<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 JUNE 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 August 7, 1996
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING
- --------------------------------------- ----------------------------
<C> <C>
Common Stock, par value $0.01 per share 20,797,965
</TABLE>
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EXPLANATORY NOTE
This 10-Q/A is being filed to amend the report on Form 10-Q for the period
ended June 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
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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 June 30, 1996.......................................... 4
Consolidated Statements of Operations
Three and six months ended June 30, 1995 and 1996............................ 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1995 and 1996...................................... 6
Notes to Consolidated Interim Financial Statements............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations (Restated).......................................................... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................................... 22
SIGNATURES
Signatures........................................................................ 23
EXHIBITS
Exhibit 11.1...................................................................... 24
Exhibit 27.1...................................................................... 25
</TABLE>
3
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COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 45,119 $ 22,908
Restricted cash.................................................. 751 2,001
Short-term investments........................................... 781 6,124
Accounts receivables, less reserves of $2,028 and $736 at
December 31, 1995 and June 30, 1996, respectively............. 15,441 17,269
Income tax receivables........................................... 1,369 1,369
Prepaid expenses and other current assets........................ 691 1,216
------------ ------------
Total current assets..................................... 64,152 50,887
------------ ------------
Equipment and leasehold improvements, at cost:
Computer and office equipment.................................... 8,117 9,876
Furniture and fixtures........................................... 979 1,283
Leasehold improvements........................................... 338 361
------------ ------------
9,434 11,520
Less -- accumulated depreciation and amortization................ 5,787 6,688
------------ ------------
3,647 4,832
------------ ------------
Capitalized software development costs, net of accumulated
amortization of $2,232 and $2,618 at December 31, 1995 and June
30, 1996, respectively........................................... 2,440 2,902
Goodwill, net of accumulated amortization of $113 at June 30,
1996............................................................. -- 2,999
Other assets....................................................... 1,128 1,409
------------ ------------
$ 71,367 $ 63,029
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................... $ -- $ 2,466
Current portion of long-term debt................................ 351 665
Current portion of obligations under capital leases.............. 202 187
Accounts payable................................................. 2,184 2,954
Accrued expenses................................................. 7,298 9,571
Deferred revenue................................................. 13,667 15,431
------------ ------------
Total current liabilities................................ 23,702 31,274
------------ ------------
Long-term liabilities:
Long-term debt, less current portion............................. 77 34
------------ ------------
Obligations under capital leases, less current portion........... 190 97
------------ ------------
Other liabilities................................................ 1,000 500
------------ ------------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, $.01 par value, authorized 50,000 shares; 20,744
shares issued and outstanding at December 31, 1995, and 20,798
shares issued and outstanding at June 30, 1996................ 207 207
Additional paid-in capital....................................... 63,796 63,868
Accumulated deficit.............................................. (17,524) (32,679)
Cumulative translation adjustment................................ (81) (272)
------------ ------------
Total stockholders' equity............................... 46,398 31,124
------------ ------------
$ 71,367 $ 63,029
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1995 1996 1995 1996
---------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues:
License fees........................................ $ 12,149 $ 4,185 $ 19,905 $ 6,535
Services............................................ 4,863 9,042 8,978 14,361
---------- ---------- ---------- ----------
Total revenues.............................. 17,012 13,227 28,883 20,896
---------- ---------- ---------- ----------
Operating expenses:
Cost of license fees................................ 3,014 214 3,325 1,257
Cost of services.................................... 3,481 6,960 5,901 10,863
Sales and marketing................................. 5,319 6,671 8,956 12,427
Research and development............................ 2,322 2,876 4,411 5,818
General and administrative.......................... 1,895 4,128 3,652 6,828
---------- ---------- ---------- ----------
Total operating expenses.................... 16,031 20,849 26,245 37,193
---------- ---------- ---------- ----------
Operating income (loss)............................... 981 (7,622) 2,638 (16,297)
---------- ---------- ---------- ----------
Other income (expense):
Other income........................................ 79 601 281 1,239
Other expense....................................... (162) (33) (320) (65)
---------- ---------- ---------- ----------
Other income (expense), net................. (83) 568 (39) 1,174
---------- ---------- ---------- ----------
Income (loss) before income taxes..................... 898 (7,054) 2,599 (15,123)
Income tax provision.................................. 356 32 619 32
---------- ---------- ---------- ----------
Net income (loss)..................................... $ 542 $ (7,086) $ 1,980 $(15,155)
======== ======== ======== ========
Net income (loss) per common and common stock
equivalent.......................................... $ 0.03 $ (0.34) $ 0.11 $ (0.73)
======== ======== ======== ========
Weighted average number of common and common
equivalent shares................................... 18,811 20,774 18,811 20,774
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996
---------------- ----------------
(RESTATED) (RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 1,980 $(15,155)
Adjustments to reconcile net income (loss) to net cash
flows provided by (used in) operating activities --
Depreciation and amortization........................ 868 1,400
