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EPICOR SOFTWARE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included above. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under "Part I, Item 1A - Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, and in our other filings with the Securities and Exchange Commission. Unless the context requires otherwise, references to "we," "our," "us" and "the Company" are to Epicor Software Corporation and its consolidated subsidiaries. Unless the context requires otherwise, references to "Solarsoft" refer to Solarsoft Business Systems, Inc., which we acquired in October 2012 and whose results are included in our results subsequent to the date we acquired it. Overview We are a leading global provider of enterprise application software and services focused on small and mid-sized companies and the divisions and subsidiaries of Global 1000 enterprises. We provide industry-specific solutions to the manufacturing, distribution, retail and services sectors. Our fully integrated solutions, which primarily include license, professional services and support services and may include hardware products, are considered "mission critical" to many of our customers, as they manage the flow of information across the core business functions, operations and resources of their enterprises. By enabling our customers to automate and integrate information and critical business processes throughout their enterprise, as well as across their supply chain and distribution networks, our customers can increase their efficiency and productivity, resulting in higher revenues, increased profitability and improved working capital. Our fully integrated systems and services include one or more of the following software applications: inventory and production management, supply chain management ("SCM"), manufacturing execution systems ("MES"), order management, point-of-sale ("POS") and retail management, accounting and financial management, customer relationship management ("CRM"), human capital management ("HCM") and service management, among others. Our solutions also respond to our customers' need for increased supply chain visibility and transparency by offering multichannel eCommerce and collaborative capabilities that allow enterprises to extend their business and more fully integrate their operations with those of their customers, suppliers and channel partners. We believe this collaborative approach distinguishes us from conventional enterprise resource planning ("ERP") vendors, whose primary focus is predominately on internal processes and efficiencies within a single plant, facility or business. For this reason, we believe our products and services are deeply embedded in our customers' businesses and are a critical component to their success. In addition to processing the transactional business information for the vertical markets we serve, our data warehousing, business intelligence and industry catalog and content products aggregate industry data to provide our customers with advanced product information, multidimensional analysis, modeling and reporting. We have developed strategic relationships with many of the well-known and influential market participants across all segments in which we operate, and have built a large and highly diversified base of more than 20,000 customers who use our systems, maintenance and/or services offerings on a regular, ongoing basis in over 35,000 sites and locations. Additionally, our automotive parts catalog is used at approximately 27,000 locations, many of which are also our systems customers. We have a global customer footprint across more than 150 countries and have a strong presence in both mature and emerging markets in North America, South America, Europe, Africa, Asia and Australia/New Zealand, with approximately 4,600 employees worldwide as of March 31, 2014. Our software is available in more than 30 languages and we continue to translate and localize our systems to enter new geographical markets. In addition, we have a growing network of over 400 global partners, value-added resellers and systems integrators that provide a comprehensive range of solutions and services based on our software. This worldwide coverage provides us with economies of scale, higher capital productivity through lower cost offshore operations, the ability to more effectively deliver our systems and services to high-growth emerging markets, and to support increasingly global businesses. Beginning in fiscal 2014, the Company elected to change the presentation of the revenues and cost of revenues sections of our unaudited condensed consolidated statements of comprehensive loss to better align our presentation with other companies in our industry and to enhance comparability. Beginning in fiscal 2014, within revenues and cost of revenues, we present software and software related services, professional services and hardware and other. Prior periods have been reclassified to conform to the current period presentation. The change in presentation had no effect on the total amount of revenues or cost of revenues and no change has been made to the Company's reporting segments. 36-------------------------------------------------------------------------------- Table of Contents General Business Trends Demand for our systems and services offerings has generally been correlated with the overall macroeconomic conditions. We continue to evaluate the economic situation, the business environment and our outlook for changes. We believe that our customers and prospective customers will invest in IT products and services that deliver value, reduce their operating costs and achieve strong return on investment. We believe that our product and service offerings position us to remain competitive. In the three months ended March 31, 2014, we had positive revenue growth primarily due to solid growth in Software as a Service ("SaaS") and hosting revenues as well as increased software license and software support revenues. These increases offset decreases in consulting services as well as in our hardware and other revenues. Our ERP segment has performed well in fiscal 2014, driven by solid growth in revenues from software license, SaaS revenues and software support in our America's (North, Central and South America) region and continued recovery in our EMEA (Europe, Middle East and Africa) region, partially offset by lower professional services revenues and unfavorable foreign exchange rate impacts in our APAC (Asia Pacific) region. Our Retail Solutions segment performance continues to be driven by longer sales cycles as well as by the number and timing of large strategic deals. Recent quarters of lower software license revenues in Retail Solutions have contributed to lower professional services revenues in fiscal 2014. Our Retail Distribution segment has also performed well in fiscal 2014, driven by software license and hardware revenues which have been favorably impacted by improvements in consumer confidence and the residential housing market recovery. All of our reporting segments continue to see strong customer retention rates. Over the last year we have enhanced our capabilities and marketplace experience with additions to our management team. In October 2013, Joseph L. Cowan became our new President and Chief Executive Officer and during the second quarter of fiscal 2014, Janie West was appointed as Chief Product Officer. Additionally, during the fourth quarter of fiscal 2013, Noel Goggin was appointed as General Manager of Retail Solutions, and Donna Troy was appointed as General Manager of ERP Americas. Components of Operations The key components of our results of operations are as follows: Revenues Our revenues are primarily derived from sales of our software and software related services, professional services and hardware and other to customers that are categorized into one of our three segments - ERP, Retail Solutions and Retail Distribution. • ERP segment - Our ERP segment provides (1) distribution solutions designed to meet the expanding requirement to support a demand driven supply network by increasing focus on the customer and providing a more seamless order-to-shipment cycle for a wide range of vertical markets including electrical supply, plumbing, medical supply, heating and air conditioning, tile, industrial machinery and equipment, industrial supplies, building supplies, fluid power, janitorial and sanitation, medical, value-added fulfillment, food and beverage, redistribution and general distribution; (2) manufacturing solutions designed for discrete, process and mixed-mode manufacturers with batch, lean and "to-order" manufacturing in a range of verticals including industrial machinery, instrumentation and controls, food and beverage, medical devices, printing, packaging, automotive, aerospace and defense, energy and high tech; and (3) financial management and professional services solutions designed to provide the project accounting, time and expense management, and financial analysis and reporting necessary to support the complex requirements of serviced-based companies in the consulting, banking, financial services, not-for-profit and software sectors. • Retail Solutions segment - Our Retail Solutions segment supports (1) large, distributed retail environments that require a comprehensive multichannel retail solution including POS store operations, cross-channel order management, CRM, loyalty management, merchandising, planning and assortment planning, business intelligence and audit and operations management capabilities and (2) small- to mid-sized retailers with our Epicor Software as a Service for retail which provides a preconfigured, full suite retail solution, including the infrastructure for the host and store hardware, ongoing solution updates, monitoring, maintenance and support, as a subscription service. Our Retail Solutions segment caters to the general merchandise, specialty retail, apparel and footwear, sporting goods and department store verticals. 