**U.S. Securities and Exchange Commission**

 

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**x QUARTERLY REPORT UNDER SECTION 13 OF 15 (D) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedDecember 31, 2002**

 

**OR**

 

**o TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THESECURITIES EXCHANGE ACT**

 

**For the transition period from            to           .**

 

**Commission File No. 000-29299**

 

| **CorVu Corporation**                                                                            |
|--------------------------------------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)                                          |
|                                                                                             |   |   |
| **Minnesota**(State of Incorporation)                                                            |   | **41-1457090**(IRS Employer ID #) |
|                                                                                             |   |   |
| **3400 West  66th Street  Edina, Minnesota  55435**(Address of Principal Executive Offices) |
|                                                                                             |   |   |
| **952-944-7777**(Issuer’s Telephone Number, Including Area Code)                            |

 

Checkwhether the issuer (1) filed all reports required to be filed by Sections 13 or15(d) of the Exchange Act during the past 12 months (or such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes  x   No  o

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity as of the latest practicable date.

 

**Class:  Common Stock, parvalue $.01 per share**

**Outstanding shares as of February10, 2003:  22,694,295**

 

 

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**CorVu Corporation**

**Index to Form 10-QSB**

 
| PART I FINANCIAL INFORMATION |
|------------------------------|
|                         |
|                         | Item  1.  Financial Statements |
|                         |   |
|                         | Consolidated  Balance Sheets December 31, 2002 (Unaudited) and June 30, 2002 |
|                         |   |
|                         | Consolidated  Statements of Cash Flows (Unaudited) Six Month Periods Ended December 31,  2002 and 2001 |
|                         |   |
|                         | Consolidated  Statements of Operations (Unaudited) Three and Six Month Periods Ended  December 31, 2002 and 2001 |
|                         |   |
|                         | Notes  to Unaudited Consolidated Financial Statements For the Three and Six Month  Periods Ended December 31, 2002 and 2001 |
|                         |   |
|                         | Item  2.  Management’s Discussion and Analysis of Financial Condition and  Results of Operations |
|                         |   |
|                         | Item 3.   Controls and Procedures |
|                         |   |
| PART II OTHER  INFORMATION   |
|                         |
|                         | Item 1.   Legal Proceedings |
|                         |   |
|                         | Item  2.  Changes in Securities and Use of  Proceeds |
|                         |   |
|                         | Item  3.  Default Upon Senior Securities |
|                         |   |
|                         | Item 4.   Submission of Matters to a Vote of Security Holders |
|                         |   |
|                         | Item 5.   Other Information |
|                         |   |
|                         | Item  6.  Exhibits and Reports on Form 8-K |
|                         |   |
| SIGNATURES                   |
|                         |
| CERTIFICATIONS               |
|                         |
| EXHIBITS                     |
|                              |  |  |

 

1

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.****                 ****Finan****cial Statements**

 

**CORVU CORPORATION AND SUBSIDIARIES**

** **

Consolidated Balance Sheets

 

 
|                                                                                                                            |   | **December 31,  2002  (Unaudited)** |       | **June 30,  2002  (Audited)** |       |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|-------------------------------|------------|
| **Assets**                                                                                                                      |   |                                |       |                          |       |
|                                                                                                                            |   |                                | ** ** |                          | ** ** |
| Current assets:                                                                                                                 |   |                                |       |                          |       |
| Cash and cash  equivalents                                                                                                      |   | $                                   | 563,495    |                          | 279,176    |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $197,000 and $160,000,  respectively                      |   | 3,118,381                           |       | 2,845,858                     |       |
| Deferred income  taxes                                                                                                          |   | 708,000                             |       | —                        |       |
| Prepaid expenses  and other                                                                                                     |   | 104,328                             |       | 197,851                       |       |
| Total current  assets                                                                                                           |   | 4,494,204                           |       | 3,322,885                     |       |
| Furniture,  fixtures and equipment, net                                                                                         |   | 165,938                             |       | 99,940                        |       |
|                                                                                                                            |   | $                                   | 4,660,142  |                          | 3,422,825  |   |
|                                                                                                                            |   |                                |       |                          |       |
| **Liabilities and  Stockholders’ Deficit**                                                                                 |   |                                |       |                          |       |
|                                                                                                                            |   |                                | ** ** |                          | ** ** |
| Current  liabilities:                                                                                                           |   |                                |       |                          |       |
| Accounts payable                                                                                                                |   | $                                   | 1,198,843  |                          | 2,036,842  |   |
| Accrued  compensation and related costs                                                                                         |   | 2,151,546                           |       | 2,527,493                     |       |
| Deferred revenue                                                                                                                |   | 3,352,052                           |       | 2,872,329                     |       |
| Notes  payable-stockholder                                                                                                      |   | 685,767                             |       | —                        |       |
| Accrued interest                                                                                                                |   | 177,904                             |       | 73,232                        |       |
| Other accrued  expenses                                                                                                         |   | 711,867                             |       | 845,168                       |       |
| Total current  liabilities                                                                                                      |   | 8,277,979                           |       | 8,355,064                     |       |
|                                                                                                                            |   |                                |       |                          |       |
| Notes  payable-stockholder                                                                                                      |   | —                              |       | 685,767                       |       |
|                                                                                                                            |   |                                |       |                          |       |
| Stockholders’  deficit:                                                                                                    |   |                                |       |                          |       |
| Undesignated,  24,000,000 shares                                                                                                |   |                                |       | —                        |       |
| Series A  convertible preferred stock, par value $10 per share; 1,000,000 shares  authorized; 200 shares issued and outstanding |   | 2,000                               |       | 2,000                         |       |
| Common stock,  $0.01 par value; 75,000,000 shares authorized; 22,694,295 and 20,730,835  shares issued and outstanding          |   | 226,887                             |       | 207,252                       |       |
| Additional  paid-in capital                                                                                                     |   | 16,693,103                          |       | 16,223,744                    |       |
| Stock subscription  receivable                                                                                                  |   | (324,000                            | )          | —                        |       |
| Accumulated  deficit                                                                                                            |   | (20,223,134                         | )          | (22,191,944                   | )          |
| Foreign currency  translation adjustment                                                                                        |   | 7,307                               |       | 140,942                       |       |
| Total  stockholders’ deficit                                                                                               |   | (3,617,837                          | )          | (5,618,006                    | )          |
| Total  liabilities and stockholders’ deficit                                                                               |   | $                                   | 4,660,142  |                          | 3,422,825  |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

