UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
(Commission File Number) 000-27071
AGILE SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0397905
(State of incorporation) (IRS Employer Identification Number)
One Almaden Boulevard, San Jose, Ca 95113-2253
(Address of principal executive offices, including ZIP code)
(408) 975-3900
(Registrant's telephone number, including area code)
None
(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.
Yes X No ___
---
The number of shares outstanding of the Registrant's Common Stock as of October
31, 2001 was 47,919,581.
AGILE SOFTWARE CORPORATION
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at October 31, 2001
and April 30, 2001 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended October 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended October 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Part II. Other Information
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signature 31
2
Part 1 - Financial Information
Item 1. Financial Statements
AGILE SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
October 31, April 30,
----------------------
2001 2001
--------- ---------
ASSETS (1)
Current assets:
Cash and cash equivalents $ 94,385 $ 139,917
Short-term investments 194,997 160,608
Accounts receivable, net 15,127 22,626
Other current assets 12,841 12,105
--------- ---------
Total current assets 317,350 335,256
Property and equipment, net 13,584 12,975
Intangible assets, net 820 1,198
Other assets 4,757 5,762
--------- ---------
$ 336,511 $ 355,191
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,651 $ 10,972
Accrued expenses and other liabilities 10,806 11,544
Deferred revenue 13,932 18,542
Current portion of capital lease obligations 83 359
--------- ---------
Total current liabilities 28,472 41,417
Capital lease obligations, noncurrent - 95
Notes payable 39 39
--------- ---------
28,511 41,551
--------- ---------
Stockholders' equity:
Common Stock 48 48
Additional paid-in capital 510,110 510,433
Notes receivable from stockholders (422) (628)
Unearned stock compensation (6,009) (9,368)
Accumulated other comprehensive income 844 217
Accumulated deficit (196,571) (187,062)
--------- ---------
Total stockholders' equity 308,000 313,640
--------- ---------
$ 336,511 $ 355,191
========= =========
1) The April 30, 2001 consolidated balance sheet information has been derived
from the audited financial statements at that date.
See accompanying notes to these condensed consolidated financial statements.
3
AGILE SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
October 31, October 31,
---------------------------------------------------------------------
2001 2000 2001 2000
------------- --------------- --------------- ---------------
Revenues:
License $ 13,063 $ 15,246 $ 29,070 $ 26,696
Professional services 2,198 2,229 4,385 4,265
Maintenance 5,947 2,771 11,078 5,053
------------- --------------- --------------- ---------------
Total revenues 21,208 20,246 44,533 36,014
------------- --------------- --------------- ---------------
Cost of revenues:
License 690 965 1,652 1,522
Professional services 2,223 1,608 4,700 3,205
Maintenance 1,408 1,057 2,636 1,945
Stock compensation (recovery) (15) 178 12 380
------------- --------------- --------------- ---------------
Total cost of revenues 4,306 3,808 9,000 7,052
------------- --------------- --------------- ---------------
Gross profit 16,902 16,438 35,533 28,962
------------- --------------- --------------- ---------------
Operating expenses:
Sales and marketing:
Other sales and marketing 14,288 15,381 29,356 28,317
Stock compensation 31 1,997 466 4,062
Research and development:
Other research and development 7,968 5,586 16,316 10,387
Stock compensation (recovery) (71) 1,110 67 2,339
General and administrative:
Other general and administration 1,850 1,416 4,050 2,841
Stock compensation (recovery) (106) 869 (292) 1,789
Amortization of goodwill and other intangible assets 189 8,999 378 18,066
Merger related benefit - - (835) -
------------- --------------- --------------- ---------------
Total operating expenses 24,149 35,358 49,506 67,801
------------- --------------- --------------- ---------------
Loss from operations (7,247) (18,920) (13,973) (38,839)
Interest and other income 2,838 5,008 6,194 10,034
Impairment of equity investments - - (1,446) -
Interest expense (30) (152) (127) (206)
------------- --------------- ---------------- ---------------
Loss before income taxes (4,439) (14,064) (9,352) (29,011)
Provision for income taxes 50 - 157 -
------------- --------------- ---------------- ---------------
Net loss $ (4,489) $ (14,064) $ (9,509) $ (29,011)
------------- --------------- ---------------- ---------------
Net loss per share:
Basic and diluted $ (.09) $ (.31) $ (.20) $ (.64)
-------------- ---------------- ---------------- ---------------
Weighted average shares 47,294 45,471 47,073 45,188
-------------- ---------------- ---------------- ---------------
See accompanying notes to these condensed consolidated financial statements.
4
AGILE SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended October 31,
----------------------------
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss $ (9,509) $ (29,011)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts 332 70
Depreciation and amortization 5,055 20,272
Amortization of stock compensation 253 8,570
Impairment of equity investments 1,446 -
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable 7,167 (8,455)
Other assets, current and non-current (1,027) (2,570)
Accounts payable (7,321) 1,394
Accrued expenses and other liabilities (738) 1,439
Deferred revenue (4,610) 5,904
---------- ----------
Net cash used in operating activities (8,952) (2,387)
---------- ----------
Cash flows from investing activities:
Purchases of investments (182,462) (46,472)
Proceeds from maturities and sales of investments 148,700 49,348
Purchases of privately-held investments (150) (6,350)
Acquisition of property and equipment (5,286) (6,919)
---------- ----------
Net cash used in investing activities (39,198) (10,393)
---------- ----------
Cash flows from financing activities:
Repayment of capital lease obligations (371) (380)
Proceeds from issuance of common stock, net of repurchases 2,806 5,015
Repayment of notes receivable from stockholders 183 691
---------- ----------
Net cash provided by financing activities 2,618 5,326
---------- ----------
Net decrease in cash and cash equivalents (45,532) (7,454)
Cash and cash equivalents at beginning of period 139,917 142,721
---------- ----------
Cash and cash equivalents at end of period $ 94,385 $ 135,267
========== ==========
Non-cash investing and financing activities:
Additions (reductions) in unearned stock compensation $ (3,106) $ 8,973
---------- ----------
See accompanying notes to these condensed consolidated financial statements.
5
AGILE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Agile
Software Corporation and its subsidiaries ("Agile" or the "Company") have been
prepared by the Company and reflect all adjustments (all of which are normal and
recurring in nature) that, in the opinion of management, are necessary for a
fair presentation of the interim periods presented. The results of operations
for the interim periods presented are not necessarily indicative of the results
to be expected for any subsequent quarter or for the fiscal year ending April
30, 2002. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in
accordance with the Securities and Exchange Commission's rules and regulations.
These unaudited condensed consolidated financial statements and notes included
herein should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the fiscal year ended April 30, 2001,
included in the Company's Annual Report on Form 10-K filed on July 25, 2001 with
the Securities and Exchange Commission.
Certain reclassifications have been made to prior year balances in order to
conform to the current year presentation.
2. Revenue Recognition
The Company recognizes revenues in accordance with SOP 97-2, "Software Revenue
Recognition," and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions."
The Company derives revenues from the license of software products under
software license agreements and from the delivery of professional services and
maintenance services. When contracts contain multiple elements, and vendor-
specific objective evidence of fair value exists for all undelivered elements,
the Company accounts for the delivered elements in accordance with the "Residual
Method" prescribed by SOP 98-9. Multiple element arrangements generally include
post-contract customer support (PCS or maintenance), software products, and in
some cases, service. Vendor-specific objective evidence of fair value is
generally determined by sales of the same element or service to other customers,
or with respect to PCS, through a renewal rate specified in the related
arrangement.
License revenues are recognized when persuasive evidence of an arrangement
exists, the fee is fixed or determinable, collectibility is probable, and
delivery and customer acceptance (including the expiration of an acceptance
period), if required under the terms of the contract, of the software products
have occurred. In the event the Company grants its customers the right to
specified upgrades and vendor-specific objective evidence of fair value exists
for such upgrades, license revenue in an amount equal to this fair value is
deferred until delivery of the specified upgrade. If vendor-specific objective
evidence of fair value does not exist, then the entire license fee is deferred
until the delivery of the specified upgrade. Allowances for estimated returns
are provided upon product delivery. In instances where vendor obligations
remain, revenues are deferred until the obligation has been satisfied.
Revenues from professional services consist of implementation and training
services. Training revenues are recognized as the services are performed.
Implementation services are typically performed under fixed-price contracts and,
accordingly, revenues are recognized upon customer acceptance. A provision for
estimated losses on fixed-price professional services contracts is recognized in
the period in which the loss becomes known.
Maintenance revenues are recognized ratably over the term of the maintenance
contract, which is generally twelve months. Maintenance contracts include the
right to unspecified upgrades on a when-and-if available basis, and ongoing
support.
3. Net Loss Per Share
Basic net loss per share is computed by dividing the net loss available to
holders of Common Stock for the period by the weighted average number of shares
of Common Stock outstanding during the period. Diluted net loss per share is the
same as basic net loss per share because the calculation of diluted net loss per
share excludes potential shares of Common Stock since their effect is
antidilutive. Potential shares of Common Stock consist of unvested restricted
Common Stock, incremental common shares issuable upon the exercise of stock
options and warrants.
The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated (in thousands, except per share amounts):
6
Three Months Ended Six Months Ended
October 31, October 31,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Numerator:
Net loss $ (4,489) $ (14,064) $ (9,509) $ (29,011)
---------- ---------- ---------- ----------
Denominator:
Weighted average shares 47,887 46,788 47,767 46,641
Weighted average unvested shares of
Common Stock subject to repurchase (593) (1,317) (694) (1,453)
---------- ---------- ---------- ----------
Denominator for basic and diluted
calculation 47,294 45,471 47,073 45,188
========== ========== ========== ==========
Net loss per share:
Basic and diluted $ (.09) $ (.31) $ (.20) $ (.64)
========== ========== ========== ==========
4. Segment Information
The Company identifies its operating segments based on business activities,
management responsibility and geographical location. During the three months
ended October 31, 2001 and 2000, the Company operated in a single business
segment, primarily in the United States. Revenues from foreign operations were
approximately $3.2 million and $5.9 million for the three and six months ended
October 31, 2001, respectively. Foreign operations were not significant in
either revenue or investment in long-lived assets for the three and six months
ended October 31, 2000. Our international revenues were derived primarily from
sales in Europe, Asia Pacific and Japan.
5. Stock compensation
In connection with certain stock option grants to employees, stock compensation
expense is being recognized over the applicable vesting period of the options,
generally five years, consistent with the accelerated amortization method
prescribed by FASB Interpretation No. 28. Amortization of stock compensation for
employees was ($261,000) and $231,000 for the three and six months ended October
31, 2001, respectively, and $3.3 million and $7.1 million for the three and six
months ended October 31, 2000, respectively. During the three months ended
October 31, 2001 stock option cancellations exceeded the total amortization
expense for that period. The amounts credited represents the reversal of the
accelerated amortization recorded on such unvested and cancelled options.
