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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 November 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 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: approximately 70.1 million
shares of common stock, $.002 par value, as of January 7, 2003.
1
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) - 3
November 30, 2002 and February 28, 2002
Condensed Consolidated Statements of Operations (Unaudited) - 4
Three and nine months ended November 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows (Unaudited) - 5
Nine months ended November 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements (Unaudited) - 6
November 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 15
Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 43
Item 4. Controls and Procedures 44
PART II OTHER INFORMATION
Item 5. Other Information 44
Item 6. Exhibits and Reports on Form 8-K 44
SIGNATURES 46
CERTIFICATIONS -SECTION 302 47
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE)
November 30, February 28,
2002 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 127,468 $ 228,801
Marketable securities 5,315 4,259
--------- ---------
Total cash, cash equivalents and marketable securities 132,783 233,060
Accounts receivable, net of allowance for doubtful accounts of
$8,836 and $8,308 at November 30, 2002 and February 28, 2002,
respectively 63,922 76,443
Deferred tax assets -- 9,061
Other current assets 10,203 11,471
--------- ---------
Total current assets 206,908 330,035
NON-CURRENT ASSETS:
Property and equipment, net of accumulated depreciation 32,616 22,872
Software development costs, net of accumulated amortization 13,416 14,506
Restricted cash 14,096 --
Goodwill, net of accumulated amortization 283,613 269,998
Acquired technology, net of accumulated amortization 44,724 36,086
Other intangible assets and non-current assets, net of
accumulated amortization 31,234 37,854
Deferred tax assets -- 11,289
--------- ---------
TOTAL ASSETS $ 626,607 $ 722,640
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,919 $ 9,009
Accrued compensation 6,566 12,720
Deferred revenue 35,204 43,578
Accrued liabilities and other 28,836 27,777
--------- ---------
Total current liabilities 80,525 93,084
--------- ---------
NON-CURRENT LIABILITES:
Convertible debt 250,000 250,000
Long-term debt and capital leases 4,939 1,023
Other non-current liabilities 9,954 5,726
--------- ---------
Total non-current liabilities 264,893 256,749
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock, $.002 par value per share; 300,000 shares
authorized; 69,880 and 69,042 issued and outstanding at
November 30, 2002 and February 28, 2002, respectively 140 138
Additional paid-in capital 632,959 629,861
Deferred compensation (3,534) (9,049)
Accumulated other comprehensive loss (2,137) (2,704)
Accumulated deficit (346,239) (245,439)
--------- ---------
Total stockholders' equity 281,189 372,807
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 626,607 $ 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 NINE MONTHS
ENDED NOVEMBER 30, ENDED NOVEMBER 30,
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUE:
Software $ 14,084 $ 22,150 $ 56,712 $ 92,015
Services 25,132 27,575 79,614 82,629
Support 20,412 19,020 61,867 54,875
Reimbursed expenses 2,736 2,266 8,700 7,708
--------- --------- --------- ---------
Total revenue 62,364 71,011 206,893 237,227
--------- --------- --------- ---------
OPERATING EXPENSES:
Cost of revenue:
Cost of software 4,365 4,750 15,495 14,848
Amortization of acquired technology 3,576 2,654 10,064 6,553
--------- --------- --------- ---------
Total cost of software 7,941 7,404 25,559 21,401
--------- --------- --------- ---------
Cost of services and support 23,707 23,598 74,809 71,212
Cost of reimbursed expenses 2,736 2,266 8,700 7,708
Non-cash stock compensation expense (benefit) for cost of
services and support 390 535 1,296 (390)
--------- --------- --------- ---------
Total cost of services and support 26,833 26,399 84,805 78,530
--------- --------- --------- ---------
Sales and marketing 20,593 26,889 75,849 91,002
Non-cash stock compensation expense (benefit) for sales and marketing 209 537 718 (2,166)
--------- --------- --------- ---------
Total cost of sales and marketing 20,802 27,426 76,567 88,836
--------- --------- --------- ---------
Product development 14,095 17,232 48,308 53,993
Non-cash stock compensation expense (benefit) for product development 59 115 244 (1,393)
--------- --------- --------- ---------
Total cost of product development 14,154 17,347 48,552 52,600
--------- --------- --------- ---------
General and administrative 7,056 6,375 21,338 21,170
Non-cash stock compensation expense (benefit) for general and
administrative 96 116 418 (211)
--------- --------- --------- ---------
Total cost of general and administrative 7,152 6,491 21,756 20,959
--------- --------- --------- ---------
Amortization of intangibles 1,005 21,800 2,861 62,730
Restructuring and impairment charges 8,159 4,193 16,996 6,612
Purchased research and development -- -- 3,800 --
IRI settlement -- 3,115 -- 3,115
--------- --------- --------- ---------
Total operating expenses 86,046 114,175 280,896 334,783
--------- --------- --------- ---------
LOSS FROM OPERATIONS (23,682) (43,164) (74,003) (97,556)
OTHER EXPENSE, NET (1,629) (12,250) (5,348) (12,433)
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (25,311) (55,414) (79,351) (109,989)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 692 (10,434) 21,450 (19,919)
--------- --------- --------- ---------
NET LOSS $ (26,003) $ (44,980) $(100,801) $ (90,070)
========= ========= ========= =========
BASIC AND DILUTED LOSS PER SHARE $ (0.37) $ (0.66) $ (1.45) $ (1.33)
SHARES USED IN BASIC AND DILUTED LOSS PER SHARE COMPUTATION
69,876 68,142 69,683 67,736
See accompanying notes to the condensed consolidated financial statements.
4
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended November 30,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(100,801) $ (90,070)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 31,718 84,384
Amortization of debt issuance costs 859 855
Purchased research and development 3,800 --
Deferred income taxes 20,350 (22,389)
Non-cash stock compensation expense (benefit) 2,677 (4,160)
Loss on investments 42 10,604
Asset impairment charges 2,484 --
Other 249 1,034
Changes in assets and liabilities:
Accounts receivable 15,491 7,057
Other assets 1,476 2,002
Accounts payable 63 (1,253)
Accrued compensation (7,612) (9,559)
Other liabilities 4,096 (3,089)
Deferred revenue (11,802) (1,055)
--------- ---------
Net cash used in operating activities (36,910) (25,639)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired (32,063) (30,644)
Restricted cash (14,096) --
Investment in business -- (10,150)
Proceeds from sale of investment -- 362
(Purchases) sales of marketable securities, net (1,056) 90,254
Purchases of property and equipment (13,539) (8,323)
Capitalization and purchases of software (8,868) (10,674)
--------- ---------
Net cash (used in) provided by investing activities (69,622) 30,825
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 2,310 --
Payments of long-term debt, capital lease obligations and
convertible debt issuance costs (2,118) (296)
Proceeds from exercise of stock options and employee stock plan
purchases 4,617 8,567
--------- ---------
Net cash provided by financing activities 4,809 8,271
--------- ---------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 390 (1,018)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (101,333) 12,439
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 228,801 196,362
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 127,468 $ 208,801
========= =========
See accompanying notes to the condensed consolidated financial statements.
5
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOVEMBER 30, 2002
1. The Company and Basis of Presentation
THE COMPANY
Manugistics Group, Inc. (the "Company") is a leading global
provider of supply chain management (SCM) and pricing and revenue
optimization (PRO) solutions. The Company also provides solutions for
supplier relationship management (SRM) and service and parts
management (S&PM). Our solutions help companies lower operating costs,
improve customer service, increase revenue, 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 Company
must perform the second step of the impairment test. In the second
step, the Company must compare the implied
6
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 quarters ended August 31, 2002 and November 30, 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 November 30, 2002 and
determined that based upon the implied fair value (which includes
factors such as, but not limited to, the Company's market
capitalization, control premium and recent stock price volatility) of
the Company as of August 31, 2002 and November 30, 2002, there was no
impairment of goodwill. 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. We will perform a test for
goodwill impairment at February 28, 2003, which is our annual date for
goodwill impairment review.
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 a
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
7
94-3"), "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including 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. The effects of adoption 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 0.1 million shares and 2.8 million shares for the
three month periods ended November 30, 2002 and 2001, respectively,
and 2.7 million shares and 5.5 million shares for the nine month
periods ended November 30, 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 nine months ended November 30, 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.
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 subject to amortization as of November 30, 2002
and February 28, 2002 were as follows (amounts in thousands):
ACCUMULATED
GROSS ASSETS AMORTIZATION NET ASSETS
------------ ------------ ----------
NOVEMBER 30, 2002
Acquired technology $ 65,351 $(20,627) $ 44,724
Customer relationships 28,982 (7,322) 21,660
-------- -------- --------
Total $ 94,333 $(27,949) $ 66,384
======== ======== ========
FEBRUARY 28, 2002
Acquired technology $ 46,639 $(10,553) $ 36,086
Customer relationships 22,491 (4,368) 18,123
-------- -------- --------
Total $ 69,130 $(14,921) $ 54,209
======== ======== ========
The changes in the carrying amount of goodwill for the nine
months ended November 30, 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 (see Note 7) 5,547
Other 967
--------
BALANCE AS OF NOVEMBER 30, 2002 $283,613
========
8
Amortization expense related to goodwill and other intangible
assets was $4.6 million and $24.5 million for the three months ended
November 30, 2002 and 2001, respectively, and $12.9 million and $69.3
million for the nine months ended November 30, 2002 and 2001,
respectively. Estimated aggregate future amortization expense for
intangible assets remaining for the three-month period ending February
28, 2003 and future fiscal years are as follows (amounts in
thousands):
THREE MONTHS
ENDING FEBRUARY 28, FISCAL YEAR ENDING FEBRUARY 28 OR 29,
------------------- -------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----
Amortization expense $ 4,581 $ 18,182 $ 17,205 $ 10,753 $ 9,889 $ 5,774 $ 66,384
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 For the nine months
ended November 30, ended November 30,
----------------------- -------------------------
2002 2001 2002 2001
-------- -------- ----------- --------
Net loss:
As reported $(26,003) $(44,980) $ (100,801) $(90,070)
Add: goodwill and assembled workforce
amortization, net of taxes -- 18,660 -- 55,964
-------- -------- ----------- --------
Net loss, pro forma $(26,003) $(26,320) $ (100,801) (34,106)
======== ======== =========== ========
Basic and diluted loss per share:
As reported $ (0.37) $ (0.66) $ (1.45) $ (1.33)
Add: goodwill and assembled workforce
amortization, net of taxes -- $ 0.27 -- $ 0.83
-------- -------- ----------- --------
Basic and diluted loss per share, pro forma $ (0.37) $ (0.39) $ (1.45) $ (0.50)
======== ======== =========== ========
Shares used in basic and diluted loss
per share calculation 69,876 68,142 69,683 67,736
Please refer to Note 2 for further discussion of SFAS 142.
