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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 29, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22154
MANUGISTICS GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1469385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2115 East Jefferson Street, Rockville, Maryland 20852
(Address of principal executive offices) (Zip code)
(301) 984-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.002 par value per share
(Title of Class)
Name of each exchange on which registered: None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of May 4, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1.06 billion. As of that
date, the number of shares outstanding of the Registrant's common stock was
approximately 28.4 million, based on information provided by the Registrant's
transfer agent.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive Proxy Statement relating to the 2000 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-K.
We anticipate that our Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after the end of our fiscal year ended
February 29, 2000.
PART I
Item 1. BUSINESS.
Overview:
Manugistics Group, Inc. is a leading global provider of intelligent supply
chain optimization solutions for enterprises and evolving eBusiness trading
networks. Our solutions, which include client assessment, software products,
consulting services for implementation and solution support, can be optimized to
the supply chain requirements of companies. Our solutions provide our clients
with the business intelligence to participate in various forms of trading
relationships, from traditional linear supply chains to eBusiness trading
networks. Our broad suite of solutions can help companies power profitable
growth, increase revenues, lower overall costs and improve capital allocation
through more effective operational decisions. Other operational benefits of
implementing our solutions can include greater speed to market, strengthened
customer service, improved relationships among trading partners and increased
inventory turns within and across our clients' supply chains and eBusiness
trading networks.
Building on our supply chain solution expertise, we were an innovator in
trading partner collaboration with our first Internet-ready products
commercially available in late 1997. These initial products were focused on the
prediction of demand and sourcing of supply between an enterprise and its
trading partners ("one-to-many"). Our expanded solutions currently address new
complexities and increased operational challenges as trading partner
collaboration has evolved to include multiple enterprises and trading partners
("many-to-many"). These solutions are enabled by our WebWORKS-TM- architecture
with advanced integration to disparate systems through our WebConnect-TM-
product. We believe that supply chain requirements for one-to-many and
many-to-many trading networks will drive increased demand for our solutions. Our
technology initiatives will continue to focus on the changing needs of clients
and evolving market dynamics in order to meet this demand.
During fiscal 1999 and the first half of fiscal 2000, we experienced
operational difficulties caused by, among other factors, problems with direct
sales force execution, new and stronger competitive forces and other external
factors. Our poor financial performance in fiscal 1999 led to our decision to
restructure our business. By the end of fiscal 2000, we completed our
operational turnaround, including the hiring of a new executive management team,
delivery of enhanced supply chain and eBusiness solutions and an improved market
image, which we believe has positioned us well for the future. Although we
reported a loss for fiscal 2000, in the third and fourth quarter of the year we
generated sequential quarterly license fee revenue growth through operational
improvements, including improvements in sales force execution.
Industry Background:
Increased global competition has forced organizations to improve customer
service, reduce operating costs and improve capital utilization. Many companies
are utilizing supply chain optimization to respond to this increased global
competition. In order to build and retain a competitive advantage, these
organizations are no longer operating alone but are collaborating with
suppliers, clients and third parties to respond to these increased market
demands. These companies understand that employing an effective supply chain
optimization strategy can be a competitive differentiator. In addition, these
companies are seeking solutions that can help them make intelligent business
decisions within their enterprise and among the organizations in their trading
networks. Their focus is on the requirements, demands and satisfaction of their
customers as well as collaboration with key suppliers and trading partners to
ensure customer demands are met.
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As the Internet has rapidly gained acceptance for commercial enterprises,
increased competition and the need for alternative methods of distribution are
fueling the growth of new business initiatives. These new eBusiness initiatives
include business-to-business (B2B) and business-to-consumer (B2C) trading. These
initiatives are forcing organizations to formulate eBusiness strategies with
requirements for robust supply chain optimization solutions, integration of
front and back office systems and infrastructure to support trading networks.
Effective communication and collaboration among global and domestic trading
partners are key elements of an eBusiness strategy requiring tight integration
with customers, suppliers and third parties. Once implemented, these solutions
can provide access to information, channel visibility and a consolidated view of
customer requirements, enabling real-time decision-making.
Companies are utilizing our solutions to share information within an
enterprise and among trading partners in their supply chain to more effectively
coordinate and make decisions to meet or exceed the rapidly changing
requirements of customers. Our solutions address the business processes that
enable responsive and intelligent decision-making and are uniquely focused on
managing decisions, events and plans with the flexibility of adapting to
different forms of a trading network. These processes cover the supply chain
needs of both the enterprise and trading networks - from the processes of
design, buy and make to the additional processes of move, store, market and
sell. In addition, our solutions allow companies to leverage the Internet to
collaborate, monitor, measure and improve these business processes over time.
Strategy:
Our objective is to continue to be a leading global provider of intelligent
supply chain solutions for enterprises and eBusiness trading networks, while
returning to sustained profitability. Our strategy to achieve these objectives
includes the following elements:
EXPAND OUR SUPPLY CHAIN AND EBUSINESS OFFERINGS - We believe that the
evolution of the Internet and increasing B2B and B2C commerce will place greater
emphasis on companies' eBusiness strategies, driving demand for our supply chain
optimization solutions and eBusiness solutions. We will continue to develop our
solutions, service capabilities and sales and marketing focus to take advantage
of this anticipated demand. We believe that we have significant experience and
domain expertise in developing and providing supply chain optimization and
eBusiness solutions. This experience and expertise has been enhanced through our
relationships with customers, industry experts and third-party alliances. We
intend to leverage our experience and domain expertise to extend the
capabilities and scope of our solutions to solve a broader range of problems and
improve processes within and among companies in trading networks.
PROVIDE ADVANCED TECHNOLOGICAL LEADERSHIP - We intend to build on the
significant technology initiatives we introduced in fiscal 2000. During fiscal
2000, we introduced two software releases to improve user experience, providing
a state-of-the-art "look and feel" and navigation capabilities to enhance user
productivity and visualization of the network. Our industry leading integration
technology helps enable seamless interchange among our applications, the
extended network and other core systems. Our applications incorporate advanced
decision sciences known as "Web-based optimization engines," including
constraint-based optimization, "meta-heuristics," genetic algorithms, mixed
integer programming and linear programming, to help provide customers with the
most advanced techniques to help enable decision support solutions for the new
digital economy.
During fiscal 2000, we also expanded our strategy for real-time integration
by developing an alliance with OnDisplay, Inc. for our WebConnect products.
These B2B integration products include B2B workflow and business process design
with pre-built or configurable plug-ins that integrate to complementary business
systems, such as enterprise resource planning ("ERP"), legacy transaction
systems, warehouse management systems ("WMS"), manufacturing execution systems
("MES") and external data sources such as product catalogs and point-of-sale
information, which help reduce the time, cost and risk associated with
implementing, integrating and maintaining a best-of-breed solution.
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POWER INTELLIGENT TRADING NETWORKS - We intend to expand our role as a
leading provider of eBusiness solutions that power one-to-many and many-to-many
intelligent trading networks. Our solutions help enable intelligent decisions
within trading networks by offering internet-based optimization, real-time
integration, global visibility, exception alert capabilities and trading partner
analytics. These solutions are enabled by our WebWORKS architecture with
advanced, third-party integration to disparate systems through our WebConnect
products. These solutions can be integrated with, and power, either vertical,
industry or process-based trading networks. Our solutions help enable
collaboration among trading partners to share product designs, procurement
plans, demand forecasts, manufacturing schedules, distribution activities and
transportation movements for the trading network.
BUSINESS INVESTMENTS - We plan on making the necessary investments to
expand our research and development, sales and marketing and strategic
consulting capabilities. We believe that such investments are necessary to
continue to expand our solution offerings, increase the number of sales
personnel and increase the number of implementation consultants to assist
clients in achieving their desired business results.
EXPAND CURRENT AND EXPLORE NEW VERTICAL MARKETS - Currently, we are focused
on vertical markets in sectors such as agriculture, consumer durables,
electronics and high technology, pharmaceutical, motor vehicle parts, retail and
services. With the expansion of our supply chain optimization solutions and our
focus on growth initiatives, we are continuing to examine opportunities in our
current vertical markets and are exploring opportunities to enter others.
DEVELOP STRATEGIC ALLIANCES AND NEW BUSINESS RELATIONSHIPS - We intend to
expand and/or enhance our current solutions and integration technologies through
alliances, acquisition or investing in complementary businesses. In addition, we
will continue to form relationships to complement our sales and marketing,
consulting and implementation initiatives. These relationships include alliances
with leading technology providers such as OnDisplay, Inc. and Extricity
Software, Inc. We also intend to continue to enter relationships with
world-class consulting firms such as Andersen Consulting, Inc. ("Andersen
Consulting"), IBM Consulting and Ernst & Young LLP ("E&Y"). In addition, we
intend to supplement our sales and marketing efforts through our use of
strategic alliances with companies such as Siebel Systems, Inc. We believe that,
together with our technology and consulting providers, we will continue to
provide clients with a broad range of supply chain expertise to assist
businesses in implementing supply chain optimization and eBusiness solutions to
solve their business problems.
Applications:
Our newest generation of proven solutions help enable businesses to work in
concert with their trading partners via the Internet, expanding their supply
chains to eBusiness trading networks. Our solutions assist customers in
anticipating trading requirements in both fixed and dynamic environments to
anticipate and meet the needs of customers, thereby maximizing client
satisfaction. Our solutions are designed to collaborate, optimize, measure and
analyze across each of the key supply chain business process areas - design,
buy, make, store, move, market and sell. Our solutions are also designed to
facilitate strategic, tactical and operational decision-making. Strategic
decisions typically consider a time-frame of six months to two years; tactical
decisions typically consider a time-frame of six weeks to one year and
operational decisions typically consider a time-frame of one to six weeks, while
supply chain execution is typically focused in a time-frame of minutes to days.
Manugistics NetWORKS-TM- ("NetWORKS") family of products provides a
business-to-business, electronic commerce solutions that helps enable companies
to use the Internet to collaboratively create joint business plans, monitor the
execution of those plans and measure their success - serving the needs of all
forms of trading networks. By sharing information within their enterprise and
among their trading partners via the Internet, clients are often able to
experience real-time response to dynamic market conditions, resulting in
potential increased sales and market share growth, while attempting to minimize
supply chain costs. NetWORKS allows the user to tailor business processes to
meet the needs of each trading partner, including customers, retailers,
distributors, carriers or suppliers. Detailed descriptions of the NetWORKS
family of products follow:
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NetWORKS Strategy-TM- - NetWORKS Strategy helps enable companies and
extended trading networks to more efficiently make and incorporate optimal
design and policy decisions into operational and tactical planning processes.
These decisions include components such as virtual network capacity, production,
inventory, transportation and distribution. By modeling end-to-end trading
partner relationships, this product helps determine and fine-tune the most
profitable supply chain strategy, including choice of trading partners, optimal
inventory levels, appropriate product mix, optimal production, storage and
distribution locations, optimal lane volumes and appropriate seasonal
pre-builds.
NetWORKS Master Planning-TM- - NetWORKS Master Planning helps enable the
optimal use of constrained resources to improve customer service and increase
profit margins by reducing asset investment for tactical manufacturing and
operations. Designed to provide key functionality for vertically integrated,
complex distribution networks, this product assists in powering simultaneous
optimization of materials, capacity, inventory, transportation and distribution
constraints across multi-site manufacturing, distribution and supplier networks.
NetWORKS Demand-TM- - NetWORKS Demand is designed to predict and forecast
future customer demand with a high degree of accuracy, alerting a company to
potential supply problems and finding patterns undetected by traditional
forecasting solutions. By combining advanced forecasting techniques with
real-time collaboration via the Internet, NetWORKS Demand helps enable eBusiness
trading networks to interact and to create demand fulfillment strategies with
direct input from the customer.
NetWORKS Supply-TM- - NetWORKS Supply provides the tactical level
functionality in supply planning to help facilitate effective management of
production while simultaneously considering direct material flow between trading
partners. NetWORKS Supply takes into consideration factors such as resource
capacity, availability of raw materials, inflow and outflow (throughput) for
facilities, transportation and availability of components and labor. This
solution helps enable planning materials review for material-intensive
industries, manufacturing and replenishment activities at all facilities
throughout the supply chain. NetWORKS Supply helps provide trading networks the
ability to meet demand and supply requirements and customer service goals given
aggregate capacity and materials constraints.
NetWORKS Fulfillment-TM- - NetWORKS Fulfillment is designed to orchestrate
the time-phased storage and flow of supply to match demand, giving companies the
end-to-end visibility to minimize inventory and reduce logistics costs while
maximizing customer service. This series of components helps enable customer
requirements to be met, despite unanticipated events, through user-controlled
allocation strategies. Balancing the needs of inventory strategies, distribution
requirements and lead-times, time phased replenishment plans are shared with
trading partners such as distributors or customers on a real-time basis via the
Internet.
NetWORKS Commit-TM- - NetWORKS Commit helps drive accurate, reliable,
real-time promises of and commitments for, delivery of products by
simultaneously performing availability checks of inventory, production,
materials, manufacturing scheduling, distribution and transportation and then
immediately allocating appropriate resources. This real-time response to
customer inquiries is important to conducting e-commerce by assessing if a
delivery request can not be satisfied and automatically evaluating substitution
and configuration alternatives based upon user-defined rules.
NetWORKS Transport-TM- - NetWORKS Transport is designed to provide the
ability to simultaneously optimize transportation plans and execute all
transportation moves, inbound, outbound and intercompany, including freight
payment, tracking and reporting. NetWORKS Transport is also designed to build
feasible, cost effective consolidated loads that meet customer service and
business operating requirements and minimize enterprise-wide transportation
costs. With a competitive advantage in multi-point to multi-point transportation
planning, this solution helps drive optimized transportation plans to be shared
with carriers and manufacturers via the Internet.
NetWORKS Scheduling-TM- - NetWORKS Scheduling helps enable single and
multi-site planning, detailed scheduling and real-time communication with the
plant floor to deliver simultaneous optimization of constraints and
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improved customer service. With easy-to-use scheduling board functionality,
optimized schedules can be shared with contract manufacturers via the Internet.
WebConnect - WebConnect is a foundation solution, enabling the integration
of our supply chain optimization solutions both within the enterprise and
"across fire-walls" with third-party applications, such as ERP, WMS and MES
legacy systems and data sources, such as data warehouses. This market proven,
packaged application for integration helps reduce the risk, time and cost of
connecting dynamic, responsive trading networks providing pre-configured,
adaptable and certified integrations to third-party applications that are
real-time, business-process based. These capabilities are designed to power the
connection of a client to any external application, enabling clients to assemble
unique portfolios of applications based on their specific business needs.
Integrations are visualized through a graphical user interface that can make
integrations easier and faster to create and customize without the need to
develop custom interface programming. This application utilizes an
industry-leading enterprise application integration product as the engine
enabling companies to use one tool to support their corporate-wide integration
needs.
STATGRAPHICS - STATGRAPHICS contains a comprehensive set of statistical
tools to control, manage and improve the quality of production processes in
manufacturing companies. STATGRAPHICS utilizes statistical quality control and a
design of experiments to implement quality management in individual locations
throughout an enterprise or plant.
Global Consulting Services:
A key element of our business strategy is to provide clients with
comprehensive solutions for their enterprise and trading network supply chain
optimization problems by combining our products with professional services that
help enable clients to derive the maximum benefit from our solutions. In order
to achieve the benefits of our solutions for eBusiness trading networks, clients
will typically make many changes to their processes and overall operations,
including their planning functions, while implementing our products. To assist
clients in making these changes, we offer a wide range of solution-related
services, including supply chain development consulting to maximize competitive
advantage, business operations consulting, change management consulting,
end-user and system administrator education and training. These services help
clients re-engineer their operations to take advantage of our products and
effective supply chain optimization in eBusiness.
These solution-related services are generally provided separately from our
software products in our software license agreements and are provided on a time
and materials basis. Our solution-related services group consisted of 199
employees as of February 29, 2000.
Client Support:
Another element of our comprehensive solutions is providing on-going
support to existing clients. Substantially all of our clients enter into annual
solution support agreements entitling them to receive solution support,
including access to a hotline and an electronic bulletin board and to receive
product revisions and enhancements. Our client support function also collects
information to assist in focusing future product development efforts and in
identifying market demand. As of February 29, 2000, our client support group
consisted of 52 employees.
Product Development:
Our product development efforts are directed toward the development of new
complementary products; the enhancement of the capabilities of existing
products; expansion of eBusiness capabilities; enhancements for use in foreign
countries and the development of products tailored to the specific requirements
of particular industries and foreign language translations. To date, most of our
products, including product documentation, have been developed by our internal
staff and occasionally supplemented by product acquisitions and complementary
business relationships.
In developing new products or enhancements, we work closely with current
and prospective clients, as well
6
as with other industry leaders, to address client needs and requirements. We
believe that these collaborative efforts will lead to improved software
functionality and will result in superior products likely to have greater market
demand. We maintain committees of users and developers for our products which,
among other things, define and rank issues associated with products and discuss
product enhancement priorities and directions.
We conduct a Product Launch Program for new applications and major
enhancements, which allows clients to review design specifications and
prototypes and participate in product testing. We have also established channels
for client feedback, which include periodic surveys and focus groups. In
addition, our product development staff works closely with our marketing, sales,
support and services groups to develop products that meet the needs of our
current and prospective clients. As of February 29, 2000, our product
development staff consisted of 232 employees.
Since our inception, we have made substantial investments in product
development. We believe that getting products to market quickly, without
compromising quality, is critical to the success of these products. We continue
to make the product development expenditures that we believe are necessary for
us to rapidly deliver new product features and functions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Sales and Marketing:
Our sales operation for North and South America is headquartered at our
offices in Rockville, Maryland and includes field sales personnel in the
Atlanta, Philadelphia, Hartford, Charlotte, Chicago, Columbus, Dallas, Denver,
Detroit, Los Altos, Los Angeles, Ottawa, San Francisco, Sao Paulo (Brazil) and
Toronto metropolitan areas. Our direct sales organization focuses on licensing
supply chain planning and eBusiness solutions to large, multi-national
companies, as well as mid-sized companies with a variety of supply chain issues.
We market our solutions in regions outside of North and South America,
primarily through subsidiaries. Our British, German, French, Belgian and Dutch
subsidiaries, located in Bracknell, England; Ratingen, Germany; Paris, France;
Brussels, Belgium; and Utrecht, The Netherlands, respectively, provide direct
sales, services and support of our supply chain optimization solutions for
enterprises and evolving eBusiness trading networks, primarily to customers
located in continental Europe and the United Kingdom. We established a
subsidiary in Tokyo, Japan to license and support our solutions in Japan. We
also have a subsidiary in Australia for sales and support to customers in the
Pacific Rim, including Taiwan. We adapt our solutions for use in international
markets by addressing different languages, different standards of weights and
measures and other operational considerations. We also license our STATGRAPHICS
product in the U.S. and in other countries through independent distributors,
national resellers and local dealers. In fiscal 2000, approximately 36% of our
total licensing and services revenues were attributable to sales outside the
Americas. See "Note 13 of Notes to Consolidated Financial Statements."