Stock compensation expense related to stock options granted to consultants is
recognized as earned, over the applicable vesting period of the options,
generally five years consistent with the accelerated amortization method
prescribed by FASB Interpretation No. 28. At each reporting date, the Company
re-values the stock compensation using the Black-Scholes option pricing model
for unvested options. As a result, the stock compensation expense will fluctuate
as the fair market value of the Company's common stock fluctuates. Amortization
of stock compensation for consultants was $100,000 and $22,000 for the three and
six months ended October 31, 2001, respectively, and $814,000 and $1.5 million
for the three and six months ended October 31, 2000, respectively.
6. Intangible Assets
In connection with the acquisition of Digital Market, Inc. in November 1999, the
Company recorded goodwill and other intangible assets of approximately $109.2
million, of which $1.3 million was immediately expensed as acquired in- process
technology. Goodwill and other intangible assets are presented at cost, net of
accumulated amortization. Amortization is computed using the straight-line
method over the estimated useful life of the assets, which is generally three
years. At each balance sheet date, the Company assesses the value of recorded
intangible assets for possible impairment based upon a number of factors
including turnover of the acquired workforce and the undiscounted value of
expected future operating cash flows.
During the fourth quarter ended April 30, 2001, the Company performed an
impairment assessment of the identifiable intangibles and goodwill recorded upon
the acquisition of DMI. This assessment was performed primarily as a result of
the decision by management in February 2001 to discontinue the further
development of the products acquired in the DMI acquisition. As a result of the
assessment, the Company recorded a $55.2 million impairment charge reflecting
the amount by which the carrying amount of the assets exceeded its fair value.
The charge was determined based upon the estimated discounted future cash flows
relating to the future cash flows from the specific products acquired using a
discount rate of 25%. The assumptions supporting such cash flows including the
discount rate were determined using management's best estimates. The remaining
identifiable intangibles balance of approximately $1.2 million, consisting
principally of workforce in place, will continue to be amortized over its
remaining useful life of 1.5 years which management considers appropriate.
Amortization of goodwill and other
7
intangible assets was $189,000 and $378,000 for the three and six months ended
October 31, 2001, respectively and $9.0 million and $18.1 million for the three
and six months ended October 31, 2000, respectively.
7. Marketable Investments
The Company's investments comprise U.S., state, and municipal government
obligations; corporate debt securities; and foreign debt securities. Investments
with maturities of less than one year are considered short-term and are carried
at fair value. All investments are primarily held in the Company's name and
custodied with one major financial institution. The specific identification
method is used to determine the cost of securities disposed. At October 31, 2001
and April 30, 2001, all of the Company's investments were classified as
available for sale. Unrealized gains and losses on these investments are
included in other comprehensive income.
8. Other Assets
Other assets include investments in equity instruments of privately held
companies which amounted to $3.5 million and $4.8 million as of October 31, 2001
and April 30, 2001, respectively. These investments, accounted for using the
cost method and consisting primarily of investments in preferred stock in
privately-held companies, are reviewed each reporting period for declines
considered other-than-temporary, and, if appropriate, written down to their
estimated fair value.
During the three months ended July 31, 2001, the Company determined that certain
of these investments had incurred a decline in value that was other than
temporary primarily due to the limited liquidity and poor prospects for
additional funding and reduced their carrying amounts to their estimated fair
value by a charge of $1.4 million to results of operations.
9. Stockholders' Equity
On September 26, 2001, shareholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of authorized common shares
from 100,000,000 to 200,000,000.
On October 18, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, the Company's option holders had
the opportunity to cancel outstanding options with an exercise price in excess
of $15.00 per share in exchange for new options to be granted at a future date
that is at least six months and one day after the date of cancellation, which
was November 19, 2001. The number of shares of common stock subject to the new
options will be equal to 75% of the number subject to the exchanged options.
Under the exchange program, options for 4.0 million shares of our common stock
were tendered and cancelled. The new options will vest at the same rate as the
exchanged options and will have an exercise price equal to the fair market value
of Agile's common stock at the new grant date, which is not expected to be later
than twenty days after May 20, 2002. Agile expects that there will be no
accounting charges as a result of this stock option exchange program.
10. Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria for
determining intangible assets acquired in a purchase method business combination
that must be recognized and reported apart from goodwill. SFAS No. 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company is required to adopt the provisions of SFAS No. 141 immediately, and
SFAS No.142 effective May 1, 2002. Furthermore, any goodwill and any intangible
assets determined to have indefinite useful lives that are acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142. The Company is
currently evaluating the impact SFAS No. 141 and 142 will have on its financial
position and results of operations.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion No. 30.
SFAS 144 develops one accounting model for long-lived assets that are to be
disposed of by sale. SFAS 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an
8
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS 144 is effective for the Company for all financial
statements issued in fiscal 2002. The Company does not believe that the adoption
of SFAS 144 will have a material impact on its financial position or results of
operations.
9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. Our actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
discussed in "Other Factors Affecting Operating Results" and "Liquidity and
Capital Resources" below, as well as Risk Factors included in our Annual Report
on Form 10-K filed on July 25, 2001 with the Securities and Exchange Commission.
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and notes thereto appearing elsewhere in this
report.
Overview
We develop and market collaborative manufacturing commerce solutions that speed
the "build" and "buy" process across the virtual manufacturing network. We
believe that our products improve time-to-volume, customer responsiveness and
cost of goods sold. Our solutions manage product content and critical
communication, collaboration and commerce transactions among original equipment
manufacturers, electronic manufacturing services providers, customers and
suppliers in real-time. We were founded in March 1995 and in June 1996 we began
selling our first products and delivering related services. We currently license
our products in the United States through our direct sales force, and in Europe
and Asia through our direct sales force and distributors. We have derived our
revenues principally from the licenses of our products, the delivery of
professional services and from maintenance contracts.
Customers who license our software products receive a license for our
application servers, one or more user licenses, and adapters provided by third
parties to connect with the customer's other existing enterprise systems. Our
customers generally purchase a limited number of user licenses at the time of
the initial license of the software products and may purchase additional user
licenses as needed. Customers may purchase implementation services from us.
These professional services are generally provided on a fixed-price basis and
are often provided by third-party consulting organizations. We also offer
fee-based training services to our customers. As of October 31, 2001, over 98%
of our customers who licensed our products had purchased maintenance contracts,
which provide unspecified software upgrades on a when-and-if available basis,
and technical support over a stated term, which is generally a twelve-month
period. Over 95% of our customers had renewed their maintenance contracts as of
October 31, 2001. We may not be able to maintain or continue these rates of
purchases or renewals of maintenance agreements.
We recognize revenue under Statement of Position, or SOP, 97-2, "Software
Revenue Recognition," and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions." When contracts contain
multiple elements and vendor-specific objective evidence of fair-value exists
for all undelivered elements, we account for the delivered elements in
accordance with the "Residual Method" prescribed by SOP 98-9. Multiple element
arrangements generally include post-contract support (PCS or support), software
products, and in some cases, service. Vendor-specific objective evidence of fair
value is generally determined by sales of the same element or service to third
parties or through a renewal rate specified in the related arrangement. In most
cases, the bundled multiple elements include PCS and the software product. In
such cases, when vendor-specific objective evidence of fair value exists for all
of the undelivered elements (most commonly PCS), the residual amount is
recognized as revenue and the PCS is recognized ratably over the PCS term as
described below.
License revenues are recognized when persuasive evidence of an arrangement
exists, the fee is fixed or determinable, collectibility is probable, and
delivery and customer acceptance (including the expiration of an acceptance
period), if required under the terms of the contract, of the software products
has occurred. In the event that we grant a customer the right to specified
upgrades and vendor-specific objective evidence of fair value exists for such
upgrades, license revenue in an amount equal to this fair value is deferred
until delivery of the specified upgrade. If vendor-specific objective evidence
of fair value does not exist, then the entire license fee is deferred until the
delivery of the specified upgrade. Allowances for estimated returns are provided
upon product delivery. In instances where vendor obligations remain, recognition
of revenues is deferred until the obligation has been satisfied.
Revenues from professional services consist of implementation and training
services. Training revenues are recognized as the services are performed.
Implementation services are typically performed under fixed-price contracts and,
accordingly, revenues are recognized upon customer acceptance. A provision for
estimated losses on fixed-price professional services contracts is recognized in
the period in which the loss becomes known.
10
Maintenance revenues are recognized ratably monthly over the term of the
maintenance contract, which is generally twelve months. Maintenance contracts
include the right to unspecified upgrades on a when-and-if available basis, and
ongoing support.
Our cost of license revenues include royalties due to third parties for
integrated technology, the cost of manuals and product documentation, production
media used to deliver our products and packaging costs. Our cost of professional
services revenues include salaries and related expenses for the implementation
and training services organizations, costs of third parties contracted to
provide implementation services to customers and an allocation of our overhead
expenses. Our cost of maintenance revenues include salaries and related expenses
for the customer support organization and an allocation of our overhead
expenses. The cost of professional services can fluctuate depending upon whether
more or less of the professional services are provided to our customers by us
rather than by third-party service providers. We generally provide
implementation services to our customers on a fixed-price basis. If we have to
engage independent contractors or third parties to provide these services on our
behalf, it is generally at higher cost resulting in a lower gross margin than if
we had provided the services to our customers ourselves. Therefore, our gross
margin from professional services may fluctuate based on who performs the
services and the actual cost to provide these services. Although services
revenues may increase in absolute dollars if we increase the professional
services we provide, services revenues have lower gross margins than license
revenues. Our overall gross profit can therefore fluctuate based on the mix of
license revenues compared to professional services revenues and maintenance
revenues.
Our operating expenses are classified as sales and marketing, research and
development and general and administrative. We classify all charges to these
operating expense categories based on the nature of the expenditures. Although
each category includes expenses that are unique to the category type, there are
common recurring expenditures that are typically included in all operating
expenses categories, such as salaries, employee benefits, incentive
compensation, bonuses, travel costs, telephone, communication, rent and
allocated facilities costs and professional fees. The sales and marketing
category of operating expenses includes additional expenditures specific to the
marketing group, such as public relations and advertising, trade shows,
marketing collateral materials, and customer user group meetings and
expenditures specific to the sales group, such as commissions. To date, all
software development costs in research and development have been expensed as
incurred. Also included in our operating expenses is the amortization of stock
compensation described below.
On November 23, 1999, we acquired Digital Market, Inc. ("DMI") in a transaction
accounted for as a purchase business combination. We paid $20.0 million in cash
and issued 1,202,018 shares of our Common Stock valued at $75.7 million or
$62.95 per share based upon the average price of our Common Stock two days
before, day of and two days after the transaction measurement date. In addition,
we also assumed all unvested outstanding stock options granted by DMI. The
estimated fair value of the assumed options was $5.6 million, and was included
as a component of the purchase price. The fair value of the options was
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free rate of 5.96%, expected life of 2 to 4
years, expected dividend rate of 0%, and volatility of 85%. We incurred $1.2
million in acquisition expenses, including financial advisory and legal fees and
other direct transaction costs resulting in an adjusted aggregate purchase price
of $102.5 million.
