UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2005

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                       to                      

Commission File Number 0-22154

MANUGISTICS GROUP, INC.

(Exact name of Registrant as specified in its charter)

(301) 255-5000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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.                                                        ý Yes  o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

ý Yes   o No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)            o Yes   ý No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  84.1 million shares of common stock, $.002 par value, as of December 31, 2005

MANUGISTICS GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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PART I-FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

MANUGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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MANUGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

See accompanying Notes to Condensed Consolidated Financial Statements.

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MANUGISTICS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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MANUGISTICS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

November 30, 2005

1. The Company and Basis of Presentation

The Company

Manugistics Group, Inc. (the “Company”) is a leading global provider of supply chain, demand and revenue management software products and services. The Company combines its products and services to deliver solutions that address the specific business needs of its clients. The Company’s approach to client delivery is to advise its clients on how best to use its solutions and other technologies across their demand and supply chain to integrate pricing, forecasting, operational planning and execution in a manner that will allow them to enhance margins across their enterprise and extended trading networks and to improve their revenue management practices. The Company delivers its solutions using commercially available products and provides additional functionality addressed through product extensions for industry-specific capabilities.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its wholly-owned subsidiaries have been prepared in accordance with generally accepted accounting principles for interim reporting and follow the guidance provided in the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments that are necessary for a fair presentation of the unaudited results for the interim periods presented have been included. The results of operations for the periods presented herein are not necessarily indicative of the results of operations for the entire fiscal year, which ends on February 28, 2006.

These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended February 28, 2005 included in the Annual Report on Form 10-K of the Company for that year filed with the Securities and Exchange Commission.

Certain prior year amounts have been reclassified to conform to the current year’s financial statement presentation.

2. Stock Option-Based Compensation Plans & Restricted Stock Program

Stock Option-Based Compensation Plans. The Company accounts for its stock option-based compensation plans in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations using the intrinsic value based method of accounting. If the Company accounted for its share-based payments using a fair value based method of accounting in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (R), “Share-Based Payment,” (“SFAS 123 (R)”) as required beginning in the first quarter of fiscal year 2007, and in accordance with the provisions in Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”), the Company’s net loss and loss per basic and diluted share amounts would have been as follows (amounts in thousands, except per share amounts):

(1) Includes the impact of actual stock option forfeitures related to employee terminations.

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Consistent with the Company’s accounting for deferred tax assets resulting from the exercise of employee stock options in the accompanying unaudited Condensed Consolidated Financial Statements, the Company has not provided a tax benefit or expense on the pro forma expense in the above table.

During the three and nine months ended November 30, 2005, stock options granted had weighted average fair values of $0.58 and $0.64 per share, respectively, and $1.65 and $1.76 per share during the three and nine months ended November 30, 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 the 2004 Employee Stock Purchase Plan (ESPP) during the three and nine months ended November 30, 2005 was $0.36 and $0.37 per share, respectively. The weighted average estimated fair value of the common stock purchase rights under the ESPP during the three months ended November 30, 2004 was $0.51 per share. On November 30, 2005, 75,331 shares of the Company’s common stock were issued under the Company’s 2004 ESPP.

The Company determined the assumptions used in computing the fair value of stock options and ESPP 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 the Company’s 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:

Restricted Stock Program. In June 2003, the Company’s Board of Directors approved an amendment to the Company’s 1998 stock option plan to issue restricted shares of Manugistics’ common stock to its employees. This amendment was approved by shareholders at the Company’s 2003 Annual Meeting of Shareholders on July 29, 2003. Restricted stock awards generally have a vesting schedule of one to four years. The value of restricted awards is computed using the closing price of the stock on the date of grant and includes an estimated forfeiture rate that is based upon the actual historical forfeiture rate. The value of restricted awards is recorded as deferred compensation and reported as a reduction to stockholders’ equity. The related compensation expense is recognized over the vesting period of the award.

During fiscal years 2004 and 2005 and for the nine months ended November 30, 2005, the Company issued 205,000, 1,628,000 and 357,500 shares of restricted stock to employees, respectively, and recorded deferred compensation of $1.3 million, $3.5 million and $0.5 million, respectively.

