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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K (Mark One) 
 
 
 
  MANUGISTICS GROUP, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    52-1469385
(I.R.S. Employer
Identification Number)
 9715 Key West Avenue, Rockville, Maryland 20850
(Address of principal executive offices) (Zip code)
(301) 255-5000
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.002 par value per share
(Title of Class) Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes XNo [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [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 XNo [   ] As of August 31, 2003, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $241.2 million. As of April
30, 2004, the number of shares outstanding of the Registrants common stock was
approximately 81.9 million, based on information provided by the Registrants
transfer agent. 1




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DOCUMENTS INCORPORATED BY REFERENCE Portions of our definitive Proxy Statement relating to the 2004 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 29, 2004. PART I Item 1. BUSINESS. The disclosures set forth in this annual report are qualified by the sections
captioned Forward-Looking Statements and Factors That May Affect Future
Results in Item 7  Managements Discussion and Analysis of Financial
Condition and Results of Operations of this annual report, and other
cautionary statements set forth elsewhere in this annual report on Form 10-K. Overview: We are a leading global provider of demand and supply chain management
software. We have a solutions-based approach to client delivery  selling
configured sets of our software products that address the specific demand and
supply chain business processes that our clients want to improve. Our software
enables companies to lower operating costs, improve customer service, increase
revenue, enhance profitability and accelerate revenue and earnings growth by
combining the proven cost-reducing power of our supply chain management
software solutions with the revenue-enhancing capability of our demand and
revenue management software solutions. Our software does this by creating
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 and solutions delivery approach provide additional benefits by
providing businesses with the ability to simultaneously optimize cost and
revenue to enhance profitability on an enterprise-wide basis. These software
solutions integrate pricing, forecasting and operational planning and execution
to help companies enhance margins across their enterprises and extended trading
networks. In addition, our software products help our customers drive more
benefits from their existing investments made in information technology
provided by other software vendors, such as enterprise resource planning
(ERP) applications, and help ensure the security and integrity of their
global supply chains. Our supply chain management software helps companies plan, optimize and
execute their supply chain processes. These processes include manufacturing,
distribution and service operations and collaboration with a companys extended
trading network of suppliers and customers. Our demand and revenue management
software helps optimize a companys demand chain, including pricing and
promotions to all customers through all channels, with the aim of balancing the
trade-offs between profitability and other strategic objectives such as market
share. We also provide strategic consulting, implementation and customer
support services to our clients as part of our overall solution. 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 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
    
    DescriptionDigital Freight Exchange, Inc.
    
    May 2002
    
    Collaborative transportation logistics servicesWestern Data Systems of Nevada, Inc.
    
    April 2002
    
    Maintenance, repair and overhaul and make-to-order softwareSpaceWorks Inc. (acquired
technology only)
    
    July 2001
    
    Order management softwarePartMiner CSD, Inc.
    
    May 2001
    
    Product design and sourcing softwareOne Release, LLC
    
    May 2001
    
    Software development servicesSTG Holdings, Inc.
    
    January 2001
    
    Advanced factory planning, scheduling and simulation softwareTalus Solutions, Inc.
    
    December 2000
    
    Pricing and revenue optimization software
 2




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Industry Background: To meet the demands of todays competitive environment, companies in
diverse industries are seeking greater efficiencies and flexibility in how they
operate and how they respond to rapidly changing market conditions, both within
their own organization and throughout their extended trading networks.
Increasing global competition, shorter product life cycles, more demanding
customers and
higher standards are forcing businesses to provide improved levels of
customer service while shortening the time it takes to bring their products and
services to market. Many companies now operate and distribute their products on
a global basis, which has substantially increased the complexities of their
demand and supply chains. In order to meet these challenges, companies are
demanding greater visibility of their operations throughout their own
organization and their extended trading networks and enhanced capabilities to
make and execute decisions in response to rapidly changing conditions. 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 responsive, rapid and informed decision-making. These
capabilities make companies more competitive and profitable in this
increasingly complex environment. We also believe that companies must pursue
the further integration of the supply-side and demand-side of their businesses
to most effectively respond to these challenges and take advantage of the
opportunities these challenges create. Many companies are also 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 and those systems of companies in
their trading networks. They require that these solutions provide quick
realization of benefits and rapid return on their investment. The competition in these markets includes enterprise application software
companies, such as ERP 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, in part, of technical expertise and
lower personnel costs, including in India and China, either through 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 (SCM) and demand and revenue management (DRM)
solutions. Our strategy to achieve our objective includes the following
elements: EXPAND AND DIFFERENTIATE OUR SOLUTIONS  We intend to extend the
capabilities and scope of our SCM and our DRM solutions to help solve a broader
range of evolving business challenges and to improve operational and business
processes within and among companies. We believe the emerging market for
solutions that simultaneously leverage supply chain management and demand and
revenue management will be a large and important market, and that our industry
domain expertise and extensive solution capabilities differentiate us from our
competitors. We also believe that there is a significant opportunity to apply
revenue and price management solutions to manufacturing and other
non-reservation-based industries. Our capabilities are enhanced by our
relationships with clients, industry experts and third-party alliances, which
we believe will work to our advantage as we develop and expand our solutions. PROVIDE ADVANCED TECHNOLOGICAL INNOVATION  Using our extensive experience
and domain expertise, plus our commitment of substantial resources for research
and development, we develop advanced technological software solutions and offer
them to our clients and prospects. In addition, we will consider tactical and
strategic acquisitions of other companies and technologies, if we are able to
do so on terms favorable to us, in order to shorten the time it takes us to
bring solutions to market, to further differentiate ourselves from our
competitors and to enhance or expand our existing offerings. See Product
Development. DEVELOP STRATEGIC ALLIANCES AND NEW BUSINESS RELATIONSHIPS  We focus our
resources on the development and enhancement of our core competencies and
combine them with the competencies of third parties, such as leading consulting
firms and technology providers that provide advanced capabilities to complement
our core focus areas. This strategy permits us to offer our clients
industry-leading solutions that can better meet their needs. We continue to
expand and enhance our current solutions and our ability to implement them
through these alliances. 3




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EXPAND CURRENT VERTICAL MARKETS AND EXPLORE NEW ONES  We continue to
expand our presence in and focus on markets in a broad range of sectors such as
automotive; chemical & energy; communications; consumer packaged goods;
electronics and high technology; food & beverage; government, aerospace &
defense; industrials; life sciences; retail; third-party logistics; and travel,
transportation & hospitality. This strategy provides us with a diverse customer
base and increases the number of potential new customers in future periods. We
believe our vertical market diversification will be a key factor in helping us
achieve our growth objectives in the future and helps mitigate against the
effects of adverse changes in individual vertical markets. We also
evaluate opportunities outside of our current vertical markets as we seek
to expand the penetration of our supply chain management and our demand and
revenue management solutions. Solutions: Manugistics solutions are configured sets of our software products that
address the specific demand and supply chain business processes that our clients want to improve, and these solutions may also include
consulting, implementation, training and client support services.
Our solutions are designed to meet todays demand and supply chain challenges,
including planning and execution, optimizing revenue and prices,
collaboration with suppliers and customers, coordinating supply and
demand, managing logistics operations and managing maintenance, repair and overhaul services in complex equipment environments.  We are
presently focused on enhancing the following families of solutions: Demand and Revenue Management Our Demand and Revenue Management
solutions are designed to enable clients to create business strategies such as
consensus demand planning, optimal pricing strategies, targeted promotion
campaigns, markdown planning and revenue management for a constrained capacity
by efficiently predicting and shaping future demand. Logistics Management Our Logistics Management solutions are designed to
help shippers, carriers, and logistics service providers manage more
effectively the complexities of global logistics, including multiple modes of transport such as by air, rail, sea and truck. Capabilities
cover the entire closed-loop logistics process  from strategic logistics
sourcing, planning and optimization, execution and shipment tracking, to
payment and performance analysis. Fleet management capabilities include
finding the optimal use of a clients fleet 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. Maintenance, Repair and Overhaul Our Maintenance, Repair and Overhaul
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 profitably
provide the high levels of customer service. Manufacturing Planning and Scheduling Our Manufacturing Planning and
Scheduling solutions are designed to help clients synchronize production,
logistics, materials and other resources across their networks of plants and
manufacturing partners while simultaneously evaluating materials, manufacturing
capacity, inventory, transportation, labor, distribution and business
objectives. They are intended to help increase responsiveness to event and
demand changes, reduce inventory, shorten order fulfillment and manufacturing
lead-times, strengthen business relationships among trading partners, increase
capacity utilization and synchronize production and purchasing to meet actual
demand. Sales and Operations Planning Our Sales and Operations Planning
solutions are designed to enable cross-functional teams to simultaneously
review past performance and current data on sales forecasts, booked orders,
direct materials procurement, 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, based on the scenarios that best meet the
clients business objectives. Supplier and Customer Collaboration Our Supplier and Customer
Collaboration solutions are designed to enable adaptive and collaborative
demand and supply chain management in which strategic and operational plans are
coordinated with trading partners, supply chain operations are continuously
monitored, plan-versus-actual discrepancies are detected and business policies
and workflows help automatically resolve exceptions. These solutions are
intended to help clients realize the profit and customer service benefits of
producing the optimal mix of products, deploying optimal inventory and
allocation of product to the most profitable orders or customers. 4




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Supply Chain Management Our Supply Chain Management solutions are
designed to provide control over the activities required to source, make, store
and move goods and to service and maintain a companys assets and those of its
customers. Our clients use our solutions to manage and optimize the many facets
of their supply chains  from strategic network design to operational planning
to tactical event detection and resolution  to help improve customer service
and capture revenue at reduced total landed cost. Products: Manugisticss products are used to design, optimize and synchronize a companys extended demand and supply chain processes.  Our products are built on the 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 others information technology systems.  These open standards of J2EE help facilitate application development, aplication-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 and the flexibility and scalability  needed to effectively adapt to future business and technology shifts.  The Manugistics product suite (called Manugistics NetWORKS
Applications) consists of:  
    
    Planning applications
    
    Collaborative applications
    
    Execution applications
    
    Foundation and Platform applications. Manugistics NetWORKS Planning Applications. Manugistics NetWORKS planning applications support a comprehensive set of
business processes including advanced planning and scheduling; demand,
fulfillment and supply; pricing optimization and revenue management; and
logistics management. These applications incorporate extensive research and
development and bring together the disciplines of advanced mathematical
modeling and contemporary software technology. Our NetWORKS planning
applications are designed to facilitate strategic, tactical and operational
decision-making. Strategic decisions typically consider a time-frame of
quarters to years. Tactical decisions typically consider a time-frame of weeks
to months. Our advanced planning and scheduling applications include such products as
NetWORKS Master PlanningTM, NetWORKS Production Planning, NetWORKS Production
Scheduling, NetWORKS Sequencing, NetWORKS Attribute Based Planning, and
STATGRAPHICS. Our demand, fulfillment, and supply management applications
include such products as NetWORKS Demand, NetWORKS Fulfillment, NetWORKS
Strategy, and NetWORKS Supply. Our pricing optimization and revenue
management applications include such pricing products as NetWORKS Precision
Pricing, NetWORKS Promotions, and NetWORKS Target Pricing, and such
industry-specific revenue management applications as NetWORKS Airline Revenue
Optimizer, NetWORKS Cargo Revenue OptimizerTM and NetWORKS Hospitality Revenue
Optimizer. Our logistics management solutions include such products as
NetWORKS Transport, NetWORKS Routing, NetWORKS Resourcing and NetWORKS Tour
Design. We also provide our NetWORKS RFQ and NetWORKS RFQ Optimizer products
in a hosted environment only. Manugistics NetWORKS Collaborative Applications. Our collaborative applications support business processes that connect
trading partners. These products enable businesses to expand their supply
chains into extended trading networks. Our collaborative applications include
such products as NetWORKS Collaborate, NetWORKS Delivery ManagementTM, and
NetWORKS Market Manager. Manugistics NetWORKS Execution Applications. Our execution applications support key business transactions and provide
real-time visibility within businesses and between trading partners. These
applications support the execution of processes in order management,
manufacturing, and logistics. Our order management execution applications
include such products as NetWORKS Make-to-Order, NetWORKS Order Management,
and NetWORKS Order Promising. Our manufacturing execution applications include
such products as NetWORKS Component Management, NetWORKS Maintenance, Repair
and Overhaul, and NetWORKS Procurement. Our logistics execution applications
include such products as NetWORKS Carrier and NetWORKS Freight PaymentTM. 5




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Manugistics Foundation and Platform Applications. Our Manugistics Foundation and Platform applications provide the technical
underpinnings for all other Manugistics products and provide support for the
deployment and integration of our applications into a companys information
technology infrastructure. These applications support enterprise application
and trading network integration and facilitate trading network analysis,
monitoring, and reporting. Our integration applications include our
WebConnect suite of products. Our analysis, monitoring, and reporting
applications include such products as NetWORKS Analytics, NetWORKS Monitor
and NetWORKS Reporting. 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 29, 2004, our product development resources
included 235 employees and 100 third-party contractors, 82 of which were
working in India. Gross product development costs were $46.1 million, $73.6
million and $81.0 million in fiscal 2004, 2003 and 2002, respectively. Gross
product development costs in total over the last five fiscal years were $285.0
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 rapidly delivering new products, features and functions. 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 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. These 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 271 employees as of February 29, 2004. 6




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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
Manugistics 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 29, 2004, our client support and
application hosting service group consisted of 64 employees. Sales and Marketing: Our sales operation for North and South America is headquartered at our
office in Rockville, Maryland and includes field offices in Atlanta, GA;
Chicago, IL; Calabasas, CA; San Carlos, CA; and Sao Paulo, Brazil. Our direct
sales organization focuses on licensing supply chain management and demand and
revenue management solutions to large, multi-national enterprises, as well as
to mid-sized
enterprises with a variety of supply chain, pricing and extended trading
network issues. We 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, German, French, Belgian, and Swedish
subsidiaries, located in Bracknell, England; Munich, Germany; Paris, France;
Brussels, Belgium; and Stockholm, Sweden, respectively, provide direct sales,
services and support primarily to clients located in continental Europe and the
United Kingdom. We have established subsidiaries and maintain offices in Osaka
and Tokyo, Japan; Singapore; Shanghai, The Peoples Republic of China; Hong
Kong; Kuala Lumpur, Malaysia; and Sydney, Australia. We also maintain offices
in Taiwan and the Philippines. We adapt our solutions for use in international
markets by addressing different languages, different standards of weights and
measures and other operational considerations. In fiscal 2004, approximately
34.0% of our total revenue came from sales made to clients outside the United
States. Details of our geographic revenue are in Note 16  Segment
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, consisting of complementary software vendors,
third-party alliances and distributorships. See Alliances. Using these
channels, we seek to increase the market penetration of our software through
joint marketing and sales activities. These relationships enhance our sales
resources in target markets and expand our expertise in bringing our solutions
to prospects and clients. We also license our STATGRAPHICS product in the U.S.
and in other countries through independent distributors, national resellers and
local dealers. We support our sales activities by conducting a variety of marketing
programs, including our 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 also maintain client steering committees to involve our
clients in the ongoing development of our solutions. We also participate in
industry conferences such as those organized by the American Production and
Inventory Control Specialists (APICS) organization, Supply Chain World, Retail
Systems and Auto-Tech and in numerous pricing and revenue optimization
conferences, such as HITEC and PPS. In addition, we participate in solution
demonstration seminars and client conferences hosted by complementary software
vendors. We also conduct Manugistics brand awareness and lead-generation
programs including advertising, direct mail, public relations, seminars,
telemarketing and ongoing client communication programs. As of February 29, 2004, we had 215 employees engaged in sales and
marketing activities. 7




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Alliances: Our alliance program is based on improving and increasing the value we can
deliver to our clients and prospects. We ally ourselves with leading companies
that provide consulting and implementation services, software and technology
and hardware that complement our solutions. We have strategic alliances pursuant to written agreements with the
following software and technology providers: Agile Software; AND; Ayeca; Blue
Martini Software; Business Objects; CAS; Cognos; Emptoris; GXS; Inovis;
Proclarity; Shipnow; Tele Atlas North America; TIBCO Software; Transcore;
Vendavo; Vignette; webMethods; and Workplace plc, with whom we have software
license, distribution and strategic relationship agreements; Azerity; Chrome;
KCI Computing; Manhattan Associates; MatrixOne; Mestec; MXI; RivalWatch;
Softface; TIP Technologies; and Vastera, 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. In addition,
Manugistics has entered into agreements with Ayeca; Chemlogix, Nomis Solutions,
and The Rainmaker Group which grant them the right to resell specific
Manugistics products. 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; ILOG; IONA Technologies; MapInfo; Numerical Algorithms Group
(NAG); Progress Software; Quest Software; Recursion Software; and Rogue Wave
Software. We have also entered into written agreements with various companies
located or doing business in Asia, Europe and South America, which agreements
grant those companies the right to resell Manugistics products. We work with leading systems integrators and business strategy and
management consultancies that provide a wide range of consulting expertise such
as implementation of software solutions, process and change management and
strategic business services. We maintain close relationships with major
consulting firms worldwide to extend our delivery and solution capability for
our clients. We have also developed strategic alliances 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
consultancies to provide implementation
and business process assistance to our clients. We have augmented this
with several geographic and regional alliances and cooperate with other
professional services firms on a client-by-client basis. 8




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Clients: Various combinations of our supply chain management and demand and revenue
management software have been licensed by organizations worldwide in industries
such as automotive; chemical & energy; communications; consumer packaged goods;
electronics & high technology; government, aerospace & defense; industrials;
life sciences; retail; third-party logistics; and travel, transportation &
hospitality. We include below a sample of some of our clients that have either
licensed software products from us or our distributors, or purchased support,
consulting, or other services or both or actively used our software during
fiscal 2004. See Sales and Marketing. Automotive
    
    Consumer Packaged Goods
    
    RetailDeere & Co.
    
    Brown & Williamson Tobacco Corp.
    
    Albertsons, Inc.Ford Motor Company
    
    Coca-Cola Bottling Co. Consolidated
    
    Canadian Tire Corp., Ltd.Harley-Davidson, Inc.
    
    Hormel Foods Corp.
    
    DSG Retail LimitedMistubishi Motor Sales of America
    
    Kraft Foods, Inc.
    
    Gebr. Heinemann KGNissan
    
    Labatts Brewing Company
    
    Great Atlantic & Pacific Tea CompanySubaru of America, Inc.
    
    Levi Strauss & Co.
    
    HEB Grocery Company LPMcCormick & Company, Inc.
    
    Radioshack, CorporationChemical & Energy
    
    Nestlé
    
    Target CorporationAirgas, Inc.
    
    Oxford Industries, Inc.
    
    The Limited, Inc.BP .
    
    Remy Cointreau
    
    The TJX CompaniesDuPont
    
    Unilever Home & Personal Care, USA
    
    Toys R Us, Inc.Fuji Photo Film, USA
    
    
    
    Winn-Dixie Stores, Inc.Rohm & Haas
    
    Government, Aerospace
& DefenseVulcan Materials Co.
    
    Boeing Co.
    
    Third-Party LogisticsEDS (NAVTrans)
    
    Agora Europe S.A.Communications & High Technology
    
    Kaman Aerospace
    
    DHL Aviation NV/SAAT&T
    
    
    
    PSA Logistics PTE Ltd.Cisco Systems, Inc.
    
    Industrials
    
    Canadian Pacific Logistics SolutionsFairchild Semiconductor
    
    Hon Industries, Inc.GlobalNetExchange
    
    Pechiney Plastic Packaging
    
    Travel, Transportation
& HospitalityLexmark
    
    
    
    Continental AirlinesON Semiconductor
    
    Life Sciences
    
    Delta Air LinesTexas Instruments Incorporated
    
    AstraZeneca
    
    Great North Eastern RailwayVodafone Ltd.
    
    Pfizer, Inc.
    
    Harrahs Entertainment, Inc.Smith & Nephew
    
    Omni HotelsPrincess CruisesThompson Travel Group
 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 Adexa, Aspen
Technology, DemandTec, The Descartes Systems Group, Evant, Global Logistics
Technologies, i2 Technologies, JDA Software, Khimetrics, Logility, Manhattan
Associates, Mercia, Metreo, Profit Logic, PROS Revenue Management, Rapt, Retek,
Sabre, SAP, Viewlocity and Zilliant. 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, PeopleSoft and SSA Global Technologies. 9




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The principal competitive factors in the markets in which we compete
include product functionality and quality, domain expertise, integration
technologies, product suite integration, breath 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. 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, 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 licenses of
our software products. In consideration of the payment of license fees, we
generally grant nonexclusive, nontransferable, perpetual licenses, which are
primarily business unit, user-specific and geographically restricted. Software
license fee arrangements vary depending upon the type of software product(s)
being licensed and the customers 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 clients business and the
number of users and locations. The amount of software license fees may reach
many millions of dollars for initiatives that are very large in scope and
complexity. Clients may obtain solution support for an annual fee. We have three
levels of support that our customers choose from to best accommodate their
needs: Standard, Premium and Signature. Support fees are calculated on an
escalated scale, based on the level of service chosen and the size of the
related software license fees. Support fees are generally billed annually and
are subject to changes in support list prices. We also provide implementation
services, systems administration, training and hosting of our software
applications and other related services, generally on a time and materials
basis. This allows our clients to determine the level of support or services
appropriate for their needs. Proprietary rights and licenses: We regard our software as proprietary. 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 products.
We distribute our software under software license agreements, which typically
grant clients nonexclusive, nontransferable licenses to our products 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 afford limited protections. Manugistics owns five issued U.S. patents and numerous pending patent
applications (including a number of allowed claims) in both the United States
and in various foreign countries or regions. The latest of these issued U.S.
patents will endure until 2019  with 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 United States and in various foreign countries or regions.
Manugistics trademark registrations will endure until their subject marks
cease to be used or the registrations are otherwise not renewed. Trademark
applications are subject to review by the issuing authority, may be opposed by
private parties, and may not issue. 10




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##### 



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 virtual service providers, the licensed software
    is restricted to the internal operations of our client and to designated users.
    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 2004, 2003 and 2002 fiscal
    years. Employees: As of February 29, 2004, we had 897 full-time regular employees and 204
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: We make available, free of charge at www.manugistics.com, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended,
as soon as reasonably practicable after such material is electronically filed
with or furnished to the SEC. 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 principal accounting
    officer, known as the Code of Ethics. 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. 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. 11




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##### 



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 22 sales, service and product
development offices located in North America, South America, Europe and
Asia/Pacific, pursuant to leases that expire between calendar 2004 and calendar
2018. We believe that our current existing facilities are adequate for our
current needs and suitable additional or substitute space will be available as
needed to accommodate expansion of our operations. We continue to market office
space that has been abandoned in conjunction with restructuring 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. 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. 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
    
    PositionGregory J. Owens
    
    
    44
    
    
    Chairman and Chief Executive OfficerJeremy P. Coote
    
    
    45
    
    
    PresidentJeffrey L. Holmes
    
    
    54
    
    
    Executive Vice President, President of Government, Aerospace
and Defense OperationsRaghavan Rajaji
    
    
    57
    
    
    Executive Vice President and Chief Financial OfficerJames J. Jeter
    
    
    45
    
    
    Senior Vice President, Global MarketingLori
Mitchell-Keller
    
    
    37
    
    
    Senior Vice President, Product Development & StrategyTimothy T. Smith
    
    
    40
    
    
    Senior Vice President, General Counsel and SecretaryJean-Claude Walravens
    
    
    51
    
    
    Senior Vice President, President of European OperationsJeffrey T. Hudkins
    
    
    38
    
    
    Group Vice President, Controller and Chief Accounting Officer
 Mr. Owens has served as Chief Executive Officer and a member of our Board
of Directors since joining Manugistics in April 1999. He has served as Chairman
of the Board of Directors since February 2001. Mr. Owens has also served as
President of the Company from April 1999 through November 2000. From 1997 to
April 1999, Mr. Owens served as the Global Managing Partner for the Accenture
Supply Chain Practice. Mr. Owens has also served as a member of the Board of
Directors of Serena Software, Inc., an enterprise change management software
and services company, since April 2002 and S1 Corporation, a provider of global
enterprise software solutions for financial organizations, since January 2003. Mr. Coote has served as President since joining Manugistics in June 2003.
From November 2001 to June 2003, Mr. Coote served as President of Americas for
Chordiant Software, Inc., a provider of customer relationship management and
enterprise application software. From October 2000 to October 2001, he served
as President of eCal Corporation, a provider of calendaring and scheduling 12




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##### 



communication services. From February 1999 to September 2000, he served as
General Manager at Siebel North America, a customer relationship management
software company. From December 1995 to January 1999, Mr. Coote served as
President of SAP Americas. Mr. Holmes has served as Executive Vice President and President of
Government, Aerospace & Defense Operations since March 2003. From April 2002
through March 2003, Mr. Holmes served as Senior Vice President, Service & Parts
Management and Government, Aerospace & Defense. From September 1999 through
April 2002, Mr. Holmes was Senior Vice President, Government and Public Sector.
From April 1999 to September 1999, he served as Senior Vice President, North
American Sales Operations. From October 1998 to April 1999, he served as Vice
President, Industry Solutions. Mr. Rajaji has served as Executive Vice President and Chief Financial
Officer since December 1999. From September 1995 to December 1999, he served as
Senior Vice President, Chief Financial Officer and Treasurer at BancTec, Inc.,
a provider of hardware and software primarily for the financial services
industry. Mr. Jeter has served as Senior Vice President, Global Marketing since
August 1999. From July 1998 to August 1999, he served as Vice President and
Managing Director of European Operations for Iomega Corporation, a provider of
personal storage solutions for digital information. Ms. Mitchell-Keller has served as Senior Vice President, Product
Development & Strategy since February 2004. 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. From January 1999 to March 2001, Ms. Mitchell-Keller
served as Vice President of Product Marketing. Mr. Smith has served as Senior Vice President, General Counsel and
Secretary from January 2000 through February 2002 and since July 2002. He
served as Vice President and General Counsel for Land Rover North America, Inc.
an automobile importer and distributor, from June 1998 to December 1999. Mr. Walravens has served as Senior Vice President and President of
European Operations since January 2003. From December 1999 to December 2002,
Mr. Walravens was Group Vice President, Southern Europe. From August 1997 to
November 1999, he served as Vice President, Europe, at Numetrix (acquired by JD
Edwards & Company). Mr. Hudkins has served as Group Vice President and Controller since
October 2003. He has served as Chief Accounting Officer since April 2001. From
December 2000 to October 2003, Mr. Hudkins served as Vice President and
Controller. From January 2000 to December 2000, Mr. Hudkins was Vice President,
Controller and Chief Accounting Officer for Talus Solutions, Inc., a privately
held pricing and revenue optimization software company acquired by Manugistics
in December 2000. From May 1995 to December 1999, Mr. Hudkins served in various
accounting and finance positions with Magellan Health Services, Inc., a
publicly held behavioral healthcare company, including serving as Vice
President, Controller and Chief Accounting Officer from May 1998 to December
1999. Mr. Hudkins has resigned from the Company effective the close of business
on May 14, 2004 to take a similar position with another company. Kelly Davis-Stoudt, age 33, the Companys Assistant Controller, has been
appointed by the Board of Directors to serve as Vice President, Controller and
Principal Accounting Officer of the Company effective May 14, 2004. Ms.
Davis-Stoudt has served as the Companys Assistant Controller since April 1999. There are no family relationships among any of the executive officers or
directors of Manugistics Group, Inc. Executive officers of Manugistics Group,
Inc. are elected by the Board of Directors (the Board) on an annual basis and
serve at the discretion of the Board. There is no family relationship between
Ms. Davis-Stoudt and any of the executive officers or directors of Manugistics
Group, Inc. 13




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##### 



PART II Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock, $.002 par value per share, trades on The Nasdaq Stock
Market under the symbol MANU. The following table sets forth the high and low
sales prices in dollars per share for the respective quarterly periods over the
last two fiscal years, as reported in published financial sources. These prices
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions. Fiscal 2004
    
    High
    
    LowFirst Quarter(ended May 31, 2003)
    
    $
    4.95
    
    
    $
    2.25Second Quarter(ended August 31, 2003)
    
    
    6.50
    
    
    
    3.89Third Quarter(ended November 30, 2003)
    
    
    8.15
    
    
    
    4.44Fourth Quarter(ended February 29, 2004)
    
    
    9.10
    
    
    
    5.60
 Fiscal 2003
    
    High
    
    LowFirst Quarter(ended May 31, 2002)
    
    $
    22.75
    
    
    $
    7.50Second Quarter(ended August 31, 2002)
    
    
    8.07
    
    
    
    2.50Third Quarter(ended November 30, 2002)
    
    
    4.50
    
    
    
    1.54Fourth Quarter(ended February 28, 2003)
    
    
    4.30
    
    
    
    2.06
 As of April 30, 2004, there were approximately 597 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 one-year unsecured
revolving credit facility with Silicon Valley Bank (SVB) that is scheduled to
expire on March 30, 2005. We will seek to renew this credit facility before
expiration. 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 be dependent upon our financial condition,
results of operations, capital requirements and such other factors as the Board
may deem relevant and will be subject to the covenants contained in any
outstanding credit facility. See Managements 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. 14




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##### 



The following table provides information regarding our current equity
compensation plans as of February 29, 2004. Share amounts are in thousands. Equity Compensation Plan InformationNumber of securitiesremaining availableNumber of securities to
    
    Weighted-average
    
    for future issuancebe issued upon exercise
    
    exercise price of
    
    under equityPlan Category
    
    of outstanding options
    
    outstanding options
    
    compensation plansEquity compensation
plans approved by
security holders
    
    
    11,259
    
    
    $
    6.55
    
    
    
    6,220Equity compensation
plans not approved
by security holders
    
    
    5,711
    
    
    
    7.51
    
    
    
    Total
    
    
    16,970
    
    
    $
    6.87
    
    
    
    6,220
 Additional information regarding our equity compensation plans can be
found in Note 9 of the Notes to our Consolidated Financial Statements included
elsewhere in this annual report on Form 10-K. In fiscal 2004, the Company issued in total 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 29, 2004 and each of our last eight fiscal
quarters are set forth below. This data should be read in conjunction with our
Consolidated Financial Statements and related notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this annual report on Form 10-K. The selected financial
data for each of the years in the three-year period ended February 29, 2004,
and as of February 28 or 29, 2004 and 2003, 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 or 29, 2002, 2001 and 2000,
the years ended February 28 or 29, 2001 and 2000, 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. Subsequent to the release of the financial information included in our
earnings press release for the fourth quarter of fiscal 2004 furnished to the
Securities and Exchange Commission on Form 8-K on March 31, 2004, the Company,
on May 7, 2004, agreed to settle a lawsuit initiated in calendar 2002 involving
a dispute arising out of a proposed business venture. The Company agreed to
pay $0.9 million in full settlement of the dispute and, in accordance with
Statement of Financial Accounting Standards No. 5 (SFAS 5), such amount has
been accrued as of February 29, 2004. Prior to the settlement date, based on
the facts, circumstances and applicable law, the Company had determined the
likelihood that future events would confirm a loss related to this dispute was
remote and, in accordance with SFAS 5, no accrual was recorded. For further
detail see Note 20 in the Notes to our Consolidated Financial Statements
included elsewhere in this annual report on Form 10-K. 15




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##### 



Fiscal Year Ended February 28 or 29,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share
          and number of employees data)STATEMENT OF OPERATIONS DATA:Revenue:Software
    
    $
    73,766
    
    
    $
    74,899
    
    
    $
    129,772
    
    
    $
    139,316
    
    
    $
    60,421Support
    
    
    86,593
    
    
    
    84,075
    
    
    
    73,852
    
    
    
    55,315
    
    
    
    45,496Services
    
    
    73,254
    
    
    
    102,144
    
    
    
    106,522
    
    
    
    73,333
    
    
    
    46,516Reimbursed expenses
    
    
    9,432
    
    
    
    11,268
    
    
    
    9,741
    
    
    
    8,199
    
    
    
    7,499Total revenue
    
    
    243,045
    
    
    
    272,386
    
    
    
    319,887
    
    
    
    276,163
    
    
    
    159,932Operating expenses:Cost of revenue:Cost of software
    
    
    15,851
    
    
    
    19,127
    
    
    
    21,144
    
    
    
    19,146
    
    
    
    11,811Amortization of acquired technology
    
    
    14,210
    
    
    
    13,623
    
    
    
    9,168
    
    
    
    1,122
    
    
    
    147Cost of support and services
    
    
    80,306
    
    
    
    98,055
    
    
    
    92,083
    
    
    
    59,149
    
    
    
    43,783Cost of reimbursed expenses
    
    
    9,432
    
    
    
    11,268
    
    
    
    9,741
    
    
    
    8,199
    
    
    
    7,499Sales and marketing
    
    
    66,061
    
    
    
    95,627
    
    
    
    120,437
    
    
    
    115,610
    
    
    
    61,439Product development
    
    
    36,233
    
    
    
    63,055
    
    
    
    70,477
    
    
    
    40,830
    
    
    
    29,150General and administrative
    
    
    25,060
    
    
    
    27,885
    
    
    
    28,522
    
    
    
    22,925
    
    
    
    15,837Amortization of intangibles
    
    
    4,674
    
    
    
    3,866
    
    
    
    86,279
    
    
    
    15,082
    
    
    
    2,290Goodwill impairment charge
    
    
    
    
    
    
    96,349
    
    
    
    
    
    
    
    
    
    
    
    Purchased research and development
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    9,724
    
    
    
    Restructuring and lease abandonment charges (benefit)
    
    
    18,627
    
    
    
    19,184
    
    
    
    6,612
    
    
    
    
    
    
    
    (1,506
    )Non-cash stock option compensation expense (benefit)
    
    
    1,799
    
    
    
    3,426
    
    
    
    (3,111
    )
    
    
    12,801
    
    
    
    IRI settlement
    
    
    
    
    
    
    
    
    
    
    3,115
    
    
    
    
    
    
    
    Total operating expenses
    
    
    272,253
    
    
    
    455,265
    
    
    
    444,467
    
    
    
    304,588
    
    
    
    170,450Loss from operations
    
    
    (29,208
    )
    
    
    (182,879
    )
    
    
    (124,580
    )
    
    
    (28,425
    )
    
    
    (10,518
    )Debt conversion expense
    
    
    (59,823
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other (expense) income, net
    
    
    (13,455
    )
    
    
    (7,942
    )
    
    
    (14,638
    )
    
    
    2,899
    
    
    
    1,389Loss before income taxes
    
    
    (102,486
    )
    
    
    (190,821
    )
    
    
    (139,218
    )
    
    
    (25,526
    )
    
    
    (9,129
    )Provision for (benefit from) income taxes
    
    
    1,314
    
    
    
    21,418
    
    
    
    (24,060
    )
    
    
    2,552
    
    
    
