<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
----- -----
COMMISSION FILE NUMBER 0-4096
COMSHARE, INCORPORATED
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1804887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 BRIARWOOD CIRCLE, ANN ARBOR, MICHIGAN 48108
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (313) 994-4800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of MARCH 31, 1998.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OF COMMON STOCK MARCH 31, 1998
--------------------- ------------------
<S> <C> <C>
$ 1.00 PAR VALUE 9,918,929 SHARES
</TABLE>
<PAGE> 2
COMSHARE, INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of
March 31, 1998 and June 30, 1997.......................... 3
Condensed Consolidated Statement of Operations for the
Three and Nine Months Ended March 31, 1998 and 1997....... 5
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended March 31, 1998 and 1997................. 6
Notes to Condensed Consolidated Financial Statements......... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 15
PART II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES....................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 15
SIGNATURE........................................................... 16
INDEX TO EXHIBITS................................................... 17
2
<PAGE> 3
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------------------ ------------------------
ASSETS (unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 13,288 $ 11,651
Accounts receivable, net 25,748 24,675
Deferred income taxes 2,379 1,953
Prepaid expenses and other current assets 4,457 5,298
------------------------ ------------------------
Total current assets 45,872 43,577
PROPERTY AND EQUIPMENT, AT COST 19,108 21,386
Less - accumulated depreciation 15,493 16,432
------------------------ ------------------------
Property and equipment, net 3,615 4,954
COMPUTER SOFTWARE, NET 9,254 9,175
GOODWILL, NET 1,478 1,609
DEFERRED INCOME TAXES 15,580 15,580
OTHER ASSETS 4,613 5,856
------------------------ ------------------------
$ 80,412 $80,751
======================== ========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (audited)
CURRENT LIABILITIES
Notes payable $ 853 $ 4,332
Accounts payable 12,414 12,597
Accrued liabilities 8,077 7,745
Deferred revenue 19,949 19,868
--------------- -----------
Total current liabilities 41,293 44,542
LONG-TERM DEBT 6,102 343
OTHER LIABILITIES 3,785 3,907
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, no par value;
authorized 5,000,000 shares; none issued - -
Common stock, $1.00 par value;
authorized 20,000,000 shares; outstanding
9,918,929 shares as of March 31, 1998
and 9,871,260 shares as of June 30, 1997 9,919 9,871
Capital contributed in excess of par 39,940 39,528
Retained earnings (deficit) (15,964) (12,363)
Currency translation adjustments (4,059) (4,021)
--------------- -----------
29,836 33,015
Less - Notes receivable 604 1,056
--------------- -----------
Total shareholders' equity 29,232 31,959
--------------- -----------
$ 80,412 $ 80,751
=============== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Software licenses $ 9,041 $ 9,596 $ 26,391 $ 27,868
Software maintenance 9,212 9,178 26,859 27,285
Implementation, consulting
and other services 5,600 5,271 16,480 15,071
--------- --------- --------- ---------
TOTAL REVENUE 23,853 24,045 69,730 70,224
COSTS AND EXPENSES
Selling and marketing 10,386 13,221 31,805 41,363
Cost of revenue and support 7,476 8,140 21,715 23,138
Internal research and product development 3,116 3,385 9,254 12,084
Internally capitalized software (1,481) (1,818) (4,999) (5,018)
Software amortization 1,489 1,848 5,040 5,156
General and administrative 2,811 3,222 8,609 9,337
Unusual charge - - 1,614 -
Restructuring related costs - 6,245 - 6,245
--------- --------- --------- ---------
TOTAL COSTS AND EXPENSES 23,797 34,243 73,038 92,305
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 56 (10,198) (3,308) (22,081)
OTHER INCOME (EXPENSE)
Interest income (expense) 1 64 - 377
Exchange gain (loss) 16 (77) (41) (321)
--------- --------- --------- ---------
TOTAL OTHER INCOME (EXPENSE) 17 (13) (41) 56
INCOME (LOSS) BEFORE TAXES 73 (10,211) (3,349) (22,025)
Provision (benefit) for income taxes -- (3,288) - (7,409)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 73 $ (6,923) $ (3,349) $ (14,616)
========= ========= ========= =========
SHARES USED IN BASIC EPS COMPUTATION 9,902 9,796 9,888 9,747
========= ========= ========= =========
SHARES USED IN DILUTED EPS COMPUTATION 9,989 9,796 9,888 9,747
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $ 0.01 $ (0.71) $ (0.34) $ (1.50)
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $ 0.01 $ (0.71) $ (0.34) $ (1.50)
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited; in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------------
1998 1997
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,349) $ (14,616)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 6,809 7,063
Restructuring related costs - 1,317
Changes in operating assets and liabilities:
Accounts receivable (1,144) 6,225
Prepaid expenses and other assets 240 921
Accounts payable (165) (3,424)
Accrued liabilities 875 370
Deferred revenue 148 1,175
Deferred income taxes - (7,255)
Other liabilities (120) (90)
---------- ------------
