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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from ____________ to ____________
Commission File Number: 000-18674
MAPICS, Inc.
(Exact name of registrant as specified in its charter)
| Georgia (State or
other jurisdiction of incorporation) |
|
04-2711580 (I.R.S.
Employer Identification No.) |
1000 Windward Concourse Parkway, Suite 100
Alpharetta, Georgia 30005
(Address of principal executive offices)
(678) 319-8000
(Registrant’s telephone number)
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 ¨
The number of shares of the registrant’s common stock
outstanding at August 7, 2002 was 18,395,303.
MAPICS, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2002
| Item Number
|
|
|
|
Page Number
|
| |
| |
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| |
| 1. |
|
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| |
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3 |
| |
| |
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4 |
| |
| |
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5 |
| |
| |
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|
6 |
| |
| 2. |
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|
18 |
| |
| 3. |
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31 |
| |
| |
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| |
| 6. |
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|
32 |
| |
| |
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33 |
| |
| |
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|
34 |
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
| |
|
June 30, 2002
|
|
|
September 30, 2001
|
|
| |
|
(Unaudited) |
|
|
(As restated; See Note 2) |
|
| ASSETS |
|
|
|
|
|
|
|
|
| |
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
22,835 |
|
|
$ |
18,077 |
|
| Accounts receivable, net of allowances of $1,910 at June 30, 2002 and $3,456 at
September 30, 2001 |
|
|
24,401 |
|
|
|
34,412 |
|
| Deferred royalties |
|
|
7,848 |
|
|
|
7,492 |
|
| Deferred commissions |
|
|
8,230 |
|
|
|
9,209 |
|
| Prepaid expenses and other current assets |
|
|
3,220 |
|
|
|
2,870 |
|
| Deferred income taxes, net |
|
|
4,410 |
|
|
|
6,474 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
70,944 |
|
|
|
78,534 |
|
| Property and equipment, net |
|
|
3,418 |
|
|
|
4,507 |
|
| Computer software costs, net |
|
|
17,302 |
|
|
|
17,627 |
|
| Goodwill and other intangible assets, net |
|
|
7,246 |
|
|
|
8,494 |
|
| Other non-current assets, net |
|
|
7,047 |
|
|
|
5,991 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
105,957 |
|
|
$ |
115,153 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| |
| Current liabilities: |
|
|
|
|
|
|
|
|
| Current portion of long-term debt |
|
$ |
— |
|
|
$ |
13,069 |
|
| Note payable |
|
|
4,000 |
|
|
|
— |
|
| Accounts payable |
|
|
3,425 |
|
|
|
2,903 |
|
| Accrued expenses and other current liabilities |
|
|
24,743 |
|
|
|
29,967 |
|
| Restructuring reserve, current |
|
|
1,375 |
|
|
|
296 |
|
| Deferred license revenue |
|
|
17,572 |
|
|
|
22,124 |
|
| Deferred services revenue |
|
|
40,129 |
|
|
|
40,406 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
91,244 |
|
|
|
108,765 |
|
| Long-term debt |
|
|
— |
|
|
|
5,593 |
|
| Restructuring reserve, non-current |
|
|
2,427 |
|
|
|
137 |
|
| Other non-current liabilities |
|
|
1,340 |
|
|
|
415 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
95,011 |
|
|
|
114,910 |
|
| |
|
|
|
|
|
|
|
|
| Commitments and contingencies |
|
|
— |
|
|
|
— |
|
| |
| Shareholders’ equity: |
|
|
|
|
|
|
|
|
| Preferred stock, $1.00 par value; 1,000 shares authorized: |
|
|
|
|
|
|
|
|
| Series D convertible preferred stock, 125 shares issued and outstanding (liquidation preference of $9,419) at June 30,
2002 and September 30, 2001 |
|
|
125 |
|
|
|
125 |
|
| Series E convertible preferred stock, 50 shares issued and outstanding (liquidation preference of $3,768) at June 30,
2002 and September 30, 2001 |
|
|
50 |
|
|
|
50 |
|
| Common stock, $.01 par value; 90,000 shares authorized, 20,370 shares issued and 18,394 shares outstanding at June 30,
2002; 20,370 shares issued and 18,307 shares outstanding at September 30, 2001 |
|
|
204 |
|
|
|
204 |
|
| Additional paid-in capital |
|
|
63,178 |
|
|
|
62,923 |
|
| Accumulated deficit |
|
|
(37,064 |
) |
|
|
(46,770 |
) |
| Restricted stock compensation |
|
|
(367 |
) |
|
|
(709 |
) |
| Accumulated other comprehensive loss |
|
|
(63 |
) |
|
|
(189 |
) |
| Treasury stock-at cost, 1,976 shares at June 30, 2002 and 2,063 shares at September 30, 2001 |
|
|
(15,117 |
) |
|
|
(15,391 |
) |
| |
|
|
|
|
|
|
|
|
| Total shareholders’ equity |
|
|
10,946 |
|
|
|
243 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities and shareholders’ equity |
|
$ |
105,957 |
|
|
$ |
115,153 |
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
| |
|
Three Months Ended June
30,
|
|
|
Nine Months Ended June
30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| |
|
|
|
|
(As restated; See Note 2) |
|
|
|
|
|
(As restated; See Note 2) |
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| License |
|
$ |
9,439 |
|
|
$ |
14,086 |
|
|
$ |
30,991 |
|
|
$ |
34,978 |
|
| Services |
|
|
21,818 |
|
|
|
22,927 |
|
|
|
66,766 |
|
|
|
67,961 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
|
31,257 |
|
|
|
37,013 |
|
|
|
97,757 |
|
|
|
102,939 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of license revenue |
|
|
3,742 |
|
|
|
5,335 |
|
|
|
11,136 |
|
|
|
12,338 |
|
| Cost of services revenue |
|
|
7,935 |
|
|
|
9,166 |
|
|
|
25,120 |
|
|
|
26,527 |
|
| Selling and marketing |
|
|
9,164 |
|
|
|
11,237 |
|
|
|
25,852 |
|
|
|
31,547 |
|
| Product development |
|
|
3,168 |
|
|
|
4,194 |
|
|
|
12,438 |
|
|
|
13,514 |
|
| General and administrative |
|
|
2,910 |
|
|
|
3,446 |
|
|
|
11,076 |
|
|
|
10,699 |
|
| Amortization of goodwill |
|
|
— |
|
|
|
2,341 |
|
|
|
— |
|
|
|
7,022 |
|
| Acquisition costs |
|
|
— |
|
|
|
(1,981 |
) |
|
|
— |
|
|
|
(1,981 |
) |
| Restructuring costs and other items |
|
|
— |
|
|
|
— |
|
|
|
3,707 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
26,919 |
|
|
|
33,738 |
|
|
|
89,329 |
|
|
|
99,666 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income from operations |
|
|
4,338 |
|
|
|
3,275 |
|
|
|
8,428 |
|
|
|
3,273 |
|
| Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest income |
|
|
134 |
|
|
|
203 |
|
|
|
388 |
|
|
|
612 |
|
| Interest expense |
|
|
(151 |
) |
|
|
(671 |
) |
|
|
(989 |
) |
|
|
(2,330 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income tax expense (benefit) and extraordinary item |
|
|
4,321 |
|
|
|
2,807 |
|
|
|
7,827 |
|
|
|
1,555 |
|
| Income tax expense (benefit) |
|
|
(3,512 |
) |
|
|
2,298 |
|
|
|
(2,195 |
) |
|
|
2,233 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before extraordinary item |
|
|
7,833 |
|
|
|
509 |
|
|
|
10,022 |
|
|
|
(678 |
) |
| Extraordinary loss on early extinguishment of debt, net of income tax benefit of $173 |
|
|
(318 |
) |
|
|
— |
|
|
|
(318 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
7,515 |
|
|
$ |
509 |
|
|
$ |
9,704 |
|
|
$ |
(678 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per common share (basic): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before extraordinary item |
|
$ |
0.43 |
|
|
$ |
0.03 |
|
|
$ |
0.55 |
|
|
$ |
(0.04 |
) |
| Extraordinary loss on early extinguishment of debt, net of income tax benefit |
|
|
(0.02 |
) |
|
|
— |
|
|
|
(0.02 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
0.41 |
|
|
$ |
0.03 |
|
|
$ |
0.53 |
|
|
$ |
(0.04 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average number of common shares outstanding (basic) |
|
|
18,356 |
|
|
|
18,248 |
|
|
|
18,343 |
|
|
|
18,199 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per common share (diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before extraordinary item |
|
$ |
0.38 |
|
|
$ |
0.03 |
|
|
$ |
0.49 |
|
|
$ |
(0.04 |
) |
| Extraordinary loss on early extinguishment of debt, net of income tax benefit |
|
|
(0.02 |
) |
|
|
— |
|
|
|
(0.02 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
0.36 |
|
|
$ |
0.03 |
|
|
$ |
0.47 |
|
|
$ |
(0.04 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average number of common shares and common equivalent shares outstanding (diluted) |
|
|
20,596 |
|
|
|
20,249 |
|
|
|
20,544 |
|
|
|
18,199 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| |
|
Nine Months Ended June
30,
|
|
| |
|
2002
|
|
|
2001
|
|
| |
|
|
|
|
(As restated; See Note
2) |
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
9,704 |
|
|
$ |
(678 |
) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| Depreciation |
|
|
1,732 |
|
|
|
2,154 |
|
| Amortization of computer software costs |
|
|
4,502 |
|
|
|
5,099 |
|
| Amortization of goodwill and other intangible assets |
|
|
570 |
|
|
|
7,673 |
|
| Amortization of debt issuance costs |
|
|
338 |
|
|
|
340 |
|
| Write-off of computer software costs |
|
|
— |
|
|
|
1,551 |
|
| Loss on early extinguishments of debt |
|
|
491 |
|
|
|
— |
|
| Provision for bad debts |
|
|
900 |
|
|
|
586 |
|
| Deferred income taxes |
|
|
2,476 |
|
|
|
2,972 |
|
| Settlement of pre-acquisition contingency |
|
|
(1,000 |
) |
|
|
— |
|
| Other non-cash items, net |
|
|
189 |
|
|
|
491 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
9,111 |
|
|
|
1,969 |
|
| Deferred royalties |
|
|
(356 |
) |
|
|
(1,282 |
) |
| Deferred commissions |
|
|
979 |
|
|
|
1,918 |
|
| Prepaid expenses and other current assets |
|
|
854 |
|
|
|
3,366 |
|
| Other non-current assets |
|
|
(1,627 |
) |
|
|
197 |
|
| Accounts payable |
|
|
522 |
|
|
|
(3,927 |
) |
| Accrued expenses and other current liabilities |
|
|
(4,882 |
) |
|
|
(5,579 |
) |
| Restructuring reserve, current and non-current |
|
|
3,369 |
|
|
|
— |
|
| Deferred license revenue |
|
|
(4,552 |
) |
|
|
2,883 |
|
| Deferred service revenue |
|
|
(277 |
) |
|
|
(1,953 |
) |
| Other non-current liabilities |
|
|
873 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
23,916 |
|
|
|
17,780 |
|
| |
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Purchases of property and equipment |
|
|
(703 |
) |
|
|
(1,070 |
) |
| Additions to computer software costs |
|
|
(4,077 |
) |
|
|
(4,322 |
) |
| Purchases of computer software |
|
|
(102 |
) |
|
|
— |
|
| Acquisitions, net of cash acquired |
|
|
— |
|
|
|
7 |
|
| |
|
|
|
|
|
|
|
|
| Net cash used for investing activities |
|
|
(4,882 |
) |
|
|
(5,385 |
) |
| |
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Proceeds from stock options exercised |
|
|
173 |
|
|
|
11 |
|
| Proceeds from employee stock purchases |
|
|
409 |
|
|
|
503 |
|
| Proceeds from note payable |
|
|
8,428 |
|
|
|
— |
|
| Principal repayments of note payable |
|
|
(4,428 |
) |
|
|
— |
|
| Principal repayments of long-term debt |
|
|
(18,662 |
) |
|
|
(10,059 |
) |
| Payment of debt issuance costs |
|
|
(196 |
) |
|
|
(96 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash used for financing activities |
|
|
(14,276 |
) |
|
|
(9,641 |
) |
| |
|
|
|
|
|
|
|
|
| Net increase in cash and cash equivalents |
|
|
4,758 |
|
|
|
2,754 |
|
| Cash and cash equivalents at beginning of period |
|
|
18,077 |
|
|
|
12,175 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of period |
|
$ |
22,835 |
|
|
$ |
14,929 |
|
| |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) |
|
Basis of Presentation |
Except for the balance sheet as of September 30, 2001, the accompanying condensed consolidated financial statements are unaudited; however, in our opinion, these condensed consolidated financial statements contain all
adjustments, consisting of only normal, recurring adjustments, necessary to present fairly our consolidated financial position, results of operations and cash flows as of the dates and for the periods indicated.
