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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 DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
COMMISSION FILE NUMBER 0-4096
-----------------------------
COMSHARE, INCORPORATED
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1804887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 BRIARWOOD CIRCLE, ANN ARBOR, MICHIGAN 48108 (Address of
principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (734) 994-4800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of DECEMBER 31, 1998.
OUTSTANDING AT
CLASS OF COMMON STOCK DECEMBER 31, 1998
--------------------- -----------------
$1.00 PAR VALUE 9,521,420 SHARES
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COMSHARE, INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statement of Operations and Comprehensive
Income for the Three and Six Months Ended December 31, 1998 and 1997........................3
Condensed Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1998.........................................................4
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended December 31, 1998 and 1997.................................................6
Notes to Condensed Consolidated Financial Statements............................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................17
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................................17
SIGNATURE..........................................................................................18
INDEX TO EXHIBITS..................................................................................19
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PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited; in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
REVENUE
Software licenses $ 6,109 $ 9,254 $ 12,235 $ 16,668
Software maintenance 6,508 8,612 13,622 16,830
Implementation, consulting
and other services 4,308 5,468 8,227 10,798
------- ------- --------- --------
TOTAL REVENUE 16,925 23,334 34,084 44,296
COSTS AND EXPENSES
Selling and marketing 6,629 9,877 13,567 19,838
Cost of revenue and support 6,463 7,472 12,869 14,239
Internal research and product development 2,130 3,048 4,377 6,138
General and administrative 2,082 2,863 4,059 5,831
Unusual charge - - - 1,614
------- ------- --------- --------
TOTAL COSTS AND EXPENSES 17,304 23,260 34,872 47,660
------- ------- --------- --------
INCOME (LOSS) FROM OPERATIONS (379) 74 (788) (3,364)
OTHER INCOME (EXPENSE)
Interest income 512 126 1,081 266
Interest expense (52) (165) (139) (267)
Exchange gain (loss) 39 48 46 (57)
------- ------- --------- --------
TOTAL OTHER INCOME (EXPENSE) 499 9 988 (58)
INCOME (LOSS) BEFORE TAXES 120 83 200 (3,422)
Provision for income taxes 40 - 68 -
------- ------- --------- --------
NET INCOME (LOSS) $ 80 $ 83 $ 132 $ (3,422)
======= ======= ========= ========
OTHER COMPREHENSIVE INCOME (LOSS)
Currency translation adjustment 4 (324) 381 (115)
-------- ------- --------- ---------
Comprehensive Income (Loss) $ 84 $ (241) $ 513 $ (3,537)
======== ======== ========= =========
SHARES USED IN BASIC EPS COMPUTATION 9,752 9,888 9,846 9,881
======== ======= ========= =========
SHARES USED IN DILUTED EPS COMPUTATION 9,752 9,919 9,846 9,881
======== ======= ========= =========
NET INCOME (LOSS) PER COMMON SHARE - BASIC EPS $ 0.01 $ 0.01 $ 0.01 $ (0.35)
======== ======= ========= =========
NET INCOME (LOSS) PER COMMON SHARE - DILUTED EPS $ 0.01 $ 0.01 $ 0.01 $ (0.35)
======== ======= ========= =========
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, June 30,
1998 1998
---- ----
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $ 36,422 $ 49,102
Accounts receivable, net 18,950 21,354
Deferred income taxes 1,256 1,256
Prepaid expenses and other current assets 3,336 3,322
-------- --------
Total current assets 59,964 75,034
PROPERTY AND EQUIPMENT, at cost
Computers & other equipment 11,117 16,781
Leasehold improvements 2,309 2,293
-------- --------
13,426 19,074
Less - Accumulated depreciation 10,945 15,792
-------- --------
Property and equipment, net 2,481 3,282
GOODWILL, net 1,453 1,500
DEFERRED INCOME TAXES 5,377 5,377
OTHER ASSETS 3,880 3,499
-------- --------
TOTAL ASSETS $ 73,155 $ 88,692
======== ========
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, June 30,
1998 1998
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (audited)
CURRENT LIABILITIES
Notes payable $ 622 $ 1,238
Accounts payable 10,456 14,398
Accrued liabilities:
Payroll 2,163 2,964
Taxes 1,035 5,035
Other 4,708 7,034
-------- --------
Total accrued liabilities 7,906 15,033
Deferred revenue 13,199 14,834
-------- --------
TOTAL CURRENT LIABILITIES 32,183 45,503
LONG-TERM DEBT 1,437 1,434
OTHER LIABILITIES 2,978 3,350
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, no par value;
authorized 5,000,000 shares; none issued - -
Common stock, $1.00 par value;
authorized 20,000,000 shares; outstanding
