SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission File Number 0-26358
COMPUTRON SOFTWARE, INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2966911
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Route 17 North
Rutherford, New Jersey 07070
(Address of principal executive offices) (Zip Code)
(201) 935-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Number of shares outstanding of the issuer's common stock as of November 2, 1998
Class Number of Shares Outstanding
- --------------------------------------- ----------------------------
Common Stock, par value $0.01 per share 23,794,355
<PAGE>
COMPUTRON SOFTWARE, INC.
INDEX
Page
PART I FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Consolidated Balance Sheets December 31, 1997
and September 30, 1998 ............................ 3
Consolidated Statements of Operations
Three and nine months ended September 30, 1997
and 1998 .......................................... 4
Consolidated Statements of Cash Flows Nine months
ended September 30, 1997 and 1998 ................. 5
Notes to Consolidated Interim Financial Statements .. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................... 24
Item 6. Exhibits and Reports on Form 8-K .................... 24
SIGNATURES
Signatures ................................................... 25
2
<PAGE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS Unaudited
Current assets:
Cash and cash equivalents $ 6,280 $ 1,341
Short-term investments 193 --
Restricted cash 6,124 5,449
Accounts receivables, less reserves of $3,056 at
December 31, 1997 and $2,516 at September 30, 1998 11,420 12,773
Prepaid expenses and other current assets 3,230 3,320
------------ ------------
Total current assets 27,247 22,883
------------ ------------
Equipment and leasehold improvements, at cost:
Computer and office equipment 11,844 12,870
Furniture and fixtures 1,298 1,502
Leasehold improvements 592 972
------------ ------------
13,734 15,344
Less--accumulated depreciation and amortization 9,670 11,513
------------ ------------
4,064 3,831
------------ ------------
Capitalized software development costs, net of accumulated
amortization of $3,734 at December 31, 1997 and $4,264 at September 30, 1998 1,429 899
Goodwill, net of accumulated amortization of $1,072 at December 31, 1997
and $1,456 at September 30, 1998 1,732 1,432
Other assets 1,126 784
------------ ------------
$ 35,598 $ 29,829
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT )
Current liabilities:
Current portion of long-term debt and capital leases $ 71 $ 1,680
Accounts payable 4,375 4,683
Accrued expenses 10,956 10,081
Deferred revenue 9,078 9,150
------------ ------------
Total current liabilities 24,480 25,594
------------ ------------
Long-term liabilities:
Long-term debt and capital leases, less current portion 23 2,656
------------ ------------
Common stock subject to repurchase 5,000 5,000
------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, authorized 5,000
shares, no shares issued and outstanding -- --
Common stock, $.01 par value, authorized 50,000 shares;
23,777 shares and 23,794 shares issued and
outstanding at December 31, 1997 and September 30, 1998, respectively 238 238
Additional paid-in capital 69,373 69,396
Accumulated deficit (63,016) (72,402)
Cumulative translation adjustment (500) (653)
------------ ------------
Total stockholders' equity (deficit) 6,095 (3,421)
------------ ------------
$ 35,598 $ 29,829
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 3,763 $ 3,233 $ 14,275 $ 10,612
Services 12,336 12,922 35,421 35,386
-------- -------- -------- --------
Total revenues 16,099 16,155 49,696 45,998
-------- -------- -------- --------
Operating expenses:
Cost of license fees 534 705 1,421 2,515
Cost of services 7,085 6,695 20,518 20,957
Sales and marketing 3,085 2,959 11,466 11,318
Research and development 2,573 2,205 7,369 7,216
General and administrative 4,005 3,446 11,798 12,014
Restructuring costs -- -- -- 1,311
-------- -------- -------- --------
Total operating expenses 17,282 16,010 52,572 55,331
-------- -------- -------- --------
Operating income (loss) (1,183) 145 (2,876) (9,333)
-------- -------- -------- --------
Other income (expense):
Costs related to class action litigation (6,912) -- (9,185) (40)
Other income 166 109 714 372
Other expense (18) (202) (82) (385)
-------- -------- -------- --------
Other expense, net (6,764) (93) (8,553) (53)
-------- -------- -------- --------
Net income (loss) $ (7,947) $ 52 $(11,429) $ (9,386)
======== ======== ======== ========
Basic and diluted income (loss)
per common share $ (0.38) $ -- $ (0.55) $ (0.39)
======== ======== ======== ========
Weighted average basic and diluted
common shares outstanding 20,819 23,791 20,822 23,788
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,429) $ (9,386)
Adjustments to reconcile net loss to net
cash flows used in operating activities -
Proposed non-cash class action litigation cost 5,000 --
Depreciation and amortization 2,422 2,768
Provision for doubtful accounts 300 --
Loss on sale of equipment and leasehold improvements 27 --
Changes in current assets and liabilities
Restricted cash 1,939 675
Accounts receivable 9,372 (1,320)
Prepaid expenses and other current assets (324) (37)
Accounts payable and accrued expenses (3,694) (785)
Deferred revenue (7,406) 88
---------- ----------
Net cash flows used in operating activities (3,793) (7,997)
---------- ----------
Cash flows from investing activities:
Other assets 143 376
Purchase of equipment and leasehold improvements (1,248) (1,610)
Proceeds from sale of equipment and leashold improvements 75 --
Short-term investments 596 193
---------- ----------
Net cash flows used in investing activities (434) (1,041)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 15 23
Proceeds from long term debt -- 5,000
Repayment of notes payable (1,402) --
Payments of long term debt and capital lease obligations (518) (753)
Decrease in liabilities related to acquisitions (1,304) --
---------- ----------
Net cash flows provided by (used in) financing activities (3,209) 4,270
---------- ----------
Foreign currency exchange rate effects (41) (171)
---------- ----------
Net decrease in cash and cash equivalents (7,477) (4,939)
Cash and cash equivalents, beginning of period 19,730 6,280
---------- ----------
Cash and cash equivalents, end of period $ 12,253 $ 1,341
========== ==========
Supplemental disclosures of cash flow information
and noncash financing activities:
Cash paid during the period for -
Interest $ 27 $ 262
========== ==========
Income taxes $ 37 $ 40
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Company designs, develops, markets and supports client/server financial,
workflow, plant maintenance and archival data management software solutions to
manage mission-critical applications in large organizations operating across a
broad range of industries worldwide.
