancelable or cancelable with penalty provisions. The costs related to the
negotiated termination of these contracts are included in the restructuring
charge as contract terminations.
As a result of the restructuring program, the Company recorded a
restructuring charge of $3,202 in October 2001. The restructuring charge
consisted of costs related to the following statement of operations
classifications:
Cost of service revenues ................. $ 625
Selling and marketing .................... 2,279
Research and development ................. 168
General and administrative ............... 130
----------
$ 3,202
==========
During the three months ended June 29, 2002, the Company recorded a $390
adjustment to the restructuring charge as a result of the settlement of certain
employee severance, lease and other contractual arrangements.
59
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The significant components of the restructuring charge, non-cash
adjustments, cash payments and the remaining accrual as of June 29, 2002 are as
follows:
Employee
Severance
and Facilities
Fringe and Contract
Benefits Leases Terminations Total
---------- ---------- ------------ ----------
Restructuring charges ........................ $ 2,466 $ 514 $ 222 $ 3,202
Non-cash adjustments ......................... (85) (184) (121) (390)
---------- ---------- ------------ ----------
Adjusted restructuring charges ............... 2,381 330 101 2,812
Cash payments ................................ (1,726) (306) (101) (2,133)
---------- ---------- ------------ ----------
Remaining accrual as of June 29, 2002 ........ $ 655 $ 24 $ -- $ 679
========== ========== ============ ==========
The restructuring program was substantially completed during fiscal 2002.
The remaining cash payments are expected to be paid through January 31, 2003.
Note 4: Discontinued Operations
On May 7, 1998, the Company sold substantially all of the net assets of its
legacy design and manufacturing business, which had been operated as a
wholly-owned subsidiary of the Company under the name Adra Systems, Inc. ("Adra
Systems"), to SofTech, Inc. In fiscal 2001, the Company paid $275, plus legal
fees, to settle a dispute relating to the May 1998 sale of Adra Systems, Inc.,
and recognized a gain on the sale of discontinued operations of $500,
representing the difference between the amount originally accrued and the
settlement amount.
Note 5: Income Taxes
The following is the geographic pretax income (loss):
Year Ended
------------------------------------------
June 29, June 30, July 1,
2002 2001 2000
----------- ----------- -----------
United States ....... $ (20,929) $ 15,825 $ (2,237)
Foreign ............. (7,776) (5,514) (4,216)
----------- ----------- -----------
$ (28,705) $ 10,311 $ (6,453)
=========== =========== ===========
During fiscal 2001, the provision for income taxes of $1,465 primarily
consisted of current U.S. federal and state taxes and minimum taxes due in
certain foreign countries. No provision for income taxes was recorded in fiscal
2002 and fiscal 2000 due to reported net losses.
60
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
At June 29, 2002, the Company had available U.S. federal and state net
operating loss ("NOL") carryforwards of approximately $106,062 and approximately
$274 of available U.S. federal and state tax credits to reduce future U.S.
income taxes. These NOLs include deductions of approximately $83,685 related to
certain stock option exercises. The tax benefit from the NOLs related to the
exercise of stock options will be recorded as an increase to additional paid in
capital as these NOLs are utilized. The NOLs and tax credit carryforwards expire
in varying amounts commencing in fiscal 2003 through fiscal 2022, if not
utilized. Use of these NOLs and tax credits may be limited due to certain
changes in ownership.
At June 29, 2002, the Company also had NOLs in certain foreign countries
aggregating approximately $26,812 that are also subject to certain limitations.
These NOLs include deductions of approximately $11,919 related to certain stock
option exercises. The tax benefit from the NOLs related to the exercise of stock
options will be recorded as an increase to additional paid in capital as these
NOLs are utilized. These NOLs expire in varying amounts commencing in fiscal
2003 through fiscal 2007, if not utilized.
The Company has recorded a valuation allowance against its deferred tax
asset due to the fact it is more likely than not that the deferred tax asset
will not be realized. Management regularly evaluates the realizability of its
deferred tax assets and may adjust the valuation allowance based on such
analysis.
The components of the deferred tax asset are as follows:
As of
----------------------------
June 29, June 30,
2002 2001
----------- -----------
Net operating loss carryforwards .......... $ 37,910 $ 25,970
Deferred revenue .......................... 2,275 743
Accrued liabilities. ...................... 1,258 2,139
Allowance for doubtful accounts ........... 803 442
Depreciation .............................. 514 (44)
Stock compensation ........................ 391 414
Tax credits. .............................. 274 281
Other ..................................... 462 --
----------- -----------
Total deferred tax assets ............. 43,887 29,945
Valuation allowance ....................... (43,887) (29,945)
----------- -----------
Net deferred tax asset ................ $ -- $ --
=========== ===========
61
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The reconciliation between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
Year Ended
---------------------------------
June 29, June 30, July 1,
2002 2001 2000
------- ------- --------
U.S. federal statutory rate ................ (35.0)% 35.0% (35.0)%
State tax, net of federal tax benefit ...... (2.3) 6.0 (6.0)
Foreign tax rate differential .............. (3.9) -- --
Nondeductible stock compensation expense ... 3.3 7.0 --
Other nondeductible expenses ............... 1.4 1.5 --
Provision for valuation allowance .......... 36.5 (35.3) 41.0
------- ------- --------
--% 14.2% --%
======= ======= ========
Note 6: Line of Credit and Debt
On December 29, 2001, the Company amended its line of credit to increase
the maximum borrowing amount from $7.0 million to $10.0 million and to remove
certain provisions that reduced the maximum borrowing amount. The line of credit
bears interest at the bank's prime rate (4.75% at June 29, 2002) plus 0.5% per
annum on any outstanding balances and expires December 28, 2002. Borrowings
under the line of credit are limited to 80% of eligible accounts receivable from
customers in the United States. As of June 29, 2002, there were no borrowings
outstanding under the line of credit and $9.6 million available. The line of
credit is collateralized by all of the Company's assets and has financial and
other covenants. The Company was in compliance with these financial and other
covenants as of June 29, 2002.
