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RAND WORLDWIDE INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Readers of this report should
be aware of the speculative nature of "forward-looking statements." Statements
that are not historical in nature, including those that include the words
"anticipate," "estimate," "should," "expect," "believe," "intend," and similar
expressions, are based on current expectations, estimates and projections about,
among other things, the industry and the markets in which Rand Worldwide, Inc.
operates, and they are not guarantees of future performance. Whether actual
results will conform to expectations and predictions is subject to known and
unknown risks and uncertainties, including risks and uncertainties discussed in
this report; general economic, market, or business conditions; changes in
interest rates, the cost of funds, and demand for the Company's products and
services; changes in the Company's competitive position or competitive actions
by other companies; the Company's ability to manage growth; changes in laws or
regulations or policies of federal and state regulators and agencies; ability to
successfully integrate acquired businesses; and other circumstances beyond the
Company's control. Consequently, all of the forward-looking statements made in
this report are qualified by these cautionary statements, and there can be no
assurance that the actual results anticipated will be realized or, if
substantially realized, will have the expected consequences on the Company's
business or operations. Except as required by applicable laws, the Company does
not intend to publish updates or revisions of any forward-looking statements to
reflect new information, future events or otherwise.
When used throughout this report, the terms "Rand Worldwide", "the Company",
"we", "us" and "our" refer to Rand Worldwide, Inc. and, unless the context
clearly indicates otherwise, its consolidated subsidiaries.
Overview
The Company is a leading provider of design engineering, data archiving,
facilities and data management solutions for the manufacturing, building design,
engineering, and total infrastructure markets. The Company also specializes in
technical support, training, and consulting services aimed at improving design
and documentation efficiencies and the seamless integration of workflow
processes. This combination of technology solutions and services enables
customers to enhance productivity, profitability, and competitive position.
The Company's business strategy is built on three core principles designed to
leverage its existing strengths with expected market opportunities:
• Maintain and profitably grow its strong position in the Autodesk software
economy;
• Profitably grow its consulting and services business by leveraging its
expertise in design engineering and data management; and
• Acquire and integrate diverse, yet complementary, software and services
businesses to extend its product offerings to its large customer base and
expand its market potential.
This strategy was designed to match the Company's product and service offerings
more precisely with the needs of its customers, while providing avenues of
growth and diversification.
Product Sales -Product sales consist primarily of the resale of packaged design
software, including:
• Autodesk 2D and 3D computer aided design software for customers in the
mechanical, architectural and civil engineering sectors, as well as
visualization and animation technology to companies in the media and
entertainment industry;
• Autodesk data management software;
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• Archibus facilities management software for space planning, strategic
planning, and lease/property administration;
• Leica 3D laser scanning equipment for the Architectural, Engineering and
Construction sector;
• ASCENT internally developed courseware for a variety of engineering
applications; and
• Autonomy data archiving solutions.
Service Revenue - The Company provides services in the form of training,
implementation, consulting services, software development, custom courseware
development and technical support to its customers. The Company employs a
technical staff of over 100 personnel associated with these types of services.
The Company also offers support and implementation services to complement the
data archive solutions provided and sold through its RAND Secure Archive
Division.
Commission Revenue - The Company offers Autodesk's subscription programs, which
entitle subscribers to receive software upgrades, web support and eLearning
lessons directly from Autodesk. Because the Company does not participate in the
delivery of these subscription products or the web support and eLearning lesson
benefits, the Company records the gross profit from the sale of Autodesk
software subscriptions as commission revenue. In addition, the Company sells
technology upgrades to existing Autodesk customers through the Autodesk
Subscription program where the customers receive the latest releases of Autodesk
software, incremental product enhancements, and personalized web support direct
from Autodesk.
Based on its analysis of the Autodesk Subscription program, Rand Worldwide
records the net proceeds that it receives from Autodesk for subscription sales
in accordance with the provisions of Financial Accounting Standards Board
Accounting Standards Codification Topic 605, "Revenue Recognition".