The total acquisition price of $102.5 million was allocated to the assets
acquired, including tangible and intangible assets, and liabilities assumed
based upon the fair value of such assets and liabilities on the date of the
acquisition. The total acquisition price of the acquisition was allocated to
assets and liabilities based on management's estimates of their fair value and
an independent appraisal of certain intangible assets, with the excess costs
over the net assets acquired allocated to goodwill. The aggregate purchase price
was allocated as follows (in thousands):
Net tangible liabilities ............................. $ (6,659)
In-process technology ................................ 1,300
Existing technology .................................. 1,850
Trademark ............................................ 150
Assembled workforce .................................. 2,100
Goodwill ............................................. 103,776
--------
$102,517
========
The net tangible liabilities consisted primarily of cash and cash equivalents,
accounts receivable, property and equipment, accounts payable and other
liabilities and notes payable. Because the in-process technology had not reached
the stage of technological feasibility at the acquisition date and had no
alternative future use, the amount was immediately charged to operations. The
amount allocated to existing technology, trademark and assembled workforce was
being amortized over the estimated useful lives of three years. The purchase
price in excess of identified tangible and intangible assets was allocated as
goodwill. As a result of the rapid technological changes occurring in the
software and Internet industries, goodwill was being amortized over the
estimated useful life of three years. The valuation of the intangible assets was
been determined using management's assumptions and a valuation report from an
independent appraiser.
11
Management assesses the impairment of identifiable intangibles and related
goodwill periodically in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of. Impairment of
enterprise level goodwill is also assessed periodically in accordance with the
provision of Accounting Principles Board (APB) Opinion No. 17, Intangible
Assets. An impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
considered important which could trigger an impairment review include, but are
not limited to, significant underperformance relative to expected historical or
projected future operating results, significant changes in the manner of use of
the acquired assets or the strategy for our overall business, significant
negative industry or economic trends, a significant decline in our stock price
for a sustained period, or a significant decline in our market capitalization
relative to net book value. When it is determined that the carrying value of
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of impairment, any impairment is measured based on a projected
discounted cash flow method using a discount rate commensurate with the risk
inherent in our current business model.
During the three months ended April 30, 2001, management performed an impairment
assessment of the identifiable intangibles and goodwill recorded upon the
acquisition of DMI. This assessment was performed primarily as a result of the
decision by management in February 2001 to discontinue the further development
of the products acquired in the DMI acquisition. As a result of the assessment,
an impairment charge of $55.2 million was recorded to reduce the carrying value
of developed technology and goodwill. The charge was determined based upon our
estimated discounted cash flows using a discount rate of 25%. The assumptions
supporting such cash flows including the discount rate were determined using
management's best estimates. The remaining identifiable intangibles balance of
approximately $1.2 million, consisting principally of workforce in place, will
continue to be amortized over its remaining useful life of 1.5 years which
management considers appropriate.
In the third quarter of fiscal 2000, we granted options below market price to
purchase 269,144 shares of our common stock to certain DMI employees who
remained our employees after the acquisition. We recorded additional deferred
stock compensation of approximately $11.7 million associated with these stock
option grants, which was amortized over their expected term of 18 months.
In connection with the granting of stock options to our employees (including the
DMI employees who remained our employees after the acquisition) and non-employee
consultants, we have recorded unearned stock compensation totaling approximately
$37.3 million through October 31, 2001, of which $6.0 million remains to be
amortized. This amount is included as a component of stockholders' equity and is
being amortized by charges to operations over the applicable vesting period of
the options, consistent with the accelerated amortization method described in
Financial Accounting Standards Board, or FASB, Interpretation No. 28. We
recognized amortization of unearned stock compensation of ($161,000) and
$253,000 in the three and six months ended October 31, 2001, respectively, and
$4.2 million and $8.6 million in the three and six months ended October 31,
2000, respectively. During the three months ended October 31, 2001 stock option
cancellations exceeded the total amortization expense for that period. The
amounts credited represents the reversal of the accelerated amortization
recorded on such unvested and cancelled options. The amortization of the
remaining unearned stock compensation at October 31, 2001 will result in
additional charges to operations through fiscal 2005. We calculated the fair
value of options to purchase 130,000 shares of our common stock granted to
non-employee consultants, which totals $626,000 as of October 31, 2001, using
the Black-Scholes option pricing model as prescribed by SFAS No. 123 with the
following underlying assumptions: expected volatility of 100%, risk-free
interest rate of 4.25% and option terms of two to four years. We are accounting
for these options under variable plan accounting and therefore the expense
associated with these options may fluctuate significantly from quarter to
quarter through fiscal 2005.
In September 2000, in connection with a marketing alliance with a third party,
we issued a warrant to purchase 50,000 shares of our common stock at an exercise
price of $67.05 per share, the fair value of our common stock on the date of the
agreement. We recorded a charge of $2.0 million representing the fair value of
the warrant, estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free rate of 5.75%, expected life
of 3.0 years, expected dividend rate of 0%, and volatility of 80%. Such amount
is presented as a reduction of stockholders' equity and is being amortized to
sales and marketing expense over the three-year life of the marketing alliance.
The warrant was granted on a non-contingent basis and vests immediately. The
warrant is not subject to repurchase, nor does it require substantial
performance for the third party to exercise. The marketing alliance is a
three-year non-exclusive cooperative agreement, which is designed to enhance our
and the third party's potential revenues in their respective areas, and
credibility in collaborative manufacturing commerce without constraining each
other's business. We will each be responsible for our own cost and expenses in
performing joint marketing sales activities.
On October 18, 2001, we announced a voluntary stock option exchange program for
our employees. Under the program, Agile's option holders will have the
opportunity to cancel outstanding options with an exercise price in excess of
$15.00 per share in exchange for new options to be granted at a future date that
is at least six months and one day after the date of cancellation, which was
November 19, 2001. The number of shares of common stock subject to the new
options will be equal to 75% of the number subject to the exchanged options.
Under the exchange program, options for 4.0 million shares of our common stock
were tendered and cancelled. The new options will vest at the same rate as the
exchanged options and will have an exercise price equal
12
to the fair market value of Agile's common stock at the new grant date, which is
not expected to be later than twenty days after May 20, 2002. We do not expect
to incur accounting charges as a result of this stock option exchange program.
Although our total revenues have increased from year to year, we have incurred
significant costs to develop our products and to recruit and train personnel for
our engineering, sales, marketing, professional services and administration
departments. As a result, we have incurred significant losses since inception,
and, as of October 31, 2001, had an accumulated deficit of $196.6 million.
We intend to continue to incur significant sales and marketing, research and
development, general and administrative expenses and stock compensation
expenses. For example, we had 487 full-time employees at October 31, 2001,
compared to 398 at October 31, 2000. We expect to continue to incur operating
losses for the foreseeable future. In order to achieve profitability, we will
need to increase our revenues significantly. Therefore, we cannot be sure that
we will ever attain or maintain profitability. Our expansion will also place
significant demands on our management and operational resources. To manage this
rapid growth and increased demands, we must improve existing and implement new
operational and financial systems, procedures and controls. We must also hire,
train, manage, retain and motivate qualified personnel. We expect future
expansion to continue to challenge our ability to hire, train, manage, retain
and motivate our employees.
In view of the rapidly changing nature of our market and our limited operating
history, we believe that period-to-period comparisons of our revenues and other
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Our historic revenue growth rates are not
necessarily sustainable or indicative of our future growth.
Results of Operations
The following table sets forth selected consolidated financial data for the
periods indicated, expressed as a percentage of total revenues:
13
Three Months Ended Six Months Ended
October 31, October 31,
---------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- -------------- --------------
Revenues:
License 62% 75% 65% 74%
Professional services 10 11 10 12
Maintenance 28 14 25 14
--------------- --------------- -------------- --------------
Total revenues 100 100 100 100
--------------- --------------- -------------- --------------
Cost of revenues:
License 3 5 4 4
Professional services 11 8 11 9
Maintenance 6 5 6 6
Stock compensation - 1 - 1
--------------- --------------- -------------- --------------
Total cost of revenues 20 19 20 20
--------------- --------------- -------------- --------------
Gross profit 80 81 80 80
--------------- --------------- -------------- --------------
Operating expenses:
Sales and marketing:
Other sales and marketing 67 76 66 79
Stock compensation - 10 1 11
Research and development:
Other research and development 38 28 37 29
Stock compensation - 6 - 6
General and administrative:
Other general and administration 9 7 9 8
Stock compensation (1) 4 (1) 5
Amortization of goodwill and other intangible assets 1 44 1 50
Merger related expenses - - (2) -
--------------- --------------- -------------- --------------
Total operating expenses 114 175 111 188
--------------- --------------- -------------- --------------
Loss from operations (34) (94) (31) (109)
Interest income (expense) 13 25 14 27
Impairment of equity investments - - (3) -
--------------- --------------- -------------- --------------
Loss before income taxes (21) (69) (21) (81)
Provision for income taxes - -
--------------- --------------- -------------- --------------
Net loss (21)% (69)% (21)% (81)%
--------------- --------------- -------------- --------------
Three and Six Months Ended October 31, 2001 and 2000
Revenues
Our total revenues for the three months ended October 31, 2001 were $21.2
million, representing an increase of $962,000, or 4.8%, from the revenues of
$20.2 million in the quarter ended October 31, 2000. Our total revenues for the
six months ended October 31, 2001 were $44.5 million, representing an increase
of $8.5 million, or 24%, from the revenues of $36.0 million for the six months
ended October 31, 2000. During the three months ended October 31, 2001 and 2000,
two customers and no customers, respectively, accounted for more than 10% of our
total revenues. During the six months ended October 31, 2001 and 2000, no
customers accounted for more than 10% of our total revenues. Revenues from
foreign operations were approximately $3.2 million and $5.9 million for the
three and six months ended October 31, 2001, respectively. Foreign operations
were not significant in either revenue or investment in long-lived assets for
the three or six months ended October 31, 2000. Our international revenues were
derived primarily from sales in Europe, Asia Pacific and Japan.
License Revenues. Our license revenues for the three months ended October 31,
2001 were $13.1 million, representing a decrease of $2.2 million, or 14%, from
the license revenues of $15.2 million in the three months ended October 31,
2000. License revenues as a percentage of total revenues were 62% and 65% for
the three and six months ended October 31, 2001, respectively, and 75% and 74%
for the three and six months ended October 31, 2000, respectively. The decrease
in license revenues for the three months ended October 31, 2001 from the prior
year period was due to lower number of license sales due to the current economic
slow down and the significant decline in information technology spending. We
expect that the current economic slowdown will continue to adversely impact our
business and we expect that license revenues, on an absolute basis and as a
percentage of total revenues, will decrease sequentially for at least the next
quarter and perhaps longer. Our license revenues for the six months ended
October 31, 2001 were $29.1 million, representing an increase of $2.4 million,
or 9%, from the revenues of $26.7 million for the six months ended October 31,
2000. The increase in license revenues for the six months ended October 31,
14
2001 compared to the prior year period reflected the sequential license revenue
growth through the three months ended April 30, 2001 that was primarily
attributable to expanded market acceptance of and demand for our products.
