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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 0-26368
COMPUTRON SOFTWARE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2966911
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 ROUTE 17 NORTH
RUTHERFORD, NEW JERSEY 07070
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(Address of principal executive offices) (Zip Code)
(201) 935-3400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO
----- -----
Number of shares outstanding of the issuer's common stock as of August 7, 1996
Class Number of Shares Outstanding
--------------------------------------- ----------------------------
Common Stock, par value $0.01 per share 20,797,965
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<PAGE>
COMPUTRON SOFTWARE, INC.
------------
INDEX
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1995 and June 30, 1996 .................. 3-4
Consolidated Statements of Operations
Three and six months ended June 30, 1995 and 1996 .... 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1995 and 1996 .............. 6
Notes to Consolidated Interim Financial Statements ..... 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 9-22
PART II OTHER INFORMATION
Item 1. Legal Proceedings ...................................... 23
Item 6. Exhibits and Reports on Form 8-K ....................... 23
SIGNATURES
Signatures ..................................................... 24
EXHIBITS
Exhibit 11.1 ................................................... 25
2
<PAGE>
<TABLE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
<CAPTION>
December 31, June 30,
1995 1996
------------ ----------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents .............................. $45,119 $22,908
Restricted cash ........................................ 751 2,001
Short-term investments ................................. 781 6,124
Accounts receivables, less reserves of $3,928
and $2,636 at December 31, 1995 and
June 30, 1996, respectively .......................... 17,119 18,836
Income tax receivables ................................. 1,369 1,369
Prepaid expenses and other current assets .............. 691 1,216
------- -------
Total current assets ......................... 65,830 52,454
------- -------
Equipment and leasehold improvements, at cost:
Computer and office equipment .......................... 8,117 9,876
Furniture and fixtures ................................. 979 1,283
Leasehold improvements ................................. 338 361
------- -------
9,434 11,520
Less--accumulated depreciation and amortization ....... 5,787 6,688
------- -------
3,647 4,832
------- -------
Capitalized software development costs, net of
accumulated amortization of $2,232 and $2,618
at December 31, 1995 and June 30, 1996, respectively ... 2,440 2,902
Goodwill, net of accumulated
amortization of $113 at June 30, 1996 .................. -- 3,521
Other assets ............................................. 1,128 1,409
------- -------
$73,045 $65,118
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
<TABLE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
December 31, June 30,
1995 1996
----------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable .............................................. $ -- $ 2,466
Current portion of long-term debt .......................... 351 665
Current portion of obligations under capital leases ........ 202 187
Accounts payable ........................................... 2,184 2,954
Accrued expenses ........................................... 6,856 9,467
Deferred revenue ........................................... 10,474 10,292
-------- --------
Total current liabilities ............................. 20,067 26,031
-------- --------
Long-term liabilities:
Long-term debt, less current portion ....................... 77 34
-------- --------
Obligations under capital leases, less current portion ..... 190 97
-------- --------
Other liabilities .......................................... 1,000 500
-------- --------
Commitments and contingencies (Note 2)
Stockholders' equity:
Common stock, $.01 par value, authorized 50,000
shares; 20,744 shares issued and outstanding
at December 31, 1995, and 20,798 shares
issued and outstanding at June 30, 1996 .................. 207 207
Additional paid-in capital ................................. 63,796 63,868
Accumulated deficit ........................................ (12,211) (25,347)
Cumulative translation adjustment ......................... (81) (272)
-------- --------
Total stockholders' equity ............................ 51,711 38,456
-------- --------
$ 73,045 $ 65,118
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
------------------ -------------------
June 30, June 30, June 30, June 30,
1995 1996 1995 1996
------- ------- ------- --------
Revenues:
License fees .................... $12,160 $ 4,960 $19,188 $ 9,165
Services ........................ 4,895 8,915 9,042 14,088
------- ------- ------- --------
Total revenues ................ 17,055 13,875 28,230 23,253
------- ------- ------- --------
Operating expenses:
Cost of license fees ............ 3,014 214 3,325 1,257
Cost of services ................ 3,481 6,960 5,901 10,863
Sales and marketing ............. 4,919 6,951 8,556 12,765
Research and development ........ 2,322 2,876 4,411 5,818
General and administrative ...... 1,962 4,128 3,785 6,828
------- ------- ------- --------
Total operating expenses ...... 15,698 21,129 25,978 37,531
------- ------- ------- --------
Operating income (loss) ........... 1,357 (7,254) 2,252 (14,278)
------- ------- ------- --------
Other income (expense):
Other income .................... 79 601 281 1,239
Other expense ................... (162) (33) (320) (65)
------- ------- ------- --------
Other income (expense), net ... (83) 568 (39) 1,174
------- ------- ------- --------
Income (loss) before income taxes.. 1,274 (6,686) 2,213 (13,104)
Income tax provision .............. 356 32 619 32
======= ======= ======= ========
Net income (loss) ................. $ 918 $(6,718) $ 1,594 $(13,136)
======= ======= ======= ========
Net income (loss) per common
and common stock equivalent ..... $ 0.05 $ (0.32) $ 0.08 $ (0.63)
======= ======= ======= ========
Weighted average number of
common and common equivalent
shares .......................... 18,811 20,774 18,811 20,774
======= ======= ======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands, except per share data)
(Unaudited)
Six Months Ended
June 30,
-------------------
1995 1996
------- --------
Cash flows from operating activities:
Net income (loss) ....................................... $ 1,594 $(13,136)
Adjustments to reconcile net income (loss) to net
cash flows provided by (used in) operating activities
Depreciation and amortization ........................ 868 1,400
Provision for doubtful accounts ...................... 653 477
Changes in current assets and liabilities net
of effect of acquisitions:
Restricted cash ...................................... -- (1,250)
Accounts receivables ................................. (6,417) 179
Prepaid expenses and other current assets ............ (2) (110)
Accounts payable and accrued expenses ................ 1,628 1,072
Deferred revenue ..................................... (1,410) (451)
------- --------
Net cash flows used in operating activities ............. (3,086) (11,819)
------- --------
Cash flows from investing activities:
Other assets ......................................... (770) 87
Capitalized software development costs ............... (609) (848)
Purchase of equipment and leasehold improvements ..... (1,387) (1,361)
Net cash paid for acquisitions in France and Germany . -- (1,895)
Cash paid for acquisition costs ...................... -- (111)
Short-term investments ............................... (1,783) (4,946)
------- --------
Net cash flows used in investing activities ............. (4,549) (9,074)
------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options .............. -- 72
Repayment of notes payable ........................... -- (507)
Payments of long term debt ........................... (652) (66)
Decrease in other long-term liabilities .............. -- (500)
Principal payments under capital lease obligations ... (101) (108)
------- --------
Net cash flows provided by (used in) financing activities (753) (1,109)
------- --------
Foreign currency exchange rate effects .................. 71 (209)
------- --------
Net decrease in cash and cash equivalents ............... (8,317) (22,211)
Cash and cash equivalents, beginning of period .......... 15,186 45,119
------- --------
Cash and cash equivalents, end of period ................ $ 6,869 $ 22,908
======= ========
Supplemental disclosures of cash flow information
and noncash financing activities:
Cash paid during the period for --
Interest ........................................... $ 311 $ 78
======= ========
Income taxes ....................................... $ 50 $ 59
======= ========
Capital lease obligations incurred ................... $ 123 $ --
======= ========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Company designs, develops, markets and supports client/server financial,
workflow, plant maintenance and archival data management software solutions to
manage mission-critical applications in large organizations operating across a
broad range of industries worldwide.
