UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2005
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22154
MANUGISTICS GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
|
52-1469385 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
9715 Key West Avenue, Rockville, Maryland |
|
20850 |
(Address of principal executive office) |
|
(Zip Code) |
(301) 255-5000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
ý Yes o No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes ý No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 83.8 million shares of common stock, $.002 par value, as of September 30, 2005
TABLE OF CONTENTS
2
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
|
|
August 31, |
|
February 28, |
|
||
|
|
2005 |
|
2005 |
|
||
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
||
CURRENT ASSETS: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
81,192 |
|
$ |
80,342 |
|
Marketable securities |
|
51,964 |
|
49,636 |
|
||
Total cash, cash equivalents and marketable securities |
|
133,156 |
|
129,978 |
|
||
|
|
|
|
|
|
||
Accounts receivable, net of allowance for doubtful accounts of $7,631 and $7,605 at August 31, 2005 and February 28, 2005, respectively |
|
38,048 |
|
45,659 |
|
||
Other current assets |
|
9,955 |
|
10,890 |
|
||
|
|
|
|
|
|
||
Total current assets |
|
181,159 |
|
186,527 |
|
||
|
|
|
|
|
|
||
NON-CURRENT ASSETS: |
|
|
|
|
|
||
Property and equipment, net of accumulated depreciation |
|
15,034 |
|
15,795 |
|
||
Software development costs, net of accumulated amortization |
|
11,046 |
|
14,390 |
|
||
Long-term investments |
|
2,953 |
|
5,911 |
|
||
Goodwill |
|
185,740 |
|
185,658 |
|
||
Acquired technology, net of accumulated amortization |
|
6,275 |
|
13,816 |
|
||
Customer relationships, net of accumulated amortization |
|
6,011 |
|
9,335 |
|
||
Other intangibles and non-current assets, net of accumulated amortization |
|
7,789 |
|
8,848 |
|
||
|
|
|
|
|
|
||
TOTAL ASSETS |
|
$ |
416,007 |
|
$ |
440,280 |
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
||
CURRENT LIABILITIES: |
|
|
|
|
|
||
Accounts payable |
|
$ |
5,588 |
|
$ |
7,117 |
|
Accrued compensation |
|
3,553 |
|
2,858 |
|
||
Accrued exit and disposal obligations |
|
7,358 |
|
8,032 |
|
||
Deferred revenue |
|
38,881 |
|
43,173 |
|
||
Other current liabilities |
|
14,651 |
|
19,814 |
|
||
|
|
|
|
|
|
||
Total current liabilities |
|
70,031 |
|
80,994 |
|
||
|
|
|
|
|
|
||
NON-CURRENT LIABILITIES: |
|
|
|
|
|
||
Convertible debt |
|
175,500 |
|
175,500 |
|
||
Accrued exit and disposal obligations |
|
10,876 |
|
13,799 |
|
||
Long-term debt and capital leases |
|
1,261 |
|
1,668 |
|
||
Other non-current liabilities |
|
4,334 |
|
3,573 |
|
||
|
|
|
|
|
|
||
Total non-current liabilities |
|
191,971 |
|
194,540 |
|
||
|
|
|
|
|
|
||
COMMITMENTS AND CONTINGENCIES (Note 4) |
|
|
|
|
|
||
|
|
|
|
|
|
||
STOCKHOLDERS EQUITY: |
|
|
|
|
|
||
Preferred stock, $.01 par value per share, 4,620 shares authorized; none outstanding |
|
|
|
|
|
||
Common stock, $.002 par value per share; 300,000 shares authorized; 83,780 and 83,869 issued and outstanding at August 31, 2005 and February 28, 2005, respectively |
|
168 |
|
168 |
|
||
Additional paid-in capital |
|
779,960 |
|
780,306 |
|
||
Deferred compensation |
|
(1,354 |
) |
(3,044 |
) |
||
Accumulated other comprehensive income |
|
3,014 |
|
4,065 |
|
||
Accumulated deficit |
|
(627,783 |
) |
(616,749 |
) |
||
|
|
|
|
|
|
||
Total stockholders equity |
|
154,005 |
|
164,746 |
|
||
|
|
|
|
|
|
||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
416,007 |
|
$ |
440,280 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
REVENUE: |
|
|
|
|
|
|
|
|
|
||||
Software license |
|
$ |
5,068 |
|
$ |
11,111 |
|
$ |
13,459 |
|
$ |
21,479 |
|
Support |
|
21,755 |
|
21,296 |
|
43,570 |
|
42,717 |
|
||||
Services |
|
15,259 |
|
16,374 |
|
29,940 |
|
33,932 |
|
||||
Reimbursed expenses |
|
1,567 |
|
2,481 |
|
3,337 |
|
4,717 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
|
43,649 |
|
51,262 |
|
90,306 |
|
102,845 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
||||
Cost of software license |
|
3,114 |
|
3,422 |
|
7,582 |
|
7,336 |
|
||||
Amortization of acquired technology |
|
1,817 |
|
3,546 |
|
3,808 |
|
7,092 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total cost of software license |
|
4,931 |
|
6,968 |
|
11,390 |
|
14,428 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Cost of services and support |
|
16,244 |
|
19,040 |
|
31,632 |
|
37,230 |
|
||||
Cost of reimbursed expenses |
|
1,567 |
|
2,481 |
|
3,337 |
|
4,717 |
|
||||
Non-cash stock option compensation expense for cost of services and support |
|
|
|
6 |
|
|
|
75 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total cost of services and support |
|
17,811 |
|
21,527 |
|
34,969 |
|
42,022 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
8,313 |
|
15,225 |
|
19,521 |
|
30,465 |
|
||||
Non-cash stock option compensation expense for sales and marketing |
|
|
|
6 |
|
|
|
26 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total cost of sales and marketing |
|
8,313 |
|
15,231 |
|
19,521 |
|
30,491 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Product development |
|
7,956 |
|
8,566 |
|
15,454 |
|
16,894 |
|
||||
Non-cash stock option compensation expense for product development |
|
|
|
5 |
|
|
|
15 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total cost of product development |
|
7,956 |
|
8,571 |
|
15,454 |
|
16,909 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
5,054 |
|
6,006 |
|
10,322 |
|
12,020 |
|
||||
Non-cash stock option compensation expense for general and administrative |
|
|
|
31 |
|
|
|
52 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total cost of general and administrative |
|
5,054 |
|
6,037 |
|
10,322 |
|
12,072 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Amortization of intangibles |
|
1,662 |
|
1,662 |
|
3,325 |
|
3,324 |
|
||||
Asset impairment |
|
3,733 |
|
|
|
3,733 |
|
|
|
||||
Exit and disposal activities |
|
1,302 |
|
6,222 |
|
1,729 |
|
3,705 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
50,762 |
|
66,218 |
|
100,443 |
|
122,951 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
LOSS FROM OPERATIONS |
|
(7,113 |
) |
(14,956 |
) |
(10,137 |
) |
(20,106 |
) |
||||
OTHER EXPENSE, NET |
|
(1,735 |
) |
(1,808 |
) |
(3,231 |
) |
(4,070 |
) |
||||
LOSS BEFORE INCOME TAXES |
|
(8,848 |
) |
(16,764 |
) |
(13,368 |
) |
(24,176 |
) |
||||
(BENEFIT) PROVISION FOR INCOME TAXES |
|
(2,730 |
) |
350 |
|
(2,334 |
) |
671 |
|
||||
NET LOSS |
|
$ |
(6,118 |
) |
$ |
(17,114 |
) |
$ |
(11,034 |
) |
$ |
(24,847 |
) |
|
|
|
|
|
|
|
|
|
|
||||
BASIC AND DILUTED LOSS PER SHARE |
|
$ |
(0.07 |
) |
$ |
(0.21 |
) |
$ |
(0.13 |
) |
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
||||
SHARES USED IN BASIC AND DILUTED LOSS PER SHARE COMPUTATION |
|
82,171 |
|
81,907 |
|
82,158 |
|
81,863 |
|
See accompanying notes to the Condensed Consolidated Financial Statements.