6. Comprehensive Loss
Other comprehensive (loss) income relates to foreign currency
translation adjustment and unrealized gains (losses) on investments in
marketable securities. The following table sets forth the
comprehensive loss for the three and nine month periods ended November
30, 2002 and 2001, respectively (amounts in thousands):
Three months ended November 30, Nine months ended November 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net loss $ (26,003) $ (44,980) $(100,801) $ (90,070)
Other comprehensive (loss) income (963) 24 567 (1,621)
--------- --------- --------- ---------
Total comprehensive loss $ (26,966) $ (44,956) $(100,234) $ (91,691)
========= ========= ========= =========
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 in cash. WDS was
a leading provider of application software and services to 135
customers in 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
was paid in cash in November 2002. Approximately $3.9 million of the
purchase price is being held in escrow for the satisfaction of
indemnification claims under the terms of the acquisition agreement.
During the year ended and as of January 31, 2002, WDS had revenue of
approximately $28.0 million and had approximately 160 employees.
9
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.
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 relationships to be amortized over seven years and $3.3
million of goodwill.
In connection with the acquisition of WDS, we allocated $3.8
million, or 14.5% of the purchase price to in-process research and
development projects. There were several in-process research and
development projects at the time of the WDS acquisition. At the
acquisition date, WDS was evaluating the efforts required to complete
acquired in-process research and development projects including
planning, designing, testing and other activities necessary to
establish that the product or enhancements to existing products could
be produced to meet desired functionality and technical performance
requirements. This was being done in conjunction with the enhancement
of three software products. The most significant of these projects was
the completion of the Buying Advantage product, which is an advanced
internet-based direct procurement solution designed for large
aerospace and defense companies, mid-sized suppliers and maintenance,
repair and overhaul facilities in industry and government. It enables
single-site or multi-site organizations to leverage the supplier
community as a strategic asset through aggregated sourcing and buying,
increased buyer efficiencies and through efficient collaboration and
integration with suppliers. This results in reduced lead-time and cost
and improved responsiveness. The value assigned to Buying Advantage
was $3.3 million.
The value of the purchased in-process research and development
was computed using discount rates ranging from 26% to 30% on the
anticipated income stream of the related product revenue using the
income approach appraisal method. The discounted cash flows were based
on management's forecast of future revenue, costs of revenue and
operating expenses related to the products and technologies purchased
from WDS. The determined value was then adjusted to reflect only the
value creation efforts of WDS prior to the close of the acquisition.
At the time of the acquisition, the products and enhancements were at
various stages of completion, ranging from approximately 5% to 96%
complete and future costs to complete the projects were anticipated to
be $2.8 million. Anticipated completion dates ranged from one month to
15 months. The resulting value of purchased in-process research and
development was further reduced by the estimated value of core
technology. A purchased research and development charge of $3.8
million was recorded in the nine months ended November 30, 2002.
The estimated revenue for the in-process projects were expected
to commence in calendar 2002 and 2003 upon project completion and to
decline over four years as new products and technologies enter the
market. The discount rate utilized was higher than our
weighted-average cost of capital due to the inherent uncertainties
surrounding the successful development of the purchased in-process
technology, the useful life of such technology, the profitability
levels of the technology and the uncertainty of technological advances
that were unknown at the time of the acquisition. The original
research and development projects are still in the process of being
completed in accordance with the plans outlined above.
Digital Freight Exchange, Inc.
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 agreement.
8. Restructuring and Impairment Charges
Fiscal 2003 Restructuring and Impairment Charges.
Plan FY03Q2 Restructuring Charges. 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 employee
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
10
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. The Company also recorded a charge of
approximately $0.3 million during the three months ended August 31,
2002, related to contract termination costs.
In accordance with SFAS 144, the Company recorded write-down
relating to the restructuring of approximately $0.2 million during the
three months ended August 31, 2002. The write-down consisted of the
abandonment of certain furniture, fixtures, computer equipment and
leasehold improvements related to the closure of certain facilities.
Plan FY03Q2 Impairment Charges. In accordance with SFAS 144, the
Company recorded an impairment charge of approximately $1.2 million
during the three months ended August 31, 2002 related to the
discontinued use of a portion of the Company's sales force automation
software, which is being replaced with another tool. The remaining net
book value at August 31, 2002 of $0.7 million is being amortized over
its remaining useful life of approximately one year.
The following table sets forth a summary of Plan FY03Q2
restructuring and impairment charges, payments made against those
charges and the remaining liabilities as of November 30, 2002 (in
thousands):
Adjustments Non-cash
to Plan asset
FY03Q2 Utilization disposal
Charges in charges in of cash in losses in
Balance three months three months six months six months Balance as
as of Feb ended Aug. ended Nov. ended Nov. ended Nov. of Nov.
PLAN FY03Q2 28, 2002 31, 2002 30, 2002 30, 2002 30, 2002 30, 2002
-------- -------- ------------ ----------- ------------ ----------
Lease obligations and terminations $ -- $ 4,211 $ (32) $ (60) $ -- $ 4,119
Severance and related benefits -- 2,818 48 (2,534) -- 332
Impairment charges and write-downs -- 1,449 -- -- (1,449) --
Other -- 290 (44) (99) (135) 12
------- ------- ------- ------- ------- -------
Total $ -- $ 8,768 $ (28) $(2,693) $(1,584) $ 4,463
======= ======= ======= ======= ======= =======
Plan FY03Q3 Restructuring Charges. During the three months ended
November 30, 2002, the Company announced and implemented an additional
restructuring plan designed to further align our cost structure with
expected revenue. Actions taken included a reduction in the Company's
employee workforce by approximately 12%, a reduction in contractors,
the consolidation of some smaller field offices and lease termination
costs. The reduction in workforce was achieved through a combination
of attrition and involuntary terminations and totaled 163 employees,
144 of which were involuntary, across most business functions and
geographic regions. All terminated employees were notified by November
30, 2002 and 20 were still employed on November 30, 2002. The Company
recorded a charge for severance and related benefits of approximately
$3.6 million during the three months ended November 30, 2002. The
Company also recorded a facility charge of approximately $3.3 million
during the three months ended November 30, 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. The Company also recorded other charges
of approximately $0.3 million related to contract termination costs.
In accordance with SFAS 144, the Company recorded a write down
relating to the restructuring of approximately $1.0 million during the
three months ended November 30, 2002. The write-down consisted of the
abandonment of certain furniture, fixtures, computer equipment and
leasehold improvements related to the closure of certain facilities.
The following table sets forth a summary of Plan FY03Q3
restructuring and impairment charges, payments made against those
charges and the remaining liabilities as of November 30, 2002 (in
thousands):
11
Non-cash
asset
disposal
Utilization losses in
Charges in of cash in three
Balance three months three months months Balance as
as of Feb ended Nov. ended Nov. ended Nov. of Nov. 30,
PLAN FY03Q3 28, 2002 30, 2002 30, 2002 30, 2002 2002
--------- ------------ ------------ ---------- -----------
Lease obligations and terminations $ -- $ 3,305 $ (66) $ -- $ 3,239
Severance and related benefits -- 3,585 (1,323) -- 2,262
Impairment charges and write-downs -- 1,035 -- (1,035) --
Other -- 262 (7) -- 255
------- ------- ------- ------- -------
Total $ -- $ 8,187 $(1,396) $(1,035) $ 5,756
======= ======= ======= ======= =======
Fiscal 2002 Restructuring Charges.
Plan FY02Q2 Restructuring Charges. 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
the three months ended August 31, 2001.
The following table sets forth a summary of Plan FY02Q2
restructuring charges, payments made against those charges and the
remaining liabilities as of November 30, 2002 (in thousands):
Utilization
of cash in
Balance nine months Balance as
as of Feb ended Nov. of Nov.
PLAN FY02Q2 28, 2002 30, 2002 30, 2002
--------- ----------- ----------
Lease obligations and terminations $1,072 $ (278) $ 794
Severance and related benefits 93 (93) --
Impairment charges and write-downs -- -- --
Other 15 (15) --
------ ------ ------
Total $1,180 $ (386) $ 794
====== ====== ======
Plan FY02Q3 Restructuring Charges ("Plan FY02Q3"). During October
2001, the Company announced and implemented an additional
restructuring plan designed to reduce expenses as a result of expected
reduction in revenue caused by client concerns about committing to
large capital projects in the face of weakening global economic
conditions. 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 employee 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 the three months ended November 30,
2001. The Company recorded a facility charge of approximately $2.3
million during the three months ended November 30, 2001 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.
The following table sets forth a summary of Plan FY02Q3
restructuring charges, payments made against those charges and the
remaining liabilities as of November 30, 2002 (in thousands):
Adjustments
to Plan
FY02Q3 Utilization
charges in of cash in
Balance as three months nine months Balance as
of Feb 28, ended Aug. ended Nov. of Nov.
PLAN FY02Q3 2002 31, 2002 30, 2002 30, 2002
---- -------- -------- --------
Lease obligations and terminations $ 517 $ -- $(195) $ 322
Severance and related benefits 151 69 (41) 179
Impairment charges and write-downs -- -- -- --
Other -- -- -- --
----- ----- ----- -----
Total $ 668 $ 69 $(236) $ 501
===== ===== ===== =====
12
Fiscal 1999 Restructuring Charges
Plan FY99 Restructuring Charges ("Plan FY99"). During the third
and fourth quarters of fiscal 1999, the Company implemented a
restructuring plan aimed at reducing costs and returning the Company
to profitability. Actions taken included a reduction in the Company's
workforce of 412 employees across all business functions in the United
States, the abandonment of future lease commitments on office
facilities that were closed and write-downs of operating assets,
goodwill and capitalized software made in accordance with SFAS 121.
The following table sets forth a summary of Plan FY99
restructuring charges, payments made against those charges and the
remaining liabilities as of November 30, 2002 (in thousands):
Utilization
of cash in
Balance nine months Balance as
as of Feb ended Nov. of Nov.
PLAN FY99 28, 2002 30, 2002 30, 2002
-------- -------- --------
Lease obligations and terminations $3,708 $ (379) $3,329
Severance and related benefits -- -- --
Impairment charges and write-downs -- -- --
Other 179 (70) 109
------ ------ ------
Total $3,887 $ (449) $3,438
====== ====== ======
The following table sets forth a summary of total restructuring
and impairment charges, payments made against those charges and the
remaining liabilities as of November 30, 2002 (in thousands):
Charges and Non-cash
adjustments Utilization asset
to charges of cash disposal
in nine in nine losses in
Balance months months nine months Balance as
as of Feb ended Nov. ended Nov. ended Nov. of Nov.
ALL PLANS 28, 2002 30, 2002 30, 2002 30, 2002 30, 2002
-------- ------- -------- -------- --------
Lease obligations and terminations $ 5,297 $ 7,484 $ (978) $ -- $11,803 (3)
Severance and related benefits 244 6,520 (3,991) -- 2,773
Impairment charges and write-downs -- 2,484 -- (2,484) --
Other 194 508 (191) (135) 376
------- ------- ------- ------- -------
Total $ 5,735 (1) $16,996 $(5,160) $(2,619) $14,952 (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) $6.0 million and $9.0 million are included in other accrued
current liabilities and other non-current liabilities,
respectively, in the consolidated balance sheet as of
November 30, 2002.