Basis of Presentation:
The accompanying unaudited consolidated financial statements include the
accounts of Computron Software, Inc. and its wholly owned foreign subsidiaries
located in Australia, Canada, France, Germany, Poland, Singapore, South Africa
and the United Kingdom (collectively, the "Company"). These consolidated
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 consolidated financial statements.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
1997 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
The results of operations for the three and nine months ended September 30,
1998, are not necessarily indicative of results to be expected for any future
periods.
(a) Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"). Revenue from non-cancelable
software licenses is recognized when contract negotiations are complete,
delivery has occurred, the fee is fixed or determinable and collectibility is
probable. 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. The Company
recognizes revenue from certain contracts, generally those with fixed prices,
using the percentage of completion method. Anticipated losses, if any, are
charged to operations in the period such losses are determined.
The adoption in 1998 of SOP 97-2, which is effective for transactions entered
into in fiscal years beginning after December 15, 1997, did not have a
significant impact on the Company's revenue recognition policies.
6
<PAGE>
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
(In thousands, except share and per share data)
(b) 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.
(c) Reclassification
Certain reclassifications have been made to prior periods to conform to the
current period presentation.
(2) REVOLVING LINE OF CREDIT AND LONG-TERM DEBT
On March 31, 1998, the Company entered into a Loan and Security Agreement
("Agreement") which provides for maximum borrowings of up to $10 million. Upon
signing, the Company borrowed $5 million pursuant to a three year term loan. The
term loan bears interest at prime plus 1.5%, and is repayable in 36 monthly
installments beginning May 1, 1998. The Company currently has available the
lesser of $5 million or 85% of eligible receivables under a revolving line of
credit pursuant to the Agreement. Such available amount is reduced further by a
$600 letter of credit outstanding at September 30, 1998. The net available
amount under the revolving line of credit at September 30, 1998 is approximately
$2.3 million.
Borrowings under the revolving line of credit will bear interest at prime plus
1.25%. The Agreement provides for yearly fees as follows: (i) $111 in year one,
$86 in years two and three and (ii) an unused revolving line of credit fee of
.375% per annum. The Agreement is secured by substantially all domestic assets
of the Company together with a pledge of 65% of the stock of its foreign
subsidiaries, and contains certain financial and restrictive covenants, which
were amended as of September 30, 1998.
(3) CONTINGENCIES
On March 6, 1998, the District Court issued a final order approving a settlement
in the class action securities litigation, In re Computron Software, Inc.
Securities Litigation, Master File No. 96-1911 (AJL), brought against the
Company and certain of its present and former officers and directors in the
United States District Court for the District of New Jersey.
The overall settlement includes consideration totaling $15 million for the
benefit of class members, including consideration from the Company, and payments
from certain of its present and former officers and directors, its former
auditors, and the insurance companies that provided Computron with directors and
officers liability insurance. In return for the payments by the insurance
companies, the settlement also resolves a separate lawsuit brought by the
Company against the insurance companies. As its share of the settlement, the
Company has paid $1 million in cash, and will issue 1 million shares of Common
Stock of the Company.
7
<PAGE>
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
Class members will receive a non-transferable right to resell the stock received
in the settlement to a business trust formed by the Company at a price of $5.00
per share. In March 1998, the trust was capitalized by a contribution of $5
million from the Company's restricted cash, which will be used to pay the claims
of any class members who receive stock in the settlement and exercise their
right to resell such stock to the trust according to the terms of the
Stipulation of Settlement.
The exercise period during which class members may resell these shares to the
trust will be December 1, 1998 to December 21, 1998. The resale right will
expire at the end of the exercise period, or earlier as to any shares issued in
the settlement that are sold by class members prior to the final day of the
exercise period. The resale right will also expire earlier than the exercise
period if the closing price of the Company's Common Stock is higher than $5.00
per share for 20 consecutive trading days. The Company recorded a charge to
operations of $9,185 during the nine months ended September 30, 1997 which
includes $6 million for the Company's share of the settlement costs and $3,185
of legal costs related to the class action litigation.