2

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**CORVU CORPORATION AND SUBSIDIARIES**

 

ConsolidatedStatements of Cash Flows (Unaudited)

 

Six Month Periods Ended December 31,2002 and 2001

 
|                                                                                      |   | **2002** |      | **2001** |     |
|-------------------------------------------------------------------------------------------|--------|----------|-----------|----------|----------|
| Cash flows from  operating activities:                                                    |   |     |      |     |     |
| Net income  (loss)                                                                        |   | $        | 1,968,875 |     | (471,022 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |     |      |     |     |
| Depreciation                                                                              |   | 29,206   |      | 29,264   |     |
| Warrants and  stock options vested                                                        |   | 64,194   |      | 309,646  |     |
| Changes in  operating assets and liabilities:                                             |   |     |      |     |     |
| Trade accounts  receivable, net                                                           |   | (304,502 | )         | 293,889  |     |
| Deferred income  taxes                                                                    |   | (708,000 | )         | —   |     |
| Prepaid expenses  and other                                                               |   | 93,523   |      | 14,259   |     |
| Accounts payable                                                                          |   | (936,367 | )         | 90,065   |     |
| Accrued  compensation and related costs                                                   |   | (420,062 | )         | (54,591  | )        |
| Deferred revenue                                                                          |   | 536,015  |      | 114,246  |     |
| Accrued interest                                                                          |   | 104,672  |      | 19,902   |     |
| Other accrued  expenses                                                                   |   | (148,943 | )         | (267,038 | )        |
| Net cash  provided by operating activities                                                |   | 278,611  |      | 78,620   |     |
|                                                                                      |   |     |      |     |     |
| Cash flows from  investing activities:                                                    |   |     |      |     |     |
| Capital  expenditures                                                                     |   | (95,204  | )         | (46,079  | )        |
| Net cash used in  investing activities                                                    |   | (95,204  | )         | (46,079  | )        |
|                                                                                      |   |     |      |     |     |
| Cash flows from  financing activities:                                                    |   |     |      |     |     |
| Proceeds from  sale of common stock, net of costs                                         |   | 100,800  |      | 19,005   |     |
| Repayment of  notes payable                                                               |   | —   |      | (188,123 | )        |
| Borrowings  on notes payable— stockholder                                       |   | —   |      | 161,381  |     |
| Repayment on  notes payable— stockholder                                             |   | —   |      | (46,400  | )        |
| Net cash  provided (used) by financing activities                                         |   | 100,800  |      | (54,137  | )        |
| Effect of  exchange rate changes on cash                                                  |   | 112      |      | 1,100    |     |
| Net increase  (decrease) in cash and cash equivalents                                     |   | 284,319  |      | (20,496  | )        |
| Cash and cash  equivalents at beginning of period                                         |   | 279,176  |      | 77,409   |     |
| Cash and cash  equivalents at end of period                                               |   | $        | 563,495   |     | 56,913   |   |
| Non-cash  investing and financing activities:                                             |   |     |      |     |     |
| Common stock  issued for stock subscription receivable                                    |   | $        | 324,000   |     | —   |   |
| Cashless  exercise of stock warrants                                                      |   | $        | 4,888     |     | —   |   |
| Conversion of  director advance into common stock                                         |   | $        | —    |     | 12,000   |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

