U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22154
MANUGISTICS GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
52-1469385 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification Number) |
9715 Key West Avenue, Rockville, Maryland 20850
(Address of principal executive offices) (Zip code)
(301) 255-5000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.002 par value per share
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
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 Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes x No o
As of August 31, 2004, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $148.4 million. As of April 30, 2005, the number of shares outstanding of the Registrants common stock was approximately 83.8 million, based on information provided by the Registrants transfer agent.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive Proxy Statement relating to the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. We anticipate that our Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended February 28, 2005.
Item 1. BUSINESS.
The disclosures set forth in this Annual Report on Form 10-K are qualified by the sections captioned Forward-Looking Statements and Factors That May Affect Future Results in Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K, and other cautionary statements set forth elsewhere in this Annual Report on Form 10-K.
Overview:
We are a leading global provider of supply chain, demand and revenue management software products and services. We combine these products and services to deliver solutions that address specific business needs of our clients. Our approach to client delivery is to advise clients on how best to use our solutions and other technologies across their entire demand and supply chain and in their revenue management practices to enable informed, responsive, rapid and cost and price effective decision-making throughout their own enterprise and across their extended trading network by creating a fully synchronized supply chain.
The solution sets we offer are:
· Demand Management and Pricing
· Supply Management
· Transportation and Logistics
· Collaboration and Visibility
· Contract Materials Resource Planning (MRP) & Maintenance, Repair and Overhaul (MRO)
· Performance Management
· Revenue Management
These solutions include the products described under Solutions below.
Our solutions are designed to increase revenue and profits by enabling our clients to improve customer service, reduce stock-outs, lower costs, source more efficiently, reduce inventory, optimize price, collaborate with suppliers and customers, coordinate supply and demand, manage transportation and logistics operations and improve revenue management practices. A key element of our market strategy is to offer implementation, consulting, training and support services to our clients and prospects as an integral part of our solutions.
Our solutions are built and reliant on our internal WebWORKS platform. WebWORKS is based on the Java 2 Platform and J2EE industry standards.
We have organized our sales and marketing operations under four primary business units, Retail, Consumer Goods (CG), Government, Aerospace & Defense and Revenue Management (Travel, Transportation & Hospitality), which we call strategic business units or SBUs. We believe this new
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operational structure will allow us to most effectively use our capabilities and resources to realize opportunities in our markets.
We market our solutions to companies primarily throughout North, South and Central America, Europe and the Asia-Pacific region. Among others, our clients include many of the worlds leading Consumer Goods, Retail and Travel, Transportation & Hospitality organizations, and the U.S. Government, including Limited Brands, Dixons, Coca Cola Bottling Co., Kraft Foods, Tyson Foods, Caesars Entertainment, Great North Eastern Railway, DHL and the Defense Logistics Agency (DLA). No individual client accounted for more than 10% of annual revenue for the three years ended February 28, 2005.
The Company was incorporated in Delaware in 1986. Our fiscal year end is February 28th or 29th. We completed our initial public offering of common stock in 1993, a secondary public offering of common stock in 1997 and a private placement of convertible subordinated notes in 2000. We subsequently registered the convertible subordinated notes for resale early in fiscal 2002. We have invested significant resources to develop new software, to enhance existing software and to acquire additional software products and solutions through acquisitions.
A summary of our acquisitions over the past five fiscal years follows:
Company |
|
|
|
Date |
|
Description |
Digital Freight Exchange, Inc. (DFE)* |
|
May 2002 |
|
Collaborative transportation logistics services |
||
Western Data Systems of Nevada, Inc. (WDS)* |
|
April 2002 |
|
Maintenance, repair and overhaul and make-to-order software |
||
SpaceWorks Inc. (acquired technology only)* |
|
July 2001 |
|
Order management software |
||
PartMiner CSD, Inc.* |
|
May 2001 |
|
Product design and sourcing software |
||
One Release, LLC* |
|
May 2001 |
|
Software development services |
||
STG Holdings, Inc. (STG) |
|
January 2001 |
|
Advanced factory planning, scheduling and simulation software |
||
Talus Solutions, Inc. (Talus) |
|
December 2000 |
|
Pricing and revenue optimization software |
* Asset acquisitions
Industry Background:
Increasing global competition, shorter product life cycles, more demanding customers and higher standards are forcing businesses to be more responsive to customer demand, bring their products to market more quickly and efficiently, provide improved levels of customer service, and improve margins by lowering costs to market and improving pricing decisions. To meet these challenges, companies are demanding greater visibility of operations throughout their own organization and their extended trading networks and the capability to make and execute decisions in response to rapidly changing conditions of demand and supply.
Effective demand and supply chain management solutions allow companies to share information throughout their own organizations and extended trading networks and to monitor, measure and improve their business processes over time. They also enable informed, responsive, rapid decision-making that is cost and price effective.
We believe that traditional enterprise application systems, such as enterprise resource planning (ERP) systems, do not provide the visibility, flexibility, responsiveness or efficiencies required to meet effectively the demands of todays competitive environment. We believe that companies need to pursue the
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integration of the supply-side and demand-side of their businesses to lower operational costs and increase the value derived from their processes and technology systems.
To meet these challenges, many companies are seeking information technology solutions based on open standards that operate in a fast, effective and secure environment and can be integrated with their existing systems, as well as those of the companies in their trading networks. They require that these solutions provide quick realization of benefits and rapid return on their systems investments.
The competition in these markets includes enterprise application software companies, such as traditional ERP companies and other transaction-based application software companies, supply chain management companies, pricing and revenue management companies and other information technology services companies, in addition to software solutions custom developed within the user company.
Information technology companies are engaging offshore (global) workforces on an increasing basis to take advantage of technical expertise and lower personnel costs in countries such as India and China. Companies may utilize their own or out-sourced operations to provide development, consulting and implementation services.
Strategy:
Our objective is to enhance our position as a leading global provider of supply chain management and demand and revenue management solutions. Our strategy to achieve our objective includes the following elements:
FOCUS ON KEY MARKETSWe have organized our sales and marketing operations under four primary business units: Retail, Consumer Goods (CG), Government, Aerospace & Defense and Revenue Management (Travel, Transportation & Hospitality), which we call strategic business units or (SBUs). We believe this new operational structure will allow us to more effectively use our capabilities and resources to realize opportunities in our markets.
FOCUS AND DIFFERENTIATE OUR SOLUTIONSWe intend to focus the scope of our solutions offerings on our core products and enhance the capabilities of these solutions through additional industry and client-specific functionality, to help our clients solve a broader range of evolving business challenges and to improve operational and business processes within and among companies. We believe there is an increasing market for solutions that integrate supply chain management with demand and revenue management solutions, and that our ability to provide these integrated solutions differentiates us from our competitors. We also intend to make our solutions easier to implement and integrate.
PROVIDE ADVANCED TECHNOLOGICAL INNOVATIONWe have extensive experience and domain expertise and have committed substantial resources for research and development, which we use to develop advanced technological software solutions to offer our clients and prospects. We opened our own development center in Hyderabad, India during the fourth quarter of fiscal 2005 to expand our product development capabilities while taking advantage of lower personnel costs. Our new development center will work closely with our core product development group at our headquarters in Rockville, MD. See Product Development.
PROVIDE COMPREHENSIVE SERVICESAs a key element of our market strategy, we offer implementation, consulting, training and support services to our clients and prospects, directly and through third parties.
DEVELOP STRATEGIC ALLIANCES AND NEW BUSINESS RELATIONSHIPSWe combine our solutions with the competencies of third parties which complement ours, such as leading consulting firms and technology providers. This strategy permits us to offer our clients solutions that can better meet their needs. We also intend to provide more focused sales and marketing efforts to small and
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medium-sized businesses in Europe and the Asia-Pacific region through third-party marketing and reseller agreements.
Solutions:
Manugistics solutions are configured sets of our software products that address the specific demand and supply chain business processes and revenue management practices that our clients want to improve. These solutions may also include consulting, implementation, training and client support services. Our solutions are designed to meet the demand and supply chain and revenue management needs of our clients helping them to increase revenue and profits by enabling them to improve customer service, reduce stock outs, lower costs, source more efficiently, reduce inventory, optimize price, collaborate with suppliers and customers, coordinate supply and demand, manage transportation and logistics operations and improve revenue management practices. Our solutions are built on and rely on our internal WebWORKS platform. WebWORKS is based on the Java 2 Platform and J2EE industry standards.
Demand Management and PricingOur Demand Management and Pricing solutions are designed to provide integrated price optimization and demand planning capabilities that enable clients to create business strategies such as consensus demand planning, optimal pricing strategies, targeted promotion campaigns and markdown planning to efficiently predict, respond to and shape demand. Demand Management and Pricing solutions include: NetWORKS Demand, NetWORKS Precision Pricing, NetWORKS Promotions, NetWORKS Markdowns and NetWORKS Target Pricing.
Supply ManagementOur Supply Management solutions are designed to create an optimal supply network and set sourcing policies to generate a synchronized inventory, distribution, production and material plan for our clients and their supply chain partners. Our clients use our Supply Management solutions to manage, optimize and synchronize the many facets of their supply chainsfrom collaboration with trading partners on production plans, purchasing, logistics and fill rates to alignment and execution of a sales and operations planning process to meet corporate objectivesand to meet customer demand while reducing inventory and cost. Supply Management solutions include: NetWORKS Fulfillment, NetWORKS Strategy, NetWORKS Supply, NetWORKS Master Planning, NetWORKS Order Provisioning, NetWORKS Sequencing, and Networks Inventory Policy Optimization.
Transportation and Logistics ManagementOur Transportation and Logistics Management solutions are designed to help global and other shippers, consignees, carriers, trading partners and logistics service providers effectively manage the complexities of transportation and logistics, including multiple modes of transport such as by air, rail, sea and road. Our capabilities cover the entire spectrum of the logistics processfrom strategic logistics sourcing, planning and optimization, execution and shipment tracking, capacity management to payment and performance analysis. Fleet management capabilities include finding the optimal use of a clients fleet based upon or measured against shipment requirements and constraints such as locations, carriers, rates, capacities and hours of operation and generating detailed work plans that help manage the fleet. Transportation and Logistics solutions include: NetWORKS Transport, NetWORKS Delivery Management, NetWORKS Routing, NetWORKS Carrier, NetWORKS Freight Payment, NetWORKS Fleet Capacity Planner, NetWORKS RFQ, offered in two optionsa product or service, and NetWORKS RFQ Optimizer.
Collaboration and VisibilityOur Collaboration solutions are designed to enable collaboration among trading partners by allowing them to view and make decisions using the same information. These solutions are intended to help clients facilitate processes such as collaborative planning, forecasting and replenishment and collaborative supply planning across extended trading networks. Our Visibility solutions provide event-based views into critical supply chain information such as inventory balances and order and shipment status, within the trading network. Multiple trading partners are able to simultaneously review past performance and current data on sales forecasts, booked orders, direct materials procurement,
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manufacturing plans and distribution and shipping capacity in order to make and execute decisions on what to produce and when and how to deliver finished goods, to best meet the clients business objectives. Our Collaboration and Visibility solutions include: NetWORKS Collaborate, NetWORKS Market Manager, NetWORKS Carrier and NetWORKS Delivery Management.
Contract Materials Resource Planning (MRP) & Maintenance, Repair and Overhaul (MRO)Our Contract MRP solutions provide comprehensive enterprise resource planning (ERP) capabilities for Aerospace & Defense and other complex enterprises engaged in contract-oriented, order-centric manufacturing and re-manufacturing. Our Contract MRO solutions are designed to provide comprehensive support, from asset receipt to delivery back into service, for heavy maintenance, repair, overhaul, upgrade or modification services for complex equipment such as aircraft, engines, vehicles or ships, related sub-systems and components. These solutions include service and parts management capabilities that help companies optimize and manage their service and parts operations by effectively planning and scheduling maintenance programs, parts, materials, tools, manpower and repair facilities to provide efficiently the high levels of customer service on a cost effective basis. Our Contract MRP and MRO solutions reduce overhead and enhance cash flow and productivity through advanced cost collection and earned-value management processes. Contract Master Resource Planning and Maintenance, Repair & Overhaul solutions include: NetWORKS Make-to-Order, NetWORKS Component Management, NetWORKS Maintenance, Repair and Overhaul, NetWORKS Carrier and NetWORKS Procurement.
Performance ManagementOur Performance Management solutions provide clients with a means to measure and predict their supply chain performance. Our solutions are designed to enable the definition and monitoring of key performance indicators (KPIs), such as forecast accuracy, customer service levels, inventory turns and adherence to the financial plan. Performance Management solutions include such products as: NetWORKS Reporting, NetWORKS Analytics and NetWORKS Monitor.
Revenue ManagementOur Revenue Management solutions for the travel, transportation, hospitality and media industries are designed to help companies meet the unique challenges of industries where products and services are perishable and optimizing capacity utilization is critical. Passenger travel companies, cargo carriers, hotel and resort companies, and media networks, broadcast groups and cable companies use our solutions to more accurately forecast future demand, optimally allocate capacity, maximize revenue and increase profits and customer satisfaction. Our Revenue Management solutions include: NetWORKS Airline Revenue Optimizer, NetWORKS Cargo Revenue Optimizer, NetWORKS Hotel Revenue Optimizer and NetWORKS Rental Car Optimization.
Manugistics Supply Chain Technology Platform
Manugistics Solutions are modular and support phased implementations. Our solutions are used to design, optimize and synchronize a companys extended demand and supply chain processes and improve revenue management practices. The architecture is based on an industry standard Java 2 platform, Enterprise Edition (J2EE), which defines the programming model and architecture for implementing web services that allow organizations to communicate data without intimate knowledge of each others information technology systems. These open standards of J2EE help facilitate application development, application-to-application integration, portal connectivity, and business process management. Built on an architecture that provides rapid implementation and interoperability with other information technology assets, our products are designed to deliver industry-specific functionality and provide low total cost of ownership as well as the flexibility and scalability needed to adapt effectively to future business and technology shifts.
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Product Development:
We direct our efforts in product development to:
· developing new products;
· enhancing existing products;
· enhancing our products for use in different languages and different measurements and standards;
· increasing the breadth and depth of our product functionality to address increasingly complex customer challenges quickly;
· increasing the performance of our software and its ability to address increasingly large-scale problems; and
· developing products tailored to the specific requirements of particular industries.
To date, our products, including product documentation, have been developed by our internal staff and third-party contractors and have been supplemented by acquisitions and complementary business relationships.
In developing new products or enhancements, we work closely with current and prospective clients, as well as with other industry leaders, to make sure that our products address the needs of the markets we serve. We believe that this collaboration will lead to improved software and will result in superior products that are likely to be in greater demand in the market. We maintain committees of users, developers and marketers of our products, who, among other things, define and rank issues associated with products and discuss priorities and directions for their enhancement.
For new applications and major enhancements, we also conduct a launch program, which allows clients to review design specifications and prototypes and to participate in product testing. We have established channels for client feedback, which include periodic surveys and focus groups. In addition, our product development staff works closely with our marketing, sales, support and services groups to develop products that meet the needs of our current and prospective clients.