Basis of Presentation:
The accompanying unaudited consolidated financial statements include the
accounts of Computron Software, Inc. and its wholly owned foreign subsidiaries
located in Australia, Canada, Hong Kong, Singapore, France, Germany and the
United Kingdom, as well as, a joint venture in Poland which is 80 percent owned
by Computron (collectively, the "Company"). These financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles and in the opinion of management, contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
these financial statements.
These consolidated financial statements should be read in conjunction with the
financial statements and related notes included in the Company's 1995 Annual
Report on Form 10K filed with the Securities and Exchange Commission.
The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of results to be expected for the full year or for any
future periods.
(a) CONCENTRATION OF CREDIT RISK
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains the majority of cash
balances with three financial institutions and its accounts receivable credit
risk is not concentrated within any geographic area.
(b) PRO FORMA NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
For the three months and six months ended June 30, 1995 net income per common
and common equivalent share was based on the proforma weighted average number of
common and common equivalent shares outstanding during the period computed in
accordance with the treasury stock method. The weighted average number of common
and common equivalent shares assumes that all series of Redeemable Convertible
Preferred Stock and Class A and Class B Common Stock had been converted to
Common Stock as of the original issuance dates and that shares of Common Stock
related to options issued during the period from August of 1994 to August of
1995 were outstanding, computed in accordance with the treasury stock method.
7
<PAGE>
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(c) REVENUE RECOGNITION
The Company recognizes revenue from non-cancelable software licenses upon
product shipment, provided collection is probable and no significant vendor and
post-contract customer obligations remain at the time of shipment. The Company
accounts for insignificant vendor obligations by deferring a portion of the
revenue and recognizing it when the related services are performed. Post
contract support (maintenance) service fees are typically billed separately and
are recognized on a straight line basis over the life of the applicable
agreement. The Company recognizes service revenues from consulting and
implementation services, including training, provided by both its own personnel
and by third parties, upon performance of the services.
(d) CASH AND CASH EQUIVALENTS
Cash equivalents are stated at cost, which approximates market, and consist of
short-term, highly liquid investments with original maturities of less than
three months.
(2) CONTINGENCIES
During the period from April through June 1996, the Company and certain of its
officers and directors were named as defendants in six civil suits filed as
class actions on behalf of individuals claiming to have purchased Computron
common stock during the time period from August 24, 1995 through April 1, 1996.
The suits were filed in the United States District Court for the District of New
Jersey and have been consolidated by court order into one suit captioned In re
Computron Software, Inc. Securities Litigation, Master File No. 96-1911 (AJL). A
second amended complaint was filed on August 9, 1996 and the defendants have
until September 9, 1996 to respond to the complaint. The complaint asserts
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, Rule 10b-5
of the Securities and Exchange Commission, and state law, and seeks unspecified
compensatory damages, attorneys' fees and costs. On June 26, 1996, the Company
was named as a defendant in a civil suit filed by Grey Advertising, Inc. in the
United States District Court for the Southern District of New York captioned
Grey Advertising, Inc. v. Computron Technologies Corporation, 96 Civ. 4833
(Jones). In general, the complaint alleges false advertising and breach of
contract. The plaintiff is seeking monetary damages of $350,000 and punitive
damages of $1,000,000, plus fees and disbursements. The Company intends to
defend itself against the suits vigorously. Since the litigations have recently
been filed and discovery has not yet commenced, the Company is unable to assess
the likelihood of an adverse result. There can be no assurances as to the
outcome of such lawsuits. The inability of the Company to resolve the claims
that are the basis for the lawsuits or to prevail in any related litigation
could result in the Company being required to pay substantial monetary damages
for which the Company may not be adequately insured, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In any event, the Company's defense of such lawsuits, even if the
outcome is favorable to the Company, could result in substantial costs to the
Company.
From time to time, the Company is involved in disputes and/or litigation
encountered in its normal course of business. The Company believes that the
ultimate outcome of these proceedings will not have a material adverse impact on
the Company's consolidated financial position, results of operations and cash
flows.
(3) ACQUISITIONS
On April 10, 1996, Computron Software, Inc. acquired the Financial Software
Service Division of Generale de Service Informatique (GSI) based in Paris,
France. GSI was owned by Automatic Data Processing. The acquisition was
effective April 1, 1996. The purchase price was 15,463,503 French Francs or
approximately $3 million. Approximately $1.5 million was paid upon closing. The
remainder of the purchase price is to be paid in nine equal monthly
installments, beginning April 30, 1996. In addition, the Company capitalized
approximately $101,000 of acquisition related costs.
8
<PAGE>
On June 30, 1996, Computron Software, Inc. acquired a division of AT&T ISTEL and
Co. GmbH, a company owned by the AT&T Group based in Essen, Germany. The
purchase price was approximately $1.8 million of which $400,000 was paid in June
with the remaining $1.4 million payable on December 31, 1996. In addition, the
Company capitalized approximately $110,000 of acquisition related costs.