9,521,420 shares as of December 31, 1998
and 10,003,167 shares as of June 30, 1998 9,521 10,003
Capital contributed in excess of par 38,379 40,335
Retained deficit (7,218) (7,350)
Accumulated other comprehensive income (3,651) (4,032)
-------- --------
37,031 38,956
Less - Notes receivable 474 551
-------- --------
Total shareholders' equity 36,557 38,405
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 73,155 $ 88,692
======== ========
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,
----------------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 132 $ (3,422)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,042 4,697
Changes in operating assets and liabilities:
Accounts receivable 2,600 (736)
Prepaid expenses and other assets (312) 769
Accounts payable (3,828) (731)
Accrued liabilities (7,164) 985
Deferred revenue (1,503) 801
Other liabilities (380) 164
-------- --------
Net cash provided by (used in) operating activities (9,413) 2,527
INVESTING ACTIVITIES
Additions to computer software - (3,618)
Payments for property and equipment (383) (143)
Other 219 1,189
-------- --------
Net cash used in investing activities (164) (2,572)
FINANCING ACTIVITIES
Net repayments under notes payable (647) (4,141)
Net borrowings under debt agreements
and capital lease obligations 36 5,524
Stock repurchased (2,835) -
Stock options exercised - 321
Other 279 (6)
-------- --------
Net cash provided by (used in) financing activities (3,167) 1,698
EFFECT OF EXCHANGE RATE CHANGES 64 (217)
-------- --------
NET INCREASE (DECREASE) IN CASH (12,680) 1,436
CASH AT BEGINNING OF PERIOD 49,102 11,651
-------- --------
CASH AT END OF PERIOD $ 36,422 $ 13,087
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 52 $ 150
======== ========
Cash paid for income taxes $ 3,516 $ 408
======== ========
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, Inc. (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 1998
financial statements have been reclassified to conform with fiscal 1999
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 statement of
operations and comprehensive income for the three and six months ended December
31, 1998 and 1997, the consolidated balance sheet as of December 31, 1998 and
the consolidated statement of cash flows for the six months ended December 31,
1998 and 1997.
The results of operations for the three months ended December 31, 1998
and 1997 are not necessarily indicative of the results to be expected in future
quarters or the full fiscal year. The software industry is generally
characterized by seasonal trends.
NOTE B - COMPUTER SOFTWARE
In prior years, the costs of developing and purchasing new software
products and enhancements to existing software products were capitalized after
technological feasibility was established. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
required considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenue, estimated economic product lives and changes in software and hardware
technology. In the last several years, product upgrades for the Company's
products are being released by the Company on a more rapid basis. The rapid
increase in product version updates has led to an almost continuous product
development cycle and has reduced the time between establishing technological
feasibility and general release to the public. With these rapid changes
expected, the Company believes that the useful lives of these products will be
reduced to a year or less. In the current and future years, based on continuous
product life cycles noted, the period between establishing technological
feasibility and the general availability of such software will be short, and
software costs qualifying for capitalization will be insignificant. Accordingly,
the Company has not capitalized any software development costs during the six
months ended December 31, 1998 and will not capitalize future software
development costs.
NOTE C - BORROWINGS
The Company has a $10 million credit agreement which matures on October
1, 2000. Borrowings are secured by accounts receivable and the credit agreement
contains covenants regarding among other things, earnings leverage, net worth
and payment of dividends. Under the terms of the agreement, the Company is not
permitted to pay cash dividends on its common stock. Permitted borrowings
available as of December 31, 1998 under this credit agreement were $10 million,
of which $1.2 million was outstanding. Borrowings available at any time are
based on the lower of $10 million or a percentage of worldwide eligible accounts
receivable and cash. At December 31, 1998, the interest rate varied between 1.5%
and 2.7%.
Separately, in August 1997, one of the Company's European subsidiaries
entered into a $1.2 million loan agreement which matures on June 30, 2000. The
Company had outstanding borrowings of $0.7 million under this agreement at
December 31, 1998. The interest rate was 12.5% at December 31, 1998.
