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 DECEMBER 31, 1999
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
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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 DECEMBER 31, 1999.
OUTSTANDING AT
CLASS OF COMMON STOCK DECEMBER 31, 1999
--------------------- -----------------
$1.00 PAR VALUE 9,645,065 SHARES
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COMSHARE, INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended December 31, 1999 and 1998...............................3
Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended December 31, 1999 and 1998...............................4
Condensed Consolidated Balance Sheets as of
December 31, 1999 and June 30, 1999.........................................................5
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended December 31, 1999 and 1998.................................................7
Notes to Condensed Consolidated Financial Statements............................................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...............................20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................21
SIGNATURE....................................................................................... 22
INDEX TO EXHIBITS................................................................................23
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PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
REVENUE
Software licenses $ 5,566 $ 6,109 $ 10,868 $ 12,235
Software maintenance 6,006 6,508 11,754 13,622
Implementation, consulting
and other services 3,451 4,308 6,907 8,227
---------- ---------- ---------- ----------
TOTAL REVENUE 15,023 16,925 29,529 34,084
COSTS AND EXPENSES
Selling and marketing 5,932 6,629 11,749 13,567
Cost of revenue and support 5,733 6,463 10,971 12,869
Internal research and product development 2,136 2,130 4,286 4,377
General and administrative 1,472 2,082 2,951 4,059
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 15,273 17,304 29,957 34,872
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (250) (379) (428) (788)
OTHER INCOME (EXPENSE)
Interest income 352 512 738 1,081
Interest expense (22) (52) (44) (139)
Exchange gain (loss) 10 39 (94) 46
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 340 499 600 988
INCOME BEFORE TAXES 90 120 172 200
Provision for income taxes 31 40 61 68
---------- ---------- ---------- ----------
NET INCOME $ 59 $ 80 $ 111 $ 132
========== ========== ========== ==========
SHARES USED IN BASIC EPS COMPUTATION 9,604 9,752 9,623 9,846
========== ========== ========== ==========
SHARES USED IN DILUTED EPS COMPUTATION 9,735 9,752 9,685 9,846
========== ========== ========== ==========
NET INCOME PER COMMON SHARE - BASIC EPS $ 0.01 $ 0.01 $ 0.01 $ 0.01
========== ========== ========== ==========
NET INCOME PER COMMON SHARE - DILUTED EPS $ 0.01 $ 0.01 $ 0.01 $ 0.01
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
-------- -------- -------- --------
Net income $ 59 $ 80 $ 111 $ 132
Other comprehensive income (loss):
Currency translation adjustment (41) 4 (73) 381
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 18 $ 84 $ 38 $ 513
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, June 30,
1999 1999
------------ ------------
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $ 27,468 $ 32,212
Accounts receivable, net 16,870 14,723
Deferred income taxes 654 654
Prepaid expenses and other current assets 1,850 4,585
------------ ------------
TOTAL CURRENT ASSETS 46,842 52,174
Property and equipment, at cost
Computers & other equipment 11,223 11,099
Leasehold improvements 3,057 2,893
------------ ------------
14,280 13,992
Less - Accumulated depreciation 11,990 11,354
------------ ------------
Property and equipment, net 2,290 2,638
Goodwill, net 1,331 1,330
Deferred income taxes 6,094 5,067
Other assets 2,221 2,246
------------ ------------
TOTAL ASSETS $ 58,778 $ 63,455
============ ============
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, June 30,
1999 1999
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (audited)
CURRENT LIABILITIES
Current portion of long-term debt $ 592 $ 882
Accounts payable 3,728 5,871
Accrued liabilities:
Payroll 1,397 1,864
Taxes 1,313 808
Other 5,457 6,684
------------ ------------
Total accrued liabilities 8,167 9,356
Deferred revenue 11,025 11,611
------------ ------------
TOTAL CURRENT LIABILITIES 23,512 27,720
Long-term debt 532 1,198
Other liabilities 3,089 3,271
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
9,645,065 shares as of December 31, 1999
and 9,642,033 shares as of June 30, 1999 9,645 9,642
Capital contributed in excess of par value 38,590 38,650
Retained deficit (8,375) (8,486)
Accumulated other comprehensive income:
Pension liability, net of tax (3,262) (3,262)
Cumulative translation adjustment (4,953) (4,880)
------------ ------------
31,645 31,664
Less - Notes receivable - 398
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 31,645 31,266
