<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 MARCH 31, 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 30, 1996
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES OUTSTANDING
- --------------------------------------- ----------------------------
<C> <C>
Common Stock, par value $0.01 per share 20,771,939
</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 March 31, 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 March 31, 1996......................................... 4
Consolidated Statements of Operations
Three months ended March 31, 1995 and 1996................................... 5
Consolidated Statements of Cash Flows
Three months ended March 31, 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
<PAGE> 4
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
(RESTATED) (RESTATED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................ $ 45,119 $ 31,937
Restricted cash...................................................... 751 751
Short-term investments............................................... 781 4,265
Accounts receivables, less reserves of $2,028 and $1,785 at December
31, 1995 and March 31, 1996, respectively......................... 15,441 15,263
Income tax receivables............................................... 1,369 1,369
Prepaid expenses and other current assets............................ 691 1,076
------------ ---------
Total current assets......................................... 64,152 54,661
------------ ---------
Equipment and leasehold improvements, at cost:
Computer and office equipment........................................ 8,117 8,554
Furniture and fixtures............................................... 979 1,073
Leasehold improvements............................................... 338 359
------------ ---------
9,434 9,986
Less -- accumulated depreciation and amortization.................... 5,787 6,164
------------ ---------
3,647 3,822
------------ ---------
Capitalized software development costs, net of accumulated amortization
of $2,232 and $2,416 at December 31, 1995 and March 31, 1996,
respectively......................................................... 2,440 2,735
Other assets........................................................... 1,128 3,713
------------ ---------
$ 71,367 $ 64,931
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................... $ 351 $ 272
Current portion of obligations under capital leases.................. 202 225
Accounts payable..................................................... 2,184 1,906
Accrued expenses..................................................... 7,298 7,930
Deferred revenue..................................................... 13,667 15,302
------------ ---------
Total current liabilities.................................... 23,702 25,635
------------ ---------
Long-term liabilities:
Long-term debt, less current portion................................. 77 44
------------ ---------
Obligations under capital leases, less current portion............... 190 123
------------ ---------
Other liabilities.................................................... 1,000 750
------------ ---------
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 20,771 shares
issued and outstanding at March 31, 1996.......................... 207 208
Additional paid-in capital........................................... 63,796 63,833
Accumulated deficit.................................................. (17,524) (25,595)
Cumulative translation adjustment.................................... (81) (67)
------------ ---------
Total stockholders' equity................................... 46,398 38,379
------------ ---------
$ 71,367 $ 64,931
========== ========
</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
---------------------------------
MARCH 31, 1995 MARCH 31, 1996
-------------- --------------
(RESTATED) (RESTATED)
<S> <C> <C>
Revenues:
License fees.................................................. $ 7,756 $ 2,350
Services...................................................... 4,115 5,319
-------------- --------------
Total revenues........................................ 11,871 7,669
-------------- --------------
Operating expenses:
Cost of license fees.......................................... 311 1,003
Cost of services.............................................. 2,420 3,903
Sales and marketing........................................... 3,637 5,756
Research and development...................................... 2,089 2,982
General and administrative.................................... 1,757 2,701
-------------- --------------
Total operating expenses.............................. 10,214 16,345
-------------- --------------
Operating income (loss)......................................... 1,657 (8,676)
-------------- --------------
Other income (expense):
Other income.................................................. 202 637
Other expense................................................. (158) (32)
-------------- --------------
Other income (expense), net................................ 44 605
-------------- --------------
Income (loss) before income taxes............................... 1,701 (8,071)
Income tax provision............................................ 263 --
-------------- --------------
Net income (loss)............................................... $ 1,438 $ (8,071)
=========== ===========
Net income (loss) per common and common stock equivalent........ $ 0.08 $ (0.39)
=========== ===========
Weighted average number of common and common equivalent