As of February 28, 2005, our product development resources included 183 employees and 108 third-party contractors, 98 of which were working in India. Gross product development costs were $42.0 million, $46.1 million and $73.6 million in fiscal 2005, 2004 and 2003, respectively. Gross product development costs in total over the last five fiscal years were $292.5 million.
We have made substantial investments in product development, and we will continue to make the expenditures for product development that we believe are necessary for delivering new products, features and functions rapidly. We believe that getting products to market quickly, without compromising quality, is critical to the success of our business.
Implementation Services:
A key element of our business strategy is to provide clients with comprehensive solutions for their internal and external demand and supply chains and revenue management practices by offering implementation services for our products. When implementing our software, clients typically make changes to their business processes and overall operations, including their planning and pricing functions. To assist clients in making these changes, we offer a wide range of implementation services. Our implementation services also include business operations consulting, change management consulting and end-user and system administrator education and training. These services help clients redesign their operations to take full advantage of our software. Additionally, third-party service providers implement our solutions.
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Our implementation services are priced and sold separately from our software products and are provided primarily on a time and materials basis. Our consulting services group consisted of 220 employees as of February 28, 2005.
Client Support and Application Hosting Service:
Our comprehensive solutions include global support to clients. Most of our clients enter into annual solution support agreements for post-contract customer support and the right to unspecified software upgrades and enhancements. Support includes in-depth support services, product maintenance and a web-based knowledge management tool for tips and techniques and online support. Upgrades include new features and functionality, as well as core technology enhancements. Our client support personnel also collect information that we use to assist us in developing new products, enhancing existing products and in identifying market demand.
Our application hosting service offers clients the option of letting Manugistics administer and run the clients solutions at our data center helping clients to move quickly to realize the benefits of our products by reducing internal resource requirements such as costs of hardware, infrastructure, security, training and technology and by operating in proven technical environments. As of February 28, 2005, our client support and application hosting service group consisted of 62 employees.
Sales and Marketing:
Our sales operation for North, South and Central America is headquartered at our office in Rockville, Maryland and includes field offices in Atlanta, GA; Calabasas, CA; Chicago, IL and Sao Paulo, Brazil. Our direct sales organization focuses on licensing supply chain and demand and revenue management solutions to large, multi-national enterprises, as well as to mid-sized enterprises with a variety of demand and supply chain, revenue management and extended trading network issues. We operate in Canada and Mexico through subsidiaries established in those countries.
We license our solutions in regions outside of the Americas primarily through foreign subsidiaries. Our British, French and Belgian subsidiaries, located in Bracknell, England; Paris, France; and Brussels, Belgium, respectively, provide direct sales, services and support primarily to clients located in continental Europe and the United Kingdom. We have established subsidiaries and maintain offices in Osaka and Tokyo, Japan; Singapore; Shanghai and Hong Kong, The Peoples Republic of China; Hyderabad, India; Kuala Lumpur, Malaysia; and Sydney, Australia. We also maintain an office in Taipei, Taiwan. We adapt our solutions for use in certain international markets by addressing different languages, different standards of weights and measures and other operational considerations. In fiscal 2005, approximately 33.8% of our total revenue came from sales made to clients outside the U.S. Details of our geographic revenue are in Note 16Segment Information in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. We also use indirect sales channels to market our software in certain markets. See Alliances. Using these channels, we seek to increase the market penetration of our software. These relationships enhance our sales resources in target markets and expand our expertise in bringing our solutions to prospects and clients.
We support our sales activities by conducting a variety of marketing programs, including our annual conference called enVISION, which provides a forum for executives and managers to exchange ideas and best practices regarding technological innovations in supply chain management and demand and revenue management. We maintain client steering committees to involve our clients in the ongoing development of our solutions. We also participate in industry conferences such as those organized by the American Production and Inventory Control Specialists (APICS) organization, the National Retail Federations Annual Show, Retail Systems, Logicon, AUSA and in numerous pricing and revenue optimization conferences, such as HITEC and PPS (Professional Pricing Society). In addition, we participate in solution
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demonstration seminars and client conferences hosted by complementary software vendors. We also conduct Manugistics brand awareness and lead-generation programs including advertising, direct mail, public relations, seminars, telemarketing and ongoing client communication programs.
As of February 28, 2005, we had 127 employees engaged in sales and marketing activities.
Alliances:
Our alliance program is based on improving and increasing the value we deliver to our clients and prospects. We ally ourselves with leading companies that provide products or services that complement our solutions.
We work with leading systems integrators and business strategy and management consulting firms that provide a wide range of consulting expertise such as implementation of software solutions, process and change management and strategic business services. We maintain close relationships with major consulting firms worldwide to extend our delivery and solution capability for our clients. We have also developed strategic alliances pursuant to written agreements with consulting and systems integration partners such as Accenture, AT Kearney, Bearing Point, Cap Gemini Ernst & Young, IBM and other leading consulting firms to provide implementation and business process assistance to our clients. We augmented this with several geographic and regional alliances and cooperate with other professional services firms on a client-by-client basis.
We have strategic relationships pursuant to written agreements with the following software and technology providers: AND Group; Ayeca; Business Objects; CAS; Cognos; Global eXchange Services; Kewill (formerly, Shipnow); Marc Global; Proclarity; Tele Atlas North America; TIBCO Software; Vignette; and Workplace plc, with whom we have software license, distribution or strategic relationship agreements; Chrome; KCI Computing; MXI; Softface; and TIP Technologies, with whom we have joint marketing and sales referral agreements; and Hewlett Packard; IBM; Microsoft; and Sun Microsystems, with whom we have various development support and hardware lease agreements.
We have entered into an Independent Software Vendor (ISV) Agreement with BEA Systems, an Application Specific Full Use License Agreement with Oracle,a SunOne Software Agreement with Sun Microsystems, and an original equipment manufacturer (OEM) software agreement with IBM.
Manugistics has entered into agreements with Ayeca, Chemlogix, Nomis Solutions, and The Rainmaker Group which grant them the right to resell specific Manugistics products. We have also entered into written agreements with various companies located or doing business in Asia, Europe and South America, which grant those companies the right to resell Manugistics products.
In addition, Manugistics maintains agreements with a number of technology providers whose products are embedded and shipped with one or more Manugistics products. These include ActiveState; Actuate; DataDirect Technologies; HCL Technologies; ILOG; IONA Technologies; MapInfo; Microfocus; Numerical Algorithms Group (NAG); Progress Software; Quest Software; Recursion Software; and Rogue Wave Software.
Clients:
Various combinations of our supply chain and demand and revenue management software have been licensed by organizations worldwide in such industries as: retail; consumer goods (including life sciences); Government, Aerospace & Defense; and Travel, Transportation & Hospitality. We include below a sample of companies that have either licensed software products from us or our distributors, or purchased support, consulting, or other services or actively used our software during fiscal 2005. See Sales and Marketing.
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Retail
Ahold USA, Albertsons, Inc., Canadian Tire Corp, Ltd., Circuit City, CompUSA, DSG Retail Group (Dixons), Dollar General, Federated Department Stores, Gordon Food Service, H-E-B Grocery Company LP, IKEA, Kohls Department Stores, L.L. Bean, McDonalds Europe, RadioShack Corporation, Target Corporation, The Great Atlantic & Pacific Tea Co., The Limited, Toys R Us, Wickes Building Supplies and Winn-Dixie Stores.
Consumer Goods
Airgas, Inc., Avon, BIC, Black & Decker, Campbell Soup Company, Church & Dwight, Coca-Cola Bottling Co., Coty Inc., Deere & Co., Diageo, Georgia-Pacific, Kraft Foods, Inc., McCormick & Company, Inc., Ocean Spray Cranberries, Inc., Perdue Farms Inc., Pepsico, Remy Cointreau, Rohm & Haas, Smith & Nephew Orthopaedics, The Scotts Company, Tyson Foods Inc.and Unilever.
Government, Aerospace & Defense
Boeing Co., Defense Logistics Agency, Surface Deployment & Distribution Center.
Revenue Management (Travel, Transportation & Hospitality)
Caesars Entertainment, Canadian Pacific Logistics Solutions, Continental Airlines, Delta Air Lines, DHL, Eurostar Railway, Great North Eastern Railway (GNER), Harrahs Entertainment, Inc., Princess Cruise Lines and TUI UK.
Competition:
The markets for our solutions are very competitive. Other application software vendors offer products that compete directly with some of our products. These include, but are not limited to, such vendors as, Aspen Technology, DemandTec, Global Logistics Technologies, i2 Technologies, JDA Software, Logility, Manhattan Associates, Profit Logic, PROS Revenue Management, Rapt, Retek (acquired by Oracle), Sabre, SAP and Teradata (a division of NCR). Certain enterprise resource planning vendors, in addition to SAP, have acquired or developed demand and supply chain management software, products, or functionality or have announced intentions to develop and sell demand and supply chain management solutions. Such vendors include Oracle, which recently acquired PeopleSoft and Retek, and SSA Global Technologies.
The principal competitive factors in the markets in which we compete include product functionality and quality, domain expertise, integration technologies, product suite integration, breadth of products and related services such as customer support and implementation services. Other factors important to clients and prospects include:
· customer service and satisfaction;
· the ability to provide client references;
· compliance with industry standards and requirements;
· the ability of the solution to generate business benefits;
· rapid paybacks and large returns on investment;
· software availability in foreign languages;
· vendor financial stability and reputation; and
· to some extent, price.
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We believe that our principal competitive advantages are our comprehensive, integrated solutions, our list of referenceable clients, the ability of our solutions to generate business benefits for clients, our substantial investment in product development, our domain expertise in our markets, our quick implementations, rapid paybacks and large returns on investment for our clients, our client support services and our extensive knowledge of supply chain management and demand and revenue management solutions.
Software License, Support and Implementation Service Agreements and Pricing:
Software revenue consists principally of fees generated from licensing our software products. In consideration of the payment of license fees, we generally grant nonexclusive, nontransferable, perpetual licenses, which are primarily business unit, user-specific and geographically restricted. Software license fee arrangements vary depending upon the type of software product(s) being licensed and the customers computer environment. Software license fees are based primarily on which products are licensed, the size and complexity of the customer problem being addressed, the size of the clients business and the number of users and locations. The amount of software license fees may reach many millions of dollars for initiatives that are large in scope and complexity.
Clients may obtain solution support for an annual fee. Our clients may select from three levels of support that our customers choose from to accommodate their needs: Standard, Premium and Signature. Support fees are calculated on an escalated scale, based on the level of service chosen and the size of the related software license fees. Support fees are generally billed annually and are subject to changes in support list prices. We also provide implementation services, training and hosting of our software applications and other related services, generally on a time and materials basis. This allows our clients to determine the level of support or services appropriate for their needs.
Proprietary Rights and Licenses:
We regard our software as proprietary. We rely on a combination of trade secret, patent, copyright and trademark laws, confidentiality procedures and agreements and provisions to help protect proprietary rights in our software. We distribute our software under software license agreements, which typically grant clients nonexclusive, nontransferable licenses to our software and have perpetual terms unless the term is limited or the license is terminated for breach. Under such typical license agreements, we retain all rights to market our products, which affords limited protection.
Manugistics owns five issued U.S. patents and numerous pending patent applications (including a number of allowed claims) in both the U.S. and in various foreign countries or regions. The latest of these issued U.S. patents will endure until 2019with the earliest enduring until 2016. Any patent issued may be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not challenged, may not be issued with the scope of claims we seek, if at all.
Manugistics also owns a number of active trademark registrations (including those for the mark MANUGISTICS among others) and pending trademark applications in the U.S. and in various foreign countries or regions. Each trademark registration of Manugistics will endure until the respective mark ceases to be used or the corresponding registration is otherwise not renewed. Trademark applications are subject to review by the issuing authority, may be opposed by private parties, and may not issue. Likewise, once issued, trademark registrations remain subject to challenge and/or cancellation.
We also seek to protect the source code of our software as a trade secret and as an unpublished, copyrighted work.
Use of our software is usually restricted to the internal operations of our clients and to designated users. In sales to logistics or service providers, the licensed software is usually restricted to use by the
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logistics or service provider for the benefit of its clients. Use is subject to terms and conditions that prohibit unauthorized reproduction or transfer of the software.
We also rely, in part, on technology that we license from third parties, including software that is integrated with internally developed software and used in our software products to perform key functions. For example, we license reporting software from Cognos, Inc., application integration software from Business Objects, application integration software from Vignette, Inc. and an application platform suite of software from BEA Systems, Inc., on terms we believe to be commercially reasonable. We also license software for non-key functions from one or more technology vendors that we embed and ship with our software on terms we believe to be commercially reasonable. Typically, these licenses are worldwide, non-exclusive and royalty-based. The license agreements typically have terms of two to five years, and automatically renew for one-year terms unless terminated in accordance with their terms. If we are unable to continue to license certain of this software on commercially reasonable terms, including the reporting software from Cognos and the application platform suite from BEA Systems, we may face delays in releases of certain of our software solutions until equivalent technology can be identified, licensed or developed, and integrated into our current product. These delays, if they occur, may seriously harm our business. The royalties paid under these licenses were, in aggregate, less than 5% of our total revenue in each of our 2005, 2004 and 2003 fiscal years.
Employees:
As of February 28, 2005, we had 695 full-time regular employees and 221 full-time and part-time third-party contractors. None of our employees are represented by a labor union. We have experienced no work stoppages and believe that our employee relations are generally good. All of our employees sign non-compete agreements as a condition of employment.
Available Information:
Our fiscal year ends on February 28 or 29. We furnish our stockholders with annual reports containing audited financial statements. In addition, we file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information that we file with the Securities and Exchange Commission at the Securities and Exchange Commissions Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.
We file our reports with the Securities and Exchange Commission electronically via the Securities and Exchange Commissions Electronic Data Gathering, Analysis and Retrieval system (EDGAR). The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding companies that file electronically with the Securities and Exchange Commission via EDGAR. The address of this Internet site is http://www.sec.gov. We also make available free of charge through our website at www.manugistics.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
12
Code of Ethics:
We have adopted a code of business conduct and ethics for all employees of our Finance department and those with financial oversight responsibility, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, known as the Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002. The Code of Ethics is available on our website at www.manugistics.com.
We intend to disclose any amendment to, and any waiver from, a provision of the Code of Ethics that applies to the Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer or any other executive officer and that relates to any element of the Code of Ethics definition enumerated in Item 406(b) of Regulation S-K, on Form 8-K, within five business days following the date of such amendment or waiver.
Code of Conduct:
We have adopted a code of business conduct and ethics for all directors, officers and employees, known as the Code of Conduct pursuant to applicable NASDAQ listing standards. The Code of Conduct is available on our website at www.manugistics.com.
We intend to disclose any amendment to the Code of Conduct that relates to any element of the Code of Ethics definition enumerated in Item 406(b) of Regulation S-K, and any waiver from a provision of the Code of Conduct granted to any director or executive officer, on Form 8-K, within five business days following the date of such amendment or waiver.
