SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996 COMMISSION FILE NUMBER 0-26368
COMPUTRON SOFTWARE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2966911
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 ROUTE 17 NORTH
RUTHERFORD, NEW JERSEY 07070
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(201) 935-3400
----------------------------------------------------
(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 November 1 , 1996
Class Number of Shares Outstanding
- --------------------------------------- ----------------------------
Common Stock, par value $0.01 per share 20,801,192
<PAGE>
COMPUTRON SOFTWARE, INC.
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1995 and September 30, 1996 ............ 3-4
Consolidated Statements of Operations
Three and nine months ended
September 30, 1995 and 1996 ......................... 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1995 and 1996 ....... 6
Notes to Consolidated Interim Financial Statements .... 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................10-24
PART II OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 25
Item 6. Exhibits and Reports on Form 8-K ...................... 25
SIGNATURES
Signatures .................................................... 26
EXHIBITS
Exhibit 11.1 .................................................. 27
2
<PAGE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
December 31, September 30,
1995 1996
------------ ------------
ASSETS:
Current Assets:
Cash and cash equivalents $45,119 $18,506
Restricted cash 751 3,675
Short-term investments 781 4,522
Accounts receivables, less reserves of $3,928
and $3,006 at December 31, 1995 and
September 30, 1996, respectively 17,119 18,547
Income tax receivables 1,369 1,369
Prepaid expenses and other current assets 691 1,839
------- -------
Total current assets 65,830 48,458
------- -------
Equipment and leasehold improvements, at cost:
Computer and office equipment 8,117 10,381
Furniture and fixtures 979 1,413
Leasehold improvements 338 388
------- -------
9,434 12,182
Less -- accumulated depreciation and amortization 5,787 7,284
------- -------
3,647 4,898
------- -------
Capitalized software development costs, net of
accumulated amortization of $2,232 and $2,810
at December 31, 1995 and September 30, 1996,
respectively 2,440 2,353
Goodwill, net of accumulated
amortization of $236 at September 30, 1996 -- 3,398
Other assets 1,128 1,435
======= =======
$73,045 $60,542
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except and per share data)
(Unaudited)
December 31, September 30,
1995 1996
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 1,409
Current portion of long-term debt 351 284
Current portion of obligations under
capital leases 202 346
Accounts payable 2,184 4,677
Accrued expenses 6,856 11,506
Deferred revenue 10,474 11,423
-------- --------
Total current liabilities 20,067 29,645
-------- --------
Long-term liabilities:
Long-term debt, less current portion 77 40
-------- --------
Obligations under capital leases, less
current portion 190 43
-------- --------
Other liabilities 1,000 250
-------- --------
Commitments and contingencies (Note 2)
Stockholders' equity:
Preferred stock, authorized 5,000
shares; no shares issued and outstanding -- --
Common stock, $.01 par value, authorized 50,000
shares; 20,744 shares issued and outstanding
at December 31, 1995, and 20,801 shares
issued and outstanding at September 30, 1996 207 208
Additional paid-in capital 63,796 63,877
Accumulated deficit (12,211) (33,544)
Cumulative translation adjustment (81) 23
-------- --------
Total stockholders' equity 51,711 30,564
-------- --------
$ 73,045 $ 60,542
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
<TABLE>
COMPUTRON SOFTWARE, INC.
