<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 SEPTEMBER 30, 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: (734) 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 SEPTEMBER 30, 1998.
OUTSTANDING AT
CLASS OF COMMON STOCK SEPTEMBER 30, 1998
- --------------------- ------------------
$1.00 PAR VALUE 9,982,667 SHARES
<PAGE> 2
COMSHARE, INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations and Comprehensive
Income for the Three Months Ended September 30, 1998 and 1997...............................3
Condensed Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1998........................................................4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 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.................................17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................17
SIGNATURE..........................................................................................18
INDEX TO EXHIBITS..................................................................................19
</TABLE>
2
<PAGE> 3
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUE
Software licenses $ 6,126 $ 7,414
Software maintenance 7,114 8,218
Implementation, consulting
and other services 3,919 5,330
-------- --------
TOTAL REVENUE 17,159 20,962
COSTS AND EXPENSES
Selling and marketing 6,938 9,961
Cost of revenue and support 6,406 6,767
Internal research and product development 2,247 3,091
General and administrative 1,977 2,967
Unusual charge -- 1,614
-------- --------
TOTAL COSTS AND EXPENSES 17,568 24,400
-------- --------
LOSS FROM OPERATIONS (409) (3,438)
OTHER INCOME (EXPENSE)
Interest income 569 140
Interest expense (87) (102)
Exchange gain (loss) 7 (105)
-------- --------
TOTAL OTHER INCOME (EXPENSE) 489 (67)
INCOME (LOSS) BEFORE TAXES 80 (3,505)
Provision for income taxes 28 --
-------- --------
NET INCOME (LOSS) $ 52 $ (3,505)
======== ========
OTHER COMPREHENSIVE INCOME
Currency translation adjustment 377 209
-------- --------
COMPREHENSIVE INCOME $ 429 $ (3,296)
======== ========
SHARES USED IN BASIC EPS COMPUTATION 9,998 9,874
======== ========
SHARES USED IN DILUTED EPS COMPUTATION 9,998 9,874
======== ========
NET INCOME (LOSS) PER COMMON SHARE-BASIC EPS $ 0.01 $ (0.36)
======== ========
NET INCOME (LOSS) PER COMMON SHARE-DILUTED EPS $ 0.01 $ (0.36)
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
---- ----
ASSETS (unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $43,831 $49,102
Accounts receivable, net 19,575 21,354
Deferred income taxes 1,256 1,256
Prepaid expenses and other current assets 3,679 3,322
------- -------
Total current assets 68,341 75,034
PROPERTY AND EQUIPMENT, at cost
Computers & other equipment 17,188 16,781
Leasehold improvements 2,353 2,293
Less: Accumulated depreciation 16,519 15,792
------- -------
Property and equipment, net 3,022 3,282
GOODWILL, net 1,459 1,500
DEFERRED INCOME TAXES 5,377 5,377
OTHER ASSETS 3,822 3,499
------- -------
$82,021 $88,692
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (audited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 4,339 $ 1,238
Accounts payable 12,210 14,398
Accrued liabilities:
Payroll 2,663 2,964
Taxes 1,730 5,035
Other 5,719 7,034
------- -------
Total accrued liabilities 10,112 15,033
Deferred revenue 12,999 14,834
------- -------
Total current liabilities 39,660 45,503
LONG-TERM DEBT 485 1,434
OTHER LIABILITIES 3,168 3,350
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
9,982,667 shares as of September 30, 1998
and 10,003,167 shares as of June 30, 1998 9,983 10,003
Capital contributed in excess of par 40,188 40,335
Retained deficit (7,298) (7,350)
Accumulated other comprehensive income (3,655) (4,032)
-------- --------
39,218 38,956
Less - Notes receivable 510 551
-------- --------
Total shareholders' equity 38,708 38,405
-------- --------
$ 82,021 $ 88,692
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 52 $ (3,505)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 539 2,432
Changes in operating assets and liabilities:
Accounts receivable 2,168 (790)
Prepaid expenses and other assets (572) 1,321
Accounts payable (1,896) (1,024)
Accrued liabilities (5,098) 1,005
Deferred revenue (1,640) (1,331)
Other liabilities (232) 491
-------- --------
Net cash used in operating activities (6,679) (1,401)
INVESTING ACTIVITIES
Additions to computer software -- (1,965)
Payments for property and equipment (183) (62)
Other -- 1,148
-------- --------
Net cash used in investing activities (183) (879)
FINANCING ACTIVITIES
Repayments under notes payable -- (3,334)
Net borrowings under debt agreements and capital
lease obligations 2,181 4,356
Stock repurchased (387) --
Stock options exercised -- 25
Other 66 19
-------- --------
Net cash provided by financing activities 1,860 1,066
EFFECT OF EXCHANGE RATE CHANGES (269) 115
-------- --------
NET DECREASE IN CASH (5,271) (1,099)
BALANCE AT BEGINNING OF PERIOD 49,102 11,651
-------- --------
BALANCE AT END OF PERIOD $ 43,831 $ 10,552
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 42 $ 79
======== ========
Cash paid for income taxes $ 3,150 $ 89
======== ========
</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
most recent 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 September 30, 1998, the consolidated statements of operations and
comprehensive income for the three months ended September 30, 1998 and 1997 and
the consolidated statements of cash flows for the three months ended September
30, 1998 and 1997.
