** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

 

**ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For theQuarterly Period Ended June 30, 2002**

 

**o  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile Number********000-30389**

 

**EXE TECHNOLOGIES, INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                    |   | **751719817**                            |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |                                     |
|                                                            |   |                                     |
| **8787  Stemmons Freeway**                                      |
| **Dallas,  Texas 75247**                                        |
| (Address including zip  code of principal executive offices)    |
|                                                            |   |                                     |
| **(214)  775-6000**                                             |
| (Registrant’s telephone  number, including area code)      |

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes  ý      NO  o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of July 31, 2002.

 

Common stock, $0.01 parvalue, 46,059,766 shares outstanding.

 

 

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#### **EXE TECHNOLOGIES,INC. AND SUBSIDIARIES**

#### **INDEX TO FORM 10-Q**

 
| **PART I.**                        |   | **FINANCIAL INFORMATION**                                                                       |
|------------------------------------|--------|-------------------------------------------------------------------------------------------------|
|                               |   |                                                                                            |
| **Item 1.**                        |   | **Financial Statements**                                                                        |
|                               |   |                                                                                            |
|                               |   | **Consolidated Balance Sheets**                                                                 |
|                               |   |                                                                                            |
|                               |   | **Consolidated  Statements of Operations**                                                      |
|                               |   |                                                                                            |
|                               |   | **Consolidated  Statements of Cash Flows**                                                      |
|                               |   |                                                                                            |
|                               |   | **Notes  to Consolidated Financial Statements**                                                 |
|                               |   |                                                                                            |
| **Item  2.**                       |   | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|                               |   |                                                                                            |
| **Item  3.**                       |   | **Quantitative  and Qualitative Disclosures About Market Risk**                                 |
|                               |   |                                                                                            |
| **PART II.**                       |   | **OTHER INFORMATION**                                                                           |
|                               |   |                                                                                            |
| **Item  2.**                       |   | **Changes  in Securities and Use of Proceeds**                                                  |
|                               |   |                                                                                            |
| **Item  4.**                       |   | **Submission  of Matters to a Vote of Security Holders**                                        |
|                               |   |                                                                                            |
| **Item 6.**                        |   | **Exhibits and  Reports on Form 8-K**                                                           |
|                               |   |                                                                                            |
| **Signatures**                     |
|                               |   |                                                                                            |
| **Index to Exhibits and Exhibits** |

 

2

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**PART I.****                                 ****FINANCIALINFORMATION**

** **

**ITEM 1.****                                  ****FINANCIALSTATEMENTS**

** **

**EXE TECHNOLOGIES, INC. ANDSUBSIDIARIES**

#### **CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                                    |   | **As of  December 31,  2001** |       | **As of  June 30,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|---------------------------|--------|
|                                                                                                                                                                                    |   |                          |       | **(unaudited)**           |   |
| **Assets**                                                                                                                                                                              |   |                          |       |                      |   |
| **Current assets:**                                                                                                                                                                     |   |                          |       |                      |   |
| Cash and cash equivalents                                                                                                                                                               |   | $                             | 30,250,156 |                      | $      | 35,260,238 |   |
| Marketable securities, short-term                                                                                                                                                       |   | 12,842,683                    |       | 7,335,752                 |   |
| Accounts receivable, net of allowance for doubtful accounts and  adjustments of approximately $3,721,000 and $4,153,000 at December 31, 2001  and June 30, 2002, respectively           |   | 25,029,162                    |       | 17,488,596                |   |
| Other receivables and advances                                                                                                                                                          |   | 572,438                       |       | 445,612                   |   |
| Prepaid and other current assets                                                                                                                                                        |   | 2,171,409                     |       | 2,852,463                 |   |
| Total current assets                                                                                                                                                                    |   | 70,865,848                    |       | 63,382,661                |   |
| Marketable securities, long-term                                                                                                                                                        |   | 2,203,891                     |       | 4,417,028                 |   |
| Property and equipment, net                                                                                                                                                             |   | 8,424,584                     |       | 6,080,219                 |   |
| Goodwill, net                                                                                                                                                                           |   | 5,265,685                     |       | 5,265,685                 |   |
| Intangible assets, net                                                                                                                                                                  |   | 1,760,666                     |       | 1,199,366                 |   |
| Other assets                                                                                                                                                                            |   | 2,549,794                     |       | 1,709,569                 |   |
| Total assets                                                                                                                                                                            |   | $                             | 91,070,468 |                      | $      | 82,054,528 |   |
|                                                                                                                                                                                    |   |                          |       |                      |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                          |   |                          |       |                      |   |
| **Current liabilities:**                                                                                                                                                                |   |                          |       |                      |   |
| Accounts payable                                                                                                                                                                        |   | $                             | 6,585,936  |                      | $      | 6,574,901 |   |
| Accrued expenses                                                                                                                                                                        |   | 11,557,606                    |       | 11,106,240                |   |
| Accrued payroll and benefits                                                                                                                                                            |   | 1,749,046                     |       | 2,030,730                 |   |
| Deferred revenue                                                                                                                                                                        |   | 9,206,736                     |       | 10,128,804                |   |
| Current portion of long-term debt and capital lease obligations                                                                                                                         |   | 435,167                       |       | 541,842                   |   |
| Total current liabilities                                                                                                                                                               |   | 29,534,491                    |       | 30,382,517                |   |
| Long-term debt and capital lease obligations, net of current portion                                                                                                                    |   | 995,973                       |       | 670,670                   |   |
| Long-term accrued expenses, net of current portion                                                                                                                                      |   | 6,814,018                     |       | 9,106,545                 |   |
| Minority interest                                                                                                                                                                       |   | 169,623                       |       | 178,794                   |   |
| Commitments and contingencies                                                                                                                                                           |   |                          |       |                      |   |
| **Stockholders’ equity:**                                                                                                                                                          |   |                          |       |                      |   |
| Preferred stock, $.01 par value:   shares authorized — 20,000,000;   none issued or outstanding                                                                          |   | —                        |       | —                    |   |
| Common stock, voting, $.01 par value:   shares authorized — 150,000,000; shares issued — 46,788,900 and  47,154,689 at December 31, 2001 and June 30, 2002, respectively |   | 467,889                       |       | 471,547                   |   |
| Additional paid-in capital                                                                                                                                                              |   | 178,741,296                   |       | 179,122,032               |   |
| Note receivable from stockholder                                                                                                                                                        |   | (211,750                      | )          | —                    |   |
| Treasury stock, at cost, 999,483 and 1,094,923 shares of common stock  at December 31, 2001 and June 30, 2002, respectively                                                             |   | (3,431,464                    | )          | (3,645,859                | )      |
| Accumulated deficit                                                                                                                                                                     |   | (119,601,384                  | )          | (131,748,713              | )      |
| Deferred compensation                                                                                                                                                                   |   | (2,515,440                    | )          | (1,978,070                | )      |
| Other comprehensive income (loss)                                                                                                                                                       |   | 107,216                       |       | (504,935                  | )      |
| Total stockholders’ equity                                                                                                                                                         |   | 53,556,363                    |       | 41,716,002                |   |
| Total liabilities and stockholders’ equity                                                                                                                                         |   | $                             | 91,070,468 |                      | $      | 82,054,528 |   |

 

*Seeaccompanying notes.*

 

3

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**EXE TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

** **
|                                                                      |   | **Three Months Ended  June 30,** |        | **Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------|--------|----------------------------------|-------------|--------------------------------|--------|
|                                                                      |   | **2001**                         |        | **2002**                       |   | **2001** |   | **2002** |   |
|                                                                      |   |                             |        |                           |   |   |   |   |   |
| **Revenue:**                                                              |   |                             |        |                           |   |   |   |   |   |
| Software license                                                          |   | $                                | 5,545,591   |                           | $      | 3,122,592 |   | $ | 15,530,773 |   | $ | 7,266,664 |   |
| Services and maintenance                                                  |   | 16,757,063                       |        | 12,831,201                     |   | 34,429,139 |   | 24,694,834 |   |
| Resale of software and equipment                                          |   | 2,412,377                        |        | 2,000,300                      |   | 4,112,350 |   | 5,099,369 |   |
| Reimbursable expenses                                                     |   | 657,452                          |        | 477,017                        |   | 1,514,655 |   | 1,006,215 |   |
| Total revenue                                                             |   | 25,372,483                       |        | 18,431,110                     |   | 55,586,917 |   | 38,067,082 |   |
| **Costs and expenses:**                                                   |   |                             |        |                           |   |   |   |   |   |
| Cost of software licenses                                                 |   | 84,158                           |        | 86,305                         |   | 130,459 |   | 199,381 |   |
| Cost of services and maintenance                                          |   | 10,980,577                       |        | 8,042,909                      |   | 22,616,503 |   | 16,218,209 |   |
| Cost of resale of software and equipment                                  |   | 1,989,929                        |        | 1,655,829                      |   | 3,316,041 |   | 4,228,063 |   |
| Cost of reimbursable expenses                                             |   | 657,452                          |        | 477,017                        |   | 1,514,655 |   | 1,006,215 |   |
| Sales and marketing                                                       |   | 7,327,142                        |        | 4,914,140                      |   | 14,639,371 |   | 9,969,243 |   |
| Research and development                                                  |   | 3,989,260                        |        | 2,907,218                      |   | 7,836,946 |   | 5,960,601 |   |
| General and administrative                                                |   | 5,621,392                        |        | 3,018,315                      |   | 10,039,759 |   | 6,195,616 |   |
| Amortization of goodwill and intangible assets                            |   | 2,316,591                        |        | 280,293                        |   | 4,203,504 |   | 561,300 |   |
| Warrant and stock compensation expense allocated to:                      |   |                             |        |                           |   |   |   |   |   |
| Cost of services and maintenance                                          |   | 128,397                          |        | 87,946                         |   | 276,619 |   | 175,892 |   |
| Sales and marketing                                                       |   | 49,500                           |        | 45,446                         |   | 240,936 |   | 90,892 |   |
| Research and development                                                  |   | 58,487                           |        | 45,446                         |   | 94,076 |   | 90,892 |   |
| General and administrative                                                |   | 130,204                          |        | 89,847                         |   | 316,090 |   | 179,694 |   |
| Provision for estimated loss on lease abandonment                         |   | 7,440,336                        |        | 3,998,862                      |   | 7,440,336 |   | 3,998,862 |   |
| Employee severance and other facility closure costs                       |   | 2,059,664                        |        | 2,487,769                      |   | 2,489,744 |   | 2,487,769 |   |
| Total costs and expenses                                                  |   | 42,833,089                       |        | 28,137,342                     |   | 75,155,039 |   | 51,362,629 |   |
| Operating loss                                                            |   | (17,460,606                      | )           | (9,706,232                     | )      | (19,568,122 | ) | (13,295,547 | ) |
| **Other income (expense):**                                               |   |                             |        |                           |   |   |   |   |   |
| Interest income                                                           |   | 664,146                          |        | 302,356                        |   | 1,495,245 |   | 633,333 |   |
| Interest expense                                                          |   | (12,304                          | )           | (20,928                        | )      | (20,008 | ) | (50,816 | ) |
| Other                                                                     |   | 17,464                           |        | 807,198                        |   | (386,951 | ) | 753,693 |   |
| Total other income                                                        |   | 669,306                          |        | 1,088,626                      |   | 1,088,286 |   | 1,336,210 |   |
| Loss before minority interest and taxes                                   |   | (16,791,300                      | )           | (8,617,606                     | )      | (18,479,836 | ) | (11,959,337 | ) |
| Minority interest in subsidiary income                                    |   | (1,778                           | )           | (4,150                         | )      | (100,671 | ) | (9,171 | ) |
| Loss before taxes                                                         |   | (16,793,078                      | )           | (8,621,756                     | )      | (18,580,507 | ) | (11,968,508 | ) |
| Income taxes                                                              |   | 151,377                          |        | 178,821                        |   | 151,377 |   | 178,821 |   |
| Net loss                                                                  |   | $                                | (16,944,455 | )                              | $      | (8,800,577 | ) | $ | (18,731,884 | ) | $ | (12,147,329 | ) |
| Net loss per common share - basic and diluted                             |   | $                                | (0.37       | )                              | $      | (0.19 | ) | $ | (0.42 | ) | $ | (0.26 | ) |
| Weighted average number of common shares outstanding - basic and  diluted |   | 45,432,434                       |        | 46,049,634                     |   | 45,086,391 |   | 45,982,161 |   |

