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 MARCH 31, 2002
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 APRIL 30, 2002.
OUTSTANDING AT
CLASS OF COMMON STOCK APRIL 30, 2002
--------------------- --------------
$1.00 PAR VALUE 10,279,931 SHARES
COMSHARE, INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended March 31, 2002 and 2001.................................3
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended March 31, 2002 and 2001.................................4
Condensed Consolidated Balance Sheets as of
March 31, 2002 and June 30, 2001............................................................5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2002 and 2001...................................................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 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................19
SIGNATURE..........................................................................................20
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
-------- -------- -------- --------
REVENUE
Software licenses $ 3,694 $ 5,828 $ 11,881 $ 15,839
Software maintenance 5,768 5,885 17,524 17,625
Implementation, consulting
and other services 4,046 4,164 13,400 12,681
-------- -------- -------- --------
TOTAL REVENUE 13,508 15,877 42,805 46,145
COSTS AND EXPENSES
Selling and marketing 6,782 6,140 18,138 17,404
Cost of revenue and support 5,797 6,004 18,305 18,736
Internal research and product development 2,341 2,284 6,941 6,425
General and administrative 1,416 1,425 4,103 4,147
Restructuring and unusual - 892 1,280 892
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 16,336 16,745 48,767 47,604
-------- -------- -------- --------
LOSS FROM OPERATIONS (2,828) (868) (5,962) (1,459)
OTHER INCOME
Interest income 128 304 458 1,107
Interest expense - (1) (1) (5)
Exchange gain (loss) 20 - (12) (77)
-------- -------- -------- --------
TOTAL OTHER INCOME 148 303 445 1,025
LOSS BEFORE TAXES (2,680) (565) (5,517) (434)
Provision (benefit) for income taxes (1,040) (48) 7,156 -
-------- -------- -------- --------
NET LOSS $ (1,640) $ (517) $(12,673) $ (434)
======== ======== ======== ========
SHARES USED IN BASIC EPS COMPUTATION 10,272 9,940 10,166 9,836
======== ======== ======== ========
SHARES USED IN DILUTED EPS COMPUTATION 10,272 9,940 10,166 9,836
======== ======== ======== ========
NET LOSS PER COMMON SHARE - BASIC EPS $ (0.16) $ (0.05) $ (1.25) $ (0.04)
======== ======== ======== ========
NET LOSS PER COMMON SHARE - DILUTED EPS $ (0.16) $ (0.05) $ (1.25) $ (0.04)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements
3
COMSHARE, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
-------- --------- --------- ---------
Net loss $ (1,640) $ (517) $(12,673) $ (434)
Other comprehensive loss:
Currency translation adjustment (108) (442) (202) (595)
-------- -------- -------- --------
COMPREHENSIVE LOSS $ (1,748) $ (959) $(12,875) $ (1,029)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, June 30,
2002 2001
------- -------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $18,294 $24,106
Accounts receivable, net 17,647 19,541
Deferred income taxes - 767
Prepaid expenses and other current assets 2,461 1,411
------- -------
TOTAL CURRENT ASSETS 38,402 45,825
Property and equipment, at cost
Computers & other equipment 6,979 6,716
Leasehold improvements 2,675 2,649
------- -------
9,654 9,365
Less - Accumulated depreciation 8,312 7,955
------- -------
Property and equipment, net 1,342 1,410
Deferred income taxes - 7,355
Other assets 3,932 4,687
------- -------
TOTAL ASSETS $43,676 $59,277
======= =======
See accompanying notes to condensed consolidated financial statements.
