<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 33-63335
[COMSHARE LOGO]
2,170,000 SHARES
COMMON STOCK
Of the 2,170,000 shares of Common Stock offered hereby, 1,125,000 shares
are being sold by Comshare, Incorporated ("Comshare" or the "Company") and
1,045,000 shares are being sold by the Selling Shareholders. The Company will
not receive any of the proceeds from the sale of shares by the Selling
Shareholders. See "Selling Shareholders." The Common Stock trades on the Nasdaq
National Market under the symbol "CSRE." On November 21, 1995, the last reported
sale price for the Common Stock was $21.75, reflecting the recently declared
stock split described below. See "Price Range of Common Stock."
The Company's Board of Directors recently declared a three-for-two stock
split effective November 20, 1995. All share and per share information in this
Prospectus reflect the stock split. Purchasers of Common Stock in this Offering
will not be entitled to receive shares issued in the stock split in respect of
any shares so purchased.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS(2)
<S> <C> <C> <C> <C>
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Per Share......................... $21.00 $1.21 $19.79 $19.79
- --------------------------------------------------------------------------------------------------------------
Total(3).......................... $45,570,000 $2,625,700 $22,263,750 $20,680,550
==============================================================================================================
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(1) Before deducting expenses payable by the Company estimated at $233,000.
(2) Before deducting expenses payable by the Selling Shareholders estimated at
$217,000.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to an additional 168,750 shares and 156,750
shares of Common Stock, respectively, at the Price to Public shown above
less the Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Shareholders will be $52,405,500, $3,019,555,
$25,603,313 and $23,782,632, respectively. See "Underwriting."
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The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company, L.P. ("Robertson, Stephens
& Company"), San Francisco, California, on or about November 28, 1995.
ROBERTSON, STEPHENS & COMPANY
VOLPE, WELTY & COMPANY
THE CHICAGO CORPORATION
The date of this Prospectus is November 22, 1995.
<PAGE> 2
A diagram illustrates the process whereby data is extracted from
various databases by data extraction tools contained in Comshares products and
delivered to the desktop by a range of client front-ends.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE
MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE
THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND
SELLING GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON NASDAQ
IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE
"UNDERWRITING."
<PAGE> 3
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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PAGE
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Available Information................................................................. 3
Incorporation of Certain Documents by Reference....................................... 4
Summary............................................................................... 5
Risk Factors.......................................................................... 7
Use of Proceeds....................................................................... 14
Price Range of Common Stock........................................................... 14
Dividend Policy....................................................................... 14
Capitalization........................................................................ 15
Selected Consolidated Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 17
Business.............................................................................. 33
Management............................................................................ 48
Selling Shareholders.................................................................. 51
Description of Capital Stock.......................................................... 54
Shares Eligible for Future Sale....................................................... 56
Underwriting.......................................................................... 57
Legal Matters......................................................................... 59
Experts............................................................................... 59
Additional Information................................................................ 59
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
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ARTHUR, Commander Budget, Commander OLAP, Commander Decision, Commander
Execu-View Server, Commander FDC, Commander NewsAlert and Commander Prism are
trademarks of Comshare. Microsoft is a registered trademark and Windows is a
trademark of Microsoft Corporation. This Prospectus also includes other
trademarks of Comshare and trademarks of companies other than Comshare.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and the rules and regulations
thereunder, and in accordance therewith files reports, proxy statements, and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed by the
Company can be inspected and copied at the Commission's Public Reference Section
at 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the Regional
Offices of the Commission located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can be obtained by mail from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
The Common Stock of the Company is quoted on the Nasdaq National Market.
Reports, proxy and information statements and other information concerning the
Company may be inspected at the offices of Nasdaq Operations at 1735 K Street,
N.W., Washington, D.C. 20006.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference: (i) the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995, as
filed with the Commission on September 28, 1995, (ii) the Company's Annual
Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended June 30, 1995,
as filed with the Commission on October 2, 1995, (iii) the Company's Annual
Report on Form 10-K/A (Amendment No. 2) for the fiscal year ended June 30, 1995,
as filed with the Commission on October 11, 1995, (iv) the Company's Annual
Report on Form 10-K/A (Amendment No. 3) for the fiscal year ended June 30, 1995,
as filed with the Commission on November 9, 1995, (iv) the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995, as filed with the
Commission on October 24, 1995, (v) the Company's Report on Form 8-K, as filed
with the Commission on November 9, 1995 and (vi) the description of the
Company's Common Stock contained in the Prospectus forming a part of the
Company's Registration Statement on Form S-1 (no. 2-29663) (incorporated by
reference into the Company's Registration Statement on Form 10 under the
Exchange Act, filed in October 1969, as amended by Item 4 of the Company's
Report on Form 8-K, filed in January 1973, and Item 5 of the Company's Report on
Form 8-K, filed in September 1988).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, after the date of this Prospectus and prior to the
termination of this Offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request, a copy of any or all of
the foregoing documents incorporated by reference in this Prospectus. Requests
for such documents should be directed to: Comshare, Incorporated, 555 Briarwood
Circle, Ann Arbor, MI 48108, Attention: Ricia Hughes, telephone (313) 994-4800.
The information relating to the Company contained in this Prospectus does not
purport to be comprehensive and should be read together with the information
contained in the incorporated documents.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and Consolidated Financial Statements and
Notes thereto, appearing elsewhere in the Prospectus. Unless otherwise noted,
all financial information, share and per share data in this Prospectus have been
adjusted to reflect a three-for-two stock split effective on November 20, 1995.
THE COMPANY
Comshare develops, markets and supports client/server decision support
applications software designed to improve business analysis, planning, reporting
and decision making. The Company's software products enable the enterprise-wide
integration and transformation of data into business-critical information by
leveraging on-line analytical processing ("OLAP") technologies to provide
customers with robust multidimensional analysis capabilities. More specifically,
the Company focuses on delivering complete decision support solutions by
targeting specific industry and functional markets -- currently, executive
information systems ("EIS"), financial reporting and retail decision support --
and by providing implementation, consulting, training and support expertise in
these markets. Such complete decision support solutions permit the easy
implementation and adoption of the Company's software applications throughout an
enterprise, thus enabling end-users to make better and faster decisions.
To succeed in today's environment of intensifying global competition,
organizations must seek new ways of making faster and more informed decisions.
Specific products that have been used to automate decision support activities
include spreadsheets, relational database management systems ("RDBMSs"), data
warehouses, query and reporting tools and analysis modules on transaction
processing-based applications. While each performs specific functions, none
possesses the full range of features which assist an end-user or an organization
to transform data into business-critical information. For example, a business
professional may wish to analyze the profitability of a customer from several
perspectives, or dimensions, such as channel, geography, sales representative,
fiscal period or budget versus actual. However, these traditional technology
approaches to decision support do not readily provide such multidimensional
analysis capability.
Recently, OLAP has emerged as a technology capable of integrating,
organizing and presenting historical, as well as projected, data located
throughout an enterprise on a multidimensional basis. OLAP solutions permit
multidimensional views of data, providing businesses with the robust calculation
capabilities they require to transform data into information that facilitates
decision making. More specifically, OLAP software enables end-users to rapidly
understand data relationships by permitting the multidimensional analysis of
large amounts of data organized consistent with the end-user's perception of the
business (e.g., sales by region, by channel, by budget versus actual).
Leveraging OLAP technology, the Company's complete decision support
solutions provide specific industry or functional application and customer
service expertise. The Company designs its software products to access data
located in spreadsheets, RDBMSs, data warehouses, legacy systems and other data
repositories so that end-users can extract and analyze data located throughout
the enterprise for more informed decision making. In addition, the Company's
internally developed information visualizers and interfaces to popular front-end
applications enable end-users to quickly manipulate and analyze this data.
Moreover, the Company's products permit quick, enterprise-wide adoption through
their availability on popular client/server platforms (Windows on the client and
Windows NT and OS/2 on the server).
The Company markets its products through a direct sales force in the United
States, Canada, United Kingdom, France, Germany and Australia and has an
extensive agent/distributor network in 34 other countries. The Company has
implemented its client/server and mainframe decision support application
software, and is currently providing maintenance, at more than 3,000 corporate
and public sector customer sites. The Company has customers in the
communications, financial services, health care, retail and transportation
industries, including AT&T Corporation, Chase Manhattan Corporation, Johnson &
Johnson, Inc., NIKE, Inc. and TRW Inc.
The Company was incorporated in Michigan in 1966. Its executive offices are
located at 555 Briarwood Circle, Ann Arbor, Michigan 48108, and its telephone
number is (313) 994-4800.
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THE OFFERING
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Common Stock Offered by the Company....................... 1,125,000 shares
Common Stock Offered by the Selling Shareholders.......... 1,045,000 shares
Common Stock to be Outstanding after the Offering......... 9,365,273 shares(1)
Use of Proceeds........................................... To repay bank indebtedness, and
for working capital and general
corporate purposes.
Nasdaq National Market Symbol............................. CSRE
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SUMMARY CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
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THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
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1993 1994 1995 1994 1995
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Software licenses......................... $ 40,397 $ 37,871 $ 49,294 $10,006 $13,920
Software maintenance...................... 43,064 41,625 36,649 8,972 9,015
Implementation, consulting and other
services............................... 21,733 17,130 22,415 5,180 5,718
-------- ------- -------- ------- -------
Total revenue.......................... 105,194 96,626 108,358 24,158 28,653
Income (loss) from operations............... (1,271) 1,648 2,485 1,418 2,628
Net income (loss)........................... (1,763) 222 5,328 751 1,510
Net income (loss) per common share.......... $ (0.22) $ 0.03 $ 0.63 $ 0.09 $ 0.17
Weighted average number of common and
dilutive common equivalent shares......... 7,978 8,234 8,398 8,235 8,730
</TABLE>
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SEPTEMBER 30, 1995
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ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Cash................................................................ $ 2,023 $ 19,392
Total assets........................................................ 81,376 98,745(3)
Long-term debt...................................................... 4,662 --
Total shareholders' equity.......................................... $34,354 $ 56,385(3)
</TABLE>
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(1) Based on the number of shares outstanding as of September 30, 1995. Excludes
828,375 shares of Common Stock issuable upon the exercise of stock options
outstanding as of September 30, 1995, and approximately 9,870 shares
employees have elected to purchase under the Employee Stock Purchase Plan.
(2) Adjusted to reflect the sale of 1,125,000 shares of Common Stock offered by
the Company hereby at the public offering price of $21.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
(3) Does not reflect a non-cash charge of $23.2 million recorded by the Company
in the three months ended December 31, 1995 to write off certain capitalized
software, which the Company estimates will reduce net income in such quarter
by $15.5 million after taxes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Events." As adjusted
to give effect to this write-off and the Offering, total assets and total
shareholders' equity would have been $82.9 million and $40.9 million,
respectively, at September 30, 1995.
Unless otherwise noted, all financial information, share and per share data
in this Prospectus (i) have been adjusted to reflect a three-for-two split of
the Common Stock effective on November 20, 1995, and (ii) assume no exercise of
the Underwriters' over-allotment option.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; FUTURE OPERATING RESULTS UNCERTAIN
The Company has experienced and may in the future experience significant
fluctuations in revenue and operating results from quarter to quarter and from
year to year due to a combination of factors, including: 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; cancellations of maintenance and support
agreements; software defects; changes in operating expenses; fluctuations in
foreign exchange rates; and economic conditions generally or in specific
industry segments. In addition, revenue and income from operations may fluctuate
due to the mix of products and services sold and the mix of distribution
channels employed. Further, the Company's results of operations reflect seasonal
trends, and the Company's business, results of operations and financial
condition may be affected by such trends in the future. As a result of all of
these factors, there can be no assurance that the Company will remain profitable
on a quarterly or annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's future revenues are difficult to predict. This is due in part
to the fact that a significant portion of the Company's revenue in any quarter
is typically derived from non-recurring license fees, and the timing of orders
for the Company's products is subject to delay for a number of reasons,
including factors beyond the Company's control. The Company typically ships its
products shortly after receipt of orders, and, consequently, order backlog at
the beginning of any quarter has in the past represented only a small portion of
that quarter's expected revenue. As a result, license revenue in any quarter is
substantially dependent on orders booked and shipped in that quarter.
Historically, the Company has often recognized a substantial portion of its
software license revenue in the last month of a quarter. The Company believes
that the purchase of its products is relatively discretionary and generally
involves a significant commitment of capital. As a result of these factors, 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, which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
In addition, a significant portion of the Company's annual revenue is
derived from ongoing annual maintenance contracts, including contracts relating
to the Company's mainframe applications still in use. Although mainframe
maintenance revenue is expected to decline in future periods, if such decline
occurs more rapidly than is anticipated, the Company's revenue, profits and cash
flow from operations will be at lower levels than are currently anticipated
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
Further, the Company's expense levels are based, in part, on its
expectations as to future revenue. If revenue is below expectations, results of
operations are likely to be materially adversely affected. Net income may also
be disproportionately affected by a reduction in revenue, because a significant
portion of the Company's expenses do not vary with revenue. The Company may also
choose to reduce prices or increase spending in response to competition or to
pursue new market opportunities, either of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and that
such comparisons should not be relied upon as indications of future performance.
Further, the Company has in recent periods experienced significant percentage
growth in client/server license revenue, but such rate of growth is not
necessarily
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indicative of future performance. In addition, it is possible that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, or in the event that
adverse conditions prevail or are perceived to prevail generally or with respect
to the Company's business, the price of the Company's Common Stock would likely
be materially adversely affected. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The client/server applications software market, including the market for
decision support software, is intensely competitive, highly fragmented and
subject to rapid change and evolving industry standards. Because the Company
offers multiple products, the Company competes with a variety of other companies
depending on the target market for their applications software products. In the
EIS market, the Company competes primarily with Oracle Corporation, which
recently purchased Express software from Information Resources, Inc.;
Information Resources, Inc., which retained rights to Express software for
certain applications; The Dun and Bradstreet Corporation, which purchased Pilot
Software; and certain other software vendors. In the financial reporting
applications market, the Company's principal competitor is Hyperion Software
Corporation, which is generally recognized as the current market leader for
stand-alone financial consolidation applications. In the retail decision support
applications market, the Company competes with traditional EIS providers that do
not have specific merchandise planning applications and with a number of smaller
software providers. The Company also competes with a variety of additional
software companies, third-party professional services organizations that develop
custom software and with internal information technology departments which
develop decision support solutions. Among the Company's current and potential
competitors are also a number of large software companies, including developers
of spreadsheets, RDBMSs, data warehouses, database query and reporting tools,
transaction processing-based applications and OLAP technologies, that may elect
to increase the decision support capabilities of their current products or that
may develop or acquire products that compete with the Company's products. In
addition, recent acquisitions and adoptions of OLAP technologies by various
software vendors may result in increased competition in the Company's markets.
Increased competition could result in price reductions, reduced operating
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of products than can the
Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, results of operations and financial condition. See "Business --
Competition."
RELIANCE ON RELATIONSHIPS WITH ARBOR SOFTWARE CORPORATION AND OTHER THIRD
PARTIES
The Company licenses certain software from third parties and incorporates
such software into its products. Generally, these licenses are non-exclusive
worldwide licenses providing for varying royalty payments and expiration dates.
In particular, the Company is substantially dependent on Essbase,
multidimensional database software developed by Arbor Software Corporation
("Arbor") which is incorporated in several of the Company's major products, and
is expected to be incorporated in certain future products. Because Essbase is
the OLAP technology which provides the critical multidimensional functionality
for Commander OLAP and is an integral component of the Company's ARTHUR product
line, loss of the Company's rights to Essbase, or any change impacting the
availability of Essbase, could have a material adverse effect on the Company's
business, results of operations and financial condition. If there is any
significant change in the competitiveness of Essbase, the Company could be
required to undertake an expensive and time-consuming revision of its products
to operate on competitive
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products or technologies, and the Company's business, results of operations and
financial condition could be materially adversely affected. See "Business --
Licensed Technologies."
In the future, the Company intends to increase the rate at which it
licenses software tools from third parties for incorporation into its products
as part of its strategy to reduce product development risk and time to market
for new products and product enhancements. Incorporating third-party software
into its products subjects the Company to risks that its third-party vendors
will refuse to renew a license, or become unable or unwilling to support and
enhance their products in a manner that satisfies the Company's requirements. If
the Company were unable to renew these licenses, or if its third-party vendors
were to become unable or unwilling to support and enhance their products, the
Company could be required to devote additional resources to the enhancement and
support of these products or to acquire or develop software providing equivalent
capabilities, which could adversely impact the ability of the Company to sell
its current products, cause delays in the development and introduction of new
products and increase the Company's cost of development of such products. The
occurrence of any of the foregoing risks associated with licensing software from
third parties could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business -- Licensed
Technologies."
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by rapid
technological advances, evolving industry standards, changes in customer
requirements and frequent introductions and enhancements of competitive
products. The Company's success and future financial performance will depend on
its ability to anticipate these changes as they occur and to enhance its
existing products and develop new products in a timely and cost-effective manner
which keeps pace with these changes.
The Company has been required to make several technological and product
transitions in response to changing market conditions. Most recently, these
transitions have included the adaptation of its products from the mainframe to
the client/server environment and the modification of its products to run on the
Windows operating environment. The most recent transition from mainframe-to
client/server-based products required a significant financial investment by the
Company in research and development over a number of years, financed by
operating cash flow and increased bank borrowings. During this transition, the
Company experienced a period of significantly decreased revenue and net income,
including net losses in fiscal 1992 and fiscal 1993, and incurred significant
unusual and restructuring related costs, which included the write-off of the
Company's remaining capitalized software associated with its mainframe-based
products. There can be no assurance that the Company will be able to
successfully accomplish future technological or product transitions, that the
Company will not experience significant delays in developing new products or
enhancements required to accomplish such transitions or that the Company will
have sufficient financial resources available to it to finance such efforts.
There can be no assurance as to the impact that any such transition would have
on the Company's revenue or profitability. In addition, there can be no
assurance that the Company's new products and enhancements will adequately
address the changing needs of the marketplace and achieve market acceptance or
that developments by others will not render the Company's products obsolete or
noncompetitive. As required by SFAS No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased or Otherwise Marketed," a substantial portion of the
Company's software development costs have been capitalized. The Company recorded
a non-cash charge of $23.2 million in the three months ended December 31, 1995
to write off a significant portion of its capitalized software, which the
Company estimates will reduce net income in such quarter by $15.5 million after
taxes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Events." Any failure of the Company's products
to achieve and sustain market acceptance, and the increased pace at which the
Company may be required to introduce new products in response to technological
advances, evolving industry standards, changing customer requirements and
introductions and enhancements of competitive products, could result in
additional
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<PAGE> 10
write-offs of all or part of such capitalized costs. Any such failure or
write-off could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company has a number of ongoing development projects for the
enhancement of existing products and the introduction of new products. There can
be no assurance that products under development will be completed successfully
or on time or that they will include the features required to achieve market
acceptance. Failure of these new product development projects could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Research and Product Development."
UNCERTAIN MARKET ACCEPTANCE OF THE COMPANY'S NEW PRODUCT OFFERINGS
The Company's business strategy involves the development and licensing of
client/server decision support applications software designed to address
specific industry or functional markets. Although the Company has been
successful in the past in developing and licensing applications software
designed to address specific industry or functional markets, such as its
financial reporting and retail applications, the Company intends to introduce
additional applications in the Company's current markets and markets not
previously served by the Company. There can be no assurance that the Company's
current or future applications will achieve widespread market acceptance or that
sales of such products will be sufficient to justify the development, marketing
and other expenses associated with such products. Failure of the Company's
products, whether internally developed or acquired, to achieve widespread market
acceptance or the need to rewrite certain products could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business -- The Comshare Solution" and "-- Business Strategy."
DEPENDENCE ON SALES TO INSTALLED BASE
A substantial percentage of the Company's licenses of its recently
introduced client/server applications software has been made to customers of the
Company's earlier generation of mainframe-based products. In fiscal 1995, 54% of
the Company's software license revenue was attributable to software licenses
sold to companies that had purchased an earlier generation of the Company's
products. The Company's revenue in future periods will depend in large part on
its continued ability to sell its products to existing customers, as well as to
customers that are not previous users of the Company's products. Failure to
successfully transition the Company's existing base of mainframe customers to
the Company's client/server products, or failure of such products to be adopted
by new customers, could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business --
Business Strategy" and "-- Products."
INTERNATIONAL OPERATIONS
The Company derived 57%, 55%, 55% and 54% of its total revenue from outside
North America in fiscal 1993, 1994, 1995 and in the three months ended September
30, 1995, respectively, and expects that revenue generated outside of North
America will continue to represent a significant portion of the Company's total
revenue. This international business is subject to various risks inherent in
international activities, including the impact on the Company's operations of,
and the burdens of complying with, a wide variety of laws, regulations, rules
and policies of local foreign governments, such as those relating to currency
controls, hiring and termination of employees, import restrictions and the
protection of propriety rights. There can be no assurance that the Company will
be able to maintain or increase international market demand for the Company's
products. In addition, a substantial percentage of the Company's international
revenue is attributable to sales by the Company's international distributors and
agents. Although no one distributor or agent accounted for more than 5% of the
Company's total revenue in fiscal 1995, the loss of one or more of such
distributors or agents could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company intends to develop programs to increase the dollar level of revenue
generated by these distributors and agents. There can be no assurance that such
programs will be successful or that the Company's will be
10
<PAGE> 11
able to continue to generate sales through distributors and agents at or above
current levels. See "Business -- Business Strategy" and "-- Sales and
Marketing."
The Company's international operations also expose the Company to
constantly fluctuating currency rates. Currency fluctuations have in the past
adversely affected, and may in the future adversely affect, the Company's
reported revenue, expenses and shareholders' equity. The Company's international
sales are primarily denominated in foreign currencies. As a result, an increase
in the value of the U.S. dollar relative to foreign currencies may have the
effect of reducing the Company's reported revenue and profits from international
sales denominated in such currencies. If the Company were to increase its prices
in certain markets in response to such fluctuations, its products may be less
competitive in those markets. Currency exchange rate fluctuations can also
result in gains and losses from foreign currency exchange transactions. The
Company at various times has entered into forward exchange contracts to hedge
exposures related to foreign currency exchange transactions. Because the Company
only selectively hedges against certain large transactions that present the most
exposure to exchange rate fluctuations, the Company's results of operations will
continue to be impacted by fluctuations in foreign currency exchange rates,
which at times could be material. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 of Notes to
Consolidated Financial Statements.
The Company also believes that it is exposed to greater risks of software
piracy in international markets because of the weaker protection afforded to
intellectual property in some foreign jurisdictions. Although the Company is not
aware of any significant unauthorized use of its proprietary software to date,
there can be no assurance that it will not experience such unauthorized use in
the future. See "Risk Factors -- Limited Intellectual Property Protection" and
"Business -- Intellectual Property."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent on its ability to
attract and retain key management, sales, consulting and technical personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able retain its key managerial, sales, consulting and technical
employees or that it will be able to attract, assimilate or retain such highly
qualified managerial, sales, consulting or technical personnel as may be
required in the future. If the Company is unable to retain its key managerial,
sales, consulting and technical personnel, or attract, assimilate and retain
additional qualified personnel as needed, the Company's business, results of
operations and financial condition could be materially adversely affected.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent on its proprietary technology. The
Company does not hold any material patents and seeks to protect its technology
primarily through trademarks, copyrights, employee and third-party
non-disclosure agreements and trade secret laws, which afford only limited
protection. The Company's software products are generally licensed to customers
under license agreements which generally restrict usage to internal operations
and prohibit unauthorized reproduction or transfer to third parties. The laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. In addition, certain provisions
of the Company's contracts prohibiting unauthorized reproduction may be
unenforceable under the laws of certain foreign countries. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to prevent misappropriation of its technology or development by
others of similar or superior technology. Although the Company believes that its
products and technology do not infringe on any existing proprietary rights of
others, there can be no assurance that third parties will not assert
infringement claims in the future or that any such claims will not require the
Company to enter into license arrangements or result in litigation, regardless
of the merits of such claims. No assurance can be given that any necessary
licenses will be available or that, if available, such licenses can be obtained
on commercially reasonable terms. Should litigation with
11
<PAGE> 12
respect to any such claims commence, such litigation could be extremely
expensive and time consuming and could have a material adverse effect on the
Company's business, results of operations and financial condition regardless of
the outcome of such litigation. See "Business -- Intellectual Property."