4
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
Six Months Ended August 31, |
|
||||
|
|
2005 |
|
2004 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
||
Net loss |
|
$ |
(11,034 |
) |
$ |
(24,847 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
15,877 |
|
19,684 |
|
||
Amortization of debt issuance costs |
|
450 |
|
452 |
|
||
Exit and disposal activities |
|
1,729 |
|
3,705 |
|
||
Non-cash stock option compensation expense |
|
|
|
168 |
|
||
Bad debt expense |
|
567 |
|
2,314 |
|
||
Asset impairment |
|
3,733 |
|
|
|
||
Other |
|
1,103 |
|
465 |
|
||
Changes in assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
6,934 |
|
10,479 |
|
||
Other assets |
|
1,027 |
|
(410 |
) |
||
Accounts payable |
|
(1,529 |
) |
(3,718 |
) |
||
Accrued compensation |
|
695 |
|
(880 |
) |
||
Other liabilities |
|
(4,846 |
) |
(469 |
) |
||
Accrued exit and disposal obligations |
|
(5,326 |
) |
(5,851 |
) |
||
Deferred revenue |
|
(3,529 |
) |
(8,864 |
) |
||
Net cash provided by (used in) operating activities |
|
5,851 |
|
(7,772 |
) |
||
|
|
|
|
|
|
||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
||
Sales of marketable securities, net |
|
604 |
|
29,587 |
|
||
Purchases of property and equipment |
|
(1,741 |
) |
(2,903 |
) |
||
Capitalization and purchases of software |
|
(1,745 |
) |
(4,745 |
) |
||
Purchases of long-term investments, net |
|
|
|
(7,936 |
) |
||
Net cash (used in) provided by investing activities |
|
(2,882 |
) |
14,003 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
||
Principal payments of debt and capital lease obligations and debt issuance costs |
|
(1,650 |
) |
(1,272 |
) |
||
Proceeds from exercise of stock options and employee stock plan purchases |
|
242 |
|
600 |
|
||
Net cash used in financing activities |
|
(1,408 |
) |
(672 |
) |
||
|
|
|
|
|
|
||
EFFECTS OF EXCHANGE RATES ON CASH BALANCES |
|
(711 |
) |
(1,210 |
) |
||
|
|
|
|
|
|
||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
850 |
|
4,349 |
|
||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
80,342 |
|
97,559 |
|
||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
81,192 |
|
$ |
101,908 |
|
|
|
|
|
|
|
||
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
||
Cash paid for interest |
|
$ |
4,520 |
|
$ |
4,546 |
|
|
|
|
|
|
|
||
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
||
Acquisition of capital leases |
|
$ |
834 |
|
$ |
1,364 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 31, 2005
1. The Company and Basis of Presentation
The Company
Manugistics Group, Inc. (the Company) is a leading global provider of supply chain, demand and revenue management software products and services. The Company combines its products and services to deliver solutions that address the specific business needs of its clients. The Companys approach to client delivery is to advise clients on how best to use the Companys software and other technologies across their entire demand and supply chain and in their revenue management practices to enable informed, responsive, rapid and cost and price effective decision making throughout their own enterprise and across their extended trading network by creating a fully synchronized supply chain.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its wholly-owned subsidiaries have been prepared in accordance with generally accepted accounting principles for interim reporting and follow the guidance provided in the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments that are necessary for a fair presentation of the unaudited results for the interim periods presented have been included. The results of operations for the periods presented herein are not necessarily indicative of the results of operations for the entire fiscal year, which ends on February 28, 2006.
These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended February 28, 2005 included in the Annual Report on Form 10-K of the Company for that year filed with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to the current years financial statement presentation.
2. Stock Option-Based Compensation Plans & Restricted Stock Program
Stock Option-Based Compensation Plans. The Company accounts for its stock option-based compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations using the intrinsic value based method of accounting. If the Company accounted for its share-based payments using a fair value based method of accounting in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment, (SFAS 123 (R)) as required beginning in the first quarter of fiscal year 2007, and in accordance with the provisions in Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (SFAS 148), the Companys net loss and loss per basic and diluted share amounts would have been as follows (amounts in thousands, except per share amounts):
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Net loss, as reported |
|
$ |
(6,118 |
) |
$ |
(17,114 |
) |
$ |
(11,034 |
) |
$ |
(24,847 |
) |
Add: Stock option-based compensation expense included in reported net loss, net of tax |
|
|
|
48 |
|
|
|
168 |
|
||||
Deduct: Stock option-based compensation expense determined under the fair-value method, net of tax (1) |
|
1,206 |
|
(1,572 |
) |
164 |
|
(3,742 |
) |
||||
Pro forma net loss |
|
$ |
(4,912 |
) |
$ |
(18,638 |
) |
$ |
(10,870 |
) |
$ |
(28,421 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted loss per share, as reported |
|
$ |
(0.07 |
) |
$ |
(0.21 |
) |
$ |
(0.13 |
) |
$ |
(0.30 |
) |
Basic and diluted loss per share, pro forma |
|
$ |
(0.06 |
) |
$ |
(0.23 |
) |
$ |
(0.13 |
) |
$ |
(0.35 |
) |
(1) Includes the impact of actual stock option forfeitures related to employee terminations.
Consistent with the Companys accounting for deferred tax assets resulting from the exercise of employee stock options in the accompanying unaudited Condensed Consolidated Financial Statements, the Company has not provided a tax benefit or expense on the
6
pro forma expense in the above table.
During the three and six months ended August 31, 2005, stock options granted had weighted average fair values of $0.90 and $0.90 per share, respectively, and $1.36 and $1.96 per share during the three and six months ended August 31, 2004, respectively, as calculated using the Black-Scholes option valuation model.
The weighted average estimated fair value of the common stock purchase rights granted under the 2004 Employee Stock Purchase Plan (ESPP) during the three and six months ended August 31, 2005 was $0.40 and $0.38 per share, respectively. There were no stock purchase rights granted under the employee stock purchase plan during the three and six months ended August 31, 2004. The Companys then-existing employee stock purchase plan was suspended as of June 30, 2003. At the 2004 Annual Meeting of Shareholders, the shareholders of the Company approved the 2004 ESPP, and participation commenced on September 1, 2004. On August 31, 2005, 74,527 shares of the Companys common stock were issued under the Companys 2004 ESPP.
The Company determined the assumptions used in computing the fair value of stock options and ESPP shares by estimating the expected useful lives, giving consideration to the vesting and purchase periods, contractual lives, actual employee forfeitures, and the relationship between the exercise price and the fair market value of the Companys common stock, among other factors. The risk-free interest rate is the U.S. Treasury bill rate for the relevant expected life. The fair value of stock options and stock purchase plan shares was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
OPTIONS |
|
ESPP |
|
OPTIONS |
|
ESPP |
|
||||||||
|
|
Three Months Ended |
|
Three Months Ended |
|
Six Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Risk-free interest rates |
|
3.78 |
% |
2.86 |
% |
3.33 |
% |
N/A |
|
3.75 |
% |
2.75 |
% |
3.18 |
% |
N/A |
|
Expected term |
|
4.13 years |
|
3.35 years |
|
0.25 years |
|
N/A |
|
4.39 years |
|
3.45 years |
|
0.25 years |
|
N/A |
|
Volatility |
|
0.5546 |
|
0.7796 |
|
0.6186 |
|
N/A |
|
0.5581 |
|
0.8062 |
|
0.5125 |
|
N/A |
|
Dividend yield |
|
0 |
% |
0 |
% |
0 |
% |
N/A |
|
0 |
% |
0 |
% |
0 |
% |
N/A |
|
Restricted Stock Program. In June 2003, the Companys Board of Directors approved an amendment to the Companys 1998 stock option plan to issue restricted shares of Manugistics common stock to its employees. This amendment was approved by shareholders at the Companys 2003 Annual Meeting of Shareholders on July 29, 2003. During fiscal year 2005, the Company issued 1.3 million shares of restricted stock to certain key employees. The restricted stock awards granted to key employees have a vesting schedule pursuant to which the stock awards vest in three equal annual increments over three years from the date of grant, with the first increment vesting on November 3, 2005. The total value of the fiscal 2005 restricted stock awards of approximately $2.6 million was computed using the closing stock price on the date of grant and a 22% estimated forfeiture rate and was recorded as a component of deferred compensation. The related compensation expense is recognized and amortized over the vesting period. Additionally, in fiscal 2005, 333,000 shares, which vest in full on January 1, 2006, were issued to the new Chief Executive Officer, resulting in an increase in deferred compensation in stockholders equity of $0.9 million.
On October 17, 2003, the Company issued 205,000 shares of restricted stock to certain key employees. The restricted stock awards granted to key employees have a vesting schedule pursuant to which the stock awards vest in four equal installments on the day which is 18 months, 24 months, 36 months and 48 months following the date of grant. The first increment vested on April 17, 2005. The total value of the fiscal 2004 restricted stock awards granted of approximately $1.3 million was computed using the closing stock price on the date of grant and was recorded as a component of deferred compensation. The related compensation expense is recognized and amortized over the vesting period.
The Company recorded $0.4 million and $0.9 million in compensation expense related to restricted shares outstanding during the three and six months ended August 31, 2005, respectively, and recorded $0.2 million and $0.3 million in compensation expense during the three and six months ended August 31, 2004, respectively.
3. Net Loss Per Share
Basic net loss per share is computed using the weighted average number of shares of common stock outstanding. Diluted net loss per share is computed using the weighted average number of shares of common stock and, when dilutive, potential common shares from options, restricted stock and warrants to purchase common stock using the treasury stock method and the effect of the assumed conversion of the Companys convertible subordinated debt, using the if-converted method. The dilutive effect of options, restricted stock and warrants to acquire 0.5 million and 0.6 million shares for the three and six months ended August 31, 2005, respectively, and 0.5 million and 0.8 million shares for the three and six months ended August 31, 2004, respectively, was excluded from the calculation of diluted net loss per share because including these shares would be anti-dilutive due to the Companys reported net loss. The assumed
7
conversion of the Companys convertible debt was excluded from the computation of diluted net loss per share for the three months ended August 31, 2005 and 2004 because it was anti-dilutive.
4. Commitments and Contingencies
Legal Actions. The Company is involved from time to time in disputes and litigation in the ordinary course of business. The Company has established accruals for losses related to such matters that are probable and reasonably estimable. The Company does not believe that the outcome of any existing disputes or litigation will have a material adverse effect on the Companys business, operating results, financial condition or cash flows. However, the ultimate outcome of these matters, as with dispute resolution and litigation generally, is inherently uncertain and it is possible that some of these matters may be resolved adversely to the Company. Accordingly, an unfavorable outcome of some or all of these matters could have a material adverse effect on the Companys business, operating results, financial condition or cash flows.
Indemnification. The Company licenses software to its customers under software license agreements, which generally provide the customer with limited indemnification against damages, judgments and reasonable costs and expenses incurred by the customer for any claim or suit based on infringement of a trademark or copyright as a result of the customers use of the Companys software. To date, the Company has not incurred any material costs associated with these indemnification provisions and no material claims of this nature are outstanding as of August 31, 2005. However, there can be no assurance that any claims under these indemnification provisions will not arise in the future or that any such claims will not have a material adverse effect on the Companys business, operating performance, financial condition or cash flows.