Net cash provided by (used in) operating activities 3,294 (8,314)
INVESTING ACTIVITIES
Additions to computer software (5,141) (5,120)
Payments for property and equipment (337) (2,591)
Other 1,148 (773)
---------- ------------
Net cash used in investing activities (4,330) (8,484)
FINANCING ACTIVITIES
Net borrowings (repayments) under notes payable (3,868) 2,485
Net borrowings (repayments) under debt agreements
and capital lease obligations 6,097 (1,911)
Stock options exercised 746 559
Other (86) 23
---------- ------------
Net cash provided by financing activities 2,889 1,156
EFFECT OF EXCHANGE RATE CHANGES (216) 204
---------- ------------
NET INCREASE (DECREASE) IN CASH 1,637 (15,438)
BALANCE AT BEGINNING OF PERIOD 11,651 27,468
---------- ------------
BALANCE AT END OF PERIOD $ 13,288 $ 12,030
========== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 184 $ 133
========== ============
Cash paid for income taxes $ 579 $ 549
========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's latest annual
report on Form 10-K.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring items, required to present fairly its consolidated balance
sheet as of March 31, 1998, the consolidated statement of operations for the
three and nine months ended March 31, 1998 and 1997 and the consolidated
statement of cash flows for the nine months ended March 31, 1998 and 1997.
The results of operations for the three and nine months ended March 31,
1998 and 1997 are not necessarily indicative of the results to be expected in
future quarters or the full fiscal year. The software industry is generally
characterized by seasonal trends.
NOTE B - COMPUTER SOFTWARE
The costs of developing and purchasing new software products and
enhancements to existing software products are capitalized after technological
feasibility and realizability are established. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated gross product
revenue, estimated economic product lives and changes in software and hardware
technology. Capitalized development costs are currently amortized using the
straight-line method over a two-year service life. On an ongoing basis,
management reviews the valuation and amortization of capitalized development
costs. As part of this review, the Company considers the value of future cash
flows attributable to the capitalized development costs in evaluating potential
impairment of the asset.
NOTE C - BORROWINGS
Effective September 23, 1997 the Company entered into a new $10 million
credit agreement which matures on October 1, 2000. Borrowings are secured by
accounts receivable and the credit agreement contains covenants regarding among
other things, earnings, leverage, net worth and payment of dividends. Under
the terms of the agreement, the Company is not permitted to pay cash dividends
on its common stock. Permitted borrowings available as of March 31, 1998 under
this credit agreement were $10 million, of which $5.3 million was outstanding.
Borrowings available at any time are based on the lower of $10 million or a
percentage of worldwide eligible accounts receivable. At March 31, 1998, the
interest rate, which was based on LIBOR plus applicable margin, varied between
2.8% and 7.6%.
Separately, in August 1997, one of the Company's European subsidiaries
entered into a $1.2 million loan agreement which matures on June 30, 2000. The
Company had outstanding borrowings under this agreement of $978,000 at March
31, 1998. The interest rate was 10.4% at March 31, 1998.
In addition, one of the Company's European subsidiaries has a local
currency overdraft facility under which $0.8 million was available. The
Company had outstanding borrowings of $280,000 at March 31, 1998 under this
facility. The interest rate was 9.5% at March 31, 1998.
7
<PAGE> 8
COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE D - FINANCIAL INSTRUMENTS
The Company at various times enters into forward exchange contracts to
hedge certain exposures related to identifiable foreign currency commitments
that are relatively certain as to both timing and amount. Gains and losses on
the forward contracts are recognized concurrently with the gains and losses
from the underlying commitments. The forward exchange contracts used are
classified as "held for purposes other than trading." The Company does not use
any other types of derivative financial instruments to hedge such exposures,
nor does it use derivatives for speculative purposes. At March 31, 1998 and
June 30, 1997, the Company had forward foreign currency exchange contracts of
approximately $3.1 million and $1.8 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at March 31, 1998
mature at various dates through July 10, 1998, and are intended to hedge
various foreign currency commitments due from foreign subsidiaries and the
Company's agents and distributors. Due to the short term nature of these
financial instruments, the fair value of these contracts is not materially
different than their notional amount at March 31, 1998 and June 30, 1997.
NOTE E - UNUSUAL CHARGE
The Company recorded a $1.6 million pre-tax unusual charge for the cost of
termination of certain executives and others in the first quarter ended
September 30, 1997. The unusual charge includes staff reductions of
approximately 12 employees. At March 31, 1998, $1.1 million remains to be paid
for termination of employment and related contractual obligations.
