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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-15578
CONCERTO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware No. 02-0364368
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
6 Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices) (Zip Code)
Telephone: (978) 952-0200
(Registrant's telephone number, including area code)
----------------------------------
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 (or for such shorter period that the
registrant was required to file such reports), 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: Common Stock, par value $.10 per share, outstanding as
of August 12, 2002: 11,878,860 shares.
CONCERTO SOFTWARE, INC. & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
-------
Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risks 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value)
(Unaudited)
June 30, December 31,
ASSETS 2002 2001
---- ----
Current assets:
Cash and cash equivalents $ 23,269 $ 20,105
Marketable securities 17,719 47,838
Accounts receivable, net of reserves of $3,163 and
$2,324 in 2002 and 2001, respectively 16,619 11,007
Prepaid expenses and other current assets 5,914 5,310
Deferred tax assets 5,161 3,791
---------- ---------
Total current assets 68,682 88,051
Property and equipment, net 7,380 6,447
Goodwill 17,160 -
Purchased intangible assets, net 6,251 -
Deferred tax asset 2,382 2,382
Other assets 518 276
---------- ---------
$ 102,373 $ 97,156
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 828 -
Accounts payable $ 7,152 $ 5,307
Accrued expenses 12,670 8,643
Customer deposits 4,908 4,664
Deferred revenue 12,504 8,074
---------- ---------
Total current liabilities 38,062 26,688
Long-term debt 421 -
---------- ---------
Total liabilities 38,483 26,688
Stockholders' equity:
Common stock, $0.10 par value -
Authorized - 30,000 shares
Issued - 14,556 shares 1,456 1,456
Additional paid-in capital 82,924 82,136
Accumulated foreign currency translation adjustments (379) (345)
Retained earnings 5,779 9,644
---------- ---------
89,780 92,891
Treasury stock, 2,605 and 2,247 shares, at cost, in
2002 and 2001, respectively (25,890) (22,423)
---------- ---------
Total stockholders' equity 63,890 70,468
---------- ---------
$ 102,373 $ 97,156
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Product revenue $ 11,544 $ 12,369 $ 22,169 $ 24,273
Service revenue 13,160 13,417 25,860 26,445
-------- --------- ---------- ---------
Total revenue 24,704 25,786 48,029 50,718
-------- --------- ---------- ---------
Cost of product revenue 2,147 2,171 4,161 4,154
Cost of service revenue 6,391 7,010 12,732 14,305
-------- --------- ---------- ---------
Total cost of revenue 8,538 9,181 16,893 18,459
-------- --------- ---------- ---------
Gross profit 16,166 16,605 31,136 32,259
-------- --------- ---------- ---------
Operating expenses:
Research, development and engineering 3,996 4,966 8,060 9,712
Selling, general and administrative 11,585 11,438 22,789 22,803
Non-recurring merger and integration costs - - 3,112 -
Restructuring costs - - 2,030 -
Amortization of purchased intangible assets 441 - 809 -
-------- --------- ---------- ---------
Total operating expenses 16,022 16,404 36,800 32,515
-------- --------- ---------- ---------
Income (loss) from operations 144 201 (5,664) (256)
Other income (primarily interest income) 183 683 511 1,621
-------- --------- ---------- ---------
Income (loss) before provision for
(benefit from) income taxes 327 884 (5,153) 1,365
Provision for (benefit from) income taxes 82 274 (1,288) 424
-------- --------- ---------- ---------
Net income (loss) $ 245 $ 610 ($3,865) $ 941
======== ========= ========== =========
Earnings (loss) per share:
Basic $ 0.02 $ 0.05 ($0.31) $ 0.07
======== ========= ========== =========
Diluted $ 0.02 $ 0.05 ($0.31) $ 0.07
======== ========= ========== =========
Weighted average shares outstanding:
Basic 12,152 12,784 12,440 12,737
======== ========= ========== =========
Diluted 12,313 13,218 12,440 13,229
======== ========= ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30,
--------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net income (loss) ($3,865) $ 941
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities -
Write-off of prepaid OEM software licenses 1,127 -
Depreciation and amortization 2,945 2,005
Deferred taxes (1,370) -
Tax benefit from exercise of stock options - 171
