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UNITED STATES
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 August 31, 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 0-22154
MANUGISTICS GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1469385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9715 Key West Avenue, Rockville, Maryland 20850
(Address of principal executive office) (Zip code)
(301) 255-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 69.9 million shares of common
stock, $.002 par value, as of October 8, 2002.
1
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
August 31, 2002 and February 28, 2002 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three and six months ended August 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six months ended August 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements (Unaudited) -
August 31, 2002 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 39
Item 4. Controls and Procedures 40
PART II OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 6. Exhibits and Reports on Form 8-K 41
SIGNATURES 42
CERTIFICATIONS -SECTION 302 43
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
August 31, 2002 February 28, 2002
--------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 189,544 $ 228,801
Marketable securities 8,475 4,259
--------- ---------
Total cash, cash equivalents and marketable securities 198,019 233,060
Accounts receivable, net of allowance for doubtful accounts of $8,445 and
$8,308 at August 31, 2002 and February 28, 2002, respectively 66,226 76,443
Deferred tax assets -- 9,061
Other current assets 7,862 11,471
--------- ---------
Total current assets 272,107 330,035
NON-CURRENT ASSETS:
Property and equipment, net of accumulated depreciation 33,689 22,872
Software development costs, net of accumulated amortization 14,276 14,506
Goodwill, net of accumulated amortization 283,625 269,998
Other intangible assets and non-current assets, net of accumulated 81,707 73,940
amortization
Deferred tax assets -- 11,289
--------- ---------
TOTAL ASSETS $ 685,404 $ 722,640
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,311 $ 9,009
Accrued compensation 7,415 12,720
Deferred revenue 40,355 43,578
Acquisition consideration payable 27,800 --
Accrued liabilities and other 27,965 27,777
--------- ---------
Total current liabilities 114,846 93,084
--------- ---------
NON-CURRENT LIABILITIES:
Convertible debt 250,000 250,000
Long-term debt and capital leases 5,014 1,023
Other non-current liabilities 8,371 5,726
--------- ---------
Total non-current liabilities 263,385 256,749
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock, $.002 par value per share; 300,000 shares authorized; 69,875
and 69,042 issued and outstanding at August 31, 2002 and February 28,
2002, respectively 140 138
Additional paid-in capital 633,480 629,861
Deferred compensation (5,036) (9,049)
Accumulated other comprehensive loss (1,174) (2,704)
Accumulated deficit (320,237) (245,439)
--------- ---------
Total stockholders' equity 307,173 372,807
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 685,404 $ 722,640
========= =========
See accompanying notes to the condensed consolidated financial statements.
3
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
2002 2001 2002 2001
-------- --------- --------- ---------
REVENUE:
Software $ 18,112 $ 24,809 $ 42,628 $ 69,865
Services 27,617 27,521 54,482 55,054
Support 21,246 18,634 41,455 35,855
Reimbursed expenses 2,954 2,810 5,964 5,442
-------- --------- --------- ---------
Total revenue 69,929 73,774 144,529 166,216
-------- --------- --------- ---------
OPERATING EXPENSES:
Cost of revenue:
Cost of software 4,892 4,963 11,130 10,098
Amortization of acquired technology 3,577 2,319 6,488 3,899
-------- --------- --------- ---------
Total cost of software 8,469 7,282 17,618 13,997
-------- --------- --------- ---------
Cost of services and support 25,281 24,274 51,102 47,614
Cost of reimbursed expenses 2,954 2,810 5,964 5,442
Non-cash stock compensation expense (benefit) for cost of services and support 427 (2,654) 905 (925)
-------- --------- --------- ---------
Total cost of services and support 28,662 24,430 57,971 52,131
-------- --------- --------- ---------
Sales and marketing 24,277 30,114 55,255 64,113
Non-cash stock compensation expense (benefit) for sales and marketing 123 (5,215) 510 (2,703)
-------- --------- --------- ---------
Total cost of sales and marketing 24,400 24,899 55,765 61,410
-------- --------- --------- ---------
Product development 16,681 20,326 34,213 36,761
Non-cash stock compensation expense (benefit) for product development 99 (2,694) 185 (1,508)
-------- --------- --------- ---------
Total cost of product development 16,780 17,632 34,398 35,253
-------- --------- --------- ---------
General and administrative 7,092 6,997 14,282 14,795
Non-cash stock compensation expense (benefit) for general and administrative 196 (807) 322 (327)
-------- --------- --------- ---------
Total cost of general and administrative 7,288 6,190 14,604 14,468
-------- --------- --------- ---------
Amortization of intangibles 1,004 21,002 1,856 40,930
Restructuring and impairment charges 8,837 2,419 8,837 2,419
Purchased research and development -- -- 3,800 --
-------- --------- --------- ---------
Total operating expenses 95,440 103,854 194,849 220,608
-------- --------- --------- ---------
LOSS FROM OPERATIONS (25,511) (30,080) (50,320) (54,392)
OTHER EXPENSE, NET (1,526) (865) (3,719) (183)
-------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (27,037) (30,945) (54,039) (54,575)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 20,680 (9,281) 20,759 (9,485)
-------- --------- --------- ---------
NET LOSS $(47,717) $ (21,664) $ (74,798) $ (45,090)
======== ========= ========= =========
BASIC AND DILUTED LOSS PER SHARE $ (0.68) $ (0.32) $ (1.08) $ (0.67)
SHARES USED IN BASIC AND DILUTED LOSS PER SHARE COMPUTATION 69,812 67,884 69,518 67,548
See accompanying notes to the condensed consolidated financial statements.
4
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended August 31,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (74,798) $ (45,090)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 21,053 55,035
Amortization of debt issuance costs 573 569
Purchased research and development 3,800 --
Deferred income taxes 20,350 (11,448)
Non-cash stock compensation expense (benefit) 1,922 (5,463)
Asset impairment charges 1,449 --
Other 109 501
Changes in assets and liabilities:
Accounts receivable 13,187 13,555
Other assets 3,375 3,656
Accounts payable 1,455 (2,781)
Accrued compensation (6,764) (10,211)
Other liabilities 1,569 (6,170)
Deferred revenue (6,651) 4,668
--------- ---------
Net cash used in operating activities (19,371) (3,179)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired (3,828) (29,573)
Investments in unconsolidated subsidiaries -- (10,150)
(Purchases) sales of marketable securities, net (4,216) 85,254
Purchases of property and equipment (11,099) (6,555)
Capitalization and purchases of software (6,618) (7,673)
--------- ---------
Net cash (used in) provided by investing activities (25,761) 31,303
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 1,165 --
Payments of long-term debt, capital lease obligations and convertible debt
issuance costs (1,385) (273)
Proceeds from exercise of stock options and employee stock plan purchases 4,615 8,243
--------- ---------
Net cash provided by financing activities 4,395 7,970
--------- ---------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 1,480 (634)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (39,257) 35,460
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 228,801 196,362
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 189,544 $ 231,822
========= =========
See accompanying notes to the condensed consolidated financial statements.
5
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 31, 2002
1. The Company and Basis of Presentation
THE COMPANY
Manugistics Group, Inc. (the "Company") is a leading global
provider of Enterprise Profit Optimization(TM) (EPO) solutions. The
Company provides solutions for supply chain management (SCM),
supplier relationship management (SRM), pricing and revenue
optimization (PRO) and service and parts management (S&PM). Our
solutions help companies lower operating costs, improve customer
service, increase revenues, enhance profitability and accelerate
revenue and earnings growth.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of the Company and its wholly-owned subsidiaries have
been prepared in accordance with generally accepted accounting
principles for interim reporting and in accordance with the
instructions to the Quarterly Report on Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments which are necessary for a fair
presentation of the unaudited results for the interim periods
presented have been included. The results of operations for the
periods presented herein are not necessarily indicative of the
results of operations for the entire fiscal year, which ends on
February 28, 2003.
These financial statements should be read in conjunction with
the financial statements and notes thereto for the fiscal year ended
February 28, 2002 included in the Annual Report on Form 10-K of the
Company for that year filed with the Securities and Exchange
Commission.
RECLASSIFICATION
Certain prior year information has been reclassified to
conform to the current year presentation.
2. New Accounting Pronouncements
On March 1, 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 141 ("SFAS 141")
"Business Combinations," and Statement of Financial Accounting
Standards No. 142 ("SFAS 142") "Goodwill and Other Intangible
Assets," with the exception of the immediate requirement to use the
purchase method of accounting for all business combinations
initiated after June 30, 2001. SFAS 141 establishes new standards
for accounting and reporting for business combinations and requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 142 requires
goodwill and certain intangible assets to remain on the balance
sheet and not be amortized. Therefore, the Company stopped
amortizing goodwill, including goodwill recorded in past business
combinations, on March 1, 2002. In addition, SFAS 142 requires
assembled workforce and certain other identifiable intangible assets
to be reclassified as goodwill. On an annual basis, and when there
is reason to suspect that values may have been impaired, goodwill
must be tested for impairment and write-downs may be necessary. SFAS
142 changes the accounting for goodwill from an amortization method
to an impairment-only approach. SFAS 142 also requires recognized
intangible assets with finite lives to be amortized over their
respective estimated useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 144
("SFAS 144") "Accounting for the Impairment of Long-Lived Assets."
SFAS 142 required the Company to perform an assessment of
whether there was an indication that goodwill was impaired at the
date of adoption. To accomplish this, the Company identified its
reporting units and determined the carrying value of each reporting
unit by assigning the assets and liabilities, including existing
goodwill and intangible assets, to those reporting units as of the
date of adoption. The first test for potential impairment requires
the Company to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount. To the extent
the reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired
and the
6
Company must perform the second step of the impairment test. In the
second step, the Company must compare the implied fair value (which
includes factors such as, but not limited to, the Company's market
capitalization, control premium and recent stock price volatility)
of the reporting unit's goodwill, determined by allocating the
reporting unit's fair value to all of its assets and liabilities in
a manner similar to a purchase price allocation in accordance with
SFAS 141, to its carrying amount, both of which would be measured as
of the date of adoption.
The Company performed the initial goodwill impairment test
required by SFAS 142 during the first quarter of fiscal 2003. The
Company considers itself to have a single reporting unit.
Accordingly, all of our goodwill is associated with the entire
Company. As of March 1, 2002, based on the Company's implied fair
value, there was no impairment of goodwill. The Company will
continue to test for impairment on an annual basis, coinciding with
our fiscal year end, or on an interim basis if circumstances change
that would more likely than not reduce the fair value of the
Company's reporting unit to below its carrying amount.
During the quarter ended August 31, 2002, the Company
experienced adverse changes in its stock price resulting from a
decline in our financial performance and adverse business conditions
that have affected the technology industry, especially application
software companies. Based on these factors, we performed a test for
goodwill impairment at August 31, 2002 and determined that, based
upon the implied fair value of the Company as of August 31, 2002,
there was no impairment of goodwill. The Company will continue to
test for impairment on an annual basis, coinciding with our fiscal
year end, or on an interim basis if circumstances change that would
more likely than not reduce the fair value of the Company's
reporting unit to below its carrying amount. Based on continued
adverse changes in our stock price since August 31, 2002 and adverse
business conditions that continue to affect the application software
industry, the Company will also perform a test for goodwill
impairment at November 30, 2002. There can be no assurance that at
the time additional reviews are completed material impairment
charges will not be recorded.
Effective March 1, 2002, as required by SFAS 142, we have
ceased amortization of goodwill associated with acquisitions
completed prior to July 1, 2001. Goodwill and intangible assets
acquired in business combinations initiated before July 1, 2001 were
amortized until February 28, 2002. SFAS 142 does not require the
restatement of prior period earnings, but does require transitional
disclosure for earnings per share and adjusted net income under the
revised rules (see Note 5).
On March 1, 2002, the Company adopted the provisions of SFAS
144. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes
Statement of Financial Accounting Standards No. 121 ("SFAS 121")
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," but retains the fundamental
provisions of SFAS 121 for (i) recognition/measurement of impairment
of long-lived assets to be held and used and (ii) measurement of
long-lived assets to be disposed of by sale. SFAS 144 also
supersedes the accounting and reporting provisions of Accounting
Principles Board's Opinion No. 30 ("APB 30"), "Reporting the Results
of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for segments of a business to be disposed
of but retains APB 30's reporting requirement to report discontinued
operations separately from continuing operations and extends that
reporting requirement to a component of an entity that either has
been disposed of or is classified as held for sale. Adoption of this
standard did not have any material impact on the Company's financial
statements.
On March 1, 2002, the Company adopted the provisions of Staff
Announcement Topic No. D-103 "Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred,"
which was subsequently incorporated in Emerging Issues Task Force
No. 01-14 ("EITF 01-14"). EITF 01-14 establishes that reimbursements
received for "out-of-pocket" expenses such as airfare, hotel stays
and similar costs should be characterized as revenue in the income
statement. Adoption of the guidance had the resulting effect of
increased revenue and increased operating expenses. Prior to our
adoption of this standard, the Company recorded "out-of-pocket"
expense reimbursements as a reduction of cost of services.
Accordingly, the Company reclassified these amounts to revenue in
our comparative financial statements beginning in our first quarter
of fiscal 2003. Application of EITF 01-14 did not result in any net
impact to operating income or net income in any past periods and
will not result in any net impact in future periods.
In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 nullifies
Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including
7
Certain Costs Incurred in a Restructuring)." SFAS 146 requires that
a liability for a cost associated with an exit or disposal activity
be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of a company's
commitment to an exit plan. SFAS 146 eliminates the definition and
requirements for recognition of exit costs in EITF 94-3 and also
establishes that fair value is the objective for initial measurement
of the liability. We will adopt the provisions of SFAS 146 for exit
or disposal activities, if any, that are initiated after December
31, 2002 in accordance with the transition rules. Companies may not
restate previously issued financial statements for the effect of the
provisions of SFAS 146 and liabilities that a company previously
recorded under EITF 94-3 are not effected. We are currently
evaluating this new standard but expect that the effects of
adoption, if any, would relate solely to exit or disposal activities
undertaken after December 31, 2002.
3. Net Loss Per Share
Basic net loss per share is computed using the weighted
average number of shares of common stock outstanding. Diluted net
loss per share is computed using the weighted average number of
shares of common stock and, when dilutive, potential common shares
from options and warrants to purchase common stock using the
treasury stock method, the effect of the assumed conversion of the
Company's convertible subordinated debt and the effect of the
potential issuance of common stock in connection with acquisitions.
The dilutive effect of options and warrants of 0.5 million shares
and 5.7 million shares for the three month periods ended August 31,
2002 and 2001, respectively, and 3.6 million shares and 6.1 million
shares for the six month periods ended August 31, 2002 and 2001,
respectively, were excluded from the calculation of diluted net loss
per share because including these shares would be anti-dilutive due
to the Company's reported net loss. The assumed conversion of the
Company's convertible debt was excluded from the computation of
diluted net loss per share for the three and six months ended August
31, 2002 and 2001 since it was anti-dilutive. The Company's
convertible debt may be exchanged for up to approximately 5.7
million shares of the Company's common stock in future periods.