NOTE F - LITIGATION
The Company and certain of its officers and directors are defendants in a
shareholder class action suit, In Re Comshare, Incorporated Securities
Litigation, filed in the United States District Court for the Eastern District
of Michigan. This suit was described in Item 3 of the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1997. On September 18, 1997
the Court dismissed all of the claims. The plaintiffs have filed an appeal of
the dismissal with the U.S. Court of Appeals for the Sixth Circuit. The
Company is vigorously contesting the appeal.
On September 27, 1996, Arbor Software Corporation ("Arbor") filed a
lawsuit against Comshare in the United States District Court for the Northern
District of California alleging breach of contract and fraud relating to
royalty calculations. This suit was described in Item 3 of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997. The
Company denied all of Arbor's claims and filed a counterclaim against Arbor for
fraud, defamation, unfair competition, interference with economic relationships
and breach of contract. On December 12, 1997, Comshare and Arbor entered into
a Settlement Agreement, and on December 15, 1997, the litigation was dismissed.
NOTE G - FINANCIAL ACCOUNTING STANDARDS
In 1997, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information". The
Company has adopted SFAS 128 during the second quarter ended December 31, 1997.
Basic EPS and Diluted EPS are disclosed in the Item 1 "Condensed Consolidated
Statement of Operations for the Three and Nine Months Ended March 31, 1998 and
1997." The disclosure prescribed by SFAS No. 130 and 131 must be made
beginning with the fiscal year ending June 30, 1999.
8
<PAGE> 9
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis sets forth information for the three
and nine months ended March 31, 1998 compared to the three and nine months
ended March 31, 1997. This information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial
data as a percentage of total revenue.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
------ ------- ------ --------
<S> <C> <C> <C> <C>
REVENUE
Software licenses 37.9% 39.9% 37.9% 39.7%
Software maintenance 38.6 38.2 38.5 38.9
Implementation and consulting services 23.5 21.9 23.6 21.4
----- ------ ------ -------
Total revenue 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 43.6 55.0 45.6 58.9
Cost of revenue and support 31.3 33.8 31.2 32.9
Internal research and product development 13.1 14.1 13.3 17.2
Internally capitalized software (6.2) (7.6) (7.2) (7.1)
Software amortization 6.2 7.7 7.2 7.3
General and administrative 11.8 13.4 12.3 13.3
Unusual charge - - 2.3 -
Restructuring related costs - 26.0 - 8.9
----- ------ ------ -------
Total costs and expenses 99.8 142.4 104.7 131.4
INCOME (LOSS) FROM OPERATIONS 0.2 (42.4) (4.7) (31.4)
OTHER INCOME (EXPENSE)
Interest income (expense) 0.0 0.3 0.0 0.5
Exchange gain (loss) 0.1 (0.3) (0.1) (0.4)
----- ------ ------ -------
Total other income (expense) 0.1 0.0 (0.1) 0.1
INCOME (LOSS) BEFORE INCOME TAXES 0.3 (42.4) (4.8) (31.3)
Provision (benefit) for income taxes - (13.7) - (10.6)
----- ------ ------ -------
NET INCOME (LOSS) 0.3% (28.7)% (4.8)% (20.7)%
===== ======= ====== =======
</TABLE>
9
<PAGE> 10
REVENUE
<TABLE>
<CAPTION>
Three Months Ended Percent Nine Months Ended Percent
March 31, Change March 31, Change
---------------------- ----------- ----------------------------- ----------
1998 1997 1998 1997
---------- ---------- ------------ -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Software licenses $ 9,041 $ 9,596 (5.8)% $ 26,391 $ 27,868 (5.3)%
Software maintenance 9,212 9,178 0.4 26,859 27,285 (1.6)
Implementation and consulting services 5,600 5,271 6.2 16,480 15,071 9.3
---------- ---------- ------------ -------------
TOTAL REVENUE $ 23,853 $ 24,045 (0.8)% $ 69,730 $ 70,224 (0.7)%
========== ========== ============ =============
</TABLE>
Total revenue declined less than 1% in the three and nine months ended
March 31, 1998 compared to the same periods last year. Software licenses
revenue decreased 5.8% and 5.3% in the three and nine months ended March 31,
1998. The decline in license fee revenue in the three and nine months ended
March 31, 1998 was primarily due to transitional changes and turnover in the
North American sales organization.
Software maintenance revenue was relatively flat in the three and nine
months ended March 31, 1998 compared to the same periods last year.
Client/server software maintenance revenue in the three and nine months ended
March 31, 1998 represented 82.9% and 81.6% of total software maintenance
revenue and increased 8.1% and 6.8% compared with the prior year. Mainframe
software maintenance revenue decreased 25.5% and 26.9% in the three and nine
months ended March 31, 1998 compared to last year primarily due to mainframe
maintenance cancellations and continued customer migration to client/server
platforms. Mainframe software maintenance revenue is expected to continue to
decline.