The results of operations for the three months ended September 30, 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
In prior years, the costs of developing and purchasing new software
products and enhancements to existing software products were capitalized after
technological feasibility was established. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
required considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenue, estimated economic product lives and changes in software and hardware
technology. In the last several years, product upgrades for the Company's
products are being released by the Company on a more rapid basis. The rapid
increase in product version updates has led to an almost continuous product
development cycle and has reduced the time between establishing technological
feasibility and general release to the public. With these rapid changes
expected, the Company believes that the useful lives of these products will be
reduced to a year or less. In the current and future years, based on the
continuous product life cycles noted, the period between establishing
technological feasibility and the general availability of such software will be
short, and software costs qualifying for capitalization will be insignificant.
Accordingly, the Company has not capitalized any software development costs
during the quarter ended September 30, 1998 and will not capitalize future
software development costs.
NOTE C - BORROWINGS
The Company has a $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 September 30, 1998 under the credit agreement were $10 million,
of which $3.7 million was outstanding. Borrowings available at any time are
based on the lower of $10 million or a percentage of worldwide eligible accounts
receivable and cash. At September 30, 1998, the interest rate, which was based
on LIBOR plus applicable margin, varied between 2.3% and 7.1%.
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 of $0.8 million under this agreement at
September 30, 1998. The interest rate was 12.5% at September 30, 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 transactions
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 transactions. 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 September 30, 1998 and June 30,
1998, the Company had forward foreign currency exchange contracts outstanding of
approximately $2.4 million and $3.1 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at September 30,
1998 mature at various dates through October 15, 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 September 30, 1998 and June 30, 1998.
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 included staff reductions of
approximately 12 employees.
NOTE F - FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 131 "Disclosures About Segments
of an Enterprise and Related Information" and SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". The Company is required to adopt
SFAS No. 131 for the fiscal year ending June 30, 1999 and SFAS No. 133 for the
period ending September 30, 1999. The Company has not quantified the effect of
adopting SFAS No. 133.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income"
during the quarter ended September 30, 1998. The Company has currency
translation adjustments for both quarters ended September 30, 1998 and September
30, 1997, which are defined as comprehensive income by SFAS No. 130.
NOTE G - DILUTED EPS COMPUTATION
Shares used in the Diluted EPS Computation are identical to the shares
used in the Basic EPS Computation, as the Company's potentially dilutive stock
options all have exercise prices above the average market price of the
Company's common stock for the three months ended September 30, 1998 and 1997.
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 months ended September 30, 1998 compared to the three months ended
September 30, 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,
1998.