Product Warranty. The Company typically provides a limited warranty to its customers with respect to its software products. The Company records a liability for the estimated cost of product warranties based on specific warranty claims, provided that it is probable that a liability exists and provided the amount can be reasonably estimated. To date, the Company has not had any material costs associated with these warranties.
Tax Matters. The Company recorded a benefit for income taxes of $(2.7) million and $(2.3) million for the three and six months ended August 31, 2005, respectively, compared to an income tax expense of $0.4 million and $0.7 million for the three and six months ended August 31, 2004, respectively. The benefit recorded for the three and six months ended August 31, 2005 included a $1.9 million refund for previously paid withholding taxes and $0.7 million related to the reversal of additional amounts accrued for withholding taxes that the Company no longer deemed probable to be paid.
5. Intangible Assets and Goodwill
Acquisition-related intangible assets subject to amortization as of August 31, 2005 and February 28, 2005 were as follows (amounts in thousands):
|
|
|
|
Accumulated |
|
|
|
|||
|
|
Gross Assets |
|
Amortization |
|
Net Assets |
|
|||
August 31, 2005 |
|
|
|
|
|
|
|
|||
Acquired technology |
|
$ |
51,939 |
|
$ |
(45,664 |
) |
$ |
6,275 |
|
Customer relationships |
|
28,109 |
|
(22,098 |
) |
6,011 |
|
|||
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
80,048 |
|
$ |
(67,762 |
) |
$ |
12,286 |
|
|
|
|
|
|
|
|
|
|||
February 28, 2005 |
|
|
|
|
|
|
|
|||
Acquired technology |
|
$ |
64,739 |
|
$ |
(50,923 |
) |
$ |
13,816 |
|
Customer relationships |
|
28,109 |
|
(18,774 |
) |
9,335 |
|
|||
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
92,848 |
|
$ |
(69,697 |
) |
$ |
23,151 |
|
During the three months ended August 31, 2005, the Company performed an impairment test of its long-lived assets and concluded that although the Company continues to sell the products acquired in the PartMiner CSD, Inc. asset acquisition, the Company does not believe that future operating cash flows will be sufficient to support the related asset balance. Therefore, the Company wrote-off the remaining $12.8 million gross acquired technology asset balance and related $(9.1) million of accumulated amortization. The impairment resulted in a net reduction in acquisition-related intangible assets of $3.7 million for the three and six months ended August 31, 2005.
8
The change in the carrying amount of goodwill for the three months ended August 31, 2005 was as follows (amounts in thousands):
Balance as of February 28, 2005 |
|
$ |
185,658 |
|
Foreign currency translation adjustments, net |
|
82 |
|
|
|
|
|
|
|
Balance as of August 31, 2005 |
|
$ |
185,740 |
|
During the three months ended May 31, 2005, the Company experienced adverse changes in its stock price. The Company performed a test for goodwill impairment and determined that based upon the implied fair value (which includes factors such as, but not limited to, the Companys market capitalization, control premium and recent stock price volatility) of the Company as of May 31, 2005, there was no impairment of goodwill. There were no further developments in the three months ended August 31, 2005 that would trigger the need to perform a subsequent impairment test.
Amortization expense for acquisition-related intangible assets was $3.5 million and $5.2 million for the three months ended August 31, 2005 and 2004, respectively, and $7.1 million and $10.4 million for the six months ended August 31, 2005 and 2004, respectively. Estimated aggregate future amortization expense for acquisition-related intangible assets for the six-month period ending February 28, 2006 and future fiscal years is as follows (amounts in thousands):
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
February 28, |
|
Fiscal Year Ended February 28 or 29, |
|
||||||||||||||
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Total |
|
||||||
Amortization expense |
|
$ |
4,298 |
|
$ |
5,013 |
|
$ |
1,908 |
|
$ |
914 |
|
$ |
153 |
|
$ |
12,286 |
|
6. Capitalized Software Development Costs
Operations commenced at our new development center in Hyderabad, India during the fourth quarter of fiscal 2005. Because of this change, the Company expects that technological feasibility in its product development life cycles will be reached just before products are available for general release to clients. Capitalized software development costs as of August 31, 2005 and February 28, 2005 were as follows (amounts in thousands):
|
|
August 31, 2005 |
|
February 28, 2005 |
|
||
Software development costs |
|
$ |
46,585 |
|
$ |
44,960 |
|
Less: Accumulated amortization |
|
(35,539 |
) |
(30,570 |
) |
||
|
|
|
|
|
|
||
Total software development costs, net |
|
$ |
11,046 |
|
$ |
14,390 |
|
Capitalization of software development costs was $1.6 million and $4.5 million for the six months ended August 31, 2005 and 2004, respectively. Amortization expense was $5.0 million and $4.8 million for the six months ended August 31, 2005 and 2004, respectively.
7. Comprehensive Loss
Other comprehensive loss relates primarily to foreign currency translation adjustments and unrealized gains (losses) on investments in marketable securities and long-term investments. The following table sets forth the comprehensive loss for the three and six month periods ended August 31, 2005 and 2004 (amounts in thousands):
9
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
(6,118 |
) |
$ |
(17,114 |
) |
$ |
(11,034 |
) |
$ |
(24,847 |
) |
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
||||
Unrealized gains (losses) on investments |
|
46 |
|
60 |
|
120 |
|
(194 |
) |
||||
Foreign currency translation adjustments |
|
185 |
|
(440 |
) |
(1,171 |
) |
(1,038 |
) |
||||
Total comprehensive loss |
|
$ |
(5,887 |
) |
$ |
(17,494 |
) |
$ |
(12,085 |
) |
$ |
(26,079 |
) |
8. Exit and Disposal Activities
Summary: The Company has adjusted its cost structure and resource allocation several times in recent years to respond to business and market conditions. Each exit and disposal plan has included involuntary terminations across most functional areas throughout the Company and the reduction of excess office space.
The following table sets forth a summary of total exit and disposal charges, payments made against those charges and the remaining liabilities as of August 31, 2005 (amounts in thousands):
|
|
|
|
Charges and |
|
Charges and |
|
|
|
|
|
|||||
|
|
|
|
adjustments to |
|
adjustments to |
|
Utilization of |
|
|
|
|||||
|
|
|
|
charges in three |
|
charges in three |
|
cash in six |
|
|
|
|||||
|
|
Balance as of |
|
months ended |
|
months ended |
|
months ended |
|
Balance as of |
|
|||||
|
|
Feb. 28, 2005 |
|
May 31, 2005 |
|
August 31, 2005 |
|
August 31, 2005 |
|
August 31, 2005 |
|
|||||
Lease obligations and |
|
$ |
18,274 |
|
$ |
225 |
|
$ |
(37 |
) |
$ |
(3,532 |
) |
$ |
14,930 |
|
Severance and related benefits |
|
2,312 |
|
227 |
|
1,339 |
|
(1,736 |
) |
2,142 |
|
|||||
Other |
|
83 |
|
(25 |
) |
|
|
(58 |
) |
|
|
|||||
Subtotal |
|
$ |
20,669 |
|
$ |
427 |
|
$ |
1,302 |
|
$ |
(5,326 |
) |
17,072 |
|
|
Reclassification of deferred rent |
|
1,162 |
|
|
|
|
|
|
|
1,162 |
|
|||||
Total |
|
$ |
21,831 |
|
|
|
|
|
|
|
$ |
18,234 |
|
(1) Certain accrued lease obligations extend through fiscal year 2019.
(2) Includes $120 and $250 of accretion expense in adjustments to charges in the three and six months ended August 31, 2005.
The Company has outstanding lease obligations for facilities that have been entirely vacated which are located in Brussels, Belgium; Wayne, Pennsylvania; Detroit, Michigan and Ratingen and Munich, Germany. The Company has outstanding lease obligations for facilities for which a portion of the office space was vacated in certain facilities that are located in Rockville, Maryland; Atlanta, Georgia; Calabasas and San Carlos, California; and Bracknell, United Kingdom.
Exit and disposal activities: In order to further adjust the Companys cost structure and resource allocation to increase efficiencies and reduce excess office space in response to current business conditions, the Company announced and began implementing two exit and disposal plans, the (FY05 Q2 Plans) in the second quarter of fiscal 2005. Actions taken included the involuntary termination of employees across most business functions and the abandonment of excess office space.
The following table summarizes the Companys exit and disposal activities since fiscal year 2003 (amounts in millions, except number of involuntarily terminated employees):
10
|
|
Involuntary terminations |
|
|
|
|
|
|
|
|
|
|||||||
|
|
Number of |
|
|
|
Office |
|
Property and |
|
|
|
|
|
|||||
Period |
|
employees |
|
$ |
Amount |
|
leases |
|
equipment |
|
Other |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Three months ended |
|
31 |
(a) |
$ |
1.3 |
|
|
|
|
|
|
|
$ |
1.3 |
|
|||
Three months ended |
|
13 |
(b) |
$ |
0.2 |
|
$ |
0.2 |
(d) |
|
|
|
|
$ |
0.4 |
|
||
Fiscal Year 2005 |
|
127 |
(c) |
$ |
6.1 |
|
$ |
8.1 |
(e) |
$ |
2.7 |
|
$ |
0.4 |
|
$ |
17.3 |
|
Fiscal Year 2004 |
|
79 |
|
$ |
0.9 |
|
$ |
12.9 |
|
$ |
4.2 |
|
$ |
0.6 |
|
$ |
18.6 |
|
Fiscal Year 2003 |
|
343 |
|
$ |
8.0 |
|
$ |
8.0 |
|
$ |
2.5 |
|
$ |
0.7 |
|
$ |
19.2 |
|
(a) 30 US, 1 Europe
(b) 13 US
(c) 96 US, 11 United Kingdom, 15 Other Europe, 4 Asia, 1 Canada
(d) Completely vacated Brussels, Belgium
(e) Partially vacated-Rockville, Maryland; San Carlos and Calabasas, California; Bracknell, United Kingdom and Tokyo, Japan. Completely vacated-Munich, Germany; Stockholm, Sweden and the Philippines.