Item 2. PROPERTIES.
Our principal sales, marketing, product development, support and administrative facilities are located in Rockville, MD, where we lease approximately 280,000 square feet of office space under a lease agreement which expires on June 30, 2012. Approximately 26% of our corporate headquarters space is subleased.
In addition, we lease office space for our 23 sales, service and product development offices located in North America, South America, Europe and Asia/Pacific, pursuant to leases that expire between calendar 2005 and calendar 2018. We believe that our current facilities are adequate for our current needs and suitable additional or substitute space will be available as needed to accommodate any future expansion of our operations. We continue to market office space that has been abandoned in conjunction with exit and disposal plans implemented by the Company. Please refer to Note 8 and Note 15 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for information regarding our lease obligations and exit and disposal plans.
Item 3. LEGAL PROCEEDINGS.
We are involved from time to time in disputes and other litigation in the ordinary course of business. We do not believe that the outcome of any pending disputes or litigation will have a material adverse effect on our business, operating results, financial condition and cash flows. However, the ultimate outcome of these matters, as with dispute resolution and litigation generally, is inherently uncertain, and it is possible that some of these matters may be resolved adversely to us. The adverse resolution of any one or more of these matters could have a material adverse effect on our business, operating results, financial condition and cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
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 |
Joseph L. Cowan |
|
56 |
|
Director and Chief Executive Officer |
||
Raghavan Rajaji |
|
58 |
|
Executive Vice President and Chief Financial Officer |
||
Lori Mitchell-Keller |
|
38 |
|
Senior Vice President of Global Marketing & Solution Management |
||
Jeffrey L. Kissling |
|
50 |
|
Senior Vice President and Chief Technology Officer |
||
Ronald P. Kubera |
|
40 |
|
Senior Vice President of Consumer Goods |
||
Timothy T. Smith |
|
41 |
|
Senior Vice President, General Counsel and Secretary |
||
Edward R. Daihl |
|
51 |
|
Group Vice President, Revenue Management |
||
Kelly Davis-Stoudt |
|
34 |
|
Vice President, Controller and Chief Accounting Officer |
Mr. Cowan has served as Chief Executive Officer since July 2004 and a member of our Board of Directors since August 2004. From November 2002 to December 2003, Mr. Cowan served as President and Chief Executive Officer of EXE Technologies, Inc., a provider of supply chain management and work management software and services. From April 2001 to November 2002, he served as President and Chief Executive Officer of Invensys Automation & Information Systems, a business unit of Invensys plc and provider of enterprise resource planning and supply chain management software. From July 2000 to April 2001, Mr. Cowan served as President and Chief Executive Officer, and from April 1998 to July 2000, as Senior Vice President, Sales and Marketing, of Wonderware, a business unit of Invensys plc and provider of industrial automation software. From 1997 to April 1998, he served as Senior Vice President, Sales and Marketing of Wonderware, a provider of industrial automation software.
Mr. Rajaji has served as Executive Vice President and Chief Financial Officer since December 1999.
Ms. Mitchell-Keller has served as Senior Vice President of Global Marketing & Solution Management since March 2005. From February 2004 to March 2005, Ms. Mitchell-Keller served as Senior Vice President, Product Development & Strategy. From July 2001 to February 2004, Ms. Mitchell-Keller served as Senior Vice President, Market Strategy. From March 2001 to July 2001, she served as Senior Vice President of Product and Solutions Marketing and from January 1999 to March 2001, as Vice President of Product Marketing.
Mr. Kissling has served as Senior Vice President and Chief Technology Officer since September 2004. From June 2001 to March 2002, Mr. Kissling served as Chief Technology Officer of Baan Company, a provider of enterprise resource planning systems and a provider of software and consulting services. From June 1999 to June 2001, he served as the Chief Technology Officer of Invensys Manufacturing and Process Systems, a business unit of Invensys plc and provider of enterprise industrial automation systems.
Mr. Kubera has served as Senior Vice President of Consumer Goods since March 2005. From November 2004 to March 2005, Mr. Kubera served as Senior Vice President of Global Services and Support. From September 2002 to November 2004, he served as Senior Vice President, Northern European Operations, from March 2001 to September 2002, as Senior Vice President, Global Services, and from March 1999 to March 2001, as Vice President, Consulting Services.
14
Mr. Smith has served as Senior Vice President, General Counsel and Secretary from January 2000 through February 2002 and since July 2002. From June 1998 to December 1999, he served as Vice President and General Counsel for Land Rover North America, Inc., an automobile importer and distributor.
Mr. Daihl has served as Group Vice President of Revenue Management since September 2004. From August 2003 to September 2004, Mr. Daihl served as President of Dexec Consulting, a provider of management advisory services to the high tech industry. From July 2000 to August 2003, he served as President of the CAPS Logistics, a wholly-owned subsidiary of Baan Company, a provider of enterprise resource planning systems and a provider of software and consulting services, and from July 1999 to July 2000 as the Vice President, Consulting, of Baan Company.
Ms. Davis-Stoudt has served as Vice President, Controller and Chief Accounting Officer since May 2004. From April 1999 to May 2004, Ms. Davis-Stoudt served as Assistant Controller.
There are no family relationships among any of the executive officers or directors of Manugistics Group, Inc. Executive officers of Manugistics Group, Inc. are elected by the Board of Directors (the Board) on an annual basis and serve at the discretion of the Board.
15
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock, $.002 par value per share, trades on The NASDAQ Stock Market under the symbol MANU. The following table sets forth the high and low sales prices in dollars per share for the respective quarterly periods over the last two fiscal years, as reported in published financial sources. These prices reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
Fiscal 2005 |
|
|
|
High |
|
Low |
|
|||
First Quarter |
|
$ |
7.34 |
|
$ |
4.25 |
|
|
||
(ended May 31, 2004) |
|
|
|
|
|
|
||||
Second Quarter |
|
$ |
4.20 |
|
$ |
2.21 |
|
|
||
(ended August 31, 2004) |
|
|
|
|
|
|
||||
Third Quarter |
|
$ |
2.88 |
|
$ |
2.20 |
|
|
||
(ended November 30, 2004) |
|
|
|
|
|
|
||||
Fourth Quarter |
|
$ |
3.07 |
|
$ |
1.80 |
|
|
||
(ended February 28, 2005) |
|
|
|
|
|
|
Fiscal 2004 |
|
|
|
High |
|
Low |
|
|||
First Quarter |
|
$ |
4.95 |
|
$ |
2.25 |
|
|
||
(ended May 31, 2003) |
|
|
|
|
|
|
||||
Second Quarter |
|
$ |
6.50 |
|
$ |
3.89 |
|
|
||
(ended August 31, 2003) |
|
|
|
|
|
|
||||
Third Quarter |
|
$ |
8.15 |
|
$ |
4.44 |
|
|
||
(ended November 30, 2003) |
|
|
|
|
|
|
||||
Fourth Quarter |
|
$ |
9.10 |
|
$ |
5.60 |
|
|
||
(ended February 29, 2004) |
|
|
|
|
|
|
As of April 30, 2005, there were approximately 410 stockholders of record of our common stock, according to information provided by our transfer agent.
We have never declared or paid any cash dividends on our common stock and do not intend to do so in the foreseeable future. It is our present intention to retain any future earnings to provide funds for the operation, and expansion of our business and to retire debt. In addition, we have a two-year unsecured revolving credit facility with Silicon Valley Bank (SVB) that is scheduled to expire on March 29, 2007. We intend to renew this credit facility before it expires. During the term of the credit facility, we are subject to a covenant not to declare or pay cash dividends to holders of our common stock under certain conditions. Future payment of cash dividends, if any, will be at the discretion of the Board and will depend 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. See Managements Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources and Note 7 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
16
The following table provides information regarding our current equity compensation plans as of February 28, 2005. Share amounts are in thousands.
Equity Compensation Plan Information
|
|
|
|
|
|
Number of securities |
|
|||||||||
|
|
|
|
|
|
remaining available |
|
|||||||||
|
|
Number of securities to |
|
Weighted-average |
|
for future issuance |
|
|||||||||
|
|
be issued upon exercise |
|
exercise price of |
|
under equity |
|
|||||||||
Plan Category |
|
|
|
of outstanding options |
|
outstanding options |
|
compensation plans |
|
|||||||
Equity compensation plans approved by security holders |
|
|
13,891 |
|
|
|
$ |
5.29 |
|
|
|
1,799 |
|
|
||
Equity compensation plans not approved by security holders |
|
|
5,513 |
|
|
|
7.21 |
|
|
|
|
|
|
|||
Total |
|
|
19,404 |
|
|
|
$ |
5.84 |
|
|
|
1,799 |
|
|
||
Additional information regarding our equity compensation plans can be found in Note 9 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
In fiscal 2004, the Company issued 9,725,750 shares of its common stock in exchange for $74.5 million of 5% Convertible Subordinated Notes due in 2007 (the Notes) in privately negotiated transactions with note holders in reliance on the exemption from registration set forth in Section 3(a)(9) of the Securities Act of 1933.
Item 6. SELECTED FINANCIAL DATA.
Our selected consolidated financial data for each of the five fiscal years in the period ended February 28, 2005 and each of our last eight fiscal quarters is set forth below. This data should be read in conjunction with our Consolidated Financial Statements and related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. The selected financial data for each of the years in the three-year period ended February 28, 2005, and as of February 28, 2005 and February 29, 2004, are derived from the Consolidated Financial Statements that have been included in this Annual Report on Form 10-K. The selected financial data as of February 28, 2003, 2002 and 2001, the years ended February 28, 2002 and 2001, and in each of our last eight fiscal quarters are derived from the Consolidated Financial Statements that have not been included in this Annual Report on Form 10-K.
17
|
|
Fiscal year ended February 28 or 29, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|||||
|
|
(in thousands, except per share and number of employees data) |
|
|||||||||||||
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Software |
|
$ |
36,203 |
|
$ |
73,766 |
|
$ |
74,899 |
|
$ |
129,772 |
|
$ |
139,316 |
|
Support |
|
84,050 |
|
86,593 |
|
84,075 |
|
73,852 |
|
55,315 |
|
|||||
Services |
|
64,933 |
|
73,254 |
|
102,144 |
|
106,522 |
|
73,333 |
|
|||||
Reimbursed expenses |
|
7,920 |
|
9,432 |
|
11,268 |
|
9,741 |
|
8,199 |
|
|||||
Total revenue |
|
193,106 |
|
243,045 |
|
272,386 |
|
319,887 |
|
276,163 |
|
|||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cost of software |
|
14,213 |
|
15,851 |
|
19,127 |
|
21,144 |
|
19,146 |
|
|||||
Amortization of acquired technology |
|
13,207 |
|
14,210 |
|
13,623 |
|
9,168 |
|
1,122 |
|
|||||
Cost of support and services |
|
73,694 |
|
80,306 |
|
98,055 |
|
92,083 |
|
59,149 |
|
|||||
Cost of reimbursed expenses |
|
7,920 |
|
9,432 |
|
11,268 |
|
9,741 |
|
8,199 |
|
|||||
Sales and marketing |
|
52,662 |
|
66,061 |
|
95,627 |
|
120,437 |
|
115,610 |
|
|||||
Product development |
|
32,404 |
|
36,233 |
|
63,055 |
|
70,477 |
|
40,830 |
|
|||||
General and administrative |
|
22,110 |
|
25,060 |
|
27,885 |
|
28,522 |
|
22,925 |
|
|||||
Amortization of intangibles |
|
6,648 |
|
4,674 |
|
3,866 |
|
86,279 |
|
15,082 |
|
|||||
Goodwill impairment charge |
|
|
|
|
|
96,349 |
|
|
|
|
|
|||||
Purchased research and development |
|
|
|
|
|
3,800 |
|
|
|
9,724 |
|
|||||
Exit and disposal activities |
|
17,312 |
|
18,627 |
|
19,184 |
|
6,612 |
|
|
|
|||||
Non-cash stock option compensation expense (benefit) |
|
168 |
|
1,799 |
|
3,426 |
|
(3,111 |
) |
12,801 |
|
|||||
IRI settlement |
|
|
|
|
|
|
|
3,115 |
|
|
|
|||||
Total operating expenses |
|
240,338 |
|
272,253 |
|
455,265 |
|
444,467 |
|
304,588 |
|
|||||
Loss from operations |
|
(47,232 |
) |
(29,208 |
) |
(182,879 |
) |
(124,580 |
) |
(28,425 |
) |
|||||
Debt conversion expense |
|
|
|
(59,823 |
) |
|
|
|
|
|
|
|||||
Other (expense) income, net |
|
(7,314 |
) |
(13,455 |
) |
(7,942 |
) |
(14,638 |
) |
2,899 |
|
|||||
Loss before income taxes |
|
(54,546 |
) |
(102,486 |
) |
(190,821 |
) |
(139,218 |
) |
(25,526 |
) |
|||||
Provision for (benefit from) income taxes |
|
725 |
|
1,314 |
|
21,418 |
|
(24,060 |
) |
2,552 |
|
|||||
Net loss |
|
$ |
(55,271 |
) |
$ |
(103,800 |
) |
$ |
(212,239 |
) |
$ |
(115,158 |
) |
$ |
(28,078 |
) |
Basic and diluted loss per share |
|
$ |
(0.67 |
) |
$ |
(1.43 |
) |
$ |
(3.04 |
) |
$ |
(1.69 |
) |
$ |
(0.48 |
) |
BALANCE SHEET AND OTHER DATA: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash, cash equivalents and marketable securities |
|
$ |
129,978 |
|
$ |
146,300 |
|
$ |
137,735 |
|
$ |
233,060 |
|
$ |
300,308 |
|
Working capital |
|
105,533 |
|
128,090 |
|
122,791 |
|
237,751 |
|
301,468 |
|
|||||
Long-term investments |
|
5,911 |
|
8,999 |
|
|
|
|
|
|
|
|||||
Goodwill |
|
185,658 |
|
185,501 |
|
187,438 |
|
269,998 |
|
335,651 |
|
|||||
Acquired technology and customer relationships, net of accumulated amortization |
|
23,151 |
|
43,007 |
|
61,889 |
|
54,206 |
|
45,385 |
|
|||||
Total assets |
|
440,280 |
|
498,081 |
|
529,373 |
|
722,640 |
|
847,261 |
|
|||||
Convertible debt |
|
175,500 |
|
175,500 |
|
250,000 |
|
250,000 |
|
250,000 |
|
|||||
Total stockholders equity |
|
164,746 |
|
216,860 |
|
172,082 |
|
372,807 |
|
470,321 |
|
|||||
Cash flows from operating activities |
|
(5,505 |
) |
6,825 |
|
(30,675 |
) |
(15,899 |
) |
15,514 |
|
|||||
Employees (period end) |
|
695 |
|
897 |
|
1,133 |
|
1,384 |
|
1,451 |
|
18
Fiscal 2005 |
|
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
|
||||||||||||
|
|
(in thousands, except per share data) |
|
||||||||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Software |
|
|
$ |
10,368 |
|
|
|
$ |
11,111 |
|
|
|
$ |
6,664 |
|
|
|
$ |
8,060 |
|
|
||
Support |
|
|
21,421 |
|
|
|
21,296 |
|
|
|
20,666 |
|
|
|
20,667 |
|
|
||||||
Services |
|
|
17,558 |
|
|
|
16,374 |
|
|
|
16,159 |
|
|
|
14,842 |
|
|
||||||
Reimbursed expenses |
|
|
2,236 |
|
|
|
2,481 |
|
|
|
1,556 |
|
|
|
1,647 |
|
|
||||||
Total revenue |
|
|
51,583 |
|
|
|
51,262 |
|
|
|
45,045 |
|
|
|
45,216 |
|
|
||||||
Cost of software |
|
|
3,914 |
|
|
|
