10-Q 1 k67554e10-q.txt FORM 10-Q FOR PERIOD ENDED DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) ----- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) ----- OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____. COMMISSION FILE NUMBER 0-4096 COMSHARE, INCORPORATED (Exact name of registrant as specified in its charter) MICHIGAN 38-1804887 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 555 BRIARWOOD CIRCLE, ANN ARBOR, MICHIGAN 48108 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (734) 994-4800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of JANUARY 31, 2002. OUTSTANDING AT CLASS OF COMMON STOCK JANUARY 31, 2002 --------------------- ---------------- $1.00 PAR VALUE 10,263,508 SHARES
1 COMSHARE, INCORPORATED INDEX
Page No. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Operations For the Three and Six Months Ended December 31, 2001 and 2000...............................3 Consolidated Statements of Comprehensive Income For the Three and Six Months Ended December 31, 2001 and 2000...............................4 Condensed Consolidated Balance Sheets as of December 31, 2001 and June 30, 2001.........................................................5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2001 and 2000.................................................7 Notes to Condensed Consolidated Financial Statements............................................8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................................................12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................19 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................................19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...........................................................19 Signature................................................................................................20 INDEX TO EXHIBITS........................................................................................21
2 PART I. - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS COMSHARE, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited; in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 ---- ---- ---- ---- REVENUE Software licenses $ 4,094 $ 5,308 $ 8,187 $ 10,011 Software maintenance 6,006 5,899 11,756 11,740 Implementation, consulting and other services 4,181 3,618 9,354 8,517 -------- -------- -------- -------- TOTAL REVENUE 14,281 14,825 29,297 30,268 COSTS AND EXPENSES Selling and marketing 5,881 5,803 11,356 11,264 Cost of revenue and support 6,044 5,951 12,508 12,732 Internal research and product development 2,305 2,085 4,600 4,141 General and administrative 1,198 1,290 2,687 2,722 Restructuring 1,280 - 1,280 - -------- -------- -------- -------- TOTAL COSTS AND EXPENSES 16,708 15,129 32,431 30,859 -------- -------- -------- -------- LOSS FROM OPERATIONS (2,427) (304) (3,134) (591) OTHER INCOME (EXPENSE) Interest income 138 375 330 802 Interest expense - (2) (1) (4) Exchange loss (18) (61) (32) (76) -------- -------- -------- -------- TOTAL OTHER INCOME 120 312 297 722 INCOME (LOSS) BEFORE TAXES (2,307) 8 (2,837) 131 Provision for income taxes - 3 8,196 48 -------- -------- -------- -------- NET INCOME (LOSS) $ (2,307) $ 5 $(11,033) $ 83 ======== ======== ======== ======== SHARES USED IN BASIC EPS COMPUTATION 10,118 9,790 10,115 9,785 ======== ======== ======== ======== SHARES USED IN DILUTED EPS COMPUTATION 10,118 9,833 10,115 9,926 ======== ======== ======== ======== NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $ (0.23) $ 0.00 $ (1.09) $ 0.01 ======== ======== ======== ======== NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $ (0.23) $ 0.00 $ (1.09) $ 0.01 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 3 COMSHARE, INCORPORATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited, in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net income (loss) $ (2,307) $ 5 $(11,033) $ 83 Other comprehensive income (loss): Currency translation adjustment (28) 276 (94) (154) -------- -------- -------- -------- COMPREHENSIVE INCOME (LOSS) $ (2,335) $ 281 $(11,127) $ (71) ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 4 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 31, June 30, 2001 2001 ---- ---- ASSETS (unaudited) CURRENT ASSETS Cash and cash equivalents $19,322 $24,106 Accounts receivable, net 18,663 19,541 Deferred income taxes - 767 Prepaid expenses and other current assets 1,831 1,411 ------- ------- TOTAL CURRENT ASSETS 39,816 45,825 Property and equipment, at cost Computers & other equipment 6,970 6,716 Leasehold improvements 2,724 2,649 ------- ------- 9,694 9,365 Less - Accumulated depreciation 8,291 7,955 ------- ------- Property and equipment, net 1,403 1,410 Deferred income taxes - 7,355 Other assets 4,599 4,687 ------- ------- TOTAL ASSETS $45,818 $59,277 ======= =======
