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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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 MARCH 31, 2000.
OUTSTANDING AT
CLASS OF COMMON STOCK MARCH 31, 2000
--------------------- --------------
$1.00 PAR VALUE 9,653,790 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 Nine Months Ended March 31, 2000 and 1999...... 3
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended March 31, 2000 and 1999...... 4
Condensed Consolidated Balance Sheets as of
March 31, 2000 and June 30, 1999................................. 5
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended March 31, 2000 and 1999........................ 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...... 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 18
SIGNATURE............................................................... 19
INDEX TO EXHIBITS....................................................... 20
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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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
REVENUE
Software licenses $ 5,562 $ 5,361 $ 16,430 $ 17,596
Software maintenance 5,747 6,362 17,501 19,984
Implementation, consulting
and other services 3,719 3,075 10,626 11,302
--------- ----------- ----------- ----------
TOTAL REVENUE 15,028 14,798 44,557 48,882
COSTS AND EXPENSES
Selling and marketing 5,944 5,995 17,693 19,562
Cost of revenue and support 5,422 5,967 16,393 18,836
Internal research and product development 2,285 2,353 6,571 6,730
General and administrative 1,547 2,265 4,498 6,324
--------- ----------- ----------- ----------
TOTAL COSTS AND EXPENSES 15,198 16,580 45,155 51,452
--------- ----------- ----------- ----------
LOSS FROM OPERATIONS (170) (1,782) (598) (2,570)
OTHER INCOME (EXPENSE)
Interest income 374 429 1,112 1,510
Interest expense (18) (50) (62) (189)
Exchange gain (loss) 62 (19) (32) 27
--------- ----------- ----------- ----------
TOTAL OTHER INCOME 418 360 1,018 1,348
INCOME (LOSS) BEFORE TAXES 248 (1,422) 420 (1,222)
Provision for income taxes 87 - 148 68
--------- ----------- ----------- ----------
NET INCOME (LOSS) $ 161 $ (1,422) $ 272 $ (1,290)
========= =========== =========== ==========
SHARES USED IN BASIC EPS COMPUTATION 9,649 9,528 9,632 9,748
========= =========== =========== ==========
SHARES USED IN DILUTED EPS COMPUTATION 10,105 9,528 9,875 9,748
========= =========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $ 0.02 $ (0.15) $ 0.03 $ (0.13)
========= =========== =========== ==========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $ 0.02 $ (0.15) $ 0.03 $ (0.13)
========= =========== =========== ==========
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
--------- ----------- --------- -----------
Net income (loss) $161 $ (1,422) $272 $ (1,290)
Other comprehensive income (loss):
Currency translation adjustment (124) (743) (197) (362)
--------- ----------- --------- -----------
COMPREHENSIVE INCOME (LOSS) $ 37 $ (2,165) $ 75 $ (1,652)
========= =========== ========= ===========
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, June 30,
2000 1999
---- ----
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $ 27,541 $ 32,212
Accounts receivable, net 14,738 14,723
Deferred income taxes 654 654
Prepaid expenses and other current assets 2,166 4,585
----------- ------------
TOTAL CURRENT ASSETS 45,099 52,174
Property and equipment, at cost
Computers & other equipment 11,312 11,099
Leasehold improvements 3,109 2,893
----------- ------------
14,421 13,992
Less - Accumulated depreciation 12,142 11,354
----------- ------------
Property and equipment, net 2,279 2,638
Goodwill, net 1,182 1,330
Deferred income taxes 6,094 5,067
Other assets 2,003 2,246
----------- ------------
TOTAL ASSETS $ 56,657 $ 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)
MARCH 31, June 30,
2000 1999
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (audited)
CURRENT LIABILITIES
Current portion of long-term debt $ 434 $ 882
Accounts payable 1,942 5,871
Accrued liabilities:
Payroll 1,304 1,864
Taxes 1,104 808
Other 6,359 6,684
-------------- --------------