Historically, the Company has been involved in other 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 effect on
the Company's business, financial condition and results of operations or cash
flows.
(4) Comprehensive Income (Loss)
Effective January 1, 1998 the Company adopted SFAS No. 130, a new accounting
rule on reporting comprehensive income (loss). The rule requires reporting of
comprehensive income (loss), which includes net income (loss) and all other
non-owner changes in equity (deficit) during a period as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- --------
Net Income (loss) $ (7,947) $ 52 $(11,429) $ (9,386)
Cumulative translation
adjustment (377) (67) (467) (153)
-------- -------- -------- --------
Comprehensive loss $ (8,324) $ (15) $(11,896) $ (9,539)
======== ======== ======== ========
(5) Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per common share is presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 provides for new accounting principles used in the
calculations of earnings (loss) per share and was effective for financial
statements for both interim and annual periods ended after December 15, 1997.
The Company has restated the net loss per common share for all periods presented
to give effect to SFAS No. 128.
8
<PAGE>
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (continued)
(in thousands, except share and per share data)
Basic income (loss) per common share is based on the weighted average number of
shares of common stock outstanding during the period. Diluted income (loss) per
common share is the same as basic income (loss) per common share since the
effect of stock options, warrants, and contingently issuable shares in
connection with the December 1997 private placement of common stock is
antidilutive for all periods presented except for the three months ended
September 30, 1998, which effect is immaterial.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
This Report contains 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 1997 Annual Report on Form 10-K filed with the Securities and Exchange
Commission which could cause actual results to differ materially from those
indicated by such forward-looking statements, including the matters set forth
under the caption "Certain Factors That May Affect Future Results and Financial
Condition and the Market Price of Securities" below.
The Company was founded in 1978 as a developer of custom financial software for
mission-critical applications in large organizations, primarily financial
institutions. In the early 1980's, the Company developed financial software for
legacy platforms and introduced sophisticated enterprise-wide financial
software. Identifying the need for client/server financial software applications
in the late 1980's, the Company commenced the re-architecture of its financial
software and began the development and deployment of new product, 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. During the fourth
quarter of 1995, the Company acquired the rights to its Yorvik Software.
During 1996, the Company acquired the Financial Services Division of Generale de
Service Informatique (GSI) based in Paris, France, and certain assets of AT&T
Istel and Co., GMBH, in Essen, Germany. These operations primarily provide
software services in their respective countries.
The Company's revenues are derived from license fees and services. Revenues for
services and training are recognized upon performance of the services. The
Company's license agreements generally do not provide a right of return.
Historically, the Company's backlog has not been substantial, since products are
generally shipped as orders are received.
The Company has experienced, and may in the future experience, significant
fluctuations in its quarterly and annual revenues and results of operations. 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 timing of revenue recognition related to significant license
agreements, the lengthy sales cycle for the Company's products, the proportion
of revenues attributable to license fees versus services, the utilization of
third parties to perform 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,
10
<PAGE>
changes in customers' budgets, competitive conditions in the industry and
general economic conditions.
Following the audits of the Company's consolidated financial statements for
1994, 1995 and 1996 the Company received management letters from its former
independent public accountants, which enumerated material weaknesses in the
Company's financial and accounting processes, controls, reporting systems and
procedures. The Company's former independent public accountants highlighted the
Company's need for additional financial and accounting personnel with software
industry experience.
In response to the management letters and recent operating results, during 1997
the Company hired senior executives with significant experience in the software
industry, and improved financial and accounting processes, controls, reporting
systems and procedures, which eliminated all material weaknesses.
The Company incurred net losses of $8.6 million for 1995, $31.8 million for
1996, and $13.6 million for 1997, and reported a net loss of $9.4 million for
the nine months ended September 30, 1998. As of September 30, 1998, the Company
had an accumulated deficit of $72.4 million. There can be no assurance that the
Company will be profitable in the future.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reporting segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 is effective for financial statements for fiscal years beginning after
December 15, 1997, and the Company will comply beginning with year-end 1998
results. Financial statement disclosures for prior periods are required to be
restated. The Company is in the process of evaluating the disclosure
requirements. The adoption of SFAS 131 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
On January 1, 1999, certain countries of the European Union are scheduled to
establish fixed conversion rates between their existing currencies and one
common currency, the euro. The euro will then trade on currency exchanges and
may be used in business transactions. Beginning in January 2002, new
euro-denominated currencies will be issued and the existing local currencies
will be withdrawn from circulation by July 1, 2002. The Company is in the
process of arranging euro bank accounts for the conversion to the euro currency,
and is evaluating other systems and business issues raised by the euro
conversion. These issues include the need to adapt computer and other business
systems and equipment and the long-term competitive implications of conversion.
During the nine months ended September 30, 1998, the Company derived
approximately 46.2% of its total revenues outside the United States, a
significant portion of which is in Europe. The Company has not completed its
assessment of the potential impact of the euro conversion. However, at present
the Company believes the euro conversion will not have a material effect on the
Company's consolidated financial position or results of operations.