Note 7: Commitments and Contingencies
Commitments
The Company leases its facilities, automobiles and certain office equipment
under various operating leases that expire through fiscal 2010. Certain of the
facility leases require the Company to pay its proportionate share of building
expenses and provide the Company with the option to renew its lease for an
extended period. Aggregate rental expense under operating leases was
approximately $5,293, $4,020 and $2,123 for fiscal 2002, 2001 and 2000,
respectively.
62
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Future minimum lease commitments, by fiscal year, as of June 29, 2002 are
as follows:
Autos and
Fiscal Year Facilities Equipment Total
- ---------------------- ------------ ----------- ------------
2003 ................. $ 3,971 $ 812 $ 4,783
2004 ................. 3,492 546 4,038
2005 ................. 2,773 240 3,013
2006 ................. 2,551 80 2,631
2007 ................. 2,398 45 2,443
Thereafter ........... 5,852 3 5,855
------------ ----------- -----------
$ 21,037 $ 1,726 $ 22,763
============ =========== ===========
In connection with certain product development agreements with third-party
software developers for technology integrated into certain application and
integration products, the Company is required to pay prepaid software license
fees. Prepaid software license fees due under these contracts aggregated $1,175
at June 29, 2002 and will be paid in varying amounts through June 28, 2003.
Contingencies
On April 19, 2002, a consolidated amended class action complaint was filed
in the United States District Court for the Southern District of New York. The
complaint, which supersedes five virtually identical complaints that had been
filed from July 24, 2001 to September 5, 2001, names as defendants the Company,
two of its officers, and certain underwriters involved in the Company's initial
public offering of common stock ("IPO"). The complaint is allegedly brought on
behalf of purchasers of the Company's common stock during the period from
February 29, 2000 to December 6, 2000 and asserts, among other things, that the
Company's prospectus and registration statement violated federal securities laws
because they contained material misrepresentations and/or omissions regarding
the conduct of our IPO underwriters in allocating shares in the Company's IPO to
the underwriters' customers, and that the Company and the two named officers
engaged in fraudulent practices with respect to this underwriters' conduct. The
action seeks damages, fees and costs associated with the litigation, and
interest. The Company understands that various plaintiffs have filed
substantially similar lawsuits against over three hundred other publicly traded
companies in connection with the underwriting of their initial public offerings.
The Company and its officers and directors believe that the allegations in the
complaint are without merit and intend to contest them vigorously. The Company,
along with the 300-plus other publicly-traded companies that have been named in
substantially similar lawsuits, filed a motion to dismiss the complaint on July
15, 2002. The litigation process is inherently uncertain and unpredictable,
however, and there can be no guarantee as to the ultimate outcome of this
pending lawsuit.
The Company may from time to time become a party to various other legal
proceedings arising in the ordinary course of business. Management believes that
the outcomes of these proceedings will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
63
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Note 8: Redeemable Convertible Preferred Stock
As of the closing of the Company's IPO, each share of Class G and Class H
redeemable convertible preferred stock was converted into 4.275 and 4.5 shares,
respectively, of common stock and all the rights, preferences and privileges of
the Class G and H redeemable convertible preferred stock terminated.
As of July 3, 1999, redeemable convertible stock was comprised of the
following:
Shares Shares Shares Redemption
Authorized Issued Outstanding Value
------------ ------------ ------------ ----------
Class G, $1.00 par value ................ 2,000 1,899 1,899 $ 11,015
Class H, $1.00 par value ................ 750 750 750 6,000
------------ ------------ ------------ ----------
2,750 2,649 2,649 $ 17,015
============ ============ ============ ==========
Note 9: Stockholders' Equity (Deficit)
Common Stock
On August 10, 1999, the Board of Directors (the "Board") voted to approve a
3-for-2 stock split, effected as a 50% stock dividend, provide for a single
class of common stock, eliminate the Class B common stock and increase the
number of authorized shares of common stock from 12,000 to 40,000. On December
9, 1999, the Board voted to approve a 3-for-1 stock split, which was effected as
a 200% stock dividend on February 23, 2000. The consolidated financial
statements for all periods presented have been restated to reflect both stock
splits.
On December 9, 1999, the Board approved, effective upon the closing of the
IPO, a change in the total number of shares which the Company is authorized to
issue to 105,000 shares, of which 100,000 shares are common stock and 5,000
shares are preferred stock. As of June 29, 2002, 24,675 shares of common stock
had been authorized for issuance pursuant to the exercise of stock options and
other stock rights.
On February 1, 2000, the Company entered into software license and
maintenance agreements and a professional services agreement with a customer. In
connection with these agreements, a party related to this customer agreed to
purchase 450 shares of common stock in a private placement. The sale price was
the IPO price less underwriters' discounts and commissions, or $23.25 per share.
The sale occurred contemporaneously with the Company's IPO. The proceeds from
the private placement were $10,462.