During the six months ended August 31, 2002, the Company acquired
the assets and business of Western Data Systems of Nevada, Inc.
("WDS") and Digital Freight Exchange, Inc. ("DFE") (see Note 7). The
dilutive effect of the potential issuance of common stock related to
the WDS and DFE acquisitions were excluded from the calculation of
diluted net loss per share for the three and six months ended August
31, 2002 because including these potential shares would be
anti-dilutive due to the Company's net loss.
4. Commitments and Contingencies
The Company is involved in disputes and litigation in the
normal course of business. The Company does not believe that the
outcome of existing disputes or litigation will have a material
effect on the Company's business, operating results, financial
condition or cash flows. The Company has established accruals for
losses related to such matters that are probable and reasonably
estimable. However, an unfavorable outcome of some or all of these
matters could have a material effect on the Company's business,
operating results, financial condition and cash flows.
5. Intangible Assets and Goodwill
Intangible assets as of August 31, 2002 and February 28, 2002
were as follows (amounts in thousands):
ACCUMULATED
GROSS ASSETS AMORTIZATION NET ASSETS
------------ ------------ ----------
AUGUST 31, 2002
Acquired technology $65,357 $(17,056) $48,301
Customer lists 28,979 (6,314) 22,665
------- -------- -------
Total $94,336 $(23,370) $70,966
======= ======== =======
FEBRUARY 28, 2002
Acquired technology $46,639 $(10,553) $36,086
Customer lists 22,491 (4,368) 18,123
------- -------- -------
Total $69,130 $(14,921) $54,209
======= ======== =======
8
The changes in the carrying amount of goodwill for the six months ended
August 31, 2002 are as follows (amounts in thousands):
NET ASSETS
----------
BALANCE AS OF FEBRUARY 28, 2002 $269,998
Reclassification of assembled workforce as required by SFAS 142 7,101
WDS and DFE acquisitions 5,547
Other 979
--------
BALANCE AS OF AUGUST 31, 2002 $283,625
========
Amortization expense related to goodwill and intangible assets
was $4.6 million and $23.3 million for the three months ended August
31, 2002 and 2001, respectively, and $8.3 million and $44.8 million
for the six months ended August 31, 2002 and 2001, respectively.
Estimated aggregate future amortization expense for intangible
assets remaining for the six-month period ended February 28, 2003
and future fiscal years are as follows (amounts in thousands):
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Amortization expense $9,186 $18,182 $17,205 $10,753 $9,889 $5,751 $70,966
Summarized below are the effects on net loss and net loss per
share data, if the Company had followed the amortization provisions
of SFAS 142 for all periods presented (amounts in thousands, except
per share data):
For the three months ended For the six months ended
August 31, August 31,
-------------------------- ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net loss:
As reported $(47,717) $(21,664) $(74,798) $(45,090)
Add: goodwill and assembled workforce
amortization, net of taxes -- 18,981 -- 37,304
-------- -------- -------- --------
Net loss, pro forma $(47,717) $ (2,683) $(74,798) $ (7,786)
======== ======== ======== ========
Basic and diluted loss per share:
As reported $ (0.68) $ (0.32) $ (1.08) $ (0.67)
Add: goodwill and assembled workforce
amortization, net of taxes -- $ 0.28 -- $ 0.55
-------- -------- -------- --------
Basic and diluted loss per share, pro forma $ (0.68) $ (0.04) $ (1.08) $ (0.12)
======== ======== ======== ========
Shares used in basic and diluted loss per
share calculation 69,812 67,884 69,518 67,548
Please refer to Note 2 for further discussion of SFAS 142.
6. Comprehensive Loss
Other comprehensive income (loss) relates primarily to foreign
currency translation income (losses) and unrealized gains (losses)
on investments in marketable securities. The following table sets
forth the comprehensive loss for the three and six month periods
ended August 31, 2002 and 2001, respectively (amounts in thousands):
9
Three months ended August 31, Six months ended August 31,
----------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net loss $(47,717) $(21,664) $(74,798) $(45,090)
Other comprehensive income (loss) 205 197 1,530 (1,645)
-------- -------- -------- --------
Total comprehensive loss $(47,512) $(21,467) $(73,268) $(46,735)
-------- -------- -------- --------
7. Acquisitions
Western Data Systems of Nevada, Inc.
On April 26, 2002, the Company acquired certain assets and
assumed certain liabilities of WDS for $26.2 million. WDS is a
leading provider of application software and services to commercial
aerospace, defense and maritime industries and the military.
Approximately $2.6 million of the purchase price was paid in cash at
closing. The remaining purchase price of $23.6 million is payable in
shares of the Company's common stock, cash, or a combination thereof
at the Company's election. If the Company elects to pay some or all
of the remaining purchase price in shares of its common stock, the
number of shares to be issued will be determined by dividing the
remaining $23.6 million (the "Negotiated Value") by the average
closing price of the common stock for the two consecutive trading
days ending on the second trading day prior to the shares becoming
registered for resale. Based on the Company's stock price in recent
weeks, it is likely that the Company will elect to pay the remaining
consideration in cash. Pursuant to the terms of the acquisition, the
Company has filed a registration statement with the Securities and
Exchange Commission to register for resale by WDS the shares
issuable to WDS in payment of the Negotiated Value. If the
registration statement for the shares is not declared effective by
November 25, 2002, the Company would be required to pay the
Negotiated Value in cash.
If, at the close of the ten trading day period beginning after
the registration for resale of the shares becomes effective, the
aggregate value of the shares issued to WDS (the "Trading Value"),
using the average closing price of the Company's common stock during
such ten trading day period (the "Trading Price"), is less than 95%
of the Negotiated Value, the Company will be required to pay the
difference between the Negotiated Value and the Trading Value (not
to exceed $8.26 million) to WDS in cash, shares of the Company's
common stock or a combination thereof at the Company's election. If
the Company elects to pay the difference in shares of its common
stock, the number of shares to be issued will be determined by
dividing the difference between the Negotiated Value and the Trading
Value by the Trading Price. If, at the close of such ten trading day
period, the Trading Value is more than 105% of the Negotiated Value,
WDS will return shares to the Company in an amount determined in the
same manner.
The results of operations for WDS have been included in the
Company's operations since the acquisition date. The purchase price
has been allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the acquisition date. The
allocation of the purchase price is subject to final determination
based upon potential changes in the Company's stock price in the
event some or all of the Negotiated Value is paid with common stock.
Intangible assets related to the WDS acquisition include $16.2
million of acquired technology to be amortized over five years, $6.4
million of customer lists to be amortized over seven years and $3.3
million of goodwill.
There were several in-process research and development
projects at the time of the WDS acquisition. The efforts required to
complete acquired in-process research and development include
planning, designing, testing and other activities necessary to
establish that the product or enhancement to existing products can
be produced to meet desired functionality and technical performance
requirements. The value of the purchased in-process research and
development was computed using discount rates ranging from 26% to
30% on the anticipated income stream of the related product revenue.
The discounted cash flows were based on management's forecast of
future revenue, costs of revenue and operating expenses related to
the products and technologies purchased from WDS. The determined
value was then adjusted to reflect only the value creation efforts
of WDS prior to the close of the acquisition. At the time of the
acquisition, the products and enhancements were at various stages of
completion, ranging from approximately 2% to 96% complete. The
resulting value of purchased in-process research and development was
further reduced by the estimated value of core technology. A
purchased research and development charge of $3.8 million was
recorded in the six months ended August 31, 2002.
10
On May 23, 2002, the Company acquired substantially all of the
assets of DFE for $4.5 million. DFE is a provider of collaborative
logistics solutions that facilitate online, real-time bids for global
transportation contracts. Approximately $0.3 million of the purchase
price was paid in cash at closing. The remaining purchase price of $4.2
million was paid in cash in September 2002. Approximately $675,000 of
the purchase price is being held in escrow for the satisfaction of
indemnification claims under the terms of the acquisition agreements.
8. Restructuring and Impairment Charges
Fiscal 2003 Restructuring Plan. During the three months ended
August 31, 2002, the Company announced and implemented a restructuring
plan designed to better align our cost structure with expected revenue.
Actions taken included a reduction in the Company's workforce by
approximately 9%, a reduction in the number of contractors and the
consolidation of some smaller field offices. The reduction in workforce
was achieved through a combination of attrition and involuntary
terminations and totaled 123 employees across most business functions
and geographic regions. All terminated employees were notified by
August 31, 2002. The Company recorded a charge for severance and
related benefits of approximately $2.8 million during the three months
ended August 31, 2002. The Company also recorded a facility charge of
approximately $4.2 million during the three months ended August 31,
2002, related to the abandonment of leased office space and the
consolidation of some smaller field offices. These costs include
management's best estimates of expected sublease income.
In accordance with SFAS 144, the Company recorded an
impairment charge relating to the restructuring of approximately $0.2
million during the three months ended August 31, 2002. The
restructuring impairment charge consisted primarily of the abandonment
of certain furniture, fixtures, computer equipment and leasehold
improvements related to the closure of certain facilities.
Fiscal 2003 Impairment Charge. In accordance with SFAS 144,
the Company recorded an impairment charge of approximately $1.2 million
during the three months ended August 31, 2002. The impairment relates
to the discontinued use of a portion of the Company's sales force
automation software, which is being replaced with another tool. The
remaining net book value at August 31, 2002 of $0.7 million will be
amortized over its remaining useful life of approximately one year.
Fiscal 2002 Restructuring Plans. During June 2001, the Company
adopted a restructuring plan in order to centralize certain of its
product development functions in Rockville, MD from two remote offices.
This resulted in the closure of one office and reduction of space
occupied in another office, as well as the relocation and termination
of approximately 10 and 40 employees, respectively. As a result, the
Company recorded a restructuring charge related to the product
development consolidation of approximately $2.4 million during fiscal
2002.
During October 2001, the Company announced and implemented an
additional restructuring plan designed to reduce expenses as a result
of expected reduction in revenues caused primarily by client concerns
about committing to large capital projects in the face of weakening
global economic conditions. We believe that these concerns were
heightened further by the terrorist attacks in the United States on
September 11, 2001 making it difficult for us to accurately forecast
our revenues while global economic conditions were uncertain. Actions
taken included a reduction in the Company's workforce and a reduction
in the amount of office space to be used in certain of the Company's
leased facilities. Involuntary employee terminations totaled 123 across
most business functions and geographic regions through November 30,
2001. All terminated employees were notified by November 30, 2001. The
Company recorded a charge for severance and related benefits of
approximately $1.9 million during fiscal 2002. The Company recorded a
facility charge of approximately $2.3 million during fiscal 2002
resulting from approximately $0.7 million related to the abandonment of
leased office space in two offices as well as approximately $1.6
million from the expected loss of sublease rental income on office
space closed in fiscal 1999. These costs include management's best
estimates of the remaining lease obligations and loss of sublease
rental income.
11
The following table sets forth a summary of the restructuring
and impairment charges, payments made against those charges and the
remaining liabilities as of August 31, 2002 (in thousands):
Non-cash
asset
disposal
Utilization Utilization Balance
of cash Charges of cash losses
in three Balance in three in three in three Balance
Balance months as of months months months as of
as of Feb ended May May ended Aug. ended Aug. ended Aug. Aug.
28, 2002 31, 2002 31, 2002 31, 2002 31, 2002 31, 2002 31, 2002
Lease obligations and $ 5,476 $ (290) $ 5,186 $ 4,211 $ (413) $ -- $ 8,984(3)
terminations
Severance and related 244 (39) 205 2,763 (2,066) -- 902
benefits
Impairments charges -- -- -- 1,449 -- (1,449) --
Other 15 (15) -- 414 (61) (259) 94
--------- ------- ------- ------- ------- ------- ---------
Total $ 5,735(1) $ (344) $ 5,391 $ 8,837 $(2,540) $(1,708) $ 9,980(2)
======= ======= ======= ======= ======= ======= =======
(1) $1.6 million and $4.1 million are included in other accrued
current liabilities and other non-current liabilities,
respectively, in the consolidated balance sheet as of February
28, 2002.
(2) $2.5 million and $7.5 million are included in other accrued
current liabilities and other non-current liabilities,
respectively, in the consolidated balance sheet as of August
31, 2002.
(3) Certain lease obligations extend through fiscal year 2009.
9. Income Taxes
Income tax expense of $20.7 million and $20.8 million was
recorded for the three and six-month periods ended August 31, 2002,
respectively. Management regularly evaluates the realizability of its
deferred tax assets given the nature of its operations and the tax
jurisdictions in which it operates. Based on various factors including
cumulative losses for fiscal 2001, 2002 and 2003 when adjusted for
non-recurring items, the size of our expected loss for fiscal 2003 and
estimates of future profitability, management has concluded that future
income will, more likely than not, be insufficient to recover its net
deferred tax assets. Based on the weight of positive and negative
evidence regarding recoverability of our deferred tax assets (primarily
net operating loss carryforwards), we recorded a valuation allowance
for the full amount of our net deferred tax assets, which resulted in a
$20.4 million charge to income tax expense in the three and six months
ended August 31, 2002, respectively. Despite the valuation allowance,
these deferred tax assets and the future tax-deductible benefits
related to these deferred tax assets will remain available to offset
future taxable income. Management will continue to monitor its
estimates of future profitability and realizability of its net deferred
tax assets based on evolving business conditions.
10. Supplemental Cash Flow Information
The Company paid total interest of $6.3 million and $6.7
million during the six months ended August 31, 2002 and 2001,
respectively.
Supplemental information of non-cash financing activities is
as follows:
- We recorded approximately $4.7 million and $0.5
million in capital leases during the six months ended
August 31, 2002 and 2001, respectively.
11. Subsequent Events
On September 26, 2002, the Company announced plans to further
reduce its workforce and contractors by approximately 10% to 12%. The
reduction in workforce and contractors will be achieved through a
combination of attrition and involuntary terminations. In addition, the
Company announced other cost reduction measures including reductions in
discretionary spending. These cost reduction measures have been devised
to better align our cost structure with expected revenue. The Company
expects to record a restructuring charge of approximately $2 to $4
million in the quarter ending November 30, 2002 for severance and
related benefits associated with involuntary terminations and possibly
lease termination costs and impairment losses on property and
equipment. See "Forward Looking Statements" and "Factors That May
Affect Future Results."
12
Richard Bergmann, our former President, who had been on a
personal leave of absence since June 2002, resigned effective October
15, 2002. All sales and services functions now report directly to
Gregory Owens, Chairman and Chief Executive Officer.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS:
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES AND OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS REPORT. THE DISCUSSION AND ANALYSIS
CONTAINS FORWARD-LOOKING STATEMENTS AND ARE MADE IN RELIANCE UPON SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AND OTHER FORWARD-LOOKING STATEMENTS MADE ELSEWHERE IN THIS REPORT AS
A RESULT OF SPECIFIED FACTORS, INCLUDING THOSE SET FORTH UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE RESULTS."