Exit and disposal accounting policies and practices: The Company records exit and disposal costs in accordance with Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146).
SFAS 146 (excess office space): The Company records charges for excess office space once vacated based on the present value of the sum of expected remaining lease commitments offset by managements best estimate of expected sublease income and costs associated with subleasing the vacated space. The estimated sublease income amounts require judgment and include assumptions regarding the period of sublease and the price per square foot to be paid by sublessors. The Company reviews these estimates periodically and records appropriate adjustments, as necessary, to reflect managements best estimates. In certain cases, only a portion of the total office space within a property is vacated when such excess office space allows appropriate physical separation.
SFAS 146 (severance costs): All terminated employees are notified within the requisite time period as prescribed by SFAS 146 and are typically not required to render service beyond the earlier of their termination date or a minimum retention period of 60 days, as defined by SFAS 146. When employees are required to render service beyond the earlier of their termination date or minimum retention period of 60 days, the severance cost for such employees is recognized and accrued over the required service period in accordance with SFAS 146. There were seven employees involuntarily terminated during the three months ended August 31, 2005 and 23 during fiscal year 2005 who were required to render service beyond 60 days.
SFAS 88: Certain terminated employees had employment contracts that defined the amount of severance and related benefits received upon termination. The severance and related benefits for such employees is accounted for in accordance with Statement of Financial Accounting Standards No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (SFAS 88) when amounts are both probable and estimable. During fiscal year 2005, three employees with employment contracts were involuntarily terminated.
SFAS 144: In connection with permanently vacating excess office space, the Company records an impairment charge of certain property, plant and equipment and leasehold improvements in accordance with Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
9. Warrant
In March 2004, the Company entered into an amendment to an existing alliance agreement with International Business Machines Corporation (IBM) under which the companies will develop, market, sell and deliver demand and supply chain solutions globally. In connection with entering into the amendment to the alliance agreement, the Company issued a warrant (the Warrant) to IBM to acquire 250,000 shares of the Companys common stock at a per share purchase price of $8.51, in reliance upon an exception provided under Section 4(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering. The Warrant is immediately
11
exercisable, expires March 12, 2009, and provides for customary registration and indemnification rights and certain limited transfer rights. The fair value of the Warrant of $1.1 million is being recognized as operating expense over the three-year service period of the alliance agreement. The fair value of the Warrant was calculated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 2.79%; dividend yield of zero; volatility of 99%; and a Warrant life of five years. The Company recorded $0.2 million in amortization expense associated with the Warrant for each of the six months ended August 31, 2005 and August 31, 2004.
10. Credit Facilities
The Company had a one-year unsecured revolving credit facility (the Credit Facility) with Silicon Valley Bank (SVB) for $15.0 million which expired on March 30, 2005. Under the terms of the Credit Facility, the Company could request cash advances, letters of credit, or both. On April 8, 2005, the Company renewed the Credit Facility (the New Credit Facility) with SVB for $15.0 million and a two-year term, effective March 29, 2005. Under the terms of the New Credit Facility, the Company may request cash advances, letters of credit, or both. Borrowings under the New Credit Facility accrue interest at the prime rate plus 0.5%. The New Credit Facility requires the Company to comply with the following financial covenants: (i) minimum tangible net worth (defined as stockholders equity plus convertible debt less goodwill, capitalized software costs and other intangible assets) must be at least $90.0 million plus 50% of consolidated net income generated cumulatively commencing with the first quarter of fiscal 2006 and (ii) the Companys ratio of (a) unrestricted cash, cash equivalents, marketable securities and long-term investments deposited with SVB and its affiliates plus net accounts receivable to (b) current liabilities plus long-term indebtedness to SVB and outstanding letters of credit minus deferred revenue, must be at least 2.0 to 1.0. The Company was in compliance with all financial covenants as of August 31, 2005 and there were no cash draws outstanding. As of August 31, 2005, the Company had $9.2 million in letters of credit outstanding under the New Credit Facility to secure its lease obligations for certain office space.
The New Credit Facility requires the Company to maintain $50.0 million in funds with SVB Asset Management and its affiliates. The New Credit Facility also restricts the amount of additional debt the Company can incur and restricts the amount of cash that the Company can use for acquisitions and for the repurchase of convertible debt. Under the terms of the New Credit Facility, the Company retains the right to terminate the facility at any time upon repayment of any advances and the posting of cash collateral for any outstanding letters of credit. Under the New Credit Facility, SVB has the right to obtain a lien on all of the Companys assets, other than intellectual property, upon an occurrence of default, unless the Company terminates the facility as provided above. The New Credit Facility also provides that, upon an event of default, the Company is prohibited from paying a cash dividend to its shareholders.
The New Credit Facility includes a provision for supplemental equipment advances, under which the Company may borrow up to an additional $5.0 million for the purchase of equipment, office furniture and other capital expenditures. Amounts may be borrowed for such capital expenditures through December 31, 2005 and accrue interest at a fixed interest rate equal to 7.75% annually. Equipment advances will be repaid monthly over a 36-month period, beginning in the month following the advance. As of August 31, 2005, there were no borrowings outstanding for equipment advances under the New Credit Facility. The financial covenants for the supplemental equipment advances are the same as the financial covenants for the New Credit Facility.
The Company had an additional credit agreement (the Equipment Line) with SVB, as amended, which expired March 31, 2003, under which the Company was permitted to borrow up to $5.0 million for the purchase of equipment. Amounts borrowed under the Equipment Line accrue interest at a rate equal to the greater of the three-year Treasury note rate plus 5%, or 8.25%, and are repaid monthly over a 36-month period. During fiscal 2003, the Company borrowed $2.9 million under the Equipment Line. The principal balance remaining as of August 31, 2005 was approximately $0.2 million. The financial covenants for the Equipment Line are the same as the financial covenants for the New Credit Facility. The Company was in compliance with all financial covenants as of August 31, 2005.
12
11. Segment Information
The Company and its subsidiaries are principally engaged in the design, development, marketing, licensing and support and implementation of supply chain, demand and revenue management software products and services. Substantially all revenue results from the licensing of the Companys software products and related consulting and support services. The Companys chief operating decision maker reviews financial information, presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment.
Revenue is attributable to geographic regions based on the location of the Companys customers. The following table presents total revenue by geographic region for the three and six months ended August 31, 2005 and 2004, and total long-lived assets for the periods ended August 31, 2005 and February 28, 2005 (in thousands):
|
|
Three Months Ended August 31, |
|
Six Months Ended August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
28,818 |
|
$ |
32,538 |
|
$ |
56,865 |
|
$ |
68,651 |
|
Europe |
|
10,591 |
|
11,967 |
|
25,201 |
|
22,325 |
|
||||
Asia/Pacific |
|
3,617 |
|
5,043 |
|
6,450 |
|
8,068 |
|
||||
Other |
|
623 |
|
1,714 |
|
1,790 |
|
3,801 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
43,649 |
|
$ |
51,262 |
|
$ |
90,306 |
|
$ |
102,845 |
|
|
|
August 31, 2005 |
|
Feb. 28, 2005 |
|
||
Long-lived Assets: |
|
|
|
|
|
||
United States |
|
$ |
223,589 |
|
$ |
239,374 |
|
Europe |
|
4,897 |
|
5,351 |
|
||
Asia/Pacific |
|
618 |
|
770 |
|
||
Other |
|
2,791 |
|
2,347 |
|
||
|
|
|
|
|
|
||
|
|
$ |
231,895 |
|
$ |
247,842 |
|
Item 2. MANAGEMENTS 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 the unaudited Condensed Consolidated Financial Statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. The discussion and analysis contains forward-looking statements which 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 Quarterly Report on Form 10-Q as a result of specified factors, including those set forth under the caption Factors that May Affect Future Results.
Executive Summary
Our unaudited Condensed Consolidated Financial Statements are included in Item 1 of this Quarterly Report on Form 10-Q. The following discussion is provided to allow the reader to have a better understanding of our operating results for the three and six months ended August 31, 2005, including (i) a brief discussion of our business and products, (ii) the business environment and factors that affected our financial performance, (iii) our focus on future improvements in our financial performance and (iv) Key Financial Metrics-Second Quarter Fiscal 2006. This executive summary should be read in conjunction with the more detailed discussion and analysis of our financial condition and results of operations included in this Item 2, section titled, Factors that May Affect Future Results and our
13
unaudited Condensed Consolidated Financial Statements, which are included in Item 1 of this Quarterly Report on Form 10-Q.
Overview Business and Products
We are a leading global provider of supply chain management and demand and revenue management software products and services. We combine these products and services to deliver solutions that address specific business needs of our clients. We focus primarily on the Consumer Goods, Retail, and Government, Aerospace & Defense markets. We are also focused on providing revenue management solutions for the Travel, Transportation & Hospitality markets.
