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, 2003
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 APRIL 30, 2003.
OUTSTANDING AT
CLASS OF COMMON STOCK APRIL 30, 2003
--------------------- --------------
$1.00 PAR VALUE 10,671,114 SHARES
1
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, 2003 and 2002.... 3
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended March 31, 2003 and 2002.... 4
Condensed Consolidated Balance Sheets as of
March 31, 2003 and June 30, 2002............................... 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2003 and 2002...................... 7
Notes to Condensed Consolidated Financial Statements............... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 22
ITEM 4. CONTROLS AND PROCEDURES........................................ 22
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 23
SIGNATURE.............................................................. 24
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER.. 25
INDEX TO EXHIBITS...................................................... 27
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,
2003 2002 2003 2002
---- ---- ---- ----
REVENUE
Software licenses $ 5,292 $ 3,694 $14,881 $ 11,881
Software maintenance 5,575 5,768 16,777 17,524
Implementation, consulting
and other services 3,013 4,046 10,947 13,400
------- ------- ------- --------
TOTAL REVENUE 13,880 13,508 42,605 42,805
COSTS AND EXPENSES
Selling and marketing 6,238 6,782 16,877 18,138
Cost of revenue and support 4,566 5,797 15,658 18,305
Internal research and product development 2,408 2,341 7,196 6,941
General and administrative 1,561 1,416 4,234 4,103
Tax settlement - - (1,208) -
Restructuring - - - 1,280
------- ------- ------- --------
TOTAL COSTS AND EXPENSES 14,773 16,336 42,757 48,767
------- ------- ------- --------
LOSS FROM OPERATIONS (893) (2,828) (152) (5,962)
OTHER INCOME (EXPENSE)
Interest on tax settlement - - 1,125 -
Interest income, net 95 128 225 457
Exchange gain (loss) (39) 20 (47) (12)
------- ------- ------- --------
TOTAL OTHER INCOME 56 148 1,303 445
INCOME (LOSS) BEFORE TAXES (837) (2,680) 1,151 (5,517)
Provision (benefit) for income taxes 111 (1,040) 676 7,156
------- ------- ------- --------
NET INCOME (LOSS) $ (948) $(1,640) $ 475 $(12,673)
======= ======= ======= ========
SHARES USED IN BASIC EPS COMPUTATION 10,663 10,272 10,543 10,166
======= ======= ======= ========
SHARES USED IN DILUTED EPS COMPUTATION 10,663 10,272 10,554 10,166
======= ======= ======= ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $(0.09) $ (0.16) $ 0.05 $ (1.25)
======= ======= ======= ========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $(0.09) $ (0.16) $ 0.05 $ (1.25)
======= ======= ======= ========
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,
2003 2002 2003 2002
------ -------- ----- ---------
Net income (loss) $ (948) $ (1,640) $ 475 $ (12,673)
Other comprehensive loss:
Currency translation adjustment (5) (108) (18) (202)
------ -------- ----- ---------
COMPREHENSIVE INCOME (LOSS) $ (953) $ (1,748) $ 457 $ (12,875)
====== ======== ===== =========
See accompanying notes to condensed consolidated financial statements.
4
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, June 30,
2003 2002
--------- --------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 17,902 $ 19,280
Accounts receivable, net 18,796 17,683
Prepaid expenses and other current assets 2,784 2,949
-------- --------
TOTAL CURRENT ASSETS 39,482 39,912
Property and equipment, at cost
Computers & other equipment 6,612 6,357
Leasehold improvements 2,934 2,856
-------- --------
9,546 9,213
Less - Accumulated depreciation 8,259 7,862
-------- --------
Property and equipment, net 1,287 1,351
Goodwill, net 907 907
Pension asset 2,853 2,853
Other assets 526 670
-------- --------
TOTAL ASSETS $ 45,055 $ 45,693
======== ========
See accompanying notes to condensed consolidated financial statements.