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COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE D - FINANCIAL INSTRUMENTS
The Company at various times enters into forward exchange contracts to
hedge certain exposures related to identifiable foreign currency transactions
that are relatively certain as to both timing and amount. Gains and losses on
the forward contracts are recognized concurrently with the gains and losses from
the underlying transactions. The forward exchange contracts used are classified
as "held for purposes other than trading." The Company does not use any other
types of derivative financial instruments to hedge such exposures, nor does it
use derivatives for speculative purposes. At December 31, 1998 and June 30,
1998, the Company had forward foreign currency exchange contracts outstanding of
approximately $4.9 million and $3.1 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at December 31,
1998 mature at various dates through April 16, 1999, 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 amounts at December 31, 1998 and June 30, 1998.
NOTE E - FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 131 "Disclosures About Segments
of an Enterprise and Related Information" and SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities". The Company is required to adopt
SFAS No. 131 for fiscal year ending June 30, 1999 and SFAS No. 133 for the
period ending September 30, 1999. The Company has not quantified the effect of
adopting SFAS No. 133.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income"
during the quarter ended September 30, 1998. The Company has currency
translation adjustments for the three and six months ended December 31, 1998 and
December 31, 1997, which are defined as comprehensive income by SFAS No. 130.
NOTE F - DILUTED EPS COMPUTATION
Shares used in the Diluted EPS Computation are identical to the shares
used in the Basic EPS Computation, as the Company's potentially dilutive stock
options all have exercise prices above the average market price of the Company's
common stock for the three and six months ended December 31, 1998. As of
December 31, 1998, there were 880,423 options issued and outstanding with
exercise prices ranging from $5.06 to $27.50.
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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, 1998, compared to the three and six
months ended December 31, 1997. This information should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial data
as a percentage of total revenue.
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -----------------------
1998 1997 1998 1997
REVENUE
Software licenses 36.1 % 39.7 % 35.9 % 37.6 %
Software maintenance 38.4 36.9 40.0 38.0
Implementation, consulting and other services 25.5 23.4 24.1 24.4
----- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 39.1 42.3 39.8 44.8
Cost of revenue and support 38.2 32.0 37.8 32.1
Internal research and product development 12.6 13.1 12.8 13.9
General and administrative 12.3 12.3 11.9 13.2
Unusual charge - - - 3.6
----- ---- ----- -----
Total costs and expenses 102.2 99.7 102.3 107.6
INCOME (LOSS) FROM OPERATIONS (2.2) 0.3 (2.3) (7.6)
OTHER INCOME (EXPENSE)
Interest income 3.0 0.5 3.2 0.6
Interest expense (0.3) (0.7) (0.4) (0.6)
Exchange gain (loss) 0.2 0.2 0.1 (0.1)
---- ---- ---- ----
Total other income (expense) 2.9 - 2.9 (0.1)
INCOME (LOSS) BEFORE TAXES 0.7 0.3 0.6 (7.7)
Provision for income taxes 0.2 - 0.2 -
---- ---- ----- ----
NET INCOME (LOSS) 0.5 % 0.3 % 0.4 % (7.7) %
==== ==== ===== =====
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REVENUE
Three Months Ended Percent Six Months Ended Percent
December 31, Change December 31, Change
------------------------ --------- ------------------------ --------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands) (in thousands)
REVENUE
Software licenses $ 6,109 $ 9,254 (34.0) % $ 12,235 $ 16,668 (26.6)%
Software maintenance 6,508 8,612 (24.4) 13,622 16,830 (19.1)
Implementation, consulting and other services 4,308 5,468 (21.2) 8,227 10,798 (23.8)
-------- -------- -------- --------
TOTAL REVENUE $ 16,925 $ 23,334 (27.5) % $ 34,084 $ 44,296 (23.1)%
======== ======== ======== ========
Total revenue decreased 27.5% and 23.1% in the three and six months
ended December 31, 1998 compared to the prior year due to the Company's sale of
its Retail Business during June, 1998, as well as the sale of the Company's
French and German operations and their conversion to distributor operations,
during the quarter ended December 31, 1998. As a result of the sales noted
above, software license revenue, software maintenance revenue and
implementation, consulting and other services revenue were negatively impacted.