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 58,778 $ 63,455
============ ============
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited; in thousands)
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
1999 1998
---------- ----------
OPERATING ACTIVITIES
Net income $ 111 $ 132
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 711 1,042
Changes in operating assets and liabilities:
Accounts receivable (1,996) 2,600
Prepaid expenses and other assets (113) (312)
Accounts payable (2,223) (3,828)
Accrued liabilities (1,044) (7,164)
Deferred revenue (676) (1,503)
Deferred income taxes 1,861 -
Other liabilities (182) (380)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (3,551) (9,413)
INVESTING ACTIVITIES
Payments for property and equipment (295) (383)
Other 7 219
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (288) (164)
FINANCING ACTIVITIES
Net repayments under debt agreements,
capital lease agreements and notes payable (985) (611)
Common stock repurchased and retired - (2,835)
Other 189 279
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (796) (3,167)
Effect of exchange rate changes (109) 64
---------- ----------
NET DECREASE IN CASH (4,744) (12,680)
CASH AT BEGINNING OF PERIOD 32,212 49,102
---------- ----------
CASH AT END OF PERIOD $ 27,468 $ 36,422
========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 25 $ 52
========== ==========
Cash paid for income taxes $ 297 $ 3,516
========== ==========
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COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by Comshare, Incorporated (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. Certain amounts in the fiscal
1999 financial statements have been reclassified to conform with fiscal 2000
presentations.
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 statements
of operations and the consolidated statements of comprehensive income for the
three and six months ended December 31, 1999 and 1998, the consolidated balance
sheet as of December 31, 1999 and the consolidated statements of cash flows for
the six months ended December 31, 1999 and 1998.
The results of operations for the three and six months ended December 31,
1999 and 1998 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
Product upgrades for the Company's products have been released regularly
with an almost continuous product development cycle. This has reduced the time
between establishing technological feasibility and general release to the
public. Based on these continuous product life cycles, software costs qualifying
for capitalization will be insignificant. Accordingly, the Company does not
capitalize any software development costs and does not anticipate capitalizing
future software development costs.
NOTE C - BORROWINGS
The Company has a $10 million credit agreement, which expires on September
30, 2001. 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 credit agreement, the Company
is not permitted to pay cash dividends on its common stock. Borrowings under
this credit agreement were approximately $0.5 million and total available
borrowings were $10 million at December 31, 1999. Borrowings available at any
time are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash. At December 31, 1999, the interest rate on
borrowings denominated in Japanese yen, which were used to hedge yen based
receivables, was 3.34%.
Separately, in August 1997, the Company's United Kingdom subsidiary entered
into a $1.2 million loan agreement, which matures on May 31, 2000. The Company
had outstanding borrowings of $0.2 million under this agreement at December 31,
1999, which are classified as a capital lease. The interest rate was 10.4% at
December 31, 1999.
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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 December 31, 1999 and June 30,
1999, the Company had forward foreign currency exchange contracts outstanding of
approximately $6.4 million and $2.9 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at December 31,
1999 mature at various dates through September 22, 2000 and are intended to
hedge various foreign currency commitments due from 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 amounts at
December 31, 1999 and June 30, 1999.
NOTE E - FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 137, a
deferral of SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Company has not yet adopted this
Statement, but is required to adopt the Statement for the fiscal year ended June
30, 2001. Management has not yet quantified the effect of adopting this
Statement.
NOTE F - LITIGATION
The shareholder class action against Comshare has been dismissed. During
fiscal 1996, a shareholder class action suit (In Re Comshare, Incorporated
Securities Litigation) was filed against the Company and certain of its officers
and directors. On September 18, 1997, the U.S. District Court dismissed all
related claims. The plaintiffs appealed the dismissal of the action to the U.S.
