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, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of JANUARY 31, 2003.
OUTSTANDING AT
CLASS OF COMMON STOCK JANUARY 31, 2003
--------------------- ----------------
$1.00 PAR VALUE 10,653,914 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, 2002 and 2001...............................3
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended December 31, 2002 and 2001...............................4
Condensed Consolidated Balance Sheets as of
December 31, 2002 and June 30, 2002.........................................................5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 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........................................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................21
ITEM 4. CONTROLS AND PROCEDURES....................................................................21
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................................22
SIGNATURE..........................................................................................23
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER..............................24
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,
2002 2001 2002 2001
---- ---- ---- ----
REVENUE
Software licenses $ 5,806 $ 4,094 $ 9,589 $ 8,187
Software maintenance 5,672 6,006 11,202 11,756
Implementation, consulting
and other services 3,069 4,181 7,934 9,354
-------- -------- -------- --------
TOTAL REVENUE 14,547 14,281 28,725 29,297
COSTS AND EXPENSES
Selling and marketing 5,807 5,881 10,639 11,356
Cost of revenue and support 5,453 6,044 11,092 12,508
Internal research and product development 2,455 2,305 4,788 4,600
General and administrative 1,264 1,198 2,673 2,687
Tax settlement - - (1,208) -
Restructuring - 1,280 - 1,280
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 14,979 16,708 27,984 32,431
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (432) (2,427) 741 (3,134)
OTHER INCOME (EXPENSE)
Interest on tax settlement 1,125 - 1,125 -
Interest income, net 49 138 130 329
Exchange loss (9) (18) (8) (32)
-------- -------- -------- --------
TOTAL OTHER INCOME 1,165 120 1,247 297
INCOME (LOSS) BEFORE TAXES 733 (2,307) 1,988 (2,837)
Provision for income taxes 129 - 565 8,196
-------- -------- -------- --------
NET INCOME (LOSS) $ 604 $ (2,307) $ 1,423 $(11,033)
======== ======== ======== ========
SHARES USED IN BASIC EPS COMPUTATION 10,491 10,118 10,484 10,115
======== ======== ======== ========
SHARES USED IN DILUTED EPS COMPUTATION 10,492 10,118 10,489 10,115
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $ 0.06 $ (0.23) $ 0.14 $ (1.09)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $ 0.06 $ (0.23) $ 0.14 $ (1.09)
======== ======== ======== ========
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,
2002 2001 2002 2001
-------- -------- -------- --------
Net income (loss) $ 604 $ (2,307) $ 1,423 $(11,033)
Other comprehensive income (loss):
Currency translation adjustment 13 (28) (13) (94)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 617 $ (2,335) $ 1,410 $(11,127)
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, June 30,
2002 2002
---- ----
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $18,405 $19,280
Accounts receivable, net 19,502 17,683
Prepaid expenses and other current assets 2,856 2,949
------- -------
TOTAL CURRENT ASSETS 40,763 39,912
Property and equipment, at cost
Computers & other equipment 6,604 6,357
Leasehold improvements 2,982 2,856
------- -------
9,586 9,213
Less - Accumulated depreciation 8,230 7,862
------- -------
Property and equipment, net 1,356 1,351
Goodwill, net 907 907
Pension asset 2,853 2,853
Other assets 575 670
------- -------
TOTAL ASSETS $46,454 $45,693
======= =======
See accompanying notes to condensed consolidated financial statements.
5
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, June 30,
2002 2002
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
CURRENT LIABILITIES
Accounts payable $ 2,870 $ 2,819
Accrued liabilities:
Payroll 1,666 1,985
Taxes 380 454
Other 2,907 3,299
-------- --------
Total accrued liabilities 4,953 5,738
Deferred revenue 10,960 11,327
-------- --------
TOTAL CURRENT LIABILITIES 18,783 19,884
Accrued pension liability 8,318 8,174
Other liabilities 27 73
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
10,653,914 shares as of December 31, 2002
and 10,469,409 shares as of June 30, 2002 10,654 10,469
Capital contributed in excess of par value 39,830 39,686
Retained deficit (18,786) (20,208)
Accumulated other comprehensive income:
Pension liability, net of tax (6,318) (6,318)
Cumulative translation adjustment (6,054) (6,067)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 19,326 17,562
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 46,454 $ 45,693
======== ========
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,
--------------------
2002 2001
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 1,423 $(11,033)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 285 380
Increase in pension liability 144 -
Deferred income taxes - 8,122
Changes in operating assets and liabilities:
Accounts receivable (1,700) 955
Prepaid expenses and other assets 201 (360)
Accounts payable 76 (853)
Accrued liabilities (746) (1,592)
Deferred revenue (227) (124)
Other liabilities (46) 49
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (590) (4,456)
INVESTING ACTIVITIES
Payments for property and equipment (121) (205)
Other (133) (109)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (254) (314)
FINANCING ACTIVITIES
Net repayments under debt agreements,
capital lease agreements and notes payable - (100)
Other 329 403
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 329 303
Effect of exchange rate changes (360) (317)
-------- --------
NET DECREASE IN CASH (875) (4,784)
CASH AT BEGINNING OF PERIOD 19,280 24,106
-------- --------
CASH AT END OF PERIOD $ 18,405 $ 19,322
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 7 $ 1
======== ========
Cash paid for income taxes $ 223 $ 430
======== ========
See accompanying notes to condensed consolidated financial statements.
