10-K 1 imic10k_02.txt FORM 10-K FOR FISCAL YEAR ENDED APRIL 30, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 2002 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No. 0-21359 INDUSTRI-MATEMATIK INTERNATIONAL CORP. (Exact name of registrant as specified in its charter) DELAWARE 51-0374596 (State of or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 901 Market Street Suite 475 Wilmington, DE 19801 (Address of principal executive offices) Registrant's telephone number, including area code: 302-777-1608 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on July 25, 2002, was approximately $7,154,000. At July 25, 2002, 31,945,303 shares of the registrant's Common Stock, $.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The registrant incorporates by reference in Part III of this Report specified portions of its definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with its 2002 Annual Meeting of Shareholders ("2002 Proxy Statement"). This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-K regarding the prospects of the Company's industry and its prospects, plans, financial position and business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "plan," "foresee," "believe," or "continue" or the negatives or variations of these terms or similar terminology. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. All forward-looking statements contained in this Form 10-K are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from the Company's expectations include, among others: * the unpredictability of orders for the Company's software; * the lengthy time associated with the sale and implementation of the Company's software; * the Company's ability to effectively compete with other companies offering similar products; * the Company's ability to attract and retain key personnel; * the market for order management software; and * the Company's ability to keep up with technological changes. More information about these and other potential factors that could affect the Company's business and financial results is set forth under "Item 1. Business -- Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are urged to consider carefully these factors in evaluating the forward-looking statements. The forward-looking statements included herein are made only as of the date of this Form 10-K and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. All forward-looking statements contained in this Form 10-K are qualified by reference to this cautionary statement. PART I ITEM 1. BUSINESS INDUSTRI-MATEMATIK INTERNATIONAL CORP. ("IMI" or "Company"), was incorporated in the State of Delaware in 1995 and conducts its business through domestic and international subsidiaries. The Company's business was founded in 1967 by incorporation in Sweden as Industri-Matematik AB ("IMAB"). In May 1995, the then stockholders of IMAB exchanged all of their IMAB shares for shares of the Company's capital stock and IMAB became a wholly-owned subsidiary of the Company. Pursuant to a Prospectus dated September 25, 1996, 5,060,000 shares of the Company's Common Stock were sold to the public in an initial public offering and the Company's Common Stock began trading on the Nasdaq National Market under the symbol "IMIC". During fiscal 1998, pursuant to a Prospectus dated October 31, 1997, the Company completed a secondary public offering of 8,136,250 shares of Common Stock. IMI develops, markets, and supports client/server and Internet architectured application software that enables manufacturers, distributors, wholesalers, retailers, logistics service providers, and e-businesses to more effectively manage their supply chains and their customer relationships. Supply chain management encompasses the execution of multiple customer-focused order fulfillment processes, including order management, pricing and promotion, handling, sourcing, warehouse management, transportation management, service management, customer relationship management, and replenishment planning and coordination. IMI's software products monitor and manage events beyond the physical limitations of the enterprise. The Company's software products are designed to meet the complex fulfillment and customer service needs of distribution-intensive businesses. These products allow customers to leverage the value of their existing enterprise systems by integrating with legacy, new client/server, and new Internet based manufacturing, advanced planning, and financial management systems. The Company has a professional services organization and relationships with third-party technology vendors and system integrators that configure solutions for clients. One of the most expensive and time consuming systems challenges businesses face is building a custom order management system into their web front end in order to provide customers with information on the availability of products and services, order status, pricing, and ship date. Once they build them, they are often difficult to maintain and impossible to scale with increasing order volumes. Another challenge businesses face is integrating their web front end with their customer contact centers to enable call center agents to be truly knowledgeable about their customers and provide the most responsive customer service possible. This new channel of sales and distribution must also be integrated with the existing enterprise systems to allow for a seamless customer interface. IMI's solutions solves these problems by providing a pre-configured, pre- integrated contact center and fulfillment solution that can be seamlessly and tightly integrated to almost any web front end and leverages the best-of- class capabilities of IMI's enterprise business solution applications. The software is designed for very fast implementation and to scale for future growth and is built to handle very high volumes and complex logistics. The Company believes it is the first to offer such a package. At a practical level, IMI's software replaces inventory with information. This helps companies reduce inventories while at the same time delivering products more quickly and efficiently while improving customer service. Representative customers of IMI include Albert Heijn, AT&T Pre-Paid Cards, Brunswick Corporation - Mercury Marine, Campbell Soup Company, Canadian Tire Corporation, Canon, Dannon, InterPharm Group B.V., J.F. Hillebrand, JM Smuckers, The Kellogg Company, Kramp Groep, Price Chopper, Royal Ahold - Hakongruppen, Shenker, Sherwin-Williams Company, Spicers, Starbucks Corporation, Telia AB, TNT Express, Warner/Electra/Atlantic (WEA), and West Farm Foods Inc. During fiscal 2002, the Company streamlined its structure, eliminating two management layers while retaining global corporate marketing, corporate finance, and product development operations in its Stockholm headquarters. It created four regional organizations - the Americas, Continental Europe, Northern Europe, and the United Kingdom - with full responsibility for marketing, sales, consulting, customer support and partnerships within each region. In addition, the Company recruited a new management team for IMI Americas and a new sales team for Northern Europe. It changed its global product strategy and management structure to make these functions more responsive to evolving client needs. The Company also initiated a re-branding initiative resulting in the adoption of a single brand strategy centered on IMI and the adoption of a unique position - "IMI - The Order Company" - within the supply chain management technology space. IMI's current primary focus is to provide solutions for retailers and wholesalers that turn supply chain friction into smoother order flows; specifically, the Company is now principally developing, marketing, and supporting application software that enables its clients to optimize and manage order and replenishment business processes based on actual customer demand and supporting best-in-class, pull-driven supply chain practices. IMI's target clients are members of the Retail Value Chain: mid-range to large-scale consumer goods manufacturers, wholesalers, retailers, and logistics service providers. The Company has identified supply-chain business processes that are critical to the Retail Value Chain: collaborative order management, demand replenishment, store replenishment, and logistics execution. The Company's suite of branded modules - IMI Order, IMI Warehouse, IMI Replenishment, IMI Store, IMI CRM, IMI Analytics, IMI Collaboration, and IMI Access - supports these processes. INDUSTRY BACKGROUND The current or "new" economy has fundamentally changed the way companies compete by forcing them to shift their business models from the traditional Buy/Hold/Sell model where they buy or make materials or finished goods and hold them in inventory while they try to sell them to a more dynamic and fluid model where companies first sell a product, source or build it based on the customer's needs, and then ship it to the customer. Pure e-businesses are the best example of this new model, but traditional, distribution- intensive manufacturers, wholesalers, and retailers are being forced to adapt their business processes to compete. In this environment, IMI has focused on the replenishment process to help companies keep and grow existing customers profitably by eliminating stock-outs at each point in the supply chain. Advanced fulfillment and customer service software applications are helping companies accelerate this shift by enabling them to anticipate shifts in customer demand earlier and respond more quickly by reducing cycle time and moving product through their supply chains at a more rapid pace freeing up working capital invested in inventory for other parts of the business. Today, companies are competing based on their supply chains instead of competing with product. As a result, there is an increasing demand for advanced supply chain management software solutions that can meet the rigorous demands of the new economy by providing real-time information to companies about their customers, their supply chains, and their business and operational performance. In this new environment, the Internet provides customers with immediate and constant access. This means the ability to place an order at anytime, from anywhere, for anything. Continuous ordering - 24 hours per day, 7 days per week, 365 days per year - is increasing the order volumes, velocity, and complexity that companies must handle. As a result, many companies need fulfillment solutions that can handle much higher transaction volumes and more complex logistics to satisfy customers. To meet these needs, enterprises are extending their supply chain capabilities by enabling collaboration with trading partners, such as customers, vendors, and services providers. This collaborative environment enables more efficient and effective control and visibility for all of the processes necessary for supply chain management. Another area that is taking on critical importance in collaborative supply chains is customer relationship management, or "CRM." With increased access to information comes an increased need for around the clock customer service. Call centers need to be available at any time to answer questions, configure orders, and provide service. By integrating customer relationship capabilities with advanced supply chain solutions, companies can manage customers throughout their entire relationship - from the time they acquire them, to the time they fulfill their orders, to the time they service them. As a result, companies will be able to capture, access, and leverage critical customer information about marketing, order fulfillment, product preference, and service requirements. This is high-value information as companies strategize on how to increase customer retention, target new product offerings, and differentiate customers by revenue and profit potential. For web-based businesses, fulfillment and customer service are the keys to customer retention and profitability. STRATEGY During the past fiscal year, IMI: * Identified and claimed Order Management as the Company's market- differentiating and market-leading core competence. * Began the re-orientation of the Company from a product-focused to an industry solutions-focused company. * Adopted a single brand strategy, retiring the former VIVALDI(r) product brand name in favor of IMI branded products. * Developed the tag line "The Order Company" and the concept "Turning Friction to Flow" which it believes will strengthen the Company's brand among key audiences. * Began the creation of a communication platform to ensure that, in all worldwide and multilingual communications, IMI speaks with one voice on behalf of the Company's corporate and product brand. As the first tactical implementation of IMI's new strategic position, the Company initiated aggressive marketing tactics aimed at key customer segments. IMI committed to using multiple vehicles - including advertising, direct response, Web, trade show, press relations - to support its branding effort. During the final two quarters of fiscal 2002, IMI launched its Retail Value Chain initiative, with the goal of increasing both market awareness and sales activity. This initiative leveraged client references (including Ahlsell, Canadian Tire, Dial, and Price Chopper) and, the Company believes, significantly increased the visibility of both the Company and its products among industry influencers, clients, and prospects. IMI continues to serve other categories of customers with supply chain software products: 1. Large, distribution-intensive companies with complex supply chain requirements that need enterprise-wide software solutions. 2. Web-based businesses selling goods and services over the Internet that need fulfillment and customer service solutions. 3. Logistics service providers who manage supply chain processes for their clients. The Company serves these customers from a common product platform. While IMI approaches each market with some common strategies, each also has its own unique elements. Expanded Usage Within Existing Customer Base. The Company's traditional enterprise customers are large, multinational businesses that initially have licensed Company software for use within one or more specific divisions. IMI believes that an opportunity exists within its established customer base to expand usage of its software by licensing new sites and additional users as well as licensing new applications like warehouse management, store replenishment, and CRM. Enhanced Core Product Functionality. The Company will continue to focus its product development resources on the development and enhancement of advanced supply chain management software solutions. IMI has over 25 years of experience in developing logistics management software. The Company intends to continue to increase product functionality. IMI currently is funding development efforts to increase order volume throughput, enhance and expand Internet and intranet applications, enable collaborative supply chain management, and extend its use of object-oriented technology. Integration with Complementary Products. The Company believes that the ability to offer a software product that can integrate seamlessly with selected third party components to provide a comprehensive solution tailored for a particular vertical market is a key competitive advantage. The Company intends to continue to integrate its solutions with complementary planning, manufacturing, finance, and decision support systems developed by others. IMI's solutions are a fulfillment and service transaction backbone for web- based businesses rather than a front-end shopping experience. As such, it is designed to integrate easily with most web front-end storefront solutions. IMI PRODUCTS AND SERVICES IMI - "The Order Company" - addresses supply chain performance by focusing on the actual demand: the order. * IMI concentrates on order fulfillment and logistics. * IMI focuses on optimizing order and replenishment processes for the Retail Value Chain - consumer goods manufacturers, wholesalers, retailers, and logistics service providers. The Company focuses its marketing, sales, and product development efforts in applications for specific target markets in the Retail Value Chain. Its traditional enterprise clients are large, multinational businesses that initially have licensed IMI software for use within one or more specific divisions. The Company believes that a significant opportunity exists to expand software use within its customer base through licensing new sites and additional users and licensing its new applications. IMI will continue to focus its product development resources on the development and enhancement of advanced supply chain management software solutions. IMI currently is funding development efforts to increase order volume throughput, enhance and expand Internet and intranet applications, enable collaborative supply chain management, and extend its use of object-oriented technology. IMI also intends to continue to integrate its solutions with complementary planning, manufacturing, finance, and decision support systems developed by others. IMI's primary direction is to design solutions to enable the Retail Value Chain to compete more effectively during a period of volatile market conditions and increased global competitive pressures using best practices in supply chain management. Supply chain management coordinates and integrates the flow of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. In general, supply chain management "friction" is caused by a number of factors: * No "single face" to the customer, resulting in the inability to take single, large orders; the inability to comprehensively monitor and optimize all customer activity; the inability to serve customers through lack of an integrated system; and poor integration of multiple order channels (Web, e-mail, voice). * Poor collaboration between manufacturers and retailers, inhibiting their ability to proactively manage exceptions and order problems. * Poor inventory management, resulting in out-of-stocks at the store shelf level. * Inability to scale to handle higher-volume, fast-moving consumer goods environments. VERTICAL MARKET SOLUTIONS FOR RETAIL IMI solutions target distribution-intensive supply chain operations and complement merchandising and store operations applications. The products support multi-channel distribution strategies, helping retailers (including grocery, specialty hard goods, and direct merchant retailers) improve ordering, fulfillment, and customer service across sales channels. The Company also delivers back-end distribution capabilities that enhance the reliability and responsiveness of logistics and warehouse processes. IMI solutions are designed to provide full visibility and control of distribution center (DC) and store inventory as well as managing orders from vendors, warehouses, stores, customers, and consumers. They permit DCs and stores to maintain and control product inventory and goods-in-transit, and to replenish store shelves based on expected consumer demand. The control and visibility of inventory helps retailers: * Reduce out-of-stocks. * Increase product availability at the shelf. * Improve response to customer demand. * Better utilize store shelf capacity and store labor. IMI makes it easier to make fact-based decisions about inventory levels and ordering through: * Improving inventory handling and stock turns by removing unproductive inventory from the supply chain. * Reducing back-room inventories by ordering what is needed to meet expected sales for the period. * Improving supplier performance by integrating the supply chain and reducing overall lead-times. * Delivering supply chain visibility, from the supplier to the shelf. VERTICAL MARKET SOLUTIONS FOR CONSUMER GOODS MANUFACTURERS For consumer goods manufacturers, IMI solutions target distribution-intensive supply chain operations and complement existing ERP and supply chain planning systems. The Company's products are designed to solve the problem of multi- channel integration through a collaborative order management solution that can fulfill global customer orders and deliver a single face to customers for competitive differentiation. VERTICAL MARKET SOLUTIONS FOR WHOLESALERS IMI focuses on the grocery, hard line specialty goods, and pharmaceutical and over-the-counter drugs industries. The Company's solution contains advanced order management, replenishment management, warehouse management, and collaborative management components. It is designed to give the wholesaler access to a logistics platform that increases competitive advantage by: * Enabling very late customer ordering stop time to increase sales. * Allowing for multi-channel distribution within the same customer order to make it simpler for customers and vendors to conduct business with the wholesaler. * Lowering inventory handling and storage costs through managing cross- docking and merge-in-transit strategies throughout the logistics network. * Differentiating customer service to various individual customers to give additional focus to the most important customer segments. * Supporting collaborative purchasing operations by providing suppliers with time-phased forecasts and replenishment schedules over the Internet. * Managing a multi-echelon logistics network by ensuring that centralized or localized purchase and replenishment decision are optimized. VERTICAL MARKET SOLUTIONS FOR LOGISTICS SERVICE PROVIDERS The market for logistics service providers (LSP) is rapidly becoming more competitive, while complementing the traditional focus services of warehousing and transportation with services like vendor-managed inventory, replenishment and inventory control, advanced collaborative order management and customer relationship management. IMI has a number of world-leading LSPs as customers offering services to retailers, wholesalers and consumer goods manufacturers based on the same content as described above for these industries. SOLUTIONS SUPPORTING KEY BUSINESS PROCESSES COLLABORATIVE ORDER MANAGEMENT IMI delivers a complete collaborative order management solution for the Retail Value Chain, incorporating capabilities for order capture, pricing and promotion management, order fulfillment, customer service, global inventory management, order life cycle analytics, order visibility, and order event collaboration. DEMAND REPLENISHMENT Traditional push-oriented supply chain planning and forecasting approaches to inventory deployment and vendor managed solutions will not ensure that the retailer's store order is accurate and timely. IMI has developed an integrated and demand-driven replenishment solution for the Retail Value Chain, incorporating capabilities for demand forecasting, demand replenishment, vendor-managed inventory, replenishment life cycle analytics, replenishment visibility, replenishment event collaboration. STORE REPLENISHMENT IMI's applications are designed to reduce or eliminate out-of-stocks on store shelves and optimize inventory and order management, providing capabilities such as perpetual inventory, causal forecasting, and store ordering; time- phased replenishment forecasts; time-phased replenishment needs; replenishment order generation; vendor price and promotion management; vendor agreement management; store order management; purchase order management; and global inventory management. LOGISTICS EXECUTION IMI solutions can also monitor and provide visibility to events happening along the supply chain, providing capabilities for goods-in-transit monitoring, exception case handling and communication, and storage, cross- docking, flow-through, and light assembly. IMI SOLUTION COMPONENTS IMI provides solutions are configurable, scalable and flexible to deal with the needs of vertical markets and individual businesses. The Company's component solutions include: * IMI Order * IMI Warehouse * IMI Replenishment * IMI Store * IMI CRM * IMI Collaboration * IMI Analytics * IMI Access IMI solutions are Web-enabled; through their Internet portal framework, users can access and act upon critical supply chain information. IMI's product set currently operates on UNIX server platforms from