37-------------------------------------------------------------------------------- Table of Contents • Retail Distribution segment - Our Retail Distribution segment supports small- to mid-sized, independent or affiliated retailers that require integrated POS or ERP offerings. Our Retail Distribution segment primarily supports independent hardware retailers, lumber and home centers, lawn and garden centers, farm and agriculture retailers, retail pharmacies, sporting goods, and other specialty hardlines retailers, as well as customers involved in the manufacture, distribution, sale and installation of new and remanufactured parts used in the maintenance and repair of automobiles and light trucks primarily in North America as well as the United Kingdom and Ireland, including several retail chains in North America. Within each segment, we generate revenues from software and software related services, professional services, and hardware and other products as described below. Software and Software Related Services: • Software license revenues - Revenues from the granting of perpetual licenses to customers to use our software and application offerings. • Software and cloud subscriptions - Recurring fees earned from granting customers access to a broad range of our software and application offerings on a subscription basis. These offerings consist primarily of software application modules and suites, proprietary catalogs, ecommerce and electronic data interchange, data warehouses and other data management products and all software accessed or managed on-demand over the Internet through a Software as a Service ("SaaS") model. • Software Support revenues - Revenues earned primarily for providing customers with technical support services, as well as unspecified software upgrades (when and if available) and release updates and patches. Professional Services revenues: Consist primarily of revenues generated from implementation contracts to install (software and hardware), configure and deploy our software products. Our professional services revenues also include business and technical consulting, integration services, custom software development and product training and educational services regarding the use of our software products. Additionally, we provide managed services for customers hosted at our data center facilities, partner data centers or physically on-premise at customer facilities. Hardware and Other revenues: Consist primarily of revenues generated from the re-sale of servers, POS and storage product offerings, hardware maintenance fees and the sale of business products. Operating Expenses Our operating expenses consist primarily of cost of software and software related services revenues, cost of professional services revenues, cost of hardware and other revenues, sales and marketing, product development, general and administrative expenses, acquisition-related costs and restructuring costs as well as non-cash expenses, including depreciation and amortization. We allocate overhead expenses including facilities and information technology costs to all departments based on headcount. As such, overhead expenses are included in cost of revenues and each operating expense category. All operating expenses are allocated to segments, except as otherwise noted below. • Cost of software and software related services revenues - Cost of software and software related services revenues consists primarily of direct costs of software duplication and delivery, third-party royalty fees, third party maintenance costs, channel partner referral fees and other costs associated with product updates and providing support services, as well as material and production costs associated with our automotive catalog and other software and cloud subscription and allocated overhead expenses. • Cost of professional services revenues - Cost of professional services revenues consists primarily of salary related costs, third party consulting fees, travel costs and allocated overhead expenses associated with providing customers' 38-------------------------------------------------------------------------------- Table of Contents system installation and integration, custom modification and training services. Additionally the cost of professional services includes salary related costs, outside services costs, travel costs and allocated overhead expenses associated with providing our hosting and managed services offerings. • Cost of hardware and other revenues - Cost of hardware and other revenues consists primarily of hardware equipment costs, our logistics organization, third party hardware maintenance contracts and the cost of business products. • Sales and marketing - Sales and marketing expense consists primarily of salaries and bonuses, commissions, share-based compensation expense, employee benefits, travel, marketing promotional expenses and allocated overhead expenses. Corporate marketing expenses are not allocated to our segments. We sell market and distribute our products and services worldwide, primarily through a direct sales force and internal telesales, as well as through an indirect channel including a network of VARs, distributors, national account groups and referral partners who market our products on a predominately nonexclusive basis. Our marketing approach includes developing strategic relationships with many of the well-known and influential market participants in the vertical markets that we serve. In addition to obtaining endorsements, referrals and references, we have data licensing and supply chain service agreements with many of these businesses that we believe are influential. The goal of these programs is to enhance the productivity of the field and inside sales teams and to create leveraged selling opportunities, as well as offering increased benefits to our customers by providing access to common industry business processes and best practices. Incentive pay is a significant portion of the total compensation package for all sales representatives and sales managers. Our field sales teams are generally organized by new account sales, which focuses on identifying and selling to new customers and teams focused on existing customers including those migrating from one of our legacy systems to one of our new solution offerings. We also have dedicated inside sales teams that focus on selling upgrades and new software applications to our installed base of customers. In recognition of global opportunities for our software products, we have committed resources to a global sales and marketing effort. We have established offices worldwide to further such sales and marketing efforts. We sell our products in the Americas, EMEA and APAC through a mix of direct operations, VARs and certain third-party distributors. We translate and localize certain products directly or on occasion through outside contractors, for sale in Europe, the Middle East, Africa, Latin America and Asia Pacific. • Product development - Product development expense consists primarily of salaries and bonuses, share-based compensation expense, employee benefits, outside services and allocated overhead expenses. Our product development strategy combines innovative new software capabilities and technology architectures with our commitment to the long-term support of our products to meet the unique needs of our customers and vertical industries we serve. We seek to enhance our existing product lines, offer streamlined upgrade and migration options for our existing customers and develop compelling new products for our existing customer base and prospective new customers. • General and administrative - General and administrative expense primarily consists of salaries and bonuses, share-based compensation expense, employee benefits, outside services, and facility and information technology allocations for the executive, finance and accounting, human resources and legal support functions. Bad debt expenses and legal settlement fees are allocated to our segments and the remaining general and administrative expenses are not allocated. • Depreciation and amortization - Depreciation and amortization expense primarily consists of depreciation attributable to our fixed assets and amortization attributable to our intangible assets acquired in acquisitions. Depreciation and amortization are not allocated to our segments. • Acquisition-related costs - Acquisition-related costs consists primarily of legal fees, investment banker fees, due diligence fees, costs to integrate acquired companies, and costs related to contemplated business combinations and acquisitions. Acquisition-related costs are not allocated to our segments. • Restructuring costs - Restructuring costs relate to management approved restructuring actions to eliminate certain employee positions and to consolidate certain excess facilities with the intent to integrate acquisitions and streamline and focus our operations to properly align our cost structure with our projected revenue streams. Restructuring costs are not allocated to our segments. 39-------------------------------------------------------------------------------- Table of Contents Non-Operating Expenses Our non-operating expenses consist of the following: • Interest expense - Interest expense represents interest on our outstanding debt, amortization of our original issue discount and deferred financing fees related to our outstanding debt, and interest recorded for our interest rate swap. • Other income (expense), net - Other income (expense), net consists primarily of interest income, other non-income based taxes, loss on extinguishment of debt, foreign currency gains or losses and gains or losses on marketable securities. • Income tax expense (benefit) - Income tax expense (benefit) is based on federal, state and foreign taxes owed in these jurisdictions in accordance with current enacted laws and tax rates. Our income tax provision includes current and deferred taxes for these jurisdictions, as well as the impact of uncertain tax benefits for the estimated tax positions taken on tax returns. Results of Operations The following discussion of our revenues and expenses has been prepared by comparing our condensed consolidated results of operations for the comparable three and six-month periods ended March 31, 2014 and 2013. Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 Total revenues Our total revenues were $242.8 million and $238.6 million for the three months ended March 31, 2014 and 2013, respectively. Total revenues increased by $4.2 million, or 2%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The increase was primarily due to growth in software support, hosting and software and cloud subscriptions as well as a $1.3 million decrease in deferred revenue purchase accounting adjustments as described in more detail below. 40-------------------------------------------------------------------------------- Table of Contents The following table sets forth our segment revenues by software and software related services, professional services and hardware and other revenues for the periods indicated and the variance thereof: Three Months Ended (in thousands, except percentages) March 31, 2014 March 31, 2013 Variance $ Variance % ERP revenues: Software and software related services: Software license $ 22,259 $ 23,759 $ (1,500 ) (6 )% Software and cloud subscriptions 5,295 4,498 797 18 % Software support 77,733 74,072 3,661 5 % Total software and software related services 105,287 102,329 2,958 3 % Professional services 40,309 40,493 (184 ) - % Hardware and other 4,193 4,762 (569 ) (12 )% Total ERP revenues 149,789 147,584 2,205 1 % Retail Solutions revenues: Software and software related services: Software license 3,470 2,833 637 22 % Software and cloud subscriptions 2,091 1,932 159 8 % Software support 10,460 10,005 455 5 % Total software and software related services 16,021 14,770 1,251 8 % Professional services 11,060 12,249 (1,189 ) (10 )% Hardware and other 5,100 7,809 (2,709 ) (35 )% Total Retail Solutions revenues 32,181 34,828 (2,647 ) (8 )% Retail Distribution revenues: Software and software related services: Software license 6,559 5,108 1,451 28 % Software and cloud subscriptions 13,954 13,982 (28 ) - % Software support 19,390 19,266 124 1 % Total software and software related services 39,903 38,356 1,547 4 % Professional services 7,919 7,473 446 6 % Hardware and other 12,961 10,310 2,651 26 % Total Retail Distribution revenues 60,783 56,139 4,644 8 % Total revenues: Software and software related services: Software license 32,288 31,700 588 2 % Software and cloud subscriptions 21,340 20,412 928 5 % Software support 107,583 103,343 4,240 4 % Total software and software related services 161,211 155,455 5,756 4 % Professional services 59,288 60,215 (927 ) (2 )% Hardware and other 22,254 22,881 (627 ) (3 )% Total revenues $ 242,753 $ 238,551 $ 4,202 2 % Our ERP, Retail Solutions and Retail Distribution segments accounted for approximately 62%, 13% and 25%, respectively, of our revenues during the three months ended March 31, 2014. This compares to the three months ended March 41-------------------------------------------------------------------------------- Table