 

*Seeaccompanying notes.*

 

4

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**EXE TECHNOLOGIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

** **
|                                                                                       |   | **Six Months Ended  June 30,** |        |
|--------------------------------------------------------------------------------------------|--------|--------------------------------|-------------|
|                                                                                       |   | **2001**                       |        | **2002** |   |
| **Cash Flow from Opertating Activities:**                                                  |   |                           |        |   |   |
| Net loss                                                                                   |   | $                              | (18,731,884 | ) | $ | (12,147,329 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in)  operating activities: |   |                           |        |   |   |
| Depreciation and amortization                                                              |   | 6,178,452                      |        | 2,277,576 |   |
| Write-down of property and equipment                                                       |   | —                         |        | 1,032,408 |   |
| Provision for doubtful accounts                                                            |   | 2,591,418                      |        | 1,847,146 |   |
| Amortization of deferred compensation                                                      |   | 753,371                        |        | 537,370 |   |
| Issuance of warrants for services                                                          |   | 174,350                        |        | — |   |
| Minority interest                                                                          |   | 109,102                        |        | 9,171 |   |
| Changes in operating assets and liabilities, net of effect of acquisition:                 |   |                           |        |   |   |
| Accounts receivable                                                                        |   | (1,673,115                     | )           | 5,693,420 |   |
| Other receivables and advances                                                             |   | (141,196                       | )           | 126,826 |   |
| Prepaids and other current assets                                                          |   | (289,304                       | )           | (681,054 | ) |
| Other long-term assets                                                                     |   | (607,598                       | )           | 840,225 |   |
| Accounts payable                                                                           |   | (757,499                       | )           | (11,035 | ) |
| Accrued payroll and benefits                                                               |   | (544,781                       | )           | 281,684 |   |
| Deferred revenue                                                                           |   | (889,102                       | )           | 922,068 |   |
| Accrued expenses                                                                           |   | 8,135,580                      |        | 1,841,161 |   |
| Other                                                                                      |   | (132,185                       | )           | (566,652 | ) |
| Net cash provided by (used in) operating activities                                        |   | (5,824,391                     | )           | 2,002,985 |   |
|                                                                                       |   |                           |        |   |   |
| **Cash Flow from Investing Activites:**                                                    |   |                           |        |   |   |
| Purchases of property and equipment                                                        |   | (1,132,629                     | )           | (452,463 | ) |
| Purchase of marketable securities                                                          |   | (12,250,000                    | )           | (6,210,000 | ) |
| Proceeds from sale of marketable securities                                                |   | 13,922,116                     |        | 9,503,794 |   |
| Cash paid for AllPoints acquisition                                                        |   | (1,618,109                     | )           | — |   |
| Net cash provided by (used in) investing activities                                        |   | (1,078,622                     | )           | 2,841,331 |   |
|                                                                                       |   |                           |        |   |   |
| **Cash Flow from Financing Activities:**                                                   |   |                           |        |   |   |
| Issuance of common stock for options and warrants                                          |   | 1,114,665                      |        | 384,394 |   |
| Payments on long-term debt                                                                 |   | (122,072                       | )           | (218,628 | ) |
| Retirement of AllPoints line of credit                                                     |   | (750,000                       | )           | — |   |
| Net cash provided by financing activities                                                  |   | 242,593                        |        | 165,766 |   |
|                                                                                       |   |                           |        |   |   |
| Net increase (decrease) in cash and cash equivalents                                       |   | (6,660,420                     | )           | 5,010,082 |   |
| Cash and cash equivalents at beginning of year                                             |   | 39,820,056                     |        | 30,250,156 |   |
| Cash and cash equivalents at end of period                                                 |   | $                              | 33,159,636  |   | $ | 35,260,238 |   |

 

*Seeaccompanying notes.*

 

5

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**EXE TECHNOLOGIES, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

** **

**1.  Principles ofConsolidation and Basis of Presentation**

** **

EXE Technologies, Inc.(the Company or EXE) provides software that drives customers’ supply chainexecution processes, including fulfillment, warehousing, distribution, andinventory management. The accompanying unaudited consolidated financialstatements include the accounts of EXE Technologies, Inc. and ourmajority-owned subsidiaries. All significant intercompany balances and transactionshave been eliminated in consolidation.

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples for interim financial information and with the instructions to Form10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by generally accepted accountingprinciples for fiscal year end financial statements. In the opinion ofmanagement, all adjustments (consisting only of normal recurring entries)considered necessary for a fair presentation of the results have been includedfor the interim periods presented. Operating results for the three and sixmonth periods ended June 30, 2002 are not necessarily indicative of the resultsthat may be expected for any other interim period or for the year endingDecember 31, 2002. These statements should be read in conjunction with theCompany’s audited financial statements included in the Company’s Form 10-K forthe year ended December 31, 2001.

 

Certain amounts in prior year financial statementshave been reclassified to conform to current year presentation.

 

On January 1, 2002, the Company adopted FinancialAccounting Standards Board Staff Announcement Topic No. D-103, “*Income Statement Characterization of ReimbursementsReceived for “Out-of-Pocket” Expenses Incurred.*”  As a result, the Company began recordingrevenue and a related cost of revenue in its statement of operations forreimbursable expenses such as airfare, hotel lodging, meals, auto rental andother charges related to providing services to our customers.  Prior to the adoption of this standard, theCompany recorded these expense reimbursements as a reduction of expenses.  The Company’s prior period financial statementshave been reclassified to comply with the new standard.

 

Effective January 1, 2002, the Company adoptedEmerging Issues Task Force (EITF) 00-25, *“VendorIncome Statement Characterization of Consideration Paid to a Reseller of theVendor’s Products”*.  EITF00-25 requires consideration paid to resellers of the Company’s products berecorded as a reduction in revenue.  Theapplication of this EITF does not result in any impact to operating or netincome (loss) in any past or future periods. The Company’s prior period financial statements have been reclassifiedto comply with the new standard.

 

In October 2001, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standards (SFAS) No. 144, “*Accounting for the Impairment or Disposal ofLong-Lived Assets*,” effective for fiscal years beginning afterDecember 15, 2001.  This statementestablishes new rules for determining impairment of certain other long-livedassets, including intangible assets subject to amortization, property andequipment and long-lived prepaid assets. The adoption of this standard did not have an effect on the operatingresults or the financial position of the Company.

 

6

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**2.  Net Loss Per Share**

 

The Company computes net income (loss) per share inaccordance with the provisions of SFAS No. 128, “Earnings per Share.” Basic netincome (loss) per common share is computed using the weighted average number ofshares of common stock outstanding during each period.

 

Diluted net income (loss) per common share is computedusing the weighted average number of shares of common stock outstanding duringeach period and common equivalent shares consisting of preferred stock,warrants and stock options (using the treasury stock method), if dilutive.Diluted loss per common share is the same as basic loss per common share forall periods presented because all potentially dilutive securities wereanti-dilutive. The following table sets forth anti-dilutive securities whichhave been excluded from diluted earnings per share for the periods presented:

 
|                                     |   | **As of June 30,** |   |
|------------------------------------------|--------|--------------------|--------|
|                                     |   | **2001**           |   | **2002** |   |
|                                     |   |               |   |   |   |
| Common stock  options                    |   | 9,081,625          |   | 9,086,698 |   |
| Warrants                                 |   | —             |   | 15,000 |   |
| Total  anti-dilutive securities excluded |   | 9,081,625          |   | 9,101,698 |   |

 

**3.  Comprehensive Loss**

 

Comprehensive loss includes foreign currencytranslation gains (losses) and unrealized gains (losses) on securitiesavailable for sale.  The following tablesets forth the calculation of comprehensive loss for the periods presented:

 
|                                                     |   | **Three Months Ended  June 30,** |        | **Six Months Ended  June 30,** |   |
|----------------------------------------------------------|--------|----------------------------------|-------------|--------------------------------|--------|
|                                                     |   | **2001**                         |        | **2002**                       |   | **2001** |   | **2002** |   |
|                                                     |   |                             |        |                           |   |   |   |   |   |
| Net loss                                                 |   | $                                | (16,944,455 | )                              | $      | (8,800,577 | ) | $ | (18,731,884 | ) | $ | (12,147,329 | ) |
| Foreign currency  translation gains (losses)             |   | (2,490                           | )           | (566,259                       | )      | 171,951 |   | (483,796 | ) |
| Unrealized gain  (loss) on securities available for sale |   | (385                             | )           | (12,032                        | )      | 114,857 |   | (128,355 | ) |
| Total  comprehensive loss                                |   | $                                | (16,947,330 | )                              | $      | (9,378,868 | ) | $ | (18,445,076 | ) | $ | (12,759,480 | ) |

 

###### **4.  DerivativeFinancial Instruments**

 

The Company hedgescertain nonfunctional currency exposure. Forward currency exchange contracts are utilized by the Company toreduce foreign currency exchange and interest rate risks with the goal ofoffsetting foreign currency transaction gains and losses recorded foraccounting purposes with gains and losses realized on the forwardcontracts.  The Company does not holdderivative financial instruments for trading or speculative purposes.

 

As of June 30,2002, the Company had outstanding forward currency exchange contracts of $2.0million to sell British Pounds Sterling which hedge net balance sheetexposures.  Gains and losses

 

7

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arising from the changes in the fair value of forwardcurrency exchange contracts are recognized as a component of other income(expense).  At June 30, 2002, thecurrent market settlement values of the forward contracts would result in aloss of approximately $0.1 million.

###### ** **

###### **5.  IntangibleAssets and Goodwill**

** **

In June 2001, theFinancial Accounting Standards Board issued Statements of Financial AccountingStandards (SFAS) No. 141, “*BusinessCombinations*,” and No. 142, “*Goodwilland Other Intangible Assets*,” effective for fiscal years beginningafter December 15, 2001.  Under the newrules, goodwill and intangible assets deemed to have indefinite lives will nolonger be amortized but will be subject to annual impairment tests inaccordance with these statements.  TheCompany completed the transitional impairment test for its enterprise goodwillduring the three months ended June 30, 2002 and determined that no impairmentloss should be recorded as of January 1, 2002. The assessment of goodwillimpairment in the future will consider if future operating cash flows of theCompany will decline, which might indicate a decrease in the related estimateof fair market values.  Other intangibleassets will continue to be amortized over their useful lives.

