1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------ COMMISSION FILE NUMBER 0-4096 COMSHARE, INCORPORATED (Exact name of registrant as specified in its charter) MICHIGAN 38-1804887 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 555 BRIARWOOD CIRCLE, ANN ARBOR, MICHIGAN 48108 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (313) 994-4800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of SEPTEMBER 30, 1996. CLASS OF COMMON OUTSTANDING AT STOCK SEPTEMBER 30, 1996 ------------------- --------------------- $1.00 PAR VALUE 9,717,655 SHARES 2 COMSHARE, INCORPORATED INDEX Page No. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet as of September 30, 1996 and June 30, 1996 3 Condensed Consolidated Statement of Operations for the Three Months Ended September 30, 1996 and 1995 5 Condensed Consolidated Statement of Cash Flows for the Three Months Ended September 30, 1996 and 1995 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12 SIGNATURE 13 INDEX TO EXHIBITS 14 2 3 PART I. - FINANCIAL INFORMATION ITEM 1. - FINANCIAL STATEMENTS COMSHARE, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except per share data) September 30, June 30, 1996 1996 ------------- --------- ASSETS (unaudited) (audited) CURRENT ASSETS Cash and cash equivalents $ 17,884 $ 27,468 Accounts receivable, net 31,255 34,853 Deferred income taxes 758 758 Prepaid expenses and other current assets 6,245 5,733 --------- --------- Total current assets 56,142 68,812 PROPERTY AND EQUIPMENT, at cost 29,101 27,945 Less - accumulated depreciation 23,919 23,426 --------- --------- Property and equipment, net 5,182 4,519 COMPUTER SOFTWARE, net 9,038 9,064 GOODWILL, net 1,908 1,947 DEFERRED INCOME TAXES 7,940 7,940 OTHER ASSETS 6,399 5,956 --------- --------- $ 86,609 $ 98,238 ========= ========= See accompanying notes to condensed consolidated financial statements. 3 4 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except per share data) September 30, June 30, 1996 1996 ------------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (audited) CURRENT LIABILITIES Accounts payable $ 13,148 $ 17,934 Accrued liabilities 6,157 7,956 Deferred revenue 17,295 18,364 --------- --------- Total current liabilities 36,600 44,254 LONG-TERM DEBT 2,797 1,913 OTHER LIABILITIES 3,395 3,407 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 9,717,655 shares as of September 30, 1996 and 9,691,443 shares as of June 30, 1996 9,718 9,691 Capital contributed in excess of par 38,414 38,132 Retained earnings 156 5,239 Currency translation adjustments (3,548) (3,586) --------- --------- 44,740 49,476 Less - Notes receivable 923 812 --------- --------- Total shareholders' equity 43,817 48,664 --------- --------- $ 86,609 $ 98,238 ========= ========= See accompanying notes to condensed consolidated financial statements. 4 5 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited; in thousands, except per share data) Three Months Ended September 30, ------------------------ 1996 1995 -------- ----------- REVENUE Software licenses $ 6,568 $ 13,920 Software maintenance 8,777 9,015 Implementation, consulting and other services 4,639 5,718 -------- -------- TOTAL REVENUE 19,984 28,653 COSTS AND EXPENSES Selling and marketing 13,436 12,038 Cost of revenue and support 6,917 6,690 Internal research and product development 4,389 3,998 Internally capitalized software (1,499) (2,358) Software amortization 1,526 2,616 General and administrative 2,924 3,041 -------- -------- TOTAL COSTS AND EXPENSES 27,693 26,025 -------- -------- INCOME (LOSS) FROM OPERATIONS (7,709) 2,628 OTHER INCOME (EXPENSE) Interest income (expense) 211 (141) Exchange loss (96) (89) -------- -------- Total other income (expense) 115 (230) -------- -------- INCOME (LOSS) BEFORE TAXES (7,594) 2,398 Provision (benefit) for income taxes (2,663) 888 -------- -------- NET INCOME (LOSS) $ (4,931) $ 1,510 ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON AND DILUTIVE COMMON EQUIVALENT SHARES 9,704 8,730 ======== ======== NET INCOME (LOSS) PER COMMON SHARE $ (0.51) $ 0.17 ======== ======== See accompanying notes to condensed consolidated financial statements. 5 6 COMSHARE, INCORPORATED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited; in thousands) Three Months Ended September 30, --------------------- 1996 1995 -------- -------- OPERATING ACTIVITIES Net income (loss) $ (4,931) $ 1,510 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,087 3,198 Changes in operating assets and liabilities: Accounts receivable 3,660 (1,396) Prepaid expenses and other assets (506) (58) Accounts payable (4,818) 1,403 Accrued liabilities (1,806) (810) Deferred revenue (1,116) 116 Other liabilities (11) 383 -------- -------- Net cash provided by (used in) operating activities (7,441) 4,346 INVESTING ACTIVITIES Additions to computer software (1,490) (2,409) Payments for property and equipment (1,160) (523) Other (457) (332) -------- -------- Net cash used in investing activities (3,107) (3,264) FINANCING ACTIVITIES Net borrowings (repayments) under long-term debt 873 (737) Stock options exercised 21 74 Other 25 187 -------- -------- Net cash provided by (used in) financing activities 919 (476) EFFECT OF EXCHANGE RATE CHANGES 45 19 -------- -------- NET INCREASE (DECREASE) IN CASH (9,584) 625 BALANCE AT BEGINNING OF PERIOD 27,468 1,398 -------- -------- BALANCE AT END OF PERIOD $ 17,884 $ 2,023 ======== ========= SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 39 $ 118 ======== ======== Cash paid for income taxes $ 243 $ 537 ======== ======== See accompanying notes to condensed consolidated financial statements. 