3,422 |
|
|
|
3,525 |
|
|
|
3,352 |
|
|
||||||
Cost of support and services |
|
|
18,190 |
|
|
|
19,040 |
|
|
|
18,391 |
|
|
|
18,073 |
|
|
||||||
Cost of reimbursed expenses |
|
|
2,236 |
|
|
|
2,481 |
|
|
|
1,556 |
|
|
|
1,647 |
|
|
||||||
Sales and marketing |
|
|
15,240 |
|
|
|
15,225 |
|
|
|
11,387 |
|
|
|
10,810 |
|
|
||||||
Product development |
|
|
8,328 |
|
|
|
8,566 |
|
|
|
8,257 |
|
|
|
7,253 |
|
|
||||||
General and administrative |
|
|
6,014 |
|
|
|
6,006 |
|
|
|
5,250 |
|
|
|
4,840 |
|
|
||||||
Exit and disposal activities, and acquisition-related expenses(1) |
|
|
2,811 |
|
|
|
11,478 |
|
|
|
8,139 |
|
|
|
14,907 |
|
|
||||||
Operating loss |
|
|
(5,150 |
) |
|
|
(14,956 |
) |
|
|
(11,460 |
) |
|
|
(15,666 |
) |
|
||||||
Net loss |
|
|
(7,733 |
) |
|
|
(17,114 |
) |
|
|
(13,268 |
) |
|
|
(17,156 |
) |
|
||||||
Basic and diluted loss per share |
|
|
$ |
(0.09 |
) |
|
|
$ |
(0.21 |
) |
|
|
$ |
(0.16 |
) |
|
|
$ |
(0.21 |
) |
|
Fiscal 2004 |
|
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
|
||||||||||||
|
|
(in thousands, except per share data) |
|
||||||||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Software |
|
|
$ |
19,909 |
|
|
|
$ |
17,802 |
|
|
|
$ |
17,079 |
|
|
|
$ |
18,976 |
|
|
||
Support |
|
|
21,469 |
|
|
|
21,085 |
|
|
|
22,195 |
|
|
|
21,844 |
|
|
||||||
Services |
|
|
21,503 |
|
|
|
18,414 |
|
|
|
18,332 |
|
|
|
15,005 |
|
|
||||||
Reimbursed expenses |
|
|
2,760 |
|
|
|
2,406 |
|
|
|
2,291 |
|
|
|
1,975 |
|
|
||||||
Total revenue |
|
|
65,641 |
|
|
|
59,707 |
|
|
|
59,897 |
|
|
|
57,800 |
|
|
||||||
Cost of software |
|
|
4,416 |
|
|
|
4,449 |
|
|
|
3,695 |
|
|
|
3,291 |
|
|
||||||
Cost of support and services |
|
|
23,512 |
|
|
|
20,940 |
|
|
|
18,450 |
|
|
|
17,404 |
|
|
||||||
Cost of reimbursed expenses |
|
|
2,760 |
|
|
|
2,406 |
|
|
|
2,291 |
|
|
|
1,975 |
|
|
||||||
Sales and marketing |
|
|
16,849 |
|
|
|
16,034 |
|
|
|
16,326 |
|
|
|
16,852 |
|
|
||||||
Product development |
|
|
11,293 |
|
|
|
8,811 |
|
|
|
8,049 |
|
|
|
8,080 |
|
|
||||||
General and administrative |
|
|
6,349 |
|
|
|
5,897 |
|
|
|
5,912 |
|
|
|
6,902 |
|
|
||||||
Exit and disposal activities, and acquisition-related expenses(1) |
|
|
15,438 |
|
|
|
5,382 |
|
|
|
5,011 |
|
|
|
13,479 |
|
|
||||||
Operating (loss) income |
|
|
(14,976 |
) |
|
|
(4,212 |
) |
|
|
163 |
|
|
|
(10,183 |
) |
|
||||||
Net loss |
|
|
(18,471 |
) |
|
|
(7,959 |
) |
|
|
(19,847 |
) |
|
|
(57,523 |
) |
|
||||||
Basic and diluted loss per share |
|
|
$ |
(0.26 |
) |
|
|
$ |
(0.11 |
) |
|
|
$ |
(0.27 |
) |
|
|
$ |
(0.74 |
) |
|
(1) Exit and disposal activities and acquisition-related expenses includes amortization of intangibles and acquired technology, non-cash stock option compensation expense and exit and disposal activities.
19
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. The discussion and analysis contains forward-looking statements which are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements and other forward-looking statements made elsewhere in this Annual Report on Form 10-K as a result of specified factors, including those set forth under the caption Factors that May Affect Future Results.
Executive Summary
Our Consolidated Financial Statements are included in Item 15 of this Annual Report on Form 10-K. The following discussion is provided to allow the reader to have a better understanding of our operating results for the year ended February 28, 2005, including (i) a brief discussion of our business and products, (ii) the business environment and factors that affected our financial performance, (iii) our focus on future improvements in our financial performance and (iv) a summary of our fiscal 2005 operating results and financial metrics. This executive summary should be read in conjunction with the more detailed discussion and analysis of our financial condition and results of operations included in this Item 7, section titled, Factors that May Affect Future Results and our Consolidated Financial Statements, which are included in Item 15 of this Annual Report on Form 10-K.
OverviewBusiness and Products
We are a leading global provider of supply chain management and demand and revenue management software products and services. We combine these products and services to deliver solutions that address specific business needs of our clients.
Our solutions enable our clients to reduce operating costs, improve customer service and increase their top-line revenue by allowing them to plan, optimize and synchronize their entire demand and supply chain and to improve their revenue management practices. These benefits create efficiencies in how goods and services are brought to market, how they are priced and sold and how they are serviced and maintained. Our software solutions provide the further benefit of simultaneously optimizing cost and revenue on an enterprise-wide basis by integrating pricing, forecasting, operational planning and execution, enhancing margins across the clients enterprise and extended trading network. In addition, our software solutions help our clients derive more benefits from their existing IT investments with other software vendors, such as legacy ERP and other transaction-based systems, and help ensure the security and integrity of their global supply chains.
Our approach to client delivery is to advise our clients how to best use our solutions and other technologies across their entire demand and supply chain to integrate pricing, forecasting, operational planning and execution in a manner that will allow them to enhance margins across their entire enterprise and extended trading network and to improve their revenue management practices. We deliver our solutions using commercially available products and will provide additional functionality addressed through product extensions for industry-specific capabilities. Certain of our clients and prospects are also asking for unique capabilities on top of our core capabilities to give them a competitive edge in the market place which we may provide on a case by case basis. In these instances, this could lead to an increase in software license revenue being recognized on a contract accounting basis over the course of the delivery of the solution rather than upon delivery and contract execution. We are also entering new markets such as China, which require that software license revenue be recognized over the period that services and support
20
are performed. We are primarily focused on the Consumer Goods, Retail, and Government, Aerospace & Defense markets. We are also focused on providing revenue management solutions for the Travel, Transportation & Hospitality markets.
Business Environment and Factors That Affected our Fiscal Year Ended February 28, 2005 Results
Our operating results for the past three fiscal years were affected by several broad-based factors including global macro-economic conditions and cautious capital spending by corporations, especially for information technology such as enterprise application software. We believe changing conditions over the last three fiscal years caused changes in the behavior patterns in our markets as our clients and prospects intensified their efforts to reduce costs. Many shifted their focus from longer-term strategic initiatives to short-term tactical initiatives with more rapid paybacks. We also believe that our clients and prospects are focused on realizing benefits from earlier investments in information technology. In addition, we believe that some of our clients and prospects are still deferring capital spending on enterprise application software in part as a result of the challenges they have faced in complying with the requirements of the Sarbanes-Oxley Act of 2002 and other related regulatory requirements. We believe that our financial results in the fiscal year ended February 28, 2005 were also affected by the magnitude of changes in our workforce, including our executive management and sales organization, difficulties in execution, a market focus that was too broad for existing market conditions and a strong competitive environment. As a result, over the past three fiscal years we have faced challenges in our ability to stabilize revenue and improve our operating performance.
In addition to the trends in our operating environment, we also recognize that our performance did not meet our expectations. As previously announced, during our second quarter of fiscal 2005 we developed and began executing plans to improve our overall financial performance, which we discuss in more detail below.
Focus on Future Improvements in Our Financial Performance
In response to our recent financial performance, we continue to make focused changes within our business to reduce cost and improve our financial performance. These changes include, among others, the continued development of a more focused product and market strategy and strategic restructuring of the organization, and efforts to reduce our operating expenses to a level that may allow us to become profitable. During fiscal 2005 and March 2005, we hired a new Chief Executive Officer, a Chief Technology Officer and a Vice President of Mid-Markets, consolidated our senior management team, eliminating several positions including that of President, and organized into business units to address the Consumer Goods, Retail, Government, Aerospace & Defense and Revenue Management markets. In two European countries where we do not presently have a critical mass of resources, we eliminated certain offices, which are now being serviced from other locations in the region. We also intend to provide more focused sales and marketing efforts to small and medium-sized business in Europe and the Asia-Pacific region through third-party marketing and reseller agreements.
As part of these initiatives, in our second quarter of fiscal 2005, we approved and began to implement exit and disposal plans. As of February 28, 2005, we had achieved quarterly cost savings of approximately $4.0 million, compared to the first quarter of fiscal 2005, as a result of these initiatives. These exit and disposal plans included the abandonment of certain office space and related asset write-offs and the involuntary termination of employees. We recorded exit and disposal charges of $17.3 million in the twelve months ended February 28, 2005 related to these cost-cutting initiatives, including $11.3 million in lease abandonment and related asset write-offs and $6.0 million in severance and other benefits related to headcount reductions. We have completed most of the planned initiatives approved in our second quarter exit and disposal plans and will complete the remainder of the initiatives in fiscal 2006.
21
During the fourth quarter of fiscal 2005, we commenced operations at our new product development center in Hyderabad, India. We intend to move a substantial portion of our product development capabilities to our new facility over the course of the next year while keeping our core product development capabilities at our headquarters in Rockville, Maryland. We believe this will allow us to both increase our product development resources and to lower our product development costs.
If market conditions for our products and services do not improve, we may need to make further adjustments to our cost structure to improve performance.
Summary of Fiscal 2005 Operating Results and Financial Metrics
As we entered fiscal 2005, difficult market conditions continued. Certain industries have been more or less likely to invest in enterprise application software depending on the condition of their business and industry. Our customers generally licensed fewer software modules in fiscal 2005 than in past years. We have not lost any major customers in recent quarters that had a negative material impact on revenue.
Our cost containment and cost reduction measures enacted in fiscal 2004 and fiscal 2005 have lessened the adverse impact on our financial performance of our declining revenue. During fiscal 2005, our employee workforce decreased from 897 employees to 695 employees, or 22.5%, while total revenue declined 20.5% compared to the same period.
22
Key Financial MetricsFiscal 2005
Our fiscal 2005 results and key financial metrics were negatively affected by decreased revenue, however, we have made progress in decreasing our operating costs, particularly in the second half of fiscal 2005. The following is a summary of our performance relative to certain key financial metrics during fiscal 2005 compared to fiscal 2004, as well as a summary of our quarterly performance in fiscal 2005.
|
|
Year Ended February 28 or 29, |
|
Year Ended February 28, 2005 |
|
||||||||||||||||||
|
|
2004 |
|
2005 |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
||||||||||
|
|
(in thousands, except number of employees and DSO) |
|
||||||||||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Software |
|
|
$ |
73,766 |
|
|
|
$ |
36,203 |
|
|
$ |
10,368 |
|
$ |
11,111 |
|
$ |
6,664 |
|
$ |
8,060 |
|
Support |
|
|
86,593 |
|
|
|
84,050 |
|
|
21,421 |
|
21,296 |
|
20,666 |
|
20,667 |
|
||||||
Services & reimbursed |
|
|
82,686 |
|
|
|
72,853 |
|
|
19,794 |
|
18,855 |
|
17,715 |
|
16,489 |
|
||||||
Total revenue |
|
|
243,045 |
|
|
|
193,106 |
|
|
51,583 |
|
51,262 |
|
45,045 |
|
45,216 |
|
||||||
Operating expenses and employee headcount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Exit and disposal activities and acquisition-related expenses(1) |
|
|
39,310 |
|
|
|
37,335 |
|
|
2,811 |
|
11,478 |
|
8,139 |
|
14,907 |
|
||||||
All other operating |
|
|
232,943 |
|
|
|
203,003 |
|
|
53,922 |
|
54,740 |
|
48,366 |
|
45,975 |
|
||||||
Total operating expenses |
|
|
272,253 |
|
|
|
240,338 |
|
|
56,733 |
|
66,218 |
|
56,505 |
|
60,882 |
|
||||||
Total employees (period end) |
|
|
897 |
|
|
|
695 |
|
|
865 |
|
815 |
|
733 |
|
695 |
|
||||||
Total average employees |
|
|
991 |
|
|
|
800 |
|
|
880 |
|
845 |
|
766 |
|
714 |
|
||||||
Total revenue per average employee |
|
|
$ |
245 |
|
|
|
$ |
241 |
|
|
$ |
59 |
|
$ |
61 |
|
$ |
59 |
|
$ |
63 |
|
Financial condition, liquidity and capital structure |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Cash, cash equivalents, marketable securities and long-term investments |
|
|
$ |
155,299 |
|
|
|
$ |
135,889 |
|
|
$ |
148,737 |
|
$ |
137,911 |
|
$ |
132,170 |
|
$ |
135,889 |
|
Days sales outstanding (DSO) |
|
|
84 |
|
|
|
86 |
|
|
81 |
|
75 |
|
75 |
|
91 |
|
||||||
Convertible debt |
|
|
175,500 |
|
|
|
175,500 |
|
|
175,500 |
|
175,500 |
|
175,500 |
|
175,500 |
|
||||||
Total stockholders equity |
|
|
216,860 |
|
|
|
164,746 |
|
|
209,030 |
|
192,094 |
|
181,185 |
|
164,746 |
|
||||||
Common shares outstanding (period end) |
|
|
81,973 |
|
|
|
83,869 |
|
|
82,072 |
|
82,304 |
|
83,542 |
|
83,869 |
|
||||||
Cash flows from operating activities |
|
|
6,825 |
|
|
|
(5,505 |
) |
|
(1,014 |
) |
(6,758 |
) |
(5,598 |
) |
7,865 |
|
(1) Includes exit and disposal activities plus acquisition related expenses such as amortization of acquired technology and intangibles and non-cash stock option compensation expense.