11
<PAGE>
Year 2000 Compliance
The efficient operation of the Company's business is dependent in part on its
information technology ("IT") systems (which includes computer software programs
and operating systems) and its non-IT systems (process control and other systems
which include embedded technologies), collectively the "Internal Programs and
Systems." The Company has been evaluating its Internal Programs and Systems to
identify potential Year 2000 compliance problems, and has primarily conducted
these evaluations and assessments using the Company's information technology
personnel (Phase 1). These actions are necessary to ensure that the Internal
Programs and Systems will be year 2000 compliant.
It is anticipated that modification or replacement of some of the Internal
Programs and Systems may be necessary to make such Programs and Systems Year
2000 compliant (Phase 2). The Company is also communicating with its suppliers
domestically and abroad and others to coordinate Year 2000 conversion. Based on
present information, the Company believes that it will be able to achieve such
Year 2000 compliance through a combination of modification of some existing
Internal Programs and Systems and the replacement of other Internal Programs and
Systems with new programs and systems that are already Year 2000 compliant by
June 30, 1999. However, there can be no assurance that these efforts will be
successful or that the systems of other companies on which the Company's
business relies will be timely converted.
To date, costs incurred in evaluating its Internal Programs and Systems have not
been material, and anticipated costs necessary to complete such evaluations,
modifications and /or replacements are not expected to be material.
The Company has not, to date, developed a Year 2000 contingency plan but plans
to commence development of such a plan in the first quarter of 1999.
With respect to software programs which the Company licenses externally to
customers (collectively, the "External Programs"), the Company's most recent
External Programs have been Year 2000 certified. The Company has notified its
customer base that the older versions of the External Programs may not be Year
2000 compliant, and the Company encouraged these customers to upgrade to its
most recent version of the External Programs. Costs incurred to date to evaluate
and identify potential Year 2000 compliance problems contained in the Company's
External Programs have not been material, and the Company expects that future
expenses and capital expenditures associated with achieving Year 2000 compliance
will not have a material effect on the consolidated financial results in 1999
and 2000.
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 Nine Months Ended
September 30 September 30
----------------- -----------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
License fees 23.4% 20.0% 28.7% 23.1%
Services 76.6 80.0 71.3 76.9
------ ------ ------ ------
Total Revenues 100.0 100.0 100.0 100.0
Operating Expenses:
Cost of license fees 3.3 4.4 2.9 5.5
Cost of services 44.0 41.4 41.3 45.5
Sales and marketing 19.2 18.3 23.1 24.6
Research and development 16.0 13.7 14.8 15.7
General and administrative 24.9 21.3 23.7 26.1
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Restructuring costs -- -- -- 2.9
------ ------ ------ ------
Total operating expenses 107.4 99.1 105.8 120.3
------ ------ ------ ------
Operating income (loss) (7.4) 0.9 (5.8) (20.3)
Other income (expenses):
Costs related to class action litigation (42.9) -- (18.5) (0.1)
Other income 1.0 0.7 1.4 0.8
Other expense (0.1) (1.3) (0.1) (0.8)
------ ------ ------ ------
Total other expense, net (42.0) (0.6) (17.2) (0.1)
------ ------ ------ ------
Net income (loss) (49.4)% 0.3 % (23.0)% (20.4)%
====== ====== ====== ======
</TABLE>
Total Revenues
Total revenues increased 0.3% for the three months ended September 30, 1998, and
decreased 7.4% for the nine months ended September 30, 1998 compared to the
corresponding prior year periods. The decrease for the nine month period was
primarily attributable to a decrease in license fees offset by an increase in
services revenue.
The Company derived approximately $6.8 million and $21.2 million, or 42.0% and
46.2% of its total revenues, from customers outside of the United States for the
three and nine months ended September 30, 1998, respectively, compared to $6.7
million and $21.9 million, or 41.4% and 44.1%, respectively, for the
corresponding prior year periods. The Company expects that revenues from
customers outside the United States 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. 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
14.1% and 25.7% for the three and nine months ended September 30, 1998,
respectively, as compared to the prior year periods. The decreases for the three
and nine month periods were attributed to two significant license contracts from
two separate customers in 1997, which represented 35.9% and 24.5% of total
license revenues during the three and nine months ended September 30, 1997,
respectively. Two separate customers accounted for 21.3% of total license
revenues for the three months ended September 30, 1998. No customer accounted
for greater than 10% of total license revenues for the nine months ended
September 30, 1998.
Services Revenue
Services revenue includes fees from software maintenance agreements, training,
installation and consulting services. Maintenance fees 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 4.7% or $0.6 million and remained flat for
the three and nine months ended September 30, 1998, respectively compared to the
corresponding 1997 periods. The increase is due to higher demand for
implementation
13
<PAGE>
services for the Company's core product offset by declines in legacy product
service revenues in the Company's France operations, as compared to the
corresponding previous periods.
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 dollar cost of license fees increased during the three and nine months ended
September 30, 1998, as compared to the corresponding prior year period,
primarily as a result of increased third party products resold by the Company.