Court of Appeals for the Sixth Circuit. On July 8, 1999, the Court of Appeals
affirmed the dismissal of the action by the District Court. The plaintiffs
sought a rehearing before the entire Sixth Circuit Court of Appeals, which was
denied by that Court on August 23, 1999. The plaintiffs did not petition the
U.S. Supreme Court to hear an appeal of the dismissal within the required time
frame, and the dismissal of the action became final in November 1999.
NOTE G - SEGMENT REPORTING
The Company has only one reportable segment - the development, marketing
and support of client/server financial analytic applications software for
management planning and control. Revenue is derived from the licensing of
software and the provision of related services, that include product
implementation, consulting, training and support.
No single customer accounted for more that 10% of the Company's total
revenue in the three and six months ended December 31, 1999 and 1998. In
addition, the Company is not dependent on any single customer or group of
customers. Geographic segment information is as follows:
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COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUE FROM EXTERNAL CUSTOMERS:
United States $ 7,711 $ 7,970 $ 15,212 $ 16,322
United Kingdom 3,058 3,292 6,251 6,773
Other countries 4,254 5,663 8,066 10,989
------------ ------------ ------------ ------------
TOTAL REVENUE $ 15,023 $ 16,925 $ 29,529 $ 34,084
============ ============ ============ ============
OPERATING INCOME (LOSS):
United States $ (497) $ (799) $ (1,617) $ (707)
United Kingdom 726 478 1,790 146
Other countries 2,489 2,911 5,100 5,519
------------ ------------ ------------ ------------
TOTAL OPERATING INCOME 2,718 2,590 5,273 4,958
Unallocated expenses (2,628) (2,470) (5,101) (4,758)
------------ ------------ ------------ ------------
Income before taxes $ 90 $ 120 $ 172 $ 200
============ ============ ============ ============
AS OF DECEMBER 31,
1999 1998
------------ -----------
IDENTIFIABLE ASSETS:
United States $ 44,478 $ 47,135
United Kingdom and other countries 14,300 26,020
------------ -----------
TOTAL IDENTIFIABLE ASSETS $ 58,778 $ 73,155
============ ===========
Unallocated expenses consist of general corporate expenses, internal
research and product development expenses, interest expense and interest income.
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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 six months ended December 31, 1999 compared to the three and six months
ended December 31, 1998. 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,
1999.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial data
as a percentage of total revenue.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
REVENUE
Software licenses 37.0% 36.1% 36.8% 35.9%
Software maintenance 40.0 38.4 39.8 40.0
Implementation, consulting and
other services 23.0 25.5 23.4 24.1
-------- -------- -------- --------
TOTAL REVENUE 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 39.5 39.2 39.8 39.8
Cost of revenue and support 38.2 38.2 37.2 37.8
Internal research and product development 14.2 12.6 14.5 12.8
General and administrative 9.8 12.3 10.0 11.9
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 101.7 102.3 101.5 102.3
LOSS FROM OPERATIONS (1.7) (2.3) (1.5) (2.3)
OTHER INCOME (EXPENSE)
Interest income 2.3 3.0 2.5 3.2
Interest expense (0.1) (0.3) (0.1) (0.4)
Exchange gain (loss) 0.1 0.2 (0.3) 0.1
-------- -------- -------- --------
TOTAL OTHER INCOME 2.3 2.9 2.1 2.9
INCOME BEFORE TAXES 0.6 0.6 0.6 0.6
Provision for income taxes 0.2 0.2 0.2 0.2
-------- -------- -------- --------
NET INCOME 0.4% 0.4% 0.4% 0.4%
======== ======== ======== ========
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REVENUE
THREE MONTHS ENDED PERCENT SIX MONTHS ENDED PERCENT
DECEMBER 31, CHANGE DECEMBER 31, CHANGE
------------------------ --------- ------------------------ ----------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands) (in thousands)
REVENUE
Software licenses $ 5,566 $ 6,109 (8.9)% $ 10,868 $ 12,235 (11.2)%
Software maintenance 6,006 6,508 (7.7) 11,754 13,622 (13.7)
Implementation, consulting and
other services 3,451 4,308 (19.9) 6,907 8,227 (16.0)
-------- -------- -------- --------
TOTAL REVENUE $ 15,023 $ 16,925 (11.2)% $ 29,529 $ 34,084 (13.4)%
======== ======== ======== ========
During the six months ended December 31, 1998, the Company sold its French
and German operations and subsequently these operations were converted to
distributorships. Revenue for the three and six months ended December 31, 1998,
reflecting the Company's French and German operations as distributors ("on a
comparable basis"), was $16.7 million and $32.7 million, respectively.