    (184
    )Net loss
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (115,158
    )
    
    $
    (28,078
    )
    
    $
    (8,945
    )Basic and diluted loss per share
    
    $
    (1.43
    )
    
    $
    (3.04
    )
    
    $
    (1.69
    )
    
    $
    (0.48
    )
    
    $
    (0.16
    )BALANCE SHEET AND OTHER DATA:Cash, cash equivalents and marketable securities
    
    $
    146,300
    
    
    $
    137,735
    
    
    $
    233,060
    
    
    $
    300,308
    
    
    $
    51,547Working capital
    
    
    125,534
    
    
    
    119,791
    
    
    
    236,951
    
    
    
    300,668
    
    
    
    36,831Long-term investments
    
    
    8,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    185,501
    
    
    
    187,438
    
    
    
    269,998
    
    
    
    335,651
    
    
    
    6,581Acquired technology and customer relationships, net of
accumulated amortization
    
    
    43,007
    
    
    
    61,889
    
    
    
    54,206
    
    
    
    45,385
    
    
    
    431Total assets
    
    
    498,081
    
    
    
    529,373
    
    
    
    722,640
    
    
    
    847,261
    
    
    
    151,907Convertible debt
    
    
    175,500
    
    
    
    250,000
    
    
    
    250,000
    
    
    
    250,000
    
    
    
    Total stockholders equity
    
    
    216,860
    
    
    
    172,082
    
    
    
    372,807
    
    
    
    470,321
    
    
    
    86,718Cash flows from operating activities
    
    
    6,825
    
    
    
    (30,675
    )
    
    
    (15,899
    )
    
    
    15,514
    
    
    
    12,252Employees (period end)
    
    
    897
    
    
    
    1,133
    
    
    
    1,384
    
    
    
    1,451
    
    
    
    866
 16




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##### 



1st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th QuarterFiscal 2004
    
    (in thousands, except per share data)RevenueSoftware
    
    $
    19,909
    
    
    $
    17,802
    
    
    $
    17,079
    
    
    $
    18,976Support
    
    
    21,469
    
    
    
    21,085
    
    
    
    22,195
    
    
    
    21,844Services
    
    
    21,503
    
    
    
    18,414
    
    
    
    18,332
    
    
    
    15,005Reimbursed expenses
    
    
    2,760
    
    
    
    2,406
    
    
    
    2,291
    
    
    
    1,975Total revenue
    
    
    65,641
    
    
    
    59,707
    
    
    
    59,897
    
    
    
    57,800Cost of software
    
    
    4,416
    
    
    
    4,449
    
    
    
    3,695
    
    
    
    3,291Cost of support and services
    
    
    23,512
    
    
    
    20,940
    
    
    
    18,450
    
    
    
    17,404Cost of reimbursed expenses
    
    
    2,760
    
    
    
    2,406
    
    
    
    2,291
    
    
    
    1,975Sales and marketing
    
    
    16,849
    
    
    
    16,034
    
    
    
    16,326
    
    
    
    16,852Product development
    
    
    11,293
    
    
    
    8,811
    
    
    
    8,049
    
    
    
    8,080General and administrative
    
    
    6,349
    
    
    
    5,897
    
    
    
    5,912
    
    
    
    6,902Restructuring, lease
abandonment, goodwill
impairment and
acquisition-related expenses
(1)
    
    
    15,438
    
    
    
    5,382
    
    
    
    5,011
    
    
    
    13,479Operating (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
    )
 1st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th QuarterFiscal 2003
    
    (in thousands, except per share data)RevenueSoftware
    
    $
    24,516
    
    
    $
    18,112
    
    
    $
    14,084
    
    
    $
    18,187Support
    
    
    20,209
    
    
    
    21,246
    
    
    
    20,412
    
    
    
    22,208Services
    
    
    26,865
    
    
    
    27,617
    
    
    
    25,132
    
    
    
    22,530Reimbursed expenses
    
    
    3,010
    
    
    
    2,954
    
    
    
    2,736
    
    
    
    2,568Total revenue
    
    
    74,600
    
    
    
    69,929
    
    
    
    62,364
    
    
    
    65,493Cost of software
    
    
    6,238
    
    
    
    4,892
    
    
    
    4,365
    
    
    
    3,632Cost of support and services
    
    
    25,821
    
    
    
    25,281
    
    
    
    23,707
    
    
    
    23,246Cost of reimbursed expenses
    
    
    3,010
    
    
    
    2,954
    
    
    
    2,736
    
    
    
    2,568Sales and marketing
    
    
    30,978
    
    
    
    24,277
    
    
    
    20,593
    
    
    
    19,779Product development
    
    
    17,532
    
    
    
    16,681
    
    
    
    14,095
    
    
    
    14,747General and administrative
    
    
    7,190
    
    
    
    7,092
    
    
    
    7,056
    
    
    
    6,547Restructuring, lease
abandonment, goodwill
impairment and
acquisition-related expenses
(1)
    
    
    8,640
    
    
    
    14,263
    
    
    
    13,494
    
    
    
    103,851Operating loss
    
    
    (24,809
    )
    
    
    (25,511
    )
    
    
    (23,682
    )
    
    
    (108,877
    )Net loss
    
    
    (27,081
    )
    
    
    (47,717
    )
    
    
    (26,003
    )
    
    
    (111,438
    )Basic and diluted loss per share
    
    ($
    0.39
    )
    
    ($
    0.68
    )
    
    ($
    0.37
    )
    
    ($
    1.59
    )
 (1) Restructuring, lease abandonment, goodwill impairment and acquisition-related expenses include amortization of intangibles and acquired technology, non-cash stock
option compensation expense, goodwill impairment charges, restructuring and lease abandonment charges and purchased research and development. 17




---



##### 



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. Forward Looking Statements The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with 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 Impact Future Results. Executive Summary The following discussion is provided to allow the reader to have a better
understanding of our operating results for our fiscal year ended February 29,
2004, including (i) brief discussion of our business and products, (ii)
business environment and factors that impacted our financial performance in
fiscal 2004, (iii) summary of financial performance and key metrics for fiscal
2004 and (iv) outlook for fiscal 2005. 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, the section
titled, Factors that May Affect Future Results and our audited consolidated
financial statements, which are included in Item 15 of this annual report on
Form 10-K. Subsequent to the release of the financial information included in our
earnings press release for the fourth quarter of fiscal 2004 furnished to the
Securities and Exchange Commission on Form 8-K on March 31, 2004, the Company,
on May 7, 2004, agreed to settle a lawsuit initiated in calendar 2002 involving
a dispute arising out of a proposed business venture. The Company agreed to
pay $0.9 million in full settlement of the dispute and, in accordance with
Statement of Financial Accounting Standards No. 5 (SFAS 5), such amount has
been accrued as of February 29, 2004. Prior to the settlement date, based on
the facts, circumstances and applicable
law, the Company had determined the likelihood that future events would
confirm a loss related to this dispute was remote and, in accordance with SFAS
5, no accrual was recorded. For further detail see Note 20 in the Notes to our
Consolidated Financial Statements included elsewhere in this annual report on
Form 10-K. Overview  Business and Products We are a leading global provider of demand and supply chain management
software. We have a solutions-based approach to client delivery  selling
configured sets of our software products that address the specific demand and
supply chain business processes that our clients want to improve. Our software
enables companies to lower operating costs, improve customer service, increase
revenue, enhance profitability and accelerate revenue and earnings growth by
combining the proven cost-reducing power of our supply chain management
software solutions with the revenue-enhancing capability of our demand and
revenue management software solutions. Our software does this by creating
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 and solutions delivery approach provide additional benefits by
providing businesses with the ability to simultaneously optimize cost and
revenue to enhance profitability on an enterprise-wide basis. These software
solutions integrate pricing, forecasting and operational planning and execution
to help companies enhance margins across their enterprises and extended trading
networks. In addition, our software products help our customers drive more
benefits from their existing investments made in information technology
provided by other software vendors, such as ERP applications, and help ensure
the security and integrity of their global supply chains. Our supply chain management software helps companies plan, optimize and
execute their supply chain processes. These processes include manufacturing,
distribution and service operations and collaboration with a companys extended
trading network of suppliers and customers. Our demand and revenue management
software helps optimize a companys demand chain, including pricing and
promotions to all customers through all channels, with the aim of balancing the
trade-offs between profitability and other strategic objectives such as market
share. We also provide strategic consulting, implementation and customer
support services to our clients as part of our overall solution. 18




---



##### 



Business Environment and Factors Impacting our Fiscal 2004 Results Our operating results for fiscal 2004 were affected by several broad-based
factors including global macro-economic conditions and cautious capital
spending by corporations, especially for certain information technology related
items, such as enterprise application software. This represented a continuation
of the challenging market conditions faced by us and other enterprise
application software companies in fiscal 2002 and fiscal 2003. Over the past
three fiscal years, we have faced challenges in our ability to stabilize
revenue and operating performance and to expand market share as global economic
conditions resulted in deterioration in the markets for our products and
services. As a result, organizations in our target markets intensified their
efforts to identify and realize potential cost savings, in part, by sharply
restricting their software procurement to well-defined current needs. In
addition, in the years preceding the global economic slowdown, many
corporations made capital expenditures in anticipation of future growth that
did not materialize, thereby reducing their current capital expenditure needs. In response to these weak economic conditions, we enacted a number of
cost containment and cost reduction measures over the past two years to
better align our cost structure with expected revenue, including:  
    
    reducing our direct employee workforce by 41% across the
organization, from a peak of 1,529 employees at May 31, 2002 to 897
employees at February 29, 2004;
    
    reducing our office space, consistent with our reduced
employee headcount; and
    
    increasing the proportion of our product development work
performed by third party contractors in India in order to take
advantage of cost efficiencies associated with Indias lower wage
scale. The following is a summary of some of the key external factors impacting
our operating performance during fiscal 2004: Economy We believe that our operating results for any time period are
significantly affected by global macro-economic conditions. Beginning late in
calendar 2001 through the first half of calendar 2003, global economic
conditions, especially in the United States and Europe, deteriorated or
stabilized at depressed levels. Further, we believe that geopolitical
uncertainties related to the war on terrorism and hostilities in the Middle
East exacerbated the general cautiousness of corporations to embark on major
capital
spending initiatives in the face of unprecedented uncertainties. During
the second half of our fiscal 2004, economic conditions began to show signs
of modest improvement. Our operating results in fiscal 2004 mirrored the timing of economic
recovery. For instance, our software revenue increased compared to the prior
year quarter in the third and fourth quarters of fiscal 2004, compared to
year over year declines in the first two quarters of fiscal 2004. Capital Spending Environment According to the Bureau of Economic Analysis of the U.S. Department of
Commerce, information technology capital spending (which includes computer
hardware and software) increased 42 consecutive years from 1959  2000 and
then declined in both calendar years 2001 and 2002 by approximately 7% and
4%, respectively  the first consecutive annual declines in information
technology capital spending ever. The same agency reports that information
technology capital spending increased by approximately 10% during calendar
2003 with progressive improvement in each calendar quarter. We believe it is
still too early to know whether the recent improvement in general economic
conditions and the capital spending environment will continue. 19




---



##### 



Summary of Fiscal 2004 Operating Results and Financial Metrics As we entered fiscal 2004, market conditions continued to be
challenging. 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 2004 than in past years. We have not lost any major customers or
contracts in recent quarters that had a negative material impact on revenue. Our cost containment and cost reduction measures enacted in fiscal 2003
and fiscal 2004 have lessened the adverse impact on our financial performance
of our declining revenue resulting from sustained depressed levels of capital
spending on enterprise application software. From the fiscal year ended
February 28, 2003 to the fiscal year ended February 29, 2004, our employee
workforce decreased from 1,133 employees to 897 employees, or 20.8% across
the organization, while total revenue declined 10.8% compared to the same
period. Key Financial Metrics  Fiscal 2004 Despite the challenging market conditions faced by the Company during fiscal
2004, we have improved many of our key financial metrics and performance
indicators, particularly during the second half of fiscal 2004, such as
software revenue compared to the second half of fiscal 2003, revenue per
employee and our financial condition and liquidity. Year Ended February 28/29,
    
    Year Ended February 29, 20042003
    
    2004
    
    Q1
    
    Q2
    
    Q3
    
    Q4(in thousands, except number of employees)Revenue:Software
    
        $
    74,899
    
    
    $
    73,766
    
    
    $
    19,909
    
    
    $
    17,802
    
    
    $
    17,079
    
    
    $
    18,976Support
    
    
    84,075
    
    
    
    86,593
    
    
    
    21,469
    
    
    
    21,085
    
    
    
    22,195
    
    
    
    21,844Services & reimbursed expenses
    
    
    113,412
    
    
    
    82,686
    
    
    
    24,263
    
    
    
    20,820
    
    
    
    20,623
    
    
    
    16,980Total revenue
    
    
    272,386
    
    
    
    243,045
    
    
    
    65,641
    
    
    
    59,707
    
    
    
    59,897
    
    
    
    57,800Operating expenses and employee headcount:Restructuring, lease abandonment, goodwill impairment and acquisition-
related expenses (1)
    
    
    140,248
    
    
    
    39,310
    
    
    
    15,438
    
    
    
    5,382
    
    
    
    5,011
    
    
    
    13,479All other operating expenses (2)
    
    
    315,017
    
    
    
    232,943
    
    
    
    65,179
    
    
    
    58,537
    
    
    
    54,723
    
    
    
    54,504Total operating expenses
    
    
    455,265
    
    
    
    272,253
    
    
    
    80,617
    
    
    
    63,919
    
    
    
    59,734
    
    
    
    67,983Total employees (period end)
    
    
    1,133
    
    
    
    897
    
    
    
    1,039
    
    
    
    971
    
    
    
    943
    
    
    
    897Total average employees
    
    
    1,336
    
    
    
    979
    
    
    
    1,069
    
    
    
    990
    
    
    
    952
    
    
    
    905Total revenue per average employees
    
        $
    204
    
    
        $
    248
    
    
        $
    61
    
    
        $
    60
    
    
        $
    63
    
    
        $
    64Financial condition, liquidity and capital structureCash, cash equivalents, marketable securities and long-term investments
    
        $
    137,735
    
    
        $
    155,299
    
    
        $
    143,374
    
    
        $
    143,888
    
    
        $
    137,060
    
    
        $
    155,299Convertible debt
    
    
    250,000
    
    
    
    175,500
    
    
    
    250,000
    
    
    
    250,000
    
    
    
    227,500
    
    
    
    175,500Total stockholders equity
    
    
    172,082
    
    
    
    216,860
    
    
    
    155,657
    
    
    
    148,660
    
    
    
    173,449
    
    
    
    216,860Common shares outstanding (period end)
    
    
    70,104
    
    
    
    81,973
    
    
    
    70,114
    
    
    
    70,549
    
    
    
    74,833
    
    
    
    81,973Cash flows from operating activities
    
    
    (30,675
    )
    
    
    6,825
    
    
    
    (229
    )
    
    
    2,649
    
    
    
    (11,730
    )
    
    
    16,135
  (1)
    
    Includes restructuring charges, lease abandonment charges and
goodwill impairment charges plus acquisition-related expenses such as
amortization of acquired technology and intangibles, non-cash stock
option-based compensation expense and purchased research and development
charges.  (2)
    
    Includes cost of software, cost of support and services, cost of
reimbursed expenses, sales and marketing, product development and
general and administrative costs. 20




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##### 



The following is a brief discussion of the above financial metrics and
analysis of the reasons for the change between fiscal 2003 and fiscal 2004
and recent trends. Software revenue Our software revenue stabilized during fiscal 2004, declining modestly by
1.5% during fiscal 2004 to $73.8 million. The following table highlights some
of the significant trends impacting our software revenue: AverageSignificant
    
    Selling Price
    
    SoftwareSoftware
    
    (ASP)
    
    Transactions $1.0Quarter Ended
    
    Transactions (1)
    
    (in 000s)
    
    Million or GreaterMay 31, 2002
    
    
    21
    
    
    $
    1,101
    
    
    
    8August 31, 2002
    
    
    27
    
    
    
    614
    
    
    
    4November 30, 2002
    
    
    22
    
    
    
    596
    
    
    
    3February 28, 2003
    
    
    19
    
    
    
    896
    
    
    
    4May 31, 2003
    
    
    14
    
    
    
    1,279
    
    
    
    5August 31, 2003
    
    
    27
    
    
    
    556
    
    
    
    6November 30, 2003
    
    
    31
    
    
    
    513
    
    
    
    4February 29, 2004
    
    
    27
    
    
    
    654
    
    
    
    3Fiscal 2003  Total
    
    
    89
    
    
    
    785
    
    
    
    19Fiscal 2004  Total
    
    
    99
    
    
    
    672
    
    
    
    18
  (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 2003 and 2004 is as follows: Year Ended February 28/29,2003
    
    2004Government, Aerospace and Defense
    
    
    14.3
    %
    
    
    30.7
    %Consumer Packaged Goods
    
    
    35.2
    %
    
    
    16.8
    %Retail
    
    
    8.8
    %
    
    
    14.9
    %Communications and High Technology
    
    
    14.5
    %
    
    
    7.5
    %Other
    
    
    27.2
    %
    
    
    30.1
    %100.0
    %
    
    
    100.0
    %
 The previous tables indicate the following trends impacting our software revenue over the past two fiscal years:  
    
    The Company experienced three consecutive quarters of a declining
number of significant software transactions consummated beginning with
the quarter ended November 30, 2002 through the quarter ended May 31,
2003. We believe this time period represented the low point in demand
for our software products as the capital spending environment for
enterprise application software had not yet improved to levels
consistent with the general economic recovery during that same time
period. During the final three quarters of fiscal 2004, the number of
significant software transactions consummated increased significantly
compared to the previous three quarters to more normalized levels.  
    
    The average selling price of software has been relatively stable
during the past seven quarters. Excluding the quarters ended February
28, 2003 and May 31, 2003, ASP has ranged from $513,000 to $654,000.
The quarters ended February 28, 2003 and May 31, 2003 included
software revenue from installments under a large multi-year government
contract. 21




---



##### 




    
    The concentration of software revenue from the Government, Aerospace
and Defense Sector increased significantly in fiscal 2004 as a result
of (i) continued spending by the U.S. 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 Western Data Systems of Nevada, Inc.
(WDS) in April 2002.  
    
    Total significant software license transactions
consummated increased by 11.2% in fiscal 2004
compared to fiscal 2003. This is indicative of a
modestly improving capital spending environment, as
more clients are engaged in software initiatives.  
    
    ASP for software declined 14.4% during fiscal 2004
compared to fiscal 2003. As previously noted,
customers are generally licensing fewer software
modules than in past years or expanding the scope of
use of previously licensed products, resulting in a
lower ASP. Support revenue Our support revenue increased 3.0% in fiscal 2004 to $86.6 million due to
support renewal rates in excess of 90% among our existing client base and new
support agreements entered into in conjunction with new software license
agreements. Services and reimbursed expense revenue Our services and reimbursed expense revenue decreased 27.1% in fiscal 2004 to
$82.7 million, primarily due to the decline in software revenue of 42.3% in
fiscal 2003 and the resulting lag effect on services revenue that began during
the second half of fiscal 2003. Other factors that affected services revenue
included reduced hourly billing rates and an increase in implementation work
performed by customers and/or other consulting organizations. Total revenue per employee Our total revenue per employee increased by 21.6% to $248,000 in fiscal 2004
(calculated as total revenue for the year divided by average employees for the
year) and improved steadily during fiscal 2004 to $255,000 on an annualized
basis during the fourth quarter (calculated as total revenue for the quarter
divided by average employees for the quarter multiplied by four). These
increases were primarily due to reduced employee headcount and improved
productivity from revenue generating employees (sales, support and
implementation services personnel). Total operating expenses Our total operating expenses declined by 40.2% during fiscal 2004 to $272.3
million. Restructuring, lease abandonment, goodwill impairment and
acquisition-related expenses declined 72.0% during fiscal 2004 to $39.3
million. This decrease was the result of the absence of goodwill impairment
charges in fiscal 2004 ($96.3 million in fiscal 2003). All other operating
expenses declined 26.1% during fiscal 2004 to $232.9 million. This decrease was
primarily the result of a 26.7% decrease in average employee headcount as a
result of the 2003 and 2004 restructurings and normal attrition. Other notable
cost decreases included reduced office space costs as a result of the 2003 and
2004 restructurings, lower outside contractor costs in both the product
development and consulting services areas and lower bad debt expense
(See  Critical Accounting Policies  Allowance for Doubtful Accounts). All other
operating expenses declined sequentially each quarter during fiscal 2004 as a
result of continuing cost reduction and cost containment measures. Financial condition, liquidity and capital structure During fiscal 2004, we made significant improvements in our financial
condition, liquidity and capital structure. Highlights include the following:  
    
    Convertible debt balance was reduced by $74.5 million to $175.5
million through the issuance of 9.7 million shares of common stock in
debt-for equity exchange transactions. This increased stockholders
equity by $74.5 million.
    
    Cash, cash equivalents, marketable securities and long-term
investments increased by $17.6 million to $155.3 million primarily as a
result of positive cash flows from operations and eliminating
restricted cash by negotiating more favorable credit facility terms
with a new commercial lender.
    
    We reduced our convertible debt to equity ratio from 1.5:1 at
February 28, 2003 to 0.8:1 at February 29, 2004 primarily as a result
of debt-for equity exchange transactions described above. 22




---



##### 



Outlook  Fiscal 2005 As we enter fiscal 2005, the business environment appears to be stable to
modestly improving. Uncertainty in macro-economic conditions and the capital
spending environment persists to some extent, making it difficult to precisely
predict the demand for our software and services. While we are cautiously
optimistic that economic conditions will continue to improve and result in
stronger information technology capital spending environment during the second
half of our fiscal 2005, it is still too early to predict what impact this may
have on our revenue and operating performance. We expect all other operating expenses for the first half of fiscal 2005 to
be similar to the second half of fiscal 2004. Our expectations regarding
expense levels may vary depending on future revenue levels. If demand for our
products and services increases during the second half of fiscal 2005, we would
expect all other operating expenses to increase from recent levels as a
result of (i) increases in employee compensation through merit increases and
incentive payments, under certain circumstances, (ii) increases in number of
employees to meet increased demand for software and implementation services and
(iii) increases in expenses that vary directly with revenue, such as sales
commissions, third-party royalties and bad debt expense. Since a significant
portion of our software license agreements close in the latter part of each
quarter, management may not be able to adjust our cost structure in the
short-term to respond to lower than expected revenue, which may adversely
impact our operating performance in the future. We expect that our other expenses, net (primarily interest expense), will
decrease approximately $3.0 million in fiscal 2005 from fiscal 2004 levels as a
result of reducing our convertible debt balance by $74.5 million during the
second half of fiscal 2004. Our annual interest expense was reduced by $3.7
million as a result of reducing our convertible debt balance to $175.5 million
from $250.0 million. During fiscal 2004, we reported 72.7 million basic and diluted weighted shares
outstanding for our loss per share calculation. As a result of the convertible
debt-for-equity exchange transactions, we had 82.0 million shares outstanding
as of February 29, 2004. Accordingly, we expect our basic and diluted weighted
shares outstanding to increase to at least 82.0 million during fiscal 2005, or
approximately 13%. During April 2004, we signed a lease termination agreement with the landlord of
our facility in metropolitan Chicago, Illinois. This space was substantially
unused as a result of past restructuring activity. The lease termination
agreement required us to pay approximately $3.3 million in cash at signing in
exchange for terminating our lease agreement that would have expired in fiscal
2009. As of February 29, 2004, based on managements best estimate of the
remaining liability, the Company had accrued restructuring obligations of
approximately $6.1 million related to this facility. We will record a
restructuring benefit of approximately $2.8 million during the quarter ended
May 31, 2004 as a result of the lease termination agreement. Results of Operations The following table includes the consolidated statements of operations
data for each of the years in the three-year period ended February 29, 2004
expressed as a percentage of revenue: 23




---



##### 



Fiscal Year Ended February 28 or 29,2004
    
    2003
    
    2002Revenue:Software
    
    
    30.4
    %
    
    
    27.5
    %
    
    
    40.6
    %Support
    
    
    35.6
    %
    
    
    30.9
    %
    
    
    23.1
    %Services
    
    
    30.1
    %
    
    
    37.5
    %
    
    
    33.3
    %Reimbursed expenses
    
    
    3.9
    %
    
    
    4.1
    %
    
    
    3.0
    %Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Cost of software
    
    
    6.5
    %
    
    
    7.0
    %
    
    
    6.6
    %Amortization of acquired technology
    
    
    5.9
    %
    
    
    5.0
    %
    
    
    2.9
    %Cost of services and support
    
    
    33.0
    %
    
    
    36.0
    %
    
    
    28.8
    %Cost of reimbursed expenses
    
    
    3.9
    %
    
    
    4.1
    %
    
    
    3.0
    %Sales and marketing
    
    
    27.2
    %
    
    
    35.1
    %
    
    
    37.6
    %Product development
    
    
    14.9
    %
    
    
    23.1
    %
    
    
    22.0
    %General and administrative
    
    
    10.3
    %
    
    
    10.2
    %
    
    
    8.9
    %Amortization of intangibles
    
    
    1.9
    %
    
    
    1.4
    %
    
    
    27.0
    %Goodwill impairment charge
    
    
    
    
    
    
    35.4
    %
    
    
    Purchased research and development
and acquisition-related expenses
    
    
    
    
    
    
    1.4
    %
    
    
    Restructuring and lease abandonment
charges
    
    
    7.7
    %
    
    
    7.0
    %
    
    
    2.1
    %Non-cash stock compensation expense
(benefit)
    
    
    0.7
    %
    
    
    1.3
    %
    
    
    (1.0
    )%IRI settlement
    
    
    
    
    
    
    
    
    
    
    1.0
    %Total operating expenses
    
    
    112.0
    %
    
    
    167.1
    %
    
    
    138.9
    %Loss from operations
    
    
    (12.0
    )%
    
    
    (67.1
    )%
    
    
    (38.9
    )%Debt conversion expense
    
    
    (24.6
    )%
    
    
    
    
    
    
    Other expense  net
    
    
    (5.5
    )%
    
    
    (2.9
    )%
    
    
    (4.6
    )%Loss before income taxes
    
    
    (42.2
    )%
    
    
    (70.1
    )%
    
    
    (43.5
    )%Provision for (benefit from) from income taxes
    
    
    0.5
    %
    
    
    7.9
    %
    
    
    (7.5
    )%Net loss
    
    
    (42.7
    )%
    
    
    (77.9
    )%
    
    
    (36.0
    )%
 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 (benefit) as
follows (in thousands): Fiscal Year EndedFebruary 28 or 29,2004
    
    2003
    
    2002Cost of services and support
    
    $
    865
    
    
    $
    1,673
    
    
    $
    52Sales and marketing
    
    
    456
    
    
    
    931
    
    
    
    (1,794
    )Product development
    
    
    140
    
    
    
    298
    
    
    
    (1,310
    )General and administrative
    
    
    338
    
    
    
    524
    
    
    
    (59
    )$
    1,799
    
    
    $
    3,426
    
    
    $
    (3,111
    )
 See Operating Expenses: Non-Cash Stock Compensation Expense (Benefit) for
further detail. Use of Estimates and Critical Accounting Policies The accompanying discussion and analysis of our financial condition and
results of operations are based upon our audited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires that we make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from the
estimates made by management with respect to these and other items that require
managements estimates. 24




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##### 



We have identified the accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
managements judgments and estimates. These 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,
restructuring and lease abandonment related expenses and stock-based
compensation plans. These policies, and our procedures related to these
policies, are described in detail below. In addition, please refer to the
audited financial statements and notes 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 software license revenue, services revenue,
support revenue and reimbursed expenses. Software license revenue is
recognized in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue
Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions (SOP 98-9"), and
Securities and Exchange Commission (SEC) Staff Accounting Bulletins 101 and
104, Revenue Recognition (SAB 101, SAB 104). Software license revenue,
services revenue and support revenue are generally recognized when the four
basic criteria of SOP 97-2, SAB 101 and SAB 104 are met as follows:  
    
    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 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 12 months of the agreement date. If the arrangement fee
is not fixed or determinable, we recognize the revenue as amounts
become due and payable. We consider services fees to be fixed or
determinable if the services fee or rates for time and material
contracts are not subject to refund or adjustment.  
    
    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. Fees are allocated to the various elements of software
license agreements using the residual method, based on vendor specific
objective evidence (VSOE) of fair value of any undelivered elements of the
arrangement. Each software license arrangement requires careful review to
identify each individual element and to assess VSOE of fair value of those
elements to determine the proper amount of software revenue to be recorded.
VSOE of fair value for support services is provided by the renewal rate. VSOE
of fair value for implementation services is based upon separate sales of
services at stated hourly rates by level of consultant. Under the residual
method, we defer revenue for the fair value of its undelivered elements based
on 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 101 and 104 have been met. 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. 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
Performance of Construction Type and Certain Production Type Contracts. In
these cases, software revenue is deferred and recognized based on labor hours
incurred to date compared to total estimated labor hours for the contract. 25




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##### 



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
incurred to date to total estimated labor hours. 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. Recently, the proportion of services engagements under fixed-fee
arrangements has increased relative to prior periods. We expect the proportion
of services engagements under fixed-fee arrangements to fluctuate in future
periods. Accordingly, our reported revenue and operating performance may be
subject to increased levels of estimates and uncertainties in future periods. 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. Customer support is generally
billed annually, initially recorded as deferred revenue and recognized as
support revenue ratably over the support period. Allowance for Doubtful Accounts For each of the three years in the period ended February 29, 2004, our
provision for doubtful accounts has ranged between approximately 0.1% and 2.2%
of total revenue. For fiscal 2004, our provision for doubtful accounts was 0.1%
of revenue. The decrease as a percentage of revenue from prior periods
resulted from improved collections experience, improved write-off history and
improved accounts receivable aging. We initially record the provision for
doubtful accounts based on our historical experience of write-offs and adjust
our allowance for doubtful accounts at the end of each reporting period based
on a detailed assessment of our accounts receivable and related credit risks.
In estimating the allowance for doubtful accounts, management considers the age
of the accounts receivable, historical write-off experience, the
credit-worthiness of the customer, the economic conditions of the customers
industry and general economic conditions, among other factors. Should any of
these factors change, the estimates made by management will also change, which
could affect the level of the Companys future provision for doubtful accounts.
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 2004, our provision
for doubtful accounts would change by approximately $2.4 million annually for a
1% change in proportion of 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. 26




---



##### 



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 $9.9 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 (increase or decrease) would change our
annual operating expenses by approximately $(1.9) million to $3.2 million. Valuation of Long-Lived Assets, Including Intangible Assets and Impairment
Review of Goodwill We assess the impairment of long-lived assets, including property and
equipment, identifiable intangible assets and software developed for internal
use, whenever events or changes in circumstances indicate that the carrying
value may not be fully recoverable. When we determine that the carrying value
of such assets may not be recoverable, we assess recoverability based on the
undiscounted cash flows expected to be generated by the related asset or asset
group. If we determine that a long-lived asset or asset group is not
recoverable, we record an impairment loss equal to the difference between the
carrying amount of the asset or asset group and the fair value of the asset or
asset group. We generally measure fair value of an asset or asset group based
on projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in our current business
model. In addition, at each reporting date, we compare the net realizable value
of capitalized software development costs to the unamortized capitalized costs.
To the extent the unamortized capitalized costs exceed the net realizable
value, the excess amount is written off. Other identifiable intangible assets,
including acquired technology, customer relationships and software developed
for internal use, are amortized over periods ranging from two to seven years. Evaluating long-lived assets for impairment involves judgments as to when
an asset may potentially be impaired. We consider there to be a risk of
impairment if there is a significant decrease in the market value of an asset,
if there is a significant change in the extent or intended use of an asset, or
if actual or projected operating losses indicate continuing losses from an
asset used to produce revenue. During fiscal 2002, 2003 and 2004, we recorded
impairment losses for property and equipment and software developed for
internal use associated with restructuring and lease abandonment activities.
See Restructuring and Lease Abandonment Related Expenses in this section for
further detail and Note 15 in the Notes to our Consolidated Financial
Statements included elsewhere in this annual report on Form 10-K. We have not
recorded any impairment losses associated with identifiable intangible assets
during the last three fiscal years. As of February 29, 2004 our net book value of long-lived assets, consisted
of the following (in thousands): Property and equipment
    
    $
    21,632Software development costs
    
    
    14,224Software developed for internal use
    
    
    2,966Goodwill
    
    
    185,501Acquired technology
    
    
    27,023Customer relationships
    
    
    15,984Total
    
    $
    267,330
 The estimated economic useful lives of our long-lived assets are subject
to change in future periods based upon the intended use of the asset or period
of time revenues are expected to be generated. During the quarter ended
February 29, 2004, we reduced the useful life of our Talus customer
relationship asset to five years from seven years based on the reduced levels
of revenue from customers that existed at the time of the Talus acquisition in
December 2000. This will result in increased amortization of intangibles of
approximately $2.6 million in fiscal 2005. In addition, effective March 1,
2004, we will prospectively increase the depreciable lives of purchased
computer and related equipment to three years from two years due to increased
periods of time such assets have been used in the past and expected future use. 27




---



##### 



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 Companys market capitalization, control premium and
recent stock price volatility) below our carrying value. Please see Factors
That May Affect Future Results  Risks Related to Our Business. We performed
our fiscal 2004 goodwill impairment review on 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 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 their 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. Income Taxes We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. We assess the
likelihood that our deferred tax assets will be recovered from our future
taxable income, and to the extent we believe that recovery is not likely, we
establish a valuation allowance. We consider 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 fiscal 2002, 2003
and 2004 when adjusted for non-recurring items, operating performance in fiscal
2004 and estimates of future profitability, management has concluded that
future taxable income will, more likely than not, be insufficient to recover
our net deferred tax assets as of February 29, 2004. Based on similar analysis
in fiscal 2003, 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 the fiscal year ended February 28, 2003. Management will continue to
monitor its estimates of future profitability and realizability of 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 and the related
income tax expense in each jurisdiction in which we operate. 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. Restructuring and Lease Abandonment Related Expenses Our restructuring and lease abandonment charges are comprised primarily
of: (i) severance and associated employee benefits related to the involuntary
reduction of our workforce; (ii) lease termination costs, costs associated with
permanently vacating facilities (abandonment) or both; and (iii) impairment
charges for long-lived assets related to lease abandonments. 28