of Contents 31, 2013, in which our ERP, Retail Solutions and Retail Distribution segments accounted for approximately 62%, 15% and 23%, respectively, of our revenues. The following table sets forth, for the periods indicated, our Non-GAAP segment revenues by software and software related services, professional services and hardware and other excluding the impact of deferred revenue purchase accounting adjustments. Non-GAAP segment revenues, which exclude the impact of deferred revenue purchase accounting adjustments, do not represent GAAP revenues for our segments and should not be viewed as alternatives for GAAP revenues. We use segment revenues excluding the impact of deferred revenue purchase accounting adjustments in order to compare the results of our segments on a comparable basis. Three Months Ended Three Months Ended (in thousands) March 31, 2014 March 31, 2013 Purchase Purchase Accounting Accounting Non-GAAP Adjustment GAAP Non-GAAP Adjustment GAAP ERP revenues: Software and software related services $ 105,287 $ - $ 105,287 $ 103,063 $ (734 ) $ 102,329 Professional services 40,309 - 40,309 40,493 - 40,493 Hardware and other 4,193 - 4,193 4,762 - 4,762 Total ERP revenues 149,789 - 149,789 148,318 (734 ) 147,584 Retail Solutions revenues: Software and software related services 16,021 - 16,021 14,770 - 14,770 Professional services 11,131 (71 ) 11,060 12,386 (137 ) 12,249 Hardware and other 5,100 - 5,100 7,809 - 7,809 Total Retail Solutions revenues 32,252 (71 ) 32,181 34,965 (137 ) 34,828 Retail Distribution revenues: Software and software related services 39,920 (17 ) 39,903 38,925 (569 ) 38,356 Professional services 7,919 - 7,919 7,475 (2 ) 7,473 Hardware and other 13,072 (111 ) 12,961 10,413 (103 ) 10,310 Total Retail Distribution revenues 60,911 (128 ) 60,783 56,813 (674 ) 56,139 Total revenues: Software and software related services 161,228 (17 ) 161,211 156,758 (1,303 ) 155,455 Professional services 59,359 (71 ) 59,288 60,354 (139 ) 60,215 Hardware and other 22,365 (111 ) 22,254 22,984 (103 ) 22,881 Total revenues $ 242,952 $ (199 ) $ 242,753 $ 240,096 $ (1,545 ) $ 238,551 The following discussion is based upon our GAAP results of operations. • ERP revenues - ERP revenues increased by $2.2 million, or 1%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. 42-------------------------------------------------------------------------------- Table of Contents • ERP software and software related services revenues increased by $3.0 million, or 3%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Theincrease was primarily attributable to a $3.7 million increase in software support revenues (which consisted of a $3.0 million increase in support revenues primarily attributable to the addition of new customer software support and support price increases partially offset by attrition as well as a $0.7 million decrease in deferred revenue purchase accounting adjustments) and a $0.8 million increase in software and cloud subscriptions revenues primarily driven by growth in SaaS revenues, partially offset by a $1.5 million decrease in software license revenues due to several large strategic transactions in the prior year primarily in our Americas region. • ERP professional services revenues decreased by $0.2 million or less than 1%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarily due to lower professional services revenues in our APAC region as a result of lower revenues in Australia and New Zealand. • ERP hardware and other revenues decreased by $0.6 million, or 12%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarilyattributable to lower hardware equipment sales in our America's region. • Retail Solutions revenues - Retail Solutions revenues decreased by $2.6 million, or 8%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarily driven by a $2.7 million decrease in hardware and other revenues due to a large strategic transaction in the prior year and a $1.2 million decrease in professional services revenues attributable to a lower backlog as a result of software license revenues in preceding quarters, partially offset by a $1.3 million increase in software and software related services revenues. The increase in software and software related services revenues was driven by a $0.6 million increase in software license revenues primarily as a result of a strategic software license transaction and a $0.5 million increase in software support revenues as a result of new customer software support and support price increases partially offset by attrition, as well as a $0.2 million increase in software and cloud subscriptions revenues due to increased SaaS revenues. • Retail Distributions revenues - Retail Distribution revenues increased by $4.6 million, or 8%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Software and software related services revenues increased by $1.5 million which was primarily attributed to an increase in software license revenues driven by an increased number of new customer software license transactions. Professional services revenues increased by $0.4 million primarily due to higher hosting and network support revenues. Hardware and other revenues increased by $2.7 million primarily attributable to an increase in demand for customers to refresh their hardware equipment. Total operating and other expenses The following table sets forth our operating and other expenses for the periods indicated and the variance thereof: Three Months Ended (in thousands, except percentages) March 31, 2014 March 31, 2013 Variance $ Variance % Cost of software and software related services revenues $ 36,132 $ 37,001 $ (869 ) (2 )% Cost of professional services revenues 45,518 45,734 (216 ) - % Cost of hardware and other revenues 16,317 18,425 (2,108 ) (11 )% Sales and marketing 40,388 41,397 (1,009 ) (2 )% Product development 26,721 25,862 859 3 % General and administrative 15,464 18,501 (3,037 ) (16 )% Depreciation and amortization 42,167 40,818 1,349 3 % Acquisition-related costs 2,064 2,392 (328 ) (14 )% Restructuring costs 1,497 1,649 (152 ) (9 )% Total operating expenses 226,268 231,779 (5,511 ) (2 )% Interest expense (21,632 ) (22,947 ) 1,315 (6 )% Other expense, net (1,276 ) (709 ) (567 ) 80 % Income tax benefit (3,173 ) (4,080 ) 907 (22 )% 43-------------------------------------------------------------------------------- Table of Contents • Cost of software and software related services revenues - Cost of software and software related services revenues decreased by $0.9 million, or 2%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarily attributable to a $1.0 million reduction in software license royalty costs. • Cost of professional services revenues - Cost of professional services revenues decreased by $0.2 million, or less than 1%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarily the result of lower salary related expenses due to lower headcount. • Cost of hardware and other revenues - Cost of hardware and other revenues decreased by $2.1 million, or 11%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarily attributable to a favorable mix of hardware equipment sold in the current year. Hardware equipment refresh revenues in our Retail Distribution segment were at lower cost than our ordinary mix of hardware, additionally the prior year included a large strategic hardware transaction in our Retail Solutions segment which was at a higher cost than our ordinary mix of hardware. • Sales and marketing - Sales and marketing expenses decreased by $1.0 million, or 2%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarily the result of a $1.1 million decrease in sales conference expense, partially offset by a $0.2 million increase in commissions as a result of higher software license and software and cloud subscription revenues. • Product development - Product development expenses increased by $0.9 million, or 3%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The increase was primarily the result of a $1.4 million increase in employee related costs as a result of increased headcount and increased incentive compensation expense, partially offset by a $0.3 million increase in capitalized software costs and a $0.2 million decrease in outside services costs. • General and administrative - General and administrative expenses decreased by $3.0 million, or 16%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarily the result of a $2.2 million one-time insurance recovery recorded in connection with our shareholder litigation case as well as a $1.1 million decrease in bad debt expense, partially offset by a $0.5 million increase in incentive compensation expense. • Depreciation and amortization - Depreciation and amortization expense was $42.2 million for the three months ended March 31, 2014 compared to $40.8 million for the three months ended March 31, 2013, an increase of $1.4 million. The increase was primarily the result of $1.0 million of increased amortization recorded on development costs placed in service and $1.1 million of increased depreciation related to facility leasehold improvements costs and capitalized IT equipment costs, partially offset by a $0.7 million reduction on amortization of acquired intangible assets. • Acquisition-related costs - Acquisition-related costs were $2.1 million for the three months ended March 31, 2014 compared to $2.4 million for the three months ended March 31, 2013. Acquisition-related costs for the three months ended March 31, 2014 consisted primarily of costs for integration activities, such as consolidating the Company's information systems and accounting back office functions, as well as fees incurred relating to the legal entity consolidations of the Solarsoft acquisition. Acquisition-related costs for the three months ended March 31, 2013 consisted primarily of costs for integration activities, such as consolidating the Company's information systems and the accounting back office functions, as well as costs relating to the acquisition of Solarsoft. • Restructuring costs - During the three months ended March 31, 2014, we incurred $1.5 million of management-approved restructuring costs, primarily related to eliminating certain employee positions and exiting certain facilities. During the three months ended March 31, 2013, we incurred $1.6 million of management-approved restructuring costs as a result of our restructuring actions primarily related to eliminating certain employee positions as a result of prior acquisitions. See Note 9 - Restructuring Costs in our unaudited condensed consolidated financial statements. 