Professional Services Revenues. Our professional services revenues for the three
months ended October 31, 2001 were $2.2 million, representing a decrease of
$31,000, or 1.4%, from the professional services revenues of $2.2 million for
the three months ended October 31, 2000. Professional services revenues as a
percentage of total revenues were 10% for both the three and six months ended
October 31, 2001, and 11% and 12% for the three and six months ended October 31,
2000, respectively. The decrease in professional services revenues for the three
months ended October 31, 2001 from the prior year period was due to a decrease
in license revenues due to the current economic slowdown. Our professional
services revenues for the six months ended October 31, 2001 were $4.4 million,
representing an increase of $120,000, or 3%, from the professional services
revenues of $4.3 million in the six months ended October 31, 2000. The increase
in professional services revenues for the six months ended October 31, 2001 from
the prior year period was the result of higher license revenues and an increased
range of services, consisting of additional data migration and integration
services.
Maintenance Revenues. Our maintenance revenues for the three months ended
October 31, 2001 were $5.9 million, representing an increase of $3.2 million, or
115%, from the maintenance revenues of $2.8 million for the three months ended
October 31, 2000. Maintenance revenues as a percentage of total revenues were
28% and 25% for the three and six months ended October 31, 2001, respectively,
and 14% for both the three and six months ended October 31, 2000. The increase
in maintenance revenues in absolute dollars for the three months ended October
31, 2001 from the prior year period was due to our increased customer base. The
increase in maintenance revenue as a percentage of total revenue resulted from
the decrease in license revenue due to the current economic slowdown. Our
maintenance revenues for the six months ended October 31, 2001 were $11.1
million, representing an increase of $6.0 million, or 119%, from the maintenance
revenues of $5.1 million for the six months ended October 31, 2000. The increase
in maintenance revenues, in absolute dollars and as a percentage of total
revenues, was due to our increased customer base.
Cost of Revenues
Cost of License Revenues. Cost of license revenues, excluding stock
compensation, was $690,000 for the three months ended October 31, 2001,
representing a decrease of $275,000, or 28%, from the cost of license revenues
of $965,000 for the three months ended October 31, 2000. Cost of license
revenues as a percentage of license revenues for the three months ended October
31, 2001 was 5% compared to 6% for the three months ended October 31, 2000. The
decrease in cost of license revenue in absolute dollars for the three months
ended October 31, 2001 from the prior year period was due to lower royalties due
to third parties for integrated technology resulting from lower license revenues
in the current three month period. Cost of license revenues, excluding stock
compensation, was $1.7 million for the six months ended October 31, 2001,
representing an increase of $130,000, or 9%, from the cost of license revenues
of $1.5 million for the six months ended October 31, 2000. Cost of license
revenues as a percentage of license revenues for both the six months ended
October 31, 2001 and 2000 was 6%. Cost of license revenues as a percentage of
license revenues were The increase in the cost of license revenues in absolute
dollars in the six months ended October 31, 2001 reflects increased royalty
expenses resulting from higher license revenues for the current six month
period.
Cost of Professional Services Revenues. Cost of professional services revenues,
excluding stock compensation, was $2.2 million for the three months ended
October 31, 2001, representing an increase of $615,000, or 38%, from the cost of
professional services revenues of $1.6 million for the three months ended
October 31, 2000. Cost of professional services revenues as a percentage of
professional services revenues was 101% for the three months ended October 31,
2001, compared to 72% for the three months ended October 31, 2000. Cost of
professional services revenues, excluding stock compensation, was $4.7 million
for the six months ended October 31, 2001, representing an increase of $1.5
million, or 47%, from the cost of professional services revenues of $3.2 million
for the six months ended October 31, 2000. Cost of professional services
revenues as a percentage of professional services revenues was 107% for the six
months ended October 31, 2001, compared to 75% for the six months ended October
31, 2000. The increase in cost of professional services revenues in absolute
dollars from the prior period was due to increased professional services
personnel necessary to support our increased customer base. In the current
period, certain periods in the past, and potentially in the future, our cost of
professional services revenues exceeded or may exceed our professional services
revenues, primarily because the actual cost of providing the services, whether
provided internally or through third parties, exceeded or may exceed the fixed
price payment received or that will be receivable from some of our customers for
such services.
Cost of Maintenance Revenues. Cost of maintenance revenues, excluding stock
compensation, was $1.4 million for the three months ended October 31, 2001,
representing an increase of $351,000, or 33%, from the cost of maintenance
revenues of $1.1 million for the three months ended October 31, 2000. Cost of
maintenance revenues, excluding stock compensation, was $2.6 million for the six
months ended October 31, 2001, representing an increase of $691,000, or 36%,
from the cost of maintenance revenues of $1.9 million for the six months ended
October 31, 2000. Cost of maintenance revenues as a percentage of maintenance
revenues was 24% for both the three and six months ended October 31, 2001,
respectively, and 38% for both the three and six months ended October 31, 2000.
The decrease in cost of maintenance revenues as a percentage of maintenance
15
revenue for the three and six months ended October 31, 2001 over the prior year
periods was due to economies of scale realized as a result of increased
management personnel and experienced maintenance personnel. The increase in cost
of revenue, on an absolute basis, for both the three and six months ended
October 31, 2001 over the prior year periods was due to hiring and training
additional personnel needed to support our increased customer base.
Operating Expenses
Sales and Marketing. Sales and marketing expenses, excluding stock compensation,
were $14.3 million for the three months ended October 31, 2001, representing a
decrease of $1.1 million, or 7%, from the sales and marketing expenses of $15.4
million for the three months ended October 31, 2000. The decrease in sales and
marketing expenses on an absolute basis and as a percentage of sales for the
three months ended October 31, 2001, compared to the prior year period, was due
primarily to the cancellation of Agile's 2001 user group conference and lower
travel and entertainment expenses in response to the World Trade Center
terrorist attacks of September 11, 2001. Sales and marketing expenses, excluding
stock compensation, were $29.4 million for the six months ended October 31,
2001, representing an increase of $1.0 million, or 4%, from the sales and
marketing expenses of $28.3 million for the six months ended October 31, 2000.
The increase in sales and marketing expenses for the six months ended October
31, 2001, compared to the prior year period, reflects increased
personnel-related expenses such as salaries, benefits and commissions, bonuses,
recruiting fees, travel expenses and related costs of hiring sales management,
sales representatives, sales engineers and marketing personnel. We anticipate
that our sales and marketing expenses will increase in absolute dollars as we
continue to selectively expand our domestic and international sales force.
Research and Development. Research and development expenses, excluding stock
compensation, were $8.0 million for the three months ended October 31, 2001,
representing an increase of $2.4 million, or 43%, from the research and
development expenses of $5.6 million for the three months ended October 31,
2000. Research and development expenses, excluding stock compensation, were
$16.3 million for the six months ended October 31, 2001, representing an
increase of $5.9 million, or 57%, from the research and development expenses of
$10.4 million for the six months ended October 31, 2000. The increase in
research and development expenses for the three and six months ended October 31,
2001, compared to the prior year periods, was due to the increase in the number
of our software developers, quality assurance personnel and outside contractors
needed to support our product development, documentation and testing activities
related to the development and release of the latest versions of our products.
We anticipate that research and development expenses will continue to increase
in absolute dollars as we continue investing in new product development through
the economic downturn.
General and Administrative. General and administrative expenses, excluding stock
compensation, were $1.9 million for the three months ended October 31, 2001,
representing an increase of $434,000, or 31%, from the general and
administrative expenses of $1.4 million for the three months ended October 31,
2000. General and administrative expenses, excluding stock compensation, were
$4.1 million for the six months ended October 31, 2001, representing an increase
of $1.2 million, or 43%, from the general and administrative expenses of $2.8
million for the six months ended October 31, 2000. The increase in general and
administrative expenses in absolute dollars for the three and six months ended
October 31, 2001, compared to the prior year periods, was due to hiring
additional finance, legal and administrative personnel to support the growth of
our business during that period. We expect that general and administrative
expenses will remain relatively flat over the short term.
Amortization of Stock Compensation. We recognized amortization of stock
compensation of approximately ($161,000) and $253,000 for the three and six
months ended October 31, 2001, compared to $4.2 million and $8.6 million for the
three and six months ended October 31, 2000. During the three months ended
October 31, 2001 stock option cancellations exceeded the total amortization
expense for that period. The amounts credited represents the reversal of the
accelerated amortization recorded on such unvested and cancelled options.
Amortization of Goodwill and Purchased Intangible Assets. In connection with our
acquisition of Digital Market, Inc. in November 1999, $103.8 million was
allocated to goodwill and $4.1 million was allocated to other intangible assets,
all of which were being amortized over a period of 3 years. Amortization of
goodwill and intangibles was $189,000 and $378,000 for the three and six months
ended October 31, 2001, compared to $9.0 million and $18.1 million for the three
and six months ended October 31, 2000. The decrease in amortization of goodwill
and purchased intangible assets for the three and six months ended October 31,
2001 from the comparable prior year periods was due primarily to the impairment
charge taken in the fourth quarter ended April 30, 2001 to reduce the carrying
value of goodwill and other intangible assets by $55.2 million. See Note 6 of
Notes to Consolidated Financial Statements for more detailed information.
Merger related benefit. In the fourth quarter of fiscal 2001, we accrued $5.0
million for financial advisory and professional fees resulting from the
terminated merger with a third party. The accrual was management's best estimate
of its obligation at the time. As of July 31, 2001, we had incurred actual costs
of $4.2 million and we had no remaining liability related to the terminated
16
merger. As a result, we recorded a reduction of merger related expenses of
$835,000 during the three months ended July 31, 2001, which was included in the
statement of operations.
Interest income (expense) was $2.8 million and $6.1 million for the three and
six months ended October 31, 2001 compared to $4.9 million and $9.8 million for
the three and six months ended October 31, 2000. This decrease in interest
income was due principally to declining interest rates and lower average cash
and investment balances.
Impairment of Equity Investments. During the three months ended July 31, 2001,
we determined that certain equity investments of privately held companies had
incurred a decline in value that was considered other than temporary. We
recorded a charge of $1.4 million during the three months ended July 31, 2001,
in our results of operations to write down the investments to their estimated
fair values. See Note 8 of Notes to Consolidated Financial Statements for more
detailed information.
Provision for Income Taxes. The Company incurred operating losses for the three
months ended October 31, 2001 and October 31, 2000. Management has recorded a
valuation allowance for the full amount of the net deferred tax assets, as
sufficient uncertainty exists that it is more likely than not that the deferred
tax assets will not be realized. During the three and six months ended October
31, 2001, the Company incurred income tax expense of $50,000 and $157,000,
respectively, primarily attributable to its international subsidiaries.