7
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL INFORMATION
The unaudited condensed consolidated financial statements included herein
have been prepared by Comshare, Incorporated (the "Company"), in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
most recent Annual Report on Form 10-K. Certain amounts in the fiscal year 2002
financial statements have been reclassified to conform to fiscal year 2003
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, 2002 and 2001, the consolidated balance
sheets as of December 31, 2002 and June 30, 2002, and the consolidated
statements of cash flows for the six months ended December 31, 2002 and 2001.
The results of operations for the three and six months ended December 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 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, 2002
(IN THOUSANDS)
--------------------------------- -------------------------- ---------------------- -------------------------
Employee severance $1,280 $(967) $313
--------------------------------- -------------------------- ---------------------- -------------------------
Total cash expenditures related to the restructuring charge are
expected to be $1.3 million. Future cash expenditures are expected to be funded
from the Company's available cash with remaining payments expected to be paid
through the second quarter of the 2004 fiscal year. The remaining reserve
related to the October 2001 charge at December 31, 2002 and June 30, 2002 was
$313,000 and $454,000, respectively. The change of $141,000 was a result of
payments during the first and second quarters of fiscal 2003.
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, 2002
(IN THOUSANDS)
--------------------------------- -------------------------- ---------------------- -------------------------
Employee severance $892 $(635) $257
--------------------------------- -------------------------- ---------------------- -------------------------
Total cash expenditures related to the restructuring charge are
expected to be $0.8 million. Future cash expenditures are expected to be funded
from the Company's available cash and remaining payments are expected to be paid
through the fourth quarter of fiscal year 2004. The remaining reserve related to
the March 2001 charge at December 31, 2002 and June 30, 2002 was $257,000 and
$428,000, respectively. The change of $171,000 was due to payments of $89,000
during the first and second quarters of fiscal year 2003 and an accrual reversal
of $82,000 during the first quarter of fiscal year 2003 due to changes in
estimates of restructuring expenses.
As of December 31, 2002, the Company had $0.6 million of accruals
remaining from restructuring charges, payable through the fourth quarter of the
2004 fiscal year. The entire amount is related to employee severance agreements.
NOTE D - NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FAS 123"
("SFAS 148"). This statement amends Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements to SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition and annual disclosure provisions of SFAS No. 148 are
effective for interim periods beginning after December 15, 2002. Management is
currently assessing the impact of this pronouncement.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This pronouncement addresses
financial accounting and reporting for costs associated with an exit activity
(including restructuring) or with the disposal of long-lived assets and
nullifies Emerging Issues Task Force Issue No. 94-3. Under SFAS No. 146, a
liability is recorded for a cost associated with an exit activity when that
liability is incurred and can be measured at fair value. SFAS No. 146 requires
disclosure of information about exit and disposal activities, the related costs,
and changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated and in
any subsequent period until the activity is completed. SFAS No. 146 is effective
prospectively for exit and disposal activities initiated after December 31, 2002
with earlier adoption encouraged. SFAS No. 146 does not allow for the
restatement of previously issued financial statements and grandfathers the
accounting for liabilities previously recorded under Emerging Issues Task Force
Issue No. 94-3. The Company does not expect the adoption of SFAS No. 146 to have
a material impact on its financial statements.
NOTE E - GOODWILL
Goodwill represents the unamortized cost in excess of fair value of
net assets acquired and through June 30, 2002 was amortized on a straight-line
basis over forty years. In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS No. 141 requires all business combinations initiated after
June 2001 to be accounted for under the purchase method of accounting. Under
SFAS No. 142, goodwill is no longer subject to amortization over its estimated
useful life. Companies will, however, be required to perform an annual
fair-value-based analysis to determine whether the value of goodwill has been
impaired. Effective July 1, 2002 the Company adopted SFAS No. 142. The Company
performed an impairment test of the goodwill as required and determined that no
impairment of the goodwill existed at the effective date of adoption. In
addition, the Company has ceased recognizing approximately $17,500 of quarterly
goodwill amortization beginning the first quarter of fiscal year 2003. The
Company will continue to perform an impairment review on an annual basis (or
more frequently if impairment indicators arise). The first annual review will
take place in the fourth quarter of 2003.
9
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE F - CREDIT FACILITY
The Company has a $7 million credit agreement that matures on September 30,
2003. The credit agreement contains covenants regarding, among other things,
earnings, leverage, net worth and payment of dividends. The Company is required
to maintain $7.4 million in deposits in U.S. Dollars with the bank in order to
maintain this credit. Under the terms of the credit agreement, the Company is
not permitted to pay cash dividends on its common stock. Permitted borrowings
available as of December 31, 2002 under the credit agreement were $7 million, of
which none were outstanding. At June 30, 2002, none of the permitted borrowings
available were outstanding. The Company was in compliance with all financial
covenants as of December 31, 2002.
