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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 SEPTEMBER 30, 1999
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------------------- -----------------
COMMISSION FILE NUMBER 0-4096
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COMSHARE, INCORPORATED
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1804887
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 BRIARWOOD CIRCLE, ANN ARBOR, MICHIGAN 48108
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (734) 994-4800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of SEPTEMBER 30, 1999.
OUTSTANDING AT
CLASS OF COMMON STOCK SEPTEMBER 30, 1999
--------------------- ------------------
$1.00 PAR VALUE 9,642,033 SHARES
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COMSHARE, INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statement of Operations
for the Three Months Ended September 30, 1999 and 1998..........3
Consolidated Statement of Comprehensive Income
For the Three Months Ended September 30, 1999 and 1998..........4
Condensed Consolidated Balance Sheets as of
September 30, 1999 and June 30, 1998............................5
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended September 30, 1999 and 1998..................7
Notes to Condensed Consolidated Financial Statements................8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................18
SIGNATURE..............................................................19
INDEX TO EXHIBITS......................................................20
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PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited; in thousands, except per share data)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
REVENUE
Software licenses $ 5,302 $ 6,126
Software maintenance 5,748 7,114
Implementation, consulting
and other services 3,456 3,919
-------- --------
TOTAL REVENUE 14,506 17,159
Costs and expenses
Selling and marketing 5,817 6,938
Cost of revenue and support 5,238 6,406
Internal research and product development 2,150 2,247
General and administrative 1,479 1,977
-------- --------
TOTAL COSTS AND EXPENSES 14,684 17,568
-------- --------
LOSS FROM OPERATIONS (178) (409)
OTHER INCOME (EXPENSE)
Interest income 386 569
Interest expense (22) (87)
Exchange gain (loss) (104) 7
-------- --------
TOTAL OTHER INCOME 260 489
INCOME BEFORE TAXES 82 80
Provision for income taxes 30 28
-------- --------
NET INCOME $ 52 $ 52
======== ========
SHARES USED IN BASIC EPS COMPUTATION 9,642 9,998
======== ========
SHARES USED IN DILUTED EPS COMPUTATION 9,642 9,998
======== ========
NET INCOME PER COMMON SHARE -
BASIC AND DILUTED EPS $ 0.01 $ 0.01
======== ========
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited, in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
Net income $ 52 $ 52
Other comprehensive income (loss):
Currency translation adjustment (32) 377
---- ----
COMPREHENSIVE INCOME $ 20 $429
==== ====
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, JUNE 30,
1999 1999
---- ----
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents $26,715 $31,794
Accounts receivable, net 18,469 14,723
Deferred income taxes 654 654
Prepaid expenses and other current assets 2,322 5,003
------- -------
TOTAL CURRENT ASSETS 48,160 52,174
Property and equipment, at cost
Computers & other equipment 11,245 11,099
Leasehold improvements 3,039 2,893
------- -------
14,284 13,992
Less - Accumulated depreciation 11,831 11,354
------- -------
Property and equipment, net 2,453 2,638
Goodwill, net 1,311 1,330
Deferred income taxes 6,094 5,067
Other assets 2,179 2,246
------- -------
TOTAL ASSETS $60,197 $63,455
======= =======
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, JUNE 30,
1999 1999
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited) (audited)
CURRENT LIABILITIES
Current portion of long-term debt $ 753 $ 882
Accounts payable 5,346 8,293
Accrued liabilities:
Payroll 1,767 2,423
Taxes 1,205 810
Other 5,760 3,701
-------- --------
Total Accrued Liabilities 8,732 6,934
Deferred revenue 10,401 11,611
-------- --------
TOTAL CURRENT LIABILITIES 25,232 27,720
Long-term debt 691 1,198
Other liabilities 2,988 3,271
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, no par value;
authorized 5,000,000 shares; none issued -- --
Common stock, $1.00 par value;
authorized 20,000,000 shares; outstanding
9,642,033 shares as of September 30, 1999
and 9,642,033 shares as of June 30, 1999 9,642 9,642
Capital contributed in excess of par value 38,650 38,650
Retained deficit (8,434) (8,486)
Accumulated other comprehensive income:
Pension liability, net of tax (3,262) (3,262)
Cumulative translation adjustment (4,912) (4,880)
-------- --------
31,684 31,664
Less - Notes receivable 398 398
-------- --------
TOTAL SHAREHOLDERS' EQUITY 31,286 31,266
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,197 $ 63,455
======== ========
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited; in thousands)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net income $ 52 $ 52
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 385 539
Changes in operating assets and liabilities:
Accounts receivable (3,452) 2,168
Prepaid expenses and other assets (108) (572)
Accounts payable (3,076) (1,896)
Accrued liabilities 1,747 (5,098)
Deferred revenue (1,360) (1,640)
Income taxes receivable 2,888 --
Deferred income taxes (1,027) --
Other liabilities (283) (232)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (4,234) (6,679)
INVESTING ACTIVITIES
Payments for property and equipment (79) (183)
Other (38) --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (117) (183)
FINANCING ACTIVITIES
Net borrowings (repayments) under debt agreements,
capital lease agreements and notes payable (684) 2,181
Common stock repurchased and retired -- (387)
Other -- 66
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (684) 1,860
Effect of exchange rate changes (44) (269)
-------- --------
NET DECREASE IN CASH (5,079) (5,271)
CASH AT BEGINNING OF PERIOD 31,794 49,102
-------- --------
CASH AT END OF PERIOD $ 26,715 $ 43,831
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 23 $ 42
======== ========
Cash paid for income taxes $ 168 $ 3,150
======== ========
See accompanying notes to condensed consolidated financial statements.
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COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - GENERAL INFORMATION
The condensed consolidated financial statements included herein have been
prepared by Comshare, Incorporated (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's most recent Annual Report on Form 10-K. Certain amounts in the fiscal
1999 financial statements have been reclassified to conform with fiscal 2000
presentations.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring items, required to present fairly its consolidated statement of
operations and the consolidated statement of comprehensive income for the three
months ended September 30, 1999 and 1998, the consolidated balance sheet as of
September 30, 1999 and the consolidated statement of cash flows for the three
months ended September 30, 1999 and 1998.
The results of operations for the three months ended September 30, 1999
and 1998 are not necessarily indicative of the results to be expected in future
quarters or the full fiscal year. The software industry is generally
characterized by seasonal trends.
NOTE B - COMPUTER SOFTWARE
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 various external
factors. In the last several years, product upgrades for the Company's products
have been released regularly with an almost continuous product development
cycle. This has reduced the time between establishing technological feasibility
and general release to the public. Based on these continuous product life
cycles, software costs qualifying for capitalization will be insignificant.
Accordingly, the Company has not capitalized any software development costs
during the three months ended September 30, 1999 and does not anticipate
capitalizing future software development costs.
NOTE C - BORROWINGS
The Company has a $10 million credit agreement which expires on September
30, 2001. Borrowings are secured by accounts receivable and the credit agreement
contains covenants regarding, among other things, earnings leverage, net worth
and payment of dividends. Under the terms of the credit agreement, the Company
is not permitted to pay cash dividends on its common stock. Borrowings under
this credit agreement were approximately $0.7 million and total available
borrowings were $10 million at September 30, 1999. Borrowings available at any
time are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash. At September 30, 1999, the interest rate on
borrowings denominated in Japanese yen and Swiss francs, which were used to
hedge receivables in those currencies, varied between 1.8% and 2.9%.
Separately, in August 1997, the Company's United Kingdom subsidiary
entered into a $1.2 million loan agreement, which matures on May 31, 2000. The
Company had outstanding borrowings of $0.3 million under this agreement at
September 30, 1999, which are classified as a capital lease. The interest rate
was 10.4% at September 30, 1999.