Our solutions enable our clients to reduce operating costs, improve customer service and increase their top-line revenue by allowing them to plan, optimize and synchronize their demand and supply chain and to improve their revenue management practices. These benefits create efficiencies in how goods and services are brought to market, how they are priced and sold and how they are serviced and maintained. Our software solutions enable clients to optimize cost and revenue simultaneously on an enterprise-wide basis by integrating pricing, forecasting and operational planning and execution to enhance margins across the clients enterprise and extended trading networks. In addition, our software solutions help our clients derive more benefits from their existing IT investments with other software vendors, such as legacy Enterprise Resource Planning (ERP) and other transaction-based systems, and help ensure the security and integrity of their global supply chains.
Our approach to client delivery is to advise our clients on how best to use our solutions and other technologies across their demand and supply chain to integrate pricing, forecasting, operational planning and execution in a manner that will allow them to enhance margins across their enterprise and extended trading networks and to improve their revenue management practices. We deliver our solutions using commercially available products and will provide additional functionality addressed through product extensions for industry-specific capabilities. Certain of our clients and prospects ask for unique capabilities in addition to our core capabilities to give them a competitive edge in the marketplace, which we may provide on a case-by-case basis. We expect this will lead to an increase in software license revenue being recognized on a contract accounting basis over the course of the delivery of the solution rather than upon initial delivery of the software and contract execution.
Business Environment and Factors That Affected our Three and Six Months Ended August 31, 2005 Results
Our operating results for the three and six months ended August 31, 2005 and the past three fiscal years were affected by several broad-based factors including global macro-economic conditions and cautious capital spending by corporations for enterprise application software. We believe changing conditions over the last three fiscal years caused changes in the behavior patterns in our markets as our clients and prospects intensified their efforts to reduce costs. Many shifted their focus from longer-term strategic initiatives to short-term tactical initiatives with more rapid paybacks. We also believe that many of our clients and prospects are focused on realizing benefits from earlier investments in information technology rather than committing to new initiatives. We believe that these changes in the markets for enterprise application software will continue.
We continue to see a growing number of our clients and prospects wanting to structure deals to reduce their overall perceived risks. These deal structures include, but are not limited to, phased projects, delayed payments for software, and tying payments for software to performance. Certain of our clients and prospects want us to structure deals where we can earn additional revenue based on performance. During the six months ended August 31, 2005, we closed one such transaction.
We believe that the sizes of enterprise application software license transactions have declined in general. We experienced a decline in the number and size of our software transactions, including the number of software transactions of $1 million or greater, in the three and six months ended August 31, 2005, which has also resulted in a decrease in our average selling price (ASP).
We believe our financial results in the fiscal year ended February 28, 2005 and for the three and six months ended August 31, 2005 were also adversely affected by the ongoing consolidation in our industry, the pace of which has significantly increased over the past two quarters and may continue. This consolidation has increased uncertainty about the abilities of smaller enterprise application software vendors to remain independent and thrive, which has negatively affected and may continue to negatively affect our ability to grow our revenue and improve our performance. See Forward Looking Statements and Factors that May Affect Future Results.
Over the past year, we have made substantial changes in our company, including reorganizing and downsizing our workforce, including our executive management team and our sales organization, narrowing our market focus, narrowing our product focus, our ongoing move of product development to India, increasing our focus on transportation markets and pricing optimization capabilities and increasing our focus on the Asia-Pacific region. Although we have yet to increase our revenue, particularly our software license revenue, we believe these changes have enabled us to improve our financial performance and cash flows from operations in our most recent quarters.
14
Focus on Future Improvements in Our Financial Performance
For the three months and six months ended August 31, 2005, we continued the development of a more focused product and market strategy, and we continued the strategic restructuring of the organization in an effort to reduce our operating expenses to a level that may allow us to become profitable. During fiscal 2005, we organized our sales and marketing efforts to address the Consumer Goods, Retail, Government, Aerospace & Defense and Revenue Management markets. In Europe where we currently do not have a critical mass of resources, we continued to eliminate certain offices, which are now being serviced from other locations in the region. We also intend to provide more focused sales and marketing efforts to small and medium-sized businesses in Europe and the Asia-Pacific region through third-party marketing and reseller agreements.
As of August 31, 2005, we had achieved quarterly cost savings of approximately $6.1 million, compared to the three months ended August 31, 2004, as a result of our FY05 Q2 cost reduction plans (FY05 Q2 Plans). These exit and disposal plans included the abandonment of certain office space and related asset write-offs and the involuntary termination of employees. We recorded exit and disposal charges of $1.3 million in the three months ended August 31, 2005, primarily due to severance and other benefits related to headcount reductions. We have completed most of the planned initiatives approved in our FY05 Q2 Plans and will complete the remainder of the initiatives in fiscal 2006.
During the fourth quarter of fiscal 2005, we commenced operations at our new product development center in Hyderabad, India. We are in the process of moving a substantial portion of our product development capabilities to our new facility over the rest of the fiscal year while keeping our core product development capabilities at our headquarters in Rockville, Maryland. We believe this will allow us to both increase our product development resources and to lower our product development costs. At August 31, 2005, we had approximately 136 employees at our Hyderabad, India development center and expect that number to increase substantially by the first quarter of fiscal 2007. For the three months ended August 31, 2005, amortization of previously capitalized software exceeded capitalization of software development costs by approximately $1.7 million. We expect amortization of previously capitalized software to continue to exceed capitalization of software development costs as we continue to shift development operations to Hyderabad, India. Once we have fully transitioned the development process to India, we believe that we will no longer capitalize software development costs due to a change in the developmental life cycle of our products and due to the expected shortening of time between reaching technological feasibility and introduction of our products into the market.
If market conditions for our products and services do not improve, we may need to make further adjustments to our cost structure to further improve performance.
Key Financial Metrics Second Quarter Fiscal 2006
We reported second quarter year-over-year revenue decreases in software license, services and reimbursed expenses and total revenue. All other operating expenses decreased $12.5 million, or 23%, to $42.2 million for the three months ended August 31, 2005 compared to the three months ended August 31, 2004.
15
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
(in thousands, except number of employees and DSO) |
|
||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
||||
Software license |
|
$ |
5,068 |
|
$ |
11,111 |
|
$ |
13,459 |
|
$ |
21,479 |
|
Support |
|
21,755 |
|
21,296 |
|
43,570 |
|
42,717 |
|
||||
Services and reimbursed expenses |
|
16,826 |
|
18,855 |
|
33,277 |
|
38,649 |
|
||||
Total revenue |
|
$ |
43,649 |
|
$ |
51,262 |
|
$ |
90,306 |
|
$ |
102,845 |
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses and employee headcount: |
|
|
|
|
|
|
|
|
|
||||
Exit and disposal activities and acquisition-related expenses (1) |
|
$ |
8,514 |
|
$ |
11,478 |
|
$ |
12,595 |
|
$ |
14,289 |
|
All other operating expenses (2) |
|
42,248 |
|
54,740 |
|
87,848 |
|
108,662 |
|
||||
Total operating expenses |
|
$ |
50,762 |
|
$ |
66,218 |
|
$ |
100,443 |
|
$ |
122,951 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total employees (period end) |
|
765 |
|
815 |
|
765 |
|
815 |
|
||||
Total average employees |
|
748 |
|
845 |
|
726 |
|
862 |
|
||||
Total revenue per average employee |
|
$ |
58 |
|
$ |
61 |
|
$ |
124 |
|
$ |
119 |
|
|
|
August 31, |
|
May 31, |
|
February 28, |
|
|
|
|||
|
|
2005 |
|
2005 |
|
2005 |
|
|
|
|||
Financial condition, liquidity and capital structure: |
|
|
|
|
|
|
|
|
|
|||
Cash, cash equivalents, marketable securities and long-term investments |
|
$ |
136,109 |
|
$ |
133,297 |
|
$ |
135,889 |
|
|
|
Days sales outstanding (DSO) |
|
78 |
|
80 |
|
91 |
|
|
|
|||
Convertible debt |
|
175,500 |
|
175,500 |
|
175,500 |
|
|
|
|||
Total stockholders equity |
|
154,005 |
|
159,279 |
|
164,746 |
|
|
|
|||
Common shares outstanding (period end) (3) |
|
83,780 |
|
83,819 |
|
83,869 |
|
|
|
|||
Cash flows from operating activities (quarter ended) |
|
5,260 |
|
591 |
|
7,865 |
|
|
|
|||
(1) Includes exit and disposal activities, impairment of long-lived assets, acquisition-related expenses such as amortization of acquired technology and intangibles and non-cash stock option compensation expense.
(2) Includes cost of software license, cost of support and services, cost of reimbursed expenses, sales and marketing, product development and general and administrative costs.
(3) Includes the impact of restricted stock forfeitures.
The following is a brief discussion of the above financial metrics and analysis of the reasons for the change between the fiscal periods ended August 31, 2005 and 2004 and recent trends.
Software license revenue
Our software license revenue decreased $6.0 million, or 54%, to $5.1 million and $8.0 million, or 37%, to $13.5 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. Approximately 22% of our software license revenue was recognized on a percentage-of-completion basis or ratable basis for the three months ended August 31, 2005. The following table highlights some of the significant trends affecting our software license revenue:
|
|
|
|
|
|
Software |
|
|
|
|
Significant |
|
Average |
|
Transactions |
|
|
|
|
Software |
|
Selling Price |
|
$1.0 Million |
|
|
Quarter Ended |
|
Transactions (1) |
|
(ASP) |
|
or Greater |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
May 31, 2004 |
|
13 |
|
$ |
695 |
|
1 |
|
August 31, 2004 |
|
18 |
|
$ |
533 |
|
3 |
|
November 30, 2004 |
|
11 |
|
$ |
491 |
|
1 |
|
February 28, 2005 |
|
12 |
|
$ |
559 |
|
2 |
|
May 31, 2005 |
|
7 |
|
$ |
976 |
|
2 |
|
August 31, 2005 |
|
13 |
|
$ |
264 |
|
|
|
(1) Significant software transactions (excluding those recognized on a percentage-of-completion basis) are those with a value of
16
$100,000 or greater recognized within the fiscal quarter.