On March 6, 2000, the Company completed its IPO of 5,750 shares of common
stock, which included the exercise of the underwriters' over-allotment option of
750 shares, at $25.00 per share. The proceeds from the IPO were $131,763, after
deducting the underwriters' discounts and commissions and offering expenses of
$11,987.
64
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Preferred Stock
As of the closing of the Company's IPO, each share of Class A through Class
F convertible preferred stock was converted into 4.5 shares of common stock and
all the rights, preferences and privileges of the Class A through Class F
convertible preferred stock terminated.
As of July 3, 1999, convertible preferred stock was comprised of the
following:
Shares Shares Shares
Authorized Issued Outstanding Amount
---------- --------- ----------- ----------
Class A, $1.00 par value ......... 615 615 512 $ 512
Class B, $1.00 par value ......... 492 491 444 444
Class C, $1.00 par value ......... 1,195 1,194 1,194 1,194
Class D, $1.00 par value ......... 683 680 676 676
Class E, $1.00 par value ......... 167 167 167 167
Class F, $1.00 par value ......... 400 400 400 400
---------- --------- ----------- ----------
3,552 3,547 3,393 $ 3,393
========== ========= =========== ==========
Notes Receivable from Stockholders
In connection with the exercise of stock options during fiscal 2000 and
1999, the Company issued 2,076 and 342 shares of common stock, respectively, in
exchange for notes receivable from stockholders with principal balances
aggregating $916 and $117, respectively. During fiscal 2001 and 2000, the
Company received payments of notes receivable aggregating $738 and $295,
respectively. Accordingly, these notes receivable were paid in full by the end
of fiscal 2001.
Warrants
In May 1997, the Company issued a warrant, with an exercise price of $0.44,
to purchase 169 shares of common stock in conjunction with its line of credit.
No value was ascribed to this warrant on the date of issuance since the amount
was not material to the Company's consolidated financial statements. In March
2000, the holder of the warrant executed a cashless exercise and received 168
shares of common stock.
On February 1, 2000, the Company issued the purchaser of the common stock
issued in the private placement a warrant to purchase 200 shares of common
stock, which became exercisable following the closing of the IPO (March 6, 2000)
for a term of 18 months at an exercise price of $31.25 per share. In connection
with the issuance of the warrant, the Company recorded a charge of $1,788, which
represented the fair value of the warrant using the Black-Scholes option-pricing
model. This charge is included in deferred stock-based consideration, which is
reported as a component of stockholders' equity (deficit). This deferred
stock-based consideration was amortized through charges to reduce revenues as
the elements in the arrangement were delivered. During fiscal 2001 and fiscal
2000, the Company recorded charges to reduce revenues of $1,341 and $447,
respectively, related to the warrant. The warrant expired on September 6, 2001.
65
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
2000 Employee Stock Purchase Plan
In December 1999, the Board adopted the 2000 Employee Stock Purchase Plan
(the "Purchase Plan") to be effective upon the completion of the Company's IPO.
The Company has reserved a total of 1,350 shares of common stock for issuance
under the Purchase Plan. Eligible employees may purchase common stock under the
Purchase Plan at 85% of the lesser of the average market price of the Company's
common stock on the first or last day of the applicable six month payment
period. During fiscal 2002 and fiscal 2001, 229 shares and 75 shares,
respectively, of common stock were purchased under the Purchase Plan. No common
stock was purchased under the Purchase Plan during fiscal 2000.
Stock Option Plans
In January 2000, the Board adopted the 1999 Stock Plan (the "1999 Plan") to
be effective upon the completion of the Company's IPO. In fiscal 2001, the 1999
Plan was amended to increase the number of shares of common stock issuable over
the term of the 1999 Plan from 1,500 to 3,000 shares, and on November 9, 2001,
the stockholders of the Company approved an amendment to the 1999 Plan to
increase the number of shares of common stock issuable pursuant to the 1999 Plan
from 3,000 to 6,000. The 1999 Plan provides for the granting of incentive and
nonqualified stock options, stock issuances and opportunities to make direct
purchases of stock to employees, officers or consultants of the Company. Options
may be granted at not less than the fair market value of the Company's common
stock on the date of grant, as determined by the Board.
In fiscal 1996, the Company adopted a stock plan (the "1996 Plan") pursuant
to which 13,950 shares of the Company's common stock are reserved for issuance.
The 1996 Plan provides for the granting of incentive stock options, nonqualified
stock options and other stock rights. Options may be granted at not less than
the fair market value of the Company's common stock on the date of grant, as
determined by the Board.
The Company's 1987 Stock Option Plan (the "1987 Plan") has been terminated;
however, options issued under the 1987 Plan remain outstanding. The 1987 Plan
provided for the granting of both incentive stock options and nonqualified stock
options. Incentive stock options were granted at the fair market value of the
common stock on the date of grant, as determined by the Board.
Options granted under the 1999, 1996 and 1987 Plans generally vest over
four years and expire no later than ten years from the date of the grant. There
were 1,996 shares available for future grant under the 1999 and 1996 Plans as of
June 29, 2002.