NOTE G - RELATED PARTY TRANSACTIONS
Codec Systems Limited ("Codec"), a corporation organized under the laws
of Ireland, is a principal shareholder of and distributor for Comshare. As a
distributor, Codec is authorized to grant sublicenses of Comshare's products in
Ireland, Poland, Portugal, Germany and Spain. The Chief Executive Officer of
Codec, Anthony Stafford, is on the Company's Board of Directors.
Software revenue, which is defined as license fee and maintenance
revenue, of $0.5 million and $0.3 million was recognized from Codec in the six
months ended December 31, 2002 and 2001, respectively. Codec's contractual terms
and conditions are not materially different from those of the Company's other
distributors.
NOTE H - 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 determined 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 utilizes
fair value hedges and 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, 2002 and June 30, 2002, the Company had forward foreign currency
exchange contracts outstanding of approximately $2.4 million and $2.5 million
(notional amounts), respectively, denominated in foreign currencies. The
contracts outstanding at December 31, 2002 mature at various dates through March
19, 2003 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, 2002 and June 30, 2002.
NOTE I - PROVISION FOR INCOME TAXES
As of the end of the first quarter of fiscal year 2002, the Company
determined that it would no longer be prudent to sell its non-core and legacy
product lines, even if anticipated future operating income was not sufficient to
allow the Company to fully realize its deferred tax asset. Based on the weight
of this additional negative evidence and the absence of a prudent and feasible
tax planning strategy that management would implement to prevent the Company's
deferred tax assets from expiring unused, the Company determined that it could
no longer support the realizability of its deferred tax assets on a "more likely
than not" basis at the end of the first quarter of fiscal year 2002.
Accordingly, the deferred tax asset was fully reserved in the first quarter of
fiscal year 2002.
The Company recognized tax provisions of $129,000 and $565,000 in the
three and six months ended December 31, 2002, respectively. These provisions
represent taxes paid on revenue from sales in foreign countries.
10
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE J - TAX SETTLEMENT
Overall financial results for the quarter ended December 31, 2002
include a non-recurring $1.1 million credit for statutory interest on the $1.2
million tax settlement recorded in the first quarter of fiscal year 2003. This
tax settlement agreement is associated with a claim the Company made for
non-income based taxes, known as the Single Business Tax, paid to the state of
Michigan related to the years 1982-1985. The amount recorded during the first
quarter relates to the return of monies previously paid by the Company for
taxes, penalties and interest during that period. The Company accounts for
Michigan Single Business taxes, which are based on certain non-income related
factors, within the operating expenses of the Company, consistent with customary
practice. The settlement with the State of Michigan is complete and no
additional tax refunds or interest payments are anticipated.
NOTE K - PENSION LIABILITY
The Company's United Kingdom subsidiary maintains a defined benefit
plan, which covered substantially all of its employees hired prior to January 1,
1994. This plan was frozen on April 1, 1997, with no further benefits accruing
under the plan.
The pension liability and funding requirements of the Company's defined
benefit plan for its United Kingdom subsidiary are based on a number of
assumptions including the assumption that the assets in the plans will have
annual returns of 7.5%. To the extent these assumptions are not realized, the
Company's annual pension expense and cash funding requirements could increase.
NOTE L - CURRENCY TRANSLATION ADJUSTMENT
At December 31, 2002 and June 30, 2002 the "Currency translation
adjustment" balance included in the Company's balance sheet was $6.1 million.
This balance primarily represents the foreign currency translation on the net
assets related to the Company's operations in the United Kingdom. In accordance
with Financial Accounting Standards Board No. 52 "Foreign Currency Translation,"
upon "sale or complete or substantially complete liquidation" of the business in
the United Kingdom, the Company will reverse the currency translation adjustment
into the statement of operations. The revenue generated by the United Kingdom
business represented approximately 22% and 16% of total revenue, for the three
months ended December 31, 2002 and December 31, 2001, respectively and 20% and
17% of total revenue for the six months ended December 31, 2002 and December 31,
2001, respectively. The Company considers the business in the United Kingdom
significant to its operations and as of December 31, 2002 had no plans to sell
or liquidate this portion of the business. Therefore, the Company had not
adjusted the balance sheet at December 31, 2002 related to the currency
translation adjustment.
NOTE M - 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
which are not recorded within the financial statements, under all non-cancelable
operating leases are as follows (in thousands):
FISCAL YEARS ENDING JUNE 30,
- --------------------------------------------------------------
2003 $ 2,261
2004 4,161
2005 3,076
2006 1,385
2007 1,114
2008 and thereafter 555
-------------
Total minimum payments $ 12,552
=============
11
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Minimum payments under non-cancelable operating leases have not been
reduced by minimum sublease rentals of $4.2 million due in the future under
non-cancelable subleases.