(3) Certain lease obligations extend through fiscal year 2009.
9. Income Taxes
Income tax expense of $0.7 million and $21.5 million was recorded
for the three and nine-month periods ended November 30, 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
( 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 nine months ended
November 30, 2002. 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
13
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. Credit Facility and Restricted Cash
We have a one-year committed revolving credit facility with Bank
of America, N.A. ("BOA") 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, net worth,
leverage and liquidity covenants, restricts us from declaring or
paying cash dividends and limits the amount of cash paid for
acquisitions. The financial covenants under this facility are as
follows:
- Consolidated EBITDA (as defined in the credit facility, as
amended) must be equal to or greater than negative 2.5% of
consolidated stockholders' equity for the fiscal quarters
ended February 28, 2002 and May 31, 2002, not less than
negative $16.0 million for the quarter ended August 31,
2002, not less than negative $5.0 million for quarter ending
November 30, 2002 and not less than $0 for the quarter ended
February 28, 2003;
- Cash, cash equivalents and marketable securities
("liquidity") cannot be less than $125 million;
- Consolidated stockholders' equity cannot be less than $250
million plus 50% of consolidated net income (if greater than
$0) plus 100% of increases in stockholders' equity after
February 28, 2002 as a result of issuance of common stock;
and.
- Leverage ratio ((total liabilities (excluding convertible
debt) plus outstanding letters of credit) divided by
stockholders' equity) cannot exceed 50%.
As of November 30, 2002, we had $14.1 million in letters of
credit outstanding under this line to secure our lease obligations for
office space. We were in compliance with all financial covenants as of
November 30, 2002 except for the consolidated EBITDA covenant. We are
in the process of obtaining a waiver for this violation. In event BOA
does not grant a waiver, they can terminate their commitment to make
further loans and letter of credit extensions under the credit
facility. We paid cash in November 2002 for the remaining $23.6
million of consideration payable for the WDS acquisition. The credit
facility only allowed us to pay up to $15.0 million in cash per
acquisition prior to being amended in November 2002 to allow for the
WDS acquisition payment. Prior to receiving this amendment to the
credit facility, BOA required the Company to deposit sufficient cash
to provide collateral for outstanding letters of credit. The Company
has classified such amounts as restricted cash in the condensed
consolidated balance sheet as of November 30, 2002.
11. Supplemental Cash Flow Information.
The Company paid total interest of $12.7 million and $12.6
million during the nine months ended November 30, 2002 and 2001,
respectively.
Supplemental information of non-cash financing activities is as
follows:
We recorded approximately $4.5 million and $0.5 million in
capital leases during the nine months ended November 30, 2002 and
2001, respectively.
14
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 supply chain management and
pricing and revenue optimization solutions. We also provide solutions
for supplier relationship management, and service & parts management.
Our solutions help companies lower operating costs, improve customer
service, increase revenue, enhance profitability and accelerate
revenue and earnings growth. They do this by creating efficiencies in
how goods and services are brought to market, how they are sold and
how they are serviced and maintained. Our Enterprise Profit
Optimization(TM) solutions, which combine the proven cost-reducing
power of our solutions with the revenue-enhancing capability of
pricing and revenue optimization solutions, provide additional
benefits by providing businesses with the ability to simultaneously
optimize cost and revenue to enhance profitability on an
enterprise-wide basis. These solutions integrate pricing, forecasting,
and operational planning and execution to help companies enhance
margins across their enterprises and extended trading networks.
Our supply chain management 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 supplier relationship management solutions help
improve the activities required to design, source, and procure goods
and to collaborate more effectively with key suppliers of direct
materials. Our pricing and revenue optimization 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 service & parts management 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 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
15
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;
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; RadioShack Corporation; Texas Instruments
Incorporated; and Unilever Home & Personal Care, USA; as well as
mid-sized enterprises.
As a result of deterioration in the markets for our products and
services due to the 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 in response to 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 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, continued 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 quarters ended August 31, 2002 and
November 30, 2002, our financial performance was adversely affected.
The lengthening of sales cycles in recent quarters, especially the
second and third quarters of fiscal 2002 and fiscal 2003 to date have
caused our software revenue and total revenue to be much lower than
the second half of fiscal 2001 and the first quarter of fiscal 2002,
adversely affecting our operating performance. Demand for our pricing
and revenue optimization and our supplier relationship management
products has been more severely impacted than our supply chain
management and service & parts management products for which there are
more mature markets. Although our markets in most industries and
geographies have deteriorated, industries most severely impacted
include, among others, manufacturing, chemical & energy, high
technology and travel, transportation & hospitality. Industries less
affected include automotive, consumer packaged goods, food &
agriculture, life sciences and retail, as consumer spending,
especially in the United States, has remained stable. Our clients and
prospects in these markets have continued to invest in application
software, including our offerings, although at reduced rates. The
Company has not lost any major customers or contracts in recent
quarters that have negatively impacted revenue. The Company has
experienced a decline in the average selling price ("ASP") per
software license transaction over the past three-quarters. This is
attributable to the Company having no software license transactions
greater than $5.0 million during the nine months ended November 30,
2002 as compared to four in the comparable prior period and customers
generally licensing fewer software modules. Currently, it is unclear
when or if our average selling price per license transaction will
decrease, stabilize or increase. We believe market conditions will
continue to be challenging for us in the near-term as longer sales
cycles and delays in decision making on software purchases may
persist.
In response to the weakness in spending on enterprise application
software, we 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 employee
workforce by 9% across the organization, reduced the number of
contractors, implemented a mandatory unpaid leave program 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
16
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.
In our third quarter of fiscal 2003, we reduced our employee
workforce by an additional 12% across the organization, further
reduced the number of contractors, implemented another mandatory
unpaid leave program for all U.S. employees during the first week in
September and another voluntary week of unpaid leave during our third
quarter of fiscal 2003 for our European employees, consolidated some
of our smaller field offices and further reduced discretionary
spending. These cost containment and cost reduction measures resulted
in restructuring and impairment charges of approximately $8.2 million
in the quarter ending November 30, 2002 for severance and related
benefits associated with involuntary terminations, lease termination
costs, and impairment charges on property, equipment and leasehold
improvements.
Our implementation of cost containment and cost reduction
initiatives during our second and third quarters of fiscal 2003 better
aligned our operating cost structure with the anticipated 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
revenue. Total operating expenses, for our third quarter of fiscal
2003, 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 20.1%, or $18.2 million, from the total for our
first quarter of fiscal 2003, compared to a decrease in total revenues
of 16.4%, or $12.2 million, over the same period.
In the aggregate, we expect that all cost containment and cost
reduction measures implemented in fiscal 2003 will reduce our cost
structure by approximately $80 million on an annualized basis.
Results of Operations:
The following table includes the condensed consolidated
statements of operations data for the three and nine months ended
November 30, 2002 and 2001 expressed as a percentage of revenue:
Three months ended November 30, Nine months ended November 30,
2002 2001 2002 2001
------ ------ ------ ------
REVENUE:
Software 22.6% 31.2% 27.4% 38.8%
Services 40.3% 38.8% 38.5% 34.8%
Support 32.7% 26.8% 29.9% 23.1%
Reimbursed expenses 4.4% 3.2% 4.2% 3.2%
------ ------ ------ ------
Total revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
OPERATING EXPENSES:
Cost of software 7.0% 6.7% 7.5% 6.3%
Amortization of acquired technology 5.7% 3.7% 4.9% 2.8%
Cost of services and support 38.0% 33.2% 36.2% 30.0%
Cost of reimbursed expenses 4.4% 3.2% 4.2% 3.2%
Sales and marketing 33.0% 37.9% 36.7% 38.4%
Product development 22.6% 24.3% 23.3% 22.8%
General and administrative 11.3% 9.0% 10.3% 8.9%
Amortization of intangibles 1.6% 30.7% 1.4% 26.4%
Restructuring and impairment charges 13.1% 5.9% 8.2% 2.8%
Purchased research and development -- -- 1.8% --
Non-cash stock compensation expense (benefit) 1.2% 1.8% 1.3% (1.8)%
IRI settlement -- 4.4% -- 1.3%
------ ------ ------ ------
Total operating expenses 138.0% 160.8% 135.8% 141.1%
------ ------ ------ ------
Loss from operations (38.0)% (60.8%) (35.8)% (41.1%)
Other expense, net (2.6)% (17.3)% (2.6)% (5.2)%
------ ------ ------ ------
Loss before income taxes (40.6%) (78.0%) (38.4%) (46.4%)
Provision for (benefit from) income taxes 1.1% (14.7%) 10.4% (8.4%)
------ ------ ------ ------
Net loss (41.7)% (63.3%) (48.7)% (38.0%)
====== ====== ====== ======
17
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 November 30, Nine months ended November 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------- ------- ------- -------
Cost of services and support $ 390 $ 535 $ 1,296 $ (390)
Sales and marketing 209 537 719 (2,166)
Product development 59 115 244 (1,393)
General and administrative 96 116 418 (211)
------- ------- ------- -------
$ 754 $ 1,303 $ 2,677 $(4,160)
======= ======= ======= =======
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 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,
deferred income taxes and restructuring-related expenses. 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 98-9")," 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 using
the residual method, based on vendor specific objective evidence
("VSOE") of fair value of any undelivered elements of the arrangement.
VSOE of fair value for support services is measured by the renewal
rate. VSOE of fair value for implementation services is based upon
separate sales of services at stated hourly rates by level of
consultant. Under the residual method, the Company defers revenue for
the fair value of its undelivered
18
elements based on VSOE of fair value and the remaining portion of the
arrangement fee is allocated to the delivered elements and recognized
as revenue when the basic criteria in SOP 97-2 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 recognize revenue on a
percentage-of-completion basis in accordance with SOP 81-1,
"Accounting for Performance of Construction Type and Certain
Production Type Contracts." In these cases, revenue is recognized
based on labor hours incurred to date compared to total estimated
labor hours for the contract.
Implementation services are separately priced and sold, generally
available from a number of suppliers and typically are not essential
to the functionality of our software products. Implementation
services, which include project management, systems planning, design
and implementation, customer configurations and training are 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.
Support revenue includes post-contract customer 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
support period.
To date, the number of fixed price services engagements and
services engagements considered to be essential to the functionality
of our software products (both situations requiring use of the
percentage-of-completion method) have been insignificant. However, if
we enter into more of these types of arrangements in the future, our
reported revenue and operating performance will be subject to
increased levels of estimates and uncertainties.