3

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**CORVU CORPORATION AND SUBSIDIARIES**

** **

Consolidated Statements of Operations (Unaudited)

 

Three and Six Month Periods EndedDecember 31, 2002 and 2001

 
|                                              |   | **Three Months Ended** |      | **Six Months Ended**   |      |
|---------------------------------------------------|--------|------------------------|-----------|------------------------|-----------|
|                                              |   | **December 31,  2002** |      | **December 31,  2001** |      | **December 31,  2002** |   | **December 31,  2001** |   |
|                                              |   |                   |      |                   |      |   |   |   |   |
| Revenues:                                         |   |                   |      |                   |      |   |   |   |   |
| Software and  license fees                        |   | $                      | 2,136,925 |                   | 1,602,874 |   | 4,771,899 |   | 2,532,998 |   |
| Maintenance,  consulting, and other               |   | 1,754,965              |      | 1,383,364              |      | 3,564,543 |   | 2,652,480 |   |
|                                              |   |                   |      |                   |      |   |   |   |   |
| Total revenues                                    |   | 3,891,890              |      | 2,986,238              |      | 8,336,442 |   | 5,185,478 |   |
| Operating costs  and expenses:                    |   |                   |      |                   |      |   |   |   |   |
| Cost of  maintenance, consulting, and other       |   | 825,187                |      | 728,963                |      | 1,554,752 |   | 1,338,379 |   |
| Product  development                              |   | 328,359                |      | 285,222                |      | 610,594 |   | 555,140 |   |
| Sales and  marketing                              |   | 1,530,223              |      | 986,947                |      | 2,817,258 |   | 1,893,813 |   |
| General and  administrative                       |   | 955,498                |      | 724,513                |      | 2,042,744 |   | 1,796,307 |   |
| Total operating  costs and expenses               |   | 3,639,267              |      | 2,725,645              |      | 7,025,348 |   | 5,583,639 |   |
|                                              |   |                   |      |                   |      |   |   |   |   |
| Operating income  (loss)                          |   | 252,623                |      | 260,593                |      | 1,311,094 |   | (398,161 | ) |
|                                              |   |                   |      |                   |      |   |   |   |   |
| Interest  expense, net                            |   | (22,680                | )         | (50,188                | )         | (50,219 | ) | (72,861 | ) |
|                                              |   |                   |      |                   |      |   |   |   |   |
| Income (loss)  before income taxes                |   | 229,943                |      | 210,405                |      | 1,260,875 |   | (471,022 | ) |
|                                              |   |                   |      |                   |      |   |   |   |   |
| Benefit from  income taxes                        |   | 708,000                |      | —                 |      | 708,000 |   | — |   |
|                                              |   |                   |      |                   |      |   |   |   |   |
| Net income  (loss)                                |   | $                      | 937,943   |                   | 210,405   |   | 1,968,875 |   | (471,022 | ) |
|                                              |   |                   |      |                   |      |   |   |   |   |
| Net income  (loss) per common share—basic    |   | $                      | 0.04      |                   | 0.01      |   | 0.09 |   | (0.02 | ) |
| Weighted average  shares outstanding—basic   |   | 22,277,197             |      | 20,367,280             |      | 21,693,305 |   | 20,262,531 |   |
| Net income  (loss) per common share—diluted  |   | $                      | 0.04      |                   | 0.01      |   | 0.09 |   | (0.02 | ) |
| Weighted average  shares outstanding—diluted |   | 23,246,834             |      | 20,833,342             |      | 22,765,184 |   | 20,262,531 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

4

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**CORVU CORPORATION AND SUBSIDIARIES**

 

**Notes****to Unaudited Consolidated Financial Statements For the Threeand Six Month Periods Ended December 31, 2002 and 2001**

 

**(1)****                ****Unaudited Financial Statements**

 

The accompanying unauditedconsolidated financial statements of CorVu Corporation and Subsidiaries havebeen prepared by the Company in accordance with accounting principles generallyaccepted in the United States of America for interim financial information,pursuant to the rules and regulations of the Securities and ExchangeCommission.  Pursuant to such rules andregulations, certain financial information and footnote disclosures normallyincluded in the financial statements have been condensed or omitted.  The results for the periods indicated areunaudited, but reflect all adjustments (consisting only of normal recurringadjustments) which management considers necessary for a fair presentation ofoperating results.

 

Operating results for thethree and six months ended December 31, 2002 are not necessarily indicative ofthe results that may be expected for the year ending June 30, 2003.  These unaudited consolidated financialstatements should be read in conjunction with the consolidated financialstatements and footnotes thereto included in the Company’s Annual Report onForm 10-KSB for the year ended June 30, 2002.