Consolidated Statements of Operations
(In thousands, except and per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 9,807 $ 3,327 $ 28,996 $ 12,491
Services 5,154 10,267 14,195 24,355
-------- -------- -------- --------
Total revenues 14,961 13,594 43,191 36,846
-------- -------- -------- --------
Operating expenses:
Cost of license fees 572 468 3,896 1,725
Cost of services 3,418 7,900 9,319 18,763
Sales and marketing 4,407 6,366 12,963 19,131
Research and development 2,653 3,078 7,064 8,896
General and administrative 2,172 4,408 5,958 11,236
-------- -------- -------- --------
Total operating expenses 13,222 22,220 39,200 59,751
-------- -------- -------- --------
Operating income (loss) 1,739 (8,626) 3,991 (22,905)
-------- -------- -------- --------
Other income (expense):
Other income 315 490 597 1,730
Other expense (146) (19) (467) (84)
-------- -------- -------- --------
Other income (expense), net 169 471 130 1,646
-------- -------- -------- --------
Income (loss) before income taxes 1,908 (8,155) 4,121 (21,259)
Income tax provision 572 41 1,191 74
-------- -------- -------- --------
Net income (loss) $ 1,336 $ (8,196) $ 2,930 $(21,333)
======== ======== ======== ========
Net income (loss) per common
and common stock equivalent $ 0.07 $ (0.39) $ 0.15 $ (1.03)
======== ======== ======== ========
Weighted average number of
common and common equivalent
shares 19,685 20,801 18,958 20,801
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
<TABLE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,930 $(21,333)
Adjustments to reconcile net income (loss) to net cash flows provided by
(used in) operating activities Depreciation and amortization 1,424 2,908
Provision for doubtful accounts 1,111 1,105
Changes in current assets and liabilities net of effect of acquisitions:
Restricted cash -- (2,924)
Accounts receivables (4,296) (160)
Prepaid expenses and other current assets (212) (733)
Accounts payable and accrued expenses 2,373 5,441
Deferred revenue (1,744) 173
-------- --------
Net cash flows provided by (used in) operating activities 1,586 (15,523)
-------- --------
Cash flows from investing activities:
Other assets 356 61
Capitalized software development costs (1,128) (1,088)
Purchase of equipment and leasehold improvements (2,155) (1,864)
Net cash paid for acquisitions in France and Germany -- (1,895)
Cash paid for acquisition costs -- (211)
Short-term investments 191 (3,344)
-------- --------
Net cash flows used in investing activities (2,736) (8,341)
-------- --------
Cash flows from financing activities:
Net proceeds from the sale of common stock 43,346 --
Proceeds from exercise of stock options 87 82
Repayment of notes payable -- (1,564)
Payments of long term debt (4,958) (401)
Decrease in other long-term liabilities -- (750)
Principal payments under capital lease obligations (48) (162)
-------- --------
Net cash flows provided by (used in) financing activities 38,427 (2,795)
-------- --------
Foreign currency exchange rate effects 87 46
-------- --------
Net increase (decrease) in cash and cash equivalents 37,364 (26,613)
Cash and cash equivalents, beginning of period 15,186 45,119
======== ========
Cash and cash equivalents, end of period $ 52,550 18,506
======== ========
Supplemental disclosures of cash flow information and noncash financing activities:
Cash paid during the period for --
Interest $ 418 $ 84
======== ========
Income taxes $ 64 $ 87
======== ========
Capital lease obligations incurred $ 33 $ 159
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated 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, France, Germany, Hong Kong, Singapore and the
United Kingdom, as well as a joint venture in Poland which is 80 percent owned
by Computron Software, Inc. (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 nine months ended September 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 nine months ended September 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 September 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 Consolidated Complaint was filed on August 9, 1996. The
complaint asserts claims under Sections 11, 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 promulgated
thereunder, and state law, and seeks unspecified compensatory damages,
attorneys' fees and costs. By a Notice of Motion, dated September 9, 1996,
defendants moved to dismiss the Second Amended Consolidated Complaint for
failure to state a claim upon which relief can be granted, pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure and for failure to plead their
claims with particularity, as required by Rule 9(b) of the Federal Rules of
Civil Procedure and the Private Securities Litigation Reform Act of 1995 ( the
"Reform Act"). The motion has been fully briefed by the parties and is currently
scheduled to be argued before the Court on Monday, December 23, 1996. As a
consequence of filing a motion to dismiss, all discovery and other proceedings
in the action are stayed pursuant to the Reform Act. The Company intends to
vigorously defend itself against the suits.