(2) Includes cost of software, cost of support and services, cost of reimbursed expenses, sales and marketing, product development and general and administrative costs.
23
The following is a brief discussion of the above financial metrics and analysis of the reasons for the changes between fiscal 2004 and fiscal 2005 and recent trends.
Our software revenue decreased during fiscal 2005 by 50.9% to $36.2 million. The following table highlights some of the significant trends impacting our software revenue:
|
|
|
|
Average |
|
Software |
|
|||||||||
|
|
Significant |
|
Selling Price |
|
Transactions |
|
|||||||||
|
|
Software |
|
(ASP) |
|
$1.0 Million |
|
|||||||||
Quarter Ended |
|
|
|
Transactions(1) |
|
(in 000s) |
|
or Greater |
|
|||||||
May 31, 2003 |
|
|
14 |
|
|
|
$ |
1,279 |
|
|
|
5 |
|
|
||
August 31, 2003 |
|
|
27 |
|
|
|
556 |
|
|
|
6 |
|
|
|||
November 30, 2003 |
|
|
31 |
|
|
|
513 |
|
|
|
4 |
|
|
|||
February 29, 2004 |
|
|
27 |
|
|
|
654 |
|
|
|
3 |
|
|
|||
May 31, 2004 |
|
|
13 |
|
|
|
695 |
|
|
|
1 |
|
|
|||
August 31, 2004 |
|
|
18 |
|
|
|
533 |
|
|
|
3 |
|
|
|||
November 30, 2004 |
|
|
11 |
|
|
|
491 |
|
|
|
1 |
|
|
|||
February 28, 2005 |
|
|
12 |
|
|
|
559 |
|
|
|
2 |
|
|
|||
Fiscal 2004Total |
|
|
99 |
|
|
|
672 |
|
|
|
18 |
|
|
|||
Fiscal 2005Total |
|
|
54 |
|
|
|
570 |
|
|
|
7 |
|
|
|||
(1) Significant software transactions are those with a value of $100,000 or greater recognized within the fiscal quarter.
Software revenue by industry for fiscal 2005, fiscal 2004 and fiscal 2003 is as follows (in thousands):
|
|
Fiscal year ended February 28 or 29, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
Government, Aerospace & Defense |
|
$ |
2,789 |
|
$ |
22,629 |
|
$ |
10,681 |
|
Consumer Goods |
|
15,161 |
|
29,273 |
|
51,167 |
|
|||
Revenue Management |
|
2,453 |
|
477 |
|
1,359 |
|
|||
Retail |
|
12,227 |
|
10,938 |
|
5,907 |
|
|||
Other |
|
3,573 |
|
10,449 |
|
5,785 |
|
|||
|
|
$ |
36,203 |
|
$ |
73,766 |
|
$ |
74,899 |
|
The previous tables indicate the following trends affecting our software revenue over the past two fiscal years:
· The number of significant software transactions consummated during each of the quarters and in all of fiscal 2005 was significantly fewer than the number of significant software transactions consummated during each of the same periods in fiscal 2004.
· The average selling price (ASP) of software has been relatively stable during the past seven quarters. ASP has ranged from $491,000 to $695,000 during this period. The ASP for the quarter ended May 31, 2003 was significantly higher than the past seven quarters as it included software revenue from installments under a large multi-year government contract.
· Software revenue declined for all industries with the exception of an increase in the Retail and Revenue Management industries during fiscal 2005 compared to fiscal 2004. We believe the increase in our revenue from the Retail industry in the past two fiscal years is partially a result of the efforts by retailers to compete more effectively with Wal-Mart through increased investments in
24
information technology. In addition, Retailers have benefited from increased consumer spending which has enabled them to increase their investments in information technology. The increase in revenue in the Revenue Management industry (other than airlines) reflects a recovery in travel, transportation and hospitality, following a few years of decreased spending in these areas following the September 11, 2001 terrorist attack.
· Software revenue in the Government, Aerospace & Defense industry decreased significantly in fiscal 2005 compared to fiscal 2004, after having increased significantly in fiscal 2004. We believe the decline in our Government, Aerospace & Defense software revenue resulted from the Federal Government shifting monies (especially within the Department of Defense) to the war on terror. The increase in software revenue in fiscal 2004 compared to fiscal 2003 resulted from (i) continued spending by the United States Department of Defense on business modernization initiatives, including procuring and installing commercial off-the-shelf software, such as supply chain management software, to replace legacy applications and processes and (ii) increased sales to aerospace and defense customers acquired in the acquisition of WDS assets in April 2002.
· Software revenue in the Consumer Goods industry decreased in fiscal 2005 compared to the fiscal 2004. We believe that the decrease in consumer goods spending is due to lack of capital spending by these customers who are now largely focused on realizing benefits from earlier investments in information technology rather than investing in new capabilities. In addition, we believe that some consumer goods prospects have delayed purchasing decisions due to budget constraints and challenges in complying with the requirements of the Sarbanes-Oxley Act of 2002 and other regulatory requirements.
Our support revenue was $84.1 million in fiscal 2005 compared to $86.6 million in fiscal 2004. Our percentage of annual support renewals by our clients remains high; however, decreases in support revenue from non-renewals was not fully offset by increases in support revenue from new software sales during fiscal 2005.
Services and reimbursed expense revenue
Our services and reimbursed expense revenue decreased 11.9% in fiscal 2005 to $72.9 million. Services revenue tends to track software revenue in prior periods. As such, we primarily attribute the decrease in services revenue to the decrease in the number of completed software license transactions in fiscal 2005. Additionally, we experienced competitive rate pressures on consulting engagements and a decrease in the number of consulting employees who generate services revenue, from both voluntary and involuntary terminations in fiscal 2005. We have also experienced a decrease in services margin during the past two fiscal years, primarily due to lower volume and lower margins on fixed fee arrangements and services performed on non-revenue generating activities.
Total revenue per average employee
Our total revenue per average employee decreased by 1.6% to $241,000 for fiscal 2005 (calculated as total revenue for the year divided by average employees for the year). This decrease was due to lower software and services revenue in fiscal 2005 partially offset by a 22.5% decrease in total employee headcount in fiscal 2005.
Our total operating expenses declined by 11.7% during fiscal 2005 to $240.3 million. Exit and disposal activities and acquisition-related expenses declined 5.0% during fiscal 2005 to $37.3 million. This decrease
25
was the result of lower exit and disposal charges in fiscal 2005 as compared to fiscal 2004 as well as the completed amortization of non-cash stock option compensation expense in the second quarter of fiscal 2005 related to the unvested portion of stock options assumed with the acquisition of Talus. All other operating expenses declined 12.9% during fiscal 2005 to $203.0 million. This decrease was primarily the result of a 19.3% decrease in average employee headcount and reduced office space costs as a result of exit and disposal plans executed during fiscal 2005 and fiscal 2004. In addition, we had lower outside contractor costs in both the product development and consulting services areas, partially offset by higher bad debt expense (See Critical Accounting Policies-Allowance for Doubtful Accounts).
Financial condition, liquidity and capital structure
During fiscal 2005, we experienced declines in our financial condition, liquidity and capital structure, including the following:
· Cash, cash equivalents, marketable securities and long-term investments decreased by $19.4 million to $135.9 million primarily as a result of negative cash flows from operations of approximately $5.5 million and a decrease in cash flows provided by financing activities of approximately $7.2 million from the prior year.
· The convertible debt to equity ratio increased from 0.8:1 at February 29, 2004 to 1.1:1 at February 28, 2005 primarily as a result of reported net losses in fiscal 2005.
Use of Estimates and Critical Accounting Policies
The accompanying discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from the estimates made by management with respect to these and other items that require managements estimates.
We have identified the accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and the more significant areas involving managements judgments and estimates. These critical accounting policies relate to revenue recognition and deferred revenue, allowance for doubtful accounts, capitalized software development costs, valuation of long-lived assets, including intangible assets and impairment review of goodwill, income taxes, exit and disposal related expenses and stock option-based compensation plans. These policies, and our procedures related to these policies, are described in detail below. In addition, please refer to the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of our accounting policies.
Revenue Recognition and Deferred Revenue
Our revenue consists of (i) fees from licenses of our software; (ii) fees from technical support and product updates; (iii) fees from professional services, including implementation, training and hosting and (iv) reimbursed expenses. While the basis for software license revenue recognition is substantially governed by the requirements of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions (SOP 98-9), as well as Technical Practice Aids issued from time to time by the American Institute of Certified
26
Public Accountants, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin 104, Revenue Recognition (SAB 104), we exercise judgment and use estimates in connection with the determination of the amount of software license, support and professional services revenue to be recognized each accounting period.
Software license revenue is generally recognized using the residual method described below when:
· Persuasive evidence of an arrangement exists: We consider a non-cancelable agreement signed by us and the customer to be evidence of an arrangement.
· Delivery has occurred or services have been rendered: Delivery occurs when media containing the licensed program is provided to a common carrier, typically FOB shipping point or, in the case of electronic delivery, the customer is given access to the licensed programs.
· Fixed or determinable fee: We consider the license fee to be fixed or determinable if the fee is not subject to refund or adjustment and is payable within twelve months of the agreement date, based upon our successful collection history on such arrangements. If the arrangement fee is not fixed or determinable, we recognize the revenue as amounts become due and payable.
· Collection is probable: We perform a credit review for all significant transactions at the time the arrangement is executed to determine the credit-worthiness of the customer. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as they become due. If we determine that collection is not probable, we defer recognition of the revenue until collection.
If a software license contains customer acceptance criteria or a cancellation right, recognition of the software revenue is deferred until the earlier of customer acceptance or the expiration of the acceptance period or cancellation right. Typically, payments for software licenses are due within twelve months of the agreement date. When software license agreements call for payment terms of twelve months or more from the agreement date, software revenue is recognized as payments become due and all other conditions for revenue recognition have been satisfied. Under the residual method, we defer revenue for the fair value of any undelivered elements based on vendor specific objective evidence (VSOE) of fair value, and the remaining portion of the arrangement fee is allocated to the delivered elements and recognized as revenue when the basic criteria in SOP 97-2 and SAB 104 have been met.
Our customer arrangements typically contain multiple elements that may include software, options for future purchases of software products not previously licensed to the customer, support, consulting, training, hosting and reimbursed expenses. Fees are allocated to the various elements of software license agreements using the residual method, based on VSOE. Each software license arrangement requires careful review to identify each individual element and to determine the proper amount of software revenue to be allocated among the various elements based on VSOE. Under the residual method, if an arrangement contains one or more undelivered elements, the VSOE of the undelivered elements are deferred and the revenue is recognized once the elements are delivered. If VSOE for one or more of the undelivered elements in an arrangement does not exist, we recognize the entire arrangement fee over the period the undelivered elements are delivered.
In addition to evaluating the VSOE of fair value of each element of an arrangement, we also consider whether such elements can be separated into separate units of accounting in accordance with SOP 97-2. When making this determination, we consider the nature of services provided when purchased with a software license (i.e., consideration of whether services are essential to the functionality of software products licensed), degree of risk, availability of services from other vendors and timing of payments, among other things. When we provide services deemed to be essential to the functionality of the software products licensed or the licensed software requires significant production, modification or customization, we recognize revenue on a percentage-of-completion basis in accordance with SOP 81-1, Accounting for
27
Performance of Construction Type and Certain Production Type Contracts. In these cases, software revenue is recognized based on labor hours or costs incurred to date compared to total estimated labor hours or costs for the contract.
Implementation services are separately priced and sold, are generally available from a number of suppliers and typically are not essential to the functionality of our software products. Implementation services, which include project management, systems planning, design and implementation, customer configurations and training are billed on an hourly basis (time and materials) or under fixed price contracts. Implementation services are recognized as the work is performed. On fixed price contracts, services revenue is recognized using the percentage-of-completion method of accounting by relating labor hours or costs incurred to date to total estimated labor hours or costs. In the event services are billed in advance of work being performed, the billed amount is initially recorded as deferred services revenue and recognized as services revenue when the work is performed. When total cost estimates exceed revenue, we accrue for the estimated losses immediately using cost estimates that are based upon an average fully burdened daily rate applicable to the consulting organization delivering the services. VSOE of fair value for implementation services is based upon separate sales of services at stated hourly rates.
The process of estimation inherent in the application of the percentage-of-completion method of accounting for revenue is subject to judgments and uncertainties and may affect the amounts of software and services revenue under certain contracts and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates to complete client engagements, including skill level and experience of project managers, staff assigned to engagements and continuity and attrition level of implementation consulting staff. Changes in the estimated stage of completion of a particular project could create variability in our revenue and results of operations if we are required to increase or decrease previously recognized revenue related to a particular project or if we expect to incur a loss on the project.
Support revenue includes post-contract customer support and the rights to unspecified software upgrades and enhancements. Support services are separately priced and stated in our arrangements. Customer support is generally billed annually, initially recorded as deferred revenue and recognized as support revenue ratably over the support period. VSOE of fair value for support services is typically provided by renewal rates.
Allowance for Doubtful Accounts
We initially record our provision for doubtful accounts based on our historical experience and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the allowance for doubtful accounts, management considers, among other factors, (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable (e.g., license, consulting, maintenance, etc.); (iv) our historical provision for doubtful accounts, which has ranged between approximately 0.1% and 2.1% of total revenue over the three years ending February 28, 2005; (v) our historical write-offs and recoveries; (vi) the credit worthiness of each customer; (vii) the economic conditions of the customers industry; and (viii) general economic conditions. In cases where we are aware of circumstances that may impair a specific customers ability to meet their financial obligations to us, we record a specific allowance against amounts due from the customer.
28
If the assumptions we used to calculate these estimates do not properly reflect future collections, there could be an impact on future reported results of operations. Based on our total revenue reported for fiscal 2005, our provision for doubtful accounts would change by approximately $1.9 million annually for a 1% change in proportion to total revenue. The provision for doubtful accounts is included in sales and marketing expense (for software license receivables) and cost of services and support (for services and support fees receivable), in the Consolidated Statement of Operations.
Capitalized Software Development Costs
We capitalize the development cost of software, other than internal use software, in accordance with Statement of Financial Accounting Standards No. 86 (SFAS 86), Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to clients. Software development costs are amortized using the straight-line method over the estimated economic life of the product, commencing with the date the product is first available for general release. Generally, an economic life of two years is used to amortize capitalized software development costs.