Cost of Services
Cost of services consists primarily of personnel costs for product quality
assurance, training, installation, consulting and customer support. These costs
include training third party service and support organizations for the Company's
products.
For the nine months ended September 30, 1998 there was no significant change in
cost of services as a percentage of services revenue compared to the nine months
ended September 30, 1997. Cost of services for the three months ended September
30, 1998 decreased as a percentage of services revenue compared to the prior
period due primarily to 1) an increase in the utilization rate of the Company's
internal consultants as demand for services increased and 2) a decrease in low
margin outsourcing revenue as a percentage of total service revenue.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions, bonuses
and travel and promotional expenses.
Sales and marketing expenses decreased for the three and nine months ended
September 30, 1998 as compared to the prior year periods, primarily due to
decreased marketing program costs and personnel costs.
Research and Development
Research and development expenses consist primarily of personnel costs, and
costs of software for development purposes, and costs of outside consultants
hired by the Company to assist its product development efforts. Research and
development expenses are generally charged to operations as incurred. However,
certain software development costs are capitalized in accordance with Statement
of Financial Accounting Standards No. 86. Such capitalized software development
costs are generally amortized on a straight line basis over periods not
exceeding three years.
Research and development expenses decreased 14.3% and 2.1%, respectively during
the three and nine months ended September 30, 1998, as compared to the prior
year periods primarily as a result of utilizing fewer third party consultants.
In addition, the Company's personnel costs have
14
<PAGE>
increased for its financial, workflow and COOL products offset by reductions in
personnel costs for its Yorvik product. The Company has not capitalized software
development costs in either 1997 or 1998. The rate of capitalization of software
development costs 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 administrative,
executive and financial personnel costs, and outside professional fees. General
and administrative expenses decreased 14.0% for the three months ended September
30, 1998, and increased 1.8% for the nine months ended September 30, 1998, as
compared to prior year periods, primarily due to cost containment measures begun
in May 1998, and decreases in bad debt expense, depreciation and insurance
offset by increases in rent and payroll related costs attributed to an increase
in finance and general management personnel, as part of a plan to increase
financial and management controls throughout the Company.
Restructuring Costs
During the nine months ended September 30, 1998, the Company committed itself to
a plan whereby it eliminated 32 positions in the United States rendered
redundant through a reengineering process, and eliminated 20 positions outside
the United States servicing legacy products. Accordingly, the Company recorded a
charge to operations in the second quarter totaling approximately $1.3 million,
reflecting the termination costs of those personnel. As of September 30, 1998,
the Company has $0.6 million included in accrued expenses related to such
terminations.
Other Income (Expense)
Other income (expense) net increased to ($93) thousand and $(53) thousand for
the three and nine months ended September 30, 1998, respectively, compared to
($6.8) million and ($8.6) million for the comparable prior year periods
primarily due to the settlement of the class action litigation in 1997 (Note 3),
offset by interest expense on Company borrowings and lower invested balances of
cash, cash equivalents and short term investments in 1998.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash, cash equivalents and restricted
cash of $6.8 million and a working capital deficit of $2.7 million. On March 31,
1998, the Company signed a $10 million credit facility pursuant to which it
borrowed $5 million under a three year term loan (Note 2). Borrowings under the
Agreement are secured by substantially all domestic assets of the Company
including a pledge of 65% of the stock of the Company's foreign subsidiaries.
The Company is required to comply with quarterly and annual financial statement
reporting requirements, as well as certain financial covenants, which were
amended as of September 30, 1998. The ability to continue to borrow under the
Agreement is dependent upon future compliance with such covenants. Management
believes that the Company's projected operating results over the next twelve
months will result in compliance under the Agreement, although there can be no
assurance that such operating results will be achieved.
15
<PAGE>
The Company's operating activities used cash of $3.8 million and $8.0 million
for the nine months ended September 30, 1997 and 1998, respectively. Net cash
used by operations in the nine months ended September 30, 1998 was comprised
primarily of the net loss and an increase in accounts receivable and a decrease
in accounts payable and accrued expenses offset by depreciation and
amortization, and a decrease in restricted cash. Net cash used in operations
during the nine months ended September 30, 1997 was comprised of the net loss
and decreases in accounts payable and accrued expenses and deferred revenue
offset by depreciation and amortization expense, decreases in accounts
receivable and restricted cash, and the proposed non-cash class action
litigation costs.
The Company's investing activities used cash of $0.4 million and $1.0 million
for the nine months ended September 30, 1997 and 1998, respectively. The
principal uses during 1998 have been leasehold improvements and equipment
purchases.
Cash provided (used) by financing activities was ($3.2) million and $4.3 million
during the nine months ended September 30, 1997 and 1998, respectively and
related mainly to the issuance of long-term debt in 1998 and repayment of debt
in 1997.