NOTE N - 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, 2002 and 2001. In
addition, the Company is not dependent on any single customer or group of
customers. Geographic segment information is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
REVENUE FROM EXTERNAL CUSTOMERS:
North America $ 6,939 $ 8,489 $ 15,207 $ 17,590
United Kingdom 3,211 2,327 5,823 4,898
Other countries 4,397 3,465 7,695 6,809
-------- -------- -------- --------
TOTAL REVENUE $ 14,547 $ 14,281 $ 28,725 $ 29,297
======== ======== ======== ========
OPERATING INCOME (LOSS):
North America $ (132) $ (2,263) $ 1,332 $ (3,602)
United Kingdom 2,855 1,661 4,501 2,830
Other countries 2,387 2,143 4,551 4,338
-------- -------- -------- --------
TOTAL OPERATING INCOME 5,110 1,541 10,384 3,566
Unallocated expenses (4,377) (3,848) (8,396) (6,403)
-------- -------- -------- --------
INCOME (LOSS) BEFORE TAXES $ 733 $ (2,307) $ 1,988 $ (2,837)
======== ======== ======== ========
DECEMBER 31, June 30,
2002 2002
-------- --------
IDENTIFIABLE ASSETS:
North America $ 35,665 $ 36,862
United Kingdom and other countries 10,789 8,831
-------- --------
TOTAL IDENTIFIABLE ASSETS $ 46,454 $ 45,693
======== ========
Unallocated expenses consist of general corporate expenses, internal
research and product development expenses, interest expense and interest income.
12
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, 2002 compared to the three and six
months ended December 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 for the fiscal year ended June 30,
2002.
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,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUE
Software licenses 39.9% 28.7% 33.4% 28.0%
Software maintenance 39.0 42.0 39.0 40.1
Implementation, consulting and
other services 21.1 29.3 27.6 31.9
----- ----- ----- -----
TOTAL REVENUE 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 39.9 41.2 37.0 38.7
Cost of revenue and support 37.5 42.3 38.6 42.7
Internal research and product development 16.9 16.1 16.7 15.7
General and administrative 8.7 8.4 9.3 9.2
Tax settlement - - (4.2)
Restructuring and unusual - 9.0 - 4.4
----- ----- ----- -----
TOTAL COSTS AND EXPENSES 103.0 117.0 97.4 110.7
INCOME (LOSS) FROM OPERATIONS (3.0) (17.0) 2.6 (10.7)
OTHER INCOME (EXPENSE)
Interest on tax settlement 7.8 - 3.9 -
Interest income 0.3 0.9 0.4 1.1
Exchange loss (0.1) (0.1) - (0.1)
----- ----- ----- -----
TOTAL OTHER INCOME 8.0 0.8 4.3 1.0
INCOME (LOSS) BEFORE TAXES 5.0 (16.2) 6.9 (9.7)
Provision for income taxes 0.9 - 1.9 28.0
----- ----- ----- -----
NET INCOME (LOSS) 4.1% (16.2)% 5.0% (37.7)%
===== ===== ===== =====
13
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
----------------- ------ ----------------- ------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
MPC REVENUE
Software licenses $ 4,336 $ 3,466 25.1% $ 7,655 $ 7,014 9.1%
Software maintenance 3,940 3,407 15.6 7,694 6,724 14.4
Implementation, consulting and
other services 2,823 3,971 (28.9) 7,596 8,877 (14.4)
------- ------- ------- -------
TOTAL MPC REVENUE $11,099 $10,844 2.4% $22,945 $22,615 1.5%
======= ======= ======= =======
LEGACY REVENUE
Software licenses $ 1,470 $ 628 134.1% $ 1,934 $ 1,173 64.9%
Software maintenance 1,732 2,599 (33.4) 3,508 5,032 (30.3)
Implementation, consulting and
other services 246 210 17.1 338 477 (29.1)
------- ------- ------- -------
TOTAL LEGACY REVENUE $ 3,448 $ 3,437 0.3% $ 5,780 $ 6,682 (13.5)%
======= ======= ======= =======
TOTAL REVENUE
Software licenses $ 5,806 $ 4,094 41.8% $ 9,589 $ 8,187 17.1%
Software maintenance 5,672 6,006 (5.6) 11,202 11,756 (4.7)
Implementation, consulting and
other services 3,069 4,181 (26.6) 7,934 9,354 (15.2)
------- ------- ------- -------
TOTAL REVENUE $14,547 $14,281 1.9% $28,725 $29,297 (2.0)%
======= ======= ======= =======
The increase in total revenue of 2% in the quarter ended December 31,
2002 from the quarter ended December 31, 2001 was primarily due to a 2% increase
in revenue from the Company's management planning and control software
applications ("MPC"). The total revenue decline of 2% for the six months ended
December 31, 2002 was primarily due to a 14% decrease in revenue from the
Company's older desktop ("legacy") products, offset by a 2% increase in the
Company's MPC revenue. The Company's MPC suite of software applications is
comprised of Comshare MPC (formerly BudgetPLUS), Comshare FDC and Decision. In
October 2002, the Company released a new version of Comshare MPC, version 5.0.
MPC revenue was $11.1 million for the quarter ended December 31, 2002,
representing 76% of total revenue, and $22.9 million for the six months ended
December 31, 2002, representing 80% of total revenue. This compares to MPC
revenue representing 76% of total revenue for the three months ended December 1,
2001, and 77% of total revenue for the six months ended December 31, 2001.