We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission, or
SEC. As permitted by the rules of the SEC applicable to quarterly reports on Form 10-Q, these financial statements are condensed and consolidated, consisting of the condensed financial statements of MAPICS, Inc. and our subsidiaries. We eliminated
all significant intercompany accounts and transactions in the consolidation. We have reclassified certain amounts in the September 30, 2001 condensed consolidated financial statements to conform to the June 30, 2002 presentation. We also have
condensed these notes, and they do not contain all disclosures required by generally accepted accounting principles. While we believe that the disclosures presented are adequate to make these condensed consolidated financial statements not
misleading, you should read them in conjunction with our audited consolidated financial statements and related notes included in our amended Annual Report on Form 10-K/A for the fiscal year ended September 30, 2001 as filed with the SEC on August
14, 2002.
We operate on a fiscal year ending September 30th. The term “fiscal 2000” refers to our fiscal year ended September 30, 2000, the term “fiscal 2001” refers to our fiscal year
ended September 30, 2001, and the term “fiscal 2002” refers to our fiscal year ending September 30, 2002. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for a full
year.
(2) |
|
Restatement of Financial Statements |
In July 2002, we concluded that our annual renewable term license agreements for our IBM iSeries platform products are short-term time-based licenses that should be accounted for pursuant to AICPA
Technical Practice Aid (“TPA”) 5100.53, “Fair Value of PCS in a Short-Term Time-Based License and Software Revenue Recognition” issued in May 2000. In accordance with TPA 5100.53, we were unable to objectively demonstrate the
vendor-specific objective evidence (VSOE) of fair value of post-contract customer support (PCS) due to the short-term timeframe, and we were unable to apply the “residual method” set forth in SOP 98-9, “Modification of SOP 97-2,
‘Software Revenue Recognition, with Respect to Certain Transactions,’ ” which was our prior accounting practice. We concluded that we should recognize the initial license fee and related expenses for our annual renewable term
license agreements ratably over the twelve-month license term as provided in TPA 5100.53 and paragraph 12 of SOP 97-2, “Software Revenue Recognition.”
As discussed in Note 3 of the notes to our consolidated financial statements in Item 8 of our amended Annual Report on Form 10-K/A for the year ended September 30, 2001, we have restated our financial
statements for the years ended September 30, 2000 and 2001 and have revised our accounting to conform to TPA 5100.53 effective June 1, 2000. The effect of the restatement involves only the timing of when certain license revenues and direct costs are
recognized. Direct costs included in the adjustments for the restatement include royalty expense for our solution partner-developed products and commission fees paid to our affiliates. Other sales costs were recorded as period expenses. The total
revenues to be recognized over the life of the contract from sales of our software under these annual renewable term licenses will be unchanged.
We also have restated our financial statements presented in this Quarterly Report on Form 10-Q as necessary to reflect the application of TPA 5100.53. The significant adjustments to the statement of
operations for the three months ended June 30, 2001 were an increase in our license revenue of $882,000, a reduction of our royalty expenses in cost of license revenue of $549,000, and an increase in our sales commissions in selling and marketing
expenses of $779,000. In the aggregate for the three months ended June 30, 2001, the adjustments and related tax effects increased previously reported net income by $401,000 and increased both previously reported basic and diluted net income per
share by $0.02. The significant adjustments to the statement of operations for the nine months ended June 30, 2001 were a decrease in our license revenue of $2.2 million, a reduction of our royalty expenses in cost of license revenue of
$1.6 million, and an increase in our sales commissions in selling and marketing expenses of $677,000. In the aggregate for the nine months ended June 30, 2001, the adjustments and related tax effects decreased previously reported net income by
$793,000 and decreased previously reported basic and diluted net loss per share by $0.05.
Additionally, we have restated our financial statements for the six months ended March 31, 2002 the effects of which are included in our financial statements for the nine months ended
June 30, 2002. The significant adjustments to the statement of operations for the six months ended March 31, 2002 were an increase in our license revenue of $4.7 million, an increase of our royalty expense in cost of license revenue of $700,000, and
an increase in our sales commissions in selling and marketing expenses of $1.5 million. In the aggregate for the six months ended March 31, 2002, the adjustments and related tax effects increased previously reported net income by $1.6 million and
increased previously reported basic net income per share by $0.09 from $0.03 per share to $0.12 per share and previously reported diluted net income per share by $0.08 from $0.03 per share to $0.11 per share.
6
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
We also made certain adjustments to the balance sheet as of September
30, 2001 as a result of the restatement. These adjustments are discussed in Note 3 of the Notes to the Consolidated Financial Statements in Item 8 of our amended Annual Report on Form 10-K/A for the year ended September 30, 2001.
The following tables present changes to our statements of operations and statements of cash flows from previously presented
filings to the statements presented in this filing.
Statements of Operations Data
(In thousands, except per share data)
| |
|
Three Months Ended June 30, 2001
|
| |
|
As Previously Reported
|
|
As Restated
|
| Revenue: |
|
|
|
|
|
|
| License |
|
$ |
13,204 |
|
$ |
14,086 |
| Total revenue |
|
|
36,131 |
|
|
37,013 |
| Operating expenses: |
|
|
|
|
|
|
| Cost of license revenue |
|
|
5,884 |
|
|
5,335 |
| Selling and marketing |
|
|
10,458 |
|
|
11,237 |
| Total operating expenses |
|
|
33,508 |
|
|
33,738 |
| Income from operations |
|
|
2,623 |
|
|
3,275 |
| Income before income tax expense |
|
|
2,155 |
|
|
2,807 |
| Income tax expense |
|
|
2,047 |
|
|
2,298 |
| |
|
|
|
|
|
|
| Net income |
|
$ |
108 |
|
$ |
509 |
| |
|
|
|
|
|
|
| Net income per common share (basic) |
|
$ |
0.01 |
|
$ |
0.03 |
| |
|
|
|
|
|
|
| Weighted average number of common shares outstanding (basic) |
|
|
18,248 |
|
|
18,248 |
| |
|
|
|
|
|
|
| Net income per common share (diluted) |
|
$ |
0.01 |
|
$ |
0.03 |
| |
|
|
|
|
|
|
| Weighted average number of common shares and common equivalent shares outstanding (diluted) |
|
|
20,249 |
|
|
20,249 |
| |
|
|
|
|
|
|
| |
|
Nine Months Ended June 30, 2001
|
|
| |
|
As Previously Reported
|
|
As Restated
|
|
| Revenue: |
|
|
|
|
|
|
|
| License |
|
$ |
37,206 |
|
$ |
34,978 |
|
| Total revenue |
|
|
105,167 |
|
|
102,939 |
|
| Operating expenses: |
|
|
|
|
|
|
|
| Cost of license revenue |
|
|
13,954 |
|
|
12,338 |
|
| Selling and marketing |
|
|
30,870 |
|
|
31,547 |
|
| Total operating expenses |
|
|
100,605 |
|
|
99,666 |
|
| Income from operations |
|
|
4,562 |
|
|
3,273 |
|
| Income before income tax expense |
|
|
2,844 |
|
|
1,555 |
|
| Income tax expense |
|
|
2,729 |
|
|
2,233 |
|
| |
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
115 |
|
$ |
(678 |
) |
| |
|
|
|
|
|
|
|
| Net income (loss) per common share (basic) |
|
$ |
0.01 |
|
$ |
(0.04 |
) |
| |
|
|
|
|
|
|
|
| Weighted average number of common shares outstanding (basic) |
|
|
18,199 |
|
|
18,199 |
|
| |
|
|
|
|
|
|
|
| Net income (loss) per common share (diluted) |
|
$ |
0.01 |
|
$ |
(0.04 |
) |
| |
|
|
|
|
|
|
|
| Weighted average number of common shares and common equivalent shares outstanding (diluted) |
|
|
20,197 |
|
|
18,199 |
|
| |
|
|
|
|
|
|
|
7
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Statements of Cash Flow Data
(In thousands)
| |
|
Nine Months Ended June 30, 2001
|
|
| |
|
As Previously Reported
|
|
As Restated
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
115 |
|
$ |
(678 |
) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
| Deferred income taxes |
|
|
3,468 |
|
|
2,972 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
| Deferred royalties |
|
|
334 |
|
|
(1,282 |
) |
| Deferred commissions |
|
|
1,241 |
|
|
1,918 |
|
| Deferred license revenue |
|
|
656 |
|
|
2,883 |
|
We generate revenues primarily by licensing software, providing software support and maintenance and providing professional services to our customers. We record all revenues in accordance with the
guidance provided by Statement of Position, SOP 97-2, “Software Revenue Recognition,” SOP 98-9, “Modification of SOP 97-2, ‘Software Revenue Recognition, with Respect to Certain Transactions,’ “ SOP 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” and AICPA Technical Practice Aid (“TPA”) 5100.53 “Fair Value of PCS in a Short-Term Time-Based License and Software Revenue
Recognition.”
Software Licensing and Support and Maintenance
We generate a significant portion of total revenue from licensing software, which we conduct principally through our global network of
independent affiliates. We license our software products under license agreements, which the ultimate customer typically executes directly with us rather than with the affiliate. Our license agreements are either annual renewable term license
agreements or perpetual license agreements.
We generally license our software products that operate on the IBM
iSeries platform under annual renewable term licenses. When we first license our iSeries product line, we receive both an initial license fee and an annual license fee. Our customers may renew the license for an additional one-year period upon
payment of the annual license fee. We recognize the initial license fees under these annual renewable term licenses as license revenues ratably over the initial license period, which is generally twelve months. Prior to revising our revenue
recognition policy to conform with the TPA 5100.53, we recognized the license fee upon commencement of the license when certain criteria were met. As discussed in Note 2, we have restated our financial statements prospectively from June 1, 2000 to
comply with TPA 5100.53. In addition, payment of the annual license fee entitles the customer to available software support for another year. If the annual license fee is not paid, the customer is no longer entitled to use the software and we may
terminate the agreement. We record this annual license fee as services revenue ratably over the term of the services agreement.
Under our perpetual license agreements, we record both an initial license fee and an annual support fee. We record initial license fees as license revenue and typically recognize revenue when the following criteria are met:
| |
(1) |
|
the signing of a license agreement between us and the ultimate customer; |
| |
(2) |
|
delivery of the software to the customer or to a location designated by the customer; |
| |
(3) |
|
fees are fixed and determinable; and |
| |
(4) |
|
determination that collection of the related receivable is probable. |
8
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The annual support fee, which is typically paid annually in advance,
entitles the customer to receive annual support services, as available. We record these fees as services revenue and recognize this revenue ratably over the term of the annual agreement.
Professional Services
Under
the terms of our license agreements, our customers are responsible for installation and training. In many instances, the affiliates provide our customers with most of the consulting and implementation services relating to our products. During fiscal
2000, we began to provide professional consulting and implementation services to our customers. The professional services that we provide are not essential to the functionality of our delivered products. We provide our professional services under
services agreements, and we charge for them separately under time and materials arrangements or, in some circumstances, under fixed price arrangements. We recognize revenues from time and materials arrangements as the services are performed,
provided that the customer has a contractual obligation to pay, the fee is non-refundable, and collection is probable. Under a fixed price arrangement, we recognize revenue on the basis of the estimated percentage of completion of service provided.
We recognize changes in estimate in the period in which they are determined. We recognize provisions for losses, if any, in the period in which they first become probable and reasonably estimable.
We also offer educational courses and training materials to our customers and affiliates. These consulting and implementation services and
educational courses are included in services revenue, and revenue is recognized when services are provided.
(4) |
|
Computation and Presentation of Net Income (Loss) Per Common Share |
We compute net income (loss) per common share in accordance with Statement of Financial Accounting Standards, or SFAS, No. 128, “Earnings Per Share.” We compute
basic net income (loss) per common share, which excludes dilution, by dividing net income or loss by the weighted average number of common shares outstanding for the period.