See accompanying notes to condensed consolidated financial statements. 5 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, June 30, 2001 2001 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) CURRENT LIABILITIES Accounts payable $ 2,187 $ 3,047 Accrued liabilities: Payroll 1,754 2,379 Taxes 961 1,370 Other 2,935 3,537 -------- -------- Total accrued liabilities 5,650 7,286 Deferred revenue 10,977 11,166 -------- -------- TOTAL CURRENT LIABILITIES 18,814 21,499 Long-term debt 64 164 Other liabilities 5,999 5,950 SHAREHOLDERS' EQUITY Capital stock: Preferred stock, no par value; authorized 5,000,000 shares; none issued - - Common stock, $1.00 par value; authorized 20,000,000 shares; outstanding 10,263,508 shares as of December 31, 2001 and 10,104,626 shares as of June 30, 2001 10,264 10,105 Capital contributed in excess of par value 39,490 39,244 Retained deficit (18,757) (7,724) Accumulated other comprehensive income: Pension liability, net of tax (4,084) (4,084) Cumulative translation adjustment (5,972) (5,877) -------- -------- TOTAL SHAREHOLDERS' EQUITY 20,941 31,664 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,818 $ 59,277 ======== ========
See accompanying notes to condensed consolidated financial statements. 6 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited; in thousands)
SIX MONTHS ENDED DECEMBER 31, ----------------------------- 2001 2000 ---- ---- OPERATING ACTIVITIES Net income (loss) $(11,033) $ 83 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 380 495 Deferred income taxes 8,122 (547) Changes in operating assets and liabilities: Accounts receivable 955 (2,346) Prepaid expenses and other assets (360) (278) Accounts payable (853) (24) Accrued liabilities (1,592) (3,204) Deferred revenue (124) (944) Other liabilities 49 (79) -------- -------- NET CASH USED IN OPERATING ACTIVITIES (4,456) (6,844) INVESTING ACTIVITIES Payments for property and equipment (205) (104) Other (109) (138) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (314) (242) FINANCING ACTIVITIES Net repayments under debt agreements, capital lease agreements and notes payable (100) (473) Other 403 397 -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 303 (76) Effect of exchange rate changes (317) (181) -------- -------- NET DECREASE IN CASH (4,784) (7,343) CASH AT BEGINNING OF PERIOD 24,106 29,506 -------- -------- CASH AT END OF PERIOD $ 19,322 $ 22,163 ======== ======== SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 1 $ 4 ======== ======== Cash paid for income taxes $ 430 $ 609 ======== ========
See accompanying notes to condensed consolidated financial statements. 7 COMSHARE, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - GENERAL INFORMATION The condensed consolidated financial statements included herein have been prepared by Comshare, Incorporated (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's most recent Annual Report on Form 10-K/A. Certain amounts in the fiscal 2001 financial statements have been reclassified to conform with fiscal 2002 presentations. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, required to present fairly its consolidated statements of operations and the consolidated statements of comprehensive income for the three and six months ended December 31, 2001 and 2000, the consolidated balance sheets as of December 31, 2001 and June 30, 2001, and the consolidated statements of cash flows for the six months ended December 31, 2001 and 2000. The results of operations for the three and six months ended December 31, 2001 and 2000 are not necessarily indicative of the results to be expected in future quarters or the full fiscal year. The software industry is generally characterized by seasonal trends. NOTE B - COMPUTER SOFTWARE Product upgrades for the Company's products have been released regularly with an almost continuous product development cycle. Based on these continuous product life cycles, the time between establishing technological feasibility and general release to the public is very short. As a result, software costs qualifying for capitalization are not significant. Accordingly, the Company does not capitalize software development costs and does not anticipate capitalization of software costs in future periods. NOTE C - RESTRUCTURING In October 2001, the Company implemented a restructuring plan to reduce personnel costs, to bring costs more in line with revenues and improve financial performance of the Company. Restructuring and related charges of $1.3 million were expensed in the quarter ended December 31, 2001. Employee groups impacted by the restructuring include finance and administration, product development, marketing, and field operations, principally in the Company's offices in the United States and also in the Company's United Kingdom office. Approximately 32 people or 9% of the worldwide headcount were eliminated by this restructuring plan. All separations were completed prior to December 31, 2001.