For the third quarter of fiscal year 2003, the Company expects total
revenue of between $13.6 million and $14.1 million, compared to total revenue of
$13.5 million in the third quarter of fiscal year 2002. The Company expects
license fee revenue for the third quarter of fiscal year 2003 to be between $5.0
million and $5.5 million, compared to $3.7 million in the third quarter of
fiscal year 2002. The Company's expectation as to total revenue and license fee
revenue for the third quarter of fiscal year 2003 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."
14
The 42% increase in software license fees for the second quarter of
fiscal year 2003 from the quarter ended December 31, 2001 was primarily due to a
25% increase in license fees in the Company's MPC products, to $4.3 million for
the quarter ended December 31, 2002, versus $3.5 million for the quarter ended
December 31, 2001. License fees from the Company's legacy products also
increased $0.9 million from the quarter ended December 31, 2001. The entire
increase was related to the sale of Essbase license fees. MPC license fees
represented 75% of total license fees for the quarter ended December 31, 2002,
versus 85% for the same period in fiscal year 2002. License fees in the
Company's direct operations, which include North America and the United Kingdom,
increased 17% to $3.2 million for the quarter ended December 31, 2002. The
increase in the Company's direct operations was primarily due to increased
sales of MPC products in the United Kingdom. License fees from the Company's
distributor operations increased 90% to $2.5 million for the same time period,
primarily reflecting an increase in license fees from the Company's legacy
products, specifically Essbase. The Company licensed the Essbase database from
Hyperion Solutions Corporation under an agreement that expired on December 31,
2002, and resold it in connection with many of its MPC products. The Company's
management believes that a significant number of customers who rely on the
Company for support made long-term decisions on software needs and commitments
and purchased additional Essbase licenses from the Company during the quarter
ended December 31, 2002. Management also believes that these sales reflect the
Company's strong customer base and their interest in continued support from
the Company. The 17% increase in software license fees for the six months
ended December 31, 2002 was primarily due to the increase in license fees from
the Company's legacy products of $0.7 million from the six months ended
December 31, 2001. MPC license fees represented 80% of total license fees for
the six months ended December 31, 2002, versus 86% for the same period in
fiscal year 2002.
Software maintenance revenues decreased 6% in the quarter ended
December 31, 2002 from the quarter ended December 31, 2001. This reflects a
decrease of 33% in legacy maintenance, due to mainframe and desktop maintenance
cancellations and continued customer migration to other platforms. The decrease
in legacy maintenance was offset by an increase of MPC product maintenance of
16%. MPC product maintenance accounted for 69% of total maintenance revenue for
the three months ended December 31, 2002, versus 57% for the same period in
fiscal year 2002. The growth in MPC product maintenance revenue follows from
growth in Comshare MPC licensing in the prior fiscal year. Software maintenance
revenues decreased 6% from the six months ended December 31, 2001 to the same
period ended December 31, 2002, reflecting the decline in maintenance revenues
for legacy products, offset by the growth in the Company's MPC products.
Implementation, consulting and other services revenue was $3.1 million
and $7.9 million for the three and six months ended December 31, 2002,
respectively, compared to $4.2 million and $9.4 million for the three and six
months ended December 31, 2001, respectively. The decrease in implementation
services revenue for the three and six months ended December 31, 2002 compared
to the same periods in fiscal year 2002 was primarily due to the allocation of
our implementation services resources to the introduction of our Comshare 5.0
release, and to a lesser extent the completion of a large implementation
project during the second quarter of fiscal year 2003. The decrease in
implementation services revenue for the six months ended December 31, 2002 was
also due to a decrease in legacy license fees in prior periods. During each
of the three and six month periods ended December 31, 2002, 92% and 96%,
respectively, of total implementation services revenue was related to MPC
products, primarily the Comshare MPC product.
15
COSTS AND EXPENSES
THREE MONTHS ENDED PERCENT SIX MONTHS ENDED PERCENT
DECEMBER 31, CHANGE DECEMBER 31, CHANGE
------------------------- --------- --------------------- ----------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
COSTS AND EXPENSES
Selling and marketing $ 5,807 $ 5,881 (1.3)% $10,639 $ 11,356 (6.3)%
Cost of revenue and support 5,453 6,044 (9.8) 11,092 12,508 (11.3)
Internal research and product development 2,455 2,305 6.5 4,788 4,600 4.1
General and administrative 1,264 1,198 5.5 2,673 2,687 (0.5)
Tax settlement - - - (1,208) - (100.0)
Restructuring - 1,280 (100.0) - 1,280 (100.0)
---------- --------- --------- ---------
TOTAL COSTS AND EXPENSES $14,979 $ 16,708 (10.3)% $27,984 $ 32,431 (13.7)%
========== ========= ========= =========
Total costs and expenses decreased 10% and 14% for the three and six
months ended December 31, 2002, respectively, compared to the prior year. The
decrease of 10% for the quarter ended December 31, 2002 as compared to the
quarter ended December 31, 2001 was primarily due to the $1.3 million
restructuring charge. The decrease of 14% for the six months ended December 31,
2002 as compared to the six months ended December 31, 2001 is due to the
restructuring charge of $1.3 million recorded in the second quarter of fiscal
year 2002 and a $1.2 million credit recorded in the first quarter of fiscal year
2003 for a claim the Company made for non-income based taxes, known as the
Single Business Tax, paid to the state of Michigan relating to the years
1982-1985. The amount recorded relates to the return of monies previously paid
by the Company for taxes, penalties and interest during that period. The Company
accounts for Michigan Single Business taxes, which are based on certain
non-income related factors, within the operating expenses of the Company,
consistent with customary practice. The settlement with the State of Michigan is
complete and no additional tax refunds or interest payments are anticipated.