The estimation process inherent in the application of the
percentage-of-completion method of accounting for revenue is subject
to judgments and uncertainties and may affect the amounts of software
and services revenue and related expenses reported in our Condensed
Consolidated Financial Statements. A number of internal and external
factors can affect our estimates to complete client engagements
including skill level and experience of project managers and staff
assigned to engagements and continuity and attrition level of
implementation consulting staff. Changes in the estimated stage of
completion of a particular project could create variability in our
revenue and results of operations if we are required to increase or
decrease previously recognized revenue related to a particular project
or we expect to incur a loss on the project.
Allowance for Doubtful Accounts
For each of the three years in the period ended February 28,
2002, and for the nine months ended November 30, 2002, our provision
for doubtful accounts has ranged between approximately 1% and 3% of
total revenue. 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-off experience, the credit worthiness of the
customer, the economic conditions of the customer's industry and
general economic conditions, among other factors. Should any of these
factors change, the estimates made by management will also change,
which could affect the level of the Company's future provision for
doubtful accounts. If the assumptions we used to calculate these
estimates do not properly reflect future collections, there could be
an impact on future reported results of operations. Based on our total
revenue reported for the quarter ended November 30, 2002, our
provision for doubtful accounts would change by $0.6 million in any
given quarter for a 1% change in proportion of total revenue. The
provision for doubtful accounts is included in sales and marketing
expense (for software license receivables) and cost of services and
support (for services and support revenue), in the condensed
consolidated statement of operations.
19
Capitalized Software Development Costs
We capitalize the development cost of software, other than
internal use software, in accordance with Statement of Financial
Accounting Standards No. 86 ("SFAS 86"), "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Software
development costs are expensed as incurred until technological
feasibility has been established, at which time such costs are
capitalized until the product is available for general release to
clients. Software development costs are amortized 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.
In future periods, if we determine that technological
feasibility occurs at a later date, such as coincident with general
product release to clients, we may not capitalize any software
development costs, which have ranged between $2.1 million and $3.6
million per quarter during fiscal 2001 through fiscal 2003. This would
increase our reported operating expenses in the short-term. The
estimated economic life of our capitalized software development costs is
subject to change in future periods based on our experience with the
length of time our products or enhancements are being or are expected to
be used. A change in the expected economic life of our capitalized
software development costs of six months would change our quarterly
operating expenses by $(0.6) million to $1.0 million.
Valuation of Long-Lived Assets, Including Intangible Assets and
Impairment Review of Goodwill
We assess the impairment of long-lived assets, including
intangible assets and internally developed software, 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 management to be commensurate with the risk inherent in
our current business model. In addition, at each balance sheet due date,
the Company compares the net realizable value of capitalized software
development costs to the unamortized capitalized costs. To the extent
the unamortized capitalized costs exceed the net realizable value, the
excess amount is written off. Other intangible assets, including
acquired technology, are amortized over periods ranging from two to
seven years.
Evaluating long-lived assets for impairment involves judgments
as to when an asset may potentially be impaired. We consider there to be
a risk of impairment if there is a significant decrease in the market
value of an asset, there is a significant change in the extent or
intended use of an asset, or generated or forecasted operating or cash
flow losses indicate continuing losses from an asset used to produce
revenue.
As of November 30, 2002 our net book value of long-lived assets,
consisted of the following (in thousands):
Property and equipment $ 32,616
Software development costs 13,416
Software developed for internal use 2,653
Goodwill 283,613
Acquired technology 44,724
Customer relationships 21,660
------
398,682
=======
The estimated economic useful life of our long-lived and
intangible assets is subject to change in future periods based upon the
intended use of the asset or period of time revenues are expected to be
generated. 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 losses were recognized. During the quarters ended
August 31, 2002 and November 30, 2002, we experienced adverse changes in
our stock price resulting from a decline in our financial performance
and adverse business conditions that have
20
affected the technology industry, especially application software
companies. Based on these factors, we performed a test for goodwill
impairment at August 31, 2002 and November 30, 2002 and determined that
based upon the implied fair value (which includes factors such as, but
not limited to, the Company's market capitalization, control premium and
recent stock price volatility) of the Company as of August 31, 2002 and
November 30, 2002, there was no impairment of goodwill. 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. We will perform a test for
goodwill impairment at February 28, 2003, which is our annual date for
goodwill impairment review. 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."
Determining the implied fair value of goodwill involves
judgments as to when an impairment may exist, as well as estimates
used to compute the implied fair value. If the estimates used to
calculate the implied fair value of goodwill were to change such that
the fair value dropped below stockholders' equity, this could result in
an impairment charge for some or all of our goodwill balance.
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 nine months
ended November 30, 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 (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 nine
months ended November 30, 2002. Management will continue to monitor its
estimates of future profitability and realizability of its net deferred
tax assets based on evolving business conditions.
Restructuring-Related Expenses
The Company's restructuring charges are comprised primarily of:
(i) severance and associated employee benefits related to the
involuntary reduction of the Company's workforce; (ii) lease termination
costs and/or costs associated with permanently vacating its facilities
("abandonment"); and (iii) impairment costs related to certain
long-lived assets and leasehold improvements abandoned. The Company
accounts for the costs associated with the reduction of the Company's
workforce in accordance with EITF 94-3. Accordingly, the Company records
the liability related to involuntary termination costs when the
following conditions have been met: (i) management with the appropriate
level of authority approves a termination plan that commits the Company
to such plan and establishes the benefits the employees will receive
upon termination; (ii) the benefit arrangement is communicated to the
employees in sufficient detail to enable the employees to determine the
termination benefits; (iii) the plan specifically identifies the number
of employees to be terminated, their locations, and their job
classifications; and (iv) the period of time to implement the plan does
not indicate changes to the plan are likely. The termination costs
recorded by the Company are not associated with nor do they benefit
continuing activities. The Company accounts for lease termination
costs in accordance with EITF 94-3. Accordingly, the Company records the
costs associated with lease termination and/or abandonment when the
following conditions have been met: (i) management with the appropriate
level of authority approves a termination plan that commits the Company
to such plan; (ii) the plan specifically identifies all activities that
will not be continued, including the method of disposition and location
of
21
those activities, and the expected date of completion; (iii) the period
of time to implement the plan does not indicate changes to the plan are
likely; and (iv) the leased property has no substantive future use or
benefit to the Company. The Company records the liability associated
with lease termination and/or abandonment as the sum of the total
remaining lease costs and related exit costs, less probable sublease
income or the expected lease termination fees or penalties. The Company
accounts for costs related to long-lived assets abandoned in accordance
with SFAS 144 and, accordingly, charges to expense the net carrying
value of the long-lived assets when the Company ceases to use the
assets.
Inherent in the estimation of the costs related to the Company's
restructuring efforts are assessments related to the most likely
expected outcome of the significant actions to accomplish lease
abandonments. Changing business and real estate market conditions may
affect the assumptions related to the timing and extent of the Company's
ability to sublease vacated space. The Company reviews the status of
restructuring liabilities on a quarterly basis and, if appropriate,
records changes to its restructuring liabilities based on management's
most current estimates.
REVENUE:
Software Revenue. Software revenue decreased 36.4%, or $8.1
million, and 38.4%, or $35.3 million for the three and nine months ended
November 30, 2002, respectively, as compared to the same periods in
2001. The decrease in software revenue was 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 ASP for our
software for the three and nine months ended November 30, 2002 and a
decrease in the number of significant software transactions consummated
during the three and nine months ended November 30, 2002.
The following table summarizes our significant software
transactions consummated during the three and nine months ended November
30, 2002 and November 30, 2001:
Three Months Ended Nine Months Ended
November 30, November 30,
2002 2001 2002 2001
------------ ---------- ---------- -----------
Significant Software Transactions (1)
- -------------------------------------
Number of transactions 22 24 70 81
Average selling price (in thousands) $ 596 $ 843 $ 754 $ 1,087
(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 Nine Months Ended
November 30, November 30,
2002 2001 2002 2001
------------ --------- ---------- -----------
Software transactions $1.0 million - $2.49
million 3 8 13 17
Software transactions $2.5 million - $4.9
million 0 1 2 4
Software transactions $5.0 million or greater 0 0 0 4
------------ --------- ---------- -----------
Total software transactions $1.0 million or
greater 3 9 15 25
------------ --------- ---------- -----------
We believe the reduction in software transactions of $1.0
million or greater in the three and nine months ended November 30, 2002
is the result of companies becoming more cautious and deliberate
regarding commitments to large capital expenditures, especially spending
for enterprise application software, 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 three and nine months
ended November 30, 2002 as compared to the same period
in 2001; and
- customers licensing fewer software modules in the nine
months ended November 30, 2002 as compared to the same
period in 2001.
22
Services Revenue. Services revenue decreased 8.9%, or $2.4
million, and decreased 3.6%, or $3.0 million during the three and nine
months ended November 30, 2002, respectively, compared to the same
periods in 2001. The decrease in services revenue during the three and
nine months ended November 30, 2002 was the result of the decrease in
the number of completed software license transactions in fiscal 2002 and
fiscal 2003, and was 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 7.3%, or $1.4
million, and 12.7%, or $7.0 million during the three and nine months
ended November 30, 2002, respectively, compared to the same period in
2001. The increase in support revenue during the three and nine months
ended November 30, 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 27.8% and 30.5% of
total revenue, or $17.3 million and $21.6 million, during the three
months ended November 30, 2002 and 2001, respectively, and 24.5% and
27.8% of total revenue, or $50.6 million and $65.9 million, during the
nine months ended November 30, 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.
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
nine months ended November 30, 2002 and 2001 (in thousands):
Three Months Ended Nine Months Ended
November 30, November 31,
2002 2001 2002 2001
------------ ----------- ----------- -----------
Amortization of capitalized software $ 2,911 $ 2,568 $ 9,323 $ 8,522
Percentage of software revenue 20.7% 11.6% 16.4% 9.3%
Other costs of software 1,454 2,182 6,172 6,326
Percentage of software revenue 10.3% 9.9% 10.9% 6.9%
------------ ----------- ----------- -----------
Total cost of software $ 4,365 $ 4,750 $ 15,495 $ 14,848
Percentage of software revenue 31.0% 21.4% 27.3% 16.1%
The decrease in cost of software during the three months ended
November 30, 2002 compared to the same period in 2001 was the result of
decreased royalty fees due to lower software revenue, offset by higher
amortization of capitalized software development costs. The increase in
cost of software during the nine months ended November 30, 2002 was the
result of increased amortization of capitalized software development
costs. Amortization of capitalized software development costs 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. Including the impact of our fiscal 2003 acquisitions,
we expect amortization of acquired technology to be approximately $3.6
million per quarter through our fourth quarter fiscal 2005.