44-------------------------------------------------------------------------------- Table of Contents Interest expense Interest expense for the three months ended March 31, 2014 was $21.6 million compared to $22.9 million for the three months ended March 31, 2013. The $1.3 million decrease in interest expense was attributed primarily to a $1.5 million decrease in our 2011 Credit Agreement term loan interest expense due to interest rate reductions as a result of refinancing amendments in March 2013 and January 2014 and lower outstanding principal balances, a $0.5 million decrease due to decreased borrowings against our revolving credit facility, a $0.2 million decrease due to ineffectiveness recorded on our interest rate swap, partially offset by $0.9 million of interest expense reclassified from other comprehensive loss related to our interest rate swap. See Note 4 - Debt in our unaudited condensed consolidated financial statements. Other expense, net Other expense, net was $1.3 million for the three months ended March 31, 2014 compared to $0.7 million for the three months ended March 31, 2013. Other expense, net for the three months ended March 31, 2014 consisted primarily of $0.8 million of foreign exchange losses as well as a $0.5 million of loss on extinguishment of debt recorded in connection with the refinancing of our term loan in January 2014. Other expense, net for the three months ended March 31, 2013 consisted primarily of $0.9 million of foreign exchange losses, partially offset by $0.2 million of interest income and gain on marketable securities. Income tax benefit We recorded an income tax benefit of $3.2 million, or 49.4% of pre-tax loss, during the three months ended March 31, 2014 compared to an income tax benefit of $4.1 million, or 24.2% of pre-tax loss, during the three months ended March 31, 2013. Our income tax rate for the three months ended March 31, 2014 differed from the federal statutory rate primarily due to release of uncertain tax position liabilities from lapse of statute of limitations offset by non-deductible expenses including share-based compensation; foreign earnings that are currently taxed in the US under the Controlled Foreign Corporation Regime set forth in the IRC Section 951 through 960; and lower tax rates in foreign jurisdictions where earnings are deemed permanently reinvested. Our income tax rate for the three months ended March 31, 2013 differed from the federal statutory rate primarily due to lower tax rates in jurisdictions where earnings are deemed permanently reinvested, partially offset by non-deducible expense. See Note 7 - Income Taxes in our unaudited condensed consolidated financial statements for additional information about income taxes. Contribution margin Our management measures the performance of each of our segments based on several metrics, including contribution margin, which is a Non-GAAP financial measure. Segment contribution margin includes all segment revenues less the related cost of sales, direct marketing, sales, and product development expenses as well as certain general and administrative expenses, including bad debt expenses and direct legal costs. A significant portion of each segment's expenses arises from shared services and centrally managed infrastructure support costs that we allocate to the segments to determine segment contribution margin. These expenses primarily include information technology services, facilities, and telecommunications costs. See Note 11 - Segment Reporting in our unaudited condensed consolidated financial statements for a description of contribution margin, the reasons why we believe contribution margin provides useful information to investors, the limitations surrounding the use of contribution margin, and a reconciliation of contribution margin to loss before income taxes. Contribution margin for the three months ended March 31, 2014 and 2013 is as follows: Three Months Ended (in thousands, except percentages) March 31, 2014 March 31, 2013 Variance $ Variance % ERP $ 50,258 $ 45,236 $ 5,022 11 % Retail Solutions 9,023 9,958 (935 ) (9 )% Retail Distribution 21,426 17,031 4,395 26 % Total segment contribution margin $ 80,707 $ 72,225 $ 8,482 12 % • ERP contribution margin - Contribution margin for ERP increased by $5.0 million, or 11%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Software and software related services margins 45-------------------------------------------------------------------------------- Table of Contents increased by $3.0 million as a result of a $3.3 million increase in software support margins (attributable to a $2.6 million increase from new customer software support revenues and support price increases partially offset by attrition and a $0.7 million reduction in the deferred revenue purchase accounting adjustments), a $0.6 million increase in software and cloud subscriptions margins primarily due to increased SaaS revenues, partially offset by a $0.9 million decrease in software license margins as a result of decreased software license revenues. Sales and marketing expense decreased $1.9 million primarily as a result of $1.1 million decrease in employee related expenses due to lower headcount and a $0.7 million reduction in sales conference expenses. Additionally, bad debt expenses decreased by $0.8 million. These increases to contribution margin were partially offset by a $0.9 million increase in product development employee related expenses primarily due to increased headcount. • Retail Solutions contribution margin - Contribution margin for Retail Solutions decreased by $0.9 million, or 9%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease was primarily a result of a $1.5 million decrease in professional services margins due to lower professional services revenues and a $0.5 million increase in product development employee related expenses, partially offset by a $1.4 million increase in software and software related services margins due primarily to higher software license and software support revenues. • Retail Distribution contribution margin - Contribution margin for Retail Distribution increased by $4.4 million, or 26%, for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Software and software related services margins increased $2.2 million (including a $0.6 million decrease in deferred revenue purchase accounting adjustments) driven by increased software license revenues as well as increased support margins. Hardware and other margins increased by $1.3 million as a result of increased hardware equipment revenues and higher hardware equipment margins. Professional services margins increased by $0.4 million due to higher revenues. Product development costs decreased by $0.4 million primarily due to an increase in capitalized software and database costs. Additionally, bad debt expense decreased by $0.3 million. These increases were offset by a $0.2 million increase in sales and marketing expenses driven primarily by a $0.5 million increase in sales commission expenses due to higher software license revenues, partially offset by a $0.4 million decrease in sales conference expenses. Six Months Ended March 31, 2014 Compared to Six Months Ended March 31, 2013 Total revenues Our total revenues were $487.8 million and $467.0 million for the six months ended March 31, 2014 and 2013, respectively. Total revenues increased by $20.8 million, or 4%, for the six months ended March 31, 2014 as compared to the six months ended March 31, 2013. The increase was primarily due to growth in software license, software support, SaaS and hosting revenues as well as a $4.0 million decrease in deferred revenue purchase accounting adjustments as described in more detail below. 46-------------------------------------------------------------------------------- Table of Contents The following table sets forth our segment revenues by software and software related services, professional services and hardware and other for the periods indicated and the variance thereof: Six Months Ended (in thousands, except percentages) March 31, 2014 March 31, 2013 Variance $ Variance % ERP revenues: Software and software related services: Software license $ 51,443 $ 44,645 $ 6,798 15 % Software and cloud subscriptions 10,669 8,439 2,230 26 % Software support 154,048 146,683 7,365 5 % Total software and software related services 216,160 199,767 16,393 8 % Professional services 79,345 77,911 1,434 2 % Hardware and other 8,855 10,086 (1,231 ) (12 )% Total ERP revenues 304,360 287,764 16,596 6 % Retail Solutions revenues: Software and software related services: Software license 5,866 6,584 (718 ) (11 )% Software and cloud subscriptions 4,222 3,742 480 13 % Software support 21,070 20,144 926 5 % Total software and software related services 31,158 30,470 688 2 % Professional services 21,839 24,191 (2,352 ) (10 )% Hardware and other 11,763 14,549 (2,786 ) (19 )% Total Retail Solutions revenues 64,760 69,210 (4,450 ) (6 )% Retail Distribution revenues: Software and software related services: Software license 12,383 10,157 2,226 22 % Software and cloud subscriptions 27,729 27,691 38 - % Software support 38,823 38,173 650 2 % Total software and software related services 78,935 76,021 2,914 4 % Professional services 14,408 13,292 1,116 8 % Hardware and other 25,300 20,718 4,582 22 % Total Retail Distribution revenues 118,643 110,031 8,612 8 % Total revenues: Software and software related services: Software license 69,692 61,386 8,306 14 % Software and cloud subscriptions 42,620 39,872 2,748 7 % Software support 213,941 205,000 8,941 4 % Total software and software related services 326,253 306,258 19,995 7 % Professional services 115,592 115,394 198 - % Hardware and other 45,918 45,353 565 1 % Total revenues $ 487,763 $ 467,005 $ 20,758 4 % Our ERP, Retail Solutions and Retail Distribution segments accounted for approximately 63%, 13% and 24%, respectively, of our revenues during the six months ended March 31, 2014. This compares to the six months ended March 31, 47-------------------------------------------------------------------------------- Table of Contents 2013, in which our ERP, Retail Solutions and Retail Distribution segments accounted for approximately 62%, 15% and 23%, respectively, of our revenues. The following table sets forth, for the periods indicated, our Non-GAAP segment revenues by software and software related services, professional services and hardware and other excluding the impact of deferred revenue purchase accounting adjustments. Non-GAAP segment revenues, which exclude the impact of deferred revenue purchase accounting adjustments, do not represent GAAP revenues for our segments and should not be viewed as alternatives for GAAP revenues. We use segment revenues excluding the impact of deferred revenue purchase accounting adjustments in order to compare the results of our segments on a comparable basis. Six Months Ended Six Months Ended (in thousands) March 31, 2014 March 31, 2013 Purchase Purchase Accounting Accounting Non-GAAP Adjustment GAAP Non-GAAP Adjustment GAAP ERP revenues: Software and software related services $ 216,245 $ (85 ) $ 216,160 $ 202,288 $ (2,521 ) $ 199,767 Professional services 79,348 (3 ) 79,345 78,013 (102 ) 77,911 Hardware and other 8,855 - 8,855 10,086 - 10,086 Total ERP revenues 304,448 (88 ) 304,360 290,387 (2,623 ) 287,764 Retail Solutions revenues: Software and software related services 31,158 - 31,158 30,474 (4 ) 30,470 Professional services 21,980 (141 ) 21,839 24,473 (282 ) 24,191 Hardware and other 11,763 - 11,763 14,549 - 14,549 Total Retail Solutions revenues 64,901 (141 ) 64,760 69,496 (286 ) 69,210 Retail Distribution revenues: Software and software related services 78,997 (62 ) 78,935 77,353 (1,332 ) 76,021 Professional services 14,408 - 14,408 13,358 (66 ) 13,292 Hardware and other 25,515 (215 ) 25,300 20,924 (206 ) 20,718 Total Retail Distribution revenues 118,920 (277 ) 118,643 111,635 (1,604 ) 110,031 Total revenues: Software and software related services 326,400 (147 ) 326,253 310,115 (3,857 ) 306,258 Professional services 115,736 (144 ) 115,592 115,844 (450 ) 115,394 Hardware and other 46,133 (215 ) 45,918 45,559 (206 ) 45,353 Total revenues $ 488,269 $ (506 ) $ 487,763 $ 471,518 $ (4,513 ) $ 467,005 The following discussion is based upon our GAAP results of operations. • ERP revenues - ERP revenues increased by $16.6 million, or 6%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. 