UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
COMMISSION FILE NUMBER 0-4096
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 JANUARY 31, 2002.
OUTSTANDING AT
CLASS OF COMMON STOCK JANUARY 31, 2002
--------------------- ----------------
$1.00 PAR VALUE 10,263,508 SHARES
1
COMSHARE, INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended December 31, 2001 and 2000...............................3
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended December 31, 2001 and 2000...............................4
Condensed Consolidated Balance Sheets as of
December 31, 2001 and June 30, 2001.........................................................5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 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 ........................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...........................................................19
Signature................................................................................................20
INDEX TO EXHIBITS........................................................................................21
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
---- ---- ---- ----
REVENUE
Software licenses $ 4,094 $ 5,308 $ 8,187 $ 10,011
Software maintenance 6,006 5,899 11,756 11,740
Implementation, consulting
and other services 4,181 3,618 9,354 8,517
-------- -------- -------- --------
TOTAL REVENUE 14,281 14,825 29,297 30,268
COSTS AND EXPENSES
Selling and marketing 5,881 5,803 11,356 11,264
Cost of revenue and support 6,044 5,951 12,508 12,732
Internal research and product development 2,305 2,085 4,600 4,141
General and administrative 1,198 1,290 2,687 2,722
Restructuring 1,280 - 1,280 -
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 16,708 15,129 32,431 30,859
-------- -------- -------- --------
LOSS FROM OPERATIONS (2,427) (304) (3,134) (591)
OTHER INCOME (EXPENSE)
Interest income 138 375 330 802
Interest expense - (2) (1) (4)
Exchange loss (18) (61) (32) (76)
-------- -------- -------- --------
TOTAL OTHER INCOME 120 312 297 722
INCOME (LOSS) BEFORE TAXES (2,307) 8 (2,837) 131
Provision for income taxes - 3 8,196 48
-------- -------- -------- --------
NET INCOME (LOSS) $ (2,307) $ 5 $(11,033) $ 83
======== ======== ======== ========
SHARES USED IN BASIC EPS COMPUTATION 10,118 9,790 10,115 9,785
======== ======== ======== ========
SHARES USED IN DILUTED EPS COMPUTATION 10,118 9,833 10,115 9,926
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $ (0.23) $ 0.00 $ (1.09) $ 0.01
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $ (0.23) $ 0.00 $ (1.09) $ 0.01
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
COMSHARE, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income (loss) $ (2,307) $ 5 $(11,033) $ 83
Other comprehensive income (loss):
Currency translation adjustment (28) 276 (94) (154)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ (2,335) $ 281 $(11,127) $ (71)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, June 30,
2001 2001
---- ----
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $19,322 $24,106
Accounts receivable, net 18,663 19,541
Deferred income taxes - 767
Prepaid expenses and other current assets 1,831 1,411
------- -------
TOTAL CURRENT ASSETS 39,816 45,825
Property and equipment, at cost
Computers & other equipment 6,970 6,716
Leasehold improvements 2,724 2,649
------- -------
9,694 9,365
Less - Accumulated depreciation 8,291 7,955
------- -------
Property and equipment, net 1,403 1,410
Deferred income taxes - 7,355
Other assets 4,599 4,687
------- -------
TOTAL ASSETS $45,818 $59,277
======= =======
See accompanying notes to condensed consolidated financial statements.
5
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, June 30,
2001 2001
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
CURRENT LIABILITIES
Accounts payable $ 2,187 $ 3,047
Accrued liabilities:
Payroll 1,754 2,379
Taxes 961 1,370
Other 2,935 3,537
-------- --------
Total accrued liabilities 5,650 7,286
Deferred revenue 10,977 11,166
-------- --------
TOTAL CURRENT LIABILITIES 18,814 21,499
Long-term debt 64 164
Other liabilities 5,999 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
10,263,508 shares as of December 31, 2001
and 10,104,626 shares as of June 30, 2001 10,264 10,105
Capital contributed in excess of par value 39,490 39,244
Retained deficit (18,757) (7,724)
Accumulated other comprehensive income:
Pension liability, net of tax (4,084) (4,084)
Cumulative translation adjustment (5,972) (5,877)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 20,941 31,664
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,818 $ 59,277
======== ========
See accompanying notes to condensed consolidated financial statements.