During the nine months ended September 30, 1998, the Company executed a cost
reduction plan which included eliminating 32 positions in the United States
rendered redundant through a reengineering process, as well as eliminating 20
positions servicing legacy products outside the United States; bringing
previously outsourced training and documentation activities back in-house; and
refocusing its sales and marketing efforts on those industries where management
believes it maintains a competitive advantage. Management believes that the
result of these actions in addition to the seasonality of the Company's
business, reduction in expenses going forward are expected to follow the results
achieved in the third quarter of 1998
The Company has no significant capital commitments. The Company's aggregate
minimum operating lease payments for the remainder of 1998 and 1999 are expected
to be approximately $2.8 million. During December 1998, the Company expects to
utilize $5.0 million of its restricted cash to fund the common stock subject to
repurchase. The Company expects that its operating cash flow will be sufficient
to fund the Company's working capital requirements through 1999. However, the
Company's ability to achieve this result is affected by the extent of cash
generated from operations and the pace at which the Company utilizes its
available resources. Accordingly, the Company may in the future be required to
seek additional sources of financing including the issuance of debt and/or sale
of equity securities. No assurance can be given that any such additional sources
of financing or guarantees will be available on acceptable terms or at all.
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.
16
<PAGE>
History of Operating and Net Losses
The Company generated a net loss of $31.8 million for 1996, $13.6 million for
1997 and reported a net loss for the nine months ended September 30, 1998 of
$9.4 million. The Company also incurred a net loss for each of the five years in
the period ended December 31, 1995. As of September 30, 1998, the Company had an
accumulated deficit of $72.4 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 proportion of revenues attributable to
license fees versus services, the utilization of third parties to perform
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 by the customer 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, planned expenditures 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. These
fluctuations are caused primarily by customer budgeting and purchasing patterns,
and by the Company's sales commission policies which generally 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, the Company's operating results may be below the
expectations of public market analysts and investors, in some future quarter .
Such an event may have a material adverse effect on the price of the Company's
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
17
<PAGE>
Litigation
During 1996, the Company and certain of its current and former officers and
directors were named as defendants in six civil suits filed as class actions on
behalf of individuals claiming to have purchased Computron Common Stock during
the time period from August 24, 1995, through January 27, 1997. 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). See "Item 3.
Legal Proceedings".
On March 6, 1998, the District Court issued a final order approving the
settlement of this class action securities litigation. See Footnote 3 to the
Consolidated Interim Financial Statements.
Historically, the Company has been involved in other 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 effect on
the Company's business, financial condition and results of operations or cash
flows.
Management Changes
The Company experienced significant turnover of executive management during 1996
and early 1997. In February 1997, the Company added a number of key officers,
including its President and Chief Executive Officer and its Executive Vice
President and Chief Financial Officer, and later in 1997 added its Senior Vice
President of Operations. Failure to attract and maintain key management and
employee personnel could have material adverse effects on the quality of the
Company's products, and the Company's business and financial condition and
results of operations.
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 is 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(TM) software are Eastman
Kodak Company ("Kodak"), which acquired the software division of Wang
Laboratories, Inc. ("Wang"), and FileNet Corporation. The principal competitors
for the Company's Computron Yorvik(TM) software are Project Software
Development, Inc. (PSDI), Indus International, Inc. (Indus) and others. The
Company has an agreement with Kodak pursuant to which Kodak has the right to
license Computron COOL software to third parties under its own private label and
modify such software. Most of the Company's competitors are substantially larger
than the Company and have significantly greater financial, technical, and
marketing resources, and 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
18
<PAGE>
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. See "Business--Competition", in the Company's 1997 Annual
Report on Form 10-K.
Dependence on Principal Products
Substantially all of the Company's revenues are derived from the licensing of
Computron Financials, Computron Workflow, Computron COOL, Computron Yorvik 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's business, results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, in the Company's Annual Report on Form 10-K,
"Business--Products".
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 and emerging industry standards. Such
changes may or may not affect the Company's software performance, customization,
reporting functionality, or other business objectives, and may or may not render
the Company incapable of meeting future customer software demands. 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
19
<PAGE>
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. Such delays, errors or failures create a risk
that the software will not meet its stated functionality and could cause the
Company's future operating results to fall short of the published expectations
of certain public market financial analysts. From time to time, the Company
ports its products to various, new platforms, though no assurance can be given
concerning the successful development of the Company's software products on
these additional platforms or the performance characteristics of its
applications. In addition, the Company and its products and technologies rely
upon third-party products from hardware vendors, software vendors, RDBMS
vendors, tools vendors, reporting products, etc. Such dependencies may or may
not affect the Company's ability in the future to provide continued availability
and/or support for all Computron products. 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.
See "Business--Product Development," in the Company's 1997 Annual Report on Form
10-K.
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 contractual provisions and trade secrets, copyright and trademark
law 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
20
<PAGE>
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technologies.
The Company has obtained a Federal registration for its trademark "Computron",
and its application for a Federal registration for its trademark "Yorvik" is
pending in the United States. In addition the Company has certain U.S. common
law rights, and rights under foreign laws in relation to its trademarks, service
marks and product names. Although the Company believes that the trademarks and
service marks it uses are distinct, there can be no assurance that the Company
will be able to register or protect such trademarks and service marks.