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
September 30,
----------------------
1998 1997
------ -----
<S> <C> <C>
REVENUE
Software licenses 35.7% 35.4%
Software maintenance 41.5 39.2
Implementation, consulting and other services 22.8 25.4
----- -----
Total revenue 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 40.4 47.5
Cost of revenue and support 37.3 32.3
Internal research and product development 13.1 14.7
General and administrative 11.5 14.2
Unusual charge -- 7.7
----- -----
Total costs and expenses 102.3 116.4
LOSS FROM OPERATIONS (2.3) (16.4)
OTHER INCOME (EXPENSE)
Interest income 3.3 0.7
Interest expense (0.5) (0.5)
Exchange (loss) -- (0.5)
----- -----
Total other income (expense) 2.8 (0.3)
INCOME (LOSS) BEFORE TAXES 0.5 (16.7)
Provision for income taxes 0.2 --
----- -----
NET INCOME (LOSS) 0.3% (16.7)%
===== =====
</TABLE>
9
<PAGE> 10
REVENUE
<TABLE>
<CAPTION>
Three Months Ended Percent
September 30, Change
------------------- ------------
1998 1997
---- ----
<S> <C> <C> <C>
REVENUE
Software licenses $ 6,126 $ 7,414 (17.4)%
Software maintenance 7,114 8,218 (13.4)%
Implementation, consulting and other services 3,919 5,330 (26.5)%
------- -------
TOTAL REVENUE $17,159 $20,962 (18.1)%
======= =======
</TABLE>
Total revenue decreased 18.1% in the three months ended September 30,
1998 compared to the prior year, due to the Company's sale of its Retail
Business on June 4, 1998. The Retail Business accounted for approximately $5.2
million of the Company's revenue during the three months ended September 30,
1997.
Without the revenue from the Retail Business that was sold in June,
1998, and reflecting software revenue from the Company's agents on a consistent
basis, license fees and total revenue in the year ago quarter would have been
$5.3 million and $15.8 million, respectively. On a comparable basis, license
fees grew 15.1% to $6.1 million and total revenue increased 8.9% to $17.2
million. The revenue growth this quarter reflected continued improvement in the
North American operations and improvement in the Company's United Kingdom
operations.
Software maintenance revenue decreased 13.4% in the three months ended
September 30, 1998 compared to the prior year due to the Company's sale of its
Retail Business. On a comparable basis, without software maintenance revenue
from the Retail Business, software maintenance revenue slightly increased for
the three months ended September 30, 1998, compared to the three months ended
September 30, 1997. Excluding the Retail Business, mainframe software
maintenance revenue for the three months ended September 30, 1998 declined 32.6%
as compared to the prior year. Mainframe software maintenance revenue is
expected to continue to decline due to mainframe maintenance cancellations and
continued customer migration to client/server platforms.
On a comparable basis, without the Retail Business, implementation,
consulting and other services revenue was relatively flat for the three months
ended September 30, 1998, as compared to the three months ended September 30,
1997.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
Three Months Ended Percent
September 30, Change
---------------------- -----------
1998 1997
---- ----
<S> <C> <C> <C>
COST AND EXPENSES
Selling and marketing $ 6,938 $ 9,961 (30.3)%
Cost of revenue and support 6,406 6,767 (5.3)
Internal research and product development 2,247 3,091 (27.3)
General and administrative 1,977 2,967 (33.4)
-------- --------
Total costs and expenses before
unusual charge 17,568 22,786 (22.9)
Unusual charge -- 1,614 *
-------- --------
TOTAL COSTS AND EXPENSES $ 17,568 $ 24,400 (28.0)%
======== ========
</TABLE>
* % not meaningful.
10
<PAGE> 11
Selling and marketing expense decreased 30.3% in the three months ended
September 30, 1998 compared to the prior year primarily due to the decrease in
revenues resulting from the Company's sale of its Retail Business and, to a
lesser extent, streamlining of the sales management structure.
Cost of revenue and support decreased 5.3% in the three months ended
September 30, 1998 compared to the prior year. The decrease was principally due
to the Company's sale of it's Retail Business, offset by increased royalties and
other cost of sales, due to lower implementation and consulting services
margins in France and Germany during the quarter ended September 30, 1998.
Internal research and product development decreased 27.3% in the three
months ended September 30, 1998 compared to the three months ended September 30,
1997, principally due to the Company's sale of its Retail Business.
General and administrative expenses decreased 33.4% in the three months
ended September 30, 1998 compared to the prior year primarily due to cost
reduction actions taken to lower administrative costs.
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 included staff reductions
of approximately 12 employees.
NON-OPERATING INCOME AND EXPENSE
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------
1998 1997
---- ----
<S> <C> <C>
OTHER INCOME (EXPENSE)
Interest income $ 569 $ 140
Interest expense (87) (102)
Exchange gain (loss) 7 (105)
----- -----
TOTAL OTHER INCOME (EXPENSE) $ 489 $ (67)
===== =====
</TABLE>
Interest income increased in the three months ended September 30, 1998
primarily due to higher cash levels as a result of the cash received from the
Company's sale of its Retail Business.