Overview:
We are a leading global provider of Enterprise Profit Optimization(TM)
(EPO) solutions. We provide solutions for supply chain management (SCM),
supplier relationship management (SRM), pricing and revenue optimization (PRO)
and service & parts management (S&PM). Our solutions help companies lower
operating costs, improve customer service, increase revenues, enhance
profitability and accelerate revenue and earnings growth. They do this by
creating efficiencies in how goods and services are brought to market (supplier
relationship management and supply chain management), how they are sold (pricing
and revenue optimization) and how they are serviced and maintained (service &
parts management). EPO solutions provide additional benefits by combining the
proven cost-reducing power of SRM, SCM and S&PM solutions with the
revenue-enhancing capability of PRO solutions. These solutions integrate
pricing, forecasting, and operational planning and execution to help companies
enhance margins across their enterprises and extended trading networks.
Our SCM solutions help companies plan, optimize and execute their
supply chain processes. These processes include manufacturing, distribution and
service operations, and collaboration with a company's extended trading network
of suppliers and customers. Our SRM solutions help improve the activities
required to design, source, and procure goods and to collaborate more
effectively with key suppliers of direct materials. Our PRO solutions help
optimize a company's demand chain, including pricing and promotions to all
customers through all channels, with the aim of balancing the trade-offs between
profitability and other strategic objectives such as market share. Our S&PM
solutions help companies optimize and manage their service and parts operations
by effectively planning and scheduling maintenance programs, parts, materials,
tools, manpower and repair facilities to profitably provide the highest levels
of customer service. We also provide strategic consulting, implementation and
customer support services to our clients as part of our solutions.
Increasing global competition, shortening product life cycles and more
demanding customers are forcing businesses to provide improved levels of
customer service while shortening the time it takes to bring their products and
services to market. We were an early innovator in solutions that allow
collaboration among our clients and their customers and suppliers. We focus the
development of our technology on addressing the changing needs of companies in
the markets we serve, including the need to do business in extended trading
networks. We offer solutions to companies in many industries including apparel;
automotive; chemical & energy; communications & high technology; consumer
packaged goods; food & agriculture; footwear & textiles; forest products;
government, aerospace & defense; industrials; life sciences; retail; third-party
logistics; transportation; travel, transport & hospitality; and utilities. Our
customer base of approximately 1,200 clients includes large, multinational
enterprises such as 3Com Corporation; AT&T; Amazon.com; BMW; Boeing Co.; BP;
Brown & Williamson Tobacco Corp.; Caterpillar Mexico S.A. de C.V.; Circuit City;
Cisco Systems Inc.; Coca-Cola Bottling Co. Consolidated; Compaq Computer
Corporation; Continental Airlines; DaimlerChrysler; Delta Air Lines; Diageo;
DuPont; Fairchild Semiconductor; Ford Motor Company; General Electric;
Harley-Davidson, Inc.; Hormel Foods Corp.; Kraft Foods, Inc.; Levi Strauss &
Co.; Nestle; Staples, Inc.; RadioShack Corporation; Texas Instruments
Incorporated; and Unilever Home & Personal Care, USA; as well as mid-sized
enterprises.
13
As a result of progressive weakening of global economic conditions
during fiscal 2002, the Company faced new challenges in its ability to grow
revenue, improve operating performance and expand market share. The weakening
macroeconomic environment included a recession in the United States economy that
was fueled by substantial reductions in capital spending by corporations
world-wide, especially spending on information technology. Economic conditions
deteriorated more severely as a result of the terrorist attacks in the United
States on September 11, 2001, subsequent bioterrorism threats and resulting
political and military actions. During our second and third quarters of fiscal
2002, we experienced delays in consummating software license transactions,
especially during the last few days of the quarter ended August 31, 2001. The
delays were caused primarily by prospects' concerns about committing to large
capital projects in the face of uncertain global economic conditions. We believe
that these concerns were heightened further by the terrorist attacks in the
United States on September 11, 2001 making it difficult for us to accurately
forecast our revenues while global economic conditions were uncertain. Late in
our quarter ended November 30, 2001, we began to see improvements in closure
rates on software license transactions. Our closure rates on software license
transactions continued to improve during our quarter ended February 28, 2002, as
evidenced by increases in software revenue as compared to our second and third
quarters of fiscal 2002.
As we entered into fiscal 2003, global economic conditions and
information technology spending appeared to be stabilizing. However, capital
spending by corporations, especially spending on enterprise application
software, continues to be weak. In addition, we believe that market conditions
overseas, especially in Europe, tend to lag the United States. As enterprise
application software spending by United States and European corporations further
slowed late in our quarter ended May 31, 2002 and into our quarter ended August
31, 2002, our financial performance was adversely affected.
In response to the weakness in spending on enterprise application
software, we have enacted a number of cost containment and cost reduction
measures in our second and third quarters of fiscal 2003, in addition to those
implemented during fiscal 2002, to reduce our cost structure. In our second
quarter of fiscal 2003, we reduced our workforce by 9% across the organization,
reduced the number of contractors, implemented a mandatory unpaid vacation for
all U.S. employees during the first week in July and a voluntary week of unpaid
leave during our second quarter of fiscal 2003 for our European employees and
consolidated some of our smaller field offices. These cost containment and cost
reduction measures resulted in restructuring and impairment charges of
approximately $8.8 million in the quarter ending August 31, 2002 for severance
and related benefits associated with involuntary terminations, lease termination
costs, contract termination costs and impairment charges on our sales force
automation software, property, equipment and leasehold improvements. Our
implementation of cost containment and cost reduction initiatives during the
quarter ended August 31, 2002 better aligned our operating cost structure with
the anticipated reduction in revenue levels due to the downturn in the global
economy. This is evidenced by the decrease in total expenditures, when adjusted
for non-cash items and restructuring and impairment charges, as compared to
total revenues. In the three months ended August 31, 2002, total operating
expenses, excluding non-cash items (amortization of developed technology and
intangibles, non-cash stock compensation expense, purchased research and
development and impairment charges) and restructuring charges, decreased 10.6%
sequentially, or $9.6 million, compared to a sequential decrease in total
revenues of 6.3%, or $4.7 million.
We have enacted additional cost reduction measures in our third quarter
of fiscal 2003, including a 10% - 12% reduction in our workforce and contractors
across the organization, implemented a mandatory unpaid vacation for all U.S.
employees during the first week in September and a voluntary week of unpaid
leave during our third quarter of fiscal 2003 for our European employees and
further reduced discretionary spending. We expect that the cost reduction
measures implemented in our third quarter of fiscal 2003 will reduce our cost
structure by approximately $5 to $7 million per quarter and will result in a
restructuring charge of approximately $2 to $4 million in the quarter ending
November 30, 2002 for severance and related benefits associated with involuntary
terminations and possible lease termination costs and impairment losses on
property and equipment.
In the aggregate, we expect that all cost containment and cost
reduction measures implemented in fiscal 2003 will reduce our cost structure by
approximately $60 to $68 million on an annualized basis.
14
Results of Operations:
The following table includes the condensed consolidated statements of
operations data for the three and six months ended August 31, 2002 and 2001
expressed as a percentage of revenue:
Three months ended August 31, Six months ended August 31,
2002 2001 2002 2001
----- ----- ----- -----
REVENUE:
Software 25.9% 33.6% 29.5% 42.0%
Services 39.5% 37.3% 37.7% 33.1%
Support 30.4% 25.3% 28.7% 21.6%
Reimbursed expenses 4.2% 3.8% 4.1% 3.3%
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
OPERATING EXPENSES:
Cost of software 7.0% 6.7% 7.7% 6.1%
Amortization of acquired technology 5.1% 3.1% 4.5% 2.3%
Cost of services and support 36.2% 32.9% 35.4% 28.6%
Cost of reimbursed expenses 4.2% 3.8% 4.1% 3.3%
Sales and marketing 34.7% 40.8% 38.2% 38.6%
Product development 23.9% 27.6% 23.7% 22.1%
General and administrative 10.1% 9.5% 9.9% 8.9%
Amortization of intangibles 1.4% 28.5% 1.3% 24.6%
Restructuring and impairment charges 12.6% 3.3% 6.1% 1.5%
Purchased research and development -- -- 2.6% --
Non-cash stock compensation expense (benefit) 1.2% (15.4)% 1.3% (3.3)%
----- ----- ----- -----
Total operating expenses 136.5% 140.8% 134.8% 132.7%
----- ----- ----- -----
Loss from operations (36.5)% (40.8%) (34.8)% (32.7%)
Other expense, net (2.2)% (1.2)% (2.6)% (0.1)%
----- ----- ----- -----
Loss before income taxes (38.7%) (41.9%) (37.4%) (32.8%)
Provision for (benefit from) income taxes 29.6% (12.6%) 14.4% (5.7%)
----- ----- ----- -----
Net loss (68.2)% (29.4%) (51.8)% (27.1%)
===== ===== ===== =====
The percentages shown above for cost of services and support, sales and
marketing, product development and general and administrative expenses have been
calculated excluding non-cash stock compensation expense (benefit) as follows
(in thousands):
Three months ended August 31, Six months ended August 31,
--------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Cost of services and support $ 427 $ (2,654) $ 905 $ (925)
Sales and marketing 123 (5,215) 510 (2,703)
Product development 99 (2,694) 185 (1,508)
General and administrative 196 (807) 322 (327)
-------- -------- -------- --------
$ 845 $(11,370) $ 1,922 $ (5,463)
======== ======== ======== ========
See "Non-Cash Stock Compensation Expense (Benefit)" for further detail.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The accompanying discussion and analysis of our financial condition and
results of operations are based upon our unaudited condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires that we make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the
15
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from the estimates made by management with respect to these and other items that
require management's estimates.
We have identified the accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management's judgments and estimates. These significant accounting policies
relate to revenue recognition, allowance for doubtful accounts, capitalized
software, valuation of long-lived assets, including intangible assets and
impairment review of goodwill and deferred income taxes. These policies, and our
procedures related to these policies, are described in detail below. In
addition, please refer to the audited financial statements and notes included in
the Annual Report on Form 10-K of the Company for the fiscal year ended February
28, 2002.
Revenue Recognition
Our revenue consists of software revenue, services revenue, support
revenue and reimbursed expenses. Software revenue is generally recognized upon
execution of a software license agreement and shipment of the software, provided
the fees are fixed and determinable and collection is considered probable in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as modified
by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions ("SOP 97-2")," and Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin 101 ("SAB 101"), "Revenue
Recognition." If the Company determines that the arrangement fee is not fixed or
determinable at the outset of the customer arrangement, the Company defers the
revenue and recognizes the revenue when the arrangement fee becomes due and
payable. If the Company determines that collectibility is not probable at the
outset of the customer arrangement, the Company defers the revenue and
recognizes the revenue when payment is received. If a software license contains
customer acceptance criteria or a cancellation right, the software revenue is
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period or cancellation right.
Fees are allocated to the various elements of software license
agreements based on "vendor specific objective evidence" ("VSOE") for all
elements of a software arrangement. VSOE of fair value for all elements of an
arrangement is based upon the normal pricing and discounting practices for those
products and services when sold separately and, for support services, is
additionally measured by the renewal rate. If the Company does not have VSOE for
one of the delivered elements of an arrangement, but does have VSOE for all
undelivered elements, the Company uses the residual method to record revenue.
Under the residual method, the Company defers revenue for the fair value of its
undelivered elements and the remaining portion of the arrangement fee is
allocated to the delivered elements and recognized as revenue when the basic
criteria in SOP 97-2 have been met.
Typically, payments for software licenses are due within twelve months
from the agreement date. Where software license agreements call for payment
terms of twelve months or more from the agreement date, software revenue is
recognized as payments become due and all other conditions for revenue
recognition have been satisfied. When we provide services that are considered
essential to the functionality of software products sold or if software sold
requires significant production, modification or customization, we account for
the software and services revenue in accordance with SOP 81-1, "Accounting for
Performance of Construction Type and Certain Production Type Contracts," which
requires us to use the percentage-of-completion method of revenue recognition.
In these cases, software revenue is recognized based on labor hours incurred to
date compared to total estimated labor hours for the contract.
Implementation services are separately priced, generally available from
a number of suppliers and typically not essential to the functionality of our
software products. Implementation services, which include project management,
systems planning, design and implementation, customer configurations and
training are typically billed on an hourly basis (time and materials) and
sometimes under fixed price contracts. Implementation services billed on an
hourly basis are recognized as the work is performed. On fixed price contracts,
services revenue is recognized using the percentage-of-completion method of
accounting by relating labor hours incurred to date to total estimated labor
hours at completion.
16
Support revenue includes post-contract support and the rights to
unspecific software upgrades and enhancements. Support revenue from customer
support services are generally billed annually with the revenue being deferred
and recognized ratably over the maintenance period.
Allowance for Doubtful Accounts
For each of the three years in the period ended February 28, 2002, and
for the six months ended August 31, 2002, our provision for doubtful accounts
has ranged between approximately 1% and 3% of total revenues. We initially
record the provision for doubtful accounts based on our historical experience of
write-offs and adjust our allowance for doubtful accounts at the end of each
reporting period based on a detailed assessment of our accounts receivable and
related credit risks. In estimating the allowance for doubtful accounts,
management considers the age of the accounts receivable, our historical
write-offs, the credit worthiness of the customer, the economic conditions of
the customer's industry and general economic conditions, among other factors.
Should any of these factors change, the estimates made by management will also
change, which could affect the level of the Company's future provision for
doubtful accounts. The provision for doubtful accounts is included in sales and
marketing expense (for software license receivables) and cost of services and
support, in the condensed consolidated statement of operations.
Capitalized Software
We capitalize the development cost of software, other than internal use
software, in accordance with Statement of Financial Accounting Standards No. 86
("SFAS 86"), "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed." Software development costs are expensed as incurred
until technological feasibility has been established, at which time such costs
are capitalized until the product is available for general release to clients.
Software development costs are amortized at the greater of the amount computed
using either: (a) the straight-line method over the estimated economic life of
the product, commencing with the date the product is first available for general
release; or (b) the ratio that current gross revenue bears to total current and
anticipated future gross revenue. Generally, an economic life of two years is
used to amortize capitalized software development costs.
Valuation of Long-Lived Assets, Including Intangible Assets and Impairment
Review of Goodwill
We assess the impairment of long-lived assets, including intangible
assets, whenever events or changes in circumstances indicate that the carrying
value may not be fully recoverable. When we determine that the carrying value of
such assets may not be recoverable, we generally measure any impairment based on
a projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model. Other intangible assets, including acquired technology, are amortized
over periods ranging from two to seven years.
On March 1, 2002, we adopted SFAS 142 and as a result, we no longer
amortize goodwill. We performed the initial impairment review of our goodwill
required by SFAS 142 during the first quarter of fiscal 2003 and no impairment
loss was recognized. During the quarter ended August 31, 2002, we experienced
adverse changes in our stock price resulting from a decline in our financial
performance and adverse business conditions that have affected the technology
industry, especially application software companies. Based on these factors, we
performed a test for goodwill impairment on August 31, 2002 and determined that
based on the implied fair value (which includes factors such as, but not limited
to, the Company's market capitalization, control premium and recent stock price
volatility) of the Company as of August 31, 2002, there was no impairment of
goodwill. We will continue to perform additional impairment reviews annually and
whenever an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. Based on
continued adverse changes in our stock price since August 31, 2002 and adverse
business conditions that continue to affect the application software industry,
the Company will also perform a test for goodwill impairment at November 30,
2002. There can be no assurance that at the time additional reviews are
completed material impairment charges will not be recorded. Please refer to Note
2 in the Notes to Condensed Consolidated Financial Statements included elsewhere
in this report for further discussion of SFAS 142 and see "Factors That May
Affect Future Results - Risks Related to Our Business."
