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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 1-13591
COMPUTRON SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2966911
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock $.01 par value ON WHICH REGISTERED
American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on March 15, 1999
as reported on the American Stock Exchange, was approximately $12.8 million.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 15, 1999, Registrant had outstanding 23,913,557 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
ITEMS 10, 11, 12 AND 13 OF PART III ARE INCORPORATED BY REFERENCE FROM A
PORTION OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FURNISHED TO
STOCKHOLDERS IN CONNECTION WITH THE 1999 ANNUAL MEETING OF STOCKHOLDERS.
ITEM 1. BUSINESS
This Report contains statements of a forward-looking nature within the
meaning of the safe harbor provisions of section 21E of the Securities Exchange
Act of 1934, as amended, relating to future events or future financial results
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 which could cause actual events or results to
differ materially from those indicated by such forward-looking statements,
including the matters set forth in "Business--Risk Factors" below.
GENERAL
Computron is an innovative provider of business process and technology
solutions with 20 years of experience in crafting efficient, effective,
value-added systems for global organizations as well as large and mid-sized
companies. Computron believes that the wealth, potential, and ultimate success
of 21st century organizations will be determined by how well knowledge is used
to manage, protect, and leverage their corporate assets. The Company strives to
deliver knowledge-based business process solutions that empower organizations
through the ability to turn information into knowledge.
Computron designs, markets, and supports n-tier, Internet and
workflow-enabled client/server-based business process solutions consisting of
financials, workflow, desktop document access and storage, and maintenance and
asset management software. Its solutions are designed to protect software
application investment through the use of true n-tier architecture and a proven
implementation certainty methodology. The Company's current client/server
solutions are fully Year 2000 compliant and provide customers with the ability
to address both the structured and unstructured data of their business, above
and beyond traditional transaction-oriented accounting. Computron also offers
its financial applications integrated with workflow-based modules such as Budget
Cycle Management (BCM), Expense Cycle Management (ECM), and Procurement Cycle
Management (PCM), designed to seamlessly manage an organization's information
and knowledge throughout the end-to-end business process.
Computron believes that its business process solutions empower organizations
by turning all forms of information into knowledge. Its vision has been to
provide the complete functionality to manage all phases of an end-to-end
business process, combined with a strong technology foundation that can take
organizations into the 21st century. Organizations can take advantage of
significant technological innovations such as network computing, client/server,
document management, imaging, COLD (Computer Output to Laser Disk), decision
support, workflow, voice, the Internet and others utilizing Computron's advanced
architecture.
In this emerging Net economy, with the virtual office becoming more
prevalent, Computron is well positioned to provide new e-business process
solutions by leveraging the synergies between the Internet as a routing
infrastructure, EDI and EFT over the Internet, the World Wide Web as a vast
resource of business service providers, electronic mail messaging and
Computron's Workflow. Computron's advanced architecture provides for the ability
to leverage technology and disseminate business knowledge electronically
throughout the enterprise. As a result, Computron is aggressively pursuing
technology leaders with whom Computron can partner to provide customers and
prospects with e-commerce procurement and bill presentment solutions using
Internet technology to standardize, automate and reduce the cost and cycle time
of business processes.
PRODUCTS
The Company designs, markets, and supports n-tier, Internet and
workflow-enabled, client/server-based, business process solutions for
financials, workflow, desktop document access and storage, and maintenance and
asset management software. Its product line consists of
Computron-Registered Trademark- Financials, Computron-Registered Trademark-
Workflow, Computron-Registered Trademark- COOL-TM-, and
Computron-Registered Trademark- Yorvik-TM-, and is currently supported on
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a variety of UNIX-based platforms--Sun Microsystems, Inc. (Sun), Hewlett-Packard
Corporation (HP), International Business Machines Corporation (IBM), Digital
Equipment Corporation (Digital), as well as Intel-based servers running Windows
NT. The most current release of Computron software, Version 5.0 for the
Computron Financials, Computron Workflow, and Computron COOL solutions, debuted
December 31, 1998, and is available in the English language. Previous versions
are available in a number of languages including English, Bulgarian, French,
Spanish, Polish, German, and Japanese. It is expected that Version 5.0 will be
available in these languages in the future. The Company's products may be
translated into additional languages using supported language code pages with
minimal reliance on its development resources. Computron believes that Version
5.0 provides users with enhanced features, improved functionality (such as Euro
dollar support), and robust performance, and is offered on CD-ROM for its full
suite of business solutions and complete set of documentation. The software
supports a number of Electronic Data Interchange (EDI) transactions, such as
832, 850 and 855 for Purchase Order and 820 and 823 for Accounts Receivable. The
most recent release of Computron Yorvik software, Version 6.2.2, was released in
January 1999.
COMPUTRON FINANCIALS
Computron Financials and Version 5.0 address the needs of Computron's ever
growing multi-national and international client base with support for the
Economic and Monetary Union (EMU) and its new currency, the Euro. Building on
Computron's already strong multi-currency and multi-national functionality,
Version 5.0 has added currency triangulation calculations across its financial
business solutions and parent/child currency relationships for the member
currencies of EMU, providing accurate accounting regardless of the currencies
involved in any transaction.
MODULE FEATURES
- --------------------------------------- ------------------------------------------------------------------------
GENERAL LEDGER The General Ledger (G/L) module provides comprehensive financial
accounting and management information across multiple companies,
currencies, and reporting calendars. It stores and maintains financial,
statistical, and budgetary information for summary, comparison,
calculation, inquiry, and reporting. Computron believes that the product
fulfills statutory, consolidation, and management requirements and
offers benefits such as complete user control of all functions and
ledger structure, n-dimensions Geographical Chart of Account structure,
customization of Advanced User Interface, and total integration with
other Computron applications and (via its own sophisticated interfacing
tool GENEX) with non-Computron software. Through the use of various
standard Computron utilities, data can also be uploaded to and/or
downloaded from external sources.
POWER INTERACTIVE Power Interactive is a set of components used to define GL financial
reports. Created in Visual Basic, Power Interactive provides a
traditional Windows look and feel with standard icons, while allowing
users report access and drill down capability to virtually any data
available in the GL. Its components include the POWER INTERACTIVE
DEFINER and POWER INTERACTIVE VIEWER. The POWER INTERACTIVE
DEFINERallows the specification of a report using a graphical user
interface, without having to consider the details of the actual report
layout. Its POWER INTERACTIVE VIEWER component is a user-friendly tool
that facilitates end-user financial report modifications and
customizations. With Power Interactive, users can define financial
report data lines and columns using the
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MODULE FEATURES
- --------------------------------------- ------------------------------------------------------------------------
Definer, and use the Viewer to define and/or view the layout. For
performance and scalability, all data is gathered on the server.
BUDGET CYCLE MANAGEMENT The Budget Cycle Management (BCM) module is workflow-based and is
designed to allow organizations to automate the ways in which budget
information is downloaded/uploaded, disseminated and collected
throughout the enterprise. It provides the ability to track the status
of each form, reducing the frequent manual intervention involved in the
budget cycle process. With BCM, organizations in virtually any industry
can improve the overall quality and control of the budgeting process,
decrease wait time by speeding the manual process, and reduce manual
effort.
ACCOUNTS RECEIVABLE The Accounts Receivable module provides efficient and comprehensive
debtor management facilities, offering complete financial accounting and
management information, in multiple currencies, to fulfill statutory and
management requirements and is suitable for Internet Service Providers
(ISPs), etc. because of its ability to consolidate invoice line details.
It is parameter-driven for precise matching to user requirements and
offers users control of many functions including the ledger structure.
Users can create Call Back Queue records based on data from the customer
master, customer statistics, and open item files using the Credit
Manager's workbench function. Additionally, Computron Accounts
Receivable has an optional Direct Invoicing module that handles goods
and services, pick list generation, invoicing generation, deal pricing,
pricing and discount tables. It also provides comprehensive financial
accounting and management reporting and inquiry (statistical and
financial), in multiple currencies. It supports the EDI 820 and 823
requirements. Through the use of various standard Computron utilities,
data can be uploaded to and/or downloaded from external sources.
REVENUE CYCLE MANAGEMENT In June 1999, Computron will release Phase I of its Revenue Cycle
Management (RCM) module, a workflow-based, time billing and accounts
receivable module that allows organizations to manage receivables more
effectively. Phase I of RCM automates the bill memo routing process,
which enables organizations to manage their billing process and
receipting more efficiently. Phase II of RCM, scheduled for release in
early 2000, will manage the ways in which cash and aged receivables are
collected throughout the enterprise.
With RCM, organizations in virtually any industry can improve the
collection process, quality, and control of revenue. RCM enhances the
credit manager's function by allowing fast and accurate access to
pertinent information for clear and quick decision making.
ACCOUNTS PAYABLE The Accounts Payable module is a sophisticated vendor management system.
It offers an easy-to-use method of managing suppliers, vendors, and the
purchasing cycle. It embraces purchasing statistics, cash management
forecasting, employee advance and expense handling, EFT payment
capability, built-in
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MODULE FEATURES
- --------------------------------------- ------------------------------------------------------------------------
invoice logging, BACS, tracking and payment authorization procedures. It
also provides comprehensive financial accounting and management
reporting and inquiry (statistical and financial) in multiple
currencies. Through the use of various standard Computron utilities,
data can also be uploaded to and/or downloaded from external sources.
EXPENSE CYCLE MANAGEMENT Expense Cycle Management (ECM) is a complete application that integrates
portions of Computron's financial modules, with workflow technology
delivered with a graphical process design wizard called the Process
Design Workbench. It comes with all of the workflow tasks necessary for
re-engineering the payment cycle, such as several scanning, faxing and
invoice capture tasks, tasks for indexing documents, voucher approval
routing options, EFT payments, exception handling, and full online
inquiry to the workflow and financial data.
PURCHASE ORDER The Purchase Order module enables automated purchase order processing,
user-defined vendor evaluation and allows for blanket and standard
orders, transmission of purchase orders through print, fax, or EDI 832,
850 and 855, critical delivery flagging, and "contract near limit"
warnings. It provides sophisticated buyer sourcing that includes
automatic pick tickets and direct requisition to purchase order
processing. With the addition of Bids and Quotes in Version 5.0, the
buyer can now manage competitive bids on both current and historical
data and record quotes received from the vendors against the bid sent to
them.
PROCUREMENT CYCLE MANAGEMENT Procurement Cycle Management (PCM) is a complete application that
integrates portions of Computron's financial modules with workflow
technology delivered with the Process Design Workbench. It allows
individual organizations to define the procurement cycle process and
provides a view of the current processes, identifying areas that can be
improved. By coupling the value of workflow with Computron's standard
functional richness and the Internet, PCM helps organizations decrease
wait time, reduce manual effort, and improve the control of the
procurement process, while increasing the overall production and quality
of the organizational performance. PCM can electronically create both
requisitions and purchase orders, and upon completion of an online
requisition, perform custom business rules, or automatically route the
requisition to a supervisor for approval and release. Computron is
aggressively pursuing technology leaders with whom Computron can partner
to provide customers and prospects with e-commerce procurement and bill
presentment solutions using Internet technology to standardize, automate
and reduce the cost and cycle time of the procurement cycle.
INVENTORY CONTROL The Inventory Control module is a highly flexible inventory system with
full integration to both Computron Financials/Purchase Order and
Computron Financials General Ledger. This system features extensive
inventory transaction capabilities and detailed reporting
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MODULE FEATURES
- --------------------------------------- ------------------------------------------------------------------------
functionality. Notable features include Item Master File maintenance and
inquiry capability, Bill of Materials, full integration to Computron
Financials/Purchase Order through Requisition and Receiving, Pick List
processing, a full range of inventory transactions including warehouse
moves, transfers, issues, and returns, inventory count capabilities and
inventory reporting, and costing methods. Through the use of various
standard Computron utilities, data can also be uploaded and/or
downloaded from external sources.
FIXED ASSETS The Fixed Assets (FA) module tracks fixed assets, maintains related
financial and accounting records and provides for flexible, unlimited
depreciation calendars, user-defined asset identification and make,
model and number descriptions. It can generate fixed asset information
directly for the Computron Financials/General Ledger. This will produce
the data required to update asset accounts, accumulated depreciation
accounts, depreciation expense accounts, disposition gain or loss
accounts, and relieve the appropriate FA clearing accounts. This update
can then be posted directly to the Computron Financials/General Ledger
and with the integrated reconciliation of GL and FA, can be easily
monitored. Through the use of various standard Computron utilities, data
can also be uploaded and/or downloaded from external sources.
TIME AND EXPENSE ACCOUNTING The Time and Expense Accounting (TEAM) module gives business and
practice managers complete control over billing time and expenses at
every level (client, engagement, project, office, responsible employee,
etc.), as well as multiple options for contract billing and revenue
recognition. On-line data entry, editing, and billing facilities ensure
up-to-the-minute accuracy and prompt invoicing of time and expenses
incurred on multiple levels of clients and/or projects. This powerful
management tool can be utilized in maximizing the productivity and
profitability of all chargeable time and services, as well as
flexibility in defining revenue policies. Along with missing time alerts
and remote time and expense logging, the TEAM solution delivers accurate
and timely management of employees and billing tasks, which is
particularly suitable for professional service organizations. Through
the use of various standard Computron utilities, data can also be
uploaded and/or downloaded from external sources, which is most
beneficial in the Human Resource system interfaces to Computron
ENCUMBRANCE ACCOUNTING The Encumbrance Accounting module enables public sector and
not-for-profit accounting commitments to ensure that they do not exceed
budgeted amounts by enforcing strict controls over disbursements and
purchasing.