Software license revenue by industry for the three and six months ended August 31, 2005 and 2004 is as follows (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Government, Aerospace & Defense |
|
$ |
|
|
$ |
1,618 |
|
$ |
180 |
|
$ |
2,125 |
|
Consumer Goods |
|
2,381 |
|
5,805 |
|
9,056 |
|
7,398 |
|
||||
Revenue Management |
|
684 |
|
1,247 |
|
1,376 |
|
1,491 |
|
||||
Retail |
|
1,269 |
|
1,340 |
|
1,886 |
|
8,504 |
|
||||
Other |
|
734 |
|
1,101 |
|
961 |
|
1,961 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
5,068 |
|
$ |
11,111 |
|
$ |
13,459 |
|
$ |
21,479 |
|
The previous tables indicate the following trends affecting our software license revenue in the three and six months ended August 31, 2005 and 2004:
The number of significant software license transactions completed decreased in the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004.
ASP has fluctuated during the past five quarters, ranging from $264,000 to $976,000. The quarter ended May 31, 2005 included one software transaction which accounted for more than 10% of total revenue in that quarter, resulting in a higher ASP for that quarter. The quarter ended August 31, 2005 did not include any transactions greater than $1 million, which had the impact of reducing the ASP.
There were no software transactions in the Government, Aerospace & Defense industry during the three months ended August 31, 2005, causing a significant decrease in the concentration of revenue from that industry for the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004. The concentration of software license revenue from the Consumer Goods industry was higher in the six months ended August 31, 2005 compared to the six months ended August 31, 2004, due to a large software transaction which closed in the quarter ended May 31, 2005. Software license revenue from the Retail industry was significantly higher during the three and six months ended August 31, 2004 compared to the three and six months ended August 31, 2005 reflecting increased spending at that time by retail customers and the inclusion of two large software license deals during the three months ended May 31, 2004.
Support revenue
Our support revenue increased $0.5 million, or 2%, to $21.8 million and $0.9 million, or 2%, to $43.6 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. The increase was due to new software license sales and collections from certain customers for outstanding support for which the related revenue did not previously meet the criteria for recognition. This increase was partially offset by decreases in support revenue from non-renewals. Our percentage of annual support renewals by our clients remains over ninety percent.
Services and reimbursed expenses revenue
Our services and reimbursed expenses revenue decreased $2.0 million, or 11%, to $16.8 million and $5.4 million, or 14%, to $33.3 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. Services revenue tends to track software license revenue in prior periods. We primarily attribute the decrease in services revenue to the decrease in number of completed software transactions in late fiscal 2005 and the first half of fiscal 2006 compared to the same periods in late fiscal 2004 and the first half of fiscal 2005. Additionally, we have experienced competitive rate pressures on our consulting engagements and lower demand for implementation services.
Total revenue per average employee
Our total revenue per average employee decreased $3,000, or 5%, to $58,000 and increased $5,000, or 4%, to $124,000 for the three
17
and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. Total revenue per average employee is calculated as total revenue for the quarter divided by average number of employees for the quarter. The decrease during the three months ended August 31, 2005 compared to the three months ended August 31, 2004 was primarily due to the decrease in total revenue, which was proportionately higher than the decrease in average headcount, in addition to an increase in employee headcount in India as we migrate our product development function to our new development center. This trend will have a negative effect on total revenue per average employee as we increase headcount in India to take advantage of the lower wage scale. See Forward Looking Statements and Factors That May Affect Future Results.
Total operating expenses
Our total operating expenses declined by 23% to $50.8 million and 18% to $100.4 million during the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. Exit and disposal activities and acquisition-related expenses decreased 26% to $8.5 million and 12% to $12.6 million during the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. This decrease was the result of lower exit and disposal costs of $1.3 million and $1.7 million in the three and six months ended August 31, 2005, respectively, compared to $6.2 million and $3.7 million in the three and six months ended August 31, 2004. Additionally, we had lower amortization costs for the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004 related to the completion of amortization of acquired technology related to the STG Holdings, Inc., Talus Solutions, Inc. and SpaceWorks, Inc. acquisitions.
All other operating expenses declined 23% to $42.2 million and 19% to $87.8 million during the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. This decrease was primarily the result of lower office and travel expenses and salary costs due to a 11% and 16% decrease in average employee headcount during the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004, and reduced office space costs as a result of exit and disposal plans executed during the second half of fiscal 2005 and the six months ended August 31, 2005. Additionally, the decline was the result of lower commissions and incentives related to decreased software license revenue and a $1.5 million benefit related to the reversal of a previously recorded provision for anticipated losses on a contract for which the Companys obligation to provide services expired in the six months ended August 31, 2005, partially offset by increased marketing expenses related to our enVISION 2005 client conference held in May 2005. Additionally, our amortization of previously capitalized software development costs exceeded capitalization of software development costs by $1.7 million and $3.3 million in the three and six months ended August 31, 2005, respectively, compared to $0.1 million and $0.2 million in the three and six months ended August 31, 2004, respectively. The increase in amortization of previously capitalized software development costs in excess of capitalized software development costs is primarily the result of changes in the development life cycle of our products as we shift operations to our new development center in Hyderabad, India.
Financial condition, liquidity and capital structure
During the three months ended August 31, 2005, we had a net increase in cash. Activity includes the following:
Cash, cash equivalents, marketable securities and long-term investments increased $2.8 million, or 2%, to $136.1 million as of August 31, 2005 compared to $133.3 million as of May 31, 2005. This increase is primarily the result of cash flows provided by operating activities of $5.3 million offset by capital expenditures of $3.5 million.
Cash flows from operating activities increased by $4.7 million, to $5.3 million for the three months ended August 31, 2005 compared to $0.6 million for the three months ended May 31, 2005. We made a semi-annual interest payment on our convertible debt in the three months ended May 31, 2005 with no corresponding payment in the three months ended August 31, 2005.
Use of Estimates and Critical Accounting Policies
The accompanying discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue 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 managements estimates.
18
We believe that the following accounting policies are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and relate to the more significant areas involving managements judgments and estimates:
revenue recognition and deferred revenue;
allowance for doubtful accounts;
capitalized software development costs;
valuation and impairment review of long-lived assets;
income taxes;
exit and disposal activities; and
stock option-based compensation plans.
Our management has reviewed our critical accounting policies, our critical accounting estimates and the related disclosures with our Disclosure and Audit Committees. These policies and our procedures related to these policies are described further in our Annual Report on Form 10-K for the year ended February 28, 2005 in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, under the heading Use of Estimates and Critical Accounting Policies.
Results of Operations
The following table includes the Condensed Consolidated Statements of Operations data for the three and six months ended August 31, 2005 and 2004 expressed as a percentage of total revenue:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||
|
|
August 31, |
|
August 31, |
|
||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
Software license |
|
11.6 |
% |
21.7 |
% |
14.9 |
% |
20.9 |
% |
Support |
|
49.8 |
% |
41.5 |
% |
48.2 |
% |
41.5 |
% |
Services |
|
35.0 |
% |
31.9 |
% |
33.2 |
% |
33.0 |
% |
Reimbursed expenses |
|
3.6 |
% |
4.9 |
% |
3.7 |
% |
4.6 |
% |
Total revenue |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Cost of software license |
|
7.1 |
% |
6.7 |
% |
8.4 |
% |
7.1 |
% |
Amortization of acquired technology |
|
4.2 |
% |
6.9 |
% |
4.2 |
% |
6.9 |
% |
Cost of services and support |
|
37.2 |
% |
37.1 |
% |
35.0 |
% |
36.2 |
% |
Cost of reimbursed expenses |
|
3.6 |
% |
4.8 |
% |
3.7 |
% |
4.6 |
% |
Sales and marketing |
|
19.0 |
% |
29.7 |
% |
21.6 |
% |
29.6 |
% |
Product development |
|
18.2 |
% |
16.7 |
% |
17.1 |
% |
16.4 |
% |
General and administrative |
|
11.6 |
% |
11.7 |
% |
11.4 |
% |
11.7 |
% |
Amortization of intangibles |
|
3.8 |
% |
3.2 |
% |
3.7 |
% |
3.2 |
% |
Asset impairment |
|
8.6 |
% |
|
|
4.1 |
% |
|
|
Exit and disposal activities |
|
3.0 |
% |
12.1 |
% |
1.9 |
% |
3.6 |
% |
Non-cash stock option compensation expense |
|
|
|
0.1 |
% |
|
|
0.2 |
% |
Total operating expenses |
|
116.3 |
% |
129.0 |
% |
111.1 |
% |
119.5 |
% |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(16.3 |
) % |
(29.0 |
) % |
(11.1 |
) % |
(19.5 |
) % |
Other expense-net |
|
(4.0 |
) % |
(3.5 |
) % |
(3.6 |
) % |
(4.0 |
) % |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
(20.3 |
) % |
(32.5 |
) % |
(14.7 |
) % |
(23.5 |
) % |
(Benefit) provision for income taxes |
|
(6.3 |
) % |
0.7 |
% |
(2.6 |
) % |
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(14.0 |
) % |
(33.2 |
) % |
(12.1 |
) % |
(24.2 |
) % |
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 option compensation expense.