The following is additional supplemental cash flow information relating to the
aforementioned acquisitions:
Fair value of assets acquired ........................... $7,743
Liabilities assumed ..................................... 2,887
------
Net value of assets acquired ............................ 4,856
Cash paid at closing .................................... 1,895
------
Notes payable at closing ................................ $2,961
======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This Report contains certain statements of a forward-looking nature relating to
future events or the future financial performance of the Company. Investors are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, investors should
specifically consider the various factors identified in this Report and in the
Company's 1995 Annual Report on Form 10-K filed with the Securities and Exchange
Commission which could cause actual results to differ materially from those
indicated by such forward-looking statements, including the matters set forth
below under the caption "Certain Factors That May Affect Future Results and
Financial Condition and the Market Price of Securities."
The Company was founded in 1978 as a developer of custom financial software for
mission-critical applications in large organizations, primarily financial
institutions. In the early 1980's Computron developed financial software for
legacy platforms and introduced sophisticated enterprise-wide financial
software. Identifying the need for client/server financial software applications
in the late 1980's, the Company commenced the re-architecture of its financial
software and began the development and deployment of new products, specifically
a workflow and document management product. In 1993, the Company introduced
Computron Financials and Computron Workflow, the client/server versions of its
financial and workflow products. Computron COOL was introduced in the latter
half of 1993. Since 1994, the Company has released versions of its products with
the capability to interoperate with popular RDBMS software.
9
<PAGE>
The Company has continued to expand its direct sales force and its indirect
channels of distribution and in late 1994 began emphasizing indirect channels of
distribution for Computron Workflow and Computron COOL. The Company has also
expanded its indirect channels of distribution by establishing relationships
with systems integrators, distributors and third party service providers. The
Company substantially increased its sales and marketing and product development
and engineering expenses in 1994 to complete the development, introduction,
sale, marketing and support of its new products. During 1996, the Company
acquired software operations in France and Germany. Included in the acquisitions
is an installed base of approximately 180 customers as well as approximately 100
professional staff. Although the Company generated net income in 1994, it
reported a net loss of $7.3 million for 1995 and reported a net loss for the
first six months of 1996 of $13.1 million. The Company also incurred a net loss
for each of the years ended December 31, 1990, 1991, 1992, and 1993. As of June
30, 1996, the Company had an accumulated deficit of $25.3 million. There can be
no assurance that the Company will be profitable in the future. The domestic and
international operating result fluctuations during such periods primarily
reflect the timing of revenue recognition related to significant license
agreements. The Company believes that domestic and international operating
results will continue to fluctuate significantly in the future as a result of a
variety of factors, including the lengthy sales cycle for the Company's
products, the proportion of revenues attributable to license fees versus
services, the amount of revenue generated by resales of third party software,
changes in product mix, demand for the Company's product, the size and timing of
individual license transactions, the introduction of new product enhancements by
the Company or its competitors, changes in customers' budgets, competitive
conditions in the industry and general economic conditions.
The Company's revenues are derived from license fees and services. Revenues for
services and training are recognized upon performance of the service. The
Company's license agreements generally do not provide a right of return.
Historically, the Company's backlog has been insubstantial, since products are
generally shipped as orders are received.
Following the audits of the Company's consolidated financial statements for 1994
and 1995, the Company received a management letter from its independent public
accountants, Arthur Andersen LLP, which enumerated material weaknesses in the
Company's financial and accounting processes, controls, reporting systems and
procedures. The Company's independent public accountants highlighted the
Company's need for additional financial and accounting personnel with software
industry experience. In addition, the Company's independent public accountants
noted (i) the need for uniformity in the language of its contracts and
recommended that the Company standardize the terms of its license agreements and
expand its internal contract review and approval procedures, (ii) the need for
written policies and procedures related to cutoff and improve the documentation
and audit trail supporting revenue recognition, (iii) deficiencies in the
organization of customer and contract files and recommended that the Company
improve and standardize record keeping, (iv) the need for expanded and
formalized accounts receivable collection procedures, (v) the need for improved
documentation and record keeping relating to consulting service projects, and
(vi) the need to develop policies and procedures to accurately identify the date
when technological feasibility of developed software has been attained and to
improve the documentation and record keeping for capitalized software
development costs and to do so on a timely basis.
In response to the independent public accountants concerns, the Company has
taken a number of actions during 1996. In June 1996, the Company hired a Revenue
Controller who has 14 years of accounting experience at a major national
accounting firm with specific experience on revenue recognition issues within
the software industry. In addition, in July 1996 the Company hired an outside
consultant specializing in accounts receivable credit and collections to
strengthen the Company's policies and procedures in this area.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
data as a percentage of total revenues:
Three Months Ended Six Months Ended
June 30, June 30,
-------------- --------------
1995 1996 1995 1996
----- ----- ----- -----
Revenues:
License fees ...................... 71.3% 35.7% 68.0% 39.4%
Services .......................... 28.7 64.3 32.0 60.6
----- ----- ----- -----
Total revenues ................. 100.0 100.0 100.0 100.0
Operating expenses:
Cost of license fees .............. 17.7 1.5 11.8 5.4
Cost of services .................. 20.4 50.2 20.9 46.7
Sales and marketing ............... 28.8 50.1 30.3 54.9
Research and development .......... 13.6 20.7 15.6 25.0
General and administrative ........ 11.5 29.8 13.4 29.4
----- ----- ----- -----
Total operating expenses ....... 92.0 152.3 92.0 161.4
Operating income (loss) ............. 8.0 (52.3) 8.0 (61.4)
Other income (expense) .............. (0.5) 4.1 (0.2) 5.0
----- ----- ----- -----
Income (loss) before income taxes ... 7.5 (48.2) 7.8 (56.4)
Income taxes (benefit) .............. 2.1 (0.2) 2.2 (0.1)
===== ===== ----- -----
Net income (loss) ................... 5.4% (48.4)% 5.6% (56.5)%
===== ===== ===== =====
TOTAL REVENUES
Total revenues decreased 18.6% and 17.6% for the three months and six months
ended June 30, 1996, respectively compared to the corresponding previous
periods. The decrease was attributable to a decrease in license fees, offset in
part by an increase in services revenue. Two customers accounted for 38.2% of
the Company's total revenue for the three months ended June 30, 1995. For the
three months ended June 30, 1996, a single customer accounted for 11.0% of the
Company's total revenues. For the six months ended June 30, 1995, two customers
accounted for 10.6% and 16.6% of the Company's total revenue. For the six months
ended June 30, 1996, no customer accounted for 10% or more of the Company's
total revenue.