To calculate diluted net income (loss) per share, we divide net income (loss) by:
| |
• |
|
the weighted average number of common shares outstanding for the period; plus |
| |
• |
|
the weighted average number of common equivalent shares resulting from the assumed conversion of preferred stock, the assumed exercise of dilutive stock
options, and contingently issuable stock during the period. |
9
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The following table presents the calculations of basic and diluted net income (loss) per common share (in
thousands, except per share data):
| |
|
Three Months Ended June
30,
|
|
Nine Months Ended June
30,
|
|
| |
|
2002
|
|
|
2001
|
|
2002
|
|
|
2001
|
|
| |
|
|
|
|
(As restated; See Note 2) |
|
|
|
|
(As restated; See Note 2) |
|
| Income (loss) before extraordinary item |
|
$ |
7,833 |
|
|
$ |
509 |
|
$ |
10,022 |
|
|
$ |
(678 |
) |
| Extraordinary loss on early extinguishments of debt, net of income tax benefit |
|
|
(318 |
) |
|
|
— |
|
|
(318 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
7,515 |
|
|
$ |
509 |
|
$ |
9,704 |
|
|
|
(678 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average common shares outstanding |
|
|
18,356 |
|
|
|
18,248 |
|
|
18,343 |
|
|
|
18,199 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before extraordinary item |
|
$ |
0.43 |
|
|
$ |
0.03 |
|
$ |
0.55 |
|
|
$ |
(0.04 |
) |
| Extraordinary loss on early extinguishments of debt, net of income tax benefit |
|
|
(0.02 |
) |
|
|
— |
|
|
(0.02 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
0.41 |
|
|
$ |
0.03 |
|
$ |
0.53 |
|
|
$ |
(0.04 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average common shares outstanding |
|
|
18,356 |
|
|
|
18,248 |
|
|
18,343 |
|
|
|
18,199 |
|
| Common share equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Convertible preferred stock |
|
|
1,750 |
|
|
|
1,750 |
|
|
1,750 |
|
|
|
— |
|
| Common stock options |
|
|
364 |
|
|
|
141 |
|
|
325 |
|
|
|
— |
|
| Contingently issuable stock |
|
|
126 |
|
|
|
110 |
|
|
126 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average common shares and common equivalent shares outstanding |
|
|
20,596 |
|
|
|
20,249 |
|
|
20,544 |
|
|
|
18,199 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before extraordinary item |
|
$ |
0.38 |
|
|
$ |
0.03 |
|
$ |
0.49 |
|
|
$ |
(0.04 |
) |
| Extraordinary loss on early extinguishments of debt, net of income tax benefit |
|
|
(0.02 |
) |
|
|
— |
|
|
(0.02 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
0.36 |
|
|
$ |
0.03 |
|
$ |
0.47 |
|
|
$ |
(0.04 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because their inclusion would have an antidilutive effect on net
income (loss) per common share, we excluded the average number of common share equivalents listed below from the computation of diluted net income (loss) per share for the nine months ended June 30, 2001:
| |
|
Nine Months Ended June
30,
|
| |
|
2001
|
| Common share equivalents: |
|
|
| Convertible preferred stock |
|
1,750 |
| Common stock options |
|
138 |
| Contingently issuable stock |
|
110 |
| |
|
|
| Total |
|
1,998 |
| |
|
|
10
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
(5) |
|
Comprehensive Income (Loss) |
The components of comprehensive income (loss) were as follows (in thousands):
| |
|
Three Months Ended June
30,
|
|
|
Nine Months Ended June
30,
|
|
| |
|
2002
|
|
2001
|
|
|
2002
|
|
2001
|
|
| |
|
|
|
(As restated; See Note 2) |
|
|
|
|
(As restated; See Note 2) |
|
| Net income (loss) |
|
$ |
7,515 |
|
$ |
509 |
|
|
$ |
9,704 |
|
$ |
(678 |
) |
| Other comprehensive loss, net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign currency translation |
|
|
53 |
|
|
(56 |
) |
|
|
64 |
|
|
(115 |
) |
| Interest rate hedge |
|
|
— |
|
|
18 |
|
|
|
— |
|
|
(95 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income (loss) |
|
$ |
7,568 |
|
$ |
471 |
|
|
$ |
9,768 |
|
$ |
(888 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
Goodwill and Other Intangible Assets |
We adopted SFAS 142, “Goodwill and Other Intangible Assets” on October 1, 2001. Accordingly, we discontinued periodic amortization of goodwill. Goodwill will be assessed annually for
impairment by applying a fair-value-based test. Additionally, the standard requires a transitional impairment test during the period of adoption. Based on the transitional impairment test completed on March 31, 2002, we did not record an impairment
charge for goodwill as of that date. For additional information regarding SFAS No. 142 and its effect on us, see Note 12.
During the three months and nine months ended June 30, 2001, we recorded $2.3 million and $7.0 million in amortization of goodwill. The impact of amortization of goodwill on net income for the three months and nine months ended June
30, 2001 was as follows (in thousands, except per share data):
| |
|
Three Months Ended June 30, 2001
|
|
Nine Months Ended June 30, 2001
|
|
| |
|
(As restated; See Note
2) |
|
(As restated; See Note
2) |
|
| Reported net income (loss) |
|
$ |
509 |
|
$ |
(678 |
) |
| Add back: |
|
|
|
|
|
|
|
| Goodwill amortization, net of income taxes |
|
|
2,518 |
|
|
5,910 |
|
| |
|
|
|
|
|
|
|
| Net income excluding goodwill amortization, net of income taxes |
|
$ |
3,027 |
|
$ |
5,232 |
|
| |
|
|
|
|
|
|
|
| Basic net income (loss) per common share: |
|
|
|
|
|
|
|
| Reported net income (loss) |
|
$ |
0.03 |
|
$ |
(0.04 |
) |
| Add back: |
|
|
|
|
|
|
|
| Goodwill amortization, net of income taxes |
|
|
0.14 |
|
|
0.32 |
|
| |
|
|
|
|
|
|
|
| Net income excluding goodwill amortization, net of income taxes |
|
$ |
0.17 |
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
| Weighted average number of common shares outstanding (basic) |
|
|
18,248 |
|
|
18,199 |
|
| |
|
|
|
|
|
|
|
| Diluted net income (loss) per common share: |
|
|
|
|
|
|
|
| Reported net income (loss) |
|
$ |
0.03 |
|
$ |
(0.04 |
) |
| Add back: |
|
|
|
|
|
|
|
| Goodwill amortization, net of income taxes |
|
|
0.12 |
|
|
0.30 |
|
| |
|
|
|
|
|
|
|
| Net income excluding goodwill amortization, net of income taxes |
|
$ |
0.15 |
|
$ |
0.26 |
|
| |
|
|
|
|
|
|
|
| Weighted average number of common shares outstanding (diluted) |
|
|
20,249 |
|
|
20,197 |
|
| |
|
|
|
|
|
|
|
11
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
Intangible assets, other than goodwill, that have finite useful lives
will continue to be amortized over their estimated useful lives. Our intangible assets consist principally of tradenames, trademarks, and installed customer base and affiliate network, and all are considered to have finite lives. The gross carrying
amount of intangible assets as of June 30, 2002 was $8.8 million with a balance of $5.2 million in accumulated amortization. The amortization of intangible assets for the three months and nine months ended June 30, 2002 was $190,000 and $570,000.
Amortized Intangible Assets (in thousands):
| |
|
As of June 30, 2002
|
| |
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
| Installed customer base and affiliate network |
|
$7,934 |
|
$4,433 |
| Tradenames and trademarks |
|
856 |
|
799 |
| |
|
|
|
|
| Total |
|
$8,790 |
|
$5,232 |
| |
|
|
|
|
The weighted average amortization lives of the installed customer
base and affiliate network and of the tradenames and trademarks is 13 years and 10 years, respectively.
Aggregate Amortization Expense (in thousands):
| |
|
Three Months Ended June 30,
2002
|
|
Nine Months Ended
June 30, 2002
|
| Aggregate amortization expense |
|
$190 |
|
$570 |
| Estimated Amortization Expense for the Fiscal Years Ended (in thousands): |
|
|
| September 30, 2002 |
|
$759 |
| September 30, 2003 |
|
$709 |
| September 30, 2004 |
|
$673 |
| September 30, 2005 |
|
$673 |
| September 30, 2006 |
|
$673 |
In March 2002, certain tax liabilities, deferred tax assets, and
net operating losses from the acquisition of Pivotpoint were adjusted to reflect current estimates based on the settlement of an IRS exam, and pursuant to SFAS No. 109, “Accounting for Income Taxes,” goodwill was adjusted downward by
$678,000 as of March 31, 2002. At June 30, 2002, the remaining balance of goodwill and accumulated amortization was $3.7 million.
| Changes in Goodwill for the Nine Months Ended June 30, 2002: |
|
|
|
| Balance as of September 30, 2001 |
|
$4,367 |
|
| |
| Change in estimate of pre-acquisition Pivotpoint income tax liabilities |
|
(678 |
) |
| |
|
|
|
| |
| Balance as of June 30, 2002 |
|
$3,689 |
|
| |
|
|
|
The reported income tax benefit for the three months and nine months ended June 30, 2002 differs from the expected income tax expense (benefit) calculated by applying the federal
statutory rate to our income before income tax expense (benefit) and extraordinary item principally due to a $5.0 million benefit that we recorded during the quarter. This tax benefit resulted from changes in income taxes payable during the quarter
due to the resolution of federal income tax uncertainties related to tax net operating losses (NOLs) retained by MAPICS in connection with our 1997 spin off from Marcam Corporation. Accordingly, we recorded this income tax benefit and recorded a
corresponding decrease in income taxes payable. We still retain additional uncertain favorable income tax attributes in
12
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
connection with the 1997 separation of Marcam Corporation into two companies and additional income tax benefits related to these tax attributes may be realized in future periods if and when they
become certain.
Additionally, the impact of state and foreign income taxes and the second quarter adjustment of
goodwill of Pivotpoint created differences from the expected income tax expense (benefit) calculated by applying the federal statutory rate to our income before income tax expense (benefit) and extraordinary item. See Note 6 for further discussion
of the adjustment to goodwill.
(8) |
|
Long-Term Debt and Revolving Credit Facility |
On April 2, 2002, we repaid $2.8 million in principal of our term loan under our previous bank credit facility, reducing the outstanding balance to $8.4 million. On April
26, 2002, we entered into a new secured revolving credit facility which provides for a revolving credit line of up to $10.0 million. On that date, we borrowed $8.4 million under the new revolving credit facility to repay the remaining balance of the
term loan under our previous bank credit facility and we terminated the previous bank credit facility. We repaid an additional $4.4 million of the outstanding balance under our new bank credit facility during the three months ended June 30, 2002. As
of June 30, 2002, we had a balance of $4.0 million outstanding the revolving credit facility. On July 15, 2002, we repaid an additional $2.0 million on our note payable, leaving an outstanding balance of $2.0 million.
Our new revolving credit facility matures on April 24, 2003 and may be extended for an additional 364-day term at our request and at the
discretion of the bank. We may make voluntary prepayments of the revolving loans without premium or penalty, and all outstanding unpaid principal on the revolving loans will mature on April 24, 2003 but may be extended if the credit facility is
extended. At our option, the interest rates for the revolving credit facility are either adjusted LIBOR plus 2.50% per year or the defined base rate plus 1.00% per year. The base rate is the higher of the defined prime rate or the federal funds rate
plus one-half of one percent.
Substantially all of our domestic assets are pledged as collateral for any
obligations under the new revolving credit facility. The revolving credit facility contains covenants which, among other things, require us to maintain specific financial ratios and impose limitations or prohibitions on us with respect to:
| |
• |
|
incurrence of additional indebtedness outside the facility, liens and capital leases; |
| |
• |
|
the payment of dividends on and the redemption or repurchase of our capital stock; |
| |
• |
|
acquisitions and investments; |
| |
• |
|
mergers and consolidations; and |
| |
• |
|
the disposition of any of our properties or assets outside the ordinary course of business. |
(9) |
|
Early Extinguishment of Debt |
On April 26, 2002, we used our new secured revolving credit facility to repay the outstanding balance of $8.4 million under our original bank credit facility. See Note 8 for further discussion of our
revolving credit facility. At the time of refinancing, the balance of the unamortized debt issuance costs relating to our original term loan was $491,000. We wrote down the remaining balance of debt issuance costs, net of income tax benefit of
$173,000, and classified the write-down as an extraordinary item in our statement of operations for the three months and nine months ended June 30, 2002 in accordance with SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections.”