Cost of Services and Support. Cost of services and support
primarily includes personnel and third party contractor costs. Cost of
services and support as a percentage of related revenue was 52.1% and
50.6% in the three
23
months ended November 30, 2002 and 2001, respectively, and 52.9% and
51.8% during the nine months ended November 30, 2002 and 2001,
respectively. Cost of services and support remained flat during the
three months ended November 30, 2002, compared to the same period in
2001, and increased 5.1%, or $3.6 million, during the nine months ended
November 30, 2002, compared to the same period in 2001. The increase in
cost of services and support during the nine months ended November 30,
2002 was attributable to an increase in support royalties paid to third
parties and the WDS acquisition in April 2002, offset by the
implementation of our cost containment and cost reduction initiatives.
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 23.4%, or $6.3
million, and 16.7%, or $15.2 million, during the three and nine months
ended November 30, 2002, respectively, compared to the same periods in
2001. The decreases during the three and nine months ended November 30,
2002 were due to:
- an overall decrease in the average number of sales,
marketing and business development employees to 208 and
230 for the three and nine months ended November 30,
2002 compared to 254 and 259 for the same periods in
fiscal 2002. This was the result of cost containment and
cost reduction measures implemented in the second half
of fiscal 2002 and 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 nine months ended
November 30, 2002 and 2001 (in thousands):
Three Months Ended Nine Months Ended
November 30, November 30,
2002 2001 2002 2001
----------- ----------- ---------- -----------
Gross product development costs $ 16,202 $ 19,716 $ 56,636 $ 61,704
Percentage of total revenue 26.0% 27.8% 27.4% 26.0%
Less: Capitalized software development costs 2,107 2,484 8,328 7,711
Percentage of total revenue 3.4% 3.5% 4.0% 3.3%
----------- ----------- ---------- -----------
Product development costs, as reported $ 14,095 $ 17,232 $ 48,308 $ 53,993
Percentage of total revenue 22.6% 24.3% 23.3% 22.8%
Gross product development costs decreased 17.8%, or $3.5
million, and 8.2%, or $5.1 million, during the three and nine months
ended November 30, 2002, respectively, compared to the same periods in
2001. This was 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 during the nine months ended
November 30, 2002 due to the mandatory unpaid leave
program for all U.S. employees in our second and third
quarters 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 in fiscal 2003, respectively.
This decrease was offset by an increase in gross product
development costs resulting from the WDS acquisition in April 2002.
The decrease in capitalized software development costs in the
three months ended November 30, 2002 was due to the decreases listed
above. The increase in capitalized product development costs in the nine
months ended
24
November 30, 2002 was due to increased costs associated with our latest
product release completed in May 2002, 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 10.7%, or $0.7 million, and
increased 0.8%, or $0.2 million, during the three and nine months ended
November 30, 2002, respectively, compared to the same periods in 2001.
The changes in the three and nine months ended November 30, 2002 was due
to an increase in costs resulting from the WDS acquisition in April 2002
and increases in professional services fees, partially offset by a
decrease in the average 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 $20.8 million and $59.9
million during the three and nine months ended November 30, 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 the second and third quarters of fiscal 2003 and the second and
third quarters of fiscal 2002. In connection with our decision to
implement these plans, we incurred charges of $8.2 million and $17.0
million in the three and nine months ended November 30, 2002,
respectively, and $4.2 million and $6.6 million in the three and nine
months ended November 30, 2001, respectively.
The following table sets forth a summary of restructuring and
impairment charges, net of adjustments, for the three and nine months
ended November 30, 2002 and 2001 (in thousands):
Three Months Ended Nine Months Ended
November 30, November 30,
2002 2001 2002 2001
----------- ----------- ---------- -----------
Severance and related benefits $ 3,633 $ 1,893 $ 6,520 $ 2,318
Lease obligations and terminations 3,273 2,300 7,484 3,653
Impairment charges 1,035 -- 2,484 144
Other 218 -- 508 497
---------- ---------- --------- ----------
Total restructuring and impairment charges $ 8,159 $ 4,193 $ 16,996 $ 6,612
========== ========== ========= ==========
The impact to reported basic and diluted earnings per share as a
result of the restructuring and impairment charges was $0.12 and $0.24
for the three and nine months ended November 30, 2002, respectively, and
$0.04 and $0.06 for the three and nine months ended November 30, 2001,
respectively.
As a result of the adoption of our restructuring plans in fiscal
2003, we expect our operating expenses to be reduced by approximately
$80.0 million annually. 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 nine months ended
November 30, 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 $2.7 million
during the three and nine months ended November 30, 2002 related to
unvested stock options assumed in the acquisition of Talus Solutions,
Inc. ("Talus") and $1.3 million and $(4.2) million during the three and
nine months ended November 30, 2001 related to stock options that were
repriced in January 1999 and
25
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 $8.0 million during the three and nine months ended
November 30, 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 our first, second and third quarters
of fiscal 2003 was below $22.19, no charge or benefit was recorded
during the three and nine months ended November 30, 2002. As of November
30, 2002, approximately 0.9 million repriced options were still
outstanding with a remaining vesting period of approximately three
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 $2.7 million in the three and nine months
ended November 30, 2002, respectively, and $1.3 million and $3.7 million
during the three and nine months ended November 30, 2001, respectively.
IRI Settlement. In December 2001, the Company and Information
Resources, Inc. ("IRI") settled a dispute for $8.6 million. We had
previously recorded a liability of approximately $5.5 million in prior
years related to this matter. The $3.1 million difference between the
$5.5 million previously accrued and the total settlement of $8.6 million
was expensed in the third quarter of fiscal 2002.
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 $1.6 million during the three months ended November
30, 2002 compared to other expense of $12.3 million in the prior year
period, and was $5.3 million during the nine months ended November 30,
2002 compared to other expense of $12.4 million in the prior year
period. This change relates to the Company recording an impairment loss
of approximately $10.2 million relating to an other-than temporary
decline in the fair value of its equity investment in Converge, Inc.
during the three and nine months ended November 30, 2001, as well as
lower interest income as a result of lower average invested cash and
marketable securities and lower average interest rates in the three and
nine months ended November 30, 2002. This was offset by foreign currency
translation gains in the nine months ended November 30, 2002. Interest
expense was approximately the same during the comparable periods.
PROVISION FOR (BENEFIT) FROM INCOME TAXES:
We recorded income tax expense of $0.7 million and $21.5 million
during the three and nine months ended November 30, 2002. We did not
record a deferred income tax benefit during the three and nine months
ended November 30, 2002 and do not expect to record a deferred income
tax benefit in future quarters when we incur a loss.
26
During the nine months ended November 30, 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 (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 nine
months ended November 30, 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 $26.0 million and $45.0 million, and
$100.8 million and $90.1 million for the three and nine months ending
November 30, 2002 and 2001, respectively. The increased net loss in the
nine months ended November 30, 2002 compared to the same period a year
ago was 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, 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), the Converge Investment impairment, the IRI settlement, a
charge to record valuation allowances against deferred tax assets and
the related tax effect, we would have reported net losses of $12.5
million and $7.6 million, and $44.1 million and $16.1 million for the
three and nine months ended November 30, 2002 and 2001, respectively.
The change is 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; and
- assumed or actual conversions of our convertible debt
into common stock.
LIQUIDITY AND CAPITAL RESOURCES:
Historically, we have financed our operations and met our
capital expenditure requirements through cash flows provided from
operations, long-term borrowings and sales of equity securities. Our
cash, cash equivalents and marketable securities in the aggregate
decreased $100.3 million during the nine months ended November 30, 2002
to $132.8 million. Working capital decreased $110.6 million to $126.4
million at November 30, 2002. The decrease in cash, cash equivalents and
marketable securities and working capital resulted from cash payments
paid for the WDS and DFE acquisitions, two semi-annual interest payments
on our convertible debt, capital expenditures associated with the move
to our new corporate headquarters, a cash restriction requirement
related to our line of credit with BOA (see Note 10 in the Notes to our
Condensed Consolidated Financial Statements included elsewhere in this
report), as well as losses from operations. Working capital was also
negatively impacted by the valuation
27
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 $36.9 million and $25.6 million for
the nine months ended November 30, 2002 and 2001, respectively. The
$11.3 million change in operating cash flows in the nine months ended
November 30, 2002 resulted from the increase in the Company's operating
loss before non-cash items in the nine months ended November 30, 2002.
Days sales outstanding ("DSO") in accounts receivable, which is
calculated based on our third quarter revenue, decreased to 92 days as
of November 30, 2002 versus 100 days as of November 30, 2001.
Cash (used in) provided by investing activities was $(69.6)
million and $30.8 million during the nine months ended November 30, 2002
and 2001, respectively. Investing activities consist of the sales and
purchases of marketable securities, cash used as collateral for
outstanding letters of credit which are classified as restricted cash on
the condensed consolidated balance sheet as of November 30, 2002,
purchases of property and equipment, purchases and capitalization of
software and acquisitions and investments in businesses. Total purchases
of property, equipment and software, including capitalization of
software, were $22.4 million during the nine months ended November 30,
2002, an increase of $3.4 million over the comparable period in 2001.
This increase was 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 $32.1 million during
the nine months ended November 30, 2002 relate to the WDS and DFE
acquisitions. Acquisitions and investments in businesses, net of cash
acquired, of $40.8 million during the nine months ended November 30,
2001 relate 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, was $1.1 million
during the nine months ended November 30, 2002 compared to net sales of
$90.3 million during the nine months ended November 30, 2001.
Cash provided by financing activities was $4.8 million and $8.3
million during the nine months ended November 30, 2002 and 2001,
respectively. Cash provided by financing activities in the nine months
ended November 30, 2002 consisted of borrowings on our equipment line of
credit and proceeds from the exercise of stock options and employee
stock plan purchases. Cash provided by financing activities in the nine
months ended November 30, 2001 consisted of proceeds from the exercise
of stock options and employee stock plan purchases.
As of November 30, 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 $128.4 million and $176.9
million as of November 30, 2002 and February 28, 2002, respectively,
based on market quotes. 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. The conversion price of the Notes
will be adjusted in the event that we issue our common stock as a
dividend or distribution with respect to our common stock, we subdivide,
combine or reclassify our common stock, we issue rights to our common
stockholders to purchase our common stock at less than market price, we
make certain distributions of securities, cash or other property to our
common stockholders(other than ordinary cash dividends), or we make
certain repurchases of our common stock. The Notes do not have any
financial covenants. 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 revolving credit facility with a
BOA 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, leverage and
liquidity covenants, restricts us from declaring or paying cash
dividends and limits the amount of cash paid for acquisitions. The
financial covenants under this facility are as follows:
- Consolidated EBITDA (as defined in the credit facility,
as amended) must be equal to or greater than negative
2.5% of consolidated stockholders' equity for the fiscal
quarters ended February 28, 2002 and
28
May 31, 2002, not less than negative $16.0 million for
the quarter ended August 31, 2002 and not be less than
negative $5.0 million for quarter ending after November
30, 2002 and not less than $0 for the quarter ended
February 28, 2003;
- Cash, cash equivalents and marketable securities
("liquidity") cannot be less than $125 million;
- Consolidated stockholders' equity cannot be less than
$250 million plus 50% of consolidated net income (if
greater than $0) plus 100% of increases in stockholders'
equity after February 28, 2002 as a result of issuance
of common stock; and
- Leverage ratio ((total liabilities (excluding
convertible debt) plus outstanding letters of credit)
divided by stockholders' equity) cannot exceed 50%.