Implementation, consulting and other service revenue increased 6.2% and
9.3% in the three and nine months ended March 31, 1998 compared to last year
primarily due to the increased demand for such services from the existing
client base.
10
<PAGE> 11
COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Percent Nine Months Ended Percent
March 31, Change March 31, Change
---------------------- --------- ------------------------ ----------
1998 1997 1998 1997
---------- ---------- --------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
COST AND EXPENSES
Selling and marketing $ 10,386 $ 13,221 (21.4)% $ 31,805 $ 41,363 (23.1)%
Cost of revenue and support 7,476 8,140 (8.2) 21,715 23,138 (6.2)
Internal research and product development 3,116 3,385 (7.9) 9,254 12,084 (23.4)
Internally capitalized software (1,481) (1,818) (18.5) (4,999) (5,018) (0.4)
Software amortization 1,489 1,848 (19.4) 5,040 5,156 (2.2)
General and administrative 2,811 3,222 (12.8) 8,609 9,337 (7.8)
---------- ---------- --------- ----------
Total costs and expenses before unusual
charge and restructuring related costs 23,797 27,998 (15.0) 71,424 86,060 (17.0)
Unusual charge - - * 1,614 - *
Restructuring related costs - 6,245 * - 6,245 *
---------- --------- --------- ----------
TOTAL COSTS AND EXPENSES $ 23,797 $ 34,243 (30.5)% $ 73,038 $ 92,305 (20.9)%
========== ========= ========= ==========
* % not meaningful.
</TABLE>
Selling and marketing expense decreased 21.4% and 23.1% in the three and
nine months ended March 31, 1998 compared to the same period last year
primarily due to decreased spending on sales and marketing activities resulting
from cost reduction actions taken during the last half of fiscal 1997 and the
first quarter of fiscal 1998. The decrease in selling and marketing expense
during the nine months ended March 31, 1998 was also due to lower headcount
during the period.
Cost of revenue and support decreased 8.2% and 6.2% in the three and nine
months ended March 31, 1998 compared to the prior year principally due to
decreased third party royalties and lower software production and distribution
costs.
Internal research and product development expense decreased 7.9% and 23.4%
in the three and nine months ended March 31, 1998 compared to last year mainly
due to the reduction in the product development staff as a result of the
consolidation of the Company's product development activities in Ann Arbor,
Michigan and closing of the Leicester, England product development facility in
the third quarter of fiscal 1997.
Internally capitalized software decreased in the three and nine months
ended March 31, 1998 compared to the prior year mainly due to the decreased
levels of development costs that were capitalizable. Software amortization
expense decreased in the three and nine months ended March 31, 1998 primarily
due to the decreased levels of capitalized software.
General and administrative expense decreased 12.8% and 7.8% in the three
and nine months ended March 31, 1998 compared to the same period last year
primarily due to a decrease in employee-related costs as a result of cost
reduction efforts and lower legal fees, following favorable resolution of a
number of legal matters.
During the first quarter ended September 30, 1997, the Company recorded a
$1.6 million unusual charge which represented the cost of termination of
certain executives and other staff. The unusual charge includes staff
reductions of approximately 12 employees. At March 31, 1998, $1.1 million
remains to be paid for termination of employment and related contractual
obligations.
11
<PAGE> 12
During the third quarter ended March 31, 1997, the Company recorded a $6.2
million restructuring charge for management actions or plans in connection with
the consolidation of the Company's product development activities in Ann Arbor,
Michigan and reductions in staff and non-revenue generating costs. The
restructuring had a $4.2 million negative after tax impact on net income. The
restructuring charge includes staff reductions of approximately 70 employees.
NON-OPERATING INCOME AND EXPENSE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
OTHER INCOME (EXPENSE)
Interest income (expense) $ 1 $ 64 $ - $ 377
Exchange gain (loss) 16 (77) (41) (321)
----------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) $ 17 $ (13) $ (41) $ 56
=========== ========== ========== ==========
</TABLE>
Interest income declined in the three and nine months ended March 31, 1998
primarily due to lower average cash balances and increased borrowing.
FOREIGN CURRENCY
For the three and nine months ended March 31, 1998, 54% and 55% of the
Company's total revenue was from outside North America compared with 44% and
48% for the three and nine months ended March 31, 1997. Most of the Company's
international revenue is denominated in foreign currencies. The Company
recognizes currency transaction gains and losses in the period of occurrence.
As currency rates are constantly changing, these gains and losses can, at
times, fluctuate greatly.