 

The Company hasapplied the new rules on accounting for goodwill and other intangible assetsbeginning January 1, 2002.  With theapplication of the nonamortization provisions of SFAS No. 142, the Companyceased amortization of goodwill as of January 1, 2002.  The following table presents the quarterlyresults of the Company on a comparative basis assuming the nonamortizationprovisions of SFAS No. 142 were effective January 1, 2001:

 
|                                                              |   | **Three Months Ended June 30,** |        | **Six Months Ended June 30,** |       |
|-------------------------------------------------------------------|--------|---------------------------------|-------------|-------------------------------|------------|
|                                                              |   | **2001**                        |        | **2002**                      |       | **2001** |   | **2002** |   |
|                                                              |   |                            | ** **  |                          | ** ** |   | ** ** |   | ** ** |
| Reported net  loss                                                |   | $                               | (16,944,455 | )                             | $          | (8,800,577 | ) | $ | (18,731,884 | ) | $ | (12,147,329 | ) |
| Goodwill  amortization                                            |   | 1,885,594                       |        | —                        |       | 3,400,590 |   | — |   |
| Adjusted net  loss                                                |   | $                               | (15,058,861 | )                             | $          | (8,800,577 | ) | $ | (15,331,294 | ) | $ | (12,147,329 | ) |
|                                                              |   |                            |        |                          |       |   |   |   |   |
| Reported net  loss per common share — basic and dilutive     |   | $                               | (0.37       | )                             | $          | (0.19 | ) | $ | (0.42 | ) | $ | (0.26 | ) |
| Goodwill amortization  per common share — basic and dilutive |   | 0.04                            |        | —                        |       | 0.08 |   | — |   |
| Adjusted net  loss per common share — basic and dilutive     |   | $                               | (0.33       | )                             | $          | (0.19 | ) | $ | (0.34 | ) | $ | (0.26 | ) |

 

8

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Intangible assetsas of December 31, 2001 and June 30, 2002 were as follows:

 
|                               |   | **December 31,  2001** |      | **June 30,  2002** |   |
|------------------------------------|--------|------------------------|-----------|--------------------|--------|
|                               |   |                   |      |               |   |
| Developed and  acquired technology |   | $                      | 4,700,000 |               | $      | 4,700,000 |   |
| Customer base                      |   | 1,800,000              |      | 1,800,000          |   |
| Less accumulated  amortization     |   | (4,739,334             | )         | (5,300,634         | )      |
| Net intangible  assets             |   | $                      | 1,760,666 |               | $      | 1,199,366 |   |

 

Amortizationexpense related to intangible assets totaled $0.4 million and $0.3 millionduring the three months ended June 30, 2001 and 2002, respectively and $0.8million and $0.6 million during the six months ended June 30, 2001 and 2002,respectively.  Intangible assets withdefinite useful lives are amortized on a straight-line basis. The weightedaverage amortization period is five years for developed and acquired technologyand six years for customer base. The estimated aggregate future amortizationexpense for intangible assets remaining as of June 30, 2002 is as follows:

 
| Remainder of  2002 |   | $       | 560,478   |   |
|--------------------|--------|---------|-----------|--------|
| 2003               |   | 333,333 |      |
| 2004               |   | 305,555 |      |
| Total              |   | $       | 1,199,366 |   |

** **

 

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**6.  SegmentInformation**

** **

TheCompany provides software that drives customers’ supply chain executionprocesses, including fulfillment, warehousing, distribution, and inventorymanagement. All financial information is reviewed on a consolidated basis withadditional information by geographic region used to make operating decisionsand assess the results of the Company. The Company’s geographic information as of and for the three and sixmonths ended June 30, 2001 and 2002 is as follows:

 

 
|                                                |   | **North  America** |       | **Europe** |       | **Asia Pacific  and the  Middle East** |       | **Eliminations** |       | **Total**   |       |
|-----------------------------------------------------|--------|--------------------|------------|------------|------------|----------------------------------------|------------|------------------|------------|-------------|------------|
|                                                |   |               | ** ** |       | ** ** |                                   | ** ** |             | ** ** |        | ** ** |
| Three months ended June 30, 2001                    |   |               | ** ** |       | ** ** |                                   | ** ** |             | ** ** |        | ** ** |
| Revenue                                             |   | $                  | 14,071,802 |       | $          | 3,936,247                              |       | $                | 7,364,434  |        | $          | — |   | $ | 25,372,483 |   |
| Amortization of goodwill and intangible assets      |   | 2,285,434          |       | 13,347     |       | 17,810                                 |       | —           |       | 2,316,591   |       |
| Warrant and stock compensation expense              |   | 212,318            |       | 66,938     |       | 87,332                                 |       | —           |       | 366,588     |       |
| Provision for estimated loss on lease abandonment   |   | 7,154,780          |       | 285,556    |       | —                                 |       | —           |       | 7,440,336   |       |
| Employee severance and other facility closure costs |   | 1,023,926          |       | 430,288    |       | 605,450                                |       | —           |       | 2,059,664   |       |
| Operating income (loss)                             |   | (15,381,757        | )          | (1,701,713 | )          | (377,136                               | )          | —           |       | (17,460,606 | )          |
|                                                |   |               |       |       |       |                                   |       |             |       |        |       |
| Six months ended June 30, 2001                      |   |               |       |       |       |                                   |       |             |       |        |       |
| Revenue                                             |   | $                  | 30,909,090 |       | $          | 8,469,270                              |       | $                | 16,208,557 |        | $          | — |   | $ | 55,586,917 |   |
| Amortization of goodwill and intangible assets      |   | 4,154,468          |       | 27,174     |       | 21,862                                 |       | —           |       | 4,203,504   |       |
| Warrant and stock compensation expense              |   | 537,311            |       | 169,398    |       | 221,012                                |       | —           |       | 927,721     |       |
| Provision for estimated loss on lease abandonment   |   | 7,154,780          |       | 285,556    |       | —                                 |       | —           |       | 7,440,336   |       |
| Employee severance and other facility closure costs |   | 1,453,984          |       | 430,310    |       | 605,450                                |       | —           |       | 2,489,744   |       |
| Operating income (loss)                             |   | (17,711,580        | )          | (2,366,638 | )          | 510,096                                |       | —           |       | (19,568,122 | )          |
|                                                |   |               |       |       |       |                                   |       |             |       |        |       |
| As of June 30, 2001                                 |   |               |       |       |       |                                   |       |             |       |        |       |
| Property and equipment, net                         |   | $                  | 5,658,480  |       | $          | 1,430,817                              |       | $                | 924,626    |        | $          | — |   | $ | 8,013,923 |   |
| Total assets                                        |   | 129,450,245        |       | 2,278,922  |       | 6,771,114                              |       | (3,108,034       | )          | 135,392,247 |       |
|                                                |   |               | ** ** |       | ** ** |                                   | ** ** |             | ** ** |        |       |
| Three months ended June 30, 2002                    |   |               |       |       |       |                                   |       |             |       |        |       |
| Revenue                                             |   | $                  | 8,998,368  |       | $          | 4,848,868                              |       | $                | 4,583,874  |        | —     |   | $ | 18,431,110 |   |
| Amortization of goodwill and intangible assets      |   | 280,293            |       | —     |       | —                                 |       | —           |       | 280,293     |       |
| Warrant and stock compensation expense              |   | 181,209            |       | 37,246     |       | 50,230                                 |       | —           |       | 268,685     |       |
| Provision for estimated loss on lease abandonment   |   | 3,900,000          |       | 98,862     |       | —                                 |       | —           |       | 3,998,862   |       |
| Employee severance and other facility closure costs |   | 2,252,745          |       | 133,105    |       | 101,919                                |       | —           |       | 2,487,769   |       |
| Operating income (loss)                             |   | (10,028,920        | )          | 739,736    |       | (417,048                               | )          | —           |       | (9,706,232  | )          |
|                                                |   |               |       |       |       |                                   |       |             |       |        |       |
| Six months ended June 30, 2002                      |   |               |       |       |       |                                   |       |             |       |        |       |
| Revenue                                             |   | $                  | 18,275,236 |       | $          | 10,103,861                             |       | $                | 9,687,985  |        | $          | — |   | $ | 38,067,082 |   |
| Amortization of goodwill and intangible assets      |   | 560,586            |       | 714        |       | —                                 |       | —           |       | 561,300     |       |
| Warrant and stock compensation expense              |   | 362,418            |       | 74,492     |       | 100,460                                |       | —           |       | 537,370     |       |
| Provision for estimated loss on lease abandonment   |   | 3,900,000          |       | 98,862     |       | —                                 |       | —           |       | 3,998,862   |       |
| Employee severance and other facility closure costs |   | 2,252,745          |       | 133,105    |       | 101,919                                |       | —           |       | 2,487,769   |       |
| Operating income (loss)                             |   | (13,707,715        | )          | 759,158    |       | (346,990                               | )          | —           |       | (13,295,547 | )          |
|                                                |   |               |       |       |       |                                   |       |             |       |        |       |
| As of June 30, 2002                                 |   |               |       |       |       |                                   |       |             |       |        |       |
| Property and equipment, net                         |   | $                  | 4,218,833  |       | $          | 1,094,648                              |       | $                | 766,736    |        | $          | — |   | $ | 6,080,217 |   |
| Total assets                                        |   | 81,017,460         |       | 3,985,191  |       | 1,159,911                              |       | (4,108,034       | )          | 82,054,528  |       |

 

10

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**7.  EstimatedProvisions for Lease Abandonment, Employee Severance and Other Costs**

 

Duringthe year ended December 31, 2001, the Company announced and implemented plansto reduce costs and improve operating efficiency. Provisions for estimatedlosses on lease abandonment and employee severance and other facility closurecosts was $14.3 million for the year ended December 31, 2001, of whichapproximately $9.9 million was recognized during the six months ended June 30,2001. These estimated charges included: (a) $10.2 million and $7.4 million inabandonment of certain leased office space less estimated sublease rentals atfacilities in North America and in Europe for the year ended December 31, 2001and the six months ended June 30, 2001, respectively, (b) $3.5 million and $2.4million for severance and other employee related costs for the termination of233 and 137 employees for the year ended December 31, 2001 and the six monthsended June 30, 2001, respectively, and (c) $0.6 million and $0.1 million fordisposal of fixed assets, abandonment of leased equipment and other facilityclosure costs for the year ended December 31, 2001 and the six months endedJune 30, 2001, respectively.

 

In responseto the continued global slowdown in customer spending for large-scale ITprojects, the Company launched additional cost reduction actions at the end ofthe second quarter of 2002.  Theseactions, which include the consolidation of the U.S. professional services anddevelopment activities into one location in Dallas and the expansion of theCompany’s offshore development operations, resulted in estimated provisions ofapproximately $6.5 million.  Theseprovisions consisted of approximately $1.4 million for estimated severance andother employee related costs for the termination of approximately 60 services,sales and marketing, development and administrative employees and approximately$1.1 million for the estimated loss on the abandonment of leased office spacein Philadelphia.  Additionally, theCompany provided $2.9 million for additional estimated losses associated withfacilities previously abandoned and $1.1 million in other facility closurecosts primarily for the write-down of property and equipment.

 

The Company hasmade cash payments of approximately $6.1 million against the reservesestablished for these various cost reduction actions. The remaining liabilityat June 30, 2002 is approximately $13.3 million and is expected to be paidthrough 2009. These reserves include estimates pertaining to sublease rates,vacancy periods, employee separation costs and settlement of contractualobligations. Although the Company does not anticipate significant changes, theactual costs may differ from these estimates.

** **

**8. Subsequent Events**

** **

During July 2002, EXE acquired intellectual property assets for an orderanalysis and planning system for $1.0 million. The acquisition price will be paid quarterly in four consecutive equalinstallments beginning in the third quarter of 2002 and the intangible assetsassociated with this acquisition is expected to be amortized over a three yearperiod.

** **

In accordance with an amended employment agreement with the Company’sformer Chief Financial Officer dated February 19, 2002, the Company forgave anoutstanding loan of approximately $277,000 on July 1, 2002. Accordingly, theoutstanding balance was charged against operating results during the six monthsended June 30, 2002.

 

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**ITEM 2.****                                                    ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL****CONDITION AND RESULTS OF OPERATIONS**

 

*Management’s discussion and analysisof the financial condition and results of operations should be read inconjunction with the Certain Factors That May Affect Future Results includedelsewhere in this Form 10-Q and the Company’s Critical Accounting Policies andEstimates included in the Company’s Form 10-K for the year ended 2001.*

 

##### **Overview**

 

EXE Technologies,Inc. provides software that drives customers’ supply chain execution processes,including fulfillment, warehousing, distribution, and inventorymanagement.  Our software solutionsdeliver the vital, frontline supply chain intelligence necessary to drivecustomer execution decisions and processes. Our products and services help customers worldwide to increase revenue,reduce distribution costs, manage inventory across the supply chain, andimprove customer loyalty and satisfaction. We provide global service and support for our software from established facilitiesin North America, Europe, the Middle East, Asia, and Australia.

 

We derive ourrevenue from the sale of software licenses; product related consulting,training, maintenance and support (collectively, “services and maintenance”);and the resale of software and equipment.

