<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
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)
<TABLE>
<S> <C>
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)
</TABLE>
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
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING
- --------------------------------------- ----------------------------
<C> <C>
Common Stock, par value $0.01 per share 20,801,192
</TABLE>
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<PAGE> 2
EXPLANATORY NOTE
This 10-Q/A is being filed to amend the report on Form 10-Q for the period
ended September 30, 1996 (the "Original Report") and to report the restatement
of certain financial information included in the Original Report.
The Company has restated its consolidated financial statements for each of
the four years ended December 31, 1995, for certain unaudited quarters in such
periods and for each of the three unaudited quarters ended September 30, 1996.
See Note 2 to the accompanying Consolidated Financial Statements. The Company
believes that all material adjustments necessary to correct the Company's
previously reported financial statements have been recorded.
The restatements reflect revenue reversals and deferrals of sales
previously recognized in the periods from the fourth quarter of 1992 through the
third quarter of 1996. These revenue adjustments resulted in reductions of
previously recorded bad debt provisions and increases in deferred revenue. Also
included in the restated consolidated financial statements are certain operating
expenses not previously recorded by the Company and the recording of certain
expenses in different accounting periods.
The net impact of these adjustments on the Company's revenues and net
income (loss) for each of the five years ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
----------------------------
REVENUES NET INCOME (LOSS)
-------- -----------------
<S> <C> <C>
1992........................................................ $ (868) $ (868)
1993........................................................ (694) (694)
1994........................................................ (2,485) (2,485)
1995........................................................ (2,724) (1,266)
1996........................................................ (1,126) 264
</TABLE>
This 10-Q/A includes only the changes necessary to reflect the restatement
of the financial statements included in the Original Report and does not address
any other developments subsequent to the date of the Original Report. For a
discussion of developments subsequent to the date of the Original Report
including but not limited to pending litigation against the Company, changes in
management, recommendations of the Company's independent public accountants
regarding financial and accounting procedures and controls, and delisting of the
Company's common stock from Nasdaq National Market, see the Registrant's most
recent reports and documents filed with the Securities and Exchange Commission.
2
<PAGE> 3
COMPUTRON SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I FINANCIAL INFORMATION (Restated)
Item 1. Financial Statements (Restated)
Consolidated Balance Sheets December 31, 1995 and September 30, 1996........... 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
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Restated).......................................................... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 23
Item 6. Exhibits and Reports on Form 8-K.......................................... 24
SIGNATURES
Signatures........................................................................ 25
EXHIBITS
Exhibit 11.1...................................................................... 26
Exhibit 27.1...................................................................... 27
</TABLE>
3
<PAGE> 4
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(RESTATED) (RESTATED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 45,119 $18,506
Restricted cash.................................................... 751 3,675
Short-term investments............................................. 781 4,522
Accounts receivable, less reserves of $2,028 and $1,106 at December
31, 1995 and September 30, 1996, respectively................... 15,441 17,010
Income tax receivables............................................. 1,369 1,369
Prepaid expenses and other current assets.......................... 691 1,839
------------ -------------
Total current assets....................................... 64,152 46,921
------------ -------------
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............................................................... -- 2,876
Other assets......................................................... 1,128 1,435
------------ -------------
$ 71,367 $58,483
========== ==========
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................................................... 7,298 11,660
Deferred revenue................................................... 13,667 16,404
------------ -------------
Total current liabilities.................................. 23,702 34,780
------------ -------------
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 3)
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................................................ (17,524) (40,738)
Cumulative translation adjustment.................................. (81) 23
------------ -------------
Total stockholders' equity................................. 46,398 23,370
------------ -------------
$ 71,367 $58,483
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1995 1996 1995 1996
-------- -------- -------- --------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
License fees........................................... $ 8,933 $ 3,377 $ 28,839 $ 9,911
Services............................................... 5,051 10,405 14,028 24,766
-------- -------- -------- --------
Total revenues................................. 13,984 13,782 42,867 34,677
-------- -------- -------- --------
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 6,416 13,363 18,843
Research and development............................... 2,653 3,078 7,064 8,896
General and administrative............................. 2,105 4,408 5,758 11,236
-------- -------- -------- --------
Total operating expenses....................... 13,155 22,270 39,400 59,463
-------- -------- -------- --------
Operating income (loss).................................. 829 (8,488) 3,467 (24,786)
-------- -------- -------- --------
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........................ 998 (8,017) 3,597 (23,140)
Income tax provision..................................... 572 41 1,191 74
-------- -------- -------- --------
Net income (loss)........................................ $ 426 $ (8,058) $ 2,406 $(23,214)
======= ======= ======= ========
Net income (loss) per common and common stock
equivalent................................... $ 0.02 $ (0.39) $ 0.13 $ (1.12)
======= ======= ======= ========
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> 6
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
----------------- -----------------
(RESTATED) (RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 2,406 $ (23,214)
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....................... 911 1,105
Changes in current assets and liabilities net of effect
of acquisitions:
Restricted cash....................................... -- (2,924)
Accounts receivables.................................. (3,654) (301)
Prepaid expenses and other current assets............. (212) (733)
Accounts payable and accrued expenses................. 2,773 5,153
Deferred revenue...................................... (2,062) 1,961
----------------- -----------------
Net cash flows provided by (used in) operating
activities....................................... 1,586 (16,045)
----------------- -----------------
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..... -- (1,373)
Cash paid for acquisition costs.......................... -- (211)
Short-term investments................................... 191 (3,344)
----------------- -----------------
Net cash flows used in investing activities......... (2,736) (7,819)
----------------- -----------------
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 $ 43
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
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/A 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.