Total accrued liabilities 8,767 9,356
Deferred revenue 10,331 11,611
-------------- --------------
TOTAL CURRENT LIABILITIES 21,474 27,720
Long-term debt 423 1,198
Other liabilities 3,101 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
9,653,790 shares as of March 31, 2000
and 9,642,033 shares as of June 30, 1999 9,654 9,642
Capital contributed in excess of par value 38,558 38,650
Retained deficit (8,214) (8,486)
Accumulated other comprehensive income:
Pension liability, net of tax (3,262) (3,262)
Cumulative translation adjustment (5,077) (4,880)
-------------- --------------
31,659 31,664
Less - Notes receivable - 398
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 31,659 31,266
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 56,657 $ 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)
NINE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 272 $ (1,290)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 992 1,601
Changes in operating assets and liabilities:
Accounts receivable 19 4,942
Prepaid expenses and other assets (217) 611
Accounts payable (3,980) (6,392)
Accrued liabilities (558) (6,959)
Deferred revenue (1,310) (3,271)
Deferred income taxes 1,861 -
Other liabilities (170) (487)
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (3,091) (11,245)
INVESTING ACTIVITIES
Payments for property and equipment (646) (1,024)
Other 70 472
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (576) (552)
FINANCING ACTIVITIES
Net repayments under debt agreements,
capital lease agreements and notes payable (1,239) (132)
Common stock repurchased and retired - (2,835)
Other 318 655
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES (921) (2,312)
Effect of exchange rate changes (83) (277)
----------- ------------
NET DECREASE IN CASH (4,671) (14,386)
CASH AT BEGINNING OF PERIOD 32,212 49,102
----------- ------------
CASH AT END OF PERIOD $ 27,541 $ 34,716
=========== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 43 $ 59
=========== ============
Cash paid for income taxes $ 336 $ 3,792
=========== ============
See accompanying notes to condensed consolidated financial statements.
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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 nine months ended March 31, 2000 and 1999, the consolidated balance
sheet as of March 31, 2000 and the consolidated statements of cash flows for the
nine months ended March 31, 2000 and 1999.
The results of operations for the three and nine months ended March 31,
2000 and 1999 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 $0.4 million and total available
borrowings were $10 million at March 31, 2000. Borrowings available at any time
are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash. At March 31, 2000, the interest rate on borrowings
denominated in Japanese yen, which were used to hedge yen based receivables, was
1.89%.
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 $0.1 million under this agreement at March
31, 2000, which are classified as a capital lease. The interest rate was 10.40%
at March 31, 2000.
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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 March 31, 2000 and June 30, 1999,
the Company had forward foreign currency exchange contracts outstanding of
approximately $6.5 million and $2.9 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at March 31, 2000
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 March 31,
2000 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 - SEGMENT REPORTING
The Company has only one reportable segment - the development,
marketing and support of 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 nine months ended March 31, 2000 and 1999. 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)
(unaudited; in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
-------- --------- --------- ---------
REVENUE FROM EXTERNAL CUSTOMERS:
United States $ 7,756 $ 7,868 $ 22,968 $ 24,190
United Kingdom 3,094 2,584 9,345 9,357
Other countries 4,178 4,346 12,244 15,335
-------- --------- --------- ---------
TOTAL REVENUE $15,028 $ 14,798 $ 44,557 $ 48,882
======== ========= ========= =========
OPERATING INCOME (LOSS):