APPLICATION DEVELOPMENT TOOLSET The Application Development Toolset module provides a graphical-based
toolset enabling users to extend application data models, presentation,
and business rules, and manage customization of menus, user preferences,
security and other processing related characteristics.
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Computron Financials incorporate numerous international features, including
multi-currency, Economic and Monetary Union (EMU), multi-national support of
various numeric and date presentations, accounting standards and tax
calculations. Computron Financials is workflow and Internet-enabled.
COMPUTRON WORKFLOW
Computron Workflow automates various labor-intensive functions (such as
customer service, accounts payable processing, accounts receivable processing
and claims processing) throughout large organizations. Computron Workflow can be
used as a stand-alone application or in conjunction with Computron Financials or
third party applications. Computron Workflow is designed to improve the
productivity and efficiency of business processes within large organizations
that handle substantial quantities of transactions and activities on a
proceduralized basis. Computron Workflow enables users to develop systems that
automate their document processing and procedure, including on-line routing of
documents or transactions and customized sequencing of processing tasks
throughout an organization based on user defined processing rules. Computron
Workflow is Internet-enabled.
Computron Workflow consists of a series of modules including:
MODULE FEATURES
- --------------------------------------- ------------------------------------------------------------------------
WORKFLOW The Workflow module enables on-line, real-time management review and
optimization of business processes, allows for the fine-tuning and
adjustment of process handling and the audit and supervision of
productivity, and handles standard business and industry-specific
processes. This is accomplished with Computron's Process Design
Workbench, which utilizes Visio's graphical design tool to author and
maintain a workflow process. Computron also works with Interfacing
Technologies' FirstSTEP product to simulate and model the workflow
process that has been designed by the Process Design Workbench. The
Company is a member of the Workflow Management Coalition, and is
actively working with other members to develop a common set of WfMC APIs
for workflow products to promote industry-wide, cross product
interoperability.
RECORDS MANAGEMENT The Records Management module provides batch or individual document
scanning, document attachment and storage and is able to handle document
input from a variety of formats and sources, including images,
spreadsheets, text, COOL, fax transmissions, and optical character
recognition-based systems, and handles user-defined query and retrieval
functions. These functions are a subset of the Workflow module.
COMPUTRON COOL
Computron COOL software, an industry leading COLD product, enhances access
to report data available throughout an enterprise by complementing on-line data
with information that is typically stored off-line in the report output of
various computing systems or stored on microfiche or on paper. Computron COOL
accesses data that is found in reports produced by the various computer systems
found in an enterprise, regardless of whether the reports were produced by a
mainframe, legacy, personal computer, or client/server computer system and
regardless of the application that generated the reports. Computron COOL can
function as a substitute for computer output to microfiche, an on-line report
viewer, a facility for downloading information from reports into spreadsheets
and other applications, or a data warehousing support tool, as well as a tool
kit for "relating" information extracted from disparate data sources.
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Computron COOL software accesses data in report format produced from the
user's existing systems, and then indexes, compresses, and saves the data on
magnetic storage, CD, or optical disks. Computron COOL software then enables
users throughout an enterprise to retrieve the data simultaneously, to search
the report data on-line, as well as download selected data to spreadsheets or
word processing documents for further manipulation, and to print, fax, or
otherwise make available all or parts of the data on an easy-to-use basis on
LAN, WAN, Intranet and Internet. Computron COOL can function on a stand-alone
basis and can be integrated with Computron Financials, Computron Workflow, and
Computron Yorvik, as well as with the customer's own and third-party
applications through the use of APIs provided with the product. Computron COOL
is Internet-enabled.
Computron COOL consists of a series of modules including:
MODULE FEATURES
- --------------------------------------- ------------------------------------------------------------------------
COMPUTRON COOL The original COOL solution evolved from COLD technology to replace
costly, inefficient microfiche and paper-based storage of text reports
with rapid storage, instant retrieval, advanced analysis and report
production, and cost-effective distribution of electronic report data.
This includes reports from mainframe, legacy, client/ server, and
PC-based systems, which can be displayed in their original report
formats.
COOL I-MERGENCE This significantly enhances the COOL solution by collecting strategic
information from databases, COOL reports, legacy systems, data
warehouses, etc., from around the world, merging it, analyzing it, and
delivering strategic information to desktops distributed throughout the
company.
COOL/APA-TM- This extends Computron COOL software's functionality with the ability to
closely simulate the original formats and graphics of so-called
"all-points-addressable" (APA) documents created in complex printer
languages such as Xerox Metacode, IBM Advanced Function Printing (AFP),
and Hewlett-Packard PCL5.
COOL NET-TM- This Java-based solution leverages the Internet, as well as intranets
and other enterprise networks, to deploy access to COOL archives to any
location around the world--to remote offices and to traveling
executives--and provides controlled access for vendor and client
partners. COOL Net software won a 1997 AIIM Best of Show Award for its
unique "hot-link" feature, through which COOL Net software integrates
COOL archives with the vast information resources available across the
World Wide Web. COOL Net software is automatically available to
literally thousands of users having a Java-enabled Web browser such as
Netscape Navigator or Microsoft Internet Explorer.
COOL DISTRIBUTOR-TM- This version of COOL software leverages the compact disk medium for
high-volume, low-cost distribution and viewing of massive amounts of
information as processed and handled by COOL.
COOL/APIS-TM- The Computron COOL suite has been designed to integrate with other
business solutions on the desktop and the server as appropriate.
Computron's set of COOL/APIs is used to integrate COOL with custom
software.
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COMPUTRON YORVIK
Yorvik software is a knowledge-based suite of integrated business
applications that address the maintenance, project management, inventory, and
purchasing operations. Its purpose is to provide the necessary tools, through
functional richness, to enable asset intensive, change-oriented organizations to
increase profitability by maximizing equipment uptime, increasing efficiencies
of large projects, reducing inventory costs and streamlining purchasing
processes. In addition to satisfying the needs of the above mentioned
operations, Yorvik software's internal workflow allows it to be configured to
satisfy many other types of "work" bringing added value to these companies.
Unlike the conventional Computerized Maintenance Management Systems available
today, Yorvik's software is a knowledge-based Work Management System, which,
together with Computron Financial applications, provides an integrated, single
source best-of-breed, enterprise asset management solution.
The added value Yorvik software offers an organization is internal workflow
for easily configurable systems, the functionality to support business process
reengineering, and an architecture that creates a fully integrated resource,
maintenance and materials management backbone. At the heart of this backbone is
a "virtual map" of the organization within the Yorvik Facility/Equipment
database. Yorvik software automates the planning and management process, gathers
all relevant resources, schedules multiple or individual job steps, and
generates reports including those related to cost control.
Computron Yorvik software consists of a series of modules including:
MODULE FEATURES
- --------------------------------------- ------------------------------------------------------------------------
MAINTENANCE MANAGEMENT The Maintenance Management module helps organizations plan, schedule,
and manage work requirements and maintenance tasks that are critical to
keep operations running.
PROJECT MANAGEMENT Project Management is best utilized for managing more complex long-term
projects--those with several sub-projects, diverse resources, and
thousands of tasks, such as plant shutdowns or capital projects. Project
Management's powerful and sophisticated algorithms can process the
related variables, determine the optimal schedule for work, and help
monitor progress and costs along the way.
MATERIALS MANAGEMENT Materials Management automates inventory and warehousing functions and
integrates them with maintenance, project management and purchasing
processes, assuring that materials are on hand when needed while
maintaining minimum stock levels.
PROCUREMENT Procurement helps users purchase material, services, and equipment from
a competent source at a competitive price. It also provides full control
over the timing of purchases because it is fully integrated with the
other Yorvik applications. The tight integration with maintenance,
projects and materials management supports today's Maintenance Repair
Operations (MRO) requirements.
Computron Yorvik software is an open systems client/server suite of
applications that is portable across major hardware and software platforms. It
runs on a variety of UNIX based platforms--Sun Microsystems, Inc. (Sun), Hewlett
Packard Corporation (HP), International Business Machines Corporation (IBM) and
Digital Equipment Corporation (Digital), as well as Intel-based servers running
Windows NT. The Yorvik software GUI client is a Microsoft Windows 95 or
Microsoft Windows NT application. Yorvik software is written in C++ and includes
a proprietary toolkit. The supported databases are Oracle, Sybase and SQL
Server.
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Computron Yorvik serves as the basis for full lifecycle asset management,
activity based costing and continuous improvement of plant performance and
efficiency.
ARCHITECTURE
At the heart of the Company's financial and workflow software design and
technology is an open, Internet-ready, n-tier architecture designed to adapt to
new technological innovation and enable executives to capitalize on these
innovations quickly and cost-effectively. The architecture was created to
simplify continuous process re-engineering (CPR) and allow companies to achieve
their goals of increased competitiveness and reduced costs.
The n-tier architecture permits enhanced scalability, application upgrade
and/or migration ease, and multiple desktop presentation options including
Microsoft Windows, Visual Basic, and Java, all of which position the Company as
an industry leader in accurate, comprehensive, and timely application
implementations. Computron's application suite supports relational database
management systems (RDBMS) from vendors such as Microsoft Corporation (Microsoft
SQL), Oracle Corporation (Oracle), Sybase, Inc. (Sybase), and Informix
Corporation (Informix). Computron's software runs on a variety of UNIX-based
platforms--Sun Microsystems, Inc. (Sun), Hewlett-Packard Corporation (HP),
International Business Machines Corporation (IBM), Digital Equipment Corporation
(now a unit of Compaq Computer Corporation), as well as Intel-based servers
running Windows NT.
Computron's products are designed to take advantage of diverse
configurations and processing capabilities at the customer site. For example, a
Computron installation can be configured to execute discrete application
functions (components) on multiple application servers. Or, a Computron system
can be used effectively in a wide area network (WAN) configuration, (Intranet or
Internet) without resorting to remote Graphical User Interface (GUI) display
tools, as is common with two tiered applications. Computron software can be
implemented with a "thin client" extendable with Microsoft Visual Basic which
provides excellent desktop integration, or with a Java based "ultra thin" Web
client for unadministered/remote users. Furthermore, these configuration options
can be adjusted as the customer's needs change. Additional application servers
can be applied as users are added. Or, Internet and WAN access can be used
together, if this type of access is more appropriate for some users.
EXTENSIVE USE OF OBJECT-ORIENTED DESIGN TECHNIQUES
Since 1990, Computron has relied heavily on object-oriented design
techniques. The results can be seen throughout the architecture. For example,
user interface controls and display components are treated as objects that can
be individually manipulated, customized, and extended by user organizations.
The Company believes that the benefits of object-orientation are becoming
increasingly apparent. Object-oriented applications tend to be more modular than
those developed with traditional methods, have cleaner interfaces, more shared
code, and fewer entry points. Developers work in a simpler development
environment that is less prone to error, and they produce applications that are
easy to maintain, enhance, and distribute across the network. As a result,
end-users get applications that are reliable and manageable. In addition,
Computron's products allow developers to gain increased scalability and
performance via Computron's flexible, "n-tiered" architecture.
N-TIERED ARCHITECTURE
First-generation client/server systems utilized a two-tier architecture in
which presentation and application logic were combined on client workstations,
and data was stored on one or more servers.
Though its limitations have been widely acknowledged, the classic two-tier
client/server architecture is surprisingly still at the heart of many enterprise
solutions. For example, the two-tier model requires application logic to be
executed on individual client workstations, reduces performance by dramatically
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increasing network traffic, limits the Information Technology ("IT")
organization's ability to eliminate bottlenecks by increasing server resources,
and increases the complexity of applications thereby reducing their reliability.
In contrast, Computron's architecture has, for many years, separated
application functions into multiple logical groupings or tiers. At the heart of
Computron's architecture are four tiers: PRESENTATION, PROCESS LOGIC,
APPLICATION LOGIC, and INFORMATION ACCESS tiers.
Computron's application logic and information access tiers may themselves be
partitioned into multiple tiers, and it is also possible to integrate
presentation services across the Internet or private intranets and extranets.
Therefore, it is more appropriate to define the Computron architecture as
N-TIER.
The Company believes that for a multi-tiered product to perform efficiently
in diverse network and system environments, it is critical that communication
among tiers be efficient and flexible.
Many first-generation client/server products rely on the database vendor's
remote Structured Query Language (SQL) network software to communicate with the
server. In contrast, Computron provides its own middleware, consisting of local
and remote application program interface (API) libraries and protocol-specific
drivers. The middleware supports a variety of popular network protocols for
remote communication between software components. When client and server
processes run on the same platform, local interprocess communication is employed
to reduce the overhead of the network protocol.
The Company believes that the API is a crucial piece of the architecture
because of its performance impact and because it defines the extent to which
application components can be distributed across different nodes in the network.