Changes in current assets and liabilities (net of acquisition
of CellIt, Inc.) -
Accounts receivable (3,992) 584
Prepaid expenses and other current assets (1,005) (612)
Accounts payable (350) (341)
Accrued expenses (99) (501)
Customer deposits 20 (390)
Deferred revenue 2,129 2,130
-------- ---------
Net cash (used in) provided by operating activities (4,460) 3,987
-------- ---------
Cash Flows From Investing Activities:
Acquisition of CellIt, Inc., net of cash acquired (10,945) -
Purchases of property and equipment (1,156) (2,834)
Increase in other assets (99) (354)
Purchases of marketable securities (6,075) (56,558)
Maturities of marketable securities 36,194 43,343
-------- ---------
Net cash provided by (used in) investing activities 17,919 (16,403)
-------- ---------
Cash Flows From Financing Activities:
Payments of long term debt (2,325) -
Proceeds from exercise of stock options 1,463 327
Proceeds from employee stock purchase plan 163 198
Purchases of treasury stock (9,590) (874)
-------- ---------
Net cash used in financing activities (10,289) (349)
-------- ---------
Effect of exchange rate changes on cash and cash equivalents (6) (85)
-------- ---------
Net increase (decrease) in cash and cash equivalents 3,164 (12,850)
Cash and cash equivalents, beginning of period 20,105 61,758
-------- ---------
Cash and cash equivalents, end of period $23,269 $ 48,908
======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 49 $ 227
======== =========
Supplemental Schedule of Noncash Investing and Financing Activities:
Acquisition of CellIt, Inc.
Fair value of assets acquired $24,220 $ -
Less:
Cash paid 10,180 -
Fair value of common stock issued 5,287 -
Acquisition costs 1,325 -
-------- -
Net liabilities assumed $ 7,428 $ -
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
1. Basis of Preparation
The unaudited consolidated financial statements presented herein have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. The statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K, Commission File No. 000-15578, that was filed with the
Securities and Exchange Commission on March 15, 2002. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position and results of operations. The
results of operations for the three and six-month periods ended June 30, 2002
may not be indicative of the results that may be expected for the next quarter
or the full fiscal year.
Effective May 2, 2002, the Company's name change from Davox Corporation to
Concerto Software, Inc. was formally approved by the shareholders of the
Company.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
3. Revenue Recognition
The Company generates software revenue from licensing the rights to use
its software products. The Company also generates service revenues from the sale
of product maintenance contracts, implementation, education and consulting
services. The Company recognizes revenue in accordance with the provisions of
the American Institute of Certified Public Accountants Statement of Position
(SOP) No. 97-2, Software Revenue Recognition, and SOP No. 98-9, Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.
Revenue from software license fees are generally recognized upon delivery
provided that there are no significant post delivery obligations, persuasive
evidence of an agreement exists, the fee is fixed or determinable and collection
of the related receivable is probable. If acceptance is required beyond the
Company's standard published specifications, software license revenue is
recognized upon customer acceptance.
SOP 98-9 requires use of the residual method for recognition of
revenues when vendor-specific objective evidence exists for undelivered elements
but does not exist for the delivered elements of a multiple-element arrangement.
In such circumstances, the Company defers the fair
6
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
3. Revenue Recognition (continued)
value of the undelivered elements and recognizes, as revenue, the remaining
value for the delivered elements.
Revenues for consulting, implementation and educational services are
recognized over the period in which services are provided. Maintenance revenue
is deferred at the time of software license shipment and is recognized ratably
over the term of the support period, which is typically one year. Amounts
collected prior to satisfying the revenue recognition criteria are reflected as
deferred revenue in the accompanying balance sheet.