We also use indirect sales channels to market our products, complementary
software vendors, third-party alliances and distributorships. See "Alliances."
Using these channels, we seek to increase the market penetration of our
solutions via joint marketing and sales activities. These relationships enhance
our sales resources into target markets and expand our expertise to bring
optimum supply chain solutions to prospects and clients.
We support our sales activities by conducting a variety of marketing
programs, including an annual industry supply chain and eBusiness event, client
"steering committees," and appearances at industry conferences such as those
organized by the American Production and Inventory Control Specialists ("APICS")
organization, Supply Chain World, Retail Systems and Auto-Tech. We also
participate in solution demonstration seminars and client conferences hosted by
complementary software vendors. In addition, we conduct lead-generation programs
including advertising, direct mail, public relations, seminars, telemarketing
and ongoing client communication programs.
As of February 29, 2000, we had 120 employees engaged in sales activities,
33 employees engaged in marketing activities and 105 employees engaged in
business development consulting activities.
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Alliances:
We have established business alliances with leading software companies,
consulting firms, affiliate resellers and other complementary vendors. We have
entered into joint marketing agreements with Siebel Systems, Inc., as well as a
number of other prominent software companies, which generally provide that the
respective companies conduct joint marketing activities. In support of these
joint efforts, our WebConnect framework will continue to be enhanced to
integrate our solutions with the software applications of the companies
mentioned above and other ERP, WMS, MES, customer relationship management,
configuration and other related application vendors.
We continue to develop relationships with leading consulting firms in order
to complement our own marketing efforts. We also have formal relationships with
many national and major regional consulting firms including Andersen Consulting,
E & Y, IBM Consulting and others. In addition to formal programs, we cooperate
with other professional services firms informally on a client-by-client basis.
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Clients:
Our supply chain products have been licensed by organizations in
process manufacturing industries, such as the consumer packaged goods, food and
beverage, chemicals, paper and pharmaceuticals industries and by clients in
discrete and high-volume repetitive industries, including the apparel, consumer
durables, electronics and high technology and motor vehicles and parts
industries. We have licensed various combinations of our software products to
clients worldwide. During fiscal 2000, all of these clients have either licensed
software products from us or our distributors, purchased solution support,
consulting or other services or both. See "Sales and Marketing."
Consumer Packaged Goods Chemicals, Petrochemicals and Process
Chelsea Building Products BASF Corporation
Eveready Battery Co., Inc. Dow Chemical Company, Limited
The Great Atlantic & Pacific Tea Company, Inc. E.I. du Pont de Nemours and Company
The Procter & Gamble Company ExxonMobil Corporation
Revlon Consumer Products Corporation Shell Italia S.p.A.
Unilever Company The Rohm & Haas Company
Food & Beverage Consumer Electronics/High Technology
AmeriServe Food Distribution, Inc. Analog Devices, Inc.
Coca-Cola Bottling Co. Consolidated Compaq Computer Corporation
Frito-Lay, Inc. Ericsson Telecom AB
Nabisco, Inc. Hewlett-Packard Company
Ocean Spray Cranberries, Inc. IBM Corporation
Perdue Farms Inc. Lexmark International, Inc.
Starbucks Corporation Philips Consumer Electronics Company
Sugar Foods Corporation Trimble Navigation Limited
Retail Drug/Mass Merchandise/Specialty Retail Motor Vehicles and Parts
CVS, Inc. BMW AG
Rite Aid Corporation Deere & Co.
Dayton Hudson Corporation Tenneco Automotive-Monroe Auto Equipment
Kmart Corporation Harley-Davidson, Inc.
OfficeMax, Inc. Masco Corporation
Staples, Inc. Mitsubishi Motor Sales of America
Toys 'R' Us, Inc. PPG Industries, Inc.
Wal-Mart Stores, Inc.
Paper
Apparel Fort James Corporation
Kayser-Roth Corporation Mead Corporation
Levi Strauss & Co. Rayonier
Oxford Industries, Inc. Sweetheart Cup Company, Inc.
Ross Stores, Inc.
The Limited, Inc. Grocery
Food Lion, Inc.
The Kroger Co.
Richfood, Inc.
Safeway Stores, Inc.
Winn-Dixie Stores, Inc.
We generally provide our software products to clients under non-exclusive,
non-transferable license agreements. To protect our intellectual property rights
we do not sell or transfer title of our products to our clients. Under our
current standard license agreement, licensed software may be used solely for the
client's internal operations. We are expanding the use of our products and
services to provide solutions to emerging e-commerce markets including engaging
in joint development efforts and providing non-exclusive software licenses to
enable trading exchanges.
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Competition:
The market for supply chain planning software is highly competitive. Other
application software vendors, including companies targeting mainframe or
mid-range clients and certain professional services organizations, including
such vendors as i2 Technologies, Inc. and Logility, Inc. offer products that are
directly competitive with some of the software applications marketed by us. In
addition, certain ERP vendors, most of which are substantially larger than we
are, have acquired or developed supply chain planning software companies,
products or functionality or have announced intentions to develop and sell
supply chain planning solutions, including such vendors as Baan Company N.V.,
PeopleSoft, Inc., Oracle Corporation and SAP AG.
The principal competitive factors in the supply chain planning software
market served by us include product functionality and quality, domain expertise,
product suite integration, ease of use, customer service and satisfaction, the
ability to provide customer references, product support, product-related
services, compliance with industry standards and requirements, the ability of
the solution to generate business benefits, vendor reputation and, in
international markets, availability in foreign languages. We believe that our
principal competitive advantages are our comprehensive, integrated solutions,
our significant list of referenceable clients, our substantial investment in
product development, the strength of our solutions to generate business
benefits, the speed at which our solutions generate returns or are implemented,
our strong client support services and our extensive knowledge of supply chain
optimization and eBusiness requirements.
License Agreements and Pricing:
License fees consist principally of fees generated from licenses of our
software products. In consideration of the payment of license fees, we generally
grant nonexclusive, nontransferable, perpetual licenses which are primarily
business unit and user specific. License fee arrangements vary depending upon
the type of software product being licensed and the computer environment.
License fees are based primarily on which products are licensed and on the
number of users and locations. Licensing dollar amounts for supply chain
optimization solutions may be several million dollars for a large scope of
supply chain initiatives.
Clients may obtain solution support for an annual fee, depending on the
level of support and the size of the license fee. The solution support fee is
generally billed annually and is subject to changes in solution support list
prices. We also provide pre-installation assistance, systems administration,
training and other product-related services, generally on a time and materials
basis. This allows our customer to determine the level of support or services
appropriate for its needs.
Proprietary Rights and Licenses:
We regard our software as proprietary and rely on a combination of trade
secret, copyright and trademark laws; license agreements; confidentiality
agreements with our employees; and nondisclosure and other contractual
requirements imposed on our clients, consulting partners and others to protect
proprietary rights in our products. We distribute our supply chain planning
software under software license agreements, which typically grant clients
nonexclusive, nontransferable licenses to our products and have perpetual terms
unless terminated for breach. Under these types of license agreements, we retain
all rights to market our products.
Use of the licensed software is usually restricted to the customer's
internal operations and for designated users. In sales to virtual service
providers, the licensed software is restricted to the customer's internal
operations of designated users and for the processing of defined customer's
client data. Use is subject to terms and conditions prohibiting unauthorized
reproduction or transfer of the software. We also seek to protect the source
code of our software as a trade secret and as an unpublished, copyrighted work.
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Employees:
As of February 29, 2000, we had 866 full-time regular employees. None of
our employees are represented by a labor union. We have experienced no work
stoppages and believe that our employee relations are generally good.
Item 2. PROPERTIES.
Our principal sales, marketing, product development, support and
administrative facilities are located in Rockville, Maryland, where we lease
approximately 122,000 square feet of office space under a lease agreement which
expires on April 30, 2002. We lease approximately 52,000 square feet of
additional office space under a lease agreement that expires on July 31, 2002.
This space is located in a building a few miles from our headquarter facilities.
In addition, we lease office space for our 32 sales, service and product
development offices located in North America, South America, Europe and
Asia/Pacific.
Item 3. LEGAL PROCEEDINGS.
We have reported that, on March 7, 1997, we, as part of the acquisition of
certain assets of Information Resources, Inc. ("IRI"), entered into several
agreements with IRI, including a Data Marketing and Guaranteed Revenue Agreement
("Agreement") and an Asset Purchase Agreement ("Purchase Agreement"). The
Agreement set forth the obligations of the parties with regard to revenues to be
paid to IRI from the sale by us of specified products provided by IRI. Under the
terms of the Agreement, we guaranteed revenue to IRI in a total amount of $16.5
million over a period of years following execution of the Agreement by way of
three separate revenue streams.
We made an initial payment of approximately $500,000 to IRI. In addition,
as part of our commitment, we agreed to guarantee revenues to IRI in a total
amount of $12 million over an initial three-year period from execution of the
agreement ("First Revenue Stream"). We asserted that our ability to market the
IRI products had been impaired, which, under the terms of the Agreement,
obligates the parties to restructure the payments and/or modify the obligations
with regard to the First Revenue Stream. IRI responded, disagreeing that an
impairment existed and in the alternative, that any impairment was corrected.
The parties discussed their disagreement over the impairment issue until
IRI filed a complaint in the Circuit Court of Cook County, Illinois on January
15, 1999. The complaint alleged breach of the Agreement and initially sought
damages of approximately $12,000,000 for our failure to make guaranteed
payments. The complaint also alleged a breach of a separate Non-Competition and
Non-Solicitation Agreement executed at the same time as the Agreement and sought
damages in an amount in excess of $100,000. We filed a Motion to Stay
Proceedings and Compel Arbitration, which was granted as to the claim under the
Agreement and denied as to the claim under the Non-Competition and
Non-Solicitation Agreement. Arbitration proceedings have commenced under the
auspice of the American Arbitration Association.
In the arbitration, IRI seeks a total of $15,930,563 in damages. The amount
now sought by IRI includes amounts which it claims are due under a second
revenue stream under the Agreement, triggered by the resolution of IRI's lawsuit
with Think Systems Corporation. The second revenue stream represents a total
guaranteed revenue of $1.75 million for the first and second year following the
Think Systems settlement and $2.25 million for the third year following the
settlement. We contend that the conditions to these amounts becoming due under
the second revenue stream have not been satisfied and that no amounts are due to
IRI, because, among other reasons, of a failure of consideration in the overall
transaction. Both the Cook County action and the arbitration proceeding are in
the early stages; coordinated discovery in both proceedings has commenced and is
scheduled to be completed in October 2000.
As disclosed in our Periodic Report on Form 10-Q for the three months ended
November 30, 1999, we reached an agreement for the settlement of the class
action federal securities litigation in which we, our Chairman of the Board of
Directors (the"Board") and our former Chief Financial Officer were defendants
(the "Defendants"). A number of lawsuits had been filed in various Federal
District Courts alleging certain disclosure violations under the federal
securities laws against the Defendants, arising from alleged omissions and
misrepresentations by us and the
11
two individuals regarding our business, operations and financial condition. Each
complaint sought class action status on behalf of purchasers of our common stock
during certain specified periods (variously from February 13, 1998 through June
9, 1998) and sought unspecified monetary damages. These actions were
consolidated as a class action in the District of Maryland and a consolidated
complaint was filed by all plaintiffs.
As reported by us in our Current Report on Form 8-K dated August 17, 1999,
the United States District Court for the District of Maryland issued an order
dismissing the consolidated class action complaint against the Defendants. The
court dismissed the complaint for failure to state a claim on which relief can
be granted. The plaintiffs then filed an appeal of the ruling. During the
pendency of the appeal, the parties reached a settlement in principle to resolve
the matter. This settlement is reflected in a Memorandum of Understanding and is
contingent upon approval by the District Court. The parties subsequently filed
with the District Court a joint motion for relief from the dismissal of the
consolidated amended complaint based on the parties' settlement agreement.
On March 16, 2000, the District Court issued an order indicating to the
Fourth Circuit Court of Appeals that it was inclined to grant the parties' joint
motion. The District Court further indicated that it had no objection to the
Fourth Circuit remanding the matter so that the District Court may formally
consider the joint motion and the proposed settlement agreement. The amounts to
be paid by Defendants pursuant to the settlement are being funded by our insurer
and thus settlement, if finally consummated, on terms substantially the same as
those set forth in the Memorandum of Understanding, would not have a material
adverse effect on us.
As reported by us in our Current Report on Form 8-K dated February 25,
2000, we entered into a settlement agreement and general release (the
"Settlement") with Level 8 Systems, Inc., a New York corporation ("Level 8")
which provided for the dismissal of both the lawsuit filed by Template Software,
Inc. ("Template"), against Manugistics, Inc., our principal subsidiary
("Manugistics") and the counterclaims made by Manugistics, Inc. against Template
in the action. Template was formerly a Virginia corporation which was merged in
December 1999 into a wholly owned subsidiary of Level 8 (the successor in
interest to Template). Pursuant to its terms, the Settlement does not constitute
an admission of wrongdoing by either party to the dispute.
Template had filed suit against Manugistics in the United States District
Court for the Eastern District of Virginia, Alexandria Division, alleging that
Manugistics provided software that did not satisfy the requirements of a
software license agreement Template entered into with Manugistics in November
1998 (the "Agreement"). Template sought damages of at least $1.25 million, which
represented the amount of software license fees paid by Template under the
Agreement. Manugistics responded to the complaint and filed counterclaims
against Template, including a counterclaim for recovery of approximately
$600,000 for unpaid consulting services provided by Manugistics. The Settlement
provides for a cash payment that was made by us to Template in an amount that
was covered by our insurance carrier.
We are involved from time to time in disputes (including those described
below) and other litigation in the ordinary course of business. We do not
believe that the outcome of any pending disputes or litigation will have a
material adverse effect on our business, operating results, financial condition
and cash flows. However, the ultimate outcome of these matters, as with
litigation generally, is inherently uncertain and it is possible that some of
these matters may be resolved adversely to us. The adverse resolution of any one
or more of these matters could have a material adverse effect on our business,
operating results, financial condition and cash flows.
One of our clients submitted to us by letter a claim for damages based on
alleged breaches of a software license agreement entered into with one of our
foreign subsidiaries in fiscal 1997. The client claims damages in the amount of
approximately $6.5 million, a significant portion of which consists of
consequential damages. We are in the process of responding to the letter and we
believe that we have meritorious defenses to these claims and could assert
significant counterclaims against the client.
We have also received a letter from a foreign company asserting, on the
basis of information in our press releases, that certain of our supply chain
planning solutions which we sell infringe on that company's patents. We believe
that our systems and solutions do not infringe on the foreign company's patents
and intend to respond appropriately.
12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and position held by each of the executive officers of Manugistics
Group, Inc. and Manugistics, Inc., its principal operating subsidiary, are as
follows:
Name Age Position
- ----- --- --------
William M. Gibson.................. 55 Chairman of the Board of Directors
Gregory J. Owens................... 40 Chief Executive Officer and President
Terrence A. Austin................. 37 Executive Vice President, Electronics and High Technology
Richard F. Bergmann................ 44 Executive Vice President, Global Sales and Services
Raghavan Rajaji.................... 53 Executive Vice President and Chief Financial Officer
Jeffrey L. Holmes.................. 50 Senior Vice President, Strategic Solutions and Alliances
James J. Jeter..................... 41 Senior Vice President, Global Marketing
Timothy T. Smith................... 36 Senior Vice President, General Counsel and Secretary
Daniel S. Stoks.................... 38 Senior Vice President, Americas Sales
Mr. Gibson has served as Chairman of the Board of Manugistics Group, Inc.
since its formation in 1986. From 1986 until April 1999, Mr. Gibson also served
as Chief Executive Officer and President of Manugistics Group, Inc. From 1983
until 1986, Mr. Gibson served as Chief Executive Officer, President and Chairman
of the Board of STSC, Inc. (now Manugistics, Inc.). He joined STSC, Inc. as
Executive Vice President and Chief Operating Officer in 1982.
Mr. Owens became Chief Executive Officer and President of Manugistics
Group, Inc. in April 1999. From 1993 to 1999, Mr. Owens served as the Global
Managing Partner for the Andersen Consulting Supply Chain Practice, one of the
world's largest supply chain consulting practices with over $1.4 billion in
revenue in 1998. Mr. Owens joined Andersen Consulting in 1990.
Mr. Austin has served as Executive Vice President, Electronics and High
Technology since June 1999. From August 1997 to June 1999, he was head of
Andersen Consulting's Electronics and High Technology Sector of its Global
Supply Chain Practice. He joined Andersen Consulting in October 1989.
Mr. Bergmann has served as the Executive Vice President, Global Sales and
Services since June 1999. From September 1990 to June 1999, he was a partner in
the Andersen Consulting Supply Chain Strategy Group. Prior to joining Andersen
Consulting, Mr. Bergmann was Director of Corporate Logistics for Pepsico Frito
Lay.
Mr. Rajaji has served as Executive Vice President and Chief Financial
Officer since December 1999. From September 1995 to December 1999, he served as
Senior Vice President, Chief Financial Officer and Treasurer at BancTec, Inc.
13
Mr. Holmes has served as Senior Vice President, Strategic Solutions and
Alliances since September 1999. From April to September 1999, he served as
Senior Vice President, North American Sales Operations. From October 1998 to
April 1999, he served as Vice President, Industry Solutions. From January 1997
to October 1998, he served as Vice President, Consumer Products Industry. He
joined us in October 1996 as Director of Marketing, Consumer Products. From 1995
to 1996, Mr. Holmes served as Logistics and Commercial Director for Mars
Incorporated. From 1993 to 1995, Mr. Holmes served as Logistics Director for
Mars, L.L.C. in Russia.
Mr. Jeter has served as Senior Vice President, Global Marketing since
August 1999. From April 1997 to August 1999, he held various executive positions
at Iomega Corporation, ultimately rising to the level of Vice President and
Managing Director of Iomega's European business. From October 1991 to April 1997
he served as Director of Product Marketing in Duracell's new products and
technology division.
Mr. Smith has served as Senior Vice President, General Counsel and
Secretary since January 2000. He served as Vice President and General Counsel
for automobile importer Land Rover North America, Inc. from June 1998 to
December 1999. He was Associate Corporate Counsel for retail holding company
Dart Group Corporation from May 1995 to May 1998 and was an associate with the
Baltimore-based law firm of Niles, Barton & Wilmer from September 1988 to May
1995.
Mr. Stoks has served as Senior Vice President, Americas Sales since January
2000. From June 1999 to January 2000, he served as Senior Vice President of
Sales for YouDecide.com. From July 1992 to June 1999, he held various sales
management positions at Oracle Corporation.
There are no family relationships among any of the executive officers or
directors of Manugistics Group, Inc. Executive officers of Manugistics Group,
Inc. are elected by the Board of Directors on an annual basis and serve at the
discretion of the Board.