Software license fees were $5.6 million and $10.9 million for the three and
six months ended December 31, 1999, respectively and $6.1 million and $12.0
million for the three and six months ended December 31, 1998, respectively, on a
comparable basis. The decrease in license fees, on a comparable basis, was
primarily due to a decline in sales of the Company's older products, which was
partially offset by increased sales of newer products. License fees for
BudgetPLUS grew 18.9%, or $0.3 million and 44%, or $1.1 million for the three
and six months ended December 31, 1999, respectively, compared to the same
periods one year ago. In addition, FDC license fees grew 66%, or $0.5 million
and 42%, or $0.7 million, respectively, compared to the three and six months
ended December 31, 1998. License fees in Comshare's direct operations in North
America and the United Kingdom increased 16% in the second quarter compared to
the same quarter a year ago. The increase was driven by sales of BudgetPLUS and
FDC that grew 71% and 117%, respectively, in the direct territories. License
fees in the distributor operations decreased 30%, reflecting an unusually high
quarter a year ago and relatively low sales of BudgetPLUS.
Software maintenance revenue was $6.0 million and $11.8 million for the
three and six months ended December 31, 1999 and $6.4 million and $13.0 million
for the same period one year ago, on a comparable basis. The Company experienced
growth in maintenance revenue from newer products, primarily BudgetPLUS, offset
by a decline in maintenance revenue from older desktop products and mainframe
software. This decline in older desktop and mainframe applications is expected
to continue in future periods.
Implementation, consulting and other services revenue was $3.5 million and
$6.9 million for the three and six months ended December 31, 1999, respectively.
Implementation, consulting and other services revenue was $4.2 million and $7.7
million for the three and six months ended December 31, 1998, on a comparable
basis. The decrease from prior year is primarily due to the decline in license
fees and the effect of several large projects, which were completed during the
six months ended December 31, 1998.
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COSTS AND EXPENSES
THREE MONTHS ENDED PERCENT SIX MONTHS ENDED PERCENT
DECEMBER 31, CHANGE DECEMBER 31, CHANGE
------------------- --------- ------------------- ---------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands) (in thousands)
COSTS AND EXPENSES
Selling and marketing $ 5,932 $ 6,629 (10.5)% $11,749 $13,567 (13.4)%
Cost of revenue and support 5,733 6,463 (11.3) 10,971 12,869 (14.7)
Internal research and product development 2,136 2,130 0.3 4,286 4,377 (2.1)
General and administrative 1,472 2,082 (29.3) 2,951 4,059 (27.3)
------- ------- ------- -------
TOTAL COSTS AND EXPENSES $15,273 $17,304 (11.7)% $29,957 $34,872 (14.1)%
======= ======= ======= =======
Total costs and expenses decreased 11.7% and 14.1% in the three and six
months ended December 31, 1999, respectively, compared to the prior year,
reflecting the Company's sale of its French and German operations and their
conversion to distributorships during the quarter ended December 31, 1998. As a
result of these sales, all operating costs were favorably impacted. On a
comparable basis, total costs and expenses were $17 million and $32.9 million
for the three and six months ended December 31, 1998, respectively. On a
comparable basis, the decreases from the same periods one year ago are primarily
due to cost reduction actions taken to lower administrative and marketing costs,
reduced cost of sales due to improved distribution procedures and reduced third
party royalty expenses.
OTHER INCOME AND EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(in thousands) (in thousands)
OTHER INCOME (EXPENSE)
Interest income $ 352 $ 512 $ 738 $ 1,081
Interest expense (22) (52) (44) (139)
Exchange gain (loss) 10 39 (94) 46
---------- ---------- ---------- ----------
TOTAL OTHER INCOME $ 340 $ 499 $ 600 $ 988
========== ========== ========== ==========
The decreases in other income for the three and six months ended December
31, 1999, as compared to the same periods one year ago are the result of lower
average cash balances this fiscal year, which resulted in decreased interest
income.