4. Acquisition of CellIt, Inc.
On January 14, 2002 the Company acquired, for aggregate consideration
of $16.8 million, which includes acquisition costs incurred of approximately
$1.3 million, all of the outstanding stock of CellIt, Inc. (CellIt), a Florida
corporation, by means of a merger of AP Acquisition Corp, a Delaware corporation
and a wholly-owned subsidiary of the Company, with and into CellIt pursuant to
an Agreement and Plan of Merger dated as of January 10, 2002. CellIt was a
privately held provider of comprehensive, unified Customer Interaction
Management (CIM) solutions for contact centers and the aggregate consideration
included approximately $10.2 million in cash, 544 shares of the Company's
common stock valued at approximately $5.3 million and approximately $1.3 million
of acquisition costs.
The acquisition of CellIt was accounted for using the purchase method
of accounting in accordance with Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations. Accordingly, the purchase price was
allocated based on fair value as follows:
Adjusted net balances of CellIt assumed:
Current assets $ 2,455
Fixed assets and other non-current assets 2,069
Current liabilities (8,268)
Debt and other long-term liabilities (3,684)
Acquired technology 6,000
Customer relationships 490
Employment contracts and non-compete agreements 570
Goodwill 17,160
------
$ 16,792
The value of acquired technology, customer relationships, employment
contracts and non-compete agreements was determined based on an appraisal
performed by an independent third party. These intangible assets are all being
amortized on a straight-line basis over their estimated useful lives of four
years. Goodwill is not being amortized, but will be measured for
7
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
4. Acquisition of CellIt, Inc. (continued)
impairment in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and CellIt as if the acquisition
occurred on January 1, 2001, after giving effect to certain adjustments,
including amortization expense. The unaudited pro forma financial information
does not necessarily reflect the results of operations that would have occurred
had the acquisition been completed as of the dates indicated or of the results
that may be obtained in the future.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Revenues 48,212 53,576
Net loss (4,178) (6,792)
Net loss per basic and fully diluted common share $ (0.33) $ (0.51)
Also during the six months ended June 30, 2002 in connection with the
acquisition of CellIt, a one-time merger and integration charge of approximately
$3.1 million was recorded. Included in this charge were one-time expenses
associated with the merger, such as transition employee costs, travel, training
and corporate re-branding efforts associated with the Company's name change.
Also included in the one-time charge was the write-off of $1.1 million of
prepaid software licenses under an OEM agreement with a third party vendor given
that a similar technology was obtained in the CellIt acquisition.
5. Restructuring Costs
For the six months ended June 30, 2002, the Company incurred a
restructuring charge of approximately $2.0 million, representing severance and
related costs as a result of a reduction in its workforce by 48 people, or
approximately 9% of its total employees. All functional areas were affected by
the reductions.
Cash payments related to the Company's restructurings totaled $843 and
$1,809 for the three and six month periods ended June 30, 2002 and $971 in
restructuring liabilities remain in accrued expenses in the accompanying balance
sheet at June 30, 2002.
8
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
5. Restructuring Costs (continued)
A summary of the restructuring accrual activity during the period is as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2002
---- ----
Balance, beginning of period $1,814 $ 750
Provision - 2,030
Severance payments (838) (1,779)
Facilities-related payments (5) (30)
------- --------
Balance, end of period $ 971 $ 971
======= ========
6. Earnings per share
Basic earnings per share is calculated using the weighted average
number of common shares outstanding. Diluted earnings per share is computed
using the weighted average number of common shares outstanding and the effect of
dilutive common stock options using the treasury stock method. A reconciliation
of basic and diluted weighted average shares outstanding is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Basic weighted average shares outstanding 12,152 12,784 12,440 12,737
Effect of dilutive stock options 161 434 - 492
------ ------ ------ ------
Diluted weighted average shares outstanding 12,313 13,218 12,440 13,229
====== ====== ====== ======
For the three months ended June 30, 2002 and 2001, 3,717 and 1,588
common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding, as their effect would be antidilutive. For
the six months ended June 30, 2002 and 2001, 3,791 and 1,611 common equivalent
shares, respectively, were not included in the diluted weighted average shares
outstanding, as their effect would be antidilutive.