(10) |
|
Acquisition Costs, Restructuring Costs and Other Items |
Restructuring Costs and Other Items
On January 15, 2002, we announced a five-year agreement with an offshore information technology services company to perform a variety of our ongoing product development activities. The agreement was a contributing factor in a planned
reduction of our worldwide workforce by approximately 12% by June 30, 2002. We recorded a restructuring charge of $4.7 million during the nine months ended June 30, 2002. The restructuring costs included $3.7 million related to the abandonment of
excess office space and
13
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
$1.0 million related to employee severance and related costs for approximately 65 employees, primarily product development and support personnel.
The major components of the restructuring costs and the remaining restructuring accrual at June 30, 2002 were as follows (in thousands):
| |
|
Accrued Restructuring Costs at September 30, 2001
|
|
Restructuring Costs
|
|
Amounts Utilized
|
|
|
Accrued Restructuring Costs at
June 30, 2002
|
| Cost of abandonment of excess space and other |
|
$433 |
|
$3,681 |
|
$ |
(369 |
) |
|
$3,745 |
| Employee severance and related costs |
|
— |
|
1,026 |
|
|
(969 |
) |
|
57 |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
$433 |
|
$4,707 |
|
$ |
(1,338 |
) |
|
$3,802 |
| |
|
|
|
|
|
|
|
|
|
|
We expect future cash expenditures related to these restructuring
activities to be approximately $3.8 million. We will pay approximately $1.4 million within the twelve month period ending June 30, 2003 and we therefore have included this amount in current liabilities.
Additionally, we closed our acquisition of Pivotpoint on January 12, 2000 for $48 million in cash. In connection with the purchase of
Pivotpoint, a portion of the cash proceeds was put into escrow to cover any breach of warranties or representations contained in the Purchase Agreement or any additional undisclosed post-closing liabilities. In December 2000, we presented a claim
against the escrow for the release of funds to cover certain liabilities not disclosed in the closing balance sheet. During the allocation period, we did not adjust the purchase price to reflect these escrow refund claims because the ultimate
recovery of any escrow funds was neither probable nor could the amount to be recovered be reasonably estimated. In March 2002, we entered into a settlement agreement with the seller regarding the amount of the claim, and in April 2002, we received
approximately $1.3 million in cash for the settlement. Pursuant to SFAS No. 141, “Business Combinations,” $1.0 million of the settlement was related to pre-acquisition contingencies other than income taxes and is included as a reduction to
restructuring costs and other items in the statement of operations for the nine months ended June 30, 2002. The settlement also included a receipt of $204,000 relating to pre-acquisition tax liabilities from the former shareholders of Pivotpoint.
This portion of the settlement was recorded as a reduction of outstanding tax liabilities as of March 31, 2002 from the original purchase accounting allocation. The remaining $50,000 of the settlement was recorded as a liability for expenses
incurred in relation to the settlement.
Acquisition Costs
During the three months ended June 30, 2001, we recorded a net recovery of acquisition costs of $2.0 million as a result of a settlement
agreement with a third party in May 2001 resolving a dispute regarding payment for certain proprietary software and documentation to be re-licensed by us. Under the terms of the settlement, the third party paid us $2.2 million for the software and
related costs that we previously charged as a part of the acquisition costs in fiscal 2000. The settlement was partially reduced by $219,000 of accrued liabilities relating to this software product.
(11) Operating Segments and Geographic Information
We have one operating segment that provides software and services to manufacturing enterprises worldwide. Our principal administrative, marketing, product development and
support operations are located in the United States. Areas of operation outside of North America include Europe, Middle East and Africa, or EMEA, and Latin America and Asia Pacific, or LAAP.
We regularly prepare and evaluate separate financial information for each of our principal geographic areas, including 1) North America, 2) EMEA and 3) LAAP. In evaluating
financial performance, we focus on operating profit as a measure of a geographic area’s profit or loss. Operating profit for this purpose is income before interest, taxes and allocation of some corporate expenses. We include our corporate
division in the presentation of reportable segment information because some of the revenue and expenses of this division are not allocated separately to the operating segments.
14
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
The following table provides interim financial information for the
three months and nine months ended June 30, 2002 and 2001 related to our geographic areas. The information presented below may not be indicative of results if the geographic areas were independent organizations (in thousands).
| |
|
North America
|
|
EMEA
|
|
LAAP
|
|
|
Corporate
|
|
|
Total
|
|
| Three Months Ended June 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues from unaffiliated customers |
|
$ |
24,041 |
|
$ |
5,131 |
|
$ |
2,085 |
|
|
$ |
— |
|
|
$ |
31,257 |
|
| |
| Income (loss) from operations |
|
|
4,797 |
|
|
1,045 |
|
|
480 |
|
|
|
(1,984 |
) |
|
|
4,338 |
|
| Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134 |
|
| Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss before income tax benefit and extraordinary item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,321 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Three Months Ended June 30, 2001 (As restated): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues from unaffiliated customers |
|
$ |
29,050 |
|
$ |
5,843 |
|
$ |
2,120 |
|
|
$ |
— |
|
|
$ |
37,013 |
|
| |
| Income (loss) from operations |
|
|
6,247 |
|
|
1,352 |
|
|
(132 |
) |
|
|
(4,192 |
) |
|
|
3,275 |
|
| Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
| Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(671 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income tax expense and extraordinary item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,807 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
North America
|
|
EMEA
|
|
LAAP
|
|
|
Corporate
|
|
|
Total
|
|
| Nine Months Ended June 30, 2002: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues from unaffiliated customers |
|
$ |
74,168 |
|
$ |
17,054 |
|
$ |
6,535 |
|
|
$ |
— |
|
|
$ |
97,757 |
|
| |
| Income (loss) from operations |
|
|
13,535 |
|
|
3,800 |
|
|
393 |
|
|
|
(9,300 |
) |
|
|
8,428 |
|
| Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
388 |
|
| Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(989 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income tax expense and extraordinary item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,827 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Nine Months Ended June 30, 2001 (As restated): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues from unaffiliated customers |
|
$ |
79,644 |
|
$ |
17,077 |
|
$ |
6,218 |
|
|
$ |
— |
|
|
$ |
102,939 |
|
| Income (loss) from operations |
|
|
13,404 |
|
|
3,170 |
|
|
(476 |
) |
|
|
(12,825 |
) |
|
|
3,273 |
|
| Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
612 |
|
| Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,330 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before income tax expense and extraordinary item |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,555 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12) |
|
Recently Issued or Adopted Accounting Pronouncements |
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which changes financial accounting and reporting for acquired goodwill and
other intangible assets. Upon adoption, goodwill will no longer be subject to periodic amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test.
All other acquired intangibles will be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, or exchanged, regardless of our
intent to do so. Other intangibles will be amortized over their useful lives.
15
MAPICS, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)—(Continued)
We adopted SFAS No. 142 on October 1, 2001. We expect the following
significant impacts:
| |
· |
|
The balance of goodwill was $4.4 million at October 1, 2001. As we have discontinued amortizing goodwill as of October 1, 2001, we will have approximately $1.5
million less in amortization of goodwill in fiscal 2002 than if we had not adopted SFAS No. 142. |
| |
· |
|
We were required to perform a transitional impairment test. This impairment test required us to (1) identify individual reporting units, if any, (2) determine
the carrying value of any reporting units by assigning assets and liabilities, including existing goodwill and intangible assets, to those reporting units, and (3) determine the fair value of any reporting units. If the carrying value of any
reporting unit or the Company exceeded its fair value, then the amount of any goodwill impairment would be determined through a fair value analysis of each of the assigned assets (excluding goodwill) and liabilities. We were required to complete the
transitional impairment test by March 31, 2002. Based on the results of the test, we did not record an impairment for goodwill as of that date. |
| |
· |
|
Our goodwill balances will be subject to annual impairment tests using the same process described above. If any impairment is indicated as a result of the
annual test, we will record an impairment loss as part of income from operations. |
In August
2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset
retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its present value each period while the cost is depreciated over its useful life. SFAS No. 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. We have determined that SFAS No. 143 will not have a material impact on our financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144, which replaces SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell. SFAS No. 144 also broadens
disposal transaction reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. We have adopted SFAS No. 144 as of October 1, 2001 with no material
impact on our financial position, results of operations or cash flows.
In January 2002, the Emerging Issues Task
Force (“EITF”) issued EITF 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.” The EITF concluded that reimbursements for out of pocket expenses incurred should
be included in the income statement. The EITF is effective for financial reporting periods beginning after December 15, 2001 but early adoption of the provisions of this issue is permitted. We have adopted EITF 01-14 as of April 1, 2002 with no
material impact on our financial position, results of operations or cash flows. Amounts from prior year periods were deemed immaterial for reclassification.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds SFAS No.
4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64 “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds SFAS No. 44,
“Accounting for Intangible Assets of Motor Carriers.” This Statement amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. We have adopted SFAS No. 145 as it relates to the rescission of SFAS No. 4 and our classification of the write-off of debt issue costs relating to our term loan, which we refinanced to a
revolving credit facility in April 2002. See Note 9 for further discussion of our write-off of debt issue costs.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
16
(including Certain Costs Incurred in a Restructuring).” This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially
at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. We will apply SFAS No. 146 to any exit or disposal activities
that we may enter into in future periods.
(13) Stock Repurchase Plan
On July 31, 2002, we announced that our Board of Directors authorized up to $10 million for the repurchase of our outstanding common
shares. On July 31, 2002, we had 18.4 million common shares outstanding.
17
You should read the following discussion and analysis in conjunction with the condensed consolidated financial statements and notes contained in “Item 1. Financial Statements” in Part I of
this report and our consolidated financial statements for the fiscal year ended September 30, 2001 filed with the SEC as part of our Form 10-K/A report for that fiscal year. This discussion contains forward-looking statements relating to our future
financial performance, business strategy, financing plans and other future events that involve uncertainties and risks. Our actual results could differ materially from the results anticipated by these forward-looking statements as a result of many
known and unknown factors, including but not limited to those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Future Performance”
contained in the above-referenced Form 10-K/A. The cautionary statements made in that Form 10-K/A are applicable to all related
forward-looking statements wherever they appear in this report. We undertake no obligation to publicly update or
revise any forward-looking statements except as required by the law.
In January 2002, the SEC recommended
that public companies enhance their disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations with regard to liquidity, special purpose entities and other off-balance sheet arrangements, contractual
obligations and commercial commitments, energy and other commodity contracts, and related party and other transactions conducted on other than on an arm’s length basis. In February 2002, the SEC recommended that public companies address in
MD&A the accounting estimates and judgments about highly uncertain matters that have a material impact on the financial statement presentation of a company’s financial condition and results of operations. We have included these suggested
disclosures within the MD&A and the related financial statements in this report. Our inclusion with these disclosure requirements did not have any impact on our financial statements.
Results of Operations
We are a global developer
of extended enterprise applications, or EEA, that focuses on manufacturing establishments in discrete and batch-process industries. Our solutions enable mid-market manufacturers around the world to compete better by streamlining their business
processes, maximizing their organizational resources, and extending their enterprises beyond the four walls of their factory for secure collaboration with their value chain partners.
Our flagship solutions include two powerful enterprise resource planning foundations that streamline business processes for manufacturing, customer service, engineering,
supply chain planning and financial reporting. The solutions support international and multi-site operations on a variety of platforms, including the IBM eServer iSeries 400, Windows NT, UNIX and Linux. We also offer supply chain management,
collaborative commerce and enterprise asset management systems and functionality designed to enable companies to link members of their supply chain to send and receive valuable real-time information to improve business
decision-making at all
levels.
We generate a significant portion of our total revenue from licensing software, which is conducted
principally through our global network of independent affiliates. The affiliates provide the principal channel through which we license our software. However, the ultimate customer typically executes a license agreement directly with us rather than
the affiliate. We currently offer software products under an annual renewable term license or a perpetual license depending on the type of product purchased. Under our annual renewable term license, the customer pays an initial license fee and an
annual license fee for the right to use the software over the initial license period, typically twelve months. Our customers may renew the license for additional one-year periods upon payment of the annual license fee in subsequent years. The annual
renewable term license agreements are executed in most cases with the purchase of our IBM iSeries platform products. Under a perpetual license, our customer pays an initial license fee for the right to the software.
