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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
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: (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
DECEMBER 31, 1997.
OUTSTANDING AT
CLASS OF COMMON STOCK DECEMBER 31, 1997
- -------------------------------- --------------------------------
$1.00 PAR VALUE 9,913,612 SHARES
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COMSHARE, INCORPORATED
INDEX
PART I - FINANCIAL INFORMATION Page No.
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of
December 31, 1997 and June 30, 1997.................... 3
Condensed Consolidated Statement of Operations for the
Three and Six Months Ended December 31, 1997 and 1996.. 5
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended December 31, 1997 and 1996............ 6
Notes to Condensed Consolidated Financial Statements...... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.................................................... 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................ 15
SIGNATURE....................................................... 16
INDEX TO EXHIBITS............................................... 17
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PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
December 31, June 30,
1997 1997
------------------------ ------------------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,087 $ 11,651
Accounts receivable, net 25,168 24,675
Deferred income taxes 1,953 1,953
Prepaid expenses and other current assets 4,431 5,298
--------------- --------------
Total current assets 44,639 43,577
PROPERTY AND EQUIPMENT, AT COST 19,243 21,386
Less - accumulated depreciation 15,274 16,432
--------------- --------------
Property and equipment, net 3,969 4,954
COMPUTER SOFTWARE, NET 9,218 9,175
GOODWILL, NET 1,512 1,609
DEFERRED INCOME TAXES 15,580 15,580
OTHER ASSETS 4,569 5,856
--------------- --------------
$ 79,487 $ 80,751
=============== ==============
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
December 31, June 30,
1997 1997
---- ----
(unaudited) (audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 552 $ 4,332
Accounts payable 11,684 12,597
Accrued liabilities 8,484 7,745
Deferred revenue 20,486 19,868
-------------- -------------
Total current liabilities 41,206 44,542
LONG-TERM DEBT 5,483 343
OTHER LIABILITIES 4,061 3,907
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, no par value;
authorized 5,000,000 shares; none issued - -
Common stock, $1.00 par value;
authorized 20,000,000 shares; outstanding
9,913,612 shares as of December 31, 1997
and 9,871,260 shares as of June 30, 1997 9,914 9,871
Capital contributed in excess of par 39,784 39,528
Retained earnings (deficit) (15,818) (12,363)
Currency translation adjustments (4,136) (4,021)
-------------- -------------
29,744 33,015
Less - Notes receivable 1,007 1,056
-------------- -------------
Total shareholders' equity 28,737 31,959
-------------- -------------
$ 79,487 $ 80,751
============== =============
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited; in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
--------- ----------- ------- -------
REVENUE
Software licenses $ 9,592 $ 11,703 $ 17,350 $ 18,271
Software maintenance 8,996 9,331 17,647 18,108
Implementation, consulting
and other services 5,493 5,161 10,880 9,800
--------- --------- ---------- -----------
TOTAL REVENUE 24,081 26,195 45,877 46,179
COSTS AND EXPENSES
Selling and marketing 10,624 14,705 21,419 28,141
Cost of revenue and support 7,472 8,080 14,239 14,998
Internal research and product development 3,048 4,311 6,138 8,699
Internally capitalized software (1,653) (1,702) (3,518) (3,201)
Software amortization 1,685 1,784 3,551 3,310
General and administrative 2,831 3,190 5,798 6,114
Unusual charge - - 1,614 -
--------- --------- ---------- ----------
TOTAL COSTS AND EXPENSES 24,007 30,368 49,241 58,061
--------- --------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 74 (4,173) (3,364) (11,882)
OTHER INCOME (EXPENSE)
Interest income (expense) (39) 102 (1) 313
Exchange gain (loss) 48 (148) (57) (244)
--------- --------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 9 (46) (58) 69
INCOME (LOSS) BEFORE TAXES 83 (4,219) (3,422) (11,813)
Provision (benefit) for income taxes - (1,457) - (4,120)
--------- --------- ---------- ----------
NET INCOME (LOSS) $ 83 $ (2,762) $ (3,422) $ (7,693)
========= ======== ========== ==========
SHARES USED IN BASIC EPS COMPUTATION 9,888 9,742 9,881 9,723
========= ======== ========== ==========
SHARES USED IN DILUTED EPS COMPUTATION 9,919 9,742 9,881 9,723
========= ======== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $ 0.01 $ (0.28) $ (0.35) $ (0.79)
========= ======== ========== ==========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $ 0.01 $ (0.28) $ (0.35) $ (0.79)
========= ======== ========== ==========
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,
1997 1996
---- ----
OPERATING ACTIVITIES
Net loss $ (3,422) $ (7,693)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 4,697 4,512