Provision for doubtful accounts...................... 520 477
Changes in current assets and liabilities net of effect
of acquisitions --
Restricted cash...................................... -- (1,250)
Accounts receivables................................. (6,301) 68
Prepaid expenses and other current assets............ (2) (110)
Accounts payable and accrued expenses................ 2,028 734
Deferred revenue..................................... (2,179) 1,495
------- --------
Net cash flows used in operating activities..... (3,086) (12,341)
------- --------
Cash flows from investing activities:
Other assets............................................ (770) 87
Capitalized software development costs.................. (609) (848)
Purchase of equipment and leasehold improvements........ (1,387) (1,361)
Net cash paid for acquisitions in France and Germany.... -- (1,373)
Cash paid for acquisition costs......................... -- (111)
Short-term investments.................................. (1,783) (4,946)
------- --------
Net cash flows used in investing activities..... (4,549) (8,552)
------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options................. -- 72
Repayment of notes payable.............................. -- (507)
Payments of long term debt.............................. (652) (66)
Decrease in other long-term liabilities................. -- (500)
Principal payments under capital lease obligations...... (101) (108)
------- --------
Net cash flows provided by (used in) financing
activities.............................................. (753) (1,109)
------- --------
Foreign currency exchange rate effects.................... 71 (209)
------- --------
Net decrease in cash and cash equivalents................. (8,317) (22,211)
Cash and cash equivalents, beginning of period............ 15,186 45,119
------- --------
Cash and cash equivalents, end of period.................. $ 6,869 $ 22,908
======= ========
Supplemental disclosures of cash flow information and
noncash financing activities:
Cash paid during the period for --
Interest............................................. $ 311 $ 78
======= ========
Income taxes......................................... $ 50 $ 59
======= ========
Capital lease obligations incurred................... $ 123 $ --
======= ========
</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, Hong Kong, Singapore, France, Germany and the
United Kingdom, as well as, a joint venture in Poland which is 80 percent owned
by Computron (collectively, the "Company"). These financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles and in the opinion of management, contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
these financial statements.
These consolidated financial statements should be read in conjunction with
the financial statements and related notes included in the Company's 1995 Annual
Report on Form 10-K/A filed with the Securities and Exchange Commission.
The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of results to be expected for the full year or for any
future periods.
(a) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains the majority of cash
balances with three financial institutions and its accounts receivable credit
risk is not concentrated within any geographic area.
(b) Pro Forma Net Income per Common and Common Equivalent Share
For the three months and six months ended June 30, 1995 net income per
common and common equivalent share was based on the proforma weighted average
number of common and common equivalent shares outstanding during the period
computed in accordance with the treasury stock method. The weighted average
number of common and common equivalent shares assumes that all series of
Redeemable Convertible Preferred Stock and Class A and Class B Common Stock had
been converted to Common Stock as of the original issuance dates and that shares
of Common Stock related to options issued during the period from August of 1994
to August of 1995 were outstanding, computed in accordance with the treasury
stock method.
(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 six month periods ended June 30, 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
--------------------- ---------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Total Revenue.................................. $ 13,875 $ 13,227 $ 23,253 $ 20,896
Income (Loss) from operations.................. (7,254) (7,622) (14,278) (16,297)
Net Income (Loss).............................. (6,718) (7,086) (13,136) (15,155)
Net Income (Loss) per share.................... (.32) (.34) (.63) (.73)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995
--------------------- ---------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Total Revenue.................................. $ 17,055 $ 17,012 $ 28,230 $ 28,883
Income (Loss) from operations.................. 1,357 981 2,252 2,638
Net Income (Loss).............................. 918 542 1,594 1,980
Net Income (Loss) per share ................... .05 .03 .08 .11
</TABLE>
(3) CONTINGENCIES
During the period from April through June 1996, the Company and certain of
its officers and directors were named as defendants in six civil suits filed as
class actions 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 asserts
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, Rule 10b-5
of the Securities and Exchange Commission, and state law, and seeks unspecified
compensatory damages, attorneys' fees and costs. On June 26, 1996, the Company
was named as a defendant in a civil suit
8
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COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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 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 $110,000 of acquisition 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 filed with the
Securities and Exchange Commission which could cause actual results to differ
materially from those indicated by such forward-looking statements, including
the matters set forth below under the caption "Certain Factors That May Affect
Future Results and Financial Condition and the Market Price of Securities".
The Company was founded in 1978 as a developer of custom financial software
for mission-critical applications in large organizations, primarily financial
institutions. In the early 1980's Computron developed financial software for
legacy platforms and introduced sophisticated enterprise-wide financial
software. Identifying the need for client/server financial software applications
in the late 1980's, the Company commenced the re-architecture of its financial
software and began the development and deployment of new products, specifically
a workflow and document management product. In 1993, the Company introduced
Computron Financials and Computron Workflow, the client/server versions of its
financial and workflow products. Computron COOL was introduced in the latter
half of 1993. Since 1994, the Company has released versions of its products with
the capability to interoperate with popular RDBMS software.