19
Revenue:
Software License Revenue. Software license revenue decreased $6.0 million, or 54%, to $5.1 million and $8.0 million, or 37%, to $13.5 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. We believe the decrease in software license revenue and software license revenue as a percentage of total revenue is due to cautious capital spending for supply chain software purchases and to effects resulting from the magnitude of changes in our workforce, including our executive management and sales organization, difficulties in sales execution and a highly competitive environment. These factors resulted in a decrease in the number of significant software license transactions with a value of $100,000 or greater (excluding those recognized on a percentage of completion basis), software license transactions of $1 million or greater and ASP for the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004.
The following table summarizes significant software license transactions completed during the three and six months ended August 31, 2005 and 2004:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Significant Software License Transactions (1) |
|
|
|
|
|
|
|
|
|
||||
Number of transactions $100,000 to $999,999 |
|
13 |
|
15 |
|
18 |
|
27 |
|
||||
Number of transactions $1.0 million or greater |
|
0 |
|
3 |
|
2 |
|
4 |
|
||||
Total number of transactions |
|
13 |
|
18 |
|
20 |
|
31 |
|
||||
Average selling price (in thousands) |
|
$ |
264 |
|
$ |
533 |
|
$ |
513 |
|
$ |
601 |
|
(1) Significant software transactions are those with a value of $100,000 or greater recognized within the fiscal quarter.
Support Revenue. Support revenue increased $0.5 million, or 2%, to $21.8 million and $0.9 million, or 2%, to $43.6 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. The increase was due to new software license sales and collections from certain customers for outstanding support for which the related revenue did not previously meet the criteria for recognition. This increase was partially offset by decreases in support revenue from non-renewals. Our percentage of annual support renewals by our clients remains over ninety percent. There can be no assurance that our historical renewal rate will continue. See Forward-Looking Statements and Factors That May Affect Future Results.
Services Revenue. Services revenue decreased $1.1 million, or 7%, to $15.3 million and $4.0 million, or 12%, to $29.9 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. Services revenue tends to track software license revenue in prior periods. The decrease in services revenue for the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004 was primarily due to the decrease in the number of completed software transactions in late fiscal 2005 and the first half of fiscal 2006. Additionally, we have experienced competitive rate pressures on our consulting engagements and lower demand for implementation services. See Forward-Looking Statements and Factors That May Affect Future Results.
Geographic Revenue. We market and sell our software and services internationally, primarily in Europe, Asia-Pacific, Canada, Central America and South America. Total revenue outside of the U.S. decreased $3.9 million, or 21%, to $14.8 million and $0.7 million, or 2%, to $33.4 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. Total revenue by geographic area is determined on the basis of the geographic area in which transactions are consummated. Total revenue outside of the U.S. as a percentage of total revenue was 34% and 37% for the three and six months ended August 31, 2005, respectively, compared to 37% and 33% for the three and six months ended August 31, 2004, respectively. The decrease in total revenue outside of the U.S. for the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004 is due to a decrease in overall software license and services revenue.
Operating Expenses:
Cost of Software License. Cost of software license consists primarily of amortization of capitalized software development costs and royalty fees associated with third-party software either embedded in our software or resold by us. The following table sets forth amortization of capitalized software development costs and other costs of software for the three and six months ended August 31, 2005 and 2004 (in thousands):
20
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Amortization of capitalized software |
|
$ |
2,330 |
|
$ |
2,106 |
|
$ |
4,968 |
|
$ |
4,789 |
|
Percentage of software license revenue |
|
46.0 |
% |
19.0 |
% |
36.9 |
% |
22.3 |
% |
||||
Other costs of software license |
|
784 |
|
1,316 |
|
2,614 |
|
2,547 |
|
||||
Percentage of software license revenue |
|
15.5 |
% |
11.8 |
% |
19.4 |
% |
11.9 |
% |
||||
Total cost of software license |
|
$ |
3,114 |
|
$ |
3,422 |
|
$ |
7,582 |
|
$ |
7,336 |
|
Percentage of software license revenue |
|
61.4 |
% |
30.8 |
% |
56.3 |
% |
34.2 |
% |
The decrease in the total cost of software license during the three months ended August 31, 2005 compared to the three months ended August 31, 2004 is due to a decrease in other costs of software license, partially offset by increased amortization as a result of the release of our software version 7.2.1 on February 28, 2005.
The increase in the amortization of capitalized software during the six months ended August 31, 2005 compared to the six months ended August 31, 2004 was primarily a result of increased amortization from the release of our software version 7.2.1 on February 28, 2005. The increase in other costs of software during the six months ended August 31, 2005 compared to the six months ended August 31, 2004 was the result of increased amortization of prepaid royalty fees paid to a certain alliance partner over the period of remaining benefit during the three months ended May 31, 2005 as compared to the three months ended May 31, 2004.
Amortization of Acquired Technology. In connection with acquisitions in fiscal 2003, 2002 and 2001, we acquired developed technology that we offer as part of our solutions. Acquired technology is amortized over periods ranging from four to six years. We expect annual amortization of acquired technology to be approximately $5.7 million in fiscal 2006.
Cost of Services and Support. Cost of services and support includes primarily personnel and third-party contractor costs. Cost of services and support, excluding the cost of reimbursed expenses and non-cash stock option compensation expense, decreased $2.8 million, or 15%, to $16.2 million, and $5.6 million, or 15%, to $31.6 million while the cost of services and support as a percentage of related revenue decreased to 44% and 43% for the three and six months ended August 31, 2005, respectively, compared to 51% and 49% for the three and six months ended August 31, 2004, respectively. The decrease in cost of services and support was attributable to an overall decrease in the average number of services and support employees to 278 during the three and six months ended August 31, 2005, compared to 312 and 320 during the three and six months ended August 31, 2004, respectively. This was primarily the result of the exit and disposal initiatives that we approved and began implementing in the second half of fiscal 2005 and continued to implement during the six months ended August 31, 2005. The decrease in the cost of services and support as a percentage of related revenue in the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004 was primarily a result of lower outside contractor costs and a $1.5 million benefit related to the reversal of a previously recorded provision for anticipated losses on a contract for which the Companys obligation to provide services expired in the three months ended May 31, 2005.
Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, sales commissions, promotional events such as user conferences, trade shows and technical conferences, advertising and public relations programs. Sales and marketing expense decreased $6.9 million, or 45%, to $8.3 million and $10.9 million, or 36%, to $19.5 million during the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004, respectively. The decrease during the three and six months ended August 31, 2005 was due to:
an overall decrease in the average number of sales, marketing and business development employees to 123 during the three and six months ended August 31, 2005 compared to 189 and 196 during the three and six months ended August 31, 2004. This was the result of our exit and disposal initiatives that we approved and began implementing in the second half of fiscal 2005 and continued to implement in the six months ended August 31, 2005, in addition to some voluntary attrition;
a decrease in sales commissions due to lower software license revenue; and
a decrease in promotional spending, travel and public relations spending resulting from cost containment and cost reduction measures implemented in the second half of fiscal 2005 and the first half of fiscal 2006.
These decreases were partially offset by marketing expenses in the six months ended August 31, 2005 related to our enVISION 2005 client conference held in May 2005.
Product Development. Product development costs include expenses associated with the development of new software products,
21
enhancements of existing products and quality assurance activities and are reported net of capitalized software development costs. Such costs are primarily from employees and third-party contractors. The following table sets forth product development costs for the three and six months ended August 31, 2005 and 2004 (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
August 31, |
|
August 31, |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Gross product development costs |
|
$ |
8,585 |
|
$ |
10,591 |
|
$ |
17,079 |
|
$ |
21,438 |
|
Percentage of total revenue |
|
19.7 |
% |
20.7 |
% |
18.9 |
% |
20.8 |
% |
||||
Less: Capitalized software development costs |
|
629 |
|
2,025 |
|
1,625 |
|
4,544 |
|
||||
Percentage of total revenue |
|
1.4 |
% |
4.0 |
% |
1.8 |
% |
4.4 |
% |
||||
Product development costs, as reported |
|
$ |
7,956 |
|
$ |
8,566 |
|
$ |
15,454 |
|
$ |
16,894 |
|
Percentage of total revenue |
|
18.2 |
% |
16.7 |
% |
17.1 |
% |
16.4 |
% |
Gross product development costs decreased $2.0 million, or 19%, to $8.6 million and decreased $4.4 million, or 20%, to $17.1 million during the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004, respectively. The decrease in gross product development costs for the three and six months ended August 31, 2005 was due to:
an overall change in the average number of product development employees to 244 and 222 for the three and six months ended August 31, 2005 compared to 229 and 231 for the three and six months ended August 31, 2004. The increase in the average number of product development employees for the three months ended August 31, 2005 compared to the three months ended August 31, 2004 was a result of increased headcount at our Hyderabad, India product development facility. The decrease in the average number of product development employees for the six months ended August 31, 2005 compared to the six months ended August 31, 2004 was a result of the implementation of our exit and disposal initiatives that we approved and began implementing in the second half of fiscal 2005 and continued to implement in the three and six months ended August 31, 2005;
an overall decrease in the average number of product development contractors in the U.S. during the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004; and
lower personnel costs as we continue to migrate more product development efforts to our new product development center in Hyderabad, India.
General and Administrative. General and administrative expenses decreased $1.0 million, or 16%, to $5.1 million and $1.7 million, or 14%, to $10.3 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004, respectively. General and administrative expenses include personnel and other costs of our legal, finance, accounting, human resources, facilities, and information systems functions. The decrease for the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004 was the result of a decrease in the average number of general and administrative employees and decreased outside professional fees.