Without the revenue from the Retail Business and reflecting revenue from the
Company's French and German operations on a consistent basis ("on a comparable
basis"), total revenue was flat in the three months ended December 31, 1998,
compared to the prior year and increased 5.6% during the six months ended
December 31, 1998, as compared to the prior year.
On a comparable basis, software license fees were $6.7 million and
$11.3 million for the three and six months ended December 31, 1997,
respectively. The decrease in license fees for the three months ended December
31, 1998, on a comparable basis, was primarily due to the decrease of sales in
France, where the distributor experienced turnover in the sales force. The
increase in license fees for the six months ended December 31, 1998, on a
comparable basis, was primarily due to growth in sales of the Company's
BudgetPLUS product.
On a comparable basis, software maintenance revenue was $6.4 million
and $12.7 million for the three and six months ended December 31, 1997. The
Company experienced growth in maintenance revenue from newer products, primarily
BudgetPLUS and Decision, offset by a decline in maintenance revenue from older
desktop products, most notably mainframe software maintenance revenue. On a
comparable basis, mainframe software maintenance revenue represented 13.5% and
13.8% of total software maintenance revenue for the three and six months ended
December 31, 1998, and 21.8% and 22.2% for the three and six months ended
December 31, 1997, respectively, Mainframe software maintenance revenue
decreased 39.0% and 35.9% in the three and six months ended December 31, 1998
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.
On a comparable basis, implementation, consulting and other services
revenue was $3.6 million and $6.9 million for the three and six months ended
December 31, 1997, respectively. The increase in implementation, consulting and
other services revenue, on a comparable basis, is primarily due to increased
consulting services to assist in enhancing and extending existing budgeting and
consolidation implementations.
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COSTS AND EXPENSES
Three Months Ended Percent Six Months Ended Percent
December 31, Change December 31, Change
----------------------- -------- ---------------------- ---------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands) (in thousands)
COST AND EXPENSES
Selling and marketing $ 6,629 $ 9,877 (32.9) % $ 13,567 $ 19,838 (31.6) %
Cost of revenue and support 6,463 7,472 (13.5) 12,869 14,239 (9.6)
Internal research and product development 2,130 3,048 (30.1) 4,377 6,138 (28.7)
General and administrative 2,082 2,863 (27.3) 4,059 5,831 (30.4)
------- ------- -------- --------
Total costs and expenses
before unusual charge 17,304 23,260 (25.6) 34,872 46,046 (24.3)
Unusual charge - - * - 1,614 *
-------- ------- -------- --------
TOTAL COSTS AND EXPENSES $ 17,304 $ 23,260 (25.6) % $ 34,872 $ 47,660 (26.8) %
======== ======== ======== ========
* % not meaningful.
Total expenses decreased 25.6% and 26.8% in the three and six months ended
December 31, 1998 compared to the prior year due to the Company's sale of its
Retail Business during June, 1998, as well as the sale of the Company's French
and German operations and their conversion to distributor operations, during the
quarter ended December 31, 1998. As a result of these sales, all operating
costs were favorably impacted, with the exception of the unusual charge. On a
comparable basis, the Company significantly reduced operating costs by
approximately $1 million and $2 million for the three and six months ended
December 31, 1998, primarily due to streamlining of the sales management
structure, general consolidation and lower facility costs, offset by increased
consulting services provided and production and distribution fees.
OTHER INCOME AND EXPENSE
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands) (in thousands)
OTHER INCOME (EXPENSE)
Interest income $ 512 $ 126 $ 1,081 $ 266
Interest expense (52) (165) (139) (267)
Exchange gain (loss) 39 48 46 (57)
----- ----- ------- -----
TOTAL OTHER INCOME (EXPENSE) $ 499 $ 9 $ 988 $ (58)
===== ===== ======= =====
Interest income increased in the three and six months ended December
31, 1998 primarily due to higher average cash balances as a result of the cash
received from the Company's sale of its Retail Business.