 

Our revenues havebeen adversely impacted by a global slowdown in customer spending forlarge-scale IT projects during 2001 and 2002. This global slowdown began toadversely impact our revenues in early 2001 and was impacted further by theterrorist attacks upon the United States on September 11, 2001. While theglobal economic environment for large-scale IT projects remains challenging, wehave remained focused on improving our performance through better salesexecution and expanded product offerings, while significantly reducing globaloperating costs. At the end of the second quarter of 2002, we made the decisionto take significant additional cost reduction actions, including theconsolidation of our U.S. development and professional services operations inDallas and expand our offshore development activities. These actions areexpected to reduce operating costs in the future. We do not expect the fullbenefit of these actions to be achieved until the first quarter of 2003. The costreduction actions resulted in special charges of approximately $6.5 million inthe second quarter of 2002. The special charges included estimated severanceand related costs and lease abandonment costs related to the closure of ourPhiladelphia office and a provision for additional estimated losses associatedwith facilities previously abandoned.

 

We have reducedour full time employee headcount from 630 at the beginning of 2001 to 497 atthe end of June 2002. The cost reduction action we made at the end of June 2002will further reduce our headcount in the future by approximately 60 employees. 

 

**Critical Accounting Policies andEstimates**

** **

Our discussion and analysis of our financial conditionand the results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires management to make judgments regarding estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities.Management bases its judgments on historical experience and on various otherfactors that are believed to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying values ofassets and liabilities that are not apparent from other sources.  Although management evaluates these judgmentson an ongoing basis, there can be no assurance that actual results will notultimately differ from those estimates. For a more detailed explanation of these judgments, including ourjudgments relating to revenue recognition, allowance for doubtful accounts andadjustments, goodwill and intangible impairment, accruals for lease abandonmentand employee termination costs, related party transactions, and contingenciesyou may refer to our Annual Report on Form 10-K for the year ended December 31,2001.

 

##### **Results ofOperations**

 

**Three Months Ended June 30, 2002 Compared to the Three MonthsEnded June 30, 2001**

 

**Revenue**

 

*Total Revenue.* Total revenue decreased $7.0 million, or 27.4%, to $18.4 million for thethree months ended June 30, 2002, from $25.4 million for the three months endedJune 30, 2001.  International revenueaccounted for 51.2% of total revenue during the three months ended June 30,2002 and 44.5% of total revenue during the three months ended June 30,2001.  No single customer accounted formore than 10.0% of total revenue during the three months ended June 30, 2002 or2001.

 

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*Software License.* Software license revenue decreased $2.4 million, or 43.7%, to $3.1million for the three months ended June 30, 2002, from $5.5 million for thethree months ended June 30, 2001. Software license revenue as a percentage of total revenue excludingreimbursable expenses was 17.4% for the three months ended June 30, 2002 versus22.4% for the three months ended June 30, 2001.  We believe these declines continue to reflect the global slowdownin customer spending for large-scale IT projects that began during 2001 and hasextended into fiscal year 2002.  Whencompared with the prior year, the largest decline in license revenue occurredin our Asia Pacific region.  Softwarelicense revenue decreased $1.0 million or 24.7% when compared with thepreceding three months ended March 31, 2002. This decline was attributed to lower license revenue in our NorthAmerica and Asia Pacific regions.

 

*Services and Maintenance.* Services and maintenance revenue declined $4.0 million, or 23.4%, to$12.8 million for the three months ended June 30, 2002 from $16.8 million forthe three months ended June 30, 2001. Services and maintenance revenue as a percentage of total revenueexcluding reimbursable expenses was 71.5% for the three months ended June 30,2002 versus 67.8% for the three months ended June 30, 2001.  We believe the global slowdown in customerspending for large-scale IT projects has adversely impacted our ability togenerate new license revenue resulting in a shift in our revenue mix. Thisdecline in new projects from new license revenue has contributed to the declinein services and maintenance revenue. Most of the decline was in our NorthAmerica and Asia Pacific regions since these areas have been the most adverselyaffected by license revenue declines. Revenues from consulting services havedeclined 32.8% when compared to the same three month period of the prior yearand is largely attributed to the continued decline of consulting revenue fromour EXceed Fulfill WMS Unix-based products. In addition, revenues from theAllPoints product line have declined 90.2% as a result of our November 2001decision to no longer sell and market these products.  Services and maintenance revenue increased $1.0 million or 8.2%when compared to the preceding three months ended March 31, 2002.  This improvement is attributed to anincrease in consulting revenue in Europe and increased maintenance revenuesfrom contract renewals.

 

*Resale Software and Equipment.* Resale software and equipment revenue decreased $0.4 million, or17.1%,to $2.0 million for the three months ended June 30, 2002, from $2.4 million forthe three months ended June 30, 2001. Resale software and equipment as a percentage of total revenue excludingreimbursable expenses was 11.1% for the three months ended June 30, 2002 versus9.8% for the three months ended June 30, 2001. Resale software and equipment revenue decreased $1.1 million or 35.5%when compared with the preceding three months ended March 31, 2002.  This decrease is attributed to a decline inresale revenues from Europe due to a $0.9 million resale transaction during thethree months ended March 31, 2002 that accompanied a large license and servicescontract.

** **

**Costs and Expenses**

 

*Cost of Software Licenses.* Cost of software licenses consists primarily of royalties associatedwith software used to develop our software products, the cost of reproduction,and the cost of complementary software applications that we purchase to sell toour customers.  Cost of softwarelicenses represented 2.8% of software license revenue for the three monthsended June 30, 2002 and 1.5% for the three months ended June 30, 2001. Theincrease in cost of software licenses as a percentage of software licenserevenue was attributed to an increase in purchasing of complementary softwarethat was sold during the three months ended June 30, 2002.

 

*Cost of Services and Maintenance.* Cost of services and maintenance consists primarily of salaries ofprofessional staff and costs associated with implementation, consulting andtraining services, hotline telephone support, new releases of software andupdating user documentation.  Cost ofservices and maintenance decreased $3.0 million, or 26.8%, to $8.0 million forthe three months ended June 30, 2002, from $11.0 million for the three monthsended June 30, 2001.  The decrease wasrelated primarily to a

 

13

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31.7% reduction inthe number of full time and contract services and maintenance employees. Costof services and maintenance decreased $0.1 million or 1.6% when compared to thepreceding three months ended March 31, 2002. As a percentage of services andmaintenance revenue, cost of services and maintenance decreased to 62.7% forthe three months ended June 30, 2002, from 65.5% for the three months endedJune 30, 2001 and from 68.9% for the three months ended March 31, 2002.  These decreases in cost as a percentage ofservices and maintenance revenue are due primarily to improved utilization ofour professional services employees.

 

*Cost of Resale Software andEquipment.*  Cost of resale software and equipmentconsists primarily of the costs of the database software tools and hardware wepurchase to resell to our customers. Cost of resale software and equipment decreased $0.3 million, or 16.8%,to $1.7 million for the three months ended June 30, 2002, from $2.0 million forthe three months ended June 30, 2001. As a percentage of resale software and equipment revenue, cost of resalesoftware and equipment was 82.8% for the three months ended June 30, 2002,82.5% for the three months ended June 30, 2001 and 83% for the three monthsended March 31, 2002.

* *

*Sales and Marketing.* Sales and marketing expenses consist primarily of salaries, commissions,bonuses, recruiting costs, travel, marketing materials and trade shows.  Sales and marketing expenses decreased $2.4million, or 32.9%, to $4.9 million for the three months ended June 30, 2002,from $7.3 million for the three months ended June 30, 2001.  The decrease was related primarily to a29.0% reduction in the number of sales and marketing employees and to lowercommission expenses for sales staff and partners as a result of lower softwarelicense revenues.  As a percentage oftotal revenue excluding reimbursable expenses, sales and marketing expensesdecreased to 27.4% for the three months ended June 30, 2002, from 29.6% for thethree months ended June 30, 2001, and increased from 26.5% for the three monthsended March 31, 2002.  Sales andmarketing expenses decreased $0.1 million or 2.8% when compared with thepreceding three months ended March 31, 2002 primarily due to efforts to reducemarketing and travel expenses.

 

*Research and Development.*  Researchand development expenses consist primarily of salaries and otherpersonnel-related costs for our product development activities.  Research and development expenses decreased$1.1 million, or 27.1%, to $2.9 million for the three months ended June 30,2002, from $4.0 million for the three months ended June 30, 2001.  The decrease in research and developmentexpenses was due primarily to a 35.7% reduction in the number of research anddevelopment employees and contractors. As a percentage of total revenue excluding reimbursable expenses,research and development expenses increased to 16.2% for the six months endedJune 30, 2002, from 16.1% for the three months ended June 30, 2001, and from16.0% for the three months ended March 31, 2002.  Research and development expenses decreased $0.1 million or 4.8%when compared with the preceding three months ended March 31, 2002 primarilydue to efforts to reduce contractor and consulting expenses.

 

*General and Administrative.* General and administrative expenses consist primarily of salaries andother personnel-related costs of our finance, human resources, informationsystems, administrative, legal and executive departments, insurance costs andthe costs associated with legal, accounting, and other administrativeservices.  General and administrativecosts decreased $2.6 million, or 46.3%, to $3.0 million for the three monthsended June 30, 2002, from $5.6 million for the three months ended June 30,2001.  The decrease in general andadministrative expenses was due primarily to a 36.2% reduction in the number ofgeneral and administrative employees and contractors.  As a percentage of total revenue excluding reimbursable expenses,general and administrative expenses decreased to 16.8% for the three monthsended June 30, 2002, from 22.7% for the three months ended June 30, 2001, andincreased from 16.6% for the three months ended March 31, 2002.  General and administrative expensesdecreased $0.2 million or 5.0% when compared with the preceding three monthsended March 31, 2002 primarily due to efforts to reduce consulting expenses.

 

14

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In August 2002, werenewed our director and officer liability insurance for one year. The premiumwas approximately $0.9 million and will be charged to expense over the nextfour quarters. The previous premium had an annual cost of approximately $0.3million.

 

*Amortization of Goodwill andIntangible Assets.*  Amortization of goodwill and intangibleassets relates primarily to assets acquired in connection with the 1997acquisition of Dallas Systems and the 2001 acquisition of AllPoints.  Amortization of goodwill and intangibleassets decreased $2.0 million to $0.3 million for the three months ended June30, 2002, from $2.3 million for the three months ended June 30, 2001, and isconsistent with $0.3 million for the three months ended March 31, 2002.  Of the decline from the prior year,approximately $0.7 million is attributed to the implementation in the currentyear of Statement of Financial Accounting Standards Board (SFAS) No. 142, *Goodwill and Other Intangible Assets,*whichdirects that goodwill and intangible assets which are deemed to have indefinitelives are no longer amortized but are subject to annual impairment tests.  The remaining $1.3 million of the decline isattributed to the goodwill and intangible impairment write-off of AllPoints atthe end of 2001.

 

*Non-Cash Warrant and StockCompensation.*  Non-cash warrant and stock compensationexpense relates to the amortization of deferred compensation recorded primarilyin connection with stock options granted to employees.  The deferred compensation recordedrepresented the difference between the exercise price and the deemed fair valueof our common stock on the date of grant of these options.  Non-cash warrant and stock compensationexpense decreased $0.1 million to $0.3 million for the three months ended June30, 2002, from $0.4 million for the three months ended June 30, 2001, and isconsistent with $0.3 million for the three months ended March 31, 2002.

 

*Estimated Provisions for Lease Abandonment, EmployeeSeverance and Other Facility Closure Costs*.  In responseto the continued global slowdown in customer spending for large-scale ITprojects, we launched additional cost reduction actions during the three monthsended June 30, 2002.  These actions,which include the consolidation of the U.S. professional services anddevelopment activities into one location in Dallas and the expansion of ouroffshore development operations, resulted in a charge of approximately $6.5million.  These provisions consisted ofapproximately $1.4 million for estimated severance and other employee relatedcosts for the termination of approximately 60 services, sales and marketing,development and administrative employees and approximately $1.1 million for theestimated loss on the abandonment of leased office space in Philadelphia.Additionally, we provided $2.9 million for additional estimated lossesassociated with facilities previously abandoned and $1.1 million in otherfacility closure costs primarily for the write-down of property and equipment.