6 7 COMSHARE, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - GENERAL INFORMATION The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring items, required to present fairly its consolidated balance sheet as of September 30, 1996, the consolidated statement of operations for the three months ended September 30, 1996 and 1995 and the consolidated statement of cash flows for the three months ended September 30, 1996 and 1995. The results of operations for the three months ended September 30, 1996 and 1995 are not necessarily indicative of the results to be expected in future quarters or the full fiscal year. The software industry is generally characterized by seasonal trends. NOTE B - COMPUTER SOFTWARE The costs of developing and purchasing new software products and enhancements to existing software products are capitalized after technological feasibility and realizability are established. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated gross product revenue, estimated economic product lives and changes in software and hardware technology. Capitalized development costs are currently amortized using the straight-line method over a two-year service life. During the three months ended September 30, 1995 capitalized development costs were amortized using the straight-line method over a four-year service life. On an ongoing basis, management reviews the valuation and amortization of capitalized development costs. As part of this review, the Company considers the value of future cash flows attributable to the capitalized development costs in evaluating potential impairment of the asset. 7 8 COMSHARE, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE C - FINANCIAL INSTRUMENTS The Company at various times enters into forward exchange contracts to hedge certain exposures related to identifiable foreign currency transactions that are relatively certain as to both timing and amount. Gains and losses on the forward contracts are recognized concurrently with the gains and losses from the underlying transactions. The forward exchange contracts used are classified as "held for purposes other than trading." The Company does not use any other types of derivative financial instruments to hedge such exposures, nor does it use derivatives for speculative purposes. At September 30, 1996 and June 30, 1996, the Company had forward foreign currency exchange contracts of approximately $6,418,000 and $5,746,000 (notional amounts), respectively, denominated in foreign currencies. The contracts outstanding at September 30, 1996 mature at various dates through May 17, 1997, and are intended to hedge various foreign currency commitments due from foreign subsidiaries and the Company's agents and distributors. Due to the short term nature of these financial instruments, the fair value of these contracts is not materially different than their notional amount at September 30, 1996 and June 30, 1996. NOTE D - LITIGATION The Company and Arbor Software Corporation ("Arbor") disagree about certain definitions in the license agreement between the two parties related to the calculation of royalties. Comshare and Arbor were in the process of defining the procedure and legal and accounting issues to be resolved through arbitration, when on September 27, 1996, Arbor filed a lawsuit against Comshare alleging breach of contract and fraud relating to royalty calculations. Arbor's suit principally seeks monetary damages. On October 21, 1996, Comshare filed a denial of all of Arbor's claims and filed a counterclaim against Arbor for defamation, unfair competition, interference with economic relationships and breach of contract. The litigation is in its early stages, therefore the Company does not possess sufficient information to reasonably estimate the potential liability, if any. Management is contesting the Arbor suit vigorously. 8 9 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis sets forth information for the three months ended September 30, 1996 compared to the three months ended September 30, 1995. 