RISK OF SOFTWARE DEFECTS
Software products as internally complex as those offered by the Company
frequently contain errors or defects, especially when first introduced or when
new versions or enhancements are released. Despite extensive product testing by
the Company, the Company has in the past released versions of its products with
defects that were not discovered until after commencement of commercial
shipment. Although the Company has not to date experienced material adverse
effects resulting from any such defects and errors in current commercially
released products, there can be no assurance that despite testing by the Company
and by current and potential customers, defects and errors will not be found in
new versions or enhancements after commencement of commercial shipments. Such
defects or errors could result in damage to the Company's reputation, loss of
revenue, delay in market acceptance, diversion of development and consulting
resources and an increase in service and warranty costs, any of which could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Products" and "-- Research and Product
Development."
PRODUCT LIABILITY
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective as
a result of federal, state, local or foreign laws or ordinances currently in
effect or enacted in the future or of unfavorable judicial decisions. Although
the Company has not experienced any product liability claims with respect to its
software products to date, the sale and support of the Company's products and
the incorporation of products developed by third parties may entail the risk of
such claims. A product liability claim brought against the Company, regardless
of the merits of such claim, could have a material adverse effect upon the
Company's business, results of operations and financial condition.
STOCK PRICE VOLATILITY
The trading price of the Company's Common Stock has been and in the future
could be subject to wide fluctuations in response to quarterly variations in
results of operations, announcements of technological innovations or new
products by the Company or its competitors, the Company reporting results of
operations below the expectations of public market analysts and investors,
changes in earnings estimates by securities analysts, general conditions in the
software, decision support and computer industries and other events or factors.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations that have particularly affected the market price of the
stock of many high technology companies and that have often been unrelated or
disproportionate to the operating results of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. The trading prices of these companies' stocks are at or near their
historical highs and reflect price/earnings ratios substantially above
historical norms. In particular, the trading price of the Company's Common Stock
in the most recent completed quarter was at its all-time high and reflected the
increased price/earnings ratios of high technology companies in general. There
can be no assurance that the trading price of the Common Stock will remain at or
near its current level. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALES; ADVERSE EFFECT ON MARKET PRICE
Sales of substantial amounts of the Company's Common Stock in the public
market following this Offering could adversely affect the market price of the
Common Stock. Immediately upon completion
12
<PAGE> 13
of this Offering, the Company will have 9,365,273 shares of Common Stock
outstanding, all of which, including the 2,170,000 shares offered hereby, will
be freely tradeable without restriction under the Securities Act, unless they
are held by an "affiliate" of the Company (as that term is defined in Rule 144
under the Securities Act of 1993, as amended (the "Securities Act")). Of the
Company's shares outstanding at September 30, 1995, 696,591 shares are subject
to lock-up agreements pursuant to which they may not be sold or transferred for
90 days after the date of this Prospectus. However, Robertson, Stephens &
Company, in its sole discretion, may release shareholders from these lock-up
agreements, in whole or in part, at any time and without notice. No prediction
can be made as to the effect, if any, that sales of any such shares will have on
the market price of the Common Stock prevailing from time to time. See "Selling
Shareholders" and "Shares Eligible For Future Sale."
ANTI-TAKEOVER EFFECT OF BYLAWS AND MICHIGAN LAW
The Company's Bylaws contain provisions that could discourage a proxy
contest or make more difficult the acquisition of a substantial block of the
Company's Common Stock. The Company's Board of Directors is authorized to issue
preferred stock and additional shares of Common Stock which, if issued, could
dilute and adversely affect various rights of the holders of Common Stock, and,
in addition, could be used to discourage an unsolicited attempt to acquire
control of the Company. These provisions could limit the price that investors
would be willing to pay in the future for shares of Common Stock and could make
it more difficult for shareholders of the Company to effect certain corporate
actions. See "Description of Capital Stock -- Anti-Takeover Effects of the
Company's Bylaws and of Michigan Law."
13
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,125,000 shares of
Common Stock offered by the Company hereby are estimated to be $22,030,750
($25,370,313 if the over-allotment option is exercised in full), at the public
offering price of $21.00 per share and after deducting the Underwriting
Discounts and Commissions and estimated offering expenses payable by the
Company.
The Company will use a portion of the net proceeds from the sale of its
Common Stock to repay outstanding bank borrowings. As of September 30, 1995, the
outstanding principal amount owed to the Company's banks under its lines of
credit was approximately $4.7 million. The outstanding amount is due in October
1997 and the weighted average interest rate on such borrowings was 7.61% at
September 30, 1995. The Company has not yet identified specific uses for the
remainder of the net proceeds. The Company expects to use such remaining net
proceeds for working capital and general corporate purposes. Net proceeds may
also be used to acquire or invest in complementary businesses or technologies,
although the Company is not currently involved in negotiations with respect to,
and has no agreement or understanding regarding, any such acquisition or
investment. Pending such uses, the Company intends to invest the net proceeds
from the Offering in investment grade, short-term, interest-bearing instruments.
The Company will not receive any proceeds from the sale of shares of Common
Stock by Selling Shareholders. See "Selling Shareholders."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol CSRE. As of September 25, 1995, there were approximately 1,204
holders of record of the Company's Common Stock.
The following table sets forth the high and low per share trading prices of
the Company's Common Stock, as reported on the Nasdaq National Market. All
amounts in the following table have been adjusted to reflect a three-for-two
stock split effective on November 20, 1995.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1993
First Quarter............................................ $ 7.50 $ 4.50
Second Quarter........................................... 9.83 4.83
Third Quarter............................................ 9.50 4.67
Fourth Quarter........................................... 5.17 3.83
FISCAL 1994
First Quarter............................................ $ 7.33 $ 3.83
Second Quarter........................................... 7.83 6.33
Third Quarter............................................ 8.50 6.00
Fourth Quarter........................................... 9.33 6.17
FISCAL 1995
First Quarter............................................ $ 8.50 $ 6.00
Second Quarter........................................... 9.83 7.17
Third Quarter............................................ 11.50 8.83
Fourth Quarter........................................... 14.33 10.00
FISCAL 1996
First Quarter............................................ $21.58 $13.50
Second Quarter (through November 21, 1995)............... 25.67 17.33
</TABLE>
On November 21, 1995, the closing price of the Company's Common Stock was
$21.75, reflecting the three-for-two stock split described above.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since its
incorporation. It is the Company's present policy to retain earnings for use in
the Company's business. Accordingly, the Company does not anticipate that cash
dividends will be paid in the foreseeable future. Certain of the Company's
credit agreements contain covenants which prohibit the payment of cash dividends
on the Common Stock.
14
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1995, and (ii) as adjusted to give effect to the sale of the
1,125,000 shares of Common Stock offered by the Company at the public offering
price of $21.00 per share and application of the estimated net proceeds thereof.
See "Use of Proceeds." This information should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
----------------------
AS
ACTUAL ADJUSTED
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt..................................................... $ 4,662 $ --
Shareholders' equity:
Capital stock:
Preferred stock, no par value; 5,000,000 shares authorized,
none issued.................................................. -- --
Common stock, $1.00 par value; 20,000,000 shares authorized;
8,240,273 shares issued and outstanding, actual; 9,365,273
shares issued and outstanding, as adjusted................... 8,240 9,365
Capital contributed in excess of par............................. 13,278 34,184
Retained earnings................................................ 16,987 16,987(1)
Currency translation adjustments................................. (3,217) (3,217)
------- -------
35,288 57,319
Less -- Notes receivable......................................... (934) (934)
------- -------
Total shareholders' equity................................ 34,354 56,385(1)
------- -------
Total capitalization.................................... $39,016 $56,385(1)
======= =======
</TABLE>
- ---------------
(1) Does not reflect a non-cash charge of $23.2 million recorded by the Company
in the three months ended December 31, 1995 to write off certain capitalized
software, which the Company estimates will reduce net income in such quarter
by $15.5 million after taxes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Events." As adjusted
to give effect to this write-off and the Offering, retained earnings, total
shareholders' equity and total capitalization would have been $1.5 million,
$40.9 million and $40.9 million, respectively, at September 30, 1995.
15
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes selected consolidated financial data which
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto and with Management's Discussion and Analysis of
Financial Condition and Results of Operations, which are included elsewhere in
this Prospectus. The selected consolidated financial data set forth below as of
June 30, 1993, 1994 and 1995 and for each of the three fiscal years in the
period ended June 30, 1995 have been derived from the Company's consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants.
The selected consolidated financial data set forth below as of September
30, 1995 and for the three months ended September 30, 1994 and 1995 have been
derived from unaudited financial statements that, in management's opinion,
include all necessary adjustments (consisting only of normal recurring
adjustments) to present fairly the financial condition and results of operations
for such dates and periods. The results of operations for the three months ended
September 30, 1994 and 1995 are not necessarily indicative of results to be
expected for the full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- ------------------
1993 1994 1995 1994 1995
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Software licenses.......................................... $ 40,397 $ 37,871 $ 49,294 $10,006 $13,920
Software maintenance....................................... 43,064 41,625 36,649 8,972 9,015
Implementation, consulting and other services.............. 21,733 17,130 22,415 5,180 5,718
-------- -------- -------- ------- -------
Total revenue.......................................... 105,194 96,626 108,358 24,158 28,653
-------- -------- -------- ------- -------
Costs and expenses:
Selling and marketing...................................... 54,065 46,457 45,283 10,232 12,038
Cost of revenue and support................................ 20,528 17,670 24,799 5,382 6,690
Internal research and product development.................. 22,989 19,293 16,180 4,070 3,998
Internally capitalized software............................ (15,035) (13,193) (11,667) (3,079) (2,358)
Software amortization...................................... 10,761 12,517 13,250 3,385 2,616
General and administrative................................. 11,668 9,891(1) 11,663 2,750 3,041
Unusual charge............................................. -- -- 6,365 -- --
Restructuring related costs................................ 1,489 2,343 -- -- --
-------- -------- -------- ------- -------
Total costs and expenses............................... 106,465 94,978 105,873 22,740 26,025
-------- -------- -------- ------- -------
Income (loss) from operations................................ (1,271) 1,648 2,485 1,418 2,628
Other income (expense):
Interest income............................................ 298 79 157 21 15
Interest expense........................................... (611) (568) (669) (187) (156)
Exchange gain (loss)....................................... 480 (25) 307 (37) (89)
-------- -------- -------- ------- -------
Total other income (expense)........................... 167 (514) (205) (203) (230)
-------- -------- -------- ------- -------
Income (loss) before taxes................................... (1,104) 1,134 2,280 1,215 2,398
Provision (benefit) for income taxes......................... 659 912 (3,048)(2) 464 888
-------- -------- -------- ------- -------
Net income (loss)............................................ $ (1,763) $ 222 $ 5,328 $ 751 $ 1,510
======== ======== ======== ======= =======
Net income (loss) per common share........................... $ (0.22) $ 0.03 $ 0.63 $ 0.09 $ 0.17
======== ======== ======== ======= =======
Weighted average number of common and dilutive common
equivalent shares.......................................... 7,978 8,234 8,398 8,235 8,730
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1995
-------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash............................................................ $ 2,593 $ 1,774 $ 1,398 $ 2,023
Total assets.................................................... 92,582 88,944 79,310 81,376(3)
Long-term debt.................................................. 16,058 15,354 5,436 4,662
Total shareholders' equity...................................... 26,161 26,506 32,548 34,354(3)
</TABLE>
- ---------------
(1) Includes a $1.1 million gain from the sale of undeveloped land.
(2) Includes a $4.1 million tax benefit related to the recognition of prior
years' net operating losses and tax credits as well as tax reserves
released.
(3) Does not reflect a non-cash charge of $23.2 million recorded by the Company
in the three months ended December 31, 1995 to write off certain capitalized
software, which the Company estimates will reduce net income in such quarter
by $15.5 million after taxes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Events." As adjusted
for this write-off, total assets and total shareholders' equity would have
been $65.6 million, $18.8 million, respectively, at September 30, 1995.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Comshare develops, markets and supports client/server decision support
applications software designed to improve business analysis, planning, reporting
and decision making. Since its inception in 1966, the Company has accomplished
several technology and product transitions. Prior to 1992, the Company was
principally involved in the development, marketing and support of
mainframe-based executive information systems. Beginning in 1992, in response to
the market shift away from mainframe to client/server technology, the Company
began to transition its products to the client/server environment. Today, all of
the Company's major products are available for client/server implementations.
The Company's revenue in fiscal 1993, 1994 and 1995 and in the three months
ended September 30, 1995 was significantly impacted by the growth of
client/server software license and maintenance revenue and the decline in
mainframe software license and maintenance revenue, which offset the
client/server growth in fiscal 1993 and 1994. As a result of the release of the
Company's new client/server and Windows-based products beginning in mid-fiscal
1994, client/server software license and maintenance revenue increased 15.3%,
39.3% and 43.5% in fiscal 1994, fiscal 1995 and the three months ended September
30, 1995, respectively, as compared to the same period in the prior year.
Mainframe software license and maintenance revenue declined 24.2%, 35.3% and
31.2% in fiscal 1994, fiscal 1995 and the three months ended September 30, 1995,
respectively, as compared to the same period in the prior year. During fiscal
1995, for the first time, the dollar increase in client/server software license
and maintenance revenue exceeded the dollar decline in mainframe software
license and maintenance revenue. The increase in client/server software license
and maintenance revenue in fiscal 1995 and in the three months ended September
30, 1995 was driven by increases in client/server software licenses across all
three of the Company's decision support markets.
In connection with the Company's transition to client/server platforms, the
Company significantly downsized its operations and wrote off all of its
capitalized mainframe software. These actions resulted in unusual or
restructuring related costs of $1.5 million, $2.3 million and $6.4 million in
fiscal 1993, 1994 and 1995, respectively. The Company's fiscal 1995 results also
included a $4.1 million tax benefit related to the recognition of prior years'
net operating losses and tax credits as well as tax reserves released.
The Company's products are sold by direct sales organizations in the United
States, Canada, the United Kingdom, France, Germany and Australia and by an
extensive network of agents and distributors covering 34 countries not directly
served by the Company. In fiscal 1995 and the three months ended September 30,
1995, 55.3% and 53.7%, respectively, of the Company's revenue was derived from
sales outside of North America.
RECENT EVENTS
The Company recorded a non-cash charge of $23.2 million during the three
months ended December 31, 1995 to write off certain capitalized software. Total
capitalized software was $32.4 million at September 30, 1995. The Company
estimates this charge will reduce net income for the three months ended December
31, 1995 by $15.5 million after taxes. The write-off is a result of strong
customer interest in Commander Decision, a significantly enhanced version of
Commander OLAP, which substantially reduced the realizable value of the
Company's older Commander desktop products, and the Company's acceleration of
its product development cycles in response to changes in the technological
environment in the decision support application software market. See "Business
- -- Products -- Executive Information Systems (EIS)" and "-- Research and Product
Development."
The write-off principally reflects the Company's decision, following its
recent Users Conference, to focus its sales efforts on Commander Decision, which
is expected to be commercially released by December 31, 1995. The Company will
no longer market the front-ends offered with Commander
17
<PAGE> 18
OLAP upon the commercial release of Commander Decision. Commander Decision was
introduced at the Company's recent Users Conference and generated greater
interest than originally anticipated by the Company. This strong customer
interest, combined with the Company's recent decision to offer the new Commander
Decision end-user front-end to existing maintenance-paying Commander OLAP
customers at no charge, is expected to result in rapid migration from Commander
OLAP front-ends to the Commander Decision front-end. See "Business -- Products."
The write-off also reflects the reduction of the estimated useful service
life of the Company's products and the amortization period for its capitalized
software costs, prompted by the Company's acceleration of its product
development cycle. Beginning October 1, 1995, the Company will amortize its
capitalized software development costs using the straight-line method over a
two-year service life. This reduction in the software amortization period to two
years and a review of projected revenues over this service life resulted in the
write-off of unamortized capitalized software development costs.
These accelerated product development cycles are intended to allow the
Company to maintain technology leadership. Ongoing efforts in this regard are
also partially in response to increased interest in OLAP technologies recently
exhibited in the decision support software market, exemplified by recent
acquisitions and adoptions of OLAP technologies by various software vendors,
including Informix Corporation's acquisition of Stanford Technology Group, Inc.
announced in October 1995 and Oracle Corporation's acquisition of Express
software in July 1995.
The $23.2 million write-off is consistent with the Company's practice of
continually evaluating events which indicate potential impairment of its
capitalized software asset and routinely reviewing the amortization policy for
software development costs. The Company will critically evaluate the
capitalization of development costs in light of rapid technological changes and
shortened product life cycles and expects that shortened product life cycles
will reduce the portion of development costs which it will capitalize in future
periods, as compared with fiscal 1995.
18
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenue and the percentage change in the
dollar amounts of certain financial data over the same period of the prior year:
<TABLE>
<CAPTION>
PERCENT
PERCENT THREE MONTHS INCREASE
YEAR ENDED INCREASE (DECREASE) ENDED (DECREASE)
JUNE 30, ------------------------- SEPTEMBER 30, ------------
------------------------- 1994 OVER 1995 OVER ----------------- 1995 OVER
1993 1994 1995 1993 1994 1994 1995 1994
----- ----- ----- ---------- ---------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses............. 38.4% 39.2% 45.5% (6.3)% 30.2% 41.4% 48.6% 39.1%
Software maintenance.......... 41.0 43.1 33.8 (3.3) (12.0) 37.1 31.4 0.5
Implementation, consulting and
other services.............. 20.6 17.7 20.7 (21.2) 30.9 21.5 20.0 10.4
----- ----- -----
Total revenue............. 100.0 100.0 100.0 (8.1) 12.1 100.0 100.0 18.6
Costs and expenses:
Selling and marketing......... 51.4 48.1 41.8 (14.1) (2.5) 42.3 42.0 17.7
Cost of revenue and support... 19.5 18.3 22.9 (13.9) 40.3 22.3 23.3 24.3
Internal research and product
development................. 21.9 20.0 14.9 (16.1) (16.1) 16.8 14.0 (1.8)
Internally capitalized
software.................... (14.3) (13.7) (10.8) (12.3) (11.6) (12.7) (8.2) (23.4)
Software amortization......... 10.2 13.0 12.2 16.3 5.9 14.0 9.1 (22.7)
General and administrative.... 11.1 10.2 10.8 (15.2) 17.9 11.4 10.6 10.6
Unusual charge................ -- -- 5.9 -- * -- -- --
Restructuring related costs... 1.4 2.4 -- 57.4 * -- -- --
----- ----- -----
Total costs and
expenses................ 101.2 98.3 97.7 (10.8) 11.5 94.1 90.8 14.4
Income (loss) from operations... (1.2) 1.7 2.3 * 50.8 5.9 9.2 85.3
Other income (expense).......... 0.2 (0.5) (0.2) * 60.1 (0.9) (0.8) 13.3
----- ----- -----
Income (loss) before taxes...... (1.0) 1.2 2.1 * 101.1% 5.0 8.4 97.4
Provision (benefit) for income
taxes......................... 0.6 1.0 (2.8) 38.4% * 1.9 3.1 91.4
----- ----- -----
Net income (loss)............... (1.6)% 0.2% 4.9% * * 3.1% 5.3% 101.1%
===== ===== =====
</TABLE>
- ---------------
* Not meaningful.
The following table sets forth, for the periods indicated, certain sources
of software license revenue in dollar amounts and the percentage change in the
dollar amounts of such sources over the same period of the prior year:
<TABLE>
<CAPTION>
PERCENT
PERCENT THREE MONTHS INCREASE
YEAR ENDED INCREASE (DECREASE) ENDED (DECREASE)
JUNE 30, ----------------------- SEPTEMBER 30, ------------
----------------------------- 1994 OVER 1995 OVER ------------------ 1995 OVER
1993 1994 1995 1993 1994 1994 1995 1994
------- ------- ------- --------- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
Software license revenue:
Client/server:
EIS....................... $13,785 $15,849 $26,748 15.0% 68.8% $ 4,661 $ 7,492 60.7%
Financial Reporting....... 7,291 7,160 10,047 (1.8) 40.3 2,073 3,277 58.1
Retail Decision Support... 2,945 5,075 8,506 72.3 67.6 2,075 2,573 24.0
Other..................... -- 220 210 * (4.6) 54 53 (1.9)
------- ------- -------
Total client/server..... 24,021 28,304 45,511 17.8 60.8 8,863 13,395 51.1
Mainframe................... 16,264 9,375 3,783 (42.4) (59.6) 1,143 525 (54.1)
Other....................... 112 192 -- 71.4 * -- -- --
------- ------- -------
Total software license
revenue............... $40,397 $37,871 $49,294 (6.3) 30.2 $10,006 $13,920 39.1
======= ======= =======
Software maintenance revenue:
Client/server............... $16,526 $18,456 $19,620 11.7 6.3 $ 4,460 $ 5,717 28.2
Mainframe................... 25,970 22,639 16,932 (12.8) (25.2) 4,415 3,298 (25.3)
Other....................... 568 530 97 (6.7) (81.7) 97 -- *
------- ------- -------
Total software
maintenance revenue... $43,064 $41,625 $36,649 (3.3)% (12.0)% $ 8,972 $ 9,015 0.5%
======= ======= =======
</TABLE>
- ---------------
* Not meaningful.
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<PAGE> 20
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1994
REVENUE
The Company's revenue consists of software license, software maintenance
and implementation, consulting and other service revenue. Software license
revenue is recognized once the customer contract has been executed and the
product has been shipped; software maintenance revenue is recognized over the
term of the maintenance contract; and implementation, consulting and other
service revenue is recognized as services are performed.
Total revenue for the three months ended September 30, 1995 increased 18.6%
to $28.7 million, from $24.2 million in the three months ended September 30,
1994. The primary cause of this increase in revenue was the increase in
client/server software license and maintenance revenue.
Software License Revenue. Total software license revenue for the three
months ended September 30, 1995 increased 39.1% to $13.9 million, or 48.6% of
total revenue, from $10.0 million, or 41.4% of total revenue in the three months
ended September 30, 1994. Software license revenue from client/server products
for the three months ended September 30, 1995 increased 51.1% to $13.4 million,
or 96.2% of total software license revenue, from $8.9 million, or 88.6% of total
software license revenue in the three months ended September 30, 1994. Software
license revenue from the Company's mainframe products for the three months ended
September 30, 1995 decreased 54.1% to $0.5 million, or 3.8% of total software
license revenue, from $1.1 million, or 11.4% of total software license revenue
in the three months ended September 30, 1994. Software license revenue from
mainframe products is expected to continue to decline as the Company continues
to emphasize its client/server products.
Software license revenue increased in all three decision support market
areas. In the EIS market, software license revenue in the three months ended
September 30, 1995 increased 45.1% to $8.0 million, or 57.3% of total software
license revenue, from $5.5 million, or 54.9% of total software license revenue
in the three months ended September 30, 1994. Software license revenue for the
Company's client/server EIS products in the three months ended September 30,
1995 increased 60.7% to $7.5 million, or 53.8% of total software license
revenue, from $4.7 million, or 46.6% of total software license revenue in the
three months ended September 30, 1994, principally due to the strong demand
experienced for Commander OLAP. This increase in EIS client/server software
license revenue was partially offset by declines in EIS mainframe software
license revenue. Software license revenue for the Company's client/server
financial reporting products in the three months ended September 30, 1995
increased 58.1% to $3.3 million, or 23.5% of total software license revenue,
from $2.1 million, or 20.7% of total software license revenue in the three
months ended September 30, 1994, principally due to the sales of enhanced
versions of Commander FDC and Commander Budget products during the three months
ended September 30, 1995 that were not released in the three months ended
September 30, 1994. In the retail decision support applications market area,
software license revenue in the three months ended September 30, 1995 increased
15.5% to $2.6 million, or 18.8% of total software license revenue, from $2.3
million, or 22.6% of total software license revenue in the three months ended
September 30, 1994. Software license revenue for the Company's client/server
retail decision support products in the three months ended September 30, 1995
increased 24.0% to $2.6 million, or 18.5% of total software license revenue,
from $2.1 million, or 20.7% of total software license revenue in the three
months ended September 30, 1994. The increase was principally attributable to
sales of an enhanced version of ARTHUR Plan Monitor, incorporating Arbor's
Essbase, during the three months ended September 30, 1995, that was not released
in the three months ended September 30, 1994.