During the third quarter of fiscal 1998, the overall strengthening of the
dollar against European currencies had a slight negative impact on the
Company's foreign revenues, as compared to the same period of fiscal 1997. If
foreign exchange rates in the third quarter of fiscal 1997 had been the same as
they were in the same period of fiscal 1998, international revenues during the
third quarter of fiscal 1998 would have increased $2.4 million instead of $2.2
million, as reported. However, the impact on revenue was offset by the
exchange rate impact on foreign expenses. The $5.0 million decrease in foreign
expenses over the third quarter of fiscal 1997 would have been $4.5 million, if
foreign exchange rates in the third quarter of fiscal 1997 had been the same as
they were in the same period of fiscal 1998. As a result of the changes in
foreign currency exchange rates, the increase in the international income
before taxes, at actual exchange rates, was $0.3 million more than at
comparable exchange rates for the third quarter of fiscal 1998.
For the nine months ended March 31, 1998, the overall strengthening of the
dollar against European currencies had a slight negative impact on the
Company's foreign revenues, as compared to the same period of fiscal 1997. If
foreign exchange rates for the nine months ended March 31, 1997 had been the
same as they were in the same period of fiscal 1998, international revenues for
the nine months ended March 31, 1998 would have increased $5.6 million instead
of $4.7 million, as reported. However, the impact on revenue was offset by the
exchange rate impact on foreign expenses. The $8.9 million decrease in foreign
expenses over the nine months ended March 31, 1997 would have been $7.5
million, if foreign exchange rates for the nine months ended March 31, 1997 had
been the same as they were in the same period of fiscal 1998. As a result of
the changes in foreign currency exchange rates, the increase in the
international income before taxes, at actual exchange rates, was $0.5 million
more than at comparable exchange rates for the nine months ended March 31,
1998. In general, the Company's future operating results may be adversely
impacted by the overall strengthening of the U.S. dollar against foreign
currencies of countries where the Company conducts business; conversely, future
operating results may be favorably impacted by an overall weakening of the U.S.
dollar against foreign currencies.
12
<PAGE> 13
The Company had several forward exchange contracts totaling $3.1 million
outstanding at March 31, 1998. See Note D of Notes to Condensed Consolidated
Financial Statements.
PROVISION (BENEFIT) FOR INCOME TAXES
The effective income tax rate in the three and nine months ended March 31,
1998 was 0%, compared with 32% and 34% for the same periods a year ago, as the
Company did not recognize any provision (benefit) for income taxes on its
operating income (loss) in the three and nine months ended March 31, 1998.
Realization of deferred tax assets associated with the Company's future
deductible temporary differences, net operating loss carryforwards and tax
credit carryforwards is dependent upon generating sufficient taxable income
prior to their expiration. Although realization of the deferred tax assets is
not assured, management believes it is more likely than not that the deferred
tax assets will be realized through future taxable income or by using a tax
strategy currently available to the Company. On a quarterly basis, management
will assess whether it remains more likely than not that the deferred tax
assets will be realized. This assessment could be impacted by a combination of
continuing operating losses and a determination that the tax strategy is no
longer sufficient to realize some or all of the deferred tax assets. If
management determines that it is no longer more likely than not that the
deferred tax assets will be realized, a valuation allowance will be required
against some or all of the deferred tax assets. This would require a charge to
the income tax provision, and such charge could be material to the Company's
results of operations.
The foregoing statements regarding the realization of deferred tax assets
are "forward looking statements" within the meaning of the Securities Exchange
Act of 1934. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Harbor Statement" for discussion of
uncertainties relating to such statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, cash and cash equivalents were $13.3 million, compared
with cash of $11.7 million at June 30, 1997. The increase in cash and cash
equivalents is principally due to increased borrowings for operating and
investing activities.
Net cash provided by operating activities was $3.3 million in the nine
months ended March 31, 1998, compared with net cash used in operating
activities of $8.3 million in the nine months ended March 31, 1997. The
increase in net cash provided by operating activities was primarily due to the
decline in net operating loss before income taxes from $22 million to $3.3
million and a $2.4 million payment to terminate the Company's lease obligation
on its vacated London office facility in the first quarter of fiscal 1997,
offset by a decrease in accounts receivable in the nine months ended March 31,
1997.
Net cash used in investing activities was $4.3 million in the nine months
ended March 31, 1998, compared with $8.5 million in the nine months ended March
31, 1997. The decrease in net cash used in investing activities was primarily
due to the decreased purchases of property and equipment, and the receipt of
the net cash surrender value of certain life insurance policies as a result of
the cancellation of the policies held by the Company in the first quarter of
fiscal 1998. At March 31, 1998, the Company did not have any material capital
expenditure commitments.
Total assets were $80.4 million at March 31, 1998, compared with total
assets of $80.8 million at June 30, 1997. Working capital as of March 31, 1998
was $4.6 million, compared with a negative $1 million as of June 30, 1997. The
decrease in total assets from June 30, 1997 to March 31, 1998 was primarily due
to the decline in property and equipment as a result of the depreciation
expense taken during the nine months of fiscal 1998. The increase in working
capital was primarily due to a decrease in notes payable as a result of
refinancing such notes under the Company's new credit agreement, as well as
increases in cash and accounts receivable as described above.