14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock, $.002 par value per share, trades on The Nasdaq Stock
Market under the symbol "MANU". The following table sets forth the high and low
closing prices in dollars per share for the respective quarterly periods over
the last two fiscal years, as reported in published financial sources. These
prices reflect inter-dealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.
Fiscal 2000 High Low
- ----------- ---- ----
First Quarter 10 3/4 6 1/16
(ended May 31, 1999)
Second Quarter 15 3/4 8 7/8
(ended August 31, 1999)
Third Quarter 16 15/16 9 1/2
(ended November 30, 1999)
Fourth Quarter 56 13/16 18 7/16
(ended February 29, 2000)
Fiscal 1999 High Low
- ----------- ---- ----
First Quarter 66 3/8 25 1/4
(ended May 31, 1998)
Second Quarter 31 1/2 14
(ended August 31, 1998)
Third Quarter 16 1/2 6 1/8
(ended November 30, 1998)
Fourth Quarter 17 3/8 7 1/2
(ended February 28, 1999)
As of April 14, 2000, there were approximately 320 stockholders of record
and approximately 11,000 beneficial owners of our common stock, according to
information provided by our transfer agent.
We have never declared or paid any cash dividends on our common stock and
do not intend to do so in the foreseeable future. It is our present intention to
retain any future earnings to provide funds for the operation and expansion of
our business. In addition, we have an unsecured revolving credit facility with a
commercial bank that will expire on September 30, 2000. We intend to renew this
credit facility upon expiration. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations, Liquidity and Capital Resources"
and Note 5 of Notes to Consolidated Financial Statements. During the term of the
facility, we are subject to a covenant not to declare or pay cash dividends to
holders of our common stock. Future payment of cash dividends, if any, will be
at the discretion of the Board and will be dependent upon our financial
condition, results of operations, capital requirements and such other factors as
the Board may deem relevant and will be subject to the covenants contained in
any outstanding credit facility.
Recent Sale of Unregistered Securities:
None.
15
Item 6. SELECTED FINANCIAL DATA.
Selected consolidated financial data with respect to us for each of the
five fiscal years in the period ended February 29, 2000 is set forth below. This
data should be read in conjunction with our Consolidated Financial Statements
and related Notes thereto for the corresponding periods, which are contained in
Part IV of this Annual Report on Form 10-K.
Fiscal Year Ended February 29 or 28
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
License fees $ 60,421 $ 73,802 $ 107,547 $ 54,342 $ 33,111
Consulting, solution support and other
services 92,012 103,762 72,716 45,865 33,865
-------- ------- --------- -------- --------
Total revenues 152,433 177,564 180,263 100,207 66,976
-------- ------- --------- -------- --------
Operating expenses:
Cost of license fees 13,685 13,415 11,102 5,011 3,070
Cost of consulting, solution support
and other services 44,346 50,585 33,213 19,618 15,181
Sales and marketing 61,439 103,006 66,228 34,961 22,933
Product development 29,150 49,389 32,794 18,889 12,133
General and administrative 15,837 19,828 14,639 9,344 6,664
Acquisition-related expenses (1) -- 3,095 -- -- --
Restructuring costs (1) (1,506) 33,775 -- -- --
Purchased research and development (2) -- -- 47,340 3,697 --
-------- ------- --------- -------- --------
Total operating expenses 162,951 273,093 205,316 91,520 59,981
(Loss) income from operations (10,518) (95,529) (25,053) 8,687 6,995
Other income - net 1,389 2,362 2,863 1,047 1,144
-------- ------- -------- -------- --------
(Loss) income before income taxes (9,129) (93,167) (22,190) 9,734 8,139
Provision (benefit) for income taxes (184) 2,945 (9,025) 5,077 3,064
-------- ------- -------- -------- --------
Net (loss) income $(8,945) $(96,112) $ (13,165) $ 4,657 $ 5,075
======== ======= ======== ======== =======
Basic (loss) income per share $ (0.33) $ (3.64) $ (0.56) $ 0.22 $ 0.24
======== ======= ======== ======== =======
Shares used in basic share computation 27,486 26,402 23,484 21,657 20,909
======== ======= ======== ======== =======
Diluted (loss) income per share $ (0.33) $ (3.64) $ (0.56) $ 0.20 $ 0.23
======== ======= ======== ======== =======
Shares used in diluted share computation 27,486 26,402 23,484 23,159 21,935
======== ======= ======== ======== =======
(1) During fiscal 1999, we incurred charges to operations totaling $33.8 million
for certain restructuring costs related to management's plan to reduce costs and
improve operating efficiencies. Also during fiscal 1999, we incurred a
non-recurring charge to operations totaling $3.1 million for certain
acquisition-related expenses in connection with the business combination
involving TYECIN Systems, Inc. The impact of these charges on basic and diluted
loss per share was $1.59 per share for fiscal 1999. Excluding the effect of
these charges, basic and diluted loss per share would have been $2.05.
(2) During fiscal 1998 and 1997, we incurred non-recurring, non-cash charges to
operations totaling $47.3 million (or $28.6 million, net of $18.7 million tax
benefit) and $3.7 million, respectively, in connection with the write-off of
purchased research and development which had not yet reached technological
feasibility and had no alternative future use. The impact of these charges on
basic and diluted (loss) income per share was ($1.22) and ($1.15), respectively,
in fiscal 1998 and ($.17) and ($.16) respectively, in fiscal 1997. Excluding the
effect of these non-recurring, non-cash charges, basic and diluted income per
share would have been $.66 and $.59, respectively, in fiscal 1998 and $.39 and
$.36, respectively, in fiscal 1997.
16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview:
Manugistics Group, Inc. is a leading global provider of intelligent supply
chain optimization solutions for enterprises and evolving eBusiness trading
networks. Our solutions, which include client assessment, software products,
consulting services for implementation and solution support, can be optimized to
the supply chain requirements of companies. Our solutions provide our clients
with the business intelligence to participate in various forms of trading
relationships, from traditional linear supply chains to eBusiness trading
networks. Our broad suite of solutions can help companies power profitable
growth, increase revenues, lower overall costs and improve capital allocation
through more effective operational decisions. Other operational benefits of
implementing our solutions can include greater speed to market, strengthened
customer service, improved relationships among trading partners and increased
inventory turns within and across our clients' supply chains and eBusiness
trading networks.
Building on our supply chain solution expertise, we were an innovator in
trading partner collaboration with our first Internet-ready products
commercially available in late 1997. These initial products were focused on the
prediction of demand and sourcing of supply between an enterprise and its
trading partners ("one-to-many"). Our expanded solutions currently address new
complexities and increased operational challenges as trading partner
collaboration has evolved to include multiple enterprises and trading partners
("many-to-many"). These solutions are enabled by our WebWORKS architecture with
advanced integration to disparate systems through our WebConnect product. We
believe that supply chain requirements for one-to-many and many-to-many trading
networks will drive increased demand for our solutions. Our technology
initiatives will continue to focus on the changing needs of clients and evolving
market dynamics in order to meet this demand.
During fiscal 1999 and the first half of fiscal 2000, we experienced
operational difficulties caused by, among other factors, problems with direct
sales force execution, new and stronger competitive forces and other external
factors. Our poor financial performance in fiscal 1999 led to our decision to
restructure our business. By the end of fiscal 2000, we completed our
operational turnaround, including the hiring of a new executive management team,
delivery of enhanced supply chain and eBusiness solutions and an improved market
image, which we believe has positioned us well for the future. Although we
reported a loss for fiscal 2000, in the third and fourth quarter of the year we
generated sequential quarterly license fee revenue growth through operational
improvements, including improvements in sales force execution.
17
Results of Operations:
Revenues:
Our revenues consist of software license fees, consulting revenues and
solution support revenues. Software license revenues are recognized upon
execution of a software license agreement, provided that the software product
has been shipped, there are no uncertainties surrounding product acceptance, the
license fees are fixed and determinable, collection is considered probable and
no significant production, modification or customization of the software is
required, in accordance with the American Institute of Certified Public
Accountants' ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition with respect to Certain Transactions," for fiscal periods subsequent
to December 31, 1997. Fees are allocated to the various elements of software
license agreements based on our historical fair value experience. Consulting
revenues are recognized as the services are performed. Solution support revenues
are recognized ratably over the support period defined in the software license
agreement. For the fiscal year ended February 28, 1998, software license
revenues were recognized upon the execution of a software license agreement and
shipment of the software provided that the license fee was fixed, collection was
considered probable and no significant vendor obligations remained outstanding,
in accordance with the AICPA's SOP 91-1, "Software Revenue Recognition." The
following table sets forth software, consulting, solution support and other
services revenues for the three fiscal years ended February 29, 2000, and
February 28, 1999 and 1998 (dollar amounts in thousands):
Fiscal Year Ended February 29 or 28
2000 Change 1999 Change 1998
------------ ---------- ------------- ---------- --------------
License fees $ 60,421 (18.1%) $ 73,802 (31.4%) $ 107,547
Percentage of total revenues 39.6% 41.6% 59.7%
Consulting, solution support
and other services 92,012 (11.3%) 103,762 42.7% 72,716
Percentage of total revenues 60.4% 58.4% 40.3%
Total revenue 152,433 (14.2%) 177,564 (1.5%) 180,263
Percentage of total revenues 100% 100% 100%
License fees. Our license fees consist primarily of software license
revenues from direct sales. We also earn license fees through indirect channels,
primarily through complementary software vendors, consulting firms, distributors
and systems integrators.
License fees decreased for the year ended February 29, 2000 compared to the
year ended February 28, 1999 primarily because we fielded a smaller direct sales
organization during fiscal 2000 which resulted in a decrease in the number of
licenses sold to customers and a decrease in the average deal size in the first
half of fiscal 2000 when compared to fiscal 1999. License fees decreased for the
year ended February 28, 1999 compared to the prior fiscal year primarily due to
sales execution issues and other external factors described below.
Our direct sales force execution suffered from (1) delays in new sales
employees becoming productive; (2) the major sales territory re-alignment that
resulted from the rapid sales force expansion and changing to a vertical market
organization of the sales force; and (3) certain difficulties involving the
integration of the products and operations of ProMIRA Software, Inc. ("ProMIRA")
and TYECIN Systems, Inc. ("TYECIN"). See "Factors that May Affect Future
Results."
External factors compounded our sales execution problems and affected our
ability to generate license fee revenues, including new and stronger competitive
forces, issues impacting clients and prospects such as the Year 2000 problem and
concerns with global economic conditions. These factors lengthened or deferred
sales cycles as clients diverted budgets and other resources to accommodate
testing and preparation for the Year 2000 problem and postponed licensing
decisions. In addition, our operating results during fiscal 1999 raised concerns
with clients and prospects about our financial viability, which tended to
lengthen sales cycles. We believe that these concerns adversely affected our
ability to generate license fee revenues.
18
Although there has been variation in license fees as a percentage of total
revenues over the past several quarters, we anticipate that license fees are
likely to represent approximately 50% of total revenues for fiscal 2001. See
"Forward Looking Statements" and "Factors That May Affect Future Results."
Consulting, solution support and other services. Consulting, solution
support and other services ("Services") revenues decreased for the year ended
February 29, 2000 compared to the year ended February 28, 1999 primarily due to
a decrease in implementation services provided, resulting from a lower number of
software licenses closed during the year. Services revenue increased for the
year ended February 28, 1999 compared to the prior year primarily due to the
continuation of customer implementations from license revenues in the fourth
quarter of fiscal 1998 and the first three quarters of fiscal 1999, in addition
to an increase in the number of clients being actively supported under solution
support agreements.
Solution support revenues increased following the increase in the number of
clients that have licensed our software products and entered into annual
solution support contracts. Solution support revenues tend to track software
license fee transactions in prior periods. In the past three fiscal years,
approximately 95% of customers with solution support contracts have renewed
these contracts.
Operating Expenses:
General. In the second half of fiscal 1999, we executed company-wide
restructuring activities that included overall cost containment initiatives as
we pursued our business strategies of returning to profitability, expanding
product innovation to enable companies to take advantage of e-commerce and
include interface and integration technology and expanding our indirect
distribution channels through alliances with complementary software vendors and
consulting and implementation organizations.
Due to our cost containment actions, such as headcount and occupancy
reductions, total operating expenses decreased for the fiscal year ended
February 29, 2000 compared to fiscal years ended February 28, 1999 and February
28, 1998.
The following table sets forth operating expenses for the three fiscal
years ended February 29, 2000 and February 28, 1999 and 1998 (dollar amounts in
thousands):
Fiscal Year Ended February 29 or 28
Operating expenses 2000 Change 1999 Change 1998
------------ ---------- ------------- ---------- --------------
Cost of license fees $ 13,685 2.0% $ 13,415 20.8% $ 11,102
Percentage of total revenues 9.0% 7.6% 6.2%
Cost of consulting, solution support
and other services 44,346 (12.3%) 50,585 52.3% 33,213
Percentage of total revenues 29.1% 28.5% 18.4%
Sales and marketing 61,439 (40.4%) 103,006 55.5% 66,228
Percentage of total revenues 40.3% 58.0% 36.7%
Product development 29,150 (41.0%) 49,389 50.6% 32,794
Percentage of total revenues 19.1% 27.8% 18.2%
General and administrative 15,837 (20.1%) 19,828 35.4% 14,639
Percentage of total revenues 10.4% 11.2% 8.1%
Restructuring costs (1,506) (104.5%) 33,775 100% --
Percentage of total revenues (1.0%) 19.0% N/M
Acquisition-related expenses -- (100%) 3,095 100% --
Percentage of total revenues N/M 1.7% N/M
Purchased research and development -- 0% -- (100%) 47,340
Percentage of total revenues N/M N/M 26.3%
------------ ------------- --------------
Total operating expenses $ 162,951 (40.3%) $ 273,093 33.0% $ 205,316
Percentage of total revenues 106.9% 153.8% 113.9%
19
Cost of license fees. Cost of license fees consist of amortization of
capitalized software development costs, cost of goods and other expenses, which
include royalty fees associated with third-party software included with our
licensed software and amortization of goodwill associated with certain
acquisitions. Capitalized software development costs and acquired research and
development costs are amortized at the greater of the amount computed using
either (a) the straight-line method over the estimated economic life of the
product, commencing with the date the product is first available for general
release or (b) the ratio that current gross revenues from the product bears to
the total current and anticipated future gross revenues. Generally, an economic
life of two years is assigned to capitalized software development costs.
Goodwill is amortized over five years.
The following table sets forth amortization of capitalized software, cost
of goods and other expenses and cost of license fees for the three fiscal years
ended February 29, 2000 and February 28, 1999 and 1998 (dollar amounts in
thousands):
Fiscal Year Ended February 29 or 28
2000 Change 1999 Change 1998
------------ ---------- ------------- ---------- --------------
Amortization of capitalized software $ 9,006 3.5% $ 8,704 15.1% $ 7,560
Percentage of license fees 14.9% 11.8% 7.0%
Cost of goods and other expenses 4,679 (0.7%) 4,711 33.0% 3,542
Percentage of license fees 7.7% 6.4% 3.3%
------------ ------------- --------------
Cost of license fees 13,685 2.0% 13,415 20.8% 11,102
Percentage of license fees 22.6% 18.2% 10.3%
Cost of license fees increased for the fiscal year ended February 29, 2000
compared to fiscal years ending February 28, 1999 and 1998 primarily due to an
increase in the amortization of previously capitalized software costs for
products that became available for general release during the fiscal year ended
February 29, 2000. In addition, cost of license fees increased as a percentage
of total license fees due to a decrease in license fee revenues generated for
the fiscal year ended February 29, 2000 compared to fiscal years ending February
28, 1999 and 1998.
Cost of consulting, solution support and other services. Cost of
consulting, solution support and other services consist primarily of personnel
costs. Cost of consulting, solution support and other services decreased for the
fiscal year ending February 29, 2000, compared to the fiscal year ending
February 28, 1999 primarily due to the reduction of expenses in connection with
the company-wide restructuring activities, which included reducing headcount, in
the second half of fiscal 1999. Cost of services increased for the fiscal year
ended February 28, 1999 compared to fiscal year ended February 28, 1998
primarily due to hiring additional consultants during the first part of fiscal
1999 and increasing product support and training personnel in both domestic and
foreign locations.
Sales and marketing. Sales and marketing expenses consist primarily of
personnel costs, commissions, promotional events and advertising. Sales and
marketing expenses decreased for the fiscal year ended February 29, 2000
compared to fiscal years ending February 28, 1999 and 1998 primarily due to the
reduction of sales and marketing headcount implemented under the company-wide
restructuring activities during the second half of fiscal 1999. Sales and
marketing expenses increased for the fiscal year ended February 28, 1999
compared to fiscal year ended February 28, 1998 primarily because we added new
personnel in both our domestic and foreign locations throughout the first half
of fiscal 1999. In fiscal 1999, we also incurred promotional costs to establish
new offices and enhance our presence in foreign locations.
Product development. We record product development costs net of capitalized
software development costs for products that have reached technological
feasibility in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Software development costs are amortized at the greater of
the amount computed using either (a) the straight-line method over the estimated
economic life of the product, commencing with the date the product is first
available for general release or (b) the ratio that current gross revenues bears
to the total current and anticipated future gross revenues. Generally, an
economic life of two years is assigned to capitalized software development
costs.
20
The following table sets forth product development costs for the three
fiscal years ended February 29, 2000 and February 28, 1999 and 1998 (dollar
amounts in thousands):
Fiscal Year Ended February 29 or 28
2000 Change 1999 Change 1998
------------ ---------- ------------- ---------- --------------
Gross product development costs $ 34,585 (41.8%) $ 59,464 37.7% $ 43,068
Percentage of total revenues 22.7% 33.5% 24.0%
Less: Capitalized product
development costs 5,435 (46.1%) 10,075 (1.9%) 10,274
Percentage of gross product
development costs 15.7% 17.0% 24.1%
------------ ------------- --------------
Product development costs 29,150 (40.9%) 49,389 50.6% 32,794
Percentage of total revenues 19.2% 27.8% 18.2%
Gross product development costs and net product development costs decreased
for the fiscal year ended February 29, 2000 compared to the fiscal years ended
February 28, 1999 and 1998, primarily due to the reduction of headcount
implemented under our restructuring plan during the second half of fiscal 1999.
In addition, we have consolidated our research and development efforts.
General and administrative. General and administrative expenses consist
primarily of personnel, infrastructure expenses and the fees and expenses
associated with legal, accounting and other functions. General and
administrative expenses decreased for the fiscal year ended February 29, 2000
compared to the fiscal years ended February 28, 1999 and 1998, primarily due to
the reduction of headcount implemented under our restructuring plan during the
second half of fiscal 1999 and increased controls on discretionary spending.
Acquisition-related expenses. We acquired TYECIN in June 1998. We accounted
for the acquisition as a pooling of interests and recorded a non-recurring
charge during the second quarter of fiscal 1999 of approximately $3.1 million
for certain expenses related to this transaction, including, among other items,
accounting, legal and severance expenses.