Software Maintenance Revenue. Software maintenance revenue was $9.0 million
in each of the three month periods ended September 30, 1995 and 1994, or 31.4%
and 37.1% of total revenue, respectively. Client/server software maintenance
revenue in the three months ended September 30, 1995 increased 28.2% to $5.7
million, or 63.4% of total software maintenance revenue, from $4.5 million, or
49.7% of total software maintenance revenue in the three months ended September
30, 1994. The increase was principally due to the increase in client/server
license revenue during the most recent
20
<PAGE> 21
twelve months in all three decision support market areas. Mainframe software
maintenance revenue in the three months ended September 30, 1995 decreased 25.3%
to $3.3 million, or 36.6% of total software maintenance revenue, from $4.4
million, or 49.2% of total software maintenance revenue in the three months
ended September 30, 1994. The decrease was primarily due to mainframe
maintenance cancellations and customer migration to client/server platforms.
Implementation, Consulting and Other Service Revenue. Implementation,
consulting and other service revenue in the three months ended September 30,
1995 increased 10.4% to $5.7 million, or 20.0% of total revenue, from $5.2
million, or 21.5% of total revenue in the three months ended September 30, 1994.
The increase in client/server software license revenue in all three decision
support markets led to increased demand for implementation and consulting
services.
COSTS AND EXPENSES
Total operating expenses in the three months ended September 30, 1995
increased 14.4% to $26.0 million, with an operating profit margin of 9.2%,
compared with total operating expenses of $22.7 million, with an operating
profit margin of 5.9% in the three months ended September 30, 1994.
Selling and Marketing Expense. The Company's selling and marketing expense
primarily includes employee costs, travel costs, agent fees, facilities expenses
and advertising. Selling and marketing expense in the three months ended
September 30, 1995 increased 17.7% to $12.0 million, or 42.0% of total revenue,
from $10.2 million, or 42.3% of total revenue in the three months ended
September 30, 1994. The dollar increase was principally due to an increase in
employee costs, including sales commissions, in support of increased revenue in
the three months ended September 30, 1995, compared with the same fiscal quarter
in the prior year.
Cost of Revenue and Support. Cost of revenue and support includes direct
costs of producing software, royalty expense for licensed technologies, customer
support costs and costs related to service revenue. Cost of revenue and support
in the three months ended September 30, 1995 increased 24.3% to $6.7 million, or
23.3% of total revenue, from $5.4 million, or 22.3% of total revenue in the
three months ended September 30, 1994. The increase was primarily attributable
to increased royalty fees payable to Arbor as a result of increased software
license revenue from certain Comshare products which use Arbor's Essbase and to
the higher costs to support the growth in implementation, consulting and other
services revenue.
Internal Research and Product Development; Internally Capitalized Software;
Software Amortization Expense. Internal research and product development expense
primarily includes employee costs, facilities expenses and computer hardware and
software costs. Internal research and product development expense in the three
months ended September 30, 1995 remained relatively constant at $4.0 million, or
14.0% of total revenue, compared with $4.1 million, or 16.8% of total revenue in
the three months ended September 30, 1994. Internally capitalized software in
the three months ended September 30, 1995 decreased 23.4% to $2.4 million, or
8.2% of total revenue, from $3.1 million, or 12.7% of total revenue in the three
months ended September 30, 1994. The decrease is primarily due to increased
levels of development costs that were not capitalizable. Software amortization
expense in the three months ended September 30, 1995 decreased 22.7% to $2.6
million, or 9.1% of total revenue, from $3.4 million, or 14.0% of total revenue
in the three months ended September 30, 1994. The decrease in amortization
expense was principally attributable to reduced levels of capitalized software
following the write-off of capitalized mainframe software in the fourth quarter
of fiscal 1995.
General and Administrative Expense. General and administrative expense
primarily includes employee costs, facilities expenses and professional fees.
General and administrative expense in the three months ended September 30, 1995
increased 10.6% to $3.0 million, or 10.6% of total revenue, from $2.8 million,
or 11.4% of total revenue in the three months ended September 30, 1994. The
increase in general and administrative expense is primarily attributable to
professional services and employee-related costs.
21
<PAGE> 22
INTEREST EXPENSE
Interest expense in the three months ended September 30, 1995 decreased
16.6% to $156,000, or 0.5% of total revenue, from $187,000, or 0.8% of total
revenue in the three months ended September 30, 1994. The decrease was primarily
due to reduced loan balances outstanding during the period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
PROVISION FOR INCOME TAXES
The effective income tax rate in the three months ended September 30, 1995
was 37.0%, as compared with 38.2% for the same period a year ago. A comparative
analysis of the factors influencing the effective income tax rate is presented
in Note 8 of Notes to Consolidated Financial Statements.
FOREIGN CURRENCY
In the three months ended September 30, 1995, 53.7% of the Company's total
revenue was from outside North America. 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 had an exchange loss of $89,000 in the three months ended September
30, 1995, as compared with a $37,000 exchange loss for the three months ended
September 30, 1994.
Foreign currency fluctuations in the three months ended September 30, 1995
impacted operating income as currency fluctuations on revenue denominated in a
foreign currency were offset by currency fluctuations on expenses denominated in
foreign currency. Overall, the increase in total revenue for the three months
ended September 30, 1995, compared with the three months ended September 30,
1994, would have been approximately $0.5 million lower, offset by a reduction in
the increase in total expenses, resulting in an estimated net $25,000 positive
impact on the increase in pre-tax profit, at comparable exchange rates.
At various times, the Company denominates borrowings in foreign currencies
and enters into forward exchange contracts to hedge exposures related to foreign
currency transactions. In general, the Company uses forward exchange contracts
selectively to hedge against certain large transactions that present the most
exposure to exchange rate fluctuations. The Company had two forward contracts
totaling $1.8 million outstanding at September 30, 1995. See Note 1 of Notes to
Consolidated Financial Statements.
FISCAL 1995 COMPARED WITH FISCAL 1994
REVENUE
Total revenue for fiscal 1995 increased 12.1% to $108.4 million from $96.6
million in fiscal 1994. This revenue growth was primarily due to the increase in
client/server software license revenue, reflecting the release of the Company's
new products during the past 18 months.
Software License Revenue. Total software license revenue in fiscal 1995
increased 30.2% to $49.3 million, or 45.5% of total revenue, from $37.9 million,
or 39.2% of total revenue in fiscal 1994. Software license revenue from
client/server products in fiscal 1995 increased 60.8% to $45.5 million, or 92.3%
of total software license revenue, from $28.3 million, or 74.7% of total
software license revenue in fiscal 1994. Software license revenue from the
Company's mainframe products in fiscal 1995 decreased 59.6% to $3.8 million, or
7.7% of total software license revenue, from $9.4 million, or 24.8% of total
software license revenue in fiscal 1994.
Software license revenue increased in all three decision support market
areas. In the EIS market, software license revenue in fiscal 1995 increased
25.7% to $29.8 million, or 60.4% of total software license revenue, from $23.7
million, or 62.5% of total software license revenue in fiscal 1994. Software
22
<PAGE> 23
license revenue for the Company's client/server EIS products in fiscal 1995
increased 68.8% to $26.8 million, or 54.3% of total software license revenue,
from $15.8 million, or 41.9% of total software license revenue in fiscal 1994,
principally due to the March 1994 release of Commander OLAP. This increase in
EIS client/server software license revenue was partially offset by declines in
EIS mainframe software license revenue. Software license revenue for the
Company's client/server financial reporting products in fiscal 1995 increased
40.3% to $10.0 million, or 20.4% of total software license revenue, from $7.2
million, or 18.9% of total software license revenue in fiscal 1994, principally
due to the release of Windows versions of Commander FDC and Commander Budget. In
the retail decision support applications market area, software license revenue
in fiscal 1995 increased 40.9% to $9.1 million, or 18.5% of total software
license revenue, from $6.5 million, or 17.1% of total software license revenue
in fiscal 1994. Software license revenue for the Company's client/server retail
decision support products in fiscal 1995 increased 67.6% to $8.5 million, or
17.3% of total software license revenue, from $5.1 million, or 13.4% of total
software license revenue in fiscal 1994, principally as a result of new
client/server releases of ARTHUR Planning and ARTHUR Plan Monitor.
Software Maintenance Revenue. Software maintenance revenue in fiscal 1995
decreased 12.0% to $36.6 million, or 33.8% of total revenue, from $41.6 million,
or 43.1% of total revenue in fiscal 1994. The decrease was primarily due to the
decline in software maintenance revenue from mainframe products. Mainframe
software maintenance revenue in fiscal 1995 decreased 25.2% to $16.9 million, or
46.2% of total software maintenance revenue, from $22.6 million, or 54.4% of
total software maintenance revenue in fiscal 1994. The decrease was principally
due to the conversion of certain agents to distributors, the impact of
maintenance cancellations and price discounts on multi-year agreements.
Client/server software maintenance revenue in fiscal 1995 increased 6.3% to
$19.6 million, or 53.5% of total software maintenance revenue, from $18.5
million, or 44.3% of total software maintenance revenue in fiscal 1994. The
increase was due to the growth in client/server software licenses, partially
offset by the conversion of certain agents to distributors. The conversion of
certain agents to distributors in fiscal 1994 impacted the comparability of
software maintenance revenue in fiscal 1995 and fiscal 1994. When an agent
converts to a distributor, sales are made directly to the distributor rather
than the end-user, and the distributor assumes the obligation of providing
maintenance. In addition, the revenue from distributors is recognized net of
fees (which fees are approximately the same as agent fees, but unlike agent
fees, are not recorded as selling expenses), and revenue from agents is
recognized before deducting their fees. As a result, the conversion of agents to
distributors reduced reported software maintenance revenue in fiscal 1995,
without a material impact on operating profits. In addition, in fiscal 1994,
software maintenance revenue benefited from the nonrecurring release of
approximately $1.6 million of deferred software maintenance revenue related to
the conversion of the Company's Belgium and Holland offices to an independent
agency and to the conversion of certain of the Company's agents to distributors.
Included in fiscal 1994 operating expenses was approximately $0.9 million of
costs associated with the recording of this software maintenance revenue.
Implementation, Consulting and Other Service Revenue. Implementation,
consulting and other service revenue in fiscal 1995 increased 30.9% to $22.4
million, or 20.7% of total revenue, from $17.1 million, or 17.7% of total
revenue in fiscal 1994. The increase in client/server software license revenue
during the fiscal period in all three decision support market areas created
increased demand for implementation, consulting and other services.
COSTS AND EXPENSES
Total operating expenses, excluding restructuring and unusual charges, in
fiscal 1995 increased 7.4% to $99.5 million, with an operating profit margin of
8.2%, compared with total operating expenses of $92.6 million, with an operating
profit margin of 4.1% in fiscal 1994.
Selling and Marketing Expense. Selling and marketing expense in fiscal 1995
decreased 2.5% to $45.3 million, or 41.8% of total revenue, from $46.5 million,
or 48.1% of total revenue in fiscal 1994. The decrease was principally due to a
$5.4 million reduction in agent fees as a result of the conversion of
23
<PAGE> 24
certain agents to distributors. Partially offsetting this decline was a $3.8
million increase in direct selling and marketing expenses during fiscal 1995 to
support the increased revenue base.
Cost of Revenue and Support Expense. Cost of revenue and support in fiscal
1995 increased 40.3% to $24.8 million, or 22.9% of total revenue, from $17.7
million, or 18.3% of total revenue in fiscal 1994. The increase is primarily
attributed to royalty fees related to the use of Arbor's Essbase in certain of
the Company's products and to personnel and outside contract costs associated
with the growth in implementation, consulting and other services.
Internal Research and Product Development; Internally Capitalized Software;
Software Amortization Expense. Internal research and product development expense
in fiscal 1995 decreased 16.1% to $16.2 million, or 14.9% of total revenue, from
$19.3 million, or 20.0% of total revenue in fiscal 1994. The decrease was
primarily attributable to staff reductions made at the end of 1994. These
reductions principally reflected the Company's change in development strategy to
include the increased utilization of technology developed by third parties,
which the Company believes shortens development cycles, minimizes investment in
software tools and accelerates time to market. The decrease in internal research
and product development costs resulted in lower internally capitalized software
in fiscal 1995 of $11.7 million, or 10.8% of total revenue, compared with $13.2
million, or 13.7% of total revenue, in fiscal 1994. Software amortization
expense increased 5.9% to $13.2 million in the current year, or 12.2% of total
revenue, from $12.5 million, or 13.0% of total revenue in fiscal 1994. The
increase in software amortization expense was a result of new client/server
product enhancements released during the previous year.
General and Administrative Expense. General and administrative expense in
fiscal 1995 increased 17.9% to $11.7 million, or 10.8% of total revenue, from
$9.9 million, or 10.2% of total revenue in fiscal 1994. General and
administrative expense, after excluding the $1.1 million gain on the sale of
undeveloped land which was included in general and administrative expense in
fiscal 1994, increased 6.4% in fiscal 1995, as compared with the prior year.
This increase in general and administrative expenses principally related to
employee costs, including relocation, travel and incentives.
Unusual Charge. An unusual charge of $6.4 million was recorded in fiscal
1995 due to the write-off of capitalized software associated with the Company's
mainframe products. The write-off was the result of the Company's 1996 product
plans to focus primarily on client/server decision support applications software
and the decreased industry emphasis on mainframe decision support software
products. In addition, the Company recently implemented a marketing strategy to
migrate its existing clients using mature mainframe products to its new
client/server products. The above factors will reduce the future revenue from
mainframe software, which prompted the Company to write off the remainder of its
capitalized mainframe software.
INTEREST EXPENSE
Interest expense in fiscal 1995 increased 17.8% to $0.7 million, from $0.6
million in fiscal 1994. The increase was primarily due to the loan origination
fees associated with amending and restating a domestic credit agreement with the
Company's banks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
BENEFIT FOR INCOME TAXES
The benefit from income taxes was $3.0 million in fiscal 1995, as compared
with an income tax provision of $0.9 million for fiscal 1994. The income tax
benefit included the release of tax valuation reserves of $2.5 million related
to tax credits, attributable to the significant improvement in the Company's
profitability in fiscal 1995, which allowed for the realization of a significant
portion of these credits. In addition, settlements with tax authorities
regarding certain outstanding issues allowed the Company to release tax reserves
of $1.6 million previously established against these exposures. The net tax
assets remaining are projected by the Company to be substantially utilized by
fiscal 1997, well
24
<PAGE> 25
before expiration. A comparative analysis of the factors influencing the
effective income tax rate is presented in Note 8 of Notes to Consolidated
Financial Statements.
FOREIGN CURRENCY
In fiscal 1995, 55.3% of Comshare's total revenue was from outside North
America. The Company had an exchange gain of $0.3 million in fiscal 1995,
compared with an exchange loss of $25,000 in fiscal 1994. The exchange gain in
fiscal 1995 was attributable to the strengthening of the Deutsche mark and
French franc against the British pound.
Foreign currency fluctuations in fiscal 1995 impacted operating income as
currency fluctuations on revenue denominated in a foreign currency were offset
by currency fluctuations on expenses denominated in foreign currency. Overall,
the increase in total revenue and total expenses in fiscal 1995, compared with
fiscal 1994, would have been approximately $3.6 million and $3.3 million lower,
respectively, with an estimated net $0.3 million negative impact on the increase
in pre-tax profit, at comparable exchange rates.
The Company had two forward contracts totaling $2.2 million outstanding at
June 30, 1995. See Note 1 of Notes to Consolidated Financial Statements.
FISCAL 1994 COMPARED WITH FISCAL 1993
REVENUE
Total revenue for fiscal 1994 decreased 8.1% to $96.6 million from $105.2
million in fiscal 1993. The decrease was principally due to both the decline in
revenue from mainframe sources and the weakening of foreign currencies against
the U.S. dollar in fiscal 1994. Overall, total revenue for fiscal 1994 would
have been approximately $5.5 million higher, as compared to fiscal 1993 levels,
at comparable exchange rates.
Software License Revenue. Total software license revenue in fiscal 1994
decreased 6.3% to $37.9 million, or 39.2% of total revenue, compared with $40.4
million, or 38.4% of total revenue in fiscal 1993. Software license revenue from
client/server products in fiscal 1994 increased 17.8% to $28.3 million, or 74.7%
of total software license revenue, from $24.0 million, or 59.5% of total
software license revenue in fiscal 1993. Software license revenue from the
Company's mainframe products in fiscal 1994 decreased 42.4% to $9.4 million, or
24.8% of total software license revenue, from $16.3 million, or 40.3% of total
software license revenue in fiscal 1993. The Company believes that this decline
was due to the industry slowdown in sales of mainframe computer software as
customers migrated to new generation client/server operating systems from their
traditional mainframe operating systems.
In the EIS market, software license revenue in fiscal 1994 decreased 17.7%
to $23.7 million, or 62.5% of total software license revenue, from $28.8
million, or 71.3% of total software license revenue in fiscal 1993, primarily
due to the decline in mainframe software license revenue partially offset by the
revenue resulting from the March 1994 release of the Company's Commander OLAP
product. Software license revenue from financial reporting applications remained
essentially unchanged in fiscal 1994 at $7.3 million, compared with the prior
year. Retail decision support software license revenue in fiscal 1994 increased
54.8% to $6.5 million, or 17.1% of total software license revenue, from $4.2
million, or 10.4% of total software license revenue in fiscal 1993, principally
as a result of the international release of a new Windows version of ARTHUR
Planning.
Software Maintenance Revenue. Total software maintenance revenue in fiscal
1994 decreased 3.3% to $41.6 million, or 43.1% of total revenue, from $43.1
million, or 41.0% of total revenues in fiscal 1993. Mainframe software
maintenance revenue in fiscal 1994 decreased 12.8% to $22.6 million, or 54.4% of
total software maintenance revenue, from $26.0 million, or 60.3% of total
software maintenance revenue in fiscal 1993. Partially offsetting the decline
was the increase in software maintenance revenue from client/server products,
which in fiscal 1994 increased 11.7% to $18.5 million, or 44.3% of total
software maintenance revenue, from $16.5 million, or 38.4% of total software
maintenance revenue in fiscal 1993.
25
<PAGE> 26
During fiscal 1994, software maintenance revenue benefited from the release
of approximately $1.6 million of deferred revenue related to the conversion of
the Company's Belgium and Holland offices to an independent agent and to the
conversion of certain of the Company's agents to distributors. Included in
operating expenses was approximately $0.9 million of costs associated with the
recording of the maintenance revenue.
Implementation, Consulting and Other Service Revenue. Implementation,
consulting and other service revenue in fiscal 1994 decreased 21.2% to $17.1
million, or 17.7% of total revenue, from $21.7 million, or 20.6% of total
revenue in fiscal 1993. The decrease in implementation, consulting and other
service revenue was partially due to the decline in mainframe software license
revenue and increased competition from small implementation and consulting
service companies, as well as to management changes in France in the second
quarter.
COSTS AND EXPENSES
Total costs and expenses for fiscal 1994 and fiscal 1993 included $2.3
million and $1.5 million, respectively, of restructuring related costs.
Excluding the restructuring related costs, total costs and expenses in fiscal
1994 decreased 11.8% to $92.6 million from $105.0 million in fiscal 1993. The
weakening of foreign currencies against the U.S. dollar in fiscal 1994 caused
$4.8 million of the decline in total costs and expenses from fiscal 1993 levels.
The remaining $6.4 million of the decline was primarily the result of cost
containment actions taken by the Company at the end of fiscal 1993, most of
which related to personnel reductions implemented in connection with the
restructuring.
Selling and Marketing Expense. Selling and marketing expense in fiscal 1994
decreased 14.1% to $46.5 million, or 48.1% of total revenue, from $54.1 million,
or 51.4% of total revenue in fiscal 1993. The decrease was principally due to
cost containment actions taken by the Company at the end of fiscal 1993.
Cost of Revenue and Support Expense. Cost of revenue and support decreased
13.9% to $17.7 million, or 18.3% of total revenue in fiscal 1994, from $20.5
million or 19.5% of total revenue in fiscal 1993. The decline was principally
caused by lower costs associated with the $4.6 million decline in
implementation, consulting and other service revenue. This was partially offset
by the inclusion of $1.0 million of royalty expense in fiscal 1994 for products
licensed from others for use in the Company's product offerings. The increase in
royalty expense was principally due to the initiation in March 1994 of sales of
products which incorporated Essbase, licensed from Arbor.
Internal Research and Product Development; Internally Capitalized Software;
Software Amortization Expense. Internal research and product development expense
decreased 16.1% to $19.3 million, or 20.0% of total revenue in fiscal 1994,
compared with $23.0 million, or 21.9% of total revenue in fiscal 1993. The
decrease was principally due to cost containment actions. The decrease in
internal research and product development expense resulted in lower internally
capitalized software in fiscal 1994 of $13.2 million, or 13.7% of total revenue,
compared with $15.0 million, or 14.3% of total revenue in fiscal 1993. Software
amortization expense in fiscal 1994 increased 16.3% to $12.5, or 13.0% of total
revenue, from $10.8 million, or 10.2% of total revenue in fiscal 1993. The
increase was primarily due to several products that were commercially released
during the fourth quarter of fiscal 1993 and the first quarter of fiscal 1994.
General and Administrative Expense. General and administrative expense
decreased 15.2% to $9.9 million, or 10.2% of total revenue in fiscal 1994, from
$11.7 million, or 11.1% of total revenue in fiscal 1993. The decrease was
primarily attributable to the $1.1 million gain on the sale of undeveloped land
in the second quarter of fiscal 1994 included in general and administrative
expense.
Restructuring Related Costs. Restructuring related costs were $2.3 million
in fiscal 1994 and represented provisions for management actions or plans in
connection with restructuring, primarily related to staff reductions. For the
period ended June 30, 1994, the restructuring related costs included staff
reductions of approximately 50 employees. Restructuring related costs for fiscal
1993 were $1.5
26
<PAGE> 27
million and also related to management actions or plans in connection with
restructuring, primarily related to staff reductions.
INTEREST EXPENSE
Interest expense was $0.6 million in fiscal 1994, essentially unchanged
from fiscal 1993. Reduced loan balances were partly offset by higher interest
rates and a reduction in the amount of interest capitalized as part of
capitalized computer software. The banks with which the Company has its domestic
credit agreement reduced the interest rate on the Company's borrowings,
effective November 1, 1993, from prime plus 3% to prime plus 1%. Interest
expense was capitalized as required under accounting principles and included in
capitalized computer software.
PROVISION FOR INCOME TAXES
The effective income tax rate for fiscal 1994 was 80%. The provision for
fiscal 1994 resulted from a combination of factors including losses occurring in
certain countries where no tax benefit could be provided, partially offset by
the reversal of taxes previously provided. For fiscal year 1993, there was a
provision for income taxes on a loss, rather than a tax benefit as would usually
be expected, primarily caused by losses occurring in certain countries where no
tax benefit could be provided while profits occurred in countries where a tax
provision was required. A detailed comparative analysis of the numerous factors
influencing the effective income tax rate is presented in Note 8 of Notes to
Consolidated Financial Statements.
FOREIGN CURRENCY
In fiscal 1994, 55.3% of the Company's total revenue was from outside North
America. The Company had an exchange loss of $25,000 in fiscal 1994, compared
with an exchange gain of $0.5 million in fiscal 1993. The unusually high
currency gain in fiscal 1993 was principally due to the United Kingdom's
withdrawal from the European Exchange Rate Mechanism.
Foreign currency fluctuations in fiscal 1994 impacted operating income as
currency fluctuations on revenue denominated in a foreign currency were offset
by expenses denominated in foreign currency. Overall, the reduction in total
revenue and total expenses for fiscal 1994, compared with fiscal 1993, would
have been $5.5 million and $4.8 million lower, respectively, with an estimated
net $0.7 million positive impact on the increase in pre-tax profit, at
comparable exchange rates.
At June 30, 1994, the Company did not have any forward contracts.