---



##### 



Prior to December 31, 2002, we accounted for the costs associated with the
reduction of our workforce in accordance with Emerging Issues Task Force No.
94-3 Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). Accordingly, we recorded the liability related
to involuntary termination costs when the following conditions were met: (i)
management with the appropriate level of authority approved a termination plan
that committed us to such plan and established the benefits the employees would
receive upon termination; (ii) the benefit arrangement was communicated to the
employees in sufficient detail to enable the employees to determine the
termination benefits; (iii) the plan specifically identified the number of
employees to be terminated, their locations, and their job classifications; and
(iv) the period of time to implement the plan did not indicate changes to the
plan were likely. The termination costs we record are not associated with, nor
do they benefit, continuing activities. Prior to December 31, 2002, we
accounted for lease termination costs in accordance with EITF 94-3.
Accordingly, we recorded the costs associated with lease termination,
abandonment or both when the following conditions were met: (i) management with
the appropriate level of authority approved a termination plan that committed
us to such plan; (ii) the plan specifically identified all activities that
would not be continued, including the method of disposition and location of
those activities, and the expected date of completion; (iii) the period of time
to implement the plan does not indicate changes to the plan were likely; and
(iv) the leased property had no substantive future use or benefit to us. We
recorded the liability associated with lease termination, abandonment or both
as the sum of the total remaining lease costs and related exit costs, less
probable sublease income or the expected lease termination fees or penalties.
We accounted for costs related to long-lived assets abandoned in accordance
with Statement of Financial Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets,(SFAS 144) and, accordingly,
charged to expense the net carrying value of the long-lived assets when we
ceased to use the assets. We adopted Statement of Financial Accounting Standards No. 146 Accounting
for Costs Associated with Exit or Disposal Activities (SFAS 146) on January
1, 2003. SFAS 146 nullifies EITF 94-3 and requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF 94-3, a liability for an exit cost was recognized at
the date of a companys commitment to an exit plan. SFAS 146 eliminates the
definition and requirements for recognition of exit costs in EITF 94-3 and also
establishes that fair value is the objective for initial measurement of the
liability. Accordingly, for exit or disposal activities undertaken after
December 31, 2002, we recorded the liability related to involuntary termination
costs, lease termination costs, lease abandonment costs and relocation costs as
they were incurred. Inherent in the estimation of the costs related to our restructuring
efforts are assessments related to the most likely expected outcome of the
significant actions to accomplish lease abandonments. 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 review the status of
restructuring liabilities on a quarterly basis and, if appropriate, we record
changes to our restructuring liabilities based on managements most current
estimates. Lease termination costs are required to be recognized and measured
at fair value when we terminate lease agreements. Stock-Based Compensation Plans We account for our stock-based compensation plans in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations using the intrinsic value
based method of accounting. If we accounted for our stock-based compensation
plan using the fair value based method of accounting in accordance with the
provisions as required by Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation, as amended by
Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting
for Stock-Based Compensation  Transition 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 29,2004
    
    2003
    
    2002Net loss, as reported
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (115,158
    )Add: Stock-based compensation expense
(benefit) included in reported net loss, net
of tax
    
    
    1,799
    
    
    
    3,426
    
    
    
    (3,111
    )Less: Stock-based compensation, net of tax
    
    
    (2,611
    )
    
    
    (26,564
    )
    
    
    (63,948
    )Pro forma net loss
    
    
    (104,612
    )
    
    
    (235,377
    )
    
    
    (182,217
    )Basic and diluted loss per share, as reported
    
    $
    (1.43
    )
    
    $
    (3.04
    )
    
    $
    (1.69
    )Basic and diluted loss per share, pro forma
    
    $
    (1.44
    )
    
    $
    (3.37
    )
    
    $
    (2.68
    )
 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. 29




---



##### 



Stock options granted had weighted average fair values of $5.97, $3.48 and
$3.28 per share, respectively, for fiscal 2002, 2003 and 2004 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 during fiscal 2002, 2003 and 2004 was $23.84,
$3.96 and $2.23 per share, respectively. The employee stock purchase plan
program was no longer active as of February 29, 2004. 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
    
    
    
    
    
    
    
    
    
    ESPP2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Risk-free interest rates
    
    
    2.51
    %
    
    
    2.53
    %
    
    
    3.63
    %
    
    
    1.357
    %
    
    
    1.75
    %
    
    
    3.35
    %Expected term
    
    4.53 years
    
    3.95 years
    
    3.11 years
    
    6 months
    
    6 months
    
    6 monthsVolatility
    
    
    .9423
    
    
    
    1.01
    
    
    
    .8282
    
    
    
    .8492
    
    
    
    .8705
    
    
    
    .8268
 Revenue Software Revenue. Software revenue decreased 1.5%, or $1.1 million, in
fiscal 2004 and decreased 42.3%, or $54.9 million, in fiscal 2003. Our software
revenue stabilized during fiscal year 2004, with a modest decrease. The
decrease in software revenue and software revenue as a percentage of total
revenue in fiscal 2003 compared
to fiscal 2002 was due to the continued weakness of the global economy and
geopolitical uncertainties in our fiscal 2003 and the related decline in
spending for enterprise application software by businesses. This resulted in a
decrease in the ASP for our software during fiscal 2003 and a decrease in the
number of significant software license transactions consummated during fiscal
2003. The following table summarizes significant software transactions
consummated during fiscal 2004, 2003 and 2002: Fiscal Year Ended February 28 or 29,2004
    
    2003
    
    2002Significant Software Transactions (1)Number of transactions $100,000 to $999,999
    
    
    81
    
    
    
    70
    
    
    
    73Number of transactions $1.0 million and greater
    
    
    18
    
    
    
    19
    
    
    
    38Total number of transactions
    
    
    99
    
    
    
    89
    
    
    
    111Average selling price (in thousands)
    
    $
    672
    
    
    $
    785
    
    
    $
    1,118
 (1) Significant software transactions are those with a value of $100,000
or greater recognized within the fiscal year. 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 smaller
significant software transactions and increased software revenue from
transactions accounted for on a percentage-of-completion basis. Services Revenue. Services revenue decreased 28.3%, or $28.9 million, in
fiscal 2004 and decreased 4.1%, or $4.4 million, in fiscal 2003. The decrease
in services revenue in fiscal 2004 and fiscal 2003 was the result of the
decrease in the number of completed software license transactions in fiscal
2003 and fiscal 2002 and resulting lower demand for implementation services,
offset by the services revenue from WDS which was acquired in April 2002.
Services revenue tends to track software license revenue in prior periods. Support Revenue. Support revenue increased 3.0%, or $2.5 million, in
fiscal 2004 and increased 13.8%, or $10.2 million, in fiscal 2003. The increase
in support revenue in fiscal 2004 and fiscal 2003 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 and the WDS acquisition. In the past, we
have experienced high rates of renewed annual support contracts. There can be
no assurance that our historical renewal rate will continue. See Forward
Looking Statements and Factors That May Affect Future Results. 30




---



##### 



Geographic Revenue. We market and sell our software and services
internationally, primarily in Europe, Asia, Canada, Central America and South
America. Revenue outside of the United States increased 21.3%, or $14.5
million, to $82.6 million in fiscal 2004 and decreased 23.9%, or $21.4 million,
to $68.0 million in fiscal 2003. Revenue outside of the United States as a
percentage of total revenue was 34.0%, 25.0% and 28.0%, in fiscal 2004, 2003
and 2002, respectively. The increase in our international revenue in fiscal
2004 was due to improved sales execution in Europe and growth in the emerging
markets of Asia Pacific. In fiscal 2004 within the Americas region, a
significant portion of our software and total revenue was derived from our
government, aerospace & defense customers, offsetting softness in the remainder
of the Americas. The decrease in our international revenue in fiscal 2003
resulted from the progressive weakening of global economic conditions,
especially in the European economies, and geopolitical uncertainties, which
resulted in delayed and smaller buying decisions by prospects and customers for
our products. Operating Expenses Cost of Software. Cost of software consists primarily of amortization of
capitalized software development costs and royalty fees associated with
third-party software either embedded in our software or resold by us. The
following table sets forth amortization of capitalized software development
costs and other costs of software for the three fiscal years ended February 28
or 29, 2004, 2003 and 2002 (in thousands): Fiscal Year Ended February 28 or 29,2004
    
    2003
    
    2002Amortization of capitalized software
    
    $
    8,987
    
    
    $
    11,587
    
    
    $
    11,382Percentage of software revenue
    
    
    12.2
    %
    
    
    15.5
    %
    
    
    8.8
    %Other costs of software
    
    
    6,864
    
    
    
    7,540
    
    
    
    9,762Percentage of software revenue
    
    
    9.3
    %
    
    
    10.1
    %
    
    
    7.5
    %Total cost of software
    
    $
    15,851
    
    
    $
    19,127
    
    
    $
    21,144Percentage of software revenue
    
    
    21.5
    %
    
    
    25.5
    %
    
    
    16.3
    %
 The decrease in cost of software in fiscal 2004 was a result of decreased
amortization of capitalized software and decreased royalties paid to third
parties as a result of a slight decrease in software revenue and changes in the
mix of products licensed. The decrease in amortization of capitalized software
was due to product release 6.1 becoming fully amortized in fiscal 2003 while
product release 7.2 in fiscal 2004 was completed in February 2004 resulting in
no incremental amortization in fiscal 2004. The decrease in cost of software in
fiscal 2003 was the result of decreased royalty fees due to lower software
revenue. 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 $13.2 million in fiscal 2005. Cost of Services and Support. Cost of services and support primarily
includes personnel and third-party contractor costs. Cost of services and
support as a percentage of related revenue was 50.2% in fiscal 2004, 52.7% in
fiscal 2003 and 51.1% in fiscal 2002. Cost of services and support decreased
18.1%, or $17.7 million, in fiscal 2004. The decrease in cost of services and
support was attributable to an overall 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 2003 and fiscal 2004 and improved
utilization rates for consulting services employees in fiscal 2004. The
decrease in cost of services and support as a percentage of related revenue in
fiscal 2004 reflects an increase in the proportion of this revenue derived from
support services, which historically have higher margins than implementation
services. Cost of services and support increased 6.5%, or $6.0 million, in
fiscal 2003. The increase in cost of services and support during fiscal 2003
was attributable to an increase in support royalties paid to third parties and
the WDS acquisition in April 2002, offset by the implementation of our cost
containment and cost reduction initiatives during fiscal 2003. 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 30.9%, or $29.6
million in fiscal 2004 and decreased 20.6%, or $24.8 million, in fiscal 2003.
The decrease in fiscal 2004 and fiscal 2003 was due to:  
    
    an overall decrease in the average number of sales, marketing and
business development employees to 216 for fiscal 2004 compared to 328
for fiscal 2003 compared to 414 for fiscal 2002, which was the result of
cost containment and cost reduction measures implemented in the second
half of fiscal 2002, fiscal 2003 and fiscal 2004; 31




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##### 




    
    a decrease in promotional spending, travel, advertising and public
relations spending resulting from cost containment and cost reduction
measures implemented in the second half of fiscal 2002, fiscal 2003 and
fiscal 2004; and  
    
    in fiscal 2003, a decrease in sales commissions due to lower software
revenue. 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, 2004, 2003 and 2002 (in
thousands): Fiscal Year Ended February 28 or 29,2004
    
    2003
    
    2002Gross product development costs
    
    $
    46,121
    
    
    $
    73,570
    
    
    $
    80,956Percentage of total revenue
    
    
    19.0
    %
    
    
    27.0
    %
    
    
    25.3
    %Less: Capitalized software development costs
    
    
    9,888
    
    
    
    10,515
    
    
    
    10,479Percentage of total revenue
    
    
    4.1
    %
    
    
    3.9
    %
    
    
    3.3
    %Product development costs, as reported
    
    $
    36,233
    
    
    $
    63,055
    
    
    $
    70,477Percentage of total revenue
    
    
    14.9
    %
    
    
    23.1
    %
    
    
    22.0
    %
 Gross product development costs decreased 37.3%, or $27.4 million, in
fiscal 2004 and decreased 9.1%, or $7.4 million, in fiscal 2003. The decrease
in fiscal 2004 and 2003 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 275 in fiscal 2004, compared to 414 in fiscal 2003 and 409
in fiscal 2002. This was a result of the implementation of our cost
containment and cost reduction initiatives during fiscal 2003 and fiscal
2004;  
    
    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 Indias lower wage scale; and  
    
    a decrease in the average number of contractors in the United States
resulting from cost containment and cost reduction measures implemented
in fiscal 2002, fiscal 2003 and fiscal 2004. In fiscal 2003 the decrease was offset in part by an increase in gross
product development costs resulting from the WDS acquisition in April 2002. 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 10.1%, or $2.8 million, in fiscal 2004 and decreased 2.2%,
or $0.6 million, in fiscal 2003. The decrease in fiscal 2004 and 2003 was due
to a decrease in the average number of general and administrative employees
resulting from cost containment and cost reduction measures implemented in the
fiscal 2002, fiscal 2003 and fiscal 2004, offset by an increase in costs
resulting from the WDS acquisition in April 2002. Amortization of Intangibles and Goodwill Impairment. Our past acquisitions
resulted in our recording goodwill and other intangible assets that represent
the excess of the purchase price paid over the fair value of the net tangible
assets acquired. Other intangible assets are amortized over periods ranging
from four to seven years. Amortization of intangibles increased $0.8 million in
fiscal 2004 as a result of the change in the Talus customer relationships
amortization from seven years to five years in fiscal 2004. Amortization of
intangibles decreased by 95.5%, or $82.4 million, in fiscal 2003. The fiscal
2003 decrease resulted from our adoption of SFAS 142 on March 1, 2002, which
requires that we no longer amortize goodwill and assembled workforce. SFAS 142
also requires that goodwill be tested for impairment on an annual basis and
when there is reason to suspect that values may have been impaired. We
performed a test for goodwill impairment as of February 28, 2003, our annual
date for goodwill impairment review and determined a write-down was necessary.
Accordingly, we recorded a goodwill impairment charge of $96.3 million in
fiscal 2003 to reduce goodwill associated with our acquisitions down to their
estimated fair value. Details of our amortization of intangibles and goodwill
impairment are included in Note 6 in the Notes to our Consolidated Financial
Statements included elsewhere in this annual report on Form 10-K and details of
our acquisitions are included in Note 13 in the Notes to our Consolidated
Financial Statements included elsewhere in this annual report on Form 10-K. 32




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##### 



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 13 in
the Notes to our Consolidated Financial Statements included elsewhere in this
annual report on Form 10-K. Restructuring and lease abandonment charges. In order to better align our
cost structure with anticipated revenue levels, we adopted restructuring plans
in the first and fourth quarters of fiscal 2004, second, third and fourth
quarters of fiscal 2003 and in the second and third quarters of fiscal 2002. In
connection with our decision to implement these plans, we incurred related
restructuring and lease abandonment charges of $18.6 million in fiscal 2004,
$19.2 million in fiscal 2003 and $6.6 million in fiscal 2002. The following table sets forth a summary of restructuring and lease
abandonment charges, net of adjustments, for fiscal 2004, fiscal 2003 and
fiscal 2002 (in thousands): Fiscal Year Ended February 28 or 29,2004
    
    2003
    
    2002Lease obligations and terminations
    
    $
    12,917
    
    
    $
    7,973
    
    
    $
    3,653Severance and related benefits
    
    
    855
    
    
    
    7,942
    
    
    
    2,318Impairment charges
    
    
    4,241
    
    
    
    2,528
    
    
    
    144Other
    
    
    614
    
    
    
    741
    
    
    
    497Total restructuring and lease abandonment charges
    
    $
    18,627
    
    
    $
    19,184
    
    
    $
    6,612
 The impact to reported basic and diluted loss per share as a result of the
restructuring and lease abandonment charges was $(0.26), $(0.27) and $(0.06)
for fiscal 2004, fiscal 2003 and fiscal 2002, respectively. Over the past three fiscal years, we have faced challenges in our ability
to stabilize revenue and operating performance and to expand market share as
global economic conditions resulted in deterioration in the markets for our
products and services. In response to these weak economic conditions, we have
enacted a number of cost containment and cost reduction measures over the past
three years to better align our cost structure with expected revenue.
Specifically, we took the following actions:  1.
    
    We reduced our workforce by 79, 343 and 163 employees through
involuntary terminations with the fiscal 2004, 2003 and 2002
restructurings, respectively.  2.
    
    We further consolidated our product development function in the
United States to the corporate headquarters in Rockville, Maryland as
part of the restructuring plans in fiscal 2004, 2003 and 2002. 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 ceased to utilize the then-vacated
office space. The facilities permanently removed from our operations
during fiscal 2004, 2003 and 2002 were located in Wayne, Pennsylvania;
Irving, Texas; Detroit, Michigan; Denver, Colorado; Ratigen, Germany;
Ottawa, Canada; and Milan, Italy. A portion of the office space was
permanently vacated in certain facilities located in Rockville,
Maryland; Chicago, Illinois; Atlanta, Georgia; Calabasas and San Carlos,
California; and Bracknell, United Kingdom.  4.
    
    As part of the consolidation of our facilities, certain leasehold
improvements, furniture and fixtures were abandoned. As a result we
recorded a non-cash impairment charge equal to the net book value of
these abandoned assets in restructuring and lease abandonment charges.  5.
    
    Primarily due to the real estate markets in which we operate
remaining at depressed levels longer than originally anticipated, we
extended the estimated sublease commencement dates and/or reduced the
estimated sublease rates on certain restructured properties. We believe
that our estimates with respect to our remaining obligations related to
fiscal 2004, 2003 and 2002 restructurings are appropriate as of February
29, 2004. 33




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##### 



As a result of our restructuring initiatives during the past three fiscal
years, we have reduced all other operating expenses (as defined on page 20)
to $232.9 million in fiscal 2004 from $315.0 million and $342.4 million in
fiscal 2003 and fiscal 2002, respectively. The cost savings associated with our
restructuring and cost containment efforts begin to be fully realized in the
following quarter. We do not expect our cost savings to be offset by increases
in other expense areas. Details of our restructuring and lease abandonment
charges are included in Note 15 to the Notes to Consolidated Financial
Statements included elsewhere in this annual report on Form 10-K. Substantially all of the cost savings from our restructuring initiatives
had been reflected in our operating results by the second half of fiscal 2004.
All other operating expenses were $109.2 million during the six months ended
February 29, 2004. We expect all other operating expenses to be similar
during the first half of fiscal 2005. The total restructuring and lease
abandonment charges reflected in the financial statements are based on
managements current estimates, which may change materially if actual
lease-related expenditures or sublease income differ from current estimates. Non-Cash Stock Compensation Expense (Benefit). We recognized non-cash
stock compensation expense (benefit) of $1.8 million in fiscal 2004, $3.4
million in fiscal 2003 related to unvested stock options assumed in the
acquisition of Talus and $(3.1) million in fiscal 2002, respectively, related
to stock options that were repriced in January 1999 and unvested stock options
assumed in the Talus acquisition. These amounts are included as a separate
component of stockholders equity and are amortized by charges to operations in
accordance with FASB Interpretation No. 44 (FIN 44) Accounting for Certain
Transactions Involving Stock Compensation. Repriced Options: In January 1999, 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. This resulted in a benefit of $8.0 million in
fiscal 2002. 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 2004 and 2003 was below $22.19, no charge or benefit was recorded
during fiscal 2004 and 2003. As of February 29, 2004, approximately 0.5 million
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. Unvested Stock Options -Talus Acquisition: 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. FIN 44 requires the acquiring company to measure the
intrinsic value of unvested stock options assumed at the acquisition date in a
purchase business combination and record a compensation charge over the
remaining vesting period of those options to the extent those options remain
outstanding. This resulted in a charge of $1.8 million in fiscal 2004, $3.4
million in fiscal 2003, and $4.8 million in fiscal 2002. We expect to record
approximately $0.1 million in fiscal 2005 for the remaining compensation charge
related to the Talus stock options. IRI Settlement. The IRI settlement charge of $3.1 million in fiscal 2002
represents the amount in excess of a liability accrued in prior years for the
resolution of a dispute between the Company and Information Resources, Inc.
(IRI). Details of the IRI Settlement are included in Note 8 in the Notes to
our Consolidated Financial Statements included elsewhere in this annual report
on Form 10-K . Other Expense, Net Other expense, net, includes interest income from cash equivalents,
marketable securities and long-term investments, interest expense from
borrowings, foreign currency exchange gains or losses and other gains or
losses. Other expense, net was $13.5 million in fiscal 2004, compared to $7.9
million and $14.6 million in fiscal 2003 in fiscal 2002, respectively. The
increase in fiscal 2004 relates to a reduction in interest income of $2.0
million and $1.6 million exchange loss in fiscal 2004, compared to a $2.3
million exchange gain in fiscal 2003. The decrease in fiscal 2003 relates to an
impairment loss we recorded of approximately $10.2 million relating to an
other-than-temporary decline in the fair value of our equity investment in
Converge, Inc. in fiscal 2002 offset by lower interest income as a result of
lower average invested cash and marketable securities and lower average
interest rates in fiscal 2003. 34




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##### 



Debt Conversion Expense 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 represent approximately
11.9% of the shares outstanding as of February 29, 2004. Provision for (Benefit from) Income Taxes We recorded an income tax provision of $1.3 million and $21.4 million in
fiscal 2004 and fiscal 2003, respectively, and a benefit from income tax of
$(24.1) million in fiscal 2002. In fiscal 2004, $1.0 million of income tax
provision relates to foreign taxes. During fiscal 2003, management concluded
that, based on various factors, including our cumulative losses for fiscal
2001, 2002 and 2003 when adjusted for non-recurring items, 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 deferred tax assets (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. We do not expect to record a deferred income tax
benefit in future periods when we incur a loss. Loss Per Common Share 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
earnings (loss) per common share is
based on net income divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings or loss per common share
include, when dilutive, (i) the effect of stock options, 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. Our cash, cash equivalents, marketable securities and long-term
investments in aggregate increased $17.6 million during fiscal 2004 to $155.3
million as of February 29, 2004. Working capital increased $5.7 million to
$125.5 million at February 29, 2004. In fiscal 2003 working capital decreased
$117.2 million to $119.8 million at February 28, 2003. In fiscal 2004 the
increase in cash, cash equivalents, marketable securities and long-term
investments resulted from net loss, excluding non-cash charges, less changes in
working capital items plus:  
    
    change in restricted cash of $13.0 million, which was provided
by the elimination of cash restrictions upon the transfer of our
letters of credit from Bank of America (BOA) to SVB. Approximately
$9.7 million was reclassified to cash and approximately $3.3 million
was recorded as a deposit to secure an international lease (see Note
7);  
    
    $9.8 million in payments for restructuring obligations; 35




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##### 




    
    $8.5 million in cash proceeds from the exercise of stock options and employee stock purchase plan purchases; and  
    
    $2.2 million in proceeds from settlement of an acquisition escrow,
Offset by cash outflows for:  
    
    $13.7 million in expenditures on property, equipment and software, including capitalized software;  
    
    $3.0 million in principal payments on long-term debt and capital leases. Cash provided by operations was $6.8 million in fiscal 2004. Cash used in
operations was $30.7 million in fiscal 2003. The improvement in operating cash
flows of $37.5 million in fiscal 2004 resulted from a decreased operating loss
in fiscal 2004. Cash (used in) provided by investing activities was $(12.1) million,
$(70.0) million and $36.6 million in fiscal 2004, 2003 and 2002, respectively.
Investing activities consist of the sales and purchases of marketable
securities and long-term investments, changes in restricted cash, purchases of
property and equipment, purchases and capitalization of software and
acquisitions of businesses. In fiscal 2004, approximately $13.0 million was
provided by the elimination of cash restrictions upon the transfer of our
letters of credit from BOA to SVB. Approximately $3.3 million of this $13.0
million was recorded as a deposit to secure an international lease. Total
purchases of property and equipment were $2.2 million in fiscal 2004, a
decrease of $12.7 million compared to fiscal 2003 due to the completion of the
buildout of our new corporate headquarters space during fiscal 2003.
Acquisitions of businesses, net of cash acquired, of $2.0 million and $(32.3)
million during the fiscal 2004 and 2003 relates to approximately $2.2 million
which was provided by proceeds held in escrow from prior acquisitions (fiscal
2004) and the WDS and Digital Freight Exchange, Inc. (DFE) acquisitions
(fiscal 2003), respectively. Sales of marketable securities, net of purchases,
were $101.0 million in fiscal 2002. Acquisitions and investments in businesses,
net of cash acquired, of $41.1 million, in aggregate, during fiscal 2002,
relate to the acquisitions of PartMiner CSD, Inc. (CSD) and certain assets of
SpaceWorks, Inc. and an investment in Converge, Inc. Cash provided by financing activities was $5.5 million, $5.1 million and
$12.4 million in fiscal 2004, 2003 and 2002, respectively. Cash provided by
financing activities in all periods consisted of proceeds from the exercise of
stock options and employee stock plan purchases, offset in fiscal 2004 by
payments on capital leases and our SVB equipment line of credit. The Company had $175.5 million and $250.0 million in Notes as of February
29, 2004 and February 28, 2003, respectively. The Notes bear interest at 5.0%
per annum which is payable semi-annually. The fair market value of the Notes in
the hands of the holders was $174.4 million and $131.6 million on February 29, 2004 and February
28, 2003, respectively, based on market quotes. The Notes mature in November
2007 and are convertible into approximately 4.0 million shares of the Companys
common stock at a conversion price of $44.06, subject to adjustment under
certain conditions. The conversion price of the Notes will be adjusted in the
event that we issue our common stock as a dividend or distribution with respect
to our common stock, we subdivide, combine or reclassify our common stock, we
issue rights to our common stockholders to purchase our common stock at less
than market price, we make certain distributions of securities, cash or other
property to our common stockholders (other than ordinary cash dividends), or we
make certain repurchases of our common stock. Upon a change of control of the
Company, the holders of the Notes would have the right to require us or our
successor to repurchase the Notes at a purchase price equal to 100% of the
principal amount, plus accrued and unpaid interest to the date of repurchase in
cash. The Notes do not have any financial covenants. On or after November 7,
2003, we may redeem, from time to time, the Notes in whole or in part, at our
option. Redemption can be made on at least 30 days notice if the trading price
of our common stock for 20 trading days in a period of 30 consecutive trading
days ending on the day prior to the mailing of notice of redemption exceeds
120% of the conversion price of the Notes. The redemption price, expressed as a
percentage of the principal amount, is: Redemption Period
    
    Redemption PriceNovember 7, 2003 through October 31, 2004
    
    
    103
    %November 1, 2004 through October 31, 2005
    
    
    102
    %November 1, 2005 through October 31, 2006
    
    
    101
    %November 1, 2006 through maturity
    
    
    100
    %
 In the twelve months ended February 29, 2004, the Company exchanged $74.5
million of the 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 are exempt from registration under Section
3(a) (9) of the Securities Act of 1933 and were freely traded upon issuance. 36




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##### 



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 twelve months 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 represent 11.9% of the shares outstanding as of February
29, 2004. On January 14, 2003, we entered into a one year unsecured revolving credit
facility with SVB for $20.0 million. In March 2004, we renewed the unsecured
revolving credit facility with SVB for $15.0 million. Under the terms of this
credit facility, we may request cash advances, letters of credit, or both. The
credit facility requires us to comply with the following financial covenants:
(i) minimum tangible net worth (defined as stockholders equity plus
convertible debt less goodwill, capitalized software costs and other intangible
assets) must be greater than $120.0 million as of February 29, 2004, $130.0
million as of May 31, 2004, $140.0 million as of August 31, 2004 and November
30, 2004 and $150.0 million as of February 28, 2005; and (ii) a ratio of (a)
unrestricted cash, cash equivalents, marketable securities and long-term
investments deposited with SVB and its affiliates plus net accounts receivable
to (b) current liabilities plus, long-term indebtedness to SVB and outstanding
letters of credit, minus deferred revenue, of at least 1.75 to 1.0. In addition, the SVB credit facility requires us to maintain $50.0 million
in funds with SVB and its affiliates. The credit facility also restricts the
amount of additional debt we can incur and restricts the amount of cash that we
can use for acquisitions and for the repurchase of convertible debt. Under the
terms of the SVB credit facility, we maintain the right to terminate the
facility at any time upon repayment of any advances and the posting of cash
collateral for any outstanding letters of credit. Under the credit facility,
SVB has the right to obtain a lien on all of our assets, other than
intellectual property, upon an occurrence of default, unless we terminate the
facility as provided above. The credit facility also provides that, upon an
event of default, we are prohibited from paying a cash dividend to our
shareholders. As of February 29, 2004, we had $9.9 million in letters of credit
outstanding under this line to secure our lease obligations for office space.
We were in compliance with all financial covenants as of February 29, 2004. We have an additional credit agreement with SVB, as amended, under which
the Company was able to borrow up to $5.0 million for the purchase of
equipment. Amounts may be borrowed under the facility through December 31,
2004, and accrue interest at a fixed rate equal to 7.75%. The first advance is
repaid monthly over a 24 month period, each advance thereafter is repaid
monthly over a 30 month period. Amounts borrowed under the facility in fiscal
2003 accrue interest at a rate of 8.25%, and are repaid monthly over a 36 month
period. During fiscal 2003, the Company borrowed $2.9 million under this credit
facility. The principal balance remaining as of February 29, 2004 was
approximately $1.7 million. The Company was in compliance with all financial
covenants as of February 29, 2004. As of February 29, 2004, the Companys 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 29,2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalCapital lease obligations (1)
    
    $
    1,364
    
    
    $
    1,316
    
    
    $
    546
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,226Operating lease obligations not in restructuring
    
    
    12,313
    
    
    
    10,596
    
    
    
    8,536
    
    
    
    7,861
    
    
    
    6,652
    
    
    
    29,554
    
    
    
    75,512Operating lease obligations in restructuring
    
    
    7,219
    
    
    
    6,978
    
    
    
    6,928
    
    
    
    5,956
    
    
    
    4,081
    
    
    
    15,186
    
    
    
    46,348Equipment line of credit (1)
    
    
    1,098
    
    
    
    737
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,835Convertible subordinated notes (1)
    
    
    8,775
    
    
    
    8,775
    
    
    
    8,775
    
    
    
    184,275
    
    
    
    
    
    
    
    
    
    
    
    210,600Total fixed commitments
    
    $
    30,769
    
    
    $
    28,402
    
    
    $
    24,785
    
    
    $
    198,092
    
    
    $
    10,733
    
    
    $
    44,740
    
    
    $
    337,521
 (1) Includes principal and interest payments The lease commitments in the above table designated as Operating lease
obligations in restructuring include only the non-cancelable portion of lease
commitments included in past restructuring initiatives and, accordingly, have
not been reduced by estimated sublease income. However, as required by EITF
Issue No. 88-10 Costs Associated with Lease Modification or Termination.
(EITF 88-10), we have reduced these lease commitments by estimated sublease
income in determining the total restructuring lease obligations of $18.6
million recorded in the accompanying balance sheet as of February 29, 2004.
Please refer to Notes 8 and 15 in the Notes to Consolidated Financial
Statements included elsewhere in this annual report on Form 10-K. In the future, we may pursue acquisitions of complementary businesses and
technologies. In addition, we may make strategic investments in businesses and
enter into joint ventures that complement our existing business. Any future
acquisition or investment may result in a decrease to our liquidity and working
capital to the extent we pay with cash. 37




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We may chose to purchase a portion of the Notes in the open market from
time to time with cash or enter into alternative transactions to reduce the
balance of the Notes, such as exchanging Notes for shares of our common stock,
if we are able to do so on terms favorable to us. Purchases of the Notes with
cash would reduce our debt outstanding and may result in a decrease to our
liquidity and working capital to the extent that we pay cash. We believe that our existing liquidity and expected cash flows from
operations will satisfy our capital requirements for the foreseeable future. We
believe that the combination of cash and cash equivalents, marketable
securities and 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.
However, weakening economic conditions or weak demand for enterprise
application software in future periods could have a material adverse impact on
our future operating results and liquidity. 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 favorable to us. See Forward Looking Statements and
Factors That May Affect Future Results. Off-Balance Sheet Arrangements We do not use off-balance sheet arrangements with unconsolidated entities
or related parties, nor do we use other forms of off-balance sheet arrangements
such as research and development arrangements. Accordingly, our liquidity and
capital resources are not subject to off-balance sheet risks from
unconsolidated entities. We have entered into operating leases for most U.S. and international
sales and support offices and certain equipment in the normal course of
business. These arrangements are oftentimes referred to as a form of
off-balance sheet financing. Future minimum lease payments under our operating
leases as of February 29, 2004 are detailed previously in Liquidity and
Capital Resources. We have a one year unsecured revolving credit facility with
SVB for $15.0 million which will expire on March 30, 2005, unless renewed.
Under the terms of this credit facility, we may request cash advances, letters
of credit, or both. As of February 29, 2004, $9.9 million in letters of credit
were outstanding under this line to secure our lease obligations for certain
office space. We license software to our customers under written agreements we refer to
as Software License Agreements (SLA). Each SLA contains the relevant terms of
the contractual arrangement with the customer, and generally includes certain
provisions for indemnifying the customer against losses, expenses and
liabilities from damages that may be awarded against the customer in the event
that our software is found to infringe upon a patent, copyright, trademark or
other proprietary right of a third party. The SLA generally limits the scope
and remedies for such indemnification obligations in a variety of
industry-standard respects, including but not limited to certain time and
geography-based scope limitations and a right to replace an infringing product
or modify the product so that it is no longer infringing. If we cannot address
the infringement by replacing the products or services, or modifying the
products or services, we are allowed to cancel the software license and return
the fees paid by customer. We require our employees to sign a proprietary
information and inventions assignment agreement, which assigns the rights in
our employees development work to us. To date, we have not had to reimburse any of our customers for any losses
related to these indemnification provisions and no material claims are
outstanding as of February 29, 2004. For several reasons, including the lack of
prior indemnification claims and the lack of a monetary liability limit for
certain infringement cases under the SLAs, we cannot determine the maximum
amount of potential future payments, if any, related to such indemnification
provisions. There can be no assurance that potential future payment will not
have a material adverse effect on our operating performance or financial
condition. Recently Issued Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Statement No. 46, Consolidation of Variable Interest Entities, (FIN 46)
that addresses the consolidation of variable interest entities. FIN 46
provides guidance for determining when a primary beneficiary should consolidate
a variable interest entity, or equivalent structure that functions to support
the activities of the primary beneficiary. The interpretation is effective
after January 31, 2003 for newly created variable interest entities. For
variable interest entities created before February 1, 2003, the interpretation
is effective as of the beginning of the first interim or annual reporting
period beginning after December 15, 2003. We believe the effect of adopting
this statement will not have a material impact on our operating performance and
financial position. 38