 

**(2)****                ****Summary of Significant AccountingPolicies**

 

***(a)******                ******Revenue Recognition***

 

Software license revenue isrecognized when all of the following criteria have been met: there is anexecuted license agreement, software has been delivered to the customer, thelicense fee is fixed and payable within twelve months, collection is deemedprobable and product returns are reasonably estimable.  Revenues related to multiple elementarrangements are allocated to each element of the arrangement based on the fairvalues of elements such as license fees, maintenance, and professionalservices.  Fair value is determinedbased on vendor specific objective evidence. Maintenance revenues are recognized ratably over the term of themaintenance contract, typically 12 to 36 months.  Consulting and other revenues are recognized when services areperformed.

 

Deferred revenue representspayment received or amounts billed in advance of services to be performed.

 

5

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***(b)******                ******Net Income (Loss) per Common Share***

*** ***

Basic net income (loss) percommon share is computed by dividing net income (loss) by the weighted averagenumber of common shares outstanding during the period. Diluted net income(loss) per common share is computed by dividing net income (loss) by theweighted average number of common shares outstanding plus all additional commonstock that would have been outstanding if potentially dilutive common stockrelated to stock options and warrants had been issued. Weighted average sharesoutstanding-diluted includes 969,637 and 837,969 shares of dilutive securitiesfor the three and six months ended December 31, 2002, respectively. Weightedaverage shares outstanding-diluted includes 466,062 shares of dilutive securitiesfor the three months ended December 31, 2001. Dilutive common equivalent shareshave not been included in the computation of diluted net loss per share for thesix months ended December 31, 2001 because their inclusion would beanti-dilutive.

 

Following is areconciliation of basic and diluted net income (loss) per common share for thethree and six months ended December 31, 2002 and 2001, respectively:

 
|                                                              |   | **Three Months Ended  December 31,** |    | **Six Months Ended  December 31,** |    |
|-------------------------------------------------------------------|--------|--------------------------------------|---------|------------------------------------|---------|
|                                                              |   | **2002**                             |    | **2001**                           |    | **2002** |   | **2001** |   |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Net  income (loss)                                                |   | $                                    | 937,943 |                               | 210,405 |   | 1,968,875 |   | (471,022 | ) |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Weighted  average shares outstanding                              |   | 22,277,197                           |    | 20,367,280                         |    | 21,693,305 |   | 20,262,531 |   |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Net  income (loss) per common share— basic                   |   | $                                    | 0.04    |                               | 0.01    |   | 0.09 |   | (0.02 | ) |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Net  income (loss) per common share — diluted:               |   |                                 |    |                               |    |   |   |   |   |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Net  income (loss)                                                |   | $                                    | 937,943 |                               | 210,405 |   | 1,968,875 |   | (471,022 | ) |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Weighted  average shares outstanding                              |   | 22,277,197                           |    | 20,367,280                         |    | 21,693,305 |   | 20,262,531 |   |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Common  stock equivalents                                         |   | 969,637                              |    | 466,062                            |    | 1,071,879 |   | 0 |   |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Weighted  average shares and potential diluted shares outstanding |   | 23,246,834                           |    | 20,833,342                         |    | 22,765,184 |   | 20,262,531 |   |
|                                                              |   |                                 |    |                               |    |   |   |   |   |
| Net  income (loss) per common share — Diluted                |   | $                                    | 0.04    |                               | 0.01    |   | 0.09 |   | (0.02 | ) |

 

The Company uses thetreasury method for calculating the dilutive effect of the stock options andwarrants (using the average market price).

 

6

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Options and warrants topurchase 4,205,077 shares of common stock with a weighted average exerciseprice of $2.24 were outstanding at December 31, 2002 but were excluded from thecomputation of common share equivalents for the three and six months endedDecember 31, 2002 because their exercise prices were greater than the averagemarket price of the common shares. Options and warrants to purchase 5,534,890shares of common stock with a weighted average exercise price of $1.83 wereoutstanding at December 31, 2001 but were excluded from the computation ofcommon share equivalents for the three months ended December 31, 2001 becausetheir exercise prices were greater than the average market price of the commonshares. All options and warrants outstanding as of December 31, 2001 wereexcluded from the computation of common stock equivalents for the six monthsended December 31, 2001 as they were anti-dilutive.