Since the litigation's 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
8
<PAGE>
damages for which the Company may not be adequately insured. Such an event would
have a material adverse effect on the Company's business, consolidated 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 $3.0 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.
On June 30, 1996, Computron Software, Inc. acquired 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
======
9
<PAGE>
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 and the other reports and documents
filed by the Company with the Securities and Exchange Commission from time to
time, 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, the Company 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 additional versions of its
products with the capability to interoperate with popular RDBMS software.
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 research and
development 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 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 nine months of 1996
of $21.3 million. The Company also incurred a net loss for each of the years
ended December 31, 1990, 1991, 1992, and 1993. As of September 30, 1996, the
Company had an accumulated deficit of $33.5 million. There can be no assurance
that the Company will be profitable in the future. 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.
10
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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 has operated with very little backlog, since its
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 employed an
experienced financial manager, with 14 years 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 employed
outside consultants specializing in accounts receivable credit and collections
to strengthen the Company's policies and procedures in this area. The Company
also hired Alan J. Kirschbaum as Vice President of Finance and Corporate
Controller in September 1996 and Alex W. Comandini as Chief Financial Officer in
October 1996. Mr. Comandini replaced Rich Yonker who resigned in October 1996
for personal reasons. No assurance can be given that the actions taken by the
Company will be sufficient to eliminate the Company's material weaknesses in its
financial and accounting processes, controls, reporting systems and procedures
during 1996.
11
<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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
----- ----- ----- -----
Revenues:
License fees 65.6% 24.5% 67.1% 33.9%
Services 34.4 75.5 32.9 66.1
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Operating expenses:
Cost of license fees 3.8 3.5 9.0 4.7
Cost of services 22.8 58.1 21.6 51.0
Sales and marketing 29.5 46.8 30.0 51.9
Research and development 17.8 22.7 16.4 24.1
General and administrative 14.5 32.4 13.8 30.5
----- ----- ----- -----
Total operating expenses 88.4 163.5 90.8 162.2
Operating income (loss) 11.6 (63.5) 9.2 (62.2)
Other income (expense) 1.1 3.5 0.3 4.5
----- ----- ----- -----
Income (loss) before income taxes 12.7 (60.0) 9.5 (57.7)
Income taxes (benefit) 3.8 0.3 2.7 0.2
----- ----- ----- -----
Net income (loss) 8.9% (60.3)% 6.8% (57.9)%
===== ===== ===== =====
TOTAL REVENUES
Total revenues decreased 9.1% and 14.7% for the three months and nine months
ended September 30, 1996, respectively, compared to the corresponding previous
periods. The decrease was attributable to a decline in license fees, offset in
part by an increase in services revenue. For the nine months ended September 30,
1995, one customer accounted for 12.0% of the Company's total revenue. For the
nine months ended September 30, 1996, no customer accounted for 10% or more of
the Company's total revenues.
The Company derived approximately $5.8 million and $14.1 million or 42.7% and
38.3% of its total revenues, from customers outside of the United States for the
three months and nine months ended September 30, 1996, respectively compared to
$4.1 million and $13.0 million or 27.4% and 30.1%, 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. 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 transactions. 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.
12
<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 as well as third party products resold by the Company. License fees
decreased 66.1% and 56.9% for the three months and nine months ended September
30, 1996, respectively, as compared to the corresponding previous periods. The
decrease was attributable, in part, to reduced demand for licenses, resulting
from the uncertainty caused by the Company's results of operations in recent
quarters and the Company's pending litigation. For the nine months ended
September 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 99.2% and 71.6% for the three months and nine months ended September
30, 1996 respectively, as compared to the corresponding previous periods. The
increase was attributable primarily to increased training and consulting
services resulting from a larger installed base of the Company's products. In
addition, approximately $2.9 million and $5.0 million of the services revenue
for the three and nine months ended September 30, 1996, respectively was
generated by the Company's recent acquisitions in France and Germany.