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On May 15, 2003, the FASB issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, (SFAS 150). SFAS 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity. SFAS
150 represents a significant change in practice in the accounting for a number
of financial instruments, including mandatorily redeemable equity instruments
and certain equity derivatives that frequently are used in connection with
share repurchase programs. SFAS 150 is effective for all financial instruments
created or modified after May 31, 2003, and to other instruments as of
September 1, 2003. The effect of adopting this statement did not have a
material impact on our operating performance and financial position. Factors that May Affect Future Results In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating us and our business. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties that we do not presently know or that we currently deem
immaterial, may also impair our business, operating performance and financial
condition. RISKS RELATED TO OUR
INDEBTEDNESS AND FINANCIAL CONDITION OUR INDEBTEDNESS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION. In November 2000, we completed a convertible debt offering of $250.0
million in Notes that are due November 2007. During fiscal 2004, the balance of
the Notes was reduced to $175.5 million as a result of $74.5 million of Notes
being exchanged for shares of our common stock. Our indebtedness could have
important consequences for investors. For example, it could:  
    
    increase our vulnerability to general adverse economic and industry
conditions;  
    
    limit our ability to obtain additional financing;  
    
    require the dedication of a substantial portion of our cash flows
from operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of capital to fund our
operations, working capital, capital expenditures, acquisitions and
other general corporate purposes;  
    
    limit our flexibility in planning for, or reacting to, changes in our
business and the industry; and  
    
    place us at a competitive disadvantage relative to our competitors. Although we have no present plans to do so, we may incur substantial
additional debt in the future. While the terms of our credit facility impose
certain limits on our ability to incur additional debt, we are permitted to
incur additional debt subject to compliance with the terms and conditions set
forth in the credit facility. The terms of the Notes set forth no limits on our
ability to incur additional debt. If a significant amount of new debt is added
to our current levels, the related risks described above could intensify. WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS WHICH
COULD NEGATIVELY IMPACT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS. We will be required to generate cash sufficient to pay all amounts due on
the Notes and to conduct our business operations. The Notes require interest
payments of $8.8 million annually with $175.5 million of principal due November
2007. As of February 29, 2004, the remaining principal and interest payments
due under the Notes were $210.6 million. Our cash, cash equivalents, marketable
securities and long-term investments totaled $155.3 million as of February 29,
2004. Assuming our cash, cash equivalents, marketable securities and long-term
investments remain constant from our February 29, 2004 levels, we will have to
generate a minimum of $55.3 million of net cash flow through any combination of
normal operations of the Company, raising of debt and equity capital or asset
sales by November 2007 to meet our remaining principal and interest payments
under the Notes. We have incurred net losses in the past, and we may not be
able to cover our anticipated debt service obligations. This may materially
hinder our ability to make principal and interest payments on the Notes.
Concerns about our ability to meet our debt service obligations could
negatively impact our ability to attract and retain customers. Our ability to
meet our future debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and other factors
affecting our operations, many of which are beyond our control. 39




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WE MAY CHOOSE TO EXCHANGE THE NOTES FOR SHARES OF OUR COMMON STOCK IN THE OPEN
MARKET OR PURCHASE A PORTION OF THE NOTES FOR CASH WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION OR COULD MATERIALLY DILUTE EXISTING
STOCKHOLDERS. We have issued 9,725,750 shares of our common stock in exchange for the
Notes in privately negotiated transactions under Section 3(a)(9) of the
Securities Act of 1933, and we expect to enter into such transactions from time
to time if we are able to do so on terms that are favorable to us. If we
choose to enter into privately negotiated transactions to exchange some of our
outstanding Notes for shares of our common stock, it could materially dilute
the ownership percentage of our existing shareholders and result in a non-cash
charge to earnings. In addition, to the extent we are able to do so on terms
favorable to us, we may choose to purchase a portion of the Notes outstanding
from time to time in the open market with cash. While the terms of our credit
facility impose certain limits on our ability to repurchase our debt securities
with cash, we are permitted to do so subject to compliance with the terms and
conditions set forth in the credit facility. If purchases of the Notes in the
open market were funded from available cash and cash equivalents, it could have
a material adverse effect on our liquidity and financial condition. WE MAY VIOLATE FINANCIAL COVENANTS UNDER OUR CREDIT FACILITY WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY AND FINANCIAL CONDITION. During fiscal 2003, our financial performance made it difficult for us to
achieve the financial covenants under our credit facility with BOA. During
November 2002, we were required to cash collateralize $14.1 million of
outstanding letters of credit under the BOA credit facility as a result of
violating a financial covenant. Also, we violated the consolidated EBITDA
covenant under the BOA credit facility for the quarter ended November 30, 2002. In January 2003, we entered into a new unsecured $20.0 million credit
facility with SVB to replace the BOA credit facility. We renewed the unsecured
credit facility with SVB on March 31, 2004 with borrowing capacity reduced to
$15.0 million. We also have an additional credit agreement with SVB, under
which the Company is able to borrow up to $5.0 million for the purchase of
equipment. As of February 29, 2004, approximately $9.9 million of letters of
credit were outstanding with SVB, and approximately $1.7 million was
outstanding under the equipment financing credit line with SVB. If our future
financial performance results in a violation of financial covenants under the
new credit facility with SVB, or with our equipment financing credit line with
SVB, we could be required to provide cash collateral for letters of credit or
repay outstanding borrowings, which would have a material adverse effect on our
liquidity and financial condition. RISKS RELATED TO OUR
BUSINESS ADVERSE ECONOMIC AND POLITICAL CONDITIONS CAUSED A DETERIORATION OF DEMAND IN
THE MARKETS FOR OUR PRODUCTS AND SERVICES IN RECENT YEARS AND HAVE ADVERSELY
AFFECTED AND COULD FURTHER ADVERSELY AFFECT OUR OPERATING PERFORMANCE AND FINANCIAL
CONDITION. Our revenue and operating results depend on the overall demand for our
software and related services. Regional and global adverse changes in the
economy and political upheaval and unrest caused a deterioration of the markets
for our products and services in recent years. This resulted in reductions,
delays and postponements of customer purchases, which materially adversely
affected our financial performance during fiscal 2002, fiscal 2003 and fiscal
2004. Demand for our solutions designed to optimize pricing and revenue
management, a component of our demand management solutions, was more severely
affected than our other solutions for which there are more mature markets.
Although our markets deteriorated in most industries and geographies,
industries most severely impacted include, among others, chemical & energy,
high technology, and travel, transportation & hospitality. Industries less
affected include communications, consumer packaged goods, government, life
sciences, retail and aerospace & defense. If these adverse conditions continue
or worsen, we would likely experience further reductions, delays, and
postponements of customer purchases further adversely affecting our operating
performance and financial condition. National and global responses to future hostilities and terrorist attacks
may materially adversely affect demand for our software and services because of
the economic and political effects on our markets and by interrupting the
ability of our customers to do business in the ordinary course, as a result of
a variety of factors, including, among others, changes or disruptions in
movement and sourcing of materials, goods and components or possible
interruptions in the flow of information or monies. 40




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WE EXPERIENCED SIGNIFICANT LOSSES IN RECENT YEARS DUE TO A DETERIORATION OF
DEMAND IN OUR MARKETS RESULTING FROM WEAKENING ECONOMIC CONDITIONS AND
INCREASED POLITICAL INSTABILITY COMMENCING IN FISCAL 2002. We recently incurred significant losses. Beginning in fiscal 2002,
weakening economic conditions and increased political instability resulted in a
deterioration in our markets. We experienced sequential declines in software
and total revenue during our second and third quarters of fiscal 2002. Further
weakening of economic conditions, which severely impacted the timing of capital
spending decisions for computer software, particularly enterprise application
software, further negatively impacted the markets for our products and
services. This again resulted in sequential quarterly declines in software and
total revenue in our first three quarters of fiscal 2003 and the second quarter
of fiscal 2004. The losses incurred during these periods were $115.2 million in
fiscal 2002, $212.2 million in fiscal 2003 and $103.8 million in fiscal 2004.
Our ability to improve our financial performance will depend on a stabilization
or improvement of economic conditions resulting in increased demand for our
software and our continued ability to align our cost structure with revenue
without retarding our ability to grow revenue in future periods. If market
conditions for our software do not improve or if we do not successfully
continue to align our cost structure with our revenue without retarding our
ability to grow revenue, our operating performance and financial condition
could be harmed, and we could continue to incur significant losses. WE RECORDED A GOODWILL IMPAIRMENT CHARGE OF $96.3 MILLION IN OUR FOURTH QUARTER
OF FISCAL 2003 AS A RESULT OF SEVERE DECLINES IN OUR STOCK PRICE OVER FISCAL
2003. IF OUR STOCK PRICE DECREASES TO LEVELS SUCH THAT THE IMPLIED FAIR VALUE
OF THE COMPANY IS SIGNIFICANTLY LESS THAN STOCKHOLDERS EQUITY FOR A SUSTAINED
PERIOD OF TIME, WE MAY BE REQUIRED TO RECORD ADDITIONAL SIGNIFICANT NON-CASH
CHARGES ASSOCIATED WITH GOODWILL IMPAIRMENT. On March 1, 2002, we adopted SFAS 142, which changed the accounting for
goodwill from an amortization method to an impairment-only method. Effective
March 1, 2002, we stopped amortizing goodwill, but continued amortizing other
intangible assets with finite lives. As required by the provisions of SFAS 142,
we performed the initial goodwill impairment test required during our first
quarter of fiscal 2003. We consider ourselves to have a single reporting unit.
Accordingly, all of our goodwill is associated with our entire Company. As of
March 1, 2002, based upon our implied fair value, there was no impairment of
goodwill recorded upon implementation of SFAS 142. During the quarters ended August 31, 2002, November 30, 2002 and February
28, 2003, we experienced adverse changes in our stock price resulting from a
decline in our financial performance caused by adverse business conditions that
have affected the technology industry, especially enterprise application
software companies. Based on these factors, we performed a test for goodwill
impairment at August 31, 2002, November 30, 2002 and February 28, 2003 and
determined that based upon the implied fair value (which includes factors such
as, but not limited to, our market capitalization, control premium and recent
stock price volatility) of the Company as of August 31, 2002 and November 30,
2002, there was no impairment of goodwill, but as of February 28, 2003, there
was an impairment of goodwill. As a result of the impairment of goodwill as of
February 28, 2003, we recorded a non-cash goodwill impairment charge of $96.3
million to reduce goodwill associated with our acquisitions to their estimated
fair value as of that date. We will continue to test for impairment on an
annual basis, coinciding with our fiscal year end, or on an interim basis if
circumstances change that would more likely than not reduce the fair value of
our reporting unit below its carrying value. If our stock price is
significantly lower than recent levels such that the implied fair value of
the Company is significantly less than stockholders equity for a sustained
period of time, among other factors, we may be required to record an additional
impairment loss related to goodwill below its carrying amount. We performed a
test for goodwill impairment at February 29, 2004, which is our annual date for
goodwill impairment review, and determined that based upon the implied fair
value (which includes factors such as, but not limited to, our market
capitalization, control premium and recent stock price volatility) of the
Company as of February 29, 2004 there was no impairment of goodwill. We will
continue to test for impairment on an annual basis, coinciding with our fiscal
year end, or on an interim basis if circumstances change that would more likely
than not reduce the implied fair value of the Company below its carrying value. 41




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OUR FUTURE RESULTS WILL BE ADVERSELY AFFECTED BY SEVERAL TYPES OF SIGNIFICANT
NON-CASH CHARGES WHICH COULD IMPAIR OUR ABILITY TO ACHIEVE OR MAINTAIN
PROFITABILITY IN THE FUTURE. We will incur significant non-cash charges in the future related to the
amortization of acquired technology and intangible assets from past
acquisitions. During fiscal 2002, we announced that we were required to write
off our investment in Converge, Inc., which resulted in a pre-tax charge of
$10.2 million. During fiscal 2003, we recorded a valuation allowance for the
full amount of our net deferred tax assets which resulted in a $20.4 million
non-cash charge to income tax expense. Also during fiscal 2003, we recorded a
goodwill impairment charge of $96.3 million to reduce goodwill associated with
our acquisitions to their estimated fair value as of that date. During fiscal
2002, 2003 and 2004, we recorded write-downs of long-lived assets associated
with restructuring and lease abandonments of approximately $0.1 million, $2.5
million and $4.2 million, respectively, consisting of the abandonment of
certain furniture, fixtures, computer equipment and leasehold improvements
related to permanently vacating office space. During fiscal 2004, we exchanged
$74.5 million of the Notes for 9.7 million shares of our common stock in
privately negotiated transactions, which resulted in a non-cash debt conversion
expense of $59.8 million. We may also incur non-cash charges in future periods
related to impairments of long-lived assets and future exchanges of Notes for
shares of our common stock, if any. To achieve profitability, we must grow our
revenue sufficiently to cover these charges. Our failure to achieve
profitability could cause our stock price to decline. IF OUR RESTRUCTURING PLANS AND OUR COST CONTAINMENT AND COST REDUCTION MEASURES
FAIL TO ACHIEVE THE DESIRED RESULTS OR RESULT IN UNANTICIPATED NEGATIVE
CONSEQUENCES, WE MAY SUFFER MATERIAL HARM TO OUR OPERATING PERFORMANCE AND
FINANCIAL CONDITION. Because of the downturn in our markets as a result of progressive
weakening of global economic conditions and increased political instability
during fiscal 2002, fiscal 2003 and fiscal 2004, we faced significant
challenges in our ability to stabilize revenue, improve operating performance
and expand market share. In response to the impact on our financial
performance, we implemented restructuring plans and cost containment and cost
reduction measures and are continuing to implement cost containment and cost
reduction measures to align our cost structure with our revenues. These
actions have included, among other things, workforce reductions and mandatory
unpaid leave programs. In fiscal 2002, fiscal 2003 and fiscal 2004, we recorded
restructuring and impairment charges of $6.6 million, $19.2 million and $18.6
million, respectively. In addition, we may incur additional restructuring
charges in future periods. If we fail to achieve the desired results of our
restructuring plans and our cost containment and cost reduction measures, we
may suffer material harm to our operating performance and financial condition. WE REDUCED OUR WORKFORCE AS PART OF OUR RECENT COST CONTAINMENT AND COST
REDUCTION INITIATIVES. IF WE FAIL TO FIELD AND RETAIN A QUALIFIED WORKFORCE,
OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY
AFFECTED. We believe that our success depends on our ability to motivate and retain
highly skilled technical, managerial, sales, marketing and services personnel.
Competition for skilled personnel can be intense, and there can be no assurance
that we will be successful in attracting, motivating and retaining the
personnel required to improve our financial performance and grow. During the
second half of fiscal 2004, voluntary employee attrition has increased compared
to recent periods. In addition, the cost of hiring, training and retaining
skilled employees is high. Failure to attract and retain highly skilled
personnel could materially and adversely affect our business. Our recent cost containment and cost reduction initiatives may yield
unintended consequences, such as attrition beyond our planned reduction in
workforce, reduced employee morale and decreased productivity. In addition, the
recent trading levels of our stock have decreased the value of our stock
options granted to employees under our stock option plans. As a result of these
factors, our remaining personnel may seek alternate employment, such as with
larger, more established companies or companies that they perceive as having
less volatile stock prices or better prospects. Continuity of personnel is a
very important factor in sales and implementation
of our software and our product development efforts. Attrition beyond our
planned reduction in workforce or a material decrease in employee morale or
productivity could have a material adverse effect on our operating performance
and financial condition. WE HAVE EXPERIENCED SIGNIFICANT TURNOVER IN SENIOR MANAGEMENT RECENTLY. THE
SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER IF WE LOSE ADDITIONAL KEY
PERSONNEL. Our success depends significantly on the continued service of our
executive officers. We do not have fixed-term employment agreements with any
executive officers, and we do not maintain key person life insurance on our
executive officers. Seven of our executive officers left the Company between
May 2002 and March 2004. The loss of services of any of our executive officers
for any reason could have a material adverse effect on our operating
performance and financial condition. 42




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WE REDUCED OUR SALES FORCE AS PART OF OUR RECENT COST CONTAINMENT AND COST
REDUCTION INITIATIVES. IF WE FAIL TO FIELD AN EFFECTIVE SALES ORGANIZATION, OUR
ABILITY TO GROW WILL BE LIMITED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION. We have reduced our sales force in fiscal 2002, fiscal 2003 and fiscal
2004 as a result of the deterioration in our markets. Decreasing software
revenue and unpaid leave programs have resulted in reduced compensation earned
by members of our sales force, which may result in further voluntary attrition
of our sales force over time. In order to grow our revenue, we will have to
field a more productive sales force. Recently, we replaced a number of our
sales account managers and sales management and began to expand our sales force
as the markets for our products and solutions appear to be improving modestly.
Our past efforts to expand our sales organization have required significant
resources. New sales personnel require training and take time to achieve full
productivity. There is no assurance that we will be able to field a more
productive sales force or successfully attract and retain qualified sales
people at levels sufficient to support growth. Any failure to adequately sell
our products could limit our growth and have a material adverse effect on our
operating performance and financial condition. WE PERIODICALLY HAVE RESTRUCTURED OUR SALES FORCE, WHICH CAN BE DISRUPTIVE. We continue to rely heavily on our direct sales force. In recent years, we
have restructured or made other adjustments to our sales force in response to
factors such as management changes, product changes, geographical coverage and
other internal considerations. Change in the structures of the sales force and
sales force management can result in temporary lack of focus and reduced
productivity that may affect revenues in one or more quarters. We cannot assure
you that we will not continue to restructure our sales force or that the
transition issues associated with restructuring the sales force will not recur. SALES CYCLES FOR OUR PRODUCTS AND SERVICES CAN BE LONG AND UNPREDICTABLE.
VARIATIONS IN THE TIME IT TAKES US TO LICENSE OUR SOFTWARE MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS. The time it takes to license our software to prospective clients varies
substantially, but historically has ranged between three and twelve months.
Variations in the length of our sales cycles could cause our revenue to
fluctuate widely from period to period. Because we typically recognize a
substantial portion of our software revenue in the last month of a quarter, any
delay in the licensing of our products could cause significant variations in
our revenue from quarter to quarter. These delays have occurred on a number of
occasions in the past and materially adversely affected our financial
performance. Furthermore, these fluctuations could cause our operating results
to suffer in some future periods because our operating expenses are relatively
fixed over the short term, and we devote significant time and resources to
prospective clients. The length of our sales cycle depends on a number of
factors, including the following:  
    
    the complexities of client challenges our solutions address;  
    
    the breadth of the solution required by the client, including the
technical, organizational and geographic scope of the license;  
    
    the size, timing and complexity of contractual terms of licenses and sales of our products and services;  
    
    wide variations in contractual terms, which may result in deferred recognition of revenue;  
    
    customer financial constraints and credit-worthiness;  
    
    the evaluation and approval processes employed by the clients and
prospects, which has become more complex and lengthy;  
    
    economic, political and market conditions; and  
    
    any other delays arising from factors beyond our control. 43




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FAILURE TO MAINTAIN OUR SERVICE RATES FOR IMPLEMENTATION SERVICES COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION. A significant portion of our revenue is derived from implementation
services. Implementation services are predominately billed on an hourly or
daily basis (time and materials) and sometimes under fixed price contracts.
Implementation services billed on an hourly or daily basis are generally
recognized as work is performed. If we are not able to maintain the current
service rates for our time and materials implementation services, without
corresponding cost reductions, or if the percentage of fixed price contracts
increases, and we underestimate the costs of our fixed price contracts, our
operating performance may suffer. The rates we charge for our implementation
services depend on a number of factors, including the following:  
    
    our clients and prospects perceptions of our ability to add value through our implementation services;  
    
    complexity of services performed;  
    
    competition;  
    
    pricing policies of our competitors and systems integrators;  
    
    the use of globally sourced, lower-cost service delivery capabilities within our industry; and  
    
    general economic conditions. CHANGES IN THE SIZE OF OUR SOFTWARE TRANSACTIONS MAY CAUSE MATERIAL
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS. The size of our software license transactions fluctuates. Fluctuations in
the size of our software transactions have occurred, and may in the future
occur, as a result of changes in demand for our software and services. Losses
of, or delays in concluding, larger software transactions (which typically are
more complex, take longer to negotiate and are more subject to delays) have had
and could have a proportionately greater effect on our revenue and financial
performance for a particular period. For example, we recorded 38 software
transactions of $1.0 million or greater in fiscal 2002, 19 software
transactions of $1.0 million or greater in fiscal 2003 and 18 software
transactions of $1.0 million or greater in fiscal 2004. As a result of these
changes in the size of our software transactions, our quarterly revenue and
financial performance have fluctuated significantly and may fluctuate
significantly in the future. WE EXPERIENCED DECLINES IN SOFTWARE REVENUE IN FISCAL 2002, FISCAL 2003 AND
FISCAL 2004. A REDUCTION IN OUR REVENUE DERIVED FROM SOFTWARE LICENSES RESULTED
AND MAY IN THE FUTURE RESULT IN REDUCED SERVICES AND SUPPORT REVENUE. Our ability to maintain or increase services and support revenue depends
on our ability to maintain or increase the amount of software we license to
customers. During our fiscal 2003 and 2004, we experienced declines in services
revenue primarily as a result of declining software revenue in prior periods.
Additional decreases of software license revenue or slowdowns in licensing may
have a material adverse effect on our services and support revenues in future
periods. IN OUR THIRD QUARTER OF FISCAL 2003, OUR FIRST TWO QUARTERS OF FISCAL 2004 AND
FOURTH QUARTER OF FISCAL 2004, WE EXPERIENCED SEQUENTIAL QUARTERLY DECLINES IN
SUPPORT REVENUE RESULTING FROM BOTH THE RECENT DECLINE IN SOFTWARE REVENUE AND
CLIENTS NOT RENEWING OR PARTIALLY RENEWING EXISTING SUPPORT CONTRACTS. FURTHER
DECLINES IN SOFTWARE REVENUE, A REDUCTION IN THE RENEWAL RATE OF ANNUAL SUPPORT
CONTRACTS, OR BOTH, COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR OPERATING
PERFORMANCE AND FINANCIAL CONDITION. Our support revenue includes post-contract support and the rights to
unspecified software upgrades and enhancements. Support contracts are generally
renewable annually at the option of our customers. We have experienced high
rates of renewed annual support contracts from our customers. If our software
revenue does not grow and if our customers fail to renew or to fully renew
their support contracts at historical rates, our support revenue could
materially decline. 44




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WE HAVE A HISTORY OF SUPPLEMENTING OUR EXISTING REVENUE GENERATION CAPABILITIES
THROUGH ACQUISITIONS OF BUSINESSES AND TECHNOLOGY. ACQUISITIONS INCREASE
BUSINESS AND FINANCIAL RISK. WE HAVE EXPERIENCED DIFFICULTIES INTEGRATING
ACQUISITIONS IN THE PAST. An acquisition involves the integration of business that has previously
operated independently and increases the business and financial risk of the
acquirer. In fiscal 2001, 2002 and 2003 we acquired the products and operations
of Talus, STG Holdings, Inc., OneRelease, CSD, SpaceWorks, WDS and DFE. In connection with these and any
future acquisitions, there can be no assurance that we will:  
    
    effectively integrate employees, operations, products and systems;  
    
    realize the expected benefits of the transaction;  
    
    retain key employees;  
    
    effectively develop and protect key technologies and proprietary know-how;  
    
    avoid conflicts with our clients and business partners that have
commercial relationships or compete with the acquired company;  
    
    avoid unanticipated operational difficulties or expenditures or both;
and  
    
    effectively operate our existing business lines, given the
significant diversion of resources and management attention required to
successfully integrate acquisitions. Although we are not currently contemplating any acquisitions, future
acquisitions may result in a dilution to existing shareholders to the extent we
issue shares of our common stock as consideration or reduced liquidity and
capital resources to the extent we use cash as consideration. IF THE MARKETS FOR OUR PRODUCTS DO NOT GROW OR SUFFER FURTHER DECLINES, OUR
OPERATING PERFORMANCE AND FINANCIAL CONDITION WILL BE MATERIALLY AND ADVERSELY
AFFECTED. Substantially all of our software, services and support revenue have
arisen from, or are related directly to, our solutions. We expect to be
dependent upon these solutions in the future, and any factor adversely
affecting the markets for our solutions would materially and adversely affect
our ability to grow revenue and operating profitability. The markets for our
solutions have been and may continue to be materially adversely affected if
economic and political conditions deteriorate. While we believe the markets for
our solutions will expand as the economy improves, they may grow more slowly
than in the past or anticipated. If the markets for our solutions decline or do
not grow as rapidly as we expect, revenue growth, operating margins, or both,
could be adversely affected. OUR MARKETS ARE VERY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY. The markets for our solutions are very competitive. The intensity of
competition in our markets has significantly increased in part as a result of
the deterioration in our markets. We expect this intensity of competition to
increase in the future. Our current and potential competitors may make
acquisitions of other competitors and may establish cooperative relationships
among themselves or with third parties. If there is significant consolidation
among enterprise application software companies, we may be at a competitive
disadvantage. Some competitors are offering software that competes with ours
at little or no charge as components of bundled products or on a stand-alone
basis. Smaller niche software companies have been and will likely continue to
develop unique offerings that compete effectively with some of our solutions.
Further, our current or prospective clients and partners may become competitors
in the future. Increased competition has resulted and in the future could
result in price reductions, lower gross margins, longer sales cycles and the
loss of market share. Each of these developments could have a material adverse
effect on our operating performance and financial condition. 45




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MANY OF OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER
RESOURCES THAN WE DO, AND THEREFORE, WE MAY BE AT A DISADVANTAGE IN COMPETING
WITH THEM. We directly compete with other enterprise application software vendors
including: Adexa, Aspen Technology, DemandTec, The Descartes Systems Group,
Global Logistics Technologies, i2 Technologies, JDA Software, Khimetrics,
Logility, Manhattan Associates, Mercia, Metreo, PROS Revenue Management, Rapt,
Retek, Sabre, SAP, Viewlocity and Zilliant. Certain enterprise resource
planning (ERP) vendors, in addition to SAP, all of which are substantially
larger than Manugistics, have acquired or developed demand and supply chain
management software companies, products, or functionality or have announced
intentions to develop and sell demand and supply chain management solutions.
Such vendors include Oracle, PeopleSoft and SSA Global Technologies. Some of
our current and potential competitors, particularly the ERP vendors, have
significantly greater financial, marketing, technical and other competitive
resources than we do, as well as greater name recognition and a larger
installed base of clients. Some of our current and potential competitors,
particularly, but not limited to, Oracle and PeopleSoft, may combine pursuant
to recently announced tender offers and subsequently utilize enhanced financial
and human resources to develop and sell more competitive demand chain and
supply chain products. In addition, many of our competitors have
well-established relationships with our current and potential clients and have
extensive knowledge of our industry. As a result, they may be able to adapt
more quickly to new or emerging technologies and changes in client requirements
or to devote greater resources to the development, promotion and
sale of their products than we can. Any of these factors could materially
impair our ability to compete and have a material adverse effect on our
operating performance and financial condition. IF THE DEVELOPMENT OF OUR PRODUCTS AND SERVICES FAILS TO KEEP PACE WITH OUR
INDUSTRYS RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE MATERIALLY
AND ADVERSELY AFFECTED. The markets for our solutions are subject to rapid technological change,
changing client needs, frequent new product introductions and evolving industry
standards. We have historically been successful in keeping pace with these
changes, but if we fail to do so in the future, our products and services may
be rendered less competitive or obsolete. Our product development and testing
efforts have required, and are expected to continue to require, substantial
investments. We have released a web-native version of many of our products and
will continue to develop and release web-native versions of our products. We
may not possess sufficient resources in the future to continue to make further
necessary investments in technology. Recent cutbacks in our workforce could
lengthen the time necessary to develop our products. In addition, we may not
successfully identify new software opportunities or develop and bring new
software to market in a timely and efficient manner. Our growth and future operating results will depend, in part, upon our
ability to continue to enhance existing applications and develop and introduce
new applications or capabilities that:  
    
    meet or exceed technological advances in the marketplace;  
    
    meet changing market and client requirements, including rapid
realization of benefits and the need to rapidly manage and analyze
increasingly large volumes of data;  
    
    comply with changing industry standards;  
    
    achieve market acceptance;  
    
    integrate third-party software effectively; and  
    
    respond to competitive offerings. If we are unable, for technological or other reasons, to develop and
introduce new and enhanced software in a timely manner, we may lose existing
clients and fail to attract new clients, which may have a material adverse
effect on our operating performance and financial condition. 46




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OUR CONTINUED SHIFT OF A SIGNIFICANT NUMBER OF OUR CONTRACTORS TO INDIA POSES
SIGNIFICANT RISKS. We have relationships with third parties in India to outsource a
significant portion of our product development effort. We have continued to
increase the proportion of our product development work being performed by
contractors to India in order to take advantage of cost efficiencies associated
with Indias lower wage scale. However, we may not achieve the cost savings and
other benefits we anticipate from this program, and we may not be able to find
sufficient numbers of developers with the necessary skill sets in India to meet
our needs. We have a heightened risk exposure to changes in the economic,
security and political conditions of India. Economic and political instability,
military actions and other unforeseen occurrences in India could impair our
ability to develop and introduce new software applications and functionality in
a timely manner, which could put our products at a competitive disadvantage
whereby we lose existing customers and fail to attract new customers. DEFECTS IN OUR SOFTWARE OR PROBLEMS IN THE IMPLEMENTATION OF OUR SOFTWARE COULD
LEAD TO CLAIMS FOR DAMAGES BY OUR CLIENTS, LOSS OF REVENUE OR DELAYS IN THE
MARKET ACCEPTANCE OF OUR SOLUTIONS. Our software is complex. This complexity can make it difficult to detect
errors in our software prior to implementation. We may not discover errors in
our software until our customers install and use a given product or until the
volume of services that a product provides increases. When our software is
installed, the environment into which it is installed is frequently complex and
typically contains a wide variety of systems and third-party software, with
which our software must be integrated. This can make the process of
implementation difficult and lengthy. As a result, some customers may have
difficulty implementing our products successfully within anticipated timeframes
or otherwise achieve the expected benefits. These problems may result in claims
for damages suffered by our clients, a loss of, or delays in, the market
acceptance of our solutions, client dissatisfaction and lost revenue and
collection difficulties during the period required to correct these errors. WE UTILIZE THIRD-PARTY SOFTWARE THAT WE INCORPORATE INTO AND INCLUDE WITH OUR
PRODUCTS AND SOLUTIONS, AND IMPAIRED RELATIONS WITH THESE THIRD PARTIES, DEFECTS IN
THIRD-PARTY SOFTWARE OR THEIR INABILITY OR FAILURE TO ENHANCE THEIR SOFTWARE
OVER TIME COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE AND
FINANCIAL CONDITION. We incorporate and include third-party software into and with our products
and solutions. We are likely to incorporate and include additional third-party
software into and with our products and solutions as we expand our product
offerings. If our relations with any of these third-party software providers
are impaired, and if we are unable to obtain or develop a replacement for the
software, our business could be harmed. The operation of our products would be
impaired if errors occur in the third-party software that we utilize. It may be
more difficult for us to correct any defects in third-party software because
the software is not within our control. Accordingly, our business could be
adversely affected in the event of any errors in this software. There can be no
assurance that these third parties will continue to invest the appropriate
levels of resources in their products and services to maintain and enhance the
capabilities of their software. WE UTILIZE THIRD PARTIES TO INTEGRATE OUR SOFTWARE WITH OTHER SOFTWARE PRODUCTS
AND PLATFORMS. IF ANY OF THESE THIRD PARTIES SHOULD CEASE TO PROVIDE
INTEGRATION SERVICES TO US, OUR OPERATING PERFORMANCE AND FINANCIAL CONDITION
COULD BE MATERIALLY ADVERSELY AFFECTED. We depend on companies such as Business Objects, Inovus, Tibco Software,
Vignette, and webMethods to integrate our software with software and platforms
developed by third parties. If relations with any of these third-parties are
impaired, and if we are unable to secure a replacement on a timely basis, our
operating performance and financial condition could be harmed. If these
companies are unable to develop or maintain software that effectively
integrates with our software and is free from defects, our ability to license
our products and provide solutions could be impaired and our operating
performance and financial condition could be harmed. There can be no assurance
that these third parties will continue to invest the appropriate levels of
resources in their products and services to maintain and enhance their
softwares capabilities. 47




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OUR EFFORTS TO DEVELOP AND SUSTAIN RELATIONSHIPS WITH VENDORS SUCH AS SOFTWARE
COMPANIES, CONSULTING FIRMS, RESELLERS AND OTHERS TO MARKET AND IMPLEMENT OUR
SOFTWARE PRODUCTS MAY FAIL, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING PERFORMANCE AND FINANCIAL CONDITION. We are developing, maintaining and enhancing significant working
relationships with complementary vendors, such as software companies,
consulting firms, resellers and others that we believe can play important roles
in marketing our products and solutions. We are currently investing, and intend
to continue to invest, significant resources to develop and enhance these
relationships, which could adversely affect our operating margins. We may be
unable to develop relationships with organizations that will be able to market
our products effectively. Our arrangements with these organizations are not
exclusive and, in many cases, may be terminated by either party without cause.
Many of the organizations with which we are developing or maintaining marketing
relationships have commercial relationships with our competitors. There can be
no assurance that any organization will continue its involvement with us and
our products. The loss of relationships with important organizations could
materially and adversely affect our operating performance and financial
condition. AS A RESULT OF THE WDS ACQUISITION, AN INCREASED PERCENTAGE OF OUR REVENUE WILL
BE DERIVED FROM CONTRACTS WITH THE GOVERNMENT. GOVERNMENT CONTRACTS ARE SUBJECT
TO COST AND OTHER AUDITS BY THE GOVERNMENT AND TERMINATIONS FOR THE CONVENIENCE
OF THE GOVERNMENT. GOVERNMENT PROCUREMENT IS HIGHLY REGULATED, AND CONTRACTORS
ARE SUBJECT TO THE RISKS OF PROTESTS, CLAIMS, PENALTIES, FINES, DEFAULT
TERMINATION, AND RESCISSION, AMONG OTHER ACTIONS. THE ADVERSE RESULT OF A
GOVERNMENT AUDIT OR ACTION AGAINST ANY OF OUR CONTRACTS WITH THE GOVERNMENT
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATING PERFORMANCE AND FINANCIAL CONDITION. Government contracts face special risks due to potential audits by government
agencies. The WDS acquisition has significantly increased the percentage of our
revenue derived from contracts with the Federal Government. Government
contractors are commonly subject to various audits and investigations by
Government agencies. One agency that oversees or enforces contract performance
is the Defense Contract Audit Agency (DCAA). The DCAA generally performs a
review of a contractors performance on its contracts, its pricing practices,
costs and compliance with applicable laws, regulations and standards and to
verify that costs have been properly charged to the Government. Although the
DCAA has completed an initial review of our accounting practices and procedures allowing us to
invoice the Government, it has yet to exercise its option to perform an audit
of our actual invoicing of Government contracts. These audits may occur several
years after completion of the audited work. If an audit were to identify
significant unallowable costs, we could have a material charge to our earnings
or reduction to our cash position as a result of the audit and this could have
a material adverse effect on our operating performance and financial condition. If a government audit uncovers improper or illegal activities, we may be
subject to civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeiture of profits, suspension of payments, fines,
and suspension or debarment from doing business with U.S. federal government
agencies. In addition, we could suffer serious harm to our reputation if
allegations of impropriety were made against us, whether or not true. Government contracts are subject to unique risks of early termination. In addition, Government contracts may be subject to termination by the
Government for its convenience, as well as termination, reduction or
modification in the event of budgetary constraints or any change in the
Governments requirements. If any of our time-and-materials or fixed-priced
contracts were to be terminated for the Governments convenience, we would
probably receive only the purchase price for items delivered prior to
termination, reimbursement for allowable costs for work-in-progress and an
allowance for profit on the contract, or an adjustment for loss if completion
of performance would have resulted in a loss. Government contracts are also
conditioned upon the continuing availability of Congressional appropriations.
Congress usually appropriates funds on a fiscal-year basis, even though the
contract performance may extend over many years. Consequently, at the outset of
a program, the contract is usually only partially funded, and Congress must
annually determine if additional funds will be appropriated to the program. As
a result, long-term contracts are subject to cancellation if appropriations for
future periods become unavailable. We have not historically experienced any
significant material adverse effects as a result of the Governments failure to
fund programs awarded to us. If the Government were to terminate some or all of
our contracts or reduce appropriations, cancel appropriations or both to a
program we have a contract under, our operating performance and financial
condition could be materially adversely affected. 48