The Company has continued to expand its direct sales force and its indirect
channels of distribution and in late 1994 began emphasizing indirect channels of
distribution for Computron Workflow and Computron COOL. The Company has also
expanded its indirect channels of distribution by establishing relationships
with systems integrators, distributors and third party service providers. The
Company substantially increased its sales and marketing and product development
and engineering expenses in 1994 to complete the development, introduction,
sale, marketing and support of its new products. During 1996, the Company
acquired software operations in France and Germany. Included in the acquisitions
is an installed base of approximately 180 customers as well as 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 six months of 1996
of $15.2 million. The Company also incurred a net loss for each of the years
ended December 31, 1990, 1991, 1992, and 1993. As of June 30, 1996, the Company
had an accumulated deficit of $32.7 million. There can be no assurance that the
Company will be profitable in the future. The domestic and international
operating result fluctuations during such periods primarily reflect the timing
of revenue recognition related to significant license agreements. The Company
believes that domestic and international operating results will continue to
fluctuate significantly in the future as a result of a variety of factors,
including the lengthy sales cycle for the Company's products, the proportion of
revenues attributable to license fees versus services, the amount of revenue
generated by resales of third party software, changes in product mix, demand for
the Company's product, the size and timing of individual license transactions,
the introduction of new product enhancements by the Company or its competitors,
changes in customers' budgets, competitive conditions in the industry and
general economic conditions.
The Company's revenues are derived from license fees and services. Revenues
for services and training are recognized upon performance of the service. The
Company's license agreements generally do not provide a right of return.
Historically, the Company's backlog has been insubstantial, since products are
generally shipped as orders are received.
Following the audits of the Company's consolidated financial statements for
1994 and 1995, the Company received a management letter from its independent
public accountants, Arthur Andersen LLP, which enumerated material weaknesses in
the Company's financial and accounting processes, controls, reporting systems
and procedures. The Company's independent public accountants highlighted the
Company's need for additional financial and accounting personnel with software
industry experience. In addition, the Company's
10
<PAGE> 11
independent public accountants noted (i) the need for uniformity in the language
of its contracts and recommended that the Company standardize the terms of its
license agreements and expand its internal contract review and approval
procedures, (ii) the need for written policies and procedures related to cutoff
and improve the documentation and audit trail supporting revenue recognition,
(iii) deficiencies in the organization of customer and contract files and
recommended that the Company improve and standardize record keeping, (iv) the
need for expanded and formalized accounts receivable collection procedures, (v)
the need for improved documentation and record keeping relating to consulting
service projects, and (vi) the need to develop policies and procedures to
accurately identify the date when technological feasibility of developed
software has been attained and to improve the documentation and record keeping
for capitalized software development costs and to do so on a timely basis.
In response to the independent public accountants concerns, the Company has
taken a number of actions during 1996. In June 1996, the Company hired a Revenue
Controller who has 14 years accounting experience at a major national accounting
firm with specific experience on revenue recognition issues within the software
industry. In addition, in July 1996, the Company hired an outside consultant
specializing in accounts receivable credit and collections to strengthen the
Company's policies and procedures in this area.
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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1995 1996 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
License fees....................................... 71.4% 31.6% 68.9% 31.3%
Services........................................... 28.6 68.4 31.1 68.7
----- ----- ----- -----
Total revenues............................. 100.0 100.0 100.0 100.0
Operating expenses:
Cost of license fees............................... 17.7 1.6 11.5 6.0
Cost of services................................... 20.5 52.6 20.4 52.0
Sales and marketing................................ 31.3 50.4 31.0 59.5
Research and development........................... 13.6 21.7 15.3 27.8
General and administrative......................... 11.1 31.3 12.7 32.7
----- ----- ----- -----
Total operating expenses................... 94.2 157.6 90.9 178.0
Operating income (loss).............................. 5.8 (57.6) 9.1 (78.0)
Other income (expense)............................... (0.5) 4.3 (0.1) 5.6
----- ----- ----- -----
Income (loss) before income taxes.................... 5.3 (53.3) 9.0 (72.4)
Income taxes (benefit)............................... 2.1 0.3 2.1 0.1
----- ----- ----- -----
Net income (loss).......................... 3.2% (53.6)% 6.9% (72.5)%
===== ===== ===== =====
</TABLE>
Total Revenues
Total revenues decreased 22.2% and 27.7% for the three months and six
months ended June 30, 1996, respectively compared to the corresponding previous
periods. The decrease was attributable to a decrease in license fees, offset in
part by an increase in services revenue. Two customers accounted for 38.3% of
the Company's total revenue for the three months ended June 30, 1995. For the
three months ended June 30, 1996, a single customer accounted for 11.5% of the
Company's total revenues. For the six months ended June 30, 1995, two customers
accounted for 10.4% and 18.5%, respectively of the Company's total revenue. For
the six months ended June 30, 1996, no customer accounted for 10% or more of the
Company's total revenue.
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<PAGE> 12
The Company derived approximately $5.3 million and $7.1 million or 40.2%
and 34.0% of its total revenues, from customers outside of the United States for
the three months and six months ended June 30, 1996, respectively compared to
$6.7 million and $8.4 million or 39.4% and 29.1%, 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, as the Company has made recent acquisitions in Europe.
Most of the Company's international license fees and services revenue are
denominated in foreign currencies. Decreases in the value of foreign currencies
relative to the US dollar could result in losses from foreign currency
translations. The Company does not currently hedge its foreign exchange
exposure. With respect to the Company's sales that are US dollar-denominated,
decreases in the value of foreign currencies relative to the US dollar could
make the Company's products less price competitive.