The Company also generates commission revenue from the resale of Autodesk
software to various customers, a number of which Autodesk considers "major
accounts." Autodesk designates these customers as major accounts based on
specific criteria, primarily sales volume, and typically gives these customers
volume discounts. The Company is responsible for managing and reselling Autodesk
products to a number of these major account customers; however, software
products are shipped directly from Autodesk to the customers. The Company
receives commissions upon shipment of the products from Autodesk to the customer
based on the product sales price.
Cost of Product Sales - The cost of product sales consists of the cost of
purchasing products from software suppliers or hardware manufacturers as well as
the associated shipping and handling costs. The Company earns incentives from
its main supplier based upon the achievement of certain quarterly sales targets
and these incentives, when achieved, serve to reduce the cost of product sales.
The incentive targets are set annually and while the targets have changed over
time in amount and structure, the Company has generally been able to focus its
sales efforts in a manner to achieve margins on its product sales that are
within a relatively narrow range from period to period.
Cost of Service Revenue - Cost of service revenue includes the direct costs
associated with the implementation of software and hardware solutions as well as
training, support services, and professional services. These costs consist
primarily of compensation, employee benefits, travel, printed materials and the
costs of third-party contractors engaged by the Company. The cost of service
revenue does not include an allocation of overhead costs.
Selling, General and Administrative Expense - Selling, general and
administrative expense consist primarily of compensation and other expenses
associated with the Company's sales force, management, finance, human resources,
and information systems. Advertising and public relations expenses and expenses
for facilities, such as rent and utilities, are also included in selling,
general and administrative expense.
Depreciation and Amortization Expense - Depreciation expense represents the
period costs associated with our investment in property and equipment,
consisting principally of computer equipment, software, furniture and fixtures,
and leasehold improvements. Amortization expense represents the period costs of
the acquired customer list and trade name intangible assets. The Company
computes depreciation
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and amortization expenses using the straight-line method. The Company leases all
of its facilities and depreciates leasehold improvements over the lesser of the
lease term or the estimated useful life of the asset.
Interest Expense - Interest expense consists of interest on capital lease
obligations and borrowings from lines of credit.
Three Months Ended December 31, 2011 Compared to the Three Months Ended
December 31, 2010
The following tables set forth a comparison of the Company's results of
operations for the three-month period ended December 31, 2011 to the three-month
period ended December 31, 2010. The amounts are derived from selected items
reflected in the Company's unaudited Consolidated Statements of Operations
included elsewhere in this report. The three-month financial results are not
necessarily indicative of future results.
Revenues
Three Months Ended December 31,
%
2011 2010 change
Revenues:
Product sales $ 12,771,000 $ 10,838,000 17.8 %
Service revenue 5,255,000 5,397,000 (2.6 )%
Commission revenue 4,447,000 5,433,000 (18.1 )%
Total revenues $ 22,473,000 $ 21,668,000 3.7 %
Revenues. Total revenues for the three months ended December 31, 2011 increased
by $805,000, or 3.7%, when compared to the same period in the prior fiscal year.
Product sales increased $1,933,000, or 17.8%, for the three months ended
December 31, 2011 when compared to the same period in the prior fiscal year. The
majority of the product revenue increase, approximately $1.6 million, resulted
from the growing popularity of Autodesk Design Suites, which include several
popular design software components bundled together into software suites
tailored to specific industries. Design Suites offer customers an enhanced value
proposition, as the suites are priced significantly lower than the individual
software components that are bundled with the suites, and the products included
within the suites are tightly integrated to increase efficiency and improve
workflows. Additionally, the Company's ASCENT courseware sales increased by
$321,000 during the three months ended December 31, 2011 when compared with the
same period in the prior fiscal year mainly as the result of developing outside
distribution channels for the courseware.
Service revenues decreased $142,000, or 2.6%, for the three months ended
December 31, 2011 when compared with the same period in the prior fiscal year.