17
Deferred Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." We assess the
likelihood that our deferred tax assets will be recovered from our future
taxable income, and to the extent we believe that recovery is not likely, we
establish a valuation allowance. We consider historical taxable income,
estimates of future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the amount of the valuation allowance. Adjustments could
be required in the future if we determine that the amount to be realized is
greater or less than the valuation allowance we have recorded. During the three
and six months ended August 31, 2002, we did not record a deferred income tax
benefit to offset our loss before income taxes. Based on various factors,
including our cumulative losses for fiscal 2001, 2002 and 2003 when adjusted for
non-recurring items, the size of our expected loss for fiscal 2003 and estimates
of future profitability, management has concluded that future income will, more
likely than not, be insufficient to recover its net deferred tax assets. Based
on the weight of positive and negative evidence regarding recoverability of our
deferred tax assets (primarily net operating loss carryforwards), we recorded a
valuation allowance for the full amount of our net deferred tax assets, which
resulted in a $20.4 million charge to income tax expense in the three and six
months ended August 31, 2002. Management will continue to monitor its estimates
of future profitability and realizability of its net deferred tax assets based
on evolving business conditions.
REVENUE:
Software Revenue. Software revenue decreased 27.0%, or $6.7 million,
and 39.0%, or $27.2 million for the three and six months ended August 31, 2002,
respectively, as compared to the same periods in 2001. The decrease in software
revenue was primarily due to the continued weakness of the global economy and
related decline in spending for enterprise application software, which resulted
in a decrease in the average selling price ("ASP") for our software for the
three and six months ended August 31, 2002 and a decrease in software
transactions for the six months ended August 31, 2002.
The following table summarizes our software transactions for the three
and six months ended August 31, 2002 and August 31, 2001:
Three Months Ended Six Months Ended
August 31, August 31,
2002 2001 2002 2001
------ ------ ------ ------
Significant Software Transactions (1)
Number of transactions 27 22 48 57
Average selling price (in thousands) $ 614 $1,074 $ 827 $1,190
(1) Significant software transactions are those with a value of $100,000 or
greater recognized within the fiscal quarter.
The following table summarizes the number of software transactions of
$1.0 million or greater:
Three Months Ended Six Months Ended
August 31, August 31,
2002 2001 2002 2001
---- ---- ---- ----
Software transactions $1.0 million - $2.49 million 4 2 10 9
Software transactions $2.5 million - $4.9 million 0 0 2 3
Software transactions $5.0 million or greater 0 2 0 4
---- ---- ---- ----
Total software transactions $1.0 million or greater 4 4 12 16
We believe the reduction in software transactions of $1.0 million or
greater in the six months ended August 31, 2002 is primarily the result of
companies becoming more cautious and deliberate regarding commitments to large
capital expenditures due to the uncertain global economic conditions, as
evidenced by:
- the decrease in the number of software transactions of $2.5
million or greater in the six months ended August 31, 2002 as
compared to the same period in 2001; and
- customers licensing fewer software modules in the six months
ended August 31, 2002 as compared to the same period in 2001.
18
Services Revenue. Services revenue increased 0.3%, or $0.1 million, and
decreased 1.0%, or $0.6 million during the three and six months ended August 31,
2002, respectively, compared to the same periods in 2001. The decrease in
services revenue during the six months ended August 31, 2002 was the result of
the decrease in the number of completed software license transactions in fiscal
2002 and fiscal 2003, and was somewhat offset by the services revenue from WDS.
As a result of the decline in the number of completed software license
transactions in fiscal 2002 and fiscal 2003, we believe that services revenue in
fiscal 2003 will be lower than fiscal 2002. Services revenue tends to track
software license revenue in prior periods. See "Forward Looking Statements" and
"Factors That May Affect Future Results."
Support Revenue. Support revenue increased 14.0%, or $2.6 million, and
$15.6%, or $5.6 million during the three and six months ended August 31, 2002,
respectively, compared to the same period in 2001. The increase in support
revenue during the three and six months ended August 31, 2002 was due to the
increase in the base of clients that have licensed our software products and
entered into annual support arrangements coupled with renewals of annual support
agreements by our existing client base and the WDS acquisition. In the past, we
have experienced high rates of renewed annual support contracts. There can be no
assurance that this renewal rate will continue. See "Forward Looking Statements"
and "Factors That May Affect Future Results."
International Revenue. We market and sell our software and services
internationally, primarily in Europe, Asia, Canada and Latin America. Revenue
outside of the United States was 23.9% and 28.2% of total revenue, or $16.7
million and $20.8 million, during the three months ended August 31, 2002 and
2001, respectively, and 23.0% and 26.6% of total revenue, or $33.3 million and
$44.3 million, during the six months ended August 31, 2002 and 2001,
respectively. The decrease in this revenue resulted from the progressive
weakening of global economic conditions, especially in the European economies
which resulted in delayed buying decisions by prospects and customers for our
products. We believe increasing international revenue is important and may lower
our overall exposure to unfavorable economic conditions in specific regions.
OPERATING EXPENSES:
Cost of Software. Cost of software consists primarily of amortization
of capitalized software development costs and royalty fees associated with
third-party software either embedded in our software or resold by us. The
following table sets forth amortization of capitalized software development
costs and other costs of software for the three and six months ended August 31,
2002 and 2001 (in thousands):
Three Months Ended August 31, Six Months Ended August 31,
2002 2001 2002 2001
---------- ---------- ---------- ---------
Amortization of capitalized software $ 2,814 $ 2,951 $ 6,412 $ 5,954
Percentage of software revenue 15.5% 11.9% 15.0% 8.5%
Other costs of software 2,078 2,012 4,718 4,144
Percentage of software revenue 11.5% 8.1% 11.1% 5.9%
---------- ---------- ---------- ---------
Total cost of software $ 4,892 $ 4,963 $ 11,130 $ 10,098
Percentage of software revenue 27.0% 20.0% 26.1% 14.5%
The decrease in cost of software during the three months ended August
31, 2002 compared to the same period in 2001 was primarily a result of decreased
amortization of capitalized software. The increase in cost of software during
the six months ended August 31, 2002 was primarily the result of increased other
costs of software and increased amortization of capitalized software. The
increase in other costs of software during the six months ended August 31, 2002
was the result of increases in royalties paid to third parties as a result of
the mix of software sold and increases in fixed royalty expenses that are not
dependent on individual software transactions. Amortization of capitalized
software does not vary with software revenue.
Amortization of Acquired Technology. In connection with our acquisition
of WDS in April 2002 and certain previous acquisitions, we acquired developed
technology that we offer as part of our integrated solutions. Acquired
technology is amortized over periods ranging from four to six years.
Cost of Services and Support. Cost of services and support primarily
includes personnel and third party contractor costs. Cost of services and
support as a percentage of related revenue was 51.7% and 52.6% in the three
19
months ended August 31, 2002 and 2001, respectively, and 53.3% and 52.4% during
the six months ended August 31, 2002 and 2001, respectively. Cost of services
and support increased 4.1%, or $1.0 million, and 7.3%, or $3.5 million during
the three and six months ended August 31, 2002, respectively, compared to the
same periods in 2001. The increase in cost of services and support was primarily
attributable to an increase in support royalties paid to third parties and the
WDS acquisition in April 2002, somewhat offset by the implementation of our cost
containment and cost reduction initiatives. The decrease in cost of services and
support as a percentage of related revenue in the three months ended August 31,
2002 reflects an increase in the proportion of this revenue derived from support
services, which historically have higher margins than implementation services.
Sales and Marketing. Sales and marketing expense consists primarily of
personnel costs, sales commissions, promotional events such as trade shows and
technical conferences, advertising and public relations programs. Sales and
marketing expense decreased 19.4%, or $5.8 million, and 13.8%, or $8.9 million,
during the three and six months ended August 31, 2002, respectively, compared to
the same periods in 2001. The decreases during the three and six months ended
August 31, 2002 were primarily due to:
- an overall decrease in the number of sales, marketing and
business development employees primarily resulting from cost
containment and cost reduction measures implemented in the
second half of fiscal 2002 and fiscal 2003;
- a decrease in wages due to the mandatory unpaid leave program
for all U.S. employees and a voluntary unpaid leave program
for all international employees in our second quarter of
fiscal 2003;
- a decrease in sales commissions due to lower software revenue;
and
- a decrease in promotional spending, travel, advertising and
public relations spending resulting from cost containment and
cost reduction measures implemented in the second half of
fiscal 2002 and fiscal 2003.
Product Development. Product development costs include expenses
associated with the development of new software products, enhancements of
existing products and quality assurance activities and are reported net of
capitalized software development costs. Such costs are primarily from employees
and third party contractors. The following table sets forth product development
costs for the three and six months ended August 31, 2002 and 2001 (in
thousands):
Three Months Ended August 31, Six Months Ended August 31,
2002 2001 2002 2001
---------- ---------- --------- ----------
Gross product development costs $ 19,314 $ 23,117 $ 40,434 $ 41,988
Percentage of total revenue 27.6% 31.3% 28.0% 25.3%
Less: Capitalized product development costs 2,633 2,791 6,221 5,227
Percentage of total revenue 3.8% 3.8% 4.3% 3.1%
---------- ---------- --------- ----------
Product development costs, as reported $ 16,681 $ 20,326 $ 34,213 $ 36,761
Percentage of total revenue 23.9% 27.6% 23.7% 22.1%
Gross product development costs decreased 16.5%, or $3.8 million, and
3.7%, or $1.6 million, during the three and six months ended August 31, 2002,
respectively, compared to the same periods in 2001. This was primarily due to:
- an increase in the proportion of our development work being
performed by contractors in India in order to take advantage
of cost efficiencies associated with India's lower wage
scale.;
- a decrease in wages due to the mandatory unpaid leave program
for all U.S. employees in our second quarter of fiscal 2003;
and
- a decrease in the average number of contractors in the United
States resulting from cost containment and cost reduction
measures implemented in the second half of fiscal 2002 and
fiscal 2003, respectively.
This decrease was somewhat offset by an increase in gross product
development costs resulting from the WDS acquisition in April 2002.
20
The decrease in capitalized product development costs in the three
months ended August 31, 2002 was due primarily to the decreases listed above.
The increase in capitalized product development costs in the six months ended
August 31, 2002 was due to increased costs associated with our latest product
release completed in May 2002, somewhat offset by the decreases listed above.
General and Administrative. General and administrative expenses include
personnel and other costs of our legal, finance, accounting, human resources,
facilities and information systems functions. General and administrative
expenses increased 1.4%, or $0.1 million, and decreased 3.5%, or $0.5 million,
during the three and six months ended August 31, 2002, respectively, compared to
the same periods in 2001. The changes in the three and six months ended August
31, 2002 was due to an increase in costs resulting from the WDS acquisition in
April 2002, partially offset by a decrease in the number of general and
administrative employees resulting from cost containment and cost reduction
measures implemented in the second half of fiscal 2002 and fiscal 2003.
Amortization of Intangibles. Our acquisition of WDS in April 2002 and
certain previous acquisitions were accounted for under the purchase method of
accounting. As a result, we recorded goodwill and other intangible assets that
represent the excess of the purchase price paid over the fair value of the net
tangible assets acquired. Other intangible assets are amortized over periods
ranging from two to seven years. Amortization of intangibles decreased by $20.0
million and $39.1 million during the three and six months ended August 31, 2002
compared to the same periods in 2001. This decrease resulted from our adoption
of SFAS 142 on March 1, 2002, which requires that we no longer amortize goodwill
and assembled workforce. Details of our amortization of intangibles are included
in Note 5 in the Notes to our Condensed Consolidated Financial Statements
included elsewhere in this report.
Restructuring and Impairment Charges. We adopted restructuring plans in
both the second quarter of fiscal 2003 and the second quarter of fiscal 2002. In
connection with our decision to implement these plans, we incurred a charge of
$8.8 million in the three and six months ended August 31, 2002, respectively,
and $2.4 million in the three and six months ended August 31, 2001,
respectively. The charges in fiscal 2003 were primarily attributable to
severance and related benefits, remaining lease obligations and impairment of
long-lived assets incurred on or prior to August 31, 2002. The charges in fiscal
2002 were primarily attributable to severance and related benefits, employee
relocation costs and remaining lease obligations incurred on or prior to August
31, 2001. Details of our restructuring and impairment charges are included in
Note 8 in the Notes to our Condensed Consolidated Financial Statements included
elsewhere in this report.
Purchased Research and Development. Our acquisition of WDS included the
purchase of technology that has not yet been determined to be technologically
feasible and has no alternative future use in its then-current stage of
development. Accordingly, in the six months ended August 31, 2002, $3.8 million
of the purchase price for WDS was allocated to purchased research and
development and expensed immediately in accordance with generally accepted
accounting principles. Details of our acquisitions are included in Note 7 in the
Notes to our Condensed Consolidated Financial Statements included elsewhere in
this report.
Non-Cash Stock Compensation Expense (Benefit). We recognized non-cash
stock compensation expense of $0.8 million and $1.9 million during the three and
six months ended August 31, 2002 related to unvested stock options assumed in
the Talus acquisition and $(11.4) million and $(5.5) million during the three
and six months ended August 31, 2001 primarily related to stock options that
were repriced in January 1999 and unvested stock options assumed in the Talus
acquisition. These amounts are included as a component of stockholders' equity
and are amortized by charges to operations in accordance with FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation."
Repriced Options:
In January 1999, the Company repriced certain employee stock options,
other than those held by executive officers or directors. Approximately 3.0
million options were repriced and the four-year vesting period started over.
Under FIN 44, repriced options are subject to variable plan accounting, which
requires compensation cost or benefit to be recorded each period based on
changes in our stock price until the repriced options are exercised, forfeited
or expire. This resulted in a benefit of $0 and $12.6 million, and $0 and $8.0
million during the three and six months
21
ended August 31, 2002 and 2001, respectively. The initial fair value used to
measure the ongoing stock compensation charge or benefit was $22.19 based on the
closing price of our common stock on June 30, 2000. Since our stock price at the
beginning and end of the three months ended August 31, 2002 was below $22.19, no
charge or benefit was recorded during the quarter. As of August 31, 2002,
approximately 0.9 million repriced options were still outstanding with a
remaining vesting period of approximately six months. In future periods, we will
record additional charges or benefits related to the repriced stock options
still outstanding based on the change in our common stock price compared to the
last reporting period. If our stock price at the beginning and end of any
reporting period is below $22.19, no charge or benefit will be recorded.