Effective September 23, 1997, the Company entered into a new $10 million
credit agreement with its bank which has permitted borrowings based on a
percentage of worldwide eligible accounts receivable. At March 31, 1998, the
permitted borrowings available under this credit agreement were $10 million, of
which $5.3 million was outstanding. Borrowings available at any time are based
on the lower of $10 million or a percentage of worldwide eligible accounts
receivable. At March 31, 1998, the interest rate, which was based on LIBOR
plus applicable margin, varied between 2.8% and 7.6%.
13
<PAGE> 14
Separately, in August 1997, one of the Company's European subsidiaries
entered into a $1.2 million loan agreement which matures on June 30, 2000. The
Company had outstanding borrowings under this agreement of $978,000 at March
31, 1998. The interest rate was 10.4% at March 31, 1998.
The Company believes that the combination of present cash balances and
amounts available under credit facilities will be sufficient to meet the
Company's currently anticipated cash requirements for at least the next twelve
months. The foregoing statement is a "forward looking statement" within the
meaning of the Securities Exchange Act of 1934. The extent to which such
sources will be sufficient to meet the Company's anticipated cash requirements
is subject to a number of uncertainties including the ability of the Company's
operations to generate sufficient cash to support operations, and other
uncertainties described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Safe Harbor Statement."
YEAR 2000
The Company is modifying and testing the most current versions of its
products to be year 2000 compliant. The Company believes that all but one of
the current client/server products are year 2000 compliant. The Company
expects to have released new versions of its mainframe products and the
remaining client/server product which will be year 2000 compliant prior to
January 1, 2000. Since not all the Company's customers are running product
versions that are year 2000 compliant, the Company has been encouraging
customers to migrate to current product versions.
The Company has also reviewed its internal systems for year 2000
compliance and is in the process of upgrading to year 2000 compliant versions
from third party software vendors, modifying certain systems, and planning to
replace certain systems with new third party software, which the Company
expects to complete prior to January 1, 2000.
The management does not believe that the cost to bring its software
products and internal systems into year 2000 compliance will have a material
adverse effect on the Company's results of operations or financial condition.
There can be no assurance that the Company's current products and internal
systems do not contain undetected errors or defects associated with year 2000
date functions that may result in material costs to the Company. Some
commentators have stated that a significant amount of litigation will arise out
of year 2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may be
affected by it.
SAFE HARBOR STATEMENT
Certain information in this Form 10-Q contains "forward looking
statements" within the meaning of the Securities Exchange Act of 1934,
including those concerning the Company's future results and strategy. Actual
results could differ materially from those in the forward looking statements
due to a number of uncertainties, including, but not limited to, the demand for
the Company's products and services; the size, timing and recognition of
revenue from significant orders; increased competition; the Company's success
in and expense associated with developing, introducing and shipping new
products; new product introductions and announcements by the Company's
competitors; changes in Company strategy; product life cycles; the cost and
continued availability of third party software and technology incorporated into
the Company's products; the impact of rapid technological advances, evolving
industry standards and changes in customer requirements; the impact of recent
transitional changes in North American and international management and sales
personnel; cancellations of maintenance and support agreements; software
defects; changes in operating expenses; variations in the amount of cost
savings anticipated to result from cost reduction actions; the impact of cost
reduction actions on the Company's operations; fluctuations in foreign exchange
rates; the impact of undetected errors or defects associated with year 2000
date functions on the Company's current products and internal systems; the
ability of the Company to generate sufficient future taxable income or to
execute available tax strategies required to realize deferred tax assets; and
economic conditions generally or in specific industry segments. In addition, a
significant portion of the Company's revenue in any quarter is typically
derived from non-recurring license fees, a substantial portion of which is
booked in the last month of a quarter. Since the purchase of the Company's
products is relatively discretionary and generally involves a significant
commitment of capital, in the event of any downturn in any potential customer's
business or the economy in general, purchases of the Company's products may be
deferred or canceled. Further, the Company's expense levels are based, in
part, on its expectations as to future revenue and a significant portion of the
Company's expenses do not vary with revenue. As a result, if revenue is below
expectations, results of operations are likely to be materially adversely
affected.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 20, 1998, Mr. Richard L. Crandall, a member of the Board of
Directors of the Company, purchased directly from the Company 20,000 shares of
the Company's common stock at price per share of $8.25 for a total purchase
price of $165,000, payable in cash. The Company did not register and does not
plan to register, the common stock sold to Mr. Crandall under the Securities
Act of 1933, as amended (the "Act"), based upon exemptions from registration
set forth in Section 4(2) of the Act and Regulation D. The Company relied upon
these exemptions based upon Mr. Crandall's representations set forth in a
subscription agreement, his position as a member of the Board of the Company
and the negotiated nature of the transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) The exhibits included herewith are set forth on the Index to Exhibits.