shares........................................................ 18,437 20,767
=========== ===========
</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, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, 1995 MARCH 31, 1996
-------------- --------------
(RESTATED) (RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $ 1,438 $ (8,071)
Adjustments to reconcile net income (loss) to net cash flows
provided by (used in) operating activities --
Depreciation and amortization................................ 594 561
Provision for doubtful accounts.............................. 59 127
Changes in current assets and liabilities --
Accounts receivable.......................................... (2,432) 51
Prepaid expenses and other current assets.................... 7 (385)
Accounts payable and accrued liabilities..................... 28 354
Deferred revenue............................................. (872) 1,635
-------------- --------------
Net cash flows provided by (used in) operating
activities........................................... (1,178) (5,728)
-------------- --------------
Cash flows from investing activities:
Other assets.................................................... 105 (2,677)
Capitalized software development costs.......................... (200) (387)
Purchase of equipment and leasehold improvements................ (758) (552)
Short-term investments.......................................... (5,761) (3,484)
-------------- --------------
Net cash flows used in investing activities............. (6,614) (7,100)
-------------- --------------
Cash flows from financing activities:
Proceeds from exercise of stock options......................... -- 38
Payments of long term debt...................................... (348) (112)
Decrease in other long-term liabilities......................... -- (250)
Principal payments under capital lease obligations.............. -- (44)
-------------- --------------
Net cash flows provided by financing activities................... (348) (368)
-------------- --------------
Foreign currency exchange rate effects............................ (76) 14
-------------- --------------
Net decrease in cash and cash equivalents......................... (8,216) (13,182)
Cash and cash equivalents, beginning of period.................... 15,186 45,119
-------------- --------------
Cash and cash equivalents, end of period.......................... $ 6,970 $ 31,937
=========== ===========
Supplemental disclosures of cash flow information and noncash
financing activities:
Cash paid during the period for --
Interest..................................................... $ 155 $ 32
=========== ===========
Income taxes................................................. $ 49 $ 47
=========== ===========
Capital lease obligations incurred.............................. $ 89 $ --
=========== ===========
</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, and the United Kingdom, as
well as, a joint venture in Poland 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 three months ended March 31, 1996 are not
necessarily indicative of results to be expected 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 ended March 31, 1995 net income per common and common
equivalent share was based on the 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 month periods ended March 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
--------------------- ---------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Total Revenue.................................... $ 9,378 $ 7,699 $ 11,175 $ 11,871
Income (Loss) from operations.................... (7,025) (8,676) 895 1,657
Net Income (Loss)................................ (6,420) (8,071) 676 1,438
Net Income (Loss) per share ..................... (.31) (.39) .04 .08
</TABLE>
(3) CONTINGENCIES
Certain stockholders have filed four lawsuits against the Company and
certain of its officers and directors in the United States District Court for
the District of New Jersey. The lawsuits allege violations of the federal
securities laws, and purport to seek damages on behalf of a class of
stockholders who purchased the Company's common stock during the period from
August 24, 1995 through April 1, 1996. The Company intends to defend itself
against the suits vigorously. Since the litigation has recently been filed and
discovery has not yet commenced, the Company is unable to assess the likelihood
of an adverse result. There can be no assurances as to the outcome of such
lawsuits. The inability of the Company to resolve the claims that are the basis
for the lawsuits or to prevail in any related litigation could result in the
Company being required to pay substantial monetary damages for which the Company
may not be adequately insured, which would have a material adverse effect on the
Company's business, financial condition and results of operations. In any event,
the Company's defense of such lawsuits, even if the outcome is favorable to the
Company, could result in substantial costs to the Company.
From time to time, the Company is involved in disputes and/or litigation
encountered in its normal course of business. The Company believes that the
ultimate outcome of these proceedings will not have a material adverse impact on
the Company's consolidated financial position, results of operations and cash
flows.
8
<PAGE> 9
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
(4) SUBSEQUENT EVENTS
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 is 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.