66
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The following is a summary of the status of the Company's stock options as
of June 29, 2002, June 30, 2001 and July 1, 2000 and the stock option activity
for all stock option plans during the years ending on those dates:
June 29, 2002 June 30, 2001 July 1, 2000
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ ----------- ------------- ------------ ------------
OUTSTANDING:
Beginning balance ....... 9,248 $ 8.60 10,318 $ 1.67 11,742 $ 0.45
Granted .............. 3,706 $ 11.02 2,370 $ 28.60 2,802 $ 5.07
Exercised ............ (1,607) $ 0.73 (3,141) $ 0.76 (3,843) $ 0.46
Canceled ............. (1,068) $ 12.98 (299) $ 10.39 (383) $ 1.04
----------- ----------- ----------- ---------- ----------- -----------
Ending balance .......... 10,279 $ 10.25 9,248 $ 8.60 10,318 $ 1.67
=========== =========== =========== ========== =========== ===========
EXERCISABLE ............... 4,986 $ 6.63 4,025 $ 3.43 4,377 $ 0.66
=========== =========== =========== ========== =========== ===========
Information regarding options outstanding as of June 29, 2002 is as
follows:
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Price Shares Life (Years) Price Shares Price
- ----------------------------------- ------------- ----------- --------- -----------
$ 0.33 - $ 0.44 ..... 3,122 5.55 $ 0.44 2,864 $ 0.44
$ 1.11 - $ 1.11 ..... 1,022 7.07 $ 1.11 569 $ 1.11
$ 3.33 - $ 8.00 ..... 1,152 8.78 $ 6.62 286 $ 6.45
$ 8.02 - $12.86 ..... 1,140 9.35 $ 10.21 173 $ 9.67
$ 12.95 - $12.97 ..... 1,269 9.11 $ 12.97 245 $ 12.97
$ 13.00 - $17.27 ..... 939 8.51 $ 14.17 208 $ 14.22
$ 17.49 - $29.56 ..... 443 8.21 $ 23.38 139 $ 23.36
$ 30.19 - $36.50 ..... 1,125 8.10 $ 36.00 475 $ 36.06
$ 36.88 - $69.50 ..... 67 7.55 $ 43.90 27 $ 43.44
---------- ------------- ----------- --------- -----------
10,279 7.60 $ 10.25 4,986 $ 6.63
========== ============= =========== ========= ===========
In connection with certain stock option grants to employees, the Company
recorded deferred stock-based compensation of $13,574 and $4,080 in fiscal 2000
and fiscal 1999, respectively. Deferred stock-based compensation represents the
difference between the option price and the deemed fair value of the Company's
common stock on the date of grant and is reported as stock-based consideration,
a component of stockholders' equity (deficit). Deferred stock-based compensation
is amortized through charges to operations over the vesting period of the
options, which is generally four years. Stock-based compensation was $3,910,
$4,142 and $3,593 for fiscal 2002, 2001 and 2000, respectively.
67
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
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 options.
The fair value of options granted in fiscal 2002, 2001 and 2000 have been
determined using the Black-Scholes option pricing model. The assumptions used
are as follows:
Year Ended
-----------------------------------------------
June 29, June 30, July 1,
2002 2001 2000
------------ ------------ ------------
Risk-free interest rate ............................ 3.53 - 4.54% 4.54 - 6.23% 5.80 - 6.50%
Expected dividend yield ............................ None None None
Expected lives ..................................... 4 years 4 years 5 years
Expected volatility (0% before January 1, 2000) .... 110% 100% 85%
The weighted average fair value of options granted in fiscal 2002, 2001 and
2000 were $8.03, $20.80 and $7.44 per share, respectively.
Had compensation expense for stock options been determined based on fair
value as prescribed by Statement of Financial Accounting Standards No. 123, the
Company's pro forma net income (loss) and basic and diluted net income (loss)
per share would have been as follows:
Year Ended
-----------------------------------------------
June 29, June 30, July 1,
2002 2001 2000
------------ ------------ ------------
NET INCOME (LOSS):
As reported ....................................... $ (28,705) $ 8,846 $ (6,453)
Pro forma ......................................... $ (45,862) $ (1,418) $ (7,500)
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
As reported:
Basic net income (loss) per share .............. $ (0.62) $ 0.20 $ (0.36)
Diluted net income (loss) per share ............ $ (0.62) $ 0.18 $ (0.36)
Pro forma:
Basic net income (loss) per share .............. $ (0.99) $ (0.03) $ (0.42)
Diluted net income (loss) per share ............ $ (0.99) $ (0.03) $ (0.42)
68
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Note 10: Employee Benefit Plans
Eligible employees of the Company's U.S. operations may elect to
participate in the Company's 401(k) plan. The Company does not make
contributions to the 401(k) plan. Employees of certain of the Company's
subsidiaries are provided with savings plans to which the Company and the
employee contribute. The Company's contributions to these plans aggregated $195
in fiscal 2002 but were not material in fiscal 2001 or 2000.
Note 11: Related Party Transactions
During fiscal 2002, the Company issued the Chief Executive Officer of the
Company a note receivable of $114 to satisfy tax obligations incurred upon the
exercise of stock options by certain trusts related to the Chief Executive
Officer. The note receivable was issued with full recourse to the Chief
Executive Officer and is collateralized by the personal assets of the Chief
Executive Officer. The note receivable bears interest at 4.75% per annum and
matures on December 15, 2002. As of June 29, 2002, the outstanding balance of
the note receivable was $117 and was included in prepaid expenses and other
current assets. The note receivable was paid in full on September 9, 2002.