6
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
2001 2000
---- ----
OPERATING ACTIVITIES
Net income (loss) $(11,033) $ 83
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 380 495
Deferred income taxes 8,122 (547)
Changes in operating assets and liabilities:
Accounts receivable 955 (2,346)
Prepaid expenses and other assets (360) (278)
Accounts payable (853) (24)
Accrued liabilities (1,592) (3,204)
Deferred revenue (124) (944)
Other liabilities 49 (79)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (4,456) (6,844)
INVESTING ACTIVITIES
Payments for property and equipment (205) (104)
Other (109) (138)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (314) (242)
FINANCING ACTIVITIES
Net repayments under debt agreements,
capital lease agreements and notes payable (100) (473)
Other 403 397
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 303 (76)
Effect of exchange rate changes (317) (181)
-------- --------
NET DECREASE IN CASH (4,784) (7,343)
CASH AT BEGINNING OF PERIOD 24,106 29,506
-------- --------
CASH AT END OF PERIOD $ 19,322 $ 22,163
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1 $ 4
======== ========
Cash paid for income taxes $ 430 $ 609
======== ========
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/A. Certain amounts in the fiscal 2001 financial statements have been
reclassified to conform with 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 income for the
three and six months ended December 31, 2001 and 2000, the consolidated balance
sheets as of December 31, 2001 and June 30, 2001, and the consolidated
statements of cash flows for the six months ended December 31, 2001 and 2000.
The results of operations for the three and six months ended December
31, 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 - RESTRUCTURING
In October 2001, the Company implemented a restructuring plan to reduce
personnel costs, to bring costs more in line with revenues and improve financial
performance of the Company. Restructuring and related charges of $1.3 million
were expensed in the quarter ended December 31, 2001. Employee groups impacted
by the restructuring include finance and administration, product development,
marketing, and field operations, principally in the Company's offices in the
United States and also in the Company's United Kingdom office. Approximately 32
people or 9% of the worldwide headcount were eliminated by this restructuring
plan. All separations were completed prior to December 31, 2001.
----------------------------------------------------------------------------------------------------------
RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGES TO RESERVES BALANCE AT
(IN THOUSANDS) (IN THOUSANDS) DECEMBER 31, 2001
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------------
Employee severance $1,280 $(489) $791
----------------------------------------------------------------------------------------------------------
Total cash expenditures relating to the restructuring charge are
expected to be $1.3 million, with approximately $0.5 million paid prior to
December 31, 2001. Such cash expenditures are expected to be funded from the
Company's available cash, and be paid through the second quarter of the 2003
fiscal year, principally during the remainder of fiscal year 2002.
In March 2001, the Company implemented a restructuring plan to reduce
personnel costs. Restructuring and related charges of $0.9 million were expensed
in the quarter ended March 31, 2001. Employee groups impacted by the
restructuring include marketing and field operations in the Company's North
American and United Kingdom offices. A total of thirteen people or 4% of the
worldwide headcount were eliminated by this restructuring plan.
8
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
----------------------------------------------------------------------------------------------------------
RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGES TO RESERVES BALANCE AT
(IN THOUSANDS) (IN THOUSANDS) DECEMBER 31, 2001
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------------
Employee severance $892 $(367) $525
----------------------------------------------------------------------------------------------------------
As of December 31, 2001, the Company had $1.3 million of accruals
remaining from restructuring charges. The entire amount is related to employee
severance agreements.
NOTE D - 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 December 31, 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 December 31, 2001, the interest rate on
borrowings denominated in Japanese yen, which was used to hedge receivables, was
1.84%.
