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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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COMMISSION FILE NUMBER 0-4096
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COMSHARE, INCORPORATED
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1804887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 BRIARWOOD CIRCLE, ANN ARBOR, MICHIGAN 48108
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (734) 994-4800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of SEPTEMBER 30, 2001.
OUTSTANDING AT
CLASS OF COMMON STOCK OCTOBER 31, 2001
--------------------- ----------------
$1.00 PAR VALUE 10,116,716 SHARES
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1
COMSHARE, INCORPORATED
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
for the Three Months Ended September 30, 2001 and 2000 3
Consolidated Statements of Comprehensive Loss
For the Three Months Ended September 30, 2001 and 2000 4
Condensed Consolidated Balance Sheets as of
September 30, 2001 and June 30, 2001 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2001 and 2000 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 18
INDEX TO EXHIBITS 19
2
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2001 2000
------- -------
REVENUE
Software licenses $ 4,093 $ 4,703
Software maintenance 5,750 5,841
Implementation, consulting
and other services 5,173 4,899
------- -------
TOTAL REVENUE 15,016 15,443
COSTS AND EXPENSES
Selling and marketing 5,475 5,461
Cost of revenue and support 6,464 6,781
Internal research and product development 2,295 2,056
General and administrative 1,489 1,432
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TOTAL COSTS AND EXPENSES 15,723 15,730
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LOSS FROM OPERATIONS (707) (287)
OTHER INCOME (EXPENSE)
Interest income 192 427
Interest expense (1) (2)
Exchange loss (14) (15)
------- -------
TOTAL OTHER INCOME 177 410
INCOME (LOSS) BEFORE TAXES (530) 123
Provision for income taxes 8,196 45
------- -------
NET INCOME (LOSS) $(8,726) $ 78
======= =======
SHARES USED IN BASIC EPS COMPUTATION 10,111 9,780
======= =======
SHARES USED IN DILUTED EPS COMPUTATION 10,111 10,007
======= =======
NET INCOME (LOSS) PER COMMON SHARE -
BASIC AND DILUTED EPS $ (0.86) $ 0.01
======= =======
See accompanying notes to condensed consolidated financial statements.
3
COMSHARE, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited, in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2001 2000
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Net income (loss) $(8,726) $ 78
Other comprehensive loss:
Currency translation adjustment (66) (430)
------- -----
COMPREHENSIVE LOSS $(8,792) $(352)
======= =====
See accompanying notes to condensed consolidated financial statements.
4
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, JUNE 30,
2001 2001
------------- ---------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $20,658 $24,106
Accounts receivable, net 19,236 19,541
Deferred income taxes -- 767
Prepaid expenses and other current assets 1,231 1,411
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TOTAL CURRENT ASSETS 41,125 45,825
Property and equipment, at cost
Computers & other equipment 6,809 6,716
Leasehold improvements 2,753 2,649
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9,562 9,365
Less - Accumulated depreciation 8,221 7,955
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Property and equipment, net 1,341 1,410
Goodwill, net 960 977
Deferred income taxes -- 7,355
Other assets 3,577 3,710
------- -------
TOTAL ASSETS $47,003 $59,277
======= =======
See accompanying notes to condensed consolidated financial statements.
5
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, JUNE 30,
2001 2001
------------- ---------
(UNAUDITED) (AUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,503 $ 3,047
Accrued liabilities:
Payroll 1,360 2,379
Taxes 912 1,370
Other 3,080 3,537
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Total accrued liabilities 5,352 7,286
Deferred revenue 10,299 11,166
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TOTAL CURRENT LIABILITIES 18,154 21,499
Long-term debt 70 164
Other liabilities 5,866 5,950
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, no par value;
authorized 5,000,000 shares; none issued -- --
Common stock, $1.00 par value;
authorized 20,000,000 shares; outstanding
10,116,716 shares as of September 30, 2001
and 10,104,626 shares as of June 30, 2001 10,117 10,105
Capital contributed in excess of par value 39,273 39,244
Retained deficit (16,450) (7,724)
Accumulated other comprehensive income:
Pension liability, net of tax (4,282) (4,282)
Cumulative translation adjustment (5,745) (5,679)
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TOTAL SHAREHOLDERS' EQUITY 22,913 31,664
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $47,003 $59,277
======= =======
See accompanying notes to condensed consolidated financial statements.