The revenue decrease is primarily the result of decreased revenue from data
archiving services. The Company recently made substantial investments in new
data archiving infrastructure, greatly enhancing its data archiving service
offerings. These new data archiving services, marketed under the trade name of
Rand Secure Archive, are expected to improve data archiving service revenues in
the near term, and the company has made progress during the current quarter in
developing its infrastructure and closing new contracts for the Secure Archive
offering. Additionally, the Company recently started an initiative targeting
strategic accounts and offering enterprise-wide training services for the
Autodesk products, leveraging on the proven skills of a team of training sales
professionals, and this strategic training sales effort has ramped up during the
three months ended December 31, 2011.
Commission revenues decreased $986,000, or 18.1%, for the three months ended
December 31, 2011 when compared with the same period in the prior fiscal year.
The Company closed a large, single subscription renewal during the three months
ended December 31, 2010, which netted approximately $550,000 of commission
revenue, and no similar large sales during the three months ended December 31,
2011. Furthermore, commission revenues on government sales decreased $175,000.
The remaining decrease in commission revenues is due primarily to a single large
annual subscription renewal which closed during the second quarter of the prior
fiscal year but not until the third fiscal quarter of the current year.
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Cost of Revenues and Gross Margin
Three Months Ended December 31,
%
2011 2010 change
Cost of revenue:
Cost of product sales $ 8,703,000 $ 6,986,000 24.6 %
Cost of service revenue 3,198,000 3,748,000 (14.7 )%
Total cost of revenue $ 11,901,000 $ 10,734,000 10.9 %
Gross margin $ 10,572,000 $ 10,934,000
Cost of revenue. The total cost of revenue increased $1,167,000, or 10.9%, for
the three months ended December 31, 2011 when compared to the same period in the
prior fiscal year.
Cost of product sales increased 24.6% during the three months ended December 31,
2011 when compared with the same period in the prior fiscal year, while product
revenues increased 17.8%. Product costs increased at a higher rate than product
revenues due to the Company earning lower sales rebates based on targets
established by the Company's principal supplier, Autodesk. These sales rebates
are applied to the cost of product sales.
Cost of service revenue decreased 14.7% for the three months ended December 31,
2011 when compared to the same period in the prior fiscal year, while service
revenues decreased 2.6% due to lower technical staffing resulting in higher
utilization of the existing staff as well as decreased external costs associated
with email archiving and data storage services. Cost of service revenue as a
percentage of related revenue decreased to 60.9% during the three months ended
December 31, 2011 from 69.4% during the same period in the prior fiscal year for
the reasons explained above.
Gross margin. The Company's overall gross margin percentage of 47.0% for the
three months ended December 31, 2011 was lower than the 50.5% gross margin for
the same period in the prior fiscal year due primarily to lower achievement of
vendor rebates in the current quarter combined with a sales mix which included
less commission revenue, which represents 100% margin because it is reported net
of cost.
Other Operating Expenses
Three Months Ended December 31,
%
2011 2010 change
Other operating expenses:
Selling, general and administrative $ 8,829,000 $ 8,986,000 (1.7 )%
Depreciation and amortization 400,000 455,000 (12.1 )%
Total other operating expenses $ 9,229,000 $ 9,441,000 (2.2 )%
Selling, General and Administrative Expense. Selling, general and administrative
expenses decreased $157,000, or 1.7%, for the three months ended December 31,
2011 when compared to the same period in the prior fiscal year, mainly due to
reduced severance costs that occurred in the prior period following the merger.
Selling, general and administrative expense as a percent of total revenues was
39.3% for the three months ended December 31, 2011, a decrease from 41.5% for
the same period in the prior fiscal year.
Depreciation and Amortization. Depreciation and amortization expenses decreased
$55,000, or 12.1%, for the three months ended December 31, 2011 when compared to
the same period in the prior fiscal year. The decrease is due to a group of
computers having reached the end of their depreciable life prior to the current
fiscal quarter but remaining in service until they were replaced with new
equipment at the end of the quarter. Accordingly, depreciation expense is
expected to increase next quarter as the new equipment is depreciated.