IBM, Hewlett-Packard, and Sun Microsystems, as well as on Microsoft Windows NT server platforms. It provides an object-oriented architecture, supports Internet-based electronic commerce and currently supports 13 languages. IMI solutions support Microsoft Windows and Web and Java-based clients. IMI makes full use of relational database technology, storing each field in its own column, using descriptive column names and identifying primary key/foreign key relations. Since the Company's solution makes use of relational database technology, additional third party tools and complementary applications are easily integrated with it. In general, relatively little modification to, or customization of, the standard IMI software is required in order for the software to meet the basic functionality requirements of individual clients. IMI Service, Support, and Training The Company believes that providing a high level of customer service and technical support is essential to customer satisfaction and timely implementation of its software applications. As of April 30, 2002, IMI had 250 employees worldwide in its regional services and maintenance organization providing software maintenance and support, training, and consulting services. Consulting Services. IMI offers clients a three-step services package called the IMI Value Improvement Process (VIP), which is designed to help companies to quantify the bottom line impact that IMI software can have on its organization and target an implementation strategy to deliver and measure that value efficiently. The three steps are Value Improvement Analysis, Value-Focused Implementation, and Value Improvement Review. Third-Party Support. Clients may purchase implementation services from IMI or third party providers. Implementation services typically involve assistance with the integration of the software with other software applications and databases used by the customer. Such software applications and databases often include legacy management, support, logistics, or ERP applications. The integration of the software with a customer's existing applications allows the customer to utilize the application more efficiently by linking data flows between the IMI software and various existing applications. Such integration is not, however, a prerequisite to the basic functionality of the IMI software. SSCA Program. The Company has established a Strategic Supply Chain Alliance Program ("SSCA") which trains and certifies third party providers. SSCA participants include: Worldwide - Accenture, Cap Gemini, IBM, and Oracle Consulting; North America - Unisys Inc., Kyros, Kurt Salmon Associates; and Europe - Debis, ECsoft, Xecute, Norway Medata, Ordina, Sema Group, Tamperen Systemitiimi, and Tieto-Enator. These companies provide systems integration and expertise to IMI clients and aid in the implementation of and ongoing technical consulting for IMI's software solutions. Implementation typically requires 3 to 12 months. Training Services. IMI clients can receive, for a fee, training either at the customer's premises or at one of IMI's offices. Course offerings are divided into three primary blocks: IMI Solutions, System Administration, and System Development. Clients who purchase training services receive training in the use of the software, particularly in the use of some of the software's more advanced features. Clients often purchase training services as a means of efficiently introducing those staff members who will be users of the software to the basic operation of the system. Such training services are not, however, necessary for IMI's solution to function. Customer Support. The Company has fully-staffed support centers in the United States, the United Kingdom, and Sweden. IMI provides 24 hour a day, 7 day a week support through the Web, electronic mail, and telephone, and uses logging/tracking systems for quality assurance. CUSTOMERS The following list below features some of IMI's customers worldwide: Ahlsell Albert Heijn Alko Oy Alltia Oy Alpina AstraZeneca AT&T Pre-Paid Cards Bergendahls Bosch Rexroth British Airways Brunswick Corp-Mercury Marine Campbell Soup Company Canadian Tire Corporation Canon Carlton & United Breweries Color Line A/S Dannon Darigold/Westfarms Dial Dynadro Effem Foods Ericsson Business Networks Flextronics Forlagscentralen Fuji Film Gamesa/Frito Lay GE Plastics General Domestic Appliances GIST Hakongruppen Hartz Mountain Hobby Hall Oy InterPharm Group B.V. Isaberg Rapid J.F. Hillebrand JM Smuckers Kal Kan Kiilto Oy Kodak Kramp Groep Land O'Lakes Libri-Logistiikka Oy Louis Dryfus MediCarrier AB Meow Mix Metallvaruhuset National Grid Ltd. New Zealand Dairy Industry NorgesGruppen Norsk Medicinaldepot A/S (NMD) ONOFF PDC Inc Pentax Price Chopper Primalco Oy Ralcorp Royal Ahold Satair Schenker Sherwin-Williams Company SLO Oy Spicers Spray International Starbucks Corporation Starkist Foods Statoil Logistik Sun Valley Foods Ltd. Suomen LVI-tukky Oy Synstar TAC Telia AB The Kellogg Company TNT Express Tuco Logistics Ufulfill.com Uncle Ben's Unipart Walker Foods/Frito Lay Warner/Elektra/Atlantic (WEA) West Farm Foods Inc. VWR International Ziehl EBM Zurn Industries IMI software license sales have usually been (and are expected to continue to be) for large dollar amounts, with licenses ranging from $0.5 million to $5.0 million. As a result of large IMI software license sales, individual clients have in the past accounted for more than 10 percent of total revenues in particular quarterly periods. For the years ended April 30, 2000, April 30, 2001, respectively, the Company had no single customer representing more than 10 percent of total revenues. For the year ended April 30 2002, the Company had one customer representing 10.4 percent of total revenues. The Company believes that the loss of any of its clients would not have a material adverse effect upon the Company's business, operating results, or financial condition. The Company does not expect any of its current clients to account for 10 percent or more of its total revenues in its 2003 fiscal year, but the Company expects that individual clients (the identity of which likely will change on a quarterly basis) will continue to account for 10 percent or more of the Company's total quarterly revenues in future periods. SALES AND MARKETING During the past fiscal year, IMI restructured its sales and marketing organization into four regions: the Americas, Continental Europe, Northern Europe, and the United Kingdom. These regions are supported by global corporate marketing operations provided by its Stockholm headquarters. The Company executed upon a strategy of tailoring its business process solutions to specific industries within each of its target geographic markets. For example, in the United States, the Company launched a new web site - www.imiamericas.com - to support its Americas go-to-market efforts and launched multiple marketing activities including selective advertising, trade show participation and creative direct mail campaigns in support of the Retail Value Chain initiative. The early results of these activities have seen an increased lead flow in the United States. The Company also has continued its marketing programs in Europe. For example, in the Netherlands, IMI invested in advertising campaigns to strengthen awareness among business executives, focusing on high travel areas such as Schiphol Airport in Amsterdam. Moreover, the Company is leveraging its partnerships with IBM and other integration solutions providers in marketing programs. In addition to IMI's corporate offices in Stockholm, Sweden, it maintains offices for product development, sales, and/or support in Mount Laurel, New Jersey; London, United Kingdom; Zeist, the Netherlands; Melbourne, Australia; and Stockholm, Gothenburg, Linkoping, and Hassleholm, Sweden. As of April 30, 2002, the Company employed 48 sales and marketing personnel. The Company intends to maintain current expenditures for marketing activities worldwide to support its direct sales force. These programs will include public relations, direct mail, trade shows, product seminars, web marketing, user group conferences, and ongoing customer communication programs. The Company also relies on informal arrangements with a number of hardware, software, consulting, and systems integration firms to enhance its marketing, sales, and customer support efforts, particularly for implementation and support of its products as well as lead generation and assistance in the sales process. The Company expects to continue to rely significantly upon such third parties for marketing and sales, lead generation, product implementation, customer support services, and end user training. PRODUCT STRATEGY AND MANAGEMENT IMI maintains a product strategy and product management organization that reports to the Americas organization. This organization reporting structure, implemented during the final quarter of fiscal 2002, is part of the Company's overall business strategy to become more market-driven in the future direction of its products and services. The strategy group maintains industry specialists in both the Americas and Europe to work with both current and prospective clients to determine the trends that are impacting the Company's target markets and aligns IMI's resources to meet their evolving needs. PRODUCT DEVELOPMENT IMI maintains worldwide product development operations at its corporate headquarters in Stockholm. Industri-Matematik has devoted significant resources to product development since its inception, and the Company's product development expenses for the years ended April 30, 2000, April 30, 2001, and 2002 were $17.8 million, $15.5 million, and $10.5 million respectively. As of April 30, 2002, the Company employed 81 people in product development. The Company believes that its future success depends upon its ability to continue to enhance existing products, respond to changing customer requirements, and develop and introduce new or enhanced products that keep pace with technological developments and emerging industry standards. There can be no assurance that the Company will be successful in developing enhanced versions of its software suite or other new products on a timely basis, or that such enhancements or new products, when introduced will achieve market acceptance or will adequately address the changing needs of the marketplace. EMPLOYEES As of April 30, 2002, the Company employed a total of 423 full-time employees, including 274 in the Nordic region, 93 in the United States, 35 in the United Kingdom, 17 in the Netherlands, and 4 in Australia. The Company believes its future success will depend in part upon its ability to attract and retain highly skilled management, marketing, sales, consulting, and product development personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to retain its key employees or that it will be successful in attracting, assimilating, and retaining such personnel in the future. Of the Company's full-time employees, 48 are in sales and marketing, 250 are in services and maintenance, 81 are in product development, and 44 are in general administrative functions. The Company does not have any collective bargaining agreements with its employees and believes that its employee relations are good. Pricing The license fees for the Company's software products have been determined based on specific components, number of servers, number of defined users, and the projected number of order lines to be processed per year in the customer's system. Software Tools The Company supports its products with a range of software tools developed by the Company or by third parties. These tools are used by the Company to develop, deliver, and maintain the software and by the Company's customers to implement, develop extensions to, and support the software. TRIM. TRIM is a 4GL application development tool that is optimized for applications involving large transaction volumes and large numbers of concurrent users. TRIM is licensed to the Company from Trifox, Inc. and was used by the Company to develop IMI Order. TRIM also is sold as an application development tool to customers requiring the ability to develop custom applications. SDCM. SDCM, the Software Development and Configuration Manager tool, allows the Company to develop, deliver, and maintain its software products. SDCM also allows customers to develop customized functionality in a multi-user environment, control the modification of programs, documentation, and databases, as well as manage data security and system integrity in the implementation of its software. Express Gateways. Express Gateways allow customers to integrate the software with other management information systems, such as financial reporting and manufacturing resource-planning systems. Business Engineering Workbench. This is a Windows client-based tool focused on enhancing the implementation process. This tool consists of two components: Navigation Express and Implementation Express. Navigation Express provides a comprehensive review of the key software business concepts, routine flows, and implementation codes and parameters. Implementation Express utilizes an upper case facility to document graphically all software business processes, routines, and functions. These graphical views of the software data model provide IMI customers with tools for mapping current and future business processes against the software business flows. WebSphere. WebSphere is a development tool used for developing the Company's Internet architected components. The tool is licensed from IBM. RISK FACTORS In addition to the other information in this Report, the following risk factors should be considered carefully in evaluating the Company and its business. NO ASSURANCE OF PROFITABILITY. Although the Company achieved net income of $6.9 million and $9.4 million in its 1997 and 1998 fiscal years, respectively, the Company had losses of $35.3 million,$22.8 million, and $35.3 million, and $6.6 million in its 1999, 2000, and 2001, and 2002 fiscal years, respectively. There can be no assurance that the Company will be profitable in any future period. Future operating results will depend on many factors, including the growth of the market for supply chain and customer relationship management software, market acceptance of the Company's existing and new or enhanced software products, competition, the success of the Company's sales, support, service, and marketing organizations, general economic conditions, and other factors. SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND SEASONALITY. The Company has experienced, and expects to continue to experience, significant fluctuations in quarterly operating results that may be caused by many factors, including, among others: the size and timing of orders for the Company's products; the lengthy sales and/or implementation cycle for the Company's products; delays in the implementation process; introduction or enhancement of products by the Company or its competitors; changes in pricing policies of the Company or its competitors; increased competition; technological changes in computer systems and environments; the ability of the Company to timely develop, introduce, and market new products and new versions of existing products; quality control of products sold; market readiness to deploy supply chain and customer relationship management products for distributed computing environments; market acceptance of new products and product enhancements; seasonality of revenue; customer order deferrals in anticipation of new products and product enhancements; personnel changes; fluctuations in foreign currency exchange rates; and mix of license and service and maintenance revenues and general economic conditions. The Company's revenues have been, and the Company believes will continue to be, derived from sales (licenses) significant to its customers and, as such, the timing of such sales is difficult to predict. Timing of sales (licenses) has caused, and is expected to continue to cause, material fluctuations in the Company's operating results, particularly on a quarterly basis. As a result of these and other factors, the Company believes that period-to-period quarterly comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. The Company's quarterly operating results also are subject to certain seasonal fluctuations. The Company's revenues, particularly its license revenues, are typically strongest in its third and fourth fiscal quarters, which end January 31 and April 30, respectively, and weakest in its first and second fiscal quarters, which end July 31 and October 31, respectively. The Company's revenues and operating results in its third fiscal quarter typically benefit from purchase decisions made by the large concentration of customers with calendar year-end budgeting, while revenues and operating results in its fourth fiscal quarter typically benefit from the efforts of the Company's sales force to meet fiscal year-end sales quotas. Like many application software vendors, in its first and second fiscal quarters, the Company's sales force initiates sales activity directed to achieving fiscal year-end goals. In addition, the Company's first and second fiscal quarters include the months of July and August when both sales and billable customer services activity, as well as customer purchase decisions, are reduced, particularly in Europe, due to summer vacation schedules. As a result of these seasonal factors, the Company generally experiences weaker performance in its first and/or second fiscal quarters as compared to its third and/or fourth fiscal quarters. UNPREDICTABILITY OF ORDERS. Because the Company generally ships software products within a short period after receipt of an order, it typically does not have a material backlog of unfulfilled orders. License revenues in any quarter are substantially dependent on orders booked and shipped in that quarter and cannot be predicted with any degree of certainty. The Company has historically recognized a significant portion of its license revenues in the last two weeks of a quarter. Any significant shortfall of license revenues in relation to the Company's expectations or any material delay of customer orders may have an immediate adverse effect on its business, operating results, and financial condition. Due to the foregoing factors, it is possible that in future periods the Company's revenues and thus its operating results may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock could be materially and adversely affected. LENGTHY SALES AND IMPLEMENTATION CYCLE. The sale (license) and implementation of the Company's products, particularly those related to larger sales of enterprise applications, generally involve a significant commitment of resources by prospective customers. As a result, the Company's sales process often is subject to delays associated with lengthy approval processes associated with significant capital expenditures. For these and other reasons, the sales cycle associated with the license of the Company's products varies substantially from customer to customer and typically lasts between 3 and 12 months during which time the Company may devote significant time and resources to a prospective customer, including costs associated with multiple site visits, product demonstrations, and feasibility studies, and experience a number of significant delays over which the Company has no control. Any significant or ongoing failure by the Company to ultimately achieve such sales could have a material adverse effect on the Company's business, operating results, and financial condition. In addition, following license sales, the software implementation typically involves customer training, integration with the customer's other existing systems, and the development of product extensions to add customer-specific functionality. The Company and/or a third party consultant generally provide such post delivery implementation services pursuant to a separate professional services agreement. A successful implementation requires a close working relationship between the Company, the customer, and, frequently, third party consultants who assist in the implementation process. Any inability of the Company to achieve such close working relationships, or any inability of the Company's consulting services organization or third party consultants to perform implementation services on a timely basis, may result in delays in the customer implementation process. There can be no assurance that delays in the implementation process for any given customer will not have a material adverse effect on the Company's business, operating results, and financial condition. COMPETITION. The Company's products are targeted at markets for supply chain and customer relationship management software products. This market space is very competitive and characterized by rapid technological change. The Company's competitors are diverse and offer a variety of solutions directed at various segments of the supply chain and customer relationship management as well as the enterprise as a whole. These competitors include (i) enterprise application software vendors which offer client/server ERP solutions, such as SAP AG, J.D. Edwards & Company, System Software Associates, Inc., and Oracle, (ii) companies offering e-commerce and CRM solutions, such as Yantra Corporation, CommercialWare, Descarte Systems, Siebel, and I2,(iii) companies offering standardized or customized products on mainframe and/or mid-range computer systems, (iv) internal development efforts by corporate information technology departments, (v) smaller independent companies which have developed or are attempting to develop advanced supply chain management and/or logistics execution software which complements or competes with the Company's software solutions, and (vi) other business application software vendors who may broaden their product offerings by internally developing, or by acquiring or partnering with independent developers of, advanced logistics execution software. In addition, many of the Company's competitors have longer operating histories, significantly greater financial, technical, marketing, and other resources, greater name recognition, and a larger installed base of customers than the Company. In order to be successful in the future, the Company must continue to respond promptly and effectively to the challenges of technological change and competitive innovations. The Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion, and sale of their products than the Company. The Company also expects to face additional competition as other established and emerging companies enter the market for order fulfillment and customer relationship management software and new products and technologies are introduced. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share resulting in price reductions, fewer customer orders, and reduced gross margins, any one of which could materially adversely affect the Company's business, operating results, and financial condition. There can be no assurance that the Company will be able to compete successfully with existing or new competitors or that competition will not have a material adverse effect on the Company's business, operating results, and financial condition. ATTRACTING AND RETAINING KEY EMPLOYEES. The Company believes its future success and ability to achieve revenue growth will depend in significant part upon its ability to attract and retain highly skilled management, sales, support, service, marketing, and product development personnel. Competition for such personnel is intense, and recruiting such personnel is becoming increasingly difficult because of the strong world-wide economy. In addition, the loss of one or more of the Company's key personnel could have a material adverse effect on the Company's business, operating results, and financial condition. The Company does not have, and does not intend to obtain, key man life insurance on any of its executive management personnel. There can be no assurance that the Company will be able to retain its key employees or that it will be successful in attracting, assimilating, and retaining such personnel in the future. Failure to attract, assimilate, and retain key personnel could have a material adverse effect on the Company's business, operating results, and financial condition. RELIANCE ON AND NEED TO DEVELOP ADDITIONAL RELATIONSHIPS WITH THIRD PARTIES. The Company relies on formal and informal arrangements with a number of software vendors and consulting and systems integration firms to enhance its sales, support, service, and marketing efforts, particularly with respect to implementation and support of its products and lead generation and assistance in the sale process. Such firms include: Worldwide - Accenture, Cap Gemini, Emerald Solutions, IBM, and Oracle Consulting; North America - Kyrus, Kurt Salmon Associates, Safeguard Solutions and Unisys Inc.; in North America, and Europe - Debis, ECsoft, Sema Group, Xecute, IconMedialab, Logistics Consultancy, Norway Medata, Ordina, Tamperen Systemitiimi, and Tieto-Enator. The Company expects to continue to rely significantly upon such third parties for marketing and sales, lead generation, product implementation, customer support services, and end user training. The Company will need to expand its relationships with these parties and enter into relationships with additional third parties in order to support revenue growth. Many such firms have similar, and often more established, relationships with the Company's principal competitors. There can be no assurance that these and other third parties will provide the level and quality of service required to meet the needs of the Company's customers, that the Company will be able to maintain an effective, long term relationship with such third parties, or that such third parties will continue to meet the needs of the Company's customers. If the Company is unable to develop and maintain effective relationships with these and other third parties, or if such parties fail to meet the needs of the Company's customers, the Company's business, operating results, and financial condition could be adversely affected. Further, there can be no assurance that these software vendors and third party implementation providers, many of which have significantly greater financial, technical, personnel, and marketing resources than the Company, will not market software products in competition with the Company in the future or will not otherwise reduce or discontinue their relationships with or support of the Company and its products. DEPENDENCE ON CORE PRODUCTS. License and service and maintenance revenues related to the Company's IMI suite of software products (which includes products formerly know as System ESS or VIVALDI) have represented a substantial portion of the Company's revenues in recent years. The Company's success depends on continued market acceptance of its existing products as well as its ability to introduce new versions and products to meet the evolving needs of its customers. There can be no assurance that the Company's products will continue to achieve market acceptance or that the Company will introduce enhanced versions on a timely basis, or at all, to meet the evolving needs of its customers. Any reduction in demand for the Company's products, increased competition in the market for supply chain and customer relationship management software, technological change, or other factors could have a materially adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON MARKET FOR ORDER MANAGEMENT SOFTWARE. The Company is expected to continue to derive, a substantial portion of its revenues from licenses and services related to its focus on the order- order management software products. The market for enterprise-wide management software in general, and for supply chain including order management and customer relationship management software in particular, has been limited in recent periods, and there can be no assurance that it will stabilize or that businesses will continue to license the Company's products. The Company has spent, and intends to continue to spend, considerable resources educating potential customers generally about the Company's products. However, there can be no assurance that such expenditures will enable the Company's products to achieve any additional degree of market acceptance. If the market for the Company's software fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results, and financial condition could be materially and adversely affected. RAPID TECHNOLOGICAL CHANGE AND REQUIREMENT FOR FREQUENT PRODUCT TRANSITIONS. The market for the Company's products is characterized by rapid technological developments, evolving industry standards, and rapid changes in customer requirements. The introduction of products embodying new technologies, the emergence of new industry standards, or changes in customer requirements could render the Company's existing products obsolete and unmarketable. As a result, the Company's success depends upon its ability to continue to enhance existing products, respond to changing customer requirements, and develop and introduce in a timely manner new or enhanced products that keep pace with technological developments and emerging industry standards. Customer requirements include, but are not limited to, operability across distributed and changing heterogeneous hardware platforms, operating systems, relational databases, and networks. The Company's suite of software currently provides support for 13 languages and can currently operate on UNIX server platforms for Hewlett-Packard Corporation, IBM, Digital Equipment Corporation, and Sun Microsystems Corporation as well as on Windows NT server platforms. The Company continues to enhance its products to operate on such platforms in order to meet customers' requirements. There can be no assurances that the Company will be successful in developing enhanced versions or new products on a timely basis, or that such enhancements or new products, when introduced, will achieve market acceptance or will adequately address the changing needs of the marketplace. If the Company is unable to develop and introduce new products or enhancements to existing products in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results, and financial condition could be materially and adversely affected. LITIGATION. In February, 1999, a class action lawsuit was commenced by service of a complaint against the Company, certain of its officers, directors, and controlling shareholders who sold shares of Common Stock during the class period, and its underwriters claiming violations of the Federal securities laws. The complaint was dismissed, but the plaintiff had the right and did serve a new complaint. A motion to dismiss the second complaint has been submitted. No answer to either complaint was filed. While management believes the class action to be without merit, an unfavorable outcome in that case or any other action which may be brought against the Company may have a material adverse affect upon the Company's business, operating results, and financial condition. RISK OF SOFTWARE DEFECTS. Software products as complex as those offered by the Company frequently contain errors or defects, especially when first introduced or when new versions or enhancements are released. Despite product testing, the Company has in the past released products with defects, discovered software errors in certain of its new versions after introduction, and experienced delays or lost revenue during the period required to correct these errors. The Company regularly introduces new releases and periodically introduces new products. There can be no assurance that, despite testing by the Company and by its customers, defects and errors will not be found in existing products or in new products, releases, versions, or enhancements after commencement of commercial shipments. Any such defects and errors could result in adverse customer reactions, negative publicity regarding the Company and its products, harm to the Company's reputation, loss of or delay in market acceptance, or require product changes, any of which could have a material adverse effect upon the Company's business, operating results, and financial condition. PRODUCT LIABILITY. The Company's license agreements with customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. The limitation of liability provisions contained in such license agreements, professional services agreements, and support agreements may not be effective. The Company's products are generally used to manage data critical to its customers and, as a result, the sale and support of products by the Company may entail the risk of product liability claims. A successful liability claim brought against the Company not covered by insurance could have a material adverse effect upon the Company's business, operating results, and financial condition. DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. The Company's success depends, in part, upon the protection of its proprietary technology. The Company relies on a combination of copyright, trademark, and trade secret laws, confidentiality procedures, and license arrangements to establish and protect its proprietary rights. As part of its confidentiality procedures, the Company licenses its software pursuant to signed license agreements that impose restrictions on the licensee's ability to utilize the software and generally enters into non-disclosure agreements with its employees, distributors, and partners, and limits access to and distribution of its software, documentation, and other proprietary information. Despite these precautions, it may be possible for a third party to copy the Company's products or otherwise obtain and use the Company's proprietary technology without authorization. In addition, the laws of certain countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States or Sweden. Accordingly, third parties may copy or otherwise obtain and use the Company's proprietary technology without authorization. There can be no assurance that the Company's protection of its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology or duplicate illegally the Company's products. The Company is not aware that any of its products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim such infringement by the Company with respect to current or future products. The Company expects that software product developers increasingly will be subject to such claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in the industry segment overlap. Any such claims, with or without merit, could result in costly litigation that could absorb significant management time, which could have a material adverse effect on the Company's business, operating results, and financial condition. Such claims might require the Company to enter into royalty or license agreements. Such royalty or license agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results, and financial condition. EXPOSURE TO CURRENCY FLUCTUATIONS. A significant portion of the Company's business is conducted in currencies other than the U.S. dollar (the currency in which its financial statements are stated), primarily the Swedish krona and, to a lesser extent, the U.K. pound sterling, the Euro, the Australian dollar, and the Canadian dollar. The Company incurs a significant portion of its expenses in Swedish krona, including all of its product development expenses and a substantial portion of its general and administrative expenses. As a result, fluctuations of the value of the Swedish krona relative to the other currencies in which the Company generates revenues and expenses, could adversely affect operating results. The financial statements of the Company are translated from the functional currency of the operating subsidiaries into U.S. dollars, the Company's reporting currency, utilizing the current rate method. Accordingly, assets and liabilities are translated at exchange rates in effect at the end of the reporting period, and revenues and expenses are translated at the weighted average exchange rate during the period. All translation gains or losses from the translation into the Company's reporting currency are included as a separate component of stockholders' equity. Fluctuations in the Swedish krona and other currencies relative to the U.S. dollar will effect period to period comparison of the Company's reported results of operations. Due to constantly changing currency exposures and the volatility of currency exchange rates, there can be no assurance that the Company will not experience currency losses in the future, nor can the Company predict the effect of exchange rate fluctuations upon future operating results. The Company does not currently undertake hedging transactions to cover its currency exposure, but the Company may choose to hedge a portion of its currency exposure in the future as it deems appropriate. POSSIBLE VOLATILITY OF STOCK PRICE. The market price for the Common Stock has in the past been, and in the future could be, subject to significant fluctuations in response to a number of factors, including the announcement of new products or product enhancements by the Company or its competitors, quarterly variations in the Company's results of operations, or results of operations of its competitors or companies in related industries, changes in earnings or revenue estimates, or recommendations by securities analysts, developments in the Company's industry, general market conditions, and other factors, including factors unrelated to the operating performance of the Company or its competitors. In addition, stock prices for many companies in the technology and emerging growth sectors have experienced wide fluctuations that have often been unrelated to the operating performance of such companies and are currently a depressed market sector. Such factors and fluctuations, as well as general economic, political, and market conditions, such as recessions, could materially and adversely affect the market price of the Company's Common Stock. POSSIBLE DELISTING OF THE COMPANY'S COMMON STOCK FROM THE NASDAQ NATIONAL MARKET. In June 2002, the Company received notice from Nasdaq that its Common Stock had failed to maintain a minimum bid price of $1 in accordance with the requirements for continued listing on The Nasdaq National Market. The notice stated that if the Common Stock did not sustain a $1 closing bid price for at least 10 consecutive trading days prior to September 10, 2002, the Company's Common Stock could be delisted from the exchange. If the Company's Common Stock is delisted from The Nasdaq National Market, the trading market for the Common Stock could be affected which could make it difficult for investors to trade the Common Stock. The Company cannot give assurance that its Common Stock will comply with the minimum bid requirement or that Nasdaq will not delist the Common Stock. In the event that Nasdaq seeks to delist the Common Stock, the Company may or may not choose to appeal the delisting. Even if it does decide to appeal, it cannot give assurance that an appeal would be successful. If the Company's commons stock is delisted, it may or may not apply for listing on the The Nasdaq SmallCap Market, the OTC Bulletin Board, or another quotation system or exchange on which it could qualify. The Company cannot assure you, however, that it would apply for listing on another quotation system or exchange if it is delisted from The Nasdaq National Market or that if it does apply for listing, that it would be eligible initially for such listing or that if it does become listed, that it would be able to maintain eligibility. A common course of action for companies attempting to maintain their listing by ensuring a bid price in excess of $1 is the institution of a reverse stock split. At present, the Company has made no decision with respect to this course of action but will continue to evaluate this alternative in light of all other options. A reverse stock split could negatively impact the value of the Company's Common Stock by allowing additional downward pressure on the stock price as its relative value becomes greater following the reverse stock split. Similarly, a delisting may negatively impact the value of the Common Stock because stocks trading on the over-the-counter markets are typically less liquid and trade with larger variations between the bid and ask price. CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS; INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Company's executive officers and directors and their affiliates, in the aggregate, own beneficially 51.1% of the Company's outstanding Common Stock as of July 1, 2002. In particular, Warburg, Pincus Investors, L.P. ("Warburg") owned beneficially 38.0% of the Company's outstanding Common Stock as of such date. As a result, Warburg can exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The voting power of Warburg and the Company's officers and directors under certain circumstances could have the effect of delaying, deferring, or preventing a change in control of the Company, and making certain transactions more difficult or impossible absent the support of such stockholders, including proxy contests, mergers involving the Company, tender offers, open-market purchase programs, or other purchases of Common Stock that could give stockholders of the Company the opportunity to realize a premium over the then prevailing market price for shares of Common Stock. The Company has entered into agreements with its officers and directors indemnifying them against losses they may incur in legal proceedings arising from their service to the Company. EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF THE COMPANY'S CHARTER, BY-LAWS, AND DELAWARE LAW. The Company's Board of Directors has the authority to issue up to 15,000,000 shares of Preferred Stock and to determine the price, preferences, privileges, and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, the Company is subject to the antitakeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying, deferring, or preventing a change of control of the Company. Further, certain provisions of the Company's Certificate of Incorporation and By-laws may have the effect of discouraging, delaying, or preventing a merger, tender offer, or proxy contest involving the Company, which could adversely affect the market price of the Company's Common Stock. REGISTRATION RIGHTS. A total of 15,349,769 shares of Common Stock held by certain stockholders are entitled to certain registration rights. If such stockholders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, the sale of such shares could have a material adverse effect on the market price for the Company's Common Stock and could materially adversely effect the Company's ability to raise additional capital when or if required. ENFORCEABILITY OF U.S. JUDGMENTS AGAINST NON-U.S. OFFICERS AND DIRECTORS. A substantial portion of the Company's assets are located outside the United States. In addition, members of the Board of Directors of the Company and certain experts named herein are residents of countries other than the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against such persons judgments of courts of the United States predicated upon civil liabilities under the United States Federal securities laws. There can be no assurance that United States investors will be able to enforce against the members of the Board of Directors or certain experts named herein who are residents of Sweden or countries other than the United States, any judgments in civil and commercial matters, including judgments under the federal securities laws. In addition, there is doubt as to whether a Swedish court would impose civil liability on the members of the Board of Directors of the Company in an original action predicated solely upon the Federal securities laws of the United States brought in a court of competent jurisdiction in Sweden against the Company or such members. HOLDING COMPANY STRUCTURE. All of the operations of the Company are and will be conducted through direct and indirect subsidiaries. The Company's cash flow will depend upon the operating results and cash flow of its subsidiaries and the payment of funds by those subsidiaries to the Company in the form of loans, dividends, or by other methods. The subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make funds available to the Company, whether in the form of loans, dividends, or otherwise. Applicable law in certain countries may limit the ability of a subsidiary to pay dividends in the absence of sufficient distributable reserves or for other reasons. The Company's Australian, Canadian, Dutch, French, German, Swedish, United Kingdom, and United States subsidiaries are not subject to any current exchange controls of which the Company is aware. However, future exchange controls in these counties, or the existence of such controls in other countries in which the Company establishes subsidiaries, could limit or restrict the ability of the Company to obtain loans, dividends, or otherwise access financial resources in such subsidiaries. In addition, the Company's subsidiaries may from time to time in the future become parties to financing arrangements which may contain limitations on the ability of such subsidiaries to pay dividends or to make loans or advances to the Company. In the event of any insolvency, bankruptcy, or similar proceedings, creditors of the subsidiaries would generally be entitled to priority over the stockholders of the Company with respect to assets of the affected subsidiary. ITEM 2. FACILITIES The Company's principal product development facilities and its Nordic service, support, sales, and marketing offices are located in Stockholm, Sweden. In August, 1999, the Company moved its Stockholm operations to new premises of approximately 98,000 square feet pursuant to a lease expiring August 2004. The Company also leases 38,000 square feet of office space in Mt. Laurel, New Jersey, pursuant to a lease expiring in January 2005, three smaller offices in Sweden, and one each in the United Kingdom, the Netherlands, and Australia. Following reductions in personnel in the past three years, the Company has been able to sublease all extra office space. The Company believes that it will be able to locate sufficient office space to allow it to operate according to its plans for at least the next two fiscal years. ITEM 3. LEGAL PROCEEDINGS In February, 1999, a class action lawsuit was commenced by service of a complaint against the Company, certain of its officers, directors, and controlling shareholders who sold shares of Common Stock during the class period, and its underwriters claiming violations of the Federal securities laws. The complaint was dismissed, but the plaintiff had the right and did serve a new complaint. A motion to dismiss the second complaint has been submitted. No answer to either complaint was filed. While management believes this action to be without merit, an unfavorable outcome in the class or any other action which may be brought against the Company may have a material adverse affect upon the Company's business, operating results, and financial condition. In fiscal 2002, the Company obtained an arbitration award against a former customer (subsequently reduced to judgment). The collectibility of the judgment remains doubtful. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended April 30, 2002. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $.01 par value, is traded on the Nasdaq National Market under the symbol "IMIC". The following table sets forth, for the fiscal quarters indicated, the high and low closing prices per share for the respective quarterly periods, as reported in published financial sources. Fiscal year 2001 High Low ----------------- ---- ---- First Quarter (ended July 31, 2000) $ 8.0625 $ 3.5938 Second Quarter (ended October 31, 2000) 4.4375 2.7500 Third Quarter (ended January 31, 2001) 5.1250 1.7188 Fourth Quarter (ended April 30, 2001) 2.4688 1.0000 Fiscal year 2002 High Low ----------------- ---- ---- First Quarter (ended July 31, 2001) $ 1.8700 $ 0.8800 Second Quarter (ended October 31, 2001) 1.3000 0.6100 Third Quarter (ended January 31, 2002) 1.3000 0.7300 Fourth Quarter (ended April 30, 2002) 1.2600 0.9200 As of July 05, 2002, there were __ shareholders of record including Cede & Company in its capacity as nominee for the Depository Trust Company. DIVIDEND POLICY The Company has never declared or paid any dividends on its Common Stock and does not intend to do so in the foreseeable future. It is the present intention of the Company to retain any future earnings to provide funds for the operation and expansion of its business. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in Item 7 of this Form 10-K and the Consolidated Financial Statements and Notes thereto and the other financial information included in Item 14 of this Form 10-K. The selected consolidated financial data set forth below for the Company as of April 30, 2002, and April 30, 2001, and for each of the three years in the period ended April 30, 2002, are derived from audited financial statements included elsewhere in this Report. Five Year Review: Year Ended April 30, 2002 2001 2000 1999 1998 (in thousands, except per share data) Consolidated Statement of Operations Data: Revenues: Licenses ..................................... $ 4,479 13,478 $ 12,167 $ 17,039 $ 36,090 Services and maintenance ..................... 48,239 53,313 61,318 68,233 57,632 Other ........................................ 2,562 2,564 1,540 1,696 1,662 -------- -------- -------- -------- -------- Total revenues ............................... 55,280 69,355 75,025 86,968 95,384 -------- -------- -------- -------- -------- Cost of revenues: Licenses ..................................... 307 1,336 1,916 2,212 790 Services and maintenance ..................... 31,870 37,375 48,528 68,670 41,826 Other ........................................ 935 520 429 752 1,029 -------- -------- -------- -------- -------- Total cost of revenues ....................... 33,112 39,231 50,873 71,634 43,645 -------- -------- -------- -------- -------- Gross profit ................................. 22,168 30,124 24,152 15,334 51,739 -------- -------- -------- -------- -------- Operating expenses: Product development .......................... 10,458 15,479 17,784 24,267 14,684 Acquired In-process Research and Development . -- -- -- 2,500 -- Sales and marketing .......................... 10,658 15,878 20,555 27,295 20,878 General and administrative ................... 7,579 9,026 9,251 12,332 6,989 Amortization of goodwill ..................... 741 4,506 1,383 486 114 Restructuring costs .......................... -- 5,391 -- 3,522 -- -------- -------- -------- -------- -------- Total operating expenses ..................... 29,436 50,280 48,973 70,402 42,665 -------- -------- -------- -------- -------- Income (loss) from operations ................. (7,268) (20,156) (24,821) (55,068) 9,074 Other income (expense): Interest income .............................. 560 1,561 2,183 4,446 3,490 Interest expense ............................. (3) (13) (65) (128) (123) Miscellaneous expense, net ............... 109 (1,219) (96) (931) (286) -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes ............... (6,602) (19,827) (22,799) (51,681) 12,155 (Provision) benefit for income taxes .......... -- (15,424) -- 16,422 (2,762) -------- -------- -------- -------- -------- Income (loss) from continuing operations ...... (6,602) (35,251) (22,799) (35,259) 9,393 -- -------- -------- -------- -------- -------- Net income (loss) ............................. $ (6,602) $(35,251) $(22,799) $(35,259) $ 9,393 ======== ======== ======== ======== ======== Net income (loss) per share data-assuming dilution(1): Income (loss) from continuing operations ...... $ (0.20) $ (1.10) $ (0.72) $ (1.09) $ 0.30 Income from discontinued operations ........... -- -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) per share-assuming dilution $ (0.20) $ (1.10) $ (0.72) $ (1.09) $ 0.30 ======== ======== ======== ======== ======== Shares used in per share calculation-assuming dilution .................................... 32,198 31,986 31,672 32,431 30,821 ======== ======== ======== ======== ======== April 30, 2002 2001 2000 1999 1998 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents. $ 16,422 $ 12,053 $ 12,036 $ 29,065 $ 41,982 Short-term investments ... -- 12,866 19,821 24,848 69,416 Working capital .......... 11,481 16,475 32,650 54,187 120,479 Total assets ............. 38,409 52,510 88,932 115,085 149,329 Capital lease obligations, less current portion .... - - - - 281 Total stockholders' equity 18,976 25,790 61,459 83,881 124,573 - ----------

(1) See Note 12 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in calculating net income (loss) per share-assuming dilution. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW INDUSTRI-MATEMATIK INTERNATIONAL CORP. was incorporated in the State of Delaware in 1995 and conducts its business through domestic and international subsidiaries. The Company's business was founded in 1967 by incorporation in Sweden as Industri-Matematik AB ("IMAB"). In May 1995, the then-stockholders of IMAB exchanged all of their IMAB shares for shares of the Company's capital stock and IMAB became a wholly owned subsidiary of the Company. According to a Prospectus dated September 25, 1996, 5,060,000 shares of the Company's Common Stock were sold to the public in an initial public offering and the Company's Common Stock began trading on the NASDAQ National Market under the symbol "IMIC". During fiscal 1998, according to a Prospectus dated October 31, 1997, the Company completed a secondary public offering of 8,136,250 shares of Common Stock. The Company develops, markets, and supports application software that enables its clients to optimize and manage order and replenishment business processes based on actual customer demand, supporting best-in-class, pull-driven supply chain practices. IMI's current primary target customers are members of the Retail Value Chain: mid-range to large-scale consumer goods manufacturers, wholesalers, retailers, and logistics service providers. The Company has identified supply-chain business processes that are critical to the Retail Value Chain: collaborative order management, demand replenishment, store replenishment, and logistics execution. The Company's suite of branded modules - IMI Order, IMI Warehouse, IMI Replenishment, IMI Store, IMI CRM, IMI Analytics, IMI Collaboration, and IMI Access - supports these processes. In addition, the Company has a professional services organization and relationships with third-party technology vendors and system integrators that configure solutions for clients. Representative clients of IMI include Albert Heijn, AT&T Pre-Paid Cards, Brunswick Corporation - Mercury Marine, Campbell Soup Company, Canadian Tire Corporation, Canon, Dannon, InterPharm Group B.V., J.F. Hillebrand, JM Smuckers, The Kellogg Company, Kramp Groep, Price Chopper, Royal Ahold - Hakongruppen, Shenker, Sherwin-Williams Company, Spicers, Starbucks Corporation, Telia AB, TNT Express, Warner/Electra/Atlantic (WEA) and West Farm Foods. Substantially all of the Company's revenues in the last three years have been attributable to license fees and related services, including software maintenance and support, implementation, consulting, and training. The Company expects that license and services revenues will continue to constitute substantially all of the Company's revenues in the foreseeable future. North American revenues decreased to $20.0 million in fiscal 2002 from $28.2 million in fiscal 2001, European revenues decreased to $34.7 million in fiscal 2002 from $39.9 million in fiscal 2001, and Asia/Pacific revenues decreased to $0.6 million from $1.2 million over the same period. Future operating results will depend on many factors, including the growth of the supply chain and customer relationship management software market, market acceptance of the Company's products, competition, the success of the Company's sales, support, service, and marketing organizations, general economic conditions, and other factors. A significant portion of the Company's business has been conducted in currencies other than the U.S. dollar (the currency in which its financial statements are stated), primarily the Swedish krona and, to a lesser extent, the U.K. pound sterling, the Euro, the Australian dollar, and the Canadian dollar. The Company incurs a significant portion of its expenses in Swedish kronor, including a substantial part of its product development and general and administrative expenses. As a result, changes of the value of the Swedish krona relative to the other currencies in which the Company generates revenues, particularly the U.S. dollar, could affect operating results. The financial statements of the Company are translated from the functional currency of the operating subsidiaries into U.S. dollars, the Company's reporting currency, utilizing the current rate method. Accordingly, assets and liabilities are translated at exchange rates in effect at the end of the reporting period, and revenues and expenses are translated at the weighted average exchange rate during the period. All translation gains or losses from the translation into the Company's reporting currency are included in Other Comprehensive Loss. Fluctuations in the Swedish krona and other currencies relative to the U.S. dollar will affect period to period comparison of the Company's reported results of operations. Due to the constantly changing currency exposures and the volatility of currency exchange rates, there can be no assurance that the Company will not experience currency losses in the future, nor can the Company predict the effect of exchange rate fluctuations upon future operating results. The Company does not currently undertake hedging transactions to cover its currency exposure, but the Company may choose to hedge a portion of its currency exposure in the future as it deems appropriate. RESULTS OF OPERATIONS For the fiscal periods indicated, the following table sets forth the percentage of total revenues represented by certain items reflected in the Company's consolidated statements of operations: Years Ended April 30, 2002 2001 2000 Consolidated Statement of Operations Data: Revenues: Licenses ................................. 8.1% 19.4% 16.2% Services and maintenance ................. 87.2 76.9 81.7 Other .................................... 4.7 3.7 2.1 ------ ------ ------ Total revenues .......................... 100.0 100.0 100.0 Cost of revenues: Licenses ................................ 0.5 1.9 2.6 Services and maintenance ................ 57.7 53.9 64.7 Other ................................... 1.7 0.8 0.5 ------ ------ ------ Total cost of revenues ................. 59.9 56.6 67.8 ------ ------ ------ Gross profit ........................... 40.1 43.4 32.2 ------ ------ ------ Operating expenses: Product development ...................... 18.9 22.3 23.7 Acquired in-process research and development -- -- -- Sales and marketing ...................... 19.3 22.9 27.4 General and administrative ............... 13.7 13.0 12.3 Amortization of goodwill and other intangibles 1.3 6.5 1.9 Restructuring costs ...................... -- 7.8 -- ------ ------ ------ Total operating expenses ................ 53.2 72.5 65.3 ------ ------ ------ Loss from operations ................. (13.1) (29.1) (33.1) Other income (expense): Interest income .......................... 1.0 2.2 2.9 Interest expense ......................... -- -- (0.1) Miscellaneous expense, net ............... 0.2 (1.8) (0.1) ------ ------ ------ Loss from continuing operations before income taxes ............................. (11.9) (28.7) (30.4) (Provision) benefit for income taxes....... -- (22.2) -- ------ ------ ------ ------- Net loss .................................. (11.9%) (50.9%) (30.4) COMPARISON OF FISCAL YEARS 2002, 2001, and 2000 REVENUES The Company's revenues consist of software license revenues, service and maintenance revenues, and other revenues. Software license revenue is recognized when persuasive evidence of an arrangement exists and delivery has occurred, the fee is fixed and determinable, collectibility is probable, and the arrangement does not require significant customization of the software. Service revenue is recognized as the Company performs the services in accordance with the contract. Maintenance and support revenue is deferred and recognized ratably over the term of the agreement, generally one year. Other revenues are primarily third-party hardware sales necessary to help certain customers implement the Company's products. The Company derives substantially all of its revenues from licenses of its software and related service and maintenance. Total revenues decreased 20.3% to $55.3 million in fiscal 2002 from $69.4 million in fiscal 2001 as a result of a significant decrease in software license revenues as well as a related fall off of service and maintenance revenues. Total revenues decreased 7.6% to $69.4 million in fiscal 2001 from $75.0 million in fiscal 2000 as a result of a decrease in service and maintenance revenues offset by a small increase in software license revenues and other revenues. Software License Revenues. Revenues from software licenses decreased 66.8% to $4.5 million in fiscal 2002 from $13.5 million in fiscal 2001, and increased 10.8% in fiscal 2001 from $12.2 million in fiscal 2000. Software license revenues constituted 8.1%, 19.4%, and 16.2% of total revenues in fiscal 2002, 2001, and 2000, respectively. Management believes that a major factor in the decrease in software license revenue in fiscal 2002 from fiscal 2001 was due to a noticeable reduction in capital spending by companies reacting to a general economic recession and political uncertainties surrounding the war against terrorism. Service and Maintenance Revenues. Service and maintenance revenues decreased 9.5% to $48.2 million in fiscal 2002 from $53.3 million in fiscal 2001, and decreased 13.0% in fiscal 2001 from $61.3 million in fiscal 2000. Service and maintenance revenues constituted 87.2%, 76.9%, and 81.7% of total revenues in fiscal 2002, 2001, and 2000, respectively. The decreases in the absolute dollar amount of service and maintenance revenues in fiscal 2002 from fiscal 2001 and in fiscal 2001 from fiscal 2000 were related primarily to the decreases in software licenses sold during prior periods, as service and maintenance revenues tend to track software license transactions in prior periods. Other Revenues. Other revenues are primarily third-party hardware sales to the Company's Scandinavian customer base. Other revenues remained on the same level in fiscal 2002 as in fiscal 2001, $2.6 million, and increased 66.5% in fiscal 2001 from $1.5 million in fiscal 2000. Other revenues constituted 4.7%, 3.7%, and 2.1% of total revenues in fiscal 2002, 2001, and 2000, respectively. Other revenues tend to vary over time in absolute dollars and as a percentage of total revenues due to the size of specific hardware sales. COST OF REVENUES Cost of revenues was $33.1 million, $39.2 million, and $50.9 million in fiscal 2002, 2001, and 2000, representing 59.9%, 56.6%, and 67.8% of total revenues, respectively. The decreases in cost of revenues both in absolute dollars and as a percentage of total revenues in fiscal 2002 from fiscal 2001 and in fiscal 2001 from fiscal 2000 were primarily due to actions taken by the company to align costs with revenues. These actions consist primarily of allowed attrition, reductions in force, and the elimination of excess overheads. The following table sets forth, for the periods indicated, the cost of revenues for each revenue category and the cost of revenues represented as a percentage of each revenue category: Year Ended April 30, 2002 2001 2000 ----------------------------------------------------------- Cost % of Cost % of Cost % of of Revenue of Revenue of Revenue Revenues Category Revenues Category Revenues Category (in thousands, except percentage data) Licenses ............... $ 307 6.8% $ 1,336 9.9% $ 1,916 15.7% Services and maintenance 31,870 66.1 37,375 70.1 48,528 79.1 Other .................. 935 36.5 520 20.3 429 27.9 ------- ------- ------- Total cost of revenues $33,112 59.9% $39,231 56.6% $50,783 67.8% ======= ======= =======

Cost of Software License Revenues. Cost of software license revenues consists primarily of license fees paid with respect to embedded third-party software included with the licenses of the Company's software and, occasionally, the cost of third-party complementary software that is licensed together with the Company's software without being embedded. In addition, third parties may receive royalty commissions for participation in the sales process. Cost of software license revenues was $0.3 million, $1.3 million, and $1.9 million, in fiscal 2002, 2001, and 2000, representing 6.8%, 9.9%, and 15.7% of software license revenues, respectively. The cost of software license revenues in fiscal 2000 was higher as a percentage of software licenses revenues than in either fiscal 2002 or fiscal 2001 due to a higher proportion of licenses being sold together with third-party integrators where a royalty commission is paid to the integrator for assistance in the selling process during that year. Cost of Service and Maintenance Revenues. Cost of service and maintenance revenues consists primarily of costs associated with consulting, implementation, and training services and the use by the Company of third- party consultants to perform implementation services for the Company's customers. Cost of service and maintenance revenues also includes the cost of providing software maintenance to customers, such as telephone hotline support. Cost of service and maintenance revenues was $31.9 million, $37.4 million, and $48.5 million in fiscal 2002, 2001, and 2000, representing 66.1%, 70.1%, and 79.1%, of service and maintenance revenues, respectively. The decreases in the cost of service and maintenance revenues in absolute dollar amounts in fiscal 2002 from fiscal 2001 and in fiscal 2001 from fiscal 2000 were due to reductions in workforce through layoffs and attrition, a reduction in the use of outside consultants, and a decrease in the amount of service and maintenance performed. Cost of Other Revenues. Cost of other revenues consists primarily of the cost of third party hardware supplied to certain customers. Cost of other revenues was $0.9 million, $0.5 million, and $0.4 million in fiscal 2002, 2001, and 2000, representing 36.5%, 20.3%, and 27.9% of other revenues, respectively. The Company expects the cost of other revenues to continue to fluctuate on a period to period basis due to the size and nature of specific hardware sales. Product Development. Product development expenses consist primarily of salaries and other related costs for the Company's product development staff. Product development expenses were $10.5 million, $15.5 million, and $17.8 million in fiscal 2002, 2001, and 2000, representing 18.9%, 22.3%, and 23.7% of total revenues, respectively. The decreases in product development expenses in absolute dollar amount in fiscal 2002 from fiscal 2001 and in fiscal 2001 from fiscal 2000 were due to decreases in the number of product development personnel and other related costs, including the cost of outside contractors. In addition to allowed attrition, the company instituted a restructuring effort at the end of fiscal year 2001 resulting in a 32% reduction in product development costs. Management believes that the development of the Company's products has not been materially affected by the staff reductions. Software development costs incurred in the product development of new software products are expensed as incurred until technological feasibility has been established. To date, the establishment of technological feasibility of the Company's products and general release have substantially coincided. As a result, the Company has not capitalized any software development costs since such costs have been immaterial. Sales and Marketing. Sales and marketing expenses include personnel costs, commissions, and related costs for sales and marketing personnel, as well as the cost of office facilities, travel, promotional events, and public relations programs. Sales and marketing expenses were $10.7 million, $15.9 million, and $20.6 million in fiscal 2002, 2001, and 2000, representing 19.3%, 22.9%, and 27.4% of total revenues, respectively. Sales and marketing expenses decreased in fiscal 2002 from fiscal 2001 and in fiscal 2001 from fiscal 2000 in absolute dollar amount and as a percentage of total revenues as a result of measures initiated in the fourth quarter of fiscal 2001 to reduce costs in response to market conditions for new software licenses. General and Administrative. Ongoing general and administrative expenses consist primarily of salaries and costs of the Company's finance, human resources, information systems, administrative, and executive staff and the fees and expenses associated with legal, accounting, and other requirements. General and administrative expenses were $7.6 million, $9.0 million, and $9.3 million in fiscal 2002, 2001, and 2000, representing 13.7%, 13.0%, and 12.3% of total revenues, respectively. The decreases in absolute dollar amounts of general and administrative expenses in fiscal 2002 from fiscal 2001 and in fiscal 2001 from fiscal 2000 were primarily the result of decreased staffing of accounting, human resources, and internal system administration. The increase in general and administrative expenses in fiscal 2002 and 2001 from fiscal 2000 as a percentage of total revenues was primarily the result of the decrease in total revenues over the same period. Included in General and Administrative expenses for fiscal years 2002 and 2001 are refunds from the Swedish National Pension Organization, Alecta, amounting to $802,000 and $639,000, respectively. In addition, included in the fiscal year 2002 General and Administration expenses are extra severance expenses associated with employee terminations in the Company's subsidiary, Abalon AB, amounting to $812,000. Amortization of goodwill and other intangibles. Amortization of goodwill and other intangibles relates to the fiscal 1998 acquisition of Ceratina International AB, the fiscal 1999 acquisition of Abalon AB, and the fiscal 2001 acquisition of IMOY. Goodwill and other intangibles are amortized over a 5 to 10 year period. Amortization of goodwill and other intangibles was $0.7 million in fiscal 2002, $4.5 million in fiscal 2001, and $1.4 million in 2000, respectively. In April 2001, as a result of a decline in the value of the company's goodwill and intangible assets related to Abalon, based on projected discounted cash flows, the company took an additional $3.0 million write-down. Beginning with fiscal year 2003, the Company will no longer amortize goodwill. The value of the company's goodwill assets will be assessed on an ongoing basis and any impairment in the value of goodwill assets will be written-down accordingly. Restructuring costs. In April, 2001, the Company announced a reorganization of its operations into four regional units each made up of sales, services, support, and operations staff. In connection with the reorganization, the Company took a restructuring charge of $5.4 million consisting primarily of employee severance costs, lease termination expenses, and write-downs of certain property and equipment. Of the 57 employees terminated in Sweden, 5 worked in administration, 3 worked in sales and marketing, 13 worked in services and support, and 36 worked in product development. Of the 6 employees terminated in the United States 1 worked in administration, 1 worked in services and support, and 4 worked in sales and marketing. The lease termination expenses related to the space occupied by the terminated employees in Sweden, and the assets written-down in the reorganization were office equipment and leasehold improvements related to the terminated employees as well as accounting and support systems. The reductions in staff, primarily in the Stockholm office, reduced excess overhead in the product and services organizations without significantly affecting the ongoing development of the Company's products or services to customers. Other Income (Expense). Other income (expense) comprises interest income, interest expenses, and