Restructuring costs. In the third and fourth quarters of 1999, we announced
and implemented a restructuring plan aimed at reducing costs and returning us to
profitability. The restructuring plan was necessitated due to our poor financial
performance throughout fiscal 1999, which resulted from various factors
including but not limited to poor sales execution, new and stronger competitive
factors, lengthening of sales cycles and prospects' concerns about the Year 2000
and global economic conditions. We reorganized to focus on our core business of
providing supply chain solutions to companies with dynamic supply chains,
specifically those in the customer-driven industries. We also planned on
expanding product innovation to support transforming the supply chain to an
e-chain and include interface and integration technologies in addition to
expanding our distribution channels. As a result of the restructuring, we
recorded charges of $700,000 and $33.1 million in the third and fourth quarters,
respectively, in fiscal 1999. The components of the charge included (in
thousands):
Severance and related benefits $4,094
Lease obligations and terminations 20,200
Write-down of property, equipment and leasehold improvements 6,418
Write-down capitalized software development costs 1,343
Write-down goodwill 1,354
Other 366
---------
Total restructuring charge $33,775
=========
Due to the redirection of the core business strategy, we eliminated 412
positions, across all divisions, primarily located throughout our U.S.
operations of which 330 were terminated prior to year-end. We have paid
approximately $1.8 million and $2.9 million in severance related costs for the
years ending February 29, 2000 and February 28, 1999, respectively, with the
remaining to be paid out during fiscal 2001.
21
The provision for lease obligations and terminations related primarily to
future lease commitments on office facilities that were closed as part of the
restructuring. The charge represented future lease obligations, net of projected
sublease income, on such leases past the dates the offices were closed by us. At
the time of the restructuring, some of these subleases were in negotiation but
had not been finalized and therefore the charge included management's estimates
of the likely outcome of these negotiations. Sublessors were located during
fiscal 2000 for many of the locations and the original estimates were adjusted,
as necessary. Cash payments on the leases and lease terminations will occur over
the remaining lease terms, the majority of which expire prior to 2009.
The $6.4 million write-down of operating assets and $1.3 million write-down
of capitalized software development costs relates to a charge to reduce the
carrying amount of certain equipment, furniture and fixtures, leasehold
improvements and capitalized software development costs to their estimated net
realizable value, in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of."
We also recorded a charge of $1.4 million to write-down goodwill, which was
deemed to have a carrying value in excess of the estimated net realizable value.
The net realizable value of these assets was determined based on management
estimates, which considered such factors as the nature and age of the assets to
be disposed of, the timing of the write-down and the method and potential costs
of the disposal. Such estimates will be monitored each quarter and adjusted if
necessary.
The following table depicts the restructuring activity through February 29, 2000
(in thousands):
FY Balance Utilization of Accrual Balance
Initial 1999 February 28, Adjustment February 29,
Charge Activity 1999 To Charge Cash Non-Cash 2000
---------- ---------- ------------- ------------ ----------- ----------- ------------
Severance costs $ 4,094 $ (2,942) $ 1,152 $ 1,590 $ (1,822) $ -- $ 920
Lease obligation costs 20,200 (1,286) 18,914 (2,750) (9,200) -- 6,964
Impairment of
long-lived assets 9,115 (7,406) 1,709 (220) (443) (1,046) 0
Other 366 (214) 152 (126) (26) -- 0
---------- ---------- ------------- ------------ ----------- ----------- ------------
Total $ 33,775 $(11,848) $ 21,927 $ (1,506) $(11,491) $ (1,046) $ 7,884
========== ========== ============= ============ =========== =========== ============
During the year ended February 29, 2000, we reduced our previously recorded
restructuring charge by approximately $1.5 million. These adjustments related
primarily to the sub-lease of property that management had believed, at the time
of the restructuring, would not be sublet, which were offset by increases in the
accrual for severance costs due to the finalization of several executive
employee terminations previously identified by management.
Purchased research and development. In February 1998, we acquired all the
outstanding shares of ProMIRA in exchange for approximately $64.5 million of
consideration composed of cash, shares of Manugistics, Inc. common stock and
options to purchase shares of Manugistics common stock.
This acquisition was consistent with our strategy of rapidly expanding into
new markets. ProMIRA competed in industries and market segments that we had
targeted for entry and it had developed complementary product capabilities. We
intended this acquisition to accelerate our delivery of a solution in these new
industries and market segments. The technology acquired in the ProMIRA
acquisition consisted of existing and in-process technologies. These projects
were intended to address specific supply chain planning needs of certain
industry and market segments; i.e., high-tech, industrial and discrete
manufacturers.
We utilized an independent appraiser of recognized standing to value the
assets of ProMIRA, identify the existing technology and the in-process research
and development ("R&D"), and allocate the purchase price among the assets. The
in-process R&D had not reached technological feasibility, had no future
alternative use and successful development of the projects was uncertain. We
accounted for the acquisition as a purchase and, in accordance with generally
accepted accounting principles, charged the value of acquired in-process R&D of
$47.3 million to expense in the fiscal quarter and year ended February 28, 1998.
22
ProMIRA's existing technology was a commercially viable product offering
that assists users in developing optimized manufacturing and supply chain plans
and enables rapid, intelligent responses to changes in demand, supply, product
design or other business objectives. During the first three quarters of fiscal
1999, this product generated total revenues consistent with management's
expectations.
The in-process technology consisted of two projects. The first project
consisted of three releases planned for commercial availability in fiscal 1999
and fiscal 2000. These releases represented major R&D efforts, including a
general re-architecture of the offering to enable integration to the Manugistics
solution architecture, incorporation of a new architecture to enable robust
simultaneous constraint of materials and capacity, a port to the UNIX platform,
incorporation of four-digit import, display and export functionality to achieve
Year 2000 compliance and a re-write of the entire ProMIRA solution to utilize a
single industry-standard relational database and a consolidated object model to
enable a persistent store. We estimated that it would incur $6 million to $10
million in R&D costs over the two years following the acquisition to develop
this project on a successful and timely basis.
The second in-process project entailed developing a completely new
configuration product that was aimed at the intelligent creation of complex
bills of material and planned for introduction by the end of fiscal 2000. This
technology would also help meet the needs of the high-tech, industrial and
discrete manufacturers in the markets that we were entering. We estimated that
it would incur $1 million to $3 million in costs, over a two year period
following the transaction, to develop this project on a successful and timely
basis.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions in financial statements. Such estimates and assumptions were
used in the determination of the value of the acquired ProMIRA assets. In
addition, we employed an independent appraiser to determine the allocation of
the purchase price to the acquired intangible assets. The value assigned to
purchased in-process technology was determined by estimating the contribution
the purchased in-process technology will make to developing commercially viable
products, estimating the resulting net cash flows from revenues of the
successfully developed products and discounting the net cash flows to their
present value using a risk-adjusted discount rate.
Total revenues resulting from the ProMIRA acquisition were projected to
exceed $500 million within five years, assuming the successful completion and
market acceptance of the major R&D-stage products. Estimated revenue from
ProMIRA's existing technologies was expected to nearly double in fiscal 1999,
grow approximately 30% in fiscal 2000, then rapidly decline as the in-process
R&D projects were completed and existing technology rapidly approached
obsolescence as a result of new product innovations developed by us. The
estimated revenues for the in-process projects were expected to peak in fiscal
2004 and then decline as other new products and technologies were expected to
enter the market. These revenue levels reflected the benefits expected from the
continued rapid growth of the supply chain planning market as forecast by
industry and market analysts, access to new markets and industries, leveraging
of our anticipated growth of sales and marketing resources and our anticipated
global expansion.
Cost of sales and operating expenses were estimated based upon industry
levels and management's expectations, in conjunction with our then normal
operating history. We expected that the ProMIRA products would generate net
profit margins of 15% to 16% by fiscal 2000. This margin improvement was
expected to derive from the improved attractiveness of ProMIRA's planned
products as well as economies of scale derived from our sales force and markets.
The rates utilized to discount the net cash flows to their present value
are based on cost of capital calculations. We adjusted the discount rates to
address the risks inherent in developing the acquired technologies. Accordingly,
we used the following ranges of discount rates to address the various levels of
risk: 25 percent for the existing products and technology and 40 to 45 percent
for the in-process technologies. These risk-adjusted discount rates are based
upon the uncertainties in the economic estimates described above, the inherent
uncertainty surrounding the successful development of the purchased in-process
technology, the useful life of such technology, the stage of completion of such
technology, the profitability levels of such technology and the uncertainty of
technological advances.
23
As we experienced execution and performance problems during the course of
fiscal 1999, management decided to bypass the second planned release of the
first in-process technology project and incorporate these planned capabilities
directly into the subsequent third planned release of the first in-process
technology project. This decision was made in the second quarter of fiscal 1999.
We believed that this strategy would enable us to accelerate the delivery of
this release of the in-process technology incorporating the simultaneous
constraint-based capabilities and would yield greater net economic benefits to
us.
Because the second planned release of the first in-process technology
project was bypassed, it generated no revenues or expenses. The third planned
release of the first in-process project was originally planned and, subsequently
released in fiscal 1999. We also decided in January 1999 not to further develop
the new configuration product (originally scheduled for release at the end of
fiscal 2000). This project generated no revenues and it incurred approximately
$540,000 in costs during fiscal 1999.
Although we believe that the foregoing assumptions used in the forecasts
are reasonable, no assurance can be given that actual results will reflect the
underlying assumptions used to estimate expected project sales, development
costs or profitability, the events associated with such projects or used to
value the in-process technologies. For these reasons, actual results may vary
from the projected results.
Other Income - Net:
Fiscal Year Ended February 29 or 28
2000 Change 1999 Change 1998
------------ ---------- ------------- ---------- --------------
Other income $ 1,389 (41.2%) $ 2,362 (17.5%) $ 2,863
Percentage of total revenues 1.0% 1.3% 1.6%
Other income includes interest income from short-term investments, interest
expense from short-term borrowings, foreign currency exchange gains or losses
and other gains or losses. Other income decreased for the fiscal year ended
February 29, 2000 compared with the fiscal year ended February 28, 1999 and
February 28, 1998 primarily because we sold investments in the current year to
assist in funding operations and the restructuring, thereby decreasing interest
income from investments.
Provision for Income Taxes:
As a result of the loss in fiscal 2000, we recorded a valuation allowance
against a portion of the net deferred tax asset. The net deferred tax asset
relates to certain domestic net operating losses. Although realization is not
assured for the remaining deferred tax assets, management believes it is more
likely than not that they will be realized through future taxable earnings. In
fiscal 1998, we recorded a loss as a result of the write-off of purchased
research and development associated with the acquisition of ProMIRA.
Liquidity and Capital Resources:
Fiscal Year Ended February 29 or 28
2000 Change 1999 Change 1998
---- ------ ---- ------ ----
Working capital $ 36,831 18.3% $31,138 (67.7%) $96,394
We have historically financed our growth through funds generated from
operations, proceeds from offerings of capital stock and to a lesser extent,
short-term borrowings under a revolving credit facility. The increase in working
capital for fiscal 2000 as compared to fiscal 1999, resulted principally from an
increase in cash and cash equivalents and decreases in accounts payable and
restructuring accruals, partially offset by a decrease in accounts receivable.
The decrease in working capital for fiscal 1999 as compared to fiscal 1998,
resulted principally from decreases in cash and cash equivalents, marketable
securities and accounts receivable and increases in accrued expenses and
deferred revenue.
24
Our operating activities provided net cash of $12.3 million for the fiscal
year ended February 29, 2000 primarily because the non-cash operating expenses
and the changes in assets and liabilities exceeded the net loss for the period.
Our investing activities used cash of approximately $3.9 million for the
fiscal year ended February 29, 2000, primarily because of the capitalization of
software development costs and the purchase of fixed assets and software
licenses, which were partially offset by the sale of marketable securities.
Financing activities provided net cash of approximately $5.0 million for
fiscal year ended February 29, 2000, consisting primarily of proceeds from the
exercise of employee stock options and purchases of stock through our employee
stock purchase plan which were partially offset by a reduction in short-term
borrowings under a revolving credit facility.
We have an unsecured revolving credit facility with a commercial bank.
Under the terms of the facility, we may request cash advances, letters of credit
or both in the aggregate amount of up to $20 million. We may make borrowings
under the facility for short-term working capital purposes or for acquisitions
(acquisition-related borrowings are limited to $7.5 million per acquisition).
The facility contains certain financial covenants that we believe are generally
typical for a facility of this nature and amount. This facility will expire in
September 2000, unless renewed. As of February 29, 2000, $6 million was
outstanding on the revolving credit facility, including letters of credit.
Subsequent to year-end, we repaid the $6 million outstanding on the revolving
credit facility.
For the fiscal year ended February 28, 1999, we incurred a loss of
approximately $96 million. As noted above, we restructured certain of our
business operations during the second half of fiscal 1999 to reduce operating
expenses, continue our efforts to improve execution and efficiencies, better
align expenses with revenues and enhance our sales and marketing activities to
meet the challenges of the marketplace. We believe that our existing cash
balances and marketable securities, anticipated funds generated from operations
and amounts available under our revolving credit facility and other possible
sources of funding will be sufficient to meet our anticipated liquidity and
working capital requirements in the near term. We anticipate that, in light of
our operating results for fiscal 2000, the cost of any additional funds which we
might obtain, might be greater than funds available to us under our existing
revolving credit facility or otherwise. In the event that we require additional
financing and are unable to obtain it on terms satisfactory to us, our
liquidity, results of operations and financial condition would be materially
adversely affected. We believe that inflation did not have a material effect on
our results of operations in fiscal 2000.
Litigation:
We are involved from time to time in disputes and litigation in the
ordinary course of business. We do not believe that the outcome of any pending
disputes or litigation will have a material adverse effect on our business,
operating results, financial condition and cash flows. However, an unfavorable
outcome of one or more of these matters could have a material adverse effect on
our business, operating results, financial condition and cash flows. We have
established accruals related to such matters that are probable and reasonably
estimable.
Factors that May Affect Future Results:
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating us and our business.
Our operating results have varied in the past and might vary significantly
in the future because of factors such as domestic and international business
conditions or the general economy, the timely availability and acceptance of our
products, technological change, the effect of competitive products and pricing,
the effects of marketing announcements by competitors or potential competitors,
changes in our strategy, the mix of direct and indirect sales, changes in
operating expenses, personnel changes and foreign currency exchange rate
fluctuations. Furthermore, clients may defer or cancel their purchases of our
products if they experience a downturn in their business or if there is a
downturn in the general economy.
25
Potential for Significant Fluctuations in Quarterly Results; Seasonality
We typically ship software products shortly after license agreements are
signed and, therefore, we do not maintain any material contract backlog.
Furthermore, we have typically recognized a substantial portion of our revenues
in the last month of a quarter. As a result, license fee revenues in any quarter
are substantially dependent on orders booked and shipped in that quarter and we
cannot predict license fee revenues for any future quarter with any significant
degree of certainty. We have experienced and might continue to experience from
time to time very large, individual license sales that can cause significant
variations in quarterly license revenues.
Our license fee revenues are also difficult to forecast because the market
for business application software products is evolving rapidly and our sales
cycles vary substantially from client to client. The sales cycles depend, in
part, on the nature of the transactions, including the breadth of the solution
to be licensed and the organizational and geographic scope of the licenses.
Because the licensing of our products generally involves a significant capital
expenditure by the client, our sales process is subject to the delays and
lengthy approval processes that are typically involved in such expenditures. In
addition, we expect that sales derived through indirect channels will be harder
to predict in timing and size than for direct sales because there is less direct
contact and influence with the prospective client. For these and other reasons,
the sales cycle associated with the licensing of our products varies
substantially from client to client and typically lasts between six and twelve
months, during which time we might devote significant time and resources to a
prospective client, including costs associated with multiple site visits,
product demonstrations and feasibility studies and might experience a number of
significant delays over which we have no control.
We base our expense levels upon anticipated future revenues. A substantial
portion of our revenues in any quarter is typically derived from a limited
number of large contracts. Therefore, if revenues in a period are below
expectations, operating results are likely to be adversely affected, which
occurred throughout fiscal 1999 and fiscal 2000. Net income might be
disproportionately affected by a reduction in revenues because a proportionately
smaller amount of our expenses varies directly with revenues. We have generally
realized lower revenues in our first fiscal quarter (ending in May) than in the
immediately preceding quarter. We believe that these fluctuations are caused
primarily by client budgeting and purchasing patterns and by our sales
commission policies, which compensate personnel for meeting or exceeding annual
and other performance quotas.
Competition
The market for business application software is intensely competitive,
evolving and subject to rapid technological change. The intensity of competition
has increased and is expected to further increase in the future, particularly
within the B2B electronic commerce industry. This increased competition is
likely to result in price reductions, reduced gross margins, longer sales cycle,
lower average sales prices and loss of market share, any one of which could
seriously harm our products. Competitors vary in size and in the scope and
breadth of the products and services offered. Many application software vendors
offer products that are directly competitive with the software products marketed
by us. In addition, because of the relatively low barriers to entry in the
application software market, we expect additional competition from other
established and emerging companies, as the application software market continues
to develop and expand. Also, our customers and partners may become competitors
in the future.
Some of our current and potential competitors have significantly greater
financial, marketing, technical and other competitive resources than us, as well
as greater name recognition and a larger installed base of customers. In
addition, many of our competitors have well-established relationships with our
current and potential customers and have extensive knowledge of our industry. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than can we. Certain
competitors have also attempted to raise concerns regarding our viability given
our recent losses.
Certain ERP system vendors have acquired supply chain planning software
companies, products or functionality or have announced plans to develop new
products or to incorporate additional functionality into their current products
that, if successfully developed and marketed, could compete with the products
offered by us.
26
Furthermore, current and potential competitors may make acquisitions of other
competitors or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the supply
chain planning needs of our prospective clients. Accordingly, it is possible
that new competitors may emerge and rapidly acquire significant market share. If
this were to occur our business, operating results, financial condition and cash
flows could be materially adversely affected.
Risks of a Developing Market
We currently derive a significant portion of our revenue from licenses for
supply chain planning software and related services. However, we are investing
significant resources in developing and marketing broader functionality with
e-commerce technology. The market for this broader functionality may not develop
as significantly as expected or competitors might develop superior technologies,
products or both, each of which could have a material adverse effect upon our
business, operating results, financial condition and cash flows.
Dependence on New Products and Rapid Technological Change; Risk of Product
Defects
The market for our products is characterized by rapidly changing
technologies, frequent new product introductions, rapid changes in customer
requirements and evolving industry standards. We believe that our future
financial performance will depend in large part on our ability to maintain and
enhance our products, develop new products that achieve market acceptance,
maintain technological competitiveness and meet an expanding and evolving range
of client requirements. There can be no assurance, however, that we will be
successful in developing and marketing new products or product enhancements that
respond to technological change or evolving industry standards, that we will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products or that our new products and
product enhancements will adequately meet the requirements of prospective
clients and achieve market acceptance. If we are unable, for technological or
other reasons, to successfully develop and introduce new products or product
enhancements, our business, operating results, financial condition and cash
flows could be materially adversely affected.