 

**(3)****                ****Comprehensive Income (Loss)**

 

Comprehensive income (loss)and its components, including all changes in equity during a period exceptthose resulting from investments by owners or distributions to owners are asfollows:

 
|                                    |   | **Three  Months Ended** |   | **Six Months  Ended**   |   |
|-----------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                    |   | **December  31,  2002** |   | **December  31,  2001** |   | **December  31,  2002** |   | **December  31,  2001** |   |
| Net income (loss)                       |   | $937,943                |   | $210,405                |   | 1,968,875 |   | $(471,022 | ) |
| Other comprehensive income (loss):      |   |                    |   |                    |   |   |   |   |   |
| Foreign currency translation adjustment |   | (59,636                 | )      | (67,943                 | )      | (133,635 | ) | (50,474 | ) |
| Total comprehensive income (loss)       |   | $878,307                |   | $142,462                |   | $1,835,240 |   | $(521,496 | ) |

 

 

**(4)****                ****Income Taxes**

 

At December 31, 2002, theCompany has reported U.S. net operating loss carryforwards of approximately$6.0 million.  The net operating losscarryforwards expire in the years 2010 through 2021. The Company recorded adeferred tax asset of $708,000 for the three months ended December 31, 2002.Previous to the three months ended December 31, 2002, the Company fullyreserved the deferred tax asset due to the uncertainty of its use in futureperiods.

 

Federal tax laws impose significantrestrictions on the utilization of net operating loss carryforwards in theevent of a change in ownership of the Company which constitutes an “ownershipchange,” as defined by the Internal Revenue Code, Section 382.  The Company’s net operating losscarryforward may be subject to the above limitations.

 

**(5)****                ****Liquidity**

 

The accompanying interimconsolidated financial statements are prepared assuming the Company willcontinue as a going concern. During the year ended June 30, 2002, the Companygenerated operating income of $605,491. Subsequently, for the six-month periodended December 31, 2002, the Company generated operating income of $1,311,094.As of December 31, 2002, the Company had an accumulated deficit of $20,233,134,total stockholders’ deficit of $3,617,837, and negative working capital of$3,783,775.

 

7

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During the past eighteenmonths, the Company has completely repaid the amount due to the InternalRevenue Service ($930,000) and has also significantly reduced the amount dueunder a Creditor Settlement Agreement (from $976,000 to $350,000 as of December31, 2002). Payments have been funded with current operating capital generatedas a result of five consecutive quarters of profitability. During the twelvemonth period ended December 31, 2002, the Company generated consolidatedrevenues of approximately $15 million and net income of approximately $2.9million. Management continues to focus on increasing revenues and carefullymanaging operating costs. Management projects that cash flow sufficient for theCompany to meet its obligations and to fund future operations will begenerated.

** **

**(6)****                ****Notes Payable- Stockholder**

 

The Company has receivedinterest-bearing advances from a stockholder under short-term notes. The notesbear interest at 8.5% and mature on December 31, 2006, with the right to demandpayment on or after September 30, 2003. The notes are secured by substantiallyall of the assets of the Company. Interest expense was $14,932 and $29,453 foreach of the three and six month periods ended December 31, 2002 and 2001,respectively.

 

**(7)****              ****Installment Agreement with InternalRevenue Service**

 

In March 2001, the Companyentered into an installment agreement with the Internal revenue Service regardingthe payment of past due payroll taxes, penalties and interest totalingapproximately $930,000. In October 2002, the Company made its final paymentunder this agreement.

 

**(8)****                ****Settlement of Litigation**

 

TheCompany and its officers and directors were involved in a lawsuit filed bycertain stockholders for providing allegedly false and misleading informationregarding the historical and future financial performance of the Company. InSeptember 2002, the Company entered into a Settlement Agreement and MutualRelease to fully settle the matter. Terms of the settlement are covered by aconfidentiality clause within the agreement. The settlement includes theissuance of warrants to purchase 133,332 shares of common stock at a price of$0.21 per share.

** **

**(9)****                ****Creditor Settlement Agreement**

 

InNovember 2001 the Company entered into a Stipulation of Settlement agreementwith a creditor for approximately $976,000 under which the Company agreed tomake quarterly payments through December 2003, at which time it would also payaccrued interest on the unpaid principal balance from the date of the agreementto December 2003 at a rate of 9% per annum. In the event of default, theobligation is accelerated, the interest rate is increased to 15% and legal feesin the amount of $100,000 would become due. The Company has also granted asecurity interest in the receivables of CorVu North America, Inc. as part ofthis settlement. As of December 31, 2002, the balance under this obligation,which is included in accounts payable in the accompanying balance sheets, wasapproximately $350,000. Interest expense was $10,490 and $13,502 for the threemonth periods ended December 31, 2002 and 2001, respectively and was $26,369and $13,502 six month periods ended December 31, 2002 and 2001, respectively.

 

8

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**(10)****            ****Consulting Agreement**

 

InSeptember 2002, the Company entered into a consulting agreement with GlobalNetVenture Partners, L.L.C. (GlobalNet) to provide management advisory servicesfor a period of 30 months. In exchange for these services, the Company will payGlobalNet a fee of $26,500 per month. In addition, GlobalNet can earnadditional fees under the agreement as a result of its involvement in obtainingfinancing and for introducing and developing strategic partnerships that resultin revenue to the Company. The agreement can be terminated by either party upon60 days written notice. As part of the services to be provided under thisagreement, a principal of GlobalNet agreed to serve as the Company’s Chairmanof the Board for a period of 24 months.