NOTE E - 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 December 31, 2001 and June 30, 2001, the Company had forward
foreign currency exchange contracts outstanding of approximately $1.2 million
and $1.7 million (notional amounts), respectively, denominated in foreign
currencies. The contracts outstanding at December 31, 2001 mature at various
dates through March 15, 2002 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 December 31, 2001 and June 30, 2001.
NOTE F - PROVISION FOR INCOME TAXES
The Company recognized no tax benefit associated with the losses
incurred in the three month period ended December 31, 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 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 quarter ended
September 30, 2001, the current economic downturn and reduced market valuations
in the technology sector.
9
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE G - LEASES
The Company leases office space, transportation and computer equipment
under non-cancelable operating leases. Initial lease terms vary in length and
several of the leases contain renewal options. Future minimum lease payments
under all non-cancelable operating leases as of December 31, 2001 are as follows
(in thousands):
FISCAL YEARS ENDING JUNE 30,
- --------------------------------------------------------------
2002 $ 2,443
2003 4,129
2004 3,572
2005 2,613
2006 1,183
Thereafter 1,582
-------------
Total minimum payments $ 15,522
=============
Minimum payments under non-cancelable operating leases have not been
reduced by minimum sublease rentals of $5.3 million due in the future under
non-cancelable subleases.
NOTE H - 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, which include product implementation, consulting,
training and support.
No single customer accounted for more than 10% of the Company's total
revenue in the three and six months ended December 31, 2001 and 2000. In
addition, the Company is not dependent on any single customer or group of
customers. Geographic segment information is as follows:
10
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------------ ----------- -------------- ------------
REVENUE FROM EXTERNAL CUSTOMERS:
United States $ 8,489 $ 8,025 $ 17,590 $ 16,886
United Kingdom 2,327 3,082 4,898 6,001
Other countries 3,465 3,718 6,809 7,381
------------ ----------- -------------- ------------
TOTAL REVENUE $14,281 $14,825 $ 29,297 $ 30,268
============ =========== ============== ============
OPERATING INCOME (LOSS):
United States $(2,263) $(1,806) $ (3,602) $(1,558)
United Kingdom 1,661 1,705 2,830 1,552
Other countries 2,143 2,390 4,338 4,651
------------ ----------- -------------- ------------
TOTAL OPERATING INCOME 1,541 2,289 3,566 4,645
Unallocated expenses (3,848) (2,281) (6,403) (4,514)
------------ ----------- -------------- ------------
INCOME (LOSS) BEFORE TAXES $(2,307) $ 8 $ (2,837) $ 131
============ =========== ============== ============
DECEMBER 31, June 30,
2001 2001
------------ -----------
IDENTIFIABLE ASSETS:
United States $38,460 $50,511
United Kingdom and other countries 7,358 8,766
------------ -----------
TOTAL IDENTIFIABLE ASSETS $45,818 $59,277
============ ===========
Unallocated expenses consist of general corporate expenses, internal
research and product development expenses, interest expense and interest
income.
11
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 and six months ended December 31, 2001 compared to the three and six
months ended December 31, 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUE
Software licenses 28.7 % 35.8 % 28.0 % 33.1 %
Software maintenance 42.0 39.8 40.1 38.8
Implementation, consulting and
other services 29.3 24.4 31.9 28.1
----------- -------- --------- ----------
TOTAL REVENUE 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 41.2 39.2 38.7 37.2
Cost of revenue and support 42.3 40.1 42.7 42.1
Internal research and product development 16.1 14.1 15.7 13.7
General and administrative 8.4 8.7 9.2 9.0
Restructuring and unusual 9.0 - 4.4 -
----------- -------- --------- ----------
TOTAL COSTS AND EXPENSES 117.0 102.1 110.7 102.0
LOSS FROM OPERATIONS (17.0) (2.1) (10.7) (2.0)
OTHER INCOME (EXPENSE)
Interest income 1.0 2.5 1.1 2.7
Interest expense - - - 0.0
Exchange loss (0.1) (0.4) (0.1) (0.2)
----------- -------- --------- ----------
TOTAL OTHER INCOME 0.9 2.1 1.0 2.5
INCOME (LOSS) BEFORE TAXES (16.1) (0.0) (9.7) 0.5
Provision for income taxes - 0.0 28.0 0.2
----------- -------- --------- ----------
NET INCOME (LOSS) (16.1) % (0.0) % (37.7) % 0.3 %
=========== ======== ========= ==========
12
REVENUE
The following table sets forth revenue for the Company for the periods
indicated.