In future periods, if we determine that technological feasibility occurs at a later date, such as coincident with general product release to clients, we may not capitalize any software development costs. This would increase our reported operating expenses in the short term by the amounts we do not capitalize. The amounts of software development costs that we have capitalized have ranged between $9.6 million and $10.5 million per year during our last three fiscal years. The estimated economic life of our capitalized software development costs is subject to change in future periods based on our experience with the length of time our products or enhancements are being or are expected to be used. The amortization of software development costs have ranged between $9.0 million and $11.6 million per year during our last three fiscal years. A change in the expected economic life of our capitalized software development costs of six months would change our annual operating expenses by approximately $(1.9) million if we increased the expected economic life by six months and by $3.2 million if we decreased the expected economic life by six months.
Valuation and Impairment Review of Long-Lived Assets
We account for our purchases of acquired companies in accordance with Statement of Financial Accounting Standards No. 141 Business Combinations (SFAS 141) and account for the related acquired intangible assets in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets (SFAS 142). In accordance with SFAS 141, we allocate the cost of the acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Certain intangible assets, such as acquired technology, are amortized to expense over time, while in-process research and development, if any, is recorded as an expense at the acquisition date.
The majority of the entities acquired by us do not have significant tangible assets and, as a result, a significant portion of the purchase price is typically allocated to intangible assets and goodwill. As required by SFAS 142, in lieu of amortizing goodwill, we test goodwill for impairment periodically and record any necessary impairment in accordance with SFAS 142. We are amortizing our intangible assets as follows: (i) acquired technology-related intangible assets are currently being amortized over their estimated useful life using the straight-line method and (ii) customer relationship-related intangible assets are currently being amortized over their estimated useful life based on the greater of the straight-line method or the estimated customer attrition rates.
29
We evaluate all of our long-lived assets (primarily property and equipment and intangible assets other than goodwill) for impairment in accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires that long-lived assets and intangible assets other than goodwill be evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. In accordance with SFAS 144, when a long-lived asset or intangible asset is abandoned, the carrying value is charged to expense in the period of abandonment.
During fiscal 2005, 2004 and 2003, we recorded impairment charges of $2.7 million, $4.2 million and $2.5 million, respectively, associated with certain furniture, fixtures and leasehold improvements that we abandoned in connection with exit and disposal plans. These assets were located in facilities that we ceased to use. Based on our evaluation of these assets we determined that the assets were not marketable for resale and oftentimes could not be removed from the premises (e.g., the asset consisted of a dividing wall or other permanent fixture). In fiscal 2003, $1.2 million of the aforementioned $2.5 million was related to the discontinued use of certain internal software used by our sales force that was replaced with another tool.
As of February 28, 2005 and February 29, 2004, our net book value of long-lived assets, consisted of the following (in thousands):
|
|
2005 |
|
2004 |
|
||
Property and equipment |
|
$ |
15,795 |
|
$ |
21,632 |
|
Software development costs |
|
14,390 |
|
14,224 |
|
||
Software developed for internal use |
|
1,951 |
|
2,966 |
|
||
Goodwill |
|
185,658 |
|
185,501 |
|
||
Acquired technology |
|
13,816 |
|
27,023 |
|
||
Customer relationships |
|
9,335 |
|
15,984 |
|
||
Other |
|
6,897 |
|
7,953 |
|
||
Total |
|
$ |
247,842 |
|
$ |
275,283 |
|
While we do not currently believe any of our long-lived assets are impaired, and we do not anticipate an impairment in the near term, if a change in circumstances were to occur requiring an assessment of impairment, we would be required to evaluate whether the future cash flows related to the asset will be greater than its carrying value at the time of the impairment test. While our cash flow assumptions are consistent with the plans and estimates we are using to manage our operations, there is significant judgment in determining the cash flows attributable to our intangible assets over their respective estimated useful lives. If such an evaluation resulted in an impairment of any of our long-lived assets, such impairment would be recorded in the period we make the impairment determination.
We test goodwill for impairment on an annual basis, coinciding with our fiscal year end, or on an interim basis if circumstances change that would more likely than not reduce our implied fair value (which includes factors such as, but not limited to, the Companys market capitalization, control premium and recent stock price volatility) below our carrying value. Please see Factors That May Affect Future ResultsRisks Related to Our Business. During the six months ended August 31, 2004, the Company experienced adverse changes in its stock price resulting from its poor financial performance. As a result, we performed a test for goodwill impairment at August 31, 2004 and determined that based upon the implied fair value (which includes factors such as, but not limited to, the Companys market capitalization, control premium and recent stock price volatility) of the Company as of August 31, 2004 there was no impairment of goodwill. We performed goodwill impairment reviews on February 28, 2005 and February 29, 2004, our annual dates for goodwill impairment review, and determined that the implied fair
30
value of the Company exceeded the carrying value. Accordingly, no goodwill impairment charge was recorded during fiscal 2005 or fiscal 2004.
We performed goodwill impairment reviews during our second and third quarters of fiscal 2003 due to a decrease in market capitalization, and no impairment losses were recognized. We performed a test for goodwill impairment as of February 28, 2003, our annual date for goodwill impairment review, and determined that our implied fair value was less than stockholders equity, including goodwill, an indication that goodwill may be impaired. Therefore, we performed the second step of the goodwill impairment test. As a result, we recorded a goodwill impairment charge of $96.3 million to reduce goodwill associated with our acquisitions to the estimated fair value as of that date. The goodwill impairment loss was determined by calculating the difference between: a) our implied fair value as of February 28, 2003 less the fair value of our net assets and b) the carrying value of goodwill. The fair value of the identifiable intangible assets of the Company were determined by an independent valuation. Our implied fair value was estimated based on the closing quoted market price of our common stock on February 28, 2003 multiplied by the number of outstanding common shares (market capitalization) plus an implied control premium as if we were 100% owned by a single stockholder. The implied control premium used for purposes of measuring the implied fair value of the Company was determined by review of the premiums paid by other companies in past public technology and software acquisitions.
Determining the implied fair value of goodwill involves judgments as to when an impairment may exist, as well as estimates used to compute the implied fair value. If the estimates used to calculate the implied fair value of goodwill were to change such that the fair value dropped below stockholders equity, this could result in an impairment charge for some or all of our goodwill balance in future periods.
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. We assess the likelihood that our deferred tax assets will be recovered from our future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance. We consider historical taxable income, estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. Adjustments could be required in the future if we determine that the amount to be realized is greater or less than the valuation allowance we have recorded. Based on various factors, including our cumulative losses for the three year period ended February 28, 2003, the fiscal year 2003 loss, and estimates of future profitability, management recorded a valuation allowance for the full amount of our net deferred tax assets, which resulted in a $20.4 million charge to income tax expense in the fiscal year ended February 28, 2003. Management performed a similar analysis as of February 28, 2005, and concluded that future taxable income will, more likely than not, be insufficient to recover our net deferred tax assets as of February 28, 2005. Therefore, we have maintained a valuation allowance for the full amount of our net deferred tax assets. Management will continue to monitor its estimates of future profitability and the likelihood of realizing our net deferred tax assets based on evolving business conditions.
Also, as part of the process of preparing our consolidated financial statements, we are required to estimate our full-year income on a quarterly basis and the related income tax expense, including the impact, if any, of additional taxes resulting from tax examinations, in each jurisdiction in which we operate. Additionally, we make judgments regarding the recoverability of deferred tax assets for each jurisdiction. Tax liabilities can involve complex issues and may require an extended period to resolve. Changes in the geographical mix or estimated level of annual pretax income can impact our overall income tax expense. This process involves estimating our current tax liabilities in each jurisdiction in which we operate.
31
During fiscal 2003, 2004 and 2005 we initiated and completed a series of exit and disposal plans (the Exit Plans). We have accounted for the Exit Plans in accordance with SEC Staff Accounting Bulletin No. 100 Restructuring and Impairment Charges and other applicable accounting standards as discussed below.
In June 2002, the Financial Accounting Standards Board (the FASB) issued SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 superseded EITF Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Associated with a Restructuring) (EITF 94-3) and EITF Issue No. 88-10 Costs Associated with Lease Modification or Termination (EITF 88-10). We adopted SFAS 146 effective January 1, 2003; therefore, exit and disposal charges subsequent to December 31, 2002 were accounted for in accordance with SFAS 146. The adoption of SFAS 146 did not impact our exit and disposal obligations recognized prior to January 1, 2003, as these obligations must continue to be accounted for in accordance with EITF 94-3 and EITF 88-10 and other applicable pre-existing guidance.
The expenses incurred in connection with the Exit Plans are composed primarily of (i) severance and associated employee termination costs related to the reduction of our workforce, (ii) lease termination costs and/or costs associated with ceasing to use certain facilities and (iii) impairment costs related to certain long-lived assets abandoned.
SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to when management commits to an exit plan. SFAS 146 also requires that (i) liabilities associated with exit and disposal activities be measured at fair value; (ii) one-time termination benefits be expensed at the date the entity notifies the employee, unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period; (iii) liabilities related to an operating lease/contract be measured at fair value and recorded when the contract does not have any future economic benefit to the entity (i.e., the entity ceases to utilize the rights conveyed by the contract); and (iv) all other costs related to an exit or disposal activity be expensed as incurred. For those employees with pre-existing employment contracts which specified benefits upon termination, we accounted for severance and related benefits in accordance with SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (SFAS 88) as the amounts were both probable and estimable.
We accounted for costs related to the assets abandoned in connection with the Exit Plans in accordance with SFAS 144 and, accordingly, charged to expense the net carrying value of the long-lived assets when we abandoned the assets, primarily leasehold improvements and furniture and fixtures. Please refer to Valuation and Impairment Review of Long-Lived Assets described above for a further discussion of our accounting policy and related accounting estimates involved related to assessing whether an asset is impaired.
Inherent in the estimation of the costs related to the Exit Plans are assessments related to the most likely expected outcome of the significant actions to accomplish the exit activities. In determining the charges related to the Exit Plans, we were required to make significant estimates related to the expenses associated with our excess facilities. For example, in determining the charge for excess facilities, we were required to estimate future sublease income (including both timing and amount of the potential sublease income), future net operating expenses of the facilities (e.g., maintenance, utilities, property management fees, etc.), and potential brokerage commissions, among other expenses. We based our estimates of sublease income, operating costs and brokerage commissions, in part, on the opinions of third-party real estate advisors, current market conditions and rental rates, the status of negotiations with potential subtenants, and the location of the respective facility, among other factors. These estimates, along with other estimates made by management in connection with the Exit Plans may vary significantly depending,
32
in part, upon factors that may be beyond our control. Specifically, these estimates will depend on our success in negotiating with lessors, the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases. Changing business and real estate market conditions may affect the assumptions related to the timing and extent of our ability to sublease vacated space. We periodically review the status of exit and disposal liabilities and, if appropriate, we record changes to our exit and disposal liabilities based on managements most current estimates.
Stock Option-Based Compensation Plans
We account for our stock option-based compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations using the intrinsic value based method of accounting. If we accounted for our stock option-based compensation plans 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, as amended by Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based CompensationTransition and Disclosure, our net loss and loss per basic and diluted share amounts would have been as follows, in thousands except per share amounts:
|
|
February 28 or 29, |
|
|||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||
Net loss, as reported |
|
$ |
(55,271 |
) |
$ |
(103,800 |
) |
$ |
(212,239 |
) |
Add: Stock option-based compensation expense included in reported net loss, net of tax |
|
168 |
|
1,799 |
|
3,426 |
|
|||
Less: Stock option-based compensation, net of tax |
|
(6,301 |
) |
(2,611 |
) |
(26,564 |
) |
|||
Pro forma net loss |
|
$ |
(61,404 |
) |
$ |
(104,612 |
) |
$ |
(235,377 |
) |
Basic and diluted loss per share, as reported |
|
$ |
(0.67 |
) |
$ |
(1.43 |
) |
$ |
(3.04 |
) |
Basic and diluted loss per share, pro forma |
|
$ |
(0.75 |
) |
$ |
(1.44 |
) |
$ |
(3.37 |
) |
Consistent with our accounting for deferred tax assets resulting from the exercise of employee stock options in the accompanying audited Consolidated Financial Statements, we have not provided a tax benefit or expense on the pro forma expense in the above table.
Stock options granted had weighted average fair values of $1.62, $3.28 and $3.48 per share for fiscal 2005, 2004 and 2003 respectively, as calculated using the Black-Scholes option valuation model. The weighted average estimated fair value of the common stock purchase rights granted under our employee stock purchase plan was $0.52, $2.23 and $3.96 per share for fiscal 2005, 2004 and 2003, respectively.
We determined the assumptions used in computing the fair value of stock options and stock purchase plan shares by estimating the expected useful lives, giving consideration to the vesting and purchase periods, contractual lives, actual employee forfeitures, and the relationship between the exercise price and the fair market value of our common stock, among other factors. The risk-free interest rate is the U.S. Treasury bill rate for the relevant expected life. The fair value of stock options and stock purchase plan shares was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
OPTIONS |
|
ESPP |
|
||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
|
2003 |
|
Risk-free interest rates |
|
3.12 |
% |
2.51 |
% |
2.53 |
% |
2.028 |
% |
1.357 |
% |
1.75 |
% |
Expected term |
|
4.37 years |
|
4.53 years |
|
3.95 years |
|
3 months |
|
6 months |
|
6 months |
|
Volatility |
|
.7399 |
|
.9423 |
|
1.01 |
|
.5498 |
|
.8492 |
|
.8705 |
|
33
The following table includes the consolidated statements of operations data for each of the years in the three-year period ended February 28, 2005 expressed as a percentage of revenue:
|
|
Fiscal Year Ended February 28 or 29, |
|
||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Software |
|
|
18.7 |
% |
|
|
30.4 |
% |
|
|
27.5 |
% |
|
Support |
|
|
43.5 |
% |
|
|
35.6 |
% |
|
|
30.9 |
% |
|
Services |
|
|
33.6 |
% |
|
|
30.1 |
% |
|
|
37.5 |
% |
|
Reimbursed expenses |
|
|
4.2 |
% |
|
|
3.9 |
% |
|
|
4.1 |
% |
|
Total revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of software |
|
|
7.4 |
% |
|
|
6.5 |
% |
|
|
7.0 |
% |
|
Amortization of acquired technology |
|
|
6.8 |
% |
|
|
5.9 |
% |
|
|
5.0 |
% |
|
Cost of services and support |
|
|
38.2 |
% |
|
|
33.0 |
% |
|
|
36.0 |
% |
|
Cost of reimbursed expenses |
|
|
4.2 |
% |
|
|
3.9 |
% |
|
|
4.1 |
% |
|
Sales and marketing |
|
|
27.3 |
% |
|
|
27.2 |
% |
|
|
35.1 |
% |
|
Product development |
|
|
16.8 |
% |
|
|
14.9 |
% |
|
|
23.1 |
% |
|
General and administrative |
|
|
11.4 |
% |
|
|
10.3 |
% |
|
|
10.2 |
% |
|
Amortization of intangibles |
|
|
3.4 |
% |
|
|
1.9 |
% |
|
|
1.4 |
% |
|
Goodwill impairment charge |
|
|
|
|
|
|
|
|
|
|
35.4 |
% |
|
Purchased research and development and acquisition-related expenses |
|
|
|
|
|
|
|
|
|
|
1.4 |
% |
|
Exit and disposal activities |
|
|
9.0 |
% |
|
|
7.7 |
% |
|
|
7.0 |
% |
|
Non-cash stock compensation expense |
|
|
0.1 |
% |
|
|
0.7 |
% |
|
|
1.3 |
% |
|
Total operating expenses |
|
|
124.6 |
% |
|
|
112.0 |
% |
|
|
167.0 |
% |
|
Loss from operations |
|
|
(24.6 |
)% |
|
|
(12.0 |
)% |
|
|
(67.0 |
)% |
|
Debt conversion expense |
|
|
|
|
|
|
(24.6 |
)% |
|
|
|
|
|
Other expensenet |
|
|
(3.8 |
)% |
|
|
(5.5 |
)% |
|
|
(2.9 |
)% |
|
Loss before income taxes |
|
|
(28.4 |
)% |
|
|
(42.1 |
)% |
|
|
(69.9 |
)% |
|
Provision for income taxes |
|
|
0.4 |
% |
|
|
0.5 |
% |
|
|
7.9 |
% |
|
Net loss |
|
|
(28.8 |
)% |
|
|
(42.6 |
)% |
|
|
(77.8 |
)% |
|
The percentages shown above for cost of services and support, sales and marketing, product development and general and administrative expenses have been calculated excluding non-cash stock compensation expense as follows (in thousands):
|
|
Fiscal Year Ended February 28 or 29, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||||||||
Cost of services and support |
|
|
$ |
75 |
|
|
|
$ |
865 |
|
|
|
$ |
1,673 |
|
|
Sales and marketing |
|
|
26 |
|
|
|
456 |
|
|
|
931 |
|
|
|||
Product development |
|
|
15 |
|
|
|
140 |
|
|
|
298 |
|
|
|||
General and administrative |
|
|
52 |
|
|
|
338 |
|
|
|
524 |
|
|
|||
|
|
|
$ |
168 |
|
|
|
$ |
1,799 |
|
|
|
$ |
3,426 |
|
|
See Operating Expenses: Non-Cash Stock Option Compensation Expense for further detail.