Our software suite incorporates some software code from third-party
affiliates. There can be no assurance that we will be able to continue to use
these third-party software codes nor that we will be able to identify, license
and integrate replacement products.
In addition, software products as complex as those offered by us might
contain undetected errors or failures when first introduced or when new versions
are released. There can be no assurance, despite testing by us and by current
and prospective clients, that errors will not be found in new products or
product enhancements after commercial release, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon our business,
operating results, financial condition and cash flows.
Lack of Product Diversification
Our future results depend on continued market acceptance of supply chain
planning software and services as well as our ability to continue to adapt and
modify this software to meet the evolving needs of our prospects and clients.
Any reduction in demand or increase in competition in the market for supply
chain planning software products could have a material adverse effect on our
business, operating results, financial condition and cash flows.
Intellectual Property and Proprietary Rights
We regard our software as proprietary and rely on a combination of trade
secret, copyright and trademark laws, license agreements, confidentiality
agreements with employees, nondisclosure and other contractual requirements
imposed on our clients, consulting partners and others and other methods to
protect proprietary rights in our products. There can be no assurance that these
protections will adequately protect our proprietary rights or that our
competitors will not independently develop products that are substantially
equivalent or superior to our products. In addition, the laws of certain
countries in which our products are or may be licensed do not protect our
products and intellectual property rights to the same extent as the laws of the
United States.
27
There has also been a substantial amount of litigation in the software
industry and the Internet industry regarding intellectual property rights. It is
possible that in the future, third parties may claim that we or our current or
potential future products, infringe their intellectual property. We expect that
software product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any claims, with or without merit, could
be time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business and could have a material adverse
effect on our operating results, financial condition and cash flows.
Although we believe that our products, trademarks and other proprietary
rights do not infringe upon the proprietary rights of third parties, there can
be no assurance that third parties will not assert infringement claims against
us.
Expansion of Indirect Channels
We are developing and maintaining significant working relationships with
complementary vendors, such as consulting firms that we believe can play an
important role in marketing our products. We are currently investing and intend
to continue to invest, significant resources to develop these relationships,
which could adversely affect our operating margins. There can be no assurance
that we will be able to attract organizations that will be able to market our
products effectively, that they will be qualified to provide timely and
cost-effective client support and services or that current partners will
continue to promote and/or license our solutions. In addition, difficulties
experienced by these complementary vendors in selling our products and services
may adversely affect our results of operations. Furthermore, our arrangements
with these organizations are not exclusive and, in many cases, may be terminated
by either party without cause and many of these organizations are also involved
with competing products. Certain ERP system vendors have acquired supply chain
planning software companies, products or functionality or have announced plans
to develop new products or to incorporate additional functionality into their
current products that would compete with our products. Therefore, there can be
no assurance that any organization will continue its involvement with us and our
products. The loss of relationships with important organizations could
materially adversely affect our results of operations. In addition, if we are
successful in selling products as a result of these relationships, any material
increase in our indirect sales as a percentage of total revenues would be likely
to adversely affect our average selling prices and operating margins because of
the lower unit prices that we receive when selling through indirect channels.
Certain Risks Associated with Acquisitions
From time to time, we have investigated potential candidates for
acquisition, joint venture opportunities, business combinations or other
relationships on an ongoing basis and have engaged in the evaluation of and
discussions with, one or more such candidates. Acquisitions involve the
integration of companies that have previously operated independently. If we
should effect any acquisitions, there can be no assurance that the we will be
able to integrate these or any future employees or operations effectively or
that we will realize the expected benefits of any such transactions or business
combinations. In addition, there can be no assurance that we will not experience
the loss of key employees of any future acquired operations. Our process of
integrating acquired employees and operations might result in unanticipated
operational difficulties and expenditures. As discussed under the section titled
"Purchased Research and Development" of this document, in 1998, we experienced
difficulties with the integration of the respective products and operations of
ProMIRA and TYECIN. These difficulties included difficulty in integrating the
prior ProMIRA sales forces and delayed releases for the in-process technology
acquired as part of the acquisition. In addition, as a result of the poor
financial performance we experienced in fiscal 1999, the technology acquired in
conjunction with the TYECIN acquisition was not integrated into our solutions
and therefore, revenues generated from this technology have been nominal.
International Operations
We currently conduct operations in a number of countries in Europe,
Asia/Pacific, Japan and South America that require significant management
attention and financial resources. If these operations are unable
28
to generate, maintain or increase demand for our products, then our operating
results could be adversely affected. Certain risks are inherent in international
operations. Although the majority of our contracts are denominated in U.S.
currency, most of the revenues from sales outside the United States have been
denominated in foreign currencies, typically the local currency of our selling
business unit. We anticipate that the proportion of our revenues denominated in
foreign currencies will increase. A decrease in the value of foreign currencies
relative to the U.S. dollar could result in losses from foreign currency
fluctuations. In connection with transactions denominated in foreign currency,
we have taken steps to minimize the risks associated with such foreign currency
in the past and might take such steps in similar circumstances in the future.
With respect to our international sales that are U.S. dollar-denominated,
currency fluctuations could make our products and services less price
competitive. Our international sales and operations might be adversely affected
by the imposition of government controls, changes in financial currencies (such
as the unified currency known as the European Monetary Unit), political and
economic instability, difficulties in staffing and managing international
operations and general economic and currency exchange rate conditions in foreign
countries.
Risks Associated With the European Monetary Union ("EMU")
Our foreign exchange exposure to legacy sovereign currencies of the
participating countries in the EMU will include foreign exchange exposures to
the Euro. Although we are not aware of any material adverse financial risk
consequences of the change from legacy sovereign currencies to the Euro, the
conversion may result in problems, which may have an adverse impact on our
business since we may be required to incur unanticipated expenses to remedy
these problems.
Limited Management History; Recent Senior Management Changes
We have experienced recent significant changes in our senior management
team. The majority of our senior management team has worked together for less
than one year. Gregory J. Owens, our Chief Executive Officer, joined us in April
2000. With one exception, all of our other present executive officers joined us
after Mr. Owens. Our success depends on the ability of our management team to
work together effectively. Our business, revenues and financial condition will
be materially adversely effected if our new senior management team does not
manage us effectively or if we are unable to retain our senior management.
Dependence Upon Key Personnel
The loss of the services of one or more of our executive officers could
have a material adverse effect on our business, operating results, financial
condition and cash flows. We do not have long term employment contracts with any
of our executive officers. We do not maintain key person insurance on any of our
executive officers. There can be no assurance that we will be able to retain our
key personnel.
Our future success also depends on our continuing ability to attract,
assimilate and retain highly qualified sales, technical and managerial
personnel. Competition for such personnel is intense and there can be no
assurance that we can attract, assimilate or retain such personnel in the
future. If we lose talented personnel in key positions and are unable to replace
such personnel in a timely manner, our business, operating results and financial
condition could be adversely affected.
Stock Option Repricing
In response to the poor performance of our stock price, we offered to
reprice employee stock options, other than those held by our executive officers
or directors, effective January 29, 1999, to bolster employee retention. The
effect of this repricing resulted in approximately 1.52 million shares being
repriced and the four-year vesting period starting over. The repricing may have
a material adverse impact on future financial performance based on the amendment
to the Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued
to Employees," which requires us to record compensation expense associated with
the change in the price of these options.
29
Possible Volatility of Stock Price
Factors such as announcements of new products or technological innovations
by us or our competitors, as well as quarterly variations in our operating
results, have caused and may cause the market price of our common stock to
fluctuate significantly. In addition, the stock market in recent years has
experienced price and volume fluctuations that have particularly affected the
market prices of many high technology stock issues and which have often been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations, as well as general economic conditions, have at
certain times adversely affected the market price of our common stock and are
likely to do so in the future.
Forward-Looking Statements:
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of this Annual Report on Form 10-K ("Annual
Report") contains certain forward-looking statements that are subject to a
number of risks and uncertainties. In addition, we may publish forward-looking
statements from time to time relating to such matters as anticipated financial
performance, business prospects and strategies, sales and marketing efforts,
technological developments, new products, research and development activities,
consulting services and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, we note that a variety of
factors could cause our actual results and experience to differ materially from
the anticipated results or other expectations expressed in our forward-looking
statements in this Annual Report or elsewhere. The risks and uncertainties that
may affect our business, operating results or financial condition include those
set forth above under "Factors that May Affect Future Results" and the
following:
Revenues for any period depend on the number, size and timing of license
agreements. The number, size and timing of license agreements depends in part on
our ability to hire and thereafter, to train, integrate and deploy our sales
force effectively. The size and timing of license agreements is difficult to
forecast because software sales cycles are affected by the nature of the
transactions, including the breadth of the solution to be licensed and the
organizational and geographic scope of the licenses. In addition, the number,
size and timing of license agreements also may be affected by certain external
factors such as general domestic and international business or economic
conditions, including the effects of such conditions on our customers and
prospects or competitors' actions. A small variation in the timing of software
licensing transactions, particularly near the end of any quarter or year, can
cause significant variations in software license revenues in any period.
We believe that the market for supply chain planning software continues to
expand, although more slowly than in prior periods. However, if market demand
for our products does not grow as rapidly as we expect, revenue growth, margins
or both could be adversely affected. If competitors make acquisitions of other
competitors or establish cooperative relationships among themselves or with
third parties to enhance the ability of their products to address the supply
chain planning needs of prospects and customers or other software vendors that
have announced plans to develop or incorporate functionality that could compete
with our products successfully develop and market such functionality, revenue
growth could be adversely affected.
There can be no assurance that we will be able to attract complementary
software vendors, consulting firms or other organizations that will be able to
market our products effectively or that will be qualified to provide timely and
cost-effective customer support and services. In addition, there can be no
assurance that a sufficient number of organizations will continue their
involvement with us and our products and the loss of current relationships with
important organizations could materially adversely affect our results of
operations.
30
Item7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Foreign Currency. In the year ended February 29, 2000, we generated
approximately 36% of our revenues outside of the Americas. International sales
are usually made by our foreign subsidiaries in their local currencies and the
expenses incurred by the foreign subsidiaries are also typically denominated in
their local currencies.
In certain circumstances, we enter into foreign currency contracts with
banking institutions to protect large foreign currency receivables against
currency fluctuations. When the foreign currency receivable is collected, the
contract is liquidated and the foreign currency receivable is converted to U.S.
dollars.
Interest rates. We manage our interest rate risk by maintaining an
investment portfolio of available-for-sale instruments with high credit quality
and relatively short average maturities. These instruments include, but are not
limited to, money-market instruments, bank time deposits and taxable and
tax-advantaged variable rate and fixed rate obligations of corporations,
municipalities and national, state and local government agencies, in accordance
with an investment policy approved by our Board of Directors. These instruments
are denominated in U.S. dollars. The fair value of securities held at February
29, 2000 was approximately $17.5 million.
We also hold cash balances in accounts with commercial banks in the United
States and foreign countries. These cash balances represent operating balances
only and are invested in short-term time deposits of the local bank. Operating
cash balances held at banks outside the United States are denominated in the
local currency.
Many of our investments carry a degree of interest rate risk. When interest
rates fall, our income from investments in variable-rate securities declines.
When interest rates rise, the fair market value of our investments in fixed-rate
securities declines. We attempt to mitigate risk by holding fixed-rate
securities to maturity, but should our liquidity needs force us to sell
fixed-rate securities prior to maturity, we may experience a loss of principal.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements and supplementary data, together with
the reports of Deloitte & Touche LLP, independent auditors and
PricewaterhouseCoopers LLP, independent accountants, are included in Part IV of
this Annual Report on Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
31
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the information to be set forth in the definitive
Proxy Statement relating to the 2000 Annual Meeting of Stockholders (which we
anticipate will be filed with the Securities and Exchange Commission within 120
days after the end of our fiscal year ended February 29, 2000) (the "Proxy
Statement") under the caption "Election of Directors" and to the information set
forth in Part I of this Annual Report on Form 10-K regarding executive officers
under the caption "Item 4A. Executive Officers of the Registrant."
Item 11. EXECUTIVE COMPENSATION.
Reference is made to the information to be set forth in the Proxy Statement
under the caption "Executive Compensation."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the information to be set forth in the Proxy Statement
under the caption "Ownership of Manugistics Group, Inc. Stock."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information to be set forth in the Proxy Statement
under the caption "Certain Business Relationships."
32
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report:
(1) Financial Statements: Page Number
In This Report
--------------
Report of Independent Auditors F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
The financial statements listed above and the financial statement schedules
listed below are filed as part of this Annual Report on Form 10-K.
(2) Financial Statement Schedules:
(A) Independent Auditors' Report on Schedule S-1
(B) Schedule II - Valuation and Qualifying Accounts S-2
Schedules other than the ones listed above are omitted because they are not
required or are not applicable or the required information is shown in the
consolidated financial statements or notes thereto contained in this Annual
Report on Form 10-K.
(3) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed below and
are filed or incorporated by reference as part of this Annual Report on
Form 10-K. Exhibits 10.1, 10.2, 10.11, 10.12, 10.13, 10.15, 10.28 through
10.32 and 10.35 through 10.45 are management contracts or compensatory
plans or arrangements required to be filed as exhibits pursuant to Item
14(c) of this report.
Number Notes Description
------ ----- -----------
2.1 (S) Agreement and Plan of Merger dated June 1, 1998, among the Company, TYECIN
Acquisition, Inc., TYECIN Systems, Inc. and certain other persons
3.1(a) (A) Amended and Restated Certificate of Incorporation of the Company
3.1(b) (B) Certificate of Retirement and Elimination (relating to the Series A and
Series B preferred stock of the Company)
33
Number Notes Description
------ ----- -----------
3.2 (A) Amended and Restated By-Laws of the Company
10.1 (I) Employee Incentive Stock Option Plan of the Company, as amended
10.2 (I) Fifth Amended and Restated Stock Option Plan of the Company
10.3 (A) Form of Notice of Grant of Option pursuant to the Director Stock Option
Plan (previously identified as Exhibit 10.4)
10.7 (A) Lease Agreement dated May 1, 1992 between the Company and GTE Realty
Corporation
10.7(a) (E) First Amendment to Lease Agreement dated July 19, 1993 between the Company
and GTE Realty Corporation
10.7(b) (E) Second Amendment to Lease Agreement dated April 13, 1994 between the
Company and East Jefferson Associates
10.7(c) (E) Third Amendment to Lease Agreement dated May 1, 1994 between the Company
and East Jefferson Associates
10.7(d) (E) Fourth Amendment to Lease Agreement dated February 27, 1995 between the
Company and East Jefferson Associates
10.7(e) (K) Fifth Amendment to Lease Agreement dated September 6, 1996 between the
State of Maryland and the Company
10.7(f) (K) Sixth Amendment to Lease Agreement dated October 10, 1996 between the State
of Maryland and the Company
10.7(g) (K) Seventh Amendment to Lease Agreement dated April 25, 1997 between the State
of Maryland and the Company
10.8 (N) Lease Agreement date March 26, 1998 Manugistics, Inc. and Washingtonian
North Associates Limited Partnership
10.11 (D) Outside Directors Non-Qualified Stock Option Plan
10.12 (D) Executive Incentive Stock Option Plan
10.13 Amended and Restated 1998 Stock Option Plan of the Company
10.15 (F) Employee Stock Purchase Plan of the Company
10.17 (G) Sublease dated May 5, 1995 between the Company, as amended and NationsBank,
N.A.
10.18 (H) Agreement and Plan of Merger dated May 24, 1996 between Avyx, Inc.,
Manugistics Acquisition, Inc. and the Company
34
Number Notes Description
------ ----- -----------
10.19 (H) Consulting Agreement dated May 24, 1996 between The Kendall Group, Inc. and
the Company
10.20 (H) Confidentiality, Non-Competition and Non-Solicitation Agreement dated May 24,
1996 between the Company and John K. Willougby and JoAnne Gardner
10.21 (J) Financing Agreement dated as of September 30, 1996 by and among the Company
and NationsBank, N.A.
10.22 (J) Form of Revolving Promissory Note dated September 30, 1996 by the Company
in favor of NationsBank, N.A.
10.23 (K) Sublease Agreement between CTA Incorporated and the Company dated May 23,
1996
10.24 (K)(i) Data Marketing and Guaranteed Revenue Agreement dated March 7, 1997 between
the Company and Information Resources, Inc.
10.25 (K)(i) Asset Purchase Agreement dated March 7, 1997 between Manugistics, Inc.,
Manugistics Services, Inc., IRI Logistics, Inc. and Information Resources, Inc.
10.26 (L) Sale and Purchase Agreement dated 7th June 1997 between M.C. Harrison, J.E.
Harrison, Manugistics U.K. Limited and the Company
10.27 (M) Stock Purchase Agreement dated February 13, 1998 between Manugistics Nova
Scotia Company and ProMIRA Software Incorporated, et al.
10.28 (O) Employment Agreement dated April 25, 1999 among the Company, Manugistics, Inc.
and with Gregory J. Owens, Chief Executive Officer and President
10.29 (O) Termination of Employment Agreement dated November 18, 1998, between Manugistics, Inc.
and David Roth
10.30 (O) Termination of Employment Agreement dated January 27, 1999, between
Manugistics, Inc. and Keith Enstice
10.31 (O) Termination of Employment Agreement dated February 10, 1999, between
Manugistics, Inc. and Joseph Broderick
10.32 (P) Termination of Employment Agreement dated May 26, 1999, between
Manugistics, Inc. and Kenneth S. Thompson
10.33 (P) Termination Agreement dated June 16, 1999 by and among Manugistics,
Inc. Boston Properties Limited Partnership and certain other parties
10.34 (P) Letter Agreement dated June 16, 1999 between Manugistics, Inc. and
Himes Associates, Ltd.
35
Number Notes Description
------ ----- -----------
10.35 (Q) Employment Agreement dated June 3, 1999 between Manugistics, Inc. and
Richard F. Bergmann, as amended.
10.36 (Q) Employment Agreement dated June 7, 1999 between Manugistics, Inc. and
Terrance A. Austin, as amended.
10.37 (Q) Employment Agreement dated August 25, 1999 between Manugistics, Inc.
and James J. Jeter, as amended.
10.38 (Q) Termination of Employment Agreement dated July 23, 1999 between
Manugistics, Inc. and Peter Q. Repetti.
10.39 (Q) Termination of Employment Agreement dated August 25, 1999 between
Manugistics, Inc. and Mary Lou Fox.
10.40 (R) Employment Agreement dated December 6, 1999 between Manugistics, Inc.
and Raghavan Rajaji.
10.41 Employment Agreement dated December 6, 1999 Manugistics, Inc.
and Timothy T. Smith
10.42 Employment Agreement dated January 19, 1999 between Manugistics, Inc.
and Daniel Stoks.
10.43(a) Stock Option Agreement dated April 27, 1999, between the Company and
Gregory J. Owens
10.43(b) Stock Option Agreement dated December 1, 1999, between the Company
and Gregory J. Owens.
10.43(c) Stock Option Agreement dated December 17, 1999, between the Company
and Gregory J. Owens.