When we first license our iSeries product line, we receive both an initial license fee and an annual license fee. We recognize the initial
license fee as license revenue ratably over the initial license period, which is generally twelve months. In addition, customers must pay an annual license fee, which entitles the customer to continuing use of the software and customer support
services as available. We record these fees as services revenue and recognize this revenue ratably over twelve months. If a customer does not pay its annual license fee the following year, it is no longer entitled to use our software and we may
terminate the agreement. We believe this licensing arrangement provides a source of recurring revenue from our installed base of iSeries customers and enables our customers to take advantage of new releases and enhancements of our software.
Additional software products or applications are not included as part of the annual license fee and are available for an additional initial and annual license fee.
18
With regards to our other software products, we license them on a perpetual
basis. Customers must pay an initial license fee and an annual support fee in the first year. We record initial license fees for perpetual licenses as license revenue and typically recognize them upon delivery of the software to the ultimate
customer, provided collection is probable. The annual support fee entitles the customer to receive annual support services, as available. We record these fees as services revenue and recognize this revenue ratably over the term of the periodic
agreement.
As discussed in Item 8 of our amended Annual Report on Form 10-K/A for the year ended September 30,
2001 in Note 3 of the Notes to Consolidated Financial Statements, we have restated our financial statements prospectively from June 1, 2000 to comply with TPA 5100.53, “Fair Value of PCS in a Short-Term Time-Based License and Software Revenue
Recognition.” See also Note 2 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The discussion in this “Management’s Discussion and Analysis” section is of our financial statements
restated as described above.
For the three months and nine months ended June 30, 2001, we have presented
amortization of goodwill related to two acquisitions in fiscal 2000 in a separate line item in the statement of operations. We have included amortization of acquired technology and other intangible assets in cost of license revenue in both periods
presented. As further explained under “Recently Issued or Adopted Accounting Pronouncements” below, we have adopted Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets,” as of
October 1, 2001, and consequently we did not record amortization of goodwill for the three months and nine months ended June 30, 2002.
On January 15, 2002, we announced a five-year agreement with an offshore information technology services company to perform a variety of our ongoing product development activities. We expect the relationship will increase
our flexibility by allowing us to staff projects with qualified resources as project needs demand, decrease the cost of meeting our development and support goals, and maintain the high standards of quality and services that we currently provide. The
implementation of this strategy resulted in a planned reduction of our worldwide workforce of approximately 12% by June 30, 2002. As of June 30, 2002, we had completed the planned reduction of our worldwide workforce. The development partner we
chose is a large, international firm with experience in working with software companies. However, managing software development projects remotely can be difficult and may result in delays or cost overruns, and we may be exposed to greater
operational, international, political and economic risks under the offshore agreement.
Three Months and Nine Months Ended
June 30, 2002 Compared to Three Months and Nine Months Ended June 30, 2001
Summary. For the three
months ended June 30, 2002, we reported net income of $7.5 million, or $0.36 per share (diluted), compared to $509,000, or $0.03 per share (diluted) for the three months ended June 30, 2001. Excluding amortization of goodwill, restructuring charge
and other items, adjusted net income for the three months ended June 30, 2002 was $2.7 million, or $0.13 per share (diluted), compared to $2.8 million, or $0.14 per share, for the three months ended June 30, 2001.
We reported net income of $9.7 million, or $0.47 per share (diluted), for the nine months ended June 30, 2002 compared to a net loss of
$678,000, or $0.04 per share (diluted), for the year earlier period. Excluding amortization of goodwill, restructuring charge and other items, adjusted net income for the nine months ended June 30, 2002 was $7.2 million, or $0.35 per share
(diluted), compared to adjusted net income of $5.0 million, or $0.25 per share (diluted), for the nine months ended June 30, 2001.
19
The following table is a reconciliation of our adjusted net income to our net
income under generally accepted accounting principles for the three months and nine months ended June 30, 2002 and 2001 (in thousands):
| |
|
Three Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
| |
|
(As restated) |
|
| Net income before income tax expense |
|
$ |
4,321 |
|
|
$ |
2,807 |
|
| Add Back: |
|
|
|
|
|
|
|
|
| Amortization of goodwill |
|
|
— |
|
|
|
2,341 |
|
| Acquisition costs |
|
|
— |
|
|
|
(1,981 |
) |
| Write-off of software development costs (included in cost of license) |
|
|
— |
|
|
|
1,551 |
|
| |
|
|
|
|
|
|
|
|
| Adjusted net income before income tax expense |
|
|
4,321 |
|
|
$ |
4,718 |
|
| Income tax expense |
|
|
1,579 |
|
|
|
1,942 |
|
| |
|
|
|
|
|
|
|
|
| Effective income tax rate |
|
|
36.5 |
% |
|
|
41.2 |
% |
| Adjusted net income |
|
$ |
2,742 |
|
|
$ |
2,776 |
|
| |
|
|
|
|
|
|
|
|
| Adjusted net income per common share (diluted) |
|
$ |
0.13 |
|
|
$ |
0.14 |
|
| |
|
|
|
|
|
|
|
|
| |
| Weighted average number of common shares outstanding (diluted) |
|
|
20,596 |
|
|
|
20,249 |
|
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
| |
|
(As restated) |
|
| Net income before income tax expense |
|
$ |
7,827 |
|
|
$ |
1,555 |
|
| Add Back: |
|
|
|
|
|
|
|
|
| Amortization of goodwill |
|
|
— |
|
|
|
7,022 |
|
| Acquisition costs |
|
|
— |
|
|
|
(1,981 |
) |
| Restructuring costs and other items |
|
|
3,707 |
|
|
|
— |
|
| Write-off of software development costs (included in cost of license) |
|
|
— |
|
|
|
1,551 |
|
| |
|
|
|
|
|
|
|
|
| Adjusted net income (loss) before income tax expense (benefit) |
|
|
11,534 |
|
|
$ |
8,147 |
|
| Income tax expense |
|
|
4,356 |
|
|
|
3,176 |
|
| |
|
|
|
|
|
|
|
|
| Effective income tax rate |
|
|
37.8 |
% |
|
|
39.0 |
% |
| Adjusted net income |
|
$ |
7,178 |
|
|
$ |
4,971 |
|
| |
|
|
|
|
|
|
|
|
| Adjusted net income per common share (diluted) |
|
$ |
0.35 |
|
|
$ |
0.25 |
|
| |
|
|
|
|
|
|
|
|
| |
| Weighted average number of common shares outstanding (diluted) |
|
|
20,544 |
|
|
|
20,197 |
|
| |
|
|
|
|
|
|
|
|
20
The following table presents our statements of operations data as a percentage of
total revenue for the three months and nine months ended June 30, 2002 and 2001:
| |
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| |
|
|
|
|
(As restated) |
|
|
|
|
|
(As restated) |
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| License |
|
30.2 |
% |
|
38.1 |
% |
|
31.7 |
% |
|
34.0 |
% |
| Services |
|
69.8 |
|
|
61.9 |
|
|
68.3 |
|
|
66.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
100.0 |
|
|
100.0 |
|
|
100.0 |
|
|
100.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of license revenue |
|
12.0 |
|
|
14.4 |
|
|
11.4 |
|
|
12.0 |
|
| Cost of services revenue |
|
25.4 |
|
|
24.8 |
|
|
25.7 |
|
|
25.8 |
|
| Selling and marketing |
|
29.3 |
|
|
30.4 |
|
|
26.4 |
|
|
30.6 |
|
| Product development |
|
10.1 |
|
|
11.3 |
|
|
12.7 |
|
|
13.1 |
|
| General and administrative |
|
9.3 |
|
|
9.3 |
|
|
11.3 |
|
|
10.4 |
|
| Amortization of goodwill |
|
0.0 |
|
|
6.3 |
|
|
0.0 |
|
|
6.8 |
|
| Restructuring charge and other items |
|
0.0 |
|
|
(5.4 |
) |
|
3.8 |
|
|
(1.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
86.1 |
|
|
91.1 |
|
|
91.3 |
|
|
96.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) from operations |
|
13.9 |
|
|
8.9 |
|
|
8.7 |
|
|
3.2 |
|
| Interest income |
|
0.4 |
|
|
0.5 |
|
|
0.4 |
|
|
0.6 |
|
| Interest expense |
|
(0.5 |
) |
|
(1.8 |
) |
|
(1.0 |
) |
|
(2.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before income tax expense (benefit) and extraordinary item |
|
13.8 |
|
|
7.6 |
|
|
8.1 |
|
|
1.5 |
|
| Income tax expense (benefit) |
|
(11.2 |
) |
|
6.2 |
|
|
(2.2 |
) |
|
2.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before extraordinary item |
|
25.0 |
|
|
1.4 |
|
|
10.3 |
|
|
(0.7 |
) |
| Loss on debt extinguishments, net of income tax benefit |
|
(1.0 |
) |
|
0.0 |
|
|
(0.3 |
) |
|
0.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
24.0 |
% |
|
1.4 |
% |
|
10.0 |
% |
|
(0.7 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Total revenue for the three months ended June 30,
2002 was $31.3 million, a decrease of 16% or $5.7 million from total revenue of $37.0 million for the three months ended June 30, 2001. Total revenue for the nine months ended June 30, 2002 was $97.8 million compared to total revenue of $102.9
million for the nine months ended June 30, 2001, a decrease of $5.2 million or 5%. As stated in Note 2 of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, reported revenues were restated to recognize
initial license fees for certain contracts ratably over the term of the initial license rather than upon delivery of the software. The decrease in total revenue in both the three months and nine months ended June 30, 2002 was primarily due to a
decrease in license revenue as a result of lower licensing volume over the preceding twelve months as compared to the comparable periods of fiscal 2001. We believe the decreased licensing activity is attributable to a continued slow down in the
growth of the enterprise applications market and the economic recession, particularly as it is affecting the manufacturing sector. Many customers and prospects have delayed purchases or implementations, some indefinitely. The growth in the market
for enterprise software, the economic recession, and uncertainty and delays on purchased from our customers may continue to adversely impact licensing activity and revenue as well as services revenue.
License revenue for the three months ended June 30, 2002 was $9.4 million, a decrease of $4.6 million or 33% from the year earlier period.
License revenue for the nine months ended June 30, 2002 was $31.0 million, a decrease of $4.0 million or 11% from the nine months ended June 30, 2001. During the three months and nine months ended June 30, 2002, our license revenue included license
revenue from time-based license contracts of $7.4 million and $24.2 million, respectively, recognized ratably with the remainder recorded from license revenue recognized upon shipment under our perpetual licenses. In comparison, during the three and
nine months ended June 30, 2001, our license revenue included license revenue from time-based license contracts of $10.8 million and $25.9 million, respectively, with the remainder recorded from license revenue under our perpetual licenses.
Services revenue for the three months ended June 30, 2002 was $21.8 million compared to $22.9 million for the
three months ended June 30, 2001, a decrease of $1.1 million or 5%. Services revenue for the nine months ended June 30, 2002 was $66.8 million compared to $68.0 million for the year earlier period, a decrease of $1.2 million or 2%. The decrease for
both the three months and
21
nine months ended June 30, 2002 was primarily due to lower revenue from our professional services organization as a result of the decrease in new license contracts, which results in fewer
implementations of our software.