(b.) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended March
31, 1998.
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: MAY 15, 1998 COMSHARE, INCORPORATED
(Registrant)
/s/ Kathryn A. Jehle
--------------------
Kathryn A. Jehle
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
16
<PAGE> 17
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Letter agreement between Comshare, Incorporated and Mark E.
Tapling regarding employment termination dated January 19, 1998.
11.1 Computation of Net Income (Loss) per Common Share.
27 Financial Data Schedule.
17
<PAGE> 1
EXHIBIT 10.1
January 19, 1998
Mr. Mark Tapling
4734 Lohr Road
Ann Arbor, MI 48108
RE: LETTER OF UNDERSTANDING
Dear Mark:
This letter ("Agreement") confirms the terms and conditions of your termination
from Comshare, Incorporated ("Comshare") under mutually agreed upon
circumstances.
The arrangement will be as follows:
(1) Your termination from Comshare, Incorporated will be effective on February
9, 1998 ("Termination Date").
(2) Comshare agrees to pay you salary continuation pay commencing from your
"Termination Date" until January 29, 1999 ("Salary Continuation Period"). After
April 17, 1998, Comshare will apply all of your future salary continuation
payments, less appropriate federal and state withholdings and deductions, to the
outstanding balance of your stock loan. You agree to repay any outstanding
balance of your stock loan, if your total obligation is not exhausted through
salary continuation. If your stock loan is repaid in full during the salary
continuation period, payroll deductions for loan repayment will cease. You will
be paid $7,692.31 bi-weekly during the Salary Continuation Period, less
appropriate federal and state withholdings and deductions, on Comshare's
regular, scheduled pay dates. Your group health, dental, vision, and life
coverage, including elected dependent coverage, which are currently in effect
shall continue for you and any of your covered dependents for six (6) months
(July 17, 1998) or you secure other employment, whichever occurs first, provided
that Comshare shall have the right to change such coverage to the extent
Comshare is generally changing coverage for its employees. You shall continue to
make required contributions, via payroll deductions, at the then current rate
for similarly situated Comshare employees. Long-term disability coverage ceases
on your Termination Date (February 9, 1998). There is no conversion option
available for this benefit.
(3) In addition, we will pay your bi-weekly car allowance of $436.15 through
April 30, 1998.
(4) You will be provided with reasonable tax return preparation provided by
Arthur Andersen for calendar year, 1997.
(5) You will be eligible to participate in an executive outplacement program
conducted by a firm that is selected by you and Comshare. The costs of the
program will be borne by Comshare and will not exceed $10,000. You may also
retain your current voice mail box until September 30, 1998.
(6) Comshare shall make available to you and your qualified dependents, the
election of coverage under the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") at the time required by COBRA.
(7) You will not accrue vacation benefits during the Salary Continuation Period.
All unused and accrued vacation that is available to you, as of your Termination
Date, will be paid within two weeks of February 9, 1998. Our records indicate
that you have twenty (20) vacation days.
(8) You will not be eligible to continue your participation in the Profit
Sharing Plan, including the 401K option, throughout the Salary Continuation
Period. You will be apprised of your options, with respect to such plan, under
separate cover.
<PAGE> 2
Letter of Understanding
January 19, 1998
Page 2
(9) Except for publicly available information, all information to which you had
access to during your employment with Comshare or as a result of your dealings
with Comshare and/or any clients, customers, suppliers, or business partners
shall be kept confidential and shall not be disclosed to any third party. This
information includes, without limitation, (a) computer programs, technical
specifications, software programming techniques, methodologies, ideas, concepts,
or interfaces; (b) information which relates to Comshare's proprietary software,
prototypes, or plans; (c) business, financial, marketing, or sales plans and
data (d) customer lists and information; and (e) other information. Your
confidentiality obligations under this paragraph are in addition to those set
forth in your Comshare Employee Agreement.
(10) You shall not discuss any of the terms of this Agreement with any third
party including, but not limited to, other Comshare employees. In addition, you
shall not comment upon the business affairs, policies or the like of Comshare
without the specific written approval of Comshare. NOTWITHSTANDING THE
FOREGOING, YOU MAY AND ARE ENCOURAGED TO PROVIDE A COPY OF THIS AGREEMENT TO
LEGAL COUNSEL AND OTHER OUTSIDE ADVISORS OF YOUR CHOICE TO OBTAIN SUCH COUNSEL
AND ADVICE AS YOU DEEM APPROPRIATE.
(11) You will return to Comshare all property of Comshare in your possession
and/or subject to your control, including, but not limited to, any and all
credit cards, files, memoranda, correspondence, customer lists, proposals,
software, or the like, and all copies of such items on whatever media they
appear. If you uncover additional company property please return it to the
company.