The Company derived approximately $6.0 million and $8.3 million or 43.4% and
35.6% of its total revenues, from customers outside of the United States for the
three months and six months ended June 30, 1996, respectively compared to $6.6
million and $7.6 million or 38.7% and 27.0%, respectively of its total revenues
for the corresponding previous periods. The Company expects that such revenues
will continue to represent a significant percentage of its total revenues in the
future, as the Company has made recent acquisitions in Europe. Most of the
Company's international license fees and services revenue are denominated in
foreign currencies. Decreases in the value of foreign currencies relative to the
US dollar could result in losses from foreign currency translations. The Company
does not currently hedge its foreign exchange exposure. With respect to the
Company's sales that are US dollar-denominated, decreases in the value of
foreign currencies relative to the US dollar could make the Company's products
less price competitive.
11
<PAGE>
LICENSE FEES
License fees include revenues from software license agreements entered into
between the Company and its customers with respect to both the Company's
products and third party products resold by the Company. License fees decreased
59.2% and 52.2% for the three months and six months ended June 30, 1996
respectively, as compared to the corresponding previous periods. The decrease
was attributable, in part, to uncertainty in the marketplace created by the
delayed release of the Company's 1995 results of operations, which resulted in
reduced demand for licenses, as well as decreased average dollar amounts per
order. For the six months ended June 30, 1995, license fee revenues include a
non-refundable source code and license fee of approximately $2.7 million
pursuant to the Company's agreement with Wang.
SERVICES REVENUE
Services revenue includes fees from software maintenance agreements, training,
installation and consulting services. Maintenance fees, including first year
maintenance, are billed separately and are recognized ratably over the period of
the maintenance agreement. Training, installation and consulting service
revenues are recognized as the services are performed. Services revenue
increased 82.1% and 55.8% for the three months and six months ended June 30,
1996 respectively, as compared to the corresponding previous periods. The
increase in services revenue was attributable primarily to increased training
and consulting services which resulted from a larger installed base of the
Company's products. In addition, approximately $2.1 million of the services
revenue for the three months ended June 30, 1996 was generated by the Company's
recent acquisition in France.
COST OF LICENSE FEES
Cost of license fees consists primarily of amortization of capitalized software
development costs, amounts paid to third parties with respect to products resold
by the Company in conjunction with licensing of the Company's products and, to a
lesser extent, the costs of product media, duplication, manuals and shipping.
The following table sets forth, for the periods indicated, the relationship of
cost of license fees to license fee revenues:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1995 1996 1995 1996
------- ------ ------- ------
(In thousands, except percentage data)
License fees ....................... $12,160 $4,960 $19,188 $9,165
Cost of license fees ............... 3,014 214 3,325 1,257
Cost of license fees as a
percentage of license fees ....... 24.8% 4.3% 17.3% 13.7%
12
<PAGE>
For the three months and six months ended June 30, 1996, compared to the
corresponding previous periods, the dollar cost of license fees and the cost of
license fees as a percentage of license fee revenue decreased substantially,
primarily as a result of a reduced amount of third party software resold to
customers.
COST OF SERVICES
Cost of services consists primarily of personnel costs for training,
installation, consulting and customer support. These costs include training
third party service and support organizations for the Company's products. The
following table sets forth, for the periods indicated, the relationship of cost
of services and services revenue:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
1995 1996 1995 1996
------ ------ ------ -------
(In thousands, except percentage data)
Services revenue ................... $4,895 $8,915 $9,042 $14,088
Cost of services ................... 3,481 6,960 5,901 10,863
Cost of services as a
percentage of services revenue ... 71.1% 78.1% 65.3% 77.1%
For the three months and six months ended June 30, 1996, cost of services as a
percentage of services revenue increased compared to the corresponding previous
periods, primarily as a result of expanding the Company's customer service
resources, principally its consulting, telephone support, and account management
staff, as the demand for services increased. Approximately $1.5 million of the
increase of cost of services for the three months ended June 30, 1996 related to
the Company's recent acquisition in France.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and commissions paid
to sales and marketing personnel and travel and promotional expenses. The
following table sets forth, for the periods indicated, sales and marketing
expenses, the percentage increases of such expenses compared to the
corresponding previous periods and the relationship of such expenses to total
revenues:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
1995 1996 1995 1996
------ ------ ------ -------
(In thousands, except percentage data)
Sales and marketing expenses ...... $4,919 $6,951 $8,556 $12,765
Percentage increase over the
comparable period in the
prior year ...................... 95% 41% 77.4% 49%
Sales and marketing expenses
as a percentage of
total revenues .................. 28.8% 50.1% 30.3% 54.9%
13
<PAGE>
Sales and marketing expenses as a percentage of total revenue increased for the
three months and six months ended June 30, 1996 respectively, as compared to the
corresponding previous periods, primarily due to substantial hiring. The Company
anticipates that sales and marketing expenses may increase in the future, as it
continues to expand its sales and marketing activities.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of engineering personnel
costs, costs of third party equipment and software used for development purposes
and costs of outside consultants hired by the Company to assist its product
development efforts. Research and development expenses are generally charged to
operations as incurred. However, certain software development costs are
capitalized in accordance with Statement of Financial Accounting Standards No.
86. Such capitalized software development costs are generally amortized over
periods not exceeding three years.
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
1995 1996 1995 1996
------ ------ ------ ------
(In thousands, except percentage data)
Gross research and development
expenses ........................ $2,731 $3,236 $5,020 $6,466
Amounts capitalized for software
development cost ................ (409) (360) (609) (848)
------ ------ ------ ------
Research and development
expenses ........................ $2,322 $2,876 $4,411 $5,818
====== ====== ====== ======
Research and development
expenses as a percentage
of total revenues ............... 13.6% 20.7% 15.6% 25.0%
Amounts capitalized for software
development cost as a
percentage of gross research
and development expenses ........ 15.0% 11.1% 12.1% 13.1%
Gross research and development expenses have increased over the periods
presented due primarily to the hiring and training of additional software
engineers to develop and enhance the Company's existing products and to develop
new products as well as an increase in depreciation due to the additional
purchases of development equipment required for the additional personnel. The
rate of capitalization of software development cost may fluctuate depending on
the mix and stage of development of the Company's product development and
engineering projects.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries of
administrative, executive and financial personnel, provision for doubtful
accounts and outside professional fees. General and administrative expenses
represented 29.8% and 29.4% of total revenues for the three months and six
months ended June 30, 1996 respectively, compared to 11.5% and 13.4% of total
revenues for the corresponding previous periods. General and administrative
expenses increased 110% and 80% for the three months and six months ended June
30, 1996 respectively, as compared to the corresponding previous periods,
primarily due to increases in payroll and benefits expenses associated with an
increase of finance and administrative personnel, increased professional fees
relating to outstanding litigation, hiring of new personnel, including a new
Chief Executive Officer, depreciation and amortization expense, and increased
insurance. While the Company anticipates continuing dollar increases in general
and administrative expenses, it expects such expenses as a percentage of total
revenues to decrease over time.