Amortization of Intangibles. Our past 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 four to seven years. Amortization of intangibles was $1.7 million for the three months ended August 31, 2005 and 2004. We continue to monitor our performance and the useful lives of our intangible assets in view of declining revenue.
Impairment of Long-Lived Assets: During the three months ended August 31, 2005, we performed an impairment test of our long-lived assets. Although we continue to sell the related products, we determined that the asset was impaired and wrote-off the remaining acquired technology balance for PartMiner CSD, Inc. The impairment resulted in a net reduction in acquisition-related intangible assets of $3.7 million for the three and six months ended August 31, 2005.
Goodwill Impairment. During the three months ended May 31, 2005, we experienced adverse changes in our stock price. We performed a test for goodwill impairment at May 31, 2005 and determined that based upon our implied fair value (which includes factors such as, but not limited to, our market capitalization, control premium and recent stock price volatility) as of May 31, 2005, there was no impairment of goodwill. There were no further developments in the three months ended August 31, 2005 that would trigger the need to perform a subsequent impairment test.
22
Exit and Disposal Charges. During the three and six months ended August 31, 2005, we continued to implement the FY05 Q2 Plans designed to further adjust our cost structure and resource allocation to increase efficiencies and reduce excess office space. For the three months ended August 31, 2005, we involuntarily terminated 30 employees located in the U.S and one in Europe and recorded a charge for severance and related benefits of approximately $1.3 million. Additionally, we recorded a benefit of approximately $0.1 million related to a lease amendment entered into during the three months ended August 31, 2005 which reduced the lease term for certain office space in our Calabasas, California facility. Other miscellaneous charges, including interest accretion, were approximately $0.1 million.
On April 14, 2004, we signed a lease termination agreement with the landlord of our facility in metropolitan Chicago, Illinois. As part of the lease termination agreement, we paid approximately $3.3 million in cash in exchange for terminating our lease agreement which would have expired in fiscal 2009. We recorded an exit and disposal benefit of approximately $2.8 million related to the lease termination during the three months ended May 31, 2004.
The following table sets forth a summary of exit and disposal charges, net of adjustments, for the three and six months ended August 31, 2005 and 2004 (in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
Lease obligations and terminations |
|
$ |
(37 |
) |
$ |
3,377 |
|
$ |
188 |
|
$ |
540 |
|
Severance and related benefits |
|
1,339 |
|
1,922 |
|
1,566 |
|
1,922 |
|
||||
Impairment charges |
|
|
|
686 |
|
|
|
932 |
|
||||
Other |
|
|
|
237 |
|
(25 |
) |
311 |
|
||||
Total exit and disposal activities |
|
$ |
1,302 |
|
$ |
6,222 |
|
$ |
1,729 |
|
$ |
3,705 |
|
The impact to reported basic and diluted loss per share as a result of the exit and disposal charges was $(0.02) for both the three and six months ended August 31, 2005 compared to $(0.08) and $(0.05) for the three and six months ended August 31, 2004, respectively.
In response to the challenges we faced in our ability to stabilize revenue and operating performance, we enacted a number of cost containment and cost reduction measures over the past four fiscal years to better align our cost structure with expected revenue. Specifically, we took the following actions:
1. We reduced our workforce by 171, 79 and 343 employees through involuntary terminations under the exit and disposal plans approved during fiscal 2005, 2004 and 2003, respectively.
2. We further consolidated our product development function in the U.S. to the corporate headquarters in Rockville, Maryland as part of the exit and disposal plans approved during fiscal 2004 and 2003. This included the relocation of certain employees from Wayne, Pennsylvania; San Carlos, California; Atlanta, Georgia; Denver, Colorado and Ottawa, Canada to our headquarters in Rockville, Maryland.
3. As a result of the workforce reductions, product development consolidation and employee attrition, certain of our facilities were under-utilized. Accordingly, we consolidated our remaining workforce in the under-utilized facilities and ceased to utilize the then-vacated office space. The facilities entirely vacated during the first quarter of fiscal 2006, fiscal 2005, 2004 and 2003 were located in Brussels, Belgium; Wayne, Pennsylvania; Irving, Texas; Detroit, Michigan; Denver, Colorado; Ratingen and Munich, Germany; Milan, Italy and Stockholm, Sweden. A portion of the office space was vacated in certain facilities located in Rockville, Maryland; Atlanta, Georgia; Calabasas and San Carlos, California; Tokyo, Japan and Bracknell, United Kingdom.
4. As part of the consolidation of our facilities, certain leasehold improvements and furniture and fixtures were abandoned. As a result, we recorded non-cash charges equal to the net book value of these abandoned assets in exit and disposal charges.
In the third quarter of fiscal 2005, we commenced operations at our new product development facility in Hyderabad, India. In conjunction with the opening of this facility, we announced that we would be shifting a substantial portion of our development to the new facility throughout calendar year 2005. We expect to realize additional cost savings of $2.0 million to $3.0 million per quarter of gross product development costs by the end of fiscal 2006 compared to our third quarter of fiscal 2005 as a result of opening the new development center.
Primarily as a result of our exit and disposal activities and cost containment initiatives during the past three fiscal years, we have reduced all other operating expenses (as shown in the table under Key Financial Metrics Fiscal 2006) to $42.2 million and $87.8 million for the three and six months ended August 31, 2005, respectively, as compared to $54.7 million and $108.7 million for the three and six months ended August 31, 2004, respectively. The cost savings associated with our exit and disposal and cost containment efforts
23
will begin to be fully realized in the quarter following completion of the implementation of the exit and disposal plans. Details of our exit and disposal charges are included in Note 8 in the Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Substantially all of the cost savings from our exit and disposal activities and cost containment initiatives implemented in fiscal 2004 and fiscal 2005 were reflected in our operating results by the first quarter of fiscal 2005 and fiscal 2006. We expect to complete our cost containment initiatives related to the FY05 Q2 Plans by the end of fiscal year 2006 and fully realize the cost savings associated with these actions by the first quarter of fiscal 2007. The total exit and disposal charges reflected in the financial statements are based on managements current estimates, which may change materially if actual lease-related expenditures or sublease income differ from current estimates. See Forward-Looking Statements.
Other Expense, Net. Other expense, net, includes interest income from cash equivalents, marketable securities and long-term investments, interest expense from borrowings, foreign currency exchange gains or losses and other gains or losses. Other expense, net decreased $0.1 million, or 4%, to $1.7 million and $0.8 million, or 21%, to $3.2 million for the three and six months ended August 31, 2005, respectively, compared to the three and six months ended August 31, 2004. The decrease in other expense, net for the three and six months ended August 31, 2005 compared to the three and six months ended August 31, 2004 primarily relates to an increase in interest and other income of $0.8 million.
(Benefit) Provision for Income Taxes. We recorded a benefit for income taxes of $(2.7) million and $(2.3) million for the three and six months ended August 31, 2005, respectively, compared to an income tax expense of $0.4 million and $0.7 million for the three and six months ended August 31, 2004, respectively. The benefit recorded for the three and six months ended August 31, 2005 included a $1.9 million refund for previously paid withholding taxes and $0.7 million related to the reversal of additional amounts accrued for withholding taxes that we no longer deem probable to be paid. Income tax expense is related to our foreign operations. We did not record a deferred income tax benefit for projected losses during the three and six months ended August 31, 2005 because we believe it is more likely than not that any tax benefits will not be realized.
Loss per Common Share. Loss per common share is computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128) which requires dual presentation of basic and diluted earnings per common share for entities with complex capital structures. Basic loss per common share is based on net loss divided by the weighted-average number of common shares outstanding during the reporting period. Diluted loss per common share includes, when dilutive, (i) the effect of outstanding stock options, restricted stock and warrants granted using the treasury stock method, (ii) the effect of contingently issuable shares earned during the reporting period, if any, and (iii) shares issuable under the conversion feature of our 5% Convertible Subordinated Notes due in 2007 (the Notes) using the if-converted method. Calculations of weighted-average shares outstanding in future reporting periods will be affected by the following factors:
the ongoing issuance of common stock associated with stock option and warrant exercises;
the potential future issuance of additional common shares associated with our employee stock purchase plan;
any fluctuations in our stock price, which could change the number of common stock equivalents included in the diluted earnings per common share calculations (to the extent we have net income);
the potential ongoing future issuance of restricted stock;
the issuance of common stock to effect capital transactions or business combinations should we enter into such transactions; and
assumed or actual conversions of our convertible debt into common stock.
Historically, we have financed our operations and met our capital expenditure requirements through cash flows provided from operations, long-term borrowings (including the sale of convertible notes) and sales of equity securities. Our cash, cash equivalents, marketable securities and long-term investments in the aggregate increased $0.2 million to $136.1 million and working capital increased $5.6 million to $111.1 million for the six months ended August 31, 2005. For the six months ended August 31, 2005, the increase in cash, cash equivalents, marketable securities and long-term investments resulted from changes in working capital items plus:
$3.5 million in expenditures for property, equipment and software, including $1.7 million of capitalized software;
$5.3 million in payments for exit and disposal obligations; and
$1.7 million in principal payments on long-term debt and capital leases.
24
Offset by:
$0.2 million in cash proceeds from ESPP purchases; and
$0.6 million in net sales of marketable securities.
Commitments.
As of August 31, 2005, our future fixed commitments and the effect these commitments are expected to have on our liquidity and cash flows in future periods are as follows (in thousands):
|
|
Six Months |
|
Fiscal Year Ended February 28 or 29, |
|
|||||||||||||||||
|
|
Feb. 28, 2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
|||||||
Capital lease obligations (1) |
|
$ |
1,167 |