34
Software Revenue. Software revenue decreased 50.9%, or $37.6 million, in fiscal 2005 and decreased 1.5%, or $1.1 million, in fiscal 2004. We believe the decreases in software revenue in fiscal 2005 were due to cautious capital spending for supply chain software purchases and to effects resulting from the magnitude of changes in our workforce, including our executive management and sales organization, difficulties in sales execution and a strong competitive environment. We experienced lengthening sales cycles and reductions in the size of customer orders compared to the same period in fiscal 2004. These factors resulted in a decrease in the number of significant software license transactions with a value of $100,000 or greater, the number of transactions greater than $1.0 million and our ASP. The modest decrease in software revenue in fiscal 2004 was due to a continued decline in the ASP offset by an increase in the number of significant software transactions and increased software revenue from transactions accounted for on a percentage-of-completion basis.
We attribute much of the caution of our clients and prospects to their concerns regarding the sustainability of the current economic recovery and the current geopolitical environment in which we operate. We saw no driving force to overcome the negative market factors that are holding back companies from supply chain initiatives. Further, we believe the effort by companies to comply with the Sarbanes-Oxley Act of 2002 consumed the internal resources of our clients and prospects in fiscal 2005 and slowed the decision making process for other software purchases.
The following table summarizes significant software transactions consummated during fiscal 2005, 2004 and 2003:
|
|
Fiscal Year Ended February 28 or 29, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||||||||
Significant Software Transactions(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Number of transactions $100,000 to $999,999 |
|
|
47 |
|
|
|
81 |
|
|
|
70 |
|
|
|||
Number of transactions $1.0 million or greater |
|
|
7 |
|
|
|
18 |
|
|
|
19 |
|
|
|||
Total number of transactions |
|
|
54 |
|
|
|
99 |
|
|
|
89 |
|
|
|||
Average selling price (in thousands) |
|
|
$ |
570 |
|
|
|
$ |
672 |
|
|
|
$ |
785 |
|
|
(1) Significant software transactions are those with a value of $100,000 or greater recognized within the fiscal year.
Support Revenue. Support revenue decreased 2.9%, or $2.5 million, in fiscal 2005 and increased 3.0%, or $2.5 million, in fiscal 2004. Our percentage of annual support renewals by our clients remains high; however, decreases in support revenue from non-renewals were not fully offset by increases in support revenue from new software sales during the year. We have not lost any of our largest support customers in the past year that had a material negative effect on revenue. The increase in support revenue in fiscal 2004 was due to the increase in the base of clients that have licensed our software products and entered into annual support arrangements, coupled with net renewals of annual support agreements by our existing client base. There can be no assurance that our historical renewal rate will continue. See Forward-Looking Statements and Factors That May Affect Future Results.
Services Revenue. Services revenue decreased 11.4%, or $8.3 million, in fiscal 2005 and decreased 28.3%, or $28.9 million, in fiscal 2004. The decrease in services revenue in the past two fiscal years was the result of the decrease in the number of completed software license transactions in fiscal 2005, fiscal 2004 and fiscal 2003, resulting in lower demand for implementation services and competitive rate pressures on consulting engagements. Additionally, we have experienced a decrease in the number of services employees from both voluntary and involuntary terminations. Services revenue tends to track software license revenue in prior periods. There can be no assurance that the rates we charge for consulting and implementation services will improve, or even remain at current levels. The market for information
35
technology consulting services is highly competitive and we are affected by these market conditions. Accordingly, services revenue may continue to decline unless and until we experience a sustained increase in our software licenses and maintain adequate resource capacity and capabilities. We also expect that services revenue will continue to fluctuate on a quarter-to-quarter basis, as revenue from the implementation of software is not generally recognized in the same period as the related license revenue. See Forward-Looking Statements and Factors That May Affect Future Results.
Reimbursed Expenses. Reimbursed expenses decreased 16.0%, or $1.5 million, in fiscal 2005 and decreased 16.3%, or $1.8 million, in fiscal 2004. The decrease in reimbursed expenses is consistent with decreases in services revenue in these periods.
International Revenue. We market and sell our software and services internationally, primarily in Europe, Asia, Canada, Central America and South America. Revenue outside of the U.S. decreased $17.4 million, or 21.1%, to $65.2 million, in fiscal 2005 compared to fiscal 2004 and increased $14.5 million, or 21.4%, to $82.6 million, in fiscal 2004 compared to $68.0 million in fiscal 2003. Revenue by geographic area is determined on the basis of the geographic area in which transactions are consummated. Revenue outside of the U.S. as a percentage of total revenue was 33.8%, 34.0% and 25.0% in fiscal 2005, 2004 and 2003, respectively. Although the percentage of international revenue to total revenue remained consistent in fiscal 2005, the decrease in our international revenue was the result of cautious capital spending for supply chain software purchases and the effects resulting from the magnitude of changes in our workforce, including our executive management and sales organization, difficulties in execution and a strong competitive environment. The increase in international revenue in fiscal 2004 was due to improved sales execution in Europe and growth in the emerging markets in the Asia-Pacific region.
Customer Concentration. No individual customer accounted for more than 10% of annual revenue in the three years ended February 28, 2005.
Cost of Software. Cost of software consists primarily of amortization of capitalized software development costs and royalty fees associated with third-party software either embedded in our software or resold by us. The following table sets forth amortization of capitalized software development costs and other costs of software for the three fiscal years ended February 28 or 29, 2005, 2004 and 2003 (in thousands):
|
|
Fiscal Year Ended February 28 or 29, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||||||||
Amortization of capitalized software |
|
|
$ |
9,407 |
|
|
|
$ |
8,987 |
|
|
|
$ |
11,587 |
|
|
Percentage of software revenue |
|
|
26.0 |
% |
|
|
12.2 |
% |
|
|
15.5 |
% |
|
|||
Other costs of software |
|
|
4,806 |
|
|
|
6,864 |
|
|
|
7,540 |
|
|
|||
Percentage of software revenue |
|
|
13.3 |
% |
|
|
9.3 |
% |
|
|
10.1 |
% |
|
|||
Total cost of software |
|
|
$ |
14,213 |
|
|
|
$ |
15,851 |
|
|
|
$ |
19,127 |
|
|
Percentage of software revenue |
|
|
39.3 |
% |
|
|
21.5 |
% |
|
|
25.5 |
% |
|
The decrease in the total cost of software in fiscal 2005 as compared to fiscal 2004 was a result of decreased royalties paid to third parties as a result of a decrease in software revenue, partially offset by an increase in amortization of capitalized software due to the product release of version 7.2 in February 2004 and the write-off of one of our capitalized products for which the anticipated future gross revenue were less than the estimated future costs of completing and disposing of the product. The decrease in the total cost of software in fiscal 2004 as compared to fiscal 2003 was a result of decreased royalties paid to third parties as a result of a decrease in software revenue and changes in the mix of products licensed as well as a decrease in amortization of capitalized software due to product release 6.1 becoming fully amortized in
36
fiscal 2003 while product release 7.2 was completed in February 2004 resulting in no incremental amortization in fiscal 2004. Amortization of capitalized software development costs does not vary with software revenue while royalty fees do.
Amortization of Acquired Technology. In connection with acquisitions in fiscal 2003, 2002 and 2001, we acquired developed technology that we offer as part of our integrated solutions. Acquired technology is amortized over periods ranging from four to six years. We expect annual amortization of acquired technology to be approximately $6.7 million in fiscal 2006.
Cost of Services and Support. Cost of services and support primarily includes personnel and third-party contractor costs. Cost of services and support, excluding the cost of reimbursed expenses and non-cash stock-option compensation expense, as a percentage of related revenue was 49.5% in fiscal 2005, 50.2% in fiscal 2004 and 52.7% in fiscal 2003. Cost of services and support decreased $6.6 million, or 8.2%, to $73.7 million in fiscal 2005 compared to fiscal 2004 and decreased $17.7 million, or 18.1%, to $80.3 million in fiscal 2004 compared to fiscal 2003. The decrease in cost of services and support was attributable to an overall decrease in the average number of services and support employees to 304 in fiscal 2005, compared to 366 in fiscal 2004. This was a result of the implementation of our cost containment and cost reduction initiatives during fiscal 2005 and fiscal 2004, as well as from voluntary attrition. The decrease in cost of services and support as a percentage of related revenue in fiscal 2005 as compared to fiscal 2004 reflects a slight increase in the proportion of this revenue derived from support services, which historically have higher margins than implementation services. The decrease in cost of services and support during fiscal 2004 compared to fiscal 2003 was attributable to a decrease in the average number of services and support employees to 366 in fiscal 2004, compared to 455 in fiscal 2003. This was a result of the implementation of our cost containment and cost reduction initiatives during fiscal 2004 and fiscal 2003 and voluntary attrition.
Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, sales commissions, promotional events such as user conferences, trade shows and technical conferences, advertising and public relations programs. Sales and marketing expense decreased $13.4 million, or 20.3%, to $52.7 million in fiscal 2005 as compared to fiscal 2004 and decreased $29.6 million, or 30.9%, to $66.1 million in fiscal 2004 as compared to fiscal 2003. The decrease in fiscal 2005 and fiscal 2004 was due to:
· an overall decrease in the average number of sales, marketing and business development employees to 170 for fiscal 2005 compared to 216 for fiscal 2004 and 328 for fiscal 2003, which was primarily a result of the implementation of our exit and disposal plans in fiscal 2005, fiscal 2004 and fiscal 2003;
· a decrease in promotional spending, travel, advertising and public relations spending resulting from cost containment and cost reduction measures implemented in fiscal 2005, fiscal 2004 and fiscal 2003; and
· a decrease in sales commissions due to lower software revenue.
Offset by:
· an increase in bad debt expense in fiscal 2005.
37
Product Development. Product development costs include expenses associated with the development of new software products, enhancements of existing products and quality assurance activities and are reported net of capitalized software development costs. Such costs are primarily from employees and third-party contractors. The following table sets forth product development costs for the three fiscal years ended February 28 or 29, 2005, 2004 and 2003 (in thousands):
|
|
Fiscal Year Ended February 28 or 29, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||||||||
Gross product development costs |
|
|
$ |
41,977 |
|
|
|
$ |
46,121 |
|
|
|
$ |
73,570 |
|
|
Percentage of total revenue |
|
|
21.7 |
% |
|
|
19.0 |
% |
|
|
27.0 |
% |
|
|||
Less: Capitalized software development costs |
|
|
9,573 |
|
|
|
9,888 |
|
|
|
10,515 |
|
|
|||
Percentage of total revenue |
|
|
5.0 |
% |
|
|
4.1 |
% |
|
|
3.9 |
% |
|
|||
Product development costs, as reported |
|
|
$ |
32,404 |
|
|
|
$ |
36,233 |
|
|
|
$ |
63,055 |
|
|
Percentage of total revenue |
|
|
16.8 |
% |
|
|
14.9 |
% |
|
|
23.1 |
% |
|
Gross product development costs decreased $4.1 million, or 9.0%, in fiscal 2005 as compared to fiscal 2004 and decreased $27.4 million, or 37.3%, in fiscal 2004 as compared to fiscal 2003. The decrease in fiscal 2005 and 2004 was due to:
· further consolidation of our U.S. product development function to our corporate headquarters in Rockville, Maryland;
· an overall decrease in the average number of product development employees to 218 in fiscal 2005, compared to 275 in fiscal 2004 and 414 in fiscal 2003. This was primarily a result of the implementation of our exit and disposal plans in fiscal 2005, fiscal 2004 and fiscal 2003;
· an increase in the proportion of our development work being performed by contractors in India in order to take advantage of cost efficiencies associated with Indias lower wage scale;
· a decrease in the average number of product development contractors in the U.S. in fiscal 2005 and fiscal 2004; and
· lower personnel costs in fiscal 2005 as we migrated some of our product development efforts to our new product development center in Hyderabad, India.
General and Administrative. General and administrative expenses include personnel and other costs of our legal, finance, accounting, human resources, facilities and information systems functions. General and administrative expenses decreased $2.9 million, or 11.8%, to $22.1 million in fiscal 2005 as compared to fiscal 2004 and decreased $2.8 million, or 10.1%, to $25.1 million in fiscal 2004 compared to fiscal 2003. The decrease in fiscal 2005 as compared to fiscal 2004 was the result of a decrease in the average number of general and administrative employees resulting from the implementation of our exit and disposal plans in fiscal 2005 and fiscal 2004, in addition to a decrease in property tax expense related to a settlement with the State of Maryland. The decrease was partially offset by an increase in accounting professional fees primarily related to compliance with the Sarbanes-Oxley Act of 2002. The decrease in fiscal 2004 as compared to fiscal 2003 was the result of a decrease in the average number of general and administrative employees resulting from the implementation of our exit and disposal plans in fiscal 2004 and fiscal 2003.