6
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2001 2000
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OPERATING ACTIVITIES
Net income (loss) $(8,726) $ 78
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 188 251
Changes in operating assets and liabilities:
Accounts receivable 433 (242)
Prepaid expenses and other assets 319 (321)
Accounts payable (531) 790
Accrued liabilities (1,878) (2,011)
Deferred revenue (774) (1,924)
Deferred income taxes 8,122 (398)
Other liabilities (84) (24)
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NET CASH USED IN OPERATING ACTIVITIES (2,931) (3,801)
INVESTING ACTIVITIES
Payments for property and equipment (29) (9)
Other (38) (83)
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NET CASH USED IN INVESTING ACTIVITIES (67) (92)
FINANCING ACTIVITIES
Net repayments under debt agreements,
capital lease agreements and notes payable (94) (254)
Other 41 82
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NET CASH USED IN FINANCING ACTIVITIES (53) (172)
Effect of exchange rate changes (397) (427)
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NET DECREASE IN CASH (3,448) (4,492)
CASH AT BEGINNING OF PERIOD 24,106 29,506
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CASH AT END OF PERIOD $20,658 $25,014
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1 $ 2
======= =======
Cash paid for income taxes $ 215 $ 443
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See accompanying notes to condensed consolidated financial statements.
7
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by Comshare, Incorporated (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's most recent Annual Report on Form 10-K.
Certain amounts in the fiscal 2001 financial statements have been reclassified
to conform to fiscal 2002 presentations.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring items, required to present fairly its consolidated statements
of operations and the consolidated statements of comprehensive loss for the
three months ended September 30, 2001 and 2000, the consolidated balance sheets
as of September 30, 2001 and the consolidated statements of cash flows for the
three months ended September 30, 2001 and 2000.
The results of operations for the three months ended September 30, 2001 and
2000 are not necessarily indicative of the results to be expected in future
quarters or the full fiscal year. The software industry is generally
characterized by seasonal trends.
NOTE B - COMPUTER SOFTWARE
Product upgrades for the Company's products have been released regularly
with an almost continuous product development cycle. Based on these continuous
product life cycles, the time between establishing technological feasibility and
general release to the public is very short. As a result, software costs
qualifying for capitalization are not significant. Accordingly, the Company does
not capitalize software development costs and does not anticipate capitalization
of software costs in future periods.
NOTE C - BORROWINGS
The Company has a $10 million credit agreement which expires on September
30, 2003. Borrowings are secured by accounts receivable and the credit agreement
contains covenants regarding, among other things, earnings leverage, net worth
and payment of dividends. Under the terms of the credit agreement, the Company
is not permitted to pay cash dividends on its common stock. Borrowings under
this credit agreement were approximately $0.1 million and total available
borrowings were $10 million at September 30, 2001. Borrowings available at any
time are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash. At September 30, 2001, the interest rate on
borrowings denominated in Japanese yen, which was used to hedge receivables, was
1.81%.
8
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE D - FINANCIAL INSTRUMENTS
The Company, at various times, enters into forward exchange contracts to
hedge certain exposures related to identifiable foreign currency transactions
that are relatively certain as to both timing and amount. On July 1, 2000, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, as
amended by SFAS No. 137 and SFAS No. 138 and has quantified the impact,
determining that there was no material effect on the financial statements. The
Company uses derivative financial instruments to manage its exposures to
fluctuations in foreign exchange rates. The use of these financial instruments
mitigates the Company's exposure to these risks with the intent of reducing the
risks and variability of the Company's operating results. Initially, upon
adoption of SFAS No. 133, and prospectively, on the date a derivative contract
is entered into, the Company designates the derivative as a hedge. The
ineffective portion of the hedge is recorded in earnings and reflected in the
consolidated statement of operations as exchange gain or loss within other
income (expense). The Company formally documents its hedge relationships,
including the identification of the hedging instruments and the hedged items, as
well as its risk management objectives and strategies for undertaking the hedge
transaction. At September 30, 2001 and June 30, 2001, the Company had forward
foreign currency exchange contracts outstanding of approximately $1.3 million
and $1.7 million (notional amounts), respectively, denominated in foreign
currencies. The contracts outstanding at September 30, 2001 mature at various
dates through December 14, 2001 and are intended to hedge various foreign
currency commitments due from the Company's distributors. Due to the short-term
nature of these financial instruments, the fair value of these contracts is not
materially different than their notional amounts at September 30, 2001 and June
30, 2001.