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. The Company generated a net
loss in 1994 of $2.4 million, a net loss of $8.6 million for 1995 and reported a
net loss for the first quarter of 1996 of $8.1 million. The Company also
incurred a net loss for each of the years ended December 31, 1990, 1991, 1992,
and 1993. As of March 31, 1996, the Company had an accumulated deficit of $25.6
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 audit of the Company's consolidated financial statements for
1994, 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
10
<PAGE> 11
approval procedures, (ii) deficiencies in the organization of customer and
contract files and recommended that the Company improve and standardize record
keeping, (iii) the need for expanded and formalized accounts receivable
collection procedures, (iv) the need for improved documentation and record
keeping relating to consulting service projects, and (v) 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. It hired David A. Gerth, an executive with
substantial software industry experience, as Chief Financial Officer in July
1995. The Company subsequently hired a corporate controller, a services
financial analyst/controller and a consolidation accountant. When Mr. Gerth
resigned due to family considerations, the Company hired Mr. Richard C. Yonker,
an executive with substantial computer/technology industry experience, as Chief
Financial Officer in December 1995. In addition, the Company began implementing
more extensive financial and accounting processes, controls, reporting systems
and procedures which are designed to address those material weaknesses.
Specifically, in early 1995, the Company (i) began to develop standard
contractual terms for its license agreements and expand its contract review and
approval procedures, (ii) reorganized and centralized its customer files and
consulting services contracts and standardized its record keeping procedures,
and (iii) expanded and began to formalize its accounts receivable collection
efforts. During 1995, the Company experienced significant turnover of its senior
financial and accounting personnel which management believes delayed the
implementation of certain improvements and resulted in material weaknesses in
these same areas. The December 31, 1995 audit resulted in material adjustments
to the fourth quarter's revenues and expenses.
Arthur Andersen LLP has notified the Company that it intends to issue a
material weakness letter in connection with their completion of the audit of the
Company's financial statements for 1995. The matters to be discussed in the
letter are expected to be substantially the same as those discussed above. In
addition, they have recommended that the Company implement improved internal
accounting control procedures approved by the audit committee of the Board of
Directors and reorganize and upgrade the contracts administration processes,
procedures and personnel to ensure proper revenue recognition and financial
reporting. The Company believes that further improvements in its financial and
accounting controls are needed to correct such material weaknesses and manage
future growth, should it occur and concurs in such recommendations. The Company
intends to further improve its financial and accounting controls and implement
such recommendations during 1996.
11
<PAGE> 12
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
ENDED
MARCH 31,
--------------
1995 1996
----- ------
<S> <C> <C>
Revenues:
License fees.............................................. 65.3% 30.6%
Services.................................................. 34.7 69.4
----- ------
Total revenues.................................... 100.0 100.0
Operating expenses:
Cost of license fees...................................... 2.6 13.1
Cost of services.......................................... 20.4 50.9
Sales and marketing....................................... 30.6 75.1
Product development and engineering....................... 17.6 38.9
General and administrative................................ 14.8 35.1
----- ------
Total operating expenses.......................... 86.0 213.1
Operating income (loss)..................................... 14.0 (113.1)
Other income (expense)...................................... 0.3 7.9
----- ------
Income (loss) before income taxes........................... 14.3 (105.2)
Income taxes (benefit)...................................... 2.2 --
----- ------
Net income (loss)................................. 12.1% (105.2)%
===== ======
</TABLE>
Total Revenues
Total revenues decreased 35.4% for the three months ended March 31, 1996,
compared to the three months ended March 31, 1995, respectively. The decrease
was attributable to a decrease in license fees, offset in part by an increase in
services revenue. One customer accounted for 23.3% of the Company's total
revenue for the quarter ended March 31, 1995.
The Company derived approximately $1.7 million and $1.8 million or 14.4%
and 23.4% of its total revenues, from customers outside of the United States for
the three months ended March 31, 1995 and 1996, respectively. 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 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
69.7% for the three months ended March 31, 1996, as compared to the three months
ended March 31, 1995. 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 three months ended March 31, 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.
12
<PAGE> 13
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 29.3% for the three months ended March 31, 1996, as compared to the
three months ended March 31, 1995. 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.