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COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE D - FINANCIAL INSTRUMENTS
The Company, at various times, enters into forward exchange contracts to
hedge certain exposures related to identifiable foreign currency transactions
that are relatively certain as to both timing and amount. Gains and losses on
the forward contracts are recognized concurrently with the gains and losses from
the underlying transactions. The forward exchange contracts used are classified
as "held for purposes other than trading." The Company does not use any other
types of derivative financial instruments to hedge such exposures, nor does it
use derivatives for speculative purposes. At September 30, 1999 and June 30,
1999, the Company had forward foreign currency exchange contracts outstanding of
approximately $1.4 million and $2.9 million (notional amounts), respectively,
denominated in foreign currencies. The contracts outstanding at September 30,
1999 mature at various dates through January 14, 2000 and are intended to hedge
various foreign currency commitments due from the Company's distributors. Due to
the short term nature of these financial instruments, the fair value of these
contracts is not materially different than their notional amounts at September
30, 1999 and June 30, 1999.
NOTE E - FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 137, a
deferral of SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Company has not yet adopted this
Statement, but is required to adopt the Statement for the fiscal year ended June
30, 2001. Management has not yet quantified the effect of adopting this
Statement.
NOTE F - SEGMENT REPORTING
The Company has only one reportable segment - the development, marketing
and support of client/server financial analytic applications software for
management planning and control. Revenue is derived from the licensing of
software and the provision of related services, that include product
implementation, consulting, training and support.
No single customer accounted for more that 10% of the Company's total
revenue in the three months ended September 30, 1999 and 1998. In addition, the
Company is not dependent on any single customer or group of customers.
Geographic segment information is as follows:
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COMSHARE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- --------
REVENUE FROM EXTERNAL CUSTOMERS:
United States $ 7,501 $ 8,352
United Kingdom 3,193 3,481
Other countries 3,812 5,326
-------- --------
TOTAL REVENUE $ 14,506 $ 17,159
======== ========
OPERATING INCOME:
United States $ (1,120) $ 92
United Kingdom 1,064 (332)
Other countries 2,611 2,608
-------- --------
Total operating income 2,555 2,368
Unallocated expenses (2,473) (2,288)
-------- --------
INCOME BEFORE TAXES $ 82 $ 80
======== ========
IDENTIFIABLE ASSETS:
United States $ 48,433 $ 52,038
United Kingdom and other countries 11,764 29,983
-------- --------
TOTAL IDENTIFIABLE ASSETS $ 60,197 $ 82,021
======== ========
Unallocated expenses consist of general corporate expenses, internal
research and product development expenses, interest expense and interest income.
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ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis sets forth information for the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998. This information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes thereto contained
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1999.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain financial data
as a percentage of total revenue.
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
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REVENUE
Software licenses 36.6% 35.7%
Software maintenance 39.6 41.5
Implementation, consulting and other services 23.8 22.8
----- -----
TOTAL REVENUE 100.0 100.0
COSTS AND EXPENSES
Selling and marketing 40.1 40.4
Cost of revenue and support 36.1 37.3
Internal research and product development 14.8 13.1
General and administrative 10.2 11.5
----- -----
TOTAL COSTS AND EXPENSES 101.2 102.3
LOSS FROM OPERATIONS (1.2) (2.3)
OTHER INCOME (EXPENSE)
Interest income 2.7 3.3
Interest expense (0.2) (0.5)
Exchange loss (0.7) --
----- -----
TOTAL OTHER INCOME 1.8 2.8
INCOME BEFORE TAXES 0.6 0.5
Provision for income taxes 0.2 0.2
----- -----
NET INCOME 0.4% 0.3%
===== =====
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REVENUE
THREE MONTHS ENDED PERCENT
SEPTEMBER 30, CHANGE
------------------------- ------------
1999 1998
---- ----
(in thousands)
REVENUE
Software licenses $ 5,302 $ 6,126 (13.5)%
Software maintenance 5,748 7,114 (19.2)
Implementation, consulting and other services 3,456 3,919 (11.8)
------- -------
TOTAL REVENUE $14,506 $17,159 (15.5)%
======= =======
Total revenue decreased 15.5% in the three months ended September 30,
1999, compared to the prior year, primarily due to the sale of the Company's
French and German operations and their conversion to distributorships during the
quarter ended December 31, 1998. As a result of the sales of these operations,
software licenses revenue, software maintenance revenue and implementation,
consulting and other services revenue decreased. Revenue for the three months
ended September 30, 1998, reflecting the Company's French and German operations
as distributors ("on a comparable basis"), was $16 million.