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Competitive bidding, a cornerstone to government contracting, imposes risks and
costs. We derive significant revenue from federal contracts awarded through a
competitive bidding process, which can impose substantial costs upon us, and we
will lose revenue if we or our contracting partners (typically, prime
contractors with whom we subcontract) fail to compete effectively. Competitive
bidding imposes substantial costs and presents a number of risks, including:
the need to bid before design is complete, bid and proposal costs, risks in
estimation of prospective needs, and bid protests that may delay or derail
awards. Our work with other contractors poses risks, including risks to our reputation. As a prime contractor, we may rely upon other companies as subcontractors
to perform work we are obligated to deliver to our clients. A failure by one or
more of our subcontractors to perform the agreed-upon services on a timely and
satisfactory basis may compromise our ability to perform our obligations as a
prime contractor. In some cases, we have limited involvement in the work
performed by the subcontractor and may have exposure as a result of problems
caused by the subcontractor. In extreme cases, performance deficiencies on the
part of our subcontractors could result in a government client terminating our
contract for default. A default termination could expose us to liability for
the agencys costs of reprocurement, damage our reputation, and hurt our
ability to compete for future contracts. Additionally, we may have disputes
with our subcontractors that could impair our ability to execute our contracts
as required. Despite careful precautions that we take, we are exposed to risk due to
potential employee misconduct in the highly regulated government marketplace. We are exposed to the risk that employee fraud or other misconduct could
occur. Misconduct by employees could include intentional failures to comply
with federal government procurement regulations, engaging in unauthorized
activities, or falsifying time records. Employee misconduct could also involve
the improper use of our clients sensitive or classified information, which
could result in regulatory sanctions against us and serious harm to our
reputation. It is not always possible to deter employee misconduct, and the
precautions we take to prevent and detect this activity may not be effective in
controlling unknown or unmanaged risks or losses, which could harm our
business. The government marketplace has a unique risk: that appropriations to fund
contracts will not be made, or will be diverted or delayed. A decline in overall U.S. government expenditures could cause a decrease
in our revenue and adversely affect our operating performance. Defense spending
levels may not continue at present levels, and future levels of expenditures
and authorizations for existing programs may decline, remain constant, or shift
to agencies or programs in areas where we do not currently have contracts. A
significant decline in defense expenditures, or a shift in expenditures away
from agencies or programs that we support, could cause a material decline in
our government-related revenue. Federal contracts are subject to unique terms and risks, not commonly found in
the commercial marketplace. Federal government contracts contain provisions and are subject to laws
and regulations that provide government clients with rights and remedies not
typically found in commercial contracts. These rights and remedies allow
government clients, among other things, to: as noted, terminate existing
contracts for convenience, as well as default; reduce or modify contracts or
subcontracts, often unilaterally; terminate security clearances and thereby
prevent classified contracting; cancel multi-year contracts and related orders
if funds for contract performance for any subsequent years become unavailable;
decline to exercise options to renew multi-year contracts; claim rights in
certain products, systems, and technology produced by us; prohibit future
awards based on a finding of an organizational conflict of interest; subject
contract awards to protest; and, as noted, suspend or debar contractors. 49




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Our federal contracts pose unique pricing risks. Much of our federal contracting is done through a type of special
contract, sponsored by the U.S. General Services Administration (GSA), known as
the Multiple Award Schedules (or simply Schedules) contract. Our GSA
Schedules contract, like all others, includes a clause known as the Price
Reductions clause; the terms of that clause are analogous to a most favored
customer clause in commercial contracts. Under that clause, we have agreed
that the prices to the government under the GSA Schedules contract will
maintain a constant relationship to the prices charged to certain commercial
customers, i.e., when prices to those benchmark customers drop, so too must our
prices on our GSA Schedules contract. Although we have undertaken extensive
efforts to comply with the Price Reductions clause, it is possible that we,
through, for example, an unreported discount offered to a benchmark customer,
might fail to honor the obligations of the Price Reductions clause. If that
occurred, we could, under certain circumstances, be subject to an audit, an
action in fraud, or other adverse government actions or penalties. THE LIMITED ABILITY OF LEGAL PROTECTIONS TO SAFEGUARD OUR INTELLECTUAL PROPERTY
RIGHTS COULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY. Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of confidentiality procedures and agreements, contractual
provisions, patent, copyright, trademark and trade secret laws. Despite our
efforts to protect our proprietary rights, unauthorized parties may copy
aspects of our products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is difficult,
particularly in certain foreign countries, including, among others, The
Peoples Republic of China. We are unable to determine the extent to which
piracy of our software products exists. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States. Furthermore, our competitors may independently develop
technology similar to ours. OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
WHICH MAY CAUSE US TO INCUR UNEXPECTED COSTS OR PREVENT US FROM SELLING OUR
PRODUCTS. The number of intellectual property claims in our industry may increase as
the number of competing products grows and the functionality of products in
different industry segments overlaps. In recent years, there has been a
tendency by software companies to file substantially increasing numbers of
patent applications, including those for business methods and processes. We
have no way of knowing what patent applications third parties have filed until
the application is published or until a patent is issued. Patent applications
are often published within 18 months of filing, but it can take as long as
three years or more for a patent to be granted after an application has been
filed. Although we are not aware that any of our products infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by us with respect to current or future
products. Any of these claims, with or without merit, could be time-consuming
to address, result in costly litigation, cause product shipment delays or
require us to enter into royalty or license agreements. These royalty or
license agreements might not be available on terms acceptable to us or at all,
which could materially and adversely affect our financial performance. OUR INTERNATIONAL OPERATIONS POSE RISKS FOR OUR BUSINESS AND FINANCIAL
CONDITION. We currently conduct operations in Australia, Belgium, Brazil, Canada,
France, Germany, Hong Kong, Japan, Malaysia, Mexico, Philippines, Taiwan, The
Peoples Republic of China, Singapore, Sweden and the United Kingdom. We also
have relationships with third parties in India to outsource a portion of our
product development and implementation services effort. We intend to expand
our international operations and to increase the proportion of our revenue from
outside the U.S. These operations require significant management attention and
financial resources and additionally subject us to risks inherent in doing
business internationally, such as:  
    
    failure to properly comply with foreign laws and regulations applicable
to our foreign activities;  
    
    failure to properly comply with U.S. laws and regulations relating to
the export of our products and services;  
    
    difficulties in managing foreign operations and appropriate levels of
staffing;  
    
    foreign currency exposure;  
    
    longer collection cycles;  
    
    tariffs and other trade barriers;  
    
    seasonal reductions in business activities, particularly throughout
Europe;  
    
    proper compliance with local tax laws which can be complex and may
result in unintended adverse tax consequences;  
    
    anti-American sentiment due to the war with Iraq and other American
policies that may be unpopular in certain countries; and  
    
    increasing political instability, adverse economic conditions and the
potential for war or other hostilities in many of these countries. 50




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Our failure to properly comply or address any of the above factors could
adversely affect the success of our international operations and could have a
material adverse effect on our operating performance and financial condition. CHANGES IN THE VALUE OF THE U.S. DOLLAR, IN RELATION TO THE CURRENCIES OF
FOREIGN COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR OPERATING
PERFORMANCE AND FINANCIAL CONDITION. In fiscal 2004, 34.0% of our total revenue was derived from outside the
United States. Our primary international operations are located throughout
Europe and Asia-Pacific. We also have operations in Brazil, Canada and Mexico.
Our international revenue and expenses are denominated in foreign currencies,
typically the local currency of the selling business unit. Therefore, changes
in the value of the U.S. Dollar as compared to these other currencies may
adversely affect our operating results. We intend to expand our international
operations and to increase the proportion of our revenue from outside the U.S.
For example, we recently opened offices in Malaysia, The Philippines and The
Peoples Republic of China. We expect to use an increasing number of foreign
currencies, causing our exposure to currency exchange rate fluctuations to
increase. We generally do not implement hedging programs to mitigate our
exposure to currency fluctuations affecting international accounts receivable,
cash balances and intercompany accounts, and we do not hedge our exposure to
currency fluctuations affecting future international revenues and expenses and
other commitments. For the foregoing reasons, currency exchange rate
fluctuations have caused, and likely will continue to cause, variability in our
foreign currency denominated revenue streams and costs and our cost to settle
foreign currency denominated liabilities, which could have a material adverse
effect on our operating performance and financial condition. WE MAY BE SUBJECT TO FUTURE LIABILITY CLAIMS, AND THE REPUTATIONS OF OUR
COMPANY AND PRODUCTS MAY SUFFER. Many of our implementations involve projects that are critical to the
operations of our clients businesses and provide benefits, some of which may
be difficult to quantify. Any failure in a clients system could result in a
claim for substantial damages against us, regardless of our responsibility for
the failure. We have entered into and plan to continue to enter into agreements
with software vendors, consulting firms, resellers and others whereby they
market and implement our solutions. If these vendors fail to meet their
clients expectations or cause failures in their clients systems, our
reputation and that of our products could be materially and adversely affected
even if our software products perform in accordance with their functional
specifications. IF REQUIREMENTS RELATING TO ACCOUNTING TREATMENT FOR EMPLOYEE STOCK OPTIONS ARE
CHANGED, WE MAY CHOOSE TO CHANGE OUR COMPENSATION PRACTICES. IF WE ISSUE
ADDITIONAL RESTRICTED STOCK TO OUR EMPLOYEES IN FUTURE PERIODS, WE WILL BE
REQUIRED TO RECORD ADDITIONAL COMPENSATION EXPENSE. We currently account for the issuance of stock options under APB Opinion
No. 25, Accounting for Stock Issued to Employees. The FASB recently issued a
proposed statement of Financial Standards that, if enacted in its current form,
would require compensation expense to be recorded for stock options granted to
employees and directors in future periods. As a result, we could decide to
reduce the number of stock options granted to employees or to grant options to
fewer employees. This could affect our ability to retain existing employees and
attract qualified candidates, and increase the cash compensation or benefits we
would have to pay to them. In addition, such a change could have a material
effect on our operating performance. In June 2003, our Board of Directors approved an amendment to our 1998
stock option plan to issue restricted shares of Manugistics common stock to
our employees. This amendment was approved by stockholders at our Annual
Meeting on July 29, 2003. On October 17, 2003, we issued 205,000 shares of
restricted stock to certain key employees. The restricted stock awards granted
to key employees vest over four years. The fair value of the restricted stock
awards granted of approximately $1.3 million was recorded as a component of
deferred compensation. Accordingly, we are required to record compensation
expense over the life of the vesting period of the restricted stock. We will
be required to record additional compensation expense to the extent that we
issue restricted stock to our employees in future periods. Such a change could
have a material effect on our operating performance. 51




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IT MAY BECOME INCREASINGLY EXPENSIVE TO OBTAIN AND MAINTAIN INSURANCE. We obtain insurance to cover a variety of potential risks and liabilities.
In the current market, insurance coverage has become more restrictive, and when
insurance coverage is offered, the deductible for which we are responsible is
larger and premiums have increased substantially. As a result, it may become
more difficult to maintain insurance coverage at historical levels, or if such
coverage is available, the cost to obtain or maintain it may increase
substantially. This may result in our being forced to bear the burden of an
increased portion of risks for which we have traditionally been covered by
insurance, which could have a material effect on our operating performance and
financial condition. RISKS RELATED TO OUR
COMMON STOCK OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE. SIGNIFICANT
DECLINES IN OUR STOCK PRICE MAY RESULT FOR VARIOUS REASONS, INCLUDING POOR
FINANCIAL PERFORMANCE. The trading price of our common stock has been and is likely to be highly
volatile. Our stock price has been and could continue to be subject to wide
fluctuations in response to a variety of factors, including the following:  
    
    actual or anticipated variations in quarterly revenue and operating
results and continuing losses;
    
    continued or deteriorating adverse economic, political and market
conditions;
    
    announcements of technological innovations;
    
    new products or services offered by us or our competitors;
    
    changes in financial estimates and ratings by securities analysts;
    
    changes in the performance, market valuations, or both, of our
current and potential competitors and the software industry in general;
    
    our announcement or a competitors announcement of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
    
    adoption of industry standards and the inclusion of our technology
in, or compatibility of our technology with, such standards;
    
    adverse or unfavorable publicity about us, or our products, services or
implementations;
    
    adverse or unfavorable publicity regarding our competitors, including
their products and implementations;
    
    additions or departures of key personnel;
    
    sales or anticipated sales of additional debt or equity securities; and
    
    other events or factors that may be beyond our control. In addition, the stock markets in general, The Nasdaq National Market and
the equity markets for software companies in particular, have experienced
extraordinary price and volume volatility in recent years. Such volatility has
adversely affected the stock prices for many companies irrespective of, or
disproportionately to, the operating performance of these companies. These
broad market and industry factors may materially and adversely further affect
the market price of our common stock, regardless of our actual operating
performance. SCHEDULED SALES OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK BY OUR EXECUTIVE
OFFICERS MAY CAUSE OUR STOCK PRICE TO DECLINE. Certain of our executive officers, including our chief executive officer
and our chief financial officer have entered into pre-established trading plans
to facilitate the orderly sale by them of shares of our common stock. Our
executive officers who entered into pre-established trading plans are scheduled
to sell shares subject to the terms of their respective trading plan. These
terms include one or more price floors below which shares may not be sold.
The minimum price floor for our chief executive officer is $6.00 per share with
respect to a total of 160,000 shares that may be sold under the plan and $9.00
per share with respect to the balance of the shares that may be sold under the
plan. The minimum price floor for our chief financial officer is $8.00 per
share with respect to a total of 28,000 shares that may be sold under the plan
and $9.00 per share with respect to the balance of the shares that may be sold
under the plan. Sales under each of these pre-established trading plans will,
subject to the respective terms of the trading plan, continue until the trading
plan is modified, terminated or expires. The sale of these shares, if
significant in amount, may cause the market price of our stock to decline. 52




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OUR CHARTER AND BYLAWS, DELAWARE LAW AND THE INDENTURE FOR THE NOTES CONTAIN
PROVISIONS THAT COULD DISCOURAGE A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS. Our charter and our bylaws, in conjunction with Delaware law, contain
provisions that could make it more difficult for a third party to obtain
control of us even if doing so would be beneficial to stockholders. For
example, our bylaws provide for a classified board of directors and allow our
board of directors to expand its size and fill any vacancies without
stockholder approval. Furthermore, our board has the authority to issue
preferred stock and to designate the voting rights, dividend rate and
privileges of the preferred stock, all of which may be greater than the rights
of common stockholders. Additionally, upon a change of control of the Company,
the holders of the Notes would have the right to require us or our successor to
repurchase the Notes at a purchase price
equal to 100% of the principal amount, plus accrued and unpaid interest to
the date of repurchase in cash. This could make it more difficult for a third
party to obtain control of us even if doing so would be beneficial to
stockholders. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. Foreign Currency Risk. We are subject to risk from changes in foreign
exchange rates for our subsidiaries which use a foreign currency as their
functional currency and are translated into U.S. dollars. Such changes could
result in cumulative translation gains or losses that are included in
shareholders equity. Revenue outside of the United States was 34.0%, 25.0% and
28.0% for fiscal 2004, 2003 and 2002, respectively. Revenue outside the United
States is derived from operations in Australia, Belgium, Brazil, Canada, The
Peoples Republic of China, France, Germany, Hong Kong, Japan, Malaysia,
Mexico, Netherlands, Philippines, Singapore, Sweden, Taiwan and the United
Kingdom. Exchange rate fluctuations between the U.S. dollar and the currencies
of these countries result in positive or negative fluctuations in the amounts
relating to foreign operations reported in our consolidated financial
statements. None of the components of our financial statements were materially
affected by exchange rate fluctuations during fiscal 2004, 2003 and 2002. We
generally do not use foreign currency options and forward contracts to hedge
against the earnings effects of such fluctuations. While we do not expect to
incur material losses as a result of this currency risk, there can be no
assurance that losses will not result. Interest Rate Risk. Our long-term investments, marketable securities and
certain cash equivalents are subject to interest rate risk. These securities,
like all fixed income instruments, are subject to interest rate risk and,
accordingly, if market interest rates increase, these investments will decline
in value. We manage this risk by maintaining an overall investment portfolio
of available-for-sale instruments with high credit quality and relatively short
average maturities. All securities in our long-term investment portfolio mature
in two years or less. Instruments in our entire portfolio include, but are not
limited to, commercial paper, money-market instruments, bank time deposits and
variable rate and fixed rate obligations of corporations and national, state
and local governments and agencies, in accordance with an investment policy
approved by our Board of Directors. These instruments are denominated in U.S.
dollars. The fair market value of our long-term investments and marketable
securities held was $16.3 million and $2.9 million at February 29, 2004 and
February 28, 2003, respectively. We also hold cash balances in accounts with commercial banks in the United
States and foreign countries. These cash balances represent operating balances
only and are invested in short-term deposits of the local bank. Generally, operating
cash balances held at banks outside of the United States are denominated in the
local currency. The United States Federal Reserve Board influences the general market rates of
interest. The federal funds rate was 1.75% as of March 1, 2002. During fiscal
2003 and fiscal 2004, the federal funds rate was further reduced by 75 basis
points to its February 29, 2004 level of 1.00%. These actions have led to a
general market decline in interest rates. The weighted average yield on interest-bearing investments held as of
February 28 or 29, 2004 and 2003 was approximately 1.3% and 1.2%, respectively.
Based on our investment holdings at February 29, 2004, a 100 basis point
decline in the average yield would reduce our annual interest income by $1.6
million. Credit Risk. Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments in marketable securities and trade accounts receivable. We have
policies that limit investments to investment grade securities and the amount
of credit exposure to any one issuer. We perform ongoing credit evaluations of
our customers and maintain an allowance for potential credit losses. We do not
require collateral or other security to support clients receivables since most
of our customers are large, well-established companies. Our credit risk is also
mitigated because our customer base is diversified both by geography and
industry and no single customer accounts for more than 10% our consolidated
revenue. We generally do not use foreign exchange contracts to hedge the risk
in receivables denominated in foreign currencies. We do not hold or issue
derivative financial instruments for trading or speculative purposes. 53




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##### 



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Our consolidated financial statements and supplementary data, together
with the reports of Deloitte & Touche LLP, independent auditors, are included
in Part IV of this annual report on Form 10-K. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we evaluated the
effectiveness of our disclosure controls and procedures (as such term is
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended) under the supervision and with the participation of our chief
executive officer and chief financial officer. Based on and as of the date of
such evaluation, the aforementioned officers have concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures
were effective. There have been no changes in our internal control over financial
reporting that occurred during our most recent completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 54




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##### 



PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Reference is made to the information to be set forth in the definitive
Proxy Statement relating to the 2004 Annual Meeting of Stockholders (which we
anticipate will be filed with the Securities and Exchange Commission within 120
days after the end of our fiscal year ended February 29, 2004) (the Proxy
Statement) under the captions Audit Committee Financial Experts, Election
of Directors and Section 16(a) Beneficial Ownership Reporting Compliance and
to the information set forth in Part I of this annual report on Form 10-K
regarding executive officers under the caption Item 4A. Executive Officers of
the Registrant. Item 11. EXECUTIVE COMPENSATION. Reference is made to the information to be set forth in the Proxy
Statement under the caption Executive Compensation. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Reference is made to the information to be set forth in the Proxy
Statement under the caption Ownership of Manugistics Group, Inc. Stock. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the information to be set forth in the Proxy
Statement under the caption Certain Business Relationships. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Reference is made to the information required to be set forth in the Proxy
Statement under the caption Audit Fees. 55




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##### 



PART IV Item 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. (a) Documents filed as a part of this annual report on Form 10-K: Page NumberFinancial Statements:
    
    In This ReportIndependent Auditors Report
    
    
    F-1Consolidated Balance Sheets
    
    
    F-2Consolidated Statements of Operations and Comprehensive Loss
    
    
    F-3Consolidated Statements of Stockholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6
 The financial statements listed above are filed as part of this
annual report on Form 10-K. Schedules are omitted because they are not required, are not applicable or
the required information is shown in the consolidated financial statements
or notes thereto contained in this annual report on Form 10-K. (2) Exhibits The exhibits required by Item 601 of Regulation S-K are listed below and are
filed or incorporated by reference as part of this annual report on Form
10-K. Exhibits 10.1, 10.2, 10.11, 10.12, 10.13, 10.13(a), 10.13(b), 10.14,
10.16 through 10.28(b) and 10.32 through 10.37 are management contracts or
compensatory plans or arrangements required to be filed as exhibits pursuant
to Item 14(C) of this annual report on Form 10-K. Number
    
    Notes
    
    Description2.1
    
    (J)
    
    Agreement and Plan of Merger dated June 1, 1998, among the Company, TYECIN Acquisition, Inc.,
TYECIN Systems, Inc. and certain other persons2.2
    
    (M)
    
    Agreement Plan of Merger by and among Manugistics Group, Inc., Talus Solutions, Inc. and Manu
Acquisition Corp. dated September 21, 20003.1(a)
    
    (A)
    
    Amended and Restated Certificate of Incorporation of the Company3.1(b)
    
    (B)
    
    Certificate of Retirement and Elimination (relating to the Series A and Series B preferred stock
of the Company)3.1 (c)
    
    (C)
    
    Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company
(effective July 29, 1997)3.2
    
    (Q)
    
    Amended and Restated By-Laws of the Company3.3
    
    (W)
    
    Amendment to Second Amended and Restated By-Laws of the Company (adopted January 22, 2003)3.4
    
    (X)
    
    Amendment to Second Amended and Restated By-Laws of the Company (adopted June 11, 2003)4.1
    
    (M)
    
    Purchase Agreement dated October 16, 2000, between Deutsche Bank Securities, Inc.,(as
representative of the initial purchasers) and Manugistics Group, Inc.4.2
    
    (M)
    
    Indenture dated as of October 20, 2000, between Manugistics Group, Inc., and State Street Bank
and Trust Company4.3
    
    (M)
    
    Registration Rights Agreement dated as of October 20, 2000, and Deutsche Bank Securities Inc.,
and Banc of America Securities LLC.4.4
    
    (O)
    
    Form of Note for Manugistics Group, Inc.s 5% Convertible Subordinated Notes due November 1, 2007
 56




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##### 



Number
    
    Notes
    
    Description10.1
    
    (F)
    
    Employee Incentive Stock Option Plan of the Company, as amended10.2
    
    (F)
    
    Fifth Amended and Restated Stock Option Plan of the Company10.3
    
    (A)
    
    Form of Notice of Grant of Option pursuant to the Director Stock Option Plan (previously
identified as Exhibit 10.4)10.11
    
    (D)
    
    Outside Directors Non-Qualified Stock Option Plan10.12
    
    (D)
    
    Executive Incentive Stock Option Plan10.13
    
    (Q)
    
    Second Amended and Restated 1998 Stock Option Plan of the Company10.13 (a)
    
    (W)
    
    Amendment to the Second Amended and Restated 1998 Stock Option Plan of the Company (effective
March 1, 2003)10.13 (b)
    
    (Y)
    
    Amended and Restated 1998 Stock Option Plan of Manugistics Group, Inc., incorporated herein by
reference to Exhibit 10 to the registrants Post-Effective Amendment No. 1 to Form S-8, filed
with the Commission on September 15, 2003.10.14
    
    (E)
    
    Employee Stock Purchase Plan of the Company10.16
    
    (G)
    
    Employment Agreement dated April 25, 1999 among the Company, Manugistics, Inc. and with Gregory
J. Owens, Chief Executive Officer and President10.17
    
    (H)
    
    Employment Agreement dated June 3, 1999 between Manugistics, Inc. and Richard F. Bergmann, as
amended (as of October 15, 2002, Mr. Bergmann was no longer an executive of the Company.)10.18
    
    (H)
    
    Employment Agreement dated June 7, 1999 between Manugistics, Inc. and Terrance A. Austin, as
amended (as of January 5, 2003, Mr. Austin was no longer an executive of the Company.)10.19
    
    (H)
    
    Employment Agreement dated August 25, 1999 between Manugistics, Inc. and James J. Jeter, as
amended10.20
    
    (I)
    
    Employment Agreement dated December 6, 1999 between Manugistics, Inc. and Raghavan Rajaji10.21
    
    (K)
    
    Employment Agreement dated December 6, 1999 between Manugistics, Inc. and Timothy T. Smith.10.23(a)
    
    (K)
    
    Stock Option Agreement dated April 27, 1999, between the Company and Gregory J. Owens10.23(b)
    
    (K)
    
    Stock Option Agreement dated December 1, 1999, between the Company and Gregory J. Owens10.23(c)
    
    (K)
    
    Stock Option Agreement dated December 17, 1999, between the Company and Gregory J. Owens10.24(a)
    
    (K)
    
    Stock Option Agreement dated December 6, 1999, between the Company and Richard F. Bergmann (as of
October 15, 2002, Mr. Bergmann was no longer an executive of the Company.)10.24(b)
    
    (K)
    
    Stock Option Agreement dated June 16, 1999, between the Company and Richard F. Bergmann (as of
October 15, 2002, Mr. Bergmann was no longer an executive of the Company.)10.24(c)
    
    (L)
    
    Stock Option Agreement dated December 16, 1999, between the Company and Richard F. Bergmann (as
of October 15, 2002, Mr. Bergmann was no longer an executive of the Company.)10.25
    
    (K)
    
    Stock Option Agreement dated June 7, 1999, between the Company and Terrence A. Austin (as of
January 5, 2003, Mr. Austin was no longer an executive of the Company.)10.28(a)
    
    (X)
    
    Employment agreement dated June 19, 2003 between the Company and Jeremy P. Coote.10.28(b)
    
    (AA)
    
    Stock Option Agreement dated June 19, 2003 between the Company and Jeremy P. Coote.10.29(a)
    
    (N)
    
    Lease Agreement dated December 19, 2000, between the Company and DANAC Corporation.10.29(b)
    
    (P)
    
    First amendment dated June 2001 to lease agreement dated December 19, 2000, between the Company
and DANAC Corporation.10.29 (c)
    
    (Y)
    
    Sublease agreement between Theracom, Inc. and the Company dated July 24, 2003.10.31 (b)
    
    (Q)
    
    Credit Agreement dated as of February 28, 2002 by the Company in favor of Bank of America, N.A.10.31 (c)
    
    (R)
    
    Amendment Agreement dated as of July 12, 2002 to Credit Agreement dated as of February 28, 2002
by the Company in favor of Bank of America, N.A.
 57




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##### 



Number
    
    Notes
    
    Description10.31 (d)
    
    (S)
    
    Amendment Agreement No. 2 dated as of November 22, 2002 to Credit Agreement dated as of February
28, 2002 by the Company in favor of Bank of America, N.A.10.32
    
    (Q)
    
    Second Amended and Restated 2000 Stock Option Plan of the Company (effective January 29, 2002)10.33
    
    (Q)
    
    Employment Agreement dated November 21, 2000, between the Company and Jeffrey Hudkins10.34
    
    (W)
    
    Amended Employment Agreement dated February 27, 2002 between the Company and Jeffrey L. Holmes10.35
    
    (W)
    
    Employment Agreement dated December 14, 2001 between the Company and Everett G. Plante10.36
    
    (U)
    
    Termination of Employment Agreement dated October 15, 2002 between the Company and Richard F.
Bergmann10.37
    
    (S)
    
    Termination of Employment Agreement dated January 3, 2003 between the Company and Terrance A.
Austin10.45
    
    (T)
    
    Standstill Agreement dated October 24, 2002 between Manugistics Group, Inc and Warburg Pincus
Private Equity VIII, LP.10.50
    
    (U)
    
    Loan and Security Agreement dated April 12, 2002 by the Company in favor of Silicon Valley Bank.10.51
    
    (V)
    
    Financing Agreement and Form of Revolving Promissory Note dated January 14, 2003 by the Company
in favor of Silicon Valley Bank.10.52
    
    (V)
    
    Amended Loan and Security Agreement dated January 14, 2003 by the Company in favor of Silicon
Valley Bank.10.53
    
    (Z)
    
    Loan Modification Agreement dated December 16, 2003 between the Company and Silicon Valley Bank.10.54
    
    
    
    Loan Modification Agreement dated March 31, 2004 between the Company and Silicon Valley Bank10.55
    
    
    
    Loan Modification Agreement dated March 31, 2004 between the Company and Silicon Valley Bank10.56
    
    
    
    Loan and Security Agreement dated March 31, 2004 by the Company in favor of Silicon Valley Bank10.57
    
    
    
    Financing Agreement and Form of Revolving Promissory Note dated March 31, 2004 by the Company in
favor of Silicon Valley Bank21
    
    
    
    Subsidiaries of the Company23
    
    
    
    Independent Auditors Consent31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  (A)
    
    Incorporated by reference from the exhibits to the Companys registration
statement on form S-1 (NO. 33-65312).(B)
    
    Incorporated by reference to 4.1(A) to the Companys registration statement
on form S-3 (REG. NO. 333-31949).(C)
    
    Incorporated by reference to exhibit 4.1 (b) to the Companys registration
statement on form S-3 (REG. NO. 333-31949).(D)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on form 10-Q for the quarter ended August 31, 1994.(E)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on form 10-Q for the quarter ended August 31, 1995.(F)
    
    Incorporated by reference from the exhibits to the Companys definitive
proxy statement relating to the 1996 annual meeting of shareholders dated
June 20, 1996. 58




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(G)
    
    Incorporated by reference from the exhibits to the Companys annual
report on Form 10-K for fiscal year ended February 28, 1999.(H)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended August 31, 1999.(I)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended November 30, 1999.(J)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended August 31, 1998.(K)
    
    Incorporated by reference from the exhibits to the Companys annual report
on Form 10-K for fiscal year ended February 29, 2000.(L)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended May 31, 2000.(M)
    
    Incorporated by reference from the exhibits to the Companys current report
on form 8-K/A dated October 11, 2000.(N)
    
    Incorporated by reference from the exhibits to the Companys current report
on Form 10-Q for the quarter ended November 30, 2000.(O)
    
    Incorporated by reference from the exhibits to the Companys registration
statement on form S-3/A (NO. 333-53918).(P)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended May 31, 2001.(Q)
    
    Incorporated by reference from the exhibits to the Companys annual
report on Form 10-K for the fiscal year ended February 28, 2002.(R)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended May 31, 2002.(S)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended November 30, 2002.(T)
    
    Incorporated by reference from the exhibits to the Companys current
report on for 8-K dated October 25, 2002.(U)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended August 31, 2002.(V)
    
    Incorporated by reference from the exhibits to the Companys current
report on for 8-K dated January 16, 2003.(W)
    
    Incorporated by reference from the exhibits to the Companys annual
report on Form 10-K for the fiscal year ended February 28, 2003.(X)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended May 31, 2003.(Y)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended August 31, 2003.(Z)
    
    Incorporated by reference from the exhibits to the Companys quarterly
report on Form 10-Q for the quarter ended November 30, 2003.(AA)
    
    Incorporated by reference to the Companys registration statement Form
S-8 filed by the Company on September 15, 2003 (NO. 333-108811). 59




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(b)
    
    Reports on Form 8-K  1 On December 18, 2003, we furnished a Current Report on Form 8-K
dated December 18, 2003 reporting under Item 12 our issuance of a press
release announcing our financial results for the three and nine months
ended November 30, 2003.  (c)
    
    Exhibits See the response to Item 15(a)(2) above. 60




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 13, 2004. MANUGISTICS GROUP, INC. (Registrant) /s/ Gregory J. Owens  
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on May 13, 2004. /s/ Gregory J. OwensGregory J. OwensChairman of the Board and Chief Executive Officer(Principal executive officer)/s/ Raghavan RajajiRaghavan RajajiExecutive Vice President andChief Financial Officer(Principal financial officer)/s/ Jeffrey T. HudkinsJeffrey T. HudkinsGroup Vice President, Controller andChief Accounting Officer(Principal accounting officer)
 /s/ J. Michael Cline
    
    /s/ Thomas A. SkeltonJ. Michael Cline
Director
    
    Thomas A. Skelton
Director/s/ William H. Janeway

William H. Janeway
Director
    
    /s/ Lynn C. Fritz

Lynn C. Fritz
Director/s/ Joseph H. Jacovini

Joseph H. Jacovini
Director
    
    /s/ William G. Nelson

William G. Nelson
Director/s/ Kevin C. Melia

Kevin C. Melia
Director
 61




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##### 



INDEPENDENT AUDITORS REPORT To the Board of Directors and Stockholders of
Manugistics Group, Inc.
Rockville, Maryland We have audited the accompanying consolidated balance sheets of Manugistics
Group, Inc. and its subsidiaries (the Company) as of February 29, 2004 and
February 28, 2003, and the related consolidated statements of operations and
comprehensive loss, stockholders equity and cash flows for each of the three
years in the period ended February 29, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of February 29,
2004 and February 28, 2003, and the results of its operations and its cash
flows for each of the three years in the period ended February 29, 2004, in
conformity with accounting principles generally accepted in the United States
of America. As described in Note 6 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets,during the year ended February 28, 2003. /s / DELOITTE & TOUCHE LLP McLean, VA May 11, 2004 F-1




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##### 



MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) February 28 or 29,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    138,984
    
    
    $
    134,789Marketable securities
    
    
    7,316
    
    
    
    2,946Total cash, cash equivalents and marketable securities
    
    
    146,300
    
    
    
    137,735Accounts receivable, net of allowance for doubtful accounts of $4,395 and
$7,007 at February 29, 2004 and February 28, 2003, respectively
    
    
    55,575
    
    
    
    63,940Other current assets
    
    
    11,924
    
    
    
    11,612Total current assets
    
    
    213,799
    
    
    