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FOREIGN CURRENCY
For the three and six months ended December 31, 1999, 48.7% and 48.5%,
respectively, of the Company's total revenue was from outside North America
compared with 52.9% and 52.1% for the three and six months ended December 31,
1998, respectively. 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. 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. For the three
and six months ended December 31, 1999, foreign currency fluctuations did not
have a material impact on the Company's revenues, operating expenses or net
income.
The Company had several forward exchange contracts totaling a notional
amount of $6.4 million, outstanding at December 31, 1999. See Note D of Notes to
Condensed Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The effective income tax rate in the three and six months ended December
31, 1999 and 1998 was approximately 35%.
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 statements" 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 Harbor Statement" for discussion of
uncertainties relating to such statements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, cash and cash equivalents were $27.5 million,
compared with $32.2 million at June 30, 1999. The decrease in cash and cash
equivalents is principally due to decreased accounts payable and increased
accounts receivables, during the six months ended December 31, 1999.
Net cash used in operating activities was $3.6 million in the six months
ended December 31, 1999, compared with $9.4 million in the six months ended
December 31, 1998. The prior year cash used included tax payments related to the
sale of the Retail Business and significant payments on restructuring, which did
not affect the six months ended December 31, 1999 to the same extent. The six
months ended December 31, 1999 also benefited from a tax refund of $1.9 million.
Net cash used in investing activities was $0.3 million in the six months
ended December 31, 1999, compared with $0.2 million in the six months ended
December 31, 1998. The Company purchases most of its computer equipment under
operating leases. At December 31, 1999, the Company did not have any material
capital expenditure commitments.
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Net cash used in financing activities was $0.8 million in the six months
ended December 31, 1999, compared to $3.2 million in the same period one year
ago. The net cash used in financing activities was primarily due to the
Company's stock repurchase during the six months ended December 31, 1998.
Total assets were $58.8 million at December 31, 1999, compared with total
assets of $63.5 million at June 30, 1999. Working capital as of December 31,
1999 was $23.3 million, compared with $24.5 million as of June 30, 1999.
The Company has a $10 million credit agreement, which expires on September
30, 2001. 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 credit agreement, the Company
is not permitted to pay cash dividends on its common stock. Borrowings under
this credit agreement were approximately $0.5 million and total available
borrowings were $10 million at December 31, 1999. Borrowings available at any
time are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash. At December 31, 1999, the interest rate on
borrowings denominated in Japanese yen, which were used to hedge yen based
receivables, was 3.34%.
Separately, in August 1997, the Company's United Kingdom subsidiary entered
into a $1.2 million loan agreement, which matures on May 31, 2000. The Company
had outstanding borrowings of $0.2 million under this agreement at December 31,
1999, which are classified as a capital lease. The interest rate was 10.4% at
December 31, 1999.
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 and Exchange Act of 1934, as amended. 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."
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
December 31, 1999 and June 30, 1999, the Company had forward contracts of
approximately $6.4 million and $2.9 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at December 31,
1999 mature through September 22, 2000 and are intended to hedge various foreign
currency commitments due from 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 amounts at December 31, 1999 and June
30, 1999.
Gains and losses on the forward contracts are largely offset by gains and
losses on the underlying exposure. The Company conducts business in
approximately 11 foreign currencies, predominately British pounds and Japanese
yen. A hypothetical 10 percent appreciation of the U.S. dollar from December 31,
1999 market rates would not materially increase the unrealized value of the
Company's forward contracts and a hypothetical 10 percent depreciation of the
U.S. dollar from December 31, 1999 market rates would not materially decrease
the unrealized value of the Company's forward contracts. In either scenario, the
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gains or losses on the forward contracts would be 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
The following discussion contains information regarding Year 2000
readiness, and constitutes a "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Information and Readiness Disclosure Act of 1998.
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. It is possible some Year
2000 issues may not be discovered until well after January 1, 2000. 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 and 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.