License Fees
License fees include revenues from software license agreements entered into
between the Company and its customers with respect to both the Company's
products and third party products resold by the Company. License fees decreased
65.6% and 67.2% for the three months and six months ended June 30, 1996
respectively, as compared to the corresponding previous periods. The decrease
was attributable, in part, to uncertainty in the marketplace created by the
delayed release of the Company's 1995 results of operations, which resulted in
reduced demand for licenses, as well as decreased average dollar amounts per
order. For the six months ended June 30, 1995, license fee revenues include a
non-refundable source code and license fee of approximately $2.7 million
pursuant to the Company's agreement with Wang.
Services Revenue
Services revenue includes fees from software maintenance agreements,
training, installation and consulting services. Maintenance fees, including
first year maintenance, are billed separately and are recognized ratably over
the period of the maintenance agreement. Training, installation and consulting
service revenues are recognized as the services are performed. Services revenue
increased 85.9% and 60.0% for the three months and six months ended June 30,
1996 respectively, as compared to the corresponding previous periods. The
increase in services revenue was attributable primarily to increased training
and consulting services which resulted from a larger installed base of the
Company's products. In addition, approximately $2.1 million of the services
revenue for the three months ended June 30, 1996 was generated by the Company's
recent acquisition in France.
Cost of License Fees
Cost of license fees consists primarily of amortization of capitalized
software development costs, amounts paid to third parties with respect to
products resold by the Company in conjunction with licensing of the Company's
products and, to a lesser extent, the costs of product media, duplication,
manuals and shipping. The following table sets forth, for the periods indicated,
the relationship of cost of license fees to license fee revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1995 1996 1995 1996
-------- ------- ------- ------
(IN THOUSANDS, EXCEPT PERCENTAGE
DATA)
<S> <C> <C> <C> <C>
License fees.................................... $12,149 $4,185 $19,905 $6,535
Cost of license fees............................ 3,014 214 3,325 1,257
Cost of license fees as a percentage of license
fees.......................................... 24.8% 5.1% 16.7% 19.2%
</TABLE>
The dollar cost of license fees and the cost of license fees as a
percentage of license fee revenue decreased substantially during the three
months ended June 30, 1996 as compared to the corresponding period in 1995,
primarily as a result of a reduced amount of third party software resold to
customers. Cost of license fees increased as a percentage of license fees during
the six months ended June 30, 1996 as certain costs were recorded on contracts,
while 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 for 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------- ----------------
1995 1996 1995 1996
------ ------ ------ -------
(IN THOUSANDS, EXCEPT PERCENTAGE
DATA)
<S> <C> <C> <C> <C>
Services revenue..................................... $4,863 $9,042 $8,978 $14,361
Cost of services..................................... 3,481 6,960 5,901 10,863
Cost of services as a percentage of services
revenue............................................ 71.6% 77.0% 65.7% 75.6%
</TABLE>
For the three months and six months ended June 30, 1996, cost of services
as a percentage of services revenue increased compared to the corresponding
previous periods, primarily as a result of expanding the Company's customer
service resources, principally its consulting, telephone support, and account
management staff, as the demand for services increased. Approximately $1.5
million of the increase of cost of services for the three months ended June 30,
1996 related to the Company's recent acquisition in France.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and commissions
paid to sales and marketing personnel and travel and promotional expenses. The
following table sets forth, for the periods indicated, sales and marketing
expenses, the percentage increases of such expenses compared to the
corresponding previous periods and the relationship of such expenses to total
revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------- ----------------
1995 1996 1995 1996
------ ------ ------ -------
(IN THOUSANDS, EXCEPT PERCENTAGE
DATA)
<S> <C> <C> <C> <C>
Sales and marketing expenses......................... $5,319 $6,671 $8,956 $12,427
Percentage increase over the comparable period in the
prior year......................................... 95% 25.4% 77.4% 38.8%
Sales and marketing expenses as a percentage of total
revenues........................................... 31.3% 50.4% 31.0% 59.5%
</TABLE>
Sales and marketing expenses as a percentage of total revenue increased for
the three months and six months ended June 30, 1996 as compared to the
corresponding previous periods, primarily due to substantial hiring. The Company
anticipates that sales and marketing expenses may increase in the future, as it
continues to expand its sales and marketing activities.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of engineering
personnel costs, costs of third party equipment and software for development
purposes and costs of outside consultants hired by the Company used to assist
its product development efforts. Research and development expenses are generally
charged to operations as incurred. However, certain software development costs
are capitalized in accordance with
13
<PAGE> 14
Statement of Financial Accounting Standards No. 86. Such capitalized software
development costs are generally amortized over periods not exceeding three
years.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1995 1996 1995 1996
------ ------ ------ ------
(IN THOUSANDS, EXCEPT PERCENTAGE
DATA)
<S> <C> <C> <C> <C>
Gross research and development expenses..................... $2,731 $3,236 $5,020 $6,666
Amounts capitalized for software development cost........... (409) (360) (609) (848)
------ ------ ------ ------
Research and development expenses........................... $2,322 $2,876 $4,411 $5,818
====== ====== ====== ======
Research and development expenses as a percentage of total
revenues.................................................. 13.6% 21.7% 15.3% 27.8%
Amounts capitalized for software development cost as a
percentage of gross research and development expenses..... 15.0% 11.1% 12.1% 12.7%
</TABLE>
Gross research and development expenses have increased over the periods
presented due primarily to the hiring and training of additional software
engineers to develop and enhance the Company's existing products and to develop
new products as well as an increase in depreciation due to the additional
purchases of development equipment required for the additional personnel. The
rate of capitalization of software development cost may fluctuate depending on
the mix and stage of development of the Company's product development and
engineering projects.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries of
administrative, executive and financial personnel, provision for doubtful
accounts and outside professional fees. General and administrative expenses
represented 31.3% and 32.7% of total revenues for the three months and six
months ended June 30, 1996 respectively, compared to 11.1% and 12.7% of total
revenues for the corresponding previous periods. General and administrative
expenses increased 117.8% and 87% for the three months and six months ended June
30, 1996 respectively, as compared to the corresponding previous periods,
primarily due to increases in payroll and benefits expenses associated with an
increase of finance and administrative personnel, increased professional fees
relating to outstanding litigation, hiring of new personnel, including a new
Chief Executive Officer, depreciation and amortization expense, and increased
insurance. While the Company anticipates continuing dollar increases in general
and administrative expenses, it expects such expenses as a percentage of total
revenues to decrease over time.