Unvested Stock Options - Talus Acquisition:
As part of the Talus acquisition, we assumed all outstanding stock
options, which were converted into our stock options. Options to purchase
approximately 631,000 shares of our common stock were unvested at the
acquisition date. FIN 44 requires the acquiring company to measure the intrinsic
value of unvested stock options assumed at the acquisition date in a purchase
business combination and record a compensation charge over the remaining vesting
period of those options to the extent those options remain outstanding. This
resulted in a charge of $0.8 million and $1.9 million in the three and six
months ended August 31, 2002, respectively, and $1.2 million and $2.5 million
during the three and six months ended August 31, 2001, respectively.
Other Expense, Net:
Other expense, net, includes interest income from cash equivalents and
marketable securities, interest expense from borrowings, foreign currency
exchange gains or losses and other gains or losses. Other expense was $1.5
million during the three months ended August 31, 2002 compared to other expense
of $865,000 in the prior year period, and was $3.7 million during the six months
ended August 31, 2002 compared to other expense of $183,000 in the prior year
period. This change relates primarily to lower interest income as a result of
lower average invested cash and marketable securities and lower average interest
rates in the three and six months ended August 31, 2002, somewhat offset by
foreign currency translation gains in the three and six months ended August 31,
2002. Interest expense was approximately the same during the comparable periods.
Provision for (Benefit) from Income Taxes:
We recorded income tax expense of $20.7 million and $20.8 million
during the three and six months ended August 31, 2002. We did not record a
deferred income tax benefit during the three and six months ended August 31,
2002 and do not expect to record a deferred income tax benefit in future
quarters when we incur a loss.
During the three months ended August 31, 2002, management concluded
that based on various factors including our cumulative losses for fiscal 2001,
2002 and 2003 when adjusted for non-recurring items, the size of our expected
loss for fiscal 2003 and estimates of future profitability, future income will,
more likely than not, be insufficient to cover its net deferred tax assets.
Based on the weight of positive and negative evidence regarding recoverability
of our deferred tax assets (primarily net operating loss carryforwards), we
recorded a valuation allowance for the full amount of our net deferred tax
assets, which resulted in a $20.4 million charge to income tax expense in the
three and six months ended August 31, 2002. Management will continue to monitor
its estimates of future profitability and realizability of its net deferred tax
assets based on evolving business conditions.
Net Loss:
We reported a net loss of $47.7 million and $21.7 million, and $74.8
million and $45.1 million for the three and six months ending August 31, 2002
and 2001, respectively. The increased net loss in the three and six months ended
August 31, 2002 compared to the same periods a year ago was primarily due to an
increased operating loss (excluding non-cash charges and restructuring and
impairment charges) and income tax charges in the fiscal 2003 periods compared
to income tax benefits in the fiscal 2002 periods, somewhat offset by the
favorable effect of the non-amortization provisions of SFAS 142 beginning March
1, 2002. Excluding the impact of amortization of acquired technology and
intangibles, restructuring and impairment charges, purchased research and
development charges associated with acquisitions, non-cash stock compensation
expense (benefit), a charge to record valuation
22
allowances against deferred tax assets and the related tax effect, we would have
reported a net loss of $13.1 million and $10.7 million, and $31.5 million and
$8.5 million for the three and six months ended August 31, 2002 and 2001,
respectively. The change is primarily due to the effects of economic uncertainty
and a related decline in spending for enterprise application software, as
discussed above.
Loss Per Common Share
Loss per common share is computed in accordance with SFAS No. 128,
"Earnings Per Share," which requires dual presentation of basic and diluted
earnings per common share for entities with complex capital structures. Basic
earnings (loss) per common share is based on net income divided by the
weighted-average number of common shares outstanding during the period. Diluted
earnings or loss per common share include, when dilutive, (i) the effect of
stock options and warrants granted using the treasury stock method, (ii) the
effect of contingently issuable shares, and (iii) shares issuable under the
conversion feature of our convertible notes using the if-converted method.
Future weighted-average shares outstanding calculations will be affected by
these, among other, factors:
- the on-going issuance of common stock associated with stock
option and warrant exercises;
- the issuance of common shares associated with our employee
stock purchase plan;
- any fluctuations in our stock price, which could cause changes
in the number of common stock equivalents included in the
diluted earnings per common share calculations;
- the issuance of common stock to effect business combinations
should we enter into such transactions;
- assumed or actual conversions of our convertible debt into
common stock; and
- the potential issuance of common stock related to the WDS
acquisition (see Note 7 in the Notes to our Condensed
Consolidated Financial Statements and "Liquidity and Capital
Resources").
Liquidity and Capital Resources:
Historically, we have financed our operations and met our capital
expenditure requirements primarily through cash flows provided from operations,
long-term borrowings and sales of equity securities. Our cash, cash equivalents
and marketable securities in the aggregate decreased $35.0 million during the
six months ended August 31, 2002 to $198.0 million. Working capital decreased
$79.7 million to $157.3 million at August 31, 2002. The decrease in cash, cash
equivalents, marketable securities and working capital resulted primarily from a
semi-annual interest payment on our convertible debt, cash payments paid at
closing for the WDS and DFE acquisitions, capital expenditures associated with
the move to our new corporate headquarters, as well as a loss from operations.
Working capital was also negatively impacted by the WDS and DFE aggregate
acquisition consideration payable of $27.8 million and the valuation allowance
recorded for the full amount of our net deferred tax assets, including $9.1
million of current deferred tax assets.
Cash used in operations was $19.4 million and $3.2 million for the six
months ended August 31, 2002 and 2001, respectively. The $16.2 million change in
operating cash flows in the six months ended August 31, 2002 resulted primarily
from the increase in the Company's operating loss before non-cash items in the
six months ended August 31, 2002. Days sales outstanding ("DSO") in accounts
receivable, which is calculated based on our second quarter revenue, decreased
to 85 days as of August 31, 2002 versus 88 days as of August 31, 2001.
Cash (used in) provided by investing activities was $(25.8) million and
$31.3 million during the six months ended August 31, 2002 and 2001,
respectively. Investing activities consist primarily of the sales and purchases
of marketable securities, purchases of property and equipment, purchases and
capitalization of software and acquisitions and investments in businesses. Total
purchases of property, equipment and software, including capitalized software,
were $17.7 million during the six months ended August 31, 2002, an increase of
$3.5 million over the comparable period in 2001. This increase was primarily due
to the completion of the buildout of our new corporate headquarters space during
fiscal 2003. Acquisitions and investments in businesses, net of cash acquired,
of $3.8 million during the six months ended August 31, 2002 relate primarily to
the WDS and DFE acquisitions. Acquisitions and investments in unconsolidated
subsidiaries, net of cash acquired, of $39.7 million during the six months ended
August 31, 2001 relate primarily to the acquisitions of Partminer Inc.'s CSD
business and certain assets of SpaceWorks, Inc. and an investment in Converge,
Inc. Purchases of marketable securities, net of sales,
23
was $4.2 million during the six months ended August 31, 2002 compared to net
sales of $85.3 million during the six months ended August 31, 2001.
Cash provided by financing activities was $4.4 million and $8.0 million
during the six months ended August 31, 2002 and 2001, respectively. Cash
provided by financing activities in the six months ended August 31, 2002 and
2001 consisted primarily of proceeds from the exercise of stock options and
employee stock plan purchases.
As of August 31, 2002, we had $250.0 million in 5% convertible
subordinated notes outstanding (the "Notes"). The Notes bear interest at 5.0%
per annum, which is payable semi-annually. The fair market value of the Notes in
the hands of the holders was $126.9 million and $176.9 million as of August 31,
2002 and February 28, 2002, respectively. The Notes mature in November 2007 and
are convertible by the holder into approximately 5.7 million shares of our
common stock at a conversion price of $44.06 per share, subject to adjustment
under certain conditions. On or after November 7, 2003, we may redeem the Notes
in whole, or from time to time, in part, at our option. Redemption can be made
on at least 30 days' notice if the trading price of our common stock for 20
trading days in a period of 30 consecutive days ending on the day prior to the
mailing of notice of redemption exceeds 120% of the conversion price of the
Notes. The redemption price, expressed as a percentage of the principal amount,
is:
Redemption Period Redemption Price
----------------- ----------------
November 7, 2003 through October 31, 2004 103%
November 1, 2004 through October 31, 2005 102%
November 1, 2005 through October 31, 2006 101%
November 1, 2006 through maturity 100%
We have a one-year committed unsecured revolving credit facility with a
commercial bank for $20.0 million, as amended, that expires on February 28,
2003. Under its terms, we may request cash advances, letters of credit, or both.
We may make borrowings under the facility for working capital purposes,
acquisitions or otherwise. The facility requires us to comply with various
operating performance, minimum net worth and liquidity covenants, restricts us
from declaring or paying cash dividends and limits the amount of cash paid for
acquisitions. As of August 31, 2002, we had $14.4 million in letters of credit
outstanding under this line primarily to secure our lease obligations for office
space. We were in compliance with all financial covenants as of August 31, 2002.
In the event that we violate financial covenants under this credit facility in
the future, the bank can require us to provide cash collateral for outstanding
letters of credit or borrowings. We may pay cash in November 2002 for the
remaining $23.6 million of consideration payable for the WDS acquisition. The
credit facility only allows us to pay up to $15.0 million in cash per
acquisition. We are in the process of obtaining a waiver or amendment to the
credit facility for this potential covenant violation. However, there can be no
assurance that we will be able to obtain such a waiver or amendment.
In April 2002, the Company entered into a credit agreement with a
commercial bank, under which the Company may borrow up to $5.0 million for the
purchase of equipment. Amounts borrowed under the facility accrue interest at a
rate equal to the greater of the three year treasury note rate plus 5% or 8.25%,
and are repaid monthly over a 36 month period. During the three months ended
August 31, 2002, the Company borrowed $1.2 million under this credit facility.
The Company may utilize the facility to fund additional equipment purchases of
up to $3.8 million through December 31, 2002. We were in compliance with all
financial covenants as of August 31, 2002.
The following summarizes our lease obligations and the effect these
obligations are expected to have on our liquidity and cash flows in future
periods (in thousands):
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Capital leases $ 2,800 $ 2,846 $ 1,314 $ 1,310 $ 546 $ -- $ 8,816
Operating leases 21,018 20,161 16,978 15,737 15,055 46,881 135,830
------ ------ ------ ------ ------ ------ -------
Total lease obligations $23,818 $23,007 $18,292 $17,047 $15,601 $46,881 $144,646
24
On January 16, 2001, we acquired STG Holdings, Inc. ("STG"). We may be
required to make additional contingent payments to the former stockholders of
STG of up to $27.9 million during fiscal 2003 if certain revenue-based
performance criteria are met during the 21-month period ending October 31, 2002.
Additional contingent payments, if any, would be payable in cash, or in limited
circumstances, in common stock at our election. Management believes that
additional contingent payments to the former stockholders of STG are not likely.
See "Forward Looking Statements" and "Factors That May Affect Future Results."
On April 26, 2002, we acquired the assets and business of WDS for a
total of $26.2 million. Approximately $2.6 million of the purchase price was
paid in cash at closing. The remaining purchase price of $23.6 million is
payable in shares of our common stock, cash, or a combination thereof at our
election and is included in acquisition consideration payable in the condensed
consolidated balance sheet as of August 31, 2002. We have agreed to issue
additional shares of our common stock to WDS (or to make a cash payment in lieu
thereof) under certain circumstances relating to the trading price of the common
stock subsequent to the effectiveness date of the registration statement which
we have filed for the resale of the shares issuable in connection with the
payment of the purchase price. However, based on our stock price in recent
weeks, it is likely that the Company will elect to pay the remaining
consideration in cash. Additional information relating to the acquisition
appears in Note 7 in the Notes to Condensed Consolidated Financial Statements
included elsewhere in this report.
On May 23, 2002, we acquired the assets and business of DFE for a total
of $4.5 million. Approximately $0.3 million of the purchase price was paid in
cash at closing. The remaining purchase price of $4.2 million was paid in cash
in September 2002.
In the future, we may pursue acquisitions of complementary businesses
and technologies. In addition, we may make strategic investments in businesses
and enter into joint ventures that complement our existing business. Any future
acquisition or investment may result in a decrease to our liquidity and working
capital to the extent we pay with cash.
We believe that our existing liquidity and expected cash flows from
operations will satisfy our capital requirements for the foreseeable future. We
believe that the combination of cash and cash equivalents, marketable securities
and anticipated cash flows from operations will be sufficient to satisfy our
potential cash payment for the STG contingent consideration, the remaining
consideration payable for the WDS acquisition and expected capital expenditures,
capital lease obligations and working capital needs for the next twelve months.
However, weakening economic conditions or continued weak demand for enterprise
application software in future periods could have a material adverse impact on
our future operating results and liquidity. Although we have no current plans to
do so, we may elect to obtain additional equity financing if we are able to
raise it on terms favorable to us. See "Forward Looking Statements" and "Factors
That May Affect Future Results."
FACTORS THAT MAY AFFECT FUTURE RESULTS:
In addition to the other information in this Form 10-Q, the following
factors should be considered in evaluating us and our business. The risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties that we do not presently know or that we currently deem
immaterial, may also impair our business, results of operations and financial
condition.
RISKS RELATED TO OUR BUSINESS
CONTINUED ADVERSE CHANGES IN GLOBAL ECONOMIC, POLITICAL AND MARKET CONDITIONS
COULD CAUSE FURTHER DECREASES IN DEMAND FOR OUR SOFTWARE AND RELATED SERVICES,
WHICH COULD NEGATIVELY AFFECT OUR REVENUE AND OPERATING RESULTS.
Our revenue and operating performance depend on the overall demand for
our software and related services. A regional and/or global adverse change in
the economy and financial markets could result in the delay or reconsideration
of customer purchases. Weak economic conditions have materially adversely
affected our financial results performance during the quarters ended August 31,
2001, November 30, 2001, May 31, 2002 and August 31,
25
2002. If demand for our software and related services continues to decrease, our
revenues may decrease and our operating results would be adversely affected,
which may cause our stock price to fall.
THE TERRORIST ATTACKS THAT TOOK PLACE IN THE UNITED STATES ON SEPTEMBER 11, 2001
AND THE POST-ATTACK DOMESTIC AND GLOBAL ENVIRONMENT HAVE CREATED OR EXACERBATED
ECONOMIC AND POLITICAL UNCERTAINTIES, SOME OF WHICH HAVE HARMED OUR BUSINESS AND
PROSPECTS AND COULD HARM OUR ABILITY IN GENERAL TO CONDUCT BUSINESS IN THE
ORDINARY COURSE.
The terrorist attacks that took place in the United States on September
11, 2001, and thereafter in the United States and elsewhere in the world and the
resulting military actions have adversely affected many businesses, including
ours, in multiple ways. Further terrorist attacks, the anticipation of
additional terrorist attacks and future developments relating to these events
could further worsen the business climate. The potential national and global
responses to these terrorist attacks, including military actions, may materially
adversely affect us in ways we cannot predict at present. Some of the possible
material adverse impacts to our business include, but are not limited to:
- further possible reductions, delays or postponements, in
capital expenditures as a result of changes in priorities and
approval processes;
- the reduced ability to do business in the ordinary course,
resulting from a variety of factors, including changes or
disruptions in movement and sourcing of materials, goods and
components or the possible interruption in the flow of
information or monies;
- a lengthening of our sales cycles and implementations, which
might result from a number of factors, including among others
changes in security measures for passenger air travel and
reductions in available commercial flights which may make it
more difficult for our sales force to schedule face-to-face
meetings with prospects and to negotiate and consummate
transactions; and
- increased credit and business risk for customers in industries
that were severely impacted by the attacks, including
passenger airlines and other travel and hospitality
industries.