9
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
7. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $245 $610 ($3,865) $941
Foreign currency translation adjustments (28) (151) (35) (90)
----- ----- -------- -----
Comprehensive income (loss) $217 $459 ($3,900) $851
===== ===== ======== =====
8. Segment and Geographic Information
The Company has three primary product lines: its Ensemble(TM) Customer
Contact Suite, Unison(R) Call Management System and ContactPro(TM) System. The
following table represents the Company's percentage of product revenue by
product line for the three and six months ended June 30, 2002 and 2001:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Unison 42.4% 84.5% 54.0% 84.5%
Ensemble 21.5 12.9 22.3 11.6
ContactPro 34.5 - 22.0 -
Other 1.6 2.6 1.7 3.9
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Product revenue from international sources for the three and six months
ended June 30, 2002 and June 30, 2001 totaled approximately $3.5 million and
$4.3 million for the three month period ended and $7.0 million and $9.4 million
for the six month period ended, respectively. The Company's revenue from
international sources was primarily generated from customers located in the
U.K., Europe and Asia/Pacific. Substantially all of the Company's product
revenue for the periods presented was shipped from its headquarters located in
the United States.
10
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
8. Segment and Geographic Information (continued)
The following table represents the Company's percentage of product
revenue by geographic region for the three months ended June 30, 2002 and 2001:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
U.S. 70.1% 65.5% 68.4% 61.3%
Asia/Pacific 14.2 10.5 17.1 11.9
U.K. 8.1 17.4 7.8 21.7
Europe 7.5 6.6 5.3 4.4
Other 0.1 - 1.4 0.7
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Substantially all of the Company's assets are located in the United States.
9. Reimbursed Expenses
In November 2001, the Emerging Issues Task Force issued Topic No. D-103
relating to the accounting for reimbursement received for out-of-pocket
expenses. In accordance with Topic D-103, reimbursements received for
out-of-pocket expenses incurred should be characterized as revenue in the
statement of operations. The Company has historically accounted for
reimbursements received for out-of-pocket expenses as a reduction to cost of
service revenues in the statement of operations to offset the costs incurred.
The Company has adopted Topic D-103 in financial reporting periods beginning
after December 31, 2001 and comparative financial statements herein for prior
periods have been reclassified to comply with the guidance in Topic D-103.
During the three and six months ended June 30, 2002 and June 30, 2001, the
reimbursed out-of-pocket expenses totaled $247 and $203 for the three months
ended and $392 and $438 for the six months ended, respectively, which has been
reflected as service revenues and cost of services revenues in accordance with
Topic D-103 in the accompanying statements of operations for all periods
presented.
10. New accounting standards
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, issued in July 2002, addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs
11
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Per Share Data)
10. New accounting standards (continued)
Incurred in a Restructuring)." The principal difference between Statement 146
and Issue 94-3 relates to Statement 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. Statement 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as generally defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. Therefore, this Statement
eliminates the definition and requirements for recognition of exit costs in
Issue 94-3. This Statement also establishes that fair value is the objective for
initial measurement of the liability.
The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not anticipate the adoption of this statement to
have a material impact on its consolidated financial statements.
12
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. Statements set forth herein
may contain "forward-looking" information that involves risks and uncertainties.
Actual future financial or operating results may differ materially from such
forward-looking statements. Statements indicating that the Company "expects,"
"estimates," "believes," "is planning," or "plans to" are forward-looking, as
are other statements concerning future financial or operating results, product
offerings or other events that have not yet occurred. There are several
important factors that could cause actual results or events to differ materially
from those anticipated by the forward-looking statements. Such factors are
described in greater detail under Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Future Results. Although the Company has sought to identify the most significant
risks to its business, the Company cannot predict whether, or to what extent,
any of such risks may be realized nor can there be any assurance that the
Company has identified all possible issues that the Company may face.
RESULTS OF OPERATIONS
On January 14, 2002 the Company acquired, for aggregate consideration
of $16.8 million, which includes acquisition costs of $1.3 million, all of the
outstanding stock of CellIt, Inc. (CellIt), a Florida corporation. The aggregate
consideration included approximately $10.2 million in cash and 544,366 shares of
the Company's common stock valued at approximately $5.3 million
Three and Six Months Ended June 30, 2002 and 2001
Total revenue for the three months ended June 30, 2002 decreased
approximately $1.1 million or 4.2%, to $24.7 million compared to the same period
in 2001. Total revenue for the first six months of 2002 decreased approximately
$2.7 million, or 5.3%, to $48.0 million compared to the same period in 2001.