---------------------------------------------------------------------------------------------------------- RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGES TO RESERVES BALANCE AT (IN THOUSANDS) (IN THOUSANDS) DECEMBER 31, 2001 (IN THOUSANDS) ---------------------------------------------------------------------------------------------------------- Employee severance $1,280 $(489) $791 ----------------------------------------------------------------------------------------------------------
Total cash expenditures relating to the restructuring charge are expected to be $1.3 million, with approximately $0.5 million paid prior to December 31, 2001. Such cash expenditures are expected to be funded from the Company's available cash, and be paid through the second quarter of the 2003 fiscal year, principally during the remainder of fiscal year 2002. In March 2001, the Company implemented a restructuring plan to reduce personnel costs. Restructuring and related charges of $0.9 million were expensed in the quarter ended March 31, 2001. Employee groups impacted by the restructuring include marketing and field operations in the Company's North American and United Kingdom offices. A total of thirteen people or 4% of the worldwide headcount were eliminated by this restructuring plan. 8 COMSHARE, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
---------------------------------------------------------------------------------------------------------- RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGES TO RESERVES BALANCE AT (IN THOUSANDS) (IN THOUSANDS) DECEMBER 31, 2001 (IN THOUSANDS) ---------------------------------------------------------------------------------------------------------- Employee severance $892 $(367) $525 ----------------------------------------------------------------------------------------------------------
As of December 31, 2001, the Company had $1.3 million of accruals remaining from restructuring charges. The entire amount is related to employee severance agreements. NOTE D - BORROWINGS The Company has a $10 million credit agreement which expires on September 30, 2003. Borrowings are secured by accounts receivable and the credit agreement contains covenants regarding, among other things, earnings leverage, net worth and payment of dividends. Under the terms of the credit agreement, the Company is not permitted to pay cash dividends on its common stock. Borrowings under this credit agreement were approximately $0.1 million and total available borrowings were $10 million at December 31, 2001. Borrowings available at any time are based on the lower of $10 million or a percentage of worldwide eligible accounts receivable and cash. At December 31, 2001, the interest rate on borrowings denominated in Japanese yen, which was used to hedge receivables, was 1.84%. NOTE E - FINANCIAL INSTRUMENTS The Company, at various times, enters into forward exchange contracts to hedge certain exposures related to identifiable foreign currency transactions that are relatively certain as to both timing and amount. On July 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, as amended by SFAS No. 137 and SFAS No. 138 and has quantified the impact, determining that there was no material effect on the financial statements. The Company uses derivative financial instruments to manage its exposures to fluctuations in foreign exchange rates. The use of these financial instruments mitigates the Company's exposure to these risks with the intent of reducing the risks and variability of the Company's operating results. Initially, upon adoption of SFAS No. 133, and prospectively, on the date a derivative contract is entered into, the Company designates the derivative as a hedge. The ineffective portion of the hedge is recorded in earnings and reflected in the consolidated statement of operations as exchange gain or loss within other income (expense). The Company formally documents its hedge relationships, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. At December 31, 2001 and June 30, 2001, the Company had forward foreign currency exchange contracts outstanding of approximately $1.2 million and $1.7 million (notional amounts), respectively, denominated in foreign currencies. The contracts outstanding at December 31, 2001 mature at various dates through March 15, 2002 and are intended to hedge various foreign currency commitments due from the Company's distributors. Due to the short-term nature of these financial instruments, the fair value of these contracts is not materially different than their notional amounts at December 31, 2001 and June 30, 2001. NOTE F - PROVISION FOR INCOME TAXES The Company recognized no tax benefit associated with the losses incurred in the three month period ended December 31, 2001. The Company fully reserved its deferred tax asset during the quarter ended September 30, 2001, resulting in a provision for income taxes of $8.2 million. Realization of deferred tax assets associated with the Company's future deductible temporary differences, net of operating loss carryforwards and tax credit carryforwards, is dependent upon generating sufficient taxable income prior to their expiration. Management now believes it is not likely that the deferred tax assets previously recognized will be realized through future taxable income generated by using a tax strategy available to the Company. This belief is based on a determination that the tax strategy is no longer consistent with the Company's business strategy. The Company's deferred tax assets were previously supported through the valuation of non-core and legacy product lines. Management believed that the sale of those product lines would have resulted in sufficient taxable income to realize the deferred tax assets. The Company's current business strategy, however, is not consistent with the sale of such product lines and, as a result, such tax strategies are no longer available. This change in the Company's business strategy was due to the impact of the continued decline in revenues from legacy product lines experienced in the quarter ended September 30, 2001, the current economic downturn and reduced market valuations in the technology sector. 9 COMSHARE, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE G - LEASES The Company leases office space, transportation and computer equipment under non-cancelable operating leases. Initial lease terms vary in length and several of the leases contain renewal options. Future minimum lease payments under all non-cancelable operating leases as of December 31, 2001 are as follows (in thousands):
FISCAL YEARS ENDING JUNE 30, -------------------------------------------------------------- 2002 $ 2,443 2003 4,129 2004 3,572 2005 2,613 2006 1,183 Thereafter 1,582 ------------- Total minimum payments $ 15,522 =============
Minimum payments under non-cancelable operating leases have not been reduced by minimum sublease rentals of $5.3 million due in the future under non-cancelable subleases. NOTE H - SEGMENT REPORTING The Company has only one reportable segment - the development, marketing and support of financial analytic applications software for management planning and control. Revenue is derived from the licensing of software and the provision of related services, which include product implementation, consulting, training and support. No single customer accounted for more than 10% of the Company's total revenue in the three and six months ended December 31, 2001 and 2000. In addition, the Company is not dependent on any single customer or group of customers. Geographic segment information is as follows: 10 COMSHARE, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2001 2000 2001 2000 ------------ ----------- -------------- ------------ REVENUE FROM EXTERNAL CUSTOMERS: United States $ 8,489 $ 8,025 $ 17,590 $ 16,886 United Kingdom 2,327 3,082 4,898 6,001 Other countries 3,465 3,718 6,809 7,381 ------------ ----------- -------------- ------------ TOTAL REVENUE $14,281 $14,825 $ 29,297 $ 30,268 ============ =========== ============== ============ OPERATING INCOME (LOSS): United States $(2,263) $(1,806) $ (3,602) $(1,558) United Kingdom 1,661 1,705 2,830 1,552 Other countries 2,143 2,390 4,338 4,651 ------------ ----------- -------------- ------------ TOTAL OPERATING INCOME 1,541 2,289 3,566 4,645 Unallocated expenses (3,848) (2,281) (6,403) (4,514) ------------ ----------- -------------- ------------ INCOME (LOSS) BEFORE TAXES $(2,307) $ 8 $ (2,837) $ 131 ============ =========== ============== ============ DECEMBER 31, June 30, 2001 2001 ------------ ----------- IDENTIFIABLE ASSETS: United States $38,460 $50,511 United Kingdom and other countries 7,358 8,766 ------------ ----------- TOTAL IDENTIFIABLE ASSETS $45,818 $59,277 ============ ===========
Unallocated expenses consist of general corporate expenses, internal research and product development expenses, interest expense and interest income. 11 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis sets forth information for the three and six months ended December 31, 2001 compared to the three and six months ended December 31, 2000. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain financial data as a percentage of total revenue.