United States $ (550) $ (639) $ (2,167) $ (1,346)
United Kingdom 782 (321) 2,572 (175)
Other countries 2,444 2,383 7,544 7,902
-------- --------- --------- ---------
Total operating income 2,676 1,423 7,949 6,381
Unallocated expenses (2,428) (2,845) (7,529) (7,603)
-------- --------- --------- ---------
INCOME BEFORE TAXES $ 248 $ (1,422) $ 420 $ (1,222)
======== ========= ========= =========
AS OF MARCH 31,
2000 1999
--------- ---------
IDENTIFIABLE ASSETS:
United States $ 43,828 $ 42,736
United Kingdom and other countries 12,829 24,861
--------- ---------
TOTAL IDENTIFIABLE ASSETS $ 56,657 $ 67,597
========= =========
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 nine months ended March 31, 2000 compared to the three and nine months
ended March 31, 1999. 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUE
Software licenses 37.0 % 36.2 % 36.9 % 36.0 %
Software maintenance 38.2 43.0 39.3 40.9
Implementation, consulting and
other services 24.8 20.8 23.8 23.1
--------- -------- --------- ---------
TOTAL REVENUE 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 39.6 40.5 39.7 40.0
Cost of revenue and support 36.1 40.3 36.8 38.5
Internal research and product development 15.2 15.9 14.7 13.8
General and administrative 10.2 15.3 10.1 12.9
--------- -------- --------- ---------
TOTAL COSTS AND EXPENSES 101.1 112.0 101.3 105.2
LOSS FROM OPERATIONS (1.1) (12.0) (1.3) (5.2)
OTHER INCOME (EXPENSE)
Interest income 2.5 2.9 2.5 3.1
Interest expense (0.1) (0.3) (0.1) (0.4)
Exchange gain (loss) 0.4 (0.1) (0.1) 0.1
--------- -------- --------- ---------
TOTAL OTHER INCOME 2.8 2.5 2.3 2.8
INCOME (LOSS) BEFORE TAXES 1.7 (9.5) 1.0 (2.4)
Provision for income taxes 0.6 - 0.3 0.1
--------- -------- --------- ---------
NET INCOME (LOSS) 1.1 % (9.5)% 0.7 % (2.5)%
========= ======== ========= =========
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REVENUE
THREE MONTHS ENDED PERCENT NINE MONTHS ENDED PERCENT
MARCH 31, CHANGE MARCH 31, CHANGE
----------------------- -------- ----------------------- --------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands) (in thousands)
REVENUE
Software licenses $ 5,562 $ 5,361 3.7 % $ 16,430 $ 17,596 (6.6) %
Software maintenance 5,747 6,362 (9.7) 17,501 19,984 (12.4)
Implementation, consulting and
other services 3,719 3,075 20.9 10,626 11,302 (6.0)
---------- ---------- ---------- ----------
TOTAL REVENUE $ 15,028 $ 14,798 1.6 % $ 44,557 $ 48,882 (8.8) %
========== ========== ========== ==========
Total revenue for the three months ended March 31, 2000 increased 1.6%
compared to the prior year due to the increase in software licenses revenue and
implementation, consulting and other services revenue. Total revenue for the
nine months ended March 31, 2000 decreased 8.8% compared to the prior year
primarily due to a decline in maintenance revenue from the Company's older
desktop ("legacy") products. In addition, 23% of the revenue decline is due to
the sale of the Company's French and German operations and their conversion to
distributorships during the first six months of the prior year. Revenue for the
nine months ended March 31, 1999, reflecting the Company's French and German
operations as distributors ("on a comparable basis"), was $47.5 million.
Software licenses revenue was $5.6 million and $5.4 million for the
three months ended March 31, 2000 and 1999, respectively. The increase in
license fees was due to the increase in the Company's newer products, which grew
38% and represented 90% of total license fees for the three month period.
License fees for BudgetPLUS grew 172%, or $1.7 million and FDC license fees grew
104%, or $0.4 million, compared to the same quarter one year ago. License fees
in Comshare's direct operations in North America and the United Kingdom
increased 29% in the third quarter compared to the same quarter one year ago.
The increase was driven by sales of BudgetPLUS and FDC, which grew 254% and 93%,
respectively, in the direct territories. Direct license fee growth was offset by
a decline in distributor license fees of 15%, reflecting a decline in sales of
the Company's legacy products, which are heavily concentrated in the distributor
operations.