The Company does not believe 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. See "Business--Intellectual Property," in the Company's
1997 Annual Report on Form 10-K.
Security Risks
The Company's products provide security features designed to protect its users'
data from unauthorized retrieval or modification. Its built in security features
utilize the capabilities of its own applications, the client operating system
software, as well as the security features contained in the RDBMS platforms on
which the applications run. Computron's systems add additional capabilities to
those provided by the underlying security systems. Though the Company is not
aware of any violations of its application security architecture within its
installed base, and its security features are subject to constant review and
enhancement, no assurances can be given concerning the successful implementation
of security features and their effectiveness within a customer's operating
environment. In the event of an actual security breach, there may be a material
adverse effect on the Company's business, results of operations, and financial
condition.
Risks Associated with International Operations
The Company derived approximately $14.2 million, $21.3 million and $29.4 million
or 26.9%, 39.2% and 43.4% of its total revenues, from customers outside of the
United States in 1995, 1996, and 1997, respectively. The Company derived
approximately $21.9 million and $21.2 million or 44.1% and 46.2% of its total
revenues from customers outside the United States for the nine months ended
September 30, 1997 and 1998, 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.
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. The Company does not currently hedge its foreign exchange
exposure. With respect
21
<PAGE>
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, reduced legal protection of the
Company's intellectual property, 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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,
product development, 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 or
terminate the support of these products, the Company may be forced to expend
significant time and development resources to try 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. See
"Business--Strategic Alliances," and "Intellectual Property," in the Company's
1997 Annual Report on Form 10-K.
Control by Existing Stockholders
The Company's executive officers, directors and affiliates together beneficially
own approximately 58% of the outstanding shares of Common Stock as of March 6,
1998. As a result, these stockholders are able to exercise control over matters
requiring stockholder approval, including the election of 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.
22
<PAGE>
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 could have a material adverse effect on the Company's
business. The Company is a party to employment agreements with certain key
personnel. In addition, the Company is the beneficiary of key-person life
insurance on the lives of certain 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 estimates of operating results 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.
23
<PAGE>
COMPUTRON SOFTWARE, INC.
Part II
Other Information
Item 1. Legal Proceedings
On March 6, 1998 the District Court issued a final order approving a settlement
in the class action securities litigation, In re Computron Software, Inc.
Securities Litigation, Master File No. 96-1911 (AJL), brought against the
Company and certain of its present and former officers and directors in the
United States District Court for the District of New Jersey.
The overall settlement includes consideration totaling $15 million for the
benefit of class members, including consideration of $6 million from the
Company, and payments from certain of its present and former officers and
directors, its former auditors, and the insurance companies that provided
Computron with directors and officers liability insurance. In return for the
payments by the insurance companies, the settlement also resolves a separate
lawsuit brought by the Company against the insurance companies. As its share of
the settlement, the Company has paid $1 million in cash, and will issue 1
million shares of Common Stock of the Company.
Class members will receive a non-transferable right to resell the stock received
in the settlement to a business trust formed by the Company at a price of $5.00
per share. The trust was capitalized by a contribution of $5 million by the
Company in March of 1998, which will be used to pay the claims of any class
members who receive stock in the settlement and exercise their right to resell
such stock to the trust according to the terms of the Stipulation of Settlement.
The exercise period during which class members may resell these shares to the
trust will be December 1, 1998 to December 21, 1998. The resale right will
expire at the end of the exercise period, or earlier, as to any shares issued in
the settlement that are sold by class members prior to the final day of the
exercise period. The resale right will also expire earlier than the exercise
period if the closing price of Computron's Common Stock is higher than $5.00 per
share for 20 consecutive trading days. The Company recorded a charge to
operations of $6 million during the quarter ended September 30, 1997, reflecting
the Company's share of the settlement costs, excluding legal fees.
Historically, the Company has been involved in other 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 effect on
the Company's business, financial condition and results of operations or cash
flows.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.29 - Amendment Number 2 to the Loan and Security
Agreement with Foothill Capital Corporation.
Exhibit 27 - Financial Data Schedule (Edgar filing only).
b) Reports on Form 8-K - None
24
<PAGE>
COMPUTRON SOFTWARE, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUTRON SOFTWARE, INC.
Date: November 10, 1998 By: /s/ Michael R. Jorgensen
--------------------------------------
Michael R. Jorgensen
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
EXECUTION VERSION
AMENDMENT NO. 2 TO
LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 2, dated as of September 30, 1998, to the LOAN AND
SECURITY AGREEMENT , DATED AS OF March 31, 1998 (the "Loan and Security
Agreement") between FOOTHILL CAPITAL CORPORATION, a California corporation, with
a place of business located at 11111 Santa Monica Boulevard, Suite 1500, Los
Angeles, California 90025-3333 ("Foothill"), and COMPUTRON SOFTWARE, INC., a
Delaware corporation, with its chief executive offices located at 301 Route 17
North, Rutherford, New Jersey 07070 (the "Borrower")
Presemble
The Borrower has requested Foothill to amend the Loan and Security
Agreement to change the amount set forth in the Loan and Security Agreement as a
limitation on loans and advances permitted to be made by Borrower to its
wholly-owned Subsidiaries. Accordingly, the Borrower and Foothill hereby agree
as follows:
1. Definitions. All terms used herein which are defined in the Loan
and Security Agreement and not otherwise defined herein are used herein as
defined therein.