Software license fees were $5.3 million for the three months ended
September 30, 1999 and $5.8 million for the three months ended September 30,
1998, on a comparable basis. The decrease in license fees, on a comparable
basis, was primarily due to a decline in sales of the Company's older products,
which was partially offset by sales of newer products. License fees for
BudgetPLUS grew 76%, or $0.8 million, compared to the year ago quarter. In
addition, FDC license fees grew 26%, or $0.3 million and Decision license fees
grew 22%, or $0.3 million, compared to the year ago quarter.
Software maintenance revenue was $5.7 million for the three months ended
September 30, 1999 and $6.7 million for the same period a year ago, on a
comparable basis. The Company experienced growth in maintenance revenue from
newer products, primarily BudgetPLUS, offset by a decline in maintenance revenue
from older desktop products and mainframe software. Total mainframe software
maintenance revenue decreased 28% in the three months ended September 30, 1999
compared to last year, primarily due to expected mainframe maintenance
cancellations and continued migration to client/server platforms.
Implementation, consulting and other services revenue was $3.5 million
for the three months ended September 30, 1999 and 1998, on a comparable basis.
COSTS AND EXPENSES
THREE MONTHS ENDED PERCENT
SEPTEMBER 30, CHANGE
--------------------------- ----------
1999 1998
---- ----
(in thousands)
COST AND EXPENSES
Selling and marketing $ 5,817 $ 6,938 (16.2)%
Cost of revenue and support 5,238 6,406 (18.2)
Internal research and product development 2,150 2,247 (4.3)
General and administrative 1,479 1,977 (25.2)
------- -------
TOTAL COSTS AND EXPENSES $14,684 $17,568 (16.4)%
======= =======
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Total costs and expenses decreased 16.4% in the three months ended
September 30, 1999 compared to the prior year, primarily due to the Company's
sale of its French and German operations and their conversion to
distributorships during the quarter ended December 31, 1998. As a result of
these sales, all operating costs were favorably impacted. On a comparable basis,
total costs and expenses were $16.0 million for the three months ended September
30, 1998. The decrease from the same period one year ago is primarily due to
cost reduction actions taken to lower administrative and marketing costs and
reduced cost of sales due to improved distribution procedures.
OTHER INCOME AND EXPENSE
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
---- ----
(in thousands)
OTHER INCOME (EXPENSE)
Interest income $ 386 $ 569
Interest expense (22) (87)
Exchange gain (loss) (104) 7
----- -----
TOTAL OTHER INCOME $ 260 $ 489
===== =====
Lower average cash balances during the three months ended September 30,
1999 resulted in decreased interest income compared to the three months ended
September 30, 1998.
FOREIGN CURRENCY
For the three months ended September 30, 1999, 48.3% of the Company's
total revenue was from outside North America compared with 51.3% for the three
months ended September 30, 1998. 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 months ended September 30, 1999, foreign currency fluctuations did
not have a material impact on the Company's revenues, operating expenses or net
income.
The Company had several forward exchange contracts totaling a notional
amount of $1.4 million, outstanding at September 30, 1999. See Note D of Notes
to Condensed Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
The effective income tax rate in the three months ended September 30,
1999 and 1998 was approximately 35%, as the Company recorded a provision for
income taxes on its operating income in the first quarter of fiscal 2000 and
fiscal 1999.