As of November 30, 2002, we had $14.1 million in letters of
credit outstanding under this line to secure our lease obligations for
office space. We were in compliance with all financial covenants as of
November 30, 2002 except for the consolidated EBITDA covenant. We are in
the process of obtaining a waiver for this violation. In event BOA
does not grant a waiver, they can terminate their commitment to make
further loans and letter of credit extensions under the credit facility.
We paid cash in November 2002 for the remaining $23.6 million of
consideration payable for the WDS acquisition. The credit facility only
allowed us to pay up to $15.0 million in cash per acquisition prior to
being amended in November 2002 to allow for the WDS acquisition payment.
Prior to receiving this amendment to the credit facility, BOA required
the Company to deposit sufficient cash to provide collateral for
outstanding letters of credit. The Company has classified such amounts
as restricted cash in the condensed consolidated balance sheet as of
November 30, 2002.
In April 2002, the Company entered into a credit agreement with
Silicon Valley Bank, as amended, under which the Company could 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 nine months ended November 30, 2002, the
Company borrowed $2.3 million under this credit facility. The facility
allowed for borrowings through December 31, 2002. We were in compliance
with all financial covenants as of November 30, 2002. The Company's
currently negotiating an unsecured credit facility with another
commercial lender to replace our credit facility with BOA. The Company
expects this credit facility to close no later than January 17, 2003 and
to eliminate the cash restriction under the BOA credit facility by
February 28, 2003.
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 $ 2,721 $ 2,716 $ 1,314 $ 1,310 $ 546 $ -- $ 8,607
Operating leases 21,018 20,161 16,978 15,737 15,055 46,881 135,830
------ ------ ------ ------ ------ ------ -------
Total lease obligations $ 23,739 $ 22,877 $18,292 $17,047 $ 15,601 $ 46,881 $144,437
======== ======== ======= ======= ======== ======== ========
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 were 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. We are in the process of finalizing the calculations related
to the contingent consideration. 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."
29
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 in 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 fund 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 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 (the "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 operations,
working capital, capital expenditures, acquisitions and
other general corporate purposes;
- limit our flexibility in planning for, or reacting to,
changes in our business and the industry; and
- place us at a competitive disadvantage relative to our
competitors with less debt.
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. The
Notes require interest payments of $12.5 million annually with $250.0
million of principal due November 2007. As of November 30, 2002, the
remaining principal and interest payments due under the Notes was $312.5
million. Our cash, cash equivalents and marketable securities were
$132.8 million as of November 30, 2002. We will have to generate $179.7
million of net cash flow through any combination of normal operations of
the
30
Company, raising of debt and equity capital or asset sales by November
2007 to meet our remaining principal and interest payments under the
Notes. We have 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.
WE MAY VIOLATE FINANCIAL COVENANTS UNDER OUR CREDIT FACILITY WHICH COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION.
During fiscal 2003, our financial performance has made it
difficult for us to achieve the financial covenants under our credit
facility with BOA. During November 2002, we were required to cash
collateralize $14.1 million of outstanding letters of credit under the
BOA credit facility as a result of violating a financial covenant. Also,
we violated the consolidated EBITDA covenant under the BOA credit
facility for the quarter ended November 30, 2002.
We expect to enter into a new unsecured credit facility with
another commercial lender no later than January 17, 2003 to replace the
BOA credit facility, which should eliminate the cash restriction
described above. However, if our future financial performance results
in a violation of financial covenants in future periods, we could be
required to provide cash collateral for outstanding borrowings or
letters of credit, which would adversely impact our liquidity and
financial condition.
RISKS RELATED TO OUR BUSINESS
ADVERSE ECONOMIC AND POLITICAL CONDITIONS HAVE CAUSED A DETERIORATION OF
THE MARKETS FOR OUR PRODUCTS AND SERVICES WHICH HAS NEGATIVELY AFFECTED
AND COULD FURTHER NEGATIVELY AFFECT OUR FINANCIAL PERFORMANCE.
Our revenue and operating results depend on the overall demand
for our software and related services. Regional and global adverse
changes in the economy and political unrest have caused a deterioration
of the markets for our products and services. This has resulted in
reductions, delays and postponements of customer purchases, which
materially adversely affected our financial results performance during
the quarters ended August 31, 2001, November 30, 2001, May 31, 2002,
August 31, 2002 and November 30, 2002. Demand for our pricing and
revenue optimization and our supplier relationship management products
has been more severely impacted than our supply chain management and
service & parts management products for which there are more mature
markets. Although our markets in most industries and geographies have
deteriorated, industries most severely impacted include, among others,
chemicals and energy, high technology, manufacturing and travel,
transportation & hospitality. Industries less affected include
automotive, consumer packaged goods, food & agriculture, life sciences
and retail. If these adverse conditions continue or worsen, we would
likely experience further reductions, delays, and postponements of
31
customer purchases further negatively impacting our financial
performance.
National and global responses to future terrorist attacks or
similar developments, including military actions or war, would likely
materially adversely affect demand for our software and services because
of the economic and political effects on our markets and by interrupting
the ability of our customers to do business in the ordinary course, as a
result of a variety of factors, including, among others, changes or
disruptions in movement and sourcing of materials, goods and components
or the possible interruption in the flow of information or monies.
WE HAVE EXPERIENCED SIGNIFICANT LOSSES IN RECENT YEARS DUE TO
OPERATIONAL DIFFICULTIES IN FISCAL 1999 AND THE FIRST HALF OF FISCAL
2000 AND TO A DETERIORATION OF OUR MARKETS RESULTING FROM WEAKENING
ECONOMIC CONDITIONS COMMENCING IN FISCAL 2002.
We have recently incurred significant losses. 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. Thereafter, our financial
performance began to improve under our new management team. However,
beginning late in our second quarter of fiscal 2002, weakening economic
conditions resulted in a deterioration in our markets. We experienced
sequential declines in software and total revenue during our second and
third quarters of fiscal 2002. Further weakening of economic conditions,
which severely impacted the timing of capital spending decisions for
computer software, particularly enterprise application software, further
negatively impacted the markets for our products and services. This
again resulted in significant sequential quarterly declines in software
and total revenue in our first three-quarters of fiscal 2003. The losses
incurred during these periods were $96.1 million in fiscal 1999, $8.9
million in fiscal 2000, $28.1 million in fiscal 2001, $115.2 million in
fiscal 2002, and $100.8 million in the nine months ended November 30,
2002. Our ability to improve our financial performance will depend on a
stabilization or improvement of economic conditions resulting in
increased demand for our solutions or our ability to align our cost
structure with revenue without retarding our ability to grow revenue in
future periods. If market conditions for our solutions do not improve or
if we do not successfully align our cost structure with our revenue
without retarding our ability to grow revenue, our business could be
harmed, and we could continue to incur significant losses. .
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 IMPAIRMENT.
On March 1, 2002, we adopted SFAS 142, which changed the
accounting for goodwill from an amortization method to an
impairment-only method. Effective March 1, 2002, 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 $283.6 million in goodwill as of November
30, 2002 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 quarters ended August 31, 2002 and November 30, 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 November 30, 2002 and
determined that based upon the implied fair value (which includes
factors such as, but not limited to, the Company's market
capitalization, control premium and recent stock price volatility) of
the Company as of August 31, 2002 and November 30, 2002, there was no
impairment of goodwill. 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
32
amount. We will perform a test for goodwill impairment at February 28,
2003, which is our annual date for goodwill impairment review.
OUR FUTURE RESULTS WILL BE ADVERSELY AFFECTED BY SEVERAL TYPES OF
SIGNIFICANT NON-CASH CHARGES WHICH COULD IMPAIR OUR ABILITY TO ACHIEVE
OR MAINTAIN PROFITABILITY IN THE FUTURE.
We will incur significant non-cash charges in the future related
to the amortization of intangible assets, including acquired technology
relating to the Western Data Systems of Nevada, Inc. ("WDS"), Digital
Freight Exchange, Inc. ("DFE"), STG Holdings, Inc. ("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. To achieve profitability we
must grow our revenue sufficiently to cover these charges. Our failure
to achieve profitability could cause our stock price to decline.
OUR OPERATING PERFORMANCE HAS BEEN NEGATIVELY IMPACTED BY THE
PROGRESSIVE WEAKENING OF GLOBAL ECONOMIC CONDITIONS WHICH RESULTED IN A
DETERIORATION OF OUR MARKETS. IN FISCAL 2002 AND IN THE NINE MONTHS
ENDED NOVEMBER 30, 2002, WE HAVE RECORDED CERTAIN RESTRUCTURING CHARGES
AND HAVE ENACTED COST CONTAINMENT AND COST REDUCTION MEASURES IN
RESPONSE TO THE DOWNTURN IN OUR MARKETS. 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
OUR MARKETS CONTINUE TO EXPERIENCE WEAKNESS, WE MAY SUFFER MATERIAL HARM
TO OUR BUSINESS.
Because of the downturn in our markets as a result of
progressive weakening of global economic conditions during fiscal 2002
and in the first three-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 impact on our financial performance, we
implemented restructuring plans and cost containment and cost reduction
measures to reduce our cost structure, which included, among other
things, workforce reductions and mandatory unpaid leave programs. In our
fiscal year 2002 and in our second and third quarters of fiscal 2003, we
recorded restructuring and impairment charges of $6.6 million, $8.8
million and $8.2 million, respectively. Although we have no present
plans to do so, we may initiate further restructuring plans in future
periods requiring restructuring and impairment charges. If we fail to
achieve the desired results of our restructuring plans and our cost
containment and cost reduction measures or if our markets continue to
experience weakness, we may suffer material harm to our business.
WE HAVE REDUCED OUR WORKFORCE AS PART OF OUR RECENT COST
CONTAINMENT AND COST REDUCTION INITIATIVES. IF WE FAIL TO FIELD AND
RETAIN A QUALIFIED WORKFORCE OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED.
We believe that our success depends on our ability to motivate
and retain highly skilled technical, managerial, sales, marketing and
services personnel. Competition for skilled personnel can be intense,
and there can be no assurance that we will be successful in attracting,
motivating and retaining the personnel required to improve our financial
performance and grow. 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.
Our recent cost containment and cost reduction initiatives may
yield unintended consequences, such as attrition beyond our planned
reduction in workforce, reduced employee morale and decreased
productivity. In addition, the recent trading levels of our stock have
decreased the value of our stock options granted to employees under our
33
stock option plans. As a result of these factors, our remaining
personnel may seek alternate employment, such as with larger, more
established companies or companies that they perceive as having less
volatile stock prices or better prospects. Continuity of personnel is a
very important factor in sales and implementation of our software and
our product development efforts. Attrition beyond our planned reduction
in workforce could have a material adverse effect on our financial
performance.