Our operations are conducted principally in (1) North America, (2) the Europe,
Middle East and Africa region, or EMEA, and (3) the Latin America and the Asia Pacific regions, or LAAP. The following table shows the percentage of license revenue, services revenue, and total revenue contributed by each of our primary geographic
markets for the three months ended June 30, 2002 and 2001:
| |
|
License Revenue
|
|
|
Services Revenue
|
|
|
Total Revenue
|
|
| |
|
Three Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| |
|
|
|
|
(As restated) |
|
|
|
|
|
(As restated) |
|
|
|
|
|
(As restated) |
|
| North America |
|
69.6 |
% |
|
75.9 |
% |
|
80.1 |
% |
|
80.0 |
% |
|
76.9 |
% |
|
78.5 |
% |
| EMEA |
|
20.1 |
% |
|
16.0 |
|
|
14.8 |
|
|
15.7 |
|
|
16.4 |
|
|
15.8 |
|
| LAAP |
|
10.3 |
% |
|
8.1 |
|
|
5.1 |
|
|
4.3 |
|
|
6.7 |
|
|
5.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the percentage of license revenue,
services revenue and total revenue contributed by each of our primary geographic areas for the nine months ended June 30, 2002 and 2001:
| |
|
License Revenue
|
|
|
Services Revenue
|
|
|
Total Revenue
|
|
| |
|
Nine Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| |
|
|
|
|
(As
restated) |
|
|
|
|
|
(As restated) |
|
|
|
|
|
(As restated) |
|
| North America |
|
66.8 |
% |
|
74.2 |
% |
|
80.0 |
% |
|
79.0 |
% |
|
75.8 |
% |
|
77.4 |
% |
| EMEA |
|
23.5 |
|
|
17.4 |
|
|
14.6 |
|
|
16.2 |
|
|
17.4 |
|
|
16.6 |
|
| LAAP |
|
9.7 |
|
|
8.4 |
|
|
5.4 |
|
|
4.8 |
|
|
6.8 |
|
|
6.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information about our operations in these geographic
areas is presented in Note 11 of the notes to our condensed consolidated financial statements contained in “Item 1. Financial Statements” in Part I of this report.
Cost of License Revenue. Cost of license revenue for the three months ended June 30, 2002 was $3.7 million compared to $5.3 million for the three months ended June
30, 2001, a decrease of $1.6 million or 30%. For the nine months ended June 30, 2002, cost of license revenue decreased $1.2 million or 10% from $12.3 million in the prior year to $11.1 million. During the three months and nine months ended June 30,
2001, we recorded a non-cash write-down of $1.6 million of capitalized software development costs related to the translation of earlier versions of our software, which we discontinued to market. Excluding the aforementioned write-down, cost of
license revenue remained relatively flat for the three months and nine months ended June 30, 2002 compared to the year earlier periods. For the three months ended June 30, 2002, product royalty expense and amortization of capitalized software
remained constant in comparison to the prior year period despite the decline in license revenue over the period. This is not unusual because our cost of license revenue will vary from period to period based on the mix of products licensed between
internally developed products and royalty bearing products and the timing of computer software amortization. For the nine months ended June 30, 2002 cost of license revenue included an increase in product royalty expense offset by a decrease in
amortization of capitalized software. We believe that our offshore development agreement and the associated restructuring of operations should decrease our cost of developing software and, consequently, over time should contribute to lower
amortization expense included in cost of license revenue.
Cost of Services Revenue. Cost of services
revenue for the three months and nine months ended June 30, 2002 was $7.9 million and $25.1 million, respectively, compared to $9.2 million and $26.5 million for the year earlier periods. The decreases for the three months and nine months periods
were $1.2 million, or 13%, and $1.4 million, or 5%, from the year earlier periods. These decreases for both periods were due to lower services revenue and overall cost reduction efforts.
Selling and Marketing Expenses. Selling and marketing expenses for the three months ended June 30, 2002 were $9.2 million compared to $11.2 million in the year
earlier period. The decrease of $2.1 million or 18% was primarily due to lower license revenue
22
for the period, which resulted in lower sales commissions recognized for our affiliate channel partners and our direct sales organization. For the nine months ended June 30, 2002, selling and
marketing expenses were $25.9 million compared to $31.5 million for the nine months ended June 30, 2001. The decrease in selling and marketing expenses of $5.7 million or 18% for the nine months ended June 30, 2002 compared to the nine months ended
June 30, 2001 was also primarily due to lower license revenue for the period, which resulted in lower recognized commissions to our affiliate channel and direct sales organization. We believe that sales commissions will fluctuate from period to
period based on the levels of sales by our affiliates and by our directs sales organization.
Product
Development Expenses. The following table shows information about our product development expenses during the three months and nine months ended June 30, 2002 and 2001(dollars in thousands):
| |
|
Three Months Ended June 30,
|
|
|
Change From Prior Year
|
|
|
Nine Months Ended June 30,
|
|
|
Change From Prior Year
|
|
| |
|
2002
|
|
|
2001
|
|
|
|
2002
|
|
|
2001
|
|
|
| |
|
|
|
|
(As restated) |
|
|
|
|
|
|
|
|
(As restated) |
|
|
|
|
| Product development |
|
$ |
4,075 |
|
|
$ |
5,302 |
|
|
(23.1 |
)% |
|
$ |
14,182 |
|
|
$ |
16,086 |
|
|
(11.8 |
)% |
| Software translation |
|
|
839 |
|
|
|
461 |
|
|
82.0 |
|
|
|
2,333 |
|
|
|
1,750 |
|
|
33.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total spending |
|
|
4,914 |
|
|
|
5,763 |
|
|
(14.7 |
) |
|
$ |
16,515 |
|
|
|
17,836 |
|
|
(7.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capitalized product development costs |
|
|
(1,207 |
) |
|
|
(1,509 |
) |
|
(20.0 |
) |
|
|
(2,766 |
) |
|
|
(3,635 |
) |
|
(23.9 |
) |
| Capitalized software translation costs |
|
|
(539 |
) |
|
|
(60 |
) |
|
798.3 |
|
|
|
(1,311 |
) |
|
|
(687 |
) |
|
90.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total capitalization |
|
|
(1,746 |
) |
|
|
(1,569 |
) |
|
11.3 |
|
|
|
(4,077 |
) |
|
|
(4,322 |
) |
|
(5.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product development expenses |
|
$ |
3,168 |
|
|
$ |
4,194 |
|
|
(24.5 |
) |
|
$ |
12,438 |
|
|
$ |
13,514 |
|
|
(8.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total spending as a percentage of total revenue |
|
|
15.7 |
% |
|
|
15.6 |
% |
|
|
|
|
|
16.9 |
% |
|
|
17.3 |
% |
|
|
|
| Product development expense as a percentage of total revenue |
|
|
10.1 |
% |
|
|
11.3 |
% |
|
|
|
|
|
12.7 |
% |
|
|
13.1 |
% |
|
|
|
Spending on product development activities decreased 23% for the
three months ended June 30, 2002 compared to the year earlier period. Similarly, spending on product development activities for the nine months ended June 30, 2002 decreased 12% as compared to the nine months ended June 30, 2001. Software
capitalization rates generally are affected by the nature and timing of development activities and vary from period to period. Capitalization of product development costs decreased by 20% for the three months ended June 30, 2002 as compared to prior
year. For the nine months ended June 30, 2002, capitalization of product development costs decreased by 24% from the nine months ended June 30, 2001. The decrease in product development cost and capitalization for the three and nine months ended
June 30, 2002 principally relates to several new versions of our software becoming generally available for sale during the end of the fiscal 2001.
Spending on software translation activities increased significantly for both the three months and nine months ended June 30, 2002 compared to the prior year. Similarly, capitalization of software
translation activities increased significantly for both the three months and nine months ended June 30, 2002 compared to the prior year. Software translation costs are typically project related, and the timing of those expenditures is subject to
change from period to period.
On January 15, 2002, we announced a five-year agreement with an offshore
information technology services company to outsource a variety of our on-going development activities. The partnership and associated restructuring of operations should result in reduced product development costs and will likely reduce the amounts
of software development costs periodically capitalized and subsequently amortized.
General and Administrative
Expenses. For the three months ended June 30, 2002, general and administrative expenses were $2.9 million compared to $3.4 million in the year earlier period, a decrease of $536,000 or 16%. The decrease for the three months ended June 30, 2002
was primarily due to a decrease in foreign exchange losses principally in our EMEA region and a decrease in bad debt expense. For the nine months ended June 30, 2002, general and administrative expenses were $11.1 million, an increase of $377,000 or
4% from $10.7 million for the nine months ended June 30, 2002. The increase for the nine months ended June 30, 2002 period was primarily due to an increase in foreign exchange losses principally in our EMEA region and an increase in bad debt
expense.
23
Amortization of Goodwill. On October 1, 2001, we adopted SFAS No. 142,
“Goodwill and Other Intangible Assets,” which requires that amortization of goodwill be discontinued at the date of adoption and an annual impairment test be completed on the remaining goodwill balance. Accordingly, we recorded no
amortization of goodwill for the three months and nine months ended June 30, 2002. Goodwill amortization for the three months and nine months ended June 30, 2001 was $2.3 million and $7.0 million, respectively.
Acquisition Costs. During the three months and nine months ended June 30, 2001, we recorded a net recovery of acquisition costs of
$2.0 million as a result of a settlement agreement with a third party resolving a dispute regarding payment for certain proprietary software and documentation to be re-licensed by the company. Under the terms of the settlement, the third party paid
us $2.2 million for the software and related costs that we previously charged against acquisition costs in fiscal 2000. The settlement was offset by $219,000 of accrued liabilities relating to this software product.
Restructuring costs and other items. Restructuring costs and other items for the nine months ended June 30, 2002 was $3.7
million. On January 15, 2002, we announced a five-year agreement with an offshore information technology services to perform a variety of our ongoing product development activities. The agreement was a contributing factor in a planned reduction of
our worldwide workforce by approximately 12% by June 30, 2002. We recorded a restructuring charge of $4.7 million during the nine months ended June 30, 2002. The restructuring costs included $3.7 million related to the abandonment of excess office
space and $1.0 million related to employee severance and related costs for approximately 65 employees, primarily product development and support personnel.
The major components of the restructuring costs and the remaining restructuring accrual at June 30, 2002 were as follows (in thousands):
| |
|
Accrued Restructuring Costs at
September 30, 2001
|
|
Restructuring Costs
|
|
Amounts Utilized
|
|
|
Accrued Restructuring Costs at June 30, 2002
|
| Cost of abandonment of excess space and other |
|
$ |
433 |
|
$ |
3,681 |
|
$ |
(369 |
) |
|
$ |
3,745 |
| Employee severance and related costs |
|
|
— |
|
|
1,026 |
|
|
(969 |
) |
|
|
57 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
433 |
|
$ |
4,707 |
|
$ |
(1,338 |
) |
|
$ |
3,802 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the personnel included in the workforce reduction
were terminated as of June 30, 2002. We have currently realized and anticipate continuing to realize in future periods reduced personnel and facility costs as a result of the restructuring plan. We expect future cash expenditures related to these
restructuring activities to be approximately $3.8 million, of which approximately $1.4 million will be paid within the twelve months ending June 30, 2003.
Additionally, we closed our acquisition of Pivotpoint on January 12, 2000 for $48 million in cash. In connection with the purchase of Pivotpoint, a portion of the cash proceeds was put into escrow to
cover any breach of warranties or representations contained in the Purchase Agreement or any additional undisclosed post-closing liabilities. In December 2000, we presented a claim against the escrow for the release of funds to cover certain
liabilities not disclosed in the closing balance sheet. During the allocation period, we did not adjust the purchase price to reflect these escrow refund claims because the ultimate recovery of any escrow funds was neither probable nor could the
amount to be recovered be reasonably estimated. During the nine months ended June 30, 2002, we entered into a settlement agreement with the seller regarding the amount of the claim and we received approximately $1.3 million in cash for the
settlement. Pursuant to SFAS No. 141, “Business Combinations,” $1.0 million of the settlement was related to pre-acquisition contingencies other than income taxes and is included as a reduction to restructuring costs and other items in the
statement of operations for the nine months ended June 30, 2002. The settlement also included a receipt of $204,000 relating to pre-acquisition tax liabilities from the former shareholders of Pivotpoint. This portion of the settlement was recorded
as a reduction of outstanding tax liabilities as of March 31, 2002 from the original purchase accounting allocation. The remaining $50,000 of the settlement was recorded as a liability for expenses incurred in relation to the settlement.
Interest Income and Interest Expense. Interest income was $134,000 for the three months ended June 30,
2002 compared to $203,000 in the year earlier period, a decrease of $69,000 or 34%. Interest income was $388,000 for the nine months ended June 30, 2002 compared to $612,000 for the nine months ended June 30, 2001, a decrease of $224,000 or 37%. The
decrease for the three months and nine months ended June 30, 2002 resulted primarily from a decrease in interest rates, partially offset by a higher balance of cash for the periods.