THREE MONTHS ENDED PERCENT SIX MONTHS ENDED PERCENT
DECEMBER 31, CHANGE DECEMBER 31, CHANGE
----------------------- -------- ----------------------- --------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands) (in thousands)
MPC REVENUE
Software licenses $ 3,466 $ 3,740 (7.3) % $ 7,014 $ 6,962 0.7 %
Software maintenance 3,407 3,114 9.4 6,724 5,802 15.9
Implementation, consulting and
other services 3,971 3,395 17.0 8,877 7,774 14.2
---------- ---------- ---------- ----------
TOTAL MPC REVENUE $ 10,844 $ 10,249 5.8 % $ 22,615 $ 20,538 10.1 %
========== ========== ========== ==========
LEGACY REVENUE
Software licenses $ 628 $ 1,568 (59.9) % $ 1,173 $ 3,049 (61.5)%
Software maintenance 2,599 2,785 (6.7) 5,032 5,938 (15.3)
Implementation, consulting and
other services 210 223 (5.8) 477 743 (35.8)
---------- ---------- ---------- ----------
TOTAL LEGACY REVENUE $ 3,437 $ 4,576 (24.9) % $ 6,682 $ 9,730 (31.3)%
========== ========== ========== ==========
TOTAL REVENUE
Software licenses $ 4,094 $ 5,308 (22.9) % $ 8,187 $ 10,011 (18.2)%
Software maintenance 6,006 5,899 1.8 11,756 11,740 0.1
Implementation, consulting and
other services 4,181 3,618 15.6 9,354 8,517 9.8
---------- ---------- ---------- ----------
TOTAL REVENUE $ 14,281 $ 14,825 (3.7) % $ 29,297 $ 30,268 (3.2)%
========== ========== ========== ==========
The decline in total revenue of 4% in the quarter ended December 31,
2001 from the quarter ended December 31, 2000 was primarily due to a 25% decline
in revenue from the Company's older desktop ("legacy") products, offset by a 6%
increase in revenue from the Company's management planning and control software
applications ("MPC"). The total revenue decline of 3% for the six months ended
December 31, 2001 was primarily due to a 10% increase in MPC revenue, offset by
a decline of 31% in the Company's legacy products. The Company does not expect
total revenues for fiscal year 2002 to exceed those of fiscal year 2001. MPC
revenue was $10.8 million for the quarter ended December 31, 2001, representing
76% of total revenue, and $22.6 million for the six months ended December 31,
2001, representing 77% of total revenue. The Company's MPC suite of software
applications is comprised of Comshare MPC (formerly BudgetPLUS), Comshare FDC
and Decision. The release of a new version of Comshare MPC, version 4.5, is
currently scheduled for March 2002. The Company's expectation as to total
revenue for fiscal year 2002 is a "forward looking statement" within the meaning
of the Securities 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."
The 23% decline in software license fees for the second quarter of
fiscal year 2002 from the quarter ended December 31, 2000 was primarily due to a
60% decline in license fees from the Company's legacy products, from $1.6
million to $0.6 million, for the quarter ended December 31, 2001 versus the
quarter ended December 31, 2000. MPC license fees represented 85% of total
license fees for the quarter ended December 31, 2001, versus 70% for the same
period in fiscal year 2001. Total second quarter license fees were negatively
impacted by the difficult economic conditions that continue to affect the
Company's primary markets. License fees in the Company's direct
13
operations, which include North America and the United Kingdom, declined 22% to
$2.7 million for the quarter ended December 31, 2001. License fees from the
Company's distributor operations declined 26% to $1.3 million for the same time
period, primarily reflecting a decline in the sales of the Company's legacy
products by distributors and global economic uncertainty. The 18% decline in
software license fees for the six months ended December 31, 2001 was primarily
due to the decline in license fees from the Company's legacy products of $1.8
million from the six months ended December 31, 2000. MPC license fees
represented 86% of total license fees for the six months ended December 31,
2001, versus 70% for the same period in fiscal year 2001.