** **

**(11)****            ****Stock Purchase**

 

InSeptember 2002, the Company sold 1.2 million shares of the Company’s commonstock to GlobalNet at a price of $0.27 per share under a stock purchaseagreement. GlobalNet paid the entire purchase price by delivering a promissorynote to the Company and pledged the stock purchased as security for the note.The note, which expires in September 2009, bears an interest rate of 5.5% perannum through September 2, 2009, with interest payable quarterly startingSeptember 30, 2002. The note is a limited recourse note in that in the event ofnon-payment, the Company’s only recourse is against the pledged shares.

 

9

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**Item 2.****                                  ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**For the Three and Six Month PeriodsEnded December 31, 2002versus December 31, 2001**

 

REVENUES:

 

Total revenue for the three and six-monthperiods ended December 31, 2002 increased 30% and 61%, respectively, comparedto the same periods a year ago.

 

Software revenues increased $534,051 (33%)and $2,238,901 (88%) for the three and six-month periods ended December 31,2002, respectively, from the same periods last year. These increases reflectthe signing of new customers which result in new license sales.

 

Maintenance,consulting and other revenues increased $371,601 (27%) and $912,063 (34%), forthe three and six-month periods ended December 31, 2002, respectively, from thesame periods last year. These results reflect continued improvement ofmaintenance contract renewals and collections, as well as increased utilizationof our professional services personnel required to service the increased demandfor consulting and training services.

 

OPERATINGCOSTS AND EXPENSES:

 

Operating expenses increased $913,622 (34%)and $1,441,709 (26%) for the three and six-month periods ended December 31,2002, respectively, from the same periods last year.

 

Cost ofmaintenance, consulting and other expenses increased $96,224 (13%) and $216,373(16%) for the three and six-month periods ended December 31, 2002,respectively, from the same periods last year. Increased demand for our services caused primarily by the increasedsoftware license fees has caused us to increase staffing levels.

 

Productdevelopment costs increased $43,137 (15%) and $55,454 (10%) for the three andsix-month periods ended December 31, 2002, respectively, from the same periodslast year.  Development staffing hasincreased by two positions as we continue to further enhance and improve ourproduct offerings.

 

Sales and marketing expenses increased$543,276 (55%) and $923,445 (49%) for the three and six-month periods endedDecember 31, 2002, respectively, from the same periods last year. Theseincreases are the result of slight increases in new sales positions andincreased sales commissions expenses as a result of our increasing revenuesfrom both software license fees and professional services.

 

General and administrative expenses increased$230,985 (32%) and $246,437 (14%) for the three and six-month periods endedDecember 31, 2002, respectively, from the same periods last year. Due to ourprofitable results for our fiscal year 2003, bonuses earned by our chiefexecutive officer have caused this increased expense level. The bonus earnedfor the six month period ended December 31, 2002 was approximately $210,000.

 

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INTERESTEXPENSE, NET:

 

Interest expense, net decreased $27,508 (55%)and $22,642 (31%) for the three and six-month periods ended December 31, 2002,respectively, compared to the same periods last year due to lower debt levels.

 

BENEFIT FROM INCOME TAXES:

 

For the three month period ended December 31,2002, the Company recorded a deferred tax asset of $708,000. In previousperiods, the Company had fully reserved the deferred tax asset due to theuncertainty of its use in future periods.

 

NETINCOME (LOSS):

 

CorVu Corporation reported net income of$937,943 and $1,968,875 for the three and six-month periods ended December 31,2002, respectively, compared to net income of $210,405 and a net loss of$471,022 for the three and six-month periods ended December 31, 2001,respectively. Results for the three and six-month periods ended December 31,2002 includes a benefit for income taxes related to a deferred tax asset of$708,000 which represents the value of its accumulated net operating lossesthat will be utilized in future periods to offset federal and state incometaxes, due to the Company's continuing positive financial performance.

 

**Liquidity and Capital Resources**

 

Total cash and cash equivalents increased by$284,319 during the six-month period ended December 31, 2002 from $279,176 asof June 30, 2002 to $563,495 as of December 31, 2002.  Net cash provided by operating activities was $278,611 for thesix-month period ended December 31, 2002. Net cash used in investing activitieswas $95,204, reflecting the acquisition of capital assets during the period.Net cash provided by financing activities was $100,800 for the six-month periodended December 31, 2002, reflecting the proceeds from the sale of common stock.

 

During the twelve month period ended December31, 2002, the Company has generated consolidated revenues of approximately $15million and net income of approximately $2.9 million. Management intends tocontinue to increase revenues from software licenses and other revenue sourcesand, to carefully manage operating costs, as deemed necessary. Management believesthese activities will generate sufficient cash flows to sustain CorVu’soperations for the next twelve months.