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
MARCH 31,
------------------
1995 1996
------ ------
(IN THOUSANDS,
EXCEPT PERCENTAGE
DATA)
<S> <C> <C>
License fees................................................ $7,756 $2,350
Cost of license fees........................................ 311 1,003
Cost of license fees as a percentage of license fees........ 4.0% 42.7%
</TABLE>
For the three months ended March 31, 1996, compared to the three months
ended March 31, 1995, the dollar cost of license fees increased substantially,
primarily as a result of increased costs associated with third party software
resold to customers and for costs recorded on contracts, while the associated
license revenues were deferred due to uncertainty with respect to collections.
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
MARCH 31,
----------------------
1995 1996
-------- --------
(IN THOUSANDS, EXCEPT
PERCENTAGE DATA)
<S> <C> <C>
Services revenue............................................ $4,115 $5,319
Cost of services............................................ 2,420 3,903
Cost of services as a percentage of services revenue........ 58.8% 73.4%
</TABLE>
For the three months ended March 31, 1996, cost of services as a percentage
of services revenue increased compared to the three months ended March 31, 1995,
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.
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Sales and Marketing
Sales and marketing expenses consist primarily of salaries and commissions
paid to sales and marketing personnel 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
comparable period in the prior year and the relationship of such expenses to
total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1996
------ ------
(IN THOUSANDS,
EXCEPT PERCENTAGE
DATA)
<S> <C> <C>
Sales and marketing expenses................................ $3,637 $5,756
Percentage increase over the comparable period in the prior
year...................................................... 58.1% 58.3%
Sales and marketing expenses as a percentage of total
revenues.................................................. 30.6% 75.1%
</TABLE>
Sales and Marketing expenses as a percentage of total revenue increased for
the three months ended March 31, 1996, as compared to the three months ended
March 31, 1995, primarily due to substantial hiring and due to the significant
decrease in revenues recorded. The Company anticipates that sales and marketing
expenses may increase in the future, as it expands its sales and marketing
activities.
Product Development and Engineering
Product development and engineering 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 to
assist its product development efforts. Product development and engineering
expenses are generally charged to operations as incurred. However, certain
software development costs are capitalized in accordance with Statement of
Financial Accounting Standards No. 86. Such capitalized software development
costs are generally amortized over periods not exceeding three years.
Software product development and engineering expenses (net of capitalized
software development costs) increased from $2.1 million in the first quarter of
1995 to $3.0 million in the first quarter of 1996. The Company capitalized
software development costs of $0.2 million in the first quarter of 1995 and $0.4
million in the first quarter of 1996. Gross product development and engineering
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 35.2% of total revenues for the three months ended March 31, 1996,
compared to 14.8% of total revenues for the three months ended March 31, 1995.
General and administrative expenses increased 53.7% for the three months ended
March 31, 1996, as compared to the three months ended March 31, 1995, primarily
due to increases in payroll and benefits expenses associated with an increase of
finance and administrative personnel, increased depreciation 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
14
<PAGE> 15
variety of factors, including the lengthy sales cycle for the Company's
products, the proportion of revenue attributable to license fees versus
services, the amount of revenue generated by resales of third party software,
changes in product mix, demand for the Company's products, the size and timing
of individual license transactions, the introduction of new products and product
enhancements by the Company or its competitors, changes in customer budgets,
competitive conditions in the industry and general economic conditions. Further,
the license of the Company's products generally involves a significant
commitment of capital, and may be delayed due to time-consuming authorization
procedures within an organization. For these and other reasons, the sales cycles
for the Company's products are typically lengthy and subject to a number of
significant risks over which the Company has little or no control, including
customers' budgetary constraints and internal authorization reviews. The Company
has historically operated with relatively little backlog, since its products are
generally shipped as orders are received. The Company has historically
recognized a substantial portion of its revenues in the last month of a quarter,
with these revenues frequently concentrated in the last week of the quarter.
License fees in any quarter are substantially dependent on orders booked and
shipped in the last month and last week of that quarter. Delays in the timing of
recognition of specific revenues may adversely and disproportionately affect the
Company's results of operations because a high percentage of the Company's
operating expenses are relatively fixed, and planned expenditures, such as
continued expansion of the Company's sales force, are based primarily on sales
forecasts and only a small percentage of the Company's operating expenses vary
with its revenues. Accordingly, the Company believes that period to period
comparisons of results of operations are not necessarily meaningful and should
not be relied upon as an indication of future results of operations. There can
be no assurance that the Company will be profitable in any future quarter.