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Other Expense, Net
Three Months Ended December 31,
%
2011 2010 change
Other expense, net $ (197,000 ) $ (186,000 ) 5.9 %
Other Expense, Net. The Company incurred $197,000 in other expense, net, during
the three months ended December 31, 2011, compared to $186,000 during the same
period in the prior fiscal year. Other income and expense consists primarily of
interest income and expense, foreign currency translation gains and losses, and
gains and losses on the disposal of assets.
Income Tax Expense
Three Months Ended December 31,
%
2011 2010 change
Income tax expense $ 107,000 $ 35,000 205.7 %
Income Tax Expense. The Company recorded $107,000 of income tax expense during
the three months ended December 31, 2011, compared to $35,000 in income tax
expense recorded for the same period in the prior fiscal year.
As of December 31, 2011, the Company had U.S. federal net operating loss
carryforwards available to reduce future taxable income of approximately $22.6
million, a portion of which may be limited as to annual utilization under
Internal Revenue Code Section 382. These carryforwards expire between 2012 and
2029. As of December 31, 2011, the Company also had foreign net operating loss
carryforwards of approximately $18.2 million available to reduce future taxable
income. These carryforwards expire between 2012 and 2029 for some jurisdictions
and for other jurisdictions the losses may be carried forward indefinitely.
The Company's net deferred tax assets are approximately $15 million which are
fully offset by a valuation allowance. During the current fiscal quarter,
management completed an evaluation of its deferred tax assets and its offsetting
valuation allowance and concluded that the Company will retain the full
valuation allowance until the Company demonstrates sufficient history of
profitable operations to support the release of any of the calculated
reserve. While the Company was profitable in the prior fiscal year and has
continued to be profitable in the current fiscal year, two full years of
profitability are considered standard for declaring a sustained profitable trend
to support the release of valuation allowance. An evaluation will be conducted
again at fiscal year-end based on updated operating results, the state of the
overall economy and the Company's marketplace at that time.
Six Months Ended December 31, 2011 Compared to the Six Months Ended December 31,
2010
The following tables set forth a comparison of the Company's results of
operations for the six-month period ended December 31, 2011 to the six-month
period ended December 31, 2010. The amounts are derived from selected items
reflected in the Company's unaudited Consolidated Statements of Operations
included elsewhere in this report. The six-month financial results are not
necessarily indicative of future results.
On August 17, 2010, the Company, then known as Avatech Solutions, Inc.
("Avatech), acquired all the outstanding common stock of a separate corporation
then known as Rand Worldwide, Inc. in a reverse merger transaction (the
"Merger"). On January 1, 2011, the Company changed its name from Avatech
Solutions, Inc. to Rand Worldwide, Inc. In accordance with U.S. generally
accepted accounting principles ("U.S. GAAP"), because the Merger was accounted
for as a reverse merger, the consolidated financial statements represent a
continuation of the pre-Merger Rand Worldwide, Inc. Accordingly, the financial
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results for the six months ended December 31, 2010 include the results of
pre-Merger Rand Worldwide, Inc. from July 1, 2010 through August 17, 2010 and
the results of the post-Merger combined Company from August 18, 2010 through
December 31, 2010. Results for pre-Merger Avatech prior to August 17, 2010 have
not been included. The results for the six months ended December 31, 2011 are
those of the combined post-Merger Company.
Revenues
Six Months Ended December 31,
%
2011 2010 change
Revenues:
Product sales $ 26,046,000 $ 20,166,000 29.2 %
Service revenue 10,059,000 9,892,000 1.7 %
Commission revenue 8,311,000 8,432,000 (1.4 )%
Total revenues $ 44,416,000 $ 38,490,000 15.4 %
Revenues. Total revenues for the six months ended December 31, 2011 increased by
$5,926,000, or 15.4%, when compared to the same period in the prior fiscal year.
Product sales increased $5,880,000, or 29.2%, for the six months ended
December 31, 2011 when compared to the same period in the prior fiscal year.