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------- -------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- REVENUE Software licenses 28.7 % 35.8 % 28.0 % 33.1 % Software maintenance 42.0 39.8 40.1 38.8 Implementation, consulting and other services 29.3 24.4 31.9 28.1 ----------- -------- --------- ---------- TOTAL REVENUE 100.0 100.0 100.0 100.0 COSTS AND EXPENSES Selling and marketing 41.2 39.2 38.7 37.2 Cost of revenue and support 42.3 40.1 42.7 42.1 Internal research and product development 16.1 14.1 15.7 13.7 General and administrative 8.4 8.7 9.2 9.0 Restructuring and unusual 9.0 - 4.4 - ----------- -------- --------- ---------- TOTAL COSTS AND EXPENSES 117.0 102.1 110.7 102.0 LOSS FROM OPERATIONS (17.0) (2.1) (10.7) (2.0) OTHER INCOME (EXPENSE) Interest income 1.0 2.5 1.1 2.7 Interest expense - - - 0.0 Exchange loss (0.1) (0.4) (0.1) (0.2) ----------- -------- --------- ---------- TOTAL OTHER INCOME 0.9 2.1 1.0 2.5 INCOME (LOSS) BEFORE TAXES (16.1) (0.0) (9.7) 0.5 Provision for income taxes - 0.0 28.0 0.2 ----------- -------- --------- ---------- NET INCOME (LOSS) (16.1) % (0.0) % (37.7) % 0.3 % =========== ======== ========= ==========
12 REVENUE The following table sets forth revenue for the Company for the periods indicated.
THREE MONTHS ENDED PERCENT SIX MONTHS ENDED PERCENT DECEMBER 31, CHANGE DECEMBER 31, CHANGE ----------------------- -------- ----------------------- -------- 2001 2000 2001 2000 ---- ---- ---- ---- (in thousands) (in thousands) MPC REVENUE Software licenses $ 3,466 $ 3,740 (7.3) % $ 7,014 $ 6,962 0.7 % Software maintenance 3,407 3,114 9.4 6,724 5,802 15.9 Implementation, consulting and other services 3,971 3,395 17.0 8,877 7,774 14.2 ---------- ---------- ---------- ---------- TOTAL MPC REVENUE $ 10,844 $ 10,249 5.8 % $ 22,615 $ 20,538 10.1 % ========== ========== ========== ========== LEGACY REVENUE Software licenses $ 628 $ 1,568 (59.9) % $ 1,173 $ 3,049 (61.5)% Software maintenance 2,599 2,785 (6.7) 5,032 5,938 (15.3) Implementation, consulting and other services 210 223 (5.8) 477 743 (35.8) ---------- ---------- ---------- ---------- TOTAL LEGACY REVENUE $ 3,437 $ 4,576 (24.9) % $ 6,682 $ 9,730 (31.3)% ========== ========== ========== ========== TOTAL REVENUE Software licenses $ 4,094 $ 5,308 (22.9) % $ 8,187 $ 10,011 (18.2)% Software maintenance 6,006 5,899 1.8 11,756 11,740 0.1 Implementation, consulting and other services 4,181 3,618 15.6 9,354 8,517 9.8 ---------- ---------- ---------- ---------- TOTAL REVENUE $ 14,281 $ 14,825 (3.7) % $ 29,297 $ 30,268 (3.2)% ========== ========== ========== ==========
The decline in total revenue of 4% in the quarter ended December 31, 2001 from the quarter ended December 31, 2000 was primarily due to a 25% decline in revenue from the Company's older desktop ("legacy") products, offset by a 6% increase in revenue from the Company's management planning and control software applications ("MPC"). The total revenue decline of 3% for the six months ended December 31, 2001 was primarily due to a 10% increase in MPC revenue, offset by a decline of 31% in the Company's legacy products. The Company does not expect total revenues for fiscal year 2002 to exceed those of fiscal year 2001. MPC revenue was $10.8 million for the quarter ended December 31, 2001, representing 76% of total revenue, and $22.6 million for the six months ended December 31, 2001, representing 77% of total revenue. The Company's MPC suite of software applications is comprised of Comshare MPC (formerly BudgetPLUS), Comshare FDC and Decision. The release of a new version of Comshare MPC, version 4.5, is currently scheduled for March 2002. The Company's expectation as to total revenue for fiscal year 2002 is a "forward looking statement" within the meaning of the Securities Exchange Act of 1934, as amended. Such expectations are subject to a number of uncertainties described in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement." The 23% decline in software license fees for the second quarter of fiscal year 2002 from the quarter ended December 31, 2000 was primarily due to a 60% decline in license fees from the Company's legacy products, from $1.6 million to $0.6 million, for the quarter ended December 31, 2001 versus the quarter ended December 31, 2000. MPC license fees represented 85% of total license fees for the quarter ended December 31, 2001, versus 70% for the same period in fiscal year 2001. Total second quarter license fees were negatively impacted by the difficult economic conditions that continue to affect the Company's primary markets. License fees in the Company's direct 13 operations, which include North America and the United Kingdom, declined 22% to $2.7 million for the quarter ended December 31, 2001. License fees from the Company's distributor operations declined 26% to $1.3 million for the same time period, primarily reflecting a decline in the sales of the Company's legacy products by distributors and global economic uncertainty. The 18% decline in software license fees for the six months ended December 31, 2001 was primarily due to the decline in license fees from the Company's legacy products of $1.8 million from the six months ended December 31, 2000. MPC license fees represented 86% of total license fees for the six months ended December 31, 2001, versus 70% for the same period in fiscal year 2001. Software maintenance revenues increased 2% in the quarter ended December 31, 2001 from the three months ended December 31, 2000 as a result of an increase of 9% in MPC product maintenance, mostly offset by a decline of 7% in