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FOREIGN CURRENCY
For the three and six months ended December 31, 1998, 53.1% and 52.2% of
the Company's total revenue was from outside North America compared with 54.4%
and 54.1% for the three and six months ended December 31, 1997. Most of the
Company's international revenue is denominated in foreign currencies. The
Company recognizes currency transaction gains and losses in the period of
occurrence. As currency rates are constantly changing, these gains and losses
can, at times, fluctuate greatly. The Company's future operating results may be
adversely impacted by the overall strengthening of the U.S. dollar against
foreign currencies of countries where the Company conducts business; conversely,
future operating results may be favorably impacted by an overall weakening of
the U.S. dollar against foreign currencies. For the three and six months ended
December 31, 1998, 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 $4.9 million
(notional amounts) outstanding at December 31, 1998. See Note D of Notes to
Condensed Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The effective income tax rate in the three and six months ended December
31, 1998 was 35%, as the Company recorded a provision for income taxes on its
operating income in the first six months of fiscal year 1999. This compares to a
0% effective income tax rate for the same periods a year ago, as the Company did
not recognize benefits for income taxes on its operating loss in the 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. The assessment could be impacted by a combination of
continuing operating losses and a determination that the tax strategy is no
longer sufficient to realize some or all of the deferred tax assets. The
foregoing statements regarding the realization of deferred tax assets are
"forward looking statements" within the meaning of the Securities Exchange Act
of 1934. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Safe Harbor Statement" for discussion of
uncertainties relating to such statements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, cash and cash equivalents were $36.4 million,
compared with cash and cash equivalents of $49.1 million at June 30, 1998. The
decrease in cash and cash equivalents is principally due to the payment of taxes
and other costs related to the Retail sale and fourth quarter fiscal 1998
restructuring related items, the Company's stock repurchase program and other
cash used in operating activities for the six months ended December 31, 1998.
Net cash used in operating activities was $9.4 million in the six months
ended December 31, 1998, compared with net cash provided by operating activities
of $2.5 million in the six months ended December 31, 1997. In fiscal year 1998,
the Company amortized software development costs, resulting in $3.6 million of
software amortization during the six months ended December 31, 1997. During the
six months ended December 31, 1998, the Company did not capitalize, nor amortize
software development costs. The remaining increase in net cash used in operating
activities was primarily due to income taxes and other expenses paid related to
the gain on the sale of the Company's Retail Business and fourth quarter fiscal
1998 restructuring related items. These amounts were offset by the increase in
operating income during the six months ended December 31, 1998, as compared to
the prior year.
Net cash used in investing activities was $0.2 million in the six months
ended December 31, 1998, compared with $2.6 million in the six months ended
December 31, 1997. The decrease in net cash used in investing activities was
primarily due to the decrease in additions to computer software during the six
months ended December 31, 1998 as compared to the same period last year. The
Company did not capitalize software development costs during the six months
ended December 31, 1998. At December 31, 1998, the Company did not have any
material capital expenditure commitments. However, the Company plans to
consolidate its London sales office and is currently seeking a subtenant for
part of the space. The Company is expecting to spend approximately $700,000 for
renovation of the office space.
Total assets were $73.1 million at December 31, 1998, compared with
total assets of $88.7 million at June 30, 1998. Working capital as of December
31, 1998 was $27.8 million, compared with $29.5 million as of June 30, 1998.
The decrease in total assets from June 30, 1998 to December 31, 1998 was
primarily due to the decline in cash and cash equivalents during the six months
ended December 31, 1998. The decrease in working capital was primarily due to
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the decrease in cash and cash equivalents, offset by the decrease in accrued
liabilities primarily due to payment of taxes and other accruals related to the
Retail Business sale and payment of fourth quarter fiscal 1998 restructuring
related items.
The Company has a $10 million credit agreement which matures on
October 1, 2000. Borrowings are secured by accounts receivable and the credit
agreement contains covenants regarding among other things, earnings leverage,
net worth and payment of dividends. Under the terms of the agreement, the
Company is not permitted to pay cash dividends on its common stock. Permitted
borrowings available as of December 31, 1998 under this credit agreement were
$10 million, of which approximately $1.2 million was outstanding. Borrowings
available at any time are based on the lower of $10 million or a percentage of
worldwide accounts receivable and cash. At December 31, 1998, the interest rate
varied between 1.5% and 2.7%.
Separately, in August 1997, one of the Company's European subsidiaries
entered into a $1.2 million loan agreement which matures on June 30, 2000. The
Company had outstanding borrowings of $0.7 million under this agreement at
December 31, 1998. The interest rate was 12.5% at December 31, 1998.
In September 1998, the Company's Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's outstanding Common Stock.
Pursuant to this repurchase program, the Company has repurchased 617,850 shares
of the Company's Common Stock for a total cost of approximately $2,834,800, as
of February 5, 1999. The Company may buy shares of its Common Stock on the open
market or in privately negotiated transactions from time to time, based on
market prices.