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, to expenditures for 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 Nine months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
------ ------ ------ ------
(In thousands, except percentage data)
License fees ................ $9,807 $3,327 $28,996 $12,491
Cost of license fees ........ 572 468 3,896 1,725
Cost of license fees as a
percentage of license fes .. 5.8% 14.1% 13.4% 13.8%
For the three months and nine months ended September 30, 1996, compared to the
corresponding previous periods, the cost of license fees as a percentage of
license fee revenue remained stable due primarily to relatively constant sales
of third party software resold to customers.
13
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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 in 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 Nine months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
------ ------ ------ ------
(In thousands, except percentage data)
Services revenue ........... $5,154 $10,267 $14,195 $24,355
Cost of services ........... 3,418 7,900 9,319 18,763
Cost of services as a
percentage of services
revenue ................... 66.3% 76.9% 65.6% 77.0%
For the three and nine months ended September 30, 1996, cost of services as a
percentage of services revenue increased compared to the corresponding previous
periods due primarily to increased demand for services resulting in expanding
the Company's customer service resources, principally its consulting, telephone
support, account management staff, as well as charges relating to the costs
of future services for existing client contracts. Approximately $2.3 million and
$3.8 million of the increase of cost of services for the three and nine months
ended September 30, 1996 related to the Company's recent acquisitions in France
and Germany.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and commissions as
well as 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 Nine months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
------ ------ ------ ------
(In thousands, except percentage data)
Sales and marketing
expenses .................. $4,407 $6,366 $12,963 $19.131
Sales and marketing
expenses as a percentage
of total revenues ........ 29.5% 46.8% 30.0% 51.9%
Sales and marketing expenses as a percentage of total revenue increased for the
three months and nine months ended September 30, 1996 respectively, as compared
to the corresponding previous periods, primarily due to increased hiring in late
1995 and early 1996 coupled with the costs associated with the Company's recent
acquisitions in France and Germany and other charges relating to the Company's
rationalization strategy.
14
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RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of engineering personnel
costs; costs of third party equipment and software for development purposes; and
costs of outside consultants employed by the Company to assist its product
development efforts. Research and development expenses are generally charged to
operations as incurred. 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 Nine months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
------ ------ ------ ------
(In thousands, except percentage data)
Gross research and
development expenses ......... $3,172 $3,318 $8,192 $9,984
Amounts capitalized as
software development costs ... 519 240 1,128 1,088
------ ------ ------ ------
Research and development
expenses ..................... $2,653 $3,078 $7,064 $8,896
====== ====== ====== ======
Research and development
expenses as a percentage
of total revenues ............ 17.8% 22.7% 16.4% 24.1%
Amounts capitalized as
software development cost
as a percentage of gross
research and development
expenses ..................... 16.4% 7.2% 13.8% 10.9%
Gross research and development expenses have increased for the nine months ended
September 30, 1996 compared to 1995 due primarily to the hiring and training of
additional software engineers employed to develop and enhance the Company's
existing products and to develop new products. Increases in depreciation due to
additional purchases of development equipment also contributed to the increase.
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 payroll and related
costs for administrative, executive and financial personnel, as well as charges
to the Company's provision for doubtful accounts and outside professional fees.
General and administrative expenses represented 32.4% and 30.5 % of total
revenues for the three months and nine months ended September 30, 1996
respectively, compared to 14.5% and 13.8% of total revenues for the
corresponding previous periods. General and administrative expenses increased
103% and 89% for the three months and nine months ended September 30, 1996
respectively, as compared to the corresponding previous periods, primarily due
to increases in payroll and related expenses; increased professional fees
relating to outstanding litigation, as well as increased depreciation and
amortization charges.