5
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, June 30,
2002 2001
-------- --------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,711 $ 3,047
Accrued liabilities:
Payroll 1,400 2,379
Taxes 671 1,370
Other 2,640 3,537
-------- --------
Total current liabilities 4,711 7,286
Deferred revenue 11,611 11,166
-------- --------
TOTAL CURRENT LIABILITIES 19,033 21,499
Long-term debt - 164
Other liabilities 5,406 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
10,279,932 shares as of March 31, 2002
and 10,104,626 shares as of June 30, 2001 10,280 10,105
Capital contributed in excess of par value 39,518 39,244
Retained deficit (20,397) (7,724)
Accumulated other comprehensive loss:
Pension liability, net of tax (4,282) (4,084)
Cumulative translation adjustment (5,882) (5,877)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 19,237 31,664
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,676 $ 59,277
======== ========
See accompanying notes to condensed consolidated financial statements.
6
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
NINE MONTHS ENDED
MARCH 31,
---------------------
2002 2001
-------- --------
OPERATING ACTIVITIES
Net loss $(12,673) $ (434)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 558 714
Deferred income taxes 7,082 (562)
Changes in operating assets and liabilities:
Accounts receivable 1,915 (1,525)
Prepaid expenses and other assets 687 415
Accounts payable (333) (64)
Accrued liabilities (2,545) (2,802)
Deferred revenue 459 (1,289)
Other liabilities (545) (163)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (5,395) (5,710)
INVESTING ACTIVITIES
Payments for property and equipment (326) (152)
Other (106) (165)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (432) (317)
FINANCING ACTIVITIES
Net repayments under debt agreements (164) (284)
Other 449 440
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 285 156
Effect of exchange rate changes (270) (532)
-------- --------
NET DECREASE IN CASH (5,812) (6,403)
CASH AT BEGINNING OF PERIOD 24,106 29,506
-------- --------
CASH AT END OF PERIOD $ 18,294 $ 23,103
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1 $ 5
======== ========
Cash paid for income taxes $ 108 $ 785
======== ========
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.
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 nine months ended March 31, 2002 and 2001, the consolidated balance
sheets as of March 31, 2002 and the consolidated statements of cash flows for
the nine months ended March 31, 2002 and 2001.
The results of operations for the three and nine months ended March 31,
2002 and 2001 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 the
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) MARCH 31, 2002
(IN THOUSANDS)
--------------------------------- -------------------------- ---------------------- -------------------------
Employee severance $1,280 $(713) $567
--------------------------------- -------------------------- ---------------------- -------------------------
Total cash expenditures relating to the restructuring charge are expected
to be $1.3 million. 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) MARCH 31, 2002
(IN THOUSANDS)
--------------------------------- -------------------------- ---------------------- -------------------------
Employee severance $892 $(421) $471
--------------------------------- -------------------------- ---------------------- -------------------------
As of March 31, 2002, the Company had $1.0 million of accruals
remaining from restructuring charges, payable through the second quarter of the
2003 fiscal year, principally during the remainder of the 2002 fiscal year. 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. There were
no borrowings under this credit agreement at March 31, 2002. Total available
borrowings were $10 million at March 31, 2002. Borrowings available at any time
are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash.
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 March 31, 2002 and June 30, 2001, the Company had forward
foreign currency exchange contracts outstanding of approximately $2.2 million
and $1.7 million (notional amounts), respectively, denominated in foreign
currencies. The contracts outstanding at March 31, 2002 mature at various dates
through June 13, 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 March 31, 2002 and June 30, 2001.
NOTE F - PROVISION FOR INCOME TAXES
The Company recognized an income tax benefit of approximately $1.0
million during the third quarter of fiscal 2002 as a result of the federal
economic stimulus package signed into law on March 9, 2002, entitled the "Jobs
Creation and Worker Assistance Act of 2002." The law contains a provision
extending the general tax net operating loss carryback period to five years.
This law enabled the Company to utilize net operating losses that had been fully
reserved. As such, the Company recorded a receivable of approximately $1.0
million.