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QUARTERLY RESULTS
The Company has experienced, and may in the future continue to experience,
significant quarter to quarter fluctuations in results of operations and
revenues. Such fluctuations may result in volatility in the price of the
Company's Common Stock. Quarterly revenues and results of operations may
fluctuate as a result of a variety of factors, including the lengthy sales cycle
for the Company's products, the proportion of revenue attributable to license
fees versus services, the amount of revenue generated by resales of third party
software, changes in product mix, demand for the Company's products, the size
and timing of individual license transactions, the introduction of new products
and product enhancements by the Company or its competitors, changes in customer
budgets, competitive conditions in the industry and general economic conditions.
Further, the license of the Company's products generally involves a significant
commitment of capital, and may be delayed due to time-consuming authorization
procedures within an organization. For these and other reasons, the sales cycles
for the Company's products are typically lengthy and subject to a number of
significant risks over which the Company has little or no control, including
customers' budgetary constraints and internal authorization reviews. The Company
has historically operated with relatively little backlog, since its products are
generally shipped as orders are received. The Company has historically
recognized a substantial portion of its revenues in the last month of a quarter,
with these revenues frequently concentrated in the last week of the quarter.
License fees in any quarter are substantially dependent on orders booked and
shipped in the last month and last week of that quarter. Delays in the timing of
recognition of specific revenues may adversely and disproportionately affect the
Company's results of operations because a high percentage of the Company's
operating expenses are relatively fixed, and planned expenditures, such as
continued expansion of the Company's sales force, are based primarily on sales
forecasts and only a small percentage of the Company's operating expenses vary
with its revenues. Accordingly, the Company believes that period to period
comparisons of results of operations are not necessarily meaningful and should
not be relied upon as an indication of future results of operations. There can
be no assurance that the Company will be profitable in any future quarter.
The Company's business has experienced and is expected to continue to experience
significant seasonality, due in part to customer buying patterns. In recent
years until 1995, the Company generally has had greater demand for its products
in the fourth quarter. These fluctuations are caused primarily by customer
budgeting and purchasing pattern, and by the Company's sales commission policies
which compensate sale personnel on the basis of quarterly and annual performance
quotas. The Company believes this pattern may continue in the future.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. Such an event would have a material adverse effect on
the price of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash, restricted cash, cash equivalents and
short-term investments of $2 million and working capital of $26.4 million.
The restricted cash relates to $2 million of standby letters of credit
collateralized by U.S. Treasury securities and maturing in June 1997.
The Company's operating activities used cash of $3.1 million and $11.8 million
for the six months ended June 30, 1995 and 1996, respectively. Net cash used in
operating activities for the six months ended June 30, 1995 was primarily
composed of an increase in accounts receivable due to increased revenue levels.
Net cash used by operations in the six months ended June 30, 1996 was composed
primarily of net loss.
The Company's investing activities have used cash of $4.5 million and $9.0
million for the six months ended June 30, 1995 and 1996, respectively. The
principle uses were increases in short-term investments, capitalized
software costs, purchases of equipment, and the acquisitions made in France and
Germany.
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Cash used by financing activities was $0.8 million and $1.1 million during the
six months ended June 30, 1995 and 1996, respectively. During the six months
ended June 30, 1995 and 1996, cash used by financing activities consisted
primarily of repayment of debt and capital lease obligations.
The Company has no significant capital commitments. The Company's aggregate
minimum operating lease payments for 1996 and 1997 are expected to be
approximately $3 million. The Company believes that its available cash and cash
equivalents, together with investment income and cash flows from operations,
will be sufficient to meet its cash requirements at least through 1996.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION AND THE
MARKET PRICE OF SECURITIES
The Company's future business, results of operations and financial condition are
also dependent on the Company's ability to successfully develop, manufacture,
market and support its products in order to meet customer demands. Inherent in
this process are a number of factors that the Company must carefully manage in
order to be successful. A discussion of certain of these factors is discussed
below.
LIMITED HISTORY OF PROFITABILITY; PRIOR LOSSES
Although the Company generated net income in 1994, it reported a net loss of
$7.3 million for 1995 and reported a net loss for the first six months of 1996
of $13.1 million. The Company also incurred a net loss for each of the years
ended December 31, 1990, 1991, 1992, and 1993. As of June 30, 1996, the Company
had an accumulated deficit of $25.3 million. There can be no assurance that the
Company will be profitable in the future.
POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS;
SEASONALITY
The Company has experienced, and may in the future experience, significant
quarter to quarter fluctuations in revenues and results of operations. Such
fluctuations may result in volatility in the price of the Company's Common
Stock. Quarterly revenues and results of operations may fluctuate as a result of
a variety of factors, including the lengthy sales cycle for the Company's
products, the proportion of revenues attributable to license fees versus
services, the amount of revenue generated by resales of third party software,
changes in product mix, demand for the Company's products, the size and timing
of individual license transactions, the introduction of new products and product
enhancements by the Company or its competitors, changes in customer budgets,
competitive conditions in the industry and general economic conditions. Further,
the license of the Company's products generally involves a significant
commitment of capital and may be delayed due to time-consuming authorization
procedures within an organization.
For these and other reasons, the sales cycles for the Company's products are
typically lengthy and subject to a number of significant risks over which the
Company has little or no control, including customers' budgetary constraints and
internal authorization reviews. The Company has historically operated with
little backlog, since its products are generally shipped as orders are received.
The Company has historically recognized a substantial portion of its revenues in
the last month of a quarter, with these revenues frequently concentrated in the
last week of the quarter. License fees in any quarter are substantially
dependent on orders booked and shipped in the last month and last week of that
quarter. Delays in the timing of recognition of specific revenues may adversely
and disproportionately affect the Company's results of operations because a high
percentage of the Company's operating expenses are relatively fixed, and planned
expenditure such as continued expansion of the Company's sales force, are based
primarily on sales forecasts and only a small percentage of the Company's
operating expenses vary with its revenues.