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
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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 on the part of its customers, 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 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, 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 could have a material adverse effect on
the price of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash, restricted cash, cash equivalents
and short-term investments of $26.7 million and working capital of $19.7
million. In July 1996, the Company entered into two credit facilities
aggregating $10.0 million with a sublimit of $5.0 million for standby letters of
credit collateralized by certificates of deposits. The credit facilities expire
on July 31, 1997. At September 30 1996, the Company has not borrowed against the
credit facilities but has outstanding $3.7 million of standby letters of credit
maturing at various times through July 2002. The Company has classified, as
restricted cash, certificates of deposit aggregating $3.7 million which are
being utilized as collateral for the standby letters of credit.
The Company's operating activities provided (used) cash of $1.6 million and
$(15.5) million for the nine months ended September 30, 1995 and 1996,
respectively. Net cash provided by operating activities for the nine months
ended September 30, 1995 was primarily comprised of net income, an increase in
accounts payable and accrued expenses, depreciation and amortization and
provision for doubtful accounts, which in the aggregate more than offset an
increase in accounts receivable. Net cash used in operating activities for the
nine months ended September 30, 1996 was comprised primarily of a net loss and
an increase in restricted cash offset by an increase in accounts payable and
accrued expenses, depreciation and amortization and provision for doubtful
accounts.
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The Company's investing activities have (used) cash of $(2.7) million and $(8.3)
million for the nine months ended September 30, 1995 and 1996, respectively. The
principal use of cash was for investment in short-term monetary instruments,
increases in capitalized software costs, purchases of equipment, as well as the
acquisitions of France and Germany.
Cash provided (used) by financing activities was $38.4 million and $(2.8)
million during the nine months ended September 30, 1995 and 1996, respectively.
During the nine months ended September 30, 1995, cash provided by financing
activities consisted primarily of net proceeds of $43.3 million from its initial
public offering offset by repayment of $5.0 million of long-term debt. During
the nine months ended September 30, 1996, cash used in 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 $3.0 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
1997.
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 AND RECENT 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 nine months of 1996
of $21.3 million. The Company also incurred a net loss for each of the years
ended December 31, 1990, 1991, 1992, and 1993. As of September 30, 1996, the
Company had an accumulated deficit of $33.5 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 involve a significant commitment
of capital and may be delayed due to time-consuming authorization procedures
within an organization.
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<PAGE>
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. 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, 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 could 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.
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<PAGE>
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 could
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.
MANAGEMENT OF GROWTH
The Company has recently experienced significant growth. This growth has placed
a noticeable strain on the Company's management, administrative and operational
resources and financial control systems. As a result the Company has recently
added a number of key officers including Adrian Peters, as Chief Executive
Officer in August 1996, Alan J. Kirschbaum as Vice President of Finance and
Corporate Controller in September 1996 and Alex W. Comandini as Chief Financial
Officer in October 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 and financial condition.
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 employed an
experienced financial manager with 14 years accounting experience at a major
national accounting firm with specific experience on revenue
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recognition issues within the software industry. In addition, in July 1996, the
Company employed outside consultant specializing in accounts receivable credit
and collections to strengthen the Company's policies and procedures in this
area. The Company also hired Alan J. Kirschbaum as Vice President of Finance and
Corporate Controller in September 1996 and Alex W. Comandini as Chief Financial
Officer in October 1996. Mr. Comandini replaced Rich Yonker who resigned in
October 1996 for personal reasons. No assurance can be given that the actions
taken by the Company will be sufficient to eliminate the Company's material
weaknesses in its financial and accounting processes, controls, reporting
systems and procedures during 1996.
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.
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
20
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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.
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 September 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 Consolidated Complaint was filed on August 9, 1996. The
complaint asserts claims under Sections 11, 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 promulgated
thereunder, and state law, and seeks unspecified compensatory damages,
attorneys' fees and costs. The Company intends to defend itself against the
suits vigorously. By a Notice of Motion, dated September 9, 1996, defendants
moved to dismiss the Second Amended Consolidated Complaint for failure to state
a claim upon which relief can be granted, pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure and for failure to plead their claims with
21
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particularity, as required by Rule 9(b) of the Federal Rules of Civil Procedure
and the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
The motion has been fully briefed by the parties and is currently scheduled to
be argued before the Court on Monday, December 23, 1996. As a consequence of
filing a motion to dismiss, all discovery and other proceedings in the action
are stayed pursuant to the Reform Act. The Company intends to vigorously defend
itself against the suits.