Product revenue for the three months ended June 30, 2002 decreased
approximately $825,000, or 6.7%, to $11.5 million compared to the same period in
2001. Product revenue for the first six months of 2002 decreased approximately
$2.1 million, or 8.7%, to $22.2 million compared to the same period in 2001. The
decrease in product revenue for the three and six months ended June 30, 2002, is
due primarily to the continued effect of the weakened North American economy and
the resulting decrease in IT spending. During the three and six month period
ended June 30, 2002, product revenue attributed to CellIt product was
approximately $4.0 million and $4.9 million, respectively.
13
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Cost of product revenue for three months ended June 30, 2002 decreased
approximately $24,000, or 1.1%, to $2.1 million compared to the same period in
2001. Cost of product revenue for the first six months of 2002 increased
approximately $7,000, or 0.2%, to $4.2 million compared to the same period in
2001. As a percentage of product revenue, the cost of product revenue increased
by 1.0% to 18.6% in the second quarter of 2002 compared to 17.6% for the same
period in 2001. As a percentage of product revenue, the cost of product revenue
increased by 1.7% to 18.8% in the first six months of 2002 compared to 17.1% for
the same period in 2001. The decrease in product gross margin was due primarily
to product mix, which resulted in a higher cost of hardware components shipments
in the three and six months ended June 30, 2002, versus the same periods in
2001.
Service revenue for the second quarter of 2002 decreased approximately
$257,000, or 1.9%, to $13.2 million compared to the same period in 2001. Service
revenue for the first six months of 2002 decreased approximately $585,000, or
2.2%, to $25.9 million compared to the same period in 2001. The decrease in
service revenue was due primarily to decreased implementation, professional
services, and educational services revenue in the three and six months ended
June 30, 2002, compared to the same periods in 2001 as a result of lower product
revenue. During the three and six month period ended June 30, 2002, service
revenue attributed to CellIt activity was approximately $332,000 and $846,000.
Cost of service revenue for the three months ended June 30, 2002,
decreased approximately $619,000, or 8.8%, to $6.4 million compared to the same
period in 2001. Cost of service revenue for the first six months of 2002
decreased approximately $1.6 million, or 11.0%, to $12.7 million compared to the
same period in 2001. As a percentage of service revenue, the cost of service
revenue decreased by 3.6% to 48.6% for the three months ended June 30, 2002 and
decreased by 4.9% to 49.2% for the six months ended June 30, 2002, compared to
the same periods in 2001. The decrease in service cost of revenue and
corresponding increase in service gross margin during the three and six months
ended June 30, 2002, was due primarily to decreased headcount and payroll and
related expenses, including travel expenses, due to the restructurings
undertaken by the company in late 2001, combined with the continued focus to
decrease discretionary expenses, such as the use of outside contractors.
Research, development and engineering expenses for the three months
ended June 30, 2002, decreased approximately $970,000, or 19.5%, to $4.0 million
compared to the same period in 2001. Research, development and engineering
expenses for the six months ended June 30, 2002, decreased approximately $1.7
million, or 17.0%, to $8.1 million compared to the same period in 2001. The
decreases for second quarter and first six months of 2002 were primarily due to
a decrease in payroll related expenses, recruiting and consulting costs compared
to the same periods in 2001.
Selling, general and administrative expenses increased by approximately
$147,000, or 1.3%, to $11.6 million for the second quarter of 2002 compared to
the same period in 2001. This
14
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
increase is the result of the Company recording incremental bad debt expense
during 2002 to provide additional accounts receivable reserve due primarily to
the weakening economic environment in North America, offset by a decrease in
headcount and related expenses. Selling, general and administrative expenses
decreased by approximately $14,000, or 0.1%, to $22.8 million for the first six
months of 2002 compared to the same period in 2001.
During the six months ended June 30, 2002, the Company recorded
non-recurring merger and integration related charges totaling approximately $3.1
million due to the purchase of CellIt. The components of the merger charge
included employee costs, training, corporate re-branding initiative associated
with the Company's name change and the write-off of $1.1 million of prepaid
software licenses under an OEM agreement with a third-party vendor given that
similar technology was obtained in the CellIt acquisition and the licenses were
no longer realizable.