24
For the three months ended June 30, 2002, interest expense was $151,000 compared
to $671,000 for the three months ended June 30, 2001, a decrease of $520,000 or 78%. Similarly, interest expense decreased $1.3 million or 58% for the nine months ended June 30, 2002 from $2.3 million in the year earlier period to $989,000 for the
current year period. The decrease for both the three months and nine months was primarily due to the lower balance on our term loan and note payable under our revolving credit facility and lower interest rates. Taking into effect our interest rate
swap and excluding the amortization of debt issue costs, the effective annual interest rate on our term loan for the three months and nine months ended June 30, 2002 was 5.5% and 6.3% compared to 10.0% and 10.5% in the year earlier period. The
effective annual interest rate on our note payable under our revolving credit facility for the three months and nine months ended June 30, 2002 was 5.5%.
Income Tax Expense (Benefit). The effective income tax rates for the three months and nine months ended June 30, 2002 were (81)% and (28)%. The reported income tax benefit for the three months
and nine months ended June 30, 2002 differs from the expected income tax expense (benefit) calculated by applying the federal statutory rate to our income before income tax expense (benefit) and extraordinary item principally due to a $5.0 million
benefit that we recorded during the quarter. This tax benefit resulted from changes in income taxes payable during the quarter due to the resolution of federal income tax uncertainties related to tax net operating losses (NOLs) retained by MAPICS in
connection with our 1997 spin off from Marcam Corporation. Accordingly, we recorded this income tax benefit and a corresponding decrease to income taxes payable. We still retain additional favorable income tax attributes in connection with the 1997
separation of Marcam Corporation into two companies and additional future income tax benefits related to these tax attributes may be realized in future periods if and when they become certain.
Additionally, the impact of state and foreign income taxes and the adjustment of goodwill of Pivotpoint created differences from the expected income tax expense
(benefit) calculated by applying the federal statutory rate to our income before income tax expense (benefit) and extraordinary item.
The effective income tax rate for the three months and nine months ended June 30, 2001 was 82% and 144%, respectively. These rates differ from the federal statutory rate because of the effect of amortization of goodwill that
was not deductible for income tax purposes. On October 1, 2001, we adopted SFAS No. 142 and ceased periodic amortization of goodwill. Other items that affected our effective tax rate during the three months and nine months ended June 30, 2001
include income tax credits and state and foreign income taxes.
Extraordinary Loss on Early Extinguishment of
Debt. On April 26, 2002, we used our new secured revolving credit facility to repay the outstanding balance of $8.4 million under our original bank credit facility. See Note 8 for further discussion on our revolving credit facility. At the time
of refinancing, the balance of the unamortized debt issuance costs relating to our original term loan was $491,000. We wrote down the remaining balance of debt issuance costs, net of income tax benefit of $173,000, and classified the write-down as
an extraordinary item in our Statement of Operations for the three months and nine months ended June 30, 2002 in accordance with SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.”
Liquidity and Capital Resources
We fund our operations and capital expenditures primarily with cash generated from operating activities, supplemented as necessary with funds available under our new $10.0
million revolving credit facility. Because our principal source of liquidity is operating cash flow, decreases in demand for our products and services could reduce the availability of funds to us. As noted previously, our revenues declined 16% from
the three months ended June 30, 2001 compared to the three months ended June 30, 2002. Likewise, our revenues declined 5% from the nine months ended June 30, 2001 compared to the nine months ended June 30, 2002. We believe the declines are
principally attributable to a continued slowdown in the market for enterprise applications and the economic recession, particularly as it is affecting the manufacturing sector. Many customers or prospects have delayed purchases or implementations,
some indefinitely. The decreased growth in the market for our products, the economic recession, and uncertainty and delays in purchases from our customers may continue to impact licensing revenue and services revenue and hence our operating cash
flow. For a discussion of other factors that could reduce our operating cash flow, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Future Performance – If we
are unable to react effectively to various factors outside our control, our operating results could be adversely impacted and our quarterly results could fluctuate significantly” in our amended Annual Report on Form 10-K/A for the fiscal year
ended September 30, 2001.
Additionally, declining revenue, earnings or cash flow could cause us to fail to
satisfy one or more of the financial ratios or other conditions or covenants of our new revolving credit agreement. This in turn could affect our future availability of funds under the
25
revolving credit facility. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Future Performance – If our
operating performance does not support our cash flow requirements, we may breach our bank credit facility” in the above referenced Form 10-K/A for fiscal 2001.
Furthermore, as noted previously, we have restated our financial statements prospectively from June 1, 2000 to comply with TPA 5100.53, “Fair Value of PCS in a
Short-Term Time-Based License and Software Revenue Recognition.” See also Note 2 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q. The restatement did not impact our cash position only the timing of the recognition
of our license revenues and related expenses.
The following tables show information about our cash flows during
the nine months ended June 30, 2002 and 2001 and selected balance sheet data as of June 30, 2002 and September 30, 2001 (in thousands).
| |
|
Summary of Cash Flows
|
|
| |
|
Nine Months Ended June
30,
|
|
| |
|
2002
|
|
|
2001
|
|
| |
|
|
|
|
(As restated) |
|
| Net cash provided by operating activities before changes in operating assets and liabilities |
|
$ |
19,902 |
|
|
$ |
20,188 |
|
| Increase (decrease) in operating assets and liabilities |
|
|
4,014 |
|
|
|
(2,408 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
23,916 |
|
|
|
17,780 |
|
| Net cash used for investing activities |
|
|
(4,882 |
) |
|
|
(5,385 |
) |
| Net cash used for financing activities |
|
|
(14,276 |
) |
|
|
(9,641 |
) |
| |
|
|
|
|
|
|
|
|
| Net increase in cash and cash equivalents |
|
$ |
4,758 |
|
|
$ |
2,754 |
|
| |
|
|
|
|
|
|
|
|
| |
|
Balance Sheet Data
|
|
| |
|
June 30, 2002
|
|
|
September 30, 2001
|
|
| |
|
|
|
|
(As restated) |
|
| Cash and cash equivalents |
|
$ |
22,835 |
|
|
$ |
18,077 |
|
| Working capital deficit |
|
|
(20,300 |
) |
|
|
(30,231 |
) |
| Working capital (excluding deferred license and services revenue) |
|
|
37,401 |
|
|
|
32,299 |
|
| Total assets |
|
|
105,957 |
|
|
|
115,153 |
|
| Total long-term debt, including current portion |
|
|
— |
|
|
|
18,662 |
|
| Total note payable, current |
|
|
4,000 |
|
|
|
— |
|
| Total shareholders’ equity |
|
|
10,946 |
|
|
|
243 |
|
Operating Activities
Changes in net cash provided by operating activities generally reflect the changes in net income (loss) plus the effects of changes in
working capital. Changes in working capital, especially trade accounts receivable, trade accounts payable and accrued expenses, are generally the result of timing differences between collection of fees billed and payment of operating expenses.
We generated positive cash flows from operating activities of $23.9 million and $17.8 million during the nine
months ended June 30, 2002 and June 30, 2001. Net cash provided by operating activities before changes in operating assets and liabilities decreased to $19.9 million for the nine months ended June 30, 2002 from $20.2 million for the prior year
period, a $286,000 or 1% decrease. Net income (loss) for the nine months ended June 30, 2002 increased by $10.4 million from the year earlier period. This increase in net income (loss) was principally off-set by the following non-cash activities for
the nine months ended June 30, 2001 compared to the nine months ended June 30, 2002:
| |
· |
|
$8.1 million decrease in depreciation and amortization of computer software costs and goodwill and other intangible assets, principally related to the adoption
of SFAS No. 142, as a result of which we ceased amortization of goodwill; |
| |
· |
|
$496,000 decrease in deferred income taxes; |
| |
· |
|
$1.0 million decrease for the settlement of an acquisition contingency related to the Pivotpoint acquisition; and |
| |
· |
|
$1.6 million for the write-off of computer software costs in fiscal 2001. |
26
Significant changes in operating assets and liabilities during the nine months
ended June 30, 2002 included (1) a decrease in accounts receivable of $9.1 million attributable to an increase in cash collections and fewer license transactions during the period; (2) a $4.4 million decrease in accounts payable, accrued expenses
and other current liabilities resulting primarily from the $5.0 million tax benefit recognized during the period and from the timing of cash payments; (3) a $3.4 million increase in our restructuring reserve for the actions taken during the nine
months ended June 30, 2002 related to vacated leased space and employee severance, and (4) a $4.8 million decrease in deferred license and service revenue offset by a decrease in deferred royalties and commissions of $623,000.
Additionally, non-cash operating activities included a net reduction to goodwill of $678,000 as of June 30, 2002. This
reduction was a result of a change in income tax related estimates from the acquisition of Pivotpoint based on the settlement of an IRS examination.
Investing and Financing Activities
For the nine months
ended June 30, 2002 compared to the same period in the prior year, we decreased spending for property and equipment by $367,000 and we decreased spending for additions to computer software by $245,000.
During the nine months ended June 30, 2002, we repaid $18.7 million on our term loan compared to $10.1 million during the nine months
ended June 30, 2001. Of the $18.7 million repaid on our term loan, $8.4 million was related to the refinancing of our term loan into a new secured revolving credit facility discussed below.
On April 2, 2002, we repaid $2.8 million in principal of our term loan under the previous bank credit facility reducing the outstanding balance to $8.4 million. On April
26, 2002, we entered into a new secured revolving credit facility, which provides for a revolving credit line of up to $10.0 million. On that date, we borrowed $8.4 million under the new revolving credit facility to repay the remaining balance of
the term loan under our previous bank credit facility and we terminated the previous bank credit facility. We repaid an additional $4.4 million of the outstanding balance under our new bank credit facility during the three months ended June 30,
2002. As of June 30, 2002, we had a balance of $4.0 million outstanding under a note payable pursuant to the revolving credit facility. On July 15, 2002, we repaid an additional $2.0 million leaving an outstanding balance of $2.0 million under the
new credit facility.
Our new revolving credit facility matures on April 24, 2003 and may be extended for an
additional 364-day term at our request and at the discretion of the bank. We may make voluntary prepayments of the revolving loans without premium or penalty and all outstanding unpaid principal on the revolving loans will mature on April 24, 2003
but may be extended if the credit facility is extended. At our option, the interest rates for the revolving credit facility are either adjusted LIBOR plus 2.50% per year, or the base rate plus 1.00% per year. The base rate is the higher of the
defined prime rate or the federal funds rate plus one-half of one percent.
Substantially all of our domestic
assets are pledged as collateral for any obligations under the new revolving credit facility. The revolving credit facility contains covenants, which, among other things, require us to maintain specific financial ratios and impose limitations or
prohibitions on us with respect to:
| |
· |
|
incurrence of additional indebtedness outside the facility, liens and capital leases; |
| |
· |
|
the payment of dividends on and the redemption or repurchase of our capital stock; |
| |
· |
|
acquisitions and investments; |
| |
· |
|
mergers and consolidations; and |
| |
· |
|
the disposition of any of our properties or assets outside the ordinary course of business. |
On July 31, 2002, we announced that our Board of Director’s approved a plan to repurchase our outstanding common stock up to $10
million. Purchases are expected to be made from time to time, depending on market conditions, in private transactions as well as in the open market at prevailing market prices. We can begin to repurchase our shares on August 15, 2002. As of July 31,
2002, we had approximately 18.4 million common shares outstanding.
We do not have any off-balance sheet
arrangements or financing arrangements with related parties, persons who were previously
27
related parties, or any other parties who might be in a position to negotiate arrangements with us other than on an arms-length basis.
We do not have any current plans or commitments for any significant capital expenditures.
We believe that cash and cash equivalents on hand as of June 30, 2002, together with cash flows from operating activities and available borrowings under our revolving
credit facility, will be sufficient for us to maintain our operations for at least the next twelve months. However, as noted previously, a continuation or worsening of the economic recession could adversely affect our liquidity and capital resources
during the next twelve months.
Application of Critical Accounting Policies
In applying the accounting policies that we use to prepare our consolidated financial statements, we necessarily make accounting estimates that affect our reported
amounts of assets, liabilities, revenues and expenses. Some of these accounting estimates require us to make assumptions about matters that are highly uncertain at the time we make the accounting estimates. We base these assumptions and the
resulting estimates on historical information and other factors that we believe to be reasonable under the circumstances, and we evaluate these assumptions and estimates on an ongoing basis. However, in many instances we reasonably could have used
different accounting estimates, and in other instances changes in our accounting estimates are reasonably likely to occur from period to period, with the result in each case being a material change in the financial statement presentation of our
financial condition or results of operations. We refer to accounting estimates of this type as “critical accounting estimates.” Among those critical accounting estimates that we believe are most important to an understanding of our
consolidated financial statements are those that we discuss below.