the legacy maintenance, due to mainframe and desktop maintenance cancellations and continued customer migration to other platforms. MPC product maintenance accounted for 57% of total maintenance revenue for the three months ended December 31, 2001, versus 53% for the same period in fiscal year 2001. The growth in MPC product maintenance revenue follows from growth in Comshare MPC licensing in the prior fiscal year. Software maintenance revenues remained relatively flat from the six months ended December 31, 2000 to the same period ended December 31, 2001, reflecting growth in the Company's MPC products, offset by a decline in maintenance revenues for legacy products. Implementation, consulting and other services revenue was $4.2 million and $9.4 million for the three and six months ended December 31, 2001, respectively, compared to $3.6 million and $8.5 million for the three and six months ended December 31, 2000, respectively. The increase in implementation services revenue from the three months ended December 31, 2001 and the first six months of fiscal year 2001 to the same periods in fiscal year 2002 was primarily due to the growth in MPC licensing in the prior quarters and a number of large projects currently underway. During each of the three and six month periods ended December 31, 2001, 95% of total implementation services revenue was related to MPC products, primarily the Comshare MPC product. COSTS AND EXPENSES
THREE MONTHS ENDED PERCENT SIX MONTHS ENDED PERCENT DECEMBER 31, CHANGE DECEMBER 31, CHANGE ------------------------ --------- ---------------------- --------- 2001 2000 2001 2000 ---- ---- ---- ---- (in thousands) (in thousands) COSTS AND EXPENSES Selling and marketing $ 5,881 $ 5,803 1.3 % $ 11,356 $ 11,264 0.8 % Cost of revenue and support 6,044 5,951 1.6 12,508 12,732 (1.8) Internal research and product development 2,305 2,085 10.6 4,600 4,141 11.1 General and administrative 1,198 1,290 (7.1) 2,687 2,722 (1.3) Restructuring and unusual 1,280 - - 1,280 - - ---------- ---------- ---------- ---------- TOTAL COSTS AND EXPENSES $ 16,708 $ 15,129 10.4 % $ 32,431 $ 30,859 5.1 % ========== ========== ========== ==========
Total costs and expenses increased 10% and 5% for the three and six months ended December 31, 2001, respectively, compared to the prior year. This increase was primarily due to restructuring charges taken during the second quarter of fiscal year 2002. Selling and marketing expenses remained relatively flat for the three and six months ended December 31, 2001 and 2000. Cost of revenue and support expenses increased 2% and decreased 2% for the three and six months ended December 21, 2001, respectively, compared to the prior year. The increase during the three month period was primarily due to additional purchased professional services to support implementation, consulting and other services revenue, offset by a decrease in royalty expenses resulting from lower sales of Hyperion Solutions Corporation's Essbase database. The decrease during the six month period was primarily due to the decrease in royalty expenses and, to a lesser extent, a reduction in cost of goods sold due to lower license fees for the first quarter of 2002. The 14 Company licenses the Essbase database from Hyperion under an agreement that expires in December 2002, and resells it in connection with many of its MPC products. Internal research and product development costs increased 11% to $2.3 million for the quarter ended December 31, 2001, from $2.1 million for the quarter ended December 31, 2000. Internal research and product development costs for the six month period ended December 31, 2001 were $4.6 million, representing an 11% increase over the same period a year ago. The increases in both periods were primarily due to increased employee costs attributable to additional staffing to support increased product development activity. General and administrative costs decreased 7% and 1% for the three and six months ended December 31, 2001, respectively, as compared to the same periods in fiscal year 2001, primarily due to reduced employee costs related to the second quarter restructuring and lower purchased services expenses, offset by increased general facility costs. During the second quarter of fiscal 2002, the Company also benefited from a non-recurring credit from an insurance company. In October 2001, the Company implemented a restructuring plan to reduce personnel costs, to bring costs more in line with revenues and improve financial performance of the Company. The restructuring plan was undertaken in response to the slowdown in the economy, which resulted in a decline in the Company's revenue in the first quarter of the 2002 fiscal year. Restructuring and related charges of $1.3 million were expensed in the quarter ended December 31, 2001. The restructuring charge consisted entirely of employee severance costs. The amounts reserved, amounts charged against the reserve as of December 31, 2001 and the balance of the reserve as of December 31, 2001 are as follows:
---------------------------------------------------------------------------------------------------------- RESTRUCTURING COMPONENTS BEGINNING RESERVE CHARGES TO RESERVES BALANCE AT (IN THOUSANDS) (IN THOUSANDS) DECEMBER 31, 2001 (IN THOUSANDS) ---------------------------------------------------------------------------------------------------------- Employee severance $1,280 $(489) $791 ----------------------------------------------------------------------------------------------------------