 

During the threemonths ended June 30, 2001, we implemented a cost reduction plan and recorded apretax charge of $9.5 million that included approximately $2.0 million forseverance and other employee related costs for the termination of 119 services,sales and marketing, development and administrative employees, $7.4 million forthe abandonment of certain leased office space, less estimated subleaserecoveries, at our North American and United Kingdom facilities, and $0.1million for other costs associated with the downsizing of operations at ourHong Kong office.

 

These provisionsare based on management’s judgment of the estimated costs related to theseverance, lease abandonments and other related costs. Actual future costscould vary from these estimates and result in additional provisions in thefuture.

 

*Other Income (Expense).* Other income (expense) consists of gains and losses from currencyfluctuations, interest expense, and interest income on investments.  Other income increased $0.4 million to anincome of $1.1 million for the three months ended June 30, 2002, from an incomeof $0.7 million for the three months ended June 30, 2001.  The increase was due primarily to animprovement of $0.8 million from foreign exchange gains.  This increase was offset by a decrease ininterest income of $0.4 million due to a

 

15

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decline ininterest rates and a decline in funds held in marketable securities during thethree months ended June 30, 2002.  Otherincome (expense) improved $0.8 million when compared with the preceding threemonths ended March 31, 2002 primarily due to foreign exchange gains during thethree months ended June 30, 2002. Although we periodically buy forwardcontracts to hedge against certain foreign currency fluctuations, we may haveforeign currency gains and losses which can significantly vary from quarter toquarter.

* *

*Income Taxes.* An income tax provision of $0.2 million was recognized during the threemonths ended June 30, 2002 and 2001. The income tax provision was primarily due to tax on income earned byforeign subsidiaries while corresponding domestic tax benefit generated byforeign tax credits was not recognized due to the uncertainty of the timing andamount of future taxable income.

 

**Six Months Ended June 30, 2002 Compared to the Six MonthsEnded June 30, 2001**

 

**Revenue**

 

*Total Revenue.* Total revenue decreased $17.5 million, or 31.5%, to $38.1 million forthe six months ended June 30, 2002, from $55.6 million for the six months endedJune 30, 2001.  International revenueaccounted for 52.0% of total revenue during the six months ended June 30, 2002and 44.4% of total revenue during the six months ended June 30, 2001.  No single customer accounted for more than10.0% of total revenue during the six months ended June 30, 2002 or 2001.

 

*Software License.* Software license revenue decreased $8.2 million, or 53.2%, to $7.3million for the six months ended June 30, 2002, from $15.5 million for the sixmonths ended June 30, 2001.  Softwarelicense revenue as a percentage of total revenue excluding reimbursableexpenses was 19.6% for the six months ended June 30, 2002 versus 28.7% for thesix months ended June 30, 2001.  Webelieve these declines were primarily attributed to the global slowdown incustomer spending for large-scale IT projects that began during 2001 and hasextended into the first and second quarters of fiscal year 2002.

 

*Services and Maintenance.* Services and maintenance revenue decreased $9.7 million, or 28.3%, to$24.7 million for the six months ended June 30, 2002 from $34.4 million for thesix months ended June 30, 2001. Services and maintenance revenue as a percentage of total revenueexcluding reimbursable expenses was 66.6% for the six months ended June 30,2002 versus 63.7% for the six months ended June 30, 2001.  We believe the global slowdown in customerspending for large-scale IT projects has adversely impacted our ability togenerate new license revenue resulting in a shift in our revenue mix. Thisdecline in new projects from new license revenue has contributed to the declinein services and maintenance revenue. Most of the decline was in our NorthAmerica and Asia Pacific regions since these areas have been the most adverselyaffected by license revenue declines. Revenues from consulting services havedeclined 37.1% when compared to the same six month period of the prior year andis largely attributed to the continued decline of consulting revenue from ourEXceed Fulfill WMS Unix-based products. In addition, revenues from theAllPoints product line have declined 83.7% as a result of our November 2001decision to no longer sell and market these products.

* *

*Resale Software and Equipment.*  Resalesoftware and equipment revenue increased $1.0 million, or24.0%, to $5.1million for the six months ended June 30, 2002, from $4.1 million for the sixmonths ended June 30, 2001.  Resalesoftware and equipment as a percentage of total revenue excluding reimbursableexpenses was 13.8% for the six months ended June 30, 2002 versus 7.6% for thesix months ended June 30, 2001. The increase was due to improved resale revenuefrom Europe that accompanied a large new license and services contract duringthe first quarter of 2002.

 

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**Costs and Expenses**

 

*Cost of Software Licenses.* Cost of software licenses represented 2.7% of software license revenuefor the six months ended June 30, 2002 and 0.8% for the six months ended June30, 2001. The increase in cost of software licenses as a percentage of softwarelicense revenue was attributed to an increase in purchasing of complementarysoftware that was sold during the six months ended June 30, 2002.

 

*Cost of Services and Maintenance.* Cost of services and maintenance decreased $6.4 million, or 28.3%, to$16.2 million for the six months ended June 30, 2002, from $22.6 million forthe six months ended June 30, 2001.  Thedecrease was related primarily to a reduction in the number of full time andcontract services and maintenance employees. As a percentage of services andmaintenance revenue, cost of services and maintenance was 65.7% for the sixmonths ended June 30, 2002 and 2001.

 

*Cost of Resale Software and Equipment. *Cost of resale software and equipment increased $0.9million, or 27.5%, to $4.2 million for the six months ended June 30, 2002, from$3.3 million for the six months ended June 30, 2001.  The increase was due to higher resale software and equipmentsales for the six months ended June 30, 2002. As a percentage of resale software and equipment revenue, cost of resalesoftware and equipment was 82.9% for the six months ended June 30, 2002 and80.6% for the six months ended June 30, 2001. The increase in cost as apercentage of revenue reflects that significant sales of higher margin database software occurred during the first quarter of the prior year.

* *

*Sales and Marketing.* Sales and marketing expenses decreased $4.6 million, or 31.9%, to $10.0million for the six months ended June 30, 2002, from $14.6 million for the sixmonths ended June 30, 2001.  Thedecrease was related primarily to a reduction in the number of sales andmarketing employees and to lower commission expenses for sales staff andpartners as a result of lower software license revenues.  As a percentage of total revenue excludingreimbursable expenses, sales and marketing expenses decreased to 26.9% for thesix months ended June 30, 2002, from 27.1% for the six months ended June 30,2001.

 

*Research and Development.* Research and development expenses decreased $1.8 million, or 23.9%, to$6.0 million for the six months ended June 30, 2002, from $7.8 million for thesix months ended June 30, 2001.  Thedecrease in research and development expenses was due primarily to a reductionin the number of research and development employees and contractors.  As a percentage of total revenue excludingreimbursable expenses, research and development expenses increased to 16.1% forthe six months ended June 30, 2002, from 14.5% for the six months ended June30, 2001.  The increase was primarilydue to lower revenue we have experienced since the beginning of the slowdown inglobal IT spending.

 

*General and Administrative.* General and administrative costs decreased $3.8 million, or 38.3%, to$6.2 million for the six months ended June 30, 2002, from $10.0 million for thesix months ended June 30, 2001.  Thedecrease in general and administrative expenses was due to a reduction in thenumber of general and administrative employees and contractors.  As a percentage of total revenue excludingreimbursable expenses, general and administrative expenses decreased to 16.7%for the six months ended June 30, 2002, from 18.6% for the six months endedJune 30, 2001.

 

In August 2002, werenewed our director and officer liability insurance for one year. The premiumwas approximately $0.9 million and will be charged to expense over the nextfour quarters. The previous premium had an annual cost of approximately $0.3million.

 

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*Amortization of Goodwill andIntangible Assets.*  Amortization of goodwill and intangibleassets decreased $3.6 million to $0.6 million for the six months ended June 30,2002, from $4.2 million for the six months ended June 30, 2001.  Approximately $1.4 million of this declineis attributed to the implementation in the current year of Statement ofFinancial Accounting Standards Board (SFAS) No. 142, *Goodwill and Other Intangible Assets,*which directs thatgoodwill and intangible assets which are deemed to have indefinite lives are nolonger amortized but are subject to annual impairment tests.  The remaining $2.2 million of the decline isattributed to the goodwill and intangible impairment write-off of AllPoints inthe fourth quarter of 2001.

 

*Non-Cash Warrant and StockCompensation. *Non-cash warrant and stock compensationexpense decreased $0.4 million to $0.5 million for the six months ended June30, 2002, from $0.9 million for the six months ended June 30, 2001.

 

*Estimated Provisions for Lease Abandonment, EmployeeSeverance and Other Facility Closure Costs*.  In responseto the continued global slowdown in customer spending for large-scale ITprojects, we launched additional cost reduction actions during the three monthsended June 30, 2002.  These actions,which include the consolidation of the U.S. professional services anddevelopment activities into one location in Dallas and the expansion of ouroffshore development operations, resulted in a charge of approximately $6.5million.  These provisions consisted ofapproximately $1.4 million for estimated severance and other employee relatedcosts for the termination of approximately 60 services, sales and marketing,development and administrative employees and approximately $1.1 million for theestimated loss on the abandonment of leased office space in Philadelphia.Additionally, we provided $2.9 million for additional estimated lossesassociated with facilities previously abandoned and $1.1 million in otherfacility closure costs primarily for the write-down of property and equipment.

 

During the sixmonths ended June 30, 2001, we implemented cost reduction plans and recorded apretax charge of $9.9 million that included approximately $2.4 million forseverance and other employee related costs for the termination of 137 services,sales and marketing, development and administrative employees, $7.4 million forthe abandonment of certain leased office space, less estimated subleaserecoveries, at our North American and United Kingdom facilities, and $0.1million for other costs associated with the downsizing of operations at ourHong Kong office.

 

These provisionsare based on management’s judgment of the estimated costs related to theseverance, lease abandonments and other related costs. Actual future costscould vary from these estimates and result in additional provisions in thefuture.

 

*Other Income (Expense).* Other income increased $0.2 million to an income of $1.3 million for thesix months ended June 30, 2002, from an income of $1.1 million for the sixmonths ended June 30, 2001.  Theincrease was due primarily to an improvement of $1.2 million from foreignexchange gains.  This increase wasoffset by a decrease in interest income of $1.0 million due to a decline ininterest rates and a decline in funds held in marketable securities during thesix months ended June 30, 2002. Although we periodically buy forward contractsto hedge against foreign currency fluctuations, we may have foreign currencygains or losses which can significantly vary from quarter to quarter.

* *

*Income Taxes.* An income tax provision of $0.2 million was recognized during the sixmonths ended June 30, 2002 and 2001. The income tax provision was primarily due to tax on income earned byforeign subsidiaries while corresponding domestic tax benefit generated byforeign tax credits was not recognized due to the uncertainty of the timing andamount of future taxable income.

 

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**Liquidity and Capital Resources**

 

Wehave funded our operations through the issuance of our preferred and commonstock, bank borrowings and cash flow from operations.  As of June 30, 2002 we had approximately $47.0 million in cashand marketable securities, including long-term marketable securities, a growthof approximately $1.7 million during the first six months of 2002.

 

Netcash provided by operating activities was $2.0 million for the six months endedJune 30, 2002. The net loss after deducting non-cash adjustments wasapproximately $6.4 million. This net cash use was more than offset by cashgenerated by changes in operating assets and liabilities of approximately $8.4million. This includes an improvement in our receivable days outstanding whichimproved from 121 days at the end of 2001 to 85 days at the end of June 2002.As a result, $5.7 million of cash was generated from a reduction in netreceivables. Additionally, accrued expenses increased by $1.8 million dueprimarily to the cost reduction plan and deferred revenues increased $1.0million.  Net cash used in operatingactivities was $5.8 million for the comparable six months ended June 30, 2001.

 

Net cash provided by investing activities was $2.8million for the six months ended June 30, 2002.  We purchased property and equipment of $0.5 million and generated$3.3 million of cash from net sales of marketable securities.  Net cash used in investing activities was$1.1 million for the comparable six months ended June 30, 2001. We believe thatcapital expenditures over the next twelve months will not exceed $1.0 million.In July 2002, we agreed to purchase certain intellectual property for $1.0million (see Note 8 to the consolidated financial statements included elsewhereherein). The acquisition will be paid quarterly in four consecutive equalinstallments beginning in the third quarter of 2002.