10.44(a) Stock Option Agreement dated December 6, 1999, between the Company
and Richard F. Bergmann.
10.44(b) Stock Option Agreement dated June 16, 1999 between the Company and
Richard F. Bergmann.
10.45 Stock Option Agreement dated June 7, 1999, between the Company and
Terrence A. Austin
21 Subsidiaries of the Company
23.1 Independent Auditors' Consent
23.2 Consent of Independent Accountants
27 Financial Data Schedule
36
(A) Incorporated by reference from the exhibits to the Company's registration
statement on form S-1 (NO. 33-65312).
(B) Incorporated by reference to 4.1(A) to the Company's registration statement
on form S-3 (REG. NO. 333-31949).
(C) Incorporated by reference to exhibit 4.1 (b) to the Company's registration
statement on form S-3 (REG. NO. 333-31949).
(D) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended August 31, 1994.
(E) Incorporated by reference from the exhibits to the Company's annual report
on form 10-K for the fiscal year ended February 28, 1995.
(F) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended August 31, 1995.
(G) Incorporated by reference from the exhibits to the Company's annual report
on form 10-K for the fiscal year ended February 29, 1996.
(H) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended May 31, 1996.
(I) [Incorporated by reference from the exhibits to the Company's definitive
proxy statement relating to the 1996 annual meeting of shareholders dated
June 20, 1996.]
(J) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended November 30, 1996.
(K) Incorporated by reference from the exhibits to the Company's annual report
on form 10-K for the fiscal year ended February 28, 1997.
(L) Incorporated by reference from the exhibits to the Company's quarterly
report on form 10-Q for the quarter ended May 31, 1997.
(M) Incorporated by reference from the exhibits to the Company's current report
on form 8-K dated March 2, 1998
(N) Incorporated by reference from the exhibits to the Company's annual report
on form 10-K for the fiscal year ended February 28, 1998.
(O) Incorporated by reference from the exhibits to the Company's annual report
on Form 10-K for fiscal year ended February 28, 1999.
(P) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended May 31, 1999.
(Q) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended August 31, 1999.
(R) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended November 30, 1999.
(S) Incorporated by reference from the exhibits to the Company's quarterly
report on Form 10-Q for the quarter ended August 31, 1998.
(i) Confidential treatment previously granted for certain portions of this
exhibit.
37
(b) Reports on Form 8-K
1. On February 25, 2000, the Company filed a Current Report on Form 8-K
announcing that it had entered into a settlement agreement and release
relating to a lawsuit filed by Template Software, Inc. against Manugistics,
Inc., to be covered by the Company's insurance carrier.
(c) Exhibits
See the response to Item 14(a)(3) above.
(d) Financial Statement Schedules
The financial statement schedule required to be filed is listed in the response
to Item 14(a)(2) above and appears on page S-2 of this report.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on May 12, 2000.
MANUGISTICS GROUP, INC.
(Registrant)
/s/ Gregory J. Owens
- --------------------
Gregory J. Owens
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 12, 2000.
/s/ Gregory J. Owens /s/ Raghavan Rajaji
- -------------------- -------------------
Gregory J. Owens Raghavan Rajaji
President, Chief Executive Officer and Director Executive Vice President and Chief
(Principal executive officer) Financial Officer
(Principal financial officer and
principal accounting officer)
/s/ William M. Gibson
- ---------------------
William M. Gibson
Chairman of the Board and Director /s/ Jack A. Arnow
-----------------
Jack A. Arnow
Director
/s/ J. Michael Cline
- --------------------
J. Michael Cline
Director /s/ Lynn C. Fritz
-----------------
Lynn C. Fritz
Director
/s/ Joseph H. Jacovini
- ----------------------
Joseph H. Jacovini
Director /s/ William G. Nelson
---------------------
William G. Nelson
Director
/s/ Thomas A. Skelton
- ---------------------
Thomas A. Skelton /s/ Hau L. Lee
Director --------------
Hau L. Lee
Director
39
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Manugistics Group, Inc.:
We have audited the accompanying consolidated balance sheets of Manugistics
Group, Inc. (the Company) and its subsidiaries as of February 29, 2000 and
February 28, 1999 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended February 29, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
give retroactive effect to the merger of the Company and TYECIN Systems, Inc.
("TYECIN"), which has been accounted for as a pooling of interests as described
in Note 11 to the consolidated financial statements. We did not audit the
statements of income, stockholders' equity and cash flows of TYECIN for the year
ended December 31, 1997, which consolidated statements reflect total revenues of
$4,597,200 for the year ended December 31, 1997. Those consolidated statements
were audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for TYECIN for 1997 is
based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company and its subsidiaries at
February 29, 2000 and February 28, 1999 and the results of their operations and
their cash flows for each of the three years in the period ended February 29,
2000 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
McLean, VA
March 23, 2000
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
FOR TYECIN SYSTEMS, INC.
To the Board of Directors and Shareholders of TYECIN Systems, Inc.:
In our opinion, the consolidated statements of income, of shareholders' equity
and of cash flows of TYECIN Systems, Inc. and its subsidiary (not presented
separately herein) present fairly, in all material respects, their results of
their operation and their cash flows for the year ended December 31, 1997 in
conformity with generally accepted accounting principles. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
San Jose, California
March 6, 1998, except as to Note 11, which is as of June 1, 1998
F-2
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
February 29 or 28
2000 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,051 $ 20,725
Marketable securities 17,496 22,637
Accounts receivable, net of allowance for doubtful accounts of
$1,875 and $6,299 at February 29, 2000 and February 28, 1999,
respectively 38,705 51,143
Current portion of deferred tax asset 2,306 4,907
Other current assets 6,946 9,742
----------- ---------
Total current assets 99,504 109,154
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 14,157 21,832
NONCURRENT ASSETS:
Software development costs, net of accumulated amortization 16,514 20,540
Intangible assets, net of accumulated amortization 7,317 9,382
Deferred tax asset 12,776 9,240
Other non-current assets 2,160 2,182
----------- ---------
TOTAL ASSETS $152,428 $172,330
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,792 $ 8,142
Accrued compensation 8,345 7,815
Line of credit 6,000 9,500
Deferred revenue 26,727 24,710
Current portion of long-term liabilities 260 1,028
Current portion of restructuring accrual 5,130 13,789
Other current liabilities 10,419 13,032
----------- ---------
Total current liabilities 62,673 78,016
LONG-TERM LIABILITIES 283 454
LONG-TERM RESTRUCTURING ACCRUAL 2,754 8,138
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock, $.002 par value per share; 100,000,000 shares authorized;
29,047,162 and 27,705,382 shares issued and 28,294,652 and 26,952,872
shares outstanding at February 29, 2000 and February 28, 1999,
respectively 58 55
Additional paid-in capital 189,480 179,996
Treasury stock - 752,510 shares, at cost (717) (717)
Accumulated other comprehensive income (loss) 100 (354)
Accumulated deficit (102,203) (93,258)
----------- ---------
Total stockholders' equity 86,718 85,722
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $152,428 $172,330
=========== =========
See accompanying notes to consolidated financial statements.
F-3
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
February 29 or 28
2000 1999 1998
---- ---- ----
REVENUES:
License fees $ 60,421 $ 73,802 $ 107,547
Consulting, solution support and other services 92,012 103,762 72,716
---------- --------- -----------
Total revenues 152,433 177,564 180,263
---------- --------- -----------
OPERATING EXPENSES:
Cost of license fees 13,685 13,415 11,102
Cost of consulting, solution support and other services 44,346 50,585 33,213
Sales and marketing 61,439 103,006 66,228
Product development 29,150 49,389 32,794
General and administrative 15,837 19,828 14,639
Acquisition-related expenses -- 3,095 --
Restructuring expenses (1,506) 33,775 --
Purchased research and development -- -- 47,340
---------- --------- -----------
Total operating expenses 162,951 273,093 205,316
---------- --------- -----------
LOSS FROM OPERATIONS (10,518) (95,529) (25,053)
---------- --------- -----------
OTHER INCOME - NET 1,389 2,362 2,863
---------- --------- -----------
LOSS BEFORE INCOME TAXES (9,129) (93,167) (22,190)
(BENEFIT) PROVISION FOR INCOME TAXES (184) 2,945 (9,025)
---------- --------- -----------
NET LOSS $ (8,945) $(96,112) $ (13,165)
========== ========= ===========
BASIC LOSS PER SHARE $ (0.33) $ (3.64) $ (0.56)
========== ========= ===========
SHARES USED IN BASIC SHARE COMPUTATION 27,486 26,402 23,484
========== ========= ===========
DILUTED LOSS PER SHARE $ (0.33) $ (3.64) $ (0.56)
========== ========= ===========
SHARES USED IN DILUTED SHARE COMPUTATION 27,486 26,402 23,484
========== ========= ===========
COMPREHENSIVE LOSS:
Net loss $ (8,945) $ (96,112) $ (13,165)
---------- --------- -----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 487 (701) (94)
Unrealized (losses) gains on securities (33) 114 (132)
---------- --------- -----------
Total other comprehensive income (loss) 454 (587) (226)
---------- --------- -----------
TOTAL COMPREHENSIVE LOSS $ (8,491) $ (96,699) $ (13,391)
========== ========= ===========
See accompanying notes to consolidated financial statements.
F-4
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
COMMON STOCK
-----------------
OTHER ACCUMULATED
PAR PAID-IN TREASURY COMPREHENSIVE EARNINGS
SHARES VALUE CAPITAL STOCK INCOME(LOSS) (DEFICIT) TOTAL
-------- ------- --------- --------- ------------- ---------- -------
BALANCE, FEBRUARY 28, 1997 22,725 $ 45 $ 38,819 $ (717) $ 459 $ 16,267 $54,873
Issuance of common stock, net of
issuance costs of $652 3,137 6 120,110 -- -- -- 120,116
Issuance of stock options in
connection with acquisitions -- -- 1,081 -- -- -- 1,081
Exercise of stock options 858 2 3,334 -- -- -- 3,336
Tax benefit of options exercised -- -- 7,731 -- -- -- 7,731
Translation adjustment -- -- -- -- (94) -- (94)
Unrealized loss on
marketable securities -- -- -- -- (132) -- (132)
Net loss -- -- -- -- -- (13,165) (13,165)
------- ------ --------- -------- -------------- ------------- --------
BALANCE, FEBRUARY 28, 1998 26,720 53 171,075 (717) 233 3,102 173,746
TYECIN conforming year end
adjustments -- -- -- -- -- (248) (248)
Issuance of common stock 194 -- 2,745 -- -- -- 2,745
Exercise of stock options 791 2 4,248 -- -- -- 4,250
Tax benefit of options exercised -- -- 1,928 -- -- -- 1,928
Translation adjustment -- -- -- -- (701) -- (701)
Unrealized gain on
marketable securities -- -- -- -- 114 -- 114
Net loss -- -- -- -- -- (96,112) (96,112)
------- ------ --------- -------- -------------- ------------- --------
BALANCE, FEBRUARY 28, 1999 27,705 55 179,996 (717) (354) (93,258) 85,722
Issuance of common stock 124 1 1,419 -- -- -- 1,420
Exercise of stock options 1,218 2 8,065 -- -- -- 8,067
Translation adjustment -- -- -- -- 487 -- 487
Unrealized loss on marketable
securities -- -- -- -- (33) -- (33)
Net loss -- -- -- -- -- (8,945) (8,945)
------- ------ --------- -------- -------------- ------------- --------
BALANCE, FEBRUARY 29, 2000 29,047 $ 58 $189,480 $ (717) $ 100 $ (102,203) $86,718
======= ====== ========= ======== ============== ============= ========
See accompanying notes to consolidated financial statements.
F-5
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
February 29 or 28
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,945) $ (96,112) $ (13,165)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 21,850 24,321 16,150
Write-off of purchased research and development -- -- 47,340
Restructuring provision (1,506) 33,775 --
Allowances for doubtful accounts (4,424) 4,200 1,510
Deferred income tax assets (936) 5,140 (19,326)
Tax benefit of stock options exercised -- 1,928 7,731
Loss on disposal of property and intangibles 632 488 --
Other (189) 993 (261)
Changes in assets and liabilities:
Accounts receivable 16,862 4,397 (20,908)
Other current assets 2,796 (5,379) (2,739)
Other non-current assets 22 (287) (503)
Accounts payable and accrued expenses (4,966) 1,623 5,777
Accrued compensation 530 (4,604) 6,016
Deferred revenue 2,017 6,164 2,470
Restructuring accrual (11,491) (4,442) --
---------- --------- ---------
Net cash provided by (used in) operating
activities 12,252 (27,795) 30,092
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions -- -- (9,637)
Sales of marketable securities 21,054 48,436 46,865
Purchases of marketable securities (15,912) (8,827) (96,347)
Purchase of property and equipment (3,242) (16,402) (16,011)
Capitalization of software developed for internal use (101) (193) --
Capitalization of software development costs (5,435) (10,075) (10,274)
Purchase of software licenses (228) (582) (816)
Net change in cash due to conforming year-ends -- (450) --
---------- --------- ---------
Net cash (used in) provided by investing
activities (3,864) 11,907 (86,220)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings (3,500) 9,500 --
Payments of long-term liabilities (939) (246) 58
Proceeds from sale of common stock,
net of issuance costs 1,420 2,745 63,768
Proceeds from exercise of stock options 8,067 4,474 3,336
---------- --------- ---------
Net cash provided by financing activities 5,048 16,473 67,162
---------- --------- ---------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES (110) 249 23
---------- --------- ---------
NET INCREASE IN CASH 13,326 834 11,057
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,725 19,891 8,834
---------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34,051 $ 20,725 $ 19,891
========== ========= =========
See accompanying notes to consolidated financial statements.
F-6
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED FEBRUARY 29, 2000
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Manugistics Group, Inc. ("the Company") is a global provider of intelligent
supply chain optimization solutions for enterprises and evolving eBusiness
trading networks. The Company's solutions, which include client assessment,
software products, consulting services for implementation and solution support,
can be optimized to the supply chain requirements of companies. The Company's
solutions provide the Company's clients with the business intelligence to
participate in various forms of trading relationships, from traditional linear
supply chains to eBusiness trading networks. The Company's broad suite of
solutions can help companies power profitable growth, increase revenues, lower
overall costs and improve capital allocation through more effective operational
decisions. Other operational benefits of implementing the Company's solutions
can include greater speed to market, strengthened customer service, improved
relationships among trading partners and increased inventory turns within and
across the Company's clients' supply chains and eBusiness trading networks.
The Company was incorporated in Delaware in 1986 to acquire Manugistics,
Inc. (then known as STSC, Inc.), which was a subsidiary of Continental Telecom
of Atlanta, Georgia and which is now the principal operating subsidiary of the
Company. The Company completed its initial public offering of common stock in
August 1993 and completed another underwritten offering of its common stock in
August 1997.
Basis of Presentation
The consolidated financial statements include the accounts of Manugistics
Group, Inc., its wholly and majority owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain prior year
amounts have been reclassified for comparability with the current year's
financial statement presentation.
Effective June 1, 1998, the Company acquired TYECIN Systems, Inc.
("TYECIN") by merger and accounted for the transaction as a pooling of
interests. Accordingly, all financial information included in these financial
statements give retroactive effect to the combination for all periods presented.
Previously, TYECIN's year-end was December 31, 1997. Effective March 1, 1998,
TYECIN's year-end was changed to February 28 or 29. During the two-month period
January and February 1998, TYECIN recorded revenues of approximately $609,000
and expenses of approximately $857,000. The resulting net loss of approximately
$248,000 is directly reflected in the accumulated deficit in the Company's
consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America
("GAAP"), requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised principally of amounts in operating
accounts, cash on hand, money market investments and other short-term
instruments, stated at cost, which approximates market value, with original
maturities of three months or less.
F-7
Marketable Securities
The Company's short-term marketable securities are classified as
"available-for-sale." These securities are recorded at fair value with
unrealized gains and losses reported as a component of stockholders' equity and
comprehensive loss. Realized gains and losses on available-for-sale securities
are computed using the specific identification method. On February 29, 2000 and
February 28, 1999, marketable securities consisted of investments in corporate
debt, municipal bonds and other short-term investments which generally mature
in one year or less.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments in marketable securities and accounts receivable. The Company has
policies that limit investments to investment grade securities and the
amount of credit exposure to any one issuer. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential losses,
but does not require collateral or other security to support clients'
receivables. The Company's credit risk is also further mitigated because its
customer base is diversified both by geography and by industry.
Property and Equipment
Property and equipment is stated at cost. Furniture and fixtures are
depreciated on a straight-line basis over three to ten years. Computer equipment
and software are depreciated on a straight-line basis over two years. Leasehold
improvements are amortized over the shorter of the lease term or the useful life
of the improvements.
Capitalized Software
In accordance with Statement of Financial Accounting Standards No. 86
("SFAS 86"), "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed," software development costs are expensed as incurred
until technological feasibility has been established, at which time such costs
are capitalized until the product is available for general release to clients.
These costs are then amortized using the straight-line method over a period of
two years.
Intangibles
Intangibles include goodwill, customer lists, intellectual property and
other items. Goodwill, equal to the fair value of consideration paid in excess
of the fair value of the net assets purchased, has been recorded in conjunction
with several of the Company's purchased business combinations and is being
amortized on a straight-line basis over a period of five years. Customer lists
acquired in conjunction with certain of the Company's purchased business
combinations are amortized using the straight-line method over a period of five
years (see Note 11). Intellectual property and other intangibles are amortized
on a straight-line basis over a period of two to five years.
Internally Developed Software
Effective fiscal 1999, certain costs to develop or obtain internal use
software are capitalized in accordance with American Institute of Certified
Public Accountants ("AICPA") Statement of Position No. 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." These capitalized costs are amortized on a straight-line basis
over a period of two to five years after completion or acquisition of the
software.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment
and intangibles, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. In
performing an evaluation of recoverability, the estimated future undiscounted
net cash flows of the assets are compared to the assets' carrying amount to
determine if a write-down is required.
F-8
Fair Values of Financial Instruments
The carrying values of cash and cash equivalents, marketable securities,
accounts receivable, accounts payable and the line of credit approximate fair
value due to the short maturities of such instruments. The carrying value of
long-term debt approximates fair value based on current rates offered to the
Company for debt with similar collateral and guarantees, if any, and maturities.
Foreign Currency Translation and Operations
Assets and liabilities of the Company's international subsidiaries are
translated at the exchange rate in effect on the balance sheet date. The related
revenues and expenses are translated using the average exchange rate in effect
during the reporting period. Foreign currency translation adjustments are
disclosed as a separate component of stockholders' equity and comprehensive
loss.
The Company generates revenues from sales outside the United States which
are denominated in foreign currencies, typically the local currency of the
selling business unit. There are certain economic, political, technological and
regulatory risks associated with operating in foreign countries. International
sales and operations may be adversely affected by the imposition of governmental
controls, foreign currency exchange rate fluctuations and economic instability.