Note 12: Segment and Geographic Information
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available to the chief
operating decision maker, or decision-making group, in assessing performance and
allocating resources. The Company's decision-making group, its executive
management team, views the Company's operations and manages its business
principally as one segment with two offerings: PLM software and related
services. The executive management team evaluates these offerings based on their
respective gross margins. Therefore, the financial information presented in
these financial statements represents all the material financial information
related to the Company's principal operating segment.
Revenues and property and equipment by significant geographic region are as
follows:
Year Ended
-----------------------------------------------
June 29, June 30, July 1,
2002 2001 2000
----------- ----------- -----------
REVENUES:
North America ........................................ $ 80,292 $ 106,285 $ 46,986
----------- ----------- -----------
Japan ................................................ 11,851 10,422 4,870
Germany .............................................. 7,746 8,161 9,519
The Netherlands ...................................... 7,365 5,339 2,989
France ............................................... 4,302 5,887 6,202
Asia/Pacific (excluding Japan) ....................... 476 628 --
Europe (excluding the Netherlands, Germany and
France) ............................................ 9,431 8,668 5,885
----------- ----------- -----------
Total international ............................... 41,171 39,105 29,465
----------- ----------- -----------
$ 121,463 $ 145,390 $ 76,451
=========== =========== ===========
69
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
The Company reports revenue in the geographic region of the customer at the
time of the license. However, the customer may deploy licenses in other
geographic regions.
As of
--------------------------------
June 29, June 30,
2002 2001
------------ -----------
PROPERTY AND EQUIPMENT, NET:
North America ................................................... $ 13,267 $ 10,710
----------- -----------
Japan ........................................................... 305 310
Germany ......................................................... 203 237
The Netherlands ................................................. 276 272
France .......................................................... 264 267
Asia/Pacific (excluding Japan) .................................. 78 47
Europe (excluding the Netherlands, Germany and France) .......... 391 448
----------- -----------
Total international .......................................... 1,517 1,581
----------- -----------
$ 14,784 $ 12,291
=========== ===========
Note 13: Net Income (Loss) Per Share
The calculation of basic and diluted net income (loss) per share is as
follows:
Year Ended
----------------------------------------------
June 29, June 30, July 1,
2002 2001 2000
-------------- ------------- -------------
NET INCOME (LOSS):
Income (loss) from continuing operations ........................ $ (28,705) $ 8,346 $ (6,453)
Gain on sale of discontinued operations ......................... -- 500 --
---------- ---------- ----------
Net income (loss) ............................................... $ (28,705) $ 8,846 $ (6,453)
========== ========== ==========
SHARES USED IN COMPUTING BASIC AND DILUTED NET INCOME (LOSS) PER
SHARE:
Weighted average shares outstanding used in computing basic net
income (loss) per share ....................................... 46,147 43,543 17,966
Dilutive effect of stock options ................................ -- 6,814 --
---------- ---------- ----------
Shares used in computing diluted net income (loss) per share .... 46,147 50,357 17,966
========== ========== ==========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share from continuing operations .... $ (0.62) $ 0.19 $ (0.36)
Basic net income per share from discontinued operations ......... -- 0.01 --
---------- ---------- ----------
Basic net income (loss) per share ............................... $ (0.62) $ 0.20 $ (0.36)
========== ========== ==========
Diluted net income (loss) per share from continuing operations .. $ (0.62) $ 0.17 $ (0.36)
Diluted net income per share from discontinued operations........ -- 0.01 --
---------- ---------- ----------
Diluted net income (loss) per share ............................. $ (0.62) $ 0.18 $ (0.36)
========== ========== ==========
70
MATRIXONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except per share amounts)
Potentially dilutive common stock options and warrants aggregating 10,279,
1,320 and 10,518 for fiscal 2002, 2001 and 2000, respectively, have been
excluded from the computation of diluted net income (loss) per share because
their inclusion would be anti-dilutive.
Note 14: Quarterly Financial Information (unaudited)
Year Ended June 29, 2002
---------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------- ------------ ------------ ------------ -----------
Revenues ........................... $ 24,842 $ 32,027 $ 32,584 $ 32,010 $ 121,463
Gross profit ....................... $ 9,666 $ 16,640 $ 17,121 $ 17,631 $ 61,058
Net loss ........................... $ (11,912) $ (9,248) $ (5,006) $ (2,539) $ (28,705)
Basic and diluted net loss
per share ....................... $ (0.26) $ (0.20) $ (0.11) $ (0.05) $ (0.62)
Shares used in computing basic and
diluted net loss per share ...... 45,427 45,782 46,462 46,916 46,147
Year Ended June 30, 2001
---------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------- ------------ ------------ ------------ -----------
Revenues ........................... $ 28,912 $ 34,986 $ 39,012 $ 42,480 $ 145,390
Gross profit ....................... $ 18,800 $ 22,941 $ 24,195 $ 25,505 $ 91,441
Income from continuing
operations ...................... $ 529 $ 2,189 $ 2,582 $ 3,046 $ 8,346
Income from discontinued
operations ...................... $ -- $ -- $ -- $ 500 $ 500
Net income ......................... $ 529 $ 2,189 $ 2,582 $ 3,546 $ 8,846
Basic net income per share from
continuing operations ........... $ 0.01 $ 0.05 $ 0.06 $ 0.07 $ 0.19
Basic net income per share from
discontinued operations ......... $ -- $ -- $ -- $ 0.01 $ 0.01
Basic net income per share ......... $ 0.01 $ 0.05 $ 0.06 $ 0.08 $ 0.20
Diluted net income per share from
continuing operations ........... $ 0.01 $ 0.04 $ 0.05 $ 0.06 $ 0.17
Diluted net income per share from
discontinued operations ......... $ -- $ -- $ -- $ 0.01 $ 0.01
Diluted net income per share ....... $ 0.01 $ 0.04 $ 0.05 $ 0.07 $ 0.18
Shares used in computing basic net
income per share ................ 42,258 43,022 43,982 44,901 43,543
Shares used in computing diluted
net income per share ............ 50,384 50,157 50,360 50,518 50,357
71
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 19, 2002, we dismissed our independent auditors, Arthur Andersen
LLP and engaged Ernst & Young LLP to serve as our independent auditors for our
fiscal year ending June 29, 2002. The decision to dismiss Arthur Andersen LLP
and engage Ernst & Young LLP was approved by the Audit Committee and our Board
of Directors. Arthur Andersen LLP served as our independent auditors from August
1983 to June 19, 2002.