 

Netcash provided by financing activities was $0.2 million for the six months endedJune 30, 2002.  We generated cash of$0.4 million from the issuance of common stock and reduced other long-term debtby $0.2 million.  Net cash provided byfinancing activities was $0.2 million for the comparable six months ended June30, 2001.

 

Wecurrently have operating lease obligations of approximately $45.5 million, of which$5.1 million are payable over the next year and the balance is due over anadditional 13 years. Certain of the leases are abandoned and provisions havebeen made for the estimated losses on these leases (see Note 7 to theconsolidated financial statements included elsewhere herein), but cash paymentswill be required for the remainder of the existing lease obligation. If we areable to reach a settlement with the lessors of these abandoned facilities onterms favorable to the Company within the next twelve months, a settlementpayment might be required which could be considerably higher than the scheduledlease payments during that period. As of the date of this Form 10-Q there hasbeen no settlement offer by any of the lessors.

 

Although we may use cash over thenext six months due to severance and facility related costs associated with thecost reduction actions taken at the end of the second quarter of 2002 andcertain other expenditures previously discussed, we believe that our existingworking capital will be sufficient to fund our operations for at least the nextyear. However, there can be no assurance that we will not require additionalfinancing in the future. We cannot be sure that we will be able to obtain anyadditional required financing or that, if we can, the terms will be acceptableto us.

 

**Forward-Looking Statements**

 

In addition to historical information, this filing and ourAnnual Report on Form 10-K may contain forward-looking statements.  Any statements contained herein (includingwithout limitation statements to the effect that the Company or its management“believes,” “expects,” “anticipates,” “plans,” and similar expressions) thatrelate to future events or conditions, including, among others, statementsrelating to

 

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economicconditions, sales execution, cost reduction and restructuring actions and theirimpact on earnings and cash flows, sufficiency of working capital, accountingfor goodwill and other intangible assets, interest rate risk and enhancement ofthe company’s software should be considered forward-looking statements.  These forward-looking statements are subjectto certain risks and uncertainties that could cause actual results to differmaterially from those reflected in these forward-looking statements.  Factors that might cause such a differenceinclude, but are not limited to, those discussed in the section entitled“Certain Factors That May Affect Future Results” below.  Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sopinions only as of the date hereof. The Company undertakes no obligations to revise or publicly release theresults of any revision to these forward-looking statements, whether as a resultof new information, future events, or otherwise.

 

**Certain Factors That May Affect Future Results**

 

**Risks Relating to Our Business**

** **

**Ourcustomers may delay or cancel spending on software and services because of thecurrent economic climate.**

 

Sincethe beginning of 2001, some companies have experienced financial difficultiesor uncertainty and, as a result, have delayed or canceled spending oninformation technology projects such as fulfillment software and services. Ifcompanies continue to delay, or cancel, their information technologyinitiatives because of the current economic climate, or for other reasons, ourbusiness, financial condition and results of operations could be materiallyadversely affected.

 

**Wecan give you no assurance that we will be able to maintain or grow our level ofrevenue or achieve profitability in the future.**

 

Ourgrowth rates and, consequently, our future operating results may be affected byany of the following factors:

 

•                  a continued decline in general economic conditions;

 

•                  the level of market acceptance of, and demand for, our software;

 

•                  the overall growth rate of the markets in which we compete;

 

•                  our competitors’ products and prices;

 

•                  our ability to establish strategic marketing relationships;

 

•                  our ability to develop and market new and enhanced products;

 

•                  our ability to successfully train alliance companies and consultingorganizations;

 

•                  our ability to control costs;

 

•                  changes in our products and services mix; and

 

•                  our ability to train and expand our direct sales force and indirectdistribution channels worldwide.

 

**Wemay not be profitable in the future.**

 

Withthe exception of the third and fourth quarters of the year ended December 31,2000, we have experienced quarterly and annual losses since the formation ofEXE in September 1997. We experienced net losses of $26.1 million in 1999, $3.3million in 2000, $63.9 million in 2001, and $12.1 million for the six

 

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months ended June30, 2002. We may continue to incur losses on both a quarterly and an annualbasis. Moreover, we expect to continue to incur significant sales andmarketing, research and development and general and administrative expensesand, as a result, we will need to generate significant revenue to report netincome in future periods. We may not achieve our planned growth or generatesufficient revenue to report net income in future periods.

 

**Ourrevenue could decline if our customers do not continue to accept our existingproducts, including fulfillment and collaboration products.**

 

Weexpect to derive a majority of our product license revenue in the future fromour fulfillment and collaboration products and their components. Our businessdepends on continued customer acceptance of these products and the release,introduction and customer acceptance of new products. We expect that we willcontinue to depend on revenue from new and enhanced versions of our fulfillmentand collaboration products, and our revenue could decline if our targetcustomers do not continue to adopt and expand their use of these products andtheir components.

 

**Ourquarterly operating results depend heavily on software license revenue, whichis difficult to forecast and may fluctuate.**

 

Ourquarterly software license revenue is difficult to forecast because our salescycles, from initial evaluation to delivery of software, vary substantiallyfrom customer to customer. Revenue in any quarter is dependent on ordersreceived, contracts signed and products shipped in that quarter. We typicallyrecognize the majority of our revenue in the last month of the quarter,frequently in the last week or even days of the quarter. In addition, thetiming of large individual license sales is difficult for us to predict, and,in some cases, transactions are concluded later than anticipated. Since ouroperating expenses are based on anticipated revenue levels and most of ouroperating expenses, particularly personnel and facilities costs, are relativelyfixed in advance of any particular quarter, any revenue shortfall may causefluctuations in operating results in any particular quarter. We can give you noassurance that revenue will grow in future periods, that revenue will grow athistorical rates, or that we will achieve and maintain positive operatingmargins in future quarters. If revenue falls below our expectations in aparticular quarter, our operating results could be harmed.

 

**Becauseour sales cycles are lengthy and subject to uncertainties, it is difficult toforecast our sales, and the delay or failure of a significant software licensetransaction or our inability to anticipate a delay could harm our operatingresults.**

 

Oursoftware is used for mission critical division- or enterprise-wide purposes andinvolves a significant commitment of resources by customers. A customers’decision to license our software usually involves the evaluation of theavailable alternatives by a number of personnel in multiple functional andgeographic areas, each often having specific and conflicting requirements. Accordingly,we typically must expend substantial resources educating prospective customersabout the value of our solutions. For these and other reasons, the length oftime between the date of initial contact with the potential customer and theexecution of a software license agreement typically ranges from three to ninemonths, and is subject to delays over which we may have little or no control.As a result of the length and variability of the sales cycle for our softwareproducts, our ability to forecast the timing and amount of specific sales islimited, and the delay or failure to complete one or more anticipated largelicense transactions could harm our operating results.

 

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**Failureto expand our alliance relationships with consulting firms and complementarysoftware vendors and to establish new strategic alliances may slow acceptanceof our software and delay the growth of our revenue.**

 

Tosupplement our direct sales force and our implementation capabilities, we haveestablished strategic marketing alliances with consulting firms andcomplementary software vendors, and we rely on them to recommend our softwareto their customers and to periodically install and support our software. Toincrease our sales and implementation capabilities, one of our key strategiesis to expand our existing relationships and establish new strategic allianceswith consulting firms and complementary software vendors. The loss of, orfailure to expand, existing relationships or our failure to establish newstrategic alliances could limit the number of transactions we may complete, mayresult in our inability to recognize revenue and may harm our operatingresults.

 

**We depend on a limited number ofsales personnel who have recently joined us.**

** **

Wesell our software primarily through a direct sales force and through strategicrelationships with systems integrators, consulting services companies, vendorsof complementary software and hardware vendors. During the past several monthswe have experienced significant turnover in our U.S. sales force. Almost all ofthe current members of our U.S. sales force have joined us within the pastseveral months. Our future success will depend in part on the efforts of ourdirect sales force. Most of the members of our sales force have not workedtogether in the past and, as a result, may not work together effectively as ateam. In addition, our newly hired sales personnel may fail to develop thenecessary skills to be productive within our organization, or if they reachproductivity more slowly than anticipated, our ability to increase our revenueand grow our business will be compromised. In addition, due to the competitivenature of our industry, we may not be able to retain some or all of the membersof our sales force.

 

**If our new or enhanced products donot gain market acceptance, our business and results of operations would beharmed.**

** **

Thegrowth of our business will depend on the successful development, introductionand acceptance of new and enhanced versions of our products. The introductionof new or enhanced products requires that we manage the transition fromexisting products to these new or enhanced products. We have recentlyintroduced our EXceed AIM and EXceed SNx software solutions to work inconjunction with our existing fulfillment software suite in order to extend ourproduct reach into complementary markets. We expect to derive a significantportion of our revenues in the future from EXceed AIM and EXceed SNx and othernew and enhanced products. If EXceed AIM and EXceed SNx and our other new andenhanced products do not gain market acceptance, our revenues may decline.Factors that may affect the market acceptance of EXceed AIM and EXceed SNx andour other new and enhanced products, some of which are beyond our control, mayinclude:

 

•                  the changing requirements of our industry;

 

•                  the performance, quality and price of our new and enhanced products;and

 

•                  the availability, performance, quality and price of competing productsand technologies.

 

**Wemay experience delays in the scheduled introduction of new or upgradedsoftware, and our software may contain undetected errors or “bugs,” resultingin loss of revenue and harm to our reputation.**

 

Historically,we have issued significant new software products or new releases of oursoftware periodically, with interim releases issued more frequently. Oursoftware is particularly complex, because it

 

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must perform inenvironments operating multiple computer systems and respond to customer demandfor high performance fulfillment, warehousing and distribution applications andmajor new product enhancements. Our software requires long development andtesting periods before it is commercially released. For example, thedevelopment cycle for the introduction of our EXceed Crossdock component tookapproximately nine months. If we experience delays in the scheduledintroduction of new software or software upgrades, our customers may becomedissatisfied and our reputation and operating results could be harmed.

 

Also,despite testing by us, our software may contain undetected errors or “bugs.” Inthe past, we have discovered software bugs in new versions of our softwareafter its release. We may experience software bugs in the future. These bugscould result in a delay or loss of revenue, diversion of development resources,damage to our reputation, increased service and warranty costs, or impairedmarket acceptance and sales of this software, any of which could harm ouroperating results.

 

**Ifwe are unsuccessful in identifying, financing and integrating suitableacquisition candidates, including businesses, products and technologies, ourgrowth could be harmed.**

 

Due tothe intense competition we face, we may not be able to identify suitableacquisition candidates available for purchase at reasonable prices, consummateany acquisition or successfully integrate any acquired business into ouroperations.

 

Further,acquisitions may involve a number of additional risks, including:

 

•                  diversion of management’s attention;

 

•                  failure to retain key personnel of the acquired businesses;

 

•                  unanticipated events or circumstances;

 

•                  legal liabilities; and

 

•                  impairment charges on goodwill and intangible assets.

 

Weexpect to finance any future acquisitions with cash on hand, as well as withpossible debt financing or by issuing common or preferred stock. If we were toproceed with one or more future acquisitions for cash, a substantial portion ofour available cash could be used to complete them. If we were to proceed withone or more acquisitions for stock, our stockholders would suffer dilution oftheir interests. We can give you no assurance that we would be able to arrangefor any needed debt financing on terms acceptable to us. Most of the businessesthat might be attractive acquisition candidates are likely to have significantintangible assets. During 2001, amortization of acquired or existing intangibleassets represents a substantial charge and has and will continue to reduceearnings. However, under new accounting rules effective for fiscal yearsbeginning after December 15, 2001, goodwill and intangible assets deemed tohave indefinite lives will no longer be amortized but will be subject to annualimpairment tests in accordance with the new rules. Other intangible assets willcontinue to be amortized over their useful lives.