Revenue Recognition
Prior to March 1, 1998, the Company recognized revenue in accordance with
the provisions of the AICPA Statement of Position No. 91-1 ("SOP 91-1"),
"Software Revenue Recognition." Software license revenues from supply chain
planning products were recognized upon the execution of a noncancellable license
agreement and shipment of the software, provided that no significant vendor
obligations remained outstanding, the license fee was fixed and amounts were due
within one year and collection was considered probable by management. For
transactions entered into after February 28, 1998, the Company recognized
revenue in accordance with the provisions of AICPA Statement of Position No.
97-2 ("SOP 97-2"), "Software Revenue Recognition" and SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition with respect to Certain Transactions,"
which provide guidance in applying GAAP in recognizing revenues on software
transactions and supersede SOP 91-1. SOP 97-2 requires that the Company have an
executed software license agreement, the license fee be fixed and determinable
and collection be deemed probable by management in order to record software
license revenue. SOP 97-2 also requires revenues earned on software arrangements
involving multiple elements to be allocated to each element based on vendor
specific objective evidence of the relative fair values of the elements. If a
vendor does not have evidence of the fair value for all elements in a
multiple-element arrangement, all revenue from the arrangement is deferred until
such evidence exists or until all elements are delivered.
Consulting service revenues are recognized when the services are provided,
generally on a time and materials basis. Consulting service revenues consist
primarily of implementation and training services related to the installation of
the Company's products and typically do not include significant customization to
or development of the underlying software code. Solution support revenues are
deferred and recognized ratably over the term of the solution support contract,
typically twelve months.
Income Taxes
The provision for income taxes is based on income recognized for financial
reporting purposes and includes the effects of temporary differences between
such income and income recognized for income tax purposes. Deferred income taxes
reflect the net tax effects of temporary differences between carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be realized.
Comprehensive Loss
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." This
statement establishes the rules for the reporting of comprehensive (loss) income
and its components. The Company's comprehensive loss includes net loss, foreign
F-9
currency translation adjustments and unrealized (losses) gains on short-term
investments and is presented in the Consolidated Statements of Operations. The
adoption of SFAS No. 130 had no impact on total stockholders' equity. Fiscal
1998 financial statements have been reclassified to conform to the SFAS No. 130
requirements.
Net Loss Per Share
Basic loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted loss per share is computed using the
weighted average number of shares of common stock and, when dilutive, common
equivalent shares from options to purchase common stock using the treasury stock
method.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" using the intrinsic value-based method of accounting. The
Company has made the pro-forma net income and earnings per share disclosures in
Note 7, calculated as if the Company accounted for its stock-based compensation
plan using the fair value-based method of accounting in accordance with the
provisions as required by Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation."
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivatives and Hedging Activities." In May 1999, the FASB voted
to defer the implementation of SFAS No. 133 for one year. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated and
accounted for as: (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment; (b) a hedge of
the exposure to variable cash flows of a forecasted transaction; or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. This statement is to be
effective for all annual and interim periods beginning after June 15, 2000.
Management does not presently believe the adoption of SFAS No. 133 will have a
material effect on the Company's consolidated financial position or results of
operations in fiscal 2001.
In April 2000, the FASB issued a final interpretation to address
significant outstanding practice issues related to accounting for stock-based
compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The effective date of the issuance of the final interpretation, FASB
Interpretation No. 44 ("FIN 44"), is July 1, 2000. The interpretation will be
applied prospectively but will also cover events that occurred after December
15, 1998. There will be no effect resultant from FIN 44 on the financial
statements issued prior to July 1, 2000. The Company will be required to record
compensation expense associated with the change in the exercise price of stock
options granted to employees which were repriced, which could cause a material,
adverse impact on the Company's financial condition. As of February 29, 2000,
the Company had approximately 927,272 repriced options outstanding.
F-10
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
February 29 or 28
2000 1999
---- ----
Computer equipment and software $ 26,118 $ 26,913
Office furniture and equipment 6,526 6,921
Leasehold improvements 7,959 9,740
---------- ---------
Total 40,603 43,574
Less: accumulated depreciation (26,446) (21,742)
---------- ---------
Total property and equipment $ 14,157 $ 21,832
========== =========
3. SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs incurred in the development of its software
products for commercial availability. Software development costs include certain
internal development costs, software costs purchased from third parties in
connection with acquisitions (if the related software product under development
has reached technological feasibility or if there are alternative future uses
for the purchased software, provided the capitalized amounts will be realized
over a period not exceeding five years) and purchased software license costs for
products used in the development of the Company's products. Costs incurred prior
to establishing technological feasibility are charged to product development
expense as incurred. Software development costs are amortized at the greater of
the amount computed using either: (a) the straight-line method over the
estimated economic life of the product, commencing with the date the product is
first available for general release; or (b) the ratio that current gross
revenues bears to the total current and anticipated future gross revenues.
Generally, an economic life of two years is assigned to capitalized software
development costs.
The Company capitalized software development costs and purchased licensed
software to be resold of $5,663,000, $10,657,000 and $11,090,000 and recorded
amortization expense of $9,689,000, $11,014,000 and $8,277,000 for fiscal 2000,
1999 and 1998, respectively. In addition, an additional $9,940,000 is recorded
in the fiscal 1998 balance for purchased software development costs capitalized
in connection with the acquisition of ProMIRA Software Inc. (see Note 11).
The amortization expense amounts for fiscal 2000, 1999 and 1998 include
write-offs totaling approximately $366,000, $1,432,000 and $1,897,000,
respectively, of previously capitalized software development costs. These
capitalized costs were deemed to exceed their future net realizable value as a
result of new technologies developed by the Company and acquired in connection
with acquisitions.
F-11
4. INTANGIBLES
Intangibles consists of the following (in thousands):
February 29 or 28
2000 1999
---- ----
Goodwill $ 12,135 $ 12,135
Customer lists 214 214
Intellectual property 750 750
Non-compete agreements 217 217
Software developed for internal use 294 193
Other 56 46
---------- ---------
Total 13,666 13,555
Less: accumulated amortization (6,349) (4,173)
---------- ---------
Total intangibles $ 7,317 $ 9,382
========== =========
In January 1999, the Company wrote off $1,354,000 of goodwill representing a
gross balance of $3,872,000 and accumulated amortization of $2,518,000 related
to the acquisitions of certain assets of Information Resources, Inc. ("IRI") and
Marketing Systems, Inc. The Company determined that goodwill balances were
impaired such that undiscounted cash flows pertaining to the goodwill could not
support the goodwill balance recorded.
5. LONG-TERM LIABILITIES
Long-term liabilities consisted of the following (in thousands):
February 29 or 28
2000 1999
---- ----
Notes payable $ 102 $ 987
Capital lease obligations (see Note 6) 31 64
Deferred rent 410 431
---------- ---------
Total $ 543 $ 1,482
Less - current portion (260) (1,028)
---------- ---------
Total long-term liabilities $ 283 $ 454
========== =========
Notes Payable - The Company has some outstanding notes payable which accrue
interest at rates ranging from 1.93% to 6.25% as of February 29, 2000. Principal
repayment requirements for each of the four succeeding fiscal years beginning
March 1, 2000 are as follows: $43,000 for 2001, $24,000 for 2002, $24,000 for
2003 and $11,000 for 2005.
Line of Credit - The Company has an unsecured revolving credit facility with a
commercial bank. As of February 29, 2000, $6 million was outstanding on the
revolving credit facility. This $6 million was repaid in March 2000. During the
third quarter, the Company renewed its revolving credit facility. The current
agreement, which the Company intends to renew, will expire in September of 2000.
Under its terms, the Company may request cash advances, letters of credit or
both in an aggregate amount of up to $20 million. The Company may make
borrowings under the facility for short-term working capital purposes or for
acquisitions (acquisition-related borrowings are limited to $7.5 million per
acquisition). The facility contains certain financial covenants that the Company
believes are typical for a facility of this nature and amount.
F-12
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS - The Company leases office space, office equipment and
automobiles under operating leases and various computers and other equipment
under capital leases. Property acquired through capital leases amounted to
$828,000 and $881,000 at February 29, 2000 and February 28, 1999, respectively
and has been included in computer equipment and software (Note 2). Total
accumulated amortization relating to these leases was $806,000 and $850,000 as
of February 29, 2000 and February 28, 1999, respectively.
Rent expense for operating leases for fiscal 2000, 1999 and 1998 was
approximately $9,712,000, $16,020,000 and $7,754,000, respectively. The future
minimum lease payments under these capital and operating leases for each of the
succeeding fiscal years beginning March 1, 2000 are as follows (in thousands):
Capital Operating
Leases Leases
----------- -------------
2001 $ 17 $ 17,500
2002 9 15,024
2003 9 9,841
2004 -- 6,495
2005 -- 5,449
Thereafter -- 36,984
---------- -------------
Total minimum lease payments 35 91,293
Less sublease income -- (2,733)
Less amount representing interest (4) --
---------- -------------
Present value of net minimum lease payments $ 31 $ 88,560
========== =============
Contingencies - The Company is involved in disputes and litigation in the
normal course of business. The Company does not believe that the outcome of any
of these disputes or litigation will have a material effect on the Company's
financial condition or results of operations. However, an unfavorable outcome of
some or all of these matters could have a material effect on the Company's
business, operating results, financial condition and cash flows.
The Company has previously disclosed in its periodic reports filed with the
Securities and Exchange Commission that, on March 7, 1997, the Company, as part
of the acquisition of certain assets of IRI, entered into several agreements
with IRI, including a Data Marketing and Guaranteed Revenue Agreement
("Agreement") and an Asset Purchase Agreement ("Purchase Agreement"). The
Agreement set forth the obligations of the parties with regard to revenues to be
paid to IRI from the sale by the Company of specified products provided by IRI.
Under the terms of the Agreement, the Company guaranteed revenue to IRI in a
total amount of $16.5 million over a period of years following execution of the
Agreement by way of three separate revenue streams.
The Company made an initial payment of approximately $500,000 to IRI. In
addition, as part of its commitment, the Company agreed to guarantee revenues
to IRI in a total amount of $12 million over an initial three-year period from
execution of the agreement ("First Revenue Stream"). The Company asserted that
its ability to market the IRI products had been impaired, which, under the terms
of the Agreement, obligates the parties to restructure the payments and/or
modify the obligations with regard to the First Revenue Stream. IRI responded,
disagreeing that an impairment existed and in the alternative, that any
impairment was corrected.
The parties discussed their disagreement over the impairment issue until
IRI filed a complaint in the Circuit Court of Cook County, Illinois on January
15, 1999. The complaint alleged breach of the Agreement and initially sought
damages of approximately $12,000,000 for the Company's failure to make
guaranteed payments. The complaint also alleged a breach of a separate
Non-Competition and Non-Solicitation Agreement executed at the
F-13
same time as the Agreement and sought damages in an amount in excess of
$100,000. The Company filed a Motion to Stay Proceedings and Compel Arbitration,
which was granted as to the claim under the Agreement and denied as to the claim
under the Non-Competition and Non-Solicitation Agreement. Arbitration
proceedings have commenced under the auspice of the American Arbitration
Association.
In the arbitration, IRI seeks a total of $15,930,563 in damages. The amount
now sought by IRI includes amounts which it claims are due under a second
revenue stream under the Agreement, triggered by the resolution of IRI's lawsuit
with Think Systems Corporation. The second revenue stream represents a total
guaranteed revenue of $1.75 million for the first and second year following the
Think Systems settlement and $2.25 million for the third year following the
settlement. The Company contends that the conditions to these amounts becoming
due under the second revenue stream have not been satisfied and that no amounts
are due to IRI, because, among other reasons, of a failure of consideration in
the overall transaction. Both the Cook County action and the arbitration
proceeding are in the early stages; coordinated discovery in both proceedings
has commenced and is scheduled to be completed in October 2000.
One of the Company's clients submitted to the Company by letter a claim for
damages based on alleged breaches of a software license agreement entered into
with one of the Company's foreign subsidiaries in fiscal 1997. The client claims
damages in the amount of approximately $6.5 million, a significant portion of
which consists of consequential damages. The Company is in the process of
responding to the letter and the Company believes that it has meritorious
defenses to these claims and could assert a significant counterclaim against the
client.
The Company has also received a letter from a foreign company asserting, on
the basis of information in the Company's press releases, that certain of the
Company's supply chain planning solutions which the Company sells infringe on
that company's patents. The Company believes that its systems and solutions do
not infringe on the foreign company's patents and the Company intends to respond
appropriately.
The ultimate outcome of these proceedings, as with litigation generally, is
inherently uncertain and it is possible that these matters may be resolved
adversely to the Company. The adverse resolution of these proceedings could have
a material adverse effect on the Company's business, operating results,
financial condition and cash flows.
7. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has authorized 4,620,253 shares of $.01 par value preferred
stock. As of February 29, 2000, no preferred shares were outstanding.
Common Stock
The Company has authorized 100,000,000 shares of $.002 par value common
stock. No cash dividends on common stock have been declared or paid in any of
the fiscal years presented. On August 18, 1997, the Company completed an
underwritten offering of 1,600,000 newly issued shares of common stock. The
proceeds to the Company were approximately $61,985,000, net of related offering
expenses.
Stock Split
On May 9, 1997, the Board of Directors of the Company declared a
two-for-one stock split on the Company's common stock, which was paid in the
form of a 100% stock dividend on June 11, 1997 to shareholders of record as of
May 23, 1997. The shares outstanding, weighted average shares, amounts per share
and all other references to shares of common stock reported have been restated
to give effect to the stock split.
F-14
Net Loss per Share
The following is a reconciliation of the number of shares used in the basic
and diluted earnings per share computation for the periods presented (in
thousands):
February 29 or 28
2000 1999 1998
---- ---- ----
Weighted average common shares 27,486 26,402 23,484
Dilutive potential common shares -- -- --
---------- --------- ---------
Shares used in diluted share computation 27,486 26,402 23,484
---------- --------- ---------
Net loss $ (8,945) $(96,112) $(13,165)
========== ========= =========
Basic loss per share $ (0.33) $(3.64) $(0.56)
========== ========= =========
Diluted loss per share $ (0.33) $(3.64) $(0.56)
========== ========= =========
The dilutive effect of options of approximately 1.9 million, 1.3 million
and 3.8 million shares has not been considered in the computation of diluted
loss per share in fiscal 2000, 1999 and 1998, respectively, because including
these shares would be anti-dilutive.
Employee Stock Purchase Plan
In October 1994, the Company adopted an employee stock purchase plan
("ESPP") that authorizes the Company to sell up to 1,500,000 shares of common
stock to employees through voluntary payroll withholdings. The stock price to be
paid by employees is equal to 85% or 95% of the lower average market price as
reported on the National Association of Securities Dealers Automated Quotation
system from either the first or last day of each six-month withholding period.
Payroll deductions may not exceed the lesser of 10% of a participant's
compensation or $25,000 per year. The number of shares purchased under this plan
by employees totaled 123,493 shares, 194,013 shares and 69,113 shares in fiscal
2000, 1999 and 1998, respectively. The weighted average fair value of shares
purchased in fiscal 2000, 1999 and 1998 was $13.34, $16.62 and $44.88,
respectively.
F-15
Stock Options
Effective July 24, 1998, the Company adopted the 1998 Stock Option Plan
("1998 Plan") under which incentive and non-qualified stock options may be
granted to officers, directors and employees to purchase a total of up to
5,237,900 new shares of common stock at prices not less than the fair market
value at the time of grant. Prior to the adoption of the 1998 Plan, the Company
had additional plans under which it granted stock options including the 1994
Employee Stock Option Plan ("1994 Plan"), the 1994 Outside Directors
Non-qualified Stock Option Plan ("1994 Director Plan"), the 1994 Executive
Incentive Stock Option Plan ("1994 Executive Plan") and the 1996 Employee
Incentive Stock Option Plan ("1996 Plan"). No new options will be granted under
these additional stock option plans, which will remain in effect with respect to
options outstanding under such plans until such options are exercised,
terminated or expire. As of February 29, 2000, the Company has cumulatively
granted options on 1,972,418 shares under the 1998 plan, 4,961,895 shares under
the 1994 plan, 381,500 shares under the 1994 Director Plan, 120,190 shares under
the 1994 Executive Plan and 1,570,000 shares under the 1996 Plan.
Under the 1998 Plan, the vesting period for new options issued is in
accordance with the Incentive and Non-Qualified Stock Option Policy approved by
the compensation committee of the Board of Directors. The majority of options
outstanding under the plan vest and become exercisable ratably over a four-year
period from the date of grant. The right to exercise the vested options expires
upon the earlier of either ten years (or for options granted prior to 1994,
eleven years) from the date of grant or within thirty days of termination of
employment.
During fiscal 2000, the Company also granted a total of 3,670,000
non-qualified stock options to several of the Company's executive officers.
These stock option grants were approved by the company's Board of Directors and
were not granted under any of the above mentioned stock option plans. These
shares vest and become exercisable over periods ranging from immediate vesting
to monthly vesting over a period of five years from the date of grant.
Effective January 29, 1999, the Company completed a stock option repricing
program in which options to purchase a total of approximately 1.52 million
shares of the Company's common stock were repriced. Under the repricing program,
which was approved by the shareholders of the Company, outstanding options
(other than those held by executive officers and directors) surrendered for
repricing were exchanged for an equivalent number of repriced options. The
exercise price of the repriced options is $8.75 per share (the fair market value
of the common stock at that date) and the four-year vesting schedule of each
option restarted on February 1, 1999. In conjunction with the Company's
restructuring, the Compensation Committee of the Board of Directors, pursuant to
authority granted to it under the related option plans, modified the annual
vesting provisions of the repriced options to provide that the vesting for the
first two years would be accelerated if certain earnings milestones are met in
fiscal 2000 and 2001.
Under FASB Interpretation No. 44 ("FIN 44"), which is retroactive to option
repricings effected after December 15, 1998, companies are required to treat
repriced options as compensatory options accounted for using variable accounting
treatment. As a result, companies will need to record non-cash compensation
expense, over the term of the option, based upon increases in the market price
of the companies' common stock over the market price at July 1, 2000. The impact
of FIN 44 could cause a material, adverse impact on the Company's financial
condition. As of February 29, 2000, the Company had approximately 927,272
repriced options outstanding.