AS A RESULT OF OUR SIGNIFICANT LOSSES IN RECENT FISCAL PERIODS, YOU MAY HAVE
DIFFICULTY EVALUATING OUR FUTURE PROSPECTS.
We experienced operational difficulties in fiscal 1999 and the first
half of fiscal 2000. Problems with our direct sales operation and intense
competition, among other factors, contributed to net losses in fiscal 1999 and
fiscal 2000 and a decline in revenue in fiscal 2000. Late in our second quarter
of fiscal 2002 and into our third quarter of fiscal 2002, we experienced
declines in revenue, due to weakening economic conditions and the affects
resulting from the terrorist attacks of September 11, 2001. In our first two
quarters of fiscal 2003 we again experienced a decline in revenues due to
further weakening of economic conditions which severely impacted the timing of
capital spending decisions by clients and prospects for computer software,
particularly enterprise application software. Our ability to improve our
financial performance or maintain financial stability will be subject to a
number of risks and uncertainties, including the following:
- weakening economic conditions which materially adversely
impacted our operating performance during the quarters ended
August 31, 2001, November 30, 2001, May 31, 2002 and August
31, 2002 that may continue into the future;
- slower growth in the markets for SRM, SCM, PRO and S&PM
solutions than expected;
- our ability to introduce new software products and services to
respond to technological and client needs;
- our ability to manage through difficult economic and political
environments;
26
- our ability to hire, integrate, train and deploy our direct
sales force effectively;
- our ability to expand our distribution capability through
indirect sales channels;
- our ability to implement our cost reduction initiatives,
including our ability to contain or reduce operating costs
without adversely impacting revenue growth;
- our ability to respond to competitive developments and
pricing; and
- our dependence on our current executive officers and key
employees.
If we fail to successfully address these risks and uncertainties, our
business could be harmed and we could continue to incur significant losses.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES IN RECENT YEARS. OUR FUTURE RESULTS WILL
BE ADVERSELY AFFECTED BY SEVERAL TYPES OF SIGNIFICANT NON-CASH CHARGES WHICH
COULD IMPAIR OUR ABILITY TO ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
We have recently incurred significant losses, including net losses of
$74.8 in the six months ended August 31, 2002, $115.2 million during fiscal
2002, $28.1 million in fiscal 2001 and $8.9 million in fiscal 2000. We will
incur significant non-cash charges in the future related to the amortization of
intangible assets, including acquired technology, relating to the WDS, DFE, STG,
PartMiner Inc.'s CSD business, SpaceWorks, Inc. and Talus acquisitions and
non-cash stock compensation expenses associated with our acquisition of Talus.
In addition, we have incurred and may in the future incur non-cash stock
compensation charges related to our stock option repricing. During fiscal 2002,
we announced that we were required to write off our investment in Converge,
Inc., which resulted in a pre-tax charge of $10.2 million. In the three months
ended August 31, 2002, we recorded a valuation allowance for the full amount of
our net deferred tax assets which resulted in a $20.4 million non-cash charge to
income tax expense. We may also incur non-cash charges in future periods related
to impairments of long-lived assets. We cannot assure you that our revenue will
grow or that we will achieve profitability in the future. Our ability to
increase revenue and achieve profitability will be affected by the other risks
and uncertainties described in this section. Our failure to achieve
profitability could cause our stock price to decline.
OUR OPERATING RESULTS FLUCTUATE, AND IF WE FAIL TO MEET THE EXPECTATIONS OF THE
INVESTMENT COMMUNITY IN ANY PERIOD, OUR STOCK PRICE COULD SUFFER FURTHER
SIGNIFICANT DECLINES.
Our revenue and operating results are difficult to predict and have
become more difficult to predict since global economic uncertainties and
political instability increased in fiscal 2002 and fiscal 2003. We believe that
period-to-period comparisons of our operating results will not necessarily be
indicative of future performance. The factors that may cause fluctuations of our
quarterly operating results include the following:
- the size, timing and contractual terms of licenses and sales
of our products and services;
- customer financial constraints and credit-worthiness;
- the potentially long and unpredictable sales cycle for our
products;
- technical difficulties in our software that could delay the
introduction of new products or increase their costs;
- introductions of new products or new versions of existing
products by us or our competitors;
27
- delay or deferral of customer purchases and implementations of
our solutions due to weakening economic conditions which
adversely impacted our operating performance during the
quarters ended August 31, 2001, November 30, 2001, May 31,
2002 and August 31, 2002;
- increased economic uncertainty and political instability
world-wide following the terrorist attacks which began in the
United States on September 11, 2001;
- changes in prices or the pricing models for our products and
services or those of our competitors;
- changes in the mix of our software, services and support
revenue;
- changes in the mix of software products we sell and related
impact on third-party royalty payments;
- changes in the mix of sales channels through which our
products and services are sold; and
- changes in rules relating to revenue recognition or in
interpretations of those rules.
Due to fluctuations from quarter to quarter, our operating results may
not meet the expectations of securities analysts or investors, as was the case
for the quarters ended August 31, 2001 and May 31, 2002. If this occurs, the
price of our common stock could suffer further significant declines.
IF OUR STOCK PRICE REMAINS NEAR OR LOWER THAN RECENT LEVELS FOR A SUSTAINED
PERIOD OF TIME, WE MAY BE REQUIRED TO RECORD SIGNIFICANT NON-CASH CHARGES
ASSOCIATED WITH GOODWILL IMPAIRMENTS.
On March 1, 2002, we adopted SFAS 142, which changed the accounting for
goodwill from an amortization method to an impairment-only method. Effective
March 1, 2002, the Company stopped amortizing goodwill, but will continue
amortizing other intangible assets with finite lives. As required by the
provisions of SFAS 142, we performed the initial goodwill impairment test
required during our first quarter of fiscal 2003. We consider ourselves to have
a single reporting unit. Accordingly, all of our goodwill is associated with our
entire Company. As of March 1, 2002, based upon the Company's implied fair
value, there was no impairment of goodwill recorded upon implementation of SFAS
142.
During the quarter ended August 31, 2002, we experienced adverse
changes in our stock price resulting from a decline in our financial performance
and adverse business conditions that have affected the technology industry,
especially application software companies. Based on these factors, we performed
a test for goodwill impairment at August 31, 2002 and determined that based upon
the implied fair value (which includes factors such as, but not limited to, the
Company's market capitalization, control premium and recent stock price
volatility) of the Company as of August 31, 2002, there was no impairment of
goodwill. We will continue to test for impairment on an annual basis, coinciding
with our fiscal year end, or on an interim basis if circumstances change that
would more likely than not reduce the fair value of our reporting unit below its
carrying value. If our stock price remains near or lower than recent levels such
that the implied fair value of the Company is significantly less than
stockholders' equity for a sustained period of time, among other factors, we may
be required to record an impairment loss related to goodwill below its carrying
amount. Based on continued adverse changes in our stock price since August 31,
2002 and adverse business conditions that continue to affect the application
software industry, We will also perform a test for goodwill impairment at
November 30, 2002.
IN FISCAL 2002 AND IN THE SIX MONTHS ENDED AUGUST 31, 2002, WE HAVE TAKEN
CERTAIN RESTRUCTURING CHARGES AND HAVE ENACTED COST CONTAINMENT AND COST
REDUCTION MEASURES IN RESPONSE TO THE DOWNTURN IN THE GLOBAL ECONOMY. IF OUR
RESTRUCTURING PLANS AND OUR COST CONTAINMENT AND COST REDUCTION MEASURES FAIL TO
ACHIEVE THE DESIRED RESULTS OR RESULT IN UNANTICIPATED NEGATIVE CONSEQUENCES, OR
IF THE GLOBAL ECONOMY CONTINUES TO EXPERIENCE WEAKNESS, WE MAY SUFFER MATERIAL
HARM TO OUR BUSINESS.
28
As a result of progressive weakening of global economic conditions during
fiscal 2002 and in the first two quarters of fiscal 2003, we faced new
challenges in our ability to grow revenue, improve operating performance and
expand market share. In response to the global downturn in the economy and the
related impact on our financial performance, we implemented restructuring plans
and cost containment and cost reduction measures to reduce our cost structure,
which included workforce reductions and mandatory unpaid leave programs. In our
fiscal year 2002 and in our second quarter of fiscal 2003, we recorded
restructuring and impairment charges of $6.6 million and $8.8 million,
respectively. We expect to record a restructuring charge of approximately $2 to
$4 million in the quarter ending November 30, 2002 as a result of the
restructuring plan announced during our third quarter of fiscal 2003. If we fail
to achieve the desired results of our restructuring plans and our cost
containment and cost reduction measures or if the global economy continues to
experience weakness, we may suffer material harm to our business.
Our cost containment and cost reduction measures may yield unanticipated
consequences, such as attrition beyond our planned reduction in workforce,
reduced employee morale and decreased productivity. The recent trading levels of
our stock have decreased the value of our stock options granted to employees
under our stock option plans. As a result of these factors, our remaining
personnel may seek alternate employment, such as with larger, more established
companies or companies that they perceive as having less volatile stock prices.
Continuity of personnel can be a very important factor in sales and
implementation of our software and completion of our product development
efforts. Attrition beyond our planned reduction in workforce could have a
material adverse effect on our business, operating results, financial condition
and cash flows.
VARIATIONS IN THE TIME IT TAKES US TO LICENSE OUR SOFTWARE MAY CAUSE
FLUCTUATIONS IN OUR OPERATING RESULTS.
The time it takes to license our software to prospective clients varies
substantially, but typically has ranged historically between three and twelve
months. Variations in the length of our sales cycles could cause our revenue to
fluctuate widely from period to period. Because we typically recognize a
substantial portion of our software revenue in the last month of a quarter, any
delay in the license of our products could cause significant variations in our
revenue from quarter to quarter. These delays have occurred on a number of
occasions in the past, including, most recently, in our quarters ended August
31, 2001, November 30, 2001, May 31, 2002 and August 31, 2002. Furthermore,
these fluctuations could cause our operating results to suffer in some future
periods because our operating expenses are relatively fixed over the short term
and we devote significant time and resources to prospective clients. The length
of our sales cycle depends on a number of factors, including the following:
- the complexities of the SRM, SCM, PRO and S&PM client challenges our
solutions address;
- the breadth of the solution required by the client, including the
technical, organizational and geographic scope of the license;
- the evaluation and approval processes employed by the clients and
prospects;
- the economic conditions in the United States and abroad;
- increased economic uncertainty and political instability world-wide
following the terrorist attacks which began in the United States on
September 11, 2001; and
- any other delays arising from factors beyond our control.
THE SIZE AND SCOPE OF OUR LARGEST CONTRACTS WITH CLIENTS HAVE INCREASED IN
RECENT YEARS, WHICH MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
Our clients and prospective clients are seeking to solve increasingly
complex SRM, SCM, PRO and S&PM challenges. Further, we are focused on providing
more comprehensive solutions for our clients, as opposed to only licensing
software. As the complexities of the problems our clients seek to solve
increases, the size and scope of our
29
contracts with clients increase, as evidenced by the increase in the number of
software transactions of $5.0 million or greater in fiscal 2002 and 2001. We
recorded six software transactions of $5.0 million or greater in fiscal 2002 as
compared to three and zero software transactions of $5.0 million or greater in
fiscal 2001 and 2000, respectively. We did not report any software transactions
of $5.0 million or greater in the six months ended August 31, 2002. As a result,
our operating results could fluctuate due to the following factors:
- the complexities of the contracting processes of our clients and
prospects;
- contractual terms may vary widely, which may result in differing
methods of accounting for revenue from each contract;
- the sales cycles related to larger contracts may be longer and
subject to greater delays; and
- losses of, or delays in concluding, larger contracts could have a
proportionately greater effect on our revenue for a particular
period.
Any of these factors could cause our revenue to decline or fluctuate
significantly in any quarter and could cause a decline in our stock price.
A REDUCTION IN OUR REVENUE DERIVED FROM SOFTWARE LICENSES MAY RESULT IN REDUCED
SERVICES AND SUPPORT REVENUES IN FUTURE PERIODS.
Our ability to maintain or increase services and support revenue primarily
depends on our ability to increase the amount of software we license to
customers. Decreases or slowdowns in licensing activity may impact our
implementation service and support revenues in future periods.
A PORTION OF OUR REVENUE IS DERIVED FROM SUPPORT CONTRACTS. A REDUCTION IN THE
RENEWAL RATE OF ANNUAL SUPPORT CONTRACTS COULD MATERIALLY HARM OUR BUSINESS.
Our support revenue includes post-contract support and the rights to
unspecified software upgrades and enhancements. Support revenue as a percentage
of total revenue was 28.7% in the six months ended August 31, 2002 and 23.8%,
20.6% and 29.8% in fiscal 2002, 2001 and 2000, respectively. Support contracts
are generally renewable annually at the option of our customers. In the past, we
have experienced high rates of renewed annual support contracts from our
customers. If our customers fail to renew their support agreements at historical
rates, our support revenues could materially decline.
WE HAVE EXPERIENCED DIFFICULTIES INTEGRATING ACQUISITIONS IN THE PAST AND MAY
EXPERIENCE PROBLEMS WITH FUTURE ACQUISITIONS THAT COULD MATERIALLY HARM OUR
BUSINESS.
Acquisitions involve the integration of companies that have previously
operated independently. During our first quarter of fiscal 2003, we acquired the
assets and businesses of WDS and DFE. In connection with these and any future
acquisitions, there can be no assurance that we will:
- effectively integrate employees, operations, products and systems;
- realize the expected benefits of the transaction;
- retain key employees;
- effectively develop and protect key technologies and proprietary
know-how;
30
- avoid conflicts with our clients and business partners that have
commercial relationships or compete with the acquired company;
- avoid unanticipated operational difficulties or expenditures or
both; and
- effectively operate our existing business lines, given the
significant diversion of resources and management attention required
to successfully integrate acquisitions.
In addition, future acquisitions may result in a dilution to existing
shareholders and to earnings per share to the extent we issue shares of our
common stock as consideration.
IF THE MARKET FOR OUR PRODUCTS DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL BE
MATERIALLY AND ADVERSELY AFFECTED.
Substantially all of our software, service and support revenue have arisen
from, or are related directly to, our SRM, SCM, PRO and S&PM solutions. We
expect to continue to be dependent upon these solutions in the future, and any
factor adversely affecting the solutions or the markets for SRM, SCM, PRO and
S&PM solutions, in general, would materially and adversely affect our ability to
generate revenue. While we believe the markets for SRM, SCM, PRO and S&PM
solutions will continue to expand as the economy improves, they may grow more
slowly than in the past. If the markets for our solutions do not grow as rapidly
as we expect, revenue growth, operating margins, or both, could be adversely
affected.