QUARTERLY RESULTS
The Company has experienced, and may in the future continue to experience,
significant quarter to quarter fluctuations in results of operations and
revenues. Such fluctuations may result in volatility in the price of the
Company's Common Stock. Quarterly revenues and results of operations may
fluctuate as a result of a variety of factors, including the lengthy sales cycle
for the Company's products, the proportion of revenue attributable to license
fees versus services, the amount of revenue generated by resales of third party
software, changes in product mix, demand for the Company's products, the size
and timing of individual license transactions, the introduction of new products
and product enhancements by the Company or its competitors, changes in customer
budgets, competitive conditions in the industry and general economic conditions.
Further, the license of the Company's products generally involves a significant
commitment of capital, and may be delayed due to time-consuming authorization
procedures within an organization. For these and other reasons, the sales cycles
for the Company's products are typically lengthy and subject to a number of
significant risks over which the Company has little or no control, including
customers' budgetary constraints and internal authorization reviews. The Company
has historically operated with relatively little backlog, since its products are
generally shipped as orders are received. The Company has historically
recognized a substantial portion of its revenues in the last month of a quarter,
with these revenues frequently concentrated in the last week of the quarter.
License fees in any quarter are substantially dependent on orders booked and
shipped in the last
14
<PAGE> 15
month and last week of that quarter. Delays in the timing of recognition of
specific revenues may adversely and disproportionately affect the Company's
results of operations because a high percentage of the Company's operating
expenses are relatively fixed, and planned expenditures, such as continued
expansion of the Company's sales force, are based primarily on sales forecasts
and only a small percentage of the Company's operating expenses vary with its
revenues. Accordingly, the Company believes that period to period comparisons of
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future results of operations. There can be no assurance
that the Company will be profitable in any future quarter.
The Company's business has experienced and is expected to continue to
experience significant seasonality, due in part to customer buying patterns. In
recent years until 1995, the Company generally has had greater demand for its
products in the fourth quarter. These fluctuations are caused primarily by
customer budgeting and purchasing pattern, and by the Company's sales commission
policies which compensate sale personnel on the basis of quarterly and annual
performance quotas. The Company believes this pattern may continue in the
future.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. Such an event would have a material adverse effect on
the price of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had cash, cash equivalents, restricted cash
and short-term investments of $31.0 million and working capital of $19.6
million. The restricted cash relates to $2 million of standby letters of credit
collateralized by U.S. Treasury securities and maturing in June 1997.
The Company's operating activities used cash of $3.1 million and $12.3
million for the six months ended June 30, 1995 and 1996, respectively. Net cash
used in operating activities for the six months ended June 30, 1995 was
primarily composed of an increase in accounts receivable due to increased
revenue levels. Net cash used by operations in the six months ended June 30,
1996 was composed primarily of net loss.
The Company's investing activities have used cash of $4.5 million and $8.5
million for the six months ended June 30, 1995 and 1996, respectively. The
principle uses were increases in short-term investments, capitalized software
costs, purchases of equipment, and the acquisitions made in France and Germany.
Cash used by financing activities was $0.8 million and $1.1 million during
the six months ended June 30, 1995 and 1996, respectively. During the six months
ended June 30, 1995 and 1996, cash used by financing activities consisted
primarily of repayment of debt and capital lease obligations.
The Company has no significant capital commitments. The Company's aggregate
minimum operating lease payments for 1996 and 1997 are expected to be
approximately $3 million. The Company believes that its available cash and cash
equivalents, together with investment income and cash flows from operations,
will be sufficient to meet its cash requirements at least through 1996.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION AND THE
MARKET PRICE OF SECURITIES
The Company's future business, results of operations and financial
condition are also dependent on the Company's ability to successfully develop,
manufacture, market and support its products in order to meet customer demands.
Inherent in this process are a number of factors that the Company must carefully
manage in order to be successful. A discussion of certain of these factors is
discussed below.
Limited History of Profitability; Prior Losses
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 six months of 1996
of $15.2 million. The Company also incurred a net loss for each of the years
ended December 31, 1990, 1991, 1992, and 1993. As of June 30, 1996, the Company
had an
15
<PAGE> 16
accumulated deficit of $32.7 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 involves a significant
commitment of capital and may be delayed due to time-consuming authorization
procedures within an organization.