The Company recorded $0.3 million and $1.2 million in compensation expense related to restricted shares outstanding during the three and nine months ended November 30, 2005, respectively, and recorded $0.3 million and $0.6 million in compensation expense during the three and nine months ended November 30, 2004, respectively.

3. 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, using the if-converted method. The dilutive effect of options, restricted stock and warrants to acquire 0.8 million and 1.1 million shares for the three and nine months ended November 30, 2005, respectively, and six thousand and 0.9 million shares for the three and nine months ended November 30, 2004, respectively, was excluded from the calculation of diluted net loss per share 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 the three and nine months ended November 30, 2005 and 2004 because it was anti-dilutive.

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4. Commitments and Contingencies

Legal Actions. The Company is involved from time to time in disputes and litigation in the ordinary course of business. The Company has established accruals for losses related to such matters that are probable and reasonably estimable. The Company does not believe that the outcome of any existing disputes or litigation will have a material adverse effect on the Company’s business, operating results, financial condition or 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 the Company. Accordingly, an unfavorable outcome of some or all of these matters could have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.

Indemnification. The Company licenses software to its customers under software license agreements, which generally provide the customer with limited indemnification against damages, judgments and reasonable costs and expenses incurred by the customer for any claim or suit based on infringement of a trademark or copyright as a result of the customer’s use of the Company’s software. To date, the Company has not incurred any material costs associated with these indemnification provisions and no material claims of this nature were outstanding as of November 30, 2005. However, there can be no assurance that claims under these indemnification provisions will not arise in the future or that any such claims will not have a material adverse effect on the Company’s business, operating performance, financial condition or cash flows.

Product Warranty. The Company typically provides a limited warranty to its customers with respect to its software products. The Company records a liability 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.

Tax Matters.  The Company recorded a benefit for income taxes of $0.2 million and $2.5 million for the three and nine months ended November 30, 2005, respectively, compared to an income tax expense of $0.2 million and $0.9 million for the three and nine months ended November 30, 2004, respectively. The benefit recorded for the nine months ended November 30, 2005 included a $1.9 million refund for previously paid withholding taxes, $1.3 million related to the reversal of additional amounts accrued for certain withholding tax obligations which the Company no longer deemed probable to be paid and approximately $0.7 million in current income tax expense related to certain of the Company’s foreign subsidiaries.

5. Intangible Assets and Goodwill

Acquisition-related intangible assets subject to amortization as of November 30, 2005 and February 28, 2005 were as follows (amounts in thousands):

During the three months ended August 31, 2005, the Company performed an impairment test of its long-lived assets and concluded that although the Company continues to sell the products acquired in the PartMiner CSD, Inc. asset acquisition, the Company does not believe that future operating cash flows will be sufficient to support the related asset balance. Therefore, the Company wrote-off the remaining $12.8 million gross acquired technology asset balance and related $(9.1) million of accumulated amortization. The impairment resulted in a net reduction in acquisition-related intangible assets of $3.7 million.

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The change in the carrying amount of goodwill for the nine months ended November 30, 2005 was as follows (amounts in thousands):

During the three months ended May 31, 2005, the Company experienced adverse changes in its stock price. The Company performed a test for goodwill impairment 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 May 31, 2005, there was no impairment of goodwill.

During the three months ended November 30, 2005, the Company’s Chief Financial Officer left the Company to take a position at another company. As a result, the Company performed a test for goodwill impairment as of November 30, 2005. The Company 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 November 30, 2005, there was no impairment of goodwill.