Changes in operating assets and liabilities:
Accounts receivable (736) 1,367
Prepaid expenses and other assets 769 (3,564)
Accounts payable (731) (3,902)
Accrued liabilities 985 (1,447)
Deferred revenue 801 1,082
Other liabilities 164 (190)
------------ ------------
Net cash provided by (used in) operating activities 2,527 (9,835)
INVESTING ACTIVITIES
Additions to computer software (3,618) (3,302)
Payments for property and equipment (143) (2,227)
Other 1,189 (710)
------------ ------------
Net cash used in investing activities (2,572) (6,239)
FINANCING ACTIVITIES
Net borrowings (repayments) under notes payable (4,141) 3,134
Net borrowings (repayments) under debt agreements
and capital lease obligations 5,524 (1,913)
Stock options exercised 321 311
Other (6) 25
------------ ------------
Net cash provided by financing activities 1,698 1,557
EFFECT OF EXCHANGE RATE CHANGES (217) (255)
------------ ------------
NET INCREASE (DECREASE) IN CASH 1,436 (14,772)
BALANCE AT BEGINNING OF PERIOD 11,651 27,468
------------ ------------
BALANCE AT END OF PERIOD $ 13,087 $ 12,696
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 150 $ 119
============ ============
Cash paid for income taxes $ 408 $ 280
============ ============
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 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 December 31, 1997, the consolidated statement of operations for the
three and six months ended December 31, 1997 and 1996 and the consolidated
statement of cash flows for the six months ended December 31, 1997 and 1996.
The results of operations for the three and six months ended December 31,
1997 and 1996 are not necessarily indicative of the results to be expected in
future quarters or the full fiscal year. The software industry is generally
characterized by seasonal trends.
NOTE B - COMPUTER SOFTWARE
The costs of developing and purchasing new software products and
enhancements to existing software products are capitalized after technological
feasibility and realizability are established. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated gross product
revenue, estimated economic product lives and changes in software and hardware
technology. Capitalized development costs are currently amortized using the
straight-line method over a two-year service life. On an ongoing basis,
management reviews the valuation and amortization of capitalized development
costs. As part of this review, the Company considers the value of future cash
flows attributable to the capitalized development costs in evaluating potential
impairment of the asset.
NOTE C - BORROWINGS
Effective September 23, 1997 the Company entered into a new $10 million
credit agreement which matures on October 1, 2000. Borrowings are secured by
accounts receivable and the credit agreement contains covenants regarding among
other things, earnings, leverage, net worth and payment of dividends. Under
the terms of the agreement, the Company is not permitted to pay cash dividends
on its common stock. Permitted borrowings available as of December 31, 1997
under this credit agreement were $10 million, of which $4.6 million was
outstanding. Borrowings available at any time are based on the lower of $10
million or a percentage of worldwide eligible accounts receivable. At December
31, 1997, the interest rate, which was based on LIBOR plus applicable margin,
varied between 2.5% and 8.5%.
Separately, in August 1997, one of the Company's European subsidiaries
entered into a $1.2 million loan agreement which matures on June 30, 2000. The
Company had outstanding borrowings under this agreement of $1,048,000 at
December 31, 1997. The interest rate was 10.4% at December 31, 1997.
In addition, one of the Company's European subsidiaries has a local
currency overdraft facility under which $0.8 million was available. There were
no borrowings outstanding under this agreement at December 31, 1997.
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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 commitments
that are relatively certain as to both timing and amount. Gains and losses on
the forward contracts are recognized concurrently with the gains and losses
from the underlying commitments. The forward exchange contracts used are
classified as "held for purposes other than trading." The Company does not use
any other types of derivative financial instruments to hedge such exposures,
nor does it use derivatives for speculative purposes. At December 31, 1997 and
June 30, 1997, the Company had forward foreign currency exchange contracts of
approximately $2.3 million and $1.8 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at December 31,
1997 mature at various dates through April 10, 1998, and are intended to hedge
various foreign currency commitments due from foreign subsidiaries and the
Company's agents and distributors. Due to the short term nature of these
financial instruments, the fair value of these contracts is not materially
different than their notional amount at December 31, 1997 and June 30, 1997.