OUR PRESIDENT, EXECUTIVE VICE PRESIDENT OF PRICING AND REVENUE
MANAGEMENT AND PRESIDENT OF EUROPEAN OPERATIONS HAVE RESIGNED IN FISCAL
2003. THE SUCCESS AND GROWTH OF OUR BUSINESS MAY SUFFER IF WE LOSE
ADDITIONAL KEY PERSONNEL.
Our success depends significantly on the continued service of
our executive officers. Three of our executive officers have recently
left the Company. Gregory Cudahy, former Executive Vice President of
Pricing and Revenue 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. Terrence A. Austin, our
former Executive Vice President of European Operations, resigned
effective January 6, 2003. 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. Jean-Claude Walravens, who has been with the Company
since 1999, most recently as our Vice President Sales, Southern Europe,
has replaced Mr. Austin as our Senior Vice President and President of
European Operations. 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.
WE HAVE REDUCED OUR SALES FORCE AS PART OF OUR RECENT COST CONTAINMENT
AND COST REDUCTION INITIATIVES. IF WE FAIL TO FIELD AN EFFECTIVE SALES
ORGANIZATION, OUR ABILITY TO GROW WILL BE LIMITED, WHICH COULD ADVERSELY
AFFECT OUR FINANCIAL PERFORMANCE.
We have reduced our sales force in fiscal 2002 and fiscal 2003
as a result of the deterioration in our markets.. Decreasing software
revenues and mandatory leave programs have resulted in reduced
compensation earned by members of our sales force, which may result in
further voluntary attrition of our sales force over time. In order to
grow our revenue, our existing sales force will have to be more
productive, and we will likely expand our sales force when the markets
for our products and solutions improve. 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
growth. Any failure to adequately sell our products could limit our
growth and adversely affect our financial performance.
THE SALES CYCLES FOR OUR PRODUCTS AND SERVICES CAN BE LONG AND
UNPREDICTABLE. VARIATIONS IN THE TIME IT TAKES US TO LICENSE OUR
SOFTWARE MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS.
The time it takes to license our software to prospective clients
varies substantially, but 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 licensing of
our products could cause significant variations in our revenue from
quarter to quarter. These delays have occurred on a number of occasions
in the past and materially adversely affected our financial performance,
including, most recently, in our quarters ended August 31, 2001,
November 30, 2001, May 31, 2002, August 31, 2002 and November 30, 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:
34
- the complexities of client challenges our solutions
address;
- the size, timing and complexity of contractual terms of
licenses and sales of our products and services;
- wide variations in contractual terms, which may result
in deferred recognition of revenue;
- customer financial constraints and credit-worthiness;
- the 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, which recently become more
complex and lengthy;
- economic, political and market conditions; and
- any other delays arising from factors beyond our
control.
CHANGES IN THE SIZE OF OUR SOFTWARE TRANSACTIONS MAY CAUSE MATERIAL
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
The size of our software transactions fluctuates. Fluctuations
in the size of our software transactions have occurred, and may in the
future occur, as a result of changes in demand for our products and
services. Losses of, or delays in concluding, larger software
transactions have had and could have a proportionately greater effect on
our revenue and financial performance for a particular period. For
example, we recorded no software transaction of $5.0 or greater in
fiscal 2000, three software transactions of $5.0 million or greater in
fiscal 2001, six software transactions of $5.0 million or greater in
fiscal 2002, and no software transactions of $5.0 million or greater in
the nine months ended November 30, 2002. During this same time period,
we recorded 14 software transactions of $1.0 or greater in fiscal 2000,
47 software transactions of $1.0 or greater in fiscal 2001, 38 software
transactions of $1.0 or greater in fiscal 2002 and 15 software
transactions of $1.0 or greater in the nine months ended November 30,
2002. As a result of these changes in the size of our software
transactions, our quarterly revenue and financial performance have
fluctuated significantly and may cause significant fluctuations in the
future.
WE EXPERIENCED DECLINES IN SOFTWARE REVENUE IN FISCAL 2002 AND THE FIRST
THREE-QUARTERS OF FISCAL 2003. A REDUCTION IN OUR REVENUE DERIVED FROM
SOFTWARE LICENSES HAS AND MAY IN THE FUTURE RESULT IN REDUCED SERVICES
AND SUPPORT REVENUE.
Our ability to maintain or increase services revenue depends on
our ability to maintain or increase the amount of software we license to
customers. During our fourth quarter fiscal 2002 and third quarter
fiscal 2003 we have experienced a decline in services revenue as a
result of decreasing software revenue. Additional decreases or slowdowns
in licensing may further adversely impact our services and support
revenues in future periods.
IN OUR THIRD QUARTER OF FISCAL 2003 WE EXPERIENCED A SEQUENTIAL DECLINE
IN SUPPORT REVENUE COMPARED TO OUR SECOND QUARTER OF FISCAL 2003
RESULTING FROM BOTH THE RECENT DECLINE IN SOFTWARE REVENUE AND CLIENTS
NOT RENEWING OR PARTIALLY RENEWING EXISTING SUPPORT CONTRACTS. FURTHER
DECLINES IN SOFTWARE REVENUE, A REDUCTION IN THE RENEWAL RATE OF ANNUAL
SUPPORT CONTRACTS, OR BOTH, COULD MATERIALLY HARM OUR BUSINESS.
Our support revenue includes post-contract support and the
rights to unspecified software upgrades and enhancements. Support
contracts are generally renewable annually at the option of our
customers. In the past, we have experienced high rates of renewed annual
support contracts from our customers. If our customers fail to renew or
to fully renew their support contracts at historical rates, our support
revenue could materially decline.
35
WE HAVE A RECENT HISTORY OF SUPPLEMENTING OUR INTERNAL REVENUE GROWTH
THROUGH ACQUISITIONS OF BUSINESSES AND TECHNOLOGY. ACQUISITIONS INCREASE
BUSINESS RISK. WE HAVE EXPERIENCED DIFFICULTIES INTEGRATING ACQUISITIONS
IN THE PAST.
Acquisitions involve the integration of companies that have
previously operated independently and increase the business risk of the
acquiror. In February 1998 and June 1998 we made two acquisitions. The
integration of the products and operations of these two acquisitions was
negatively impacted by operational difficulties the Company was
experiencing at the time. As a result, the products and operations of
one of these acquisitions were never integrated and the Company
abandoned the products acquired and the integration of the products and
operations of the other was significantly retarded. In fiscal 2001 and
2002 we acquired the products and operations of Talus, STG, OneRelease
and Partminer, Inc.'s CSD business and the technology of SpaceWorks.
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;
- avoid conflicts with our clients and business partners
that have commercial relationships or compete with the
acquired company;
- avoid unanticipated operational difficulties or
expenditures or both; and
- effectively operate our existing business lines, given
the significant diversion of resources and management
attention required to successfully integrate
acquisitions.
Although we are not currently contemplating any acquisitions,
future acquisitions may result in a dilution to existing shareholders to
the extent we issue shares of our common stock as consideration or
reduced liquidity and capital resources to the extent we use cash as
consideration.
IF THE MARKETS FOR OUR PRODUCTS DO NOT GROW OR FURTHER DECLINE, OUR
BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED.
Substantially all of our software, services and support revenue
have arisen from, or are related directly to, our solutions. We expect
to continue to be dependent upon these solutions in the future, and any
factor adversely affecting the markets for our solutions would
materially and adversely affect our ability to generate revenue. While
we believe the markets for our solutions will expand as the economy
improves, they may grow more slowly than in the past or anticipated. If
the markets for our solutions further decline or do not grow as rapidly
as we expect, revenue growth, operating margins, or both, could be
adversely affected. The markets for our solutions have been and may
continue to be adversely affected by continuing or further deteriorating
economic or political conditions.
OUR MARKETS ARE VERY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The markets for our solutions are very competitive. The
intensity of competition in our markets has significantly increased in
part as a result of the deterioration in our markets, 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 competes with our
applications at little or no charge as components of bundled products or
on a stand-alone basis. Smaller
36
niche software companies have been and will likely continue to develop
unique offerings that compete effectively with some of our solutions.
Further, our current or prospective clients and partners may become
competitors in the future. Increased competition has resulted and in the
future could result in price reductions, lower gross margins, longer
sales cycles and the loss of market share. Each of these developments
could 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 (recently acquired by Manhattan Associates), Mercia,
Metreo, PROS Revenue Management, Retek, Inc., Sabre, Inc., SAP AG,
Viewlocity, Inc. (formerly SynQuest) and YieldStar Technology. In
addition, some Enterprise Resource Planning ("ERP") software companies
such as Invensys plc , J.D. Edwards & Company, Oracle Corporation,
PeopleSoft, Inc. and SAP AG have acquired or developed and are
developing solutions that compete with ours. 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
financial 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 our solutions are subject to rapid technological
change, changing client needs, frequent new product introductions and
evolving industry standards. The Company has historically been
successful in keeping pace with these changes, but if we fail to do so
in the future, our products and services may be rendered obsolete. Our
product development and testing efforts have required, and are expected
to continue to require, substantial investments. We recently released a
web-native version of certain of our products and will continue to
develop and release web-native versions of our products. We may not
possess sufficient resources to continue to make further necessary
investments in technology. Recent cutbacks in our workforce could
lengthen the time necessary to develop our products. In addition, we may
not successfully identify new software opportunities or develop and
bring new software to market in a timely and efficient manner.
Our growth and future operating results will depend, in part,
upon our ability to continue to enhance existing applications and
develop and introduce new applications or capabilities that:
- meet or exceed technological advances in the
marketplace;
- meet changing market and client requirements, including
rapid realization of benefits and the need to rapidly
manage and analyze increasingly large volumes of data;
- comply with changing industry standards;
- achieve market acceptance;
- integrate third-party software effectively; and
- respond to competitive offerings.
37
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 financial 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. This complexity can make it difficult
to detect errors or failure in our software prior to implementation. We
may not discover errors in our software until our customers install and
use a given product or until the volume of services that a product
provides increases. When our software is installed, the environment into
which it is installed is frequently complex and typically contains a
wide variety of systems and third-party software, to which our software
must be integrated. This can make the process of implementation
difficult and lengthy. As a result, some customers may have difficulty
or be unable to implement our products successfully within anticipated
timeframes or otherwise achieve the expected benefits. These problems
may result in claims for damages suffered by our clients, a loss of, or
delays in, the market acceptance of our solutions, client
dissatisfaction and potentially lost revenue and collection difficulties
during the period required to correct these errors.
WE UTILIZE THIRD-PARTY SOFTWARE THAT WE INCORPORATE INTO AND INCLUDE
WITH OUR PRODUCTS AND SOLUTIONS, AND IMPAIRED RELATIONS WITH THESE THIRD
PARTIES, DEFECTS IN THIRD-PARTY SOFTWARE OR THE INABILITY TO ENHANCE
THEIR SOFTWARE OVER TIME COULD HARM OUR BUSINESS.
