-----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, Bdi0TMU/fKnxw6U8xlgpD0hVSbVh0Y30Mw05Sd8MK0fsW42wRwLGBuLRUokLL6A/ rmNDW9yXbdQWbZse8CBDkw== 0000950124-98-006781.txt : 19981118 0000950124-98-006781.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950124-98-006781 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98753093 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 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 2 COMSHARE, INCORPORATED INDEX
Page No. -------- 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
2 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)
Three Months Ended September 30, ------------------------ 1998 1997 ---- ---- 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) ======== ========
See accompanying notes to condensed consolidated financial statements. 3 4 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, June 30, 1998 1998 ---- ---- ASSETS (unaudited) (audited) 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 ======= =======
See accompanying notes to condensed consolidated financial statements. 4 5 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
September 30, June 30, 1998 1998 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (audited) 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 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited; in thousands)
Three Months Ended September 30, -------------------- 1998 1997 ---- ---- 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 ======== ========
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 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 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 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.
Three Months Ended September 30, ---------------------- 1998 1997 ------ ----- 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)% ===== =====
9 10 REVENUE
Three Months Ended Percent September 30, Change ------------------- ------------ 1998 1997 ---- ---- 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)% ======= =======
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
Three Months Ended Percent September 30, Change ---------------------- ----------- 1998 1997 ---- ---- 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)% ======== ========
* % not meaningful. 10 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
Three Months Ended September 30, ---------------- 1998 1997 ---- ---- OTHER INCOME (EXPENSE) Interest income $ 569 $ 140 Interest expense (87) (102) Exchange gain (loss) 7 (105) ----- ----- TOTAL OTHER INCOME (EXPENSE) $ 489 $ (67) ===== =====
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 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 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 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 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 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 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 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 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 EX-4.01 2 FIRST AMENDMENT TO CREDIT AGREEMENT 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" 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 EX-11.1 3 COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE 1 EXHIBIT 11.1 COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Three Months Ended September 30, --------------------------------- 1998 1997 ---- ---- (In thousands, except per share amounts) 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)
EX-27 4 FINANCIAL DATA SCHEDULE
5 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 43,831,000 0 19,575,000 1,797,000 0 68,341,000 19,541,000 16,519,000 82,021,000 39,660,000 485,000 0 0 9,983,000 28,725,000 82,021,000 0 17,159,000 0 17,568,000 (576,000) 0 87,000 80,000 28,000 52,000 0 0 0 52,000 0.01 0.01 Accounts receivable are stated at net of allowance for doubtful accounts. Comprised of $569,000 of interest income and $7,000 of exchange gain.
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