5
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, June 30,
2003 2002
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
CURRENT LIABILITIES
Accounts payable $ 2,763 $ 2,819
Accrued liabilities:
Payroll 1,495 1,985
Taxes 480 454
Other 1,878 3,299
-------- --------
Total accrued liabilities 3,853 5,738
Deferred revenue 11,596 11,327
-------- --------
TOTAL CURRENT LIABILITIES 18,212 19,884
Accrued pension liability 8,390 8,174
Other liabilities 28 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
10,671,114 shares as of March 31, 2003
and 10,469,409 shares as of June 30, 2002 10,671 10,469
Capital contributed in excess of par value 39,856 39,686
Retained deficit (19,733) (20,208)
Accumulated other comprehensive income:
Minimum pension liability, net of tax (6,318) (6,318)
Cumulative translation adjustment (6,051) (6,067)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 18,425 17,562
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,055 $ 45,693
========= ========
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,
-----------------------
2003 2002
------- --------
OPERATING ACTIVITIES
Net income (loss) $ 475 $(12,673)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 435 558
Increase in pension liability 216 -
Deferred income taxes - 7,082
Changes in operating assets and liabilities:
Accounts receivable, net (994) 1,915
Prepaid expenses and other assets 323 687
Accounts payable (11) (333)
Accrued liabilities (1,857) (2,545)
Deferred revenue 368 459
Other liabilities (45) (545)
------- --------
NET CASH USED IN OPERATING ACTIVITIES (1,090) (5,395)
INVESTING ACTIVITIES
Payments for property and equipment (138) (326)
Other (210) (106)
------- --------
NET CASH USED IN INVESTING ACTIVITIES (348) (432)
FINANCING ACTIVITIES
Net repayments under debt agreements - (164)
Employee stock purchases and other 371 449
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 371 285
Effect of exchange rate changes (311) (270)
------- --------
NET DECREASE IN CASH (1,378) (5,812)
CASH AT BEGINNING OF PERIOD 19,280 24,106
------- --------
CASH AT END OF PERIOD $17,902 $ 18,294
======= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 8 $ 1
======= ========
Cash paid for income taxes $ 330 $ 108
======= ========
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.
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, 2003 and 2002, the consolidated balance
sheet as of March 31, 2003, and the consolidated statements of cash flows for
the nine months ended March 31, 2003 and 2002.
The results of operations for the three and nine months ended March 31,
2003 and 2002 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. The initial
charge, amounts charged against the reserve through March 31, 2003, and the
balance of the reserve as of March 31, 2003 are as follows:
RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGED TO BALANCE AT
(IN THOUSANDS) RESERVES MARCH 31, 2003
(IN THOUSANDS) (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------
Employee severance $1,280 $(1,041) $239
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 March 31, 2003 and June 30, 2002 was
$239,000 and $454,000, respectively. The change of $215,000 was a result of
payments during the first three 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. All separations
were completed prior to March 2001. The initial charge, amounts charged against
the reserve through March 31, 2003, and the balance of the reserve as of March
31, 2003 are as follows:
8
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGED TO BALANCE AT
(IN THOUSANDS) RESERVES MARCH 31, 2003
(IN THOUSANDS) (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------
Employee severance $892 $(679) $213
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 March 31, 2003 and June 30, 2002 was $213,000 and
$428,000, respectively. The change of $215,000 was due to payments of $133,000
during the first three 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 March 31, 2003, the Company had $0.5 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 June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). 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 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 146 is effective prospectively
for exit and disposal activities initiated after December 31, 2002. SFAS 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 adopted SFAS 146 effective January
1, 2003. The adoption of SFAS 146 did not have a material effect on the
Company's 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 141 requires all business combinations initiated after June 2001 to be
accounted for under the purchase method of accounting. Under SFAS 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 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 fiscal year 2003. The Company does not believe the first annual review will
have a material affect on the financial statements.
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 March 31, 2003 under the credit agreement were $7 million, of
which none were outstanding. At June 30, 2002, none of the permitted borrowings
available were outstanding. As of March 31, 2003, the Company was in violation
of one of the covenants relating to the line of credit. The Company has obtained
a waiver for the violation at March 31, 2003.