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, 1996. RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain financial data as a percentage of total revenue. Three Months Ended September 30, ------------------ 1996 1995 ------- -------- REVENUE Software license fees 32.9% 48.6% Software maintenance revenue 43.9 31.4 Implementation and consulting services 23.2 20.0 ----- ----- Total revenue 100.0 100.0 COSTS AND EXPENSES Selling and marketing 67.2 42.0 Cost of revenue and support 34.6 23.3 Internal research and product development 22.0 14.0 Internally capitalized software (7.5) (8.2) Software amortization 7.6 9.1 General and administrative 14.6 10.6 ----- ----- Total costs and expenses 138.5 90.8 ----- ----- INCOME (LOSS) FROM OPERATIONS (38.5) 9.2 OTHER INCOME (EXPENSE) Interest income (expense) 1.0 (0.5) Exchange loss (0.5) (0.3) ----- ----- Total other income (expense) 0.5 (0.8) ----- ----- INCOME (LOSS) BEFORE INCOME TAXES (38.0) 8.4 Provision (benefit) for income taxes (13.3) 3.1 ===== ===== NET INCOME (LOSS) (24.7)% 5.3% ===== ===== 9 10 REVENUE Three Months Ended Percent September 30, Change ---------------------- ------- 1996 1995 --------- --------- REVENUE Software license fees $ 6,568 $13,920 (52.8)% Software maintenance revenue 8,777 9,015 (2.6) Implementation and consulting services 4,639 5,718 (18.9) -------- ------- TOTAL REVENUE $19,984 $28,653 (30.3)% ======== ======= Total revenue decreased 30.3% in the three months ended September 30, 1996 compared to the prior year primarily due to the decrease in software license fee revenue. The decline in license fee revenue was primarily due to the Company's internal focus during the first quarter as a result of the expanded fiscal year-end audit and investigation into violations of the Company's revenue recognition policies. The audit and investigation were concluded in September 1996. The decline in license fee revenue was also attributable to the transitional changes in the Company's sales organization. Software maintenance revenue decreased 2.6% in the three months ended September 30, 1996 compared to the same period last year. Client/server software maintenance revenue in the three months ended September 30, 1996 represented 74.5% of total software maintenance revenue and grew 14.3% compared with the prior year quarter. Mainframe software maintenance revenue decreased 32.0% in the three months ended September 30, 1996 compared to last year primarily due to mainframe maintenance cancellations and continued migration to client/server platforms. Mainframe software maintenance revenue is expected to continue to decline. Implementation, consulting and other service revenue decreased 18.9% in the three months ended September 30, 1996 compared to last year. Approximately 40% of the decline is due to the sale in June 1996 of the Company's Australian business to a Comshare agent. COSTS AND EXPENSES Three Months Ended Percent September 30, Change ------------------ ------- 1996 1995 ------- ------ COSTS AND EXPENSES Selling and marketing $13,436 $12,038 11.6% Cost of revenue and support 6,917 6,690 3.4 Internal research and product development 4,389 3,998 9.8 Internally capitalized software (1,499) (2,358) (36.4) Software amortization 1,526 2,616 (41.7) General and administrative 2,924 3,041 (3.8) ------- ------- TOTAL COSTS AND EXPENSES $27,693 $26,025 6.4% ======= ======= Selling and marketing expense increased 11.6% in the three months ended September 30, 1996 compared to the same period last year primarily due to increased spending on marketing promotions to launch the Company's new budgeting application Commander BudgetPlus and the two BOOST applications, BOOST Sales Analysis and BOOST Sales and Margin Planning. The hiring of new direct sales representatives and sales support consultants during the quarter also contributed to the increase in selling and marketing expense. 10 11 Cost of revenue and support increased 3.4% in the three months ended September 30, 1996 compared to the prior year principally due to hiring of additional customer service technicians and implementation consultants during the quarter. Internal research and product development expense increased 9.8% in the three months ended September 30, 1996 compared to last year mainly due to increased spending for new software applications and on-going enhancements to existing software products. Internally capitalized software decreased in the three months ended September 30, 1996 primarily due to increased levels of development costs that were not capitalizable. Software amortization expense decreased in the three months ended September 30, 1996 principally due to the reduced levels of capitalized software following the $23.2 million write-off of capitalized software in the second quarter of fiscal 1996. General and administrative expense decreased 3.8% in the three months ended September 30, 1996 compared to the same period last year primarily due to lower employee-related costs. NON-OPERATING INCOME AND EXPENSE Three Months Ended September 