2. Investments. Section 7.13 of the Loan and Securty Agreement is
hereby amended to change the amount of $3,000,000 set forth in the tenth line of
such Section to $4,250,000.
3. Conditions. This Amendment shall become effective (and the
covenants set forth in Section 2 above be applicable as of the date of this
Amendment) only upon satisfaction in full of the following conditions precedent
(the date upon which all such conditions have been satisfied being herein called
the "Effective Date");
(a) The representations and warranties contained in this Amendment
in Section 5 of the Loan and Security Agreement and each other Loan Document
shall be correct on and as of the Effective Date as though made on and as such
date (except where such representations and warranties relate to an earlier date
in which case such representations and warranties shall be true and correct as
of such earlier date); no Default or Event of Default shall have occurred
(assuming Section 7.13 is amended as set forth above) and be continuing on the
Effective Date or result form this Amendment becoming effective in accordance
with its terms.
<PAGE>
(b) Foothill shall have received a counterpart of this
Amendment, duly executed by the Borrower.
(c) The Borrower shall have provided to Foothill projections
with respect to the anticipated amount of the Borrowing Base ( as defined in
Section 2.1(a) of the Loan and Security Agreement) for the next 90 days, in form
and substance reasonably acceptable to Foothill.
(d) All legal matters incident to this Amendment shall be
satisfactory to Foothill and its counsel.
4. Representations and Warranties. The Borrower hereby represents
and warrants to Foothill me follows:
(a) The Borrower (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and (ii)
has all requisite corporate power, authority and legal right to execute, deliver
and perform this Amendment, and to perform the Loan and Security Agreement, as
amended hereby.
(b) The execution, delivery and performance of this Amendment
by the Borrower, and the Performance by the Borrower of the Loan and Security
Agreement, as amended hereby (i) have been duly authorized by all necessary
corporate action, (ii) do not and will not contravene its charter or by-laws or
any applicable law, and (iii) except as provided in the Loan Documents, do not
and will not result in the creation of any Lien upon or with respect to any of
its respective properties.
(c) This Amendment and the Loan and Security Agreement, as
amended hereby, constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in accordance with its terms.
(d) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority is required in connection
with the due execution, delivery and performance by the Borrower of this
Amendment and the performance by the Borrower of the Loan and Security Agreement
as amended hereby.
(e) The representations and warranties contained in Section 5
of the Loan and Security Agreement and each other Loan Document, after giving
effect to this Amendment, are correct on and as of the Effective Date as though
made on and as of the Effective Date (except to the extent such representations
and warranties expressly relate to an earlier date in which case such
representations and warranties such be true and correct as of such earlier
date), and no Default of Event of Default has occurred and is continuing on and
as of the Effective Date or will result from this Amendment becoming effective
in accordance with its terms.
5. Continued Effectiveness of the Loan and Security Agreement and
Loan Documents. The Borrower hereby (i) confirms and agrees that each Loan
Document to which it
-2-
<PAGE>
is a party is, and shall continue to be, in full force and effect and is hereby
ratified and confirmed in all respects except that on and after the Effective
Date of this Amendment all references in any such Loan Document to "the Loan and
Security Agreement", the "Agreement", "thereto", "thereof", "thereunder" or
words of like import referring to the Loan and Security Agreement shall mean the
Loan and Security Agreement as amended by this Amendment; and (ii) confirms and
agrees that to the extent that any such Loan Document purports to assign or
pledge to Foothill, or to grant a security interest in or Lien on, any
collateral as security for the obligations of the Borrower from time to time
existing in respect of the Loan and Security Agreement and the Loan Documents,
such pledge, assignment and/or grant of the security interest or Lien is hereby
ratified and confirmed in all respects.
6. Miscellaneous.
(a) This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(c) This Amendment shall be governed by, and construed in
accordance with, the laws of the State of California.
(d) The Borrower will pay on demand all reasonable fees, costs
and expenses of Foothill in connection with the preparation, execution and
delivery of this Amendment including, without limitation, reasonable fees
disbursements and other charges of Schulte Roth & Zabel LLP, counsel to
Foothill.
COMPUTRON SOFTWARE, INC.,
a Delaware corporation
By: /s/ Michael Jorgensen
-------------------------
Name: Michael Jorgensen
Title: CFO
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ Erik R. Sawyer
-------------------------
Name: Erik R. Sawyer
Title: Assistant Vice President
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,790
<SECURITIES> 0
<RECEIVABLES> 15,289
<ALLOWANCES> 2,516
<INVENTORY> 0
<CURRENT-ASSETS> 22,883
<PP&E> 15,344
<DEPRECIATION> 11,513
<TOTAL-ASSETS> 29,829
<CURRENT-LIABILITIES> 25,594
<BONDS> 0
0
0
<COMMON> 69,634
<OTHER-SE> 73,055
<TOTAL-LIABILITY-AND-EQUITY> 29,829
<SALES> 10,612
<TOTAL-REVENUES> 45,998
<CGS> 2,515
<TOTAL-COSTS> 32,275
<OTHER-EXPENSES> 20,541
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307
<INCOME-PRETAX> (9,386)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,386)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