NOTE E - PROVISION FOR INCOME TAXES
The Company recognized no tax benefit associated with the losses incurred
in the three month period ended September 30, 2001. The Company fully reserved
its deferred tax asset during the quarter September 30, 2001, resulting in a
provision for income taxes of $8.2 million. Realization of deferred tax assets
associated with the Company's future deductible temporary differences, net of
operating loss carryforwards and tax credit carryforwards, is dependent upon
generating sufficient taxable income prior to their expiration. Management now
believes it is not likely that the deferred tax assets previously recognized
will be realized through future taxable income generated by using a tax strategy
available to the Company. This belief is based on a determination that the tax
strategy is no longer consistent with the Company's business strategy. The
Company's deferred tax assets were previously supported through the valuation of
non-core and legacy product lines. Management believed that the sale of those
product lines would have resulted in sufficient taxable income to realize the
deferred tax assets. The Company's current business strategy, however, is not
consistent with the sale of such product lines and, as a result, such tax
strategies are no longer available. This change in the Company's business
strategy was due to the impact of the continued decline in revenues from legacy
product lines experienced in the first quarter of fiscal year 2002, the current
economic downturn and reduced market valuations in the technology sector.
NOTE F - SEGMENT REPORTING
The Company has only one reportable segment - the development, marketing
and support of financial analytic applications software for management planning
and control. Revenue is derived from the licensing of software and the provision
of related services that include product implementation, consulting, training
and support.
No single customer accounted for more than 10% of the Company's total
revenue in the three months ended September 30, 2001 and 2000. In addition, the
Company is not dependent on any single customer or group of customers.
Geographic segment information is as follows:
9
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
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(IN THOUSANDS)
REVENUE FROM EXTERNAL CUSTOMERS:
United States $ 9,101 $ 8,861
United Kingdom 2,571 2,919
Other countries 3,344 3,663
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TOTAL REVENUE $15,016 $15,443
======= =======
OPERATING INCOME (LOSS):
United States $(1,339) $ 248
United Kingdom 1,169 (153)
Other countries 2,195 2,261
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TOTAL OPERATING INCOME 2,025 2,356
Unallocated expenses (2,555) (2,233)
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INCOME (LOSS) BEFORE TAXES $ (530) $ 123
======= =======
IDENTIFIABLE ASSETS:
United States $38,669 $46,471
United Kingdom and other countries 8,334 9,753
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TOTAL IDENTIFIABLE ASSETS $47,003 $56,224
======= =======
Unallocated expenses consist of general corporate expenses, internal
research and product development expenses, interest expense and interest income.
10
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis sets forth information for the three
months ended September 30, 2001 compared to the three months ended September 30,
2000. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial data
as a percentage of total revenue.