 

**If we are unable to timely collectour accounts receivable, our cash flow will be harmed.**

** **

Althoughwe have recently improved on the time required to collect accounts receivablefrom our customers, there is no assurance that this trend will continue.Historically, we have experienced longer receivable collection periods whichhas largely been attributed to the deterioration of certain of our customers’financial condition due to the negative economic climate in the United Statesand the international markets we serve. The failure of any significant customerto pay for our products on a timely basis could adversely affect our results ofoperations and our operating cash flow.

 

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**If we do not expand our customerbase, our business may not grow.**

** **

Our growth is dependent in part on our ability to attract new customersfor our products. We derive a substantial portion of our revenue from the saleof additional products and services to our existing customers. If we are unableto expand our customer base by attracting new customers for our products, ourbusiness will suffer. In addition, a material reduction in the demand for ourproducts and services from our existing customers would have a material adverseeffect on our business, financial condition and results of operations.

 

**Ourinternational operations, which we plan to expand, are subject to heightenedrisks. If any of these risks actually occur, our earnings could decline.**

 

Internationalrevenue accounted for approximately 52.0% of our total revenue during the sixmonths ended June 30, 2002, 46.9% of our total revenue during the year endedDecember 31, 2001, 40.5% of our total revenue during the year ended December31, 2000 and approximately 36.2% of our total revenue during 1999. We expectinternational revenue to continue to account for a significant percentage oftotal revenue in the future, and we plan to continue to expand ourinternational activities as part of our growth strategy. This expansion willrequire significant financial resources and management attention that couldhave a negative effect on our earnings. As our international operations continueto develop, they may become increasingly subject to risks inherent ininternational business activities, including:

 

•                  difficulty in staffing and managing geographically diverse operations;

 

•                  longer accounts receivable payment cycles in certain countries;

 

•                  compliance with a variety of foreign laws and regulations;

 

•                  unexpected changes in regulatory requirements and overlap of differenttax structures;

 

•                  greater difficulty in safeguarding intellectual property;

 

•                  trade restrictions;

 

•                  changes in tariff rates and import and export licensing requirements;and

 

•                  general economic conditions in international markets.

 

Our earnings coulddecline if these or other factors affect international operations.

 

**Becausemany of our customers pay us in foreign currencies, we may be exposed toexchange rate risks and our profitability may suffer due to currencyfluctuations.**

 

Amajority of the revenue and expenses incurred by our international operationsare denominated in currencies other than the United States dollar. Inparticular, our revenue and costs of operations in Japan and Singapore aredenominated in Japanese yen and Singapore dollars and in Europe some of ourcontracts are denominated in the Euro. In addition, with the expansion ofinternational operations, the number of foreign currencies in which we mustoperate is likely to increase, resulting in increased exposure to exchange ratefluctuations. Exchange rate fluctuations have caused and will continue to causecurrency transaction gains and losses. We experienced currency transactiongains (losses) of $0.8 million for the six months ended June 30, 2002, $(0.5)million for the year ended December 31, 2001 and $(0.8) million for the yearended December 31, 2000. We can give you no assurance that currency transactionlosses will not adversely affect our results in future periods.

 

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**Oursuccess depends on our ability to attract and retain key personnel, inparticular knowledgeable and experienced sales and marketing personnel andprofessional services personnel. If we are unable to attract these personneland use them efficiently, our ability to sell and implement our software couldbe harmed.**

 

Webelieve our success will depend significantly on our ability to attract,motivate and retain highly skilled technical, managerial, consulting, sales andmarketing personnel and professional services personnel. We compete intenselyfor these personnel, and we may be unable to achieve our personnel goals. Our failureto attract, motivate and retain such highly skilled personnel could seriouslylimit our ability to expand our business.

 

Also,we believe our success will depend on our ability to productively manage ourpersonnel. We expect future increases in the number of our sales andprofessional services staff. Growth may result in increased salary expenses andtraining costs in advance of any resulting increase in services revenue due tothe typically lower productivity levels of newer personnel. Moreover, any growthin software license revenue will likely generate the need for more professionalservices personnel to deploy and implement software and to train customers. Ashortage in the number of trained personnel, either within our company oravailable from outside consulting firms, could limit our ability to implementour software on a timely and cost-effective basis. Our earnings will suffer ifwe generate insufficient revenue to cover growth-related expenses,significantly strain management resources with additional responsibilities,fail to successfully expand our relationships and develop additionalrelationships with third-party implementers and complementary software vendorsor fail to have sufficiently trained sales and marketing personnel and professionalservices personnel.

 

**Wedepend on the services of a number of key personnel, and a loss of any of thesepersonnel could disrupt our operations and result in reduced revenue.**

 

Oursuccess depends on the continued services and performance of our senior managementstaff, in particular, Raymond Hood, our Chairman of the Board of Directors andChief Executive Officer. The loss of the services of Mr. Hood or any of ourother senior management staff or key employees could seriously impair ourability to operate and achieve our objectives, which could reduce our revenue.We have $3.0 million of key man life insurance on Mr. Hood. This amount may notbe sufficient to compensate us for the loss of his services. We also haveemployment agreements with Mr. Hood and all of our executive officers.

 

However,these employment agreements do not prevent Mr. Hood, or other key employees,from voluntarily terminating their employment with us.

 

**Thelength and complexity of our implementation cycle may result in implementation delays,which may cause customer dissatisfaction.**

 

Theintroduction of new products and the size and complexity of some of oursoftware implementations can result in lengthy implementation cycles and mayresult in delays. These delays could result in customer dissatisfaction, whichcould adversely affect our reputation. Additional delays could result if wefail to attract, train and retain services personnel, or if our alliancecompanies fail to commit sufficient resources towards implementing our software.These delays and resulting customer dissatisfaction could harm our reputationand cause our revenue to decline.

 

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**Theuse of fixed-price service contracts subjects us to the risk that we may notsuccessfully complete these contracts on budget.**

 

Weoffer software implementation and related consulting services to our customers.Although we typically provide services on a “time and material” basis, we havefrom time to time entered into fixed-price service contracts, and we expectthat some customers will demand these contracts in the future. These contractsspecify certain milestones to be met by us regardless of actual costs incurredin meeting those obligations. If we are unable to successfully complete thesecontracts on budget, our earnings could suffer.

 

**Werely on software licenses that may be terminated or unavailable to us oncommercially reasonable terms.**

 

Wemarket and resell, under license, third party software, including:

 

•                  software embedded in our products;

 

•                  software that enables our software to interact with other softwaresystems or databases; and

 

•                  software in conjunction with which our software operates.

 

We also licensesoftware tools used to develop our software and software for internal systems.We cannot assure you that the third party software or software tools willcontinue to be available to us on commercially reasonable terms. The loss orinability to maintain any of these software licenses could result in delays orreductions in product shipments until equivalent software could be identifiedand licensed or compiled, which could harm our business.

 

**Wecould be subject to legal actions by former personnel, which could be costly,divert management time and attention and harm our operating results.**

 

Duringthe calendar year 2001, we terminated approximately 233 of our services, sales,development and administrative personnel. Additionally, at the end of June2002, we announced that approximately an additional 60 employees would be terminated.It is possible that these employees could bring legal actions against us underapplicable federal, state or local laws. Any such claims, whether with orwithout merit, could subject us to costly litigation and the diversion ofmanagement time and attention, and successful claims could result in awards ofdamages to or reinstatement of former employees, any of which could harm ouroperating results.

 

**Productliability and other claims related to our customers’ business operations couldresult in substantial costs.**

 

Manyof our installations involve projects that are critical to the operations ofour clients’ businesses and provide benefits that may be difficult to quantify.Any failure in a client’s system or any intellectual property infringement claimsby third parties could result in a claim for substantial damages against us,regardless of our responsibility for the failure or for the allegedintellectual property infringement. We cannot assure you that our customercontracts will protect us in the event of any such claim. In addition, althoughwe maintain general liability insurance coverage, including coverage for errorsor omissions, we cannot assure you that this coverage will continue to beavailable on reasonable terms or will be available in sufficient amounts tocover one or more large claims, or that the insurer will not disclaim coverage.

 

Thesuccessful assertion of one or more large claims against us that exceedsavailable insurance coverage or changes in our insurance policies, including premiumincreases or the imposition of large deductible or co-insurance requirements,could result in substantial costs.

 

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Fivecustomers have requested defense and indemnification from us for threatened patentclaims against them by a third party relating to bar code technology. Foradditional information about these requests, see “Item 1. Business—Intellectual Property” in our AnnualReport on Form 10-K.

 

**Weexpect our results of operations to fluctuate, and the price of our commonstock could fall if quarterly results differ from the expectations ofsecurities analysts.**

 

Ouroperating results historically have fluctuated on a quarterly basis and maycontinue to do so in the future. If our quarterly results differ from theexpectations of securities analysts, the price of our common stock could fall.Some of the factors which could cause our operating results to fluctuateinclude:

 

•                  general economic conditions;

 

•                  demand for our products and services;

 

•                  our competitors’ products and prices;

 

•                  the timing and market acceptance of new product introductions andupgrades by us or our competitors;

 

•                  our success in expanding our services, customer support and marketingand sales organizations, and the timing of these activities;

 

•                  the mix of products and services sold;

 

•                  delays in, or cancellations of, customer implementations;

 

•                  customers’ budget constraints;

 

•                  the level of research and development expenditures;

 

•                  the size of recurring compensation charges;

 

•                  changes in foreign currency exchange rates;

 

•                  our ability to control costs; and

 

•                  the timing of acquisitions and of the amortization or impairment ofintangible assets.

 

Alarge portion of our expenses, including expenses for facilities, equipment andpersonnel, is relatively fixed. Accordingly, if our revenue declines or doesnot grow as anticipated, we may not be able to correspondingly reduce ouroperating expenses in a timely manner. Failure to achieve anticipated levels ofrevenue could therefore significantly harm our operating results for aparticular fiscal period.

 

**Ourstock price could be extremely volatile and may result in litigation againstus.**

 

Thestock market has experienced significant price and volume fluctuations, and themarket price for our common stock has been in the past and could continue to bevolatile. In the past, following periods of volatility in the market price of acompany’s securities, securities class action litigation has often beeninstituted. Litigation could result in substantial costs and a diversion ofmanagement’s attention and resources.

 

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**Theconcentration of ownership of our common stock may have the effect of delayingor preventing a change of control of us.**

 

Ourdirectors, executive officers and their affiliated companies beneficially ownmore than forty percent of our outstanding common stock. As a result, thesestockholders will have the ability to elect our directors and to determine theoutcome of corporate actions requiring stockholder approval. This concentrationof ownership may have the effect of delaying or preventing a change of controlof us. As a result, if these stockholders voted as a group, they would have theability to significantly influence the outcome of corporate actions requiringstockholder approval.

 

**Wehave implemented anti-takeover provisions that may discourage a change ofcontrol.**

 

Ourcertificate of incorporation authorizes the issuance of 20,000,000 shares ofpreferred stock. Our board of directors has the power to determine the priceand terms of any preferred stock. The ability of our board of directors toissue one or more series of preferred stock without stockholder approval coulddeter or delay unsolicited changes of control by discouraging open marketpurchases of our common stock or a non-negotiated tender or exchange offer forour common stock. Discouraging open market purchases may be disadvantageous toour stockholders who may otherwise desire to participate in a transaction inwhich they would receive a premium for their shares.

 

Inaddition, some provisions of our certificate of incorporation and by-laws mayalso discourage a change of control by means of a tender offer, open marketpurchase, proxy contest or otherwise. These provisions include:

 

•                  a board that is divided into three classes, each of which is elected toserve staggered three year terms;

 

•                  provisions under which only the board of directors or our chiefexecutive officer or secretary may call a special meeting of the stockholders;

 

•                  provisions which permit the board of directors to increase the numberof directors and to fill these positions without a vote of the stockholders;

 

•                  provisions under which no director may be removed at any time exceptfor cause and by a majority vote of the outstanding shares of voting stock; and

 

•                  provisions under which stockholder action may be taken only at astockholders meeting and not by written consent of the stockholders.

 

These provisionsmay have the effect of discouraging takeovers and encouraging persons seekingto acquire control first to negotiate with us.