 

**(1)****                ****Critical Accounting Policies andEstimates-**

 

Our significant accounting policies aredescribed in Note 1 to the consolidated financial statements included in ourannual report for the year ended June 30, 2002.  The accounting policies used in preparing our interim 2003consolidated financial statements are the same as those described in our annualreport, and are as follows:

 

We believe the critical accounting policieslisted below affect significant judgments and estimates used in the preparationof our consolidated financial statements.

 

Revenue Recognition.  We recognize revenues in accordance with theprovisions of the American Institute of Certified Public Accountants’ Statementof Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4and SOP 98-9, as well as Technical Practice Aids issued from time to time bythe American Institute of Certified Public Accountants, and in accordance withthe Securities and Exchange Commission Staff Accounting Bulletin No. 101,“Revenue Recognition in Financial Statements.” We license software under non-cancelable license agreements and providerelated professional services, including consulting, training, andimplementation services, as well as ongoing customer support andmaintenance.  Consulting, training andimplementation services are not essential to the functionality of our software

 

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products, are sold separately and also areavailable from a number of third-party service providers.  Accordingly, revenues from these servicesare generally recorded separately from the license fee.  Our specific revenue recognition policiesare as follows:

 

Software License Fees —Software license fee revenues from end-users and resellers are generallyrecognized when there is an executed license agreement, software has beendelivered to the customer, the license fee is fixed and payable within 12months, collection is deemed probable and product returns are reasonablyestimable.  Revenues related to multipleelement arrangements are allocated to each element of the arrangement based onthe fair values of elements such as license fees, maintenance, and professionalservices.  Fair value is determinedbased on vendor specific objective evidence.

 

Maintenance, Consulting andother - Revenues from training and consulting services are recognized asservices are provided to customers. Revenues from maintenance contracts are deferred and recognized ratablyover the term of the maintenance agreements.

 

Software Development Costs.  Software development costs are expensed asincurred until technological feasibility is established.  Software development costs incurredsubsequent to establishing technological feasibility are capitalized andamortized over their estimated useful lives. Management is required to use professional judgment in determiningwhether development costs meet the criteria for immediate expense orcapitalization.

 

Allowance for Doubtful Accounts.  We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments.  If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required orrevenue could be deferred until collectibility becomes probable.

 

Contingencies.  We are subject to the possibility of various loss contingenciesin the normal course of business.  Weaccrue for loss contingencies when a loss is estimable and probable.

 

**Recently Issued AccountingPronouncements**

 

In December 2002, the FASB issued SFAS No.148, “Accounting for Stock-Based Compensation - Transition andDisclosure.”  SFAS No. 148 is anamendment to SFAS No. 123 providing alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation and also provides requires additional disclosures aboutthe method of accounting for stock-based employee compensation.  The amendments are effective for financialstatements for fiscal years ending after December 31, 2002 and for the interimperiods beginning after December 15, 2002. The Company has currently chosen tonot adopt the voluntary change to the fair value based method of accounting forstock-based employee compensation, pursuant to SFAS No. 148, which, if adopted,could have a material effect on the Company’s consolidated financial positionor results of operations.

 

In February 2003, the FASB issued SFAS No.149, “Accounting for Certain Financial Instruments with Characteristics ofLiabilities and Equity,” which is effective at the beginning of the firstinterim period beginning after March 15, 2003. SFAS No. 149 establishes standards for the Company’s classification ofliabilities in the financial statements that have characteristics of bothliabilities and equity.  The Companybelieves the adoption of SFAS No. 149 will not have a material effect on theCompany’s consolidated financial position or results of operations.

 

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**Cautionary Factors That MayAffect Future Results**

 

ThisQuarterly Report on Form 10-QSB, including the information incorporated byreference herein and the exhibits hereto, and other written and oral statementsmade from time to time by us may include “forward-looking” statements.Forward-looking statements broadly involve our current expectations for future results.Any statement that is not a historical fact, including estimates, projections,future trends and the outcome of events that have not yet occurred, areforward-looking statements. Our forward-looking statements generally relate toour financing plans, trends affecting our financial condition or results ofoperations, our growth and operating strategy, product development, competitivestrengths, the scope of our intellectual property rights, sales efforts, andthe declaration and payment of dividends.  Words such as “anticipates,”“believes,” “could” “estimates,” “expects,” “forecast,” “intend,” “may,”“plan,” “possible,” “project,” “should,” “will” and similar expressionsgenerally identify our forward-looking statements. You must carefully consider forward-lookingstatements and understand that such statements involve a variety ofassumptions, risks and uncertainties, known and unknown, and may be affected bya number of factors, including, among others, the factors discussed in ourAnnual Report on Form 10-KSB for the year ended June 30, 2002.