Software licenses revenue was $16.4 million and $17.3 million in the
nine months ended March 31, 2000 and 1999, respectively, on a comparable basis,
a decline of $0.9 million. This is primarily due to a decline in sales of the
Company's legacy products, which was partially offset by increased sales of
newer products.
Software maintenance revenue was $5.7 million and $6.4 million for the
three months ended March 31, 2000 and 1999, respectively. Software maintenance
revenue was $17.5 million and $19.4 million for the nine months ended March 31,
2000 and 1999, respectively, 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. The decline in the legacy applications is expected to continue in
future periods.
Implementation, consulting and other services revenue was $3.7 million
and $3.1 million for the three months ended March 31, 2000 and 1999,
respectively. Implementation, consulting and other services revenue was $10.6
million and $10.8 million for the nine months ended March 31, 2000 and 1999,
respectively, on a comparable basis. The increase for the three months ended
March 31, 2000 from prior year is primarily due to the increased direct
territory license fee revenues, resulting in increased product implementations.
The decrease in implementation, consulting and other services revenue of 1.6% in
the nine months ended March 31, 2000, on a comparable basis, is primarily due to
the decline in license fees from the prior year.
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COSTS AND EXPENSES
THREE MONTHS ENDED PERCENT NINE MONTHS ENDED PERCENT
MARCH 31, CHANGE MARCH 31, CHANGE
------------------------ --------- ---------------------- ---------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands) (in thousands)
COSTS AND EXPENSES
Selling and marketing $ 5,944 $ 5,995 (0.9) % $ 17,693 $ 19,562 (9.6)%
Cost of revenue and support 5,422 5,967 (9.1) 16,393 18,836 (13.0)
Internal research and product development 2,285 2,353 (2.9) 6,571 6,730 (2.4)
General and administrative 1,547 2,265 (31.7) 4,498 6,324 (28.9)
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES $ 15,198 $ 16,580 (8.3) % $ 45,155 $ 51,452 (12.2)%
========== ========== ========== ==========
Total costs and expenses decreased 8.3% and 12.2% in the three and nine
months ended March 31, 2000, respectively, compared to the prior year. The
decrease in the nine month period reflects 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.
Total costs and expenses were $15.2 million and $16.6 million for the
three months ended March 31, 2000 and March 31, 1999, respectively. Total costs
and expenses were $45.2 million and $49.3 million for the nine months ended
March 31, 2000 and 1999, on a comparable basis, respectively. The reduction in
costs in the three and nine month periods was primarily in cost of revenue and
support and general and administrative costs. The decrease in the cost of
revenue and support from a year ago can be attributed to reduced costs in the
order fulfillment process and reduced third party royalty expenses. General and
administrative costs are down due to the effect of cost reduction actions taken
at the end of fiscal 1999.
OTHER INCOME AND EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands) (in thousands)
OTHER INCOME (EXPENSE)
Interest income $ 374 $ 429 $ 1,112 $ 1,510
Interest expense (18) (50) (62) (189)
Exchange gain (loss) 62 (19) (32) 27
--------- ---------- ---------- ---------
TOTAL OTHER INCOME $ 418 $ 360 $ 1,018 $ 1,348
========= ========== ========== =========
The increase in other income for the three months ended March 31, 2000,
as compared to the same period one year ago is due to reduced interest expense
as well as an exchange gain. The decrease for the nine months ended March 31,
2000 compared to the prior year is 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 nine months ended March 31, 2000, 48.4% and 48.5%,
respectively, of the Company's total revenue was from outside North America
compared with 46.8% and 50.6% for the three and nine months ended March 31,
1999, 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 nine months ended March 31, 2000, 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 $6.5 million, outstanding at March 31, 2000. See Note D of Notes to
Condensed Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The effective income tax rate in the three and nine months ended March
31, 2000 and 1999 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 March 31, 2000, cash and cash equivalents were $27.5 million,
compared with $32.2 million at June 30, 1999. The $4.7 million decrease in cash
can primarily be attributed to payments associated with restructuring costs and
repayments of debt during the nine month period.