NOTE E - UNUSUAL CHARGE
The Company recorded a $1.6 million pre-tax unusual charge for the cost of
termination of certain executives and others in the first quarter ended
September 30, 1997. The unusual charge includes staff reductions of
approximately 12 employees. At December 31, 1997, $1.2 million remains to be
paid for termination of employment and related contractual obligations.
NOTE F - LITIGATION
The Company and certain of its officers and directors are defendants in a
shareholder class action suit, In Re Comshare, Incorporated Securities
Litigation, filed in the United States District Court for the Eastern District
of Michigan. This suit was described in Item 3 of the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1997. On September 18, 1997
the Court dismissed all of the claims. The plaintiffs have filed an appeal of
the dismissal with the U.S. Court of Appeals for the Sixth Circuit. The
Company is vigorously contesting the appeal.
On September 27, 1996, Arbor Software Corporation ("Arbor") filed a
lawsuit against Comshare in the United States District Court for the Northern
District of California alleging breach of contract and fraud relating to
royalty calculations. This suit was described in Item 3 of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997. The
Company denied all of Arbor's claims and filed a counterclaim against Arbor for
fraud, defamation, unfair competition, interference with economic relationships
and breach of contract. On December 12, 1997, Comshare and Arbor entered into
a Settlement Agreement, and on December 15, 1997, the litigation was dismissed.
NOTE G - FINANCIAL ACCOUNTING STANDARDS
In 1997, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information". The
Company has adopted SFAS 128 during the second quarter ended December 31, 1997.
Basic EPS and Diluted EPS are disclosed in the Item 1 "Condensed Consolidated
Statement of Operations for the Three and Six Months Ended December 31, 1997
and 1996." The disclosure prescribed by SFAS No. 130 and 131 must be made
beginning with the fiscal year ending June 30, 1999.
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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, 1997 compared to the three and six months
ended December 31, 1996. This information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial
data as a percentage of total revenue.
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
REVENUE
Software licenses 39.8% 44.7% 37.8% 39.6%
Software maintenance 37.4 35.6 38.5 39.2
Implementation and consulting services 22.8 19.7 23.7 21.2
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 44.1 56.1 46.7 60.9
Cost of revenue and support 31.0 30.8 31.1 32.5
Internal research and product development 12.7 16.5 13.4 18.8
Internally capitalized software (6.9) (6.5) (7.7) (6.9)
Software amortization 7.0 6.8 7.7 7.2
General and administrative 11.8 12.2 12.6 13.2
Unusual charge - - 3.5 -
----- ----- ----- -----
Total costs and expenses 99.7 115.9 107.3 125.7
INCOME (LOSS) FROM OPERATIONS 0.3 (15.9) (7.3) (25.7)
OTHER INCOME (EXPENSE)
Interest income (expense) (0.2) 0.4 (0.0) 0.6
Exchange gain (loss) 0.2 (0.6) (0.1) (0.5)
----- ----- ----- -----
Total other income (expense) 0.0 (0.2) (0.1) 0.1
INCOME (LOSS) BEFORE INCOME TAXES 0.3 (16.1) (7.4) (25.6)
Provision (benefit) for income taxes - (5.6) - (8.9)
----- ----- ----- -----
NET INCOME (LOSS) 0.3% (10.5)% (7.4)% (16.7)%
===== ===== ===== =====
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REVENUE
Three Months Ended Six Months Ended
December 31, Percent December 31, Percent
1997 1996 Change 1997 1996 Change
---------- ---------- ------- --------------- -------- --------
(in thousands) (in thousands)
REVENUE
Software licenses $ 9,592 $11,703 (18.0)% $17,350 $18,271 (5.0)%
Software maintenance 8,996 9,331 (3.6) 17,647 18,108 (2.5)
Implementation and consulting services 5,493 5,161 6.4 10,880 9,800 11.0
--------- ------- ------- -------
TOTAL REVENUE $ 24,081 $26,195 (8.1)% $45,877 $46,179 (0.7)%
========= ======= ======= =======
Total revenue decreased 8.1% and 0.7% in the three and six months ended
December 31, 1997 compared to the prior year primarily due to the decrease in
software licenses revenue. Software licenses revenue decreased 18.0% and 5.0%
in the three and six months ended December 31, 1997. The decline in license
fee revenue in the three and six months ended December 31, 1997 was primarily
due to a reduced number of staff in North American sales organization and a
decrease in the sales of Company's retail applications as a result of customers
delaying their purchases of retail products in anticipation of the release of
the relational versions of these products.