    213,287NON-CURRENT ASSETS:Property and equipment, net of accumulated depreciation
    
    
    21,632
    
    
    
    31,230Software development costs, net of accumulated amortization
    
    
    14,224
    
    
    
    13,428Restricted cash
    
    
    
    
    
    
    12,980Long-term investments
    
    
    8,999
    
    
    
    Goodwill
    
    
    185,501
    
    
    
    187,438Acquired technology, net of accumulated amortization
    
    
    27,023
    
    
    
    41,232Customer relationships, net of accumulated amortization
    
    
    15,984
    
    
    
    20,657Other intangibles and non-current assets, net of accumulated amortization
    
    
    10,919
    
    
    
    9,121TOTAL ASSETS
    
    $
    498,081
    
    
    $
    529,373LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    10,368
    
    
    $
    9,738Accrued compensation
    
    
    6,180
    
    
    
    7,156Accrued restructuring
    
    
    5,112
    
    
    
    5,870Deferred revenue
    
    
    43,748
    
    
    
    43,388Other current liabilities
    
    
    22,857
    
    
    
    27,344Total current liabilities
    
    
    88,265
    
    
    
    93,496NON-CURRENT LIABILITIES:Convertible debt
    
    
    175,500
    
    
    
    250,000Accrued restructuring
    
    
    14,393
    
    
    
    8,350Long-term debt and capital leases
    
    
    2,633
    
    
    
    4,795Other non-current liabilities
    
    
    430
    
    
    
    650Total non-current liabilities
    
    
    192,956
    
    
    
    263,795COMMITMENTS AND CONTINGENCIES (Note 8)STOCKHOLDERS EQUITY:Preferred stock
    
    
    
    
    
    
    Common stock, $.002 par value per share; 300,000 shares authorized
at February 29, 2004 and February 28, 2003, respectively; 81,973 and 70,104
shares issued and outstanding at February 29, 2004
and February 28, 2003, respectively
    
    
    164
    
    
    
    140Additional paid-in capital
    
    
    775,969
    
    
    
    633,801Deferred compensation
    
    
    (1,410
    )
    
    
    (3,094
    )Accumulated other comprehensive income (loss)
    
    
    3,615
    
    
    
    (1,087
    )Accumulated deficit
    
    
    (561,478
    )
    
    
    (457,678
    )Total stockholders equity
    
    
    216,860
    
    
    
    172,082TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    498,081
    
    
    $
    529,373
 See accompanying Notes to Consolidated Financial Statements. F-2




---



##### 



MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data) February 28 or 29,2004
    
    2003
    
    2002REVENUE:Software
    
    $
    73,766
    
    
    $
    74,899
    
    
    $
    129,772Support
    
    
    86,593
    
    
    
    84,075
    
    
    
    73,852Services
    
    
    73,254
    
    
    
    102,144
    
    
    
    106,522Reimbursed expenses
    
    
    9,432
    
    
    
    11,268
    
    
    
    9,741Total revenue
    
    
    243,045
    
    
    
    272,386
    
    
    
    319,887OPERATING EXPENSES:Cost of revenue:Cost of software
    
    
    15,851
    
    
    
    19,127
    
    
    
    21,144Amortization of acquired technology
    
    
    14,210
    
    
    
    13,623
    
    
    
    9,168Total cost of software
    
    
    30,061
    
    
    
    32,750
    
    
    
    30,312Cost of support and services
    
    
    80,306
    
    
    
    98,055
    
    
    
    92,083Cost of reimbursed expenses
    
    
    9,432
    
    
    
    11,268
    
    
    
    9,741Non-cash stock option compensation expense for support and services
    
    
    865
    
    
    
    1,673
    
    
    
    52Total cost of support and services
    
    
    90,603
    
    
    
    110,996
    
    
    
    101,876Sales and marketing
    
    
    66,061
    
    
    
    95,627
    
    
    
    120,437Non-cash stock option compensation expense (benefit) for sales and marketing
    
    
    456
    
    
    
    931
    
    
    
    (1,794
    )Total cost of sales and marketing
    
    
    66,517
    
    
    
    96,558
    
    
    
    118,643Product development
    
    
    36,233
    
    
    
    63,055
    
    
    
    70,477Non-cash stock option compensation expense (benefit) for product development
    
    
    140
    
    
    
    298
    
    
    
    (1,310
    )Total cost of product development
    
    
    36,373
    
    
    
    63,353
    
    
    
    69,167General and administrative
    
    
    25,060
    
    
    
    27,885
    
    
    
    28,522Non-cash stock option compensation expense (benefit) for general and
administrative
    
    
    338
    
    
    
    524
    
    
    
    (59
    )Total cost of general and administrative
    
    
    25,398
    
    
    
    28,409
    
    
    
    28,463Amortization of intangibles
    
    
    4,674
    
    
    
    3,866
    
    
    
    86,279Goodwill impairment charge
    
    
    
    
    
    
    96,349
    
    
    
    Purchased research and development charge
    
    
    
    
    
    
    3,800
    
    
    
    Restructuring and lease abandonment charges
    
    
    18,627
    
    
    
    19,184
    
    
    
    6,612IRI settlement
    
    
    
    
    
    
    
    
    
    
    3,115Total operating expenses
    
    
    272,253
    
    
    
    455,265
    
    
    
    444,467LOSS FROM OPERATIONS
    
    
    (29,208
    )
    
    
    (182,879
    )
    
    
    (124,580
    )DEBT CONVERSION EXPENSE
    
    
    (59,823
    )
    
    
    
    
    
    
    OTHER EXPENSE, NET
    
    
    (13,455
    )
    
    
    (7,942
    )
    
    
    (14,638
    )LOSS BEFORE INCOME TAXES
    
    
    (102,486
    )
    
    
    (190,821
    )
    
    
    (139,218
    )PROVISION FOR (BENEFIT FROM) INCOME TAXES
    
    
    1,314
    
    
    
    21,418
    
    
    
    (24,060
    )NET LOSS
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (115,158
    )BASIC AND DILUTED LOSS PER SHARE
    
    $
    (1.43
    )
    
    $
    (3.04
    )
    
    $
    (1.69
    )SHARES USED IN BASIC AND DILUTED SHARE COMPUTATION
    
    
    72,715
    
    
    
    69,768
    
    
    
    67,986COMPREHENSIVE LOSS:Net loss
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (115,158
    )Other comprehensive income (loss), net of tax:Foreign currency translation adjustments
    
    
    4,622
    
    
    
    1,658
    
    
    
    (2,036
    )Unrealized gains (losses) on securities
    
    
    80
    
    
    
    (41
    )
    
    
    656Total other comprehensive income (loss)
    
    
    4,702
    
    
    
    1,617
    
    
    
    (1,380
    )TOTAL COMPREHENSIVE LOSS
    
    $
    (99,098
    )
    
    $
    (210,622
    )
    
    $
    (116,538
    )
 See accompanying Notes to Consolidated Financial Statements. F-3




---



##### 



MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands) Common StockAccumulatedAdditional
    
    
    
    
    
    
    
    
    
    OtherPar
    
    Paid-in
    
    Treasury
    
    Deferred
    
    Comprehensive
    
    AccumulatedShares
    
    Value
    
    Capital
    
    Stock
    
    Compensation
    
    Income (Loss)
    
    (Deficit)
    
    TotalBALANCE, FEBRUARY 28, 2001
    
    
    67,518
    
    
    $
    135
    
    
    $
    621,824
    
    
    $
    (717
    )
    
    $
    (19,316
    )
    
    $
    (1,324
    )
    
    $
    (130,281
    )
    
    $
    470,321Issuance of common stock  employee stock purchase plan
    
    
    113
    
    
    
    
    
    
    
    2,337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,337Issuance of common stock  One Release
Acquisition
    
    
    136
    
    
    
    
    
    
    
    4,343
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,343Exercise of stock options
    
    
    1,787
    
    
    
    4
    
    
    
    10,561
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,565Issuance of common stock  IRI settlement
    
    
    241
    
    
    
    1
    
    
    
    3,874
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,875Retirement of treasury shares
    
    
    (753
    )
    
    
    (2
    )
    
    
    (715
    )
    
    
    717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock option repricing
    
    
    
    
    
    
    
    
    
    
    (10,176
    )
    
    
    
    
    
    
    10,176
    
    
    
    
    
    
    
    
    
    
    
    Stock option  based compensation benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,111
    )
    
    
    
    
    
    
    
    
    
    
    (3,111
    )Deferred stock-based compensation related to acquisitions
    
    
    
    
    
    
    
    
    
    
    (2,187
    )
    
    
    
    
    
    
    3,202
    
    
    
    
    
    
    
    
    
    
    
    1,015Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,036
    )
    
    
    
    
    
    
    (2,036
    )Net change in unrealized gain / loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    656
    
    
    
    
    
    
    
    656Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115,158
    )
    
    
    (115,158
    )BALANCE, FEBRUARY 28, 2002
    
    
    69,042
    
    
    $
    138
    
    
    $
    629,861
    
    
    $
    
    
    
    $
    (9,049
    )
    
    $
    (2,704
    )
    
    $
    (245,439
    )
    
    $
    372,807Issuance of common stock  employee stock purchase plan
    
    
    429
    
    
    
    1
    
    
    
    1,481
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,482Issuance of common stock  One Release
Acquisition
    
    
    67
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Exercise of stock options
    
    
    566
    
    
    
    1
    
    
    
    3,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,596Stock option  based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,426
    
    
    
    
    
    
    
    
    
    
    
    3,426Deferred stock-based compensationrelated to acquisitions and other
    
    
    
    
    
    
    
    
    
    
    (2,136
    )
    
    
    
    
    
    
    2,529
    
    
    
    
    
    
    
    
    
    
    
    393Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,658
    
    
    
    
    
    
    
    1,658Net change in unrealized gain / loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (212,239
    )
    
    
    (212,239
    )BALANCE, FEBRUARY 28, 2003
    
    
    70,104
    
    
    $
    140
    
    
    $
    633,801
    
    
    $
    
    
    
    $
    (3,094
    )
    
    $
    (1,087
    )
    
    $
    (457,678
    )
    
    $
    172,082Issuance of common stock  employee stock purchase plan
    
    
    212
    
    
    
    1
    
    
    
    470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    471Issuance of common stock  debt conversion
    
    
    9,726
    
    
    
    19
    
    
    
    134,308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,327Issuance of common stock  restricted stock
    
    
    205
    
    
    
    1
    
    
    
    1,341
    
    
    
    
    
    
    
    (1,081
    )
    
    
    
    
    
    
    
    
    
    
    261Exercise of stock options
    
    
    1,726
    
    
    
    3
    
    
    
    8,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,077Deferred financing fees reclassification debt conversion
    
    
    
    
    
    
    
    
    
    
    (1,293
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,293
    )Stock option  based compensation benefit
    
    
    
    
    
    
    
    
    
    
    (732
    )
    
    
    
    
    
    
    2,531
    
    
    
    
    
    
    
    
    
    
    
    1,799Deferred stock-based compensation
Related to acquisitions and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    234Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,622
    
    
    
    
    
    
    
    4,622Net change in unrealized gain / loss on marketable
securities and long-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    80Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,800
    )
    
    
    (103,800
    )BALANCE, FEBRUARY 29, 2004
    
    
    81,973
    
    
    $
    164
    
    
    $
    775,969
    
    
    $
    
    
    
    $
    (1,410
    )
    
    $
    3,615
    
    
    $
    (561,478
    )
    
    $
    216,860
 See accompanying Notes to Consolidated Financial Statements. F-4




---



##### 



MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) February 28 or 29,2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (115,158
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    37,046
    
    
    
    41,391
    
    
    
    116,592Amortization of debt issuance costs
    
    
    1,175
    
    
    
    1,157
    
    
    
    1,141Restructuring and lease abandonment charges
    
    
    18,627
    
    
    
    19,184
    
    
    
    6,612Goodwill impairment charge
    
    
    
    
    
    
    96,349
    
    
    
    Debt conversion expense
    
    
    59,823
    
    
    
    
    
    
    
    Purchased research and development charge
    
    
    
    
    
    
    3,800
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    20,350
    
    
    
    (28,168
    )Non-cash option stock compensation expense (benefit)
    
    
    1,799
    
    
    
    3,426
    
    
    
    (3,111
    )Loss on investments
    
    
    
    
    
    
    41
    
    
    
    10,561Other
    
    
    769
    
    
    
    (47
    )
    
    
    1,552Changes in assets and liabilities:Accounts receivable
    
    
    8,365
    
    
    
    15,473
    
    
    
    9,134Other current assets
    
    
    (325
    )
    
    
    (34
    )
    
    
    850Other non-current assets
    
    
    (3,695
    )
    
    
    119
    
    
    
    1,289Accounts payable
    
    
    630
    
    
    
    (118
    )
    
    
    (3,791
    )Accrued compensation
    
    
    (976
    )
    
    
    (7,023
    )
    
    
    (6,973
    )Other liabilities
    
    
    (3,143
    )
    
    
    (849
    )
    
    
    (4,127
    )Deferred revenue
    
    
    360
    
    
    
    (3,618
    )
    
    
    2,015Accrued restructuring
    
    
    (9,830
    )
    
    
    (8,037
    )
    
    
    (4,317
    )Net cash provided by (used in) operating activities
    
    
    6,825
    
    
    
    (30,675
    )
    
    
    (15,899
    )CASH FLOWS FROM INVESTING ACTIVITIES:Acquisitions of businesses and acquired technology, net of cash acquired
    
    
    1,968
    
    
    
    (32,259
    )
    
    
    (30,951
    )Restricted cash
    
    
    12,980
    
    
    
    (12,980
    )
    
    
    Sales of investments
    
    
    
    
    
    
    
    
    
    
    367Sales of marketable securities
    
    
    27,871
    
    
    
    3,511
    
    
    
    102,387Purchases of marketable securities
    
    
    (32,242
    )
    
    
    (2,198
    )
    
    
    (1,350
    )Purchases of property and equipment
    
    
    (2,165
    )
    
    
    (14,821
    )
    
    
    (10,179
    )Investments in businesses
    
    
    
    
    
    
    
    
    
    
    (10,150
    )Capitalization and purchases of software
    
    
    (11,520
    )
    
    
    (11,222
    )
    
    
    (13,547
    )Purchases of long-term investments
    
    
    (8,999
    )
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (12,107
    )
    
    
    (69,969
    )
    
    
    36,577CASH FLOWS FROM FINANCING ACTIVITIES:Line of credit borrowings
    
    
    
    
    
    
    2,830
    
    
    
    Payments on long-term debt, capital lease obligations and debt issuance
costs
    
    
    (3,046
    )
    
    
    (2,771
    )
    
    
    (490
    )Proceeds from exercise of stock options and employee
stock plan purchases
    
    
    8,548
    
    
    
    5,078
    
    
    
    12,902Net cash provided by financing activities
    
    
    5,502
    
    
    
    5,137
    
    
    
    12,412EFFECTS OF EXCHANGE RATES ON CASH BALANCES
    
    
    3,975
    
    
    
    1,495
    
    
    
    (651
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    4,195
    
    
    
    (94,012
    )
    
    
    32,439CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    134,789
    
    
    
    228,801
    
    
    
    196,362CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    138,984
    
    
    $
    134,789
    
    
    $
    228,801
 See Note 17 for supplemental cash flow information.
See accompanying Notes to Consolidated Financial Statements. F-5




---



##### 



MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.
    
    THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES The Company Manugistics Group, Inc. (the Company) is a leading global provider of
demand and supply chain management software. The Company has a solutions-based
approach to client delivery  selling configured sets of its software products
that address the specific demand and supply chain business processes that our
clients want to improve. Our software helps companies lower operating costs,
improve customer service, increase revenues, enhance profitability and
accelerate revenue and earnings growth. Basis of Presentation The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated. Certain prior year amounts have been
reclassified to conform with the current years financial statement
presentation. Use of Estimates The preparation of consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America
(GAAP), requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from these
estimates. Significant items subject to such estimates and assumptions include
revenue recognition, carrying amount and useful lives of long-lived assets,
valuation allowances for accounts receivable and deferred tax assets, sublease
income associated with the restructuring plans, capitalized software
development costs and contingencies, such as litigation, claims and
assessments. Cash and Cash Equivalents Cash and cash equivalents are comprised of amounts in operating accounts,
money market investments and other short-term, highly liquid investments with
original maturities of three months or less. Each is recorded at cost, which
approximates market value. The Companys policy is to record short-term, highly
liquid investments as cash and cash equivalents. The balance at February 29,
2004 is comprised of $53.2 million in operating accounts, $41.4 million, with
an original maturity of three months or less, in money market investments and
$44.4 million in debt securities. The balance at February 28, 2003 is comprised
of $42.9 million in operating accounts, $72.4 million, with an original
maturity of three months or less, in money market investments and $19.5 million
in debt securities. Marketable Securities The Companys short-term marketable securities are classified as
available-for-sale. These securities are recorded at fair value with
unrealized gains and losses reported as a component of stockholders equity and
comprehensive loss. Realized gains and losses on available-for-sale securities
are computed using the specific identification method. On February 29, 2004 and
February 28, 2003, marketable securities consisted of investments in corporate
debt, municipal bonds and other short-term investments which mature in one year
or less. Long-Term Investments The Companys long-term investments securities are classified as
available-for-sale. These investments are recorded at fair value with
unrealized gains and losses reported as a component of stockholders equity and
comprehensive loss. Realized gains and losses on available-for-sale securities
are computed using the specific identification method. On February 29, 2004,
long-term investments consisted of corporate debt securities and U.S. agency
securities with original maturities in excess of one year. F-6




---



##### 



Concentration of Credit Risk Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments in marketable securities, long-term investments and trade accounts
receivable. The Company has policies that limit investments to investment grade
securities, limit the amount of credit exposure to any one issuer and maximum
investment maturities, both individually and in aggregate. The Company performs
ongoing credit evaluations of its customers and maintains an allowance for
potential credit losses. The Company does not require collateral or other
security to support clients receivables since most of its customers are large,
well-established companies. The Companys credit risk is also mitigated because
its customer base is diversified both by geography and industry and no single
customer accounts for more than 10% of consolidated revenue for any period
presented. The Company initially records the provision for doubtful accounts
based on historical experience of write-offs and adjusts the allowance for
doubtful accounts at the end of each reporting period based on a detailed
assessment of accounts receivable. In estimating the allowance for doubtful
accounts, management considers the age of the accounts receivable, the
Companys historical write-offs, the credit-worthiness of the customer, the
economic conditions of the customers industry and general economic conditions,
among other factors. Should any of these factors change, the estimates made by
management will also change, which could affect the level of the Companys
future provision for doubtful accounts. Property and Equipment Property and equipment is stated at cost. Furniture and fixtures are
depreciated on a straight-line basis over three to ten years. Information
technology equipment and purchased software are depreciated on a straight-line
basis over two to three years. Leasehold improvements are amortized over the
shorter of the lease term or the useful life of the improvements. Repairs and
maintenance costs are expensed as incurred. Capitalized Software Development Costs The Company capitalizes the development cost of software, other than
internal use software, in accordance with Statement of Financial Accounting
Standards No. 86 (SFAS 86), Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed. Software development costs are expensed
as incurred until technological feasibility has been established, at which time
such costs are capitalized until the product is available for general release
to clients. Software development costs are amortized at the greater of the
amount computed using either:  (a)
    
    the straight-line method over the estimated economic life of the
product, commencing with the date the product is first available for
general release; or(b)
    
    the ratio that current gross revenue bears to the total current and
anticipated future gross revenue. Intangible Assets and Goodwill Intangible assets include goodwill, acquired technology, customer
relationships and software developed for internal use. Goodwill, which is equal
to the fair value of consideration paid in excess of the fair value of the net
assets purchased, has been recorded in conjunction with several of the
Companys business combinations. Goodwill recorded in business combinations
prior to June 30, 2001 was amortized on a straight-line basis through February
28, 2002 over five years (see Notes 6 and 13). Assembled workforce acquired in
conjunction with certain of the Companys purchase business combinations was
amortized using the straight-line method through February 28, 2002 over two
years. Acquired technology is amortized on a straight-line basis over four to
six years. Customer relationships acquired in conjunction with certain of the
Companys business combinations are amortized using the straight-line method
over five to seven years. In accordance with Statement of Financial Accounting
Standards No. 142 (SFAS 142) Goodwill and Other Intangible Assets", the
Company stopped amortizing goodwill and assembled workforce, effective March 1,
2002. Software Developed for Internal Use The Company capitalizes certain costs to develop internal use software in
accordance with American Institute of Certified Public Accountants (AICPA)
Statement of Position No. 98-1 (SOP 98-1), Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.These capitalized
costs are amortized on a straight-line basis over a period of two to five years
after completion or acquisition of the software. Software developed for
internal use is included in other intangible and non-current assets in the
Consolidated Balance Sheets. F-7




---



##### 



Impairment of Long-Lived Assets The Company assesses the impairment of long-lived assets, including property
and equipment, identifiable intangible assets and software developed for
internal use, whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. When the Company determines that
the carrying value of such assets may not be recoverable, it measures
recoverability based on the undiscounted cash flows expected to be generated by
the related asset or asset group. If the Company determines that a long-lived
asset or asset group is not recoverable, it records an impairment loss equal to
the difference between the carrying amount of the asset or asset group and fair
value of the asset or asset group. The Company generally measures fair value of
an asset or asset group based on the projected discounted cash flow method
using a discount rate determined by management to be commensurate with the risk
inherent in its current business model. In addition, at each reporting date,
the Company compares the net realizable value of capitalized software
development costs to the unamortized capitalized costs. To the extent the
unamortized capitalized costs exceed the net realizable value, the excess
amount is written off. Purchased Research and Development Technology or business acquisitions may include 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. The portion of
the purchase price allocated to in-process research and development is expensed
immediately upon the consummation of the acquisition. In making the purchase
price allocation, the Company considers present value calculations of projected
income, an analysis of project accomplishments and remaining outstanding items,
an assessment of overall contributions, as well as project risks. The value
assigned to purchased in-process technology is determined by estimating the
costs to develop the acquired technology into commercially viable projects,
estimating the resulting cash flows from the projects, and discounting the net
cash flows to their present value. The revenue projection used to value the
in-process research and development is based on estimates of relevant market
sizes and growth factors, expected trends in technology, and the nature and
expected timing of new product introduction by competitors and the Company as
of the acquisition date. The resulting net cash flows from such projects are
based on estimates of cost of sales and operating expenses from such projects. Other Non-Current Assets Other non-current assets include deferred financing fees, net of
accumulated amortization, of $2.9 million as of February 29, 2004 and $5.4
million as of February 28, 2003 that are being amortized over the life of the
related long-term debt. Other Current Liabilities Other current liabilities consist primarily of accrued interest, accrued
royalty fees, deferred rent, accrued professional fees and income taxes
payable. No individual amounts exceed five percent of total current
liabilities. Accounting for and Disclosure of Guarantees The Company accounts for guarantees in accordance with Financial
Accounting Standards Board (FASB) issued Interpretation  No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(Interpretation No. 45).
Interpretation 45 elaborates on the disclosures required in financial
statements concerning obligations under certain guarantees. It also clarifies
the requirements related to the recognition of liabilities by a guarantor at
the inception of certain guarantees. The provisions related to recognizing a
liability at inception of the guarantee do not apply to product warranties or
indemnification provisions in the Companys software license agreements. Fair Value of Financial Instruments The carrying values of cash and cash equivalents, marketable securities,
long-term investments, accounts receivable and accounts payable approximate
fair value due to the short maturities of such instruments. The fair value of
convertible debt was $174.4 million on February 29, 2004 and $131.6 million on
February 28, 2003 based on market quotes. Foreign Currency Translation and Operations Assets and liabilities of the Companys foreign subsidiaries are
translated at the exchange rate in effect on the balance sheet date. The
related revenue and expenses are translated using the average exchange rate in
effect during the reporting period. Foreign currency translation adjustments
are disclosed as a separate component of stockholders equity and comprehensive
loss. F-8




---



##### 



The Company generates revenue from sales outside the United States which
are denominated in foreign currencies, typically the local currency of the
international subsidiary. There are certain economic, political, technological
and regulatory risks associated with operating in foreign countries. Foreign
sales and operations may be adversely affected by the imposition of
governmental controls, foreign currency exchange rate fluctuations and economic
and political instability. Revenue Recognition and Deferred Revenue Revenue consists of software license revenue, services revenue, support
revenue and reimbursed expenses. Software license revenue is recognized in
accordance with the AICPA 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"), and Securities and Exchange
Commission (SEC) Staff Accounting Bulletins 101 and 104 (SAB 101, SAB
104), Revenue Recognition. Software license revenue, services revenue and
support revenue are generally recognized when the four basic criteria of SOP
97-2, SAB 101 and SAB 104 are met as follows:  
    
    Persuasive evidence of an arrangement exists: The Company considers a
non-cancelable agreement signed by the Company 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 FOB shipping point or, in the case of electronic delivery, the
customer is given access to the licensed programs.
    
    Fixed or determinable fee: The Company considers 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.
If the arrangement fee is not fixed or determinable, the Company
recognizes the revenue as amounts become due and payable. The Company
considers services fees to be fixed or determinable if the services
fee or rates for time and material contracts are not subject to refund
or adjustment.
    
    Collection is probable: The Company performs 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 the Company expects that the customer will be able to pay
amounts under the arrangement as they become due. If the Company
determines that collection is not probable, revenue recognition is
deferred 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. Fees are allocated to the various elements of software
license agreements using the residual method, based on vendor specific
objective evidence (VSOE) of fair value of any undelivered elements of the
arrangement. VSOE of fair value for support services is provided by the renewal
rate. VSOE of fair value for implementation services is based upon separate
sales of services at stated hourly rates by level of consultant. Under the
residual method, the Company defers revenue for the fair value of its
undelivered elements based on 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 101 and 104 have been met. 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. When the Company provides services deemed to be essential to
the functionality of the software products licensed or the licensed software
requires significant production, modification or customization, the Company
recognizes revenue on a percentage-of-completion basis in accordance with SOP
81-1, Accounting for Performance of Construction Type and Certain Production
Type Contracts. In these cases, software revenue is deferred and recognized
based on labor hours incurred to date compared to total estimated labor hours
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 the Companys 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 incurred to date to total estimated labor hours. 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. F-9




---



##### 



Support revenue includes post-contract customer support and the rights to
unspecified software upgrades and enhancements. Customer support is generally
billed annually, initially recorded as deferred revenue and recognized as
support revenue ratably over the support period. Payments received or billed in advance of recognizing revenue are
classified as deferred revenue in the Consolidated Balance Sheets and consist
of deferred support, service and software revenue. Advertising Advertising and promotional costs are expensed as incurred. Advertising
and promotional expense are included in sales and marketing expense and
amounted to $6.4 million, $10.7 million and $13.2 million in fiscal 2004, 2003
and 2002, respectively. Provision for (Benefit from) Income Taxes The provision for (benefit from) income taxes is the total of the current
year income tax due or refundable and the change in deferred tax assets and
liabilities. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes.The
Company assesses the likelihood that its deferred tax assets will be recovered
from its future taxable income, and to the extent the Company believes that
recovery is not likely, it establishes a valuation allowance. The Company
considers historical taxable income, estimates of future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the amount of
the valuation allowance. Based on various factors, including the Companys
cumulative losses for fiscal 2002, 2003 and 2004 when adjusted for
non-recurring items, operating performance in fiscal 2004 and estimates of
future profitability, management concluded that future taxable income will,
more likely than not, be insufficient to recover its net deferred tax assets as
of February 29, 2004. Based on similar analysis in fiscal 2003, the Company
recorded a valuation allowance for the full amount of 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 will continue to monitor its estimates
of future profitability and realizability of its net deferred tax assets based
on evolving business conditions. Net Loss Per Share Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net loss per share is computed
using the weighted average number of shares of common stock and, when dilutive,
potential common shares from options, restricted stock and warrants to purchase
common stock using the treasury stock method and the effect of the assumed
conversion of the Companys convertible subordinated debt. The dilutive effect
of options, restricted stock and warrants of 1.1 million, 1.9 million and 5.6
million shares has not been considered in the computation of diluted loss per
share in fiscal 2004, 2003 and 2002, respectively, because including these
shares would be anti-dilutive due to the Companys reported net loss. The
assumed conversion of the Companys convertible debt was excluded from the
computation of diluted net loss per share for fiscal 2004, 2003 and 2002 since
it was anti-dilutive. Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations using the intrinsic value
based method of accounting. If the Company accounted for its stock-based
compensation plan using the fair value based method of accounting in accordance
with the provisions as required by Statement of Financial Accounting Standards
No. 123 (SFAS 123), Accounting for Stock-Based Compensation,as amended by
Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting
for Stock-Based Compensation  Transition and Disclosure,the Companys net
loss and loss per basic and diluted share amounts would have been as follows,
in thousands except per share amounts: February 28 or 29,2004
    
    2003
    
    2002Net loss, as reported
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (115,158
    )Add: Stock-based compensation expense (benefit)
included in reported net loss, net of tax
    
    
    1,799
    
    
    
    3,426
    
    
    
    (3,111
    )Less: Stock-based compensation, net of tax
    
    
    (2,611
    )
    
    
    (26,564
    )
    
    
    (63,948
    )Pro forma net loss
    
    
    (104,612
    )
    
    
    (235,377
    )
    
    $
    (182,217
    )Basic and diluted loss per share, as reported
    
    $
    (1.43
    )
    
    $
    (3.04
    )
    
    $
    (1.69
    )Basic and diluted loss per share, pro forma
    
    $
    (1.44
    )
    
    $
    (3.37
    )
    
    $
    (2.68
    )
 F-10




---



##### 



The Company adopted FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation(FIN 44) effective July 1, 2000.
In accordance with FIN 44, repriced stock options are accounted for as
compensatory options using variable accounting treatment (see Note 9). In
addition, deferred compensation is recorded for the intrinsic value of unvested
stock options exchanged in a purchase business combination (see Note 9 and Note
13) and amortized over the vesting period. New Accounting Pronouncements In January 2003, the FASB issued Statement No. 46, Consolidation of
Variable Interest Entities, (FIN 46) that addresses the consolidation of
variable interest entities. FIN 46 provides guidance for determining when a
primary beneficiary should consolidate a variable interest entity, or
equivalent structure that functions to support the activities of the primary
beneficiary. The interpretation is effective after January 31, 2003 for newly
created variable interest entities. For variable interest entities created
before February 1, 2003, the interpretation is effective as of the beginning of
the first interim or annual reporting period beginning after December 15, 2003.
The Company believes the effect of adopting this statement will not have a
material impact on its operating performance and financial position. On May 15, 2003, the FASB issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, (SFAS 150). SFAS 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity. SFAS
150 represents a significant change in practice in the accounting for a number
of financial instruments, including mandatorily redeemable equity instruments
and certain equity derivatives that frequently are used in connection with
share repurchase programs. SFAS 150 is effective for all financial instruments
created or modified after May 31, 2003, and to other instruments as of
September 1, 2003. The effect of adopting this statement did not have a
material impact on the Companys operating performance and financial position.  2.
    
    CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES, AND LONG TERM INVESTMENTS The following is a summary of cash, cash equivalents and marketable securities
as of February 28 or 29, 2004 and 2003 (in thousands): UnrealizedFebruary 29, 2004
    
    Cost
    
    Gain
    
    Loss
    
    MarketCash and cash equivalents:Cash
    
    $
    53,185
    
    
    $
    
    
    
    $
    
    
    
    $
    53,185Money market funds
    
    
    41,375
    
    
    
    
    
    
    
    
    
    
    
    41,375Auction rate securities:Corporate notes
    
    
    4,600
    
    
    
    
    
    
    
    
    
    
    
    4,600US treasury and agency
    
    
    39,824
    
    
    
    
    
    
    
    
    
    
    
    39,824Total auction rate securities
    
    
    44,424
    
    
    
    
    
    
    
    
    
    
    
    44,424Total cash and cash equivalents
    
    
    138,984
    
    
    
    
    
    
    
    
    
    
    
    138,984Marketable securities
    
    
    7,307
    
    
    
    9
    
    
    
    
    
    
    
    7,316Total cash, cash equivalents
and marketable securities
    
    $
    146,291
    
    
    $
    9
    
    
    $
    
    
    
    $
    146,300
 UnrealizedFebruary 28, 2003
    
    Cost
    
    Gain
    
    Loss
    
    MarketCash and cash equivalents:Cash
    
    $
    42,931
    
    
    $
    
    
    
    $
    
    
    
    $
    42,931Money market funds
    
    
    72,358
    
    
    
    
    
    
    
    
    
    
    
    72,358Auction rate securities:Corporate notes
    
    
    4,500
    
    
    
    
    
    
    
    
    
    
    
    4,500US treasury and agency
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    15,000Total auction rate securities
    
    
    19,500
    
    
    
    
    
    
    
    
    
    
    
    19,500Total cash and cash equivalents
    
    
    134,789
    
    
    
    
    
    
    
    
    
    
    
    134,789Marketable securities
    
    
    2,946
    
    
    
    
    
    
    
    
    
    
    
    2,946Total cash, cash equivalents
and marketable securities
    
    $
    137,735
    
    
    $
    
    
    
    $
    
    
    
    $
    137,735
 F-11




---



##### 



Long-term investments are comprised of corporate debt securities and US
agency debt securities with original maturities in excess of one year. The
following is a summary of long-term investments as of February 29, 2004 (in
thousands): UnrealizedFebruary 29, 2004
    
    Cost
    
    Gain
    
    Loss
    
    MarketLong-term debt securities:Corporate notes
    
    $
    6,967
    
    
    $
    20
    
    
    $
    
    
    
    $
    6,987US treasury and agency
    
    
    2,006
    
    
    
    6
    
    
    
    
    
    
    
    2,012Total long-term debt securities
    
    $
    8,973
    
    
    $
    26
    
    
    
    
    
    
    $
    8,999
  3.
    
    ALLOWANCE FOR DOUBTFUL ACCOUNTS Activity in the allowance for doubtful accounts for the fiscal years ended
February 28 or 29, 2004, 2003 and 2002 was as follows (in thousands): February 28 or 29,2004
    
    2003
    
    2002Beginning Balance
    
    $
    7,007
    
    
    $
    8,308
    
    
    $
    5,604Write offs and other adjustments
    
    
    (2,868
    )
    
    
    (6,433
    )
    
    
    (5,365
    )Increase in allowance  acquisitions
    
    
    
    
    
    
    60
    
    
    
    973Provision for doubtful accounts
charged to costs and expenses
    
    
    256
    
    
    
    5,072
    
    
    
    7,096Ending Balance
    
    $
    4,395
    
    
    $
    7,007
    
    
    $
    8,308
  4.
    
    PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): February 28 or 29,2004
    
    2003Information technology equipment and
purchased software
    
    $
    25,890
    
    
    $
    26,207Office furniture and equipment
    
    
    14,884
    
    
    
    16,644Leasehold improvements
    
    
    10,395
    
    
    
    14,467Total
    
    
    51,169
    
    
    
    57,318Less: accumulated depreciation
    
    
    (29,537
    )
    
    
    (26,088
    )Total property and equipment, net
    
    $
    21,632
    
    
    $
    31,230
 Depreciation expense for fiscal 2004, 2003 and 2002 was approximately $6.5
million, $8.2 million and $9.8 million, respectively.  5.
    
    CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND SOFTWARE DEVELOPED FOR INTERNAL
USE CAPITALIZED SOFTWARE DEVELOPMENT COSTS The Company capitalizes costs incurred in the development of its software
products for commercial availability. Software development costs include
certain internal development costs. Costs incurred prior to establishing
technological feasibility are charged to product development expense as
incurred. Software development costs are amortized at the greater of the amount
computed using either: (a) the straight-line method over the estimated economic life of the product,
commencing with the date the product is first available for general release;
or (b) the ratio that current gross revenue bears to the total current and
anticipated future gross revenue. Generally, an economic life of two years is assigned to capitalized
software development costs. The Company capitalized software development costs of $9.9 million, $10.5
million and $10.5 million and recorded related amortization expense of $9.0
million, $11.6 million and $11.4 million for fiscal 2004, 2003 and 2002,
respectively, in accordance with SFAS 86. F-12




---



##### 



The total amortization expense for the Companys capitalized software
development costs for fiscal 2004, 2003 and 2002 include write-offs totaling
approximately $0.2 million, $1.2 million and $1.5 million, respectively, of
previously capitalized software development costs. These capitalized costs were
deemed to exceed their future net realizable value as a result of new
technologies developed by the Company and acquired in connection with
acquisitions. SOFTWARE DEVELOPED FOR INTERNAL USE The Company capitalized internally developed software costs (excluding
amounts acquired) of $1.6 million, $0.5 million and $3.1 million and recorded
related amortization expense of $1.1 million, $1.6 million and $1.0 million for
fiscal 2004, 2003 and 2002, respectively, in accordance with SOP 98-1. During fiscal 2003, the Company wrote-off approximately $1.4 million of
previously capitalized software developed for internal use (see Note 15).  6.
    
    INTANGIBLE ASSETS AND GOODWILL Acquisition-related intangible assets subject to amortization as of February
29, 2004 and February 28, 2003 are as follows (in thousands): February 28 or 29,2004
    
    2003Acquired technology
    
    $
    64,739
    
    
    $
    65,454Less: accumulated amortization
    
    
    (37,716
    )
    
    
    (24,222
    )Acquired technology, net
    
    $
    27,023
    
    
    $
    41,232Customer relationships
    
    
    28,109
    
    
    
    29,012Less: accumulated amortization
    
    
    (12,125
    )
    
    
    (8,355
    )Customer relationships, net
    
    $
    15,984
    
    
    $
    20,657
 The changes in the carrying amount of goodwill for fiscal 2004 and 2003
are as follows (amounts in thousands): February 28 or 29,2004
    
    2003Beginning balance
    
    $
    187,438
    
    
    $
    269,998Proceeds from settlement of acquisition escrow
    
    
    (2,170
    )
    
    
    Goodwill impairment charge
    
    
    
    
    
    
    (96,349
    )Reclassification of assembled workforce as required
by SFAS 142
    
    
    
    
    
    
    7,101WDS and DFE acquisitions (see Note 13)
    
    
    
    
    
    
    5,747Other
    
    
    233
    
    
    
    941Ending Balance
    
    $
    185,501
    
    
    $
    187,438
 Amortization expense related to goodwill and other intangible assets was
$18.9 million, $17.5 million and $95.4 million during fiscal 2004, 2003 and
2002, respectively. Estimated aggregate future amortization expense for
acquisition-related intangible assets in future fiscal years are as follows
(amounts in thousands): Fiscal Year Ending February 28 or 29,2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalAmortization expense
    
    $
    19,856
    
    
    $
    12,497
    
    
    $
    7,146
    
    
    $
    2,517
    
    
    $
    914
    
    
    $
    77
    
    
    $
    43,007
 In accordance with SFAS 142, the assembled workforce intangible asset was
reclassified to goodwill and the Company no longer amortizes goodwill effective
March 1, 2002. F-13




---



##### 



Summarized below are the effects on net loss and net loss per share data,
if the Company had followed the amortization provisions of SFAS 142 for all
periods presented (amounts in thousands, except per share data): For the fiscal year ended February 28 or 29,2004
    
    2003
    
    2002Net loss:As reported
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (115,158
    )Add: goodwill and assembled workforce
amortization, net of taxes
    
    
    
    
    
    
    
    
    
    
    77,394Net loss, pro forma
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (37,764
    )Basic and diluted loss per share:As reported
    
    $
    (1.43
    )
    
    $
    (3.04
    )
    
    $
    (1.69
    )Add: goodwill and assembled workforce
amortization, net of taxes
    
    
    
    
    
    $
    
    
    
    $
    1.14Basic and diluted loss per share, pro forma
    
    $
    (1.43
    )
    
    $
    (3.04
    )
    
    $
    (0.55
    )Shares used in basic and diluted loss per
share calculation
    
    
    72,715
    
    
    
    69,768
    
    
    
    67,986
 GOODWILL IMPAIRMENT On March 1, 2002, the Company adopted the provisions of SFAS 142, which
required assembled workforce and certain other identifiable intangible assets
to be reclassified as goodwill. On an annual basis, and when there is reason to
suspect that values may have been impaired, goodwill must be tested for
impairment and write-downs may be necessary. During the quarters ended August
31, 2002 and November 30, 2002, the Company experienced adverse changes in its
stock price resulting from a decline in its financial performance and adverse
business conditions that affected the technology industry, especially
application software companies. Based on these factors, the Company performed a
test for goodwill impairment at August 31, 2002 and November 30, 2002 and
determined that based upon the implied fair value (which includes factors such
as, but not limited to, the Companys market capitalization, control premium
and recent stock price volatility) of the Company as of August 31, 2002 and
November 30, 2002, there was no impairment of goodwill. The Company performed another test for goodwill impairment as of February
28, 2003, the Companys annual date for goodwill impairment review and
determined the implied fair value of the Company was less than stockholders
equity, including goodwill, an indication that goodwill may be impaired.
Therefore, the Company performed the second step of the impairment test. As a
result, the Company recorded a goodwill impairment charge of $96.3 million to
reduce goodwill associated with acquisitions to their estimated fair value as
of that date. The goodwill impairment loss was determined by calculating the
difference between: a) the implied fair value of the Company as of February 28,
2003 less the fair value of the net assets of the Company and b) the carrying
value of goodwill. The fair value of the identifiable intangible assets of the
Company were determined by an independent valuation. The implied fair value of
the Company was estimated based on the closing quoted market price of the
Companys common stock on February 28, 2003 multiplied by the number of
outstanding common shares (market capitalization) plus an implied control
premium as if the Company 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. The Company performed a test for goodwill impairment at February 29, 2004
and determined that based upon the implied fair value (which includes factors
such as, but not limited to, the Companys market capitalization, control
premium and recent stock price volatility) of the Company as of February 29,
2004, there was no impairment of goodwill. The Company will continue to test for impairment on an annual basis,
coinciding with its fiscal year end, or on an interim basis, if circumstances
change that would more likely than not reduce the implied fair value of the
Company below its carrying value.  7.
    
    LONG-TERM DEBT AND DEBT CONVERSION EXPENSE 5% Convertible Subordinated Notes. The Company completed a private
placement of $250.0 million of Notes in October and November 2000. The Notes
bear interest at 5.0% per annum which is payable semi-annually. The Company had
$175.5 million and $250.0 million in Notes outstanding as of February 29, 2004
and February 28, 2003, respectively. The fair market value of the Notes was
$174.4 million and $131.6 million on February 29, 2004 and February 28, 2003,
respectively, based on market quotes. The Notes mature in November 2007 and are
convertible into approximately 4.0 million shares of the Companys common stock
at a conversion price of $44.06, subject to adjustment under certain
conditions. The conversion price of the Notes will be adjusted in the event
that the Company issues common stock as a dividend or distribution with respect
to its common stock, subdivides, combines or reclassifies its common stock,
issues rights to its common stockholders to purchase common stock at less than
market price, makes certain distributions of securities, cash or other property
to its common stockholders (other than ordinary cash dividends), or makes
certain repurchases of common stock. Upon a change of control of the Company,
the holders of the Notes would have the right to require the Company or its
successor to repurchase the Notes at a purchase price equal to 100% of the
principal amount, plus accrued and unpaid interest to the date of repurchase in
cash. The Notes do not have any financial covenants. F-14




---



##### 



At any time on or after November 7, 2003, the Company may redeem, from
time to time, the Notes in whole, or in part, at the Companys option.
Redemption can be made on at least 30 days notice if the trading price of the
Companys common stock for 20 trading days in a period of 30 consecutive
trading days ending on the day prior to the mailing of notice of redemption
exceeds 120% of the conversion price of the Notes. The redemption price,
expressed as a percentage of the principal amount, is: Redemption Period
    
    Redemption PriceNovember 7, 2003 through October 31, 2004
    
    
    103
    %November 1, 2004 through October 31, 2005
    
    
    102
    %November 1, 2005 through October 31, 2006
    
    
    101
    %November 1, 2006 through maturity
    
    
    100
    %
 Debt Conversion Expense. During fiscal 2004, the Company exchanged $74.5
million of the 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 are exempt from registration under Section
3(a)(9) of the Securities Act of 1933 and may be 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 twelve months 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 represent approximately
11.9% of the shares outstanding as of February 29, 2004. Line of Credit. The Company has a one year unsecured revolving credit
facility with Silicon Valley Bank (SVB) for $15.0 million which will expire
on March 30, 2005, unless renewed. Under the terms of this credit facility, the
Company may request cash advances, letters of credit, or both. The credit
facility requires the Company to comply with the following financial covenants:
(i) minimum tangible net worth (defined as stockholders equity plus
convertible debt less goodwill, capitalized software costs and other intangible
assets) must be greater than $120.0 million as February 29, 2004, $130.0
million as of May 31, 2004, $140.0 million as of August 31, 2004 and November
30, 2004 and $150.0 million as of February 28, 2005; and (ii) a ratio of (a)
unrestricted cash, cash equivalents, marketable securities and long-term
investments deposited with SVB and its affiliates plus net accounts receivable
to (b) current liabilities plus, long-term indebtedness to SVB and outstanding
letters of credit, minus deferred revenue, of at least 1.75 to 1.0. The SVB credit facility requires the Company to maintain $50.0 million in
funds with SVB and its affiliates. The credit facility also restricts the
amount of additional debt the Company can incur and restricts the amount of
cash that the Company can use for acquisitions and for the repurchase of
convertible debt. Under the terms of the SVB credit facility, the Company
retains the right to terminate the facility at any time upon repayment of any
advances and the posting of cash collateral for any outstanding letters of
credit. Under the credit facility, SVB has the right to obtain a lien on all of
the Companys assets, other than intellectual property, upon an occurrence of
default, unless the Company terminates the facility as provided above. The
credit facility also provides that, upon an event of default, the Company is
prohibited from paying a cash dividend to its shareholders. As of February 29,
2004, the Company had $9.9 million in letters of credit outstanding under this
line to secure its lease obligations for certain office space. The Company was
in compliance with all financial covenants as of February 29, 2004. Prior to entering into the credit facility agreement with SVB, the Company
had a credit facility agreement with Bank of America (BOA) that expired on
February 26, 2003. As of February 28, 2003, the Company had $13.0 million in
outstanding letters of credit with BOA which were fully collateralized. The
cash collateral is presented as restricted cash in the consolidated balance
sheet as of February 28, 2003. In March 2003, $9.3 million of outstanding
letters of credit with BOA were transferred to SVB. The remaining $3.3 million
in outstanding letters of credit was used to secure a lease obligation for
certain international office space. During the year ended February 29, 2004,
the Company was informed by BOA that BOA would not renew the letter of credit
and the holder would not accept a replacement for the letter of credit from
another bank on terms that were favorable to the Company. During the fiscal
year, the holder requested a cash draw for the full amount of the letter of
credit. Accordingly, $3.3 million was recorded as a deposit in non-current
assets in the consolidated balance sheet as of February 29, 2004. The Company has an additional credit agreement with SVB, as amended, under
which the Company was able to borrow up to $5.0 million for the purchase of
equipment. Amounts may be borrowed under the facility through December 31, 2004
and accrue interest at a fixed rate equal to 7.75%. The first advance is repaid
monthly over a 24 month period, each advance thereafter is repaid monthly over
a 30 month period. Amounts borrowed under the facility in fiscal 2003 accrue
interest at a rate of 8.25%, and are repaid monthly over a 36 month period.
During fiscal 2003, the Company borrowed $2.9 million under this credit
facility. The principal F-15




---



##### 



balance remaining as of February 29, 2004 was approximately $1.7 million. The
Company was in compliance with all financial covenants as of February 29, 2004.  8.
    
    COMMITMENTS AND CONTINGENCIES Commitments. The Company leases office space, office equipment and
automobiles under operating leases and various computers and other equipment
under capital leases. Aggregate property acquired through capital leases
amounted to $6.2 million and $7.7 million at February 29, 2004 and February 28,
2003, respectively, and has been included in software and office furniture and
equipment (see Note 4). Total accumulated amortization relating to these leases
was $2.5 million and $1.5 million as of February 29, 2004 and February 28,
2003, respectively. Rent expense for fiscal 2004, 2003 and 2002, was approximately $19.7
million, $27.5 million and $23.6 million, respectively. The future minimum
lease payments under these capital and operating leases for each of the
succeeding fiscal years beginning March 1, 2004 are as follows (in thousands): Capital
    
    
    
    
    
    OperatingFiscal Year
    
    Leases
    
    
    
    
    
    Leases2005
    
    $
    1,364
    
    
    
    
    
    
    $
    19,5322006
    
    
    1,316
    
    
    
    
    
    
    
    17,5742007
    
    
    546
    
    
    
    
    
    
    
    15,4642008
    
    
    
    
    
    
    
    
    
    
    13,8172009
    
    
    
    
    
    
    
    
    
    
    10,733Thereafter
    
    
    
    
    
    
    
    
    
    
    44,740Total minimum lease payments
    
    
    3,226
    
    
    
    
    
    
    
    121,860Less amounts representing interest
    
    
    (208
    )
    
    
    
    
    
    
    Less sublease income
    
    
    
    
    
    
    
    
    
    
    (14,436
    )Net minimum lease payments
    
    $
    3,018
    (1
    )
    
    
    
    
    $
    107,424
  (1)
    
    Approximately $1.2 million and $1.8 million is included in other
current liabilities and long-term debt and capital leases, respectively,
in the consolidated balance sheet as of February 29, 2004. Contingencies. The Company is involved in disputes and litigation in the
normal course of business. The Company does not believe that the outcome of any
of these disputes or litigation will have a material affect on the Companys
operating performance and financial condition or results of operations. The
Company has established accruals related to such matters that are probable and
reasonably estimable. However, an unfavorable outcome of some or all of these
matters could have a material affect on the Companys operating performance,
financial condition and cash flows (see Note 20). Indemnification. The Company licenses software to its customers under
contracts which the Company refers to as Software License Agreements (SLA).
Each SLA contains the relevant terms of the contractual arrangement with the
customer, and generally includes certain provisions for indemnifying the
customer against losses, expenses, and liabilities from damages that may be
awarded against the customer in the event the Companys software is found to
infringe upon a patent, copyright, trademark or other proprietary right of a
third party. The SLA generally limits the scope and remedies for such
indemnification obligations in a variety of industry-standard respects,
including but not limited to certain time and geography-based scope limitations
and a right to replace an infringing product or modify the product so that it
is no longer infringing. If the Company cannot address the infringement by
replacing the products or services, or modifying the products or services, the
Company is allowed to cancel the software license and return the fees paid by
customer. The Company requires its employees to sign a proprietary information
and inventions assignment agreement, which assigns the rights in its employees
development work to the Company. To date, the Company has not had to reimburse any of its customers for any
losses related to these indemnifications provisions and no material claims are
outstanding as of February 29, 2004. For several reasons, including the lack of
prior indemnification claims and the lack of a monetary liability limit for
certain infringement cases under the SLAs, the Company cannot determine the
maximum amount of potential future payments, if any, related to such
indemnification provisions. There can be no assurance that potential future
payment will not have a material adverse effect on the Companys operating
performance or financial condition. F-16




---



##### 



Product Warranty. The Company generally warrants its software products.
The Company provides for the estimated cost of product warranties based on
specific warranty claims, provided that it is probable that a liability exists
and provided the amount can be reasonably estimated. To date, the Company has
not had any material costs associated with these warranties. The Company has previously reported its legal proceedings with Information
Resources, Inc. (IRI) arising from the acquisition of certain assets from IRI
in March 1997. IRIs claims involving revenue streams was submitted to
arbitration. IRI sought a total of $15.9 million in damages. The Company
contended that the conditions to these amounts becoming due have never been
satisfied and that no amounts were due to IRI, because, among other reasons, of
a failure of consideration in the overall transaction. In December 2001, the Company and IRI settled their dispute. The Company
agreed to pay to IRI an aggregate of approximately $8.6 million in various
installments. The payment obligation had two components. The Company made cash
payments totaling approximately $2.7 million and $2.0 million to IRI, in fiscal
2002 and 2003, respectively. In addition, the Company issued 240,683 shares of
its common stock to IRI in payment of the remaining $3.9 million on February
27, 2002. The Company had recorded a liability of approximately $5.5 million in
prior years related to this matter. The $3.1 million difference between the
$5.5 million previously accrued and the total settlement of $8.6 million was
expensed in fiscal 2002.  9.
    
    STOCKHOLDERS EQUITY Preferred Stock The Company has authorized 4,620,253 shares of $.01 par value preferred
stock. As of February 29, 2004, no preferred shares were outstanding. Common Stock The Company has authorized 300,000,000 shares of $.002 par value common
stock. No cash dividends on common stock have been declared or paid in any of
the fiscal years presented. Warrants and Customer Stock Issuances In connection with the acquisition of Talus Solutions, Inc. (Talus) in
fiscal 2001, the Company assumed warrants issued to purchase up to 65,000
shares of the Companys common stock for certain past services rendered by
outside consultants and the issuance of certain notes payable. On February 28,
2001, warrants to purchase 49,096 shares were exercised. As of February 29,
2004, warrants to purchase up to 15,904 shares were exercisable and have
exercise prices ranging from $6.83 to $16.90 and expire between July 2004 and
June 2005. Talus issued common stock to a customer at a price below fair value prior
to the acquisition date. The fair value of the common stock issued by Talus,
net of proceeds received, on December 21, 2000, the date of the Talus
acquisition, was $1.9 million. This $1.9 million is being recognized as a
reduction of revenue in proportion to the revenue recognized under the
contract. The Company reduced revenue by $1.0 million in fiscal year 2002. Employee Stock Purchase Plan In October 1994, the Company adopted an employee stock purchase plan
(ESPP) that authorizes the Company to sell up to 2,000,000 shares of common
stock to employees through voluntary payroll withholdings. The stock price to
be paid by employees is equal to 85% or 95% of the lower of the average market
price as reported on the National Association of Securities Dealers Automated
Quotation System for either the first or last day of each six-month withholding
period. Payroll deductions may not exceed the lesser of 10% of a participants
compensation or $25,000 per year. The number of shares purchased under this
plan by employees totaled 211,589 shares, 428,972 shares and 113,137 shares in
fiscal 2004, 2003 and 2002, respectively. The weighted average fair value of
shares purchased in fiscal 2004, 2003 and 2002 was $2.23, $3.96 and $23.84,
respectively. As of February 29, 2004, there are no shares available for
issuance under the ESPP. Stock Options Effective September 13, 2000, the Company adopted the 2000 Non-Qualified
Stock Option Plan (2000 Plan) under which non-qualified stock options may be
granted to officers, directors and employees to purchase a total of up to 8.0
million new shares of F-17




---



##### 



common stock at prices not less than fair market value at the time of
grant. Effective July 24, 1998, the Company adopted the 1998 Plan under which
incentive and non-qualified stock options may be granted to officers, directors
and employees to purchase a total of up to 10.5 million new shares of common
stock at prices not less than the fair market value at the time of grant. In
April 2001, the Board of Directors of the Company adopted a proposed amendment
to the 1998 Stock Option Plan (1998 Plan) to increase the number of shares of
Common Stock reserved for issuance to 20,475,800. In addition, the Board of
Directors approved the termination of the 2000 Plan. The terms of the 2000 Plan
remain in effect for options outstanding at the termination date. Prior to the
adoption of the 1998 Plan, the Company had additional plans under which it
granted stock options including the 1994 Employee Stock Option Plan (1994
Plan), the 1994 Outside Directors Non-qualified Stock Option Plan (1994
Director Plan) and the 1994 Executive Incentive Stock Option Plan (1994
Executive Plan). No new options will be granted under these additional stock
option plans, which will remain in effect with respect to options outstanding
under such plans until such options are exercised, terminated or expire.
Options under the employee option exchange program (see below) were granted
under the 1998 Plan and the 2000 Plan. As of February 29, 2004, the Company has
cumulatively granted options of 4.4 million shares under the 2000 Plan, 14.1
million shares under the 1998 Plan, 12.3 million shares under the 1994 Plan and
763,000 shares under the 1994 Director Plan and 369,332 shares under the 1994
Executive Plan. Under the 2000 Plan and the 1998 Plan, the vesting period for new options
issued is in accordance with the Incentive and Non-Qualified Stock Option
Policy approved by the Compensation Committee of the Board of Directors.
Options outstanding under the plans vest over various terms, ranging from
immediate vesting to annual vesting over a five-year period from the date of
grant. The right to exercise the vested options expires upon the earlier of
either ten years (or for options granted prior to 1994, eleven years) from the
date of grant or, generally, within thirty days of termination of employment. During fiscal 2004, 2001 and 2000, the Company granted non-qualified stock
options in the amount of 400,000, 770,000 and 7.3 million shares, respectively,
to several of the Companys executive officers and employees. These stock
option grants were approved by the Companys Board of Directors and were not
granted under any of the above-mentioned stock option plans. These shares vest
and become exercisable over periods ranging from immediate vesting to one
hundred percent vesting upon the earlier of achievement of certain pre-defined
performance targets or seven years from the date of grant. As of February 29,
2004, 5.3 million of these options were outstanding. No options of this nature
were granted in fiscal 2003 and fiscal 2002. Effective January 29, 1999, the Company completed a stock option repricing
program in which options to purchase a total of approximately 3.0 million
shares of the Companys common stock were repriced. Under the repricing
program, which was approved by the shareholders of the Company, outstanding
options (other than those held by executive officers and directors) surrendered
for repricing were exchanged for an equivalent number of repriced options. The
exercise price of the repriced options is $4.38 per share (the fair market
value of the common stock at that date) and the four-year vesting schedule of
each option restarted on February 1, 1999. In conjunction with the Companys
restructuring, the vesting period for the first two years was accelerated as
previously provided for in the plan and approved by the Compensation Committee
of the Board of Directors, pursuant to authority granted to it under the
related option plans, due to certain earnings milestones being met in fiscal
2001 and 2000. Under FASB Interpretation No. 44 Accounting for Certain Transactions
Involving Stock Compensation,(FIN 44), which is retroactive to option
repricings effected after December 15, 1998, companies are required to treat
repriced options as compensatory options accounted for using variable
accounting treatment. As a result, the Company will record non-cash stock
compensation (benefit) expense, over the term of the option, based upon changes
in the market price of its common stock over the market price at July 1, 2000
($22.19 per share). As of February 29, 2004, the Company had approximately 0.5
million repriced options outstanding. The Company recorded a benefit of $(8.0)
million during fiscal 2002 and a charge of $11.1 million in fiscal 2001 related
to repriced stock options. Since the stock price at the beginning and end of
each of the fiscal 2004 quarters was below $22.19, no charge or benefit was
recorded during fiscal 2004. As part of the Talus acquisition, the Company assumed all outstanding
stock options, which were converted into Manugistics stock options. Options to
purchase approximately 631,000 shares of Manugistics common stock were
unvested at the acquisition date. FIN 44 requires the acquiring company to
measure the intrinsic value of unvested stock options assumed at the
acquisition date in a purchase business combination and record a compensation
charge over the remaining vesting period of those options to the extent those
options remain outstanding. This resulted in a charge of $1.8 million, $3.4
million and $4.8 million in fiscal 2004, 2003 and 2002, respectively. F-18




---



##### 



A summary of the status of the Companys stock option plans and changes
during the fiscal years is presented below with share amounts in thousands: February 28 or 29,2004
    
    2003
    
    2002Options to
    
    
    
    
    
    Options to
    
    
    
    
    
    Options toPurchase
    
    Wtd. Avg.
    
    Purchase
    
    Wtd. Avg.
    
    Purchase
    
    Wtd. Avg.Shares
    
    Ex. Price
    
    Shares
    
    Ex. Price
    
    Shares
    
    Ex. PriceOutstanding at beginning of year
    
    
    20,655
    
    
    $
    13.38
    
    
    
    22,360
    
    
    $
    16.16
    
    
    
    20,948
    
    
    $
    17.49Options granted at market value
    
    
    5,473
    
    
    
    5.87
    
    
    
    3,153
    
    
    
    5.11
    
    
    
    5,407
    
    
    
    10.91Exercised
    
    
    (1,726
    )
    
    
    4.68
    
    
    
    (566
    )
    
    
    6.36
    
    
    
    (1,683
    )
    
    
    6.27Cancelled
    
    
    (7,432
    )
    
    
    24.74
    
    
    
    (4,292
    )
    
    
    22.68
    
    
    
    (2,312
    )
    
    
    28.15Outstanding at end of year
    
    
    16,970
    
    
    $
    6.87
    
    
    
    20,655
    
    
    $
    13.38
    
    
    
    22,360
    
    
    $
    16.16Exercisable at end of year
    
    
    10,220
    
    
    $
    7.49
    
    
    
    11,482
    
    
    $
    13.19
    
    
    
    7,665
    
    
    $
    13.76
 Restricted Stock Program In June 2003, the Companys Board of Directors approved an amendment to
its 1998 stock option plan to issue restricted shares of Manugistics common
stock to its employees. This amendment was approved by stockholders at the
Companys Annual Meeting on July 29, 2003. On October 17, 2003, the Company
issued 205,000 shares of restricted stock to certain key employees. The
restricted stock awards granted to key employees have a vesting schedule
pursuant to which the stock award vests in four equal increments over four
years from the date of grant, with the first increment vesting on April 17,
2005. The quoted market price of the restricted stock awards granted of
approximately $1.3 million was recorded as a component of deferred compensation
and is amortized over the vesting period. The Company recorded deferred
compensation expense of $0.3 million in fiscal 2004, related to amortization of
restricted stock. Stock-Based Compensation As permitted under SFAS No. 123, as amended by SFAS 148, the Company
continues to account for stock-based compensation to employees in accordance
with APB Opinion No. 25, under which no compensation expense is recognized,
since the exercise price of options granted is equal to or greater than the
fair market value of the underlying security on the grant date. Pro forma
information regarding net loss and loss per share is required by SFAS No. 123,
which uses the fair value method. The fair value of the Companys stock-based
awards to employees was estimated as of the date of grant using the
Black-Scholes option pricing model. Limitations on the effectiveness of the
Black-Scholes option pricing model include that it was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable and that the model requires the use of highly
subjective assumptions including expected stock price volatility. Because the
Companys stock-based awards to employees have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. Had compensation cost for these plans been recorded, the Companys net
loss and loss per basic and diluted share amounts would have been as follows,
in thousands except per share amounts: February 28 or 29,2004
    
    2003
    
    2002Net loss, as reported
    
    $
    (103,800
    )
    
    $
    (212,239
    )
    
    $
    (115,158
    )Add: Stock-based compensation expense
included in reported net loss, net of tax
    
    
    1,799
    
    
    
    3,426
    
    
    
    (3,111
    )Less: Stock-based compensation, net of tax
    
    
    (2,611
    )
    
    
    (26,564
    )
    
    
    (63,948
    )Pro forma net loss
    
    $
    (104,612
    )
    
    $
    (235,377
    )
    
    $
    (182,217
    )Basic and diluted loss per share, as reported
    
    $
    (1.43
    )
    
    $
    (3.04
    )
    
    $
    (1.69
    )Basic and diluted loss per share, pro forma
    
    $
    (1.44
    )
    
    $
    (3.37
    )
    
    $
    (2.68
    )
 Fiscal 2004, 2003 and 2002 pro forma amounts include $170 thousand, $557
thousand and $945 thousand, respectively, related to the purchases under the
employee stock purchase plan. F-19




---



##### 



The weighted average fair value of options granted in fiscal 2004, 2003
and 2002 was $3.28, $3.48 and $5.97 per share, respectively. The fair value of
options granted was estimated assuming no dividends and using the following
weighted-average assumptions for each of the fiscal years presented: OPTIONS
    
    
    
    
    
    
    
    
    
    ESPP2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Risk-free interest rates
    
    
    2.51
    %
    
    
    2.53
    %
    
    
    3.63
    %
    
    
    1.357
    %
    
    
    1.75
    %
    
    
    3.35
    %Expected term
    
    4.53 years
    
    3.95 years
    
    3.11 years
    
    6 months
    
    6 months
    
    6 monthsVolatility
    
    
    .9423
    
    
    
    1.01
    
    
    
    .8282
    
    
    
    .8492
    
    
    
    .8705
    
    
    
    .8268
 A summary of the weighted average remaining contractual life and the
weighted average exercise price of options outstanding as of February 29, 2004
is presented below with share amounts in thousands: Weighted Avg.Number
    
    Remaining
    
    Weighted Avg.
    
    Number
    
    Weighted Avg.Range of
    
    Outstanding
    
    Contractual
    
    Exercise
    
    Exercisable
    
    ExerciseExercise Prices
    
    at 2/29/04
    
    Life
    
    Price
    
    at 2/29/04
    
    Price$0.00-$3.98
    
    
    4,744
    
    
    
    6.2
    
    
    $
    3.87
    
    
    
    3,320
    
    
    $
    3.863.98  5.54
    
    
    3,984
    
    
    
    7.4
    
    
    
    5.15
    
    
    
    1,872
    
    
    
    4.925.55  6.55
    
    
    4,836
    
    
    
    8.4
    
    
    
    6.20
    
    
    
    1,939
    
    
    
    5.966.55  46.78
    
    
    3,395
    
    
    
    6.0
    
    
    
    13.91
    
    
    
    3,121
    
    
    
    13.7247.38  60.81
    
    
    11
    
    
    
    6.9
    
    
    
    49.01
    
    
    
    8
    
    
    
    48.92$0.00-$60.81
    
    
    16,970
    
    
    
    7.1
    
    
    $
    6.87
    
    
    
    10,260
    
    
    $
    7.49
 Employee Stock Option Exchange Program On February 10, 2003, the Company announced a voluntary stock option
exchange program for its employees. Under the program, the Company offered to
exchange options to purchase approximately an aggregate of 6.1 million shares
of Manugistics common stock held by eligible employees, vested or unvested,
that had exercise prices equal to or greater than $7.0001 per share. All
employees had the opportunity to exchange existing eligible options for a
promise to grant new options at exchange ratios dependent on the exercise price
of the exchanged options. Members of our Board of Directors, including the
Companys Chairman and CEO, did not participate in this program. On March 10, 2003, the Company announced that it had accepted for
cancellation and exchange options to purchase approximately 4.8 million shares
of its common stock in exchange for approximately 1.5 million new options of
its common stock, to be granted on September 16, 2003. The Company granted
approximately 1.2 million new options on September 16, 2003 as a result of the
option exchange program. The number of new options granted to employees
declined from the original expected amount as a result of voluntary and
involuntary terminations. The replacement options have terms and conditions
that are substantially the same as those of the cancelled options. The exercise
price of the replacement options is $5.55 per share, which was the market value
of a share of the Companys common stock on the date of grant as determined
under the Companys option plans. Options cancelled in the exchange program and the new options have been
treated as fixed option awards for accounting purposes as the new options were
granted six months and five days after the cancellation date and any options
granted after August 9, 2002 (the look back period) were required to be
exchanged in order to participate in the program. Therefore, no compensation
expense will be recorded as a result of the program.  10.
    
    RETIREMENT PLANS The Company has two defined contribution retirement savings plans (one in
the U.S. and another in the U.K.) under the terms of which the Company matches
a percentage of the employees qualified contributions. New employees are
eligible to participate in the plans upon completing one month of service. The
Companys contribution to the plans totaled $1.8 million, $2.1 million and $2.2
million for fiscal 2004, 2003 and 2002, respectively.  11.
    
