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 March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-15578
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 May
13, 2002: 12,201,995 shares.
CONCERTO SOFTWARE, INC. & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
-------
Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risks 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security-Holders 18
Item 5. Other Information 18
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)
March 31, December 31,
2002 2001
---- ----
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 17,442 $ 20,105
Marketable securities 28,745 47,838
Accounts receivable, net of reserves of $2,879 and
$2,324 in 2002 and 2001, respectively 15,422 11,007
Prepaid expenses and other current assets 4,907 5,310
Deferred tax assets 5,161 3,791
--------- ---------
Total current assets 71,677 88,051
Property and equipment, net 7,967 6,447
Goodwill 17,160 --
Purchased intangible assets, net 6,692 --
Long-term deferred tax assets 2,382 2,382
Other assets 559 276
--------- ---------
$ 106,437 $ 97,156
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,377 $ 5,307
Accrued expenses 13,121 8,643
Customer deposits 5,233 4,664
Deferred revenue 11,839 8,074
Current portion of long-term debt 938 --
--------- ---------
Total current liabilities 39,508 26,688
Long-term debt 559 --
--------- ---------
Total liabilities 40,067 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 83,043 82,136
Accumulated foreign currency translation adjustments (351) (345)
Retained earnings 5,532 9,644
--------- ---------
89,680 92,891
Treasury stock, 2,301 and 2,247 shares, at cost, in
2002 and 2001, respectively (23,310) (22,423)
--------- ---------
Total stockholders' equity 66,370 70,468
--------- ---------
$ 106,437 $ 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
March 31,
2002 2001
---- ----
Product revenue $ 10,625 $ 11,903
Service revenue 12,700 13,029
-------- --------
Total revenue 23,325 24,932
-------- --------
Cost of product revenue 2,014 1,970
Cost of service revenue 6,341 7,308
-------- --------
Total cost of revenue 8,355 9,278
-------- --------
Gross profit 14,970 15,654
-------- --------
Operating expenses:
Research, development and engineering 4,064 4,746
Selling, general and administrative 11,204 11,365
Non-recurring merger and integration costs 3,112 --
Restructuring costs 2,030 --
Amortization of purchased intangible assets 368 --
-------- --------
Total operating expenses 20,778 16,111
-------- --------
Loss from operations (5,808) (457)
Other income (primarily interest income) 327 938
-------- --------
Income (loss) before provision for
(benefit from) income taxes (5,481) 481
Provision for (benefit from) income taxes (1,371) 149
-------- --------
Net income (loss) ($ 4,110) $ 332
======== ========
Earnings/(loss) per share:
Basic ($ 0.33) $ 0.03
======== ========
Diluted ($ 0.33) $ 0.03
======== ========
Weighted average shares outstanding:
Basic 12,534 12,683
======== ========
Diluted 12,534 13,230
======== ========
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)
Three Months Ended
March 31,
---------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net income/(loss) ($ 4,110) $ 332
Adjustments to reconcile net income/(loss) to net cash
used in operating activities -
Write-off of prepaid OEM software licenses 1,127 --
Depreciation and amortization 1,220 983
Deferred tax assets (1,370) --
Tax benefit from exercise of stock options -- 16
Changes in current assets and liabilities (net of acquisition
of CellIt, Inc.)-
Accounts receivable (2,773) (2,243)
Prepaid expenses and other current assets (13) 752
Accounts payable 878 571
Accrued expenses 356 (1,145)
Customer deposits 346 (441)
Deferred revenue 1,461 690
-------- --------
Net cash used in operating activities (2,878) (485)
-------- --------
Cash Flows From Investing Activities:
Acquisition of CellIt, Inc., net of cash acquired (10,931) --
Purchases of property and equipment (441) (1,662)
Increase in other assets (139) (198)
Purchases of marketable securities -- (11,390)
Maturities of marketable securities 19,092 8,946
-------- --------
Net cash provided by (used in) investing activities 7,581 (4,304)
-------- --------
Cash Flows From Financing Activities:
Payments of long term debt (2,077) --
Proceeds from exercise of stock options 296 316
Proceeds from employee stock purchase plan 163 196
Purchases of treasury stock (5,726) (225)
-------- --------
Net cash (used in) provided by financing activities (7,344) 287