30, ------------------ 1996 1995 ------ ------ OTHER INCOME (EXPENSE) Interest income (expense) $211 $(141) Exchange gain (loss) (96) (89) ---- ------ TOTAL OTHER INCOME (EXPENSE) $115 $(230) ==== ====== The Company had interest income in the three months ended September 30, 1996 due to investment of the net proceeds received from the public offering of the Company's common stock in the quarter ended December 31, 1995. PROVISION FOR INCOME TAXES The effective income tax rate in the three months ended September 30, 1996 was 35%, comparable with 37% for the same period a year ago. FOREIGN CURRENCY In the three months ended September 30, 1996, 52% of the Company's total revenue was from outside North America compared with 54% for the three months ended September 30, 1995. Most of the Company's international revenue is denominated in foreign currencies. The Company recognizes currency transaction gains and losses in the period of occurrence. As currency rates are constantly changing, these gains and losses can, at times, fluctuate greatly. During the three months ended September 30, 1996 foreign currency fluctuations on revenue denominated in a foreign currency were offset by currency fluctuations on expenses denominated in a foreign currency. For the three months ended September 30, 1996 the decrease in total revenue, at actual exchange rates, was $102,000 more than at comparable exchange rates. For the three months ended September 30, 1996 the increase in total expenses, at actual exchange rates, was $243,000 less than at comparable exchange rates. As a result of the changes in the foreign currency exchange rates, the decrease in income before taxes, at actual exchange rates, was $141,000 less than at comparable exchange rates. The Company had several forward contracts totaling $6.4 million outstanding at September 30, 1996. See Note C of Notes to Condensed Consolidated Financial Statements. 11 12 LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, cash and cash equivalents were $17.9 million, compared with cash of $27.5 million at June 30, 1996. The decrease in cash and cash equivalents is principally due to the net cash used for operating activities in the quarter ended September 30, 1996. Net cash used in operating activities was $7.4 million in the three months ended September 30, 1996, compared with net cash provided by operating activities of $4.3 million in the three months ended September 30, 1995. The decrease in net cash provided by operating activities was primarily due to the net loss from operations and decrease in accounts payable, which included a $2.4 million payment to terminate the Company's lease obligation on its vacated London office facility. Net cash used in investing activities was $3.1 million in the three months ended September 30, 1996, compared with $3.3 million in the three months ended September 30, 1995. The slight decrease in net cash used in investing activities was primarily due to the decrease in the amount of capitalized internally developed software costs, partially offset by an increase in property and equipment purchases. At September 30, 1996, the Company did not have any material capital expenditure commitments. Total assets were $86.6 million at September 30, 1996, compared with total assets of $98.2 million at June 30, 1996. Working capital as of September 30, 1996 was $19.5 million, compared with $24.6 million as of June 30, 1996. The decrease in both total assets and working capital from June 30, 1996 to September 30, 1996 was primarily due to the decline in cash and cash equivalents. The Company believes that the combination of present cash balances, future operating cash flows 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. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a.) The exhibit included herewith is set forth on the Index to Exhibits. (b.) Since the end of its most recent fiscal quarter on June 30, 1996, Comshare has filed the following reports on Form 8-K: Date of Report Item Reported - -------------- ------------- August 7, 1996............. Comshare, Incorporated announced the delay of releasing its financial results for the fourth quarter and year ended June 30, 1996 pending completion of its year-end audit including a more detailed review of orders in the United Kingdom and certain other foreign countries to determine if revenue recognition was in accordance with the Company's policies. September 17, 1996......... Comshare, Incorporated announced the adoption of a shareholder rights plan. 12 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: NOVEMBER 13, 1996 COMSHARE, INCORPORATED (Registrant) /s/ Kathryn A. Jehle ----------------------------------- Kathryn A. Jehle Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary 13 14 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- 11.1 Computation of Earnings per Share. 27 Financial Data Schedule. 14