Liquidity and Capital Resources
As of October 31, 2001, we had cash, cash equivalents and short-term investments
of $289.4 million, a decrease of $11.1 million from the cash, cash equivalents
and short-term investments held as of April 30, 2001. Our working capital at
October 31, 2001 was $288.9 million.
Operating activities used cash of $9.0 million and $2.4 million for the six
months ended October 31, 2001, and 2000, respectively. Net cash used in
operating activities in the six months ended October 31, 2001 was due primarily
to the net loss (less non-cash expenses) and decreases in accounts payable,
deferred revenue and an increase in other assets, partially offset by decreases
in accounts receivable. Net cash used in operating activities in the six months
ended October 31, 2000 was due primarily to the net loss (less non-cash
expenses) and increases in accounts receivable and other assets, partially
offset by increases in deferred revenue, accounts payable and accrued expenses.
Investing activities used cash of $39.2 million and $10.4 million for the six
months ended October 31, 2001, and 2000, respectively. Net cash used in
investing activities in the six months ended October 31, 2001 consisted
primarily of net purchases of marketable investments and purchases of property
and equipment. Net cash used in investing activities for the six months ended
October 21, 2000 consisted primarily of net sales and maturities of marketable
investments, purchases of property and equipment and purchases of privately-held
investments. Purchases of property and equipment were approximately $5.3 million
and $6.9 million in the six months ended October 31, 2001, and 2000,
respectively. These capital expenditures were primarily for computer hardware
and software and furniture and fixtures. We expect that capital expenditures
will remain at the current levels over the short term.
Financing activities provided cash of $2.6 million and $5.3 million in the six
months ended October 31, 2001, and, 2000, respectively. Net cash was provided in
the six months ended October 31, 2001 and 2000, primarily from the sale of
common stock under employee stock option plans.
Capital lease obligations, including both short-term and long-term portions,
were $83,000 at October 31, 2001, and are payable through fiscal 2003.
We expect to experience growth in our operating expenses, particularly research
and development and sales and marketing expenses, for the foreseeable future in
order to execute our business plan. As a result, we anticipate that such
operating expenses, as well as planned capital expenditures, will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions of investments in complementary businesses, technologies or
product lines. We believe that our existing cash and cash equivalents and our
anticipated cash flow from operations will be sufficient to meet our working
capital and operating resource expenditure requirements for at least the next
twelve months. Thereafter, we may find it necessary to obtain additional equity
or debt financing. In the event additional financing is required, we may not be
able to raise it on acceptable terms or raise it at all, and the issuance of any
additional securities would result in ownership dilution to our existing
stockholders.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria for
determining intangible assets acquired in a purchase method business combination
that must be recognized and
17
reported apart from goodwill, noting that any purchase price allocable to an
assembled workforce may not be accounted for separately. SFAS No. 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company is required to adopt the provisions of SFAS No. 141 immediately, and
SFAS No.142 effective May 1, 2002. Furthermore, any goodwill and any intangible
assets determined to have indefinite useful lives that are acquired in a
purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142. The Company is
currently evaluating the impact SFAS No. 141 and 142 will have on its financial
position and results of operations.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS 144 applies to all long-lived assets (including discontinued
operations) and consequently amends Accounting Principles Board Opinion No. 30.
SFAS 144 develops one accounting model for long-lived assets that are to be
disposed of by sale. SFAS 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for the Company for all financial statements issued in fiscal 2002.
The Company does not believe that the adoption of SFAS 144 will have a material
impact on its financial position or results of operations.
Other Factors Affecting Operating Results
We Have a History of Losses, We Expect to Incur Losses in the Future and We
May Not Achieve or Maintain Profitability
Since inception, we have funded our business primarily through selling our
stock, not from cash generated from our business. We have incurred quarterly and
annual losses in each of the years since we were formed and we expect to
continue to incur quarterly and annual losses in the near term. We incurred
losses of $4.5 million and $9.5 million for the three and six months ended
October 31, 2001, respectively, and $14.1 million and $29.1 million for the
three and six months ended October 31, 2000, respectively. As of October 31,
2001 we had an accumulated deficit of approximately $196.6 million. We expect to
continue to incur significant sales and marketing, research and development and
general and administrative expenses. We have incurred and expect to continue to
incur substantial non-cash costs relating to the amortization of intangible
assets and stock compensation which will contribute to our net losses. We expect
to incur losses for the foreseeable future. We will need to generate significant
increases in revenues to achieve and maintain profitability, and we may not be
able to do so. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
Because We Have a Limited Operating History, It Is Difficult to Evaluate Our
Business and Prospects
We are still in the early stages of development, so evaluating our business
operations and our prospects is difficult. We incorporated in 1995 and began
shipping our first product in June 1996. The revenues and income potential of
our business and market are unproven. We will encounter risks and difficulties
frequently encountered by early-stage companies in new and rapidly evolving
markets. These risks include the following:
. we need to increase sales to achieve profitability, requiring us to sell
additional licenses and software products to our existing customers and expand
our customer base outside of the electronics and medical device industries;
. we need to expand our sales and marketing, customer support and professional
services organizations, build strategic relationships and expand our
international operations in order to increase sales; and
. we need to effectively manage our anticipated growth which could lead to
management distractions and increased operating expenses, and will require us to
attract and retain key personnel.
Our business strategy may not be successful and we may not be able to
successfully address these risks. In addition, because of our limited operating
history, we have limited insight into trends that may emerge and affect our
business.
Our Quarterly Operating Results Fluctuate and Are Difficult to Predict and, if
Our Future Results Are Below the Expectations of Public Market Analysts or
Investors, the Price of Our Common Stock May Decline
18
Our quarterly operating results have varied significantly in the past and are
likely to vary significantly in the future, which makes it difficult for us to
predict our future operating results. This quarter-to-quarter fluctuation is due
to a number of factors, including the following:
. fluctuations in demand for Internet collaborative manufacturing commerce
software;
. size and timing of sales and installations of our products;
. entry of new competitors into our market, or the announcement of new products
or product enhancements by competitors;
. our ability to successfully expand our direct sales force and our
international sales organization;
. changes in our sales force incentives;
. unexpected delays in developing or introducing new and enhanced products;
. unexpected decline in purchases by our existing customers, including purchases
of additional licenses and maintenance contracts;
. delays in our customers' orders due to their priorities;
. variability in the mix of our license and professional services revenues;
. our ability to accurately price fixed-priced professional services projects;
. variability in the mix of professional services that we perform versus those
performed for our customers by others; and
. our ability to establish and maintain relationships with our third-party
implementation partners.
Furthermore, we typically receive and fulfill most of our orders within the same
quarter, with the substantial majority of our orders typically received in the
last month of each fiscal quarter. Recently, because declining economic
conditions have caused our customers to delay and reduce spending on information
technology, our sales cycle has lengthened and orders are being pushed to the
last day of the quarter. As a result, we may not learn of revenue shortfalls
until late in a fiscal quarter, after which it is too late to adjust expenses
for that quarter.
Moreover, recent adverse economic conditions in the United States, particularly
those related to the technology industry, may increase the likelihood that
customers will unexpectedly delay or cancel orders causing us to fail to achieve
anticipated revenues for the quarter. A number of technology companies,
particularly software companies that, like Agile, sell enterprise-wide software
solutions, have recently announced that adverse economic conditions have
negatively affected their business and results of operations. Any revenue
shortfall below our expectations could have an immediate and significant adverse
effect on our results of operations.
If, in response to market pressures or other demands, we introduce new pricing
structures for our existing products, we could experience customer
dissatisfaction and loss of sales. In addition, we could introduce products that
are sold in a manner different from how we currently market our products, or we
could recognize revenue differently than under our current accounting policies.
Depending on the manner in which we sell existing or future products, this could
have the effect of extending the length of time over which we recognize
revenues. Furthermore, our quarterly revenues could be significantly affected
based on how applicable accounting standards are amended or interpreted over
time.
In addition, we have accounted for options to purchase common stock granted to
consultants under variable plan accounting. The expenses associated with these
options may fluctuate significantly from quarter to quarter through fiscal 2006
if the price of our stock fluctuates and could cause our operating results to
vary significantly from quarter to quarter.
Due to these and other factors, we believe that period-to-period comparisons of
our results of operations are not meaningful and should not be relied upon as
indicators of our future performance. It is possible that in some future periods
our results of operations may be below the expectations of public market
analysts and investors. If this occurs, the price of our common stock may
decline.
The Impact of Changes in Global Economic Conditions on Our Customers May
Cause Us to Fail to Meet Expectations, Which Would Negatively Impact the
Price of Our Stock
19
Our operating results can vary significantly based upon the impact of changes in
global economic conditions on our customers. More specifically, the
macro-economic environment that we are facing in fiscal 2002 is more uncertain
than in recent periods and has the potential to materially and adversely affect
us and our operating results. The revenue growth and profitability of our
business depends on the overall demand for enterprise-level software services,
particularly in the areas in which we compete. Because our sales are primarily
to major corporate customers whose business fluctuates with general economic and
business conditions, a softening of demand for computer software caused by a
weakening economy may result in decreased revenues and lower growth rates. We
may be especially prone to this as a result of the relatively large license
transactions we have historically relied upon. Customers may defer or reconsider
purchasing products if they experience a downturn in the general economy.
We May Not Achieve Anticipated Revenues if the Introduction and Customer
Acceptance of Agile Anywhere or Any Upgrades or Enhancements to Our Products
Is Unsuccessful
Our future financial performance will depend on customer acceptance of Agile
Anywhere products and any upgrades or enhancements that we may make to our
products in the future. We have generated substantially all of our revenues from
licenses and services related to current and prior versions of our product
suite. We believe that revenues from Agile Anywhere, together with revenues from
maintenance and support contracts from Agile Anywhere and prior versions of our
suite, will account for a substantial portion of our revenues for the
foreseeable future. If we are unable to ship or implement any upgrades or
enhancements when planned, or if the introduction of upgrades or enhancements
causes customers to defer orders for our existing products, we may not achieve
anticipated revenues.
We May Need to Make Additional Future Acquisitions to Remain Competitive. Our
Business Could be Adversely Affected as a Result of These Acquisitions
We may encounter risks to our business during our integration of acquisitions
including:
. difficulties in assimilation of acquired personnel, operations, technologies
or products;
. unanticipated costs associated with acquisitions. For example, in fiscal 2001
we recorded a $55.2 million impairment charge relating to goodwill and other
intangible assets as a result of management's decision in February 2001 to
discontinue the further development of the products acquired in the DMI
acquisition;
. diversion of management's attention from other business concerns;
. adverse effects on our existing business relationships with our customers or
the customers of any acquisitions we make; and
. inability to retain employees of acquisitions we make.