Approximately $2.4 million of this increase was because the prior fiscal quarter
included only a partial quarter of post-Merger operations, while the current
fiscal quarter included a full quarter of post-Merger results. Approximately
$700,000 of the increase was due to a single sale from the Company's Australian
operations with the remaining increase due to economic improvements in the
markets served by the Company. Additionally, the Company's ASCENT courseware
sales increased by $422,000 during the three months ended December 31, 2011 when
compared with the same period in the prior fiscal year mainly as the result of
developing outside distribution channels for the courseware. The remaining
increase in product revenue resulted from the growing popularity of Autodesk
Design Suites, which include several popular design software components bundled
together into software suites tailored to specific industries.
Service revenues increased $167,000, or 1.7%, for the six months ended
December 31, 2011 when compared with the same period in the prior fiscal year.
The effect of having a full quarter of post-Merger operations in the current
fiscal quarter versus a partial quarter of post-Merger operations in the prior
fiscal quarter was an increase in service revenues of $865,000. Service revenues
would have decreased approximately $698,000 if the Merger had not taken place,
due to decreases in Autodesk-related services of approximately $451,000 and
declines in email archiving and data storage services of approximately $247,000.
The Company recently made substantial investments in new data archiving
infrastructure, greatly enhancing its data archiving service offerings. These
new data archiving services, marketed under the trade name of Rand Secure
Archive, are expected to improve data archiving service revenues in the near
term, and the company has made progress during the current quarter in developing
its infrastructure and closing new contracts for the Secure Archive offering.
Additionally, the Company recently started an initiative targeting strategic
accounts and offering enterprise-wide training services for the Autodesk
products, leveraging on the proven skills of a team of training sales
professionals, and this strategic training sales effort has ramped up during the
three months ended December 31, 2011.
Commission revenues decreased $121,000, or 1.4%, for the six months ended
December 31, 2011 when compared with the same period in the prior fiscal year.
The effect of including only a partial quarter of post-Merger results in the
prior fiscal year was a reduction of $776,000 in commission revenues. Commission
revenues would have declined $897,000 if the prior fiscal year had included a
full quarter of post-Merger results. The Company closed a large single sale
during the six months ended December 31, 2010, which netted approximately
$550,000 of commission revenue, and no similar large sales during the six months
ended December 31, 2011. The remaining decrease is largely the result of
decreased commission revenues from government sales.
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Cost of Revenues and Gross Margin
Six Months Ended December 31,
%
2011 2010 change
Cost of revenue:
Cost of product sales $ 18,003,000 $ 13,349,000 34.9 %
Cost of service revenue 6,332,000 7,004,000 (9.6 )%
Total cost of revenue $ 24,335,000 $ 20,353,000 19.6 %
Gross margin $ 20,081,000 $ 18,137,000
Cost of revenue. The total cost of revenue increased $3,982,000, or 19.6%, for
the six months ended December 31, 2011 when compared to the same period in the
prior fiscal year.
Cost of product sales increased 34.9% during the six months ended December 31,
2011 when compared with the same period in the prior fiscal year, while product
revenue increased 29.2%. Product costs increased at a higher rate than product
revenues due to the Company earning lower sales rebates based on targets
established by the Company's principal supplier, Autodesk. These sales rebates
were applied to the cost of product sales.
Cost of service revenue decreased 9.6% for the six months ended December 31,
2011 when compared to the same period in the prior fiscal year, while service
revenues increased 1.7%. The effect of having a full quarter of post-Merger
operations in the current fiscal quarter versus a partial quarter of post-Merger
operations in the same quarter the prior fiscal year was a $588,000 increase in
cost of services revenue, offset by cost reductions due to having fewer
technical staff as well as decreased external costs associated with email
archiving and data storage services. Cost of service revenue as a percentage of
related revenue decreased to 62.9% during the six months ended December 31, 2011
from 70.8% during the same period in the prior fiscal year for the reasons
explained above.
Gross margin. The Company's overall gross margin percentage of 45.2% for the six
months ended December 31, 2011 was lower than the 47.1% gross margin for the
same period in the prior fiscal year due primarily to decreased vendor rebates
combined with a sales mix which included less commission revenue, which
represents 100% margin because it is reported net of cost.