27
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table presents the Company's unaudited quarterly results of
operations for each of the quarters of fiscal 1994 and 1995 and the three months
ended September 30, 1995. This unaudited quarterly information has been prepared
on the same basis as the audited annual Consolidated Financial Statements and,
in management's opinion, includes all necessary adjustments (consisting only of
normal recurring adjustments, except as otherwise noted below) to present fairly
the unaudited quarterly results when read in conjunction with the Company's
audited Consolidated Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The results of operations in any quarter are not necessarily
indicative of future fiscal period results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
SEPT.
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 30,
1993 1993 1994 1994 1994 1994 1995 1995 1995
--------- -------- -------- -------- --------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses........... $ 7,833 $ 9,793 $ 9,188 $11,057 $10,006 $13,018 $12,705 $13,565 $13,920
Software maintenance........ 11,052 9,915 10,194 10,464 8,972 9,237 8,895 9,545 9,015
Implementation, consulting
and other services........ 4,845 4,071 3,820 4,394 5,180 5,401 6,104 5,730 5,718
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenue............. 23,730 23,779 23,202 25,915 24,158 27,656 27,704 28,840 28,653
------- ------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Selling and marketing....... 11,033 11,860 11,387 12,177 10,232 11,514 11,375 12,162 12,038
Cost of revenue and
support................... 4,262 4,159 4,224 5,025 5,382 5,979 6,959 6,479 6,690
Internal research and
product development....... 5,223 4,676 4,683 4,711 4,070 4,031 3,884 4,195 3,998
Internally capitalized
software.................. (3,512) (3,285 ) (3,056 ) (3,340 ) (3,079) (2,940 ) (2,845 ) (2,803 ) (2,358 )
Software amortization....... 3,008 2,912 3,075 3,522 3,385 3,262 3,415 3,188 2,616
General and
administrative............ 2,719 1,756 (1) 2,696 2,720 2,750 2,964 3,088 2,861 3,041
Unusual charge.............. -- -- -- -- -- -- -- 6,365 --
Restructuring related
costs..................... -- -- -- 2,343 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses................ 22,733 22,078 23,009 27,158 22,740 24,810 25,876 32,447 26,025
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations.................. 997 1,701 193 (1,243 ) 1,418 2,846 1,828 (3,607 ) 2,628
Other income (expense):
Net interest income
(expense)................. (112) (115 ) (81 ) (181 ) (166) (175 ) (126 ) (45 ) (141 )
Exchange gain (loss)........ 42 (180 ) 107 6 (37) (6 ) 216 134 (89 )
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes.... 927 1,406 219 (1,418 ) 1,215 2,665 1,918 (3,518 ) 2,398
Provision (benefit) for income
taxes....................... 270 354 125 163 464 984 714 (5,210 )(2) 888
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............. $ 657 $ 1,052 $ 94 ($1,581 ) $ 751 $ 1,681 $ 1,204 $ 1,692 $ 1,510
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per common
share....................... $ 0.08 $ 0.13 $ 0.01 $ (0.20 ) $ 0.09 $ 0.20 $ 0.14 $ 0.20 $ 0.17
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of
common and dilutive common
equivalent shares........... 8,052 8,212 8,271 8,020 8,235 8,325 8,472 8,526 8,730
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes a $1.1 million gain from the sale of undeveloped land.
(2) Includes a $4.1 million tax benefit related to the recognition of prior
years' net operating losses and tax credits as well as tax reserves
released.
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<PAGE> 29
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1993 1993 1994 1994 1994 1994 1995 1995 1995
--------- -------- -------- -------- --------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses........... 33.0% 41.2% 39.6% 42.6% 41.5% 47.1% 45.9% 47.0% 48.6%
Software maintenance........ 46.6 41.7 43.9 40.4 37.1 33.4 32.1 33.1 31.4
Implementation, consulting
and other services........ 20.4 17.1 16.5 17.0 21.4 19.5 22.0 19.9 20.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Total revenue............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Costs and expenses:
Selling and marketing....... 46.5 49.9 49.1 47.0 42.4 41.6 41.1 42.2 42.0
Cost of revenue and
support................... 18.0 17.5 18.2 19.4 22.3 21.6 25.1 22.5 23.3
Internal research and
product development....... 22.0 19.7 20.2 18.2 16.8 14.6 14.0 14.5 14.0
Internally capitalized
software.................. (14.8) (13.8) (13.2) (12.9) (12.8) (10.6) (10.3) (9.7) (8.2)
Software amortization....... 12.7 12.2 13.3 13.6 14.0 11.8 12.3 11.0 9.1
General and
administrative............ 11.4 7.4 11.6 10.5 11.4 10.7 11.2 9.9 10.6
Unusual charges............. -- -- -- -- -- -- -- 22.1 --
Restructuring related
costs..................... -- -- -- 9.0 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Total costs and
expenses................ 95.8 92.9 99.2 104.8 94.1 89.7 93.4 112.5 90.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations.................. 4.2 7.2 0.8 (4.8) 5.9 10.3 6.6 (12.5) 9.2
Other income (expense):
Net interest income
(expense)................. (0.5) (0.5) (0.4) (0.7) (0.7) (0.6) (0.5) (0.2) (0.5)
Exchange gain (loss)........ 0.2 (0.8) 0.5 0.0 (0.2) (0.0) 0.8 0.5 (0.3)
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before taxes.... 3.9 5.9 0.9 (5.5) 5.0 9.7 6.9 (12.2) 8.4
Provision (benefit) for income
taxes....................... 1.1 1.5 0.5 0.6 1.9 3.6 2.6 (18.1) 3.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............. 2.8% 4.4% 0.4% (6.1)% 3.1% 6.1% 4.3% 5.9% 5.3%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The software industry is generally characterized by seasonal trends. Such
trends may cause higher revenue in the Company's last fiscal quarter as a result
of efforts to exceed sales quotas, and in the second fiscal quarter as many
customers complete annual budgetary cycles. In addition, lower revenue in the
first fiscal quarter may be principally due to the impact of slower sales during
the summer months, particularly in Europe.
In general, over the quarterly periods indicated, the decrease in selling
and marketing expense in absolute dollar amounts and as a percentage of total
revenue is primarily due to the reduction in agent fees as a result of the
conversion of certain agents to distributors. The increase in cost of revenue
and support in absolute dollar amounts and as a percentage of total revenue is
primarily due to an increase in royalty expense due to increased sales of
products that incorporate Arbor's multidimensional database software, Essbase,
and to an increase in personnel and outside contract costs associated with the
growth in implementation, consulting and other services. The decrease in
internal research and product development in absolute dollar amounts and as a
percentage of total revenue is primarily due to a reduction in research and
development staff as the Company made a strategic change to more actively seek
third-party technology.
The Company has experienced and may in the future experience significant
fluctuations in revenue and operating results from quarter to quarter and from
year to year due to a combination of factors, including: 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; cancellations of maintenance and support
agreements; software defects; changes in operating expenses; fluctuations in
foreign exchange rates; and economic conditions generally or in specific
industry segments. In addition, revenue and income from operations may fluctuate
due to the mix of products and services sold and the mix of distribution
channels employed. Further, the Company's results of operations reflect seasonal
trends, and the Company's business, results of operations and financial
condition may be affected by such trends in the future. As a result of all of
these factors, there can be no assurance that the Company will remain profitable
on a quarterly or annual basis.
29
<PAGE> 30
The Company's future revenues are difficult to predict. This is due in part
to the fact that a significant portion of the Company's revenue in any quarter
is typically derived from non-recurring license fees, and the timing of orders
for the Company's products is subject to delay for a number of reasons,
including factors beyond the Company's control. The Company typically ships its
products shortly after receipt of orders, and, consequently, order backlog at
the beginning of any quarter has in the past represented only a small portion of
that quarter's expected revenue. As a result, license revenue in any quarter is
substantially dependent on orders booked and shipped in that quarter.
Historically, the Company has often recognized a substantial portion of its
software license revenue in the last month of a quarter. The Company believes
that the purchase of its products is relatively discretionary and generally
involves a significant commitment of capital. As a result of these factors, 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, which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
In addition, a significant portion of the Company's annual revenue is
derived from ongoing annual maintenance contracts, including contracts relating
to the Company's mainframe applications still in use. Although mainframe
maintenance revenue is expected to decline in future periods, if such decline
occurs more rapidly than is anticipated, the Company's revenue, profits and cash
flow from operations will be at lower levels than are currently anticipated
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
Further, the Company's expense levels are based, in part, on its
expectations as to future revenue. If revenue is below expectations, results of
operations are likely to be materially adversely affected. Net income may also
be disproportionately affected by a reduction in revenue, because a significant
portion of the Company's expenses do not vary with revenue. The Company may also
choose to reduce prices or increase spending in response to competition or to
pursue new market opportunities, either of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and that
such comparisons should not be relied upon as indications of future performance.
Further, the Company has in recent periods experienced significant percentage
growth in client/server license revenue, but such rate of growth is not
necessarily indicative of future performance. In addition, it is possible that
in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, or in the
event that adverse conditions prevail or are perceived to prevail generally or
with respect to the Company's business, the price of the Company's Common Stock
would likely be materially adversely affected. See "Selected Consolidated
Financial Data" and "Risk Factors -- Fluctuations in Quarterly Operating
Results; Future Operating Results Uncertain."
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, cash was $2.0 million and available borrowings under
the Company's lines of credit were $13.8 million, as compared with cash of $1.4
million and available borrowings under the Company's lines of credit of $12.2
million at June 30, 1995 and cash of $1.8 million and available borrowings under
the Company's lines of credit of $1.6 million at June 30, 1994. In November
1995, the Company reduced permitted borrowings under its lines of credit by $4.0
million.
Net cash provided by operating activities was $4.3 million in the three
months ended September 30, 1995, $23.3 million in fiscal 1995 and $13.6 million
in fiscal 1994. In the three months ended September 30, 1995, net income, plus
depreciation and amortization, was $4.7 million. In fiscal 1995, pretax profit,
excluding the non-cash write-off of software, was $8.6 million, which
contributed $7.5 million of the $9.7 million increase in net cash provided by
operating activities in fiscal 1995, compared with fiscal 1994. Due to net
operating losses and tax credits generated prior to fiscal 1995, only $0.6
million of tax was paid in fiscal 1995. The $2.7 million reduction in accounts
receivable balances during
30
<PAGE> 31
fiscal 1995, attributable to improved collections, also contributed to the
increased cash flow in fiscal 1995 as compared with fiscal 1994.
Net cash used in investing activities was $3.3 million, $14.1 million and
$12.4 million in the three months ended September 30, 1995, fiscal 1995 and
fiscal 1994, respectively. The $1.7 million increase in fiscal 1995 over fiscal
1994 was primarily due to the one-time benefit in fiscal 1994 from the proceeds
of the sale of undeveloped land. Additions to capitalized computer software
declined in dollar amount during fiscal 1995 primarily due to the decrease in
internal product development spending.
The Company used the net cash from operating activities to fund its
investing activities and reduce long-term debt by approximately $0.7 million and
$10.0 million during the three months ended September 30, 1995 and fiscal 1995,
respectively.
At September 30, 1995, the Company did not have any material capital
expenditure commitments. In fiscal 1996, property and equipment purchases and
additions to internally developed software are expected to continue at levels
similar to those of fiscal 1995 and fiscal 1994.
Working capital was a negative $0.7 million, a negative $2.2 million and a
negative $0.5 million at September 30, 1995, June 30, 1995 and June 30, 1994,
respectively. The increase of $1.5 million from June 30, 1995 to September 30,
1995 was primarily due to the $1.5 million increase in accounts receivable. The
decrease of $1.7 million from fiscal 1994 to fiscal 1995 was primarily due to
the $2.7 million reduction in accounts receivable, mentioned above, offset by
the $1.0 million reduction in deferred revenue. Deferred revenue as of September
30, 1995, June 30, 1995 and June 30, 1994 was $18.7 million, $18.6 million and
$19.6 million, respectively. Deferred revenue, which is included in current
liabilities, principally relates to prepaid maintenance contracts.
Total assets were $81.4 million, $79.3 million and $88.9 million at
September 30, 1995, June 30, 1995 and June 30, 1994, respectively. The primary
contributing factors to the increase from June 30, 1995 to September 30, 1995
were the increases in cash and accounts receivable balances. The primary
contributing factor to the decrease from fiscal 1994 to fiscal 1995 was the
write-off of $6.4 million of capitalized software associated with the Company's
mainframe products. The Company recorded a non-cash charge of $23.2 million in
the three months ended December 31, 1995 to write off certain capitalized
software, which is estimated to reduce net income in such quarter by $15.5
million after taxes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Events." As adjusted to give
effect to this write-off, total assets at September 30, 1995 would have been
$65.6 million.
The Company has a $10.0 million amended and restated, domestic credit
agreement with its banks which matures on October 31, 1997. The amended and
restated credit agreement contains covenants regarding, among other things,
working capital, leverage, net worth and payment of dividends. Under the terms
of the agreement, the Company is prohibited from paying cash dividends on the
Common Stock. Permitted borrowings under the credit agreement are based on a
percentage of worldwide eligible accounts receivable. At September 30, 1995 and
June 30, 1995, permitted borrowings under the agreement totaled $14.0 million,
of which $2.1 million and $3.5 million were outstanding, respectively. In
November 1995, the Company reduced permitted borrowings under the agreement from
$14.0 million to $10.0 million. At September 30, 1995, interest was at the
Eurodollar rate (5.875% at September 30, 1995) plus an applicable margin, which
varies between 1 1/2% and 2 1/2% (2% at September 30, 1995). At June 30, 1995,
interest was at the bank's prime rate (8.75% at June 30, 1995) plus 1% until
July 1, 1995, at which time it changed to the Eurodollar rate, plus the
applicable margin. In the first quarter of fiscal 1996, the banks released all
security interests in the assets of the Company previously granted to the banks.
In addition, certain of the Company's subsidiaries have local currency
credit agreements or overdraft facilities with banks totaling $4.4 million and
$3.7 million, of which $2.6 million and $1.9 million were outstanding at
September 30, 1995 and June 30, 1995, respectively. These credit
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<PAGE> 32
agreements expire on October 1, 1997. The interest rates generally vary with the
banks' base rate. Most of such borrowings are guaranteed by the Company.
The Company expects to use a portion of the net proceeds from this Offering
to pay outstanding bank borrowings. The Company expects to use the remaining net
proceeds from this Offering for working capital and general corporate purposes.
Pending such uses, the Company intends to invest the net proceeds from the
Offering in investment grade, short-term, interest bearing instruments.
The Company believes that the combination of the proceeds from this
Offering, present cash balances, future operating cash flows and credit
facilities will be sufficient to meet the Company's currently anticipated cash
requirements for at least the next 12 months.
32
<PAGE> 33
BUSINESS
Comshare develops, markets and supports client/server decision support
applications software designed to improve business analysis, planning, reporting
and decision making. The Company's software products enable the enterprise-wide
integration and transformation of data into business-critical information by
leveraging on-line analytical processing ("OLAP") technologies to provide
customers with robust multidimensional analysis capabilities. More specifically,
the Company focuses on delivering complete decision support solutions by
targeting specific industry and functional markets -- currently, executive
information systems ("EIS"), financial reporting and retail decision support --
and by providing implementation, consulting, training and support expertise in
these markets. Such complete decision support solutions permit the easy
implementation and adoption of the Company's software applications throughout an
enterprise, thus enabling end-users to make better and faster decisions.
BACKGROUND
To succeed in today's environment of intensifying global competition,
organizations must seek new ways of making faster and more informed decisions. A
key element of decision making is the analysis of enterprise-wide historical and
projected data. Such analyses, including profitability analysis, budgeting,
trend analysis and financial consolidations, often are computation-intensive and
iterative in nature. For example, a business professional may wish to analyze
the profitability of a customer from several perspectives, or dimensions,
including channel, geography, sales representative, fiscal period or budget
versus actual. Often initial analyses lead to additional questions, resulting in
significant follow-on or scenario analyses, such as the calculation of projected
customer profitability under different pricing scenarios or economic conditions.
Business and Technology Trends
The pace and complexity of business decision making has increasingly become
a greater challenge for organizations. In order to improve their
competitiveness, many organizations have implemented business process
reengineering initiatives. Decision making authority has generally become more
distributed throughout all levels of an organization, creating a need by more
people to access information used for making critical business decisions.
Consequently, management information systems ("MIS") groups and end-users have
invested in a wide variety of information systems to collect, access and analyze
business data. These end-users, who are increasingly involved in system purchase
decisions, demand easy-to-use solutions that can be implemented quickly and that
address their specific business problems.
The development of open systems and client/server architectures has further
enabled the distribution of decision making by allowing end-users to share
common databases, business rules and graphical user interfaces ("GUIs"). These
technologies have also increased the availability of data and improved the
environment for automated decision support. In addition, these open systems and
client/server architectures permit the integration of multiple hardware and
software products, giving organizations the flexibility they require to
implement available technologies. Specific products that have been used to
automate decision support activities include: spreadsheets, databases, data
warehouses, query and reporting tools and analysis modules on transaction
processing-based applications. While each performs specific functions, none
possesses the full range of features which assist an end-user or an organization
in transforming data into business-critical information.
Available Technologies
Spreadsheets are a widespread and popular approach to planning and
analysis. However, spreadsheets are two-dimensional in nature, and therefore are
not well-suited for planning and analysis requiring multidimensional views of
data. In addition, spreadsheets frequently require rekeying
33
<PAGE> 34
significant amounts of data, thereby increasing the risk of error, and are
cumbersome to change as organizations' structures evolve.
Relational database management systems ("RDBMSs") have been widely used as
storage repositories for high-volume, historical transaction information.
Businesses typically employ multiple RDBMSs, with each often designed for a
specific function. Accordingly, the limited ability to integrate and update data
from multiple relational databases ultimately restricts planning, analysis and
reporting.
Data warehouses have emerged as an approach to complement RDBMSs by acting
as central repositories for data loaded from various databases. However,
end-users often have read-only access to the data and may be unfamiliar with the
syntax necessary to extract this information from the databases. Consequently,
the assistance of MIS personnel is often necessary for the end-user to further
analyze and process business data.
Database query and reporting tools have been developed to make it easier to
access and view the contents of RDBMSs and data warehouses. These tools are
well-suited for viewing historical data and performing simple analytical
functions, but they (i) generally have limited ability to handle complex
hierarchies and analytical functions, and (ii) may be slow-performing and lead
to errors in cross-dimensional analysis. As a result, the Company believes that
organizations require more powerful software for accessing and analyzing RDBMS
data and warehouse data.
General ledgers, manufacturing resource planning, human resource management
and other transaction processing-based applications provide repositories of
information for specific corporate functions. While these applications often
have add-on analysis modules for particular functional areas, these modules are
generally incapable of integrating data from throughout the enterprise and have
limited planning, analysis and reporting capabilities. Typically, these systems
only generate pre-programmed reports. Consequently, decision-making end-users
cannot easily perform follow-on analyses.
Recently, OLAP has emerged as a technology capable of integrating,
organizing and presenting historical, as well as projected, data located
throughout an enterprise on a multidimensional basis. OLAP solutions permit
multidimensional views of data, providing businesses with the robust calculation
capabilities they require to transform data into information that facilitates
decision making. More specifically, OLAP software enables end-users to rapidly
understand data relationships by permitting the multidimensional analysis of
large amounts of data organized consistent with the end-user's perception of the
business (e.g., sales by region, by channel, by budget versus actual).
The availability of these technologies and the growing need for better and
faster decisions have increased demand for decision support solutions. End-users
seek easy-to-use decision support applications that provide solutions tailored
to specific industry or functional needs and can answer end-user's business
questions through robust multidimensional analytical capabilities. Further,
these applications must build on the organization's existing computing
infrastructure and integrate data located throughout the enterprise so that
existing and projected data can be transformed into useful information upon
which decisions can be based.
THE COMSHARE SOLUTION
Comshare develops, markets and supports client/server decision support
applications software designed to improve business analysis, planning, reporting
and decision making. The Company's software enables the enterprise-wide
integration and transformation of data into business-critical information. The
Company's products currently target three decision support markets: EIS,
financial reporting and retail. The following are key attributes of the Comshare
solution:
Complete Decision Support Solutions. The Company provides its customers
with complete decision support solutions, either through customizable or
packaged applications. The Company's software products address the full range of
a customer's information access and analysis needs, from data extraction to
end-user desktop access. Packaged applications are designed to satisfy the
specific
34
<PAGE> 35
decision support needs of an industry, such as merchandise planning for the
retail industry, or a function, such as financial consolidation or budgeting.
The Company then supports these applications through implementation, consulting,
training and support offered by the Company's team of industry and application
specialists.
Enterprise-Wide Integration of Data. The Company's decision support
solutions extract and integrate data that reside in a variety of spreadsheets,
RBDMSs, data warehouses, legacy systems and other data repositories. The
Company's decision support applications include data extraction tools which
leverage existing data sources, permitting quick and cost-effective
implementation of the Company's solutions. This integration of data in a common
database permits end-users throughout an enterprise to access and manipulate
information, enabling better and faster decision making.
On-Line Analytical Processing Capability. The Company leverages OLAP
technology in certain of its software products and is currently utilizing
Arbor's multidimensional database software, Essbase, to enable end-users to
rapidly access information, calculate data relationships and analyze large
amounts of data organized in multiple dimensions. More specifically, OLAP
software allows end-users to quickly understand data relationships by permitting
the multidimensional analysis of large amounts of data organized consistent with
the end-user's perception of the business (e.g. sales by region, by channel, by
budget versus actual).
Ease-of-Use. Comshare's software products provide information to end-users'
desktops by permitting database query, browsing and analysis through an
easy-to-use information visualizer, Commander Execu-View Server ("Execu-View"),
which provides data manipulation and viewing capability through simple
mouse-based operations; Briefing Book, a series of pre-formatted reports; or
through popular front-end applications, such as Microsoft Excel or Lotus 1-2-3.
The Company is also beta testing an information visualizer designed specifically
for Windows '95 which will combine and enhance the functionality of Execu-View
and Briefing Book. Such easy-to-use front-ends enable end-users to make quicker
decisions by allowing more intuitive access, manipulation and analysis of data.
By eliminating the need for end-users to become familiar with a new front-end,
query or programming language, Comshare's software products also lead to quick
adoption throughout the organization.
Client/Server Implementation. All of the Company's new products are
client/server-based. Most products perform computation-intensive functions on
the server, and only requested data is transmitted to the client over the
network. Consequently, information is processed faster, and end-users are able
to access data and make decisions more efficiently. In addition, the Company's
software products are available on popular client/server platforms, including
Windows on the client and Windows NT and OS/2 on the server. The availability of
the Company's products on these popular platforms allows for quick
implementation without costly hardware upgrades.
BUSINESS STRATEGY
The Company's objective is to be the leading provider of client/server
decision support applications software in its target markets. The Company's
strategy includes the following key elements:
Focus on Application-Specific Solutions. The Company seeks to differentiate
itself from its competitors by providing customizable and packaged applications
for specific industry or functional needs. With end-users requesting
decision-making solutions with increasingly sophisticated and specific
analytical capabilities, the Company plans to offer an expanded range of
application-specific products beyond the packaged applications currently offered
for financial reporting and retail decision support. The new applications
include a planning application designed for the consumer packaged goods industry
and an inventory allocation application targeting the retail industry.
Maintain Technology Leadership. The Company plans to maintain technology
leadership by continuing to develop new client/server software solutions that
are differentiated by application-specific functions and innovative internally
developed technology. For instance, the Company plans to make its new Detect and
Alert technology available for use with all of its major products. The
35
<PAGE> 36
Company also plans to commercially release Commander Decision, an enhanced
version of Commander OLAP which will feature a new end-user front-end which
enhances and combines Execu-View and Briefing Book, by December 31, 1995.
Leverage Third-Party Technologies. The Company actively seeks third-party
software tools offering the latest technological advances for inclusion in the
Company's product offerings. The Company believes the use of third-party tools
allows it to focus product development efforts on differentiating applications,
developing innovative technology and offering products which include the most
advanced technologies available, while reducing product development risk and
time to market.
Leverage Current Customer Base. The Company has implemented its
client/server and mainframe decision support applications software, and is
currently providing maintenance, at more than 3,000 corporate and public sector
customer sites. The Company seeks to leverage its current customer base to
generate additional revenue opportunities. Since the Company's products can be
used on an enterprise-wide basis, the Company targets further deployment of its
products at existing customer sites through sales of additional or new products,
the extension of its products into other departments and functional areas and
sales of client/server applications to customers converting from mainframe
systems. The Company also intends to expand its sales force so as to more fully
capitalize on existing and new customer sales opportunities and improve customer
service.