For these and other reasons, the sales cycles for the Company's products
are typically lengthy and subject to a number of significant risks over which
the Company has little or no control, including customers' budgetary constraints
and internal authorization reviews. The Company has historically operated with
little backlog, since its products are generally shipped as orders are received.
The Company has historically recognized a substantial portion of its revenues in
the last month of a quarter, with these revenues frequently concentrated in the
last week of the quarter. License fees in any quarter are substantially
dependent on orders booked and shipped in the last month and last week of that
quarter. Delays in the timing of recognition of specific revenues may adversely
and disproportionately affect the Company's results of operations because a high
percentage of the Company's operating expenses are relatively fixed, and planned
expenditure such as continued expansion of the Company's sales force, are based
primarily on sales forecasts and only a small percentage of the Company's
operating expenses vary with its revenues. Accordingly, the Company believes
that period to period comparisons of results of operations are not necessarily
meaningful and should not be relied upon as an indication of future results of
operations. There can be no assurance that the Company will be profitable in any
future quarter.
The Company's business has experienced and is expected to continue to
experience significant seasonality, due in part to customer buying patterns. In
recent years until 1995, the Company generally has had greater demand for its
products in the fourth quarter. These fluctuations are caused primarily by
customer budgeting and purchasing patterns and by the Company's sales commission
policies which compensate sales personnel on the basis of quarterly and annual
performance quotas. The Company believes this pattern may continue in the
future.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. Such an event would have a material adverse effect on
the price of the Company's Common Stock.
Intense Competition
The financial applications and business software market is intensely
competitive and rapidly changing. A number of companies offer products similar
to the Company's products and target the same customers as the Company. The
Company believes its ability to compete depends upon many factors within and
outside its control, including the timing and market acceptance of new products
and enhancements developed by the Company and its competitors, product
functionality, performance, price, reliability, customer service and support,
sales and marketing efforts and product distribution. The primary competition
for Computron Financials are the financial applications software offered by
Oracle Corporation, PeopleSoft, Inc. and SAP AG. The principal competitors for
the Company's Computron Workflow and Computron COOL software are Wang and
FileNet Corporation. The Company has entered into an agreement with Wang
pursuant to which Wang has the right to license Computron COOL software to third
parties under its own private label and modify such software. In exchange, Wang
paid a non-refundable source code and fully paid-up license fee to
16
<PAGE> 17
the Company. The Company anticipates that Wang's COOL-based product may become a
significant competitor to Computron COOL. Most of the Company's competitors are
substantially larger than the Company and have significantly greater financial,
technical and marketing resources and established, extensive direct and indirect
channels of distribution. As a result, they may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products than the Company. The Company's products also compete with products
offered by other vendors, and with proprietary software developed by third-party
professional service organizations and management information systems
departments of potential customers.
Due to the relatively low barriers to entry in the software market, the
Company expects additional competition from other established and emerging
companies as the client/server applications software market continues to develop
and expand. The Company also expects that competition will increase as a result
of software industry consolidations. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which would have a material adverse effect on the Company's business, results
of operations and financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on the Company's business, results of operations and financial condition.
Management of Growth
The Company has recently experienced significant growth. This growth has
placed a significant strain on the Company's management, administrative and
operational resources and financial control systems. The Company has recently
added a number of key officers, including Joseph Esposito, as President,
Worldwide Operations, in October 1994, Richard C. Yonker, as Chief Financial
Officer, in December 1995 and Adrian Peters, as Chief Executive Officer in
August 1996. The Company's future results of operations will depend on its
ability to continue to broaden its senior management group, and on the ability
of its officers and key employees to continue to implement and improve its
management, administrative and operational systems and to expand, train, manage
and motivate its employee base. The Company's inability to manage growth
effectively, should it occur, could have a material adverse effect on the
quality of the Company's products, the Company's ability to retain key personnel
and the Company's results of operations.
Following the audits of the Company's consolidated financial statements for
1994 and 1995, the Company received a management letter from its independent
public accountants, Arthur Andersen LLP, which enumerated material weaknesses in
the Company's financial and accounting processes, controls, reporting systems
and procedures. The Company's independent public accountants highlighted the
Company's need for additional financial and accounting personnel with software
industry experience. In addition, the Company's independent public accountants
noted (i) the need for uniformity in the language of its contracts and
recommended that the Company standardize the terms of its license agreements and
expand its internal contract review and approval procedures, (ii) the need for
written policies and procedures related to cutoff and improve the documentation
and audit trail supporting revenue recognition, (iii) deficiencies in the
organization of customer and contract files and recommended that the Company
improve and standardize record keeping, (iv) the need for expanded and
formalized accounts receivable collection procedures, (v) the need for improved
documentation and record keeping relating to consulting service projects, and
(vi) the need to develop policies and procedures to accurately identify the date
when technological feasibility of developed software has been attained and to
improve the documentation and record keeping for capitalized software
development costs and to do so on a timely basis.
In response to the independent public accountants concerns, the Company has
taken a number of actions during 1996. In June 1996, the Company hired a Revenue
Controller who has 14 years accounting experience at a major national accounting
firm with specific experience on revenue recognition issues within the software
17
<PAGE> 18
industry. In addition, in July 1996, the Company hired an outside consultant
specializing in accounts receivable credit and collections to strengthen the
Company's policies and procedures in this area.