The remote SQL APIs provided by most relational database vendors are useful for
retrieving data from a remote database server, but they do not support a
generalized interface for interprogram communication. The use of SQL based API
calls as a basis for a multi-tiered message passing mechanism can be
problematic, as this API was not designed for this purpose. In contrast, the
Computron API is modeled closely on the Distributed Computing Environment (DCE)
remote procedure call (RPC) API, an industry standard for remote communication
between disparate software products. In addition, Computron is free to exploit
the database access mechanism that is most appropriate for that database, and
not use a "least common denominator" solution across RDBMS's. Computron's RDBMS
interfaces are custom coded, and are focused on high function, high reliability,
high security, high performance information access issues.
CUSTOMIZATION AND EXTENSIBILITY
With some enterprise financial packages, customers often require extensive
source code changes to obtain the capabilities they desire. These changes add
complexity and potential instability; there is no guarantee that customized
source code versions of the product will translate to newer versions. Companies
may later find themselves unable to utilize new features or technologies that
could provide a competitive advantage.
Computron's architecture is designed to avoid this problem by using
components that can be customized and extended outside of the source code,
including:
- Presentation/user interface
- Process logic
- Application logic
- Inquiry reporting
- Drill-down modules
- The relational information model
10
- Validation and rules
- Business components for integration with other systems
COMPREHENSIVE WORKFLOW INTEGRATION
Workflow management is increasingly recognized as a critical element in
successful business process reengineering. For years, Computron has included
with its financial applications, a world-class product, Computron Workflow, as
an integral part of its business solutions.
Computron Workflow is the "connective tissue" that enables users to combine
Computron financial rules based, user defined decision processing, and document
management components, creating automated, integrated business processes.
Computron Workflow is designed from the ground up as a total business
solution. Since a powerful Workflow Rules Engine is integrated directly into
Computron Workflow's runtime, organizations can extend the reach of workflow
applications to drive all facets of their business. Computron enables companies
to build high-performance production oriented workflow systems that directly
access line-of-business and horizontal application database tables in real time
without compromising information.
Computron believes that workflow can be partitioned to a fine level of
granularity, helping organizations maximize performance at low cost. It has been
implemented in global environments characterized by high volumes, large user
bases, complex conditional routing and extensive exception handling.
MAINTAINING SECURITY
Computron's architecture provides multiple levels of security, including
ways to define update versus read-only access within specific transactions. An
organization's security hierarchy exists both across systems and within
individual applications.
For information level security, Computron's applications support NO ACCESS,
READ-WRITE ACCESS and READ-ONLY ACCESS for each record. This is defined in
security maintenance using application security schemes.
All application security is defined in a single set of system files and is
managed centrally. Computron's security extend the native security mechanisms
built into UNIX or Windows NT, as well as native RDBMS security on a PER USER,
USER GROUP or SYSTEM-WIDE basis.
LOWERING TOTAL COST OF OWNERSHIP
Computron believes that there are many ways in which its products and
architecture lower the total cost of ownership for an organization. For example:
- Computron provides Implementation Certainty, a proven methodology for
assuring a smooth transition and rapid implementation of the software.
- Computron's architecture allows organizations to leverage existing
development environments, and partition applications for maximum
performance.
- By customizing the software outside of the source code, it is easier to
upgrade from one version of the software to another--a feature that should
lower internal support costs.
- New client forms, menus, and messages can be uploaded, reducing the
maintenance required for new release implementations.
- Computron supports multiple languages, including double-byte enablement
using the same code. Therefore, the same product can be implemented across
the company.
11
PROFESSIONAL SERVICES
The Company considers its Professional Services to be a major asset and key
differentiator from other vendors. With its 24-hour client support,
implementation certainty methodology, standard as well as customized training,
product certification, and its level of dedicated support, Computron has created
a professional services program to handle the needs of its customers.
As of December 31, 1998, the Company had 186 employees worldwide providing
customer support and technical, consulting and training services. To maintain a
high standard of service, the Company requests customer evaluations of service
personnel on a quarterly basis. Bonus compensation is based, in part, on the
results of these reviews. The Company's services are described below.
CLIENT SUPPORT
Support for domestic U.S. clients is based out of the Company's corporate
headquarters in Rutherford, New Jersey. Client support centers are also based in
Essen, Johannesburg, London, Melbourne, Paris, Singapore, Sydney, Toronto and
Warsaw. Annual maintenance contracts are generally required for the first year
of a customer's use of the Company's products, and are renewable on an annual
basis. The maintenance contract entitles the customer to any product
enhancements released during the term of the contract. Maintenance fees vary
depending on the hours of hot-line support requested by the customer, and
typically range between 17% and 20% of the fees from products under license.
The Company also provides management overview and product information
bulletins on an ongoing basis and periodic informational updates about installed
products. These bulletins generally answer commonly asked questions and provide
information about new product features. The Company also provides services for
the development of customized documentation about the customer's system to
reflect, among other things, user-defined modifications and specific business
logic and processes.
TECHNICAL SERVICES
The Company offers assistance in developing interfaces with third party
software or legacy systems. These services are designed to enable the
development of additional client-specific functionality. The Company also
provides network troubleshooting and assists its customers in deploying
client/server systems, RDBMS software, operating systems and telecommunications
programs. Such services are generally not directly related to the implementation
of the Company's products but relate to effective company-wide solutions.
CONSULTING SERVICES
The Company's consulting services organization provides project assurance,
business systems review, technical design, functional design, business modeling,
system tailoring, system certification, change management and ongoing project
support in connection with customer implementation of the Company's products.
Similar services are also provided for upgrades to later versions of the
software and migrations to different operating platforms. The Company also
frequently works with third-party consultants and system integrators to provide
customers with a full range of installation, customization and project
management services.
EDUCATION SERVICES
The Company provides education services in North America through its
Instructional Services group. This group is responsible for the development and
delivery of training courses designed to familiarize users with the Company's
products. A standard schedule of courses is delivered at the Company's
facilities. A course catalog and schedule are provided to the Company's
customers. In addition to regularly scheduled classroom training, the Company
works with its customers to develop tailored training courses for delivery
12
at their site. The group also provides standard courses at the customer's
location. Training courses vary in length from one to five days. Education
services are also provided at the Company's international facilities including
Australia, Canada, France, Germany, Poland, Singapore, South Africa and the
United Kingdom.
SALES AND MARKETING
The Company currently markets its products and services primarily through a
direct sales force in the United States and directly and indirectly in other
parts of the world. The Company conducts comprehensive marketing programs in the
United States, which include telemarketing, public relations, direct mail,
advertising, seminars, trade shows and ongoing customer communications programs.
As of December 31, 1998, the Company's sales and marketing organization
consisted of 85 employees worldwide.
The Company's marketing efforts in the United States are conducted by a
direct sales force which is located at the Company's headquarters in Rutherford,
New Jersey, and in the Atlanta, Chicago and Dallas metropolitan areas. The
Company's U.S. marketing efforts are supported by independent distributors and
systems integrators. In addition, the Company has established strategic
alliances with hardware/database and software vendors.
Outside of the United States, the Company maintains sales and support
offices in Australia, Canada, France, Germany, Poland, Singapore, South Africa
and the United Kingdom. In the past the Company has established distribution
arrangements with third parties around the world and continually evaluates
future third party arrangements. Currently the Company does not generate
significant revenues from its distributors.
STRATEGIC ALLIANCES
The Company has established strategic alliances and relationships with a
number of organizations that it believes are important to the development,
sales, marketing, integration, and support of its products. The Company's
relationships with software and hardware vendors, systems integrators and
consulting firms provide marketing and sales leads to the Company's direct sales
force and expand the distribution of its products. The Company's strategic
alliances and relationships also assist the Company in keeping pace with the
technological developments of major software and hardware vendors. The Company
intends to continue to develop its strategic alliances with leading hardware and
software vendors, consulting firms, systems integrators and distributors in the
future. The Company provides education services for its strategic business
partners.
SYSTEMS INTEGRATORS AND CONSULTANTS
The Company has established non-exclusive, formal and informal relationships
with systems integrators and consultants who are active in the selection and
implementation of information systems, including, but not limited to certain big
five accounting firms. In addition, the Company has established relationships
with independent distributors. By providing technical, consulting and
integration services for the Company's products, these companies expand the
ability of the Company to service and implement its products.
HARDWARE VENDORS
The Company has developed relationships with major hardware vendors such as
Compaq Computer, Hewlett-Packard, IBM, and Sun Microsystems, Inc. These hardware
vendors provide sales leads and technical support.
SOFTWARE VENDORS
The Company has established relationships with third-party software vendors
including Informix Corporation, Microsoft Corporation, Oracle Corporation, and
MIS AG. These vendors may provide sales
13
leads, assist the Company in developing the capability of the Company's products
to inter-operate with third-party software and assist the Company in
incorporating new technologies.
PRODUCT DEVELOPMENT
The Company has a dedicated product development and engineering organization
and periodically releases new products and enhancements to existing products.
Product development efforts are directed at increasing product functionality,
improving product performance, providing support to existing products, expanding
the capabilities of the products to inter-operate with third-party software and
hardware and developing new products. In particular, the Company has from time
to time devoted substantial development resources to develop additional modules
for its products and the capability to support additional platforms, databases,
GUIs, toolsets and emerging technologies, such as Intranet/Internet web-based
access to applications. While the Company anticipates that certain new products
and enhancements will be developed internally, the Company may acquire or
license technology or software from third parties when appropriate.
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. See
"Business--Risk Factors--New Products and Rapid Technological Change: Risk of
Product Defects, Development Delays and Lack of Market Acceptance."
As of December 31, 1998, the Company had 95 employees engaged in product
development and engineering.
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 others. The principal competitors for
the Company's Computron Workflow and Computron COOL software are Eastman Kodak
Company ("Kodak"), MicroBank, TASC, Staffware Corporation and FileNet
Corporation. The principal competitors for the Company's Computron Yorvik
software are Project Software Development, Inc. (PSDI), Indus International,
Inc. (Indus) and others. See "Business--Risk Factors--Intense Competition."
INTELLECTUAL PROPERTY
The Company's success is heavily dependent upon its proprietary technologies
as well as products from third parties, software vendors, hardware vendors, etc.
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
14
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 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.
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.
The Company has obtained Federal registrations for its trademarks
"Computron" and "Yorvik". 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. See
"Business--Risk Factors--Dependence on Proprietary Rights; Risks of
Infringement."
EMPLOYEES
As of December 31, 1998, the Company had 435 full-time employees, 220 within
the United States and 215 outside the United States, including 95 in product
development and engineering, 186 in customer service and support, 85 in sales
and marketing, and 69 in finance, administration and executive management. The
Company's employees are not covered by any collective bargaining agreements. The
Company believes that its relations with its employees are good.
RISK FACTORS
HISTORY OF NET LOSSES
The Company incurred net losses of $31.8 million for 1996, $13.6 million for
1997 and $9.0 million for the year ended December 31, 1998. As of December 31,
1998, the Company had an accumulated deficit of $72.1 million. There can be no
assurance that the Company will be profitable in the future. The Company has
restated previously reported results for the four years ended December 31, 1995,
including certain unaudited quarters therein and for each of the three unaudited
quarters ended September 30, 1996. See
15
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 to the Consolidated Financial Statements.
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 the 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."
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
were 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 the class action securities litigation. The overall settlement
included consideration totaling $15 million for the benefit of class members,
including $6 million of consideration from the Company, and payments from
certain of its
16
present and former officers and directors, its former auditors, and the
insurance companies that provided the Company with directors and officers
liability insurance. In return for the payments by the insurance companies, the
settlement also resolved a separate lawsuit brought by the Company against the
insurance companies. As its share of the settlement, the Company paid $1 million
in cash, and issued, as noted below, one million shares of Common Stock of the
Company ("Settlement Stock"). 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.
The class members received a non-transferable right to resell the Settlement
Stock to a business trust formed by the Company at a price of $5.00 per share
during a period from December 1, 1998 to December 21, 1998 (the "Put Period").
The trust was capitalized by a contribution of $5 million in cash by the Company
in March 1998. During the Put Period, class members exercised the put with
respect to 880,798 shares of Settlement Stock. The right to put the remaining
shares of Settlement Stock automatically expired as of midnight on December 21,
1998. Pursuant to the terms of the stipulation of settlement, the Company
directed the trust to pay $4,403,990 in satisfaction of the timely claims made
under the put, and to return to the Company the remaining balance in the trust.
Shares of Settlement Stock that were not timely put according to the terms of
the settlement remain freely transferable.
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 and Senior Vice President of Sales and Marketing.
In December 1998, a new Senior Vice President of Sales and Marketing was added.
No other changes were made to the executive management. 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 and PeopleSoft, Inc. The principal competitors for the
Company's Computron Workflow and Computron COOL software are Eastman Kodak
Company ("Kodak"), MicroBank, TASC, Staffware Corporation and FileNet
Corporation. The principal competitors for the Company's Computron Yorvik
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
products than the Company. The
17
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."
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 "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 the emergence of new
industry standards can render existing products obsolete and unmarketable.