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<PAGE>
Accordingly, the Company believes that period to period comparisons of results
of operations are not necessarily meaningful and should not be relied upon as an
indication of future results of operations. There can be no assurance that the
Company will be profitable in any future quarter.
The Company's business has experienced and is expected to continue to experience
significant seasonality, due in part to customer buying patterns. In recent
years until 1995, the Company generally has had greater demand for its products
in the fourth quarter. These fluctuations are caused primarily by customer
budgeting and purchasing patterns and by the Company's sales commission policies
which compensate sales personnel on the basis of quarterly and annual
performance quotas. The Company believes this pattern may continue in the
future.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. Such an event would have a material adverse effect on
the price of the Company's Common Stock.
INTENSE COMPETITION
The financial applications and business software market is intensely competitive
and rapidly changing. A number of companies offer products similar to the
Company's products and target the same customers as the Company. The Company
believes its ability to compete depends upon many factors within and outside its
control, including the timing and market acceptance of new products and
enhancements developed by the Company and its competitors, product
functionality, performance, price, reliability, customer service and support,
sales and marketing efforts and product distribution. The primary competition
for Computron Financials are the financial applications software offered by
Oracle Corporation, PeopleSoft, Inc. and SAP AG. The principal competitors for
the Company's Computron Workflow and Computron COOL software are Wang and
FileNet Corporation. The Company has entered into an agreement with Wang
pursuant to which Wang has the right to license Computron COOL software to third
parties under its own private label and modify such software. In exchange, Wang
paid a non-refundable source code and fully paid-up license fee to the Company.
The Company anticipates that Wang's COOL-based product may become a significant
competitor to Computron COOL. Most of the Company's competitors are
substantially larger than the Company and have significantly greater financial,
technical and marketing resources and established, extensive direct and indirect
channels of distribution. 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 their
products than the Company. The Company's products also compete with products
offered by other vendors, and with proprietary software developed by third-party
professional service organizations and management information systems
departments of potential customers.
Due to the relatively low barriers to entry in the software market, the Company
expects additional competition from other established and emerging companies as
the client/server applications software market continues to develop and expand.
The Company also expects that competition will increase as a result of software
industry consolidations. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which would
have a material adverse effect on the Company's business, results of operations
and financial condition. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive pressures will not have a material adverse effect on the Company's
business, results of operations and financial condition.
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<PAGE>
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth. This growth has placed
a significant strain on the Company's management, administrative and operational
resources and financial control systems. The Company has recently added a number
of key officers, including Joseph Esposito, as President, Worldwide Operations,
in October 1994, Richard C. Yonker, as Chief Financial Officer, in December 1995
and Adrian Peters, as Chief Executive Officer in August, 1996. The Company's
future results of operations will depend on its ability to continue to broaden
its senior management group, and on the ability of its officers and key
employees to continue to implement and improve its management, administrative
and operational systems and to expand, train, manage and motivate its employee
base. The Company's inability to manage growth effectively, should it occur,
could have a material adverse effect on the quality of the Company's products,
the Company's ability to retain key personnel and the Company's results of
operations.
Following the audits of the Company's consolidated financial statements for 1994
and 1995, the Company received a management letter from its independent public
accountants, Arthur Andersen LLP, which enumerated material weaknesses in the
Company's financial and accounting processes, controls, reporting systems and
procedures. The Company's independent public accountants highlighted the
Company's need for additional financial and accounting personnel with software
industry experience. In addition, the Company's independent public accountants
noted (i) the need for uniformity in the language of its contracts and
recommended that the Company standardize the terms of its license agreements and
expand its internal contract review and approval procedures, (ii) the need for
written policies and procedures related to cutoff and improve the documentation
and audit trail supporting revenue recognition, (iii) deficiencies in the
organization of customer and contract files and recommended that the Company
improve and standardize record keeping, (iv) the need for expanded and
formalized accounts receivable collection procedures, (v) the need for improved
documentation and record keeping relating to consulting service projects, and
(vi) the need to develop policies and procedures to accurately identify the date
when technological feasibility of developed software has been attained and to
improve the documentation and record keeping for capitalized software
development costs and to do so on a timely basis.
In response to the independent public accountants concerns, the Company has
taken a number of actions during 1996. In June 1996, the Company hired a Revenue
Controller who has 14 years of accounting experience at a major national
accounting firm with specific experience on revenue recognition issues within
the software industry. In addition, in July 1996 the Company hired an outside
consultant specializing in accounts receivable credit and collections to
strengthen the Company's policies and procedures in this area.
DEPENDENCE ON PRINCIPAL PRODUCTS
Substantially all of the Company's revenues are derived from the licensing of
Computron Financials, Computron Workflow and Computron COOL and fees from
consulting and maintenance services. These products and services are expected to
continue to account for substantially all of the Company's revenues for the
foreseeable future. Accordingly, the Company's future results of operations will
depend, in part, on achieving broader market acceptance of these products and
services, as well as the Company's ability to continue to enhance these products
and services to meet the evolving needs of its customers. A reduction in demand
or increase in competition in the market for financial applications or business
software, or decline in sales of such products and services, could have a
material adverse effect on the Company business, results of operations and
financial condition.
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<PAGE>
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DEFECTS,
DEVELOPMENT DELAYS AND LACK OF MARKET ACCEPTANCE
The financial applications and business software market is characterized by
rapid technological change, changes in customer requirements, frequent new
product introductions and enhancements, emerging industry standards. The
introduction of products embodying new technologies and emergence of new
industry standards can render existing products obsolete and unmarketable.
Accordingly, the life cycles of the Company's products are difficult to
estimate. The Company's future success will depend in part upon its ability to
enhance its current products and to develop and introduce new products that
respond to evolving customer requirements and keep pace with technological
development and emerging industry standards, such as new operating systems,
hardware platforms, interfaces and third party applications software. There can
be no assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change,
changes in customer requirements, or emerging industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of such products and
enhancements, or that any new products or enhancements that it may introduce
will achieve market acceptance. The inability of the Company for technological
or other reasons, to develop and introduce new products or enhancements in a
timely manner in response to changing customer requirements, technological
change or emerging industry standards, would have a material adverse effect on
the Company's business, results of operations and financial condition.