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 March 31, 2002 are as follows
(in thousands):
FISCAL YEARS ENDING JUNE 30,
- --------------------------------------------------
2002 $ 1,180
2003 4,162
2004 3,626
2005 2,647
2006 1,183
Thereafter 1,582
-------
Total minimum payments $14,380
-------
Minimum payments under non-cancelable operating leases have not been
reduced by minimum sublease rentals of $5.0 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 nine months ended March 31, 2002 and 2001. 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
-------- -------- -------- --------
REVENUE FROM EXTERNAL CUSTOMERS:
North America $ 7,201 $ 9,102 $ 24,791 $ 25,989
United Kingdom 2,280 2,892 7,178 8,893
Other countries 4,027 3,883 10,836 11,263
-------- -------- -------- --------
TOTAL REVENUE $ 13,508 $ 15,877 $ 42,805 $ 46,145
======== ======== ======== ========
OPERATING INCOME (LOSS):
North America $ (3,183) $ (4,275) $ (6,785) $ (5,833)
United Kingdom 1,834 3,835 4,664 5,387
Other countries 2,639 2,534 6,977 7,185
-------- -------- -------- --------
TOTAL OPERATING INCOME 1,290 2,094 4,856 6,739
Unallocated expenses (3,970) (2,659) (10,373) (7,173)
-------- -------- -------- --------
LOSS BEFORE TAXES $ (2,680) $ (565) $ (5,517) $ (434)
======== ======== ======== ========
MARCH 31, June 30,
2002 2001
-------- --------
IDENTIFIABLE ASSETS:
North America $ 35,847 $ 50,511
United Kingdom and other countries 7,829 8,766
-------- --------
TOTAL IDENTIFIABLE ASSETS $ 43,676 $ 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 nine months ended March 31, 2002 compared to the three and nine months
ended March 31, 2001. 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/A 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ---------------------
2002 2001 2002 2001
----- ---- ---- ----
REVENUE
Software licenses 27.3% 36.7% 27.8% 34.3%
Software maintenance 42.7 37.1 40.9 38.2
Implementation, consulting and
other services 30.0 26.2 31.3 27.5
----- ----- ----- -----
TOTAL REVENUE 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 50.2 38.7 42.4 37.7
Cost of revenue and support 42.9 37.8 42.8 40.6
Internal research and product development 17.3 14.4 16.2 13.9
General and administrative 10.5 9.0 9.6 9.0
Restructuring and unusual - 5.6 3.0 1.9
----- ----- ----- -----
TOTAL COSTS AND EXPENSES 120.9 105.5 114.0 103.1
LOSS FROM OPERATIONS (20.9) (5.5) (14.0) (3.1)
OTHER INCOME (EXPENSE)
Interest income 1.0 1.9 1.1 2.4
Interest expense - - - 0.0
Exchange gain (loss) 0.1 - - (0.2)
----- ----- ----- -----
TOTAL OTHER INCOME 1.1 1.9 1.1 2.2
LOSS BEFORE TAXES (19.8) (3.6) (12.9) (0.9)
Provision (benefit) for income taxes (7.7) (0.3) 16.7 -
----- ----- ----- -----
NET LOSS (12.1)% (3.3)% (29.6)% (0.9)%
===== ===== ===== =====
12
REVENUE
THREE MONTHS ENDED PERCENT NINE MONTHS ENDED PERCENT
MARCH 31, CHANGE MARCH 31, CHANGE
------------------ ------- ------------------ -------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
MPC REVENUE
Software licenses $ 3,390 $ 4,837 (29.9)% $10,404 $11,799 (11.8)%
Software maintenance 3,455 3,183 8.5 10,179 8,985 13.3
Implementation, consulting and
other services 3,865 3,914 (1.3) 12,742 11,688 9.0
------- ------- ------- -------
TOTAL MPC REVENUE $10,710 $11,934 (10.3)% $33,325 $32,472 2.6%
======= ======= ======= =======
LEGACY REVENUE
Software licenses $ 304 $ 991 (69.3)% $ 1,477 $ 4,040 (63.4)%
Software maintenance 2,313 2,702 (14.4) 7,345 8,640 (15.0)
Implementation, consulting and
other services 181 250 (27.6) 658 993 (33.7)
------- ------- ------- -------
TOTAL LEGACY REVENUE $ 2,798 $ 3,943 (29.0)% $ 9,480 $13,673 (30.7)%
======= ======= ======= =======
TOTAL REVENUE
Software licenses $ 3,694 $ 5,828 (36.6)% $11,881 $15,839 (25.0)%
Software maintenance 5,768 5,885 (2.0) 17,524 17,625 (0.6)
Implementation, consulting and
other services 4,046 4,164 (2.8) 13,400 12,681 5.7
------- ------- ------- -------
TOTAL REVENUE $13,508 $15,877 (14.9)% $42,805 $46,145 (7.2)%
======= ======= ======= =======
The decrease in total revenue of 15% from the quarter