As part of our business strategy, we may in the future seek to acquire or invest
in additional businesses, joint venture arrangements, products or technologies
that we believe could complement or expand our business, augment our market
coverage, enhance our technical capabilities or that may otherwise offer growth
opportunities. Management's negotiations of potential acquisitions or joint
ventures and management's integration of acquired businesses, products or
technologies could divert their time and resources. Future acquisitions could
cause us to issue dilutive equity securities, incur debt or contingent
liabilities, amortize goodwill and other intangibles, write off in-process
research and development and other acquisition-related expenses that could
seriously harm our financial condition and operating results. Further, we may
not be able to properly integrate acquired businesses, products or technologies
with our existing operations or train, retain and motivate personnel from the
acquired businesses. If we are unable to fully integrate an acquired business,
product or technology or train, retain and motivate personnel from the acquired
business, we may not receive the intended benefits of that acquisition.
Recent volatility in the stock markets has made it more difficult to value
acquired businesses where the consideration payable as the purchase price is
stock. We may reach agreement to buy another company using our stock as
consideration. Thereafter, prior to closing the acquisition the relative values
of the capital stock of the acquired company could change, causing the purchase
price to increase. As a result, in periods of market volatility as we are
experiencing, acquisitions are difficult to complete, and we may be unable to
complete beneficial acquisitions of complementary businesses or technologies at
an acceptable price.
Implementation of Our Products By Large Customers May Be Complex and Customers
Could Become Dissatisfied if Implementation of Our Products Proves Difficult,
Costly or Time-Consuming
Our products must integrate with many existing computer systems and software
programs used by our customers. Integrating with many other computer systems and
software programs can be complex, time consuming and expensive, causing delays
in the deployment of our products. Because we are one of the first companies to
offer products designed for collaborative manufacturing commerce solutions, many
customers will be facing these integration issues for the first time in the
context of
20
collaborating with supply chain partners. Customers could become dissatisfied
with our products if implementations prove to be difficult, costly or
time-consuming.
We Currently Perform Most of Our Implementations on a Fixed-Price Basis, Which
Could Cause Us to Incur More Costs Than We Expect
When we install our products or when we have a third party install them, we
typically charge customers a fixed fee for these services. At the time of a
product sale and prior to agreeing to an installation price, we estimate the
amount of work involved for a particular installation project. We have at times
in the past underestimated and may in the future underestimate the amount of
time or resources required to install our products. If we do not correctly
estimate the amount of time or resources required for a large number of
installations, our gross margins could decline.
If We Do Not Sell Additional Licenses or Enhanced Versions or Upgrades of Our
Products to Existing Customers, We May Not Achieve Revenue Growth
The size of a new customer's initial order is relatively small and may include a
limited number of user licenses. In subsequent orders, customers often add user
licenses or additional products designed for specific functions, such as the AML
Server targeted at manufacturers. In order to grow revenues, we depend on sales
of additional user licenses to our existing customers as well as sales of new
licenses to new customers. Therefore, it is important that our customers are
satisfied with their initial product implementations and that they believe that
expanded use of the product they purchased will provide them with additional
benefits. Customers could choose not to purchase any new products or expand the
use of our products. If we do not increase sales to existing customers, we may
not be able to achieve revenue growth.
If We Do Not Establish and Maintain Relationships With Key Partners, We May
Encounter Difficulty in Providing Implementation and Customer Support of Our
Products
We rely heavily on our relationships with consulting and integration partners to
implement our software, provide customer support services and endorse our
products during the evaluation stage of the sales cycle. Currently, a limited
number of companies provide implementation services for our products. We expect
to increasingly rely on these types of partners in the future. These companies
are not contractually obligated to continue to provide implementation services
for us or to otherwise promote our products. Although we seek to develop and
maintain relationships with these types of service providers, they may have
similar or more established relationships with our competitors. If these service
providers do not increase this segment of their business, or reduce or
discontinue their relationships with us or their support of our products, our
business could be harmed. We will need to develop new third party relationships
if sales of our products increase and our current partners cannot fulfill all of
our needs for implementation and customer support services. Without these third
parties, we would have to expand our services organization to increase the
consulting and professional services that we provide to our customers and divert
resources from other areas of our business. If we are required to expand our
professional services capabilities, we may not be able to do so on a timely
basis.
We are beginning to implement larger deployments of our products together with
third parties such as Accenture. If we are not successful with these joint
deployments, we may incur increased costs and customer dissatisfaction and may
not achieve increased sales and market acceptance of our products.
To meet customer demand, we might have to outsource services to more costly
independent contractors and other third parties. In addition, if our
implementation partners do not adequately perform implementation services, our
customers could become dissatisfied with our products. In order to avoid
dissatisfaction, we may need to provide supplemental implementation services at
no additional cost to customers. Although we could experience an increase in
services revenues if our service partners are not successful, services revenues
have lower gross margins than license revenues. We could also experience delays
in recognition of license revenue if customer implementation projects fall
behind schedule.
We May Experience Customer Dissatisfaction and Lost Sales if Our Products Do
Not Scale to Accommodate Substantial Increases in the Number of Users
Our strategy requires that our software be highly scalable, or able to
accommodate substantial increases in the number of users. If our customers
cannot successfully implement large-scale deployments, or if they determine that
our products cannot accommodate large-scale deployments, we could experience
customer dissatisfaction and find it more difficult to obtain new customers or
to sell additional products to our existing customers.
We May Not Be Able to Increase Sales of Our Products if We Do Not Expand Our
Direct Sales Organization
We sell our products primarily through our direct sales force. Our ability to
increase our sales will depend on our ability to recruit, train and retain top
quality sales people with the advanced sales skills and technical knowledge we
need. Competition for
21
qualified personnel remains intense in our industry. In addition, it takes time
for our new sales personnel to become productive, particularly our senior sales
and services personnel, who could take up to nine months to become fully
productive. Recent volatility in our stock price could decrease our ability to
hire and retain qualified personnel. If we are unable to hire or retain
qualified sales personnel, or if newly hired personnel fail to develop the
necessary skills or reach productivity more slowly than anticipated, it would be
more difficult for us to sell our products, and we may experience a shortfall in
revenues.
Our Variable Sales Cycle Makes it Difficult For Us to Predict When or if Sales
Will Be Made
Our products have an unpredictable sales cycle that contributes to the
uncertainty of our future operating results. With the recent economic
uncertainties facing our customers, and the decline in the business that they
face, our sales cycle has lengthened. Customers are taking longer to evaluate
our product, and orders may be delayed or postponed. Our collaborative
manufacturing commerce software is a new category of products, and customers
often view the purchase of our products as a significant and strategic decision.
As a result, intensive marketing and sales efforts may be necessary to educate
prospective customers regarding the uses and benefits of our products. Customers
may take time to evaluate our products. The sale of our products may be subject
to delays due to the lengthy internal budgeting, approval and evaluation
processes of our customers. We may expend significant sales and marketing
expenses during this evaluation period before the customer places an order with
us. Customers may initially purchase a smaller number of user licenses before
expanding the order to allow a greater number of users to benefit from the
application. Larger customers may purchase our products as part of multiple
simultaneous purchasing decisions, which may result in additional unplanned
administrative processing and other delays in our product sales. If sales
forecasted from a specific customer for a particular quarter are not realized,
we may experience an unplanned shortfall in revenues. As a result, we have only
a limited ability to forecast the timing and size of sales of our products.
The Success of Our Business Depends on Our Key Personnel, Whose Knowledge of
Our Business and Technical Expertise Would Be Difficult to Replace
Our success depends largely on the continued contributions of our key senior
management, particularly Bryan D. Stolle, our Chief Executive Officer, who is
not bound by an employment agreement, as well as our key engineering and sales
and marketing personnel. We do not have key-man life insurance on Mr. Stolle. If
one or more members of our senior management or any of our key employees were to
resign, the loss of personnel could result in delays to product development,
loss of sales, and diversion of management resources.
Because of Competition For Additional Qualified Personnel, We May Not Be Able
to Recruit or Retain Necessary Personnel, Which Could Impact Development or
Sales of Our Products
Our success depends on our ability to attract and retain qualified and
experienced employees. There is substantial competition for experienced
engineering, sales and marketing personnel in our industry. The volatility and
current market price of our common stock may make it more difficult for us to
recruit, hire and retain qualified personnel, or cause us to incur higher salary
costs. If we are unable to retain our existing key personnel, or attract and
retain additional qualified personnel, we may from time to time experience
inadequate levels of staffing to perform services for our customers. As a
result, our growth could be limited due to our lack of capacity to develop and
market our products to our customers, or we could experience deterioration in
service levels or decreased customer satisfaction.
Our Efforts to Expand Sales of Our Products to Other Industries May Not
Succeed
We have historically sold our products primarily to companies in the electronics
and medical device manufacturing industries. We intend to market products to
customers in additional industries. Although we have targeted enterprises in
other markets as potential customers, these potential customers may not be as
willing to purchase products like ours as have the electronics and medical
device industries.
The Market For Our Products Is Newly Emerging and Customers May Not Accept Our
Products
The market for software products that allow companies to collaborate with
suppliers on product information and change is newly emerging. Companies have
not traditionally automated collaborative manufacturing commerce solutions like
we offer throughout the supply chain. We cannot be certain that this market will
continue to develop and grow or that companies will elect to utilize our
products rather than attempt to develop applications internally or through other
sources. In addition, the use of the Internet, as well as corporate intranets,
has not been widely adopted for sharing product information as well as for
collaboration among supply chain participants. Companies that have already
invested substantial resources in other methods of sharing product information
during the manufacturing and supply process may be reluctant to adopt a new
approach that may replace, limit or compete with their existing systems or
methods. We expect that we will continue to need to pursue intensive marketing
and sales efforts to educate prospective customers about the uses and benefits
of our products. Therefore, demand for and market acceptance of our products
will be subject to a high level of uncertainty.
22
Competition Among Providers of Software Enabling Collaboration in a
Manufacturing Supply Chain May Increase, Which Could Cause Us to Reduce
Prices, and Result in Reduced Gross Margins or Loss of Market Share
The market for products that enable companies to interactively manage and share
information relating to the manufacture and supply of products is highly
fragmented, rapidly changing and increasingly competitive. We expect competition
to continue to intensify, which could result in price reductions for our
products, reduced margins and loss of market share. Competitors vary in size and
in the scope and breadth of the products and services offered. We face potential
competition from in-house development efforts by potential customers or
partners, vendors of software designed for management of engineering
information, and developers of general purpose groupware software addressing
only limited technology components involved in managing data generated by
changes to the engineering process. We also face potential competition from
providers of enterprise resource planning software and supply-chain software.
Many of our actual or potential competitors have a number of significant
advantages over us, including:
. longer operating histories;
. significantly greater financial, technical, marketing and other resources;
. significantly greater name recognition and a larger installed base of
customers; and
. well-established relationships with our actual and potential customers as well
as with systems integrators and other vendors and service providers.
These competitors may also be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products, than we can.