Software maintenance revenue decreased 3.6% and 2.5% in the three and six
months ended December 31, 1997 compared to the same period last year.
Client/server software maintenance revenue in the three and six months ended
December 31, 1997 represented 81.5% and 80.9% of total software maintenance
revenue and grew 5.9% and 6.1% compared with the prior year. Mainframe
software maintenance revenue decreased 30.8% and 27.6% in the three and six
months ended December 31, 1997 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 increased 6.4% and
11.0% in the three and six months ended December 31, 1997 compared to last year
primarily due to the increased demand for such services from the existing
client base.
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COSTS AND EXPENSES
Three Months Ended Percent Six Months Ended Percent
December 31, Change December 31, Change
--------------------------- --------- ------------------- --------
1997 1996 1997 1996
---- ---- ---- ----
(in thousands) (in thousands)
COST AND EXPENSES
Selling and marketing $10,624 $14,705 (27.8)% $21,419 $28,141 (23.9)%
Cost of revenue and support 7,472 8,080 (7.5) 14,239 14,998 (5.1)
Internal research and product development 3,048 4,311 (29.3) 6,138 8,699 (29.4)
Internally capitalized software (1,653) (1,702) (2.9) (3,518) (3,201) 9.9
Software amortization 1,685 1,784 (5.5) 3,551 3,310 7.3
General and administrative 2,831 3,190 (11.3) 5,798 6,114 (5.2)
------- ------- ------- -------
Total costs and expenses
before unusual charge 24,007 30,368 (20.9) 47,627 58,061 (18.0)
Unusual charge - - * 1,614 - *
------- ------- ------- -------
TOTAL COSTS AND EXPENSES $24,007 $30,368 (20.9)% $49,241 $58,061 (15.2)%
======= ======= ======= =======
* % not meaningful.
Selling and marketing expense decreased 27.8% and 23.9% in the three and
six months ended December 31, 1997 compared to the same period last year
primarily due to decreased spending on sales and marketing activities resulting
from cost reduction actions taken during the last half of fiscal 1997 and the
first half of fiscal 1998. The decline in the number of sales representatives
and sales support consultants during the three and six months ended December
31, 1997 also contributed to the decrease in selling and marketing expense.
Cost of revenue and support decreased 7.5% and 5.1% in the three and six
months ended December 31, 1997 compared to the prior year principally due to
lower employee-related costs as a result of cost reduction efforts, offset by
an increase in implementation service costs in support of a higher level of
implementation service revenue.
Internal research and product development expense decreased 29.3% and
29.4% in the three and six months ended December 31, 1997 compared to last year
mainly due to the reduction in the product development staff as a result of the
consolidation of the Company's product development activities in Ann Arbor,
Michigan and closing of the Leicester, England product development facility in
the third quarter of fiscal 1997.
Internally capitalized software decreased in the three months ended
December 31, 1997 compared to the prior year mainly due to the decreased levels
of development costs that were capitalizable. Software amortization expense
decreased in the three months ended December 31, 1997 primarily due to the
decreased levels of capitalized software. Internally capitalized software and
software amortization expense increased in the six months ended December 31,
1997 primarily attributable to the increased levels of capitalized software in
the first quarter of fiscal 1998, slightly offset by the reduced level of
capitalized software in the second quarter of fiscal 1998.
General and administrative expense decreased 11.3% and 5.2% in the three
and six months ended December 31, 1997 compared to the same period last year
primarily due to a decrease in employee-related costs as a result of cost
reduction efforts.