-------- --------
Effect of exchange rate changes on cash and cash equivalents (22) 63
-------- --------
Net decrease in cash and cash equivalents (2,663) (4,439)
Cash and cash equivalents, beginning of period 20,105 61,758
-------- --------
Cash and cash equivalents, end of period $ 17,442 $ 57,319
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 49 $ 55
======== ========
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 --
Accrued 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 Share and 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-month period ended March 31, 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 Share and 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 the 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 Acquisition Date) 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 (the Merger). CellIt was a privately held provider of comprehensive,
unified CIM solutions for contact centers and the aggregate consideration
included approximately $10.2 million in cash, 544,366 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 as
follows:
Adjusted net balances of CellIt assumed:
Current assets $ 2,455
Fixed assets and other long-term 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 and 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
7
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Share and Per Share Data)
4. Acquisition of CellIt, Inc. (continued)
useful lives of four years. Goodwill is not being amortized, but will be
measured for 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.
Three Months Ended Twelve Months Ended
March 31, 2002 December 31, 2001
-------------- -----------------
Revenues $ 23,508 $ 99,359
Net loss $ (4,423) $ (18,040)
Net loss per basic and fully diluted common share $ (0.35) $ (1.37)
Also during the first quarter of 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 three months ended March 31, 2002, the Company incurred a
non-recurring 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 $966 for the
three month period ending March 31, 2002 and $1.8 million in restructuring
liabilities remain in accrued expenses in the accompanying balance sheet at
March 31, 2002.
8
PART 1. FINANCIAL INFORMATION (continued)
CONCERTO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Share and Per Share Data)
5. Restructuring (continued)
A summary of the restructuring accrual activity during the period is as
follows:
Three Months Ended
March 31,
2002
----
Balance, beginning of period $ 750
Provision 2,030
Severance payments (941)
Facilities related payments (25)
------
Balance, end of period $1,814
======
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
March 31,
2002 2001
---- ----
Basic weighted average shares outstanding 12,534 12,683
Effect of dilutive stock options -- 547
------ ------
Diluted weighted average shares outstanding 12,534 13,230
====== ======
For the three months ended March 31, 2002 and 2001, 3,766,068 and 1,685,359
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 Share and Per Share Data)
7. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
Three Months Ended
March 31,
2002 2001
---- ----
Net income (loss) ($4,110) $332
Foreign currency translation adjustments (6) 63
-------- ----
Comprehensive income (loss) ($4,116) $395
======== ====
8. Segment and Geographic Information
The Company has three primary product lines: its Ensemble Customer Contact
Suite, Unison Call Management System and ContactPro System. The following table
represents the Company's percentage of product revenue by product line for the
three months ended March 31, 2002 and 2001:
Three Months Ended
March 31,
--------
2002 2001
---- ----
Unison 68.0% 84.5%
Ensemble 23.4 10.3
ContactPro 6.3 -
Other 2.3 5.2
----- -----
Total 100.0% 100.0%
===== =====
Product revenue from international sources totaled approximately $3.6
million and $5.1 million for the first quarter of 2002 and 2001, 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.
The following table represents the Company's percentage of product revenue
by geographic region for the three months ended March 31, 2002 and 2001:
Three Months Ended
March 31,
2002 2001
---- ----
U.S. 66.6% 56.7%
U.K. 7.4 26.0
Asia/Pacific 20.5 13.5
Europe 2.9 2.2
Other 2.6 1.6
--- ---
Total 100.0% 100.0%
====== ======
Substantially all of the Company's assets are 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 Share and Per Share Data)
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 expense.