(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.
7
<PAGE> 8
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(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) RESTATED FINANCIAL RESULTS
On January 27, 1997, the Company announced that certain new information had
come to the attention of its Board of Directors and its independent public
accountants that may impact previously reported financial results. As a result,
the Company restated its consolidated financial statements for each of the four
years ended December 31, 1995, and certain unaudited quarters therein and for
each of the three unaudited quarters ended September 30, 1996. In the opinion of
management, all material adjustments necessary to correct the financial
statements have been recorded.
The restatements reflect revenue reversals and deferrals of sales
previously recognized in the periods from the fourth quarter of 1992 through the
third quarter of 1996. These revenue adjustments resulted in reductions of
previously reported bad debt provisions and increases in deferred revenue. Also
included in the restated consolidated financial statements are certain operating
expenses not previously recorded by the Company and the recording of certain
expenses in different accounting periods.
A summary of the impact of such restatements on the unaudited financial
statements for the three and nine month periods ended September 30, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---------------------- ----------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Total Revenue.............................. $ 13,594 $ 13,782 $ 14,961 $ 13,984
Income (Loss) from operations.............. (8,626) (8,488) 1,739 829
Net Income (Loss).......................... (8,196) (8,058) 1,336 426
Net Income (Loss) per share ............... (.39) (.39) .07 .02
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
---------------------- ----------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Total Revenue.............................. $ 36,846 $ 34,677 $ 43,191 $ 42,867
Income (Loss) from operations.............. (22,905) (24,786) 3,991 3,467
Net Income (Loss).......................... (21,333) (23,214) 2,930 2,406
Net Income (Loss) per share ............... (1.03) (1.12) .15 .13
</TABLE>
(3) 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
8
<PAGE> 9
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
(4) 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 $1.2 million plus approximately $110,000 of acquisition
related costs.
The following is additional supplemental cash flow information relating to
the aforementioned acquisitions:
<TABLE>
<S> <C>
Fair value of assets acquired............................................... $7,221
Liabilities assumed......................................................... 2,887
------
Net value of assets acquired................................................ 4,334
Cash paid at closing........................................................ 1,895
------
Notes payable at closing.................................................... $2,439
======
</TABLE>
9
<PAGE> 10
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/A 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.
The Company generated a net loss of $2.4 million in 1994, a net loss of $8.6
million for 1995 and reported a net loss for the first nine months of 1996 of
$23.2 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 $40.7 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.
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
10
<PAGE> 11
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1995 1996 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
License fees............................................ 63.9% 24.5% 67.3% 28.6%
Services................................................ 36.1 75.5 32.7 71.4
----- ----- ----- -----
Total revenues.................................. 100.0 100.0 100.0 100.0
Operating expenses:
Cost of license fees.................................... 4.1 3.4 9.1 5.0
Cost of services........................................ 24.4 57.3 21.7 54.1
Sales and marketing..................................... 31.5 46.6 31.2 54.3
Research and development................................ 19.0 22.3 16.5 25.7
General and administrative.............................. 15.1 32.0 13.4 32.4
----- ----- ----- -----
Total operating expenses........................ 94.1 161.6 91.9 171.5
Operating income (loss)................................... 5.9 (61.6) 8.1 (71.5)
Other income (expense).................................... 1.2 3.4 0.3 4.7
----- ----- ----- -----
Income (loss) before income taxes......................... 7.1 (58.2) 8.4 (66.8)
Income taxes (benefit).................................... 4.1 0.3 2.8 0.2
----- ----- ----- -----
Net income (loss)......................................... 3.0% (58.5)% 5.6% (67.0)%
===== ===== ===== =====
</TABLE>
Total Revenues
Total revenues decreased 1.4% and 19.1% 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 12.1% 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.
11
<PAGE> 12
The Company derived approximately $5.8 million and $12.9 million or 42.0%
and 37.2% 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 $3.4 million and $13.1 million or 24.3% and 30.5%, 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.