Selling and marketing expenses decreased 1% and 6% for the three and six
months ended December 31, 2002. The decrease during the three and six month
period was primarily due to a reduction of employee costs, and to a lesser
extent a reduction of promotional spending.
Cost of revenue and support expenses decreased 10% and 11% for the three
and six months ended December 21, 2002, respectively, compared to the prior
year. The decrease during the three and six month periods was primarily due to
reduced professional services to support implementation, consulting and other
services revenue, offset by an increase in royalty expenses resulting from
higher sales of Hyperion's Essbase database.
The Company licensed the Essbase database from Hyperion under an
agreement that expired December 31, 2002, and resold it in connection with many
of its Comshare MPC products. Management believes that the pending termination
of its license for Hyperion's Essbase database may have contributed to an
increase in its software license fees in the second quarter of fiscal year 2003,
which contribution will not occur in future periods. Management does not
believe that the termination will have a material adverse impact on the
Company's software license fees in future periods, since license fees relating
to Essbase represented less than 10% of the Company's total license fees for
fiscal year 2002. The impact of the termination on the Company's software
maintenance revenues is not currently known and will depend upon the number of
the Company's customers who decide to purchase Essbase maintenance services
directly from Hyperion. The Company's maintenance revenues related to Essbase
represented less than 30% of the Company's total maintenance fees for the
quarter ended December 31, 2002. The Company's expectations as to the impact
of the termination of the license agreement with Hyperion 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."
16
Internal research and product development costs increased 7% to $2.5
million for the quarter ended December 31, 2002, from $2.3 million for the
quarter ended December 31, 2001. Internal research and product development costs
for the six month period ended December 31, 2002 were $4.8 million, representing
a 4% increase over the same period a year ago. The increases in both periods
were primarily due to increased third party royalty costs.
General and administrative costs increased 6% and decreased 1% for the
three and six months ended December 31, 2002, respectively, as compared to the
same periods in fiscal year 2002. The three month increase is mainly due to an
increase in insurance costs. During the second quarter of fiscal year 2002, the
Company benefited from a non-recurring credit from an insurance company. The six
month decrease is primarily due to reduced employee costs and lower purchased
services expenses.
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. The initial
charge, amounts charged against the reserve through December 31, 2002 and the
balance of the reserve as of December 31, 2002 are as follows:
--------------------------------- -------------------------- ---------------------- -------------------------
RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGES TO RESERVES BALANCE AT
(IN THOUSANDS) (IN THOUSANDS) DECEMBER 31, 2002
(IN THOUSANDS)
--------------------------------- -------------------------- ---------------------- -------------------------
Employee severance $1,280 $(967) $313
--------------------------------- -------------------------- ---------------------- -------------------------
Total cash expenditures related to the restructuring charge are
expected to be $1.3 million. Future cash expenditures are expected to be funded
from the Company's available cash with remaining payments expected to be paid
through the second quarter of the fiscal year 2004. The remaining reserve
related to the October 2001 charge at December 31, 2002 and June 30, 2002 was
$313,000 and $454,000, respectively. The change of $141,000 was a result of
payments during the first and second quarters of fiscal year 2003.
OTHER INCOME AND EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
OTHER INCOME (EXPENSE)
Interest on tax settlement $ 1,125 $ - $ 1,125 $ -
Interest income 49 138 137 330
Interest expense - - (7) (1)
Exchange loss (9) (18) (8) (32)
--------- ---------- ---------- ---------
TOTAL OTHER INCOME $ 1,165 $ 120 $ 1,247 $ 297
========= ========== ========== =========
Overall financial results for the quarter ended December 31, 2002
include a non-recurring $1.1 million credit for statutory interest on the $1.2
million tax settlement recorded in the first quarter of fiscal year 2003. This
tax settlement agreement is associated with a claim the Company made for
non-income based taxes, known as the Single Business Tax, paid to the state of
Michigan related to the years 1982-1985. The amount recorded during the first
quarter relates to the return of monies previously paid by the Company for
taxes, penalties and interest during that period. The Company accounts for
Michigan Single Business taxes, which are based on certain non-income
17
related factors, within the operating expenses of the Company, consistent with
customary practice. The settlement with the State of Michigan is complete and no
additional tax refunds or interest payments are anticipated.
Excluding the interest on the tax settlement, total other income
decreased 67% and 59% during the three and six months ended December 31, 2002,
respectively, compared to the three and six months ended December 31, 2001. This
decrease was a result of lower interest rates on short-term investments and
lower average cash balances.