Accounting estimates necessarily require
subjective determinations about future events and conditions. Therefore, the following descriptions of critical accounting estimates are forward-looking statements, and actual results could differ materially from the results anticipated by these
forward-looking statements. You should read the following descriptions of our critical accounting estimates in conjunction with note 1 to our consolidated financial statements and “Management Discussion and Analysis of Financial Condition and
Results of Operations-Factors Affecting Future Performance” contained in our amended Annual Report on Form 10-K/A report for the fiscal year ended September 30, 2001.
Revenue Recognition. We generate revenues primarily by licensing software, providing software support and maintenance and providing professional services to our
customers. We record all revenues in accordance with the guidance provided by Statement of Position, SOP 97-2, “Software Revenue Recognition,” SOP 98-9, “Modification of SOP 97-2, ‘Software Revenue Recognition, with Respect to
Certain Transactions,’ “ SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts,” and AICPA Technical Practice Aid (“TPA”) 5100.53 “Fair Value of PCS in a Short-Term
Time-Based License and Software Revenue Recognition.”
We generate a significant portion of our total revenue
from licensing software. In determining when to recognize licensing revenue, we make assumptions and estimates about the probability of collection of the related receivable. If changes occur in our assumptions of the probability of collection,
operating results for any reporting period could be adversely affected.
We also provide professional consulting
and implementation services to our customers; however, the professional services that we provide are not essential to the functionality of our delivered products. We provide our professional services under services agreements, and the revenues from
our professional consulting and implementation services are generally time and material based and are recognized as the work is performed, provided that the customer has a contractual obligation to pay, the fee is non-refundable, and collection is
probable. Delays in project implementation will result in delays in revenue recognition. On some occasions our professional consulting services involve fixed-price and/or fixed-time arrangements, and we recognize the related revenues using contract
accounting, which requires the accurate estimation of cost, scope and duration of each engagement. We recognize revenue and the related costs for these projects on the percentage-of-completion method, with progress-to-completion measured by using
labor costs inputs and with revisions to estimates reflected in the period in which changes become known. Project losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. If we do not
accurately estimate the resources required or the scope of work to be performed, or we do not manage our projects properly within the planned periods of time, then future consulting margins on our projects may be negatively affected or losses on
existing contracts may need to be recognized.
Accounts Receivable and Allowance for Doubtful Accounts.
Accounts receivable comprise trade receivables that are credit based and do not require collateral. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our
28
customers to make required payments. On an ongoing basis, we evaluate the collectibility of accounts receivable based upon historical collections and assessment of the collectibility of specific
accounts. We evaluate the collectibility of specific accounts using a combination of factors, including the age of the outstanding balance(s), evaluation of the account’s financial condition and credit scores, recent payment history, and
discussions with our account executive for the specific customer and with the customer directly. Based upon this evaluation of the collectibility of accounts receivable, an increase or decrease required in the allowance for doubtful accounts is
reflected in the period in which the evaluation indicates that a change is necessary. If actual results differ, this could have an impact on our financial condition and results of operation.
Deferred Income Taxes. Deferred tax assets primarily include temporary differences related to deferred revenue and net operating loss (NOL) and tax credit
carryforwards. These carryforwards may be used to offset future taxable income through fiscal 2020, subject to certain limitations. We estimate the likelihood of future taxable income from operations and the reversal of deferred tax liabilities in
assessing the need for any valuation allowance to offset our deferred tax assets. In the event that we believe that a valuation allowance is necessary, the corresponding reduction to the deferred tax asset would result in a charge to income in the
period that the establishment of the valuation allowance is made. We evaluate the realizability of the deferred tax assets and the need for valuation allowances on a regular basis.
We also record a payable for certain federal, state, and international tax liabilities based on the likelihood of an obligation, when needed. In the normal course of
business, we are subject to challenges from U.S. and non-U.S. tax authorities regarding the amount of taxes due. These challenges, or the resolution of any income tax uncertainties, may result in adjustments to the timing or amount of taxable income
or deductions or the allocation of income among tax jurisdictions. In the event that actual results differ from these estimates, or if income tax uncertainties are resolved, we may need to adjust our income tax provisions, which could materially
impact our financial condition and results of operations.
Computer Software Costs. We charge all computer
software development costs prior to establishing technological feasibility of computer software products to product development expense as they are incurred. Following the guidance of SFAS No. 86, “Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed”, from the time of establishing technological feasibility through general release of the product, we capitalize computer software development and translation costs and report them on the balance sheet as
computer software costs. We begin amortizing computer software costs upon general release of the product to customers and compute amortization on a product-by-product basis. We regularly review software for technological obsolescence and determine
the amortization period based on the estimated useful life. As a result, future amortization periods for computer software costs could be shortened to reflect changes in the estimated useful life in the future. Any resulting acceleration in
amortization could have a material adverse impact on our financial condition and results of operations.
Goodwill and Other Intangible Assets. On October 1, 2001, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Upon adoption, we ceased amortization of goodwill. We performed a required transitional
impairment test, and based on the results of the test, we recorded no impairment to goodwill. We have continued to amortize all of our intangible assets over the life of the asset. Our goodwill balances will be subject to annual impairment tests,
which require us to estimate the fair value of our business compared to the carrying value. Annual tests or other future events could cause us to conclude that impairment indicators exist and that our goodwill is impaired. Any resulting impairment
loss could have a material adverse impact on our financial condition and results of operations. The impact of our adoption of SFAS No. 142 is further explained in the section “Recently Issued or Adopted Accounting Pronouncements” below.
Restructuring. Our restructuring liability is principally comprised of the estimated excess lease and
related costs associated with vacated office space. We could incur additional restructuring charges or reverse prior charges accordingly in the event that the underlying assumptions used to develop our estimates of excess lease costs change, such as
the timing and the amount of any sublease income. For example, our current estimates assume that our excess lease space will be vacant for a period of twelve months beginning in April 2002. Depending on the current market conditions for office space
and our ability to secure a suitable subtenant and sublease for the space, we may revise our estimates of the excess lease costs and the timing and the amount of sublease income and, as a result, incur additional charges or credits to our
restructuring liability as appropriate. If our excess lease space were to remain vacant for an additional six-months, an additional restructuring charge of $670,000 could be required. Additionally, if the prevailing market rental rates were to
increase by 10% over our current estimate, an additional credit of $400,000 could also be required.
29
Recently Issued or Adopted Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which changes financial accounting and
reporting for acquired goodwill and other intangible assets. Upon adoption, goodwill will no longer be subject to periodic amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value-based test. All other acquired intangibles will be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred,
licensed, or exchanged, regardless of our intent to do so. Other intangibles will be amortized over their useful lives.
We adopted SFAS No. 142 on October 1, 2001. We expect the following significant impacts:
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The balance of goodwill was $4.4 million at October 1, 2001. As we have discontinued amortizing goodwill as of October 1, 2001, we will have approximately $1.5
million less in amortization of goodwill in fiscal 2002 than if we had not adopted SFAS No. 142. |
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We were required to perform a transitional impairment test. This impairment test required us to (1) identify individual reporting units, if any, (2) determine
the carrying value of any reporting units by assigning assets and liabilities, including existing goodwill and intangible assets, to those reporting units, and (3) determine the fair value of any reporting units. If the carrying value of any
reporting unit or the Company exceeded its fair value, then the amount of any goodwill impairment would be determined through a fair value analysis of each of the assigned assets (excluding goodwill) and liabilities. We were required to complete the
transitional impairment test by March 31, 2002. Based on the results of the test, we did not record an impairment for goodwill as of that date. |
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Our goodwill balances will be subject to annual impairment tests using the same process described above. If any impairment is indicated as a result of the
annual test, we will record an impairment loss as part of income from operations. |
In August
2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset
retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its present value each period while the cost is depreciated over its useful life. SFAS No. 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. We have not yet determined the effects that SFAS No. 143 will have on our financial position, results of operations or cash flows, but we do not anticipate any material impact.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144,
which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell.
SFAS No. 144 also broadens disposal transaction reporting related to discontinued operations. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. We have adopted SFAS No. 144 as of October 1,
2001 with no material impact on our financial position, results of operations or cash flows.
In January 2002, the
Emerging Issues Task Force (“EITF”) issued EITF 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.” The EITF concluded that reimbursements for out of pocket
expenses incurred should be included in the income statement. The EITF is effective for financial reporting periods beginning after December 15, 2001 but early adoption of the provisions of this issue is permitted. We have adopted EITF 01-14 as of
April 1, 2002 with no material impact on our financial position, results of operations or cash flows. Amounts from prior year periods were deemed immaterial for reclassification.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”
This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, SFAS No. 64 “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement
also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback
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transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. We have adopted SFAS No. 145 as it relates to the rescission of SFAS No. 4 and our classification of the
write-off of debt issue costs relating to our term loan, which we refinanced to a revolving credit facility in April 2002. See Note X for further discussion of our write-off of debt issue costs.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).” The Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. We will apply SFAS No. 146 to any exit or disposal activities that we may enter into in future periods.
We do not engage in
trading market risk sensitive instruments nor do we purchase, whether for investment, hedging or purposes “other than trading,” instruments that are likely to expose us to market risk, whether foreign currency exchange rate, interest rate,
commodity price or equity price risk, except as discussed in the following paragraphs. We have not issued any debt instruments, entered into any forward or futures contracts, purchased any options or entered into any swaps, except as discussed in
the following paragraphs.
Foreign Currency Exchange Rate Sensitivity
Some of our operations generate cash denominated in foreign currency. Consequently, we are exposed to certain foreign currency exchange
rate risks. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute products. When the U.S. dollar strengthens
against a foreign currency, the value of our sales in that currency converted to U.S. dollars decreases. When the U.S. dollar weakens, the value of our sales in that currency converted to U.S. dollars increases. As our foreign operations increase,
our business, financial condition and results of operations could be adversely affected by future changes in foreign currency exchange rates.
Interest Rate Sensitivity
On April 26, 2002, we entered
into a new secured revolving credit facility with a bank that provides for a revolving credit line of up to $10.0 million. On that date, we borrowed $8.4 million under the new revolving credit facility to repay the remaining balance of the term loan
under our previous bank credit facility and terminated the previous bank credit facility. We repaid $4.4 million of our revolving credit facility during the nine months ended June 30, 2002. On July 15, 2002, we repaid an additional $2.0 million
leaving an outstanding balance of $2.0 million under the new credit facility.
Our new revolving credit facility
matures on April 24, 2003 and may be extended for an additional 364-day term at our request and at the discretion of the bank. We may make voluntary prepayments of the revolving loans without premium or penalty and all outstanding unpaid principal
on the revolving loans will mature on April 24, 2003 but may be extended if the credit facility is extended. At our option, the interest rates for the revolving credit facility are either adjusted LIBOR plus 2.50% per year, or the defined base rate
plus 1.00% per year. The base rate is the higher of the defined prime rate or the federal funds rate plus one-half of one percent.
Inflation
Although we cannot accurately determine the amounts attributable
thereto, we have been affected by inflation through increased costs of employee compensation and other operating expenses. To the extent permitted by the marketplace for our products and services, we attempt to recover increases in costs by
periodically increasing prices. Additionally, most of our license agreements and services agreements allow for annual increases in charges.
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(a) Exhibits
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10.1 |
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Amended and Restated Agreement dated March 31, 2000 between the Company and Paragon Systems International, Inc., a Georgia corporation (“PARAGON”).
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10.2 |
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Addendum to the Amended and Restated Agreement dated April 2001 between the Company and Paragon Systems International, Inc., a Georgia corporation
(“PARAGON”). |
(b) Reports
on Form 8-K
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 2002.
| MAPICS, INC. |
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| By: |
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/s/ MICHAEL J.
CASEY
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Michael J. Casey Vice
President of Finance, Chief Financial Officer, and Treasurer (Duly Authorized Officer and Principal Financial and Accounting Officer) |
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| Exhibit No.
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Description
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| 10.1 |
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Amended and Restated Agreement dated March 31, 2000 between the Company and Paragon Systems International, Inc., a Georgia corporation
(“PARAGON”). |
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| 10.2 |
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Addendum to the Amended and Restated Agreement dated April 2001 between the Company and Paragon Systems International, Inc., a Georgia corporation
(“PARAGON”). |
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| 21 |
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Subsidiaries |
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