Software maintenance revenues increased 2% in the quarter ended
December 31, 2001 from the three months ended December 31, 2000 as a result of
an increase of 9% in MPC product maintenance, mostly offset by a decline of 7%
in the legacy maintenance, due to mainframe and desktop maintenance
cancellations and continued customer migration to other platforms. MPC product
maintenance accounted for 57% of total maintenance revenue for the three months
ended December 31, 2001, versus 53% for the same period in fiscal year 2001. The
growth in MPC product maintenance revenue follows from growth in Comshare MPC
licensing in the prior fiscal year. Software maintenance revenues remained
relatively flat from the six months ended December 31, 2000 to the same period
ended December 31, 2001, reflecting growth in the Company's MPC products, offset
by a decline in maintenance revenues for legacy products.
Implementation, consulting and other services revenue was $4.2 million
and $9.4 million for the three and six months ended December 31, 2001,
respectively, compared to $3.6 million and $8.5 million for the three and six
months ended December 31, 2000, respectively. The increase in implementation
services revenue from the three months ended December 31, 2001 and the first six
months of fiscal year 2001 to the same periods in fiscal year 2002 was primarily
due to the growth in MPC licensing in the prior quarters and a number of large
projects currently underway. During each of the three and six month periods
ended December 31, 2001, 95% of total implementation services revenue was
related to MPC products, primarily the Comshare MPC product.
COSTS AND EXPENSES
THREE MONTHS ENDED PERCENT SIX MONTHS ENDED PERCENT
DECEMBER 31, CHANGE DECEMBER 31, CHANGE
------------------------ --------- ---------------------- ---------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands) (in thousands)
COSTS AND EXPENSES
Selling and marketing $ 5,881 $ 5,803 1.3 % $ 11,356 $ 11,264 0.8 %
Cost of revenue and support 6,044 5,951 1.6 12,508 12,732 (1.8)
Internal research and product development 2,305 2,085 10.6 4,600 4,141 11.1
General and administrative 1,198 1,290 (7.1) 2,687 2,722 (1.3)
Restructuring and unusual 1,280 - - 1,280 - -
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES $ 16,708 $ 15,129 10.4 % $ 32,431 $ 30,859 5.1 %
========== ========== ========== ==========
Total costs and expenses increased 10% and 5% for the three and six
months ended December 31, 2001, respectively, compared to the prior year. This
increase was primarily due to restructuring charges taken during the second
quarter of fiscal year 2002.
Selling and marketing expenses remained relatively flat for the three
and six months ended December 31, 2001 and 2000.
Cost of revenue and support expenses increased 2% and decreased 2% for
the three and six months ended December 21, 2001, respectively, compared to the
prior year. The increase during the three month period was primarily due to
additional purchased professional services to support implementation, consulting
and other services revenue, offset by a decrease in royalty expenses resulting
from lower sales of Hyperion Solutions Corporation's Essbase database. The
decrease during the six month period was primarily due to the decrease in
royalty expenses and, to a lesser extent, a reduction in cost of goods sold due
to lower license fees for the first quarter of 2002. The
14
Company licenses the Essbase database from Hyperion under an agreement that
expires in December 2002, and resells it in connection with many of its MPC
products.
Internal research and product development costs increased 11% to $2.3
million for the quarter ended December 31, 2001, from $2.1 million for the
quarter ended December 31, 2000. Internal research and product development costs
for the six month period ended December 31, 2001 were $4.6 million, representing
an 11% increase over the same period a year ago. The increases in both periods
were primarily due to increased employee costs attributable to additional
staffing to support increased product development activity.