PENSION LIABILITY
The Company's United Kingdom subsidiary maintains a defined
benefit plan, which covered substantially all of its employees hired prior to
January 1, 1994. This plan was frozen on April 1, 1997, with no further benefits
accruing under the plan.
The pension liability and funding requirements of the Company's defined
benefit plan for its United Kingdom subsidiary are based on a number of
assumptions including the assumption that the assets in the plans will have
annual returns of 7.5%. To the extent these assumptions are not realized, the
Company's annual pension expense and cash funding requirements could increase.
CURRENCY TRANSLATION ADJUSTMENT
At December 31, 2002 and June 30, 2002 the "Currency translation
adjustment" balance included in the Company's balance sheet was $6.1 million.
This balance primarily represents the foreign currency translation on the net
assets related to the Company's operations in the United Kingdom. In accordance
with Financial Accounting Standards Board No. 52 "Foreign Currency Translation,"
upon "sale or complete or substantially complete liquidation" of the business in
the United Kingdom, the Company will reverse the currency translation adjustment
into the statement of operations. The revenue generated by the United Kingdom
business represented approximately 22% and 16% of total revenue, for the three
months ended December 31, 2002 and December 31, 2001, respectively and 20% and
17% of total revenue for the six months ended December 31, 2002 and December 31,
2001, respectively. The Company considers the business in the United Kingdom
significant to its operations and as of December 31, 2002 had no plans to sell
or liquidate this portion of the business. Therefore, the Company had not
adjusted the balance sheet at December 31, 2002 related to the currency
translation adjustment.
FOREIGN CURRENCY
For the three and six months ended December 31, 2002, 52% and 47%,
respectively, of the Company's total revenue was from outside North America,
compared with 41% and 40% for the three and six months ended December 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 six months ended December 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 $2.4 million, outstanding at December 31, 2002. See Note H of Notes to
Condensed Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
As of the end of the first quarter of fiscal year 2002, the Company
determined that it would no longer be prudent to sell its non-core and legacy
product lines, even if anticipated future operating income was not sufficient to
allow the Company to fully realize its deferred tax asset. Based on the weight
of this additional negative evidence and the absence of a prudent and feasible
tax planning strategy that management would implement to prevent the Company's
deferred tax assets from expiring unused, the Company determined that it could
no longer support the realizability of its deferred tax assets on a "more likely
than not" basis at the end of the first quarter of fiscal year
18
2002. Accordingly, the deferred tax asset was fully reserved in the first
quarter of fiscal year 2002. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Provision for Income Taxes"
in the Company's Form 10-K for the fiscal year ended June 30, 2002 for more
information.
The Company recognized tax provisions of $129,000 and $565,000 for the
three and six months ended December 31, 2002, respectively. These provisions
represent taxes paid on revenue from sales in foreign countries.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002 cash and cash equivalents were $18.4 million,
compared with cash and cash equivalents of $19.3 million at June 30, 2002. The
$0.9 million decrease in cash and cash equivalents is principally due to $0.6
million used in operating activities. The Company received $2.3 million during
the second quarter of fiscal year 2003 related to a non-recurring tax
settlement agreement and statutory interest. This tax settlement agreement is
associated with a claim the Company made for non-income based taxes, known as
the Single Business Tax, paid to the state of Michigan related to the years
1982-1985. The amount received relates to the return of monies previously paid
by the Company for taxes, penalties and interest during that period. The
settlement with the state of Michigan is complete and no additional tax refunds
or interest payments are anticipated.
Net cash of $0.6 million was used in operating activities during the
six months ended December 31, 2002. The cash used in operating activities
included $2.4 million used in working capital and other activities. Net cash
used in working capital and other activities resulted primarily from an increase
in accounts receivable and prepaid expenses and a decrease in deferred revenue.
The increase in accounts receivable was primarily due to lower than expected
cash receipts during the second quarter of fiscal year 2003. Slow payments from
a few of the international distributors, primarily in Latin America had an
impact on the Company's accounts receivable balance. The Company received a
$1.0 million tax refund that was recognized during the third quarter of fiscal
year 2002 and included in accounts receivable, which was also included in
working capital. This refund resulted from the "Jobs Creation and Worker
Assistance Act of 2002" federal economic stimulus package, which was signed
into law in March 2002.
Net cash of $0.3 million was used in investing activities for the six
months ended December 31, 2002. The Company obtains most of its computer
equipment under operating leases. During the first six months of fiscal year
2003, the Company entered into new operating leases with aggregate minimum lease
payment obligations of $0.3 million. See Note M of Notes to Condensed
Consolidated Financial Statements. At December 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
six months ended December 31, 2002 and consisted primarily of proceeds from
stock purchases under the Company's Employee Stock Purchase Plan.
Total assets were $46.5 million at December 31, 2002, compared with
total assets of $45.7 million at June 30, 2002. Working capital as of December
31, 2002 was $21.9 million, compared with $20.0 million as of June 30, 2002. The
increase in total assets from June 30, 2002 to December 31, 2002 was primarily
due to the increase in accounts receivable (net of the receipt of the tax refund
recognized in the third quarter of fiscal year 2002) offset by decreases in cash
and cash equivalents. The increase in working capital from June 30, 2002 to
December 31, 2002 was primarily due to the increase in accounts receivable
during that period.