48-------------------------------------------------------------------------------- Table of Contents • ERP software and software related services revenues increased by $16.4 million, or 8%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The increase was primarily attributable to a $6.8 million increase in software license revenues which was driven by growth in all ourgeographic regions. Our Americas region led the year over year growth as a result of revenues from a large strategic customer and strong revenues in the distribution and manufacturing segments. Software and cloud subscriptions revenues increased by $2.2 million primarily due to growth in SaaS revenues. Software support revenues increased by $7.4 million (which consisted of $5.0 million attributable to the addition of new customer software support and support price increases partially offset by attrition as well as $2.4million decrease in deferred revenue purchase accounting adjustments). • ERP professional services revenues increased by $1.4 million, or 2%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013 driven by increases in our Americas and EMEA regions as a result of increased software license revenue in the preceding quarters, partially offset by a decrease in our APAC region due to weakness in Australia and New Zealand. • ERP hardware and other revenues decreased by $1.2 million, or 12%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The decrease was primarily attributable to lower hardware equipment sales in our Americas region. • Retail Solutions revenues - Retail Solutions revenues decreased by $4.5 million, or 6%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. Professional services revenues decreased by $2.4 million primarily due to lower software license revenues in the preceding quarters, which adversely affects follow-on consulting implementation revenues. Hardware and other decreased by $2.8 million primarily due to a large strategic transaction in the prior year. The $0.7 million increase in software and software related services revenue was predominantly attributable to a $0.9 million increase in software support revenues primarily as a result of the addition of new customer software support and support price increases partially offset by attrition and a $0.5 million increase in software and cloud subscriptions revenues due to increased SaaS revenues, partially offset by a $0.7 million decrease in software license revenues due to a lower level of strategic sales transactions in the current year. • Retail Distributions revenues - Retail Distribution revenues increased by $8.6 million, or 8%, for the six months ended March 31, 2014 as compared to the six months ended March 31, 2013. The $2.9 million increase in software and software related services revenues was primarily due to a $2.2 million increase in software license revenues driven by increased revenues from both new customers and existing customers as well as a $0.5 million decrease in deferred revenue purchase accounting adjustments and a $0.6 million increase in software support revenues driven primarily by a decrease in deferred revenue purchase accounting adjustments. The $1.1 million increase in professional services revenues was primarily attributable to increases in hosting and network support revenues. The $4.6 million increase in hardware and other revenues was primarily attributable to an increase in demand for customers to refresh their hardware equipment. 49-------------------------------------------------------------------------------- Table of Contents Total operating and other expenses The following table sets forth our operating and other expenses for the periods indicated and the variance thereof: Six Months Ended (in thousands, except percentages) March 31, 2014 March 31, 2013 Variance $ Variance % Cost of software and software related services revenues $ 73,037 $ 71,069 $ 1,968 3 % Cost of professional services revenues 89,930 90,148 (218 ) - % Cost of hardware and other revenues 34,616 36,010 (1,394 ) (4 )% Sales and marketing 83,440 81,448 1,992 2 % Product development 54,492 49,674 4,818 10 % General and administrative 37,385 37,302 83 - % Depreciation and amortization 83,024 80,536 2,488 3 % Acquisition-related costs 3,968 3,844 124 3 % Restructuring costs 1,612 3,493 (1,881 ) (54 )% Total operating expenses 461,504 453,524 7,980 2 % Interest expense (44,417 ) (46,989 ) 2,572 (5 )% Other expense, net (247 ) (424 ) 177 (42 )% Income tax benefit (1,217 ) (7,565 ) 6,348 (84 )% • Cost of software and software related services revenues - Cost of software and software related services revenues increased by $1.9 million, or 3%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The increase was primarily attributable to a $1.0 million increase in software and cloud subscriptions cost of revenues, primarily attributed to increased SaaS revenues, a $0.5 million increase in royalty costs as a result of increased software license revenues and $0.4 million of higher compensation expenses in software support as a result of annual merit increases. • Cost of professional services revenues - Cost of professional services revenues decreased by $0.2 million, or less than 1%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The decrease was primarily reduced employee related expenses in our Retail Solutions segment as a result of lower revenues. • Cost of hardware and other revenues - Cost of hardware and other revenues decreased by $1.4 million, or 4%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The decrease was primarily attributable to a decrease in hardware equipment costs driven by a favorable mix of hardware equipment sold. Hardware equipment revenues in our Retail Distribution segment were at a lower cost than our ordinary mix of hardware and additionally the prior year included a large strategic hardware transaction in our Retail Solutions segment which was at a higher cost than our ordinary mix of hardware. • Sales and marketing - Sales and marketing expenses increased by $2.0 million, or 2%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The increase was primarily the result of a $1.8 million increase in commission costs due to increased software license revenues and a $1.4 million increase in employee related costs due primarily to increased incentive bonus and employee benefits costs, partially offset by a $1.0 million decrease in sales conference costs. • Product development - Product development expenses increased by $4.8 million, or 10%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The increase was primarily the result of a $3.7 million increase in employee related costs as a result of increased headcount and associated benefits, a $1.1 million increase in incentive compensation expense and a $0.8 million increase in allocated costs as a result of increased headcount, partially offset by a $0.6 million increase in capitalized software costs. • General and administrative - General and administrative expenses increased by $0.1 million, or less than 1%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The increase was primarily the result of a one-time $2.0 million severance cost related to the departure of our former President and CEO, other severance costs of $0.9 million, and a $1.2 million increase in incentive comp expense, partially offset by a $2.2 million reduction in legal costs due to a one-time insurance recovery recorded in connection with our shareholder 50 -------------------------------------------------------------------------------- Table of Contents litigation case, a $0.4 million reduction in insurance costs, a $0.5 million reduction in salaries and wages, a $0.3 million decrease in allocated costs and a $0.3 million decrease in bad debt expense. • Depreciation and amortization - Depreciation and amortization expense was $83.0 million for the six months ended March 31, 2014 compared to $80.5 million for the six months ended March 31, 2013, an increase of $2.5 million. The increase was primarily the result of $1.8 million of increased amortization recorded on development costs placed in service and $1.7 million of increased depreciation related to facility leasehold improvements costs and capitalized IT equipment costs partially offset by a $1.0 million reduction on amortization of acquired intangible assets. • Acquisition-related costs - Acquisition-related costs were $4.0 million for the six months ended March 31, 2014 compared to $3.8 million for the six months ended March 31, 2013. Acquisition-related costs for the six months ended March 31, 2014 consisted primarily of costs for integration activities, such as consolidating the Company's information systems and accounting back office functions, as well as fees incurred relating to the legal entity consolidations of the Solarsoft acquisition. The acquisition costs for the six months ended March 31, 2013 consisted primarily of costs for integration activities, such as consolidating the Company's information systems and the accounting back office functions, as well as costs relating to the acquisition of Solarsoft. • Restructuring costs - During the six months ended March 31, 2014, we incurred $1.6 million of management-approved restructuring costs, primarily to eliminate certain employee positions and exit certain leased facilities. During the six months ended March 31, 2013, we incurred $3.5 million of management-approved restructuring costs as a result of our restructuring actions primarily related to eliminating certain employee positions as a result of prior acquisitions. See Note 9 - Restructuring Costs in our unaudited condensed consolidated financial statements. Interest expense Interest expense for the six months ended March 31, 2014 was $44.4 million compared to $47.0 million for the six months ended March 31, 2013. The $2.6 million decrease in interest expense was attributed primarily to a $2.9 million decrease in our 2011 Credit Agreement term loan interest expense due to interest rate reductions as a result of refinancing amendments in March 2013 and January 2014 and lower outstanding principal balances, a $1.1 million decrease due to decreased borrowings against our revolving credit facility, a $0.3 million decrease due to ineffectiveness recorded on our interest rate swap and $0.1 million reduction in other fees and expenses, partially offset by $1.8 million of interest expense reclassified from other comprehensive loss related to our interest rate swap. See Note 4 - Debt in our unaudited condensed consolidated financial statements. Other expense, net Other expense, net was $0.2 million for the six months ended March 31, 2014 compared to $0.4 million for the six months ended March 31, 2013. The six months ended March 31, 2014 consisted primarily of a $0.5 million loss on extinguishment of debt recorded in connection with the refinancing of our term loan in January 2014, partially offset by $0.2 million of interest income and $0.1 million of gains on marketable securities. The six months ended March 31, 2013 consisted primarily of $0.9 million of foreign exchange losses, partially offset by $0.2 million of interest income and $0.2 million of recoveries from sales tax audits, and $0.1 million of other income from marketable securities. Income tax expense (benefit) We recorded an income tax benefit of $1.2 million, or 6.6% of pre-tax loss, during the six months ended March 31, 2014 compared to an income tax benefit of $7.6 million, or 22.3% of pre-tax loss, during the six months ended March 31, 2013. Our income tax rate for the six months ended March 31, 2014 differed from the federal statutory rate primarily due to non-deductible expenses including share-based compensation; foreign earnings that are currently taxed in the US under the Controlled Foreign Corporation Regime set forth in the IRC Section 951 through 960; and lower tax rates in foreign jurisdictions where earnings are deemed permanently reinvested, partially offset by other non-deductible expenses. Our income tax rate for the six months ended March 31, 2013 differed from the federal statutory rate primarily due to lower tax rates in jurisdictions where earnings are deemed permanently reinvested, partially offset by non-deducible expense. See Note 7 - Income Taxes in our unaudited condensed consolidated financial statements for additional information about income taxes. 