ended March 31, 2001 was primarily due to a 37% decrease in the Company's total
software license revenue. The total revenue decline of 7% from the nine months
ended March 31, 2001 was primarily due to a 31% decrease in the Company's older
desktop (" legacy") products, offset by an increase of 3% in MPC revenue. For
the fourth quarter of fiscal 2002, the Company expects total revenue of between
$15.0 million and $15.3 million, compared to total revenue of $16.7 million in
the fourth quarter of fiscal year 2001. MPC revenue was $10.7 million for the
quarter ended March 31, 2002, representing 79% of total revenue, and $33.3
million for the nine months ended March 31, 2002, representing 78% of total
revenue. This compares with MPC revenue representing 75% and 70% of total
revenue for the three and nine months ending March 31, 2001, respectively. The
Company's MPC Suite of software applications is comprised of Comshare MPC
(formerly BudgetPLUS), Comshare FDC and Decision. The Company released a new
version of Comshare MPC, version 4.5 in March 2002. The Company's expectation as
to total revenue and earnings for the fourth quarter of fiscal 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 37% decrease in software license fees from the quarter ended March
31, 2001 was primarily due to a 30% decrease in license fees from the Company's
MPC products. The decrease in license fee revenue reflects a continuation of the
general economic weakness and reduced capital spending in the software industry,
resulting in delays in a number of licensing contracts. License fee revenues
from the Company's MPC products accounted for 92% of total license fees during
the three months ended March 31, 2002 and 88% of total license fees for the nine
month period ended March 31, 2002 versus 83% and 75%, respectively, for the same
periods in the prior year. License fees in the Company's direct operations,
which include North America and the United Kingdom, decreased 52% over the three
month period and 28% over the nine month period ended March 31, 2001. In
addition,
13
restructuring of the Company's sales force, announced in January, and
the transition associated with new sales leadership impacted performance during
the quarter. Distributor license fees increased 1% compared to the three month
period ended March 31, 2001, reflecting a 5% increase in MPC license fees, and
decreased 20% compared to the nine month period ended March 31, 2001, reflecting
a decline in sales of the Company's legacy products, which are concentrated in
the distributor operations.
Software maintenance revenues remained relatively flat from the three
months and nine months ended March 31, 2001, decreasing 2% and 1%, respectively.
This was primarily due to an increase of 9% and 13% in MPC product maintenance
in the three and nine months ended March 31, 2002, respectively, offset by a
decline of 14% and 15% for such periods, respectively, in legacy maintenance,
due to mainframe and desktop maintenance cancellations. MPC product maintenance
accounted for 60% of total maintenance for the three months ended March 31,
2002, versus 54% for the same period in fiscal year 2001. The growth in MPC
maintenance revenue reflects the license fee growth and high retention rates
associated with the MPC products, Software maintenance revenues decreased 1%
from the nine-month period ended March 31, 2001 reflecting a decline in
maintenance revenues from legacy products, offset by the growth in the Company's
MPC products.
Implementation, consulting and other services revenue was $4.0 million
and $13.4 million for the three and nine months ended March 31, 2002,
respectively. Implementation, consulting and other services revenue was $4.2
million and $12.7 million for the three and nine months ended March 31, 2001,
respectively. During the quarter ended March 31, 2002, 96% of total
implementation services revenue was related to MPC products. Implementation
services revenue related to MPC products was 95% of total implementation
services revenue for the nine months ended March 31, 2002.