The Company has a $7 million credit agreement that matures on September
30, 2003. The credit agreement contains covenants regarding among other things,
earnings, leverage, net worth and payment of dividends. The Company is required
to maintain $7.4 million in deposits in U.S. Dollars with the bank in order to
maintain this credit. Under the terms of the credit agreement, the Company is
not permitted to pay cash dividends on its common stock. Permitted borrowings
available as of December 31, 2002 under the credit agreement were $7 million, of
which none were outstanding. At June 30, 2002, none of the permitted borrowings
available were outstanding. The Company was in compliance with all financial
covenants as of December 31, 2002.
As of December 31, 2002, the Company had $0.6 million of accruals
remaining for cash restructuring expenses payable through the fourth quarter of
fiscal year 2004. See Note C of Notes to Condensed Consolidated Financial
Statements contained in this Form 10-Q.
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
19
operations to generate sufficient cash to support operations, and other
uncertainties described in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Safe Harbor Statement."
MARKET SENSITIVITY ANALYSIS
The Company is exposed to market risk from changes in foreign exchange
and interest rates. To reduce the risk from changes in foreign exchange rates,
the Company selectively uses financial instruments. The Company does not hold or
issue financial instruments for trading purposes.
The Company, at various times, denominates borrowings in foreign
currencies and enters into forward exchange contracts to hedge exposures related
to foreign currency transactions. The Company does not use any other types of
derivatives to hedge such exposures nor does it speculate in foreign currency.
In general, the Company uses forward exchange contracts to hedge against large
selective transactions that present the most exposure to exchange rate
fluctuations. At December 31, 2002 and June 30, 2002, the Company had forward
contracts of approximately $2.4 million and $2.5 million (notional amounts),
respectively, denominated in foreign currencies. The contracts outstanding at
December 31, 2002 mature through March 19, 2003 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, 2002 and June 30, 2002.
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 the British pound, the Euro
and Japanese yen. A hypothetical 10 percent appreciation of the U.S. dollar from
December 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 December 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 therefore 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 and strategy.
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 Company's right to
sell 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 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
20
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."
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in causing the material
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 to be recorded, processed,
summarized and reported, to the extent applicable, within the time periods
required for the Company to meet the Securities and Exchange Commission's
("Commission") filing deadlines for these reports specified in the Commission's
rules and forms. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
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 25,
2002. There were four proposals voted on at the meeting, which were: the
election of eight directors, an amendment to the Employee Stock Purchase Plan,
an amendment to the Directors Stock Purchase Plan and a shareholder proposal
concerning executive officer compensation. The following table sets forth the
results of the votes on these matters. All director nominees were elected and
all Plan amendments were approved. The shareholder proposal was not approved.
Election of Director Nominees:
Votes For Votes Withheld Broker Non-Votes
--------- -------------- ----------------
Geoffrey B. Bloom 8,457,289 1,422,605 -
Richard L. Crandall 8,471,169 1,408,725 -
Dennis G. Ganster 8,465,929 1,413,965 -
Kathryn A. Jehle 8,556,954 1,322,940 -
John H. MacKinnon 9,045,416 834,478 -
Alan G. Merten 8,459,849 1,420,045 -
John F. Rockart 8,449,560 1,430,334 -
Anthony G. Stafford 8,927,716 952,178 -
Approval of the amendment to the Employee Stock Purchase Plan:
Votes For Votes Against Abstained Broker Non-Votes
--------- ------------- --------- ----------------
7,674,793 2,178,816 26,285 -
Approval of the amendment to the Directors Stock Purchase Plan:
Votes For Votes Against Abstained Broker Non-Votes
--------- ------------- --------- ----------------
7,588,578 2,265,932 25,384 -
21
Approval of the shareholder proposal concerning executive officer compensation:
Votes For Votes Against Abstained Broker Non-Votes
--------- ------------- --------- ----------------
2,080,402 3,775,231 54,990 3,969,271
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) There are no exhibits included with this Form 10-Q.
(B) Reports on Form 8-K.
On November 11, 2002, the Company filed a Form 8-K under Item
9, disclosing that certifications from the Company's Chief Executive
Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) had accompanied the
Company's Quarter Report on Form 10-Q for the quarterly period ended
September 30, 2002.
22
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 14, 2003 COMSHARE, INCORPORATED
(Registrant)
/s/ Brian Jarzynski
-------------------
Brian Jarzynski
Senior Vice President,
Chief Financial Officer and
Treasurer
23
CERTIFICATION
I, Dennis G. Ganster, Chief Executive Officer of Comshare, Incorporated, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Comshare,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: February 14, 2003 /s/ Dennis G. Ganster
---------------------------
Dennis G. Ganster
Chief Executive Officer
(Principal Executive Officer)
24
CERTIFICATION
I, Brian Jarzynski, Chief Financial Officer of Comshare, Incorporated, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Comshare,
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: February 14, 2003 /s/ Brian Jarzynski
---------------------------
Brian Jarzynski
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
25