The Company's business has experienced and is expected to continue to
experience significant seasonality, due in part to customer buying patterns. In
recent years until 1995, the Company generally has had greater demand for its
products in the fourth quarter. These fluctuations are caused primarily by
customer budgeting and purchasing pattern, and by the Company's sales commission
policies which compensate sale personnel on the basis of quarterly and annual
performance quotas. The Company believes this pattern may continue in the
future.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. Such an event would have a material adverse effect on
the price of the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had cash, cash equivalents, restricted cash
and short-term investments $37.0 million and working capital of $29.0 million.
As of March 31, 1996, the Company had the following facilities under its bank
line of credit: (i) fully available $4.0 million revolving line of credit which
expires on May 31, 1996 collateralized by the Company's accounts receivable,
(ii) a fully available $1.0 million secured equipment financing facility
expiring on May 31, 1996, (iii) a fully available $2.0 million line of credit
for letters of credit which expires on May 31, 1996 and (iv) a $751,000 standby
letters of credit collateralized by U.S. Treasury securities and certificates of
deposit and maturing on July 31, 1996. In addition, the company has various
equipment loans outstanding with an aggregate balance of $.3 million at March
31, 1996 that bear, interest at rates ranging from 7.3% to 9.5% and which
matures from time to time.
The Company's operating activities used cash of $1.2 million and $5.7
million for the three months ended March 31, 1995 and 1996, respectively. Net
cash used in operating activities for the three months ended March 31, 1995 was
primarily composed of an increase in accounts receivable due to increased
revenue levels. Net cash used by operations in the three months ended March 31,
1996 was composed primarily of net loss.
The Company's investing activities have used cash of $6.6 million and $7.1
million for the three months ended March 31, 1995 and 1996, respectively. The
principal uses have been increases in short-term investments, capitalized
software costs and purchases of equipment.
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<PAGE> 16
Cash used by financing activities was $.3 million and $.4 million during
the three months ended March 31, 1995 and 1996, respectively. During the three
months ended March 31, 1995, cash used by financing activities consisted
primarily of repayment of debt.
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 quarter of 1996 of
$8.1 million. The Company also incurred a net loss for each of the years ended
December 31, 1990, 1991, 1992, and 1993. As of March 31, 1996, the Company had
an accumulated deficit of $25.6 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
16
<PAGE> 17
and purchasing patterns and by the Company's sales commission policies which
compensate sales personnel on the basis of quarterly and annual performance
quotas. The Company believes this pattern may continue in the future.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. Such an event would have a material adverse effect on
the price of the Company's Common Stock.
Intense Competition
The financial applications and business software market is intensely
competitive and rapidly changing. A number of companies offer products similar
to the Company's products and target the same customers as the Company. The
Company believes its ability to compete depends upon many factors within and
outside its control, including the timing and market acceptance of new products
and enhancements developed by the Company and its competitors, product
functionality, performance, price, reliability, customer service and support,
sales and marketing efforts and product distribution. The primary competition
for Computron Financials are the financial applications software offered by
Oracle Corporation, PeopleSoft, Inc. and SAP AG. The principal competitors for
the Company's Computron Workflow and Computron COOL software are Wang and
FileNet Corporation. The Company has entered into an agreement with Wang
pursuant to which Wang has the right to license Computron COOL software to third
parties under its own private label and modify such software. In exchange, Wang
paid a non-refundable source code and fully paid-up license fee to the Company.
The Company anticipates that Wang's COOL-based product may become a significant
competitor to Computron COOL. Most of the Company's competitors are
substantially larger than the Company and have significantly greater financial,
technical and marketing resources and established, extensive direct and indirect
channels of distribution. As a result, they may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, promotion and sale of their
products than the Company. The Company's products also compete with products
offered by other vendors, and with proprietary software developed by third-party
professional service organizations and management information systems
departments of potential customers. Due to the relatively low barriers to entry
in the software market, the Company expects additional competition from other
established and emerging companies as the client/server applications software
market continues to develop and expand. The Company also expects that
competition will increase as a result of software industry consolidations. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on the
Company's business, results of operations and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
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 and Richard C. Yonker, as Chief Financial
Officer, in December 1995. 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.