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 and Germany. 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 $0.2 million and $0.5 million was recognized from Codec in the three
months ended March 31, 2003 and 2002, respectively and $0.7 million and $0.8
million was recognized from Codec in the nine months ended March 31, 2003 and
2002, 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 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 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 March 31, 2003 and June 30, 2002, the Company had forward foreign currency
exchange contracts outstanding of approximately $2.2 million and $2.5 million
(notional amounts), respectively, denominated in foreign currencies. The
contracts outstanding at March 31, 2003 mature at various dates through June 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 March 31, 2003 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 $111,000 and $676,000 in the
three and nine months ended March 31, 2003, 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 nine months ended March 31, 2003
include a non-recurring $1.1 million credit for statutory interest recorded in
the second quarter 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 -- STOCK PLANS
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion (APB) No.25
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the stock at grant date over the amount an
employee must pay to acquire the stock. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS 123
"Accounting for Stock Based Compensation," the Company's net income (loss), in
thousands, and income (loss) per share would have been adjusted to the pro forma
amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
------------------------ -----------------------
Net income (loss) - as reported $ (948) $ (1,640) $ 475 $ (12,673)
Additional compensation expense for fair value of
stock options, net of tax $ (82) $ (105) $ (326) $ (386)
------------------------ -----------------------
Net income (loss) - pro forma $ (1,030) $ (1,745) $ 149 $ (13,059)
Basic and diluted income (loss) per share as
reported $ (0.09) $ (0.16) $ 0.05 $ (1.25)
Basic and diluted income (loss) per share - pro
forma $ (0.10) $ (0.17) $ 0.01 $ (1.28)
11
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE M -- CURRENCY TRANSLATION ADJUSTMENT
At March 31, 2003 and June 30, 2002 the "Currency translation
adjustment" balance included in the Company's balance sheet was $6.0 million and
$6.1 million, respectively. 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
19% and 17% of total revenue, for the three months ended March 31, 2003 and
March 31, 2002, respectively and 20% and 17% of total revenue for the nine
months ended March 31, 2003 and March 31, 2002, respectively. The Company
considers the business in the United Kingdom significant to its operations and
as of March 31, 2003 had no plans to sell or liquidate this portion of the
business. Therefore, the Company has not adjusted the balance sheet at March 31,
2003 related to the currency translation adjustment.
NOTE N -- 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 - Fourth Quarter $ 1,178
2004 4,371
2005 3,229
2006 1,391
2007 1,114
2008 and thereafter 555
--------
Total minimum payments $ 11,838
========
Minimum payments under non-cancelable operating leases have not been
reduced by minimum sublease rentals of $3.9 million due in the future under
non-cancelable subleases.
NOTE O -- 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, 2003 and 2002. In addition,
the Company is not dependent on any single customer or group of customers.
Geographic segment information is as follows:
12
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
2003 2002 2003 2002
------- ------- ------- --------
(in thousands) (in thousands)
REVENUE FROM EXTERNAL CUSTOMERS:
North America $ 8,307 $ 7,201 $23,514 $ 24,791
United Kingdom 2,591 2,280 8,414 7,178
Other countries 2,982 4,027 10,677 10,836
------- ------- ------- --------
TOTAL REVENUE $13,880 $13,508 $42,605 $ 42,805
======= ======= ======= ========
OPERATING INCOME (LOSS):
North America $ 340 $(3,183) $(6,410) $ (6,785)
United Kingdom 1,197 1,834 7,117 4,664
Other countries 1,888 2,639 6,439 6,977
------- ------- ------- --------
TOTAL OPERATING INCOME 3,425 1,290 7,146 4,856
Unallocated expenses (4,262) (3,970) (5,995) (10,373)
------- ------- ------- --------
INCOME (LOSS) BEFORE TAXES $ (837) $(2,680) $ 1,151 $ (5,517)
======= ======= ======= ========
MARCH 31, June 30,
2003 2002
--------- --------
IDENTIFIABLE ASSETS:
North America $33,741 $36,862
United Kingdom and other countries 11,314 8,831
------- -------
TOTAL IDENTIFIABLE ASSETS $45,055 $45,693
======= =======
Unallocated expenses consist of general corporate expenses, internal
and product development expenses, interest expense and interest income.