Software products as complex as those offered by the Company often encounter
development delays and may contain undetected errors or failures when introduced
or when new versions are released. The Company has in the past experienced
delays in the development of software by third parties which software is being
licensed to and implemented by customers who are simultaneously licensing and
implementing the Company's products. Those delays have resulted in delays in the
development and shipment of the Company's products. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new products or enhancements after commencement of
commercial shipments, or that the Company will not experience development
delays, resulting in loss of or delay in market acceptance of a new product or
enhancement, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT
The Company's success is heavily dependent upon its proprietary technology. The
Company regards its software as proprietary, and relies primarily on a
combination of contract, copyright and trademark law, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights. The Company has no patents or patent applications pending, and existing
trade secrets and copyright laws afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. The Company makes source code
available to certain of its customers which may increase the likelihood of
misappropriation or other misuse of the Company's software. In addition, 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. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies.
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<PAGE>
The Company is not aware that any of its products, trademarks or other
proprietary rights infringe the proprietary rights of third parties. However,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products. As
the number of software products in the industry increases and the functionality
of these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty and license agreements, if required, may not be
available on terms acceptable to the Company, or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
POTENTIAL ADVERSE EFFECT OF LITIGATION
During the period from April through June 1996, the Company and certain of its
officers and directors were named as defendants in six civil suits filed as
class actions on behalf of individuals claiming to have purchased Computron
common stock during the time period from August 24, 1995 through April 1, 1996.
The suits were filed in the United States District Court for the District of New
Jersey and have been consolidated by court order into one suit captioned In re
Computron Software, Inc. Securities Litigation, Master File No. 96-1911 (AJL). A
second amended complaint was filed on August 9, 1996 and the defendants have
until September 9, 1996 to respond to the complaint. The complaint asserts
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, Rule 10b-5
of the Securities and Exchange Commission, and state law, and seeks unspecified
compensatory damages, attorneys' fees and costs. On June 26, 1996, the Company
was named as a defendant in a civil suit filed by Grey Advertising, Inc. in the
United States District Court for the Southern District of New York captioned
Grey Advertising, Inc. v. Computron Technologies Corporation, 96 Civ. 4833
(Jones). In general, the complaint alleges false advertising and breach of
contract. The plaintiff is seeking monetary damages of $350,000 and punitive
damages of $1,000,000, plus fees and disbursements. The Company intends to
defend itself against the suits vigorously. Since the litigations have recently
been filed and discovery has not yet commenced, the Company is unable to assess
the likelihood of an adverse result. There can be no assurances as to the
outcome of such lawsuits. The inability of the Company to resolve the claims
that are the basis for the lawsuits or to prevail in any related litigation
could result in the Company being required to pay substantial monetary damages
for which the Company may not be adequately insured, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In any event, the Company's defense of such lawsuits, even if the
outcome is favorable to the Company, could result in substantial costs to the
Company. See "Legal Proceedings."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company derived approximately $4.7 million, $10.8 million, and $15.0
million, or 19.4%, 30.8%, and 26.9% of its total revenues, from customers
outside of the United States in 1993, 1994 and 1995, respectively. The Company
derived approximately $3.7 million and $8.3 million or 27.0% and 35.6% of its
total revenues, from customers outside of the United States for the six months
ended June 30, 1995 and 1996, respectively. The Company expects that such
revenues will continue to represent a significant percentage of its total
revenues in the future. The Company believes that its continued growth and
profitability will require expansion of its sales in international markets. The
Company intends to continue to expand its operations outside of the United
States and enter additional international markets, which will require
significant management attention and financial resources. There can be no
assurance, however, that the Company will be able to maintain or increase
international market demand for its products and services. Most of the Company's
international license fees and services revenue are denominated in foreign
currencies. Decreases in the value of foreign currencies relative to the U.S.
dollar could result in losses from foreign currency translations. The Company
does not currently hedge its foreign exchange exposure. With respect to the
Company's sales that are U.S. dollar-denominated, decreases in the value of
foreign currencies relative to the U.S. dollar could make the Company's products
less price competitive. Additional risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs of localizing products for
foreign countries, lack of acceptance of localized products in foreign markets,
longer accounts receivable payment cycles, difficulties in managing
international operations, potentially adverse tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have a
material adverse effect on the Company's
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future international revenues and, consequently, on the Company's business,
results of operations and financial condition.
EXPANSION OF INDIRECT CHANNELS
An integral part of the Company's strategy is to expand indirect marketing
channels using systems integrators and to increase the proportion of the
Company's customers licensed through such indirect channels. The Company is
currently investing, and intends to continue to invest, significant resources to
develop indirect marketing channels. There can be no assurance that the Company
will be able to attract and retain systems integrators that will be able to
market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service. The Company's agreements
with such third parties are generally not exclusive and many of those third
parties also market competitive products. In many cases, these agreements may be
terminated by either party at any time without cause. The inability to attract
and retain systems integrators could have a material adverse effect on the
Company's business, results of operations and financial condition.
RELIANCE ON CERTAIN RELATIONSHIPS
The Company relies on relationships with a number of consultants, systems
integrators and software and hardware vendors to enhance its product development
and marketing and sales efforts, to implement the Company's software products
and to support its customers. These relationships, many of which are not the
subject of formal written agreements, provide marketing and sales leads to the
Company's direct sales force, assistance in the Company's product development
process and assistance in the service and implementation of the Company's
products. There can be no assurance that these companies, most of which have
significantly greater financial and marketing resources than the Company, will
not develop or market software products which compete with the Company's
products in the future or will not otherwise discontinue their relationships
with or support of the Company.
The failure by the Company to maintain its existing relationships, or to
establish new relationships in the future, because of a divergence of interests,
acquisition of one or more of these third parties or other reason, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company also licenses software from third parties which is incorporated into
its products. These licenses expire from time to time. In addition, the Company
generally does not have access to source code for the software supplied by these
third parties. Certain of these third parties are small companies that do not
have extensive financial and technical resources. If any of these relationships
were terminated or if any of these third parties were to cease doing business,
the Company may be forced to expend significant time and development resources
to replace the licensed software. Such an event would have a material adverse
effect upon the Company's business, results of operations and financial
condition.
CONTROL BY EXISTING STOCKHOLDERS
The Company's senior management, directors and affiliated entities together
beneficially own approximately 67.3% of the outstanding shares of Common Stock.
As a result, these stockholders are able to exercise control over matters
requiring stockholder approval, including the elect directors, and mergers,
consolidations and sales of all or substantially all of the assets of the
Company. This may prevent or discourage tender offers for the Company's Common
Stock unless the terms are approved by such stockholders.