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
----- -----
REVENUE
Software licenses 27.3% 30.5%
Software maintenance 38.3 37.8
Implementation, consulting and other services 34.4 31.7
----- -----
TOTAL REVENUE 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 36.5 35.4
Cost of revenue and support 43.0 43.9
Internal research and product development 15.3 13.3
General and administrative 9.9 9.3
----- -----
TOTAL COSTS AND EXPENSES 104.7 101.9
LOSS FROM OPERATIONS (4.7) (1.9)
OTHER INCOME (EXPENSE)
Interest income 1.3 2.8
Interest expense -- --
Exchange loss (0.1) (0.1)
----- -----
TOTAL OTHER INCOME 1.2 2.7
INCOME (LOSS) BEFORE TAXES (3.5) 0.8
Provision for income taxes 54.6 0.3
----- -----
NET INCOME (LOSS) (58.1)% 0.5%
===== =====
11
REVENUE
The following table shows revenue for the Company during the quarters ended
September 30, 2001 and 2000:
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------- PERCENT
2001 2000 CHANGE
------- ------- -------
(IN THOUSANDS)
MPC REVENUE
Software licenses $ 3,548 $ 3,222 10.1
Software maintenance 3,317 2,688 23.4
Implementation, consulting and
other services 4,906 4,379 12.0
------- -------
TOTAL MPC REVENUE $11,771 $10,289 14.4%
======= =======
LEGACY REVENUE
Software licenses $ 545 $ 1,481 (63.2)
Software maintenance 2,433 3,153 (22.8)
Implementation, consulting and
other services 267 520 (48.7)
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TOTAL LEGACY REVENUE $ 3,245 $ 5,154 (37.0)%
======= =======
TOTAL REVENUE
Software licenses $ 4,093 $ 4,703 (13.0)
Software maintenance 5,750 5,841 (1.6)
Implementation, consulting and
other services 5,173 4,899 5.6
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TOTAL REVENUE $15,016 $15,443 (2.8)%
======= =======
The decline in total revenue in the quarter ended September 30, 2001 of 3%
from the quarter ended September 30, 2000 was primarily due to a 37% decline in
revenue from the Company's older desktop ("legacy") products, offset by a 14%
growth in revenue from the Company's management planning and control software
applications ("MPC"). Revenue growth in the three months ended September 30,
2001 was also impaired by the general economic slowdown during the quarter. The
Company's MPC suite of software applications is comprised of Comshare MPC
(formerly BudgetPLUS), Comshare FDC and Comshare Decision. MPC revenue was $11.8
million for the quarter ended September 30, 2001, representing 78% of total
revenue.
The 13% decline in the Company's license fees for the first quarter of
fiscal year 2002 was primarily due to a decrease in legacy license fees of 63%
from the three months ended September 30, 2000. This decrease was partially
offset by an increase of 10% in the Company's MPC license fees. MPC license fees
represented 87% of total license fees for the quarter ended September 30, 2001.
License fees of legacy products declined 63%, from $1.5 million to $0.5 million,
for the quarter ended September 30, 2001 versus the quarter ended September 30,
2000. MPC license fees showed slower growth in the quarter, primarily due to the
slowdown in the economy. License fees in the Company's direct operations, which
include North America and the United Kingdom, grew 2% to $2.7 million for the
quarter ended September 30, 2001. Direct license fee growth was offset by the
decline in distributor license fees of 31% to $1.4 million for the same time
period, primarily reflecting a decline in sales of the Company's legacy products
by distributors, limited sales by distributors of MPC products, and global
economic uncertainty. The first quarter of the Company's fiscal year is
historically the slowest from a license fee perspective
12
due to the reduced demand for our financial budgeting and analytic applications
in the third quarter of the calendar year.
Software maintenance revenues decreased 2% for the quarter ended September
30, 2001 primarily due to a 23% decrease in legacy product maintenance due to
mainframe and desktop maintenance cancellations and continued customer migration
to other platforms. During the quarter ended September 30, 2001, the Company
experienced 23% growth in maintenance revenues of the Company's MPC products to
$3.3 million due to MPC license fee growth in fiscal 2001. MPC product
maintenance accounted for 58% of total maintenance revenue for the three months
ended September 30, 2001. Legacy software maintenance represented 42% of total
software maintenance revenue for the quarter ended September 30, 2001 as
compared to 54% for the quarter ended September 30, 2000.
Implementation, consulting and other services revenues grew 6% primarily
due to the growth in license fees in the Company's direct operations in the
previous two quarters. During the quarter ended September 30, 2001, 95% of total
implementation services revenue was related to MPC products, which grew 12%.
Implementation, consulting and other services revenues for MPC products were
$4.9 million and $4.4 million for the quarters ended September 30, 2001 and
2000, respectively.
COSTS AND EXPENSES
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------- PERCENT
2001 2000 CHANGE
------- ------- --------
(IN THOUSANDS)
COST AND EXPENSES
Selling and marketing $ 5,475 $ 5,461 (0.3)%
Cost of revenue and support 6,464 6,781 (4.7)
Internal research and product
development 2,295 2,056 11.6
General and administrative 1,489 1,432 4.0
------- -------
TOTAL COSTS AND EXPENSES $15,723 $15,730 --%
======= =======
Total costs and expenses remained relatively flat from the first quarter of
the prior year.