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 for prior periods have been reclassified to
comply with the guidance in Topic D-103. During the quarters ended March 31,
2002 and March 31, 2001, the reimbursed out-of-pocket expenses totaled $145,000
and $235,000 respectively, which has been reflected as service revenues and cost
of service revenues in accordance with Topic D-103 in the accompanying
statements of operations for both periods presented.
11
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.
12
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND 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 in cash and 544,366 shares of the
Company's common stock valued at approximately $5.3 million. The Company's
results for the three months ended March 31, 2002, include the results of
operations for CellIt from January 14, 2002.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 and 2001
Total revenue for the first quarter of 2002 decreased approximately $1.4
million, or 5.6%, to $23.3 million compared to the same period in 2001.
Product revenue for the first quarter of 2002 decreased approximately $1.3
million, or 10.7%, to $10.6 million compared to the same period in 2001. The
decrease in product revenue for the first quarter of 2002, is due to the
continued effect of the weakened North American economy and the resulting
decrease in IT spending. During the first quarter of 2002, product revenue
attributed to CellIt product was approximately $0.6 million.
Cost of product revenue for the first quarter of 2002 increased
approximately $44,000, or 2.3%, to $2.0 million compared to the same period in
2001. As a percentage of product revenue, the cost of product revenue increased
by 2.4% to 18.9% in the first quarter of 2002 compared to 16.5% for the same
period in 2001. The increase in the cost of product revenue and decrease in
product gross margin was due primarily to the product revenue mix which resulted
in a higher cost of hardware components in first quarter 2002 shipments versus
2001, which resulted in the higher cost contribution.
Service revenue for the first quarter of 2002 decreased approximately
$329,000, or 2.5%, to $12.7 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 first quarter of
2002 compared to the same period in 2001 as a result of lower product revenue.
During the first quarter of 2002, service revenue attributed to CellIt activity
was approximately $0.5 million.
Cost of service revenue for the first quarter of 2002 decreased
approximately $967,000, or 13.2%, to $6.3 million compared to the same period in
2001. As a percentage of service revenue, the cost of service revenue decreased
by 6.2% to 49.9% in the first quarter of 2002 compared to the same period in
2001. The decrease in service cost of revenue and increase in service gross
margin during the first quarter of 2002 was due primarily to decreased headcount
and payroll related 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.
13
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Research, development and engineering expenses decreased approximately
$682,000, or 14.4%, to $4.1 million for the first quarter of 2002 compared to
the same period in 2001. The decrease was primarily due to decreased headcount
and payroll related expenses and consulting costs compared to the same period in
2001.
Selling, general and administrative expenses decreased by approximately
$161,000, or 1.4%, to $11.2 million for the first quarter of 2002 compared to
the same period in 2001. The decrease was principally due to lower commission
and bonus expense related to the lower product revenue in the first quarter of
2002 compared to the same period in 2001.
During the first quarter of 2002, the Company recorded non-recurring merger
and integration related charges totaling approximately $3.1 million due to the
purchase of CellIt Inc. The components of the merger charge included employee
costs, training, corporate re-branding efforts 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 first quarter of 2002, primarily in connection with the
acquisition of CellIt, Inc., 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 effected all functional areas.
In the first quarter of 2002, the Company recorded approximately $368,000
of amortization expense related to the intangible assets acquired from 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 65.1% for
the first quarter of 2002 compared to the same period in 2001. The decrease in
the first quarter 2002, was due to lower average cash balances primarily as a
result of the repurchase of 658,500 shares of the Company's common stock under
its stock repurchase program at an aggregate cost of $5.7 million and the
purchase of CellIt for cash consideration of $10.2 million, combined with lower
interest rates and investment yields compared to the same period 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 quarter of 2002, the Company recorded a
net loss of $4.1 million. As a result, during the first quarter of 2002, the
Company recorded a $1.4 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 as a result of tax deductions anticipated to be
realized in connection with the acquisition of CellIt combined with the
utilization of others available tax credits.