11
<PAGE> 12
FOREIGN CURRENCY
For the three months ended September 30, 1998, 51% of the Company's
total revenue was from outside North America compared with 56% for the three
months ended September 30, 1997. Most of the Company's international revenue is
denominated in foreign currencies. Comshare 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 first quarter of fiscal 1999, the overall weakening of the
dollar against European currencies had a slight positive impact on the Company's
foreign revenues, as compared to the same period of fiscal 1998. If foreign
exchange rates in the first quarter of fiscal 1998 had been the same as they
were in the same period of fiscal 1999, international revenues during the first
quarter of fiscal 1999 would have decreased $3.5 million instead of $3.4
million, as reported. However, the impact on revenue was offset by the exchange
rate impact on foreign expenses. If foreign exchange rates in the first quarter
of fiscal 1998 had been the same as they were in the same period of fiscal 1999,
international expenses during the first quarter of fiscal 1999 would have
decreased $5.6 million instead of $5.5 million, as reported. 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.
The Company had several forward exchange contracts totaling $2.4
million (notional amounts) outstanding at September 30, 1998. See Note D of the
Notes to Condensed Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The effective income tax rate in the three months ended September 30,
1998 was 35%, as the Company recorded a provision for income taxes on its
operating income in the first quarter of fiscal 1999. This compares to a 0%
effective income tax rate for the three months ended September 30, 1997, as the
Company did not recognize any benefits for income taxes on its operating loss
for that period.
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. The 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. The
foregoing statements regarding the realization of deferred tax assets are
"forward looking statement" within the meaning of the Securities Exchange Act of
1934. See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Safe Habor Statement" for discussion of
uncertainties relating to such statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, cash and cash equivalents were $43.8 million,
compared with cash and cash equivalents of $49.1 million at June 30, 1998. The
decrease in cash and cash equivalents was principally due to payment of taxes
and other cash related to the Retail Sale and fourth quarter fiscal 1998
restructuring related items and to a lesser extent the net cash used in
operating activities for the three months ended September 30, 1998.
Net cash used in operating activities was $6.7 million in the three
months ended September 30, 1998, compared with $1.4 million in the three months
ended September 30, 1997. The increase in net cash used in operating activities
was primarily due to income taxes paid related to the gain on the sale of the
Company's Retail Business. These amounts were offset by the increase in
operating income during the quarter ended September 30, 1998.
12
<PAGE> 13
Net cash used in investing activities was $0.2 million in the three
months ended September 30, 1998, compared with $0.9 million in the three months
ended September 30, 1997. The decrease in net cash used in investing activities
was primarily due to the decrease in additions to computer software during the
quarter ended September 30, 1998 as compared to the same period last year. The
Company did not capitalize software development costs during the three months
ended September 30, 1998. At September 30, 1998, the Company did not have any
material capital expenditure commitments.
Total assets were $82.0 million at September 30, 1998 compared with
total assets of $88.7 million at June 30, 1998. Working capital as of September
30, 1998 was $28.7 million, compared with $29.5 million as of June 30, 1998. The
decrease in total assets from June 30, 1998 to September 30, 1998 was primarily
due to the decline in cash and cash equivalents during the first quarter of
fiscal 1998. The decrease in working capital was primarily due to the decrease
in cash and cash equivalents and the increase in notes payable as a result of
additional borrowings. This was offset by the decrease in other liabilities as a
result of payment of taxes relating to the Retail Business sale.
The Company has a $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 September 30, 1998 under the credit agreement were $10 million,
of which approximately $3.7 million was outstanding. Borrowings available at any
time are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash. At September 30, 1998, the interest rate, which
was based on LIBOR plus applicable margin, varied between 2.3% and 7.1%.
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 of $0.8 million under this agreement at
September 30, 1998. The interest rate was 12.5% at September 30, 1998.
In September 1998, the Board of Director's authorized the repurchase of
up to 1,000,000 shares of the Company's outstanding Common Stock. Pursuant to
this repurchase program, the Company has repurchased 170,399 shares of the
Company's Common Stock for a total cost of approximately $872,000, as of
November 3, 1998. The Company may buy shares of its Common Stock on the open
market or in privately negotiated transactions from time to time, based on
market prices.
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 "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Safe Harbor Statement."