Other Operating Expenses
Six Months Ended December 31,
%
2011 2010 change
Other operating expenses:
Selling, general and administrative $ 17,348,000 $ 17,601,000 (1.4 )%
Depreciation and amortization 795,000 837,000 (5.0 )%
Total other operating expenses $ 18,143,000 $ 18,438,000 (1.6 )%
Selling, General and Administrative Expense. Selling, general and administrative
expenses decreased $253,000, or 1.4%, for the six months ended December 31, 2011
when compared to the same period in the prior fiscal year. Selling, general and
administrative expense as a percent of total revenues was 39.1% for the six
months ended December 31, 2011, a decrease from 45.7% for the same period in the
prior fiscal year. The six months ended December 31, 2010 included $1.7 million
in one-time Merger-related costs, and did not include $1.6 million in expenses
from the operations of pre-Merger Avatech, while the six months ended
December 31, 2011 included no Merger-related costs, and was for a full six
months of post-Merger operations. In addition to the net $100,000 decrease in
expenses related to the Merger costs, and the effect of reporting a full
post-Merger quarter versus a partial post-Merger quarter, selling, general and
administrative expense decreased by $153,000, primarily due to reduced severance
costs.
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Depreciation and Amortization. Depreciation and amortization expenses decreased
$42,000, or 5.0%, for the six months ended December 31, 2011 when compared to
the same period in the prior fiscal year. The decrease is due to a group of
computers having reached the end of their depreciable lives prior to the current
fiscal quarter but remaining in service until they were replaced with new
equipment at the end of the quarter. Accordingly, depreciation expense is
expected to increase next quarter as the new equipment is depreciated.
Other Expense, Net
Six Months Ended December 31,
%
2011 2010 change
Other expense, net $ (338,000 ) $ (501,000 ) (32.5 )%
Other Expense, Net. The Company incurred $338,000 in other expense, net, during
the six months ended December 31, 2011, compared to $501,000 during the same
period in the prior fiscal year. Other income and expense consists primarily of
interest income and expense, foreign currency translation gains and losses, and
gains and losses on the disposal of assets.
Income Tax Expense
Six Months Ended December 31,
%
2011 2010 change
Income tax expense $ 159,000 $ 97,000 63.9 %
Income Tax Expense. The Company recorded $159,000 of income tax expense during
the six months ended December 31, 2011, compared to $97,000 in income tax
expense recorded for the same period in the prior fiscal year.
As of December 31, 2011, the Company had U.S. federal net operating loss
carryforwards available to reduce future taxable income of approximately $22.6
million, a portion of which may be limited as to annual utilization under
Internal Revenue Code Section 382. These carryforwards expire between 2012 and
2029. As of December 31, 2011, the Company also had foreign net operating loss
carryforwards of approximately $18.2 million available to reduce future taxable
income. These carryforwards expire between 2012 and 2029 for some jurisdictions
and for other jurisdictions the losses may be carried forward indefinitely.
The Company's net deferred tax assets are approximately $15 million in all
jurisdictions including the United States, which is offset in full by a
valuation allowance. During the current fiscal quarter, management completed an
evaluation of its deferred tax assets and its offsetting valuation allowance and
concluded that the Company will retain its full valuation allowance until the
Company provides sufficient history of profitable operations to support the
release of any of the calculated reserve. While the Company was profitable in
the prior fiscal year and has continued to be profitable in the current fiscal
year, two full years of profitability are considered standard for declaring a
sustained profitable trend to warrant the release of calculated reserve. An
evaluation will be conducted again at fiscal year-end based on updated operating
results, the overall economy and the state of our marketplace at that time.
Liquidity and Capital Resources
Historically, the Company has financed its operations and met its capital
expenditure requirements primarily through cash flows provided by operations and
borrowings under short-term lines of credit.