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 and web-architected products are Year 2000 compliant (including
BudgetPLUS, Decision, DecisionWeb and FDC). The Company has not identified any
material Year 2000 problems with these current products, or any legacy products.
The Company has released new versions of its principal mainframe and desktop
products that it believes are Year 2000 compliant. Any issues that are
identified are addressed on an ongoing basis. The Company has no plans to make
earlier versions of its products Year 2000 compliant and has made substantial
efforts to contact customers informing them of this decision.
The Company encouraged all known customers running product versions that
were not Year 2000 compliant to upgrade 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. For non-compliant direct
customers that have maintenance contracts, the Company has proactively shipped
them the latest version of its products to ensure their compliance, and most of
the Company's distributors represented to the Company that they have done the
same in indirect territories. A significant portion of the Company's maintenance
revenue in fiscal 1999 was derived from customers running versions of the
Company's products which were not Year 2000 compliant; however, customers paying
maintenance are entitled to obtain Year 2000 compliant versions of licensed
products at no additional cost.
Certain of the Company's older products will not be made Year 2000
complaint in any version. The Company has ceased providing further maintenance
services for those products and has not renewed maintenance contracts with
customers using these products for periods after September 1999.
The Company incorporates a number of third party 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
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tools, the Company has 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. The Company has not identified or,
experienced Year 2000 problems related to third party products.
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 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 became Year 2000 compliant in a timely fashion, although the Company
is not in a position to monitor their progress or be advised of circumstances
where customers experienced problems. The Company provided extended support for
its customers during early January 2000, but has been advised of very few
instances where customers have experienced Year 2000 issues, and none of these
are related to the Company's current products. The Company has not identified or
experienced any material impact from Year 2000 issues related to its customers'
system problems.
The Company developed and implemented a plan to determine whether its
vendors, distributors and leased facilities (all of which are referred to as
"Third Party Suppliers") were Year 2000 compliant. The plan included 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 and internal testing. The Company initiated this
process before the end of calendar year 1998. Contingency plans were developed
for those not expected to be Year 2000 compliant. The Company believes it has a
limited number of mission critical Third Party Suppliers for which it can
reasonably arrange alternatives (excluding utilities and similar providers) and
believes that there are multiple alternatives for most of its mission critical
requirements, including handling certain of these functions internally. The
Company developed a disaster contingency plan for its corporate headquarters to
maintain communications, computer and network access and limited helpline
support for its customers in the event of a short-term power failure. The
Company has encountered no power, communications or vendor difficulties from
Year 2000 issues.
The Company completed the assessment of its principal internal information
technology systems for Year 2000 compliance in 1999. With respect to these eight
principal systems, the Company upgraded or replaced all of these systems with
Year 2000 compliant versions. The Company has encountered no material system
problems from Year 2000 issues.
The Company 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 began in the fourth quarter
of calendar year 1998 and was completed in the first half of calendar year 1999.
Remediation of any non-compliant personal computer and network hardware and
software was completed in calendar year 1999. The Company believes that all
mission critical desktop and network systems were remedied and are currently
Year 2000 compliant. The Company has encountered no material problems from Year
2000 issues related to these systems.
A failure of one or more of these internal systems to be 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
assessment of these systems for Year 2000 compliance and remediation has been
completed. The Company has encountered no material problems from Year 2000
issues related to these systems.
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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 would have been incurred in any event. The Company estimates
that it has spent approximately $1.5 million in fiscal 1999 and the first two
quarters of fiscal 2000 on personnel, upgrades and consulting, which are
directly or indirectly related to Year 2000 compliance. No material costs were
incurred in the second quarter of fiscal 2000, and the Company does not expect
to incur any material costs relating to Year 2000 compliance for periods after
December 31, 1999. 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 operation of the Company's systems
after December 31, 1999, resulting in the need to either replace more of the
systems than originally expected and/or hire more personnel or third party firms
to assist in the remediation process, or the failure of a Third Party Supplier
to become Year 2000 compliant, resulting in the need for the Company to
implement contingency plans, the cost of which are not included in the above
estimates.
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 the 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 scenarios, the Company's
revenues, net income or financial condition could be materially adversely
affected.