The Company believes that the combination of present cash balances and
amounts available under credit facilities will be sufficient to meet the
Company's currently anticipated cash requirements for at least the next twelve
months. The foregoing statement is a "forward looking statement" within the
meaning of the Securities and Exchange Act of 1934. The extent to which such
sources will be sufficient to meet the Company's anticipated cash requirements
is subject to a number of uncertainties including the ability of the Company's
operations to generate sufficient cash to support operations, and other
uncertainties described in "Item 2. Management's Discussion and Analysis of
Financial Condition and Result of Operations - Safe Harbor Statement."
MARKET SENSITIVITY ANALYSIS
The Company is exposed to market risk from changes in foreign exchange
and interest rates. To reduce the risk from changes in foreign exchange rates,
the Company selectively uses financial instruments. The Company does not hold or
issue financial instruments for trading purposes.
The Company at various times denominates borrowings in foreign
currencies and enters into forward exchange contracts to hedge exposures related
to foreign currency transactions. The Company does not use any other types of
derivatives to hedge such exposures nor does it speculate in foreign currency.
In general, the Company uses forward exchange contracts to hedge against large
selective transactions that present the most exposure to exchange rate
fluctuations. At December 31, 1998 and June 30, 1998, the Company had forward
contracts of approximately $4.9 million and $3.1 million (notional amounts),
respectively, denominated in foreign currencies. The contracts outstanding at
December 31, 1998 mature through April 16, 1999 and are intended to hedge
various foreign currency commitments due from foreign subsidiaries and the
Company's distributors. Due to the short term nature of these financial
instruments, the fair value of these contracts is not materially different than
their notional amounts at December 31, 1998 and June 30, 1998.
Gains and losses on the forward contracts are largely offset by gains
and losses on the underlying exposure. The Company conducts business in
approximately 15 foreign currencies, predominately British pounds, French francs
and Japanese yen. A hypothetical 10 percent appreciation of the U.S. dollar from
December 31, 1998 market rates would increase the unrealized value of the
Company's forward contracts and a hypothetical 10 percent depreciation of the
U.S. dollar from December 31, 1998 market rates would 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.
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YEAR 2000
The following discussion contains information regarding Year
2000 readiness, and constitutes a "Year 2000 Readiness Disclosure" as defined
in the Year 2000 Readiness Disclosure Act.
Many existing computer programs use only the last two digits to refer
to a year. Therefore, these computer programs do not properly recognize a year
that begins with "20" instead of the familiar "19". If not corrected, many
computer applications could fail or create erroneous results. Programs that will
operate in the Year 2000 unaffected by the change in year from 1999 to 2000 are
referred to herein as "Year 2000 compliant". Certain portions of the discussion
set forth below contain "forward looking statements" within the meaning of the
Securities and Exchange Act of 1934, as amended, including, but not limited to,
those relating to the Year 2000 compliance of the Company's products and
systems, future costs to remediate Year 2000 issues, the timetable in which such
remediation is to occur, the alternatives available to the Company to become
fully Year 2000 compliant, the Company's mission critical requirements and the
impact on the Company of an inability of it or its key suppliers to become fully
Year 2000 compliant. Actual results could differ materially from those in the
forward looking statement due to a number of uncertainties set forth below.
The Company has tested and modified the most current versions of its
products to be Year 2000 compliant. The Company believes that all of its current
client/server products are Year 2000 compliant (including BudgetPLUS, Decision,
DecisionWeb and FDC). The company has released new versions of its principal
mainframe products that are Year 2000 compliant, except for one legacy product
(the computer code is ready but the Company is currently in the process of
identifying a beta site to complete the release process), and two components of
a legacy product for which Year 2000 compliant versions are scheduled for
release in late February, 1999. 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 their decision. The Company will not renew
maintenance contracts with these customers for periods after September, 1999.
Not all of the Company's customers are running product versions that
are Year 2000 compliant. The Company will continue to encourage these customers
to migrate to its current product versions. Some of these customers may not be
willing to migrate to current product versions because of the cost and time
required to do so, including the need to rewrite custom applications which are
not Year 2000 compliant. For non-compliant customers that have maintenance
contracts, the Company intends to ship the latest version of its products to
ensure their compliance. A significant portion of the Company's maintenance
revenue in fiscal year 1998 was derived from customers running versions of the
Company's products which are not Year 2000 compliant; however, customers paying
maintenance are entitled to obtain Year 2000 compliant versions of licensed
products at no additional cost.
