-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NFSFQD1gjap6WdHZN1nd/sG2z7PHPPuWGcUpDsNwjuE0q9gGEU7GmjjlWWmwT5oh cwDJ0splR1UlBxhg3ejm/Q== 0000950124-98-002988.txt : 19980518 0000950124-98-002988.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950124-98-002988 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMSHARE INC CENTRAL INDEX KEY: 0000201513 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 381804887 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28848 FILM NUMBER: 98624715 BUSINESS ADDRESS: STREET 1: 555 BRIARWOOD CIRCLE STREET 2: P O BOX 1588 CITY: ANN ARBOR STATE: MI ZIP: 48108 BUSINESS PHONE: 3139944800 MAIL ADDRESS: STREET 1: P O BOX 1588 STREET 2: 555 BRIARWOOD CIRCLE CITY: ANN ARBOR STATE: MI ZIP: 48108 10-Q 1 FORM 10-Q 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.
OUTSTANDING AT CLASS OF COMMON STOCK MARCH 31, 1998 --------------------- ------------------ $ 1.00 PAR VALUE 9,918,929 SHARES
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 3 PART I. - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS COMSHARE, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except per share data)
March 31, June 30, 1998 1997 ------------------------ ------------------------ ASSETS (unaudited) (audited) 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 ======================== ========================
See accompanying notes to condensed consolidated financial statements. 3 4 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except per share data)
March 31, June 30, 1998 1997 --------------- ----------- 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 =============== ===========
See accompanying notes to condensed consolidated financial statements. 4 5 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited; in thousands, except per share data)
Three Months Ended Nine Months Ended March 31, March 31, 1998 1997 1998 1997 --------- --------- --------- --------- 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) ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 5 6 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited; in thousands)
Nine Months Ended March 31, ------------------------------- 1998 1997 ----------- ------------- 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 ========== ============
See accompanying notes to condensed consolidated financial statements. 6 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 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 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.
Three Months Ended Nine Months Ended March 31, March 31, 1998 1997 1998 1997 ------ ------- ------ -------- 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)% ===== ======= ====== =======
9 10 REVENUE
Three Months Ended Percent Nine Months Ended Percent March 31, Change March 31, Change ---------------------- ----------- ----------------------------- ---------- 1998 1997 1998 1997 ---------- ---------- ------------ ------------- (in thousands) (in thousands) 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)% ========== ========== ============ =============
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 11 COSTS AND EXPENSES
Three Months Ended Percent Nine Months Ended Percent March 31, Change March 31, Change ---------------------- --------- ------------------------ ---------- 1998 1997 1998 1997 ---------- ---------- --------- ---------- (in thousands) (in thousands) 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.
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 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
Three Months Ended Nine Months Ended March 31, March 31, ------------------------- ----------------------- 1998 1997 1998 1997 ----------- ----------- ---------- ---------- (in thousands) (in thousands) OTHER INCOME (EXPENSE) Interest income (expense) $ 1 $ 64 $ - $ 377 Exchange gain (loss) 16 (77) (41) (321) ----------- ---------- ---------- ---------- TOTAL OTHER INCOME (EXPENSE) $ 17 $ (13) $ (41) $ 56 =========== ========== ========== ==========
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 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 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 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 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 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 EX-10.1 2 EXHIBIT 10.1 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. 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. 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 EX-11.1 3 EXHIBIT 11.1 1 EXHIBIT 11.1 COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE (unaudited; in thousands, except per share amounts)
Three Months Ended Nine Months Ended March 31, March 31, -------------------------- ------------------------ 1998 1997 1998 1997 --------- ---------- --------- -------- 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)
18 EX-27 4 EXHIBIT 27
5 9-MOS JUN-30-1998 JUL-01-1998 MAR-31-1998 13,288,000 0 27,205,000 1,457,000 0 45,872,000 19,108,000 15,493,000 80,412,000 41,293,000 0 0 0 9,919,000 19,313,000 80,412,000 0 69,730,000 0 73,038,000 (41,000) 0 0 (3,349,000) 0 (3,349,000) 0 0 0 (3,349,000) (.34) (.34) Accounts receivable are stated at net of allowance for doubtful accounts. Comprised of $41,000 of exchange loss.
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