During the first quarter ended September 30, 1997, the Company recorded a
$1.6 million unusual charge which represented the cost of termination of
certain executives and other staff. The unusual charge includes staff
reductions of approximately 12 employees. At December 31, 1997, $1.2 million
remains to be paid for termination of employment and related contractual
obligations.
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NON-OPERATING INCOME AND EXPENSE
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -----------------------
1997 1996 1997 1996
(in thousands) (in thousands)
OTHER INCOME (EXPENSE)
Interest income (expense) $ (39) $ 102 $ (1) $ 313
Exchange gain (loss) 48 (148) (57) (244)
------ ------ ---- -----
TOTAL OTHER INCOME (EXPENSE) $ 9 $ (46) $(58) $ 69
====== ====== ==== =====
Interest income declined in the three and six months ended December 31,
1997 primarily due to lower average cash balances as a result of cash used in
operating and investment activities.
FOREIGN CURRENCY
For the three and six months ended December 31, 1997, 56% of the Company's
total revenue was from outside North America compared with 49% and 50% for the
three and six months ended December 31, 1996. 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 second quarter of fiscal 1998, the overall strengthening of the
dollar against European currencies had a slight negative impact on the
Company's foreign revenues, as compared to the same period of fiscal 1997. If
foreign exchange rates in the second quarter of fiscal 1997 had been the same
as they were in the same period of fiscal 1998, international revenues during
the second quarter of fiscal 1998 would have increased $1.2 million instead of
$0.6 million, as reported. However, the impact on revenue was offset by the
exchange rate impact on foreign expenses. The $2.7 million decrease in foreign
expenses over the second quarter of fiscal 1997 would have been $2.0 million,
if foreign exchange rates in the second quarter of fiscal 1997 had been the
same as they were in the same period of fiscal 1998. As a result of the
changes in foreign currency exchange rates, the increase in the international
income before taxes, at actual exchange rates, was $0.1 million more than at
comparable exchange rates for the second quarter of fiscal 1998.
For the six months ended December 31, 1997, the overall strengthening of
the dollar against European currencies had a slight negative impact on the
Company's foreign revenues, as compared to the same period of fiscal 1997. If
foreign exchange rates for the six months ended December 31, 1996 had been the
same as they were in the same period of fiscal 1998, international revenues for
the six months ended December 31, 1997 would have increased $3.1 million
instead of $2.4 million, as reported. However, the impact on revenue was
offset by the exchange rate impact on foreign expenses. The $3.9 million
decrease in foreign expenses over the six months ended December 31, 1996 would
have been $3.0 million, if foreign exchange rates for the six months ended
December 31, 1996 had been the same as they were in the same period of fiscal
1998. As a result of the changes in foreign currency exchange rates, the
increase in the international income before taxes, at actual exchange rates, was
$0.2 million more than at comparable exchange rates for the six months ended
December 31, 1997. In general, the Company's future operating results may be
adversely impacted by the overall strengthening of the U.S. dollar against
foreign currencies of countries where the Company conducts business; conversely,
future operating results may be favorably impacted by an overall weakening of
the U.S. dollar against foreign currencies.
The Company had several forward exchange contracts totaling $2.3 million
outstanding at December 31, 1997. See Note D of Notes to Condensed
Consolidated Financial Statements.
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PROVISION (BENEFIT) FOR INCOME TAXES
The effective income tax rate in the three and six months ended December
31, 1997 was 0%, compared with 35% for the same periods a year ago, as the
Company did not recognize any provision (benefit) for income taxes on its
operating income (loss) in the three and six months ended December 31, 1997.
Realization of deferred tax assets associated with the Company's future
deductible temporary differences, net operating loss carryforwards and tax
credit carryforwards is dependent upon generating sufficient taxable income
prior to their expiration. Although realization of the deferred tax assets is
not assured, management believes it is more likely than not that the deferred
tax assets will be realized through future taxable income or by using a tax
strategy currently available to the Company. On a quarterly basis, management
will assess whether it remains more likely than not that the deferred tax
assets will be realized. This assessment could be impacted by a combination of
continuing operating losses and a determination that the tax strategy is no
longer sufficient to realize some or all of the deferred tax assets. If
management determines that it is no longer more likely than not that the
deferred tax assets will be realized, a valuation allowance will be required
against some or all of the deferred tax assets. This would require a charge to
the income tax provision, and such charge could be material to the Company's
results of operations.