** **

**RisksRelating to Our Industry**

** **

**Weface intense competition from numerous competitors, some of whom have asignificant competitive advantage over us. If we lose our competitive position,our revenue could decline.**

 

Themarket for fulfillment, collaboration and inventory management solutions isintensely competitive, fragmented and subject to rapid technological change.The principal competitive factors in our market include:

 

•                  adherence to emerging Internet-based technology standards;

 

•                  comprehensiveness of applications;

 

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•                  adaptability and flexibility;

 

•                  immediate, interactive capability with customer and partner systems;

 

•                  financial viability;

 

•                  global capability;

 

•                  references from existing customers;

 

•                  industry domain experience and expertise;

 

•                  ability to support specific industry requirements;

 

•                  ease of application use and deployment;

 

•                  speed of implementation;

 

•                  customer service and support; and

 

•                  initial price and total cost of ownership.

 

Becausewe offer fulfillment, traditional supply chain, collaboration, inventorymanagement and supply network execution software, we consider a number of companiesin different market categories to be our competitors. Our competitors includecompanies and groups that:

 

•                  focus on providing fulfillment applications;

 

•                  offer enterprise platforms for order management, fulfillment andinventory management; and

 

•                  service internal customers, such as internal information technologygroups.

 

Webelieve that the market for integrated fulfillment, collaboration, inventorymanagement and supply network execution solutions is still in its formativestage, and that no currently identified competitor represents a dominantpresence in this market.

 

Weexpect competition to increase as a result of software industry consolidation.New competitors could emerge and rapidly capture market share. We can give youno assurance that we can maintain our competitive position against current andpotential competitors, especially those with greater name recognition,comparable or superior products, significant installed customer bases,long-standing customer relationships or the ability to price products asincremental add-ons to existing systems. If we lose our competitive position,our revenue could decline.

 

**Themarket for our software is characterized by rapid technological change. If wefail to respond promptly and effectively to technological change andcompetitors’ innovations, our growth and operating results could be harmed.**

 

Themarket for fulfillment, warehousing, distribution, inventory management andsupply network execution systems experiences rapid technological change, changingcustomer needs, frequent new product introductions and evolving industrystandards that may render existing products and services obsolete. Our growthand future operating results will depend in part on our ability to enhanceexisting applications and develop and introduce new applications or components.These new applications must:

 

•                  meet or exceed technological advances in the marketplace;

 

•                  meet changing customer requirements;

 

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•                  respond to competitive products; and

 

•                  achieve market acceptance.

 

Ourproduct development and testing efforts have required, and are expected tocontinue to require, substantial investments. Also, we may be unable tosuccessfully identify new software opportunities and develop and bring newsoftware to market quickly and efficiently. Our software may not achieve marketacceptance and current or future products may not conform to industry standardsin the markets served. If we are unable to develop and introduce new andenhanced software in a timely manner, our growth and operating results could beharmed.

 

**Wedepend on intellectual property laws, which may not fully protect us fromunauthorized use or misappropriation of our proprietary technologies.**

 

Werely on intellectual property laws, confidentiality procedures and contractualprovisions to protect our proprietary rights in our products and technology.These measures afford only limited protection to us, particularly on aninternational basis. We may be unable to avoid infringement or misappropriationclaims regarding current or future technology, or unable to adequately determisappropriation or independent third-party development of our technology. Inaddition, policing unauthorized use of our products is difficult.

 

We are unable to determine the extent to which piracyof our software products exists and software piracy could become a problem.Litigation to defend and enforce our intellectual property rights could resultin substantial costs and diversion of resources, regardless of the finaloutcome of such litigation.

** **

**ITEM 3.****                                  ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We developproducts in the United States and market our products in North America, Europe,the Middle East, Asia and Australia. Revenues outside the United States were40.5%, 46.9% and 52.0% of our total revenues for the years ended December 31,2000 and 2001 and for the six months ended June 30, 2002, respectively. Most ofour foreign subsidiaries’ sales and expenses are made in local currencies.International sales denominated in currencies other than the U.S. dollar areprimarily in the Japanese Yen, Singapore dollar and the Euro. Accordingly, weare exposed to fluctuations in currency exchange rates. Foreign currencytransaction gains (losses) were approximately $(0.8) million, $(0.5) millionand $0.8 million for the years ended December 31, 2000 and 2001 and for the sixmonths ended June 30, 2002, respectively. Because most of our sales arecurrently made in U.S. dollars, a strengthening of the dollar could make ourproducts less competitive in foreign markets.

 

InJanuary 2001, we began a foreign currency-hedging program to hedge certainnonfunctional currency exposure. Forward currency exchange contracts areutilized by us to reduce foreign currency exchange and interest rate risks withthe goal of offsetting foreign currency transaction gains and losses recordedfor accounting purposes with gains and losses realized on the forwardcontracts. We do not hold derivative financial instruments for trading orspeculative purposes.

 

As of June 30,2002, the Company had outstanding forward currency exchange contracts of $2.0million to sell British Pounds Sterling that hedge net balance sheetexposures.  Gains and losses arisingfrom the changes in the fair value of forward currency exchange contracts arerecognized as a component of other income (expense).  At June 30, 2002, the current market settlement values of theforward contracts would result in a loss of approximately $0.1 million.

 

We used a portionof the proceeds obtained from our August 2000 initial public offering torepay all

 

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outstanding amounts underour revolving credit facility and term loan, which we subsequently terminated.To the extent that we enter into a new credit facility in the future, futureinterest expense could be subject to fluctuations based on the general level ofU.S. interest rates.

 

We have investedthe remaining proceeds from our initial public offering in investment gradecorporate and government securities and money market funds. The primaryobjective of our investment activities is to preserve capital while at the sametime maximizing the income we receive from our investments withoutsignificantly increasing risk. Some of the securities that we invest in mayhave market risk. This means that a change in prevailing interest rates maycause the principal amount of the investment to fluctuate. For example, if wehold a security that was issued with a fixed interest rate at the then–prevailingrate and the prevailing interest rate later rises, the principal amount of ourinvestment will probably decline. As of June 30, 2002, we had $29.1 million ofsecurities which mature in 90 days or less, $7.3 million of securities whichmature between 90 days and one year, and $4.4 million of securities whichmature between one and two years. We do not believe that we have any materialexposure to interest rate risk.

 

##### **PART II.  OTHERINFORMATION**

** **

**ITEM 2.****           ****CHANGES IN****SECURITIES AND USE OF PROCEEDS**

** **

**(c)****          ****Recent Sales of Unregistered Securities**

** **

During the six months ended June 30, 2002, we issued warrants to purchase15,000 shares of Common Stock to alliance partners at exercise prices of $1.57and $1.85 per share. The securities were not registered under the SecuritiesAct of 1933.

 

We believe that the transactions described above were exempt fromregistration under Section 3(b) or 4(2) of the Securities Act because thesubject securities were issued to a limited group of persons, each of whom wasbelieved to be a sophisticated investor or to have had a pre-existing businessor personal relationship with us or our management and to have been purchasingfor investment without a view to further distribution. In addition, the recipientsof securities in each such transaction represented their intentions to acquirethe securities for investment only and not with a view to or for sale inconnection with any distribution thereof and appropriate legends were affixedto the certificates issued in such transactions. All recipients had adequateaccess, through their relationships with us, to information about us.

** **

**(d)****                                 ****Use of Proceeds**

** **

The Companycompleted its initial public offering of 8.0 million shares of its common stockpursuant to a Registration Statement on Form S-1 (Registration No. 333-35106,effective August 3, 2000) on August 9, 2000. Total proceeds from the offering, including the exercise of theover-allotment option, were approximately $63.9 million, net of underwriting discountsand commissions of approximately $5.0 million and other fees and expenses ofapproximately $1.8 million.

 

From the date ofreceipt through June 30, 2002, we have used the proceeds as follows:

 
| Repayment of  indebtedness |   | $           | 16.6 million |   |
|----------------------------|--------|-------------|--------------|--------|
| Acquisition of  businesses |   | 3.4 million |         |
| Working capital            |   | 9.1 million |         |
| Total                      |   | $           | 29.1 million |   |

 

Theremainder of the proceeds has been invested in investment grade corporate andgovernment

 

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securitiesand money market funds. We intend to use the remaining proceeds for researchand development activities; expenditures on sales and marketing, consultingservices, and general and administrative personnel; systems costs; and workingcapital and general corporate purposes, including possible acquisitions of, orinvestments in, businesses and technologies that are complementary to ourbusiness. None of the net proceeds of the offering were paid by us, directly orindirectly, to any director, officer or general partner of ours or any of theirassociates, or to any persons owning ten percent or more of any class of ourequity securities, or any affiliates of ours.

 

**ITEM 4.****          ****SUBMISSION OF****MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The Company held its Annual Meeting of Stockholders on May 30, 2002, atwhich the Company’s stockholders voted to elect two Class II members to theBoard of Directors. Jay C. Hoag and William J. Lansing were elected to serveuntil the 2005 annual meeting and until their successors are duly elected andqualified. There were 35,063,517 votes cast for the election of Mr. Hoag and35,031,846 votes cast for the election of Mr. Lansing. There were 1,047,258votes withheld from Mr. Hoag and 1,078,929 votes withheld from Mr. Lansing. Thestockholders also approved amendments to the Amended and Restated 1997Incentive and Non-Qualified Stock Option Plan (the “Employee Plan”) increasingthe number of shares of Common Stock available for issuance thereunder from12,000,000 shares to 15,000,000 shares and increasing the maximum number ofshares of Common Stock with respect to which options may be granted thereunderto any employee during any calendar year from 1,000,000 shares to 3,000,000shares; and an amendment to the Amended and Restated Stock Option Plan for Non-EmployeeDirectors (the “Director Plan”) increasing the number of shares of Common Stockavailable for issuance thereunder from 300,000 shares to 600,000 shares.  There were 20,283,019 votes cast for theamendments to the Employee Plan, 8,448,046 votes cast against the proposal,4,920 votes abstained, and 7,374,790 broker non-votes. There were 25,172,345votes cast for the amendment to the Director Plan, 3,557,977 votes cast againstthe proposal, 5,663 votes abstained, and 7,374,790 broker non-votes. Thestockholders also voted to ratify the selection of Ernst & Young LLP asindependent auditors of the Company for the fiscal year ending December 31,2002. There were 36,036,277 votes cast for this proposal, 69,998 votes castagainst this proposal and 4,500 votes abstained.

** **

**ITEM 6.****           ****EXHIBITS AND REPORTS ON FORM 8-K**

** **

(a)           Exhibits

** **

10.1         Employment Agreement datedas of May 13, 2002 between the Company and Kenneth R. Vines.

** **

10.2         Amended and Restated EXETechnologies, Inc. 1997 Incentive and Non-Qualified Stock Option Plan, asamended.

** **

10.3         EXE Technologies, Inc.Amended and Restated Stock Option Plan for Non-Employee Directors, as amended.

 

99.1         Certification pursuant to 18U.S.C. Section 1350.

 

(b)           Reports on Form8-K

 

None.

 

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#### **SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                         | EXE TECHNOLOGIES, INC.                 |
|------------------------------|----------------------------------------|
|                         |                                   |
| Date:  August  14, 2002 | By:                                    |       /s/  RAYMOND R. HOOD |   |
|                         | Raymond R. Hood                        |
|                         | Chairman of the Board of Directors and |
|                         | Chief Executive Officer                |
|                         |                                   |
|                         |                                   |
| Date:  August  14, 2002 | By:                                    |       /s/  KENNETH R. VINES |   |
|                         | Kenneth R. Vines                       |
|                         | Senior Vice President, Finance, Chief  |
|                         | Financial Officer and Treasurer        |

 

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**INDEXTO EXHIBITS**

** **

10.1                           EmploymentAgreement dated as of May 13, 2002 between the Company and Kenneth R. Vines.

 

10.2                           Amended andRestated EXE Technologies, Inc. 1997 Incentive and Non-Qualified Stock OptionPlan, as amended.

 

10.3                           EXETechnologies, Inc. Amended and Restated Stock Option Plan for Non-EmployeeDirectors, as amended.

 

99.1                           Certificationpursuant to 18 U.S.C. Section 1350.

 

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