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 lawsuit. The inability of
the Company to resolve the claims that are the basis for the lawsuit 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 $13.0 million and $14.1 million or 30.1% and 38.3% of its
total revenues, from customers outside of the United States for the nine months
ended September 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 intends to optimize its distribution
channels outside of the United States and to enter additional international
markets where and when appropriate. 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 may have a material adverse effect on the Company's 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 and
software implementation channels using distributors, systems integrators, and
third party consulting firms and to increase the proportion of the Company's
customers licensed and implemented through such indirect channels. The Company
is currently investing, and intends to continue to invest resources to develop
indirect marketing channels. There can be no assurance that the Company will be
able to attract and retain such third parties that will be able to market and
implement 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, implement and support
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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 terminate 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 could 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 election of directors, decisions
on 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.
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
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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, could 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.
<PAGE>
COMPUTRON SOFTWARE, INC.
Part II
Other Information
Item 1. Legal Proceedings
During the period from April through September 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 Consolidated Complaint was filed on August 9, 1996. The
complaint asserts claims under Sections 11, 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 promulgated
thereunder, and state law, and seeks unspecified compensatory damages,
attorneys' fees and costs. By a Notice of Motion, dated September 9, 1996,
defendants moved to dismiss the Second Amended Consolidated Complaint for
failure to state a claim upon which relief can be granted, pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure and for failure to plead their
claims with particularity, as required by Rule 9(b) of the federal Rules of
Civil Procedure and the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). The motion has been fully briefed by the parties and is currently
scheduled to be argued before the Court on Monday, December 23, 1996. As a
consequence of filing a motion to dismiss, all discovery and other proceedings
in the action are stayed pursuant to the Reform Act. The Company intends to
vigorously defend itself against the suits.
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
none.
25
<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: November 14, 1996 By: /s/ ALEX W. COMANDINI
--------------------------
Alex W. Comandini
Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer).
<TABLE>
EXHIBIT 11.1
COMPUTRON SOFTWARE, INC.
Statement re: computation of earnings (loss) per share
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) (in thousands) $ 1,336 $ (8,196) $ 2,930 $(21,333)
======== ======== ======== ========
Weighted average common and common equivalent shares outstanding:
Shares outstanding at the beginning of the period 17,829 20,797 17,829 20,744
Weighted average shares issued during the period 1,007 4 339 57
Dilutive effect of common stock equivalents 1,016 -- 957 --
Weighted average treasury shares required using the treasury stock method (167) -- (167) --
-------- -------- -------- --------
Weighted average common and common equivalent shares outstanding: 19,685 20,801 18,958 20,801
======== ======== ======== ========
Net income (loss) per share $ 0.07 $ (0.39) $ 0.15 $ (1.03)
======== ======== ======== ========
</TABLE>
- -----------------
(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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Company's consolidated financial statements as of September 30, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,181
<SECURITIES> 4,522
<RECEIVABLES> 21,553
<ALLOWANCES> 3,006
<INVENTORY> 0
<CURRENT-ASSETS> 48,458
<PP&E> 12,182
<DEPRECIATION> 7,284
<TOTAL-ASSETS> 60,542
<CURRENT-LIABILITIES> 29,645
<BONDS> 0
0
0
<COMMON> 64,085
<OTHER-SE> (33,544)
<TOTAL-LIABILITY-AND-EQUITY> 60,542
<SALES> 12,491
<TOTAL-REVENUES> 36,846
<CGS> 1,725
<TOTAL-COSTS> 39,619
<OTHER-EXPENSES> 20,132
<LOSS-PROVISION> 1,105
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> (21,259)
<INCOME-TAX> 74
<INCOME-CONTINUING> (21,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,333)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