13
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, 2003 compared to the three and nine months
ended March 31, 2002. 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- -----------------------
2003 2002 2003 2002
------ ------ ------ ------
REVENUE
Software licenses 38.1 % 27.3 % 34.9 % 27.8 %
Software maintenance 40.2 42.7 39.4 40.9
Implementation, consulting and
other services 21.7 30.0 25.7 31.3
------ ------ ------ ------
TOTAL REVENUE 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 44.9 50.2 39.6 42.4
Cost of revenue and support 32.9 42.9 36.8 42.8
Internal research and product development 17.4 17.3 16.9 16.2
General and administrative 11.2 10.5 9.9 9.6
Tax settlement - - (2.8)
Restructuring - - - 3.0
------ ------ ------ ------
TOTAL COSTS AND EXPENSES 106.4 120.9 100.4 114.0
LOSS FROM OPERATIONS (6.4) (20.9) (0.4) (14.0)
OTHER INCOME (EXPENSE)
Interest on tax settlement - - 2.6 -
Interest income, net 0.7 1.0 0.5 1.1
Exchange gain (loss) (0.3) 0.1 (0.1) 0.0
------ ------ ------ ------
TOTAL OTHER INCOME 0.4 1.1 3.0 1.1
INCOME (LOSS) BEFORE TAXES (6.0) (19.8) 2.6 (12.9)
Provision (benefit) for income taxes 0.8 (7.7) 1.6 16.7
------ ------ ------ ------
NET INCOME (LOSS) (6.8)% (12.1)% 1.0 % (29.6)%
====== ====== ====== ======
14
REVENUE
The following table sets forth revenue for the Company for the periods
indicated.
THREE MONTHS ENDED PERCENT NINE MONTHS ENDED PERCENT
MARCH 31, CHANGE MARCH 31, CHANGE
--------------------- ------- --------------------- -------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands) (in thousands)
MPC REVENUE
Software licenses $ 5,287 $ 3,390 56 % $ 12,942 $ 10,404 24 %
Software maintenance 3,723 3,455 8 11,417 10,179 12
Implementation, consulting and
other services 2,805 3,865 (28) 10,401 12,742 (18)
-------- -------- -------- --------
TOTAL MPC REVENUE $ 11,815 $ 10,710 10 % $ 34,760 $ 33,325 4 %
======== ======== ======== ========
LEGACY REVENUE
Software licenses $ 5 $ 304 (98)% $ 1,939 $ 1,477 31 %
Software maintenance 1,852 2,313 (20) 5,360 7,345 (27)
Implementation, consulting and
other services 208 181 15 546 658 (17)
-------- -------- -------- --------
TOTAL LEGACY REVENUE $ 2,065 $ 2,798 (26)% $ 7,845 $ 9,480 (17)%
======== ======== ======== ========
TOTAL REVENUE
Software licenses $ 5,292 $ 3,694 43 % $ 14,881 $ 11,881 25 %
Software maintenance 5,575 5,768 (3) 16,777 17,524 (4)
Implementation, consulting and
other services 3,013 4,046 (26) 10,947 13,400 (18)
-------- -------- -------- --------
TOTAL REVENUE $ 13,880 $ 13,508 3 % $ 42,605 $ 42,805 (0)%
======== ======== ======== ========
The increase in total revenue of 3% in the quarter ended March 31,
2003 from the quarter ended March 31, 2002 was due to a 10% increase in revenue
from the Company's management planning and control software applications ("MPC")
offset by a 26% decrease in legacy revenue. Total revenue remained flat for the
nine months ended March 31, 2003. Revenue for this period from the Company's
older desktop ("legacy") products decreased 17%, offset by a 4% 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. MPC
revenue was $11.8 million for the quarter ended March 31, 2003, representing 85%
of total revenue, and $34.8 million for the nine months ended March 31, 2003,
representing 82% of total revenue. This compares to MPC revenue representing 79%
of total revenue for the three months ended March 31, 2002, and 78% of total
revenue for the nine months ended March 31, 2002.
For the fourth quarter of fiscal year 2003, the Company expects total
revenue of between $14.5 million and $15.0 million, compared to total revenue of
$15.7 million in the fourth quarter of fiscal year 2002. The Company expects
license fee revenue for the fourth quarter of fiscal year 2003 to be between
$5.3 million and $5.7 million, compared to $5.6 million in the fourth quarter of
fiscal year 2002. The Company is expecting break even results from operations
for the fourth quarter of fiscal year 2003. If fourth quarter revenue is at the
low end of the range or falls below the Company's expectations, there may be a
loss for the quarter. The Company's expectation as to total revenue and license
fee revenue and profit for the fourth 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."