On December 31, 2010, the Company entered into a combined line of credit with
PNC Bank, National Association by amending the existing line of credit held by
Rand Worldwide. This line of credit permits up to $9 million of borrowing
limited to 85% of aggregate eligible accounts receivable. The interest rate is,
at the Company's option, either (i) the "Eurodollar Rate", which is calculated
by using the LIBOR rate plus an applicable margin ranging from 2.5% to 3.25% or
(ii) the bank's "Alternate Base Rate", which
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is calculated by using the base rate of the bank, the federal funds open rate,
or the daily LIBOR rate plus an applicable margin ranging from 1.75% to 2.75%.
The interest rate as of December 31, 2011 was 5%. The Company had outstanding
borrowings from the bank under its credit line of approximately $2.1 million as
of December 31, 2011 and had $3.9 million outstanding as of June 30, 2011. The
line expires on December 31, 2012 and is secured by 65% of the stock in one of
the Company's subsidiaries and 100% of the stock of a separate subsidiary.
The Company's operating assets and liabilities consist primarily of accounts
receivable, cash, borrowings under line of credit, accounts payable, and
deferred revenue. Changes in these balances are affected principally by the
timing of sales, collections and vendor payments. The Company purchases
approximately 97% of its product from one principal supplier that provides it
with credit to finance those purchases.
For the six months ended December 31, 2011, net cash provided by operating
activities was $2,362,000, compared with net cash used in operating activities
of $1,101,000 during the six months ended December 31, 2010. The increase in
cash provided by operating activities from the six months ended December 31,
2011, compared to the six months ended December 31, 2010 was due mainly to the
profitability of the Company, with some offsetting changes such as increased
accounts receivable as a result of increased revenues.
The Company's investing activities consist principally of investments in
computer and office equipment. Purchases of equipment for the six months ended
December 31, 2011 increased to $548,000 from $232,000 when compared to the six
months ended December 31, 2010. The Company also acquired $2,123,000 of cash
during the six months ended December 31, 2010 as a result of the Merger.
For the six months ended December 31, 2011, net cash used in financing
activities was $1,951,000 compared to net cash provided by financing activities
of $1,139,000 during the six months ended December 31, 2010. The difference
resulted from the Company's decision to reduce the outstanding balance under its
line of credit during the six months ended December 31, 2011.
The Company had a working capital surplus of $1,803,000 as of December 31, 2011.
Because the Company is one of the largest resellers of Autodesk software and
because Autodesk has continued to state its intention to continue to strengthen
its relationships with its resellers, the Company expects to continue to be a
leading seller of Autodesk software. The Company is a party to a Value Added
Reseller Agreement with Autodesk effective February 1, 2010. The agreement
provides for an initial term of twelve months that, subject to certain
requirements and termination rights of the parties, automatically renews on an
annual basis for two additional twelve-month periods. The agreement designates
the Company as an authorized reseller of Autodesk software and prescribes the
authorized sales territories, authorized products and services, rebate and
incentive program details and marketing support.
Operating Leases
The Company leases certain office space and equipment under noncancellable
operating lease agreements that expire in various years through 2019 and that,
generally, do not contain significant renewal options. Future minimum payments
under all noncancellable operating leases with initial terms of one year or more
consisted of the following at December 31, 2011:
Twelve months ending December 31:
2012 $ 2,437,000
2013 2,107,000
2014 1,734,000
2015 1,249,000
2016 692,000
Thereafter 736,000
Total minimum lease payments $ 8,955,000
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Capital Leases
The Company has various components of computer equipment that are used in its
training facilities and by employees throughout its office locations, much of
which is leased. These capital lease obligations totaled $936,000 as of
December 31, 2011 with approximately $246,000 representing the short-term
balance of the lease and shown as Obligations under capital leases in the
accompanying balance sheets. Payments for the leases are made either monthly or
quarterly through September 2016 and depreciation expense on this equipment was
approximately $92,000 as of December 31, 2011. Future minimum payments consisted
of the following at December 31, 2011:
Twelve months ending December 31:
2012 $ 303,000
2013 299,000
2014 258,000
2015 138,000
2016 95,000
Total minimum lease payments 1,093,000
Less:
Taxes 38,000
Imputed interest 119,000
Present value of future minimum lease payments $ 936,000
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