Accordingly, the life cycles of the Company's products are difficult to
estimate. The Company's future success will depend in part upon its ability to
enhance its current products and to develop and introduce new products that
respond to evolving customer requirements and keep pace with technological
development and emerging industry standards, such as new operating systems,
hardware platforms, interfaces and third party applications software. There can
be no assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change,
changes in customer requirements, or emerging industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of such products and
enhancements, or that any new products or enhancements that it may introduce
will achieve market acceptance. The inability of the Company, for technological
or other reasons, to develop and introduce new products or enhancements in a
timely manner in response to changing customer requirements, technological
change or emerging industry standards, would have a material adverse effect on
the Company's business, results of operations and financial condition.
18
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."
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
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technologies.
The Company has obtained Federal registrations for its trademarks
"Computron" and "Yorvik." 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
19
at all, which could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Intellectual
Property."
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 $21.3 million, $29.4 million and $29.9
million or, 39.2%, 43.4% and 47.1% of its total revenues, from customers outside
of the United States in 1996, 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. The
Company intends to continue to expand its operations outside of the United
States, 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, 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. In addition, there are risks related to the Euro Currency
conversion. 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.
20
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."
CONTROL BY EXISTING STOCKHOLDERS
The Company's executive officers, directors and affiliates together
beneficially own approximately 59% of the outstanding shares of Common Stock as
of March 15, 1999. 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.
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 Company is a party to
employment agreements with 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 or 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
21
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.
ABSENCE OF DIVIDENDS
The Company has never paid or declared any cash dividends and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in its business.
DIRECTORS, EXECUTIVE OFFICERS AND KEY MANAGEMENT EMPLOYEES
The current directors, executive officers and key management employees of
the Company as of March 6, 1999, are as follows:
NAME AGE POSITION
- -------------------------------------------- --- --------------------------------------------------------------
Elias Typaldos.............................. 49 Chairman of the Board and Senior Vice President, Research and
Development
John A. Rade................................ 64 President, Chief Executive Officer, and Director
Michael R. Jorgensen........................ 46 Executive Vice President, Chief Financial Officer and
Treasurer
Gennaro Vendome............................. 52 Vice President and Director
Rick Hartung................................ 44 Senior Vice President, Sales and Marketing for North America
Gregory Groom............................... 50 Senior Vice President of Business Operations
Paul Abel................................... 45 Vice President, Secretary and General Counsel
William G. Levering III..................... 38 Vice President, Corporate Controller
Robert Nishi................................ 38 Vice President, Product Marketing
Robert T. Hewitt............................ 51 Vice President, Product Development
Thomas V. Manobianco........................ 42 Vice President, Professional Services
Gregory Kopchinsky(2)....................... 47 Director
Robert Migliorino(1)........................ 49 Director
William E. Vogel(1)(2)...................... 61 Director
Edwin T. Brondo(1).......................... 51 Director
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
ELIAS TYPALDOS, a founder of the Company, has been Senior Vice President,
Research and Development and a director since the Company's formation in 1978,
and Chairman of the Board since March 1997.
JOHN A. RADE joined the Company as a Director, President and Chief Executive
Officer in February 1997. Prior to joining the Company, Mr. Rade, was from
April, 1995, a Vice President of American Management Systems, Inc. and was also
still active at S-Cubed International, a company in the client server system
development and consulting market, which he founded in February 1990.
MICHAEL R. JORGENSEN joined the Company as Executive Vice President and
Chief Financial Officer, Treasurer and Secretary in February 1997. Prior to
joining the Company, from June 1993 to December 1996, Mr. Jorgensen was Senior
Vice President and Chief Financial Officer of Ground Round Restaurants, Inc., a
publicly-held chain of family restaurants. Prior to that, from March 1992, to
April 1993, he was Vice President/Finance-Middle East of Alghanim Industries.
Mr. Jorgensen was Chief Financial Officer of International Proteins Corporation
from May 1988 to September 1991. Prior to 1991,
22
Mr. Jorgensen served in a financial role with several companies in the
information technology/software industry.
GENNARO VENDOME, a founder of the Company, has been a Vice President and
director since the Company's formation in 1978. Mr. Vendome was Treasurer of the
Company from 1981 until 1991 and Secretary of the Company from 1982 until 1991.
RICK HARTUNG joined the Company in December 1998 as Senior Vice President of
Sales and Marketing for North America. In 1998, prior to joining the Company,
Mr. Hartung was Vice President of Sales for Systems Consulting Company. From
1992 to 1997, Mr. Hartung was Vice President of Sales for Marcam Corporation.
GREGORY GROOM joined the Company in October 1997 as Senior Vice President of
Business Operations. Mr. Groom was in charge of Channel Marketing from October
1996 to September 1997 for Healtheon, Inc., an Internet solutions provider.
Prior to October 1996, Mr. Groom was the Technology and Administrative Systems
Practice Leader at Watson Wyatt Worldwide, a benefits consulting firm.
PAUL ABEL joined the Company in April 1997 as Secretary and Corporate
Counsel and was promoted to Vice President, Secretary and General Counsel in
June 1998. From October 1996 to March 1997, Mr. Abel served as Project Manager
for Charles River Computers, an IT systems integrator. From 1983 to September
1996, Mr. Abel was an attorney with Matsushita Electric Corporation of America,
an electronic products manufacturer/distributor.
WILLIAM G. LEVERING III joined the Company as Revenue Controller in June
1996, was promoted to Corporate Controller in February 1997 and became Vice
President, Corporate Controller in July 1998. Prior to joining the Company, Mr.
Levering was a Senior Manager with the international accounting firm of KPMG
LLP. Mr. Levering was employed by KPMG LLP from August 1982 to June 1996 and is
a Certified Public Accountant.
ROBERT T. HEWITT joined the Company as Vice President, Product Development
in April 1996. From June 1988 to April 1996, Mr. Hewitt was Senior Vice
President, Product Development at Financial Technologies International, Inc., a
software development company.
THOMAS V. MANOBIANCO joined the Company in January 1995 as a member of the
consulting organization. In February 1999 he became Vice President of
Professional Services. From January 1989 to January 1995, Mr. Manobianco was
employed by Andersen Consulting as a manager in the systems integration
practice.
GREGORY KOPCHINSKY has been a director since 1994. Mr. Kopchinsky is a
partner of the venture capital partnership Canaan Partners, which through its
affiliates is a principal stockholder of the Company. Mr. Kopchinsky joined
Canaan Partners as a General Partner in 1990. From 1984 to 1990, he was a Vice
President at J.P. Morgan with principal responsibility for private debt and
equity financing. Prior to joining J.P. Morgan, Mr. Kopchinsky was an attorney
with Davis Polk & Wardwell specializing in complex financing transactions.
ROBERT MIGLIORINO has been a director since 1991. Mr. Migliorino is a
founding partner of the venture capital partnership Canaan Partners, which
through its affiliates is a principal stockholder of the Company. Prior to
establishing Canaan Partners in 1987, he spent 15 years with General Electric
Co. in their Drive Systems, Industrial Control, Power Delivery, Information
Services and Venture Capital businesses.
WILLIAM E. VOGEL has been a director since August 1996. Since 1971, Mr.
Vogel has been Chief Executive Officer of Centennial Financial Group, Inc.,
which is in the health insurance business. He has also been the Chief Executive
Officer of W.S. Vogel Agency, Inc., a life insurance brokerage general agency,
since 1961.
EDWIN T. BRONDO has been a director since May 1997. Mr. Brondo is currently
Executive Vice President and Chief Financial Officer of Elligent Consulting
Group, Inc. Elligent may be deemed to be an affiliate of
23
the Company by virtue of the relationship of Elligent with a major stockholder
of the Company. Mr. Brondo was Chief Administrative Officer and Senior Vice
President of First Albany Companies, Inc. from June 1993 until December 1997.
From June 1992 to June 1993 he was a Financial Management Consultant at Comtex
Information Systems, Inc., a software consulting firm. He also held positions at
Goldman, Sachs & Co., Morgan Stanley & Co., Inc. and Bankers Trust Company.
ROBERT NISHI joined the Company in August 1986 as Manager of Consulting, was
promoted in 1991 to Director of National Sales Support, and became Vice
President, Product Marketing in December 1998.
Each of the Directors shall be subject to re-election at the 1999 Annual
Stockholders meeting.
ITEM 2. PROPERTIES
FACILITIES
The Company's corporate headquarters are located in Rutherford, New Jersey
in leased facilities consisting of 48,800 square feet of office space occupied
under a lease expiring in December 2002 with an option to renew the lease for
one additional three-year period. The Company leases additional facilities and
offices, including facilities located in the Atlanta, Chicago, and Dallas
metropolitan areas, and Mississauga, Canada. The Company also leases sales and
support offices outside of North America in Australia, Bulgaria, France,
Germany, Poland, Singapore, South Africa and the United Kingdom. While the
Company believes that its facilities are adequate for its present needs, the
Company periodically reviews its needs. The Company believes that additional
space, if needed, would be available on commercially reasonable terms.
ITEM 3. 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 included 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 the
Company with directors and officers liability insurance. In return for the
payments by the insurance companies, the settlement also resolved a separate
lawsuit brought by the Company against the insurance companies. As its share of
the settlement, the Company paid $1 million in cash, and issued one million
shares of common stock of the Company ("Settlement Stock").
The class members received a non-transferable right to resell the Settlement
Stock to a business trust formed by the Company at a price of $5.00 per share
during a period from December 1, 1998 to December 21, 1998 (the "Put Period").
The trust was capitalized by a contribution of $5 million in cash by the Company
in March 1998. During the Put Period, class members exercised the put with
respect to 880,798 shares of Settlement Stock. The right to put the remaining
shares of Settlement Stock automatically expired as of midnight on December 21,
1998. Pursuant to the terms of the stipulation of settlement, the Company
directed the trust to pay $4,403,990 in satisfaction of the timely claims made
under the put, and to return to the Company the remaining balance in the trust.
Shares of Settlement Stock that were not timely put according to the terms of
the settlement remain freely transferable.
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.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock currently trades on the American Stock Exchange
under the symbol "CFW." From January 27, 1997 until November 11, 1997, the
Company's Common Stock was traded on the over-the-counter market in the "pink
sheets" and on the NASD's "Electronic Bulletin Board." From August 24, 1995
until January 27, 1997, the Company's Common Stock was traded on Nasdaq under
the symbol "CTRN"
The following table lists the high and low sales prices for the periods set
forth below:
PERIOD HIGH LOW
- ------------------------------------------------------------------------------- --------- ---------
1997
First quarter.................................................................. 2 15/16 1/2
Second quarter................................................................. 2 7/8
Third quarter.................................................................. 1 13/16 1 3/8
Fourth quarter................................................................. 4 7/8 1 13/32
1998
First quarter.................................................................. 3 1/8 2 1/8
Second quarter................................................................. 2 5/8 1 5/16
Third quarter.................................................................. 1 7/16 11/16
Fourth quarter................................................................. 1 7/8 11/16
As of March 15, 1999 the approximate number of record holders of the
Company's Common Stock was 739.
The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the years ended
December 31, 1994, 1995, 1996 (as restated), 1997 and 1998 have been derived
from the audited consolidated financial statements of the Company. The
consolidated statement of operations data for the years ended December 31, 1996,
1997 and 1998, and the consolidated balance sheet data for the years ended
December 31, 1997 and 1998 are derived from, and are qualified by reference to,
the audited consolidated financial statements, and the related notes thereto
included elsewhere in this report. The selected consolidated financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition
25
and Results of Operations" and the consolidated financial statements of the
Company, as restated, and related notes thereto included elsewhere in this
report.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA(1):
Revenues:
License fees........................................... $ 20,615 $ 33,766 $ 17,625 $ 20,372 $ 15,273
Services............................................... 11,858 19,029 36,770 47,219 48,248
--------- --------- ---------- ---------- ---------
Total revenues....................................... 32,473 52,795 54,395 67,591 63,521
Operating expenses:
Cost of license fees................................... 2,447 4,673 2,634 2,004 3,824
Cost of services....................................... 7,738 12,988 28,255 28,440 28,389
Sales and marketing.................................... 11,845 19,387 24,181 16,654 14,970
Research and development............................... 6,888 9,651 11,872 10,996 10,568
General and administrative............................. 5,607 11,269 20,014 14,280 13,586
Restructuring costs.................................... -- -- -- -- 1,025
Purchased research and development..................... -- 3,797 -- -- --
--------- --------- ---------- ---------- ---------
Total operating expenses............................. 34,525 61,765 86,956 72,374 72,362
--------- --------- ---------- ---------- ---------
Operating loss........................................... (2,052) (8,970) (32,561) (4,783) (8,841)
Other income (expense)
Costs related to class action litigation............... -- -- (758) (9,591) (74)
Other.................................................. (206) 742 1,572 745 (116)
--------- --------- ---------- ---------- ---------
Total other income (expense)............................. (206) 742 814 (8,846) (190)
--------- --------- ---------- ---------- ---------
Loss before income tax provision......................... (2,258) (8,228) (31,747) (13,629) (9,031)
Income tax provision..................................... 150 350 100 16 12
--------- --------- ---------- ---------- ---------
Net loss................................................. $ (2,408) $ (8,578) $ (31,847) $ (13,645) $ (9,043)
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
Basic and diluted loss per common share (1995
pro-forma)............................................. $ (0.46) $ (1.53) $ (0.65) $ (0.38)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Weighted average basic and diluted common shares
outstanding............................................ 18,809 20,787 20,834 23,963
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
AS OF DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA(1):
Cash and cash equivalents, short-term investments and
restricted cash........................................... $ 16,302 $ 46,651 $ 23,884 $ 12,597 $ 8,865
Working capital (deficiency)................................ 7,688 40,450 4,358 2,767 (6,317)
Total assets................................................ 35,075 71,367 56,693 35,598 28,517
Deferred revenue............................................ 12,376 13,667 18,551 9,078 9,558
Total long term debt and capital lease obligations.......... 1,036 267 97 23 2,229
Common stock subject to repurchase.......................... -- -- -- 5,000 --
Redeemable convertible preferred stock...................... 40,038 -- -- -- --
Total stockholders' equity (deficit)........................ (28,782) 46,398 14,742 6,095 (2,375)
- ------------------------
(1) The consolidated financial data for 1994 and 1995 has been restated. See
Note 2 of Consolidated Financial Statements.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, as restated, and is qualified in its
entirety by reference thereto.