13
<PAGE> 14
MARKET SENSITIVITY ANALYSIS
The Company is exposed to market risk from changes in foreign exchange
and interest rates. To reduce the risk from changes in foreign exchange rates,
the Company selectively uses financial instruments. The Company does not hold or
issue financial instruments for trading purposes.
The Company at various times denominates borrowings in foreign
currencies and enters into forward exchange contracts to hedge exposures related
to foreign currency transactions. The Company does not use any other types of
derivatives to hedge such exposures nor does it speculate in foreign currency.
In general, the Company uses forward exchange contracts to hedge against large
selective transactions that present the most exposure to exchange rate
fluctuations. At September 30, 1998 and June 30, 1998, the Company had forward
contracts of approximately $2.4 million and $3.1 million (notional amounts),
respectively, denominated in foreign currencies. The contracts outstanding at
September 30, 1998 mature through October 15, 1998 and are intended to hedge
various foreign currency commitments due from foreign subsidiaries and the
Company's 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 September 30, 1998 and June 30, 1998.
Gains and losses on the forward contracts are largely offset by gains
and losses on the underlying exposure. The Company conducts business in
approximately 15 foreign currencies, predominately British pounds, French francs
and Japanese yen. A hypothetical 10 percent appreciation of the U.S. dollar from
September 30, 1998 market rates would increase the unrealized value of the
Company's forward contracts by an immaterial amount. Conversely, a hypothetical
10 percent depreciation of the U.S. dollar from September 30, 1998 market rates
would decrease the unrealized value of the Company's forward contracts by an
immaterial amount. In either scenario, the gains or losses on the forward
contracts are largely offset by the gains or losses on the underlying
transactions.
The Company maintains its cash and cash equivalents in highly liquid
investments with maturities of ninety days or less. The Company has the ability
to hold its fixed income investments until maturity, and therefore the Company
would not expect its operating results or cash flows to be affected to any
significant degree by the effect of a hypothetical 10 percent change in market
interest rates on its cash and cash equivalents.
YEAR 2000
Many existing computer programs use only the last two digits to refer
to a year. Therefore, these computer programs do not properly recognize a year
that begins with "20" instead of the familiar "19". If not corrected, many
computer applications could fail or create erroneous results. Programs that will
operate in the Year 2000 unaffected by the change in year from 1999 to 2000 are
referred to herein as "Year 2000 compliant". Certain portions of the discussion
set forth below contain "forward looking statements" within the meaning of the
Securities Exchange Act of 1934, as amended, including, but not limited to,
those relating to the Year 2000 compliance of the Company's products and
systems, future costs to remediate Year 2000 issues, the timetable in which such
remediation is to occur, the alternatives available to the Company to become
fully Year 2000 compliant, the Company's mission critical requirements and the
impact on the Company of an inability of it or its key suppliers to become fully
Year 2000 compliant. Actual results could differ materially from those in the
forward looking statement due to a number of uncertainties set forth below.
14
<PAGE> 15
The Company has tested and modified the most current versions of its
products to be Year 2000 compliant. The Company believes that all of its current
client/server products are Year 2000 compliant (including BudgetPLUS, Decision,
DecisionWeb and FDC). The Company expects to release new versions of its
principal mainframe products that will be Year 2000 compliant prior to the end
of calendar year 1998. The Company has no plans to make earlier versions of its
products Year 2000 compliant and will attempt to contact customers informing
them of their decision.
Not all the Company's customers are running product versions that are
Year 2000 compliant. The Company will continue to encourage these customers to
migrate to its current product versions. Some of these customers may not be
willing to migrate to current product versions because of the cost and time
required to do so, including the need to rewrite custom applications which are
not Year 2000 compliant. The Company may decide not to renew maintenance
contracts with these customers for periods after fiscal year 1999. A significant
portion of the Company's maintenance revenue in fiscal year 1998 was derived
from customers running versions of the Company's products which are not Year
2000 compliant; however, customers paying maintenance are entitled to obtain
Year 2000 compliant versions of licensed products at no additional cost.
The Company incorporates a number of software tools into its products.
The Company has performed limited testing of the current versions of these
software tools as part of the testing of its products and believes they are Year
2000 compliant. In addition, with respect to certain of these software tools,
the Company has also received written representations or warranties from the
vendor that these products are Year 2000 compliant. Nevertheless, if one of the
databases supported by the Company is not fully Year 2000 compliant, sales of
the Company's products could be impacted.