Employee groups impacted by the restructuring include finance and administration, product development, marketing, and field operations, principally in the Company's offices in the United States and also in the Company's United Kingdom office. A total of approximately 32 people, or 9% of the Company's worldwide headcount, were eliminated by this restructuring plan. All separations were completed prior to December 31, 2002. Total cash expenditures relating to the restructuring charge are expected to be $1.3 million, funded from the Company's available cash. Cash expenditures are expected to be paid through the second quarter of the 2003 fiscal year, principally during the remainder of fiscal year 2002. As of December 31, 2001, remaining cash expenditures are estimated to be approximately $0.8 million. The Company substantially completed the initiatives in its December 2001 restructuring plan during the second quarter of fiscal year 2002 and began to partially realize the benefits of this plan in the second quarter, with the full benefit of the plan to be realized by the third quarter of fiscal 2002. The Company expects the restructuring charge to have the impact of reducing employee related costs and third party expenses, and is part of cost reduction actions aimed at reducing annual operating costs by $2.5 million, primarily through personnel reductions, attrition and selected third party cost cuts. The Company does not expect personnel reductions to have a material negative effect on its operations because they were made in areas where the Company believes fewer employees are required to support the Company's current level of revenues. The Company's expectation as to the impact of its cost reduction actions and the impact of those actions on its operations are "forward looking statements" within the meaning of the Securities Exchange Act of 1934, as amended. Such expectations are subject to a number of uncertainties described in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement." 15 OTHER INCOME AND EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------- ---------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (in thousands) (in thousands) OTHER INCOME (EXPENSE) Interest income $ 138 $ 375 $ 330 $ 802 Interest expense - (2) (1) (4) Exchange loss (18) (61) (32) (76) --------- ---------- ---------- --------- TOTAL OTHER INCOME $ 120 $ 312 $ 297 $ 722 ========= ========== ========== =========
Lower interest rates on short-term investments and lower average cash balances during the three and six months ended December 31, 2001 resulted in decreased interest income during those periods, compared to the three and six months ended December 31, 2000. FOREIGN CURRENCY For the three and six months ended December 31, 2001, 41% and 40%, respectively, of the Company's total revenue was from outside North America compared with 46% and 44% for the three and six months ended December 31, 2000, respectively. Most of the Company's international revenue is denominated in foreign currencies. The Company recognizes currency transaction gains and losses in the period of occurrence. As currency rates are constantly changing, these gains and losses can, at times, fluctuate greatly. The Company's future operating results may be adversely impacted by the overall strengthening of the U.S. dollar against foreign currencies of countries where the Company conducts business; conversely, future operating results may be favorably impacted by an overall weakening of the U.S. dollar against foreign currencies. For the three and six months ended December 31, 2001, foreign currency fluctuations did not have a material impact on the Company's revenues, operating expenses or net income. The Company had several forward exchange contracts totaling a notional amount of $1.2 million, outstanding at December 31, 2001. See Note E of Notes to Condensed Consolidated Financial Statements. PROVISION FOR INCOME TAXES The Company recognized no tax benefit associated with the losses incurred in the three months ended December 31, 2001. The Company fully reserved its deferred tax asset during the quarter ended September 30, 2001, resulting in a provision for income taxes of $8.2 million. Realization of deferred tax assets associated with the Company's future deductible temporary differences, net of operating loss carryforwards and tax credit carryforwards, is dependent upon generating sufficient taxable income prior to their expiration. Management now believes it is not likely that the deferred tax assets previously recognized will be realized through future taxable income generated by using a tax strategy available to the Company. This belief is based on a determination that the tax strategy is no longer consistent with the Company's business strategy. The Company's deferred tax assets were previously supported through the valuation of non-core and legacy product lines. Management believed that the sale of those product lines would have resulted in sufficient taxable income to realize the deferred tax assets. The Company's current business strategy, however, is not consistent with the sale of such product lines and, as a result, such tax strategies are no longer available. This change in the Company's business strategy was due to the impact of the continued decline in revenues from legacy product lines experienced in the quarter ended September 30, 2001, the current economic downturn and reduced market valuations in the technology sector. 