    INCOME TAXES Income Tax Provision. The components of the income tax provision (benefit)
are as follows (in thousands): February 28 or 292004
    
    2003
    
    2002Current:Federal
    
    $
    147
    
    
    $
    (799
    )
    
    $
    State
    
    
    150
    
    
    
    150
    
    
    
    100Foreign
    
    
    1,017
    
    
    
    1,717
    
    
    
    1,332Total current
    
    $
    1,314
    
    
    $
    1,068
    
    
    $
    1,432
 F-20




---



##### 



February 28 or 292004
    
    2003
    
    2002Deferred:Federal
    
    $
    
    
    
    $
    15,558
    
    
    $
    (21,973
    )State
    
    
    
    
    
    
    2,082
    
    
    
    (2,938
    )Foreign
    
    
    
    
    
    
    2,710
    
    
    
    (581
    )Total deferred
    
    $
    
    
    
    $
    20,350
    
    
    $
    (25,492
    )Total provision for (benefit from) income taxes
    
    $
    1,314
    
    
    $
    21,418
    
    
    $
    (24,060
    )
 Loss before income taxes includes losses from foreign operations of
approximately $0.5 million, $20.0 million and $15.6 million in fiscal 2004,
2003 and 2002, respectively. Deferred Income Taxes. The components of the Companys deferred tax assets
and liabilities are as follows (in thousands): February 28 or 29,2004
    
    2003Deferred Tax Assets:Accrued expenses
    
    
    5,872
    
    
    
    3,002Operating loss carryforwards:Domestic
    
    
    132,974
    
    
    
    97,756Foreign
    
    
    29,890
    
    
    
    31,120Restructuring charges
    
    
    9,681
    
    
    
    8,387Tax credit carryforwards
    
    
    5,787
    
    
    
    5,787Stock-based transactions
    
    
    4,767
    
    
    
    4,426Investment losses
    
    
    4,186
    
    
    
    4,186Depreciation and amortization
    
    
    24,620
    
    
    
    21,642Software development costs
    
    
    3,052
    
    
    
    Other temporary differences
    
    
    2,601
    
    
    
    4,833Deferred tax assets
    
    
    223,430
    
    
    
    181,139Less: valuation allowance
    
    
    (208,389
    )
    
    
    (166,731
    )Total deferred tax assets
    
    
    15,041
    
    
    
    14,408Deferred tax liabilities:Acquired intangibles
    
    
    (12,381
    )
    
    
    (12,380
    )Other
    
    
    (2,660
    )
    
    
    (2,028
    )Total deferred tax liabilities
    
    
    (15,041
    )
    
    
    (14,408
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. The
Company assesses the likelihood that its deferred tax assets will be recovered
from future taxable income, and to the extent that recovery is not likely, a
valuation allowance is established. The Company considers 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 it is determined that the amount
to be realized is greater or less than the valuation allowance
recorded. Based on various factors, including the cumulative losses for fiscal
2002, 2003 and 2004 when adjusted for non-recurring items, operating
performance in fiscal 2004 and estimates of future profitability, management
has concluded that future taxable income will, more likely than not, be
insufficient to recover its net deferred tax assets as of February 29, 2004.
Based on similar analysis in fiscal 2003, a valuation allowance for the full
amount of the net deferred tax assets was recorded, which resulted in a $20.4
million charge to income tax expense in the fiscal year ended February 28,
2003. Management will continue to monitor its estimates of future profitability
and realizability of the net deferred tax assets based on evolving business
conditions. Deferred tax assets of approximately $47.5 million pertain to certain net
operating loss carryforwards resulting from the exercise of employee stock
options. The Company has provided a valuation allowance on these deferred tax
assets. The valuation allowance on these deferred tax assets will be reduced in
the period in which the Company realizes a benefit on its tax return from a
reduction of
income tax payable stemming from the utilization of these losses. When
realized, the tax benefits of these credits and losses will be accounted for as
a credit to stockholders equity rather than as a reduction of the income tax
provision. F-21




---



##### 



Changes in the valuation allowance during fiscal 2004 are as follows (in
thousands): Balance, February 28, 2003
    
    $
    166,731Current year operations
    
    
    35,987Stock option exercises
    
    
    2,506Other
    
    
    3,165Balance, February 29, 2004
    
    $
    208,389
 At February 29, 2004, the Company had a total of approximately $335.1
million of U.S. federal and $94.7 million of foreign net operating losses
available to offset future taxable income in those respective taxing
jurisdictions. The federal net operating losses expire during the fiscal years
2012 to 2024. Approximately $10.7 million of the foreign net operating losses
expire during the calendar years 2005 to 2014, while the remaining foreign net
operating losses are available in perpetuity. The Company considers the
earnings of foreign subsidiaries to be permanently reinvested outside of the
United States. Accordingly, no United States income tax on these earnings has
been provided. The Company also has $4.5 million of research and development tax credit
carryforwards, which expire between 2011 and 2022, and $1.3 million of foreign
tax credit carryforwards that expire in 2005. Statutory Rate Reconciliation. The difference between the reported amount
of income tax (benefit) expense and the amount of income tax expense that would
result from applying statutory U.S. federal tax rate of 35% is summarized as
follows (in thousands): February 28 or 29,2004
    
    2003
    
    2002Benefit for income taxes computed at statutory rate
    
    $
    (35,870
    )
    
    $
    (66,787
    )
    
    $
    (48,726
    )Increase (reduction) in taxes resulting from:State and foreign taxes, net of federal provision (benefit)
    
    
    1,321
    
    
    
    (293
    )
    
    
    (562
    )Net change in valuation allowance
    
    
    35,987
    
    
    
    54,262
    
    
    
    (1,894
    )Goodwill amortization and impairment
    
    
    
    
    
    
    33,722
    
    
    
    24,020Other
    
    
    (124
    )
    
    
    514
    
    
    
    3,102Provision for (benefit from) income taxes
    
    $
    1,314
    
    
    $
    21,418
    
    
    $
    (24,060
    )
 12. OTHER EXPENSE Other expense consists of the following (in thousands): February 28 or 29,2004
    
    2003
    
    2002Interest income
    
    $
    1,673
    
    
    $
    3,635
    
    
    $
    9,345Interest expense
    
    
    (13,839
    )
    
    
    (14,127
    )
    
    
    (13,757
    )Converge, Inc. investment loss
    
    
    
    
    
    
    
    
    
    
    (10,150
    )Exchange (loss) gain
    
    
    (1,609
    )
    
    
    2,309
    
    
    
    816Other
    
    
    320
    
    
    
    241
    
    
    
    (892
    )Total other expense
    
    $
    (13,455
    )
    
    $
    (7,942
    )
    
    $
    (14,638
    )
 13. ACQUISITIONS During the three years ended February 29, 2004, the Company completed the
following transactions: Digital Freight Exchange, Inc. On May 23, 2002, the Company acquired substantially all of the assets of
DFE for $4.5 million in cash. DFE was a provider of collaborative
transportation logistics services that facilitate online, real-time bids for
global transportation contracts. Approximately $0.3 million of the purchase
price was paid in cash at closing. The remaining purchase price of $4.2 million
was paid in cash in September 2002. Western Data Systems of Nevada, Inc. On April 26, 2002, the Company acquired certain assets and assumed certain
liabilities of Western Data Systems of Nevada, Inc. (WDS) for $26.2 million
in cash. At the time of the acquisition, WDS was a leading provider of
application software and services to 135 customers in commercial aerospace,
defense and maritime industries and the military. The WDS acquisition added to
the F-22




---



##### 



Companys offering of service & parts management solutions that address the
complex business operations inherent to asset intensive industries. WDS
software includes capabilities ranging from predictive system failure
forecasting and parts optimization, to finite capacity and labor resource
scheduling, to maintenance, repair and overhaul (MRO) shop planning and
execution, and direct materials purchase management. During the year ended and
as of January 31, 2002, WDS had revenue of approximately $28.0 million and had
approximately 160 employees. The results of operations for WDS have been included in the Companys
operations since the acquisition date. The purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair
values at the acquisition date. The fair value of identifiable intangible
assets related to the WDS acquisition was determined by an independent
valuation and includes $16.2 million of acquired technology to be amortized
over five years, $6.4 million of customer relationships to be amortized over
seven years and $3.3 million of goodwill. In connection with the acquisition of WDS, the Company allocated $3.8
million, or 14.5% of the purchase price to in-process research and development
projects. There were several in-process research and development projects at
the time of the WDS acquisition. At the acquisition date, WDS was evaluating
the efforts required to complete acquired in-process research and development
projects including planning, designing, testing and other activities necessary
to establish that the product or enhancements to existing products could be
produced to meet desired functionality and technical performance requirements.
This was being done in conjunction with the enhancement of three software
products. The most significant of these projects was the completion of the
Buying Advantage product, which is an advanced internet-based direct
procurement solution designed for large aerospace and defense companies,
mid-sized suppliers and maintenance, repair and overhaul facilities in industry
and government. It enables single-site or multi-site organizations to leverage
the supplier community as a strategic asset through aggregated sourcing and
buying, increased buyer efficiencies and through efficient collaboration and
integration with suppliers. This results in reduced lead-time and cost and
improved responsiveness. The value assigned to Buying Advantage was $3.3
million. The value of the purchased in-process research and development was
computed using discount rates ranging from 26% to 30% on the anticipated income
stream of the related product revenue using the income approach appraisal
method. The discounted cash flows were based on managements forecast of future
revenue, costs of revenue and operating expenses related to the products and
technologies purchased from WDS. The determined value was then adjusted to
reflect only the value creation efforts of WDS prior to the close of the
acquisition. At the time of the acquisition, the products and enhancements were
at various stages of completion, ranging from approximately 5% to 96% complete
and future costs to complete the projects were anticipated to be $2.8 million.
Anticipated completion dates ranged from one month to 15 months. The resulting
value of purchased in-process research and development was further reduced by
the estimated value of core technology. A purchased research and development
charge of $3.8 million was recorded in fiscal 2003. The estimated revenue for the in-process projects were expected to
commence in calendar 2002 and 2003 upon project completion and to decline over
four years as new products and technologies enter the market. The discount rate
utilized was higher than the Companys weighted-average cost of capital due to
the inherent uncertainties surrounding the successful development of the
purchased in-process technology, the useful life of such technology, the
profitability levels of the technology and the uncertainty of technological
advances that were unknown at the time of the acquisition. The original
research and development projects have been completed. SpaceWorks, Inc. On July 25, 2001, the Company acquired the intellectual property and
certain other assets of SpaceWorks, Inc. (the SpaceWorks Transaction) for
$8.3 million in cash. SpaceWorks, Inc. was a developer of software solutions
that helped enable companies to automate complex order-management related
activities. These solutions expanded the Companys supply chain execution
capabilities. The SpaceWorks Transaction was accounted for as a purchase of
developed technology. PartMiner CSD, Inc. On May 31, 2001, the Company acquired the collaborative sourcing and
design assets of PartMiner CSD, Inc., as well as related assets from its
parent, PartMiner, Inc. and its affiliates (the CSD Acquisition) for $20.0
million in cash. PartMiner CSD, Inc. was a
developer of product design and sourcing software which now constitutes a
portion of the Companys supplier relationship management software offering.
The CSD Acquisition included developed technology, existing customer contracts,
personnel and other intangible assets. The CSD Acquisition was accounted for
using the purchase method of accounting. The purchase price has been allocated
to the assets acquired and liabilities assumed based on their estimated fair
values at the acquisition date. Intangible assets related to the CSD
Acquisition include developed technology and goodwill. During the year ended
December 31, 2000, F-23




---



##### 



PartMiner CSD, Inc. had revenue of approximately $4.0
million. Contemporaneously, in a separate transaction, the Company entered into
a software license agreement with PartMiner, Inc. for various products for use
in PartMiners electronic components procurement and sourcing business. One Release, LLC. On May 17, 2001, the Company acquired certain assets of One Release, LLC
and its affiliates (the One Release Acquisition), a software engineering
services and systems business, for $4.3 million of common stock (135,793
shares). The Company also paid an additional $1.0 million in shares of the
Companys common stock in May 2002 as contingent consideration for certain
performance criteria attained during the first year after the acquisition date.
The additional consideration was recorded as goodwill. The One Release
Acquisition added approximately 25 software developers to help enhance the
Companys pricing optimization products. The One Release Acquisition was
accounted for using the purchase method of accounting. The results of
operations for One Release have been included in the Companys operations since
the acquisition date. The Company allocated approximately $7.4 million to
assembled workforce. This balance was reclassified to goodwill effective March
1, 2002 (see Note 6). 14. INVESTMENTS IN BUSINESS On May 30, 2001, the Company purchased approximately $10.2 million of
preferred stock of Converge, Inc. (the Converge Investment). Converge, Inc.
is a private marketplace exchange for components used by electronics and high
technology manufacturers. Founding investors in Converge, Inc. include Agilent
Technologies, Inc., Compaq Computer Corporation and Hewlett-Packard Company,
among others. The Converge Investment is accounted for under the cost method of
accounting for investments. In a separate transaction approximately two weeks
prior to the Converge Investment, the Company entered into a software license
agreement with Converge, Inc. for various products for use in its marketplace
exchange business. During the third quarter of fiscal 2002, the Company recorded an
impairment loss of approximately $10.2 million relating to an
other-than-temporary decline in the fair value of its equity investment in
Converge, Inc. The impairment was recorded to reflect the investment at fair
value. As of February 28, 2002, the Companys recorded basis in the Converge
Investment was reduced to $0 due to concerns about the ability of Converge to
continue funding its operations in light of current market conditions in the
high technology sector. The impairment loss is included in other expense in the
consolidated statements of operations and comprehensive loss for the fiscal
year ended February 28, 2002 (see Note 12). 15. RESTRUCTURING AND LEASE ABANDONMENT CHARGES The following table sets forth a summary of total restructuring and lease
abandonment charges, payments made against those charges and the remaining
liabilities as of February 29, 2004 (amounts in thousands): Non-cashCharges and
    
    
    
    
    
    activityadjustments to
    
    Utilization of
    
    disposalcharges in twelve
    
    cash in twelve
    
    losses in twelveBalance as of
    
    months ended
    
    months ended
    
    months ended
    
    Balance as ofAll Plans
    
    Feb. 28, 2003
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004Lease obligations and
terminations (1)
    
    $
    11,637
    
    
    $
    12,917
    
    
    $
    (5,918
    )
    
    $
    
    
    
    $
    18,636Severance and related benefits
    
    
    2,296
    
    
    
    855
    
    
    
    (3,069
    )
    
    
    
    
    
    
    82Impairment charges and write-downs
    
    
    
    
    
    
    4,241
    
    
    
    
    
    
    
    (4,241
    )
    
    
    Other
    
    
    287
    
    
    
    614
    
    
    
    (843
    )
    
    
    
    
    
    
    58Subtotal
    
    $
    14,220
    
    
    $
    18,627
    
    
    $
    (9,830
    )
    
    $
    (4,241
    )
    
    
    18,776Reclassification of deferred rent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    729Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,505
  (1)
    
    Certain accrued lease obligations extend through fiscal year
2019. Fiscal 2004 Restructuring and Lease Abandonment Charges. Plan FY04 Q4 Restructuring and Lease Abandonment Charges (Plan FY04 Q4).
During the three months ended February 29, 2004, the Company announced and
implemented a restructuring plan designed to further adjust its cost structure
and resource
allocation to increase efficiencies and reduce excess office space.
Actions taken included further consolidation of the Companys U.S. product
development functions to the corporate headquarters in Rockville, Maryland by
closing the product development facility at Wayne, Pennsylvania and relocating
employees to headquarters in Rockville, Maryland, involuntary termination for
the remaining employees at the Wayne, Pennsylvania product development facility
and lease abandonments. The Company recorded a facility charge of approximately
$5.6 million during the three months ended February 29, 2004 related to the
Company vacating Wayne, F-24




---



##### 



Pennsylvania, remaining office space in Irving, Texas
and Detroit, Michigan, as well as further reductions of office space in
Atlanta, Georgia, Itasca, Illinois, Calabasas, California and Bracknell, United
Kingdom. The costs associated with the facilities charge were recorded based on
the present value of the sum of expected remaining lease commitments and
include managements best estimates of expected sublease income and costs
associated with subleasing the vacated space. The Company also recorded other
charges of approximately $0.1 million related to relocation costs during the
three months ended February 29, 2004 to relocate certain employees under the
consolidation of its U.S. product development function from Wayne,
Pennsylvania. The involuntary terminations related to the closing of the
Wayne, Pennsylvania product development facility totaled 7 employees. All
terminated employees were notified by February 29, 2004 and were not required
to render service to the Company beyond the earlier of their termination date
or minimum retention period of 60 days (as defined by SFAS No. 146 Accounting
for Exit or Disposal Activities (SFAS 146). In accordance with SFAS 144, the Company recorded a write-down relating to
the restructuring of approximately $1.1 million during the three months ended
February 29, 2004. The write-down consisted of the abandonment of certain
furniture, fixtures, computer equipment and leasehold improvements related to
permanently vacating office space in the previously mentioned facilities. The following table sets forth a summary of Plan FY04 Q4 restructuring
and lease abandonment charges, payments made and the remaining liabilities as
of February 29, 2004 (amounts in thousands): Non-cashUtilization of
    
    activity disposalCharges in three
    
    cash in twelve
    
    losses in twelveBalance as of
    
    months ended
    
    months ended
    
    months ended
    
    Balance as ofPlan FY04 Q4
    
    Feb. 28, 2003
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004Lease obligations and terminations (1)
    
    $
    
    
    
    $
    5,622
    
    
    $
    (284
    )
    
    $
    
    
    
    $
    5,338Severance and related benefits
    
    
    
    
    
    
    82
    
    
    
    (58
    )
    
    
    
    
    
    
    24Impairment charges and write-downs
    
    
    
    
    
    
    1,051
    
    
    
    
    
    
    
    (1,051
    )
    
    
    Other
    
    
    
    
    
    
    120
    
    
    
    (62
    )
    
    
    
    
    
    
    58Subtotal
    
    $
    
    
    
    $
    6,875
    
    
    $
    (404
    )
    
    $
    (1,051
    )
    
    
    5,420Reclassification of deferred rent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,645
  (1)
    
    Includes $21 thousand of accretion expense charges in the twelve
months ended February 29, 2004. In accordance with SFAS 146, in periods subsequent to the initial
recording of the Plan FY04 Q4 and Plan FY04 Q1 facilities charge, the Company
will recognize accretion expense due to the passage of time. Accretion expense
will be recorded as an additional restructuring-related expense and increase to
restructuring liabilities. Plan FY04 Q1 Restructuring and Lease Abandonment Charges (Plan FY04 Q1)
During the three months ended May 31, 2003, the Company announced and
implemented a restructuring plan designed to further align its cost structure
with expected revenue. Actions taken included a reduction in the Companys
employee workforce by approximately 8%, further consolidation of the U.S.
product development functions to the corporate headquarters in Rockville,
Maryland and further reduced discretionary spending and lease terminations. The
reduction in workforce was achieved through a combination of attrition and
involuntary terminations and totaled 94 employees, 72 of which were
involuntary, across most business functions and geographic regions. Involuntary
terminations by geographic region included 66 in the U.S., 3 in Mexico, 2 in
Canada and 1 in Japan. All terminated employees were notified by May 31, 2003
and were not required to render service to the Company beyond the earlier of
their termination date or minimum retention period of 60 days (as defined by
SFAS 146). The Company recorded a facility charge of approximately $5.9
million during the three months ended May 31, 2003 related to the Company
vacating and subleasing approximately 26% of its corporate headquarters
building in Rockville, Maryland, as well as further reductions of office space
in San Carlos, California; Atlanta, Georgia; Irving, Texas and Detroit,
Michigan. The costs associated with the facilities charge were recorded based
on the present value of the sum of expected remaining lease commitments and
include managements best estimates of expected sublease income and costs
associated with subleasing the vacated space. In accordance with SFAS 144, the Company recorded a write-down relating to
the restructuring of approximately $3.2 million during the three months ended
May 31, 2003. The write-down consisted of the abandonment of certain furniture,
fixtures, computer equipment and leasehold improvements related to permanently
vacating office space in the previously mentioned facilities. F-25




---



##### 



The following table sets forth a summary of Plan FY04 Q1 restructuring and
lease abandonment charges, payments made and the remaining liabilities as of
February 29, 2004 (amounts in thousands): Non-cashAdjustments to
    
    Utilization of
    
    activity disposalCharges in three
    
    charges in twelve
    
    cash in twelve
    
    losses in twelveBalance as of
    
    months ended
    
    months ended
    
    months ended
    
    months ended
    
    Balance as ofPlan FY04 Q1
    
    Feb. 28, 2003
    
    May 31, 2003
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004Lease obligations and
terminations (1)
    
    $
    
    
    
    $
    5,858
    
    
    $
    233
    
    
    $
    (2,459
    )
    
    $
    
    
    
    $
    3,632Severance and related benefits
    
    
    
    
    
    
    1,348
    
    
    
    (6
    )
    
    
    (1,302
    )
    
    
    
    
    
    
    40Impairment charges and write-downs
    
    
    
    
    
    
    3,190
    
    
    
    
    
    
    
    
    
    
    
    (3,190
    )
    
    
    Subtotal
    
    $
    
    
    
    $
    10,396
    
    
    $
    227
    
    
    $
    (3,761
    )
    
    $
    (3,190
    )
    
    
    3,672Reclassification of deferred rent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    504Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,176
  (1)
    
    Includes $136 thousand of accretion expense in adjustments and
charges in the twelve months ended February 29, 2004 respectively. Fiscal 2003 Restructuring and Lease Abandonment Charges. Plan FY03 Restructuring Charges (Plan FY03). During the twelve months
ended February 28, 2003, the Company implemented three restructuring plans in
order to further align its cost structure with expected revenue. Actions taken
included a reduction in the Companys employee workforce by approximately 26%,
consolidation of most of the U.S. product development functions to the
corporate headquarters in Rockville, Maryland, further reduced discretionary
spending and lease termination costs. Implementation of these plans resulted in
a charge for severance and related benefits of approximately $7.9 million
related to 343 involuntary terminations across most business functions and
geographic regions. In addition, the plans resulted in a facility charge of
approximately $8.6 million related to the closure and abandonment of leased
office space; closure of the Ratingen, Germany, Milan, Italy, and Denver,
Colorado; reductions in office space in Bracknell, UK, San Carlos, California,
and Atlanta, Georgia; and the expected loss of sublease rental income from a
previously closed office in Bracknell, UK. The facility charge was offset by a
credit of approximately $0.7 million related to the reduction of a previously
recorded office space liability assumed as part of the Talus Solutions, Inc.
(Talus) acquisition where the landlord subsequently agreed to reduce the
remaining office space and lease obligation held by the Company. These costs
include managements best estimates of expected sublease income. The Company
also recorded other charges of approximately $0.7 million related to contract
termination costs during the twelve months ended February 28, 2003. The
Company recorded other charges of approximately $0.2 million related to
relocation costs of certain employees relocating to Rockville, Maryland as part
of the consolidation of product development during the twelve months ended
February 28, 2003. In accordance with SFAS 144, the Company recorded a write-down relating to
the restructuring of approximately $1.3 million during the twelve months ended
February 28, 2003. The write-down consisted of the abandonment of certain
furniture, fixtures, computer equipment and leasehold improvements related to
the closure of certain facilities. In accordance with SFAS 144, the Company recorded an impairment charge of
approximately $1.2 million during the twelve months ended February 28, 2003
related to the discontinued use of a portion of the Companys sales force
automation software, which is being replaced with another tool. The remaining
net book value at August 31, 2002 of $0.7 million was fully amortized over its
remaining useful life. In the fiscal 2004, the Company recorded adjustments to FY03 Plans
facility charges of approximately $1.8 million related to changes in sublease
assumptions in the Bracknell, United Kingdom , San Carlos, California and
Atlanta, Georgia facility based on current commercial real-estate conditions,
adjustments to severance charges of approximately ($0.5) million and an
adjustment to other charges of approximately $0.5 million related to its
initiative taken on in fiscal 2003 to relocate certain employees under the
consolidation of the U.S. product development functions to Rockville, Maryland. The following table sets forth a summary of Plan FY03 restructuring and
other impairment charges, payments made against those charges and the
remaining liabilities as of February 29, 2004 (amounts in thousands): Adjustments to
    
    Utilization ofcharges in twelve
    
    cash in twelveBalance as of Feb.
    
    months ended
    
    months ended
    
    Balance as ofPlan FY03
    
    28, 2003
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004Lease obligations and terminations
    
    $
    7,445
    
    
    $
    1,771
    
    
    $
    (2,292
    )
    
    $
    6,924Severance and related benefits
    
    
    2,237
    
    
    
    (510
    )
    
    
    (1,709
    )
    
    
    18Other
    
    
    207
    
    
    
    506
    
    
    
    (713
    )
    
    
    Total
    
    $
    9,889
    
    
    $
    1,767
    
    
    $
    (4,714
    )
    
    $
    6,942
 F-26




---



##### 



Non-cashCharges and
    
    Utilization of cash
    
    activity disposaladjustments in
    
    in twelve months
    
    losses in twelveBalance as of
    
    twelve months ended
    
    ended
    
    months ended
    
    Balance as ofPlan FY03
    
    Feb. 28, 2002
    
    Feb. 28, 2003
    
    Feb. 28, 2003
    
    Feb. 28, 2003
    
    Feb. 28, 2003Lease obligations and terminations
    
    $
    
    
    
    $
    8,019
    
    
    $
    (574
    )
    
    $
    
    
    
    $
    7,445Severance and related benefits
    
    
    
    
    
    
    7,873
    
    
    
    (5,636
    )
    
    
    
    
    
    
    2,237Impairment charges and write-downs
    
    
    
    
    
    
    2,528
    
    
    
    
    
    
    
    (2,528
    )
    
    
    Other
    
    
    
    
    
    
    741
    
    
    
    (399
    )
    
    
    (135
    )
    
    
    207Total
    
    $
    
    
    
    $
    19,161
    
    
    $
    (6,609
    )
    
    $
    (2,663
    )
    
    $
    9,889
 Fiscal 2002 Restructuring Charges. Plan FY02 Restructuring Charges (Plan FY02).During fiscal 2002, the
Company adopted two restructuring plans in order to (i) centralize certain of
its product development functions in Rockville, Maryland from other locations
in North America; and (ii) reduce expenses as a result of expected reduction in
revenue caused by client concerns about committing to large capital projects in
the face of weakening global economic conditions. Implementation of these plans
resulted in facility charges of approximately $3.7 million related to the
closure and abandonment of leased office space, a charge for severance and
related benefits of approximately $2.3 million related to the involuntary
termination of 163 employees across most business functions and geographic
regions, a charge of approximately $0.5 million related to the relocation of 10
employees and an impairment charge of approximately $0.1 million related to the
closure and abandonment of certain leased facilities. During the twelve months
ended February 29, 2004, the Company recorded an adjustment to severance
charges of approximately ($0.1) million from prior restructuring charges and to
facility charges of approximately ($0.6) million from prior restructuring
charges. The following table sets forth a summary of Plan FY02 restructuring
charges, payments made against those charges and the remaining liabilities as
of February 29, 2004 (amounts in thousands): Adjustments to
    
    Utilization ofcharges in twelve
    
    cash in twelveBalance as of
    
    months ended
    
    months ended
    
    Balance as ofPlan FY02
    
    Feb. 28, 2003
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004Lease obligations and terminations
    
    $
    1,016
    
    
    $
    (567
    )
    
    $
    (250
    )
    
    $
    199Severance and related benefits
    
    
    59
    
    
    
    (59
    )
    
    
    
    
    
    
    Total
    
    $
    1,075
    
    
    $
    (626
    )
    
    $
    (250
    )
    
    $
    199
 Fiscal 1999 Restructuring Charges Plan FY99 Restructuring Charges (Plan FY99). During the third and fourth
quarters of fiscal 1999, the Company implemented a restructuring plan aimed at
reducing costs and returning the Company to profitability. Actions taken
included a reduction in the Companys workforce of 412 employees across all
business functions in the United States, the abandonment of future lease
commitments on office facilities that were closed and write-downs of operating
assets, goodwill and capitalized software made in accordance with SFAS 144. The following table sets forth a summary of Plan FY99 restructuring
charges, payments made against those charges and the remaining liabilities as
of February 29, 2004 (amounts in thousands): Adjustments to Plan
    
    Utilization ofFY99 charges in
    
    cash in twelveBalance as of
    
    twelve months ended
    
    months ended
    
    Balance as ofPlan FY99
    
    Feb. 28, 2003
    
    Feb. 29, 2004
    
    Feb. 29, 2004
    
    Feb. 29, 2004Lease obligations
and terminations
    
    $
    3,176
    
    
    $
    
    
    
    $
    (633
    )
    
    $
    2,543Other
    
    
    80
    
    
    
    (12
    )
    
    
    (68
    )
    
    
    Total
    
    $
    3,256
    
    
    $
    (12
    )
    
    $
    (701
    )
    
    $
    2,543
 Also, see Note 20 for subsequent events. F-27




---



##### 



16. SEGMENT INFORMATION The Company and its subsidiaries are principally engaged in the design,
development, marketing, licensing and support and implementation of demand and
supply chain management software. Substantially all revenue results from the
licensing of the Companys software products and related consulting and support
services. The Companys chief operating decision maker reviews financial
information, presented on a consolidated basis, accompanied by disaggregated
information about revenue by geographic region for purposes of making operating
decisions and assessing financial performance. Accordingly, the Company
considers itself to be in a single industry segment. Revenue is attributable to geographic regions based on the location of the
Companys customers. The following table presents total revenue and total
long-lived assets by geographic region for fiscal 2004, 2003 and 2002: February 28 or 29,2004
    
    2003
    
    2002(in thousands)Revenue:United States
    
    $
    160,487
    
    
    $
    204,352
    
    
    $
    230,470Europe
    
    
    57,723
    
    
    
    44,932
    
    
    
    62,828Asia/Pacific
    
    
    19,094
    
    
    
    17,666
    
    
    
    20,839Other
    
    
    5,741
    
    
    
    5,436
    
    
    
    5,750$
    243,045
    
    
    $
    272,386
    
    
    $
    319,887Long-lived Assets:United States
    
    $
    274,433
    
    
    $
    308,587
    
    
    $
    383,231Europe
    
    
    5,992
    
    
    
    3,584
    
    
    
    3,625Asia/Pacific
    
    
    1,840
    
    
    
    2,072
    
    
    
    2,086Other
    
    
    2,017
    
    
    
    1,843
    
    
    
    3,663$
    284,282
    
    
    $
    316,086
    
    
    $
    392,605
 No single customer accounted for 10% or more of the Companys revenue in
fiscal 2004, 2003 or 2002. 17. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest amounted to approximately $13.8 million, $12.8
million and $12.6 million in fiscal 2004, 2003 and 2002, respectively. Cash
paid for income taxes amounted to approximately $0.9 million, $1.4 million and
$1.6 million, in fiscal 2004, 2003 and 2002, respectively. Supplemental information of non-cash operating activities is as follows: Fiscal 2004  
    
    The Company issued 205,000 shares of restricted stock. The fair value
of the restricted stock awards granted of approximately $1.3 million was
recorded as a component of deferred compensation. The restrictions on
the restricted stock awards granted vest over four years. Compensation
expense will be recorded over the life of the vesting period of the
restricted stock, approximately $0.3 million compensation expense was
recorded in fiscal 2004. Fiscal 2002  
    
    In connection with the IRI settlement, we issued common stock with a
fair value of approximately $3.9 million (see Note 8). Supplemental information of non-cash investing activities is as follows: Fiscal 2003  
    
    In connection with the acquisition of One Release, the Company issued
additional common stock with a fair value of $1.0 million (see Note 13). Fiscal 2002  
    
    In connection with the acquisition of One Release, the Company issued
common stock with a fair value of approximately $4.3 million (see Note
13). F-28




---



##### 



Supplemental
information of non-cash financing activities is as follows: Fiscal 2004  
    
    In connection with the debt conversion during the twelve months ended
February 29, 2004, the Company exchanged $74.5 million of the Notes for
9,725,750 shares of its common stock. Approximately $1.3 million of
deferred financing fees related to the Notes were reclassified from
other non-current assets to additional paid-in capital in connection
with the debt conversion transactions. (see Note 7). Fiscal 2003  
    
    The Company recorded approximately $4.5 million in capital leases (see Note 8). Fiscal 2002  
    
    The Company retired all of our 754,107 treasury shares during fiscal 2002; and  
    
    The Company recorded approximately $2.5 million in capital leases (see Note 8). 18. RELATED PARTY TRANSACTIONS Relationship with Warburg Pincus In October, 2002, the Company appointed William H. Janeway, a
Vice-Chairman of Warburg Pincus LLC, a private equity investment firm, as a
Class III director of its Board of Directors, with a term expiring in 2004. In
connection with Dr. Janeways appointment to the Board, the Company entered
into an agreement with Warburg Pincus Private Equity VIII, L.P. in which the
Company consented to the acquisition by Warburg Pincus and certain of its
affiliates of up to 19.9% of Manugistics common stock and agreed that for as
long as Warburg Pincus and its affiliates beneficially own at least ten percent
(10%) of Manugistics common stock, the Company would nominate and use its best
efforts to have elected to its Board one person designated by Warburg Pincus
and reasonably acceptable to the Company. In addition, Warburg Pincus agreed
that, for the duration of the standstill period, neither it nor its affiliates
would acquire more than 19.9% of Manugistics common stock. The standstill period is the earlier of:  
    
    three years; 
    
    the date on which another person acquires more than 15% of Manugistics
common stock with the Companys consent and on terms more favorable than those
obtained by Warburg Pincus; or 
    
    the date on which the Company fails to perform its agreement with
respect to the acquisition of additional shares by Warburg Pincus and the
election of a director designated by Warburg Pincus. At the time the agreement was entered into, Warburg Pincus and certain of
its affiliates held approximately 10.9% of Manugistics common stock. As of
February 29, 2004, Warburg Pincus and certain of its affiliates held
approximately 9.3% of Manugistics common stock. 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly consolidated financial information for fiscal 2004
and 2003 follows: 1st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th Quarter(in thousands, except per share data)Fiscal 2004Total revenue
    
    $
    65,641
    
    
    $
    59,707
    
    
    $
    59,897
    
    
    $
    57,800Operating (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
    )Shares used in basic and
diluted share computation
    
    
    70,105
    
    
    
    70,424
    
    
    
    72,753
    
    
    
    77,634Fiscal 2003Total revenue
    
    $
    74,600
    
    
    $
    69,929
    
    
    $
    62,364
    
    
    $
    65,493Operating loss
    
    
    (24,809
    )
    
    
    (25,511
    )
    
    
    (23,682
    )
    
    
    (108,877
    )Net loss
    
    
    (27,081
    )
    
    
    (47,717
    )
    
    
    (26,003
    )
    
    
    (111,438
    )Basic and diluted loss per share
    
    $
    (0.39
    )
    
    $
    (0.68
    )
    
    $
    (0.37
    )
    
    $
    (1.59
    )Shares used in basic and
diluted share computation
    
    
    69,356
    
    
    
    69,812
    
    
    
    69,876
    
    
    
    70,028
 F-29




---



##### 



Included in the first, second, third and fourth quarters of fiscal year
2004 and the second, third and fourth quarters of fiscal 2003 are restructuring
charges and adjustment to restructuring charges (see Note 15). Included in the
third and fourth quarter of fiscal 2004 are debt conversion expenses (see Note
7). Included in the fourth quarter of fiscal 2003 is a goodwill impairment
charge (see Note 6). Included in the first quarter of fiscal 2003 are
non-recurring charges for purchased research and development related to the
acquisition of WDS (see Note 13). Included in the second quarter of fiscal 2003
is a charge for income tax expense related to the recording of a valuation
allowance for the full amount of net deferred tax assets recorded (see Note
11). 20. SUBSEQUENT EVENTS On April 14, 2004 the Company signed a lease termination agreement with
the landlord of its facility in metropolitan Chicago, Illinois. This space was
substantially unused as a result of past restructuring activity. The lease
termination agreement required the Company to pay approximately $3.3 million in
cash at signing in exchange for terminating its lease agreement that expired in
fiscal 2009. As of February 29, 2004, based on managements best estimate of
the remaining liability the Company had accrued restructuring obligations of
approximately $6.1 million related to this facility. The Company will record a
restructuring benefit of approximately $2.8 million during the quarter ended
May 31, 2004 as a result of the lease termination agreement. On May 7, 2004, the Company signed a settlement agreement related to a
lawsuit initiated in calendar 2002 involving a dispute arising out of a
proposed business venture. The Company has agreed to pay $0.9 million in full
settlement of the dispute. Such amount has been accrued as of February 29,
2004 in accordance with Statement of Financial Accounting Standards No. 5 as
information available prior to issuance of the Companys financial statements
indicated that a liability had been incurred as of February 29, 2004. F-30