COSTS AND EXPENSES
- ------------------
THREE MONTHS ENDED PERCENT NINE MONTHS ENDED PERCENT
MARCH 31, CHANGE MARCH 31, CHANGE
------------------ ------- ---------------- -------
2002 2001 2002 2001
(in thousands) (in thousands)
COSTS AND EXPENSES
Selling and marketing $ 6,782 $ 6,140 10.5% $18,138 $17,404 4.2%
Cost of revenue and support 5,797 6,004 (3.4) 18,305 18,736 (2.3)
Internal research and product development 2,341 2,284 2.5 6,941 6,425 8.0
General and administrative 1,416 1,425 (0.6) 4,103 4,147 (1.1)
Restructuring and unusual - 892 - 1,280 892 -
------- ------- ------- -------
TOTAL COSTS AND EXPENSES $16,336 $16,745 (2.4)% $48,767 $47,604 2.4%
------- ------- ------- -------
Total costs and expenses decreased 2% for the three month period, and
increased 2% for the nine month period, ended March 31, 2002, compared to the
prior year. The decrease in the three month period was primarily due to cost
reduction actions taken in the second quarter partially offset by bad debt
expenses incurred during the quarter. Included in total costs and expenses for
fiscal 2001 was a $0.9 million restructuring charge. The increase in the nine
month period was primarily due to an increase in selling and marketing expenses
and, to a lesser degree, increased internal research and product development
expenses.
Selling and marketing expenses increased 11% and 4% in the three and
nine months ended March 31, 2002, respectively compared to the prior year. The
increase in the three months ended March 31, 2002 from the same quarter a year
ago is primarily due to an increase in bad debt expense, partially offset by
decreased spending in promotional and other purchased services. During the
quarter the Company took a charge of $0.9 million to reserve for receivables
related to foreign territories, primarily Latin America. The increase in the
nine months ended March 31, 2002 is primarily due to the increase in bad debt
expense.
Cost of revenue and support expenses decreased 3% and 2% for the three
and nine months ended March 31, 2002, respectively. The decrease in both periods
was primarily due to the decrease in royalty expenses resulting from lower sales
of Hyperion Solutions Corporation's Essbase database. The Company licenses the
Essbase
14
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 3% and 8% to
$2.3 million and $6.9 million in the three and nine months ended March 31, 2002
respectively compared to the prior year. The increase is primarily due to
increased employee costs attributable to additional staffing to support
increased product development activity.
General and administrative costs have remained relatively flat,
decreasing 1% from each of the three and nine-month periods ended March 31,
2001, primarily due to reduced employee costs related to the second quarter
restructuring plan.
In October 2001, the Company implemented a restructuring plan to reduce
personnel costs, to bring costs more in line with revenues and improve the
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 March 31,
2002 and the balance of the reserve as of March 31, 2002 are as follows:
--------------------------------- -------------------------- ---------------------- -------------------------
RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGES TO RESERVES BALANCE AT
(IN THOUSANDS) (IN THOUSANDS) MARCH 31, 2002
(IN THOUSANDS)
--------------------------------- -------------------------- ---------------------- -------------------------
Employee severance $1,280 $(713) $567
--------------------------------- -------------------------- ---------------------- -------------------------
Employee groups impacted by the restructuring include the 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 32 people, or 9% of the Company's
worldwide headcount, were eliminated by this restructuring plan. All separations
were completed prior to December 31, 2001. 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 March 31, 2002, remaining cash expenditures are expected
to be approximately $0.6 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 realized in the third quarter of fiscal 2002. The
restructuring charge has reduced 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 believe
personnel reductions have had 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
OTHER INCOME
Interest income $ 128 $ 304 $ 458 $ 1,107
Interest expense - (1) (1) (5)
Exchange gain (loss) 20 - (12) (77)
------- ------- ------- -------
TOTAL OTHER INCOME $ 148 $ 303 $ 445 $ 1,025
======= ======= ======= =======
Lower interest rates on short-term investments and lower average cash
balances during the three and nine months ended March 31, 2002 resulted in
decreased interest income during those periods, compared to the three and nine
months ended March 31, 2001.