We incorporate and include third-party software into and with
our products and solutions. We are likely to incorporate and include
additional third-party software into and with our products and solutions
as we expand our product offerings. If our relations with any of these
third-party software providers is impaired, and if we are unable to
obtain or develop a replacement for the software, our business could be
harmed. The operation of our products would be impaired if errors occur
in the third-party software that we utilize. It may be more difficult
for us to correct any defects in third-party software because the
software is not within our control. Accordingly, our business could be
adversely affected in the event of any errors in this software. There
can be no assurance that these third parties will continue to invest the
appropriate levels of resources in their products and services to
maintain and enhance the software capabilities.
WE UTILIZE THIRD PARTIES TO INTEGRATE OUR SOFTWARE WITH OTHER SOFTWARE
PRODUCTS AND PLATFORMS. IF ANY OF THESE THIRD PARTIES SHOULD CEASE TO
PROVIDE INTEGRATION SERVICES TO US, OUR BUSINESS, RESULTS OF OPERATIONS
AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED.
We depend on companies such as Business Objectives, Peregrine
(now Inovus), Tibco Software, Inc., Vignette Corporation, and
webMethods, Inc. to integrate our software with software and platforms
developed by third parties. If relations with any of these third-parties
is impaired, and if we are unable to secure a replacement on a timely
basis, our business could be harmed. If these companies are unable to
develop or maintain software that effectively integrates our software
and is free from defects, our ability to license our products and
provide solutions could be impaired and our business could be harmed.
There can be no assurance that those third-parties will continue to
invest the appropriate level of resources in their products and services
to maintain and enhance their software's capabilities.
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
38
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 financial performance.
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 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.
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, particularly in certain foreign countries, including, among
others, The Peoples Republic of China. We are unable to determine the
extent to which piracy of our software products exists. In addition, the
laws of some foreign countries do not protect our proprietary rights to
the same extent as the laws of the United States. Furthermore, our
competitors may independently develop technology similar to ours.
OUR PRODUCTS MAY INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS, WHICH MAY CAUSE US TO INCUR UNEXPECTED COSTS OR PREVENT US FROM
SELLING OUR PRODUCTS.
39
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 assurance that third parties
will not claim infringement by us with respect to current or future
products. Any of these claims, with or without merit, could be
time-consuming to address, result in costly litigation, cause product
shipment delays or require us to enter into royalty or license
agreements. These royalty or license agreements might not be available
on terms acceptable to us or at all, which could materially and
adversely affect our financial performance.
OUR INTERNATIONAL OPERATIONS POSE RISKS FOR OUR BUSINESS AND FINANCIAL
CONDITION.
We currently conduct operations in Australia, Belgium, Brazil,
Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia, Mexico,
Taiwan, The Netherlands, The Peoples Republic of China, Singapore,
Sweden and the United Kingdom. We intend to expand our international
operations and to increase the proportion of our revenue from outside
the U.S. These operations require significant management attention and
financial resources and additionally subject us to risks inherent in
doing business internationally, such as:
- failure to properly comply with foreign laws and
regulations applicable to our foreign activities;
- failure to properly comply with U.S. laws and
regulations relating to the export of our products and
services;
- difficulties in managing foreign operations and
appropriate levels of staffing;
- longer collection cycles;
- tariffs and other trade barriers;
- seasonal reductions in business activities, particularly
throughout Europe;
- proper compliance with local tax laws which can be
complex and may result in unintended adverse tax
consequences; and
- increasing political instability and adverse economic
conditions in many of these countries.
Our failure to properly comply or address any of the above
factors could adversely affect the success of our international
operations and could have a material adverse effect on our financial
performance.
CHANGES IN THE VALUE OF THE U.S. DOLLAR, IN RELATION TO THE CURRENCIES
OF FOREIGN COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR
OPERATING RESULTS.
In the nine months ended November 30, 2002, 24.5% of our total
revenue was derived from outside the United States. Our primary
international operations are located throughout Europe and Asia-Pacific.
We also have operations in Brazil, Canada and Mexico. Our international
revenue and expenses are denominated in foreign currencies, typically
the local currency of the selling business unit. Therefore, changes in
the value of the U.S. Dollar as compared to these other currencies may
adversely affect our operating results. We intend to expand our
international operations and to increase the proportion of our revenue
from outside the U.S. For example, we opened offices in Hong Kong,
Malaysia and Mainland China recently. We expect to use an increasing
number of foreign currencies, causing our exposure to currency exchange
rate fluctuations to increase. We generally do not
40
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 financial performance.
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 financial performance.
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 financial
performance.
RISKS RELATED TO OUR INDUSTRY
OUR FUTURE GROWTH IS SUBSTANTIALLY DEPENDENT ON THE CONTINUED SUCCESS OF
THE INTERNET AS A RELIABLE AND SECURE COMMERCIAL MEDIUM. THE FAILURE OF
THE INTERNET AS A RELIABLE AND SECURE COMMERCIAL MEDIUM WOULD BE
DETRIMENTAL TO OUR FINANCIAL PERFORMANCE.
The growth of the Internet increased demand for our solutions,
as well as created markets for new and enhanced product offerings.
Therefore, our future sales and financial performance are substantially
dependent upon the Internet as a reliable and secure commercial medium.
The continued success of the Internet as a reliable and secure
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;
- sustained disruptions in the accessibility, security and
reliability;
41
- delays in the development or adoption of new standards
and protocols required to handle increased levels of
Internet activity;
- 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. We have expended
significant amounts of resources to develop and deploy our products
using the internet as a medium. Any such modifications could require us
to expend significant additional amounts of resources. In the event that
the Internet does not remain a viable and secure commercial medium, our
financial performance 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 COMMON STOCK
OUR STOCK PRICE HAS BEEN AND IS LIKELY TO CONTINUE TO BE VOLATILE. WE
HAVE RECENTLY EXPERIENCED SIGNIFICANT DECLINES IN OUR STOCK PRICE DUE TO
OUR POOR FINANCIAL PERFORMANCE.
The trading price of our common stock has been and is likely to
be highly volatile. Our stock price has been and could continue to be
subject to wide fluctuations in response to a variety of factors,
including the following:
- actual or anticipated variations in quarterly operating
results and continuing losses;
- continued or deteriorating adverse economic, political
and market conditions;
- announcements of technological innovations;
- new products or services offered by us or our
competitors;
- changes in financial estimates and ratings by securities
analysts;
- changes in the performance, market valuations, or both,
of our current and potential competitors and the
software industry in general;
- our announcement or a 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 and services or implementations;
42
- adverse or unfavorable publicity regarding our
competitors, including their products and
implementations;
- additions or departures of key personnel;
- sales or anticipated sales of additional debt or equity
securities; and
- other events or factors that may be beyond our control.
In addition, the stock markets in general, The Nasdaq National
Market and the equity markets for software companies in particular, have
experienced extraordinary price and volume volatility in recent years.
Such volatility has adversely affected the stock prices for many
companies irrespective of, or disproportionately to, the operating
performance of these companies. These broad market and industry factors
may materially and adversely further affect the market price of our
common stock, regardless of our actual operating performance.
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 27.8% and 30.5% for the three months ended November 30, 2002 and
2001, respectively, and 24.5% and 27.8% for the nine months ended
November 30, 2002 and 2001, respectively. Revenue outside the United
States is derived from operations in Australia, Belgium, Brazil, Canada,
China, France, Germany, Hong Kong, Italy, Japan, Malaysia, 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 nine months ended November 30, 2002 and 2001. We generally do not
use foreign currency options and forward contracts to hedge against the
earnings effects of such fluctuations. While we do not expect to incur
material losses as a result of this currency risk, there can be no
assurance that losses will not result.
Interest Rate Risk. Our 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
$5.3 million and $4.3 million at November 30, 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.
43
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%. During the three months ended November 30, 2002, the
federal funds rate was further reduced by 50 basis points to 1.25%.
These actions have led to a general market decline in interest rates.
The weighted average yield on interest-bearing investments held
as of November 30, 2002 and 2001 was approximately 1.4% and 2.9%,
respectively. Based on our investment holdings at November 30, 2002, a
100 basis point decline in the average yield would reduce our annual
interest income by $1.5 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.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Relationship with Warburg Pincus. In October 2002, we appointed
William H. Janeway, a Vice-Chairman of Warburg Pincus LLC, a private
equity investment firm, as a Class III director of our Board of
Directors, with a term expiring in 2004. In connection with Dr.
Janeway's appointment to the Board, we entered into an agreement with
Warburg Pincus Private Equity VIII, L.P. in which we consented to the
acquisition by Warburg Pincus and certain of its affiliates of up to
19.9% of our common stock and agreed that for as long as Warburg
Pincus and is affiliates beneficially own at least ten percent (10%) of
our common stock, we would nominate and use our best efforts to have
elected to our Board one person designated by Warburg Pincus and
reasonably acceptable to us. In addition, Warburg Pincus agreed that,
for the duration of the standstill period, neither it nor its affiliates
would acquire more than 19.9% of our common stock.
The standstill period is the earlier of:
- three years;
- the date on which another person acquires more than 15% of our
common stock with our consent and on terms more favorable than
those obtained by Warburg Pincus; or
- the date on which we fail to perform our agreements with respect
to the acquisition of additional shares by Warburg Pincus and
the election of a director designated by Warburg Pincus.
At the time the agreement was entered into, Warburg Pincus and
certain of its affiliates held approximately 10.9% of our common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Second Amendment to the Amended and Restated Financing Agreement
and Form of Revolving Promissory Note dated November 22, 2002 by
the Company in favor of Bank of America, N.A.
44
10.2 Termination of Employment Agreement dated January 3, 2003
between the Company and Terrance A. Austin.
10.3 Standstill Agreement dated October 24, 2002 between Manugistics
Group, Inc and Warburg Pincus Private Equity VIII, L.P., which
is incorporated by reference Exhibit 10 of our Current Report on
Form 8-K filed on October 25, 2002.
(b) Reports on Form 8-K
1. On October 25, 2002, we filed a Current Report on Form 8-K announcing
the appointment of Dr. William H. Janeway of Warburg Pincus LLC to the
Company's Board of Directors and the resignation of Dr. Hau Lee from
the Company's Board of Directors. The Company also announced that, in
connection with Dr. Janeway's appointment to the Board, the Company had
consented to the acquisition of up to 19.9% of the common stock of the
Company by Warburg Pincus Private Equity VIII, L.P. and certain of its
affiliates.
45
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 January 14, 2003.
MANUGISTICS GROUP, INC.
(Registrant)
- ----------------------
Date: January 14, 2003
/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)
46
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: January 14, 2003 By: /s/ Gregory J. Owens
===============================================================================
Gregory J. Owens
Chairman and Chief Executive Officer
Principal Executive Officer
47
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: January 14, 2003 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.
48