If any of the Company's customers are unable to make their information
technology systems Year 2000 compliant in a timely fashion, they may suspend
further product purchases from the Company and renewal of maintenance contracts
until their systems are Year 2000 compliant. Because the Company's customers are
generally large and medium sized businesses and the Company has received
numerous communications from customers about their Year 2000 compliance efforts,
the Company expects most of its customers will become Year 2000 compliant in a
timely fashion, although the Company is not in a position to monitor their
progress.
The Company is currently developing a plan to determine whether its
vendors, distributors and leased facilities (all of which are referred to as
"Third Party Suppliers") are Year 2000 compliant. The plan will include the
identification of principal Third Party Suppliers, including those which are
mission critical, contact with those Third Party Suppliers to determine their
level of Year 2000 compliance, review of materials provided or published by
Third Party Suppliers regarding their Year 2000 compliance efforts and, with
respect to mission critical Third Party Suppliers, some form of additional
verification of compliance. The Company expects to initiate this process before
the end of calendar year 1998. Alternative Third Party Suppliers will be
identified for those not expected to be Year 2000 compliant by the middle of
calendar 1999. The Company believes it has a limited number of mission critical
Third Party Suppliers and believes that there are multiple alternatives for its
mission critical requirements, including handling certain of these functions
internally.
The Company has completed the assessment of its principal internal
information technology systems for Year 2000 compliance. With respect to these
eight principal systems, the Company has upgraded four of these systems with
Year 2000 compliant versions. The Company plans to replace one of the remaining
four systems with new third party software, and is currently reviewing
alternative vendors. The Company has determined that the system to be replaced
could be made Year 2000 compliant in the event a replacement system cannot be
implemented in a timely fashion. Using internal personnel the Company plans to
modify the three remaining internal systems to make these Year 2000 compliant.
The Company has started the modification process and has scheduled completion by
middle of calendar year 1999. The Company intends to actively monitor progress
on this project. In the event that the systems cannot be modified in a timely
fashion, the Company will concentrate its efforts on mission critical revisions.
The Company also believes that certain of these systems could be replaced with
new third party systems which are Year 2000 compliant, although the time
required to implement a new system or the additional costs could be significant.
The Company has engaged a third party to assess the Company's personal
computer and network hardware and software for Year 2000 compliance and to help
develop a plan to make necessary modifications. The assessment will begin in the
fourth quarter of calendar year 1998. Completion of this project is scheduled
for the first half of calendar year 1999. Since the Company continuously
upgrades its hardware and software as part of its normal
15
<PAGE> 16
business, much of the older hardware and software is likely to be eliminated
prior to 2000. The Company has contingency plans in the event that these systems
cannot be remediated in a timely fashion through the replacement of older
equipment.
A failure of one or more of these internal systems to become Year 2000
compliant, particularly the Company's principal internal information technology
systems, could require the Company to manually process information or could
prevent or limit access to mission critical information.
The Company's non-information technology systems consist principally of
telephone and data communication systems. The Company has completed the initial
assessment of these systems for Year 2000 compliance. Remediation has begun and
is scheduled for completion in the first half of calendar year 1999. If the
Company's telephone and data communications systems cannot be remediated to
become compliant, the Company will be required to replace those systems before
the end of calendar year 1999. The Company believes that there are alternative
providers of these systems which are Year 2000 compliant, but to date it has not
explored the time required to implement a new system or the additional cost to
the Company.
Most of the costs incurred by the Company to date on Year 2000
compliance issues have been internal staff costs and costs relating to normal
product upgrades, which the Company has not separately tracked. As a result, the
Company is not able to reasonably estimate the amount of such expenditures. The
Company presently expects that its future costs relating to Year 2000
compliance, including replacement systems, will be between $1.3 million and $2.5
million. The Company would have incurred many of the costs for these efforts in
any event because of the normal process of product and equipment upgrades. These
cost estimates are subject to a number of uncertainties, which could result in
actual costs exceeding the estimated amounts including, but not limited to,
undetected errors or defects discovered in connection with the remediation
process or unanticipated difficulties in completing the remediation in a timely
fashion, resulting in the need either to replace more of the systems than
originally expected and/or hire more personnel or third party firms to assist in
the remediation process.