16 LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001 cash and cash equivalents were $19.3 million, compared with cash and cash equivalents of $24.1 million at June 30, 2001. The $4.8 million decrease in cash and cash equivalents is principally due to $4.5 million used in operating activities. Net cash of $4.5 million was used in operating activities in the six months ended December 31, 2001. The cash used in operating activities consisted primarily of a net loss of $11.0 million adjusted for non-cash items of $8.5 million, including the write-down of the Company's deferred tax asset, and $2.0 million used in working capital and other activities. Net cash used in working capital and other activities resulted primarily from a decrease in accrued payroll, partially offset by a decrease in accounts receivable. The decrease in accrued payroll is primarily due to payment of incentive accruals related to sales in the fourth quarter of fiscal 2001. The accounts receivable balance decreased primarily as a result of the decline in license fee and maintenance revenue for the quarter combined with an increase in cash collections Net cash of $0.3 million was used in investing activities for the six months ended December 31, 2001. The Company obtains most of its computer equipment under operating leases. During the first six months of fiscal year 2002, the Company entered into new operating leases with aggregate minimum lease payment obligations of $0.3 million. See Note G of Notes to Condensed Consolidated Financial Statements. At December 31, 2001, the Company did not have any material capital expenditure commitments. Net cash of $0.3 million was provided by financing activities in the six months ended December 31, 2001 and consisted primarily of proceeds from stock purchases under the Company's Employee Stock Purchase Plan. Total assets were $45.8 million at December 31, 2001, compared with total assets of $59.3 million at June 30, 2001. Working capital as of December 31, 2001 was $21.0 million, compared with $24.3 million as of June 30, 2001. The decrease in total assets from June 30, 2001 to December 31, 2001 was primarily due to the write-down of the deferred tax asset by $8.2 million and the decline in cash and cash equivalents during the six months ended December 31, 2001. The decrease in working capital from June 30, 2001 to December 31, 2001 was primarily due to the decline in cash and cash equivalents during that period. The Company has a $10 million credit agreement, which expires on September 30, 2003. Borrowings are secured by accounts receivable and the credit agreement contains covenants regarding, among other things, earnings leverage, net worth and payment of dividends. Under the terms of the credit agreement, the Company is not permitted to pay cash dividends on its common stock. Borrowings under this credit agreement were approximately $0.1 million and total available borrowings were $10 million at December 31, 2001. Borrowings available at any time are based on the lower of $10 million or a percentage of worldwide eligible accounts receivable and cash. At December 31, 2001, the interest rate on borrowings denominated in Japanese yen, which were used to hedge receivables, was 1.84%. As of December 31, 2001, the Company had $1.3 million of accruals remaining for cash restructuring expenses payable through the second quarter of the 2003 fiscal year, principally during the remainder of fiscal year 2002. The Company believes that the combination of present cash balances and amounts available under credit facilities will be sufficient to meet the Company's currently anticipated cash requirements for at least the next twelve months. The foregoing statement is a "forward looking statement" within the meaning of the Securities Exchange Act of 1934, as amended. The extent to which such sources will be sufficient to meet the Company's anticipated cash requirements is subject to a number of uncertainties, including the ability of the Company's operations to generate sufficient cash to support operations, and other uncertainties described in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Safe Harbor Statement." 17 MARKET SENSITIVITY ANALYSIS The Company is exposed to market risk from changes in foreign exchange and interest rates. To reduce the risk from changes in foreign exchange rates, the Company selectively uses financial instruments. The Company does not hold or issue financial instruments for trading purposes. The Company, at various times, denominates borrowings in foreign currencies and enters into forward exchange contracts to hedge exposures related to foreign currency transactions. The Company does not use any other types of derivatives to hedge such exposures nor does it speculate in foreign currency. In general, the Company uses forward exchange contracts to hedge against large selective transactions that present the most exposure to exchange rate fluctuations. At December 31, 2001 and June 30, 2001, the Company had forward contracts of approximately $1.2 million and $1.7 million (notional amounts), respectively, denominated in foreign currencies. The contracts outstanding at December 31, 2001 mature through March 15, 2002 and are intended to hedge various foreign currency commitments due from the Company's distributors. Due to the short-term nature of these financial instruments, the fair value of these contracts is not materially different than their notional amounts at December 31, 2001 and June 30, 2001. Gains and losses on the forward contracts are largely offset by gains and losses on the underlying exposure. The Company conducts business in approximately 6 foreign currencies, predominately British pounds, the