General and administrative costs decreased 7% and 1% for the three and
six months ended December 31, 2001, respectively, as compared to the same
periods in fiscal year 2001, primarily due to reduced employee costs related to
the second quarter restructuring and lower purchased services expenses, offset
by increased general facility costs. During the second quarter of fiscal 2002,
the Company also benefited from a non-recurring credit from an insurance
company.
In October 2001, the Company implemented a restructuring plan to reduce
personnel costs, to bring costs more in line with revenues and improve financial
performance of the Company. The restructuring plan was undertaken in response to
the slowdown in the economy, which resulted in a decline in the Company's
revenue in the first quarter of the 2002 fiscal year. Restructuring and related
charges of $1.3 million were expensed in the quarter ended December 31, 2001.
The restructuring charge consisted entirely of employee severance costs. The
amounts reserved, amounts charged against the reserve as of December 31, 2001
and the balance of the reserve as of December 31, 2001 are as follows:
----------------------------------------------------------------------------------------------------------
RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGES TO RESERVES BALANCE AT
(IN THOUSANDS) (IN THOUSANDS) DECEMBER 31, 2001
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------------
Employee severance $1,280 $(489) $791
----------------------------------------------------------------------------------------------------------
Employee groups impacted by the restructuring include finance and
administration, product development, marketing, and field operations,
principally in the Company's offices in the United States and also in the
Company's United Kingdom office. A total of approximately 32 people, or 9% of
the Company's worldwide headcount, were eliminated by this restructuring plan.
All separations were completed prior to December 31, 2002. Total cash
expenditures relating to the restructuring charge are expected to be $1.3
million, funded from the Company's available cash. Cash expenditures are
expected to be paid through the second quarter of the 2003 fiscal year,
principally during the remainder of fiscal year 2002. As of December 31, 2001,
remaining cash expenditures are estimated to be approximately $0.8 million.
The Company substantially completed the initiatives in its December
2001 restructuring plan during the second quarter of fiscal year 2002 and began
to partially realize the benefits of this plan in the second quarter, with the
full benefit of the plan to be realized by the third quarter of fiscal 2002. The
Company expects the restructuring charge to have the impact of reducing employee
related costs and third party expenses, and 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. The Company
does not expect 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 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."
15
OTHER INCOME AND EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands) (in thousands)
OTHER INCOME (EXPENSE)
Interest income $ 138 $ 375 $ 330 $ 802
Interest expense - (2) (1) (4)
Exchange loss (18) (61) (32) (76)
--------- ---------- ---------- ---------
TOTAL OTHER INCOME $ 120 $ 312 $ 297 $ 722
========= ========== ========== =========
Lower interest rates on short-term investments and lower average cash
balances during the three and six months ended December 31, 2001 resulted in
decreased interest income during those periods, compared to the three and six
months ended December 31, 2000.
FOREIGN CURRENCY
For the three and six months ended December 31, 2001, 41% and 40%,
respectively, of the Company's total revenue was from outside North America
compared with 46% and 44% for the three and six months ended December 31, 2000,
respectively. 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
and six months ended December 31, 2001, foreign currency fluctuations did not
have a material impact on the Company's revenues, operating expenses or net
income.
The Company had several forward exchange contracts totaling a notional
amount of $1.2 million, outstanding at December 31, 2001. See Note E 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 months ended December 31, 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 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 quarter ended September 30, 2001, the current
economic downturn and reduced market valuations in the technology sector.
16
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001 cash and cash equivalents were $19.3 million,
compared with cash and cash equivalents of $24.1 million at June 30, 2001. The
$4.8 million decrease in cash and cash equivalents is principally due to $4.5
million used in operating activities.