The Company also provides contractual intellectual property indemnification
to its customers in the event that a claim of infringement is made against the
customer related to the Company's products. In the second quarter of fiscal
2000, the Company learned that the United States Patent and Trademark Office
("PTO") had issued a patent that purported to cover a technique known as
"windowing" for remediating Year 2000 problems in software. The PTO has since
announced that it has undertaken a review of that patent issuance, and
commentators have expressed views that the PTO may withdraw the patent grant.
The Company has used this technique for one current and several legacy products,
and may be subject to liability if it is determined that the patent was properly
issued and that the Company is liable to indemnify its customers for such
claims. In the most reasonably likely worst case 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 Report contains "forward looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended, including those concerning the Company's future results, strategy,
product releases and new market and business opportunities. 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 and pricing pressures from
competitors; 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; the level of interest and success of
the Company's distributors in marketing and selling the Company's products;
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 Microsoft's OLAP database; the overall competition for
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key employees; cancellations of maintenance and support agreements; software
defects; changes in operating expenses; 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 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,
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.
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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 1. LEGAL PROCEEDINGS
In August and September, 1996, a shareholder class action suit (In Re
Comshare, Incorporated Securities Litigation) was filed against the Company and
certain of its officers and directors in the United States District Court for
the Eastern District of Michigan. The suit was filed following the Company's
announcement of certain violations of the Company's revenue recognition policies
and alleged that the plaintiffs sustained losses as a result of the defendants'
alleged untrue statements of material facts and alleged omissions to state
material facts necessary in order to make the statements not misleading. The
complaint sought unspecified damages and costs. On September 18, 1997, the Court
dismissed all related claims. The plaintiffs appealed the dismissal of the
action to the U.S. Court of Appeals for the Sixth Circuit. On July 8, 1999, the
Court of Appeals affirmed the dismissal of the action by the District Court. The
plaintiffs sought a rehearing before the entire Sixth Circuit Court of Appeals,
which was denied on August 23, 1999. The plaintiffs did not petition the U.S.
Supreme Court to hear an appeal of the dismissal within the required time frame,
and the dismissal of the action became final in November, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on November 22, 1999.
There were four matters voted on, which were: the election of seven directors,
an amendment to the Employee Stock Purchase Plan, an amendment to the 1998
Global Employee Stock Option Plan and an amendment to the Directors Stock Option
Plan. The following table sets forth the results of the matters voted on. All
director nominees were elected and all Plans amendments were approved.
Votes For Votes Against Abstained Broker Non-votes
Election of Directors
Nominees:
Geoffrey B. Bloom 8,167,742 - 743,227 -
Daniel T. Carroll 8,111,575 - 799,394 -
Richard L. Crandall 8,090,209 - 820,760 -
Dennis G. Ganster 8,166,140 - 744,829 -
Kathryn A. Jehle 8,170,642 - 740,327 -
Alan G. Merten 7,958,942 - 952,027 -
John F. Rockart 8,114,468 - 796,501 -
Approval of amendment to
Employee Stock Purchase Plan 3,820,115 1,182,089 44,437 3,864,328
Approval of amendment to the 1998
Global Employee Stock Purchase Plan 4,140,156 863,431 42,604 3,864,778
Approval of amendment to the
Directors Stock Option Plan 3,763,435 1,233,633 49,123 3,864,778
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits included with this Form 10-Q are set forth on the Index to
Exhibits.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the six months ended
December 31, 1999.
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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: FEBRUARY 11, 2000 COMSHARE, INCORPORATED
(Registrant)
/s/ Kathryn A. Jehle
--------------------------
Kathryn A. Jehle
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.01 First Amendment to the Comshare, Incorporated Change in Control
Severance Agreement with David King
10.02 First Amendment to the Comshare, Incorporated Change in Control
Severance Agreement with Kathryn A. Jehle
10.03 First Amendment to the Comshare, Incorporated Change in Control
Severance Agreement with Dennis G. Ganster
10.04 First Amendment to the Comshare, Incorporated Change in Control
Severance Agreement with Norman R. Neuman, Jr.
10.05 First Amendment to the Comshare, Incorporated Change in Control
Severance Agreement with Stanley R. Starkey
27 Financial Data Schedule
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