Euro and Japanese yen. A hypothetical 10 percent appreciation of the U.S. dollar from December 31, 2001 market rates would increase the unrealized value of the Company's forward contracts and a hypothetical 10 percent depreciation of the U.S. dollar from December 31, 2001 market rates would decrease the unrealized value of the Company's forward contracts. In either scenario, the gains or losses on the forward contracts would be largely offset by the gains or losses on the underlying transactions, and so would have an immaterial impact on the Company's results of operations. The Company maintains its cash and cash equivalents in highly liquid investments with maturities of ninety days or less. The Company has the ability to hold its fixed income investments until maturity, and therefore the Company would not expect its operating results or cash flows to be affected to any significant degree by the effect of a hypothetical 10 percent change in market interest rates on its cash and cash equivalents. SAFE HARBOR STATEMENT Certain information in this Form 10-Q Report contains "forward looking statements" within the meaning of the Securities Exchange Act of 1934, as amended, including those concerning the Company's future results, new market and business opportunities, strategy, the impact of cost reduction actions and product releases. Actual results could differ materially from those in the forward looking statements due to a number of uncertainties, including, but not limited to, the demand for the Company's products and services; the size, timing and recognition of revenue from significant orders; the impact that cost reduction actions may have on the Company's revenues and operating results; increased competition and pricing pressures from competitors; the Company's success in and expense associated with developing, introducing and shipping new products; new product introductions and announcements by the Company's competitors; the level of interest and success of the Company's distributors in marketing and selling the Company's products; changes in Company strategy; product life cycles; the cost and continued availability of third party software and technology incorporated into the Company's products, including the impact of expiration of the license for Essbase in December 2002; the impact of rapid technological advances, evolving industry standards and changes in customer requirements, including the impact on the Company's revenues of Microsoft's OLAP database; the overall competition for key employees; cancellations of maintenance and support agreements; software defects; changes in operating expenses; fluctuations in foreign exchange rates; and economic conditions generally or in specific industry segments. The level of annual expense reductions resulting from cost reduction actions may vary due to a number of factors, including unanticipated increases in costs resulting from such actions. In addition, a significant portion of the Company's revenue in any quarter is typically derived from non-recurring license fees, a substantial portion of which is booked in the last month of a quarter. Since the purchase of 18 the Company's products is relatively discretionary and generally involves a significant commitment of capital, in the event of any downturn in any potential customer's business or the economy in general, purchases of the Company's products may be deferred or cancelled. Further, the Company's expense levels are based, in part, on its expectations as to future revenue and a significant portion of the Company's expenses do not vary with revenue. As a result, if revenue is below expectations, results of operations are likely to be materially, adversely affected. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on November 19, 2001. There were three proposals voted on at the meeting, which were: the election of seven directors, an amendment to the Employee Stock Purchase Plan and an amendment to the Directors Stock Purchase Plan. The following table sets forth the results of the votes on these matters. All director nominees were elected and all Plan amendments were approved. Election of Director Nominees:
Votes For Votes Withheld Broker Non-Votes --------- -------------- ---------------- Geoffrey B. Bloom 7,359,013 1,284,447 - Daniel T. Carroll 7,359,370 1,284,090 - Richard L. Crandall 7,352,432 1,291,028 - Dennis G. Ganster 7,285,799 1,357,661 - Kathryn A. Jehle 7,339,798 1,303,662 - Alan G. Merten 7,357,469 1,285,991 - John F. Rockart 7,360,872 1,282,588 -
Approval of the amendment to the Employee Stock Purchase Plan:
Votes For Votes Against Abstained Broker Non-Votes --------- ------------- --------- ---------------- 3,701,475 1,564,390 33,002 3,344,592
Approval of the amendment to the Directors Stock Purchase Plan:
Votes For Votes Against Abstained Broker Non-Votes --------- ------------- --------- ---------------- 7,069,617 1,536,572 37,271 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits included with this Form 10-Q are set forth on the Index to Exhibits. (b) Reports on Form 8-K. On October 23, 2001, the Company filed a Form 8-K, making certain Regulation FD disclosure under Item 9. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: FEBRUARY 13, 2002 COMSHARE, INCORPORATED (Registrant) /s/ Brian Jarzynski ---------------------------- Brian Jarzynski Vice President, Chief Financial Officer and Treasurer 20 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION 10.01 Fourth Amendment to Employee Stock Purchase Plan 10.02 Third Amendment to Director Stock Option Plan 21