15
The 43% increase in software license fees for the third quarter of
fiscal year 2003 from the quarter ended March 31, 2002 was primarily due to a
56% increase in license fees in the Company's MPC products, to $5.3 million for
the quarter ended March 31, 2003, versus $3.4 million for the quarter ended
March 31, 2002. License fees from the Company's legacy products decreased $0.3
million from the quarter ended March 31, 2002. The entire decrease was related
to the elimination of fees from sales of Essbase licenses, due to the expiration
on December 31, 2002 of the agreement under which the Company had previously
licensed the Essbase database from Hyperion Solutions Corporation. The Company
had resold Essbase licenses in connection with many of its MPC products. MPC
license fees represented 99.9% of total license fees for the quarter ended March
31, 2003, versus 92% 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 108% to $4.1 million for the quarter ended March 31, 2003.
The increase in license fees in the Company's direct operations was primarily
due to increased sales of MPC products in North America. License fees from the
Company's distributor operations decreased 35% to $1.1 million for the same time
period, primarily reflecting a decrease in license fees from the Company's
legacy products, specifically Essbase. License fees from the Company's direct
operations increased 29% to $9.6 million for the nine months ended March 31,
2003, as compared to the prior year, due to increased sales of MPC products in
North America, while license fees from the Company's distributor operations
increased 15% to $5.1 million for the same period primarily due to increased
sales of legacy products in the second quarter in connection with the expiration
of the license for Essbase. The 25% increase in software license fees for the
nine months ended March 31, 2003 was primarily due to the increase in license
fees from the Company's MPC products of $2.5 million from the nine months ended
March 31, 2002. MPC license fees represented 87% of total license fees for the
nine months ended March 31, 2003, versus 88% for the same period in fiscal year
2002.
Software maintenance revenues decreased 3% in the quarter ended March
31, 2003 from the quarter ended March 31, 2002. This reflects a decrease of 20%
in legacy maintenance, due to mainframe and desktop maintenance cancellations
and continued customer migration to other platforms. The decrease in legacy
maintenance was slightly offset by an increase of MPC product maintenance of 8%.
MPC product maintenance accounted for 67% of total maintenance revenue for the
three months ended March 31, 2003, versus 60% for the same period in fiscal year
2002. The growth in MPC product maintenance revenue follows from growth in
Comshare MPC licensing in the last three quarters. Software maintenance revenues
decreased 4% from the nine months ended March 31, 2002 to the same period ended
March 31, 2003, 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 $3.0 million
and $10.9 million for the three and nine months ended March 31, 2003,
respectively, compared to $4.0 million and $13.4 million for the three and nine
months ended March 31, 2002, respectively. The decrease in implementation
services revenue for the three and nine months ended March 31, 2003 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 MPC,
version 5.0, which was released in October 2002 and due to the completion of a
large project in the first quarter of the current fiscal year. The Company
believes it has worked through most of the implementation issues associated with
MPC 5.0. During the three and nine month periods ended March 31, 2003, 93% and
95%, respectively, of total implementation services revenue was related to MPC
products, primarily the Comshare MPC product.
16
COSTS AND EXPENSES
THREE MONTHS ENDED PERCENT NINE MONTHS ENDED PERCENT
MARCH 31, CHANGE MARCH 31, CHANGE
---------------------- ------- -------------------- -------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands) (in thousands)
COSTS AND EXPENSES
Selling and marketing $ 6,238 $ 6,782 (8)% $ 16,877 $ 18,138 (7)%
Cost of revenue and support 4,566 5,797 (21) 15,658 18,305 (15)
Internal research and product development 2,408 2,341 3 7,196 6,941 4
General and administrative 1,561 1,416 10 4,234 4,103 3
Tax settlement - - - (1,208) - (100)
Restructuring - - - - 1,280 (100)
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES $ 14,773 $ 16,336 (10)% $ 42,757 $ 48,767 (12)%
======== ======== ======== ========
Total costs and expenses decreased 10% and 12% for the three and nine
months ended March 31, 2003, respectively, compared to the prior year. The
decrease of 10% for the quarter ended March 31, 2003 as compared to the quarter
ended March 31, 2002 was primarily due to the decrease in cost of revenue and
support expenses of $1.2 million. The decrease of 12% for the nine months ended
March 31, 2003 as compared to the nine months ended March 31, 2002 is also 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 8% and 7% for the three and
nine months ended March 31, 2003. The decrease during the three and nine month
period was primarily due to a reduction in bad debt expense. During the quarter
ended March 31, 2002, the Company took a charge of $0.9 million to reserve for
receivables related to foreign territories as compared to a charge of $0.3
million to reserve for receivables during the quarter ended March 31, 2003. In
addition, during the nine Months ended March 31, 2003, selling and marketing
costs decreased due to reduced third party purchased services and a reduction in
promotional expenses.