(12) It is understood and agreed that this Agreement and your Comshare Employee
Agreement, dated August 26, 1996, constitutes the entire understanding of the
parties with respect to your employment at Comshare and that this Agreement and
your Comshare Employee Agreement supersede all other understandings, proposals,
samples, models, agreements, representations, or conditions, written or oral,
regarding its subject matter. In the event of a conflict between the terms of
this Agreement and your Comshare Employee Agreement, the terms of this Agreement
shall take precedence.
(13) You acknowledge and agree that you will not be eligible for and are not
entitled to severance pay or other considerations at the end of the Salary
Continuation Period.
(14) In exchange for the good and valuable consideration detailed in this
Agreement and effective as of the date you sign this Agreement and for all acts
prior to such date, you hereby release, waive and discharge any and all manner
of action, causes of action, claims, rights, charges, suits, damages, debts,
demands, obligations, attorney's fees, and any and all other liabilities or
claims of whatever nature, whether in law or in equity, known or unknown,
including, but not limited to any claim or claims of damages or other relief for
tort, breach of contract, personal injury, negligence, age discrimination under
the Age Discrimination in Employment Act of 1967 as amended, employment
discrimination prohibited by other federal, state or local laws including
discrimination as to sex, race, national origin, marital status, age,
disability, height, weight, or religion, and any other claims of unlawful
employment practices, and any other similar and dissimilar claims, which you
have claimed or may claim or could claim against Comshare, Incorporated, its
direct and indirect subsidiaries or their respective directors, officers,
employees, successors, or assigns, as a result of employment at and the
separation from employment with Comshare or otherwise.
(15) You acknowledge that you have read this Agreement and that you understand
all of its terms and execute it voluntarily with full knowledge of its
significance and the consequences thereof. Further, you acknowledge that you
have had twenty-one (21) days to consider the terms and conditions of this
Agreement. In addition, you shall have a seven (7) day period following your
execution of this Agreement, during which you may revoke the Agreement by
providing Comshare with written notice to that effect. (Any notice should be
addressed to the attention of the undersigned.) Finally, you hereby acknowledge
that you have had an adequate opportunity to review and consider the terms of
this Agreement, and have discussed this Agreement with legal counsel of your
choice. You agree that you grant a full and final release as set forth herein.
<PAGE> 3
Letter of Understanding
January 19, 1998
Page 3
(16) The Agreement shall be governed by and construed according to the laws of
the State of Michigan. The Agreement shall be binding upon you and your heirs,
administrator, representatives, executors, and assigns.
(17) Sections 7, 8, 9, 12, 13, 14, and 16 shall survive the end of the Salary
Continuation Period.
If the above is acceptable, please sign this Agreement and return it to me by
February 9, 1998. If I am not in receipt of a copy of this Agreement, executed
by you on or before that date, this offer shall be void.
Sincerely,
COMSHARE, INCORPORATED
/s/ Dennis G. Ganster
Dennis G. Ganster
President and Chief Executive Officer
The above terms and conditions are agreed to and accepted:
/s/ Mark Tapling
- ---------------------------------------------
Mark Tapling
January 23, 1998
- ---------------------------------------------
Date
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(unaudited; in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- ------------------------
1998 1997 1998 1997
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Weighted Average Shares 9,902 9,796 9,888 9,747
--------- ---------- --------- ---------
SHARES USED IN BASIC EPS COMPUTATION 9,902 9,796 9,888 9,747
========= ========== ========= =========
Dilutive potential common shares, treasury
stock method 87 - - -
--------- ---------- --------- ---------
SHARES USED IN DILUTED EPS COMPUTATION 9,989 9,796 9,888 9,747
========= ========== ========= =========
NET INCOME (LOSS) $ 73 $ (6,923) $ (3,349) $ (14,616)
NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $ 0.01 $ (0.71) $ (0.34) $ (1.50)
NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $ 0.01 $ (0.71) $ (0.34) $ (1.50)
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,288,000
<SECURITIES> 0
<RECEIVABLES> 27,205,000<F1>
<ALLOWANCES> 1,457,000
<INVENTORY> 0
<CURRENT-ASSETS> 45,872,000
<PP&E> 19,108,000
<DEPRECIATION> 15,493,000
<TOTAL-ASSETS> 80,412,000
<CURRENT-LIABILITIES> 41,293,000
<BONDS> 0
0
0
<COMMON> 9,919,000
<OTHER-SE> 19,313,000
<TOTAL-LIABILITY-AND-EQUITY> 80,412,000
<SALES> 0
<TOTAL-REVENUES> 69,730,000
<CGS> 0
<TOTAL-COSTS> 73,038,000
<OTHER-EXPENSES> (41,000)<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,349,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,349,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,349,000)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
<FN>
<F1>Accounts receivable are stated at net of allowance for doubtful accounts.
<F2>Comprised of $41,000 of exchange loss.
</FN>
</TABLE>