17
<PAGE> 18
Following the audit of the Company's consolidated financial statements for
1994, 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 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) deficiencies in the
organization of customer and contract files and recommended that the Company
improve and standardize record keeping, (iii) the need for expanded and
formalized accounts receivable collection procedures, (iv) the need for improved
documentation and record keeping relating to consulting service projects, and
(v) 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. During 1995, the Company
experienced significant turnover of its senior financial and accounting
personnel which management believes delayed the implementation of certain
improvements and resulted in material weaknesses in these same areas. The
December 31, 1995 audit resulted in material adjustments to the fourth quarter's
revenues and expenses. Arthur Andersen LLP has notified the Company that it
intends to issue a material weakness letter in connection with their completion
of the audit of the Company's financial statements for 1995. The matters to be
discussed in the letter are expected to be substantially the same as those
discussed above. In addition, they have recommended that the Company implement
improved internal accounting control procedures approved by the audit committee
of the Board of Directors and reorganize and upgrade the contracts
administration processes, procedures and personnel to ensure proper revenue
recognition and financial reporting. The Company believes that further additions
to its financial and accounting staff, and improvements in financial and
accounting controls, are needed to correct such material weaknesses and to
manage further growth, should it occur. The failure to implement such changes or
to hire additional financial and accounting personnel on a timely basis could
have a material adverse effect on the Company's business, results of operations
and financial condition.
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
related 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
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development, introduction and marketing of such products and enhancements, or
that any new products or enhancements that it may introduce will achieve market
acceptance. The inability of the Company for technological or other reasons, to
develop and introduce new products or enhancements in a timely manner in
response to changing customer requirements, technological change or emerging
industry standards, would have a material adverse effect on the Company's
business, results of operations and financial condition.
Software products as complex as those offered by the Company often
encounter development delays and may contain undetected errors or failures when
introduced or when new versions are released. The Company has in the past
experienced delays in the development of software by third parties which
software is being licensed to and implemented by customers who are
simultaneously licensing and implementing the Company's products. Those delays
have resulted in delays in the development and shipment of the Company's
products. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products or
enhancements after commencement of commercial shipments, or that the Company
will not experience development delays, resulting in loss of or delay in market
acceptance of a new product or enhancement, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
Dependence on Proprietary Rights; Risks of Infringement
The Company's success is heavily dependent upon its proprietary technology.
The Company regards its software as proprietary, and relies primarily on a
combination of contract, copyright and trademark law, trade secrets,
confidentiality agreements and contractual provisions to protect its proprietary
rights. The Company has no patents or patent applications pending, and existing
trade secrets and copyright laws afford only limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. The Company makes source code
available to certain of its customers which may increase the likelihood of
misappropriation or other misuse of the Company's software. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technologies.
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
Certain stockholders have filed four lawsuits against the Company and
certain of its officers and directors in the United States District Court for
the District of New Jersey. The lawsuits allege violations of the federal
securities laws, and purport to seek damages on behalf of a class of
stockholders who purchased the Company's common stock during the period from
August 24, 1995 through April 1, 1996. The Company intends to defend itself
against the suits vigorously. Since the litigation has 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
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<PAGE> 20
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 $1.7 million and $1.8 million or 14.4% and 23.4% of its
total revenues, from customers outside of the United States for the months ended
March 31, 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
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
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<PAGE> 21
these third parties or other reason, could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company also licenses software from third parties which is incorporated
into its products. These licenses expire from time to time. In addition, the
Company generally does not have access to source code for the software supplied
by these third parties. Certain of these third parties are small companies that
do not have extensive financial and technical resources. If any of these
relationships were terminated or if any of these third parties were to cease
doing business, the Company may be forced to expend significant time and
development resources to replace the licensed software. Such an event would have
a material adverse effect upon the Company's business, results of operations and
financial condition.