Leverage Global Organization. The Company seeks to expand its international
customer base by leveraging its established direct and indirect sales
distribution organizations currently located in 40 countries. By utilizing its
extensive worldwide sales network, the Company plans to address global demand
for decision support applications software and to provide the implementation,
consulting, training and support services its international customers require.
The Company plans to develop programs in conjunction with its international
agents and distributors to increase market penetration in key markets and more
fully offer its applications on a worldwide basis.
Provide Superior Customer Service and Support. The Company seeks to
differentiate itself from its competitors through its industry and application
expertise, enabling it to offer superior implementation, consulting, training
and support. Because end-users seek complete decision support solutions tailored
to their specific industry or functional needs, superior implementation,
consulting, training and support are essential for customer satisfaction and are
key components of the Company's solutions. The Company intends to leverage
customer satisfaction to increase sales at existing customer locations.
PRODUCTS
The Company's software applications are targeted at three decision support
markets: EIS, financial reporting and retail decision support. Software license
fees for the Company's decision support software applications vary widely
depending upon the product, platform and number of users supported. Add-on
features and products are available for additional fees. The initial amount paid
by customers purchasing decision support applications typically covers the
software license fee and product maintenance for the first 12 to 15 months of
the license. Customers may continue product maintenance thereafter for an annual
fee ranging from 15 to 20% of the software license fee. For fiscal 1995, the
software license fee for a typical EIS, financial reporting and retail decision
support application (including add-ons, but excluding maintenance) averaged
approximately $110,000, $82,000 and $115,000, respectively.
EXECUTIVE INFORMATION SYSTEMS (EIS)
Comshare was among the first software companies to successfully introduce
EIS products to the market. Today, Comshare is an industry leader in the EIS
market, based upon reports prepared by International Data Corporation, an
independent market research company, which ranks EIS software companies based
upon revenues.
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Within the EIS market, Comshare offers decision support applications
designed to provide information to a wide range of business users. Typical
applications include customer and product profitability, sales analysis,
business unit profitability analysis and critical success factor and key
performance indicator reporting. The Company designs its EIS applications so
that they may be customized by the Company's consultants, third parties or the
customers themselves to meet specific customer requirements.
Comshare's flagship EIS product for client/server systems, Commander OLAP,
is a suite of software which delivers customizable enterprise-wide business
planning, analysis, reporting and decision-making capabilities. Commander OLAP
capitalizes on the increased use of multidimensional analysis by business
professionals to solve business problems. Using multidimensional analysis,
business professionals view information in a manner which is consistent with
their perception of the underlying business. For example, for a business
organized along geographic lines and product lines, a business professional is
able to view this data across multiple time periods. Commander OLAP facilitates
these and other multidimensional analyses by permitting end-users to structure
business data across the multiple dimensions of importance to these users.
Commander OLAP consists of data extraction tools, a multidimensional
database, enhanced server technology, agent technology and a variety of GUIs.
Its data extraction tools collect data from multiple, disparate data sources,
including spreadsheets, RBDMSs, data warehouses, legacy systems and other data
repositories. Commander OLAP is also able to incorporate non-database data,
including text, voice annotation, video clips and personalized information
presented on GUIs. The software contains a powerful data extraction tool which
collects, integrates, summarizes and filters such data. A key component of
Commander OLAP is Arbor's multidimensional database software, Essbase. Essbase
is a comprehensive on-line analytical processing solution that stores and
summarizes data, and supports concurrent multi-user read-write for
multidimensional analysis. Comshare enhances Essbase with Commander Server, its
internally developed technology, that increases the speed of computation-
intensive functions, such as sorting and ad hoc calculations, by processing the
calculations on the server. Ad hoc calculations can be defined by end-users as
they work with data at their desktops and results can be stored and used for
further analysis. For example, an end-user may want to calculate a budget
variance, using budget and actual data existing in the database. The end-user
could then drill down to analyze the underlying detail or perform follow-on
analyses using these budget variance calculations, such as sorting the variances
by size.
Commander OLAP is enhanced by internally developed Detect and Alert
software which automates personal monitoring of internal and external (Dow Jones
and Reuters) databases to reduce data overload and optimize the end-user's time.
Detect and Alert is comprised of rule-based software agents that detect problems
and exceptions and alert the end-user to them. The agents are programmed by the
end-user to monitor targeted databases for changes, trends and other patterns
that fall within detection rules established by the end-user. These changes,
trends and patterns trigger alerts that are immediately sent to the end-user by
Commander NewsAlert, an easy-to-read electronic newspaper format. Detect and
Alert allows the end-user to easily identify the data that triggered a specific
alert, without having to generate complicated queries to review such data.
Rather than spending their time performing routine surveillance of databases,
end-users are free to analyze data for critical decision making.
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[DIAGRAM]
A diagram depicting the Commander OLAP application illustrates how data
extraction tools into Commander OLAP, and then transported to the desktop
through various front-ends.
Commander OLAP provides concise current information to the end-user's
desktop through one of the following front-ends: Execu-View, Comshare's
information visualizer; Briefing Book, a series of pre-formatted reports;
Microsoft Excel; or Lotus 1-2-3. The end-user's selection of the appropriate
front-end is based on the user's requirements for ease-of-use versus
functionality. Execu-View provides the end-user with direct access to detailed
data. By pointing and clicking, end-users are able to easily and quickly query
the information, drill down for more detail, change dimensions and extract data
for further analysis. These capabilities ensure that all of the data contained
in the database are equally available for inspection, rotation and side-by-side
comparison. Briefing Book provides the user with quick and easy access to
business information through pre-formatted reports, while Microsoft Excel and
Lotus 1-2-3 provide end-users with the spreadsheet capability with which they
are familiar. For an example illustrating how a Comshare customer has used
Commander OLAP, see "Business -- Customers."
The Company plans the commercial release of Commander Decision, an enhanced
version of Commander OLAP, by December 31, 1995. Commander Decision will be
marketed with a new end-user front-end, which will combine and enhance
Execu-View and Briefing Book, the front-ends currently offered with Commander
OLAP. Commander Decision is specifically designed for the Windows '95 and
Windows NT operating systems, and will allow the end-user to perform cross-
dimensional analysis and has built-in capabilities for various types of data
analysis. The Commander Decision server will tightly integrate internally
developed Detect and Alert software such that the end-user will be able to
easily build alerts directly from the desktop as the user reviews information in
Commander Decision.
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Comshare also sells and supports System W and IFPS decision support
software for use on mainframe computers. Customers use System W and IFPS for
applications similar to those performed through Commander OLAP, although the
multidimensional database resides on the mainframe, rather than on the server.
Because market demand has shifted towards client/server technology, these
mainframe-related portions of Comshare's EIS business have declined
significantly in recent years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FINANCIAL REPORTING APPLICATIONS
Comshare offers a suite of decision support consolidation, financial
reporting and budgeting applications targeted at the financial departments of
organizations. Comshare's principal financial reporting applications are
Commander FDC and Commander Budget, complementary products that, when used
together, share a single database to facilitate integration of historical and
budgetary financial data located throughout the enterprise for management
reporting.
Commander FDC collects and consolidates financial data from different
general ledgers within a multi-division or multi-location company and produces
consolidated financial reports for management and statutory reporting. Commander
FDC has built-in controls to ensure data accuracy and security features to
support its multi-user capabilities. The product also performs currency
translation, handles intercompany eliminations and account reclassifications and
is readily adaptable to the changing reporting needs of the end-user. For an
example illustrating how a Comshare customer has used Commander FDC, see
"Business -- Customers."
Commander Budget is a distributed budgeting system which allows managers
throughout an organization to prepare budgets using Microsoft Excel or Lotus
1-2-3 front-ends and enables an organization's central financial group to
consolidate the budgets. Commander Budget shares the same basic architecture of
Commander FDC, offering similar capabilities such as currency translation,
security and multi-user functionality.
Commander FDC and Commander Budget consist of data extraction tools, a
central database and a choice of GUIs. Similar to Commander OLAP, their data
extraction tools collect, integrate, summarize and filter data from multiple,
disparate data sources. Commander FDC and Commander Budget, when used together,
share a Btrieve database that permits the integration of consolidated historical
and budgetary financial data, giving the end-user the option of a
fully-integrated financial management system. Commander FDC and Commander Budget
provide end-users with a choice of front-ends. Both are offered with Microsoft
Excel, and Commander Budget is also offered with Lotus 1-2-3. Customers may
separately purchase Execu-View Finance, which is Execu-View sold under the
Company's financial reporting product line. Execu-View Finance allows users
point-and-click access to interactively browse, report, graph and analyze
information generated by Commander FDC
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and Commander Budget. Comshare also offers Commander Prism, a multidimensional
database that resides on the end-user's desktop and provides analytical and
report writing capabilities.
A diagram depicting the Commander FDC and Commander Budget applications
illustrates how data is collected from general ledgers and spreadsheets,
transferred to a shared application database, processed in the FDC/Budget Server
and then delivered to the desktop by a range of client front-ends.
RETAIL DECISION SUPPORT APPLICATIONS
Comshare's ARTHUR product line is a suite of retail decision support
software that enables retailers to plan merchandise purchases to control
inventory levels, tailor their purchases to consumer preferences and market
trends and track and analyze actual sales performance. Comshare designs its
ARTHUR products to improve the productivity and profitability of its retail
customers and to serve as a strategic planning tool for retailers by allowing
them to test merchandise plans and identify market opportunities, changing sales
trends or problems.
ARTHUR Planning is a suite of software offering retailers a packaged
application which enables them to create detailed merchandise plans, analyze
information and test merchandise strategies before placing orders and committing
resources. The product also helps buyers match merchandise assortments to their
customers' requirements and the characteristics of their stores. ARTHUR Planning
can be used by smaller retailers on a desktop platform or larger retailers using
ARTHUR Plan Monitor as the data repository. For an example illustrating how a
Comshare customer has used ARTHUR Planning, see "Business -- Customers."
ARTHUR Plan Monitor is server-based and has Arbor's Essbase as its core. It
may be used in conjunction with ARTHUR Planning for larger retail applications,
as described above, or as the database for multidimensional sales reporting and
tracking.
Comshare also offers ARTHUR Performance Tracking, which is mainframe-based.
Both ARTHUR Plan Monitor and ARTHUR Performance Tracking, in combination with
ARTHURView, report weekly
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sales information across the retailer's product lines and geographic regions in
various levels of detail. They provide up-to-date merchandise performance
information, giving retailers the opportunity to change merchandise plans in
response to consumer preferences and market trends. Comshare's Detect and Alert
software is also offered in connection with ARTHUR products, so variances and
trends can automatically and more easily be identified. ARTHUR Performance
Tracking has an architecture similar to Commander OLAP, except that the
multidimensional database is mainframe-based.
These products deliver vital information to the end-user through
ARTHURView, which is Execu-View sold under the ARTHUR brand name, or Briefing
Book, a series of pre-formatted reports, which may be distributed throughout a
retailing organization.
A diagram depicting the ARTHUR Planning application illustrates how data is
extracted from internal databases with Arthur Planning's data extraction tools,
transported to a multidimensional database, processed in the ARTHUR
Planning Server and delivered to the desktop by various client front-ends.
IMPLEMENTATION, CONSULTING, TRAINING, SUPPORT AND MAINTENANCE
The Company offers implementation, consulting, training, pre-sales and
post-sales technical support and maintenance to complement its product
offerings. Comshare supports its product offerings with customer support from
its teams of industry and functional decision support specialists and its
worldwide agent/distributor network. Support for Comshare's products starts
before the sale, with Comshare providing its customers with pre-sales technical
support services. Implementation and consulting services are offered in all
three of the Company's decision support software markets, and are organized by
industry and/or functional decision support expertise. These services include
application design and modification, installation assistance, implementation and
troubleshooting support. Comshare also offers training at customer sites, at its
local sales offices and at its central training centers in Ann Arbor, Michigan
and London, England.
The Company's maintenance customers receive product enhancements and
updates, bug fixing and unlimited customer telephone helpline support and access
to Comshare's CompuServe forum. Beginning 12 to 15 months following the sale,
maintenance customers pay an annual maintenance fee, which is typically 15 to 20
percent of the license fee.
CUSTOMERS
Comshare has implemented its client/server and mainframe decision support
applications software, and is currently providing maintenance, at more than
3,000 corporate and public sector
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customer sites in 40 countries. Comshare's diversified customer base includes
many Fortune 1000 and Financial Times 1000 industrial companies as well as large
and mid-sized companies in the communications, financial services, health care,
retail and transportation industries, and many governmental and other public
sector organizations. The following table includes a representative sample of
Comshare customers who purchased $50,000 or more in software licenses from
Comshare in fiscal 1995:
<TABLE>
<CAPTION>
EXECUTIVE INFORMATION FINANCIAL REPORTING RETAIL DECISION
SYSTEMS (EIS) APPLICATIONS SUPPORT APPLICATIONS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
AlliedSignal Inc. Alberto-Culver USA, Inc. Boscov's Department
AMP Incorporated Barclays Bank PLC Stores Inc.
AT&T Corporation Cargill, Inc. C&J Clark America Inc.
The Bear Stearns Companies Inc. Franklin Resources, Inc. Coach Leatherware Co., Inc.
British Gas PLC Hartmarx Corporation CompUSA Inc.
Bristol-Myers Squibb Co. Insignia Financial Group, Inc. Country Road Clothing
Canadian Coast Guard Interprovincial Pipe Line Inc. Pty. Ltd.
Chase Manhattan Corporation Kerr McGee Chemical Co. Dylex Limited
CIBA Vision Corp., a subsidiary Lee Company Foot Action USA
of CIBA-Geigy Ltd. Nestle France S.A. Gantos, Inc.
Columbia Gas System Service Corp. Paging Network, Inc. ISSC Corporation
Internal Revenue Service Pegasus Gold Inc. (Eckerd Drugs)
Johnson & Johnson, Inc. Progress Software Corporation J. Crew Group, Inc.
Lenox, Inc. Bank of America National Trust Jockey International, Inc.
Liz Claiborne, Inc. & Savings Assn. Kaufhalle AG
Old Kent Financial Corp. Skadden, Arps, Slate, Neiman Marcus Group
The Reader's Digest Meagher & Flom NIKE, Inc.
Association, Inc. Starbucks Corporation Oshman's Sporting
Roadway Package System, Inc. Time Warner, Inc. Goods, Inc.
Rohm & Haas Co. Toshiba America, Inc. Service Merchandise Co., Inc.
Shell Oil Company Toyota Motor Corporation Sportmart Inc.
Textron Inc. Tropicana Products, Inc. Sterling Inc.
TRW Inc. Watts Regulator Co. Victoria's Secret Stores
U.S. Bancorp
Wells Fargo Bank, N.A.
</TABLE>
No customer has accounted for more than 5% of the Company's total revenues
in any of its three most recent fiscal years.
The following examples illustrate how organizations use Comshare's decision
support software to make business decisions. These examples have been prepared
by the Company based on information provided by its customers.
EIS. AlliedSignal, Inc. ("Allied"), a major world-wide manufacturer, is
using Commander OLAP to collect and access data relating to its aerospace,
automotive and engineered materials sectors. Prior to implementing Commander
OLAP, reports needed by senior management at Allied's aerospace sector were
unavailable until data from dozens of division executives at remote sites had
been collected, consolidated and summarized. Other important information was
unavailable because it had never been collected at the divisional level. Allied
contacted Comshare to enable its aerospace sector's senior management to get
immediate desktop access to critical business information. Within three months
of developing a prototype, Comshare installed the first EIS at the aerospace
sector's headquarters. After a month of training sessions, Comshare's EIS was
rolled out to the desktops of more than 150 people at 15 different aerospace
sector sites. Within 18 months, the aerospace sector's 150-user EIS had become a
500-user system spanning all three sectors of Allied's operations. With
Commander OLAP, Allied's key managers are now able to obtain within seconds at
their desktops such information as the top ten customers by business unit; net
sales and income by customer and product line; and unit sales by foreign versus
domestic or military versus commercial.
Financial Reporting. The Toro Company ("Toro"), a leading manufacturer of
lawn mowers and snow blowers, is using Comshare's Commander FDC to collect and
consolidate financial data. Prior to
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implementing Commander FDC, Toro's financial staff created reports by rekeying
data into spreadsheets, printing out dozens of documents and distributing them
in thick report packages. This process took time and introduced a greater chance
of error. After implementing Commander FDC, Toro is now able to track data from
175 units, consolidate it by division and on an enterprise-wide basis and then
break down Toro's eight divisions by product line, geographical location and, in
some cases, distribution channel. Each month, Toro does three different
consolidations. Information is reported in a variety of different ways: actual,
prior year, plan, current projection and prior projection. Information provided
by Toro indicates that Commander FDC has enabled Toro to reduce the time
required to close its books from eight to four days and has helped it to
distribute its financial reports two weeks earlier.
Retail Decision Support. Gantos, Inc. ("Gantos"), a high fashion apparel
retailer, is using ARTHUR Planning to develop detailed merchandise plans that
handle such details as average stock, turnover, sales and gross margin
calculations. Prior to implementing ARTHUR Planning, Gantos's planners would
create merchandise plans based upon guidelines developed by the chief executive
officer and the director of merchandise planning. However, because each plan and
subsequent revisions had to be sent to the host and loaded into another program
for processing, it would be the next day, at the earliest, before the planner
could review the impact of those revisions on the plan. With the implementation
of ARTHUR Planning, data captured through bar code scanning at the point of sale
at 113 stores in the Midwest are transmitted to a server and transferred into
ARTHUR Planning. The data can then be manipulated on line by buyers and planners
to create merchandise plans. Since these plans then become part of the database,
plan changes can be directly entered into the system and, in a matter of
minutes, the planner has a revised plan. Gantos has found that ARTHUR Planning
has reduced planning time and allows planners to test more merchandising
strategies before resources are committed. In addition, ARTHUR Planning has
helped Gantos to more quickly create numerous bottom-up divisional merchandise
plans which conform to overall company-wide merchandise planning goals.
SALES AND MARKETING
Comshare products and services are sold on a worldwide basis by a direct
sales operation and by an extensive worldwide agent/distributor network. Both of
these complementary distribution channels leverage the Company's extensive
industry and application expertise and offer pre-sales and post-sales technical
customer support.
The Company sells and markets its software products and services in the
United States, Canada, United Kingdom, France, Germany and Australia through a
direct sales organization. Direct sales operations are organized geographically,
and within a geographic region, are organized generally by industry or
functional decision support expertise.
The sales cycle begins with the generation of sales leads through seminars,
trade journals and trade shows. After a lead is qualified, the Company's sales
force analyzes the potential customer's decision support needs and makes a
presentation to the potential customer. After obtaining a preliminary
commitment, the Company often develops customized demonstrations to illustrate
how the Company's products will satisfy a customer's specific needs. The
negotiation of a contract concludes the sales cycle, which varies in length from
customer to customer, but typically requires three to six months or more.
The Company has an extensive agent/distributor network covering 34
countries not directly served by the Company. The Company has selected
established software application vendors or systems integration firms to act as
agents and distributors to market, implement and support Comshare products in
their respective geographic areas. Comshare derived 17% of its total revenue in
fiscal 1995 from the Company's agent/distributor network.
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RESEARCH AND PRODUCT DEVELOPMENT
The Company's product development strategy is to expand the range of its
application-specific products, develop new client/server software differentiated
by innovative internally developed technology and incorporate third-party tools
offering the latest technological advances into its products. The Company has
increasingly incorporated third-party tools into its products to focus its
product development efforts on applications, while reducing product development
risk and time to market. At September 30, 1995 the Company had approximately 140
product development specialists, organized by EIS, financial reporting or retail
decision support application expertise, who are charged with implementing the
Company's product development strategy. Located in Ann Arbor, Michigan and
Leicester, England, these specialists develop new products and product
enhancements by considering customer suggestions, competitive offerings,
technology trends and market opportunities.
The Company is developing a planning application focused on the consumer
packaged goods industry which enables marketing and sales managers to both plan
for changes in consumer demand and to optimize pricing, promotions and
inventory. Based on the ARTHUR Planning technology, this new product will allow
consumer packaged goods manufacturers to better plan product sales and margins.
The Company is also developing a new application, ARTHUR Allocation,
targeting the retail industry. ARTHUR Allocation will enable a retailer to
improve sales and margins by quickly and easily determining which stores should
receive merchandise shipped to the retailer's warehouses.
The Company plans to offer its Detect and Alert technology with its
financial reporting products. Detect and Alert enables end-users to identify
variances, trends and values that fall within detection rules established by the
end-user. The Company is also developing enhanced versions of Commander FDC and
Commander Budget which tightly integrate Commander Prism, a multidimensional
database residing on the desktop, for more efficient analysis and reporting.
The Company plans to offer the new end-user front-end to be offered with
Commander Decision with certain of the Company's ARTHUR products.
There can be no assurance that products under development will be completed
successfully or on time, or that they will include the features required to
achieve market acceptance. Failure of these new product development projects
could have a material adverse effect on the Company's business, results of
operations and financial condition.
The markets for the Company's products are characterized by rapid
technological advances, evolving industry standards, changes in customer
requirements and frequent introductions and enhancements of competitive
products. The Company's success and future financial performance will depend on
its ability to anticipate these changes as they occur and to enhance its
existing products and develop new products in a timely and cost-effective manner
which keeps pace with these changes. There can be no assurance that the Company
will be able to successfully accomplish future technological or product
transitions, that the Company will not experience significant delays in
developing new products or enhancements required to accomplish such transitions
or that the Company will have sufficient financial resources available to it to
finance such efforts. There can be no assurance as to the impact that any such
transition would have on the Company's revenue or profitability. In addition,
there can be no assurance that the Company's new products and enhancements will
adequately address the changing needs of the marketplace and achieve market
acceptance or that developments by others will not render the Company's products
obsolete or noncompetitive. Any such failure could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Risk Factors -- Risks Associated With Rapid Technological Change."
INTELLECTUAL PROPERTY
Comshare distributes its software products under software license
agreements which generally grant customers a non-exclusive, non-transferable
license to use the Company's products. The
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Company considers its software products to be valuable and unique assets and
actively attempts to protect them contractually by generally restricting usage
to internal operations, and prohibiting the unauthorized reproduction or
transfer to third parties. The Company also believes that the nature of its
customers and the provision of continuing maintenance and support services
reduce the risk of unauthorized reproduction.
In addition, the Company relies on copyright protection and trade secret
laws to protect proprietary information. The laws of some foreign countries do
not protect the Company's proprietary rights to the same extent as do the laws
of the United States. In addition, certain provisions of the Company's contracts
prohibiting unauthorized reproduction may be unenforceable under the laws of
certain foreign countries. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or development by others of similar or
superior technology. Although the Company believes that its products and
technology do not infringe on any existing proprietary rights of others, there
can be no assurance that third parties will not assert infringement claims in
the future or that any such claims will not require the Company to enter into
license arrangements or result in litigation, regardless of the merits of such
claims. No assurance can be given that any necessary licenses will be available
or that, if available, such licenses can be obtained on commercially reasonable
terms. Should litigation with respect to any such claims commence, such
litigation could be extremely expensive and time-consuming and could have a
material adverse effect on the Company's business, results of operations and
financial condition regardless of the outcome of such litigation. See "Risk
Factors -- Limited Intellectual Property Protection."
LICENSED TECHNOLOGIES
The Company licenses certain software programs and tools from third parties
and incorporates them into the Company's products. Generally, these licenses are
non-exclusive worldwide licenses providing for varying royalty payments and
expiration dates. The Company believes that the inclusion of third-party
software programs and tools in its products reduces product development risk and
time to market.
Examples of third-party software tools that the Company incorporates into
its products include Arbor's Essbase, Btrieve Technology, Inc.'s Btrieve
database, Microsoft Excel and Strategic Mapping, Inc.'s Atlas View SDK. The
Company is substantially dependent upon Essbase, which is an integral part of
the Company's Commander OLAP, ARTHUR Planning and Plan Monitor products and
certain planned new products. The Company's worldwide license for Essbase
expires December 31, 2001. The license may also be terminated in the event of an
uncured material breach.