Amortization of Intangibles. Our past acquisitions were accounted for under the purchase method of accounting. As a result, we recorded goodwill and other intangible assets that represent the excess of the purchase price paid over the fair value of the net tangible assets and identifiable intangible assets acquired. Other intangible assets are amortized over periods ranging from four to seven years. Amortization of intangibles increased $2.0 million, or 42.2%, to $6.6 million in fiscal 2005 compared to fiscal 2004 and increased $0.8 million, or 20.9%, to $4.7 million in fiscal 2004 compared to fiscal 2003. The increase in
38
amortization of intangibles in fiscal 2005 and 2004 was due to a change in the Talus customer relationships amortization from seven years to five years in late fiscal 2004. In fiscal 2005, the increase in amortization of intangibles was partially offset by the completion of amortization in fiscal 2005 of acquired technology related to the STG and Talus acquisitions.
Goodwill Impairment. We test goodwill for impairment on an annual basis, coinciding with our fiscal year end, or on an interim basis if circumstances change that would more likely than not reduce our implied fair value (which includes factors such as, but not limited to, the Companys market capitalization, control premium and recent stock price volatility) below our carrying value. Please see Factors That May Affect Future ResultsRisks Related to Our Business. During the six months ended August 31, 2004, the Company experienced adverse changes in its stock price resulting from its poor financial performance. As a result, the Company performed a test for goodwill impairment at August 31, 2004 and determined that based upon the implied fair value (which includes factors such as, but not limited to, the Companys market capitalization, control premium and recent stock price volatility) of the Company as of August 31, 2004, there was no impairment of goodwill. We performed our annual goodwill impairment reviews on February 28, 2005 and February 29, 2004 and determined that the implied fair value of the Company exceeded the carrying value. Accordingly, no goodwill impairment charge was recorded during fiscal 2005. Details of our amortization of intangibles and goodwill impairment are included in Note 6 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K and details of our acquisitions are included in Note 14 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. During fiscal 2003 we recorded a goodwill impairment charge of $96.3 million to reduce goodwill associated with our acquisitions to the estimated fair value as of that date. See further discussion in Valuation and Impairment Review of Long-Lived Assets.
Purchased Research and Development. Our acquisition of WDS in fiscal 2003 included the purchase of technology that had not yet been determined to be technologically feasible and had no alternative future use at its then-current stage of development. Accordingly, in fiscal 2003 the portion of the purchase price for WDS allocated to purchased research and development of $3.8 million, in aggregate, was expensed immediately in accordance with generally accepted accounting principles. Details of our acquisitions are included in Note 14 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Exit and Disposal Activities. In order to adjust our cost structure and resource allocation to increase efficiencies and reduce excess office space, we adopted exit and disposal plans in the second quarter of fiscal 2005, the first and fourth quarters of fiscal 2004 and in the second, third and fourth quarters of fiscal 2003. In connection with our decision to implement these plans, we incurred related exit and disposal charges of $17.3 million, $18.6 million and $19.2 million in fiscal 2005, fiscal 2004 and fiscal 2003, respectively.
The following table sets forth a summary of exit and disposal activity charges, net of adjustments, for fiscal 2005, fiscal 2004 and fiscal 2003 (in thousands):
|
|
Fiscal Year Ended February 28 or 29, |
|
|||||||||||||
|
|
2005 |
|
2004 |
|
2003 |
|
|||||||||
Lease obligations and terminations |
|
|
$ |
8,119 |
|
|
|
$ |
12,917 |
|
|
|
$ |
7,973 |
|
|
Severance and related benefits |
|
|
6,064 |
|
|
|
855 |
|
|
|
7,942 |
|
|
|||
Impairment charges |
|
|
2,742 |
|
|
|
4,241 |
|
|
|
2,528 |
|
|
|||
Other |
|
|
387 |
|
|
|
614 |
|
|
|
741 |
|
|
|||
Total exit and disposal activities |
|
|
$ |
17,312 |
|
|
|
$ |
18,627 |
|
|
|
$ |
19,184 |
|
|
The impact to reported basic and diluted loss per share as a result of the exit and disposal charges was $(0.21), $(0.26), and $(0.27) for fiscal 2005, fiscal 2004 and fiscal 2003, respectively.
39
In response to the difficulties we faced in our ability to stabilize revenue and operating performance, we enacted a number of cost containment and cost reduction measures over the past four fiscal years to better align our cost structure with expected revenue. Specifically, we took the following actions:
1. We reduced our workforce by 127, 79 and 343 employees through involuntary terminations with the fiscal 2005, 2004 and 2003 exit and disposal plans, respectively.
2. We further consolidated our product development function in the U.S. to the corporate headquarters in Rockville, Maryland as part of the exit and disposal plans in fiscal 2004 and fiscal 2003. This included the relocation of certain employees from Wayne, Pennsylvania; San Carlos, California; Atlanta, Georgia; Denver, Colorado and Ottawa, Canada to Rockville, Maryland.
3. As a result of the workforce reductions, product development consolidation and employee attrition, certain of our facilities were under-utilized. Accordingly, we consolidated our remaining workforce in the under-utilized facilities and abandoned the then-vacated office space. The facilities permanently removed from our operations during fiscal 2005, 2004, 2003 and 2002 were located in Wayne, Pennsylvania; Irving, Texas; Detroit, Michigan; Denver, Colorado; Ottawa, Canada; Itasca, Illinois; Milan, Italy; Munich and Ratingen, Germany and Stockholm, Sweden and the Philippines. A portion of the office space was permanently vacated in certain facilities located in Rockville, Maryland; Atlanta, Georgia; Calabasas and San Carlos, California; Bracknell, United Kingdom and Tokyo, Japan.
4. As part of the consolidation of our facilities, certain leasehold improvements and furniture and fixtures were abandoned. As a result, we recorded non-cash charges equal to the net book value of these abandoned assets in exit and disposal activity charges.
As a result of our exit and disposal activities and cost containment initiatives during the past four fiscal years, we have reduced all other operating expenses (as shown in the table under Key Financial MetricsFiscal 2005) by $29.9 million to $203.0 million for the fiscal year ended February 28, 2005. Details of our exit and disposal charges are included in Note 15 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Substantially all of the cost savings from our exit and disposal activities and cost containment initiatives implemented in fiscal 2004 were reflected in our operating results by the first quarter of fiscal 2005. As of February 28, 2005, we had achieved quarterly cost savings of approximately $4.0 million, compared to the first quarter of fiscal 2005 as a result of implementing our exit and disposal plans during fiscal 2005. We have completed most of the planned initiatives approved in our second quarter fiscal 2005 exit and disposal plans and will complete the remainder of the initiatives in fiscal 2006. The total exit and disposal charges reflected in the financial statements are based on managements current estimates, which may change materially if actual lease-related expenditures or sublease income differ from current estimates. See Forward-Looking Statements.
Non-Cash Stock Option Compensation Expense. We recognized non-cash stock option compensation expense of $0.2 million, $1.8 million and $3.4 million in fiscal 2005, fiscal 2004 and fiscal 2003, respectively, related to unvested stock options assumed in the acquisition of Talus. As part of the Talus acquisition, we assumed all outstanding Talus stock options, which were converted into our stock options. Options to purchase approximately 631,000 shares of our common stock were unvested at the acquisition date. FASB Interpretation No. 44 (FIN 44) Accounting for Certain Transactions Involving Stock Compensation requires the acquiring company to measure the intrinsic value of unvested stock options assumed at the acquisition date in a purchase business combination and record a compensation charge over the remaining vesting period of those options to the extent those options remain outstanding. The unamortized value of these stock awards is included as a separate component of stockholders equity. All of these outstanding options are fully vested and all compensation expense has been recognized as of February 28, 2005.
40
Repriced Options. In January 1999, the Company repriced certain employee stock options, other than those held by executive officers or directors. This resulted in approximately 3.0 million options being repriced and the four-year vesting period starting over. Under FIN 44, repriced options are subject to variable plan accounting, which requires compensation cost or benefit to be recorded each period based on changes in our stock price until the repriced options are exercised, forfeited or expire. The initial fair value used to measure the ongoing stock option compensation charge or benefit was $22.19 based on the closing price of our common stock on June 30, 2000. Since our stock price at the beginning and end of fiscal 2005, 2004 and 2003 was below $22.19, no charge or benefit was recorded during fiscal 2005, 2004 and 2003. As of February 28, 2005, approximately 372,900 repriced options were still outstanding, all of which are fully vested. In future periods, we will record additional charges or benefits related to the repriced stock options still outstanding based on the change in our common stock price compared to the last reporting period. If our stock price at the beginning and end of any reporting period is less than $22.19, no charge or benefit will be recorded.
Other expense, net, includes interest income from cash equivalents, marketable securities and long-term investments, interest expense from borrowings and payments on our capital lease obligations, foreign currency exchange gains or losses and other gains or losses. Other expense, net, decreased $6.1 million, or 45.6%, to $7.3 million in fiscal 2005 as compared to fiscal 2004 and increased $5.5 million, or 69.4%, to $13.5 million in fiscal 2004 compared to fiscal 2003. The decrease in Other Expense, Net in fiscal 2005 compared to fiscal 2004 relates to a decrease in interest expense of approximately $3.6 million primarily related to a reduction in interest expense on our outstanding convertible notes due to the conversion of $74.5 million of our Notes during fiscal 2004 (See Note 7 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K), an increase in interest income of $0.7 million in fiscal 2005 and a decrease of other expense of $0.1 million and a foreign currency exchange gain of $0.3 million in fiscal 2005 compared to a $1.6 million foreign currency exchange loss in fiscal 2004. The increase in Other Expense, Net in fiscal 2004 as compared to fiscal 2003 relates to a reduction in interest income of $2.0 million and $1.6 million foreign currency exchange loss in fiscal 2004, compared to a $2.3 million exchange gain in fiscal 2003.
During fiscal 2004, the Company exchanged $74.5 million of its Notes for 9,725,750 shares of its common stock in privately negotiated transactions with note holders. The offer and issuance of the common stock underlying these transactions were exempt from registration under Section 3(a) (9) of the Securities Act of 1933 and were freely traded upon issuance.
At the conversion price of $44.06 per share, the $74.5 million of Notes exchanged would have been convertible into 1,690,780 shares of common stock. For accounting purposes, the additional 8,034,970 shares of common stock that the Company issued in these transactions are considered an inducement for the holders to convert their Notes, which required the Company to record a non-operating expense equal to the fair value of the additional shares issued to the holders. Accordingly, the Company recorded a non-cash debt conversion expense of approximately $59.8 million during the year ended February 29, 2004. These transactions resulted in a $74.5 million reduction of the Notes outstanding and increased stockholders equity by $74.5 million. The 9,725,750 shares of common stock issued in these transactions represented approximately 11.9% of the shares outstanding as of February 29, 2004.
We recorded an income tax provision of $0.7 million, $1.3 million and $21.4 million in fiscal 2005, fiscal 2004 and fiscal 2003, respectively. In fiscal 2005, fiscal 2004 and fiscal 2003, $0.6 million, $1.0 million
41
and $4.4 million of the income tax provision relates to foreign taxes, respectively. During fiscal 2003, management concluded that, based on various factors, including our cumulative losses for fiscal 2001, 2002 and 2003, the size of our loss for fiscal 2003 and estimates of future profitability, future taxable income will, more likely than not, be insufficient to cover our net deferred tax assets. Based on the weight of positive and negative evidence regarding recoverability of our net deferred tax assets (including net operating loss carryforwards), we recorded a valuation allowance for the full amount of our net deferred tax assets, which resulted in a $20.4 million charge to income tax expense in fiscal 2003. Management will continue to monitor its estimates of future profitability and realizability of our net deferred tax assets based on evolving business conditions. In fiscal 2005 and fiscal 2004, we maintained a full valuation allowance against our net deferred tax assets because we have concluded that future taxable income will, more likely than not, be insufficient to recover our net deferred tax assets as of February 28, 2005 and February 29, 2004, respectively.
Loss per common share is computed in accordance with SFAS No. 128, Earnings Per Share, which requires dual presentation of basic and diluted earnings per common share for entities with complex capital structures. Basic loss per common share is based on net loss divided by the weighted-average number of common shares outstanding during the period. Diluted earnings or loss per common share includes, when dilutive, (i) the effect of stock options, warrants and restricted stock granted using the treasury stock method, (ii) the effect of contingently issuable shares earned during the period, and (iii) shares issuable under the conversion feature of our Notes using the if-converted method. Future weighted-average shares outstanding calculations will be impacted by the following factors:
· the ongoing issuance of common stock associated with stock option and warrant exercises;
· the issuance of common shares associated with our employee stock purchase plan and restricted stock grants;
· any fluctuations in our stock price, which could cause changes in the number of common stock equivalents included in the diluted earnings per common share calculations (to the extent we have positive net income);
· the issuance of common stock to raise capital or effect business combinations should we enter into such transactions; and
· assumed or actual conversions of our convertible debt into common stock.
Liquidity and Capital Resources
Historically, we have financed our operations and met our capital expenditure requirements through cash flows provided from operations, long-term borrowings (including the sale of convertible notes) and sales of equity securities. The significant components of our working capital are liquid assets such as cash and cash equivalents, marketable securities and trade accounts receivable, reduced by accounts payable, accrued expenses, short-term restructuring obligations and deferred revenue. In fiscal 2005, working capital decreased $22.6 million, to $105.5 million, as of February 28, 2005, primarily as a result of cash used in operating activities directly attributed to decreased revenue during fiscal 2005 and investing activities.
Cash, cash equivalents, marketable securities and long-term investments decreased $19.4 million during fiscal 2005, to $135.9 million, as of February 28, 2005. The decrease is due to changes in working capital items, including $12.7 million in payments for exit and disposal obligations, as well as:
· $13.9 million in expenditures on property, equipment and software, including $9.9 million of capitalized software; and
42
· $2.5 million in principal payments on long-term debt and capital leases.
Offset by:
· $2.0 million in cash proceeds from the disposal of our right to certain fractional shares of a jet; and
· $0.9 million in cash proceeds from the exercise of stock options and employee stock purchase plan purchases.
Although we were a net user of cash in fiscal 2005, we believe that the combination of cash and cash equivalents, marketable securities and long-term investments, and anticipated cash flows from operations will be sufficient to fund expected capital expenditures, capital lease obligations and working capital needs for the next twelve months. Although we have no current plans to do so, we may elect to obtain additional debt or equity financing if we are able to raise it on terms acceptable to us. See Forward-Looking Statements and Factors That May Affect Future Results.
Commitments
As of February 28, 2005, our future fixed commitments and the effect these commitments are expected to have on our liquidity and cash flows in future periods are as follows (in thousands):
|
|
Fiscal Year Ended February 28 or 29, |
|
|||||||||||||||||||||
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
|||||||||
Capital lease obligations(1) |
|
$ |
2,029 |
|
$ |
1,371 |
|
$ |
426 |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,826 |
|
Operating lease obligations not in exit and disposal activities |
|
7,563 |
|
6,376 |
|
5,989 |
|