Cost of revenue and support expenses decreased 21% and 15% for the
three and nine months ended March 31, 2003, respectively, compared to the prior
year. The decrease during the three and nine month periods was primarily due to
reduced professional services to support implementation, consulting and other
services revenue and, to a lesser extent, a decrease in royalty expenses
resulting from the elimination of sales of Hyperion's Essbase database after
December 31, 2002.
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 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 long-term 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 27% of
the Company's total maintenance fees for the quarter ended March 31, 2003. 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."
17
Internal research and product development costs increased 3% to $2.4
million for the quarter ended March 31, 2003, from $2.3 million for the quarter
ended March 31, 2002. Internal research and product development costs for the
nine month period ended March 31, 2003 were $7.2 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 for certain product
specific items included in the latest release.
General and administrative costs increased 10% and 3% for the three and
nine months ended March 31, 2003, respectively, as compared to the same periods
in fiscal year 2002. The three and nine month increases are mainly due to an
increase in insurance costs and other third party purchased services.
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 March 31, 2003 and the
balance of the reserve as of March 31, 2003 are as follows:
RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGED TO BALANCE AT
(IN THOUSANDS) RESERVES MARCH 31, 2003
(IN THOUSANDS) (IN THOUSANDS)
-------------------------------------------------------------------------------------------------------------
Employee severance $1,280 $(1,041) $239
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 March 31, 2003 and June 30, 2002 was
$239,000 and $454,000, respectively. The change of $215,000 was a result of
payments during the first three quarters of fiscal year 2003.
OTHER INCOME AND EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------- ------------------
2003 2002 2003 2002
---- ---- ------ ----
(in thousands) (in thousands)
OTHER INCOME (EXPENSE)
Interest on tax settlement $ - $ - $1,125 $ -
Interest income 96 128 233 458
Interest expense (1) - (8) (1)
Exchange gain (loss) (39) 20 (47) (12)
---- ---- ------ ----
TOTAL OTHER INCOME $ 56 $148 $1,303 $445
==== ==== ====== ====
Overall financial results for the nine months ended March 31, 2003
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.
18
Excluding the interest on the tax settlement, total other income
decreased 62% and 60% during the three and nine months ended March 31, 2003,
respectively, compared to the three and nine months ended March 31, 2002. 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 March 31, 2003 and June 30, 2002 the "Currency translation
adjustment" balance included in the Company's balance sheet was $6.0 million and
$6.1 million, respectively. 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
19% and 17% of total revenue, for the three months ended March 31, 2003 and
March 31, 2002, respectively and 20% and 17% of total revenue for the nine
months ended March 31, 2003 and March 31, 2002, respectively. The Company
considers the business in the United Kingdom significant to its operations and
as of March 31, 2003 had no plans to sell or liquidate this portion of the
business. Therefore, the Company has not adjusted the balance sheet at March 31,
2003 related to the currency translation adjustment.
FOREIGN CURRENCY
For the three and nine months ended March 31, 2003, 40% and 45%,
respectively, of the Company's total revenue was from outside North America,
compared with 47% and 42% for the three and nine months ended March 31, 2002,
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. The strength in
foreign currencies, particularly the Euro, relative to the U.S. dollar
positively impacted the Company's revenues for the quarter and nine months ended
March 31, 2003 by approximately $350,000 and $800,000, respectively, as
compared to the prior period. For the three and nine months ended March 31,
2003, 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, 2003. 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 2002.