Some of our actual or potential competitors may also bundle their products in a
manner that may discourage potential customers from purchasing our products.
Accordingly, we may not be able to maintain or expand our sales if competition
increases and we are unable to respond effectively.
We May Experience Difficulties in Introducing New Products and Upgrades Which
Could Result in Negative Publicity, Loss of Sales, Delay in Market Acceptance
or Customer Dissatisfaction
Our future financial performance depends on our successful and timely
development, introduction and market acceptance of new and enhanced products.
The life cycles of our products are difficult to predict because the market for
our products is new and emerging, and is characterized by rapid technological
change, changing customer needs and evolving industry standards. The
introduction of products or computer systems employing new technologies and
emerging industry standards could render our existing products obsolete and
unmarketable. For example, portions of our software are written in the Java
computer programming language. If a new software language becomes standard in
our industry or is considered more robust, we may need to rewrite portions of
our products in another computer language in order to remain competitive. The
introduction of enhancements to our suite of products may also cause customers
to defer orders for our existing products. We may experience difficulties that
could delay or prevent the successful development, introduction or marketing of
new or enhanced products in the future. In addition, those products may not meet
the requirements of the marketplace and achieve market acceptance.
We expect to add new products to our supply chain applications by acquisition or
internal development and by developing enhancements to our existing products. We
have in the past experienced delays in the planned release dates of our software
products and upgrades, and we have discovered software defects in new products
after their introduction. New products or upgrades may not be released according
to schedule, or may contain defects when released. Either situation could result
in negative publicity, loss of sales, delay in market acceptance of our products
or customer claims against us.
Our Products Might Not Be Compatible With All Platforms, Which Could Inhibit
Sales
We must continually modify and enhance our products to keep pace with changes in
computer hardware and software and database technology, as well as emerging
technical standards in the software industry. For example, we have designed our
products to work with databases such as Oracle. Any changes to these platforms
could require us to modify our products, and could cause us to delay releasing
product enhancements until the updated version of that platform has been
released. Furthermore, third parties develop adapters to integrate our products
with other design, manufacture, finance and supply chain systems used by our
customers. We rely on these third parties to update the adapters to reflect
changes to our products as well as to the targeted platform in order to maintain
the functionality provided by our products. As a result, uncertainties related
to the timing and nature of new product announcements, introductions or
modifications by vendors of operating systems, back-office
23
applications and browsers and other Internet-related applications could hurt our
business, as customers may not be certain as to how our products will operate
with their existing systems.
In addition, portions of our products are based upon a programming language that
does not offer all of the features available in Windows. Accordingly, certain
features available to products that run on Windows may not be available in the
non-Windows version of our products, and this could result in reduced customer
demand. Furthermore, some of our products do not run on certain types of popular
server computers, such as those that utilize the UNIX operating system. If
another platform becomes more widely used or offers greater scalability, we
could be required to convert, or "port" our product to that platform. We may not
succeed in these efforts, and, even if we do, potential customers may not choose
our product. As we extend the functionality of our products to run on additional
platforms, we may incur increased development costs and increased development
lifecycles.
If We Are Unable to Timely Expand Our International Operations, We May Not
Achieve Anticipated Revenue Growth
We believe that expansion of our international operations will be necessary for
our future success, and a key aspect to our business strategy has been and is to
expand our sales and support organizations internationally. Therefore, we
believe that we will need to commit additional significant resources to expand
our international operations. We employ sales professionals in Europe and the
Asia-Pacific market. If we are unable to successfully expand further in these
international markets on a timely basis, we may not be able to achieve
anticipated revenue growth. This expansion may be more difficult or take longer
than we anticipate, and we may not be able to successfully market, sell, deliver
and support our products internationally.
Our international expansion will subject us to a number of risks associated with
international business activities. These risks include:
. difficulty in providing customer support for our software in multiple time
zones;
. the need to develop our software in multiple foreign languages;
. longer sales cycles associated with educating foreign customers on the
benefits of using our products;
. greater difficulty and longer time in collecting accounts receivable from
customers located abroad;
. political and economic instability, particularly in Asia;
. difficulties in enforcing agreements through foreign legal systems; and
. unexpected changes in regulatory requirements that may limit our ability to
export our software or sell into particular jurisdictions or impose multiple
conflicting tax laws and regulations.
To date, most of our revenues have been denominated in United States dollars. If
we experience an increase in the portion of our revenues denominated in foreign
currencies, we may incur greater risks in currency fluctuations, particularly
since we translate our foreign currency revenues once at the end of each
quarter. In the future, our international revenues could be denominated in the
Euro, the currency of the European Union. The Euro is an untested currency and
may be subject to economic risks that are not currently contemplated. We
currently do not engage in foreign exchange hedging activities, and therefore
our international revenues and expenses are currently subject to the risks of
foreign currency fluctuations.
We Depend on Licensed Technology and the Loss or Inability to Maintain
These Technology Licenses Could Result in Increased Cost or Delays in
Sales of Our Products
We license technology on a non-exclusive basis from several businesses for use
with our products, including licenses from RSA Security Inc. for security and
encryption technology software, Actuate Corporation for reporting capability and
from Cimmetry Systems Inc. for our viewers. We anticipate that we will continue
to license technology from third parties in the future. Some of the software we
license from third parties would be difficult to replace. This software may not
continue to be available on commercially reasonable terms, if at all. The loss
or inability to maintain any of these technology licenses could result in delays
in the licensing of our products until equivalent technology, if available, is
identified, licensed and integrated. In addition, the effective implementation
of our products depends upon the successful operation of third-party licensed
products in conjunction with our products, and therefore any undetected errors
in these licensed products may prevent the implementation or impair the
functionality of products, delay new product introductions and/or injure our
reputation. The increased use of third-party software could require us to enter
into license agreements with third parties, which could result in higher royalty
payments and a loss of product differentiation and lower product gross margins.
Defects in Our Software Products Could Diminish Demand For Our Products
24
Our software products are complex and may contain errors that may be detected at
any point in the life of the product. We have in the past discovered software
errors in certain of our products and as a result have experienced delays in
shipment of products during the period required to correct these errors. We
cannot be sure that, despite testing by us, our implementation partners and our
current and potential customers, errors will not be found in new products or
releases after shipment, resulting in loss of revenue, delay in market
acceptance and sales, diversion of development resources, injury to our
reputation or increased service and warranty costs.
Further, our products are generally used in systems with other vendors'
products, and as a result, our products must integrate successfully with these
existing systems. System errors, whether caused by our products or those of
another vendor, could adversely affect the market acceptance of our products,
and any necessary revisions could cause us to incur significant expenses.
If We Become Subject to Product Liability Litigation, It Could Be Time
Consuming and Costly to Defend
Since our products are used for mission critical applications in the supply
chain, errors, defects or other performance problems could result in financial
or other damages to our customers. For example, our products are designed to
communicate information relating to changes in product specifications during the
manufacturing process. If a supplier or other participant receives inaccurate or
erroneous data, it is possible that it could claim it incurred damages based on
its reliance on that data. Although our license agreements generally contain
provisions designed to limit our exposure to product liability litigation,
existing or future laws or unfavorable judicial decisions could negate such
limitation of liability provisions. Product liability litigation, even if
unsuccessful, would be time-consuming and costly to defend and could harm our
business.
In Order to Manage Our Growth and Expansion, We Will Need to Improve and
Implement New Systems, Procedures and Controls
We have recently experienced a period of rapid growth and expansion that has
placed a significant strain on our management information systems and our
administrative, operational and financial resources. For example, we have grown
from 398 employees at October 31, 2000 to 478 employees at October 31, 2001. If
we are unable to manage our growth and expansion in an efficient or timely
manner, our business will be seriously harmed. In addition, we have recently
hired a significant number of employees and plan to further increase our total
headcount. We also plan to expand the geographic scope of our operations. This
expansion has resulted and continues to result in substantial demands on our
management resources. To accommodate continued anticipated growth and expansion,
we will be required to:
. improve existing and implement new operational and financial systems,
procedures and controls;
. hire, train, manage, retain and motivate qualified personnel; and
. enter into relationships with strategic partners.
These measures may place additional burdens on our management and our internal
resources.
If We Are Unable to Protect Our Intellectual Property We May Lose a Valuable
Asset, Experience Reduced Market Share or Incur Costly Litigation to Protect
Our Rights
Our success and ability to compete depend upon our proprietary technology,
including our brand and logo and the technology underlying our products. We rely
on patent, trademark, trade secret and copyright laws to protect our
intellectual property. Despite our efforts to protect our intellectual property,
a third party could copy or otherwise obtain our software or other proprietary
information without authorization, or could develop software competitive to
ours. Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around patents that may be issued to us or our other intellectual
property. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States,
and we expect that it will become more difficult to monitor the use of our
products if we increase our international presence.
We may have to resort to litigation to enforce our intellectual property rights,
to protect our patents, trade secrets or know-how or to determine their scope,
validity or enforceability. Enforcing or defending our proprietary technology is
expensive, could cause the diversion of our resources, and may not prove
successful. Our protective measures may prove inadequate to protect our
proprietary rights, and any failure to enforce or protect our rights could cause
us to lose a valuable asset.
We May Be Subject to Intellectual Property Infringement Claims That, With or
Without Merit, Could Be Costly to Defend or Settle
25
We may from time to time be subject to claims of infringement of other parties'
proprietary rights or claims that our own intellectual property rights are
invalid. There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that,
in the future, third parties may claim that we or our current or potential
future products infringe their intellectual property. We expect that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
industry segments overlaps. Any infringement claims made against us, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or negative publicity. In addition, if our products were
found to infringe a third party's proprietary rights, we could be required to
enter into royalty or licensing agreements in order to continue to be able to
sell our products. Royalty or licensing agreements, if required, may not be
available on terms acceptable to us or acceptable at all.
We Rely on Third Parties to Manage System and Network Environments for Hosted
Customers
We rely on third parties to manage system and network environments running the
Agile Anywhere and Agile Buyer solutions and related solutions for customers
requiring hosting. Services provided by these third parties include managing the
hosted servers, maintaining communications lines and managing network data
centers, which are the locations where the Agile solutions reside. Since the
hosting of the Agile solutions for certain customers will depend on these third
parties, it is possible that these third parties may not be able to meet our and
our customers' service level requirements. Dissatisfaction or problems with our
service or the service of the third parties that host our solutions or delays or
interruptions or other problems with service due to mechanical failure, human
error, security breaches, power loss and other facility failures, natural
disasters, sabotage, vandalism, or other similar events could result in a
reduction of business generated by the hosted environment. In the event that we
choose to use alternative hosting sources, this may result in a temporary
degradation of the service level for hosting services that may be unacceptable
to our customers.