51-------------------------------------------------------------------------------- Table of Contents Contribution margin Our management measures the performance of each of our segments based on several metrics, including contribution margin, which is a Non-GAAP financial measure. Segment contribution margin includes all segment revenues less the related cost of sales, direct marketing, sales, and product development expenses as well as certain general and administrative expenses, including bad debt expenses and direct legal costs. A significant portion of each segment's expenses arises from shared services and centrally managed infrastructure support costs that we allocate to the segments to determine segment contribution margin. These expenses primarily include information technology services, facilities, and telecommunications costs. See Note 11 - Segment Reporting in our unaudited condensed consolidated financial statements for a description of contribution margin, the reasons why we believe contribution margin provides useful information to investors, the limitations surrounding the use of contribution margin, and a reconciliation of contribution margin to loss before income taxes. Contribution margin for the six months ended March 31, 2014 and 2013 is as follows: Six Months Ended (in thousands, except percentages) March 31, 2014 March 31, 2013 Variance $ Variance % ERP $ 100,953 $ 88,761 $ 12,192 14 % Retail Solutions 16,911 20,346 (3,435 ) (17 )% Retail Distribution 39,155 33,175 5,980 18 % Total segment contribution margin $ 157,019 $ 142,282 $ 14,737 10 % • ERP contribution margin - Contribution margin for ERP increased by $12.2 million, or 14%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. Software and software related services margins increased by $13.6 million as a result of a $6.0 million increase in software license margins due to increased software license revenues, a $6.1 million increase in software support margins (attributable to a $3.7 million increase from new customer software support revenues and support price increases partially offset by attrition and a $2.4 million reduction in the deferred revenue purchase accounting adjustments) a $1.5 million increase in software and cloud subscriptions primarily due to increased SaaS revenues. Professional services margins increased by $1.4 million driven by higher hosting and consulting revenues. Hardware and other margins increased by $0.5 million due to a favorable mix of hardware equipment sold. Sales and marketing expense decreased $0.7 million primarily as a result of $0.6 million decrease in employee related expenses due to lower headcount, a $0.7 million reduction in sales conference expenses and a $0.5 million decrease in marketing expenses, partially offset by a $1.2 million increase in commission expense as a result of increased software license revenues. These increases in contribution margin were offset by a $3.6 million increase in product development expenses due to an increase in employee related expenses and allocated expenses primarily due to increased headcount as well as a $0.4 million increase in legal related costs. • Retail Solutions contribution margin - Contribution margin for Retail Solutions decreased by $3.4 million, or 17%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. The decrease was primarily as a result a $2.2 million decrease in professional services margins due to lower professional services revenues, a $1.2 million increase in product development employee related expenses due to higher headcount levels than the prior year and a $0.8 million increase in sales and marketing employee related expenses as a result of increased headcount, partially offset by a $1.1 million increase in software and software related services margins due to higher SaaS and software support revenues. • Retail Distribution contribution margin - Contribution margin for Retail Distribution increased by $6.0 million, or 18%, for the six months ended March 31, 2014 compared to the six months ended March 31, 2013. Software and software related services margins increased $3.3 million (including a $1.3 million decrease in deferred revenue purchase accounting adjustments) driven by increased software license revenues and software support margins. Hardware and other margins increased by $1.7 million as a result of increased hardware equipment revenues and higher hardware equipment margins. Professional services margins increased by $1.0 million due to higher hosting and consulting revenues. Additionally, bad debt expense decreased by $0.4 million. These increases were offset by a $0.5 million increase in sales and marketing expenses driven primarily by a $0.7 million increase in sales commission expenses due to higher software license revenues, partially offset by a $0.4 million decrease in sales conference expenses. Liquidity and Capital Resources 52-------------------------------------------------------------------------------- Table of Contents Our primary sources of liquidity are cash flows provided by operating activities and borrowings under our 2011 Credit Agreement and Senior Notes. We believe that the predictable revenue stream generated by our support revenues as well as other cash flows from operations, and the $88.0 million of borrowing capacity available under the revolving credit facility contained in our 2011 Credit Agreement will be sufficient to cover our liquidity needs required for us to meet our working capital, capital expenditure and other cash requirements (including interest payments on our indebtedness) for the next twelve months. We believe that the costs associated with implementing our business strategy will not materially impact our liquidity. Our liquidity depends upon our future financial performance, which is subject to many economic, commercial, financial and other factors that are beyond our control, including the ability of financial institutions to meet their lending obligations to us. If those factors significantly change, our business may not be able to generate sufficient cash flow from operations or additional capital may not be available to meet our liquidity needs. We anticipate that to the extent that we require additional cash to fund our operations as a result of these factors or in order to execute our strategy, we would either borrow additional amounts under our 2011 Credit Agreement, incur other indebtedness, undertake additional equity financings or a combination of the foregoing. However, we may be unable to obtain any such additional financing on terms acceptable to us or at all. As of March 31, 2014, our total indebtedness was $1,303.0 million ($1,296.3 million, net of original issue discount). We also had an additional undrawn revolving credit facility of $88.0 million. Our cash requirements are, and will continue to be, significant, primarily due to our debt service requirements. Our interest expense for the six months ended March 31, 2014 was $44.4 million. In addition to servicing our debt, in December 2013, we paid an $18.5 million dividend to our indirect parent company, Eagle Midco, Inc. ("EGL Midco"), to fund the December 2013 interest payment on EGL Midco's $400 million in principal amount of Senior PIK Toggle Notes (the "Midco Notes") which mature in June 2018. If EGL Midco pays all interest in cash, we anticipate that our voluntary dividend payments to EGL Midco will be approximately $18 million for the remainder of fiscal 2014 and $36 million per year thereafter. See "Parent Company PIK Toggle Notes" below for further information regarding the Midco Notes. Contractual Obligations The following table summarizes our contractual obligations at March 31, 2014 (in thousands): Payments Due by Fiscal Year Contractual 2019 and Obligations (1): Total 2014 2015 2016 2017 2018 Beyond Long-term debt obligations (2) $ 1,302,966 $ 4,200 $ 8,401 $ 8,401 $ 8,401 $ 808,548 $ 465,015 Operating lease obligations 56,988 8,653 13,513 9,912 8,731 8,666 7,513 Interest obligations (3) 364,539 39,011 77,254 74,100 73,169 60,786 40,219 Pension benefit payments 2,959 105 331 237 257 292 1,737 Total $ 1,727,452 $ 51,969 $ 99,499 $ 92,650 $ 90,558 $ 878,292 $ 514,484 (1) This table excludes obligations for uncertain tax positions with a carrying value of $10.2 million as of March 31, 2014 because the Company is unable to reliably estimate the timing of payment of these obligations. Additionally, this table excludes our estimated dividend payments to fund interest payments on the $400 million of Midco Notes issued by our indirect parent company, EGL Midco. We expect to make dividend payments of approximately $18 million for the remainder of fiscal 2014 and approximately $36 million per year from fiscal 2015 through fiscal 2018 to fund interest payments on the Midco Notes. (2) Includes the current and long-term portion of debt. See Note 4 - Debt in our unaudited condensed consolidated financial statements for additional information regarding our long-term debt obligations. (3) Represents interest payment obligations related to our long-term debt as specified in the applicable debt agreements as of March 31, 2014. A portion of our long-term debt has variable interest rates due to either existing swap agreements or interest arrangements. We have estimated our variable interest payment obligations using the interest rate forward curve where practicable. Interest obligations have been calculated assuming 3-month LIBOR rates will remain below the 1.0% LIBOR floor contained in our term loan as of March 31, 2014. In addition to the contractual obligations and commercial commitments listed above, we expect capital expenditures from fiscal 2014 through fiscal 2017 to range from three to four percent of revenues. 53-------------------------------------------------------------------------------- Table of Contents In December 2013, we paid an $18.5 million dividend to our indirect parent company, EGL Midco, to fund the December 2013 interest payment on the Midco Notes. Additionally, we paid a $13.5 million mandatory prepayment on the term loan contained in our 2011 Credit Agreement. 