Selling and marketing expenses remained relatively flat for the quarters
ended September 30, 2001 and 2000.
Cost of revenue and support expenses decreased 5% from the first quarter of
the prior year. The decrease was primarily due to a decrease in royalty expenses
resulting from lower sales of Hyperion Solutions Corporation's Essbase database
and to a lesser extent, a reduction in cost of goods sold due to the lower
license fees for the quarter. The Company licenses the Essbase database from
Hyperion under an agreement that expires in December 2002, and resells it in
connection with many of its Comshare MPC products.
Internal research and product development costs increased 12% to $2.3
million from $2.1 million for the quarters ended September 30, 2001 and 2000,
respectively. The increase was primarily due increased employee costs
attributable to additional staffing.
General and administrative expenses increased 4% from the first quarter of
fiscal year 2001 to $1.5 million for the quarter ended September 30, 2001. The
increase is primarily attributable to an increase in general facilities costs
and increased employee costs from the first quarter of the prior year. During
the first quarter of fiscal year 2001, the Company benefited from a
nonrecurring credit resulting from negotiation with a third party vendor.
The Company anticipates that it will take an estimated $0.6 to $0.8 million
restructuring charge in the second quarter ending December 31, 2001 designed to
bring costs in line with revenues. The restructuring charge is expected to
consist primarily of employee termination payments to be paid during the second
and third quarters of the 2002 fiscal year. These payments will be funded from
the Company's available cash. The restructuring charge is part of cost
reduction actions aimed at reducing annual operating costs by $2.5 million,
primarily through personnel reductions, attrition and selected third party cost
cuts. Planned personnel reductions include approximately 28 employees
Company-wide, principally in the United States. The Company does not expect to
realize the full benefit of these actions until the third quarter of the 2002
fiscal year. The decision was made in response to the decline in revenue
experienced in the first quarter of fiscal 2002. The charge was not recorded in
the first quarter as the criteria of EITF 94-3 had not been met. The Company
does not expect the personnel reductions to have a material negative effect on
its operations because they were made in areas where the Company believes fewer
employees are required to support the Company's current level of revenues. The
Company's expectation as to the impact of its cost reduction actions and the
impact of those actions on its operations are "forward looking statements"
within the meaning of the Securities and Exchange Act of 1934, as amended. Such
expectations are subject to a number of uncertainties described in "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Safe Harbor Statement."
13
OTHER INCOME AND EXPENSE
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2001 2000
---- ----
(IN THOUSANDS)
OTHER INCOME (EXPENSE)
Interest income $192 $427
Interest expense (1) (2)
Exchange loss (14) (15)
---- ----
TOTAL OTHER INCOME $177 $410
==== ====
Lower interest rates on short-term investments and lower average cash
balances during the three months ended September 30, 2001 resulted in decreased
interest income for the quarter ended September 30, 2001, compared to the three
months ended September 30, 2000.
FOREIGN CURRENCY
For the three months ended September 30, 2001, 39% of the Company's total
revenue was from outside North America compared with 43% for the three months
ended September 30, 2000. Most of the Company's international revenue is
denominated in foreign currencies. The Company recognizes currency transaction
gains and losses in the period of occurrence. As currency rates are constantly
changing, these gains and losses can, at times, fluctuate greatly. The Company's
future operating results may be adversely impacted by the overall strengthening
of the U.S. dollar against foreign currencies of countries where the Company
conducts business; conversely, future operating results may be favorably
impacted by an overall weakening of the U.S. dollar against foreign currencies.
For the three months ended September 30, 2001, foreign currency fluctuations did
not have a material impact on the Company's revenues, operating expenses or net
loss.