Net cash used in operating activities was $3.1 million in the nine
months ended March 31, 2000 compared with an outflow of $11.2 million in the
nine months ended March 31, 1999. The current period cash outflow is the result
of payments of $1.7 million associated with restructuring costs, other payments
of accrued expenses, and the effect of reduced deferred maintenance revenue of
$1.3 million. The deferred maintenance revenue reduction is primarily due to the
reduction in legacy revenue, partially offset by increased deferred maintenance
revenue for new products. The nine months ended March 31, 2000 also benefited
from a tax refund of $1.9 million. 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 nine months ended March 31, 2000 to the
same extent.
Net cash used in investing activities was $0.6 million in the nine
months ended March 31, 2000, compared with $0.6 million in the nine months ended
March 31, 1999. The Company purchases most of its
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computer equipment under operating leases. At March 31, 2000, the Company did
not have any material capital expenditure commitments.
Net cash used in financing activities was $0.9 million in the nine
months ended March 31, 2000, compared to $2.3 million in the same period one
year ago. The net cash used in the nine month period ended March 31, 2000
reflects payments on the Company's debt agreements. The net cash used for the
nine months ended March 31, 1999 is primarily due to the Company's stock
repurchase program.
Total assets were $56.7 million at March 31, 2000, compared with total
assets of $63.5 million at June 30, 1999. Working capital as of March 31, 2000
was $23.6 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 $0.4 million and total available
borrowings were $10 million at March 31, 2000. Borrowings available at any time
are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash. At March 31, 2000, the interest rate on borrowings
denominated in Japanese yen, which were used to hedge yen based receivables, was
1.89%.
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 $0.1 million under this agreement at March
31, 2000, which are classified as a capital lease. The interest rate was 10.4%
at March 31, 2000.
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 March 31, 2000 and June 30, 1999, the Company had forward
contracts of approximately $6.5 million and $2.9 million (notional amounts),
respectively, denominated in foreign currencies. The contracts outstanding at
March 31, 2000 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 March 31,
2000 and June 30, 1999.
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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 March 31,
2000 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 March 31, 2000 market rates would not materially decrease the
unrealized value of the Company's forward contracts. In either scenario, the
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 the most current versions of its products to be
Year 2000 compliant and believes that they are Year 2000 compliant (including
BudgetPLUS, Decision, DecisionWeb and FDC). 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.
The Company 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.
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.
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The Company incorporates a number of third party software tools into
its products. The Company has not identified or experienced Year 2000 problems
related to third party products. The Company has encountered no power,
communications or vendor difficulties from Year 2000 issues.
The Company's principal internal information technology systems and
non-information technology systems have encountered no material system problems
from Year 2000 issues.
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. 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 operation of the Company's systems after December 31,
1999, or the failure of a Third Party Supplier to become Year 2000 compliant.
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. In the event of such
litigation, 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
key employees; cancellations of maintenance and support agreements; software
defects; changes in operating expenses; fluctuations in foreign exchange rates;
the ability of the Company to generate sufficient future taxable income or to
execute available tax strategies required to realize deferred tax assets; and
economic conditions generally or in specific industry segments. In addition, a
significant portion of the Company's revenue in any quarter is typically derived
from non-recurring license fees, a substantial portion of which is booked in the
last month of a quarter. Since the purchase of the Company's products is
relatively discretionary and generally involves a significant commitment of
capital, in the event of any downturn in any potential customer's business or
the economy in general, purchases of the Company's products may be deferred or
canceled. Further, the Company's expense levels are based, in part, on its
expectations as to future revenue and a significant portion of the Company's
expenses do not vary with revenue. As a result, if revenue is below
expectations, results of operations are likely to be materially, adversely
affected.
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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 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 nine months ended March
31, 2000.
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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: MAY 8, 2000 COMSHARE, INCORPORATED
(Registrant)
/s/ Kathryn A. Jehle
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Kathryn A. Jehle
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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27 Financial Data Schedule
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