 

Wealso caution you that forward-looking statements speak only as of the datemade. We undertake no obligation to update any forward-looking statement, butinvestors are advised to consult any further disclosures by us on this subjectin our filings with the Securities and Exchange Commission, especially onForms 10-KSB, 10-QSB, and 8-K (if any), in which we discuss in more detailvarious important factors that could cause actual results to differ from expectedor historic results. We intend to take advantage of the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995 regarding ourforward-looking statements, and are including this sentence for the expresspurpose of enabling us to use the protections of the safe harbor with respectto all forward-looking statements.

 

**Item 3****.****   ****Controlsand Procedures**

 

Within 90 days prior to the filing of thisquarterly report, the Company’s Chief Executive Officer and its Chief FinancialOfficer evaluated the Company’s disclosure controls and procedures as requiredpursuant to Rule 13a-14 under the Securities and Exchange Act of 1934, asamended.  Based on this evaluation, theChief Executive Officer and its Chief Financial Officer determined that such controlsand procedures were effective.  Therewere no significant changes in internal controls that could significantlyaffect the disclosure controls and procedures since the date of the evaluation.

 

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**PART II**

**OTHERINFORMATION**

 

Item1.       Legal Proceedings.

 

SeeItem 3 of Part II of Form 10-KSB for the year ended June 30, 2002.

 

Item2.       Changes in Securities and Use of Proceeds.

 

During the quarter endedDecember 31, 2002, the Company made the following sales of unregisteredsecurities:

 

(a)                                  In December2002, the Company issued to a business entity 244,396 shares of Common Stockupon the cashless exercise of a warrant. The warrant had provided the right to purchase a total of 253,125 sharesfor $.01 per share. Based upon the terms of the warrant, the Company assumed afair market value of $.29 per share of Common Stock for the cashless exerciseof the warrant.  The Company relied onthe exemption from registration provided by Section 3(a)(9) of the SecuritiesAct of 1933 (the “Act’).

 

(b)                                 In December2002, the Company issued to three individuals an aggregate of 244,396 shares ofCommon Stock upon the cashless exercise of a warrant. The warrant had providedthe right to purchase a total of 253,125 shares for $.01 per share. Based uponthe terms of the warrant, the Company assumed a fair market value of $.29 pershare of Common Stock for the cashless exercise of the warrant.  The Company relied on the exemption from registrationprovided by Section 3(a)(9) of the Act.

 

Item3.       Default Upon Senior Securities.

 

None

 

Item4.       Submission of Matters to a Vote of Security Holders.

 

None

 

Item5.       Other Information.

 

None

 

Item6.       Exhibits and Reports on Form 8-K.

 

(a)  Exhibits: SeeExhibit Index on page following Certifications Pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

(b)  Reports onForm 8-K:   None

 

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**SIGN****ATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                                |   |    CORVU  CORPORATION                                                                               |
|-------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
|                                |   |                                                                                                               |
|                                |   |                                                                                                               |
| Date:  February  13, 2003 | By     |    /s/  David C. Carlson                                                                            |   |
|                                |   |                David  C. Carlson        |
|                                |   |                Chief  Financial Officer |

 

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**CERTIFICATION****PURSUANT TO**

**SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, Justin M. MacIntosh,Chief Executive Officer of CorVu Corporation, certify that:

 

1.                    I have reviewed thisquarterly report on Form 10-QSB of CorVu Corporation;

 

2.                    Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                    Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                    The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                                      designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                                     evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                    The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function);

 

a)                                      all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                    The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Dated:  February 13, 2003 | Signature: |   |                    |
|--------------------------------|------------|--------|-------------------------|
|                           |       |   | Justin M. MacIntosh     |
|                           |       |   | Chief Executive Officer |
|                                |            |        |                         |  |

 

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**CERTIFICATION PURSUANT TO**

**SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

I, David C. Carlson, ChiefFinancial Officer of CorVu Corporation, certify that:

 

1.                    I have reviewed thisquarterly report on Form 10-QSB of CorVu Corporation;

 

2.                    Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                    Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                    The registrant’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                                      designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this quarterlyreport is being prepared;

 

b)                                     evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                    The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function);

 

a)                                      all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                    The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Dated:  February 13, 2003 | Signature: |   |                    |
|--------------------------------|------------|--------|-------------------------|
|                           |       |   | David C. Carlson        |
|                           |       |   | Chief Financial Officer |
|                                |            |        |                         |  |

 

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EXHIBIT INDEX

 

 

Exhibit

Number                           Description

 

99.1                                      Certification of CEOPursuant to Section 906 of Sarbanes-Oxley Act of 2002

 

99.2                                      Certification of CFOPursuant to Section 906 of Sarbanes-Oxley Act of 2002

 

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