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
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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 September 30, 1999, cash and cash equivalents were $26.7 million,
compared with cash and cash equivalents of $31.8 million at June 30, 1999. The
decrease in cash and cash equivalents is principally due to increased accounts
receivables, primarily due to the slow payment by several foreign distributors
during the three months ended September 30, 1999.
Net cash used in operating activities was $4.2 million in the three
months ended September 30, 1999, compared with $6.7 million in the three months
ended September 30, 1998. The decrease in net cash used in operating activities
was primarily due an income tax refund of $1.9 million, decreased accounts
payable and increased accounts receivable, during the three months ended
September 30, 1999.
Net cash used in investing activities was $0.1 million in the three
months ended September 30, 1999, compared with $0.2 million in the three months
ended September 30, 1998. The Company purchases most of its computer equipment
under operating leases. At September 30, 1999, the Company did not have any
material capital expenditure commitments.
Net cash used in financing activities was $0.7 million in the three
months ended September 30, 1999, compared with net cash provided by financing
activities of $1.9 million in the same period one year ago. The net cash used in
financing activities was primarily due to the repayment of borrowings under debt
agreements and capital leases compared to net borrowings during the quarter
ended September 30, 1998.
Total assets were $60.2 million at September 30, 1999, compared with
total assets of $63.5 million at June 30, 1999. Working capital as of September
30, 1999 was $22.9 million, compared with $24.5 million as of June 30, 1999. The
decrease in total assets from June 30, 1999 to September 30, 1999 was primarily
due to the decline in cash and cash equivalents during the three months ended
September 30, 1999.
The Company has a $10 million credit agreement which expires on September
30, 2001. Borrowings are secured by accounts receivable and the credit agreement
contains covenants regarding, among other things, earnings leverage, net worth
and payment of dividends. Under the terms of the credit agreement, the Company
is not permitted to pay cash dividends on its common stock. Borrowings under
this credit agreement were approximately $0.7 million and total available
borrowings were $10 million at September 30, 1999. Borrowings available at any
time are based on the lower of $10 million or a percentage of worldwide eligible
accounts receivable and cash. At September 30, 1999, the interest rate on
borrowings denominated in Japanese yen Swiss francs, which were used to hedge
receivables in those currencies, varied between 1.8% and 2.9%.
Separately, in August 1997, the Company's European subsidiary entered
into a $1.2 million loan agreement, which matures on May 31, 2000. The Company
had outstanding borrowings of $0.3 million under this agreement at September 30,
1999, which are classified as a capital lease. The interest rate was 10.4% at
September 30, 1999.
The Company believes that the combination of present cash balances and
amounts available under credit facilities will be sufficient to meet the
Company's currently anticipated cash requirements for at least the next twelve
months. The foregoing statement is a "forward looking statement" within the
meaning of the Securities and Exchange Act of 1934, as amended. The extent to
which such sources will be sufficient to meet the Company's anticipated cash
requirements is subject to a number of uncertainties, including the ability of
the Company's operations to generate sufficient cash to support operations, and
other uncertainties described in "Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Safe Harbor Statement."
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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 September 30, 1999 and June 30, 1999, the Company had forward
contracts of approximately $1.4 million and $2.9 million (notional amounts),
respectively, denominated in foreign currencies. The contracts outstanding at
September 30, 1999 mature through January 14, 2000 and are intended to hedge
various foreign currency commitments due from the Company's distributors. Due to
the short term nature of these financial instruments, the fair value of these
contracts is not materially different than their notional amounts at September
30, 1999 and June 30, 1999.
Gains and losses on the forward contracts are largely offset by gains and
losses on the underlying exposure. The Company conducts business in
approximately 13 foreign currencies, predominately British pounds and Japanese
yen. A hypothetical 10 percent appreciation of the U.S. dollar from September
30, 1999 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 September 30, 1999 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.