COMPANIES MAY RE-EVALUATE THEIR SUPPLIER AND CLIENT RELATIONSHIPS AND SOME MAY
ADJUST THEIR SERVICE LEVELS AND OTHER SUPPLY CHAIN MANAGEMENT SETTINGS AND
LEVELS IN A MANNER THAT MAY HAVE AN ADVERSE AFFECT ON OUR ABILITY TO SELL OUR
SRM, SCM, PRO AND S&PM SOLUTIONS.
Companies may re-evaluate the nature of their relationships with suppliers and
clients. They may adjust their service levels and other supply chain management
settings and levels to address risks arising out of the terrorists attacks and
resulting military actions and the increased economic and political
uncertainties in ways that may adversely affect the benefits historically
achieved through use of our solutions, which could have a material adverse
affect on our ability to market and sell our SRM, SCM, PRO and S&PM solutions.
OUR MARKETS ARE VERY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The markets for our solutions are very competitive. The intensity of
competition in our markets has significantly increased, and we expect it to
increase in the future. Our current and potential competitors may make
acquisitions of other competitors and may establish cooperative relationships
among themselves or with third parties. Some competitors are offering enterprise
application software that compete with our applications at no charge as
components of bundled products or on a stand alone basis. Further, our current
or prospective clients and partners may become competitors in the future.
Increased competition could result in price reductions, lower gross margins,
longer sales cycles and the loss of market share. Each of these developments
could materially and adversely affect our growth and operating performance.
MANY OF OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER
RESOURCES THAN WE DO, AND THEREFORE, WE MAY BE AT A DISADVANTAGE IN COMPETING
WITH THEM.
We directly compete with other enterprise application software vendors
including: Adexa, Inc., Aspen Technology, Inc., The Descartes Systems Group,
Inc., Global Logistics Technologies, Inc., i2 Technologies, Inc., JDA Software,
Inc., Khimetrics, Logility, Inc., Logisitics.com, Mercia, Metreo, PROS Revenue
Management, Retek, Inc., Sabre, Inc., SAP AG, SynQuest and YieldStar Technology.
In addition, some ERP companies such as Invensys plc (which acquired Baan
Company N.V.), J.D. Edwards & Company, Oracle Corporation, PeopleSoft,
31
Inc. and SAP AG have acquired or developed and are developing SCM, SRM, PRO and
S&PM solutions. Some of our current and potential competitors, particularly the
ERP vendors, have significantly greater financial, marketing, technical and
other competitive resources than us, as well as greater name recognition and a
larger installed base of clients. In addition, many of our competitors have
well-established relationships with our current and potential clients and have
extensive knowledge of our industry. As a result, they may be able to adapt more
quickly to new or emerging technologies and changes in client requirements or to
devote greater resources to the development, promotion and sale of their
products than we can. Any of these factors could materially impair our ability
to compete and adversely affect our revenue growth and operating performance.
IF THE DEVELOPMENT OF OUR PRODUCTS AND SERVICES FAILS TO KEEP PACE WITH OUR
INDUSTRY'S RAPIDLY EVOLVING TECHNOLOGY, OUR FUTURE RESULTS MAY BE MATERIALLY AND
ADVERSELY AFFECTED.
The markets for SRM, SCM, PRO and S&PM solutions are subject to rapid
technological change, changing client needs, frequent new product introductions
and evolving industry standards that may render existing products and services
obsolete. Our growth and future operating results will depend, in part, upon our
ability to enhance existing applications and develop and introduce new
applications or capabilities that:
- meet or exceed technological advances in the marketplace;
- meet changing client requirements;
- comply with changing industry standards;
- achieve market acceptance;
- integrate third-party software effectively; and
- respond to competitive offerings.
Our product development and testing efforts have required, and are expected
to continue to require, substantial investments. We may not possess sufficient
resources to continue to make the necessary investments in technology. In
addition, we may not successfully identify new software opportunities or develop
and bring new software to market in a timely and efficient manner. If we are
unable, for technological or other reasons, to develop and introduce new and
enhanced software in a timely manner, we may lose existing clients and fail to
attract new clients, which may adversely affect our performance.
DEFECTS IN OUR SOFTWARE OR PROBLEMS IN THE IMPLEMENTATION OF OUR SOFTWARE COULD
LEAD TO CLAIMS FOR DAMAGES BY OUR CLIENTS, LOSS OF REVENUE OR DELAYS IN THE
MARKET ACCEPTANCE OF OUR SOLUTIONS.
Our software is complex and is frequently integrated with a wide variety of
third-party software. This integration process can be complex, time consuming
and expensive and may cause delays in the development of our products. As a
result, some customers may have difficulty or be unable to implement our
products successfully or otherwise achieve the benefits attributable to our
products. We may license software that contains undetected errors or failures
when new software is first introduced or as new versions are released. We may
not discover errors in our software until our customers install and use a given
product or until the volume of services that a product provides increases. These
problems may result in claims for damages suffered by our clients, a loss of, or
delays in, the market acceptance of our solutions, client dissatisfaction and
potentially lost revenue and collection difficulties during the period required
to correct these errors.
WE ARE DEPENDENT ON THIRD-PARTY SOFTWARE THAT WE INCORPORATE INTO AND INCLUDE
WITH OUR PRODUCTS AND SOLUTIONS, AND IMPAIRED RELATIONS WITH THESE THIRD
PARTIES, DEFECTS IN THIRD-PARTY SOFTWARE OR THE INABILITY TO ENHANCE THEIR
SOFTWARE OVER TIME COULD HARM OUR BUSINESS.
32
We incorporate and include third-party software into and with our products
and solutions. We are likely to incorporate and include additional third-party
software into and with our products and solutions as we expand our product
offerings. The operation of our products would be impaired if errors occur in
the third-party software that we utilize. It may be more difficult for us to
correct any defects in third-party software because the software is not within
our control. Accordingly, our business could be adversely affected in the event
of any errors in this software. There can be no assurance that these third
parties will continue to invest the appropriate levels of resources in their
products and services to maintain and enhance the software capabilities.
Furthermore, it may be difficult for us to replace any third-party software
if we lose the ability to license or support the third-party software. Any
impairment in our relationship with these third parties could adversely impact
our business, results of operations and financial condition.
WE ARE SUBSTANTIALLY DEPENDENT ON THIRD PARTIES TO INTEGRATE OUR SOFTWARE WITH
OTHER SOFTWARE PRODUCTS AND PLATFORMS. IF ANY OF THESE THIRD PARTIES SHOULD
CEASE TO PROVIDE INTEGRATION SERVICES TO US, OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED.
We depend on companies such as Acta Technology, Inc., Peregrine
Connectivity, Inc., Tibco Software, Inc., Vignette Corporation, and webMethods,
Inc. to integrate our software with software and platforms developed by third
parties. If these companies are unable to develop or maintain software that
effectively integrates our software and is free from errors, our ability to
license our products and provide solutions could be impaired. In September 2002,
Peregrine Connectivity, Inc., filed a voluntary petition to reorganize under
Chapter 11 of the U.S. Bankruptcy Code. Although they have received financing
which will fund their ongoing business operations, the loss of the services of
Peregrine Connectivity, Inc., or of any other company that we use to integrate
our software products could adversely affect our business, results of operations
and financial condition.
OUR EFFORTS TO DEVELOP AND SUSTAIN RELATIONSHIPS WITH VENDORS SUCH AS SOFTWARE
COMPANIES, CONSULTING FIRMS, RESELLERS AND OTHERS TO IMPLEMENT AND PROMOTE OUR
SOFTWARE PRODUCTS MAY FAIL, WHICH COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR
BUSINESS.
We are developing, maintaining and enhancing significant working
relationships with complementary vendors, such as software companies, consulting
firms, resellers and others that we believe can play important roles in
marketing our products and solutions. We are currently investing, and intend to
continue to invest, significant resources to develop and enhance these
relationships, which could adversely affect our operating margins. We may be
unable to develop relationships with organizations that will be able to market
our products effectively. Our arrangements with these organizations are not
exclusive and, in many cases, may be terminated by either party without cause.
Many of the organizations with which we are developing or maintaining marketing
relationships have commercial relationships with our competitors. Therefore,
there can be no assurance that any organization will continue its involvement
with us and our products. The loss of relationships with important organizations
could materially and adversely affect our business, results of operations and
financial condition.
AS A RESULT OF THE WDS ACQUISITION, AN INCREASED PERCENTAGE OF OUR REVENUE WILL
BE DERIVED FROM CONTRACTS WITH THE GOVERNMENT. GOVERNMENT CONTRACTS ARE SUBJECT
TO COST AUDITS BY THE GOVERNMENT AND TERMINATION FOR THE CONVENIENCE OF THE
GOVERNMENT. A GOVERNMENT AUDIT OR GOVERNMENT TERMINATION OF ANY OF OUR CONTRACTS
WITH THE GOVERNMENT COULD MATERIALLY HARM OUR BUSINESS.
Although we have existing engagements for the Defense Logistics Agency,
United States Navy and United States Airforce, the WDS acquisition will
significantly increase the percentage of our revenue derived from contracts with
the Government. Government contractors are commonly subject to various audits
and investigations by Government agencies. One agency that oversees or enforces
contract performance is the Defense Contract Audit Agency ("DCAA"). The DCAA
generally performs a review of a contractor's performance on its contracts, its
33
pricing practices, costs and compliance with applicable laws, regulations and
standards and to verify that costs have been properly charged to the Government.
Although the DCAA has completed an initial review of our accounting practices
and procedures allowing us to invoice the government, it has yet to exercise its
option to perform an audit of our actual invoicing of Government contracts.
These audits may occur several years after completion of the audited work. If an
audit were to identify significant unallowable costs, we could have a material
charge to our earnings or reduction to our cash position as a result of the
audit and this could materially harm our business.
In addition, Government contracts may be subject to termination by the
Government for its convenience, as well as termination, reduction or
modification in the event of budgetary constraints or any change in the
Government's requirements. If one of our time-and-materials or fixed-priced
contracts were to be terminated for the Government's convenience, we would only
receive the purchase price for items delivered prior to termination,
reimbursement for allowable costs for work-in-progress and an allowance for
profit on the contract, or an adjustment for loss if completion of performance
would have resulted in a loss. Government contracts are also conditioned upon
the continuing availability of Congressional appropriations. Congress usually
appropriates funds on a fiscal-year basis, even though the contract performance
may extend over many years. Consequently, at the outset of a program, the
contract is usually only partially funded and Congress must annually determine
if additional funds will be appropriated to the program. As a result, long-term
contracts are subject to cancellation if appropriations for future periods
become unavailable. We have not historically experienced any significant
material adverse effects as a result of the Government's failure to fund
programs awarded to us. If the Government were to terminate some or all of our
contracts or reduce and/or cancel appropriations to a program we have a contract
with, our business could be materially harmed.
IF WE FAIL TO FIELD AN EFFECTIVE SALES ORGANIZATION, OUR ABILITY TO GROW WILL BE
LIMITED, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
We have reduced our sales force in fiscal 2002 and fiscal 2003 as a result
of weakening economic conditions. In order to grow our revenue, our existing
sales force will have to be more productive, and we will likely expand our sales
force in future periods. Our past efforts to expand our sales organization have
required significant resources. New sales personnel require training and may
take a long time to achieve full productivity. There is no assurance that we
will successfully attract and retain qualified sales people at levels sufficient
to support our growth. Any failure to adequately sell our products could limit
our growth and adversely affect our financial performance.
THE LIMITED ABILITY OF LEGAL PROTECTIONS TO SAFEGUARD OUR INTELLECTUAL PROPERTY
RIGHTS COULD IMPAIR OUR ABILITY TO COMPETE EFFECTIVELY.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of confidentiality procedures, contractual provisions, patent,
copyright, trademark and trade secret laws. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products or
obtain and use information that we regard as proprietary. Policing unauthorized
use of our products is difficult. We are unable to determine the extent to which
piracy of our software products exists. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States. Furthermore, our competitors may independently develop
technology similar to ours.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO INCUR UNEXPECTED COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.
The number of intellectual property claims in our industry may increase as
the number of competing products grows and the functionality of products in
different industry segments overlaps. In recent years, there has been a tendency
by software companies to file substantially increasing numbers of patent
applications, including those for business methods and processes. We have no way
of knowing what patent applications third parties have filed until the
application is filed or until a patent is issued. Patent applications are often
published within 18 months of filing, but it can take as long as three years or
more for a patent to be granted after an application has been filed. Although we
are not aware that any of our products infringe upon the proprietary rights of
third parties, there can be no
34
assurance that third parties will not claim infringement by us with respect to
current or future products. Any of these claims, with or without merit, could be
time-consuming to address, result in costly litigation, cause product shipment
delays or require us to enter into royalty or license agreements. These royalty
or license agreements might not be available on terms acceptable to us or at
all, which could materially and adversely affect our business.
OUR INTERNATIONAL OPERATIONS POSE RISKS FOR OUR BUSINESS AND FINANCIAL
CONDITION.
We currently conduct operations in a number of countries around the world.
These operations require significant management attention and financial
resources and subject us to risks inherent in doing business internationally,
such as:
- regulatory requirements;
- difficulties in managing foreign operations and appropriate levels
of staffing ;
- longer collection cycles;
- foreign currency risk;
- legal uncertainties regarding liability, ownership and protection of
intellectual property;
- tariffs and other trade barriers;
- seasonal reductions in business activities;
- potentially adverse tax consequences; and
- increased economic uncertainty and political instability following
the terrorist attacks in the United States on September 11, 2001.
Any of the above factors could adversely affect the success of our
international operations. One or more of these factors could have a material
adverse effect on our business and operating results.
CHANGES IN THE VALUE OF THE U.S. DOLLAR, AS COMPARED TO THE CURRENCIES OF
FOREIGN COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR OPERATING RESULTS.
In the six months ended August 31, 2002, 23.0% of our total revenue was
derived from outside the United States. Our international revenue and expenses
are denominated in foreign currencies, typically the local currency of the
selling business unit. Therefore, changes in the value of the U.S. Dollar as
compared to these other currencies may adversely affect our operating results.
As our international operations expand, we expect to use an increasing number of
foreign currencies, causing our exposure to currency exchange rate fluctuations
to increase. We generally do not implement hedging programs to mitigate our
exposure to currency fluctuations affecting international accounts receivable,
cash balances and intercompany accounts, and we do not hedge our exposure to
currency fluctuations affecting future international revenues and expenses and
other commitments. For the foregoing reasons, currency exchange rate
fluctuations have caused, and likely will continue to cause, variability in our
foreign currency denominated revenue streams and our cost to settle foreign
currency denominated liabilities, which could have a material adverse effect on
our business and operating results.
IF WE LOSE OUR KEY PERSONNEL, THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER.