miscellaneous income and expenses. Interest income was approximately $0.6 million, $1.6 million, and $2.2 million in fiscal 2002, 2001, and 2000, respectively. The decreases year to year were due to decreases in the levels of short-term investments and cash held in interest- bearing accounts compared to the amounts invested in prior years. Interest expenses were approximately $3,000, $13,000, and $65,000 in fiscal 2002, 2001, and 2000, respectively. The decreases were the result of the lower outstanding balance of notes payable and capital lease obligations. Provision (Benefit) for Income Taxes. There was no provision (benefit) for income taxes for the years ended April 30, 2000 to April 30, 2002. The Company has applied a full valuation allowance to deferred tax assets generated after April 30, 1999. In April, 2001, the Company recorded an additional charge to income amounting to $15.4 million by increasing the valuation allowance by the same amount. A 100% allowance was applied by management based upon the Company's continuing non-profitable operations and inability to predict when this asset could be realized. At April 30, 2002, the Company's deferred tax asset, which amounted to $30.9 million ($31.3 million related to net operating loss carryforwards less $0.4 million related to other temporary differences), was offset by applying a valuation allowance resulting in a net deferred tax asset at April 30, 2002, of $0. Of the net operating loss carryforwards, $12.8 million were incurred in the United States and $14.7 million were incurred in Sweden. The net operating loss carryforwards, of which substantially all were incurred after April 30, 1998, may be carried forward to offset future income up to 15 years in the United States and indefinitely in Sweden. Hedge Transaction. During November, 2000, the Company entered into a hedge transaction with a Bank to offset potential Swedish social security fee liability upon exercise of stock options by employees living in Sweden. The arrangement involved the issuance by the Bank of a call to the Company settleable in cash, which the Bank elected to cover by purchasing shares of the Company's Common Stock. The Company offset a portion of the cost of the call by issuing to the Bank a right to put shares of Company Common Stock to the Company. Gain or loss to the Company on the closing of the transaction will be realized based upon the increase or decrease in the price of the Company's Common Stock. As a result of the decline in the value of the Company Common Stock, as of April 30, 2002, and April 30, 2001 the Company has a provision for the decline in fair value recorded in its books relating to the put issued to the Bank amounting to $1.6 million and $1.4 million, respectively. Adjustments to this provision to reflect movements in the Company's Common Stock price have resulted in non-operating charges in fiscal year 2002 and fiscal year 2001 of $0.2 million and $1.4 million. The provision is reviewed quarterly and adjusted to reflect the underlying Common Stock value and will be reversed in full if the price of the Common Stock reaches $4.536 per share, which is the exercise price of the put. On April 30, 2002, and on April 30, 2001, the exercise price of the call option ($4.536) used to hedge potential Swedish social security fees was above the market price of the Company's Common Stock. Since there was no active market for these types of options, the value of the call option was limited to a calculated option premium, which was offset in the financial statements by the corresponding premium on the put option. The original net premium of $50,000 is being amortized over the 5-year term of the options. The number of shares of Company Common Stock subject to the call at any given time, which depends on the number of options outstanding from time to time, is presently 450,000 and is not expected to exceed that number. It is anticipated that the hedge transaction will be open for several years. As part of that transaction, the Company deposited $2.1 million with the Bank and recorded a non-current asset in that amount. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations". The Statement addresses financial accounting and reporting for business combinations completed after June 30, 2001. The Statement eliminates the pooling of interests method and requires use of the purchase method for all business combinations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". The Statement is effective for fiscal years beginning after December 15, 2001. The provisions of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived intangible assets, (2) require that goodwill and/or indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of such assets may be impaired, ( 3) require that reporting units be identified for the purpose of assessing potential future impairments of goodwill and (4) remove the forty-year limitation on the amortization period of intangible assets that have finite lives. IMI will adopt SFAS No.'s 141 and 142 as of May 1, 2002. IMI is in the process of adopting SFAS 142 and is making the determinations as to what its reporting units are and what amounts of goodwill, intangible assets, other assets and liabilities should be allocated to those reporting units. The Company expects that it will no longer record approximately $750,000 of annual amortization to its existing goodwill. SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year. However, a company has six months from the date of adoption to complete the first step. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of the Company's fiscal year. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative effect of a change in accounting policy in fiscal 2003. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. IMI will adopt the provisions of SFAS No. 143 as of May 1, 2003. The impact of this Statement is not expected to be material. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement, which is effective for fiscal years beginning after December 15, 2001, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Statement requires that discontinued operations be reported separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. IMI will adopt the provisions of SFAS No. 144 as of May 1, 2002. The adoption of this statement is not expected to have a material impact on the Group. CRITICAL ACCOUNTING POLICIES The discussion and analysis of the Company's financial condition and results of operations are based upon its consolidated financial statements. The Company's reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie preparation of the financial statements. The Company bases its estimates on historical experience and on various other assumptions, 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. The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing the Company's financial statements. The Company believes the following critical accounting policies involve the most significant judgments and estimates used in the preparation of its consolidated financial statements. Revenue Recognition Revenue consists primarily of software license revenue, services and maintenance revenue. License revenue is generally recognized upon execution of a software license agreement and delivery of the software, provided the fees are fixed and determinable and collection is considered probable 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," and Securities and Exchange Commission ("SEC") Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition". Fees are allocated to the various elements of software license agreements based on historical fair value experience specific to the company. In a multiple element arrangement when fair value does not exist for one or more of the undelivered elements in the arrangement, the Company recognizes revenue using the "residual method" in accordance with Statement of Position 98-9, "Software Revenue Recognition in Respect to Certain Arrangements" issued by the American Institute of Certified Public Accountants. Under the "residual method", the total fair value of the undelivered elements is deferred. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. If a software license agreement contains an undelivered element, the fair value of the undelivered element is deferred and the revenue recognized once the element is delivered. In addition, if a software license contains customer acceptance criteria or a cancellation right, the software revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period or cancellation right. Typically, payments for software licenses are due within twelve months from the agreement date. In the rare cases, when software license agreements call for payment terms of twelve months or more from the agreement date, revenue is recognized as accrued revenue if there is no continuing obligation of the part of the Company, the customer is financially viable, the term of the license extends past the last payment, there are no issues regarding potential obsolescence of the software, and the customer has no intent to upgrade. At present, the company has one such agreement. When the Company provides services that are considered essential to the functionality of software products sold or if software sold requires significant production, modification or customization, the Company accounts for the software and services revenue in accordance with SOP 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts", which requires the use of the percentage-of- completion method of revenue recognition. In these cases, software revenue is recognized based on labor hours incurred to date compared to total estimated labor hours for the contract. Implementation services, which include project management, system planning, design and implementation, customer configurations, and training, are typically billed on an hourly basis (time and materials) and sometimes under fixed price contracts. Implementation services billed on an hourly basis 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 hours incurred to date to total estimated hours at completion. Maintenance revenue includes post-contract support and the rights to unspecific software upgrades and enhancements. Maintenance revenues from customer support services are generally billed annually with the revenue being deferred and recognized ratably over the maintenance period. Allowance for Doubtful Accounts In estimating the allowance for doubtful accounts, management considers the age of the accounts receivable, 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. Software Development Costs The development cost of software, other than internal use software, is accounted for 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." Costs incurred in the product development of new software products are expensed as incurred until technological feasibility has been established. To date, the establishment of technological feasibility of the Company's products and general release substantially coincide. As a result, the Company has not capitalized any software development costs since such costs have been immaterial. Valuation of Long-Lived Assets, including Goodwill The Company assesses the impairment of long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. When it is determine that the carrying value of such assets may not be recoverable, a measurement of any impairment is made based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the Company's current business model. Goodwill is amortized over periods ranging from five to ten years. The Company will adopt Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" as of May 1, 2002, and, as a result, will no longer amortize goodwill. An initial impairment test of the Company's goodwill was performed in April 2002 which did not result in the need for any material impairment charge in the immediate future. Additional impairment reviews will be performed annually and whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. There can be no assurance that there will be no material impairment charge resulting from future impairment assessments. Deferred Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Management assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent that management believes that recovery is not likely, management establishes a valuation allowance. Management has applied a 100% allowance based upon the Company's continuing non-profitable operations and inability to predict when this asset could be realized. The Company considers future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance. However, adjustments could be required in the future if it is determined that the amount to be realized is greater or less than the amount recorded. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has financed and met its capital expenditure requirements through cash flows from operations, short-term borrowings, and, during fiscal 1997 and fiscal 1998, through sales of equity securities to the public. Cash used in operations was $8.3 million, $1.0 million, and $17.6 million in fiscal 2002, 2001, and 2000, respectively. Repayments of borrowings were $0.0 million and $0.6 million in fiscal 2002 and 2001. Cash flows from issuance of Common Stock were $0.2 million, $0.9 million, and $0.8 million in fiscal 2002, 2001, and 2000, respectively. The Company purchased approximately $0.7 million, $3.1 million, and $4.5 million, of office equipment and other property in fiscal 2002, 2001, and 2000, respectively. At April 30, 2002, the Company did not have any material commitments for capital expenditures. The Company has certain obligations related to leases and pensions. For information about the Company's commitments related to leases and pensions, see note 14 "Commitments and Contingencies" of the Notes to the Consolidated Financial Statements. At April 30, 2002, the Company had $11.5 million of working capital as compared to $16.5 million of working capital at April 30, 2001. Current assets at April 30, 2002, include $16.4 million in cash and cash equivalents. During the year, the Company's short-term investments matured and the proceeds were reinvested in assets qualifying as cash equivalents. The decreases in working capital from April 30, 2001, to April 30, 2002, and April 30, 2000 to April 30, 2001 was primarily the result of decreases in accounts receivable and cash reflecting the operating loss for the fiscal year. Accounts receivable, net of allowance for doubtful accounts, decreased to $8.0 million at April 30, 2002, from $11.0 million at April 30, 2001. Accrued income, primarily unbilled revenue on fixed price services contracts and scheduled amounts due from customers, increased to $2.2 million at April 30, 2002, from $1.9 million at April 30, 2001. Of this amount, unbilled revenues amounting to $1.7 million fall due for payment during the first half of fiscal year 2003 and the remaining amount during the second half of fiscal year 2003. The allowance for doubtful accounts remained at the same level at April 30, 2002 as at April 30, 2001 ($1.1 million). A significant portion of the amount remaining in the reserve for doubtful accounts relates to a dispute with a customer where the Company has won a judgment against the customer requiring payment, but collectability of the judgment remained uncertain. On April 30, 2000 the Company had an allowance for doubtful accounts amounting to $2.5 million. The reduction from April 30, 2000 to April 30, 2001 was due to the settlement of disputes with customers where the Company either wrote-down Accounts Receivable or collected the amounts past due. Based on the Company's operating budget and cash flow projections for fiscal year 2003, the Company believes that it has sufficient cash to fund its operations beyond April 30, 2003. Even if the Company meets its budget and cash flow projections, the Company may need to obtain additional financing in early fiscal year 2004. Should the Company miss its budget and cash flow targets, it believes that it has the ability to quickly scale back operations in order to conserve enough cash and short-term investments to fund its operations beyond April 30, 2003. The Company may evaluate possibilities to obtain additional financing through public or private equity offerings, bank debt financing, asset securitizations or from other sources. Such additional financing would be subject to the risk of availability, may be dilutive to the shareholders, or could impose restrictions on operating activities. There can be no assurance that this additional financing will be available on terms acceptable to the Company, if at all. Management believes that the effect of inflation was not material to the Company's results of operations or financial condition during the three years ended April 30, 2002. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Except for the transaction referred to above under the heading "Hedge Transaction", the Company does not believe it is exposed to market risks with respect to any of its investments; the Company does not utilize market rate sensitive instruments for trading of other purposes. As of April 30, 2002, the Company had no long-term investments and its short-term investments consisted of two Federal Agency securities with maturities of less than one year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in Part IV Item 14 (a)(1) and (2). ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information to be set forth in the 2002 Proxy Statement under the caption "Election of Directors". ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information to be set forth in the 2002 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 2002 Proxy Statement under the caption "Ownership of Common Stock." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the information to be set forth in the 2002 Proxy Statement under the caption "Certain Business Relationships." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this Report: (1) Consolidated Financial Statements. The following consolidated financial statements of Industri-Matematik International Corp. are filed as part of this report: Report of Independent Accountants dated July 5, 2002 Consolidated Balance Sheets as of April 30, 2002, and April 30, 2001 Consolidated Statements of Operations for the years ended April 30, 2002, 2001, and 2000. Consolidated Statements of Changes in Stockholders' Equity for the years ended April 30, 2002, 2001, and 2000. Consolidated Statements of Cash Flows for the years ended April 30, 2002, 20001, and 2000. Notes to Consolidated Financial Statements. Schedules other than those listed above are omitted for the reason that they are not required, are not applicable, or the required information is shown in the Consolidated Financial Statements or Notes thereto. Individual financial statements of the Company and its subsidiaries are omitted because all subsidiaries included in the Consolidated Financial Statements are 100% owned. (b) No reports on Form 8-K have been filed by the Company during the last quarter of the period covered by this Report. Schedules other than the one listed above are omitted because they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto contained in this Annual Report on Form 10-K. (c) 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. Number Description ------ ----------- 3.1 Amended and restated Certificate of Incorporation of the Company(1) 3.2 Amended and Restated By-Laws of the Company(2) 10.1 Registration and Expense Agreement among the Company, Martin Leimdorfer, and Warburg Pincus Investors, L.P.(1) 10.2 Registration Rights Agreement among the Company, Martin Leimdorfer, and Warburg Pincus Investors, L.P.(1) 10.3 Stock Option Plan of the Company(1) 10.4 Form of Agreements of Restricted Stock Program(1) 10.5 Employee Stock Purchase Plan of the Company, as amended(3) 10.6 1998 Stock Option Plan of the Company(3) 10.7 Transferable Stock Option Plan of the Company(4) 10.8 Amended and Restated Employment Agreement dated April 3, 1997 between Stig Durlow and the Company(5) 10.9 Lease Agreement dated August 1, 1999, between Tranboclarne 11 KB, as Lessor, and Industri-Matematik AB, as Lessee(6) 10.10 Form of Indemnity Agreement with Officers and Directors(1) 21 Subsidiaries of the Company 23 Consent of Independent Accountants (1) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (No. 333-5495). (2) Incorporated by reference from the Exhibits to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2000. (3) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-8 (No. 333-81905). (4) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-8 (No. 333-60876). (5) Incorporated by reference from the Exhibits to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997. (6) Incorporated by reference from the Exhibits to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2000. (d) Financial Statement Schedules None. REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of Industri-Matematik International Corp. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Industri-Matematik International Corp. and its subsidiaries at April 30, 2002 and April 30, 2001 and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers AB BY: /s/ ROBERT BARNDEN Robert Barnden Stockholm, Sweden July 5, 2002 INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) April 30, 2002 2001 ASSETS Current assets: Cash and cash equivalents.................................... $ 16,422 $ 12,053 Short-term investments....................................... -- 12,866 Accounts receivable, less allowance for doubtful accounts of $1,058 and $1,143 at April 30, 2002 and 2001, respectively 7,953 10,952 Accrued income............................................... 2,218 1,861 Prepaid expenses............................................. 1,688 1,726 Income taxes receivable...................................... 3 217 Other current assets......................................... 384 640 --------- --------- Total current assets...................................... 28,668 40,315 ========= ========= Non current assets: Property and equipment, net.................................. 3,135 4,753 Goodwill and other intangible assets......................... 2,989 3,739 Long-term cash deposit....................................... 2,728 2,794 Other non current assets..................................... 889 909 --------- --------- Total non current assets.................................. 9,741 12,195 --------- --------- Total assets......................................... $ 38,409 $ 52,510 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................. 1,341 1,129 Accrued expenses and other current liabilities............... 6,136 8,071 Accrued payroll and employee benefits........................ 4,562 7,595 Deferred revenue............................................. 5,148 7,045 --------- --------- Total current liabilities................................. 17,187 23,840 ========= ========= Long-term liabilities: Accrued pension liability.................................... 2,093 2,880 Other long-term liabilities.................................. 153 -- --------- --------- Total long-term liabilities............................... 2,246 2,880 --------- --------- Total liabilities......................................... $ 19,433 $ 26,720 ========= ========= Commitments and contingencies (Note 14) Stockholders' equity: Common Stock; $.01 par value; 75,000,000 shares authorized; 31,945,303 and 32,274,265 issued and outstanding. Preferred Stock; $0.01 par value; 15,000,000 shares authorized; 0 and 0 issued and outstanding 319 323 Additional paid-in capital................................... 120,849 125,206 Retained earnings (deficit).................................. (94,623) (88,022) Accumulated other comprehensive loss......................... (6,214) (5,835) Notes receivable from stockholders (Note 13)................. (1,355) (5,882) --------- --------- Total stockholders' equity................................ 18,976 25,790 --------- --------- Total liabilities and stockholders' equity................ $ 38,409 $ 52,510 ========= ======== The accompanying notes are an integral part of the consolidated financial statements.

INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Year Ended April 30, 2002 2001 2000 Revenues: Licenses ................................. $ 4,479 $ 13,478 $ 12,167 Services and maintenance ................. 48,239 53,313 61,318 Other .................................... 2,562 2,564 1,540 -------- -------- -------- Total revenues ........................ 55,280 69,355 75,025 ======== ======== ======== Cost of revenues: Licenses ................................. 307 1,336 1,916 Services and maintenance ................. 31,870 37,375 48,528 Other .................................... 935 520 429 -------- -------- -------- Total cost of revenues ................ 33,112 39,231 50,873 -------- -------- -------- Gross profit .......................... 22,168 30,124 24,152 -------- -------- -------- Operating expenses: Product development ...................... 10,458 15,479 17,784 Sales and marketing ...................... 10,658 15,878 20,555 General and administrative ............... 7,579 9,026 9,251 Amortization of goodwill and other intangibles 741 4,506 1,383 Restructuring ............................ -- 5,391 -- -------- -------- -------- Total operating expenses .............. 29,436 50,280 48,973 -------- -------- -------- Loss from operations ....................... (7,268) (20,156) (24,821) ======== ======== ======== Other income (expense): Interest income .......................... 560 1,561 2,183 Interest expense ......................... (3) (13) (65) Miscellaneous expense, net ............... 109 (1,219) (96) -------- -------- -------- Loss from operations before income taxes ...................... (6,602) (19,827) (22,799) (Provision) for income taxes ............... -- (15,424) -- -------- -------- -------- Net loss ................................... $ (6,602) $(35,251) $(22,799) ======== ======== ======== Net loss per share data: (Note 12) Net loss per share ......................... $ (0.20) $ (1.10) $ (0.72) ======== ======== ======== Net loss per share data assuming dilution: Net loss per share ......................... $ (0.20) $ (1.10) $ (0.72) ======== ======== ======== Weighted average shares outstanding, basic and diluted .............................. 32,198,401 31,985,991 31,671,870 ---------- ---------- ---------- The accompanying notes are an integral part of the consolidated financial statements.

INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except share data) Accumulated Notes Total Class B Additional Retained Other Receivable Stock Comprehensive Common Common Paid-in Earnings Comprehensive From holders' Income (Loss) Stock Stock Capital (Deficit) Loss Stockholders Equity Balance as of April 30, 1999 $ (36,347) $ 315 $ -- $ 123,945 $ (29,972) $ (3,514) $ (6,893) $ 83,881 ======= === === ======= ======= ===== ====== ======= Issuance of 105,097 shares of Common Stock under Stock Option Plan 1 363 364 Issuance of 234,784 shares of Common Stock under ESPP 2 477 479 Payments on notes receivable (475) 971 496 Net income (22,799) (22,799) (22,799) Currency translation adjustment (962) (962) (962) -------------------------------------------------------------------------------------------------------------- Balance as of April 30, 2000 $ (23,761) $ 318 $ -- $ 124,310 $ (52,771) $ (4,476) $ (5,922) $ 61,459 ======== === === ======= ======== ======= ======= ====== Issuance of 151,900 shares of Common Stock under Stock Option Plan 2 304 306 Issuance of 284,756 shares of Common Stock under ESPP 3 592 595 Payments on notes receivable 40 40 Net income (35,251) (35,251) (35,251) Currency translation adjustment (1,359) (1,359) (1,359) -------------------------------------------------------------------------------------------------------------- Balance as of April 30, 2001 $ (36,610) $ 323 $ -- $ 125,206 $ (88,022) $ (5,835) $ (5,882) $ 25,790 ======== === === ======= ======== ======= ======= ====== 0 Issuance of 103,038 shares of Common Stock under ESPP 1 150 151 Subsidiary Stock Incentive Plan 15 15 Cancellation of notes from shareholders (4) (4,523) 4,527 0 Net income (6,602) (6,602) (6,602) Currency translation adjustment (378) (1) 1 1 (379) (378) -------------------------------------------------------------------------------------------------------------- Balance as of April 30, 2002 $ (6,980) $ 319 $ -- $ 120,849 $ (94,623) $ (6,214) $ (1,355) $ 18,976 ======== === === ======= ======== ======= ======= ====== The accompanying notes are an integral part of the consolidated financial statements.

INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended April 30, 2002 2001 2000 Cash flows from operating activities: Net income (loss) ................................ $ (6,602) $ (35,251) $ (22,799) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ................... 2,924 4,291 5,313 Provision for doubtful accounts ................. (84) (1,421) 2,382 Deferred income taxes ........................... -- 15,424 -- Accrued interest on short-term investments ...... -- -- 14 (Gain) loss on disposal of property and equipment................................... (104) 16 91 (Gain) loss on disposal of other shares ......... (373) -- (6) Write-down of property and equipment ............ 26 1,576 1,164 Write-down of goodwill and other intangibles..... -- 3,010 -- Changes in operating assets and liabilities: Accounts receivable ........................... 3,027 9,738 696 Accrued income and prepaid expenses............ (326) (175) (543) Income taxes .................................. 213 -- 26 Other assets .................................. 272 203 (537) Accounts payable .............................. 211 (778) (1,414) Accrued expenses and other current liabilities (1,889) 761 (6,149) Accrued payroll and employee benefits and deferred revenue .......................... (4,844) 1,274 3,530 Accrued pension liability ..................... (749) 353 640 --------- --------- --------- Net cash flows (used in) operating activities ........................... (8,298) (979) (17,592) --------- --------- --------- Cash flows from investing activities: Purchase of short-term investments ............... -- (118,640) (128,577) Proceeds from maturity of short-term investments . 12,866 125,595 133,590 Additions to property and equipment .............. (725) (3,057) (4,502) Long-term cash deposit............................ 17 (2,786) -- Payment for Ceratina ............................. -- -- (658) Proceeds from sale of property and equipment ..... 104 15 80 Proceeds from sale of other shares ............... 373 -- 6 Collection of notes receivable ................... -- 40 456 --------- --------- --------- Net cash flows provided by investing activities.. 12,635 1,167 395 --------- --------- --------- Cash flows from financing activities: Payments on notes payable ........................ -- (303) (534) Principal payments on capital lease obligations .. -- -- (61) Issuance of Common Stock ......................... 151 901 843 Other ............................................ (152) (242) 374 --------- --------- --------- Net cash flows provided by (used in) financing activities ................................... (1) 356 622 --------- --------- --------- Translation differences on cash and cash equivalents ...................................... 32 (527) (454) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 4,368 17 (17,029) Cash and cash equivalents at beginning of year ..... 12,053 12,036 29,065 --------- --------- --------- Cash and cash equivalents at end of year ........... $ 16,422 $ 12,053 $ 12,036 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ......................................... $ 10 $ 11 $ 62 ========= ========= ========= Income taxes ..................................... $ 312 $ 526 $ 505 ========= ========= ========= The accompanying notes are an integral part of the consolidated financial statements.

INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Organization INDUSTRI-MATEMATIK INTERNATIONAL CORP. ("IMI" or "Company"), was incorporated in the State of Delaware in 1995 and conducts its business through domestic and international subsidiaries. The Company's business was founded in 1967 by incorporation in Sweden as Industri-Matematik AB ("IMAB"). In May 1995, the then stockholders of IMAB exchanged all of their IMAB shares for shares of the Company's capital stock and IMAB became a wholly-owned subsidiary of the Company. Pursuant to a Prospectus dated September 25, 1996, 5,060,000 shares of the Company's Common Stock were sold to the public in an initial public offering and the Company's Common Stock began trading on the Nasdaq National Market under the symbol "IMIC". During fiscal 1998, pursuant to a Prospectus dated October 31, 1997, the Company completed a secondary public offering of 8,136,250 shares of Common Stock. IMIC was formed on May 1, 1995 as the parent of Industri-Matematik AB ("IMAB"), a company domiciled in Sweden, pursuant to a corporate reorganization. The reorganization was effected by issuing all the shares of IMIC's stock to the shareholders of IMAB based upon the number and class of shares of IMAB owned by each in exchange for all of the outstanding stock of IMAB. The reorganization was accounted for in a manner similar to pooling- of-interests. IMI develops, markets, and supports client/server and Internet based application software that enables manufacturers, distributors, wholesalers, retailers, logistics service providers, and e-businesses to more effectively manage their supply chains and their customer relationships. Supply chain management encompasses the execution of multiple customer-focused order fulfillment processes, including order management, pricing and promotion, handling, sourcing, warehouse management, transportation management, service management, customer relationship management, and replenishment planning and coordination. IMI's software products monitor and manage events beyond the physical limitations of the enterprise. The Company's software products are designed to meet the complex fulfillment and customer service needs of distribution-intensive businesses. These products allow customers to leverage the value of their existing enterprise systems by integrating with legacy, new client/server, and new Internet based manufacturing, advanced planning, and financial management systems. The Company has a professional services organization and relationships with third-party technology vendors and system integrators that configure solutions for clients. 2. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of IMIC and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition License revenues represent sales of the Company's software. Service revenues represent sales from consulting implementation and training services. Annual maintenance and support revenues consist of ongoing support and sales of product updates. Other revenues primarily represent hardware sales. Revenue is recognized when persuasive evidence of an arrangement exists and delivery has occurred, the fee is fixed and determinable, collectibility is probable and the arrangement does not require significant customization of the software. Revenue on multiple element arrangements is allocated to the various elements based on fair values specific to the Company. Maintenance and support revenue is deferred and recognized ratably over the term of the agreement, generally one year. Service revenue is recognized as the Company performs the services in accordance with the contract. The Company considers a license fee payable on extended terms to be fixed and determinable and accounts for it as accrued revenue when there is no continuing obligation of the part of the Company, the customer is financially viable, the term of the license extends past the last payment, there are no issues regarding potential obsolescence of the software, and the customer has no intent to upgrade. In a multiple element arrangement when fair value does not exist for one or more of the undelivered elements in the arrangement, the Company recognizes revenue using the "residual method" in accordance with Statement of Position 98-9, "Software Revenue Recognition in Respect to Certain Arrangements" issued by the American Institute of Certified Public Accountants. Under the "residual method", the total fair value of the undelivered elements is deferred. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. If the Company provides services on a fixed price contract, or the services are considered essential to the functionality of software products sold, or if software sold requires significant production, modification or customization, license and services revenue is accounted for in accordance with SOP 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts", which requires the use of the percentage-of- completion method of revenue recognition. In these cases, software revenue is recognized based on labor hours incurred to date compared to total estimated labor hours for the contract. Out of the Company's accrued revenue, $1.6 million relates to the projects accounted for in accordance with percentage of completion method. Under the terms of the Company's License Agreements and Professional Service Agreements, in general the only warranties provided are that the software will function in accordance with the applicable software documentation by a specified date. As these warranties are effective for a very limited time period and historically the Company has not had any significant warranty claims, the Company's policy has been to record no warranty provision upon the recognition of license revenues. In addition, due to the Company's insignificant product returns and price adjustments in past years, no provision is made for product returns and price adjustments upon recognition of software license revenues. The Company reviews on a project-by-project basis the cost of claims that it considers to be "warranty" type claims under Professional Services Agreements by establishing project reserves. The Company will continue to evaluate the need for recording a warranty provision upon recognition of software license revenues and delivery of customer modification work. Product Development Costs Software development costs are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Costs incurred in the product development of new software products are expensed as incurred until technological feasibility has been established. To date, the establishment of technological feasibility of the Company's products and general release substantially coincide. As a result, the Company has not capitalized any software development costs since such costs have been immaterial. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows: Estimated useful lives Computer equipment 3 years Furniture and fixtures 1 to 10 years Automobiles 3 years Leasehold improvements 5 years Software acquired 1 to 3 years Equipment purchased under capital leases is amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the lease term. Upon retirement or sale of property and equipment, cost and accumulated depreciation on such assets are removed from the accounts and any gains or losses are reflected in the statement of operations. Maintenance and repairs are charged to expense as incurred. Goodwill and Other Intangibles Goodwill represents the excess of cost over the fair value of net assets acquired and in fiscal years 2002 and earlier, was amortized using the straight-line method over a period of 10 years. Other intangibles are comprised of acquisition costs of developed technology, assembled workforce, and customer lists which were amortized using the straight-line method over a period of 5 years up until April 30, 2001, when the balance was written down to zero, due to impairment. The Company reviews the carrying value of goodwill and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To assess impairment of intangible assets and property, plant and equipment and related goodwill under U.S. GAAP, the Company applies SFAS 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" became effective in 2002 and will be applied by the Company beginning in fiscal year 2003. As a result, the Company will cease to amortize goodwill beginning May 1, 2002. In lieu of periodic amortization, the Company performed an initial impairment review of all goodwill for U.S. GAAP purposes as of April 2002 and will continue to perform annual impairment reviews thereafter. Long-lived assets The Company identifies and records impairment losses, as circumstances dictate, on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. The Company assesses the impairment of Long-lived assets in accordance with SFAS 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." Foreign Currency Translation The functional currency of IMIC's foreign subsidiaries is the applicable local currency. The translation from the respective foreign currencies to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period. Gains or losses resulting from such translation are included as a separate component of accumulated other comprehensive loss. Gains or losses resulting from foreign currency transactions are included in miscellaneous income (expense). Concentration of Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable with customers and short-term investments. Credit risk with respect to accounts receivable, however, is limited due to the number of customers comprising the Company's customer base and their dispersion principally across the United States, Scandinavia, the United Kingdom, the Netherlands, and Australia. The Company's customers are generally multi-national companies in the food and beverage, pharmaceutical, consumer electronics, automotive parts, and industrial sector industries. The Company performs ongoing credit evaluations of its customers and does not require collateral. The Company maintains allowances for potential credit losses. Short-term investments are placed with high credit quality financial institutions or in short-duration, high quality debt securities. A significant portion of the Company's business is conducted in currencies other than the U.S. dollar (the currency in which its financial statements are stated), primarily the Swedish krona and, to a lesser extent, the U.K. pound sterling, the Euro, the Australian dollar, and the Canadian dollar. The Company incurs a significant portion of its expenses in Swedish krona, including a significant portion of its product development expenses and a substantial portion of its general and administrative expenses. As a result, appreciation of the value of the Swedish krona relative to the other currencies in which the Company generates revenues, particularly the U.S. dollar, could adversely affect operating results. The Company does not currently undertake hedging transactions to cover its currency exposure, but the Company may choose to hedge a portion of its currency exposure in the future as it deems appropriate. License and service and maintenance revenues related to the Company's software products have represented a substantial portion of the Company's revenues in recent years and are expected to continue to represent a substantial portion of the Company's revenues in the future. The Company's success depends on continued market acceptance of its suite of software and services as well as the Company's ability to introduce new versions of software or other products to meet the evolving needs of its customers. Cash, Cash Equivalents and Short-Term Investments The Company considers all highly liquid, low risk debt instruments purchased with original maturity dates of three months or less to be cash equivalents. The Company's short-term investments comprise fixed income securities with original maturities of more than 90 days at the time of purchase. The Company classifies its short-term investments in fixed income securities as available-for-sale securities, which are carried at their fair value based upon the quoted market prices of those investments at the respective balance sheet date. Accordingly, the change in unrealized gains and losses with respect to these securities is recorded as a direct increase or decrease in stockholders' equity, net of deferred income tax, if any (see note 3). Fixed income securities available for sale are purchased with the original intent to hold to maturity, but which may be available for sale if market conditions warrant, or if the Company's investment policies dictate, in order to maximize the Company's investment yield. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. When impairment of the value of an investment is considered other than temporary, the decrease in value is reported in earnings as a realized investment loss and a new cost basis is established. Accrued income Accrued income is unbilled income recognized on fixed price services contracts and scheduled amounts due from customers on terms which are longer than typical trade terms. The Company considers a license fee payable on extended terms to be fixed and determinable and accounts for it as accrued revenue when there is no continuing obligation of the part of the Company, the customer is financially viable, the term of the license extends past the last payment, there are no issues regarding potential obsolecence of the software, and the customer has no intent to upgrade. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates. Comprehensive Income Effective May 1, 1998, the Company adopted Statement of Financial Standard ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components. "Comprehensive income" includes foreign currency translation gains and losses that have been previously excluded from net income and reflected instead in equity. The Company has reported the components of comprehensive income on its consolidated statements of stockholders' equity. Net Income (Loss) Per Share Net income (loss) per share amounts have been computed in accordance with SFAS No. 128, "Earnings per Share". For each of the periods presented, net income (loss) per share amounts were computed based on the weighted average number of shares of Common Stock outstanding during the period. Net income (loss) per share - assuming dilution amounts were computed based on the weighted average number of shares of Common Stock and potential Common Stock outstanding during the period. Potential Common Stock relates to stock options outstanding for which the dilutive effect is calculated using the treasury stock method. The computations of net loss per share-assuming dilution for the years ended April 30, 2002, 2001, and 2000 do not assume the exercise of stock options since the effect would be antidilutive as a result of the losses for those fiscal years. Cash Flow Information Cash flows in foreign currencies have been converted to U.S. dollars at an approximate weighted average exchange rate. Fair Value of Financial Instruments The Company discloses the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash and cash equivalents, receivables and payables, deferred revenue, derivative instruments and current portions of long-term debt are deemed to approximate fair value due to their short maturities. The carrying amount of long-term debt with banks and capitalized lease obligations are also deemed to approximate their fair values. Hedge accounting FAS 133, as amended by FAS 138, requires that an entity recognizes all derivative instruments as either assets or liabilities in the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. Income taxes The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized, to the differences between the financial statement carrying amount and the tax bases of existing assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted. The statement also requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets may not be realized. Effect of Recent Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations". The Statement addresses financial accounting and reporting for business combinations completed after June 30, 2001. The Statement eliminates the pooling of interests method and requires use of the purchase method for all business combinations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". The Statement is effective for fiscal years beginning after December 15, 2001. The provisions of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived intangible assets, (2) require that goodwill and/or indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of such assets may be impaired), (3) require that reporting units be identified for the purpose of assessing potential future impairments of goodwill and (4) remove the forty-year limitation on the amortization period of intangible assets that finite lives. IMI will adopt SFAS No.'s 141 and 142 as of May 1, 2002. IMI is in the process of adopting SFAS 142 and is making the determinations as to what its reporting units are and what amounts of goodwill, intangible assets, other assets and liabilities should be allocated to those reporting units. The Company expects that it will no longer record approximately $750,000 of amortization to its existing goodwill. SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year. However, a company has six months from the date of adoption to complete the first step. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of the Company's fiscal year. Any impairment loss resulting from the transitional impairment tests will be reflected as the cumulative effect of a change in accounting policy in fiscal 2003. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. IMI will adopt the provisions of SFAS No. 143 as of May 1, 2003. The impact of this Statement is not expected to be material. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement, which is effective for fiscal years beginning after December 15, 2001, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Statement requires that discontinued operations be reported separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. IMI will adopt the provisions of SFAS No. 144 as of May 1, 2002. The adoption of this statement is not expected to have a material impact on the Group. 3. Short-term investments Short-term investments are comprised of fixed income securities which are classified as available-for-sale securities. As of April 30 2002, the company had no short-term investments. As of April 30, 2001, the Company had two Federal Agency securities with an amortized cost of $4.0 million and $6.9 million which approximated fair value. The Federal Agency securities matured within one year. As of April 30, 2000, the Company had two Federal Agency securities with an amortized cost of $10.0 million and $9.9 million which approximated fair value. During the years ended April 30, 2002, April 30, 2001, and 2000, maturities of fixed income securities resulted in aggregate proceeds of $12.9 million, $125.6 million and $133.6 million respectively. 4. Accounts Receivable Allowance for Doubtful Accounts The following table provides a summary of the activity in the accounts receivable allowance for doubtful accounts for the years ended April 30, 2002, 2001, and 2000: Year Ended April 30, 2002 2001 2000 (in thousands) Balance at beginning of period ...... $ 1,143 $ 2,486 $ 4,883 Charged to expense .................. (70) 422 845 Deductions .......................... (16) (1,765) (3,242) ------- ------- ------- Balance at end of period ............ $ 1,058 $ 1,143 $ 2,486 ======= ======= ======= The allowance for doubtful accounts decreased to $1,058,000 at April 30, 2002, from $1,143,000 at April 30, 2001, and from $2,486,000 at April 30, 2000, primarily as a result of settling disputes with customers. A significant portion of the amount remaining in the reserve for doubtful accounts relates to an ongoing dispute with a former customer. In fiscal 2002, the Company obtained an arbitration award against the former customer (subsequently reduced to judgment). The collectibility of the judgment remains doubtful. 5. Foreign Currency Translation For the years ended April 30, 2002, 2001, and 2000, foreign exchange gains (losses) of $155,000, $380,000 and, $136,000 respectively, were recorded by the Company. 6. Property and Equipment Property and equipment is recorded at cost, less accumulated depreciation. Property and equipment consists of: April 30, 2002 2001 (in thousands) Computer equipment .............................. 8,838 8,980 Furniture and fixtures .......................... 3,588 4,025 Automobiles ..................................... -- -- Leasehold improvements .......................... 922 873 Software acquired ............................... 221 3,396 -------- -------- 13,569 17,274 Less accumulated depreciation and amortization .. (10,434) (12,521) -------- -------- $ 3,135 $ 4,753 ======== ======== During the year ended April 30, 2001, the Company reorganized its reporting units providing more geographical responsibility. This resulted in the cancellation of projects related to building worldwide internal accounting and reporting systems. Along with this decision, it was determined that related capitalized software and implementation costs were impaired as they would no longer provide an economic benefit to the new structure. This resulted in a net book value write-off of $1,490,000. Included in property and equipment are assets leased under capital lease obligations as follows: April 30, 2001 (in thousands) Computer equipment ........................ $ 73 Furniture and fixtures .................... 120 ------- 193 Less accumulated amortization ............. (193) ------- $ -- ======= The amortization expense on capital leases amounted to $0, $11,000, and $59,000 for the years ended April 30, 2001, and 2000, respectively. 7. Goodwill and Other Intangibles Goodwill and other intangibles are recorded at cost, less accumulated amortization and impairment charges. Goodwill and other intangibles consists of: April 30 2002 2001 (in thousands) Goodwill ........................... $ 7,043 $ 7,147 Other intangibles................... -- 4,100 ------- ------- 7,043 11,247 Less accumulated amortization ...... (4,054) (7,508) ------- ------- $ 2,989 $ 3,739 ======= ======= Amortization of Goodwill and Other intangibles amounted to $741,000 in fiscal year 2002. Amortization of goodwill and other intangibles amounted to $4.5 million in fiscal 2001, of which $3.0 million consisted of an extra write- down of goodwill and other intangibles relating to the Abalon acquisition in December 1998. The extra write-down was based upon an outside appraisal which showed that the value of such goodwill and other intangibles had declined since the date of the acquisition. 8. Income Taxes Loss from continuing operations before income taxes was distributed geographically as follows: Year Ended April 30, 2002 2001 2000 (in thousands) Domestic ................. $ (4,754) $ (2,549) $ (1,714) Foreign .................. (1,848) (17,278) (21,085) ------- ------- -------- Total ................. $ (6,602) $(19,827) $(22,799) ======= ======= ======== Components of the (provision) benefit for income taxes are as follows: Year Ended April 30, 2002 2001 2000 (in thousands) Current: Federal ........................................$ -- -- -- State .......................................... -- -- -- Foreign ........................................ -- -- -- ------ ------ ------ Total current provision ..................... -- -- -- ------ ------ ------ Deferred: Federal ........................................$ -- $ (7,382) -- State .......................................... -- (2,204) -- Foreign......................................... -- (5,838) -- ------ ------ ------ Total deferred (provision) benefit ............$ -- $(15,424) -- ------ ------ ------ Total (provision) benefit for income taxes ...$ -- $(15,424) -- ====== ====== ====== The approximate tax effects of temporary differences which give rise to net deferred taxes are: April 30, 2002 2001 (in thousands) Deferred income taxes, non-current asset Net operating loss carryforwards .......................... $ 31,275 $ 29,332 Allowance for doubtful accounts ........................... 347 359 Restructuring.............................................. (1,078) 1,078 Depreciation .............................................. 191 19 Other ..................................................... 258 35 -------- -------- Total deferred income taxes, non-current asset ............ 30,993 30,823 Valuation allowance ....................................... (30,993) (30,823) -------- -------- Total net deferred income taxes, non-current asset .............. $ -- $ -- ======== ========

A reconciliation of the (provision) benefit for income taxes to the amount computed by applying the statutory rates is as follows: Year Ended April 30, 2002 2001 2000 (in thousands) Statutory rate ................ $ 2,245 34% $ 6,741 34% $ 7,752 34% Valuation of temporary differences .................. (1,665) (26) (3,867) (20) (5,994) (26) Increase in valuation allowance of deferred tax asset -- -- (15,424) (78) -- -- Foreign taxes ................. (293) (4) (1,326) (6) (902) (4) Permanent differences ......... (287) (4) (1,611) (8) -- -- Other ......................... -- -- 63 -- (856) (4) ------- ------- ------- ------- ------- --- Effective tax rate ............ $ -- -- $(15,424) (78)% -- -- ======= ======= ======= ======= ======= ===

There was no provision (benefit) for income taxes for the years ended April 30, 2000 to April 30, 2002. The Company has applied a full valuation allowance to deferred tax assets generated after April 30, 1999. In April, 2001, the Company recorded an additional charge to income amounting to $15.4 million by increasing the valuation allowance by the same amount. A 100% allowance was applied by management based upon the Company's continuing non- profitable operations and inability to predict when this asset could be realized. At April 30, 2002, the Company's deferred tax asset, which amounted to $30.9 million ($31.3 million related to net operating loss carryforwards less $0.4 million related to other temporary differences), was offset by applying a valuation allowance resulting in a net deferred tax asset at April 30, 2002, of $0. Of the net operating loss carryforwards, $12.8 million were incurred in the United States and $14.7 million were incurred in Sweden. The net operating loss carryforwards, of which substantially all were incurred after April 30, 1998, may be carried forward to offset future income up to 15 years in the United States and indefinitely in Sweden. 9. Accrued Expenses and Other Current Liabilities April 30, 2002 2001 (in thousands) Accrued purchases ......................... $ 1,586 $ 2,274 Project reserves........................... 63 148 Accrued consultancy ....................... 293 645 Accrued restructuring costs (See Note 16).. -- 1,355 Accrued pension taxes ..................... 588 588 Short-term portion pension liability....... 584 -- Value-added tax ........................... 225 374 Employee withholding taxes ................ 470 580 Fair value provision for put option ....... 1,620 1,384 Option premium expense..................... 251 -- Other...................................... 456 723 ------- ------- $ 6,136 $ 8,071 ======= ======= Short-term portion of pension liability relates to a scheduled reduction of pension debt by paying premiums and transferring employees from the pension plan administered by Swedish PRI authority to the Swedish National Pension Organization plan administered by Alecta (see note 11). The pension debt will be reduced each year going forward by approximately the same amount for the next four years. During November, 2000, the Company entered into a hedge transaction with a Bank to offset potential Swedish social security fee liability upon exercise of stock options by employees living in Sweden. The arrangement involved the issuance by the Bank of a call to the Company settleable in cash, which the Bank elected to cover by purchasing shares of the Company's Common Stock. The Company offset a portion of the cost of the call by issuing to the Bank a right to put shares of Company Common Stock to the Company. Gain or loss to the Company on the closing of the transaction will be realized based upon the increase or decrease in the price of the Company's Common Stock. As a result of the decline in the value of the Company Common Stock, as of April 30, 2002, and April 30, 2001 the Company has a provision for the decline in fair value recorded in its books relating to the put issued to the Bank amounting to $1.6 million and $1.4 million, respectively. Adjustments to this provision to reflect movements in the Company's Common Stock price have resulted in non-operating charges in fiscal year 2002 and fiscal year 2001 of $0.2 million and $1.4 million. The provision is reviewed quarterly and adjusted to reflect the underlying Common Stock value and will be reversed in full if the price of the Common Stock reaches $4.536 per share, which is the exercise price of the put. On April 30, 2002, and on April 30, 2001, the exercise price of the call option ($4.536) used to hedge potential Swedish social security fees was above the market price of the Company's Common Stock. Since there was no active market for these types of options, the value of the call option was limited to a calculated option premium, which was offset in the financial statements by the corresponding premium on the put option. The original net premium of $50,000 will be amortized over the 5-year term of the options. The number of shares of Company Common Stock subject to the call at any given time, which depends on the number of options outstanding from time to time, is presently 450,000 and is not expected to exceed that number. It is anticipated that the hedge transaction will be open for several years. As part of that transaction, the Company deposited $2.1 million with the Bank and recorded a non-current asset in that amount. 10. Accrued Payroll and Employee Benefits April 30, 2002 2001 (in thousands) Accrued commissions ....................... $ 79 $ 398 Accrued payroll taxes ..................... 398 977 Accrued vacation pay ...................... 1,807 1,571 Accrued salaries and bonus ................ 1,118 1,398 Accrued restructuring costs (see Note 16).. -- 2,256 Accrued severance costs.................... 439 -- Accrued pension expenses .................. 529 703 Debt for ESPP ............................. 17 145 Other ..................................... 175 147 ------ ------ $4,562 $7,595 ====== ====== In fiscal year 2002 an accrual was made for extra costs associated with employee terminations and severance in the Company's subsidiary, Abalon AB, amounting to $812,000. 11. Employee Benefit Plans The Company provides retirement benefits for substantially all employees in the United States and in foreign locations. In the U.S., the U.K., and the Netherlands, the Company sponsors defined contribution plans. In addition, IMAB has a supplemental defined contribution plan for certain key management employees. IMIC's Swedish subsidiary, IMAB, participates in several pension plans (non- contributory for employees), which cover substantially all employees of its Swedish operations. The plans are in accordance with a nationally-agreed standard plan, the ITP Plan, and administered by a national organization, Pensionsregistreringsinstitutet ("PRI"). The level of benefits and actuarial assumptions are calculated and established by the national organization and, accordingly, IMAB may not change benefit levels or actuarial assumptions. The Company accounts for pensions in accordance with SFAS No. 87, "Employers' Accounting for Pensions". In March 2001, IMAB amended its financing of these plans from financing via corporate assets to financing via premiums paid to Alecta (formerly SPP), the Swedish National Pension Organization. The pension book reserve will, in the future, only increase with an interest component. IMAB has provided a guaranty to Forsakringsbolaget Pensions Garanti ("FPG"), a third party guarantor of pension liabilities, in the amount of $650,000. This guaranty is in the form of a collateralized bank deposit of the same amount and is recorded as a non-current asset. During the year ended April 30, 2002 IMAB has amortized its liability by $321,000. It is expected that IMAB will continue to amortize its remaining liability by approximately $650,000 per year for the next four years. Effective April 30, 1999, the Company adopted SFAS No. 132,"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 does not change the measurement or recognition of those plans, but revises the disclosure requirements for pension and other postretirement benefit plans for all years presented. The net periodic benefit cost for the IMAB's defined benefit retirement plan in Sweden include the following components: Year Ended April 30, 2002 2001 2000 (in thousands) Service cost .................................. $ -- $337 $489 Interest cost ................................. 168 167 142 Amortization of actuarial net loss ............ 2 8 8 Amortization of transition obligation ......... -- 2 3 ---- ---- ---- Net periodic benefit cost ..................... $170 $514 $642 ==== ==== ==== The following table sets forth the change in the benefit obligation for IMAB's defined benefit plan in Sweden: April 30, 2002 2001 (in thousands) Change in benefit obligation: Benefit obligation at beginning of fiscal year .... $ 3,047 $ 3,094 Service cost ...................................... -- 337 Interest cost ..................................... 168 167 Actuarial (gain) loss ............................. 322 -- Benefits paid ..................................... (7) (19) Settlement......................................... (313) -- Effect of foreign currency exchange rates ......... (47) (532) ------- ------- Benefit obligation at end of fiscal year .......... $ 3,170 $ 3,047 ======= ======= The following table shows the plan's funded status and amounts recognized in the consolidated balance sheet: April 30, 2002 2001 (in thousands) Actuarial present value of benefit obligation: Funded status .................................. $ (3,170) $(3,047) Unrecognized actuarial loss .................... 373 159 Unrecognized transition obligation ............. 4 8 ------ ------ $ (2,793) $(2,880) Out of which long-term liability................ (2,240) (2,880) Out of which short-term liability .............. (553) -- ======= ======= The following assumptions were used to determine the IMAB's obligation under the Swedish plan: Years Ended April 30, 2002 2001 2000 Discount rate .................. 5.75% 5.75% 5.75% Salary increase ................ 3.00% 3.00% 3.00% Inflation ...................... 2.00% 2.00% 2.00% Defined Contribution Plans Contributions by the Company relating to its defined contribution plans for the years ended April 30, 2002, 2001, and 2000 were $2,493,000 $2,606,000, and $2,051,000, respectively. In fiscal years 2002 and 2001, the Company received refunds from the Swedish National Pension Organization, Alecta, amounting to $802,000 and $639,000, respectively. These refunds were related to an overfunding of the pension plans administered by Alecta in earlier years. Alecta was required by the Swedish Government to return the overfunded portion of these funds to the contributing employers. 12. Stockholders' Equity and Number of Share Information IMIC's Amended and Restated Certificate of Incorporation as in effect on April 30, 2002, authorizes (i) 15,000,000 shares of preferred stock ("Preferred Stock") with a par value of $0.01 and (ii) 75,000,000 shares of Common Stock with a par value of $0.01 of which 12,500,000 shares have been designated as Class B Common Stock. No shares of Preferred Stock or Class B Common Stock were outstanding at April 30, 2002. As of April 30, 2002, 2001, and 2000, total stockholders' equity includes an amount of SEK 40,800,000 (approximately U.S. $4,000,000) in IMAB which is restricted as to usage according to Swedish Company Law. The amount only can be used to cover a net deficit, for an increase in share capital, or for other uses as agreed by the courts. On January 31, 2002, the Company and the shareholders concerned cancelled purchases aggregating 432,000 shares of Common Stock. Accordingly, the number of shares outstanding and the related notes receivable from shareholders have been adjusted. There have not been any repurchases of Common Stock during the years ended April 30, 2002, 2001, and 2000. Share Information For each of the periods presented, income available to common shareholders (the numerator) used in the computation of net income (loss) per share was the same as the numerator used in the computation of net income (loss) per share assuming dilution. A reconciliation of the denominators used in the computations of net income (loss) per share and net income (loss) per share assuming dilution is as follows: Year Ended April 30, 2002 2001 2000 Weighted average shares outstanding .. 32,198,401 31,985,991 31,671,870 Effect of dilutive stock options ..... -- -- -- ---------- ---------- ---------- Adjusted weighted average shares outstanding assuming dilution ........ 