The Company had several forward exchange contracts totaling a notional
amount of $1.3 million, outstanding at September 30, 2001. See Note D of Notes
to Condensed Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The Company recognized no tax benefit associated with the losses incurred
in the three month period ended September 30, 2001. The Company fully reserved
its deferred tax asset during the quarter ended September 30, 2001, resulting in
a provision for income taxes of $8.2 million. Realization of deferred tax assets
associated with the Company's future deductible temporary differences, net of
operating loss carryforwards and tax credit carryforwards, is dependent upon
generating sufficient taxable income prior to their expiration. Management now
believes it is not likely that the deferred tax assets previously recognized
will be realized through future taxable income generated by using a tax strategy
available to the Company. This belief is based on a determination that the tax
strategy is no longer consistent with the Company's business strategy. The
Company's deferred tax assets were previously supported through the valuation of
non-core and legacy product liens. Management believed that the sale of those
product lines would have resulted in sufficient taxable income to realize the
deferred tax assets. The Company's current business strategy, however, is not
consistent with the sale of such product lines and, as a result, such tax
strategies are no longer available. This change in the Company's business
strategy was due to the impact of the continued decline in revenues from legacy
product lines experienced in the first quarter of fiscal year 2002, the current
economic downturn and reduced market valuations in the technology sector.
14
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, cash and cash equivalents were $20.7 million,
compared with cash and cash equivalents of $24.1 million at June 30, 2001. The
$3.4 million decrease resulted primarily from $2.9 million used in operating
activities.
Net cash of $2.9 million was used in operating activities in the three
months ended September 30, 2001. The cash used in operating activities consisted
primarily of a net loss of $8.7 million adjusted for non-cash items of $8.3
million, including the write-down of the Company's deferred tax asset, and $2.5
million used in working capital and other activities. Net cash used in working
capital and other activities resulted primarily from a decrease in accrued
payroll and deferred revenue, partially offset by a decrease in accounts
receivable. The decrease in accrued payroll is primarily due to payment of
incentive accruals related to sales in the fourth quarter of fiscal 2001.
Deferred revenue and accounts receivable decreased primarily as a result of the
decline in license fee and maintenance revenue for the quarter.
Net cash of $0.1 million was used in investing activities for the three
months ended September 30, 2001. The Company purchases most of its computer
equipment under operating leases. At September 30, 2001, the Company did not
have any material capital expenditure commitments.
Net cash of $0.1 million was used in financing activities in the three
months ended September 30, 2001 and consisted primarily of repayments of bank
borrowings.
Total assets were $47 million at September 30, 2001, compared with total
assets of $59.3 million at June 30, 2001. Working capital as of September 30,
2001 was $23.0 million, compared with $24.3 million as of June 30, 2001. The
decrease in total assets from June 30, 2001 to September 30, 2001 was primarily
due to the write-down of the deferred tax asset by $8.2 million and the decline
in cash and cash equivalents during the three months ended September 30, 2001.
The decline in working capital from June 30, 2001 to September 30, 2001 was
primarily due to the decline in cash and cash equivalents during that period.
The Company has a $10 million credit agreement which expires on September
30, 2003. Borrowings under the agreement are secured by accounts receivable and
the credit agreement contains covenants regarding, among other things, earnings
leverage, net worth and payment of dividends. Under the terms of the credit
agreement, the Company is not permitted to pay cash dividends on its common
stock. Borrowings under the credit agreement were approximately $0.1 million and
total available borrowings were $10 million at September 30, 2001. Borrowings
available at any time are based on the lower of $10 million or a percentage of
worldwide eligible accounts receivable and cash. At September 30, 2001, the
interest rate on borrowings denominated in Japanese yen, which were used to
hedge receivables in those currencies, was 1.81%.
The Company believes that the combination of present cash balances and
amounts available under credit facilities will be sufficient to meet the
Company's currently anticipated cash requirements for at least the next twelve
months. The foregoing statement is a "forward looking statement" within the
meaning of the Securities and Exchange Act of 1934, as amended. The extent to
which such sources will be sufficient to meet the Company's anticipated cash
requirements is subject to a number of uncertainties, including the ability of
the Company's operations to generate sufficient cash to support operations, and
other uncertainties described in "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Safe Harbor Statement."
MARKET SENSITIVITY ANALYSIS
The Company is exposed to market risk from changes in foreign exchange and
interest rates. To reduce the risk from changes in foreign exchange rates, the
Company selectively uses financial instruments. The Company does not hold or
issue financial instruments for trading purposes.