Amortization expense for acquisition-related intangible assets was $2.6 million and $5.2 million for the three months ended November 30, 2005 and 2004, respectively, and $9.7 million and $15.6 million for the nine months ended November 30, 2005 and 2004, respectively. Estimated aggregate future amortization expense for acquisition-related intangible assets for the three-month period ended February 28, 2006 and future fiscal years is as follows (amounts in thousands):

6. Capitalized Software Development Costs

Operations commenced at the Company’s new development center in Hyderabad, India during the fourth quarter of fiscal 2005. Once the Company has completed transitioning the development process to India, the Company will no longer capitalize software development costs due to the change in the developmental life cycle of our products that is due to the expected shortening of time between reaching technological feasibility and the introduction of the Company’s products into the market. Capitalized software development costs as of November 30, 2005 and February 28, 2005 were as follows (amounts in thousands):

Capitalization of software development costs was $2.5 million and $7.1 million for the nine months ended November 30, 2005 and 2004, respectively. Amortization expense was $7.3 million and $7.2 million for the nine months ended November 30, 2005 and 2004, respectively.

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7. Comprehensive Loss

Other comprehensive loss relates primarily to foreign currency translation adjustments and unrealized gains (losses) on investments in marketable securities and long-term investments. The following table sets forth the comprehensive loss for the three and nine-month periods ended November 30, 2005 and 2004 (amounts in thousands):

8. Exit and Disposal Activities

Summary: The Company has adjusted its cost structure and resource allocation several times in recent years to respond to business and market conditions. Each exit and disposal plan has included involuntary terminations across most functional areas throughout the Company and the reduction of excess office space.

The following table sets forth a summary of total exit and disposal charges, payments made against those charges and the remaining liabilities as of November 30, 2005 (amounts in thousands):

(1)          Certain accrued lease obligations extend through fiscal year 2019.

(2)          Includes $110 thousand and $360 thousand of accretion expense in adjustments to charges in the three and nine months ended November 30, 2005.

The Company has outstanding lease obligations for facilities that have been entirely vacated which are located in Brussels, Belgium; Wayne, Pennsylvania; Detroit, Michigan and Ratingen and Munich, Germany. The Company has outstanding lease obligations for facilities for which a portion of the office space was vacated in certain facilities that are located in Rockville, Maryland; Atlanta, Georgia; Calabasas and San Carlos, California; and Bracknell, United Kingdom.

Exit and disposal activities:  In order to further adjust the Company’s cost structure and resource allocation to increase efficiencies and reduce excess office space in response to current business conditions, the Company announced and began implementing two exit and disposal plans, (the “FY05 Q2 Plans”) in the second quarter of fiscal 2005. Actions taken included the involuntary termination of employees across most business functions and the abandonment of excess office space.

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The following table summarizes the Company’s exit and disposal activities since fiscal year 2003 (amounts in millions, except number of involuntarily terminated employees):

(a)          US.

(b)         30 US, 1 Europe.

(c)          13 US.

(d)         96 US, 11 United Kingdom, 15 Other Europe, 4 Asia, 1 Canada.

(e)          Completely vacated Brussels, Belgium.

(f)            Partially vacated-Rockville, Maryland; San Carlos and Calabasas, California; Bracknell, United Kingdom and Tokyo, Japan. Completely vacated-Munich, Germany; Stockholm, Sweden and the Philippines.

(g)         Partially vacated Rockville, Maryland and includes adjustments to estimated sublease income based upon actual signed subleases in San Carlos, California and Detroit, Michigan.

(h)         Includes adjustments to previously established accruals.

Exit and disposal accounting policies and practices:  The Company records exit and disposal costs in accordance with Statement of Financial Accounting Standards No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).

SFAS 146 (excess office space):  The Company records charges for excess office space once vacated based on the present value of the sum of expected remaining lease commitments offset by management’s best estimate of expected sublease income and costs associated with subleasing the vacated space. The estimated sublease income amounts require judgment and include assumptions regarding the period of sublease and the price per square foot to be paid by sublessors. The Company reviews these estimates periodically and records appropriate adjustments, as necessary, to reflect management’s best estimates. In certain cases, only a portion of the total office space within a property is vacated when such excess office space allows appropriate physical separation.

SFAS 146 (severance costs): All terminated employees are notified within the requisite time period as prescribed by SFAS 146 and are typically not required to render service beyond the earlier of their termination date or a minimum retention period of 60 days, as defined by SFAS 146. When employees are required to render service beyond the earlier of their termination date or minimum retention period of 60 days, the severance cost for such employees is recognized and accrued over the required service period in accordance with SFAS 146. There were seven employees involuntarily terminated during the nine months ended November 30, 2005 and 23 during fiscal year 2005 who were required to render service beyond 60 days.