Some commentators have stated that a significant amount of litigation
will arise out of Year 2000 compliance issues. While the Company believes that
its efforts to address Year 2000 issues for which it is responsible should be
successful, a description of its most reasonably likely worst case Year 2000
scenarios have been described above. In addition, it is possible that there will
be undetected errors or defects associated with Year 2000 date functions in the
Company's current products and internal systems or those of its key vendors. If
any of the foregoing scenarios should occur, it is possible that the Company
could be involved in litigation. Further, although the Company does not believe
that it has any obligation to continue to support prior versions of its products
after the termination of maintenance contracts covering those products, nor any
obligation to make prior versions of its products, including custom applications
written by the Company, Year 2000 compliant, it is possible that its customers
may take a contrary position and initiate litigation. Because of the
unprecedented nature of litigation in this area, it is uncertain how the Company
may be affected by it. In the event of such litigation or the occurrence of one
or more of the most reasonably likely worst case Year 2000 scenarios, the
Company's revenues, net income or financial condition could be materially
adversely affected.
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, including the impact on the Company's revenues of the
proposed release by Microsoft of an OLAP database; 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 the 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
16
<PAGE> 17
execute available tax strategies, required to realize deferred tax assets;
economic conditions generally or in specific industry segments; risks inherent
in seeking and consummating acquisitions, including the diversion of management
attention to the assimilation of the operations and personnel of acquired
businesses, the ability of the Company to successfully integrate acquired
businesses and the impact on the Company's results and financial condition from
debt issued, liabilities acquired, and additional expenses incurred in
connection with such acquisitions. 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.
ITEM 3. QUANTITATIVE AND QUALITATiVE DISCLOSURES ABOUT MARKET RISK.
See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations"
PART II - OTHER INFORMATION
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
September 30, 1998.
17
<PAGE> 18
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: NOVEMBER 16, 1998 COMSHARE, INCORPORATED
(Registrant)
/s/ Kathryn A. Jehle
-----------------------------------------------
Kathryn A. Jehle
Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
18
<PAGE> 19
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
4.01 First Amendment to Credit Agreement, dated
September 23, 1998, between The Registrant, Comshare,
Limited and Harris Trust and Savings Bank.
11.1 Computation of Net Income (Loss) per Common Share.
27 Financial Data Schedule.
19
<PAGE> 1
EXHIBIT 4.01
FIRST AMENDMENT TO CREDIT AGREEMENT
Harris Trust and Savings Bank
Chicago, Illinois
Gentlemen:
Reference is hereby made to that certain Credit Agreement (the "Credit
Agreement"), dated as of September 23, 1997, by and among Comshare, Incorporated
(the "Company") and Comshare Limited (the "Borrowing Subsidiary") (together the
"Borrowers") and Harris Trust and Savings Bank (the "Bank"). All capitalized
terms used herein without definition shall have the same meanings herein as such
terms have in the Credit Agreement.
The Borrowers have requested that the Bank amend certain provisions of
the Credit Agreement and the Bank will do so under the terms and conditions set
forth in this Amendment.
1. AMENDMENTS.
Upon your acceptance hereof in the space provided for that purpose
below, the Credit Agreement shall be and is hereby amended as follows:
(a) The portion of the definition of "Borrowing Base" appearing before
the term "provided" in Section 5 of the Credit Agreement shall be
amended and as so amended shall be restated to read as follows:
"Borrowing Base" means, as of any time it is to be determined, the
sum of:
(a) 80% of the then outstanding unpaid amount of Eligible
Accounts other than Software Maintenance Receivables; plus
(b) 70% of the then outstanding unpaid amount of Eligible
Accounts consisting of Software maintenance Receivables; plus
(c) the lesser of $6,000,000 or 50% of the cash on hand of the
Company and its Subsidiaries then on deposit in accounts
maintained at the Bank;"
(b) The definition of "Borrowing Base" appearing in Section 5 of the
Credit Agreement shall be further amended by deleting (b)(iii) and
(iv) appearing therein and inserting the following in their stead:
"(iii) the Borrowing Base attributable to Comshare Canada shall
not exceed $950,000, (iv) no Borrowing ] Base shall be
attributable to the Borrowing Subsidiary except during the period
when that certain Debt Subordination Agreement dated as of
September 23, 1997 between the Company and its Affiliates (the
"Debt Subordination Agreement") is in full force and effect
provided that no more than $7,287,000 of the Borrowing Base of the
Borrowing Subsidiary shall be used to support borrowings by the
Company (it being understood and agreed that no such limitation
shall apply to the Borrowing Base of the Borrowing Subsidiary used
to support borrowings by the Borrowing Subsidiary itself) and"
(c) Section 8.7 of the Credit Agreement shall be amended by deleting
the amount "$28,000,000" appearing in the fifth line thereof and
inserting the amount "$18,000,000" in its stead.