FOREIGN CURRENCY
For the three and nine months ended March 31, 2002, 46.7% and 42.1%,
respectively, of the Company's total revenue was from outside North America
compared with 42.7% and 43.7% for the three and nine months ended March 31,
2001, 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 nine months ended March 31, 2002, 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 $2.2 million, outstanding at March 31, 2002. See Note D of Notes to
Condensed Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The Company recognized an income tax benefit of approximately $1.0
million during the third quarter of fiscal 2002 as a result of the federal
economic stimulus package signed into law on March 9, 2002, entitled the "Jobs
Creation and Worker Assistance Act of 2002." The law contains a provision
extending the general tax net operating loss carryback period to five years.
This law enabled the Company to utilize net operating losses that had been fully
reserved. As such, the Company recorded a receivable of approximately $1.0
million.
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 March 31, 2002 cash and cash equivalents were $18.3 million,
compared with cash and cash equivalents of $24.1 million at June 30, 2001. The
$5.8 million decrease in cash and cash equivalents is primarily due to $5.4
million used in operating activities.
Net cash of $5.4 million was used in operating activities in the nine
months ended March 31, 2002. The cash used in operating activities consisted
primarily of a net loss of $12.7 million adjusted for non-cash items of $7.6
million, including the write-down of the Company's deferred tax asset, and $0.3
million used in working capital and other activities. Net cash used in working
capital and other activities resulted primarily from an increase in prepaid
expenses combined with a decrease in accrued payroll, partially offset by a
decrease in accounts receivable. The increase in prepaid expenses is primarily
due to income taxes 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, and was also
affected by an increase in cash collections.
Net cash of $0.4 million was used in investing activities for the nine
months ended March 31, 2002. The Company obtains most of its equipment under
operating leases. During the first nine months of fiscal year 2002, the Company
entered into new operating leases with aggregate minimum lease payment
obligations of $0.4 million. See Note G of Notes to Condensed Consolidated
Financial Statements. At March 31, 2002, the Company did not have any material
capital expenditure commitments.
Net cash of $0.3 million was provided by financing activities in the
nine months ended March 31, 2002 and consisted primarily of proceeds from stock
purchases under the Company's Employee Stock Purchase Plan slightly offset by
repayment of long-term borrowings.
Total assets were $43.7 million at March 31, 2002, compared with total
assets of $59.3 million at June 30, 2001. Working capital as of March 31, 2002
was $19.4 million, compared with $24.3 million as of June 30, 2001. The decrease
in total assets from June 30, 2001 to March 31, 2002 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 nine months ended March 31, 2002. The decrease in
working capital from June 30, 2001 to March 31, 2002 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. There were
no borrowings under this agreement at March 31, 2002. Total available borrowings
were $10 million at March 31, 2002. Borrowings available at any time are based
on the lower of $10 million or a percentage of worldwide eligible accounts
receivable and cash.
As of March 31, 2002, the Company had $1.0 million of accruals
remaining for cash restructuring expenses payable through the second quarter of
the 2003 fiscal year, principally during the remainder of the 2002 fiscal year.
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."
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 March 31, 2002 and June 30, 2001, the Company had forward
contracts of approximately $2.2 million and $1.7 million (notional amounts),
respectively, denominated in foreign currencies. The contracts outstanding at
March 31, 2002 mature through June 13, 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 March 31,
2002 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
March 31, 2002 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 March 31, 2002 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, prospects for
improved business conditions, new market and business opportunities, strategy
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 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 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
18
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended March
31, 2002.
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: MAY 14, 2002 COMSHARE, INCORPORATED
(Registrant)
/s/ Brian Jarzynski
---------------------------------
Brian Jarzynski
Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
20