14
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, the Company's principal sources of liquidity were its
cash and cash equivalent balances of approximately $17.4 million, as well as its
marketable securities of approximately $28.7 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 first quarter
2002 overall decrease of approximately $21.8 million in the total cash and
marketable securities balances was due primarily to the purchase of CellIt Inc.
for total 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
$2.6 million and $5.7 million to repurchase 658,500 shares of the Company's
common stock.
Net cash used in operating activities for the first three months of 2002
was approximately $2.9 million compared to cash used in operating activities of
approximately $485,000 for the same period in 2001. The increase in cash used in
operating activities for the first three 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 were the acquisition of CellIt,
Inc. and the purchases and maturities of marketable securities. The acquisition
of CellIt, Inc. generated a cash outflow of $10.9 million in the first quarter
of 2002, which includes the payment of some acquisition related fees. The
purchases and maturities of marketable securities generated a net cash inflow of
approximately $19.1 million during the first three months of 2002, compared to a
net cash outflow of approximately $2.4 million during the same period in 2001.
Cash used in financing activities during the first three months of 2002
totaled approximately $7.3 million and was generated primarily from the
repurchase of 658,500 shares of the Company's common stock for approximately
$5.7 million and the payment of long term debt of approximately $2.1 million.
Cash provided by financing activities during the first three months of 2001
totaled approximately $303,000 and was generated from proceeds from exercises of
stock options and from purchases of stock through the Company's employee stock
purchase plan, which was partially offset by the repurchase of 20,000 shares of
the Company's common stock for approximately $225,000.
At March 31, 2002, the working capital of the Company decreased to
approximately $32.2 million from approximately $61.4 million as of December 31,
2001. The overall decrease of approximately $29.2 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 combined with the repurchase of the Company's 658,500 shares of its
common stock. Another factor was the assumption of CellIt's net current
liabilities.
The Company's contractual obligations for future payments as of March 31,
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.
15
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
A summary of the amounts due under these operating leases is as follows:
(Amounts Are In Thousands)
Payments Due by Period
--------------------------------------------------------------------------------
Contractual 1-3 4-5 After 5
Obligation Total Less than 1 year years years years
----------- ----- ---------------- ----- ----- -------
Operating Leases $14,157 $3,142 $5,664 $1,590 $3,761
--------------------------------------------------------------------------------
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.
16
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 March 31, 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. 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 March 31, 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.
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 modest 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 immaterial for the
three months ending March 31, 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
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.
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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 4. Submission of Matters to a Vote of Security-Holders
The annual meeting of security-holders of the Company was held on May
2, 2002. The number of directors was fixed at five and the following
persons were elected as directors:
Total Votes Against
Nominee Total Votes for Nominee Nominee
Alphonse M. Lucchese 11,748,500 121,777
Michael D. Kaufman 10,943,100 927,177
R. Scott Asen 11,746,400 123,877
James D. Foy 10,764,723 1,105,554
Peter Gyenes 11,746,400 123,877
An amendment to the Company's Restated Certificate of Incorporation, as
amended, to change the name of the Company to Concerto Software, Inc. was
adopted and approved, with 11,718,364 shares voting in favor, 27,983 shares
voting against and 30,523 shares abstaining.
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 6, 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 20, 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.
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Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
10.33 Amendment #2 to Transition and Retention Agreement
for Alphonse M. Lucchese, Chairman
(b) On January 28, 2002 the Company filed Form 8-K relating to its acquisition
of CellIt, Inc., attaching the documentation/agreements thereto.
(c) On March 29, 2002, the Company filed Form 8-K/A relating to its acquisition
of CellIt, Inc. and providing the relevant audited consolidated CellIt, Inc.
financial statements and relevant unaudited pro forma combined condensed
financial statements.
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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: May 15, 2002 By: /s/ James D. Foy
----------------
James D. Foy
Chief Executive Officer
and President (Principal
Executive Officer)
Date: May 15, 2002 By: /s/ Michael J. Provenzano III
-----------------------------
Michael J. Provenzano III
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
20