During the three and six months ended June 30, 2002, primarily in
connection with the acquisition of CellIt, the Company recorded a restructuring
charge totaling approximately $2.0 million. The components of the restructuring
charge included a reduction in workforce of approximately 48 people or 9% of the
Company's total workforce, which affected all functional areas.
In the three and six months ended June 30, 2002, the Company recorded
approximately $441,000 and $809,000 respectively, of amortization expense
related to the intangible assets resulting from the purchase of CellIt.
Other income in 2002 was derived primarily from interest income from
investments in commercial paper, corporate bonds, Eurodollar bonds, and similar
financial instruments, net of investment fees. Other income decreased 73.2% for
the second quarter of 2002 compared to the same period in 2001. Other income
decreased 68.5% for the first six months of 2002 compared to the same period in
2001. The significant decrease in the three months ended June 30, 2002, was due
to lower average cash balances primarily as a result of the repurchase during
the period of 451,600 shares of the Company's common stock under its stock
repurchase program at an aggregate cost of $3.9 million, combined with lower
interest rates and investment yields compared to the same periods in 2001. The
decrease in the first six months of 2002, was due to lower average cash balances
primarily as a result of the repurchase during the period of 1.1 million shares
of the Company's common stock under its stock repurchase program at an aggregate
cost of $9.6 million and the purchase of CellIt utilizing cash consideration of
$10.2 million, combined with lower interest rates and investment yields compared
to the same periods in 2001.
In accordance with generally accepted accounting principles, the
Company provides for income taxes on an interim basis using its estimated annual
effective income tax rate. For the first six months of 2002, the Company
recorded a loss before income taxes of $5.2 million. As a result, during the
first six months of 2002, the Company recorded a $1.3 million benefit from
income taxes using a 25% effective tax rate. The effective tax rate of 25% is
less than the combined statutory federal and state tax rates primarily as a
result of the utilization of available
15
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
tax credits.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company's principal sources of liquidity were
its cash and cash equivalent balances of approximately $23.3 million, as well as
its marketable securities of approximately $17.7 million. At December 31, 2001,
the Company's cash and cash equivalent balances were approximately $20.1 million
and its marketable securities were approximately $47.8 million. The overall
decrease of approximately $27.0 million in the total cash and marketable
securities balances was due primarily to the purchase of CellIt utilizing cash
consideration of $10.2 million, the payment of $1.9 million outstanding under
CellIt's bank credit facility, payments associated with the non-recurring
restructuring and merger and integration related expenses totaling $3.7 million
and the utilization of $9.6 million to repurchase 1.1 million shares of the
Company's common stock under its stock repurchase program.
Net cash used in operating activities for the first six months of 2002
was approximately $4.5 million compared to cash provided by operating activities
of approximately $4.0 million for the same period in 2001. The increase in cash
used in operating activities for the first six months of 2002 was due to less
favorable operating results primarily due to the non-recurring merger and
integration and restructuring costs incurred.
The Company's primary investing activities for the six months ended
June 30, 2002, were the acquisition of CellIt and the purchases and maturities
of marketable securities. The acquisition of CellIt generated a cash outflow of
$10.9 million in the first six months of 2002, which includes the payment of
acquisition related fees. The purchases and maturities of marketable securities
generated a net cash inflow of approximately $30.1 million during the first six
months of 2002, compared to a net cash outflow of approximately $13.2 million
during the same period in 2001. Property and equipment purchases were
approximately $1.2 million during the first six months of 2002, compared to
approximately $2.8 million during the same period in 2001.
Cash used in financing activities during the first six months of 2002
totaled approximately $10.3 million and was due primarily to the repurchase of
1.1 million shares of the Company's common stock for approximately $9.6 million
and the payment of long-term CellIt debt of approximately $2.3 million. Cash
used in financing activities during the first six months of 2001 totaled
approximately $349,000 and was due to the repurchase of 92,300 shares of the
Company's common stock for approximately $874,000 which was partially offset by
proceeds from the exercises of stock options and from purchases of stock through
the Company's employee stock purchase plan.