Our success depends significantly on the continued service of our executive
officers. Two of our executive officers have recently left the Company. Gregory
Cudahy, former Executive Vice President of Pricing and Revenue
35
Management resigned in May 2002. Richard Bergmann, our former President, who had
been on a personal leave of absence since June 2002, resigned effective October
15, 2002. Andrew Hogenson, who has been with the Company since 1997, most
recently as our Senior Vice President of Product Development, has replaced
Gregory Cudahy. Gregory Owens, Chairman and Chief Executive Officer, has assumed
certain of Richard Bergmann's duties. We do not have fixed-term employment
agreements with any of our executive officers, and we do not maintain key person
life insurance on our executive officers. The loss of services of any of our
executive officers for any reason could have a material adverse effect on our
business, operating results, financial condition and cash flows.
THE FAILURE TO HIRE AND RETAIN QUALIFIED PERSONNEL WOULD HARM OUR BUSINESS.
We believe that our success also will depend significantly on our ability
to attract, integrate, motivate and retain highly skilled technical, managerial,
sales, marketing and services personnel. Competition for skilled personnel is
intense, and there can be no assurance that we will be successful in attracting,
motivating and retaining the personnel required to grow and operate profitably.
In addition, the cost of hiring and retaining skilled employees is high. Failure
to attract and retain highly skilled personnel could materially and adversely
affect our business. An important component of our employee compensation is
stock options. Recent trading levels of our stock have decreased the value of
our stock options granted to employees under our stock option plan. As a result,
our personnel may seek employment with larger, more established companies or
companies that they perceive as having less volatile stock prices. Sustained
levels or further declines in our stock price could adversely affect our ability
to attract and retain employees, as it has in the past.
WE MAY BE SUBJECT TO FUTURE LIABILITY CLAIMS, AND THE REPUTATIONS OF OUR COMPANY
AND PRODUCTS MAY SUFFER.
Many of our implementations involve projects that are critical to the
operations of our clients' businesses and provide benefits that may be difficult
to quantify. Any failure in a client's system could result in a claim for
substantial damages against us, regardless of our responsibility for the
failure. We have entered into and plan to continue to enter into agreements with
software vendors, consulting firms, resellers and others whereby they market our
solutions. If these vendors fail to meet their clients' expectations or cause
failures in their clients' systems, the reputation of our company and products
could be materially and adversely affected even if our software products perform
in accordance with their functional specifications.
IF REQUIREMENTS RELATING TO ACCOUNTING TREATMENT FOR EMPLOYEE STOCK OPTIONS ARE
CHANGED, WE MAY BE FORCED TO CHANGE OUR BUSINESS PRACTICES.
We currently account for the issuance of stock options under APB Opinion No.
25, "Accounting for Stock Issued to Employees." If proposals currently under
consideration by accounting standards organizations and governmental authorities
are adopted, we may be required to treat the value of the stock options granted
to employees as a compensation expense. As a result, we could decide to reduce
the number of stock options granted to employees or to grant options to fewer
employees. This could affect our ability to retain existing employees and
attract qualified candidates, and increase the cash compensation or benefits we
would have to pay to them. In addition, such a change could have a material
effect on our operating results.
IT MAY BECOME INCREASINGLY EXPENSIVE TO OBTAIN AND MAINTAIN INSURANCE.
We obtain insurance to cover a variety of potential risks and liabilities.
In the current market, insurance coverage is becoming more restrictive and when
insurance coverage is offered, the deductible for which we are responsible is
larger and premiums have increased substantially. As a result, it may become
more difficult to maintain insurance coverage at historical levels, or if such
coverage is available, the cost to obtain or maintain it may increase
substantially. This may result in our being forced to bear the burden of an
increased portion of risks for which we have traditionally been covered by
insurance, which could have a material effect on our operating results.
36
RISKS RELATED TO OUR INDUSTRY
LACK OF GROWTH OR DECLINE IN INTERNET USAGE COULD BE DETRIMENTAL TO OUR FUTURE
OPERATING RESULTS.
The growth of the Internet has increased demand for SRM, SCM, PRO and S&PM
solutions, as well as created markets for new and enhanced product offerings.
Therefore, our future sales and profits are substantially dependent upon the
Internet as a viable commercial medium. The continued success of the Internet as
a viable commercial medium may be adversely affected for a number of reasons,
including:
- potentially inadequate development of network infrastructure,
delayed development of enabling technologies, performance
improvements and security measures;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
- concerns that may develop among businesses and consumers about
accessibility, security, reliability, cost, ease of use and quality
of service;
- increased taxation and governmental regulation; or
- changes in, or insufficient availability of, communications services
to support the Internet, resulting in slower Internet user response
times.
The occurrence of any of these factors could require us to modify our
technology and our business strategy. Any such modifications could require us to
expend significant amounts of resources. In the event that the Internet does not
remain a viable commercial medium, our business, financial condition and results
of operations could be materially and adversely affected.
NEW LAWS OR REGULATIONS AFFECTING THE INTERNET OR COMMERCE IN GENERAL COULD
REDUCE OUR REVENUE AND ADVERSELY AFFECT OUR GROWTH.
Congress and other domestic and foreign governmental authorities have
adopted and are considering legislation affecting the use of the Internet,
including laws relating to the use of the Internet for commerce and
distribution. The adoption or interpretation of laws regulating the Internet, or
of existing laws governing such things as taxation of commerce, consumer
protection, libel, property rights and personal privacy, could hamper the growth
of the Internet and its use as a communications and commercial medium. If this
occurs, companies may decide not to use our products or services, and our
business, operating results and financial condition could suffer.
RISKS RELATED TO OUR INDEBTEDNESS AND FINANCIAL CONDITION
OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
In November 2000, we completed a convertible debt offering of $250.0
million in 5% subordinated convertible notes that are due November 2007. Our
indebtedness could have important consequences for investors. For example, it
could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to obtain additional financing;
- require the dedication of a substantial portion of our cash flows
from operations to the payment of principal of, and interest on, our
indebtedness, thereby reducing the availability of capital to fund
our growth strategy, working capital, capital expenditures,
acquisitions and other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in
our business and the industry; and
- place us at a competitive disadvantage relative to our competitors
with less debt.
37
Although we have no present plans to do so, we may incur substantial
additional debt in the future. While the terms of our credit facility imposes
certain limits on our ability to incur additional debt, we are permitted to
incur additional debt subject to compliance with the terms and conditions set
forth in the loan agreement. Moreover, the terms of the Notes set forth no
limits on our ability to incur additional debt. If a significant amount of new
debt is added to our current levels, the related risks described above could
intensify.
WE MAY HAVE INSUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS.
We will be required to generate cash sufficient to pay all amounts due on
the Notes and to conduct our business operations. We have net losses, and we may
not be able to cover our anticipated debt service obligations. This may
materially hinder our ability to make principal and interest payments on the
Notes. Our ability to meet our future debt service obligations will be dependent
upon our future performance, which will be subject to financial, business and
other factors affecting our operations, many of which are beyond our control.
WE MAY CHOOSE TO PURCHASE A PORTION OF OUR CONVERTIBLE SUBORDINATED NOTES IN THE
OPEN MARKET OR AUTHORIZE A STOCK REPURCHASE PROGRAM WHICH COULD ADVERSELY EFFECT
OUR FINANCIAL CONDITION.
Although we have no present plans to do so, we may choose to purchase a
portion of our convertible subordinated notes outstanding from time to time in
the open market in future periods. We may also authorize a stock repurchase
program where we would buy back shares of our common stock from time to time at
prevailing market prices, through open market or unsolicited negotiated
transactions, depending upon market conditions. Either of these actions would be
contingent on approval of our Board of Directors and on compliance with the
conditions of applicable securities laws. While the terms of our revolving
credit facility imposes certain limits on our ability to repurchase our debt and
equity securities, we are permitted to do so subject to compliance with the
terms and conditions set forth in the loan agreement. Purchases of convertible
subordinated notes or stock repurchases in the open market would be funded from
available cash and cash equivalents and could have a materially adverse effect
on our liquidity and financial condition.
RISKS RELATED TO OUR COMMON STOCK
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE.
The trading price of our common stock has been and is likely to be highly
volatile. Our stock price could be subject to wide fluctuations in response to a
variety of factors, including the following:
- actual or anticipated variations in quarterly operating results and
continuing losses;
- continued weak economic conditions;
- increased economic and political uncertainty following the terrorist
attacks in the United States on September 11, 2001;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates and ratings by securities analysts;
- conditions or trends in the market for SRM, SCM, PRO and S&PM
solutions;
38
- changes in the performance and/or market valuations of our current
and potential competitors and the software industry in general;
- our announcement or a competitors announcement of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- adoption of industry standards and the inclusion of our technology
in, or compatibility of our technology with, such standards;
- adverse or unfavorable publicity regarding us or our products;
- adverse or unfavorable publicity regarding our competitors,
including their products and implementation efforts;
- additions or departures of key personnel;
- sales or anticipated sales of additional equity securities;
- the potential issuance of common stock related to the WDS
acquisition; and
- other events or factors that may be beyond our control.
In addition, the stock markets in general, The Nasdaq National Market and
the equity markets for software companies in particular, have experienced
extraordinary price and volume volatility in recent years including significant
declines recently. Such volatility has adversely affected the stock prices for
many companies irrespective of or disproportionately to the operating
performance of these companies. These broad market and industry factors may
materially and adversely further affect the market price of our common stock,
regardless of our actual operating performance.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE
A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
Our charter and our bylaws, in conjunction with Delaware law, contain
provisions that could make it more difficult for a third party to obtain control
of us even if doing so would be beneficial to stockholders. For example, our
bylaws provide for a classified board of directors and allow our board of
directors to expand its size and fill any vacancies without stockholder
approval. Furthermore, our board has the authority to issue preferred stock and
to designate the voting rights, dividend rate and privileges of the preferred
stock, all of which may be greater than the rights of common stockholders
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Foreign Currency Risk. We are subject to risk from changes in foreign
exchange rates for our subsidiaries which use a foreign currency as their
functional currency and are translated into U.S. dollars. Such changes could
result in cumulative translation gains or losses that are included in
shareholders' equity. Revenue outside of the United States was 23.9% and 28.2%
for the three months ended August 31, 2002 and 2001, respectively, and 23.0% and
26.6% for the six months ended August 31, 2002 and 2001, respectively. Revenue
outside the United States was derived from operations in Australia, Belgium,
Brazil, Canada, China, France, Germany, Italy, Japan, Mexico, Netherlands,
Singapore, Spain, Sweden, Taiwan and the United Kingdom. Exchange rate
fluctuations between the U.S. dollar and the currencies of these countries
result in positive or negative fluctuations in the amounts relating to foreign
operations reported in our consolidated financial statements. None of the
components of our financial statements were materially affected by exchange rate
fluctuations during the three and six months ended August 31, 2002 and 2001. We
generally do not use foreign currency options and forward contracts to hedge
against the
39
earnings effects of such fluctuations. While we do not expect to incur material
losses as a result of this currency risk, there can be no assurance that losses
will not result.
Interest Rate Risk. Our marketable securities and certain cash equivalents
are subject to interest rate risk. We manage this risk by maintaining an
investment portfolio of available-for-sale instruments with high credit quality
and relatively short average maturities. These instruments include, but are not
limited to, commercial paper, money-market instruments, bank time deposits and
variable rate and fixed rate obligations of corporations and national, state and
local governments and agencies, in accordance with an investment policy approved
by our Board of Directors. These instruments are denominated in U.S. dollars.
The fair market value of marketable securities held was $8.5 million and $4.3
million at August 31, 2002 and February 28, 2002, respectively.
We also hold cash balances in accounts with commercial banks in the United
States and foreign countries. These cash balances represent operating balances
only and are invested in short-term deposits of the local bank. Such operating
cash balances held at banks outside of the United States are denominated in the
local currency.
The United States Federal Reserve Board influences the general market rates
of interest. During calendar 2001, the Federal Reserve Board decreased the
federal funds rate several times, by 475 basis points, to 1.75%. At August 31,
2002, the federal funds rate was 1.75%. These actions have led to a general
market decline in interest rates.
The weighted average yield on interest-bearing investments held as of
August 31, 2002 and 2001 was approximately 1.8% and 3.7%, respectively. Based on
our investment holdings at August 31, 2002, a 100 basis point decline in the
average yield would reduce our annual interest income by $2.0 million.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and our chief financial officer, after evaluating the effectiveness of
the Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c)) as of a date (the "Evaluation Date")
within 90 days before the filing date of this quarterly report, have concluded
that as of the Evaluation Date, our disclosure controls and procedures were
effective to ensure that material information relating to us and our
consolidated subsidiaries is recorded, processed, summarized and reported in a
timely manner.
Changes in Internal Controls. There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect such controls subsequent to the Evaluation Date.
40
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
The Company is involved in disputes and litigation in the normal course of
business. The Company does not believe that the outcome of these disputes or
litigation will have a material effect on the Company's financial condition or
results of operations. The Company has established accruals for losses related
to such matters that are probable and reasonably estimable. However, an
unfavorable outcome of some or all of these matters could have a material effect
on the Company's business, operating results, financial condition and cash
flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 25, 2002, we held our 2002 Annual Meeting of Stockholders. At the
meeting, stockholders voted on the following:
- The election of two Class I directors, with terms expiring in 2005,
J. Michael Cline (with 51,588,662 affirmative votes and 1,810,119
votes withheld) and Lynn C. Fritz (with 51,654,942 affirmative votes
and 1,743,839 votes withheld.) No other matters were submitted to
stockholders for action at the annual meeting.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Loan and Security Agreement dated April 12, 2002 by the Company in favor
of Silicon Valley Bank.
10.2 Termination of Employment Agreement dated October 15, 2002 between the
Company and Richard F. Bergmann.
(b) Reports on Form 8-K
1. On June 5, 2002, we filed a Current Report on Form 8-K reporting our
issuance of a press release after the close of trading on June 4, 2002
announcing our preliminary financial results for the three months ended
May 31, 2002 and our announcement of certain additional information in the
related teleconference.
2. On June 28, 2002, we filed a Current Report on Form 8-K reporting that
Richard Bergmann, President of the Company, was taking a personal leave of
absence.
41
SIGNATURES
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 October 15, 2002.
MANUGISTICS GROUP, INC.
(Registrant)
Date: October 15, 2002
----------------
/s/Raghavan Rajaji
------------------
Raghavan Rajaji
Executive Vice President and
Chief Financial Officer
(Principal financial officer)
/s/ Jeffrey T. Hudkins
------------------
Jeffrey T. Hudkins
Vice President, Controller and
Chief Accounting Officer
(Principal accounting officer)
42
CERTIFICATIONS
I, Gregory J Owens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Manugistics Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: October 15, 2002 By: /s/ Gregory J. Owens
- --------------------------------------------------------------------------------
Gregory J. Owens
Chairman and Chief Executive Officer
Principal Executive Officer
43
I, Raghavan Rajaji, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Manugistics Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: October 15, 2002 By: /s/ Raghavan Rajaji
- --------------------------------------------------------------------------------
Raghavan Rajaji
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
The certification required by Section 906 of the Sarbanes-Oxley Act of 2002 is
being furnished to the Securities and Exchange Commission under separate
correspondence concurrently with this filing.
44