Control by Existing Stockholders
The Company's senior management, directors and affiliated entities together
beneficially own approximately 67.3% of the outstanding shares of Common Stock.
As a result, these stockholders are able to exercise control over matters
requiring stockholder approval, including the elect directors, and mergers,
consolidations and sales of all or substantially all of the assets of the
Company. This may prevent or discourage tender offers for the Company's Common
Stock unless the terms are approved by such stockholders.
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 Andreas Typaldos, Chief Executive Officer
and 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 Andreas Typaldos. In addition, the Company is the
beneficiary of $2.15 million in key-person life insurance on the life of Andreas
Typaldos and is the beneficiary of key-person life insurance on the lives of
certain other key personnel. The Company believes that its future success will
also depend in large part upon its ability to attract and retain highly skilled
technical, management, sales and marketing personnel. Competition for such
personnel is intense, and the services of qualified personnel are difficult to
obtain and replace. There can be no assurance that the Company will be
successful in attracting and retaining the personnel necessary to develop,
market, service and support its products and conduct its operations
successfully. The inability of the Company to attract, hire, assimilate and
retain such personnel, or to increase revenues at a rate sufficient to absorb
the resulting increased expenses, would have a material adverse effect on the
Company's business, results of operations and financial condition.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock has been, and, in the
future could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant contracts, changes
in earning estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
software and computer industries and other events or factors. In addition, the
stock market in general has experienced extreme price and volume fluctuations
which have affected the market price from many companies in industries similar
or related to that of the Company and which have been unrelated to the operating
performance of such companies. These market fluctuations may adversely affect
the market price of the Company's Common Stock.
Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware Law
The Company's Fourth Amended and Restated Certificate of Incorporation
authorizes the Board of Directors to issue, without stockholder approval,
5,000,000 shares of Preferred Stock with voting, conversion and other rights and
preferences that could materially and adversely affect the voting power or other
rights of the holders of Common Stock. Although the Company has no current plans
to issue any shares of Preferred Stock, the issuance of Preferred Stock or of
rights to purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. In addition, the possible issuance of Preferred Stock
could discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock. Certain provisions of the Company's by-laws and of Delaware law
applicable to the Company could delay or make more difficult a merger, tender
offer or proxy contest involving the Company.
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COMPUTRON SOFTWARE, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain stockholders have filed four lawsuits against the Company and
certain of its officers and directors in the United States District Court for
the District of New Jersey. The lawsuits allege violations of the federal
securities laws, and purport to seek damages on behalf of a class of
stockholders who purchased the Company's common stock during the period from
August 24, 1995 through April 1, 1996. The Company intends to defend itself
against the suits vigorously. Since the litigation has 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
None
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
MARCH 31,
-------------------
1995 1996
------- -------
<S> <C> <C>
Net income (loss)........................................... $ 1,438 $(8,071)
======= =======
Weighted average common and common equivalent shares
outstanding:
Shares outstanding at the beginning of the period......... 17,829 20,744
Weighted average shares issued during the period.......... -- 23
Weighted average common stock equivalents................. 1,001 --
Weighted average treasury shares acquired using the
treasury stock method.................................. (393) --
------- -------
Weighted average common and common equivalent shares
outstanding:.............................................. 18,437 20,767
======= =======
Net income (loss) per common and common equivalent share.... $ 0.08(1) $ (0.39)
======= =======
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 32,688
<SECURITIES> 4,265
<RECEIVABLES> 17,048
<ALLOWANCES> 1,785
<INVENTORY> 0
<CURRENT-ASSETS> 54,661
<PP&E> 9,986
<DEPRECIATION> 6,164
<TOTAL-ASSETS> 64,931
<CURRENT-LIABILITIES> 25,635
<BONDS> 0
0
0
<COMMON> 64,041
<OTHER-SE> (25,662)
<TOTAL-LIABILITY-AND-EQUITY> 64,931
<SALES> 2,350
<TOTAL-REVENUES> 7,669
<CGS> 1,003
<TOTAL-COSTS> 10,662
<OTHER-EXPENSES> 5,683
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> (8,071)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,071)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,071)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