Dependence on Principal Products
Substantially all of the Company's revenues are derived from the licensing
of Computron Financials, Computron Workflow and Computron COOL and fees from
consulting and maintenance services. These products and services are expected to
continue to account for substantially all of the Company's revenues for the
foreseeable future. Accordingly, the Company's future results of operations will
depend, in part, on achieving broader market acceptance of these products and
services, as well as the Company's ability to continue to enhance these products
and services to meet the evolving needs of its customers. A reduction in demand
or increase in competition in the market for financial applications or business
software, or decline in sales of such products and services, could have a
material adverse effect on the Company business, results of operations and
financial condition.
New Products and Rapid Technological Change; Risk of Product Defects,
Development Delays and Lack of Market Acceptance
The financial applications and business software market is characterized by
rapid technological change, changes in customer requirements, frequent new
product introductions and enhancements, emerging industry standards. The
introduction of products embodying new technologies and emergence of new
industry standards can render existing products obsolete and unmarketable.
Accordingly, the life cycles of the Company's products are difficult to
estimate. The Company's future success will depend in part upon its ability to
enhance its current products and to develop and introduce new products that
respond to evolving customer requirements and keep pace with technological
development and emerging industry standards, such as new operating systems,
hardware platforms, interfaces and third party applications software. There can
be no assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change,
changes in customer requirements, or emerging industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of such products and
enhancements, or that any new products or enhancements that it may introduce
will achieve market acceptance. The inability of the Company for technological
or other reasons, to develop and introduce new products or enhancements in a
timely manner in response to changing customer requirements, technological
change or emerging industry standards, would have a material adverse effect on
the Company's business, results of operations and financial condition.
Software products as complex as those offered by the Company often
encounter development delays and may contain undetected errors or failures when
introduced or when new versions are released. The Company has in the past
experienced delays in the development of software by third parties which
software is being licensed to and implemented by customers who are
simultaneously licensing and implementing the Company's products. Those delays
have resulted in delays in the development and shipment of the Company's
products. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products or
enhancements after commencement of commercial shipments, or that the Company
will not experience development delays, resulting in loss of or delay in market
acceptance of a new product or enhancement, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Proprietary Rights; Risks of Infringement
The Company's success is heavily dependent upon its proprietary technology.
The Company regards its software as proprietary, and relies primarily on a
combination of contract, copyright and trademark law, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights. The Company has no patents or patent applications pending, and existing
trade secrets and copyright laws afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is
18
<PAGE> 19
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 asserts
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, Rule 10b-5
of the Securities and Exchange Commission, and state law, and seeks unspecified
compensatory damages, attorneys' fees and costs. On June 26, 1996, the Company
was named as a defendant in a civil suit filed by Grey Advertising, Inc. in the
United States District Court for the Southern District of New York captioned
Grey Advertising, Inc. 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 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 23.6%, 32.5%, and 26.9% of its total revenues, from customers
outside of the United States in 1993, 1994 and 1995, respectively. The Company
derived approximately $8.4 million and $7.1 million or 29.1% and 34.0% of its
total revenues, from customers outside of the United States for the six months
ended June 30, 1995 and 1996, respectively. The Company expects that such
revenues will continue to represent a significant percentage of its total
revenues in the future. The Company believes that its continued growth and
profitability will require expansion of its sales in international markets. The
Company intends to continue to expand its operations outside of the United
States and enter additional international markets, which will require
significant management attention and financial resources. There can be no
assurance, however, that the Company will be able to maintain or
19
<PAGE> 20
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
channels using systems integrators and to increase the proportion of the
Company's customers licensed through such indirect channels. The Company is
currently investing, and intends to continue to invest, significant resources to
develop indirect marketing channels. There can be no assurance that the Company
will be able to attract and retain systems integrators that will be able to
market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service. The Company's agreements
with such third parties are generally not exclusive and many of those third
parties also market competitive products. In many cases, these agreements may be
terminated by either party at any time without cause. The inability to attract
and retain systems integrators could have a material adverse effect on the
Company's business, results of operations and financial condition.
Reliance on Certain Relationships
The Company relies on relationships with a number of consultants, systems
integrators and software and hardware vendors to enhance its product development
and marketing and sales efforts, to implement the Company's software products
and to support its customers. These relationships, many of which are not the
subject of formal written agreements, provide marketing and sales leads to the
Company's direct sales force, assistance in the Company's product development
process and assistance in the service and implementation of the Company's
products. There can be no assurance that these companies, most of which have
significantly greater financial and marketing resources than the Company, will
not develop or market software products which compete with the Company's
products in the future or will not otherwise discontinue their relationships
with or support of the Company.
The failure by the Company to maintain its existing relationships, or to
establish new relationships in the future, because of a divergence of interests,
acquisition of one or more of these third parties or other reason, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company also licenses software from third parties which is incorporated
into its products. These licenses expire from time to time. In addition, the
Company generally does not have access to source code for the software supplied
by these third parties. Certain of these third parties are small companies that
do not have extensive financial and technical resources. If any of these
relationships were terminated or if any of these third parties were to cease
doing business, the Company may be forced to expend significant time and
development resources to replace the licensed software. Such an event would have
a material adverse effect upon the Company's business, results of operations and
financial condition.