YEAR 2000
The following discussion contains information regarding Year 2000
readiness, and constitutes a "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Information and Readiness Disclosure Act of 1998.
Many existing computer programs use only the last two digits to refer to
a year. Therefore, these computer programs do not properly recognize a year that
begins with "20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results. Programs that will operate
in the Year 2000 unaffected by the change in year from 1999 to 2000 are referred
to herein as "Year 2000 compliant". Certain portions of the discussion set forth
below contain "forward looking statements" within the meaning of the Securities
and Exchange Act of 1934, as amended, including, but not limited to, those
relating to the Year 2000 compliance of the Company's products and systems,
future costs to remediate Year 2000 issues, the timetable in which such
remediation is to occur, the alternatives available to the Company to become
fully Year 2000 compliant, the Company's mission critical requirements and the
impact on the Company of an inability of it or its key suppliers to become fully
Year 2000 compliant. Actual results could differ materially from those in the
forward looking statement due to a number of uncertainties set forth below.
The Company has tested and modified the most current versions of its
products to be Year 2000 compliant. The Company believes that all of its current
client/server and web-architected products are Year 2000 compliant (including
BudgetPLUS, Decision, DecisionWeb and FDC). The Company has released new
versions of its principal mainframe and desktop products that it believes are
Year 2000 compliant. Any issues that are identified are addressed on an ongoing
basis. The Company has no plans to make earlier versions of its products Year
2000 compliant and has made substantial efforts to contact customers informing
them of this decision.
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Not all of the Company's customers are running product versions that are
Year 2000 compliant. The Company has encouraged and 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 direct
customers that have maintenance contracts, the Company has proactively shipped
them the latest version of its products to ensure their compliance, and is
encouraging its distributors to do the same in indirect territories. A
significant portion of the Company's maintenance revenue in fiscal 1999 was
derived from customers running versions of the Company's products which are not
Year 2000 compliant; however, customers paying maintenance are entitled to
obtain Year 2000 compliant versions of licensed products at no additional cost.
Certain of the Company's older products will not be made Year 2000
complaint in any version. The Company has ceased providing further maintenance
services for those products and has not renewed maintenance contracts with
customers using these products for periods after September, 1999.
The Company incorporates a number of third party software tools into its
products. The Company has performed limited testing of the current versions of
these software tools as part of the testing of its products and believes they
are Year 2000 compliant. In addition, with respect to certain of these software
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 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 also plans
to provide extended support for its customers during early January 2000.
The Company has developed and implemented 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. Contingency plans have been or are
being developed for those not expected to be Year 2000 compliant. The Company
believes it has a limited number of mission critical Third Party Suppliers for
which it can reasonably arrange alternatives (excluding utilities and similar
providers) and believes that there are multiple alternatives for most of its
mission critical requirements, including handling certain of these functions
internally. The Company has developed a disaster contingency plan for its
corporate headquarters to maintain communications, computer and network access
and limited helpline support for its customers in the event of a short-term
power failure. In the event of a long-term power or communications failure, the
failure of a mission critical application or the unavailability of a principal
Third Party Supplier, the Company's operations could be materially, adversely
affected.
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 or replaced all of these
systems with Year 2000 compliant versions.
The Company engaged a third party to assess the Company's personal
computer and network hardware and software for Year 2000 compliance and to help
develop a plan to make necessary modifications. The assessment began in the
fourth quarter of calendar year 1998 and was completed in the first half of
calendar year 1999. Remediation of any non-compliant personal computer and
network hardware and software was substantially completed in the first half of
calendar year 1999. The Company believes that all mission critical desktop and
network systems have now been remediated and are currently Year 2000 compliant,
but the Company has contingency plans in the event that these systems encounter
problems.
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A failure of one or more of these internal systems to be Year 2000
compliant, particularly the Company's principal internal information technology
systems, could require the Company to manually process information or could
prevent or limit access to mission critical information.