Because Essbase is the OLAP technology which provides the critical
multidimensional functionality for Commander OLAP and is an integral component
of the Company's ARTHUR product line, loss of the Company's rights to Essbase,
or any change impacting the availability of Essbase, could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, if there is any significant change in the
competitiveness of Essbase, the Company could be required to undertake an
expensive and time-consuming revision of its products to operate on the
competitive product or technology and the Company's business, results of
operations and financial condition could be materially adversely affected.
In the future, the Company intends to increase the rate at which it
licenses software tools from third parties for incorporation into its products,
as part of its strategy to reduce product development risk and time to market
for new products and product enhancements. Incorporating third-party software
into its products subjects the Company to risks that its third-party vendors
will refuse to renew a license, or become unable or unwilling to support and
enhance their products in a manner that satisfies the Company's requirements. If
the Company were unable to renew these licenses, or if its third party vendors
were to become unable or unwilling to support and enhance their products, the
Company could be required to devote additional resources to the enhancement and
support of these
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products or to acquire or develop software providing equivalent capabilities,
which could adversely impact the ability of the Company to sell its current
products, cause delays in the development and introduction of new products and
increase the Company's cost of development of such products. The occurrence of
any of the foregoing risks associated with licensing software from third parties
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Risk Factors -- Reliance on
Relationships with Arbor Software Corporation and Other Third Parties."
COMPETITION
The markets for Comshare's software products are highly competitive and
characterized by continued change and rapid technological advancements. In
general, the Company competes on the basis of: (1) software application utility,
which includes the extent to which its product offerings meet specific end-user
markets and needs; (2) functionality, which includes the breadth and depth of
features and functions and ease-of-use; (3) service and support, which includes
the range and quality of technical support, training and consulting services;
(4) vendor reputation; (5) product architecture, which includes distributed
computing capability, and ease of customization and integration with other
applications; and (6) product pricing in relation to performance. The Company
believes it competes favorably with respect to these factors.
The client/server applications software market, including the market for
decision support software, is intensely competitive, highly fragmented and
subject to rapid change and evolving industry standards. Because the Company
offers multiple products, the Company competes with a variety of other companies
depending on the target market for their applications software products. In the
EIS market, the Company competes primarily with Oracle Corporation, which
recently purchased Express software from Information Resources, Inc.;
Information Resources, Inc., which retained rights to Express software for
certain applications; The Dun and Bradstreet Corporation, which purchased Pilot
Software; and certain other software vendors. In the financial reporting
applications market, the Company's principal competitor is Hyperion Software
Corporation, which is generally recognized as the current market leader for
stand-alone financial consolidation applications. In the retail decision support
applications market, the Company competes with traditional EIS providers that do
not have specific merchandise planning applications and with a number of smaller
software providers. The Company also competes with a variety of additional
software companies, third-party professional services organizations that develop
custom software and with internal information technology departments which
develop decision support solutions. Among the Company's current and potential
competitors are also a number of large software companies, including developers
of spreadsheets, RDBMSs, data warehouses, database query and reporting tools,
transaction processing-based applications and OLAP technologies, that may elect
to increase the decision support capabilities of their current products or that
may develop or acquire products that compete with the Company's products. In
addition, recent acquisitions and adoptions of OLAP technologies by various
software vendors may result in increased competition in the Company's markets.
Increased competition could result in price reductions, reduced operating
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of products than can the
Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, results of operations and financial condition. See "Risk Factors --
Competition."
46
<PAGE> 47
EMPLOYEES
Comshare had 694 full-time employees at September 30, 1995, including 259
in sales and marketing, 157 in consulting and implementation services, 141 in
research and product development and 137 in customer support and administration.
None of the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes that its relations with employees are
good.
FACILITIES
The Company's headquarters is located in Ann Arbor, Michigan in a leased
facility consisting of approximately 61,200 square feet. This lease expires on
February 28, 2005. The Company also leases a 52,100 square feet facility in
London, England under a lease that expires on December 9, 2007. This facility is
used for administration, sales, marketing and implementation services. In
addition, the Company leases sales offices in 25 major cities in the United
States, Europe and Australia and maintains a product development facility in
Leicester, England.
LEGAL PROCEEDINGS
The Company is not a party to any litigation that, in the opinion of
management, could reasonably be expected to have a material adverse impact on
the Company's business, results of operations or financial condition.
47
<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of the executive officers and directors of
the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------------
<S> <C> <C>
T. Wallace Wrathall.............. 58 President, Chief Executive Officer and Director
Stephen R. Fluin................. 41 Vice President, European Operations
Dennis G. Ganster................ 44 Senior Vice President and Chief Technology Officer
Kathryn A. Jehle................. 43 Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Dion T. O'Leary.................. 51 Vice President, Agents and Distributors
Charles J. Palmer................ 50 Vice President, North American EIS Sales
Steven J. Tonissen............... 46 Senior Vice President, Marketing
Donald J. Walker................. 55 Senior Vice President
Richard L. Crandall.............. 52 Chairman of the Board of Directors
Geoffrey B. Bloom................ 54 Director
Daniel T. Carroll................ 69 Director
Stanley R. Day................... 70 Director
W. John Driscoll................. 66 Director
Alan G. Merten................... 53 Director
George R. Mrkonic................ 43 Director
John F. Rockart.................. 64 Director
</TABLE>
Mr. Wrathall assumed the position of President and Chief Executive Officer
of the Company in April 1994, after having served as the Company's Chief
Financial Officer for 18 years and as a Senior Vice President since 1988.
Mr. Fluin was named Vice President, European Operations of the Company in
November 1994, after having served as the Company's Director of United Kingdom
Sales for over seven years. Mr. Fluin has been with the Company in various
positions since 1978.
Mr. Ganster was named Senior Vice President in July 1994 after having
served as Vice President and Chief Technology Officer since April 1993. He had
previously served as the Company's Vice President of Product Management from
July 1988 to April 1993, and has been with the Company in various positions
since 1972.
Ms. Jehle was named Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary in May 1994. Ms. Jehle served as Chief
Financial Officer of Pharmavene, Inc., a pharmaceutical company, from June 1993
to May 1994; and as Vice President of AMF Bowling Centers, Inc. from May 1990 to
June 1993. Ms. Jehle was previously employed by the Company from 1981 through
1987, most recently as Vice President and Treasurer.
Mr. O'Leary was named Vice President, Agents and Distributors of the
Company in November 1994 after having served as the Company's Director of Agents
and Distributors for over ten years. Mr. O'Leary has been with the Company in
various positions since 1971.
Mr. Palmer was named an executive officer of the Company in October 1995
and has served as Vice President, North American EIS Sales, of the Company since
July 1994. He previously served as Vice
48
<PAGE> 49
President, Eastern Region North American Sales, from July 1993 to July 1994,
after having served as Vice President, U.S. Sales, from July 1990 to July 1993.
Mr. Palmer has been with the Company in various positions since 1976.
Mr. Tonissen was named Senior Vice President, Marketing of the Company in
June 1995. Prior to joining the Company, Mr. Tonissen served as a principal in
The Spectrum Group, a management and information system consulting organization,
from December 1992 until June 1995; Sales Director of ONTOS, an object-oriented
database company, from December 1991 to December 1992; Managing Director of the
Telon Division of Pansophic Systems, a computer software and service company,
which was later acquired by Computer Associates, from June 1991 to December
1991; and as Director of Marketing of the same division of Pansophic from
January 1990 to June 1991.
Mr. Walker has been a Senior Vice President of the Company since July 1988
and has been with the Company in various positions since 1974.
Mr. Crandall was named Chairman of the Board of the Company in April 1994,
after having served as President and Chief Executive Officer of the Company
since 1970. Mr. Crandall also serves as a director of Computer Task Group, Inc.
Mr. Bloom is the President and Chief Executive Officer, Wolverine World
Wide, Inc, a manufacturer and seller of footwear. Mr. Bloom assumed such
position in 1993, after serving as Chief Operating Officer of such company from
1987 to 1993.
Mr. Carroll is the Chairman and President, The Carroll Group, Inc., a
management consulting company. He also serves as a director of the following
corporations: A.M. Castle & Co., American Woodmark Corporation, Aon Corporation,
DeSoto, Inc., Diebold, Inc., Michigan National Corporation, Oshkosh Truck
Corporation, UDC Homes, Inc., Wolverine World Wide, Inc. and Woodhead
Industries, Inc.
Mr. Day is the retired Chairman of the Board, Champion Enterprises, Inc., a
manufacturer of manufactured homes and mid-sized buses.
Mr. Driscoll is the retired President, Rock Island Company, a private
investment company. He also serves as a director of the following corporations:
The John Nuveen Company, The St. Paul Companies, Inc., Northern States Power
Company and Weyerhaeuser Company.
Mr. Merten is the Dean, Johnson Graduate School of Management, Cornell
University. He also serves as a director of Tompkins County Trust Company,
American Capital Bond Fund, Inc., American Capital Convertible Securities, Inc.
and American Capital Income Trust and as a trustee of the Common Sense Trust.
Mr. Mrkonic is the Vice Chairman and President, Borders Group, Inc., an
operator of book and music stores. He assumed his current position in December
1994 and has been a director of Borders Group, Inc. since August 1994. Mr.
Mrkonic served as Executive Vice President, Specialty Retailing Group of K-Mart
Corporation, a general merchandise retailer, from November 1990 to November
1994. He was President of Eyelab, Inc., an optical goods retailer, from 1987 to
1990. Mr. Mrkonic is also a director of The Sports Authority, Inc., OfficeMax,
Inc. and Champion Enterprises, Inc.
Mr. Rockart is a Director and Senior Lecturer at the Center for Information
Systems Research, Massachusetts Institute of Technology. He also serves as a
director of Keane, Inc. and Renaissance Solutions, Inc.
49
<PAGE> 50
STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1995, and
as adjusted to reflect the sale by the Selling Shareholders of the shares of
Common Stock offered by this Prospectus (assuming no exercise of the
Underwriters' over allotment option), by all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
SHARES TO BE
SHARES BENEFICIALLY BENEFICIALLY OWNED
OWNED PRIOR TO THE AFTER THE
OFFERING(1) SHARES TO BE OFFERING(1)
------------------------ SOLD IN THE --------------------
NAME NUMBER PERCENT(2) OFFERING(3) NUMBER PERCENT
- ------------------------------- --------- ---------- --------------- ------- -------
<S> <C> <C> <C> <C> <C>
All executive officers and
directors as a group (16
persons)(4).................. 1,358,538 16.2% 567,040 791,498 8.3%
</TABLE>
- ---------------
(1) To the best of the Company's knowledge, based on information reported by
such directors and officers or contained in the Company's shareholder
records. Unless otherwise indicated by any additional information included
in the footnotes to the table, the beneficial owners are presumed to have
sole voting and investment power with respect to all shares shown.
(2) The total number of shares of Common Stock deemed outstanding prior to this
Offering was 8,240,273 as of September 30, 1995. The number of shares of
Common Stock deemed outstanding after this Offering includes the additional
1,125,000 shares being offered by the Company in this Offering, and assumes
no exercise of the Underwriters' over-allotment option.
(3) The Selling Shareholders include Messrs. Crandall, Driscoll and certain
trusts of which Mr. Driscoll serves as a trustee. For a description of the
shares of Common Stock to be sold in the Offering by Messrs. Crandall,
Driscoll and the trusts of which Mr. Driscoll serves as a trustee, see
"Selling Shareholders." No other executive officer or director is
participating in this Offering as a Selling Shareholder.
(4) Includes 168,749 shares which certain directors and executive officers have,
or within 60 days of September 30, 1995 will have, the right to acquire
pursuant to the presently exercisable portion of options granted under the
Company's 1988 Stock Option Plan; 593,209 shares, referred to in Note (5)
under "Selling Shareholders," as to which beneficial ownership is
disclaimed; 11,153 shares that have been allocated to the accounts of
members of the group under the Company's Employee Stock Ownership Plan; and
36,000 shares referred to in Note (2) under "Selling Shareholders" owned by
the minor son of a director of the Company, as to which beneficial ownership
is disclaimed.
50
<PAGE> 51
SELLING SHAREHOLDERS
All of the Selling Shareholders, other than Richard L. Crandall, are
descendants or spouses of descendants of Frederick Weyerhaeuser, trusts for the
benefit of such persons, a corporation owned by such persons and trusts or a
foundation affiliated with such persons (the "Weyerhaeuser Family"). W. John
Driscoll, who has served as a director of the Company since 1970, and his
spouse, are members of the Weyerhaeuser Family and are Selling Shareholders. At
September 30, 1995, the members of the Weyerhaeuser Family, including the
Selling Shareholders, beneficially owned 1,452,819 shares, or 17.6%, of the
Common Stock. Following this Offering, the members of the Weyerhaeuser Family,
including the Selling Shareholders, will beneficially own 446,298 shares, or
4.8%, of the Common Stock. At September 30, 1995, the only member of the
Weyerhaeuser Family beneficially owning more than 1% of the Common Stock was
Rock Island Company, which beneficially owned 511,407 shares, or 6.2%, of the
Common Stock. The information pertaining to Rock Island Company is based on a
Schedule 13D Report, dated July 3, 1995. Following this Offering, no member of
the Weyerhaeuser Family will beneficially own more than 1% of the Common Stock.
Richard L. Crandall, Chairman of the Board of the Company, is also a Selling
Shareholder. At September 30, 1995, Mr. Crandall beneficially owned 209,809
shares, or 2.5%, of the Common Stock. Following this Offering, Mr. Crandall will
beneficially own 171,330 shares, or 1.8%, of the Common Stock.
The following table sets forth the name of each Selling Shareholder for
whose account shares of Common Stock are offered by this Prospectus, the number
of shares of Common Stock currently held for the account of such Selling
Shareholder, the number of shares of Common Stock being sold for the account of
such Selling Shareholder in this Offering (assuming no exercise of the
Underwriters' over-allotment option) and the number of shares of Common Stock
that will be held for the account of such Selling Shareholder following this
Offering (assuming no exercise of the Underwriters' over-allotment option).
<TABLE>
<CAPTION>
SHARES HELD FOR SHARES TO BE HELD
ACCOUNT PRIOR SHARES TO BE SOLD FOR ACCOUNT AFTER
NAME TO OFFERING IN THE OFFERING THE OFFERING
- -------------------------------------------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
Rock Island Company(1)............................ 511,407 444,702 66,705
Richard L. Crandall(2)............................ 209,809 38,479 171,330
Elizabeth S. Driscoll............................. 68,085 59,205 8,880
Rev. Trust of Rudolph W. Driscoll, Jr.(3)......... 47,187 41,033 6,154
Frederick K. Weyerhaeuser Trust of 1939 fbo Vivian
W. Piasecki(4).................................. 44,775 38,935 5,840
Elizabeth C. Driscoll............................. 42,504 36,961 5,543
John B. Driscoll.................................. 42,504 36,961 5,543
Margaret L. Driscoll.............................. 42,504 36,961 5,543
William L. Driscoll............................... 42,504 36,961 5,543
Stewardship Foundation............................ 31,692 27,559 4,133
W. John Driscoll(5)............................... 26,250 9,783 16,467
Rudolph W. Driscoll............................... 22,500 19,565 2,935
Charles L. Weyerhaeuser........................... 22,500 19,565 2,935
F. T. Weyerhaeuser(6)............................. 22,500 19,565 2,935
Trust U/W of F. Weyerhaeuser
fbo V. Rasmussen(7)............................. 22,500 19,565 2,935
Michael W. Piasecki............................... 14,719 10,003 4,716
1966 Trust #2 of Sarah-Maud W. Sivertsen(8)....... 11,700 10,173 1,527
1966 Trust #3 of Sarah-Maud W. Sivertsen(9)....... 11,700 10,173 1,527
1966 Trust #4 of Sarah-Maud W. Sivertsen(10)...... 11,700 10,173 1,527
Trust for Elise B. Rosenberry(11)................. 10,800 9,391 1,409
Trust for Lucy Rosenberry(12)..................... 10,800 9,391 1,409
Trust for Walter S. Rosenberry III(13)............ 10,800 9,391 1,409
Trust U/W of J.P. Weyerhaeuser Jr. fbo Elizabeth
W. Meadowcroft(14).............................. 10,605 9,221 1,384
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
SHARES HELD FOR SHARES TO BE HELD
ACCOUNT PRIOR SHARES TO BE SOLD FOR ACCOUNT AFTER
NAME TO OFFERING IN THE OFFERING THE OFFERING
- -------------------------------------------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
Trust U/W of J.P. Weyerhaeuser Jr.
fbo George H. Weyerhaeuser(15).................. 10,605 9,221 1,384
Trust U/W of J.P. Weyerhaeuser Jr.
fbo Ann W. Pascoe(16)........................... 10,605 9,221 1,384
Spec. Power of Appointment Trust U/W of J.P.
Weyerhaeuser III(17)............................ 10,605 9,221 1,384
Vivian W. Piasecki................................ 9,682 8,419 1,263
Julie C. Titcomb.................................. 8,145 7,082 1,063
Rev. Trust of William T. Weyerhaeuser(18)......... 7,068 6,146 922
Rev. Trust of Bruce L. Titcomb(19)................ 4,500 3,913 587
1985 Trust for Christopher B. Titcomb(20)......... 4,002 3,480 522
1985 Trust for Daniel O. Titcomb(21).............. 4,002 3,480 522
1985 Trust for Robert C. Titcomb(22).............. 4,002 3,480 522
Kirsten B. Driscoll............................... 3,750 3,260 490
Catherine C. Titcomb(23).......................... 2,499 2,173 326
Daniel L. Titcomb(23)............................. 2,499 2,173 326
Daniel C. Titcomb(24)............................. 2,437 2,119 318
Trust for Stephen T. Titcomb created
4-25-61(25)..................................... 2,100 1,826 274
Madeline O. Titcomb(23)........................... 2,062 1,793 269
Peter C. Titcomb.................................. 1,545 1,343 202
Edward R. Titcomb Insurance Trust
fbo Bruce L. Titcomb(26)........................ 1,125 978 147
Edward R. Titcomb Insurance Trust
fbo Daniel C. Titcomb(27)....................... 1,125 978 147
Edward R. Titcomb Insurance Trust fbo Frederick W.
Titcomb(28)..................................... 1,125 978 147
</TABLE>
- ---------------
(1) The information pertaining to Rock Island Company is based on a Schedule
13D Report, dated July 3, 1995, which was filed by Rock Island Company with
the Securities and Exchange Commission. The Schedule 13D Report reflects
that Rock Island Company has the sole power to vote or direct the vote and
sole power to dispose or direct the disposition of 511,407 shares.
(2) Includes 37,500 shares which Mr. Crandall has, or within 60 days of
September 30, 1995 will have, the right to acquire pursuant to the
presently exercisable portion of options granted under the Company's 1988
Stock Option Plan and 2,632 shares which have been allocated to his account
under the Company's Employee Stock Ownership Plan. Mr. Crandall disclaims
beneficial ownership of 36,000 shares reflected in the table which are
owned by his minor son.
(3) Rudolph W. Driscoll, Jr. has voting and investment power over the shares in
this revocable trust, but has delegated voting power over the shares in the
trust to W. John Driscoll.
(4) The trustees of the Frederick K. Weyerhaeuser Trust of 1939 fbo Vivian W.
Piasecki are Walter S. Rosenberry and John P. Weyerhaeuser IV, who share
voting and investment power over the shares in the trust.
(5) W. John Driscoll beneficially owns 623,919 shares of Common Stock, which
includes an aggregate of 84,387 shares owned by five trusts. Mr. Driscoll
is a co-trustee of the four trusts described in Notes (8), (9), (10) and
(25) under "Selling Shareholders" and is the sole trustee of a fifth trust
described in Note (3) under "Selling Shareholders." This number also
includes 511,407 shares owned by Rock Island Company, a private investment
company, all of the capital stock of which is owned by members of the
Weyerhaeuser Family, as well as 1,875 shares which Mr. Driscoll has, or
within 60 days of September 30, 1995 will have, the right to acquire
pursuant to the presently exercisable portion of options granted under the
Company's Directors Stock Option Plan. Mr. Driscoll is a director of, and
owns 0.8721% of the stock of, Rock Island Company. Mr. Driscoll shares
voting and investment power with respect to the shares owned by the four
trusts of which he is the co-trustee and the shares owned by Rock Island
Company; however, except as to 4,459 of the shares owned by Rock Island
Company, he disclaims beneficial ownership of such shares. Mr. Driscoll has
voting power, but no investment power, with respect to the trust of which
he is the sole trustee. All of the shares of Common Stock described in this
note are included in the shares owned by various members of the
Weyerhaeuser Family. The information in the table pertaining to W. John
Driscoll is based on a Schedule 13G Report, dated July 3, 1995, which was
filed by W. John Driscoll with the Securities and Exchange Commission. The
Schedule 13G Report reflects that W. John Driscoll has sole voting power
with respect to 26,250 shares, shared voting power with respect to 84,387
shares, sole dispositive power with respect to 26,250 shares, and shared
dispositive power with respect to 37,200 shares.
52
<PAGE> 53
(6) F.T. Weyerhaeuser is a co-trustee of the six trusts described in Notes (8),
(9), (10), (14), (15) and (16) under "Selling Shareholders."
(7) The trustees of the Trust U/W of F. Weyerhaeuser fbo V. Rasmussen are
Frederick W. Titcomb and George H. Weyerhaeuser, who share voting and
investment power over the shares in the trust.
(8) The trustees of the 1966 Rev. Trust #2 of Sarah-Maud W. Sivertsen are W.
John Driscoll, Edward R. Titcomb and F. T. Weyerhaeuser, who share voting
and investment power over the shares in the trust.
(9) The trustees of the 1966 Rev. Trust #3 of Sarah-Maud W. Sivertsen are W.
John Driscoll, Edward R. Titcomb and F. T. Weyerhaeuser, who share voting
and investment power over the shares in the trust.
(10) The trustees of the 1966 Rev. Trust #4 of Sarah-Maud W. Sivertsen are W.
John Driscoll, Edward R. Titcomb and F. T. Weyerhaeuser, who share voting
and investment power over the shares in the trust.
(11) The trustees of the Trust for Elise B. Rosenberry are Edward R. Titcomb and
Lynn W. Day, who share voting and investment power over the shares in the
trust.
(12) The trustees of the Trust for Lucy Rosenberry are Edward R. Titcomb and
Lynn W. Day, who share voting and investment power over the shares in the
trust.
(13) The trustees of the Trust for Walter S. Rosenberry III are Edward R.
Titcomb and Lynn W. Day, who share voting and investment power over the
shares in the trust.
(14) The trustees of the Trust U/W of J. P. Weyerhaeuser Jr. fbo Elizabeth W.
Meadowcroft are Walter S. Rosenberry III, F.T. Weyerhaeuser and William T.
Weyerhaeuser, who share voting and investment power over the shares in the
trust.
(15) The trustees of the Trust U/W of J. P. Weyerhaeuser Jr. fbo George H.
Weyerhaeuser are Walter S. Rosenberry III, F.T. Weyerhaeuser and William T.
Weyerhaeuser, who share voting and investment power over the shares in the
trust.
(16) The trustees of the Trust U/W of J. P. Weyerhaeuser Jr. fbo Ann W. Pascoe
are Walter S. Rosenberry, F.T. Weyerhaeuser and William T. Weyerhaeuser,
who share voting and investment power over the shares in the trust.
(17) The trustees of the Special Power of Appointment Trust U/W of J. P.
Weyerhaeuser III are George H. Weyerhaeuser and William T. Weyerhaeuser,
who share voting and investment power over the shares in the trust.
(18) The trustee of the Revocable Trust of William T. Weyerhaeuser is Gail T.
Weyerhaeuser, who has voting and investment power over the shares in the
trust.
(19) The trustee of the Revocable Trust of Bruce L. Titcomb is Kathleen Y.
Titcomb, who has voting and investment power over the shares in the trust.
(20) The trustees of the 1985 Trust for Christopher B. Titcomb are Daniel C.
Titcomb and John W. Titcomb Jr., who share voting and investment power over
the shares in the trust.
(21) The trustees of the 1985 Trust for Daniel O. Titcomb are Daniel C. Titcomb
and John W. Titcomb Jr., who share voting and investment power over the
shares in the trust.
(22) The trustees of the 1985 Trust for Robert C. Titcomb are Daniel C. Titcomb
and John W. Titcomb Jr., who share voting and investment power over the
shares in the trust.