The foregoing statements regarding the realization of the deferred tax
assets are "forward looking statements" within the meaning of the Securities
Exchange Act of 1934. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Safe Harbor Statement" for discussion of
uncertainties relating to such statements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, cash and cash equivalents were $13.1 million,
compared with cash of $11.7 million at June 30, 1997. The increase in cash and
cash equivalents is principally due to increased borrowings. Without the
higher borrowings, cash flow was approximately breakeven in the six months
ended December 31, 1997.
Net cash provided by operating activities was $2.5 million in the six
months ended December 31, 1997, compared with net cash used in operating
activities of $9.8 million in the six months ended December 31, 1996. The
increase in net cash provided by operating activities was primarily due to the
decline in operating loss before income taxes from $11.8 million to $3.4
million, and a $2.4 million payment to terminate the Company's lease obligation
on its vacated London office facility in the first quarter of fiscal 1997.
Net cash used in investing activities was $2.6 million in the six months
ended December 31, 1997, compared with $6.2 million in the six months ended
December 31, 1996. The decrease in net cash used in investing activities was
primarily due to the decreased purchases of property and equipment, and the
receipt of the net cash surrender value of certain life insurance policies as a
result of the cancellation of the policies held by the Company in the first
quarter of fiscal 1998. At December 31, 1997, the Company did not have any
material capital expenditure commitments.
Total assets were $79.5 million at December 31, 1997, compared with total
assets of $80.8 million at June 30, 1997. Working capital as of December 31,
1997 was $3.4 million, compared with a negative $1 million as of June 30, 1997.
The decrease in total assets from June 30, 1997 to December 31, 1997 was
primarily due to the decline in property and equipment as a result of the
depreciation expense taken during the first half of fiscal 1998. The increase
in working capital was primarily due to decrease in notes payable as a result
of the refinancing such notes under the Company's new credit agreement.
Effective September 23, 1997, the Company entered into a new $10 million
credit agreement with its bank which has permitted borrowings based on a
percentage of worldwide eligible accounts receivable. At December 31, 1997,
the permitted borrowings available under this credit agreement were $10
million, of which $4.6 million was outstanding. Borrowings available at any
time are based on the lower of $10 million or a percentage of worldwide
eligible accounts receivable. At December 31, 1997, the interest rate, which
was based on LIBOR plus applicable margin, varied between 2.5% and 8.5%.
Separately, in August 1997, one of the Company's European subsidiaries
entered into a $1.2 million loan agreement which matures on June 30, 2000. The
Company had outstanding borrowings under this agreement of $1,048,000 at
December 31, 1997. The interest rate was 10.4% at December 31, 1997.
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The Company believes that the combination of present cash balances and
amounts available under credit facilities will be sufficient to meet the
Company's currently anticipated cash requirements for at least the next twelve
months. The foregoing statement is a "forward looking statement" within the
meaning of the Securities Exchange Act of 1934. The extent to which such
sources will be sufficient to meet the Company's anticipated cash requirements
is subject to a number of uncertainties including the ability of the Company's
operations to generate sufficient cash to support operations, and other
uncertainties described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Safe Harbor Statement."
YEAR 2000
The Company is modifying and testing the most current versions of its
products to be year 2000 compliant. The Company believes that all but one of
the current client/server products are year 2000 compliant. The Company
expects to have released new versions of its mainframe products and the
remaining client/server product which will be year 2000 compliant prior to
January 1, 2000. Since not all the Company's customers are running product
versions that are year 2000 compliant, the Company has been encouraging
customers to migrate to current product versions.
The Company has also reviewed its internal systems for year 2000
compliance and is in the process of upgrading to year 2000 compliant versions
from third party software vendors, modifying certain systems, and planning to
replace certain systems with new third party software, which the Company
expects to complete prior to January 1, 2000.
The management does not believe that the cost to bring its software
products and internal systems into year 2000 compliance will have a
material adverse effect on the Company's results of operations or financial
condition. There can be no assurance that the Company's current products and
internal systems do not contain undetected errors or defects associated with
year 2000 date functions that may result in material costs to the Company.
Some commentators have stated that a significant amount of litigation will
arise out of year 2000 compliance issues. Because of the unprecedented
nature of such litigation, it is uncertain whether or to what extent the
Company may be affected by it.