The Company incorporates a number of software tools into its products.
The Company has performed limited testing of the current versions of these
software tools as part of the testing of its products and believes they are Year
2000 compliant. In addition, with respect to certain of these software tools,
the Company has received written representations or warranties from the vendor
that these products are Year 2000 compliant. Nevertheless, if one of the
databases supported by the Company is not fully Year 2000 compliant, sales of
the Company's products could be impacted.
If any of the Company's customers are unable to make their information
technology systems Year 2000 compliant in a timely fashion, they may suspend
further product purchases from the Company and renewal of maintenance contracts
until their systems are Year 2000 compliant. Because the Company's customers are
generally large and medium sized businesses and the Company has received
numerous communications from customers about their Year 2000 compliance efforts,
the Company expects most of its customers will become Year 2000 compliant in a
timely fashion, although the Company is not in a position to monitor their
progress.
The Company has developed a plan to determine whether its vendors,
distributors and leased facilities (all of which are referred to as "Third Party
Suppliers") are Year 2000 compliant. The plan includes the identification of
principal Third Party Suppliers, including those which are mission critical,
contact with those Third Party Suppliers to determine their level of Year 2000
compliance, review of materials provided or published by Third Party Suppliers
regarding their Year 2000 compliance efforts and, with respect to mission
critical Third Party Suppliers, some form of additional verification of
compliance and internal testing. The Company initiated this process before the
end of calendar year 1998. Alternative Third Party Suppliers will be identified
and contingency plans developed for those not expected to be Year 2000 compliant
by mid-calendar year 1999. The Company believes it has a limited number of
mission critical Third Party Suppliers and believes that there are multiple
alternatives for its mission critical requirements, including handling certain
of these functions internally.
The Company has completed the assessment of its principal internal
information technology systems for Year 2000 compliance. With respect to these
eight principal systems, the Company has upgraded five of these systems with
Year 2000 compliant versions. The Company is replacing one of the remaining
three systems with new third party software, and is currently implementing that
system. The Company has determined that the system to be replaced could be made
Year 2000 compliant in the event the replacement system cannot be implemented in
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a timely fashion. Using internal personnel, the Company plans to modify the two
remaining internal systems to make these Year 2000 compliant. The Company has
started the modification process and has scheduled completion by mid-calendar
year 1999. The Company actively monitors progress on these project. In the event
that these systems cannot be modified in a timely fashion, the Company will
concentrate its efforts on mission critical revisions. The Company also believes
that certain of these systems could be replaced with new third party systems
which are Year 2000 compliant, although the time required to implement a new
system or the additional costs could be significant.
The Company has engaged a third party to assess the Company's personal
computer and network hardware and software for Year 2000 compliance and to help
develop a plan to make necessary modifications. The assessment began in the
fourth quarter of calendar year 1998. Completion of this project is scheduled
for the first half of calendar year 1999. Since the Company continuously
upgrades its hardware and software as part of its normal business, much of the
older hardware and software is likely to be eliminated prior to the Year 2000.
The Company has contingency plans in the event that these systems cannot be
remediated in a timely fashion through the replacement of older equipment.
A failure of one or more of these internal systems to become Year 2000
compliant, particularly the Company's principal internal information technology
systems, could require the Company to manually process information or could
prevent or limit access to mission critical information.
The Company's non-information technology systems consist principally
of telephone and data communication systems. The Company has completed the
initial assessment of these systems for Year 2000 compliance. Remediation has
begun and is scheduled for completion in the first half of calendar year 1999.
If the Company's telephone and data communications systems cannot be remediated
to become compliant, the Company will be required to replace those systems
before the end of calendar year 1999. The Company believes that there are
alternative providers of these systems which are Year 2000 compliant, but to
date it has not explored the time required to implement a new system or the
additional cost to the Company.
Most of the costs incurred by the Company to date on Year 2000
compliance issues have been internal staff costs and costs relating to normal
product upgrades. The Company estimates that it has spent approximately $600,000
in the current fiscal year through December 31, 1998 on personnel, upgrades and
consulting, which are directly or indirectly related to Year 2000 compliance.