(23) These shares are held in custodial accounts under a Uniform Transfer to
Minors Act, with Judith L. Titcomb, as custodian, having voting and
investment power over these shares.
(24) Daniel C. Titcomb is a co-trustee of the three trusts described in Notes
(20), (21) and (22) under "Selling Shareholders."
(25) The trustees of the 1985 Trust for Stephen T. Titcomb created 4-25-61 are
W. John Driscoll and George H. Weyerhaeuser, who share voting and
investment power over the shares in the trust.
(26) The trustees of the Edward R. Titcomb Insurance Trust fbo Bruce L. Titcomb
are Frederick W. Davis II, George H. Weyerhaeuser and William T.
Weyerhaeuser, who share voting and investment power over the shares in the
trust.
(27) The trustees of the Edward R. Titcomb Insurance Trust fbo Daniel C. Titcomb
are Frederick W. Davis II, George H. Weyerhaeuser and William T.
Weyerhaeuser, who share voting and investment power over the shares in the
trust.
(28) The trustees of the Edward R. Titcomb Insurance Trust fbo Frederick W.
Titcomb are Frederick W. Davis II, George H. Weyerhaeuser and William T.
Weyerhaeuser, who share voting and investment power over the shares in the
trust.
53
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $1.00 par value, and 5,000,000 shares of Preferred Stock, no
par value.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of shareholders. Subject to
preferences that may be applicable to the holders of outstanding shares of
Preferred Stock, if any, the holders of Common Stock are entitled to receive
such lawful dividends as may be declared by the Board of Directors. In the event
of a liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or involuntary, and subject to the rights of the holders of
outstanding shares of Preferred Stock, if any, the holders of shares of Common
Stock shall be entitled to receive pro rata all of the remaining assets of the
Company available for distribution to its shareholders. The Common Stock has no
preemptive, redemption, conversion or subscription rights. All outstanding
shares of Common Stock are fully paid and non-assessable, and the shares of
Common Stock to be issued pursuant to this Offering will be fully paid and
non-assessable.
PREFERRED STOCK
The Board of Directors is authorized from time to time to issue shares of
Preferred Stock in one or more series and with such relative rights, powers,
preferences, limitations and restrictions as the Board of Directors may
determine, without the vote of holders of its Common Stock or Preferred Stock,
if any. Such shares may be convertible into Common Stock and may be superior to
the Common Stock in the payment of dividends, liquidation, voting and other
rights, preferences and privileges. The issuance of Preferred Stock could
adversely affect the holders of Common Stock. For example, the issuance of
Preferred Stock could be used in certain circumstances to render more difficult
or discourage a merger, tender offer or proxy contest or a removal of incumbent
management. Preferred Stock may be issued with voting and conversion rights that
could adversely affect the voting power and other rights of the holders of
Common Stock. The Company has no present plans to issue any shares of Preferred
Stock.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S BYLAWS AND OF MICHIGAN LAW
BYLAWS
The Company's Bylaws contain certain provisions that could discourage
potential takeover attempts and make more difficult attempts by shareholders to
change the Company's management. The Company's Bylaws provide that nominations
for directors may not be made by shareholders at any annual or special meeting
thereof unless the shareholder intending to make a nomination notifies the
Company of his intentions a specified number of days in advance of the meeting
and furnishes to the Company certain information regarding himself and the
intended nominee. The Company's Bylaws also require advance notice of any
proposal to be brought by a shareholder before any annual or special meeting of
shareholders and require that the shareholder provide certain information to the
Company regarding such shareholder, the proposal and any material interest such
shareholder may have in the proposal.
MICHIGAN LAW
The Michigan Business Corporation Act (the "MBCA") contains certain
provisions that may impede the acquisition of significant stock ownership in the
Company unless approved by the Company's Board of Directors. Chapter 7B of the
MBCA provides that "control shares" of the Company acquired in a control share
acquisition have no voting rights except as granted by the shareholders of the
Company. Control shares are shares that, when added to shares previously owned
by a shareholder, increases such shareholder's ownership of voting stock to 20%
or more, 33 1/3% or
54
<PAGE> 55
more or a majority of the outstanding voting power of the Company. Chapter 7A of
the MBCA provides that business combinations between a Michigan corporation
which elects to be subject to Chapter 7A and a beneficial owner of 10% or more
of the voting power of such corporation generally require the approval of 90% of
the votes of each class of stock entitled to be cast, and at least 2/3 of the
votes of each class of stock entitled to be cast other than shares owned by such
10% owner, unless the corporation's board of directors approves the transaction
prior to the time the 10% owner becomes such or the transaction satisfies
certain fairness standards, certain other conditions are met and the 10% owner
has been such for at least five years. The Company is subject to Chapter 7B of
the MBCA. The Company is not currently subject to Chapter 7A of the MBCA, but
the Company's Board of Directors may elect at any time to be subject to all or
part of Chapter 7A, with respect to specifically identified or unidentified 10%
owners, by adopting a resolution to that effect.
LIMITATION OF LIABILITY
The Company's Articles of Incorporation provide that no director of the
Company shall be personally liable to the Company or to its shareholders for
monetary damages for breach of fiduciary duty as a director, except that such
provisions do not eliminate or limit liability (i) for any breach of the
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (iii) under Section 551(1) of the MBCA dealing with liability
for unauthorized distributions and loans to insiders or (iv) for any transaction
from which the director derived an improper personal benefit.
A principal effect of these provisions is to limit or eliminate the
potential liability of the Company's directors for monetary damages arising from
breaches of their duty of care, unless the breach involves one of the four
exceptions described in (i) through (iv) above. These provisions may also shield
directors from liability under federal and state securities laws.
The Company's Articles of Incorporation and Bylaws further provide for the
indemnification of the Company's directors and officers to the fullest extent
permitted by Michigan law, including circumstances in which indemnification is
otherwise discretionary.
STOCK TRANSFER AGENT
The transfer agent for the Common Stock is KeyCorp Shareholder Services,
Inc.
55
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this Offering, the Company will have 9,365,273 shares
of Common Stock outstanding, all of which, including the 2,170,000 shares
offered hereby, will be freely tradeable in the public market without
restriction under the Securities Act unless they are held by an "affiliate" of
the Company (as that term is defined in Rule 144 under the Securities Act). Of
the Company's outstanding shares at September 30, 1995, 696,591 shares are
subject to lock-up agreements pursuant to which they may not be sold or
transferred for 90 days after the date of this Prospectus. However, Robertson,
Stephens & Company, in its sole discretion, may release the shareholders from
these lock-up agreements, in whole or in part, at any time and without notice.
The Company also maintains two stock option plans, the 1988 Stock Option
Plan and the 1994 Directors Stock Option Plan, and an Employee Stock Purchase
Plan and an Executive Stock Purchase Program. As of September 30, 1995, there
were an aggregate of approximately 838,245 shares of Common Stock subject to
outstanding options or purchase rights under these plans. The Company has filed
registration statements on Form S-8 under the Securities Act to register all
shares of Common Stock issuable under the 1988 Stock Option Plan, the 1994
Directors Stock Option Plan, the Employee Stock Purchase Plan and the Executive
Stock Purchase Plan. Shares covered by those registration statements are
eligible for resale in the public market, subject to Rule 144 limitations
applicable to affiliates and to the lock-up agreements described above, if
applicable.
No prediction can be made as to the effect, if any, that market sales or
the availability for sale of such shares will have on the market price of the
Common Stock prevailing from time to time. Nevertheless, sales of substantial
numbers of shares in the public market could adversely affect the market price
of the Common Stock and could impair the Company's ability to raise capital
through a sale of its equity securities.
56
<PAGE> 57
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company, L.P., Volpe, Welty & Company and The Chicago
Corporation (the "Representatives"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company and
the Selling Shareholders the number of shares of Common Stock set forth opposite
their respective names below. The Underwriters are committed to purchase and pay
for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
------------------------------------------------------------------ ---------
<S> <C>
Robertson, Stephens & Company, L.P. .............................. 724,000
Volpe, Welty & Company............................................ 543,000
The Chicago Corporation........................................... 543,000
Adams, Harkness & Hill, Inc. ..................................... 120,000
Roney & Co........................................................ 120,000
Wessels, Arnold & Henderson LLC................................... 120,000
---------
Total..................................................... 2,170,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $0.69 per share, of which $0.10
may be reallowed to other dealers. After this Offering, the public offering
price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company and the Selling Shareholders have granted to the Underwriters
an option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 325,500 additional shares of Common Stock at the
same price per share as the Company and the Selling Shareholders receive for the
2,170,000 shares that the Underwriters have agreed to purchase. To the extent
that the Underwriters exercise such option, each of the Underwriters will have a
firm commitment to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown in
the above table represents as a percentage of the 2,170,000 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters on
the same terms as those on which the 2,170,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.
Each executive officer and director of the Company listed in the table
under "Management" and each Selling Shareholder has agreed, during the period
ending 90 days after the date of this Prospectus, not to directly or indirectly
offer, sell, contract to sell, make subject to any purchase option, grant a
security interest in or otherwise dispose of an aggregate of 696,591 shares of
Common Stock owned at September 30, 1995 without the prior written consent of
Robertson, Stephens & Company, L.P. The
57
<PAGE> 58
Company has also agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or any options or warrants to
purchase Common Stock other than shares or options issued under the Company's
stock and option plans until 90 days after the effective date of this
Registration Statement, except with the prior written consent of Robertson,
Stephens & Company, L.P. Consent to earlier sale of such shares may be granted
by Robertson, Stephens & Company, L.P. in its discretion.
The Underwriters do not intend to confirm sales to any account over which
they have discretionary authority.
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Company's Common Stock during the "cooling off" period
immediately preceding the commencement of sales in this Offering. The Commission
has, however, adopted exemptions from these rules that permit passive market
making under certain conditions. These rules permit an underwriter to continue
to make a market subject to the conditions, among others, that its bid not
exceed the highest bid by a market maker not connected with this Offering and
that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, certain Underwriters, selling group members (if
any) or their respective affiliates intend to engage in passive market making in
the Company's Common Stock during the cooling off period.
58
<PAGE> 59
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Dykema Gossett PLLC, Detroit, Michigan. Janet L. Neary, a member of
Dykema Gossett PLLC, serves as the Company's Secretary. Certain legal matters
will be passed upon for the Underwriters by Brobeck, Phleger & Harrison, San
Francisco, California.
EXPERTS
The consolidated balance sheets as of June 30, 1994 and 1995, and the
consolidated statements of operations, shareholders' equity and cash flows of
the Company for each of the three years in the period ended June 30, 1995, and
the related financial statement schedule included in or incorporated by
reference in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated by their reports with respect thereto, and are included in or
incorporated by reference herein in reliance on the authority of said firm as
experts in accounting and auditing. Reference is made to said report, which
includes an explanatory paragraph with respect to the change in the method of
accounting for income taxes as explained in Note 8 to the consolidated financial
statements.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is hereby made to the Registration Statement. Statements
contained herein concerning the provisions of any document are not necessarily
complete, and each such statement is qualified in its entirety by reference to
the copy of such document filed with the Commission. The Registration Statement,
including the exhibits thereto, may be inspected at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part thereof may be obtained from such
office upon payment of the prescribed fees.
59
<PAGE> 60
COMSHARE, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................. F-2
Consolidated Statement of Operations for the Fiscal Years Ended
June 30, 1993, 1994 and 1995 and the Three Months Ended September 30, 1994 and 1995
(unaudited)........................................................................ F-3
Consolidated Balance Sheet as of June 30, 1994 and 1995 and September 30, 1995
(unaudited)........................................................................ F-4
Consolidated Statement of Cash Flows for the Fiscal Years Ended
June 30, 1993, 1994 and 1995 and the Three Months Ended September 30, 1994 and 1995
(unaudited)........................................................................ F-6
Consolidated Statement of Shareholders' Equity for the Fiscal Years Ended
June 30, 1993, 1994 and 1995 and the Three Months Ended September 30, 1995
(unaudited)........................................................................ F-7
Notes to Consolidated Financial Statements........................................... F-8
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comshare, Incorporated:
We have audited the accompanying consolidated balance sheet of COMSHARE,
INCORPORATED (a Michigan corporation) and subsidiaries as of June 30, 1994 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Comshare, Incorporated and
subsidiaries as of June 30, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1995 in conformity with generally accepted accounting principles.
As explained in Note 8 to the financial statements, effective July 1, 1992, the
Company changed its method of accounting for income taxes.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
July 27, 1995
F-2
<PAGE> 62
COMSHARE, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except for per share data)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------- -----------------
1993 1994 1995 1994 1995
-------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE
Software licenses.............................. $ 40,397 $37,871 $ 49,294 $10,006 $13,920
Software maintenance........................... 43,064 41,625 36,649 8,972 9,015
Implementation, consulting and other
services.................................... 21,733 17,130 22,415 5,180 5,718
-------- ------- -------- ------- -------
TOTAL REVENUE.................................... 105,194 96,626 108,358 24,158 28,653
COSTS AND EXPENSES
Selling and marketing.......................... 54,065 46,457 45,283 10,232 12,038
Cost of revenue and support.................... 20,528 17,670 24,799 5,382 6,690
Internal research and product development...... 22,989 19,293 16,180 4,070 3,998
Internally capitalized software................ (15,035) (13,193) (11,667) (3,079) (2,358)
Software amortization.......................... 10,761 12,517 13,250 3,385 2,616
General and administrative..................... 11,668 9,891 11,663 2,750 3,041
Unusual charge................................. -- -- 6,365 -- --
Restructuring related costs.................... 1,489 2,343 -- -- --
-------- ------- -------- ------- -------
TOTAL COSTS AND EXPENSES......................... 106,465 94,978 105,873 22,740 26,025
-------- ------- -------- ------- -------
INCOME (LOSS) FROM OPERATIONS.................... (1,271) 1,648 2,485 1,418 2,628
OTHER INCOME (EXPENSE)
Interest income................................ 298 79 157 21 15
Interest expense............................... (611) (568) (669) (187) (156)
Exchange gain (loss)........................... 480 (25) 307 (37) (89)
-------- ------- -------- ------- -------
TOTAL OTHER INCOME (EXPENSE)..................... 167 (514) (205) (203) (230)
-------- ------- -------- ------- -------
INCOME (LOSS) BEFORE TAXES....................... (1,104) 1,134 2,280 1,215 2,398
Provision (benefit) for income taxes............. 659 912 (3,048) 464 888
-------- ------- -------- ------- -------
NET INCOME (LOSS)................................ $ (1,763) $ 222 $ 5,328 $ 751 $ 1,510
======== ======= ======== ======= =======
NET INCOME (LOSS) PER COMMON SHARE............... $ (0.22) $ 0.03 $ 0.63 $ 0.09 $ 0.17
======== ======= ======== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND DILUTIVE
COMMON EQUIVALENT SHARES....................... 7,978 8,234 8,398 8,235 8,730
======== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 63
COMSHARE, INCORPORATED
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------ -------------
1994 1995 1995
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 1,774 $ 1,398 $ 2,023
Accounts receivable, less allowance for doubtful accounts
of $1,161 as of June 30, 1994; $887 as of June 30, 1995
and $910 as of September 30, 1995...................... 30,846 29,531 30,995
Deferred income taxes..................................... 1,487 783 783
Prepaid expenses.......................................... 4,012 4,098 4,140
------- ------- -------
Total current assets................................... 38,119 35,810 37,941
PROPERTY AND EQUIPMENT, at cost
Computers and other equipment............................. 24,278 24,023 23,839
Leasehold improvements.................................... 4,258 3,053 3,535
------- ------- -------
28,536 27,076 27,374
Less -- Accumulated depreciation.......................... 24,338 23,663 23,867
------- ------- -------
Property and equipment, net............................ 4,198 3,413 3,507
COMPUTER SOFTWARE, net of accumulated amortization of
$50,114 as of June 30, 1994; $70,308 as of June 30, 1995
and $72,800 as of September 30, 1995...................... 40,236 32,676 32,410
GOODWILL, net of accumulated amortization of $1,437 as of
June 30, 1994; $1,751 as of June 30, 1995 and $1,730 as of
September 30, 1995........................................ 2,033 2,246 2,162
OTHER ASSETS................................................ 4,358 5,165 5,356
------- ------- -------
$88,944 $79,310 $81,376
======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 64
COMSHARE, INCORPORATED
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30,
------------------ SEPTEMBER 30,
1994 1995 1995
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable............................................. $ 29 $ -- $ --
Accounts payable.......................................... 10,608 11,342 12,564
Accrued liabilities
Payroll................................................ 4,910 3,467 2,872
Taxes, other than income taxes......................... 1,399 1,486 1,441
Other.................................................. 1,364 1,465 1,008
------- ------- -------
Total accrued liabilities............................ 7,673 6,418 5,321
Income taxes.............................................. 641 1,602 2,010
Deferred revenue.......................................... 19,617 18,599 18,725
------- ------- -------
Total current liabilities............................ 38,568 37,961 38,620
LONG-TERM DEBT.............................................. 15,354 5,436 4,662
DEFERRED INCOME TAXES....................................... 5,511 275 274
OTHER LIABILITIES........................................... 3,005 3,090 3,466
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 8,036,716 shares as of June 30,
1994; 8,221,234 shares as of June 30, 1995 and
8,240,273 shares as of September 30, 1995............ 8,037 8,221 8,240
Capital contributed in excess of par...................... 11,982 13,199 13,278
Retained earnings......................................... 10,190 15,500 16,987
Currency translation adjustments.......................... (3,504) (3,239) (3,217)
------- ------- -------
26,705 33,681 35,288
Less -- Notes receivable.................................. 199 1,133 934
------- ------- -------
Total shareholders' equity........................... 26,506 32,548 34,354
------- ------- -------
$88,944 $79,310 $81,376
======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 65
COMSHARE, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- --------------------
1993 1994 1995 1994 1995
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME (LOSS).......................... $ (1,763) $ 222 $ 5,328 $ 751 $ 1,510
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization............ 15,491 15,893 15,873 4,096 3,198
Write-off of capitalized software........ -- -- 6,365 -- --
Gain on sale of undeveloped land......... -- (1,102) -- -- --
Provision for losses on accounts
receivable............................ 586 140 (119) 27 19
Loss on sale of property and equipment... 71 3 28 11 --
Changes in operating assets and
liabilities:
Accounts receivable................... 4,601 585 2,675 (297) (1,415)
Prepaid expenses...................... 1,142 929 77 (56) (58)
Other assets.......................... 1,122 35 -- -- --
Accounts payable...................... (2,716) (1,083) (469) 149 1,403
Accrued liabilities................... (2,927) 853 (337) (1,579) (810)
Deferred revenue...................... (396) (3,875) (1,489) (1,044) 116
Deferred income taxes................. 528 732 (4,645) 387 2
Other liabilities..................... 607 301 42 67 381
-------- -------- -------- -------- --------
Net cash provided by operating
activities....................... 16,346 13,633 23,329 2,512 4,346
INVESTING ACTIVITIES
Additions to computer software........... (15,811) (13,187) (11,667) (3,079) (2,409)
Payments for property and equipment...... (1,645) (1,199) (1,207) (165) (523)
Proceeds from sale of undeveloped land... -- 3,376 -- -- --
Other.................................... (235) (1,382) (1,227) (264) (332)
-------- -------- -------- -------- --------
Net cash used in investing
activities....................... (17,691) (12,392) (14,101) (3,508) (3,264)
FINANCING ACTIVITIES
Net borrowings (repayments) under notes
payable............................... (590) (40) (33) 167 --
Net borrowings (repayments) under long-
term debt............................. 768 (2,046) (10,044) (24) (737)
Stock options exercised.................. 358 74 248 41 74
Other.................................... -- (42) 202 -- 187
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities............. 536 (2,054) (9,627) 184 (476)
EFFECT OF EXCHANGE RATE CHANGES............ (408) (6) 23 45 19
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH............ (1,217) (819) (376) (767) 625
-------- -------- -------- -------- --------
BALANCE AT BEGINNING OF YEAR............... 3,810 2,593 1,774 1,774 1,398
-------- -------- -------- -------- --------
BALANCE AT END OF YEAR..................... $ 2,593 $ 1,774 $ 1,398 $ 1,007 $ 2,023
======== ======== ======== ======== ========
Supplemental disclosures:
Cash paid for interest................... $ 540 $ 624 $ 690 $ 187 $ 118
======== ======== ======== ======== ========
Cash paid for income taxes............... $ 1,113 $ 481 $ 558 $ 119 $ 537
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 66
COMSHARE, INCORPORATED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED JUNE 30, ENDED
----------------------------- SEPTEMBER 30,
1993 1994 1995 1995
------- ------- ------- -------------
(unaudited)
<S> <C> <C> <C> <C>
COMMON STOCK
Balance beginning of period...................... $ 7,930 $ 8,019 $ 8,037 $ 8,221
Employee Stock Purchase Plan..................... -- -- 22 --
1994 Executive Stock Purchase Program............ -- -- 104 --
Retirement of shares............................. (27) -- (2) (1)
Stock options exercised.......................... 116 18 60 20
------- ------- ------- -------
Balance end of period............................ 8,019 8,037 8,221 8,240
------- ------- ------- -------
CAPITAL CONTRIBUTED IN EXCESS OF PAR
Balance beginning of period...................... 11,557 11,926 11,982 13,199
Employee Stock Purchase Plan..................... -- -- 155 --
1994 Executive Stock Purchase Program............ -- -- 855 --
Retirement of shares............................. (41) -- (3) (2)
Stock options exercised.......................... 397 54 210 81
Tax benefits related to stock options............ 13 2 -- --
------- ------- ------- -------
Balance end of period............................ 11,926 11,982 13,199 13,278
------- ------- ------- -------
RETAINED EARNINGS
Balance beginning of period...................... 11,831 9,968 10,190 15,500
Net income (loss)................................ (1,763) 222 5,328 1,510
Retirement of shares............................. (100) -- (18) (23)
------- ------- ------- -------
Balance end of period............................ 9,968 10,190 15,500 16,987
------- ------- ------- -------
CURRENCY TRANSLATION ADJUSTMENTS
Balance beginning of period...................... (1,165) (3,553) (3,504) (3,239)
Translation adjustments.......................... (2,388) 49 265 22
------- ------- ------- -------
Balance end of period............................ (3,553) (3,504) (3,239) (3,217)
------- ------- ------- -------
LESS -- NOTES RECEIVABLE
Balance beginning of period...................... 199 199 199 1,133
1994 Executive Stock Purchase Program............ -- -- 934 --
Employee Stock Option Plan....................... -- -- -- (199)
------- ------- ------- -------
Balance end of period............................ 199 199 1,133 934
------- ------- ------- -------
Total shareholders' equity.................... $26,161 $26,506 $32,548 $34,354
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE> 67
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly owned.
All material intercompany accounts and transactions have been eliminated.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. The accompanying consolidated
balance sheet as of September 30, 1995 and consolidated statements of
operations, cash flows and shareholders' equity for the three months ended
September 30, 1994 and 1995 are unaudited, but in the opinion of management
include all adjustments (consisting only of normal recurring adjustments)
necessary for fair presentation thereof. The results of operations for the three
months ended September 30, 1994 and 1995 are not necessarily indicative of
results to be expected for the full year or any future period.
REVENUE. The Company's revenue consists of software license, software
maintenance and implementation, consulting and other service revenue. Software
license revenue, including sales to distributors, is recognized when a customer
contract is fully executed and the software has been shipped. Software
maintenance revenue, whether bundled with product license or priced separately,
is recorded as deferred revenue on the balance sheet when invoiced and is
recognized over the term of the maintenance contract. Implementation, consulting
and other services revenue is recognized as the services are performed.
EXPENSE CLASSIFICATION. Selling and marketing expense includes advertising
and agency fees. Cost of revenue and support includes personnel and other costs
related to produce the implementation and consulting services revenue, customer
support costs, direct cost of producing software and royalty expense for
products licensed from others for use in the Company's product offerings.
FOREIGN CURRENCY TRANSLATION. All assets and liabilities of the Company's
foreign operations are translated at current exchange rates and revenue and
expenses are translated at monthly exchange rates. Resulting translation
adjustments are reflected as a separate component of shareholders' equity.
Foreign currency transaction gains and losses are included in net income.