Accordingly, the deferred tax asset was fully reserved in the first quarter of
fiscal year 2002. See "Item 7.
19
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 $111,000 and $676,000 in the
three and nine months ended March 31, 2003, respectively. These provisions
represent taxes paid on revenue from sales in foreign countries.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003 cash and cash equivalents were $17.9 million,
compared with cash and cash equivalents of $19.3 million at June 30, 2002. The
$1.4 million decrease in cash and cash equivalents is principally due to $1.1
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 $1.1 million was used in operating activities during the
nine months ended March 31, 2003. The cash used in operating activities included
$2.2 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 a decrease in other accrued liabilities. The increase in
accounts receivable was primarily due to lower than expected cash receipts
during the third quarter of fiscal year 2003. Slow payments from a few of the
Company's international distributors, primarily in Latin America, and a few of
the Company's customers, principally related to implementation issues had an
impact on the Company's accounts receivable balance. The decrease in other
accrued liabilities was primarily due to lower royalty accruals relating to the
termination of the license for Essbase and a decrease in restructuring reserves
due to payments made during the nine months ended March 31, 2003. The Company
received a $1.0 million tax refund that was recognized during the third quarter
of fiscal year 2002 and included in prepaid expenses and other current assets,
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 nine
months ended March 31, 2003. The Company obtains most of its computer equipment
under operating leases. During the first nine months of fiscal year 2003, the
Company entered into new operating leases with aggregate minimum lease payment
obligations of $0.6 million. See Note N of Notes to Condensed Consolidated
Financial Statements. At March 31, 2003, the Company did not have any material
capital expenditure commitments.
Net cash of $0.4 million was provided by financing activities in the
nine months ended March 31, 2003 and consisted primarily of proceeds from stock
purchases under the Company's Employee Stock Purchase Plan.
Total assets were $45.1 million at March 31, 2003, compared with total
assets of $45.7 million at June 30, 2002. Working capital as of March 31, 2003
was $21.3 million, compared with $20.0 million as of June 30, 2002. The decrease
in total assets from June 30, 2002 to March 31, 2003 was primarily due to the
decreases in cash and cash equivalents. The increase in working capital from
June 30, 2002 to March 31, 2003 was primarily due to the increase in accounts
receivable during that period and a decrease in accrued liabilities.
20
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 March 31, 2003 under the credit agreement were $7 million, of
which none were outstanding. At June 30, 2002, none of the permitted borrowings
available were outstanding. As of March 31, 2003, the Company was in violation
of one of the covenants relating to the line of credit. The Company has obtained
a waiver for the violation at March 31, 2003.
As of March 31, 2003, the Company had $0.5 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 its present cash balances will be sufficient
to meet the Company's currently anticipated cash requirements for at least the
next twelve months. The foregoing statement is a "forward looking statement"
within the meaning of the Securities Exchange Act of 1934, as amended. The
extent to which such sources will be sufficient to meet the Company's
anticipated cash requirements is subject to a number of uncertainties, including
the ability of the Company's operations to generate sufficient cash to support
operations, and other uncertainties described in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Safe
Harbor Statement."
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, 2003 and June 30, 2002, the Company had forward
contracts of approximately $2.2 million and $2.5 million (notional amounts),
respectively, denominated in foreign currencies. The contracts outstanding at
March 31, 2003 mature through June 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 March 31,
2003 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 six foreign currencies, predominately the British pound, the Euro
and Japanese yen. A hypothetical 10 percent appreciation of the U.S. dollar from
March 31, 2003 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, 2003 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.
21
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 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.
22
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits included with this Form 10-Q are set forth on the Index to
Exhibits
(b) Reports on Form 8-K.
On February 14, 2003, 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 December 31, 2002.
23
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 15, 2003 COMSHARE, INCORPORATED
(Registrant)
/s/ Brian Jarzynski
----------------------------
Brian Jarzynski
Senior Vice President,
Chief Financial Officer and
Treasurer
24
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: May 15, 2003 /s/ Dennis G. Ganster
---------------------------
Dennis G. Ganster
Chief Executive Officer
(Principal Executive Officer)
25
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: May 15, 2003 /s/ Brian Jarzynski
---------------------------
Brian Jarzynski
Senior Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
26
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
27