The reports of Arthur Andersen LLP on our consolidated financial statements
for our fiscal years ended July 1, 2000 and June 30, 2001 contained no adverse
opinion or disclaimer of opinion, nor were the reports qualified or modified as
to uncertainty, audit scope or accounting principles.
In connection with the audits performed by Arthur Andersen LLP for fiscal
2000 and 2001 and through the date of the dismissal of Arthur Andersen LLP,
there were no disagreements with Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Arthur
Andersen LLP, would have caused it to make reference to the subject matter of
the disagreements in its reports. None of the reportable events described under
Item 304 (a)(1)(v) of Regulation S-K occurred within fiscal 2000 or 2001, nor
through the date of the dismissal of Arthur Andersen LLP.
We have provided a copy of the above disclosures to Arthur Andersen LLP.
During fiscal 2000 and 2001 and through the date of their appointment as
our independent auditors, we did not consult Ernst & Young LLP with respect to
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of the audit opinion that might be rendered
on our consolidated financial statements, or any other matters or reportable
events listed in Items 304 (a)(2)(i) and (ii) of Regulation S-K.
PART III
Anything herein to the contrary notwithstanding, in no event are the
sections entitled "Stock Performance Graph", "Compensation Committee Report on
Executive Compensation" and "Audit Committee Report" to be incorporated by
reference herein from the Company's definitive proxy statement for the Company's
2002 annual meeting of stockholders.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning the directors and executive officers of the
Company is incorporated by reference herein from the information contained in
the section entitled "Occupations of Directors and Executive Officers" in
MatrixOne's definitive proxy statement (the "Definitive Proxy Statement") for
the 2002 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the end of MatrixOne, Inc.'s fiscal
year ended June 29, 2002.
The information concerning compliance with Section 16(a) of the Exchange
Act required under this item is incorporated herein by reference from the
information contained in the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Definitive Proxy Statement.
72
ITEM 11: EXECUTIVE COMPENSATION
Certain information concerning executive compensation is incorporated by
reference herein from the information contained in the section entitled
"Compensation and Other Information Concerning Directors and Officers" in the
Definitive Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the information
contained in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Definitive Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information concerning certain relationships and related
transactions is incorporated by reference herein from the information contained
in the section entitled "Certain Relationships and Related Transactions" in the
Definitive Proxy Statement.
ITEM 14: CONTROLS AND PROCEDURES
There have not been any significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to the date of our Chief Executive Officer's and Chief Financial Officer's most
recent evaluation of such controls.
73
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company are filed as
part of this report:
Report of Independent Auditors
Report of Independent Public Accountants
Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001
Consolidated Statements of Operations for the years ended June 29, 2002,
June 30, 2001 and July 1, 2000
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the years ended June 29, 2002,
June 30, 2001 and July 1, 2000
Consolidated Statements of Cash Flows for the years ended June 29, 2002,
June 30, 2001 and July 1, 2000
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of MatrixOne, Inc. for each of
the years ended June 29, 2002, June 30, 2001 and July 1, 2000 is filed as
part of this report and should be read in conjunction with the Consolidated
Financial Statements and related notes thereto of MatrixOne, Inc.
Page Number
-----------
Schedule II-Valuation and Qualifying Accounts and Reserves S-II
Schedules other than those listed above have been omitted
since they are either not required, not applicable, or the
information has otherwise been included.