32,198,401 31,985,991 31,671,870 ========== ========== ========== 13. Stock Compensation Plans Stock Option Plans In May 1995, IMIC adopted the Industri-Matematik International Corp. Stock Option Plan ("1995 Plan"), and in October, 1998, IMIC adopted the Industri- Matematik International Corp. 1998 Stock Option Plan ("1998 Plan")(the 1995 Plan and 1998 Plan, collectively, "U.S. Plans"). The U.S. Plans provide for grants of incentive stock options to key employees (including officers and employee directors) of the Company and non-incentive stock options to key employees and members of IMIC's Board of Directors, consultants, and other advisors of the Company who are not employees. The maximum term for either form of option is ten years, and the options which have been granted have had vesting periods of three to five years. A total of 3,000,000 shares of Common Stock were reserved for future issuance under the 1995 Plan, of which 2,244,500 were available for grant as of April 30, 2002, and a total of 3,000,000 shares of Common Stock were reserved for future issuance under the 1998 Plan and in August, 2000, by an additional 1,000,000 shares. Of the total of 4,000,000 shares reserved for issuance under the 1998 Plan, 1,118,500 were available for grant as of April 30, 2002. Since there has been a public market for the Company's Common Stock, all stock options have been granted with an exercise price equal to or exceeding the market price. IMIC's Board of Directors believes that all stock options granted prior to there being such public market were granted with an exercise price equal to or exceeding the fair value of such Common Stock on the date of the grant, based on the facts, circumstances, and limitations existing at the time of their determinations. The following is a summary of option transactions and exercise prices as it relates to the U.S. Plans: Weighted Average Options Price per option Exercise Price Outstanding at April 30, 1999 3,176,498 $2.00 - $ 26.38 $ 6.30 --------- Granted.............. 1,510,700 $1.91 - $ 12.25 $ 3.34 Exercised............ (99,597) $2.00 - $ 11.06 $ 3.54 Terminated........... (602,751) $1.91 - $ 20.38 $ 6.12 --------- Outstanding at April 30, 2000 3,984,850 $1.91 - $ 26.38 $ 5.27 --------- Granted.............. 270,500 $1.72 - $ 3.50 $ 2.24 Exercised............ (151,900) $1.91 - $ 4.00 $ 2.03 Terminated........... (914,000) $1.91 - $ 20.38 $ 4.61 --------- Outstanding at April 30, 2001 3,189,450 $1.72 - $ 26.38 $ 5.31 --------- Granted.............. 1,753,500 $0.65 - $ 1.15 $ 0.96 Exercised............ (0,0) $0.00 - $ 0.00 $ 0.00 Terminated........... (1,305,950) $1.00 - $ 26.38 $ 8.29 --------- Outstanding at April 30, 2002 3,637,000 $0.65 - $ 26.38 $ 2.91 --------- Vested at April 30, 2002 1,412,925 $0.65 - $ 26.38 $ 4.12 ========= The following table summarizes information concerning outstanding and exercisable options as of April 30, 2002. Options Outstanding ----------------------------------------- Weighted Average Options Exercisable ----------------------------------------- ------------------------- Weighted Number of Remaining Life Number of Average Range of Exercise Prices Options (Years) Exercise Price Options Exercise Price -------------------------- --------- -------------- -------------- --------- -------------- $ 0.65 - $ 4.00 2,789,500 8.6 $ 1.74 868,125 $ 2.33 $ 5.06 - $ 6.00 728,000 6.4 $ 5.97 436,800 $ 5.97 $ 7.88 - $ 9.00 74,000 4.3 $ 9.00 74,000 $ 9.00 $ 11.06 - $15.38 40,500 5.7 $13.97 30,000 $10.45 $ 22.25 - $26.38 5,000 5.8 $26.38 4,000 $26.38 - ---------------------- ---------- ----- ------- --------- ------ $ 0.65 - $26.38 3,637,000 8.0 $ 2.9 1,412,925 $ 4.04 ========= =========

Transferable Stock Option Plans In October, 2000, the Company instituted a Transferable Stock Option Plan ("Swedish Plan") which supplements the U.S. Plans for the benefit of selected employees subject to Swedish income taxation. Pursuant to the Swedish Plan, options may be sold to employees giving them the right to purchase shares of Company Common Stock at a purchase price equal to the market value on the Common Stock on the date of sale of the option. The purchase price for the option will be its fair market value on the date of sale. The options are transferable, and if an employee owning an option terminates his employment with the Company, the Company has the right to repurchase his options at their then market value, or if the options are not publicly traded, at the original purchase price plus interest. A total of 500,000 shares were reserved for issuance under the Swedish Plan, all of which were available for grant as of April 30, 2002. In May, 2001, the Company instituted a Transferable Stock Option Plan ("Swedish Plan") for Abalon AB, a wholly owned subsidiary to Industri- Matematik International. The Plan is for the benefit of selected employees subject to Swedish income taxation. Pursuant to the Abalon Swedish Plan, options may be sold to employees giving them the right to purchase shares of Abalon AB Common Stock at a purchase price equal to the market value on the Common Stock on the date of sale of the option. The purchase price for the option will be its fair market value on the date of sale. The options are transferable, and if an employee owning an option terminates his employment with the Company, the Company has the right to repurchase his options at their then market value, or if the options are not publicly traded, at the original purchase price plus interest. At April 30, 2002 there were 310,000 Abalon AB options outstanding representing 3% of the subsidiaries outstanding common stock. The plan provides for the possibility to issue up to 20% of the subsidiaries outstanding common stock. Restricted Stock Program In May 1995, the Company instituted a restricted stock program pursuant to which shares of IMIC's Common Stock were purchased by certain key employees who may be taxable pursuant to the laws of Sweden in exchange for nonrecourse promissory notes ("Restricted Stock Program"). The shares were issued through a wholly owned subsidiary of IMIC, Software Finance Corporation ("SFC"). Principal on the promissory notes is due either nine or ten years after issuance with interest being due and payable annually. No shares were sold in fiscal 2002, 2001, or 2000. Under the terms of the Restricted Stock Program, SFC has an option to repurchase the shares issued to each employee provided it pays an annual option premium. The exercise price to be paid by SFC upon exercise of a purchase option is the fair market value, provided that if the option to purchase is exercised prior to the end of a stated period, then the exercise price is the initial purchase price for a percentage of the shares after the first anniversary of the option agreement, generally decreasing by 20% each subsequent year and the exercise price for the balance of the shares is fair market value. The annual option premium paid by SFC is at a rate substantially equal to the interest due on the non-recourse promissory note. If it exercises an option, SFC has the right and obligation to apply against the payment of any principal due on the employee's promissory note any amounts payable by SFC to the recipient of the shares as the exercise price under the Option Agreement. The individual employee has no personal obligation under the note; liability is limited to the shares sold. During fiscal 2000, pursuant to the foregoing provisions, a former employee sold the shares he acquired and applied the proceeds to his note, and the balance of the note was cancelled. During fiscal 2002, one former employee and the current employees terminated their interest in 432,000 shares and the related notes were cancelled. The shares sold pursuant to the Restricted Stock Program are included within Common Stock and additional paid-in capital in Stockholders' equity while the non-recourse promissory notes are classified as a contra-account as notes receivable from Stockholders, and shown in Stockholders' equity. The Company has the ability to prevent the recipients from selling the purchased securities. The Company has not recognized any compensation expense in respect of the restricted stock in the statements of operations since the purchase price of the restricted stock did not differ from the estimated fair market value of the Common Stock on the date of issuance. The shares sold pursuant to the Restricted Stock Program and dividends paid thereon are subject to a pledge and security interest held by SFC. On January 31, 2002, the Company and the shareholders concerned canceled purchases aggregating 432,000 shares of Common Stock. Accordingly, the number of shares outstanding and the related notes receivable from shareholders have been adjusted. As of April 30, 2002, 634,995 shares sold pursuant to the Restricted Stock Program, with respect to which the related non-recourse promissory notes remained unpaid, were outstanding. Employee Stock Purchase Plan Effective February 26, 1997, IMIC adopted the Industri-Matematik International Corp. 1997 Employee Stock Purchase Plan ("ESPP") to provide eligible employees an opportunity to purchase shares of IMIC Common Stock at a discount from market value through payroll deductions and other contributions. 600,000 shares were reserved for purchase pursuant to the ESPP, in December, 1998, and May, 2000, respectively. The ESPP establishes purchase periods of up to 23 months and two 6-month accrual periods per calendar year commencing each January 1 and July 1. On the last day of each accrual period, participant account balances are used to purchase shares of Common Stock at the lesser of 85% of the fair market value of the Common Stock on such date or on the first day of the purchase period. No participant may purchase more than 500 shares in any accrual period or shares having a value in excess of $21,250 in any calendar year. Employees purchased 103,038 and 284,756 shares at an average price of $1.47 and $2.09 per share under the ESPP during the years ended April 30, 2002 and 2001, respectively. Pro Forma Net Income in accordance with SFAS No. 123. As permitted by the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company applies APB Opinion 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock- based employee compensation plans. Accordingly, no compensation cost has been recognized for the stock options or for purchases under the ESPP. If compensation cost for stock option plans and its ESPP had been determined based on the fair value at the grant dates as defined by SFAS No. 123, the Company's pro forma net income and earnings per share would have been as follows: Year ended April 30, 2002 2001 2000 (in thousands, except per share data) Net loss As reported.. $(6,602) $(35,251) $(22,799) Pro forma.... (6,438) (39,883) (27,881) Net loss per share As reported.. $ (0.20) $ (1.10) $ (0.72) Pro forma.... (0.20) (1.25) (0.88) The fair value of each option grant is estimated on the date of the grant using the Black-Scholes options-pricing model with the following weighted- average assumptions used for grants in the years ended April 30, 2002, 2001, and 2000: Year Ended April 30, 2002 2001 2000 Expected term ..................... 5 5 5 Volatility factor ................. 101.0% 100.0% 90.0% Risk-free interest rate ........... 4.47% 5.21% 5.95% Dividend yield .................... 0.00% 0.00% 0.00% Fair value ........................ $ 0.74 $ 1.73 $ 2.44 Shares issued under the ESPP were valued at the difference between the market value of the stock and the discounted purchase price of the shares on the date of purchase. The date of grant and the date of purchase coincide for this plan. The weighted average fair value of shares issues to employees under the ESPP was $0.49, $0.68, and $0.67 during the years ended April 30, 2002, 2001, and 2000, respectively. 14. Commitments and Contingencies Operating leases The Company leases office facilities and certain office equipment under various non-cancelable operating lease agreements. Aggregate future minimum lease payments under non-cancelable operating leases are as follows as of April 30, 2002: Future minimum payments Year Ending April 30, on operating leases (in thousands) 2003............................................... $ 4,866 2004............................................... 4,627 2005 .............................................. 1,658 2006............................................... 747 2007............................................... 584 Thereafter......................................... 3,494 -------- Total future minimum lease payments $ 15,976 ======== Total rent expense under the leases was $5,558,000, $5,371,000, $7,904,000 for the years ended April 30, 2002, 2001, and 2000, respectively. The Company is liable to pay social fees on the gains in connection with the exercise of the Company's stock options by it's employees in Sweden. The amount of the future liability is dependent upon the number of options exercised and the market price. Social fees in Sweden are approximately 33 percent. To offset this potential liability, during November, 2000, the Company entered into a hedge transaction (see note 9). During the year ended April 30, 2002 IMAB has amortized its liability under the nationally-agreed standard pension plan, the ITP Plan, administered by a national organization, Pensionsregistreringsinstitutet ("PRI"). The liability was reduced by $321,000. It is expected that IMAB will continue to amortize its remaining liability by approximately $650,000 per year for the next four years. Litigation In February, 1999, a class action lawsuit was commenced by service of a complaint against the Company, certain of its officers, directors, and controlling shareholders who sold shares of Common Stock during the class period, and its underwriters claiming violations of the Federal securities laws. The complaint was dismissed, but the plaintiff had the right and did serve a new complaint. A motion to dismiss the second complaint has been submitted. No answer to either complaint was filed. While management believes this action to be without merit, an unfavorable outcome in the class or any other action which may be brought against the Company may have a material adverse affect upon the Company's business, operating results, and financial condition. In fiscal 2002, the Company obtained an arbitration award against a former customer (subsequently reduced to judgment). The collectibility of the judgment is doubtful. 15. Segment Information The Company operates in one industry segment, the design, development, marketing, licensing, and support of client/server application software. The Company is managed on a geographic basis and the Company's management evaluates the performance of its segments and allocates resources to them based upon income (loss) from operations. Income (loss) from operations for the geographic segments excludes general corporate expenses and product development costs. The majority of software development occurs in Sweden although the Company maintains some development facilities in the United States. Product development costs and general corporate expenses are reported in the Corporate segment. Assets by reportable segment are not disclosed since the Company's management does not review segmented balance sheet information. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Segment data includes intersegment revenues. The table below presents information about the Company's reportable segments: Year Ended April 30, 2002 2001 2000 (in thousands) Revenues: United States ..................... $ 19,974 $ 28,220 $ 28,859 Nordic ............................ 24,214 28,383 32,083 United Kingdom .................... 6,658 6,316 6,051 Netherlands ....................... 5,771 7,325 5,159 Other Europe....................... -- -- 346 Australia ......................... 637 1,194 2,198 Intercompany ...................... (2,845) (2,744) (137) Corporate ......................... 871 661 466 -------- -------- -------- Total revenues $ 55,280 $ 69,355 $ 75,025 ======== ======== ======== Included in the revenues for Nordic, for the years ended April 30, 2002, 2001 and 2000 respectively, $1,804,000, $1,927,000 and $137,000 were revenues earned from other companies within the group ("Intercompany"). Included in the revenues for United Kingdom, for the years ended April 30, 2002, 2001 and 2000 respectively, $1,026,000, $723,000 and $0 were revenues earned from other companies within the group ("Intercompany"). Included in the revenues for various countries, for the years ended April 30, 2002, 2001 and 2000 respectively, $15,000 $94,000 and $0 were revenues earned from other companies within the group ("Intercompany"). Various countries consists of Netherlands, Australia, United States and Other Europe. Loss from operations: United States ..................... $ 1,602 $ 7,795 $ 4,371 Nordic ............................ 2,244 2,039 3,275 United Kingdom .................... 1,304 1 (1,011) Netherlands ....................... 279 1,918 775 Other Europe ...................... (1) (160) (823) Australia ......................... 22 (228) 634 Canada ............................ (3) (3) (24) Intercompany ...................... (64) (2,072) (252) Corporate ......................... (12,651) (29,446) (31,766) -------- -------- -------- Total loss from operations $ (7,268) $(20,156) $(24,821) ======== ======== ======== Geographic data for revenues based upon customer location and long-lived assets (which consist of non-current assets other than goodwill and other intangible assets) were as follows: Year Ended April 30, 2002 2001 2000 (in thousands) Revenues: United States ..................... $ 17,311 $ 23,086 $ 26,650 Nordic ............................ 22,065 25,546 20,567 United Kingdom .................... 5,225 6,657 6,749 Netherlands ....................... 5,953 6,561 5,634 Other Europe ...................... 1,440 1,218 10,464 Asia/Pacific ...................... 638 1,455 2,665 Rest of Americas .................. 2,648 4,832 2,296 -------- -------- -------- Total revenues $ 55,280 $ 69,355 $ 75,025 ======== ======== ======== Long-lived assets: United States ..................... $ 885 $ 1,732 $ 2,673 Nordic ............................ 1,770 2,387 2,867 United Kingdom .................... 346 410 574 Netherlands ....................... 116 158 208 Other Europe....................... -- -- 137 Australia ......................... 18 66 136 -------- -------- -------- Total long-lived assets $ 3,135 $ 4,753 $ 6,595 ======== ======== ======== Major customers For the year ended April 30, 2002, the Company had one single customer, Sherwin Williams, representing 10.4% of total revenues. For the years ended April 30, 2001, and 2000, the Company had no single customer with sales comprising more than 10% of total revenues. 16. Restructuring In April, 2001, in order to reduce costs and increase efficiency, the Company announced a reorganization of its operations into four regional units each made up of sales, services, support, and operations staff. In connection with the reorganization, the Company recorded a restructuring charge of $5.4 million consisting primarily of employee severance costs, lease termination expenses, and write-downs of certain property and equipment, of which $1.5 million was utilized by April 30, 2001, and the balance utilized during the fiscal year ended April 30, 2002. The components of the charge included, in thousands: Sweden United States Total ------ ------------- ----- Severance benefits $2,431 $366 $2,797 Lease obligations and terminations 1,057 -- 1,057 Write-down on fixed assets 1,490 -- 1,490 Other 47 -- 47 ------ ---- ------ Total restructuring charge $5,025 $366 $5,391 ====== ==== ====== Of the 57 employees terminated in Sweden, 5 worked in administration, 3 worked in sales and marketing, 13 worked in services and support, and 36 worked in product development. Of the 6 employees terminated in the United States 1 worked in administration, 1 worked in services and support, and 4 worked in sales and marketing. The lease termination expenses related to the space occupied by the terminated employees in Sweden, and the assets written- down in the reorganization were office equipment and leasehold improvements related to the terminated employees as well as accounting and support systems. The following table presents the components of the accrual at April 30, 2001 (in thousands), restructuring activity relating to the fiscal 2001 restructuring through April 30, 2002, and the remaining accrual at April 30, 2002: Accrual Accrual as of Utilization as of April 30, of Currency April 30, 2001 accrual effect 2002 ------- ---------- --------- -------- Severance benefits $ 2,621 $ (2,550) $ (71) $ 0 Lease obligations and terminations 990 (958) (32) 0 Other 47 (47) 0 ------- ---------- --------- -------- Total $ 3,658 $ (3,555) $ (103) $ 0 ======= ========== ========= ======== 17. Quarterly Information (Unaudited) Summarized quarterly consolidated financial information for 2002 and 2001 is as follows: Quarter Ended July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31, April 30, 2001 2001 2002 2002 2000 2000 2001 2001 (in thousands, except per share data) Total revenues $ 13,488 $ 15,349 $ 13,850 $ 12,593 $ 16,993 $ 18,487 $15,390 $18,485 Gross profit 5,024 6,632 5,581 4,931 7,396 8,820 6,086 7,822 Net income (loss) (1,445) (796) (1,380) (2,981) (3,481) (650) (4,254) (26,866) Earnings per Share (0.05) (0.02) (0.04) (0.09) (0.11) (0.02) (0.13) (0.84) Weighted average number of shares 32,303 32,303 32,309 31,877 31,931 31,974 32,020 32,020

SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDUSTRI-MATEMATIK INTERNATIONAL CORP. July 29, 2002 By: /s/ LIN JOHNSTONE ------------------------------------ Lin Johnstone, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. July 29, 2002 /s/ LIN JOHNSTONE --------------------------------------- Lin Johnstone, Principal Executive Officer July 29, 2002 /s/ KARL ASP --------------------------------------- Karl Asp, Principal Financial and Accounting Officer July 29, 2002 /s/ JEFFREY A. HARRIS --------------------------------------- Jeffrey A. Harris, Director July 29, 2002 /s/ WILLIAM H. JANEWAY --------------------------------------- William H. Janeway, Director July 29, 2002 /s/ TERJE LAUGERUD --------------------------------------- TERJE LAUGERUD, Director July 29, 2002 /s/ MARTIN LEIMDORFER --------------------------------------- Martin Leimdorfer, Director July 29, 2002 /s/ GEOFF W. SQUIRE --------------------------------------- Geoff W. Squire, Director

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