This Report contains statements of a forward-looking nature within the
meaning of the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, as amended, 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 which could cause actual results to differ
materially from those indicated by such forward-looking statements, including
the matters set forth in "Business--Risk Factors."
OVERVIEW
The Company was founded in 1978 as a developer of custom financial software
for mission-critical applications in large organizations, primarily financial
institutions. In the early 1980's, the Company developed financial software for
legacy platforms and introduced sophisticated enterprise-wide financial
software. Identifying the need for client/server financial software applications
in the late 1980's, the Company commenced the re-architecture of its financial
software and began the development and deployment of new products, specifically
a workflow and document management product. In 1993, the Company introduced
Computron Financials and Computron Workflow, the client/server versions of its
financial and workflow products. Computron COOL was introduced in the latter
half of 1993. Since 1994, the Company has released 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 Computron Yorvik
software.
In April and June 1996, respectively, the Company acquired the Financial
Services Division of Generale de Service Informatique (GSI) based in Paris,
France, and a portion of the business and assets of AT&T Istel and Co., GMBH, in
Essen, Germany. These operations primarily provide software products and
services in their respective countries.
The Company's revenues are derived from license fees and services. Revenue
from non-cancelable software licenses is recognized when the license agreement
has been signed, delivery has occurred, the fee is fixed or determinable and
collectibility is probable. Revenues for consulting and implementation services,
including training, are recognized upon performance of the services. When the
Company enters into a license agreement requiring development or significant
customization of the software products, the Company recognizes revenue relating
to the agreement using contract accounting. 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, changes in
customers' budgets, competitive conditions in the industry and general economic
conditions. For a description of certain factors which may affect the Company's
operating results, see "Business--Risk Factors--Potential for Significant
Fluctuations in Operating Results; Seasonality."
27
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 operating
results, during 1997 the Company hired senior executives with significant
experience in the software industry, and improved the financial and accounting
process, controls, reporting systems and procedures, which eliminated all
material weaknesses.
The Company has restated its consolidated financial statements for each of
the four years in the period ended December 31, 1995 and certain unaudited
quarters therein and for each of the three unaudited quarters ended September
30, 1996. (See Note 2 of Consolidated Financial Statements). The Company
incurred net losses of $31.8 million for 1996, $13.6 million for 1997 and $9.0
million for the year ended December 31, 1998. The 1997 results include $9.6
million of costs related to class action litigation and related legal expenses.
The Company reached a final settlement in March 1998 whereby the Company was
required to pay $6 million in consideration. See "Item 3. Legal Proceedings."
NEW ACCOUNTING STANDARDS
In the first quarter of 1998, the AICPA's Accounting Standards Executive
Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP requires
that entities capitalize certain internal-use software cost once specific
criteria are met. Currently, the Company generally expenses the costs of
developing or obtaining internal-use software as incurred. The Company will
adopt SOP 98-1 on January 1, 1999, as required. The Company expects that the
adoption of SOP 98-1 will not have a material effect on its consolidated
financial statements.
In the second quarter of 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains or losses resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The Company currently does not use derivative instruments
and as such believes the adoption of SFAS No. 133, beginning January 1, 2000,
will have no effect on the consolidated financial statements.
EURO CURRENCY
On January 1, 1999, certain countries of the European Union established
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 on
its suite of products. During 1998, the Company derived approximately 47.1% 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.
28
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent in part on
its information technology ("IT") systems (which include 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
been less than $50,000 and anticipated costs necessary to complete such
evaluations, modifications and/or replacements are not expected to exceed
$100,000. Most costs incurred to achieve Year 2000 compliance, have, in fact,
been the same as those required as a normal part of technology upgrades, a
critical part of normal operations within a technology-based organization.
The Company has focused resources on the thorough review, testing, and
replacement, where necessary, of Internal Programs and Systems. The Company uses
its own software, which has already been Year 2000 certified, for all accounting
functions. Contingency plans are currently being developed, primarily focusing
on third-party deliverables and dependencies which may affect implementation of
identified anomalies.
With respect to software programs which the Company licenses externally to
customers (collectively, the "External Programs"), the most recent versions of
the Company's 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 versions of the External Programs. In addition,
continuing periodic communication with customers is scheduled for the remainder
of 1999, focused on providing assistance and education to customers as they
transition to the new century, minimizing any possibility of anomalous
conditions. 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 associated with achieving
Year 2000 compliance will not have a material effect on the consolidated
financial results in 1999 and 2000.
29
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain operating
data as a percentage of total revenues:
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
Revenues:
License fees............................................................................ 32.4% 30.1% 24.0%
Services................................................................................ 67.6 69.9 76.0
------ ------ ------
Total revenues........................................................................ 100.0 100.0 100.0
Operating expenses:
Cost of license fees.................................................................... 4.8 3.0 6.0
Cost of services........................................................................ 52.0 42.1 44.7
Sales and marketing..................................................................... 44.5 24.6 23.6
Research and development................................................................ 21.8 16.3 16.6
General and administrative.............................................................. 36.8 21.1 21.4
Restructuring costs..................................................................... -- -- 1.6
------ ------ ------
Total operating expenses.............................................................. 159.9 107.1 113.9
------ ------ ------
Operating loss............................................................................ (59.9) (7.1) (13.9)
Other income (expense).................................................................... 1.5 (13.1) (0.3)
------ ------ ------
Loss before income tax provision.......................................................... (58.4) (20.2) (14.2)
Income tax provision...................................................................... 0.1 -- --
------ ------ ------
Net loss.................................................................................. (58.5)% (20.2)% (14.2)%
------ ------ ------
------ ------ ------
TOTAL REVENUES
The Company's revenues are derived from license fees and services. Total
revenues increased from $54.4 million in 1996 to $67.6 million in 1997 and
decreased to $63.5 million in 1998 representing an increase of 24.3% in 1997 and
a decrease of 6.1% in 1998. Total revenue increased during 1997 as both license
fees and services revenue increased and maintenance fees increased due to a
larger installed base. During 1997, the Company made significant progress
removing the uncertainties effecting operations, including the hiring of an
experienced executive management team, restating prior period financial
statements, relisting the Company's Common Stock, reaching a settlement on class
action litigation (which was judicially approved in March 1998 and settled in
December 1998) and raising approximately $6 million in a private placement. (See
Note 9 to the Consolidated Financial Statements) During 1998, total revenues
decreased primarily resulting from a decrease in license fees offset in part by
an increase in services revenue.
The Company derived approximately $21.3 million, $29.4 million and $29.9
million or 39.2%, 43.4% and 47.1% of its total revenues, from customers outside
of the United States in 1996, 1997 and 1998 respectively. The Company expects
that revenues derived from such customers 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
U.S. dollar in the future could result in a decrease in the Company's revenue.
LICENSE FEES
License fees include revenues from software license agreements and hardware
sales entered into between the Company and its customers with respect to both
the Company's products and, to a lesser degree, third party products resold by
the Company. Revenue from non-cancelable software licenses is
30
recognized when the license agreement has been signed, delivery has occurred,
the fee is fixed or determinable and collectibility is probable. License fees
increased 15.6% from 1996 to 1997, and decreased 25.0% from 1997 to 1998. The
increase in 1997 included license revenue of $3.5 million from one customer or
17.2% of total license revenue for the year. During 1998, no customer accounted
for greater than 10% of total license revenues. The Company believes license
revenues were, and may continue to be, adversely affected by slower system
software market growth and intense competition.
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 and consulting service
revenues are recognized as the services are performed. Services revenue
increased 28.4% from 1996 to 1997, and 2.2% from 1997 to 1998. The increase in
services revenue in 1997 was attributable primarily to increased training and
consulting services which resulted from the increased number of customers
licensing the Company's products and increased maintenance revenues related to a
larger installed base of the Company's products. The increase in 1998 was
attributed primarily to a higher demand for implementation services for the
Company's core products in the U.S. offset by declines in legacy product service
revenues in the Company's France operations.
COST OF LICENSE FEES
Cost of license fees consists primarily of amounts paid to third parties
with respect to products resold by the Company in conjunction with licensing of
the Company's products, amortization of capitalized software development costs,
and, to a lesser extent, the costs of documentation. The first two elements can
vary substantially from period to period while the third element remains
relatively stable as a percentage of license fees.
Cost of license fees decreased from $2.6 million in 1996 to $2.0 million in
1997 and increased to $3.8 million in 1998. These costs represented 14.9%, 9.8%
and 25.0% of license fees in 1996, 1997 and 1998, respectively. The decrease
from 1996 to 1997 resulted mainly from a decrease of the third party software
resold to customers. The increase from 1997 to 1998 was a result of the
increased cost of documentation and the purchase of additional third party
hardware and software products resold to customers.
COST OF SERVICES
Cost of services consists primarily of personnel costs for product quality
assurance, training, installation, consulting and customer support. Total
service costs increased from $28.3 million in 1996 to $28.4 million in 1997 and
1998 and represented 76.8%, 60.2% and 58.8% of service revenues in 1996, 1997,
and 1998, respectively. During 1997, the cost of services as a percentage of
service revenues decreased as a result of higher utilization rates, efficiencies
obtained through the outsourcing of training services and significant increase
in maintenance revenue for which there are lower associated customer support
costs as compared to implementations and consulting activities. In 1998, the
cost of services as a percent of service revenue decreased due to continued high
utilization rates as demand for services increased, and a decrease in lower
margin outsourcing revenue in the Company's France operations.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, commissions and
bonuses paid to sales and marketing personnel and travel and promotional
expenses. Sales and marketing expenses decreased from $24.2 million in 1996 to
$16.7 million in 1997, and $15.0 million in 1998, and represented 137.2%, 81.7%
and 98.0% of total license fee revenues, respectively. Sales and marketing
expenses decreased substantially during 1997 and 1998 due primarily to a
decrease in personnel and advertising programs, as well as decreased commission
expense in 1998. The Company continues to place significant emphasis, both
domestically and internationally, on client sales through its own sales force.
31
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel costs,
costs of equipment, facilities and third party software development costs.
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 (net of capitalized software development
costs) decreased from $11.9 million in 1996 to $11.0 million in 1997 and $10.6
million in 1998, and represented 21.8%, 16.3% and 16.6% of total revenues,
respectively. The Company capitalized software development costs of $1.1
million, none and $0.3 million in 1996, 1997, and 1998, respectively. Research
and development expenses decreased during 1997 due to a decrease in the number
of personnel costing approximately $.7 million and decreased slightly in 1998
mainly as a result of decreased costs for the Yorvik product, partially offset
by increased personnel costs for its Financial, Workflow and COOL products. The
rate of capitalization of software development costs may fluctuate depending on
the mix and stage of development of the Company's research and development
projects.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries of
administrative, executive and financial personnel and outside professional fees.
General and administrative expenses decreased from $20.0 million in 1996 to
$14.3 million in 1997 and $13.6 million in 1998, representing 36.8%, 21.1% and
21.4% of total revenues in those years, respectively. General and administrative
expenses decreased $5.7 million from 1996 to 1997, primarily due to decreases in
the provisions for doubtful accounts of $4.5 million, taxes of $1.2 million and
professional fees of $1.7 million, partially offset by a full year of operations
in France and Germany, and increased severance and costs related to senior
management turnover. General and administrative expenses decreased $0.7 million
in 1998 primarily due to cost reductions in certain foreign subsidiaries as well
as a decrease in insurance expense.
RESTRUCTURING COSTS
During its fiscal second quarter of 1998, the Company committed itself to a
plan whereby it eliminated 32 positions in the United States, which were
rendered redundant through a reengineering process, and eliminated 16 positions
outside the United States, which were servicing legacy products. Of the 48
positions eliminated, all were terminated prior to December 31, 1998 except as
follows: six people resigned prior to being terminated and one position was
terminated subsequent to December 31, 1998. Accordingly, the Company recorded a
net charge to operations in 1998 totaling approximately $1.0 million ($1.3
million in the second quarter of 1998, reduced in the third quarter of 1998 by
$0.3 million for anticipated savings attributable to resignations) reflecting
the termination costs of those personnel. As of December 31, 1998 the Company
had incurred cash outlays of $0.8 million. It is expected that the remaining
$0.2 million included in accrued expenses will be satisfied through cash outlays
during 1999.