74
(3) INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Amended and Restated By-laws
4.1(1) Specimen certificate representing the common stock
10.1(1) Amended and Restated 1987 Stock Option Plan
10.2(1) Amended and Restated 1996 Stock Plan
10.3(1) 1999 Stock Plan
10.4(2) Amendment No. 1 to the 1999 Stock Plan
10.5(1) 2000 Employee Stock Purchase Plan
10.6(1) Amended and Restated Registration Rights, Restricted Stock and
Stock Option Agreement by and among the Company and certain
stockholders of the Company dated as of October 11, 1998
10.7(1) Amendment No. 1 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
Company and certain stockholders of the Company dated as of
June 26, 1991
10.8(1) Amendment No. 2 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
Company and certain stockholders of the Company dated as of
August 19, 1991
10.9(1) Amendment No. 3 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
Company and certain stockholders of the Company dated as of
October 1, 1997
10.10(1) Amendment No. 4 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
Company and certain stockholders of the Company dated as of
June 17, 1999
10.11(1) Amended and Restated Stockholders Agreement by and among the
Company and the stockholders listed therein dated as of June
17, 1999
10.12(1) Office Lease by and between the Company and New Boston
Chelmsford Limited Partnership dated March 2, 1994
10.13(1) Loan and Security Agreement between the Company and Silicon
Valley Bank dated as of December 29, 1998
10.14(1)(*) Letter Agreement between the Company and Maurice L. Castonguay
dated as of January 11, 1999
10.15(1) Agreement between the Company and Oracle Corporation dated as
of May 22, 1996
10.16(1) Loan Modification Agreement between the Company and Silicon
Valley Bank dated as of September 28, 1999
10.17(1) Loan Modification Agreement between the Company and Silicon
Valley Bank dated as of December 28, 1999
10.18(1) Common Stock Purchase Agreement between the Company and GE
Capital Equity Investments, Inc. dated as of February 1,
2000
10.19(4) Loan Modification Agreement between the Company and Silicon
Valley Bank dated as of August 18, 2000
10.20(5)(*) Employment Agreement dated November 1, 2000 between the
Company and Mark F. O'Connell
10.21(6) Sublease and Consent Agreement made as of December 1, 2000 by
and between Veryfine Products, Inc. and the Company
10.22(6) Loan Modification Agreement dated December 29, 2000 between
the Company and Silicon Valley Bank
10.23(7) Office Lease by and between the Company and Crown Milford LLC
dated May 31, 2001
10.24(8) Loan Modification Agreement between the Company and Silicon
Valley Bank dated as of December 29, 2001
75
10.25(3) Amendment No. 2 to the 1999 Stock Plan, as amended
10.26(3) Amendment No. 3 to the 1999 Stock Plan, as amended
10.27(8) Amendment No. 1 to the Second Amended and Restated 1996 Stock
Plan
10.28(*) Letter agreement dated December 3, 2001 between the Company
and Donald W. Hunt
10.29(*) Letter agreement dated June 21, 2002 between the Company and
John Fleming
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (see page 78)
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
- ---------------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 333-92731).
(2) Incorporated herein by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-8 (File No. 333-66458).
(3) Incorporated herein by reference to the exhibits to the Registration
Statement on Form S-8 (File No. 333-81176).
(4) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended July 1, 2000.
(5) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000.
(6) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
30, 2000.
(7) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001.
(8) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
29, 2001.
(*) Indicates a management contract or any compensatory plan, contract or
arrangement.
76
(b) REPORTS ON FORM 8-K
On June 24, 2002, the Company filed a Current Report on Form 8-K
disclosing a change in the Company's certifying accountant from Arthur
Andersen LLP to Ernst & Young LLP. On June 19, 2002, the Audit Committee
and our Board of Directors approved the dismissal of Arthur Andersen LLP as
our independent auditors and the engagement of Ernst & Young LLP as our
independent auditors.
(c) EXHIBITS
The Company hereby files as part of this Annual Report on Form 10-K
the exhibits listed in Item 14(a)(3) above. Exhibits which are incorporated
herein by reference can be inspected and copied at the public reference
facilities maintained by the Commission, 450 Fifth Street NW, Room 1024,
Washington, D.C. and at the Commission's regional offices at 219 South
Dearborn Street, Room 1204, Chicago, Illinois; 76 Federal Plaza, Room 1102,
New York, New York and 5757 Wilshire Boulevard, Suite 1710, Los Angeles,
California. Copies of such material can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, NW, Washington, D.C.
20549, at prescribed rates.
(d) FINANCIAL STATEMENT SCHEDULES
The Company hereby files as part of this Annual Report on Form 10-K
the consolidated financial statement schedules listed in Item 14(a)(2)
above.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MATRIXONE, INC.
Date: September 26, 2002
By: /s/ MARK F. O'CONNELL
-----------------------------------
Mark F. O'Connell
President and Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
The undersigned officers and directors of MatrixOne, Inc. hereby constitute
and appoint Mark F. O'Connell and Maurice L. Castonguay, and each of them
singly, with full power of substitution, our true and lawful attorneys-in-fact
and agents to sign for us in our names in the capacities indicated below any and
all amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.
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 Company
and in the capacities and on the dates indicated.
Signature Title(s) Date
--------- -------- ----
/s/ Mark F. O'Connell President, Chief Executive September 26, 2002
- ---------------------------------------- Officer and Director
Mark F. O'Connell (principal executive officer)
/s/ Maurice L. Castonguay Chief Financial Officer, September 26, 2002
- ---------------------------------------- Senior Vice President of Finance and
Maurice L. Castonguay Administration and Treasurer
(principal financial and
accounting officer)
/s/ W. Patrick Decker Director September 26, 2002
- ----------------------------------------
W. Patrick Decker
/s/ Daniel J. Holland Director September 26, 2002
- ----------------------------------------
Daniel J. Holland
/s/ James F. Morgan Director September 26, 2002
- ----------------------------------------
James F. Morgan
/s/ Charles R. Stuckey, Jr. Director September 26, 2002
- ----------------------------------------
Charles R. Stuckey, Jr.
78
CERTIFICATIONS
I, Mark F. O'Connell certify that:
1. I have reviewed this annual report on Form 10-K of MatrixOne, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 26, 2002
/s/ Mark F. O'Connell
- ---------------------
Mark F. O'Connell
President and Chief Executive Officer
I, Maurice L. Castonguay certify that:
1. I have reviewed this annual report on Form 10-K of MatrixOne, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: September 26, 2002
/s/ Maurice L. Castonguay
- -------------------------
Maurice L. Castonguay
Chief Financial Officer, Senior Vice President of Finance
and Administration and Treasurer
79
This is a copy of the audit report previously issued by Arthur Andersen LLP
in connection with the financial statement schedule of MatrixOne, Inc. as of
June 30, 2001 and July 1, 2000 and the years then ended included in the Annual
Report on Form 10-K of MatrixOne, Inc. for the fiscal year ended June 30, 2001.