(d) Section 8.14 of the Credit Agreement shall be amended by inserting
after subsection (b) the following phrase as subsection (c):
"the Company's expenditure of up to $10,000,000 during its
fiscal year ending on or about June 30, 1999 for the redemption of
certain of its capital stock"
<PAGE> 2
(e) The Company represents and warrants to the Bank that Comshare U.K.
has merged with and into the Borrowing Subsidiary, with the
Borrowing Subsidiary being the corporation surviving such merger.
Accordingly, (x) the references to Comshare UK in Section 5 and
7.2 and Schedule 6.2 of the Credit Agreement shall be deleted and
(y) any other references to Comshare UK in the Credit Agreement
shall be deemed references to the Borrowing Subsidiary.
2. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of all of the
following conditions precedent:
(a) The Borrowers and the Bank shall have executed and delivered this
Amendment.
(b) Legal matters incident to the execution and delivery of this
Amendment shall be satisfactory to the Bank and its counsel.
3. MISCELLANEOUS
(a) Except as specifically amended herein, the Credit Agreement shall
continue in full force and effect in accordance with its original
terms. Reference to this Specific Amendment need not be made in
any document, letter, certificate, the Credit Agreement or any
communication issued or made pursuant to or with respect to the
Credit Agreement, any reference therein being sufficient to refer
to the Credit Agreement as amended hereby.
b) This Amendment may be executed in any number of counterparts, and
by the different parties on different counterparts, all of which
taken together shall constitute one and the same agreement. Any of
the parties hereto may execute this Amendment by signing any such
counterpart and each of such counterparts shall for all purposes
be deemed to be an original. This Amendment shall be governed by
and construed in accordance with the laws of the State of
Illinois.
Dated as of this 30th day of September, 1998.
COMSHARE, INCORPORATED
By \s\ Kathryn Jehle
-----------------------------------------
Title: Senior Vice President and CFO
-----------------------------------------
COMSHARE LIMITED
By \s\ Kathryn Jehle
-----------------------------------------
Title: Director
-----------------------------------------
Accepted and agreed to as of the date last above written.
HARRIS TRUST AND SAVINGS BANK
By \s\ Kirby M. Law
-----------------------------------------
Its Vice President
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
1998 1997
---- ----
(In thousands, except per share amounts)
<S> <C> <C>
NET INCOME (LOSS)
Net income (loss) - Basic EPS $ 52 $ (3,505)
Net income (loss) - Diluted EPS 52 (3,505)
SHARES USED IN PER COMMON SHARE
Basic EPS 9,998 9,874
Diluted EPS 9,998 9,874
NET INCOME (LOSS) PER COMMON SHARE
Basic EPS 0.01 (0.36)
Diluted EPS 0.01 (0.36)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 43,831,000
<SECURITIES> 0
<RECEIVABLES> 19,575,000<F1>
<ALLOWANCES> 1,797,000
<INVENTORY> 0
<CURRENT-ASSETS> 68,341,000
<PP&E> 19,541,000
<DEPRECIATION> 16,519,000
<TOTAL-ASSETS> 82,021,000
<CURRENT-LIABILITIES> 39,660,000
<BONDS> 485,000
0
0
<COMMON> 9,983,000
<OTHER-SE> 28,725,000
<TOTAL-LIABILITY-AND-EQUITY> 82,021,000
<SALES> 0
<TOTAL-REVENUES> 17,159,000
<CGS> 0
<TOTAL-COSTS> 17,568,000
<OTHER-EXPENSES> (576,000)<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,000
<INCOME-PRETAX> 80,000
<INCOME-TAX> 28,000
<INCOME-CONTINUING> 52,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,000
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<FN>
<F1>Accounts receivable are stated at net of allowance for doubtful accounts.
<F2>Comprised of $569,000 of interest income and $7,000 of exchange gain.
</FN>
</TABLE>