16
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
At June 30, 2002, the working capital of the Company decreased to
approximately $30.6 million from approximately $61.4 million as of December 31,
2001. The overall decrease of approximately $30.8 million in the working capital
was related to the previously noted reductions in cash and marketable securities
balances due primarily to the acquisition of CellIt and its related cash
requirements and the repurchase of 1.1 million shares of the Company's common
stock.
The Company's contractual obligations for future payments as of June
30, 2002 were composed of operating leases for the various office spaces leased
by the Company, including the space acquired as a result of the merger with
CellIt.
A summary of the amounts due under these operating leases is as follows:
- -------------------------------------------------------------------------------------------------------------
Payments Due by Period
(Amounts Are In Thousands)
- -------------------------------------------------------------------------------------------------------------
Contractual Less than 1 year 1-3 4-5 After 5
Obligation Total years years years
- -------------------------------------------------------------------------------------------------------------
Operating Leases $11,938 $2,827 $6,086 $2,595 $430
- -------------------------------------------------------------------------------------------------------------
Management believes, based on its current operating plan, that the
Company's existing cash and marketable securities balances and anticipated cash
generated from operations are sufficient to meet the Company's cash requirements
for the next twelve months.
17
PART I. FINANCIAL INFORMATION (continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
As of June 30, 2002, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments". The Company's investments are primarily
short-term, Euro dollar bonds, investment-grade commercial paper, and money
market accounts that are carried on the Company's books at amortized cost, which
approximates fair market value. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.
As of June 30, 2002, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of
interest rate risk and foreign currency exchange rate risk. The Company's
investment portfolio of cash equivalent and short-term investments is subject to
interest rate fluctuations, but the Company believes this risk is immaterial due
to the short-term nature of these investments.
The Company's exposure to currency exchange rate fluctuations has been
and is expected to continue to be insignificant due to the fact that the
operations of its international subsidiaries are almost exclusively conducted in
their respective local currencies. International subsidiary operating results
are translated into U.S. dollars and consolidated for reporting purposes. The
impact of currency exchange rate movements on intercompany transactions was
$34,000 for the six months ended June 30, 2002. Currently, the Company does not
engage in foreign currency hedging activities
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to historical information contained herein, this report
contains forward-looking statements concerning future expected financial and
operating results. The Company's future actual results could differ materially
from the forward-looking statements discussed or implied in this report because
of risks or uncertainties including, but not limited to, competition and
competitive pricing pressures, technological change, new product introduction,
product integration and market acceptance, the ability of the Company to attract
and retain key personnel and general economic conditions in the United States
and worldwide markets served by the Company; and those other factors discussed
from time to time in the Company's public reports filed with the Securities and
Exchange Commission, such as those discussed under "Certain Factors That May
Affect Future Results" in the Company's quarterly reports on Form 10-Q and
annual report on Form 10-K.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material changes since the Company's Annual
Report on Form 10-K for the period ended December 31, 2001.
Item 5. Other Information
Proposal of stockholders intended for inclusion in the proxy
statement to be furnished to all stockholders entitled to vote at
the next annual meeting of stockholders of the Company must be
received at the Company's principal executive offices not later
than December 1, 2002. The deadline for providing timely notice to
the Company of matters that stockholders otherwise desire to
introduce at the next annual meeting of stockholders of the
Company is February 12, 2003. In order to curtail any controversy
as to the date, on which a proposal was received by the Company,
it is suggested that proponents submit their proposal by Certified
Mail, Return Receipt Requested.
Item 6. Exhibits and Reports on Form 8-K
(a) No current reports on Form 8-K were filed during the quarter ended
June 30, 2002.
19
Signatures
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.
CONCERTO SOFTWARE, INC.
Date: August 14, 2002 By: /s/ James D. Foy
----------------
James D. Foy
Chief Executive Officer
and President (Principal
Executive Officer)
Date: August 14, 2002 By: /s/ Michael J. Provenzano III
-----------------------------
Michael J. Provenzano III
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
20