F-16
A summary of the status of the Company's stock option plans and changes
during the fiscal years is presented below with share amounts in thousands:
FEBRUARY 29 OR 28
2000 1999 1998
----- ------ -----
OPTIONS TO OPTIONS TO OPTIONS TO
PURCHASE WTD. AVG. PURCHASE WTD. AVG. PURCHASE WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
---------- ----------- ----------- ----------- ---------- ---------
Outstanding at beginning of year 4,423 $ 11.90 4,421 $16.77 3,824 $6.78
Options granted at market value 4,880 11.83 3,091 15.84 1,503 36.64
Options granted greater than
market value 1,100 23.36 15 37.73 45 22.47
Exercised (1,204) 6.68 (751) 5.94 (777) 4.34
Cancelled (1,214) 15.77 (2,353) 28.79 (174) 16.85
---------- --------- ----------
Outstanding at end of year 7,985 $ 13.65 4,423 $11.90 4,421 $16.77
---------- --------- ----------
Exercisable at end of year 1,426 1,303 1,357
========== ========= ==========
The weighted average fair value of options granted in fiscal 2000, 1999 and
1998 was $13.95, $15.93 and $16.48 per share, respectively. A summary of the
weighted average remaining contractual life and the weighted average exercise
price of options outstanding as of February 29, 2000 is presented below with
share amounts in thousands:
Range of Number Weighted Avg. Number
Exercise Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Prices at 2/29/00 Contractual Life Exercise Price at 2/29/00 Exercise Price
- ------------- ----------- ---------------- -------------- ------------ ---------------
$0.92-$7.56 409 5.44 $5.83 331 $5.51
7.64-7.81 2,004 9.15 7.81 337 7.81
7.84-9.72 1,922 6.46 9.04 321 9.02
9.75-18.63 1,994 6.68 13.01 221 11.76
18.72-64.13 1,656 5.18 28.78 216 36.23
- ------------- ----------- ---------------- -------------- ------------ ---------------
$0.92-$64.13 7,985 6.87 $13.65 1,426 $12.45
=========== ============
Stock-Based Compensation
As permitted under SFAS No. 123, the Company continues to account for
stock-based compensation to employees in accordance with APB Opinion No. 25,
under which no compensation expense is recognized, since the exercise price of
options granted is equal to or greater than the fair market value of the
underlying security on the grant date. Pro forma information regarding net
income and income per share is required by SFAS No. 123, which uses the fair
value method. The fair value of the Company's stock-based awards to employees
was estimated as of the date of grant using the Black-Scholes option pricing
model. Limitations on the effectiveness of the Black-Scholes option pricing
model include that it was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable and
that the model requires the use of highly subjective assumptions including
expected stock price volatility. Because the Company's stock-based awards to
employees have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock-based awards.
F-17
Had compensation cost for these plans been recorded, the Company's net loss and
loss per basic and diluted share amounts would have been as follows, in
thousands except per share amounts:
February 29 or 28
2000 1999 1998
---- ---- ----
Net loss $(24,211) $(105,188) $(23,314)
Basic loss per share $(0.88) $(3.98) $(.99)
Diluted loss per share $(0.88) $(3.98) $(.99)
The decrease in the fair value of stock options granted in 1999 resulted
primarily from a significant decrease in the price of the Company's common stock
during fiscal 1999 from fiscal 1998. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to March 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years. Additionally, the fiscal 2000, 1999 and 1998 pro forma
amounts include $567,000, $964,000 and $435,000, respectively, related to
purchases under the employee stock purchase plan.
The fair value of options granted was estimated assuming no dividends and using
the following weighted-average assumptions for each of the fiscal years
presented:
OPTIONS ESPP
------- ----
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Risk-free interest rates 5.63% 5.15-5.52% 6.20-6.59% 4.87% 5.17% 5.65%
Expected term 3.83 yrs. 3.09 yrs. 2.62-7.69 yrs. 6 mos. 6 mos. 6 mos.
Volatility .7216 .6051-.6800 0.6038 .7000 0.6259 0.6044
8. RETIREMENT PLANS
The Company has two defined contribution retirement savings plans (one in
the U.S. and another in the U.K.) under the terms of which the Company matches a
percentage of the employees' qualified contributions. New employees are eligible
to participate in the plans upon completing one month of service. The Company's
contribution to the plans totaled $1,595,000, $1,669,000 and $1,045,000 for
fiscal 2000, 1999 and 1998, respectively.
9. INCOME TAXES
Income Tax Provision - The components of the (benefit) provision for income
taxes are as follows in thousands:
February 29 or 28
2000 1999 1998
---- ---- ----
Current:
Federal $ 69 $(2,392) $7,522
State 9 (231) 2,069
Foreign 674 428 710
--------- ---------- ----------
Total current provision (benefit) 752 (2,195) 10,301
Deferred:
Federal (936) 3,976 (18,891)
State -- -- 18
Foreign -- 1,164 (453)
--------- ---------- ----------
Total deferred (benefit) provision (936) 5,140 (19,326)
--------- ---------- ----------
Total (benefit) provision for income taxes $ (184) $2,945 $ (9,025)
========= ========== ==========
F-18
The net income tax benefits related to the exercise of stock options were
allocated to additional paid-in capital. Such amounts were approximately $0,
$1,928,000 and $7,731,000, for fiscal 2000, 1999 and 1998, respectively.
Deferred Income Taxes - The components of the Company's deferred tax assets and
liabilities are as follows in thousands:
February 29 or 28
2000 1999
---- ----
Deferred tax assets:
Uncollectable receivables and sales returns $594 $2,429
Accrued rents and other expenses 2,508 2,549
Operating loss carryforwards:
Domestic 24,505 15,854
Foreign 13,928 8,452
Restructuring charge 5,166 13,344
Tax credit carryforwards 2,592 1,937
Software revenue recognition 274 117
Depreciation and amortization 22,261 21,312
Accrued commissions -- 188
Other temporary differences 40 8
------------ -----------
Total deferred tax assets 71,868 66,190
Less: valuation allowance (52,933) (47,039)
------------ -----------
Total deferred tax assets 18,935 19,151
Deferred tax liabilities:
Software developments costs (2,743) (4,619)
Deferred revenue (1,036) (385)
Accrued commissions (74) --
------------ -----------
Total deferred tax liabilities (3,853) (5,004)
------------ -----------
Net deferred tax assets $15,082 $14,147
============ ===========
Based upon the Company's historic taxable income, when adjusted for
non-recurring items, net operating loss carryback potential and estimates of
future profitability, management has concluded that operating income will more
likely than not be insufficient to cover all of the deferred tax assets,
therefore, the valuation allowance has been increased in the current year to
$52,932,759 resulting in a net deferred tax asset of $15,081,945.
At February 29, 2000, the Company had a total of $61,756,000 of federal and
$37,486,000 of foreign net operating loss carry-forwards ("NOLs") available to
offset future taxable income in those respective taxing jurisdictions. The
federal NOLs expire in the years 2011 through 2020. Approximately $15,214,000 of
the foreign NOLs expire during the fiscal years 2000 to 2005 while the remaining
NOLs are available in perpetuity. The Company considers the earnings of foreign
subsidiaries to be permanently reinvested outside the United States.
Accordingly, no United States income tax on these earnings has been provided.
F-19
Effective and Statutory Rate Reconciliation - The difference between the income
tax provision and the amount computed by applying the federal statutory income
tax rate to pretax accounting income is summarized as follows in thousands:
February 29 or 28
2000 1999 1998
---- ---- ----
(Benefit) provision computed at federal statutory rate $ (3,193) $(32,608) $(7,767)
Increase (reduction) in taxes resulting from:
State and foreign taxes, net of federal benefit (388) (998) (1,450)
Change in valuation allowance 3,256 40,864 1,052
Benefit of net operating loss carrybacks and tax credits -- (4,052) (1,255)
Foreign items -- 953 529
Meals, entertainment and other non-deductible expenses 545 -- --
Tax exempt income (85) (417) (349)
Other (319) (797) 215
---------- --------- ---------
(Benefit) provision for income taxes $ (184) $2,945 $(9,025)
========== ========= =========
10. OTHER INCOME
Other Income - Other income consists of the following (in thousands):
February 29 or 28
2000 1999 1998
---- ---- ----
Interest income $ 1,989 $ 3,294 $ 2,774
Interest expense (104) (225) (110)
Other (496) (707) 199
---------- ---------- ---------
Total other income $ 1,389 $ 2,362 $ 2,863
========== ========== =========
11. ACQUISITIONS
Fiscal 1999 Business Combinations
Effective June 1, 1998, the Company acquired TYECIN by merger and accounted
for the transaction as a pooling of interests. Accordingly, all financial
information included in these financial statements gives retroactive effect to
the combination for all periods presented. Under the terms of the merger, the
Company issued approximately 333,000 shares of common stock. In addition, the
Company assumed the outstanding TYECIN common stock options and converted them
to options to purchase a total of approximately 25,000 shares of the Company's
common stock. During the second quarter of fiscal 1999, the Company recorded a
non-recurring charge of approximately $3.1 million for certain expenses related
to this transaction, including, among other items, accounting, legal and
severance fees.
Previously, TYECIN's year-end was December 31, 1997. Effective March 1,
1998, TYECIN's year-end was changed to February 28. During the two-month period
January and February 1998, TYECIN recorded revenues of approximately $609,000
and expenses of approximately $857,000. The resulting net loss of approximately
$248,000 is directly reflected in accumulated deficit in the Company's
consolidated financial statements.
Fiscal 1998 Business Combinations
During fiscal 1998, the Company made three acquisitions that have been
accounted for under the purchase method. Accordingly, the purchase prices were
allocated to certain assets and liabilities based on their respective fair
market values. The excess of the purchase price over the estimated fair market
value of the net assets acquired under each transaction was accounted for as
goodwill. Amounts allocated to certain intangibles, including goodwill,
F-20
are being amortized on a straight-line basis over five years. The consolidated
financial statements include the operating results of each acquisition from the
date of the acquisition.
In February 1998, the Company acquired ProMIRA Software, Inc. ("ProMIRA"),
a provider of supply chain planning software for manufacturers of complex
products in industries such as high technology, electronics and motor vehicles
and parts. The total purchase price was approximately $64,500,000, comprised of
cash, 1,550,000 shares of common stock and options to purchase 78,379 shares of
common stock valued at $57.8 million and acquisition costs. The purchase price
was allocated based on a fair value appraisal obtained from a nationally
recognized independent appraisal firm and included allocations to certain
intangible assets, such as existing software products which had reached
technological feasibility and in-process software development efforts which had
not reached technological feasibility ("purchased research and development").
The write-off of purchased research and development resulted in a non-recurring
charge to the Company's operating results and reduced net income for fiscal 1998
by $28,653,000 ($47,340,000, inclusive of income tax benefits of $18,687,000) or
$1.22 basic and $1.15 diluted income per share.
In June 1997, the Company acquired Synchronology Group Limited, a
closely-held company that provides manufacturing planning and scheduling
consulting services. In March 1997, the Company entered into a definitive
agreement to acquire certain assets of IRI. (See Note 6 for certain information
regarding litigation commenced by IRI against the Company.) The total purchase
prices of these acquisitions were approximately $3,200,000 and $1,900,000,
respectively and consisted primarily of cash, assumed liabilities and
acquisition costs.
F-21
12. RESTRUCTURING OF OPERATIONS
In the third and fourth quarters of 1999, the Company announced and
implemented a restructuring plan aimed at reducing costs and returning the
Company to profitability. The restructuring plan was necessitated due to the
Companys' poor financial performance throughout fiscal 1999, which resulted from
various factors including but not limited to poor sales execution, new and
stronger competitive factors, lengthening of sales cycles and prospects'
concerns about the Year 2000 and global economic conditions. The Company
reorganized to focus on the core business of providing supply chain solutions to
companies with dynamic supply chains, specifically those in the customer-driven
industries. The Company also planned on expanding product innovation to support
transforming the supply chain to an e-chain and include interface and
integration technologies in addition to expanding the Companys' distribution
channels. As a result of the restructuring, the Company recorded charges of
$700,000 and $33.1 million in the third and fourth quarters, respectively, in
fiscal 1999. The components of the charge included (in thousands):
Severance and related benefits $4,094
Lease obligations and terminations 20,200
Write-down of property, equipment and leasehold improvements 6,418
Write-down capitalized software development costs 1,343
Write-down goodwill 1,354
Other 366
---------
Total restructuring charge $33,775
=========
Due to the redirection of the core business strategy, the Company
eliminated 412 positions, across all divisions, primarily located throughout its
U.S. operations of which 330 were terminated prior to year-end. The Company has
paid approximately $1.8 million and $2.9 million in severance related costs for
the years ending February 29, 2000 and February 28, 1999, respectively, with the
remaining to be paid out during fiscal 2001.
The provision for lease obligations and terminations related primarily to
future lease commitments on office facilities that were closed as part of the
restructuring. The charge represented future lease obligations, net of projected
sublease income, on such leases past the dates the offices were closed by the
Company. At the time of the restructuring, some of these subleases were in
negotiation but had not been finalized and therefore the charge included
management's estimates of the likely outcome of these negotiations. Sublessors
were located during fiscal 2000 for many of the locations and the original
estimates were adjusted, as necessary. Cash payments on the leases and lease
terminations will occur over the remaining lease terms, the majority of which
expire prior to 2009.
The $6.4 million write-down of operating assets and $1.3 million write-down
of capitalized software development costs relates to a charge to reduce the
carrying amount of certain equipment, furniture and fixtures, leasehold
improvements and capitalized software development costs to their estimated net
realizable value, in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of."
The Company also recorded a charge of $1.4 million to write-down goodwill, which
was deemed to have a carrying value in excess of the estimated net realizable
value. The net realizable value of these assets was determined based on
management estimates, which considered such factors as the nature and age of the
assets to be disposed of, the timing of the write-down and the method and
potential costs of the disposal. Such estimates will be monitored each quarter
and adjusted if necessary.
F-22
The following table depicts the restructuring activity through February 29, 2000
(in thousands):
FY Balance Balance
Initial 1999 February 28, Adjustment Utilization of Accrual February
Charge Activity 1999 To Charge Cash Non-Cash 29, 2000
---------- ---------- ------------- ------------ ----------- ----------- ------------
Severance costs $ 4,094 $ (2,942) $ 1,152 $ 1,590 $ (1,822) $ -- $ 920
Lease obligation costs 20,200 (1,286) 18,914 (2,750) (9,200) -- 6,964
Impairment of
long-lived assets 9,115 (7,406) 1,709 (220) (443) (1,046) 0
Other 366 (214) 152 (126) (26) -- 0
---------- ---------- ------------- ------------ ----------- ----------- ------------
Total $ 33,775 $(11,848) $ 21,927 $ (1,506) $(11,491) $ (1,046) $ 7,884
========== ========== ============= ============ =========== =========== ============
During the year ended February 29, 2000, the Company reduced its previously
recorded restructuring charge by approximately $1.5 million. These adjustments
related primarily to the sub-lease of property that management had believed, at
the time of the restructuring, would not be sublet, which were offset by
increases in the accrual for severance costs due to the finalization of several
executive employee terminations previously identified by management.
13. SEGMENT INFORMATION
The Company and its subsidiaries are principally engaged in the design,
development, marketing, licensing and support and implementation of an
integrated suite of supply chain planning software products. Substantially all
revenues result from the licensing of the Company's software products and
related consulting and solution support services. The Company's chief operating
decision makers review financial information, presented on a consolidated basis,
accompanied by desegregated information about revenues by geographic region for
purposes of making operating decisions and assessing financial performance.
Accordingly, the Company considers itself to be in a single industry segment,
specifically the license, consulting and support of its software applications.
February 29 or 28
Geographic Areas 2000 1999 1998
---- ---- ----
(in thousands)
Revenues:
Americas $ 112,033 $ 138,734 $ 152,572
Europe 39,645 45,356 35,708
Asia/Pacific 15,027 7,509 5,890
Eliminations (14,272) (14,035) (13,907)
------------- -------------- -------------
$ 152,433 $ 177,564 $ 180,263
============= ============== =============
Loss from operations:
Americas (497) $ (75,795) $ (23,148)
Europe 1,435 499 9,595
Asia/Pacific 2,937 (6,198) 2,407
Eliminations (14,393) (14,035) (13,907)
------------- -------------- -------------
$ (10,518) $ (95,529) $ (25,053)
============= ============== =============
Identifiable assets:
Americas $ 165,336 $ 222,352 $ 289,701
Europe 39,163 34,587 22,932
Asia/Pacific 4,632 (1,375) 3,195
Eliminations (56,703) (83,234) (90,613)
------------- -------------- -------------
$ 152,428 $ 172,330 $ 225,215
============= ============== =============
No single customer accounted for 10% or more of the Company's net sales in
fiscal 2000, 1999 or 1998.
F-23
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest amounted to approximately $104,000, $227,000 and
$110,000 in fiscal 2000, 1999 and 1998, respectively. Cash paid for income taxes
amounted to approximately $96,000, $1,400,000 and $3,478,000 in fiscal 2000,
1999 and 1998, respectively.
Supplemental information of non-cash investing and financing activities is as
follows:
During fiscal 2000, 1999 and 1998, the Company received income tax benefits
of $0, $1,928,000 and $7,731,000, respectively, relating to the exercise of
stock options. The benefits were recorded as an increase to additional paid-in
capital.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly consolidated financial information for fiscal 2000 and 1999
follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ------------ -----------
2000 (in thousands, except per share data)
- ----
Total revenues $ 39,193 $ 33,795 $ 35,794 $ 43,651
Operating (loss) income (138) (4,455) (5,150) (775)
Net income (loss) 389 (3,435) (4,805) (1,094)
Basic income (loss) per share $ 0.01 $ (0.13) $ (0.17) $ (0.04)
Shares used in basic share computation 27,011 27,291 27,590 28,051
Dilutive income (loss) per share $ 0.01 $ (0.13) $ (0.17) $ (0.04)
Shares used in diluted share computation 27,279 27,291 27,590 28,051
1999
- ----
Total revenues $ 41,123 $ 52,940 $ 43,044 $ 40,457
Restructuring costs -- -- 701 33,074
Acquisition-related expenses -- 3,095 -- --
Operating loss (14,425) (10,340) (15,885) (54,879)
Net loss (8,539) (5,966) (10,407) (71,200)
Basic loss per share $ (0.33) $ (0.23) $ (0.39) $ (2.66)
Shares used in basic share computation 26,253 26,415 26,520 26,755
Dilutive loss per share $ (0.33) $ (0.23) $ (0.39) $ (2.66)
Shares used in diluted share computation 26,253 26,415 26,520 26,755
Included in the second quarter of fiscal 1999 are non-recurring charges related
to the TYECIN acquisition (Note 11). Included in the third and fourth quarters
of fiscal 1999 are charges related to the corporate-wide restructuring (Note
12).
* * * * *
F-24
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Stockholders and Board of Directors of Manugistics Group, Inc.:
We have audited the consolidated financial statements of Manugistics Group,
Inc. (the Company) and its subsidiaries as of February 29, 2000 and February 28,
1999, and for each of the three years in the period ended February 29, 2000, and
have issued our report thereon dated March 23, 2000; such report is included
elsewhere in this Form 10-K. Our audit also included the consolidated financial
statement schedule of Manugistics Group, Inc., listed in Item 14. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
DELOITTE & TOUCHE LLP
McLean,VA
March 23, 2000
S-1
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Balance at Charged to Balance at
Beginning Costs and End
of Period Expenses Write-offs of Period
---------------- ------------- --------------- --------------
Allowance for doubtful accounts
and sales returns
Year ended February 29,2000 6,299 1,251 (5,675) 1,875
Year ended February 28,1999 2,099 6,940 (2,740) 6,299
Year ended February 28,1998 1,235 1,517 (653) 2,099
S-2