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RELIANCE ON KEY PERSONNEL
The Company's future success will depend to a significant extent upon a number
of key management and technical personnel. The loss of the services of one or
more key employees, including Adrian Peters, Chief Executive Officer and Andreas
Typaldos, Chairman of the Board, could have a material adverse effect on the
Company's business. The Company is a party to employment agreements with certain
key personnel, including both Adrian Peters and Andreas Typaldos. In addition,
the Company is the beneficiary of $2.15 million in key-person life insurance on
the life of Andreas Typaldos and is the beneficiary of key-person life insurance
on the lives of certain other key personnel. The Company believes that its
future success will also depend in large part upon its ability to attract and
retain highly skilled technical, management, sales and marketing personnel.
Competition for such personnel is intense, and the services of qualified
personnel are difficult to obtain and replace. There can be no assurance that
the Company will be successful in attracting and retaining the personnel
necessary to develop, market, service and support its products and conduct its
operations successfully. The inability of the Company to attract, hire,
assimilate and retain such personnel, or to increase revenues at a rate
sufficient to absorb the resulting increased expenses, would have a material
adverse effect on the Company's business, results of operations and financial
condition.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been, and, in the future
could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant contracts, changes
in earning estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
software and computer industries and other events or factors. In addition, the
stock market in general has experienced extreme price and volume fluctuations
which have affected the market price from many companies in industries similar
or related to that of the Company and which have been unrelated to the operating
performance of such companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW
The Company's Fourth Amended and Restated Certificate of Incorporation
authorizes the Board of Directors to issue, without stockholder approval,
5,000,000 shares of Preferred Stock with voting, conversion and other rights and
preferences that could materially and adversely affect the voting power or other
rights of the holders of Common Stock. Although the Company has no current plans
to issue any shares of Preferred Stock, the issuance of Preferred Stock or of
rights to purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. In addition, the possible issuance of Preferred Stock
could discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. Certain provisions of the Company's by-laws and of Delaware law
applicable to the Company could delay or make more difficult a merger, tender
offer or proxy contest involving the Company.
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COMPUTRON SOFTWARE, INC.
Part II
Other Information
Item 1. Legal Proceedings
During the period from April through June 1996, the Company and certain of its
officers and directors were named as defendants in six civil suits filed as
class actions on behalf of individuals claiming to have purchased Computron
common stock during the time period from August 24, 1995 through April 1, 1996.
The suits were filed in the United States District Court for the District of New
Jersey and have been consolidated by court order into one suit captioned In re
Computron Software, Inc. Securities Litigation, Master File No. 96-1911 (AJL). A
second amended complaint was filed on August 9, 1996 and the defendants have
until September 9, 1996 to respond to the complaint. The complaint asserts
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, Rule 10b-5
of the Securities and Exchange Commission, and state law, and seeks unspecified
compensatory damages, attorneys' fees and costs. On June 26, 1996, the Company
was named as a defendant in a civil suit filed by Grey Advertising, Inc. in the
United States District Court for the Southern District of New York captioned
Grey Advertising, Inc. v. Computron Technologies Corporation, 96 Civ. 4833
(Jones). In general, the complaint alleges false advertising and breach of
contract. The plaintiff is seeking monetary damages of $350,000 and punitive
damages of $1,000,000, plus fees and disbursements. The Company intends to
defend itself against the suits vigorously. Since the litigations have recently
been filed and discovery has not yet commenced, the Company is unable to assess
the likelihood of an adverse result. There can be no assurances as to the
outcome of such lawsuits. The inability of the Company to resolve the claims
that are the basis for the lawsuits or to prevail in any related litigation
could result in the Company being required to pay substantial monetary damages
for which the Company may not be adequately insured, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In any event, the Company's defense of such lawsuits, even if the
outcome is favorable to the Company, could result in substantial costs to the
Company.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11.1 Computation of Net Income (Loss) Per Share (filed herewith)
b) Reports on Form 8-K
A Form 8-K was filed on April 10, 1996 relating to the Company's
acquisition of the Financial Software Service Division of Generale
de Service Informatique based in Paris, France.
23
<PAGE>
COMPUTRON SOFTWARE, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTRON SOFTWARE, INC.
Date: August 14, 1996 By: /s/ RICHARD C. YONKER
---------------------------------
Richard C. Yonker
Chief Financial Officer, Treasurer and
Secretary Principal Financial and
Accounting Officer
24
EXHIBIT 11.1
COMPUTRON SOFTWARE, INC.
Statement re: computation of earnings (loss) per share
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
1995 1996 1995 1996
------- ------- ------- --------
Net income (loss) (in thousands) ..... $ 918 $(6,718) $ 1,594 $(13,136)
======= ======= ======= ========
Weighted average common and
common equivalent shares outstanding:
Shares outstanding at the beginning
of the period .................... 17,829 20,767 17,829 20,744
Weighted average shares issued
during the period ................ -- 7 -- 30
Dilutive effect of common stock
equivalents ...................... 982 -- 982 --
------- ------- ------- --------
Weighted average common and common
equivalent shares outstanding: ..... 18,811 20,774 18,811 20,774
======= ======= ======= ========
Net income (loss) per share .......... $ 0.05 $ (0.32) $ 0.08 $ (0.63)
======= ======= ======= ========
- ----------
(1) All share information contained in the per share calculation has been
adjusted to reflect the conversion of all series of Redeemable Convertible
Preferred Stock and Class A and Class B Common Stock into Common Stock as
of the original issuance dates. These equities were converted into Common
Stock upon the closing of the initial public offering on August 29, 1995.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Company's consolidated financial statements as of June 30, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 24,909
<SECURITIES> 6,124
<RECEIVABLES> 21,472
<ALLOWANCES> 2,636
<INVENTORY> 0
<CURRENT-ASSETS> 52,454
<PP&E> 11,520
<DEPRECIATION> 6,688
<TOTAL-ASSETS> 65,118
<CURRENT-LIABILITIES> 26,031
<BONDS> 0
0
0
<COMMON> 64,075
<OTHER-SE> (25,619)
<TOTAL-LIABILITY-AND-EQUITY> 65,118
<SALES> 9,165
<TOTAL-REVENUES> 23,253
<CGS> 1,257
<TOTAL-COSTS> 24,885
<OTHER-EXPENSES> 12,646
<LOSS-PROVISION> 477
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> (13,104)
<INCOME-TAX> 32
<INCOME-CONTINUING> (13,136)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,136)
<EPS-PRIMARY> (.63)
<EPS-DILUTED> (.63)
</TABLE>