The Company presently expects that its future costs relating to Year 2000
compliance for periods after December 31, 1998, including replacement systems,
will be between $0.7 million and $1.9 million. The Company would have incurred
many of the costs for these efforts in any event because of the normal process
of product and equipment upgrades. These cost estimates are subject to a number
of uncertainties, which could result in actual costs exceeding the estimated
amounts including, but not limited to, undetected errors or defects discovered
in connection with the remediation process or unanticipated difficulties in
completing the remediation in a timely fashion, resulting in the need to either
replace more of the systems than originally expected and/or hire more personnel
or third party firms to assist in the remediation process.
Some commentators have stated that a significant amount of litigation
will arise out of Year 2000 compliance issues. While the Company believes that
its efforts to address Year 2000 issues for which it is responsible should be
successful, a description of its most reasonably likely worst case Year 2000
scenarios have been described above. In addition, it is possible that there will
be undetected errors or defects associated with Year 2000 date functions in the
Company's current products and internal systems or those of its key vendors. If
any of the foregoing scenarios should occur, it is possible that the Company
could be involved in litigation. Further, although the Company does not believe
that it has any obligation to continue to support prior versions of its products
after the termination of maintenance contracts covering those products, nor any
obligation to make prior versions of its products, including custom applications
written by the Company, Year 2000 compliant, it is possible that its customers
may take a contrary position and initiate litigation. Because of the
unprecedented nature of the litigation in this area, it is uncertain how the
Company may be affected by it. In the event of such litigation or the occurrence
of one or more of the most reasonably likely worst case scenarios, the Company's
revenues, net income or financial condition could be materially adversely
affected.
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
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in customer requirements, including the impact on the Company's revenues of the
release by Microsoft of an OLAP database; the impact of recent transitional
changes in North American and international management and sales personnel;
cancellations of maintenance and support agreements; software defects; changes
in operating expenses; variations in the amount of cost savings anticipated to
result from cost reduction actions; the impact of cost reduction actions on the
Company's operations; fluctuations in foreign exchange rates; the impact of
undetected errors or defects associated with Year 2000 date functions on the
Company's current products and internal systems; the ability of the Company to
generate sufficient future taxable income or to execute available tax strategies
required to realize deferred tax assets; economic conditions generally or in
specific industry segments; risks inherent in seeking and consummating
acquisitions, including the diversion of management attention to the
assimilation of the operations and personnel of acquired businesses, the ability
of the Company to successfully integrate acquired businesses and the impact on
the Company's results and financial condition from debt issued, liabilities
acquired and additional expenses incurred in connection with such acquisitions.
In addition, a significant portion of the Company's revenue in any quarter is
typically derived from non-recurring license fees, a substantial portion of
which is booked in the last month of a quarter. Since the purchase of the
Company's products is relatively discretionary and generally involves a
significant commitment of capital, in the event of any downturn in any potential
customer's business or the economy in general, purchases of the Company's
products may be deferred or canceled. Further, the Company's expense levels are
based, in part, on its expectations as to future revenue and a significant
portion of the Company's expenses do not vary with revenue. As a result, if
revenue is below expectations, results of operations are likely to be materially
adversely affected.
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on November 23,
1998. There were two matters voted on, which were the election of nine
directors and approval of the 1998 Global Employee Stock Option Plan. The
following table sets forth the results of the matters voted on. All director
nominees were elected and the 1998 Global Employee Stock Option Plan was
approved.
Votes For Votes Against Abstained Broker Non-Votes
--------- ------------- --------- ----------------
Election of Directors
Nominees:
Geoffrey B. Bloom 9,093,625 - 318,588 -
Daniel T. Carroll 9,100,165 - 312,048 -
Richard L. Crandall 9,100,315 - 311,898 -
Stanley R. Day 9,082,975 - 329,238 -
W. John Driscoll 9,098,435 - 313,778 -
Dennis G. Ganster 9,110,179 - 302,034 -
Kathryn A. Jehle 9,107,418 - 304,795 -
Alan G. Merten 9,091,248 - 320,965 -
John F. Rockart 9,106,225 - 305,988 -
Approval of 1998 Global
Employee Stock Option Plan 4,001,832 501,671 129,058 4,779,652
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit included with this Form 10-Q is set forth on the Index to
Exhibits.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended December
31, 1998.
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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 16, 1999 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
- ----------- -----------
27 Financial Data Schedule
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