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 6.2% and 65.6% 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 106% and 76.5% 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:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ----------------
1995 1996 1995 1996
------ ------ ------- ------
(IN THOUSANDS, EXCEPT PERCENTAGE
DATA)
<S> <C> <C> <C> <C>
License fees......................................... $8,933 $3,377 $28,839 $9,911
Cost of license fees................................. 572 468 3,896 1,725
Cost of license fees as a percentage of license
fees............................................... 6.4% 13.9% 13.5% 17.4%
</TABLE>
For the three months and nine months ended September 30, 1996, compared to
the corresponding previous periods, the cost of license fees increased as a
percentage of license fee revenue due primarily to amortization of capitalized
software remaining relatively constant despite decreased license fees. In
addition, costs of license fees for the nine months ended September 30, 1996
includes costs related to a contract however, the associated license revenue was
deferred as collectability was uncertain.
12
<PAGE> 13
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1995 1996 1995 1996
------- -------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
Services revenue............................. $5,051 $10,405 $14,028 $24,766
Cost of services............................. 3,418 7,900 9,319 18,763
Cost of services as a percentage of services
revenue.................................... 67.7% 75.9% 66.4% 75.8%
</TABLE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1995 1996 1995 1996
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
Sales and marketing expenses.................. $4,407 $6,416 $13,363 $18,843
Sales and marketing expenses as a percentage
of total revenues........................... 31.5% 46.6% 31.2% 54.3%
</TABLE>
Sales and marketing expenses as a percentage of total revenue increased for
the three months and nine months ended September 30, 1996 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.
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
13
<PAGE> 14
Financial Accounting Standards No. 86. Such capitalized software development
costs are generally amortized over periods not exceeding three years.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- --------------------
1995 1996 1995 1996
------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
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................................................ 19.0% 22.3% 16.5% 25.7%
Amounts capitalized as software development cost as a
percentage of gross research and development expenses... 16.4% 7.2% 13.8% 10.9%
</TABLE>
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 32.0% and
32.4% of total revenues for the three months and nine months ended September 30,
1996 respectively, compared to 15.1% and 13.4% of total revenues for the
corresponding previous periods. General and administrative expenses increased
109.4% and 95.1% 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 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
14
<PAGE> 15
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, cash equivalents, restricted
cash and short-term investments of $26.7 million and working capital of $12.1
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 collaterized 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
$(16.0) 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.
The Company's investing activities have (used) cash of $(2.7) million and
$(7.8) 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, notes payable, 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.
15
<PAGE> 16
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
The Company generated a net loss of $2.4 million in 1994, a net loss of
$8.6 million for 1995 and reported a net loss for the first nine months of 1996
of $23.2 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 $40.7 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.
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.
16
<PAGE> 17
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 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
17
<PAGE> 18
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 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
18
<PAGE> 19
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.
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 of 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 assets 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 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. vs. 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 not assurances
19
<PAGE> 20
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 many 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 $4.4 million, $9.1 million, and $14.2
million, or 18.6%, 28.0%, and 26.9% of its total revenues, from customers
outside of the United States in 1993, 1994 and 1995, respectively. The Company
derived approximately $13.1 million and $12.9 million or 30.5% and 37.2% 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 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 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 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
20
<PAGE> 21
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 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
21
<PAGE> 22
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.
22
<PAGE> 23
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. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of Net Income (Loss) Per Share (filed herewith)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
23
<PAGE> 24
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.
By: /s/ MICHAEL R. JORGENSEN
------------------------------------
Michael R. Jorgensen
Executive Vice President, Chief
Financial Officer,
Treasurer and Secretary (Principal
Financial
and Accounting Officer).
Date: April 16, 1997
24
<PAGE> 25
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
11.1 Computation of Net Income (Loss) Per Share (filed herewith)
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
COMPUTRON SOFTWARE, INC.
STATEMENT RE: COMPUTATION OF EARNINGS (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1995 1996 1995 1996
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income (loss).................................. $ 426 $(8,058) $ 2,406 $(23,214)
======= ======= ======= ========
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........................ $ 0.02 $ (0.39) $ 0.13 $ (1.12)
======= ======= ======= ========
</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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,181
<SECURITIES> 4,522
<RECEIVABLES> 18,116
<ALLOWANCES> 1,106
<INVENTORY> 0
<CURRENT-ASSETS> 46,921
<PP&E> 12,182
<DEPRECIATION> 7,284
<TOTAL-ASSETS> 58,483
<CURRENT-LIABILITIES> 34,780
<BONDS> 0
0
0
<COMMON> 64,085
<OTHER-SE> (40,715)
<TOTAL-LIABILITY-AND-EQUITY> 58,483
<SALES> 9,911
<TOTAL-REVENUES> 34,677
<CGS> 1,725
<TOTAL-COSTS> 39,331
<OTHER-EXPENSES> 20,132
<LOSS-PROVISION> 1,105
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> (23,140)
<INCOME-TAX> 74
<INCOME-CONTINUING> (23,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,214)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