We Are Subject to Employer Payroll Taxes When Our Employees Exercise Their
Stock Options That Could Adversely Affect Our Results of Operations
Employer payroll taxes are assessed on each employee's gain on the sale of stock
received upon exercise of options, which is the difference between the price of
our common stock on the date of exercise and the exercise price. During a
particular period, these payroll taxes could be material. These employer payroll
taxes are recorded as an expense and are assessed at tax rates that vary
depending upon the employee's taxing jurisdiction in the period such options are
exercised based on actual gains realized by employees. However, because we are
unable to predict how many stock options will be exercised, at what price and in
which country during any particular period, we cannot predict the amount, if
any, of employer payroll expense that will be recorded in a future period or the
impact on our future financial results.
Some of Our Customers are Small Emerging Growth Companies that May Represent
Credit Risks
We have expanded our customer base to include licenses to small emerging growth
companies. Many of these companies have limited operating histories, are
operating at a loss and have limited access to capital. With the significant
slowdown in U.S. economic growth in the past months and uncertainty relating to
the prospects for near-term U.S. economic growth, some of these customers may
represent a credit risk. If our customers experience financial difficulties or
fail to experience commercial success, we may have difficulty collecting on our
accounts.
Risks Related to the Internet on Our Business and Prospects
If Use of the Internet Does Not Continue to Develop and Reliably Support the
Demands Placed on It by Electronic Commerce, We May Experience Loss of Sales
Our success depends upon continued growth in the use of the Internet as a medium
of collaboration and commerce. Although the Internet is experiencing rapid
growth in the number of users, this growth is a recent phenomenon and may not
continue. Furthermore, despite this growth in usage, the use of the Internet for
commerce is relatively new. As a result, a sufficiently broad base of companies
and their supply chain partners may not adopt or continue to use the Internet as
a medium for collaboration for product content information. Our business would
be seriously harmed if:
. use of the Internet does not continue to increase or increases more slowly
than expected;
. the infrastructure for the Internet does not effectively support enterprises
and their supply chain partners;
. the Internet does not create a viable commercial marketplace, inhibiting the
development of electronic collaborative manufacturing commerce and reducing the
demand for our products;
26
. concerns over the secure transmission of confidential information over public
networks and general disruption could inhibit the growth of the Internet as a
means of conducting commercial transactions; or
. concerns about third parties using the Internet to create interference with
the use of our products over the Internet.
Capacity Restraints May Restrict the Use of the Internet as a Commercial
Marketplace, Resulting in Decreased Demand For Our Products
The Internet infrastructure may not be able to support the demands placed on it
by increased usage or the limited capacity of networks to transmit large amounts
of data. Other risks associated with commercial use of the Internet could slow
its growth, including:
. outages and other delays resulting from the inadequate reliability of the
network infrastructure;
. slow development of enabling technologies and complementary products; and
. limited availability of cost-effective, high-speed access.
Delays in the development or adoption of new equipment standards or protocols
required to handle increased levels of Internet activity, or increased
governmental regulation, could cause the Internet to lose its viability as a
means of communication between manufacturers and their supply chain partners. If
these or any other factors cause use of the Internet for commerce to slow or
decline, the Internet may not prove viable as a commercial marketplace,
resulting in decreased demand for our products.
Increasing Governmental Regulation of the Internet Could Limit the Market for
Our Products
As Internet commerce continues to evolve, we expect that federal, state and
foreign governments will adopt laws and regulations covering issues such as user
privacy, taxation of goods and services provided over the Internet, pricing,
content and quality of products and services. It is possible that legislation
could expose companies involved in electronic commerce to liability, taxation or
other increased costs, any of which could limit the growth of electronic
commerce generally. Legislation could dampen the growth in Internet usage and
decrease its acceptance as a communications and commercial medium. If enacted,
these laws and regulations could limit the market for our products.
The Market Price of our Common Stock Has Been and May Continue to Be Volatile,
Which Could Result in Substantial Losses for Individual Security Holders
The market price for our common stock has been, and is likely to continue to be,
highly volatile and subject to wide fluctuations in response to factors
including the following, some of which will be beyond our control:
. actual or anticipated variations in our quarterly results of
operations;
. announcements of technological innovations, increased cost of
operations or new products or services by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and/or software industries;
. changes in the economic performance and/or market valuations of other
providers of collaborative supply chain software;
. volatility in the stock markets, particularly with respect to Internet
and software stocks, and decreases in the availability of capital for
Internet-related businesses;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel; and
. pending and potential litigation.
In the past, following periods of volatility in the market price of their
securities, many companies have been the subject of securities class action
litigation. If, in addition to the pending litigation discussed elsewhere in
which we are currently involved, we are involved in any additional securities
class action suits, it could result in further, significant costs and diversion
of our management's attention and resources, and could cause the prices of our
securities to fall.
27
Risks Related to Control
Provisions Contained in Our Charter Documents May Delay or Prevent a Change in
Our Control
Provisions of our Delaware certificate of incorporation and bylaws and of
Delaware law could make it more difficult for a third party to acquire us, even
if a change in control would be beneficial to our stockholders. These provisions
also may prevent changes in our management. We are subject to the provision of
Section 203 of the Delaware General Corporation Law, which restricts certain
business combinations with interested stockholders. The combination of these
provisions may inhibit a non-negotiated merger or other business combination.
We Have Adopted Certain Anti-Takeover Measures That May Make it More Difficult
For a Third Party to Acquire Us
Our board of directors has the authority to issue up to 10,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by the stockholders. The
rights of the holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of shares of preferred stock, while potentially
providing desirable flexibility in connection with possible acquisitions and for
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock. We have no
present intentions to issue shares of preferred stock. Further, on March 2001,
our board of directors adopted a preferred stock purchase rights plan intended
to guard against certain takeover tactics. The adoption of this plan was not in
response to any proposal to acquire us, and the board is not aware of any such
effort. The existence of this plan could also have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. In addition, certain provisions of our certificate of incorporation may
have the effect of delaying or preventing a change of control, which could
adversely affect the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
We develop products in the United States and market our products in North
America, and to a lesser extent in Europe and Asia. As a result, our financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets. Because nearly
all of our revenue is currently denominated in U.S. dollars, an increase in the
value of the U.S. dollar relative to foreign currencies could make our products
less competitive in foreign markets. Although we will continue to monitor our
exposure to currency fluctuations, and, where appropriate, may use financial
hedging techniques in the future to minimize the effect of these fluctuations,
we cannot assure you that exchange rate fluctuations will not harm our business
in the future.
Interest Rate Risk
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we have invested in may be subject to market risk. This means that a change
in prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. To minimize
this risk, we maintain the majority of our portfolio of cash in money market
funds and short-term investments classified as "available for sale." In general,
money market funds and short-term investments are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing interest
rate. Because some of our debt arrangements are based on variable rates of
interest, our interest expense is sensitive to changes in the general level of
U.S. interest rates. Since these obligations represent a small percentage of our
total capitalization, we believe that there is not a material risk exposure.
The table below represents principal (or notional) amounts and related
weighted-average interest rates of our investment portfolio by year of maturity.
(in thousands, except Maturing
interest rates) within
12 months Thereafter Total
--------- ---------- -----
Cash equivalents $ 55,869 - $ 55,869
Average interest rate 2.39% - 2.39%
Investments $194,997 - $194,997
Average interest rate 3.86% - 3.86%
Total investment securities $250,866 - $250,866
28
Other Investments
We invest in equity instruments of privately-held companies for business and
strategic purposes. These investments are included in other long-term assets and
are accounted for under the cost method when ownership is less than 20% and we
do not have the ability to exercise significant influence over operations. As of
October 31, 2001, we had $3.5 million invested in privately-held companies, some
of which are business partners. For these investments, our policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. We identify and record
impairment losses when events and circumstances indicate that such assets might
be impaired.
During the three months ended July 31, 2001, we determined that these
investments had incurred a decline in value that was other-than-temporary and
reduced their carrying amounts to estimated fair value by a charge of $1.4
million to results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On or around October 25, 2001, a stockholder class action complaint was filed in
the United States District Court for the Southern District of New York against
us, several of our officers and directors, and the underwriters of our initial
public offering. The purported class actions are all brought on behalf of
purchasers of our common stock since August 19, 1999, the date of our initial
public offering. The plaintiffs allege that our prospectus, incorporated in the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission, was materially false and misleading because it failed to disclose,
among other things, that the underwriters, required several investors who wanted
large allocations of initial public offering securities to pay undisclosed and
excessive underwriters' compensation in the form of increased brokerage
commissions and required investors to agree to buy shares of our securities
after the initial public offering was completed at predetermined prices as a
precondition to obtaining initial public offering allocations. The plaintiffs
further allege that because of these alleged arrangements, the Company's
post-initial public offering stock price was artificially inflated. As a result
of the alleged omissions in our prospectus and the purported inflation of our
stock price, the plaintiffs claim violations of Sections 11 the Securities Act.
These actions have been or are expected to be consolidated with other actions
involving similar or identical allegations against more that 263 other issuers,
more than 40 underwriters, and more than 1000 individuals. We believe that we
have meritorious defenses against these actions and we intend to vigorously
defend them.
We are also subject to various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material effect on our business, financial condition or results of
operations.
Item 2. Changes in Securities and Use of Proceeds.
(a) Modification of Constituent Instruments
Not applicable.
(b) Change in Rights
Not applicable.
(c) Issuances of Securities
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders in San Jose, California on
September 26, 2001. Of the 47,754,845 shares outstanding as of the record date,
42,867,402 shares were present or represented by proxy at the meeting. At the
meeting, the Company's stockholders voted on the following matters. Proxies were
solicited by the Company pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
29
(1) Proposal to elect two Class II directors of the Company, each to serve for a
three year term, until the annual meeting of stockholders to be held in 2004,
and until his or her successor is duly elected and qualified.
For Withheld
Nancy Schoendorf 42,547,630 319,772
James L. Patterson 42,548,056 319,346
(2) Proposal to increase the maximum aggregate number of shares of Common Stock
authorized for issuance under the Company's 1995 Stock Option Plan by 4,000,000
shares and set the grant limit of 2,500,000 shares per employee per fiscal year.
For Against Abstain Not Voted
13,190,633 20,613,494 33,608 9,029,667
(3) Proposal to approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
100,000,000 to 200,000,000 shares.
For Against Abstain
39,110,673 3,737,582 19,147
(4) Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ending April 30, 2002.
For Against Abstain
42,706,105 154,669 6,628
Item 5. Other Information.
Effective September 7, 2001, Mr. Thomas P. Shanahan retired as Chief Financial
Officer of the Company. Mr. Richard J. Browne, Vice President, Finance, has been
appointed Interim Chief Financial Officer and Principal Accounting Officer. Mr.
Shanahan will remain as a consultant to the Company for an interim period to aid
in transition and to assist in the recruitment of a new Chief Financial Officer.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Not applicable.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October 31, 2001.
30
AGILE SOFTWARE CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGILE SOFTWARE CORPORATION
Date: December 12, 2001 /s/ Richard J. Browne
-------------------------------------
By: Richard J. Browne
Vice President, Finance
and Interim Chief Financial Officer
(Principal Accounting Officer)
31