The Company, at various times, denominates borrowings in foreign currencies
and enters into forward exchange contracts to hedge exposures related to foreign
currency transactions. The Company does not use any other types of derivatives
to hedge such exposures nor does it speculate in foreign currency. In general,
the Company uses forward exchange contracts to hedge against large selective
transactions that present the most exposure to exchange rate fluctuations. At
September 30, 2001 and June 30, 2001, the Company had forward contracts of
approximately $1.3 million and $1.7 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at September 30,
2001 mature through December 14, 2001 and are intended to hedge various foreign
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currency commitments due from the Company's distributors. Due to the short-term
nature of these financial instruments, the fair value of these contracts is not
materially different than their notional amounts at September 30, 2001 and June
30, 2001.
Gains and losses on the forward contracts are largely offset by gains and
losses on the underlying exposure. The Company conducts business in
approximately 7 foreign currencies, predominately British pounds, the Euro,
Australian dollars and Japanese yen. A hypothetical 10 percent appreciation of
the U.S. dollar from September 30, 2001 market rates would increase the
unrealized value of the Company's forward contracts by an immaterial amount and
a hypothetical 10 percent depreciation of the U.S. dollar from September 30,
2001 market rates would decrease the unrealized value of the Company's forward
contracts by an immaterial amount. In either scenario, the gains or losses on
the forward contracts would be largely offset by the gains or losses on the
underlying transactions.
The Company maintains its cash and cash equivalents in highly liquid
investments with maturities of ninety days or less. The Company has the ability
to hold its fixed income investments until maturity, and therefore the Company
would not expect its operating results or cash flows to be affected to any
significant degree by the effect of a hypothetical 10 percent change in market
interest rates on its cash and cash equivalents.
SAFE HARBOR STATEMENT
Certain information in this Form 10-Q Report contains "forward looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended, including those concerning the Company's future results, the impact of
cost reduction actions, the ability to use net operating losses and other tax
benefits and product releases. Actual results could differ materially from those
in the forward looking statements due to a number of uncertainties, including,
but not limited to, the demand for the Company's products and services; the
size, timing and recognition of revenue from significant orders; the impact that
cost reductions may have on the Company's revenues and operating results;
increased competition and pricing pressures from competitors; the Company's
success in and expense associated with developing, introducing and shipping new
products; new product introductions and announcements by the Company's
competitors; the level of interest and success of the Company's distributors in
marketing and selling the Company's products; changes in Company strategy;
product life cycles; the cost and continued availability of third party software
and technology incorporated into the Company's products, including the impact of
the expiration of the license for Essbase in December 2002; the impact of rapid
technological advances, evolving industry standards and changes in customer
requirements, including the impact on the Company's revenues of Microsoft's OLAP
database; the overall competition for key employees; cancellations of
maintenance and support agreements; software defects; changes in operating
expenses; fluctuations in foreign exchange rates; and the high degree of
economic uncertainty at this time and economic conditions generally or in
specific industry segments. The level of annual expense reductions resulting
from cost reduction actions may vary due to a number of factors, including
unanticipated increases in costs resulting from such actions, or otherwise. In
addition, a significant portion of the Company's revenue in any quarter is
typically derived from non-recurring license fees, a substantial portion of
which is booked in the last month of a quarter. Since the purchase of the
Company's products is relatively discretionary and generally involves a
significant commitment of capital, in the event of any downturn in any potential
customer's business or the economy in general, purchases of the Company's
products may be deferred or cancelled. Further, the Company's expense levels are
based, in part, on its expectations as to future revenue and a significant
portion of the Company's expenses do not vary with revenue. As a result, if
revenue is below expectations, results of operations are likely to be
materially, adversely affected.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits included with this Form 10-Q are set forth on the Index to
Exhibits.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended September
30, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2001 Comshare, Incorporated
(Registrant)
/s/ Brian Jarzynski
-------------------
Brian Jarzynski
Vice President,
Chief Financial Officer and
Treasurer
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.01 Seventh Amendment to Credit Agreement, dated September 28, 2001,
between the Registrant, Comshare Limited and Harris Trust and
Savings Bank.
10.01 Summary of 2002 Senior Executive Incentive Plan.
19