Control by Existing Stockholders
The Company's senior management, directors and affiliated entities together
beneficially own approximately 67.3% of the outstanding shares of Common Stock.
As a result, these stockholders are able to exercise
20
<PAGE> 21
control over matters requiring stockholder approval, including the elect
directors, and mergers, consolidations and sales of all or substantially all of
the assets of the Company. This may prevent or discourage tender offers for the
Company's Common Stock unless the terms are approved by such stockholders.
Reliance on Key Personnel
The Company's future success will depend to a significant extent upon a
number of key management and technical personnel. The loss of the services of
one or more key employees, including Adrian Peters, Chief Executive Officer and
Andreas Typaldos, Chairman of the Board, could have a material adverse effect on
the Company's business. The Company is a party to employment agreements with
certain key personnel, including both Adrian Peters and Andreas Typaldos. In
addition, the Company is the beneficiary of $2.15 million in key-person life
insurance on the life of Andreas Typaldos and is the beneficiary of key-person
life insurance on the lives of certain other key personnel. The Company believes
that its future success will also depend in large part upon its ability to
attract and retain highly skilled technical, management, sales and marketing
personnel. Competition for such personnel is intense, and the services of
qualified personnel are difficult to obtain and replace. There can be no
assurance that the Company will be successful in attracting and retaining the
personnel necessary to develop, market, service and support its products and
conduct its operations successfully. The inability of the Company to attract,
hire, assimilate and retain such personnel, or to increase revenues at a rate
sufficient to absorb the resulting increased expenses, would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock has been, and, in the
future could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant contracts, changes
in earning estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
software and computer industries and other events or factors. In addition, the
stock market in general has experienced extreme price and volume fluctuations
which have affected the market price from many companies in industries similar
or related to that of the Company and which have been unrelated to the operating
performance of such companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock.
Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware Law
The Company's Fourth Amended and Restated Certificate of Incorporation
authorizes the Board of Directors to issue, without stockholder approval,
5,000,000 shares of Preferred Stock with voting, conversion and other rights and
preferences that could materially and adversely affect the voting power or other
rights of the holders of Common Stock. Although the Company has no current plans
to issue any shares of Preferred Stock, the issuance of Preferred Stock or of
rights to purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. In addition, the possible issuance of Preferred Stock
could discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. Certain provisions of the Company's by-laws and of Delaware law
applicable to the Company could delay or make more difficult a merger, tender
offer or proxy contest involving the Company.
21
<PAGE> 22
COMPUTRON SOFTWARE, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the period from April through June 1996, the Company and certain of
its offices and directors were named as defendants in six civil suits filed as
class actions on behalf of individuals claiming to have purchased Computron
common stock during the time period from August 24, 1995 through April 1, 1996.
The suits were filed in the United States District Court for the district of New
Jersey and have been consolidated by court order into one suit captioned In re
Computron Software, Inc. Securities Litigation, Master File No- 96-1911 (AJL). A
second amended complaint was filed on August 9, 1996 and the defendants have
until September 9, 1996 to respond to the complaint. The complaint asserts
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, Rule 10b-5
of the Securities and Exchange Commission, and state law, and seeks unspecified
compensatory damages, attorneys' fees and costs. On June 26, 1996, the Company
was named as a defendant in a civil suit filed by Grey Advertising, Inc. in the
United States District Court for the Southern District of New York captioned
Grey Advertising, Inc. 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 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)
27.1 Financial Data Schedule
b) Reports on Form 8-K
A form 8-K was filed on April 10, 1996 relating to the Company's
acquisition of the Financial Software Service Division of Generale de
Service Informatique based in Paris, France.
22
<PAGE> 23
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
23
<PAGE> 24
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1995 1996 1995 1996
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss)........................................ $ 542 $(7,086) $ 1,980 $(15,155)
======= ======= ======= ========
Weighted average common and common equivalent shares
outstanding:
Shares outstanding at the beginning of the period...... 17,829 20,767 17,829 20,744
Weighted average shares issued during the period....... -- 7 30
Dilutive effect of common stock equivalents............ 982 -- 982 --
------- ------- ------- --------
Weighted average common and common equivalent shares
outstanding:........................................... 18,811 20,774 18,811 20,774
======= ======= ======= ========
Net income (loss) per share.............................. $ 0.03 $ (0.34) $ 0.11 $ (0.73)
======= ======= ======= ========
</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.
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 24,909
<SECURITIES> 6,124
<RECEIVABLES> 18,005
<ALLOWANCES> 736
<INVENTORY> 0
<CURRENT-ASSETS> 50,887
<PP&E> 11,520
<DEPRECIATION> 6,688
<TOTAL-ASSETS> 63,029
<CURRENT-LIABILITIES> 31,274
<BONDS> 0
0
0
<COMMON> 64,075
<OTHER-SE> (32,951)
<TOTAL-LIABILITY-AND-EQUITY> 63,029
<SALES> 6,535
<TOTAL-REVENUES> 20,896
<CGS> 1,257
<TOTAL-COSTS> 24,547
<OTHER-EXPENSES> 12,646
<LOSS-PROVISION> 477
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> (15,123)
<INCOME-TAX> 32
<INCOME-CONTINUING> (15,155)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,155)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