2011 Senior Secured Credit Agreement On January 17, 2014, we entered into Amendment No. 3 to the 2011 Credit Agreement to reduce the interest rate margin and the LIBOR floor applicable to borrowings under the term loan included in the 2011 Credit Agreement. Amendment No. 3 provided for the refinancing of our existing Term B-1 Loans under the 2011 Credit Agreement with new Term B-2 Loans. The interest rate on the Term B-2 Loans is based, at our option, on a LIBOR rate, plus a margin of 3% per annum, with a LIBOR floor of 1% per annum, or the Base Rate (as defined in the 2011 Credit Agreement), plus a margin of 2% per annum. Amendment No. 3 increased our annual principal payments by $6.3 million for fiscal 2014, decreased our annual principal payments from $8.6 million per annum to $8.4 million per annum from fiscal 2015 through fiscal 2017, and decreased our principal payment at maturity from $810.0 million to $804.3 million. Amendment No. 3 did not affect the maturity date or the outstanding principal amount of the term loan contained in the 2011 Credit Agreement. The borrowings under the 2011 Credit Agreement bear variable interest based on corporate rates, the federal funds rates and Eurocurrency rates. As of March 31, 2014, we had $838.0 million outstanding under the amended term loan, no borrowings outstanding under the revolving credit facility, and the interest rate applicable to the term loans was 4.0%. Substantially all of our assets and those of our domestic subsidiaries are pledged as collateral to secure our obligations under the 2011 Credit Agreement and each of our material wholly-owned domestic subsidiaries guarantees our obligations thereunder. The terms of the 2011 Credit Agreement require compliance with various covenants and amounts repaid under the term loans may not be re-borrowed. For more information, see Note 4 - Debt in the unaudited condensed consolidated financial statements included elsewhere in this filing. Calculation of Excess Cash Flow and Mandatory Prepayments The 2011 Credit Agreement requires us to make certain mandatory prepayments when we generate excess cash flow. Excess cash flow under the 2011 Credit Agreement is calculated as net income, adjusted for non-cash charges and credits, changes in working capital and other adjustments less the sum of debt principal repayments, capital expenditures, and other adjustments. The calculated excess cash flow may be reduced based on our attained ratio of consolidated total debt to consolidated Adjusted EBITDA (consolidated earnings before interest, taxes, depreciation and amortization, further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indenture governing the Senior Notes and our 2011 Credit Agreement), all as defined in the 2011 Credit Agreement. Pursuant to the terms of the 2011 Credit Agreement, excess cash flow is measured on an annual basis. Any mandatory prepayments due are reduced dollar-for-dollar by any voluntary prepayments made during the year. We generated $27 million of excess cash flow during fiscal 2013. As a result, we paid a mandatory prepayment of $13.5 million in December 2013 in accordance with the 2011 Credit Agreement. Senior Notes As of March 31, 2014, we had outstanding $465.0 million in principal amount of Senior Notes due 2019 at an interest rate of 8 5/8% (the "Senior Notes"). The indenture that governs the Senior Notes contains certain covenants, agreements and events of default that are customary with respect to non-investment grade debt securities, including limitations on mergers, consolidations, sale of substantially all of our assets, incurrence of indebtedness, restricted payments liens and affiliates transactions by us or our restricted subsidiaries. The terms of the Senior Notes require us to make an offer to repay the Senior Notes upon a change of control or upon certain asset sales. The terms of the indenture also significantly restrict us and our restricted subsidiaries from paying dividends and otherwise transferring assets. For more information, see Senior Notes Due 2019 in Note 4 - Debt in the unaudited condensed consolidated financial statements included elsewhere in this filing. 54-------------------------------------------------------------------------------- Table of Contents Parent Company PIK Toggle Notes In addition to our debt discussed above, our indirect parent company, Eagle Midco Inc. ("EGL Midco"), has issued $400 million in principal amount of Senior PIK Toggle Notes (the "Midco Notes"). The Midco Notes were issued on June 10, 2013 and mature on June 15, 2018. Interest on the Midco Notes will be payable semiannually in arrears on June 15th and December 15th of each year, commencing on December 15, 2013. See Note 4 - Debt in our unaudited condensed consolidated financial statements for additional information regarding the Midco Notes. We intend to fund cash interest payments through cash dividends to EGL Midco. In December 2013, we paid an $18.5 million dividend to fund the December 2013 interest payment on the Midco Notes. If all interest is paid in cash, our dividend payments to EGL Midco would be approximately $18 million for the remainder of fiscal 2014 and $36 million per year from fiscal 2015 through fiscal 2018. To the extent we do not fund interest with cash, interest obligations will be satisfied by issuing additional notes (PIK Interest). If all interest is paid in the form of PIK Interest, the outstanding balance of the Midco Notes as of their maturity date on June 15, 2018 would be approximately $614 million. Our voluntary servicing of the Midco Notes could affect our liquidity by utilizing cash resources which might otherwise be used to service our debt or fund other investments in our business. Furthermore, we may borrow against our revolving credit facility to service the Midco Notes. If we carry an outstanding balance on our revolving credit facility, we are required to meet the First Lien Senior Secured Leverage Ratio covenant in our 2011 Credit Agreement. See "Covenant Compliance" below for further details on our First Lien Senior Secured Leverage Ratio covenant. We continue to believe, however, that our cash flow from operations, our current working capital, as well as funds available to us on our revolving credit facility will be sufficient to cover our liquidity needs and to fund dividend payments to EGL Midco for the foreseeable future. Off Balance Sheet Arrangements The Securities Exchange Commission rules require disclosure of off-balance sheet arrangements with unconsolidated entities which are reasonably likely to have a material effect on the company's financial position, capital resources, results of operations, or liquidity. We did not have any such off-balance sheet arrangements as of March 31, 2014. Cash Flows Operating Activities Cash provided by operating activities consists of our net loss adjusted for certain non-cash items (primarily amortization, depreciation, deferred income taxes, provision for doubtful accounts and share-based compensation) and the effect of changes in working capital and other activities. Our largest source of operating cash flows is cash collections from our customers following the purchase and renewal of their maintenance agreements. We also generate significant cash from new software license revenues as well as revenues from our professional services and sales of hardware. Our primary uses of cash from operating activities are for employee related expenditures, third party royalties and maintenance, the cost of hardware products, and payment of interest on our debt. Cash provided by operating activities was $80.8 million and $66.5 million for the six months ended March 31, 2014 and 2013, respectively. Cash provided by operating activities increased by $14.2 million for the six months ended March 31, 2014 as compared to the six months ended March 31, 2013. Our net loss plus non-cash items provided $73.8 million and $61.0 million for the six months ended March 31, 2014 and 2013, respectively. This year over year increase was primarily driven by increased gross margins as a result of revenue growth partially offset by increased operating expenses primarily related to employee related expenses, sales commissions as well as a reduction in cash paid for interest due to lower interest rates paid on our term loan and lower borrowings on our revolving credit facility. Changes in operating assets and liabilities provided $7.0 million of cash for the six months ended March 31, 2014 and provided $5.6 million of cash for the six months ended March 31, 2013, respectively. The change in operating assets and liabilities in the six months ended March 31, 2014 was primarily due to reductions in accounts receivable and increases in payroll related accruals, partially offset by reductions in accrued expenses and other current liabilities. The change in operating assets and liabilities in the six months ended March 31, 2013 was primarily due to reductions in accrued interest payable and an increase in accounts receivable. 55-------------------------------------------------------------------------------- Table of Contents Investing Activities Our primary uses of cash for investing activities are for acquisitions of businesses, purchases of property and equipment, and capitalized expenditures for software and database costs. Our primary source of cash from investing activities is the proceeds from the sale of short-term investments. Cash used in investing activities was $12.4 million for the six months ended March 31, 2014, and included $6.4 million used for purchases of property and equipment, and $6.0 million used for capitalized computer software and database costs. Cash used in investing activities was $163.6 million for the six months ended March 31, 2013, and included $152.8 million used for the acquisition of Solarsoft, $6.6 million used for purchases of property and equipment, and $5.6 million used for capitalized computer software and database costs, partially offset by $1.4 million provided by sales of short-term investments. Financing Activities Our primary sources of cash from financing activities include the proceeds of equity investments from funds managed by Apax Partners, LP, which funds beneficially own all of our capital stock, the proceeds from issuance of debt, and the proceeds of loans from affiliates as a result of employee contributions to partnership equity. Our primary uses of cash for financing activities include payments on long-term debt, payments of financing fees, repayments of loans to affiliates and payments of dividends to our indirect parent company, EGL Midco, to fund interest payments on EGL Midco's PIK Toggle Notes. Cash used in financing activities was $36.9 million for the six months ended March 31, 2014, and included $15.6 million of payments on long-term debt as well as $18.5 million used for the payment of a dividend to our indirect parent company, EGL Midco, $1.4 million used for payments to affiliates for share-based liabilities and $1.3 million for payment of financing fees. Cash provided by financing activities was $41.1 million for the six months ended March 31, 2013, and included $44.0 million of net proceeds from our revolving credit facility used to partially finance the Solarsoft acquisition as well as $3.1 million of proceeds from the refinancing of our senior secured term loan, partially offset by $4.3 million of payments on long-term debt and $1.6 million used for payment of financing fees. Cash Held in Foreign Jurisdictions As of March 31, 2014, we held $65.2 million of cash outside of the U.S. Approximately 37% of this cash may be repatriated to the U.S. through repayment of outstanding intercompany loans owed to our U.S. subsidiaries by our foreign subsidiaries. Therefore, there would be no incremental U.S. tax expense to utilize such loan proceeds in the U.S as we intend to repay these loans. The remaining 63% of our foreign cash is deemed to be permanently reinvested to be used to cover working capital requirements of our foreign jurisdictions as well as to finance growth and investment in our foreign operations. These undistributed earnings would be subject to U.S. income tax if repatriated to the United States. Management considers the working capital needs of the U.S. operations, including servicing our debt obligations, when planning to reinvest foreign earnings outside of the U.S. Covenant Compliance The terms of the 2011 Credit Agreement and the Senior Notes restrict certain activities, the most significant of which include limitations on the incurrence of additional indebtedness, liens or guarantees, payment or declaration of dividends, sales of assets and transactions with affiliates. The 2011 Credit Agreement also contains certain customary affirmative covenants and events of default. Under the 2011 Credit Agreement, if at any time we have an outstanding balance under the revolving credit facility, our first lien senior secured leverage, consisting of amounts outstanding under the 2011 Credit Agreement and other secured borrowings, may not exceed the applicable ratio to our consolidated Adjusted EBITDA for the preceding 12-month period. At March 31, 2014, the applicable ratio is 3.75:1.00, which will decrease incrementally to 3.25:1.00 over the term of the revolving credit facility. At March 31, 2014, we had no outstanding borrowings under the revolving credit facility, and as such, we were not subject to the First Lien Senior Secured Leverage Ratio requirement. 