SFAS 88:  Certain terminated employees had employment contracts that defined the amount of severance and related benefits received upon termination. The severance and related benefits for such employees are accounted for in accordance with Statement of Financial Accounting Standards No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS 88”) when amounts are both probable and estimable. During fiscal year 2005, three employees with employment contracts were involuntarily terminated.

SFAS 144:  In connection with permanently vacating excess office space, the Company records an impairment charge of certain property, plant and equipment and leasehold improvements in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).

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9. Warrant

In March 2004, the Company entered into an amendment to an existing alliance agreement with International Business Machines Corporation (“IBM”) under which the companies will develop, market, sell and deliver demand and supply chain solutions globally. In connection with entering into the amendment to the alliance agreement, the Company issued a warrant (the “Warrant”) to IBM to acquire 250,000 shares of the Company’s common stock at a per share purchase price of $8.51, in reliance upon an exception provided under Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering. The Warrant is immediately exercisable, expires March 12, 2009, and provides for customary registration and indemnification rights and certain limited transfer rights. The fair value of the Warrant of $1.1 million is being recognized as operating expense over the three-year service period of the alliance agreement. The fair value of the Warrant was calculated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 2.79%; dividend yield of zero; volatility of 99%; and a Warrant life of five years. The Company recorded $0.3 million in amortization expense associated with the Warrant for each of the nine months ended November 30, 2005 and November 30, 2004.

10. Credit Facilities

The Company had a one-year unsecured revolving credit facility with Silicon Valley Bank (“SVB”) for $15.0 million which expired on March 30, 2005. On April 8, 2005, the Company renewed the credit facility with SVB for $15.0 million and a two-year term, effective March 29, 2005 (the “Credit Facility”). Under the terms of the Credit Facility, the Company may request cash advances, letters of credit, or both. Borrowings under the Credit Facility accrue interest at the prime rate plus 0.5%. 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 at least $90.0 million plus 50% of consolidated net income generated cumulatively commencing with the first quarter of fiscal 2006 and (ii) the Company’s 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, must be at least 2.0 to 1.0. The Company was in compliance with all financial covenants as of November 30, 2005 and there were no cash draws outstanding. As of November 30, 2005, the Company had $9.9 million in letters of credit outstanding under the Credit Facility to secure its lease obligations for certain office space.

The Credit Facility requires the Company to maintain $50.0 million in funds with SVB Asset Management 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 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.

The Credit Facility includes a provision for supplemental equipment advances, under which the Company may borrow up to an additional $5.0 million for the purchase of equipment, office furniture and other capital expenditures. Amounts may be borrowed for such capital expenditures through December 31, 2005 and accrue interest at a fixed interest rate equal to 7.75% annually. Equipment advances will be repaid monthly over a 36-month period, beginning in the month following the advance. As of November 30, 2005, there were no borrowings outstanding for equipment advances under the Credit Facility. The financial covenants for the supplemental equipment advances are the same as the financial covenants for the Credit Facility.

The Company had an additional credit agreement (the “Equipment Line”) with SVB, as amended, which expired March 31, 2003, under which the Company was permitted to borrow up to $5.0 million for the purchase of equipment. Amounts borrowed under the Equipment Line accrue interest at a rate equal to the greater of the three-year Treasury note rate plus 5%, or 8.25%, and are repaid monthly over a 36-month period. During fiscal 2003, the Company borrowed $2.9 million under the Equipment Line. The principal balance remaining as of November 30, 2005 was approximately $0.1 million. The financial covenants for the Equipment Line are the same as the financial covenants for the Credit Facility. The Company was in compliance with all financial covenants as of November 30, 2005.

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11. Segment Information

The Company and its subsidiaries are principally engaged in the design, development, marketing, licensing and support and implementation of supply chain, demand and revenue management software products and services. 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 by geographic region for the three and nine months ended November 30, 2005 and 2004, and total long-lived assets for the periods ended November 30, 2005 and February 28, 2005 (in thousands):