The Company at various times has entered 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. The Company only uses forward exchange contracts to hedge
against large selective transactions that present the most exposure to exchange
rate fluctuations. At June 30, 1995, the Company held a forward contract,
entered into on September 9, 1994, where it purchased a $1,500,000 contract for
British pounds with a maturity date of September 29, 1995 and a forward
contract, entered into on June 30, 1995, where it sold a $750,000 contract for
Canadian dollars with a maturity date of August 31, 1995. At September 30, 1995,
the Company held a forward contract, entered into on September 29, 1995, where
it purchased a $1,200,000 contract for British pounds with a maturity date of
December 29, 1995 and a forward contract, entered into on August 31, 1995, where
it sold a $600,000 contract for Canadian dollars with a maturity date of October
30, 1995. The carrying value of these contracts approximates the fair market
value.
Statement of Financial Accounting Standards No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments"
requires additional disclosures regarding the nature of derivatives held. This
statement is required to be adopted by the Company during its fiscal year ended
June 30, 1996.
CASH. Cash includes investments in highly liquid investments with
maturities of three months or less at the time of acquisition.
F-8
<PAGE> 68
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTERNAL RESEARCH AND PRODUCT DEVELOPMENT. Internal research and product
development includes all such expense before computer software capitalization
and amortization.
COMPUTER SOFTWARE. The costs of developing and purchasing new software
products and enhancements to existing software products are capitalized after
technological feasibility is established. These costs include capitalized
interest of $906,000, $814,000, and $681,000 in fiscal 1993, 1994 and 1995,
respectively and $179,000 and $0 for the three months ended September 30, 1994
and 1995, respectively. In fiscal 1993, 1994 and 1995, capitalized development
costs were amortized using a rolling three year method, effectively a service
life of approximately six years. In the first quarter of fiscal 1996,
capitalized development costs were amortized using the straight-line method over
a four-year service life. Beginning October 1, 1995, capitalized development
costs will be amortized using the straight-line method over a two-year service
life. The policy is reevaluated and adjusted as necessary at the end of each
accounting period. On an ongoing basis, management reviews the valuation and
amortization of capitalized development costs. As part of this review, the
Company considers the value of future cash flows attributable to the capitalized
development costs in evaluating potential impairment of the asset. In addition
to the internally capitalized software, the Company expended $776,000 on
purchased software during the year ended June 30, 1993. There were no
expenditures for purchased software for the years ended June 30, 1994 and 1995
and for the three months ended September 30, 1995.
DEPRECIATION. The cost of depreciable assets is charged to operations on a
straight-line basis. Principal service lives for computers and other equipment
are three to five years. Leasehold improvements are amortized over the expected
life of the asset or term of the lease, whichever is shorter.
GOODWILL. Goodwill represents the unamortized cost in excess of fair value
of net assets acquired and is amortized on a straight-line basis over forty
years. On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company considers the value of future cash
flows attributable to the acquired operations in evaluating potential impairment
of goodwill.
OTHER ASSETS. Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. This statement is required to be adopted by
the Company during its fiscal year ended June 30, 1997. Although a detailed
analysis has not been performed, the Company believes there would be no material
impact on its financial statements, if this statement was adopted as of June 30,
1995 or September 30, 1995.
EARNINGS PER SHARE. Earnings per share of common stock is based on the
daily weighted average number of shares of common stock outstanding considering
the dilutive effect of outstanding stock options when appropriate and reflects
the three-for-two stock split. See Note 12 for information regarding the stock
split.
RECLASSIFICATIONS. For the year ended June 30, 1995, the Company changed
its presentation of cash flows from operating activities from the direct method
to the indirect method.
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform with 1995 presentation.
2. RESTRUCTURING AND UNUSUAL CHARGES
During the years ended June 30, 1993 and 1994, the Company made provisions
totaling $1,489,000, and $2,343,000, respectively, for management actions or
plans in connection primarily with staff
F-9
<PAGE> 69
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reductions related to its restructuring. For the year ended June 30, 1994, the
restructuring charges include staff reductions of approximately 50 employees;
estimated savings of $4,000,000 was achieved in fiscal 1995. At June 30, 1995,
$554,000 remains to be paid for contractual obligations related to restructuring
actions taken during 1994.
During the year ended June 30, 1995, the Company recorded an unusual charge
of $6,365,000. This charge related to the write-off of capitalized software
associated with its mature mainframe products. The write-off of capitalized
software associated with the Company's mainframe products is the result of
current industry trends and reflects the Company's strategic product plan to
focus on desktop and client/server software products.
3. BORROWINGS
Borrowing components are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------- SEPTEMBER 30,
1994 1995 1995
------- ------ -------------
<S> <C> <C> <C>
Lines of credit............................... $15,354 $5,436 $ 4,662
Notes payable................................. 29 -- --
------- ------
Total outstanding...................... 15,383 5,436 4,662
Less current portion.......................... 29 -- --
------- ------
$15,354 $5,436 $ 4,662
======= ======
</TABLE>
On October 31, 1994 the Company entered into a $14,000,000 amended and
restated domestic credit agreement with its banks which matures on October 31,
1997. The amended and restated credit agreement contains covenants regarding
among other things, working capital, leverage, net worth and payment of
dividends. Under the terms of the agreement, the Company is not permitted to pay
dividends. Permitted borrowings under the credit agreement are based on a
percentage of worldwide eligible accounts receivable and worldwide borrowings.
At June 30, 1995 and September 30, 1995, the permitted borrowings available
under the agreement were $14,000,000, of which $3,500,000 and $2,100,000 were
outstanding, respectively. Interest was at the bank's prime rate (8.75% at June
30, 1995) plus 1% and has been reduced effective July 1, 1995, upon the
Company's meeting certain financial criteria, to the Eurodollar rate (5.875% at
September 30, 1995) plus applicable margin, which varies between 1 1/2% and
2 1/2% (2% at September 30, 1995). During the first quarter of fiscal 1996, the
banks released all security interests in the assets of the Company previously
granted to the banks.
Separately, certain of the Company's subsidiaries entered into local
currency credit agreements or overdraft facilities in various currencies with
banks totaling $3,664,000 at June 30, 1995 and $4,441,000 at September 30, 1995.
At June 30, 1995, the Company had outstanding borrowings of $1,256,000 in
British pounds and $680,000 in German marks. At September 30, 1995, the Company
had outstanding borrowings of $1,901,000 in British pounds and $661,000 in
German marks. The credit agreements expire on October 1, 1997. The interest
rates generally vary with the banks' base rate. Most of such borrowings are
guaranteed by the Company.
4. SHAREHOLDERS' EQUITY
The Board of Directors has the authority to issue up to 5,000,000 shares of
no par value preferred stock. The shares can be issued in one or more series
with full, limited or no voting powers and with such special rights,
qualifications, limitations and restrictions as may be adopted by the Board of
Directors.
F-10
<PAGE> 70
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's senior executives are encouraged to own Comshare common
stock. To facilitate such ownership, the shareholders approved the 1994
Executive Stock Purchase Program which enables such executives to purchase
Comshare common stock at then current market prices directly from the Company
via a promissory note. The promissory note cannot exceed the executive's base
annual salary and is secured by the related common stock issued by the Company.
The promissory note matures four years from the date of issuance. Interest is at
the prime rate plus 1% and may be deferred until the promissory note matures. A
total of 300,000 shares of the Company's common stock has been reserved for
issuance under the 1994 Executive Stock Purchase Program. For the year ended
June 30, 1995, a total of 104,044 shares at prices ranging from $8.67 to $12.33
were issued in exchange for notes totaling $934,000. In the first quarter of
fiscal 1996, no shares were issued under this program.
5. STOCK OPTIONS
The Company has two stock option plans, the 1988 Stock Option Plan (the
"1988 Plan") and the 1994 Directors Stock Option Plan (the "Directors Plan")
which was adopted in November, 1994.
The Company's 1988 Plan provides for the grant of both incentive stock
options and non-qualified options to officers and key employees. Options under
the 1988 Plan are granted at 100% of market price on date of grant, are
exercisable at the rate of 25% per year after one year from the date of grant
and have a term of five years. The Board of Directors may, at its discretion,
grant stock appreciation rights in connection with the grant of options, but to
date has not elected to do so.
Effective June 25, 1993, the Company offered current option holders except
for the Company's senior executive officers, the opportunity to exchange
outstanding options, for an equal number of options of the Company's common
stock, at the current market price of $4.08. All eligible option holders
accepted this offer and the Company canceled the previous options and granted
new options representing 467,640 shares of common stock under the Company's 1988
Plan. The new options vest over four years effective from the new date of grant.
Effective August 13, 1993 and September 23, 1993, the Company offered the
senior executives the opportunity to exchange certain outstanding options, for
an equal number of options of the Company's common stock, at the current market
price of $6.00 and $6.17, respectively. The executive option holders accepted
this offer and the Company canceled certain of the previous options and granted
new options representing 201,000 shares of common stock under the Company's 1988
Plan. The new options vest over four years effective from the new date of grant.
The 1988 Stock Option Plan was amended in November 1994 to increase the
number of shares of common stock authorized for grant from 900,000 shares to
1,275,000.
At June 30, 1995 and September 30, 1995, the Company had reserved 1,192,928
and 1,172,528 shares of common stock, respectively, for the exercise of employee
stock options.
F-11
<PAGE> 71
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the 1988 Plan is summarized below:
<TABLE>
<CAPTION>
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1992...................... 1,305,765 $ 3.83 to $14.67
Granted........................................... 529,140 4.09 to 7.00
Exercised......................................... (115,500) 3.83 to 4.83
Canceled.......................................... (533,265) 4.83 to 13.92
--------
Outstanding at June 30, 1993...................... 1,186,140 4.09 to 14.67
Granted........................................... 352,500 6.00 to 9.17
Exercised......................................... (17,625) 4.09 to 4.09
Canceled.......................................... (713,247) 4.09 to 14.67
--------
Outstanding at June 30, 1994...................... 807,768 4.09 to 11.17
Granted........................................... 216,000 7.33 to 13.00
Exercised......................................... (60,697) 4.09 to 4.09
Canceled.......................................... (197,546) 4.09 to 11.17
--------
Outstanding at June 30, 1995...................... 765,525 4.09 to 13.00
Granted........................................... 42,000 20.50 to 20.50
Exercised......................................... (20,400) 4.09 to 8.75
Canceled.......................................... (11,250) 4.09 to 4.09
--------
Outstanding at September 30, 1995................. 775,875 4.09 to 20.50
========
</TABLE>
The number of options exercisable was 174,250, 106,192, 182,775 and 231,375
at June 30, 1993, 1994 and 1995 and at September 30, 1995, respectively.
The 1994 Directors Stock Option plan was approved by the shareholders in
November 1994. The Directors Plan provides for the issuance of options to
purchase up to 150,000 shares of the Company's common stock to nonemployee
directors of the Company. Options under the Directors Plan are granted at 100%
of the market price on the date of grant, are exercisable at a rate of 25% per
year after one year from the date of grant and have a term of five years. In
November 1994, a total of 52,500 options were granted, with each of the
Company's seven outside directors receiving 7,500 options exercisable at $8.33
per share. None of the options was exercisable as of June 30, 1995 or September
30, 1995.
6. EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan was approved by the shareholders in
November 1994. A total of 300,000 shares of the Company's common stock have been
reserved for issuance under the Employee Stock Purchase Plan. The Employee Stock
Purchase Plan allows participating employees to purchase through payroll
deductions shares of the Company's common stock at 85% of the fair market value
at July 1 and January 1. Substantially all full time employees are eligible to
participate in the Employee Stock Purchase Plan. During the year ended June 30,
1995, 21,834 shares were issued at $8.07 per share under the Employee Stock
Purchase Plan. During the quarter ended September 30, 1995, no shares were
issued under the Employee Stock Purchase Plan.
7. BENEFIT PLANS
The Company has profit sharing and employee stock ownership plans covering
substantially all United States employees. The profit sharing plan provides for
a minimum annual contribution of 2% of an employee's salary, and both plans
require the Company to make matching contributions based on
F-12
<PAGE> 72
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee 401(k) contributions. The Company also has a deferred compensation plan
for United States officers for the payment of benefits which would not otherwise
be eligible under its tax-qualified retirement plans. The Company contributions,
other than the above, are discretionary and are determined by the Board of
Directors. The total contributions were $1,129,000, $1,007,000, $1,224,000 and
$300,000 in fiscal 1993, 1994 and 1995 and in the three months ended September
30, 1995, respectively.
A subsidiary in the United Kingdom maintains, through a trustee, a defined
benefit pension plan for substantially all of its employees hired before January
1, 1994 and a defined contribution plan for employees hired January 1, 1994 or
later. The defined contribution plan provides that employees contribute a
minimum of 5% of their pensionable salary with the Company contributing 5%. The
benefits of the defined pension plan, which are pay related, are integrated with
and supplement the benefits called for under the applicable laws of the United
Kingdom.
The components of pension expense are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Service cost for benefits earned during the year................. $ 485 $ 501 $ 540
Interest cost on projected benefit obligation.................... 962 1,111 1,292
Actual return on assets.......................................... (4,916) (1,347) (1,347)
Net amortization and deferral.................................... 3,770 261 101
------- ------- -------
Net pension expense.............................................. $ 301 $ 526 $ 586
======= ======= =======
</TABLE>
The funded status of the pension plan is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits......................................................... $11,801 $14,705
Non-vested benefits..................................................... 41 29
------- -------
Accumulated benefit obligation....................................... 11,842 14,734
Effects of salary progression........................................... 1,241 1,664
------- -------
13,083 16,398
Plan assets at fair value................................................. 13,997 15,103
------- -------
Plan assets under (over) projected benefit obligation..................... $ (914) $ 1,295
======= =======
Amounts not recognized in balance sheet:
Unamortized transition obligation....................................... $ 748 $ 702
Unamortized net (gain) loss............................................. (81) 2,888
------- -------
$ 667 $ 3,590
======= =======
</TABLE>
The actuarial present value of the projected benefit obligations was
determined using a weighted average discount rate of 9.0% and an annual rate of
increase in future compensation of 7.0% for fiscal years 1993 and 1994
calculations; for the fiscal year 1995 a weighted average discount rate of 8.5%
and an annual rate of increase in future compensation of 6.5% was used to
project the benefit obligation. The long term weighted average rate of return on
assets used was 12%, 10% and 8.5% for 1993, 1994 and 1995, respectively.
The Company provides defined retirement benefits to the employees of the
other foreign subsidiaries through various contribution plans. The amount
charged to expense for these benefits was
F-13
<PAGE> 73
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$269,000, $201,000, $142,000 and $48,000 in fiscal 1993, 1994, 1995 and in the
three months ended September 30, 1995, respectively.
8. INCOME TAXES
During 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The statement
requires a change in the method of financial accounting and reporting for income
taxes from the deferral method to an asset and liability approach. The adoption
of this standard had no material effect on income. A summary of income (loss)
before provision (benefit) for income taxes and components of the provision
(benefit) for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------- ----------------
1993 1994 1995 1994 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Income (loss) before provision (benefit) for
income taxes:
Domestic....................................... $(1,884) $(2,270) $ 486 $1,000 $ (34)
Foreign........................................ 780 3,404 1,794 215 2,432
------- ------- ------- ------ ------
$(1,104) $ 1,134 $ 2,280 $1,215 $2,398
======= ======= ======= ====== ======
Domestic provision (benefit) for income taxes:
Current........................................ $ 229 $ (230) $ (15) $ 71 $ 451
Deferred....................................... (678) (205) (2,773) 308 (481)
Foreign provision (benefit) for income taxes:
Current........................................ (99) 281 1,499 (80) 438
Deferred....................................... 1,207 1,066 (1,759) 165 480
------- ------- ------- ------ ------
Provision (benefit) for income taxes............. $ 659 $ 912 $(3,048) $ 464 $ 888
======= ======= ======= ====== ======
</TABLE>
The differences between the United States Federal statutory income tax
provision (benefit) and the consolidated income tax provision (benefit) are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------ --------------
1993 1994 1995 1994 1995
----- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Federal statutory provision (benefit)................. $(375) $386 $ 775 $413 $815
Non-deductible meals and entertainment................ 44 83 109 26 26
State income taxes, net of federal tax benefit........ 27 41 67 24 27
Increase in valuation reserve due to domestic and
foreign losses without tax benefit and tax
credits............................................. 499 882 42 -- --
Recognition of tax credits............................ -- -- (2,500) -- --
Tax reserves provided (released)...................... -- 65 (1,600) -- --
Tax rate differences.................................. 343 189 (51) 1 20
FAS 109 adjustment.................................... 131 -- -- -- --
Tax credits generated................................. -- (665) -- -- --
Other, net............................................ (10) (69) 110
----- ---- ------- ---- ----
Actual income tax provision (benefit)................. $ 659 $912 $(3,048) $464 $888
===== ==== ======= ==== ====
</TABLE>
F-14
<PAGE> 74
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. The components of
the net deferred income tax liability (asset) are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------ SEPTEMBER 30,
1994 1995 1995
------- ------- -------------
<S> <C> <C> <C>
Deferred income tax liabilities:
Research and development.................................. $ 7,005 $ 3,714 $ 3,713
Remittance of foreign earnings............................ 1,151 -- --
Employee benefits......................................... 535 727 727
Other..................................................... 208 190 190
------- ------- -------
8,899 4,631 4,630
Deferred income tax assets:
Tax credits excluding foreign............................. (1,428) (1,534) (1,534)
Foreign tax credit........................................ (1,160) (68) (68)
Depreciation and amortization............................. (1,196) (1,075) (1,075)
Net operating loss........................................ (2,708) (493) (493)
Deferred revenue.......................................... (997) (474) (474)
Employee benefits......................................... (680) (640) (640)
Other..................................................... (1,044) (1,224) (1,224)
------- ------- -------
(9,213) (5,508) (5,508)
Valuation allowance......................................... 4,338 369 369
------- ------- -------
(4,875) (5,139) (5,139)
------- ------- -------
Net deferred income tax liability (asset)................... $ 4,024 $ (508) $ (509)
======= ======= =======
</TABLE>
At June 30, 1995, for income tax purposes, the Company and certain of its
foreign subsidiaries had available net operating loss carryforwards of
approximately $493,000. If not used, these net operating loss carryforwards, as
well as the Company's general business tax credits, will expire between 1998 and
2009.
Income taxes have been provided on all undistributed earnings of foreign
subsidiaries which are expected to be remitted to the Company.
9. LEASES
The Company leases most of its office space and certain of its equipment.
Initial lease terms vary in length; several of the leases contain renewal
options. Future minimum lease payments under noncancellable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year ending June 30,
1996................................................................ $ 5,130
1997................................................................ 4,309
1998................................................................ 3,513
1999................................................................ 2,722
2000................................................................ 2,642
After 2000.......................................................... 18,955
-------
$37,271
=======
</TABLE>
F-15
<PAGE> 75
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1988, the Company purchased its London sales and administrative
office building; it was also sold in 1988 along with leasehold improvements and
leased back. The gain on the sale was deferred. During 1992, the Company
consolidated this facility with its former London computer center. The Company
has thus reduced the deferred gain on the sale by $1,135,000 to provide for the
estimated costs until the lease obligations are assumed by a new tenant.
Total rental expense was $8,451,000, $7,231,000, $7,252,000, $1,686,000 and
$1,857,000 in fiscal 1993, 1994, 1995 and in the three months ended September
30, 1994 and 1995, respectively.
10. GEOGRAPHIC OPERATIONS AND SEGMENT INFORMATION
The following table summarizes selected financial information of the
Company's operations by geographic location (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------------- -------------------
1993 1994 1995 1994 1995
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
North America........................... $ 45,596 $ 43,222 $ 48,478 $10,695 $13,273
International........................... 59,598 53,404 59,880 13,463 15,380
-------- -------- -------- ------- -------
Total revenue........................ $105,194 $ 96,626 $108,358 $24,158 $28,653
======== ======== ======== ======= =======
Operating income:
North America........................... $ 10,118 $ 10,082 $ 15,205 $ 3,892 $ 4,507
International........................... 12,163 13,938 15,392 2,905 3,872
-------- -------- -------- ------- -------
Total operating income............... 22,281 24,020 30,597 6,797 8,379
Unallocated expenses, net................. (23,385) (22,886) (28,317) (5,582) (5,981)
-------- -------- -------- ------- -------
Income (loss) before taxes................ $ (1,104) $ 1,134 $ 2,280 $ 1,215 $ 2,398
======== ======== ======== ======= =======
Identifiable assets:
North America........................... $ 25,582 $ 21,356 $ 16,672 $18,617 $17,138
International........................... 27,849 27,352 29,962 29,709 31,828
-------- -------- -------- ------- -------
Total identifiable assets............ 53,431 48,708 46,634 48,326 48,966
Computer software......................... 39,151 40,236 32,676 40,209 32,410
-------- -------- -------- ------- -------
Total assets.............................. $ 92,582 $ 88,944 $ 79,310 $88,535 $81,376
======== ======== ======== ======= =======
</TABLE>
Unallocated expenses consist of general corporate expenses, internal
research and product development expenses, interest expense and interest income.
In fiscal 1995, unallocated expenses include $6,365,000 of unusual charges
related to the write-off of capitalized software associated with the Company's
mature mainframe products.
The presentation of information on a geographical basis requires the use of
estimation techniques and does not take into account the extent to which
Comshare's marketing and management skills are inter-dependent.
The Company operates in one business segment: the development and marketing
of computer software and related services.
No customer accounted for more than 5% of total revenue in the fiscal years
ended June 30, 1993, 1994 and 1995 or in the three months ended September 30,
1994 and 1995.
F-16
<PAGE> 76
COMSHARE, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. QUARTERLY FINANCIAL DATA
Summarized quarterly financial data is as follows (unaudited and in
thousands, except per share data):
<TABLE>
<CAPTION>
INCOME NET NET
(LOSS) FROM INCOME INCOME (LOSS)
REVENUE OPERATIONS (LOSS) PER SHARE
-------- ----------- ------- -------------
<S> <C> <C> <C> <C>
1994
First quarter................................. $ 23,730 $ 997 $ 657 $ 0.08
Second quarter................................ 23,779 1,701 1,052 0.13
Third quarter................................. 23,202 193 94 0.01
Fourth quarter................................ 25,915 (1,243) (1,581) (0.20)
-------- ----------- -------
Year ended June 30, 1994...................... $ 96,626 $ 1,648 $ 222 $ 0.03
======== ========== =======
1995
First quarter................................. $ 24,158 $ 1,418 $ 751 $ 0.09
Second quarter................................ 27,656 2,846 1,681 0.20
Third quarter................................. 27,704 1,828 1,204 0.14
Fourth quarter................................ 28,840 (3,607) 1,692 0.20
-------- ----------- -------
Year ended June 30, 1995...................... $108,358 $ 2,485 $ 5,328 $ 0.63
======== ========== =======
1996
First quarter ended September 30, 1995........ $ 28,653 $ 2,628 $ 1,510 $ 0.17
</TABLE>
During the quarter ended December 31, 1993, the Company concluded an
agreement to sell undeveloped land that it owned. This resulted in a gain of
approximately $1,100,000.
During the quarter ended June 30, 1994 the Company made provisions totaling
$2,343,000 for management actions or plans primarily in connection with staff
reductions related to restructuring.
During the quarter ended June 30, 1995, the Company wrote-off $6,365,000 of
capitalized mainframe computer software.
The fourth quarter ended June 30, 1995 also included a $4,100,000 tax
benefit related to the recognition of prior years net operating losses and tax
credits as well as tax reserves released.
12. SUBSEQUENT EVENT (UNAUDITED)
On October 9, 1995, the Board of Directors declared a three-for-two stock
split of the Company's common stock which was effective November 20, 1995, after
the shareholders approved an increase in the authorized shares of common stock
to 20,000,000 shares. Capital contributed in excess of par has been charged and
common stock has been credited for the par value of the additional shares as a
result of the split. All references in the Consolidated Financial Statements and
accompanying notes have also been adjusted to reflect this split.
F-17
<PAGE> 77
<TABLE>
<S> <C>
Executive Information Systems (EIS): Commander Financial Reporting Applications: Commander FDC
OLAP is a suite of software which delivers and Commander Budget are complementary products
customizable enterprise-wide business planning, that, when used together, share a single
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market trends.
</TABLE>
<PAGE> 78
[COMSHARE LOGO]