This audit report has not been reissued by Arthur Andersen LLP in connection
with the filing of this Annual Report on Form 10-K for the fiscal year end June
29, 2002. See Exhibit 23.2 for further discussion.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To MatrixOne, Inc.:
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of MatrixOne, Inc.
included in this Annual Report on Form 10-K and have issued our report thereon
dated July 26, 2001. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule listed in Item
14(a)(2) is the responsibility of the MatrixOne, Inc.'s management and is
presented for purposes of complying with Securities and Exchange Commission's
rules and is not a part of the basic financial statements and, in our opinion,
fairly states, in all material respects, the financial data required to be set
forth therein, in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 26, 2001
S-I
Schedule II
MATRIXONE, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End
Description Period Expenses Accounts Deductions of Period
- ----------- --------------- -------------- -------------- -------------- -------------
Allowance for Doubtful
Accounts:
June 29, 2002 ..................... $ 1,387 $ 1,351 $ -- $ (367) $ 2,371
June 30, 2001 ..................... $ 927 $ 667 $ -- $ (207) $ 1,387
July 1, 2000 ...................... $ 772 $ 404 $ -- $ (249) $ 927
Reserve for Discontinued
Operations:
June 30, 2001 ..................... $ 792 $ -- $ (500)(1) $ (292) $ --
July 1, 2000 ...................... $ 950 $ -- $ -- $ (158) $ 792
- -------------
(1) Amounts charged to other accounts represents the gain on the settlement of
a dispute relating to the sale of discontinued operations in 1998.
S-II
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Amended and Restated By-laws
4.1(1) Specimen certificate representing the common stock
10.1(1) Amended and Restated 1987 Stock Option Plan
10.2(1) Amended and Restated 1996 Stock Plan
10.3(1) 1999 Stock Plan
10.4(2) Amendment No. 1 to the 1999 Stock Plan
10.5(1) 2000 Employee Stock Purchase Plan
10.6(1) Amended and Restated Registration Rights, Restricted Stock and
Stock Option Agreement by and among the Company and certain
stockholders of the Company dated as of October 11, 1998
10.7(1) Amendment No. 1 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
Company and certain stockholders of the Company dated as of
June 26, 1991
10.8(1) Amendment No. 2 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
Company and certain stockholders of the Company dated as of
August 19, 1991
10.9(1) Amendment No. 3 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
Company and certain stockholders of the Company dated as of
October 1, 1997
10.10(1) Amendment No. 4 to Amended and Restated Registration Rights,
Restricted Stock and Stock Option Agreement by and among the
Company and certain stockholders of the Company dated as of
June 17, 1999
10.11(1) Amended and Restated Stockholders Agreement by and among the
Company and the stockholders listed therein dated as of June
17, 1999
10.12(1) Office Lease by and between the Company and New Boston
Chelmsford Limited Partnership dated March 2, 1994
10.13(1) Loan and Security Agreement between the Company and Silicon
Valley Bank dated as of December 29, 1998
10.14(1)(*) Letter Agreement between the Company and Maurice L. Castonguay
dated as of January 11, 1999
10.15(1) Agreement between the Company and Oracle Corporation dated as
of May 22, 1996
10.16(1) Loan Modification Agreement between the Company and Silicon
Valley Bank dated as of September 28, 1999
10.17(1) Loan Modification Agreement between the Company and Silicon
Valley Bank dated as of December 28, 1999
10.18(1) Common Stock Purchase Agreement between the Company and GE
Capital Equity Investments, Inc. dated as of February 1,
2000
10.19(4) Loan Modification Agreement between the Company and Silicon
Valley Bank dated as of August 18, 2000
10.20(5)(*) Employment Agreement dated November 1, 2000 between the
Company and Mark F. O'Connell
10.21(6) Sublease and Consent Agreement made as of December 1, 2000 by
and between Veryfine Products, Inc. and the Company
10.22(6) Loan Modification Agreement dated December 29, 2000 between
the Company and Silicon Valley Bank
10.23(7) Office Lease by and between the Company and Crown Milford LLC
dated May 31, 2001
10.24(8) Loan Modification Agreement between the Company and Silicon
Valley Bank dated as of December 29, 2001
10.25(3) Amendment No. 2 to the 1999 Stock Plan, as amended
10.26(3) Amendment No. 3 to the 1999 Stock Plan, as amended
10.27(8) Amendment No. 1 to the Second Amended and Restated 1996 Stock
Plan
10.28(*) Letter agreement dated December 3, 2001 between the Company
and Donald W. Hunt
10.29(*) Letter agreement dated June 21, 2002 between the Company and
John Fleming
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (see page 78)
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
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(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 333-92731).
(2) Incorporated herein by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-8 (File No. 333-66458).
(3) Incorporated herein by reference to the exhibits to the Registration
Statement on Form S-8 (File No. 333-81176).
(4) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended July 1, 2000.
(5) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000.
(6) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
30, 2000.
(7) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended June 30, 2001.
(8) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended December
29, 2001.
(*) Indicates a management contract or any compensatory plan, contract or
arrangement.