OPERATING LOSS
As a consequence of the above, the Company incurred operating losses of
$32.6 million, $4.8 million and $8.8 million 1996, 1997 and 1998, respectively.
COSTS RELATED TO SETTLEMENT OF CLASS ACTION LITIGATION
Litigation and settlement costs of $.8 million in 1996 and $9.6 million in
1997 were associated with the class action civil suit, and increased primarily
due to the 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 (see Item 3).
32
Costs for 1998 were minimal.
OTHER INCOME (EXPENSE)
Other income (expense), net decreased to ($8.8 million) in 1997, due to
lower invested balances of cash, cash equivalents and short-term investments,
and increased costs related to the proposed settlement of the class action
litigation. Other income (expense) decreased to ($0.2 million) in 1998
representing minimal costs for the class action litigation, as well as a
decrease in interest income of $0.4 million from lower cash balances and an
increase of $0.4 million of interest expense related to the bank term loan (see
Note 4 to the Consolidated Financial Statements).
INCOME TAX PROVISION
The Company's income tax provision was immaterial in each of the years ended
1996, 1997 and 1998.
RESULTS OF OPERATIONS
As a consequence of the above, the Company incurred a net loss of $31.8
million in 1996, $13.6 million in 1997 and $9.0 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $4.0
million and restricted cash of $4.9 million and a working capital deficit of
$6.3 million. Included in the deficit is $9.6 million of deferred revenue. On
March 31, 1998, the Company entered into a three-year Loan and Security
Agreement ("Agreement") which provides maximum borrowings of up to $10 million.
The Agreement contains a revolving line of credit and a term loan. The term loan
provided for $5 million available in one drawdown which the Company borrowed on
the closing date. The term loan is repayable in 36 monthly installments
beginning May 1, 1998. Under the revolving line of credit the Company currently
has available the lesser of $5 million or 85% of eligible receivables, as
defined. Such available amount is reduced further by a $.6 million letter of
credit outstanding at December 31, 1998. The net available amount under the
revolving line of credit at December 31, 1998 is approximately $2 million, of
which no amounts were outstanding. On March 8, 1999, the Company amended its
credit facility with its bank in order to increase amounts available under the
term loan portion of the agreement by the lesser of $1 million or eligible
maintenance revenue, as defined, through September, 2001, to extend the
termination date of the credit facility to March 31, 2002, and to establish
financial restrictive covenants for 1999. (see note 4 to the Consolidated
Financial Statements).
The Company is required to comply with quarterly and annual financial
statement reporting requirements, as well as certain financial restrictive
covenants. The ability to continue to borrow under the Agreement is dependent
upon future compliance with such covenants and available collateral. 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
assurances that such operating results will be achieved.
The Company's operating activities used cash of $17.3 million in 1996, $13.9
million in 1997 and $4.5 million in 1998. Net cash used in 1997 was primarily
the result of the class action litigation settlement and related legal expenses
totaling approximately $9.6 million of which $5.0 million was non-cash, combined
with the Company's operating loss of $4.8 million, the net change in current
assets and liabilities of $8.9 million offset by depreciation and amortization
of $3.3 million. Net cash used in operating activities in 1998 was primarily the
result of the net loss offset by non-cash depreciation and amortization charges.
Net cash flows used in operating activities during the 6 months ended June 30,
1998 totaled $7.2 million; net cash flows provided by operating activities
during the 6 months ended December 31, 1998 totaled approximately $2.7 million.
Management believes that cost reductions realized during the fiscal second half
33
which are associated with the restructuring charge recognized during the
Company's second fiscal quarter, combined with substantially higher service
utilization rates during the Company's third and fourth fiscal 1998 quarters,
and approximately $1 million received from customers for prepaid consulting in
the fourth fiscal 1998 quarter, are primarily responsible for the improvements
in net cash flows from operating activities. Management also believes that
expense levels experienced by the Company during the third and fourth fiscal
1998 quarters are indicative of the future expense running rates at current
revenue levels.
The Company's investing activities used cash of $1.0 million in 1997 and
$1.2 million in 1998, respectively. Investing activities in 1998 were
principally for purchases of equipment totaling $1.7 million and capitalized
software costs totaling $300 thousand, offset in part by a decrease in other
assets.
Cash provided by financing activities was $2.1 million and $3.6 million in
1997 and 1998, respectively. During 1997, cash provided by financing activities
included net proceeds of $5.5 million from the sale of 2,937,500 shares of
Common Stock and warrants to purchase 734,375 shares of Common Stock (see Note 9
of Consolidated Financial Statements) offset by debt repayments associated with
acquisitions. During 1998, cash provided by financing activities included loan
proceeds of $5.0 million from a three-year loan agreement offset by repayments
of the term portion of the agreement.
The Company has no significant capital commitments. Planned capital
expenditures for 1999 total approximately $1.2 million. The Company's aggregate
minimum operating lease payments for 1999 will be approximately $2.4 million.
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 will be available on acceptable terms or at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to fluctuations in
interest rates and equity market risks as the Company seeks debt and equity
capital to sustain its operations. The Company is also exposed to fluctuations
in foreign currency exchange rates as the financial results of its foreign
subsidiaries are translated into U.S. dollars in consolidation. The Company does
not use derivative instruments or hedging to manage its exposures and does not
currently hold any market risk sensitive instruments for trading purposes.
The information below summarizes the Company's market risk associated with
its debt obligation as of December 31, 1998. Fair value included herein has been
estimated taking into consideration the nature and term of the debt instrument
and the prevailing economic and market conditions at the balance sheet date. The
table below presents principal cash flows by year of maturity based on the terms
of the debt. The variable interest rate disclosed represents the rate at
December 31, 1998. Changes in the prime interest rate during fiscal 1999 will
have a positive or negative effect on the Company's interest expense. Each 1%
fluctuation in the prime interest rate will increase or decrease annual interest
expense for the Company by approximately $39,000, based on the debt outstanding
as of December 31, 1998. Further information specific to the Company's debt is
presented in Note 4 to the consolidated financial statements.
YEAR OF MATURITY
ESTIMATED CARRYING -------------------------------
DESCRIPTION FAIR VALUE AMOUNT 1999 2000 2001
- ---------------------------------------------------------------- ----------- ----------- --------- --------- ---------
(IN THOUSANDS)
Term loan....................................................... $ 3,888 $ 3,888 $ 1,667 $ 1,667 $ 554
Variable Interest rate.......................................... 9.25% -- --
34
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference herein
from Part IV Item 14(a) (1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates herein by reference the information concerning
directors and executive officers in its Notice of Annual Stockholders' Meeting
and Proxy Statement to be filed within 120 days after the end of the Company's
fiscal year (the "1999 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning
executive compensation contained in the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates herein by reference the information concerning
security ownership of certain beneficial owners and management contained in the
1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference the information concerning
certain relationships and related transactions contained in the 1999 Proxy
Statement.
35
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
(A) CONSOLIDATED FINANCIAL STATEMENTS:
PAGE NO.
-----------
Reports of Independent Public Accountants........................................................... 39-40
Consolidated Balance Sheets at December 31, 1997 and 1998........................................... 41
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998.......... 42
Consolidated Statements of Comprehensive Loss for the years ended December 31, 1996, 1997 and
1998............................................................................................... 43
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996,
1997 and 1998...................................................................................... 44
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998.......... 45
Notes to Consolidated Financial Statements.......................................................... 46
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
Reports of Independent Public Accountants On Schedule............................................... 60-61
Schedule II--Valuation and Qualifying Accounts:
Years Ended December 31, 1996, 1997 and 1998........................................................ 62
(C) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1998:
None
(D) EXHIBITS.
3.1* Fourth Amended and Restated Certificate of Incorporation.
3.2* Amended and Restated Bylaws of the Company.
4.1* Specimen Common Stock Certificate.
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Company defining rights of holders of
Common Stock of the Company.
4.3# Form of Warrant
10.1* Series B Preferred Stock Purchase Agreement, as amended.
10.3* Employment Agreement between the Company and Elias Typaldos, as amended.
10.4* Employment Agreement between the Company and Gennaro Vendome, as amended.
10.6* 1995 Stock Option Plan.
10.7* Lease Agreement between the Company and Enterprise Development
Corporation.
10.8* Loan and Security Agreement between the Company and PNC Bank (formerly
Midlantic National Bank), as amended.
10.9* License Agreement between the Company and Pfizer, Inc., as amended.
10.10* OEM Software License and Distribution Agreement between the Company and
Wang Laboratories, Inc.
10.11* Amendment and Clarification Agreement between the Company and Wang
Laboratories, Inc.
10.12* Contract between the Company and Polish State Railways Central Office of
Purchasing and Sales Ferpol, a division of Polish State Railways.
10.13* Program License Contract between the Company and Deutsche Bank AG.
10.14* General Agreement between the Company and Canaan Capital Limited
Partnership and Canaan Capital Offshore Limited Partnership, C.V.
36
10.15** Severance Agreement between the Company and Joseph Esposito.
10.16** Employment Agreement between the Company and Michael Jorgensen.
10.17*** Termination Agreement between the Company and Andreas Typaldos.
10.18*** Consulting Agreement between the Company and Andreas Typaldos.
10.19**** 1995 Stock Option Plan, as amended.
10.20# Securities Purchase Agreement.
10.21**** Employment Agreement between the Company and John Rade.
10.22**** Employment Agreement between the Company and William H. Burke.
10.23**** Employment Agreement between the Company and Robert Hewitt.
10.24**** Amendment to Securities Purchase Agreement
10.25**** Amendment to Lease Agreement between the Company and Enterprise
Development Corporation.
10.26***** Loan and Security Agreement with Foothill Capital Corporation dated March
31, 1998
10.27***** 1998 Stock Option Plan
10.28****** Amendment No. 1 to the Loan and Security Agreement.
10.29******* Amendment No. 2 to the Loan and Security Agreement.
10.30 Amendment No. 3 to the Loan and Security Agreement.
10.31 Amendment No. 4 to the Loan and Security Agreement.
10.32 Amendment to the Employment Agreement between the Company and John Rade.
10.33 Employment Agreement between the Company and Rick Hartung.
10.34 Employment Agreement between the Company and Gregory Groom.
10.35 Software Assignment Agreement between the Company and S-Cubed
International Corporation.
10.36 OEM License Agreement between the Company and S-Cubed International
Corporation.
10.37 Consulting Services Agreement between the Company and S-Cubed
International Corporation.
10.38 Value added Reseller Agreement between the Company and S-Cubed
International Corporation.
10.39 Amendment No. 5 to the Loan and Security Agreement
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
27.1 Financial Data Schedule.
# Incorporated by reference to the Exhibits filed with the Company's Form 8-K filed
on January 8, 1998.
* Incorporated by reference to the Exhibits filed with the Company's Registration
Statement on Form S-l, File No. 33-93990.
** Incorporated by reference to the Exhibits filed with the Company's March 31, 1997
Form 10-Q.
*** Incorporated by reference to the Exhibits filed with the Company's September 30,
1997 Form 10-Q.
**** Incorporated by reference to the Exhibits filed with the Company's 1997 Form 10-K
***** Incorporated by reference to the Exhibits filed with the Company's March 31, 1998
Form 10-Q
****** Incorporated by reference to the Exhibits filed with the Company's June 30, 1998
Form 10-Q
******* Incorporated by reference to the Exhibits filed with the Company's September 30,
1998 Form 10-Q
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of
Rutherford, State of New Jersey, on this 30 th day of March 1999.
COMPUTRON SOFTWARE, INC.
By: /s/ JOHN A. RADE
-----------------------------------------
John A. Rade
CHIEF EXECUTIVE OFFICER,
PRESIDENT AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, and in the capacities indicated on March 30, 1999.