56-------------------------------------------------------------------------------- Table of Contents We use consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA"), as further adjusted, a Non-GAAP financial measure, to determine our compliance with certain covenants contained in the 2011 Credit Agreement and the Senior Notes. For covenant calculation purposes, "Adjusted EBITDA" (referred to as "Consolidated EBITDA" in the 2011 Credit Agreement) is generally defined to consist of consolidated net income (loss) adjusted to exclude interest, taxes, depreciation and amortization, and further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under our 2011 Credit Agreement. The breach of covenants in our 2011 Credit Agreement that are tied to ratios based on Adjusted EBITDA could result in a default under that agreement and under our indenture governing the Senior Notes. EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures) We believe that EBITDA and Adjusted EBITDA are useful financial metrics to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We believe that these Non-GAAP financial measures provide investors with useful tools for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt and to undertake capital expenditures. We use EBITDA and Adjusted EBITDA for business planning purposes and in measuring our performance relative to that of our competitors. We believe EBITDA and Adjusted EBITDA are measures commonly used by investors to evaluate our performance and that of our competitors. EBITDA and Adjusted EBITDA are not presentations made in accordance with GAAP and our use of the terms EBITDA and Adjusted EBITDA varies from others in our industry. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income (loss), operating income or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows or as measures of liquidity. EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. For example, EBITDA and Adjusted EBITDA: • exclude certain tax payments that may represent a reduction in cash available to us; • exclude amortization of intangible assets, which were acquired in acquisitions of businesses in exchange for cash; • do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future; • do not reflect changes in, or cash requirements for, our working capital needs; and • do not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt. Although we were not required to meet a First Lien Senior Secured Leverage Ratio, which relates to our Adjusted EBITDA under our 2011 Credit Agreement, as of March 31, 2014, due to the factors discussed above, our management believes that Adjusted EBITDA is a key performance indicator for us. As such, the calculation of Adjusted EBITDA for the periods indicated below is as follows: Twelve Months Ended (in thousands) March 31, 2014 March 31, 2013 Reconciliation of net loss to Adjusted EBITDA Net loss $ (31,194 ) $ (38,556 ) Interest expense 90,097 92,113 Income tax expense (benefit) 1,586 (8,772 ) Depreciation and amortization 163,353 151,678 EBITDA 223,842 196,463 Acquisition-related costs 8,685 9,868 Restructuring costs 3,009 4,057 Deferred revenue and other purchase accounting adjustments 2,193 6,678 Share-based compensation expense 5,575 7,702 Management fees paid to Apax 2,023 1,945 Other 11,264 6,524 Adjusted EBITDA $ 256,591 $ 233,237 57-------------------------------------------------------------------------------- Table of Contents First Lien Senior Secured Leverage Ratio Our 2011 Credit Agreement contains a First Lien Senior Secured Leverage Ratio covenant which is effective if we have an outstanding balance on our revolving credit facility as of the end of the applicable measurement period. As of March 31, 2014, we did not have a balance outstanding on our revolving credit facility. As a result, we were not required to meet this covenant as of and for the twelve months ended March 31, 2014. The First Lien Senior Secured Leverage Ratio is calculated by dividing the end of period outstanding balance of our term loan and revolving credit facility, reduced by the end of period balance of our cash and cash equivalents, by our Adjusted EBITDA for the previous twelve month period. The table below presents the First Lien Senior Secured Leverage Ratio which would have been required by the covenant at March 31, 2014 if we had a balance outstanding on our revolving credit facility, as well as the actual ratio attained as of March 31, 2014. Covenant Requirements (Maximum Ratio Allowed) Our Ratio First Lien Senior Secured Leverage Ratio 3.75x 2.82x Recently Issued Accounting Pronouncements See Note 1 - Basis of Presentation and Accounting Policy Information in our unaudited condensed consolidated financial statements for a summary of recently issued accounting pronouncements. Updates to Critical Accounting Policies During the six months ended March 31, 2014, we updated our accounting policy for revenue recognition to reflect the updates to the categories of revenue presented in our unaudited condensed consolidated statements of comprehensive loss. See Note 1 - Basis of Presentation and Accounting Policy Information - for our updated revenue recognition policy. For a full list of our accounting policies, please refer to our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 11, 2013. Item 3 - Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our exposure to market risk for changes in interest rates generally relates to our short and long-term debt obligations. At March 31, 2014, under the 2011 Credit Agreement, we had $838.0 million aggregate principal amount outstanding of term loans due 2018, $465.0 million in principal amount of Senior Notes, and no outstanding borrowings under our revolving credit facility. The term loans bear interest at floating rates, subject to a 1.0% LIBOR floor. The revolving credit facility bears interest at floating rates. As of March 31, 2014, we had no borrowings outstanding under the revolving credit facility. As of March 31, 2014, we had an outstanding hedging instrument consisting of a 30-month interest rate swap, to manage and reduce the risk inherent in interest rate fluctuations. The interest rate swap had an initial notional amount of $436.2 million, which effectively converts the applicable notional amount of floating rate debt to fixed rate debt (subject to a 1.25% LIBOR floor), commencing with the 30-month period beginning March 31, 2013 through September 30, 2015. As of March 31, 2014, the notional amount of the interest rate swap was $431.3 million. As of March 31, 2014, the 3-month LIBOR rate was 0.23%. As our term loan and swap have LIBOR floors of 1.00% and 1.25%, respectively, as of March 31, 2014, changes in the 3-month LIBOR below 1.00% would only affect interest payments on our revolving credit facility. As we have no borrowings outstanding under the revolving credit facility as of March 31, 2014, hypothetical changes in the 3-month LIBOR below 1.00% would not affect our interest expense. Changes in the LIBOR between 1.00% and 1.25% would impact interest expense on our term loan. A hypothetical change in the 3-month LIBOR rate from 1.00% to 1.25% would increase our interest expense by approximately $2.1 million annually, calculated as 0.25% of the outstanding principal amount of our term loan as of March 31, 2014. Changes in the LIBOR above 1.25% would impact interest expense on our swap and our term loan. As the outstanding principal amount of the term loans exceeds the notional amount of the swap, a hypothetical change in the 3-month LIBOR from 1.25% to 2.25% would increase our interest expense by 58-------------------------------------------------------------------------------- Table of Contents approximately $4.1 million annually, calculated as 1% of the excess of the outstanding principal balance of our term loan over the notional amount of our interest rate swap. See Note 5 - Derivative Instruments and Hedging Activities in our unaudited condensed consolidated financial statements, which section is incorporated herein by reference. Foreign Currency Risk We have operations in foreign locations around the world. These operations incur revenue and expenses in various foreign currencies. Revenues and expenses denominated in currencies other than the United States Dollar expose us to foreign currency exchange rate and devaluation risk. Unfavorable movements in foreign currency exchange rates between the United States Dollar and other foreign currencies and devaluation of foreign currencies may have an adverse impact on our operations and financial results. These foreign currency exchange rate movements could create a foreign currency gain or loss that could be realized or unrealized. The foreign currencies for which we currently have the most significant exposure are the Australian Dollar, Canadian Dollar, Euro, British Pound, Mexican Peso, Malaysian Ringgit and Swedish Krona. We use foreign currency forward contracts to manage our market risk exposure associated with foreign currency exchange rate fluctuations for certain (i) intercompany balances denominated in currencies other than an entity's functional currency and (ii) net asset exposures for entities that transact business in foreign currency but are U.S. Dollar functional for consolidation purposes. For the six months ended March 31, 2014, we recorded a net foreign currency loss of approximately $0.1 million. An effective 1% increase or decrease in average currency rates measured against the United States Dollar would affect our earnings by approximately $0.4 million. Included in our $0.1 million net foreign currency loss for the six months ended March 31, 2014 is a foreign currency remeasurement loss of $1.0 million. This loss is related to the remeasurement of certain assets and liabilities of our Venezuelan subsidiary. The Venezuelan economy has been determined to be "highly inflationary" in accordance with the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) 830, Foreign Currency Matters. In our second quarter of fiscal 2014, the Venezuelan government issued a new exchange agreement that states that certain foreign currency transactions, including the payment of royalties and the use of patents and technology importation agreements, which previously were subject to Venezuela's official Bolivar Fuerte ("VEF") to U.S. Dollar exchange rate (the "Official Rate"), are subject to conversion at the rate established at the Venezuelan government's most recent auction-based exchange rate program, the Complementary System for Foreign Currency Administration ("SICAD") rate. This SICAD rate is lower than Venezuela's Official Rate, resulting in the remeasurement loss noted above. |