Net cash of $4.5 million was used in operating activities in the six
months ended December 31, 2001. The cash used in operating activities consisted
primarily of a net loss of $11.0 million adjusted for non-cash items of $8.5
million, including the write-down of the Company's deferred tax asset, and $2.0
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, 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. The accounts receivable balance
decreased primarily as a result of the decline in license fee and maintenance
revenue for the quarter combined with an increase in cash collections
Net cash of $0.3 million was used in investing activities for the six
months ended December 31, 2001. The Company obtains most of its computer
equipment under operating leases. During the first six months of fiscal year
2002, the Company entered into new operating leases with aggregate minimum lease
payment obligations of $0.3 million. See Note G of Notes to Condensed
Consolidated Financial Statements. At December 31, 2001, the Company did not
have any material capital expenditure commitments.
Net cash of $0.3 million was provided by financing activities in the
six months ended December 31, 2001 and consisted primarily of proceeds from
stock purchases under the Company's Employee Stock Purchase Plan.
Total assets were $45.8 million at December 31, 2001, compared with
total assets of $59.3 million at June 30, 2001. Working capital as of December
31, 2001 was $21.0 million, compared with $24.3 million as of June 30, 2001. The
decrease in total assets from June 30, 2001 to December 31, 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 six months ended December 31, 2001. The
decrease in working capital from June 30, 2001 to December 31, 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 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 December 31, 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 December 31, 2001, the interest rate on
borrowings denominated in Japanese yen, which were used to hedge receivables,
was 1.84%.
As of December 31, 2001, the Company had $1.3 million of accruals
remaining for cash restructuring expenses payable through the second quarter of
the 2003 fiscal year, principally during the remainder of fiscal year 2002.
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 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."
17
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 December 31, 2001 and June 30, 2001, the Company had forward
contracts of approximately $1.2 million and $1.7 million (notional amounts),
respectively, denominated in foreign currencies. The contracts outstanding at
December 31, 2001 mature through March 15, 2002 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 December
31, 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 6 foreign currencies, predominately British pounds, the Euro and
Japanese yen. A hypothetical 10 percent appreciation of the U.S. dollar from
December 31, 2001 market rates would increase the unrealized value of the
Company's forward contracts and a hypothetical 10 percent depreciation of the
U.S. dollar from December 31, 2001 market rates would decrease the unrealized
value of the Company's forward contracts. In either scenario, the gains or
losses on the forward contracts would be largely offset by the gains or losses
on the underlying transactions, and so would have an immaterial impact on the
Company's results of operations.
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, new market and
business opportunities, strategy, the impact of cost reduction actions 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
reduction actions 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
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 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.
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
18
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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on November 19,
2001. There were three proposals voted on at the meeting, which were: the
election of seven directors, an amendment to the Employee Stock Purchase Plan
and an amendment to the Directors Stock Purchase Plan. The following table sets
forth the results of the votes on these matters. All director nominees were
elected and all Plan amendments were approved.
Election of Director Nominees:
Votes For Votes Withheld Broker Non-Votes
--------- -------------- ----------------
Geoffrey B. Bloom 7,359,013 1,284,447 -
Daniel T. Carroll 7,359,370 1,284,090 -
Richard L. Crandall 7,352,432 1,291,028 -
Dennis G. Ganster 7,285,799 1,357,661 -
Kathryn A. Jehle 7,339,798 1,303,662 -
Alan G. Merten 7,357,469 1,285,991 -
John F. Rockart 7,360,872 1,282,588 -
Approval of the amendment to the Employee Stock Purchase Plan:
Votes For Votes Against Abstained Broker Non-Votes
--------- ------------- --------- ----------------
3,701,475 1,564,390 33,002 3,344,592
Approval of the amendment to the Directors Stock Purchase Plan:
Votes For Votes Against Abstained Broker Non-Votes
--------- ------------- --------- ----------------
7,069,617 1,536,572 37,271 -
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.
On October 23, 2001, the Company filed a Form 8-K, making certain
Regulation FD disclosure under Item 9.
19
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: FEBRUARY 13, 2002 COMSHARE, INCORPORATED
(Registrant)
/s/ Brian Jarzynski
----------------------------
Brian Jarzynski
Vice President,
Chief Financial Officer and
Treasurer
20
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
10.01 Fourth Amendment to Employee Stock Purchase Plan
10.02 Third Amendment to Director Stock Option Plan
21