SIGNATURE TITLE(S)
- ------------------------------ --------------------------
/s/ ELIAS TYPALDOS Chairman of the Board,
- ------------------------------ Senior Vice President
(Elias Typaldos) Research and Development
Chief Executive Officer,
/s/ JOHN A. RADE President and Director
- ------------------------------ (Principal
(John A. Rade) Executive Officer)
Executive Vice President,
Chief Financial Officer,
/s/ MICHAEL R. JORGENSEN and
- ------------------------------ Treasurer (Principal
(Michael R. Jorgensen) Financial and Accounting
Officer)
/s/ GENNARO VENDOME
- ------------------------------ Vice President, and
(Gennaro Vendome) Director
/s/ GREGORY KOPCHINSKY
- ------------------------------ Director
(Gregory Kopchinsky)
/s/ ROBERT MIGLIORINO
- ------------------------------ Director
(Robert Migliorino)
/s/ WILLIAM E. VOGEL
- ------------------------------ Director
(William E. Vogel)
/s/ EDWIN T. BRONDO
- ------------------------------ Director
(Edwin T. Brondo)
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders:
Computron Software, Inc.:
We have audited the accompanying consolidated balance sheets of Computron
Software, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, comprehensive loss, stockholders'
equity (deficit), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Computron
Software, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG LLP
Short Hills, New Jersey
January 29, 1999, except
as to note 4, which is as
of March 8, 1999
39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO COMPUTRON SOFTWARE, INC.:
We have audited the accompanying consolidated statements of operations,
comprehensive loss, stockholders' equity (deficit) and cash flows of Computron
Software, Inc. (a Delaware Corporation) and subsidiaries for the year ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Computron Software, Inc. and subsidiaries for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 16, 1997
(except with respect to the
matter discussed in
Note 6, as to which the
date is March 6, 1998)
40
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
--------------------
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 6,280 $ 4,009
Restricted cash............................................................................. 6,124 4,856
Accounts receivable, net of allowance for doubtful accounts of $3,056 and $2,192 at December
31, 1997 and 1998, respectively........................................................... 11,420 11,172
Prepaid expenses and other current assets................................................... 3,423 2,309
--------- ---------
Total current assets...................................................................... 27,247 22,346
--------- ---------
Equipment and leasehold improvements, at cost:
Computer and office equipment............................................................... 11,844 12,641
Furniture and fixtures...................................................................... 1,298 1,510
Leasehold improvements...................................................................... 592 976
--------- ---------
13,734 15,127
Less--accumulated depreciation and amortization............................................. 9,670 11,957
--------- ---------
4,064 3,170
--------- ---------
Capitalized software development costs, net of accumulated amortization of $3,734 and $4,439
at December 31, 1997 and 1998, respectively................................................. 1,429 1,024
Goodwill, net of accumulated amortization of $1,072 and $1,607 at December 31, 1997 and 1998,
respectively................................................................................ 1,732 1,291
Other assets.................................................................................. 1,126 686
--------- ---------
$ 35,598 $ 28,517
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt and capital lease obligations............................. $ 71 $ 1,685
Accounts payable............................................................................ 4,375 4,513
Accrued expenses............................................................................ 10,956 8,503
Due to shareholders......................................................................... -- 4,404
Deferred revenue............................................................................ 9,078 9,558
--------- ---------
Total current liabilities................................................................. 24,480 28,663
--------- ---------
Long-term liabilities:
Long-term debt and capital lease obligations, net of current portion.......................... 23 2,229
--------- ---------
Common stock subject to repurchase............................................................ 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 23,913 shares
issued and outstanding at December 31, 1997 and 1998, respectively........................ 238 239
Additional paid-in capital.................................................................. 69,373 70,122
Accumulated deficit......................................................................... (63,016) (72,059)
Accumulated other comprehensive loss........................................................ (500) (677)
--------- ---------
Total stockholders' equity (deficit)...................................................... 6,095 (2,375)
--------- ---------
$ 35,598 $ 28,517
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
41
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---------- ---------- ---------
Revenues:
License fees................................................................. $ 17,625 $ 20,372 $ 15,273
Services..................................................................... 36,770 47,219 48,248
---------- ---------- ---------
Total revenues............................................................. 54,395 67,591 63,521
---------- ---------- ---------
Operating expenses:
Cost of license fees......................................................... 2,634 2,004 3,824
Cost of services............................................................. 28,255 28,440 28,389
Sales and marketing.......................................................... 24,181 16,654 14,970
Research and development..................................................... 11,872 10,996 10,568
General and administrative................................................... 20,014 14,280 13,586
Restructuring costs.......................................................... -- -- 1,025
---------- ---------- ---------
Total operating expenses................................................... 86,956 72,374 72,362
---------- ---------- ---------
Operating loss................................................................. (32,561) (4,783) (8,841)
---------- ---------- ---------
Other income (expense):
Costs related to settlement of class action litigation....................... (758) (9,591) (74)
Interest income.............................................................. 1,654 847 453
Interest expense............................................................. (100) (61) (439)
Other........................................................................ 18 (41) (130)
---------- ---------- ---------
Other income (expense) net................................................. 814 (8,846) (190)
---------- ---------- ---------
Loss before income tax provision............................................... (31,747) (13,629) (9,031)
Income tax provision........................................................... 100 16 12
---------- ---------- ---------
Net loss....................................................................... $ (31,847) $ (13,645) $ (9,043)
---------- ---------- ---------
---------- ---------- ---------
Basic and diluted net loss per common share.................................... $ (1.53) $ (0.65) $ (0.38)
---------- ---------- ---------
---------- ---------- ---------
Weighted average basic and diluted common shares outstanding................... 20,787 20,834 23,963
---------- ---------- ---------
---------- ---------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
42
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---------- ---------- ---------
Net loss.................................................... $ (31,847) $ (13,645) $ (9,043)
Translation adjustment...................................... 107 (526) (177)
---------- ---------- ---------
Comprehensive loss........................................ $ (31,740) $ (14,171) $ (9,220)
---------- ---------- ---------
---------- ---------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
43
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
COMMON ACCUMULATED TOTAL
STOCK ADDITIONAL OTHER STOCKHOLDERS'
---------------------- PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES AMOUNT CAPITAL DEFICIT LOSS (DEFICIT)
--------- ----------- ----------- ------------ --------------- ------------
BALANCE--DECEMBER 31, 1995(1)................. 20,744 $ 207 $ 63,796 $ (17,524) $ (81) $ 46,398
Net loss...................................... -- -- -- (31,847) -- (31,847)
Translation adjustment........................ -- -- -- -- 107 107
Exercise of stock options..................... 57 1 83 -- -- 84
--------- ----- ----------- ------------ ----- ------------
BALANCE--DECEMBER 31, 1996.................... 20,801 208 63,879 (49,371) 26 14,742
Net loss...................................... -- -- -- (13,645) -- (13,645)
Translation adjustment........................ -- -- -- -- (526) (526)
Sale of common stock net of related
expenses.................................... 2,937 30 5,478 -- -- 5,508
Issuance of common stock...................... 25 -- -- -- -- --
Exercise of stock options..................... 14 -- 16 -- -- 16
--------- ----- ----------- ------------ ----- ------------
BALANCE--DECEMBER 31, 1997.................... 23,777 238 69,373 (63,016) (500) 6,095
Net loss...................................... -- -- -- (9,043) -- (9,043)
Translation adjustment........................ -- -- -- -- (177) (177)
Decrease in liability relating to sale of
common stock................................ -- -- 131 -- -- 131
Issuance of common stock...................... 119 1 595 -- -- 596
Exercise of stock options..................... 17 -- 23 -- -- 23
--------- ----- ----------- ------------ ----- ------------
BALANCE--DECEMBER 31, 1998.................... 23,913 $ 239 $ 70,122 $ (72,059) $ (677) $ (2,375)
--------- ----- ----------- ------------ ----- ------------
--------- ----- ----------- ------------ ----- ------------
- ------------------------
(1) The consolidated financial data for 1995 has been restated. See Note 2 of
these Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial
statements.
44
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
Cash flows from operating activities:
Net loss............................................................................. $ (31,847) $ (13,645) $ (9,043)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Non-cash class action litigation settlement costs.................................. -- 5,000 --
Depreciation and amortization...................................................... 4,634 3,340 3,733
Provision for doubtful accounts.................................................... 4,803 300 114
Loss on sale of equipment and leasehold improvements............................... 72 27 9
Changes in current assets and liabilities, net of acquisitions--
Restricted cash.................................................................... (2,330) (3,043) 1,274
Accounts receivable................................................................ (7,329) 8,406 185
Prepaid expenses and other current assets.......................................... 487 (1,321) 1,261
Accounts payable and accrued expenses.............................................. 9,604 (3,872) (2,518)
Deferred revenue................................................................... 4,615 (9,046) 510
--------- --------- ---------
Net cash flows used in operating activities.......................................... (17,291) (13,854) (4,475)
--------- --------- ---------
Cash flows from investing activities:
Other assets....................................................................... (324) 223 705
Capitalized software development costs............................................. (1,088) -- (300)
Purchase of equipment and leasehold improvements................................... (2,162) (2,121) (1,739)
Proceeds from sale of equipment and leasehold improvements......................... -- 75 112
Acquisitions of businesses, net of cash acquired................................... (2,116) -- --
Proceeds from redemption of short-term investments................................. 105 868 --
--------- --------- ---------
Net cash flows used in investing activities.......................................... (5,585) (955) (1,222)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from the sale of common stock......................................... -- 5,508 --
Proceeds from exercise of stock options............................................ 84 16 23
Proceeds from long term debt....................................................... -- -- 5,000
Payments of long-term debt and capital lease obligations........................... (617) (461) (1,177)
Payments related to acquisitions................................................... (1,042) (2,946) --
Decrease in liabilities related to sale of common stock............................ -- -- 131
Payment of deferred financing costs................................................ -- -- (350)
Decrease in other long-term liabilities............................................ (1,000) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities.................................. (2,575) 2,117 3,627
--------- --------- ---------
Foreign currency exchange rate effects............................................... 62 (758) (201)
--------- --------- ---------
Net decrease in cash and cash equivalents.......................................... (25,389) (13,450) (2,271)
Cash and cash equivalents, beginning of year......................................... 45,119 19,730 6,280
--------- --------- ---------
Cash and cash equivalents, end of year............................................... $ 19,730 $ 6,280 $ 4,009
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information and noncash financing activities:
Cash paid during the year for--
Interest......................................................................... $ 89 $ 38 $ 373
Income taxes..................................................................... 38 34 12
Capital lease obligations incurred................................................. 43 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
45
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Company was incorporated under the laws of the State of Delaware in
September 1978. The name of the Company was changed from Computron Technologies
Corporation to Computron Software, Inc. in May 1995. The Company designs,
markets and supports n-tier, Internet-enabled client/ server financial,
workflow, desktop data access and storage, and maintenance and asset management
software. The Company also offers consulting, education and support services in
support of its customers' use of its software products.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Computron
Software, Inc.; its wholly owned subsidiaries located in Australia, Canada,
France, Germany, Poland, Singapore, South Africa and the United Kingdom
(collectively, the "COMPANY"). All significant intercompany transactions and
balances have been eliminated.
(B) 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 the license agreement has been signed,
delivery has occurred, the fee is fixed or determinable and collectibility is
probable. Post contract support (maintenance) 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, pursuant to a
professional services agreement. When the Company enters into a license
agreement requiring development or significant customization of the software
products, the Company recognizes revenue relating to the agreement using
contract accounting. 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.
(C) USE OF MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Actual results could differ from those estimates. Significant assets
and liabilities with reported amounts based on estimates include accounts
receivable, capitalized software development costs, goodwill, accrued expenses
and pro forma compensation expense.
(D) REPORTING, OPERATING AND CONTROL ENVIRONMENT
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
46
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 letter 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.
As discussed in Note 2, the Company restated its consolidated financial
statements for each of the four years in the period ended December 31, 1995, and
certain unaudited quarters therein and for each of the three unaudited quarters
ended September 30, 1996.
(E) CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash equivalents are stated at cost, which approximates market, and consists
of short-term, highly liquid investments with original maturities of less than
three months. Restricted cash represents the amount of certificates of deposit
used as collateral for outstanding letters of credit in the same amount, and
also includes $5,000 and $4,404 at December 1997 and 1998 respectively, which
will be used in connection with the trust fund described in Note 6.
(F) COMPREHENSIVE LOSS
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," a new
accounting rule on reporting comprehensive income (loss). SFAS No. 30 requires
reporting of comprehensive income (loss), which includes net income (loss) and
all other non-owner changes in equity (deficit) during a period.
(G) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation expense is computed using the
straight-line method over the estimated useful lives of the assets (three to
five years). Leasehold improvements are amortized using the straight-line method
over the lesser of the remaining term of the lease or their estimated useful
lives.
(H) SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internally generated software development costs upon
the establishment of technological feasibility until the time when the product
is available for general release to customers. Research and development costs
are expensed as incurred.
During 1996, 1997 and 1998 capitalized software development costs amounted
to $1,088, $0 and $300, respectively. Annual amortization of software
development costs of $863, $639 and $705 for 1996, 1997 and 1998 respectively
was calculated as the greater of the amount computed using (a) the ratio of
actual revenue from a product to the total of current and anticipated related
revenues from the product or (b) the economic life of the product, estimated to
be three years, on a straight-line basis.
47
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) GOODWILL
Goodwill is the result of the two acquisitions in 1996 and is amortized to
operations on a straight-line method over the periods estimated to be benefited,
currently not exceeding five years from the date of acquisitions.
(J) IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," the Company monitors events
or changes in circumstances that may indicate carrying amounts of its long-lived
assets may not be recoverable. When such events or changes in circumstances are
present, the Company assesses the recoverability of its assets by determining
whether the carrying amount of its assets will be recovered through
undiscounted, expected future cash flows. Should the Company determine that the
carrying values of specific long-lived assets are not recoverable, the Company
would record a charge to reduce the carrying value of such assets to their fair
values.
(K) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities, and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that includes the
enactment date.
(L) 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. One customer represented
13.0% of accounts receivable at December 31, 1997. As of December 31 1998, no
one customer represented more than 10% of accounts receivable. There was no
single customer accounting for more than 10% of revenues in 1996, 1997 or 1998.
(M) FOREIGN CURRENCY TRANSLATION
The functional currency for most foreign subsidiaries is the local currency.
The cumulative effects of translating the balance sheet accounts from the
functional currency into the U.S. dollar at current exchange rates are included
in the cumulative translation adjustment in stockholders' equity (deficit). The
U.S. dollar is used as the functional currency for the subsidiary in Poland.