SAFE HARBOR STATEMENT
Certain information in this Form 10-Q contains "forward looking
statements" within the meaning of the Securities Exchange Act of 1934,
including those concerning the Company's future results and strategy. Actual
results could differ materially from those in the forward looking statements
due to a number of uncertainties, including, but not limited to, the demand for
the Company's products and services; the size, timing and recognition of
revenue from significant orders; increased competition; the Company's success
in and expense associated with developing, introducing and shipping new
products; new product introductions and announcements by the Company's
competitors; changes in Company strategy; product life cycles; the cost and
continued availability of third party software and technology incorporated into
the Company's products; the impact of rapid technological advances, evolving
industry standards and changes in customer requirements; the impact of recent
transitional changes in North American and international management and sales
personnel; cancellations of maintenance and support agreements; software
defects; changes in operating expenses; variations in the amount of cost
savings anticipated to result from cost reduction actions; the impact of cost
reduction actions on the Company's operations; fluctuations in foreign
exchange rates; the impact of undetected errors or defects associated with year
2000 date functions on the Company's current products and internal systems;
the ability of the Company to generate sufficient future taxable income or to
execute available tax strategies required to realize deferred tax assets;
and economic conditions generally or in specific industry segments. In
addition, a significant portion of the Company's revenue in any quarter is
typically derived from non-recurring license fees, a substantial portion of
which is booked in the last month of a quarter. Since the purchase of the
Company's products is relatively discretionary and generally involves a
significant commitment of capital, in the event of any downturn in any
potential customer's business or the economy in general, purchases of the
Company's products may be deferred or canceled. Further, the Company's expense
levels are based, in part, on its expectations as to future revenue and a
significant portion of the Company's expenses do not vary with revenue. As a
result, if revenue is below expectations, results of operations are likely to
be materially adversely affected.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 27, 1996, Arbor Software Corporation ("Arbor") filed a
lawsuit against Comshare in the United States District Court for the Northern
District of California alleging breach of contract and fraud relating to
royalty calculations. This suit was described in Item 3 of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997. The
Company denied all of Arbor's claims and filed a counterclaim against Arbor for
fraud, defamation, unfair competition, interference with economic relationships
and breach of contract. On December 12, 1997, Comshare and Arbor entered into
a Settlement Agreement, and on December 15, 1997, the litigation was dismissed.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on November 24,
1997. There were two matters voted on, which were the election of eight
directors and approval of the 1997 Global Employee Stock Option Plan. The
following table sets forth the results of the matters voted on. All director
nominees were elected and the 1997 Global Employee Stock Option Plan was
approved.
Voted For Votes Against Abstained Broker Non-votes
--------- ------------- --------- -----------------
Election of Directors
Nominees:
Geoffrey B. Bloom 8,751,841 - 193,451 -
Daniel T. Carroll 8,731,840 - 213,452 -
Richard L. Crandall 8,748,795 - 196,497 -
Stanley R. Day 8,737,988 - 207,304 -
W. John Driscoll 8,744,188 - 201,104 -
Dennis G. Ganster 8,753,986 - 191,306 -
Alan G. Merten 8,750,378 - 194,913 -
John F. Rockart 8,746,891 - 198,401 -
Approval of 1997 Global Employee
Stock Option Plan 3,564,773 471,781 120,363 4,788,375
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) The exhibits included herewith are set forth on the Index to Exhibits.
(b.) Since the end of its most recent fiscal quarter on September 30, 1997,
Comshare has filed the following report on Form 8-K:
Date of Report Item Reported
- -------------- -------------
December 24, 1997 Comshare, Incorporated (the "Company") and Arbor Software
Corporation ("Arbor") settled all claims and counterclaims
asserted by the parties with respect to the License
Agreement, dated as of December 23, 1993. In connection
with such settlement, the Company and Arbor entered into
the Second Amendment to License Agreement, dated December
12, 1997, which amends the License Agreement.
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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 13, 1998 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 NO. DESCRIPTION
- ----------- -----------
10.1 Executive Bonus Program, effective October 1, 1997.
11.1 Computation of Net Income (Loss) per Common Share.
27 Financial Data Schedule.
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