The Company's non-information technology systems consist principally of
telephone and data communication systems. The Company has completed the
assessment of these systems for Year 2000 compliance and remediation has been
completed.
Most of the costs incurred by the Company to date on Year 2000 compliance
issues have been internal staff costs and costs relating to normal product
upgrades, which would have been incurred in any event. The Company estimates
that it has spent approximately $1.4 million in fiscal 1999 and less than $0.1
million in the first quarter of fiscal 2000 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 September 30, 1999, including replacement systems,
will be approximately $0.2 million. These cost estimates are subject to a number
of uncertainties, which could result in actual costs exceeding the estimated
amounts including, but not limited to, undetected errors or defects discovered
in connection with the remediation process or operation of the Company's systems
after December 31, 1999, resulting in the need to either replace more of the
systems than originally expected and/or hire more personnel or third party firms
to assist in the remediation process, or the failure of a Third Party Supplier
to become Year 2000 compliant, resulting in the need for the Company to
implement contingency plans, the cost of which are not included in the above
estimates.
Some commentators have stated that a significant amount of litigation
will arise out of Year 2000 compliance issues. While the Company believes that
its efforts to address Year 2000 issues for which it is responsible should be
successful, a description of its most reasonably likely worst case Year 2000
scenarios have been described above. In addition, it is possible that there will
be undetected errors or defects associated with Year 2000 date functions in the
Company's current products and internal systems or those of its key vendors. If
any of the foregoing scenarios should occur, it is possible that the Company
could be involved in litigation. Further, although the Company does not believe
that it has any obligation to continue to support prior versions of its products
after the termination of maintenance contracts covering those products, nor any
obligation to make prior versions of its products, including custom applications
written by the Company, Year 2000 compliant, it is possible that its customers
may take a contrary position and initiate litigation. Because of the
unprecedented nature of the litigation in this area, it is uncertain how the
Company may be affected by it. In the event of such litigation or the occurrence
of one or more of the most reasonably likely worst case scenarios, the Company's
revenues, net income or financial condition could be materially adversely
affected.
SAFE HARBOR STATEMENT
Certain information in this Form 10-Q Report contains "forward looking
statements" within the meaning of the Securities Exchange Act of 1934, as
amended, including those concerning the Company's future results, strategy and
product releases. Actual results could differ materially from those in the
forward looking statements due to a number of uncertainties, including, but not
limited to, the demand for the Company's products and services; the size, timing
and recognition of revenue from significant orders; increased competition and
pricing pressures from competitors; the Company's success in and expense
associated with developing, introducing and shipping new products; new product
introductions and announcements by the Company's competitors; changes in Company
strategy; product life cycles; the cost and continued availability of third
party software and technology incorporated into the Company's products; the
impact of rapid technological advances, evolving industry standards and changes
in customer requirements, including the impact on the Company's revenues of
Microsoft's OLAP database; the impact of recent changes in North American and
international sales personnel and the overall competition for key employees;
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 the Year 2000 date functions on the
Company's current products and internal systems; the ability of the Company to
generate sufficient future taxable income or to execute available tax strategies
required to realize deferred tax assets; economic conditions generally or in
specific industry segments;
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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 cancelled.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations"
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) The 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 September
30, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: NOVEMBER 9, 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
- ----------- -----------
4.01 Second Amendment and Waiver to Credit Agreement
10.01 First Amendment to the Comshare, Incorporated Employee Stock Purchase
Plan
10.02 Second Amendment to the Comshare, Incorporated Employee Stock Purchase
Plan
10.03 Third Amendment to the Comshare, Incorporated Employee Stock Purchase
Plan
10.04 First Amendment to the Comshare, Incorporated 1998 Global Employee
Stock Option Plan
10.05 First Amendment to the Comshare, Incorporated Directors' Stock Option
Plan
27 Financial Data Schedule
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