48
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(N) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with the
provisions of the Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". In October 1995, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation, which
is effective for fiscal years beginning after December 15, 1995. SFAS No. 123
establishes a fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure-only alternative under SFAS No.
123, which requires the disclosure of the pro forma effects on earnings and
earnings per share as if the accounting prescribed by SFAS No. 123 had been
adopted, as well as certain other information.
(O) BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is presented in accordance SFAS
No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 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.
Basic net loss per common share is based on the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per
common share is the same as basic net 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 and the Settlement Stock, as
defined in Note 6, is anti-dilutive for all periods presented.
The following represents the calculations of the basic and diluted net loss
per common share for the years ended December 31, 1996, 1997 and 1998.
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---------- ---------- ---------
Net loss........................................................................ $ (31,847) $ (13,645) $ (9,043)
---------- ---------- ---------
---------- ---------- ---------
Weighted average basic and diluted common shares outstanding during the year.... 20,787 20,834 23,963
---------- ---------- ---------
Basic and diluted net loss per common share..................................... $ (1.53) $ (0.65) $ (0.38)
---------- ---------- ---------
---------- ---------- ---------
(P) RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial statements
to conform to current year presentations.
(Q) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, restricted cash, accounts receivable, accounts
payable, accrued expenses and debt reported in the consolidated balance sheets
equal or approximate fair values.
49
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(R) DEFERRED REVENUE
Deferred Revenues primarily relate to customer support agreements that have
been paid for by customers prior to the performance of those services and, to a
lesser extent, prepaid consulting and deferred license fees.
(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 in the period 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 financial statements for
the years ended December 31, 1992, 1993, 1994, 1995 and the unaudited nine
months ended September 30, 1996 is as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994
---------------------- ---------------------- ----------------------
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
----------- --------- ----------- --------- ----------- ---------
Total Revenue......................................... $ 20,513 $ 19,645 $ 24,282 $ 23,588 $ 34,958 $ 32,473
Income (Loss) from Operations......................... (2,750) (3,618) (2,644) (3,338) 433 (2,052)
Net Income (Loss)..................................... (2,479) (3,347) (3,170) (3,864) 77 (2,408)
Total Assets.......................................... 16,453 15,585 17,302 16,119 36,681 35,075
Deferred Revenue...................................... 1,934 1,934 3,137 3,516 9,935 12,376
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
---------------------- -----------------------
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
----------- --------- ----------- ----------
(UNAUDITED)
Total Revenue...................................................... $ 55,519 $ 52,795 $ 36,846 $ 34,677
Loss from Operations............................................... (7,704) (8,970) (22,905) (24,786)
Net Loss........................................................... (7,312) (8,578) (21,333) (23,214)
Net Loss per Common Share.......................................... (.39) (.46) (1.03) (1.12)
Total Assets....................................................... 73,045 71,367 60,542 58,483
Deferred Revenue................................................... 10,474 13,667 11,423 16,404
50
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) ACQUISITIONS
On April 10, 1996, the Company acquired the Financial Service Division of
Generale de Service Informatique (GSI) based in Paris, France. The acquisition
was effective April 1, 1996. The purchase price of 15,463 French Francs
(approximately $3,000) was payable $1,500 at closing and the remainder in a
non-interest bearing note payable in nine equal monthly installments beginning
April 30, 1996. In addition, approximately $101 of acquisition related costs
were capitalized. On June 30, 1996, the Company acquired AT&T ISTEL and Co.
GmbH, in Essen, Germany. The purchase price was approximately $1,200 payable
$400 at closing and the balance payable in six months. Approximately $110 of
acquisition related costs were capitalized.
These acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the 1996 financial statements include the accounts of
these companies since the dates of acquisition. Pro forma results of operations
have not been presented, as the amounts would not be significant. The following
is additional supplemental cash flow information relating to the aforementioned
acquisitions:
Fair value of assets acquired....................................... $ 7,221
Liabilities assumed................................................. 2,887
---------
Net value of assets acquired........................................ 4,334
Cash paid at closing................................................ 1,895
---------
Notes and other payables as of closing date......................... $ 2,439
---------
---------
(4) LONG-TERM DEBT
The Company's long term debt consists of the following:
DECEMBER 31,
--------------------
1997 1998
--------- ---------
Term loan.................................................................... $ -- $ 3,888
Various installment loans.................................................... 12 3
--------- ---------
Subtotal................................................................... 12 3,891
Less: current portion...................................................... 12 1,670
--------- ---------
Long-term debt, net of current portion....................................... $ -- $ 2,221
--------- ---------
--------- ---------
On March 31, 1998, the Company entered into a Loan and Security Agreement
("Agreement") which provides for maximum borrowings of up to $10 million. The
Agreement contains a revolving line of credit and a term loan. The term loan
provided for $5 million available in one drawdown which the Company borrowed on
the closing date. The term loan bears interest at prime rate (7.75% at December
31, 1998) plus 1.5%, and is repayable in 36 monthly installments beginning May
1, 1998. Under the revolving line of credit the Company currently has available
the lesser of $5 million or 85% of eligible receivables, as defined. Such
available amount is reduced further by a $600 letter of credit outstanding at
December 31, 1998. The net available amount under the revolving line of credit
at December 31, 1998 is approximately $2 million of which no amounts were
outstanding.
51
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) LONG-TERM DEBT (CONTINUED)
Borrowings under the revolving line of credit bears interest at prime rate
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 restrictive covenants. The Company
was in compliance with the covenants as of December 31, 1998.
On March 8, 1999, the Company amended the Agreement ("Amended Agreement") in
order to increase amounts available under the term loan portion of the facility
by the lesser of $1 million or eligible maintenance revenue, as defined, through
September, 2001, to extend the termination date of the credit facility to March,
2002, and to establish financial restrictive covenants for 1999.
Additional amounts under the Amended Agreement are available in as many as
two one-time borrowings of $500, and are subject to the limitation that the
total outstanding balance of term loans under the credit line may not exceed 50%
of eligible maintenance revenues through March 2000, 40% of eligible maintenance
revenues from April 1, 2000 through March 31, 2001, and 30% of eligible
maintenance revenues from April 1, 2001 to September 30, 2001. Additional term
loans borrowed are repayable in equal monthly principal installments from the
date of borrowing to March 31, 2002. As of December 31, 1998, eligible
maintenance revenues totaled approximately $8,044.
The amounts of long-term debt outstanding at December 31, 1998 maturing
during the next three years are as follows:
1999................................................................ $ 1,670
2000................................................................ 1,667
2001................................................................ 554
(5) LEASE OBLIGATIONS
The Company has equipment under capital leases, which is included in
equipment and leasehold improvements. Additionally, the Company leases office
space and equipment under non-cancelable operating leases. Rent expense charged
to operations in the accompanying consolidated statements of operations for
office space, vehicles and equipment under operating leases was $2,669, $2,703
and $2,562 for the years ended December 31, 1996, 1997 and 1998, respectively.
52
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) LEASE OBLIGATIONS (CONTINUED)
Scheduled future minimum payments required for all non-cancelable leases are
as follows:
CAPITAL OPERATING
YEARS ENDING DECEMBER 31 LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
1999..................................................................... $ 20 $ 2,443
2000..................................................................... 7 1,713
2001..................................................................... 2 1,251
2002..................................................................... -- 1,017
2003..................................................................... -- 2
--- -----------
Total future minimum lease payments...................................... 29 $ 6,426
-----------
-----------
Less-amount representing interest at rate of 15.285%..................... 6
---
Present value of future minimum lease payments........................... 23
Less current portion..................................................... 15
---
Capital lease obligations, net of current portion........................ $ 8
---
---
(6) CONTINGENCIES
On March 6, 1998, the District Court issued a final order approving the
settlement of the class action securities litigation. The overall settlement
included consideration totaling $15 million for the benefit of class members,
including $6 million of 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 resolved a separate lawsuit brought by the Company against the
insurance companies. As its share of the settlement, the Company paid $1 million
in cash, and issued one million shares of Common Stock of the Company
("Settlement Stock"). 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.
The class members received a non-transferable right to resell the Settlement
Stock to a business trust formed by the Company at a price of $5.00 per share
during a period from December 1, 1998 to December 21, 1998 (the "Put Period").
The trust was capitalized by a contribution of $5 million in cash by the Company
in March 1998. During the Put Period, class members exercised the put with
respect to 881 shares of Settlement Stock. The right to put the remaining shares
of Settlement Stock automatically expired as of midnight on December 21, 1998.
Pursuant to the terms of the stipulation of settlement, the Company directed the
trust to pay $4,404 in satisfaction of the timely claims made under the put, and
to return to the Company the remaining balance of the trust. Shares of
Settlement Stock that were not timely put according to the terms of the
settlement remain freely transferable.
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, consolidated financial condition, results of
operations or cash flows.
53
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) RELATED PARTY TRANSACTIONS
The Company has certain business relationships with an entity that was
founded by the President and Chief Executive Officer. The President and Chief
Executive Officer owns a majority beneficial equity interest in such entity.
During the years ended December 31, 1996, 1997 and 1998 the Company recorded as
expense approximately $675, $641 and $513 respectively, related to work
performed by this entity on behalf of the Company.
The Company entered into a Consulting Agreement dated September 29, 1997
with the Company's former chairman and principal stockholder. The Agreement
provides for consulting services during the period of December 1, 1997 through
November 30, 2000, in exchange for $300 for each of the first two years and $250
for the third year.
On December 24, 1997, the Company loaned $175 on a secured basis to a
significant stockholder and director of the Company. Principal and interest at a
per annum rate of 8% were paid in full on March 31, 1998, pursuant to the terms
of the loan agreement.
(8) INCOME TAXES
The components of loss before provision for income taxes is as follows:
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---------- ---------- ---------
Domestic.................................................... $ (22,933) $ (6,517) $ (4,896)
Foreign..................................................... (8,814) (7,112) (4,135)
---------- ---------- ---------
Total..................................................... $ (31,747) $ (13,629) $ (9,031)
---------- ---------- ---------
---------- ---------- ---------
The provision for income taxes is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- ----- -----
State................................................................... $ 73 $ 16 $ --
Foreign................................................................. 27 -- 12
--------- --- ---
Total................................................................. $ 100 $ 16 $ 12
--------- --- ---
--------- --- ---
54
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) INCOME TAXES (CONTINUED)
A reconciliation of Federal income tax benefit at the statutory rate of 34%
to income taxes reflected in the accompanying consolidated statements of
operations is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---------- --------- ---------
Federal income tax benefit at 34%............................ $ (10,794) $ (4,634) $ (3,071)
State income taxes, net of Federal tax benefit............... (1,289) (83) (283)
Change in valuation allowance................................ 12,869 3,278 3,891
Foreign tax rate differential................................ (713) (284) (569)
Non-deductible expenses...................................... -- 1,700 --
Other, net................................................... 27 39 44
---------- --------- ---------
$ 100 $ 16 $ 12
---------- --------- ---------
---------- --------- ---------
The principal components of the Company's deferred taxes are as follows:
DECEMBER 31,
--------------------
1997 1998
--------- ---------
Deferred tax assets:
Non-deductible accruals and other..................................... $ 808 $ 773
Depreciation.......................................................... 135 120
Allowance for doubtful accounts....................................... 1,077 753
Purchased research and development.................................... 1,537 1,426
Research and development credit carry-forwards........................ 2,800 2,895
Net operating loss carry-forwards..................................... 19,916 24,035
--------- ---------
Deferred tax asset.................................................. 26,273 30,002
Less valuation allowance................................................ 25,701 29,592
--------- ---------
Net deferred tax asset................................................ 572 410
Deferred tax liability:
Software development costs............................................ 572 410
--------- ---------
Net deferred taxes...................................................... $ -- $ --
--------- ---------
--------- ---------
At December 31, 1998, the Company had United States net operating loss
carry-forwards of approximately $34,900 which are available to offset future
Federal taxable income, if any, and which begin to expire in 2007. In addition,
foreign net operating loss carry-forwards aggregated approximately $26,000 at
December 31, 1998.
The asset and liability method requires that deferred tax assets be reduced
by a valuation allowance if, based on the weight of available evidence, it is
more likely than not that some portion or all of such assets will not be
realized. The Company has recorded a valuation allowance for its net deferred
tax assets and will continue to monitor the realizability of such assets. The
change in the valuation allowance was $2,369 in 1998. Foreign subsidiaries have
paid, and are expected to continue to pay, appropriate taxes to their respective
taxing authorities. It is the intention of the Company to reinvest the earnings
of its non-U.S.
55
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) INCOME TAXES (CONTINUED)
subsidiaries in those operations. Accordingly, no Federal taxes have been
provided on undistributed foreign earnings.
(9) STOCKHOLDERS' EQUITY (DEFICIT)
(A) PRIVATE PLACEMENT
On December 31, 1997, the Company sold through a private placement, 2,937
shares of Common Stock and warrants to purchase 734 shares of the Company's
Common Stock, raising net proceeds of $5,508. These shares were subsequently
registered with the SEC. The registration was declared effective on May 7, 1998.
The warrants are exercisable at $3.00 per share, subject to adjustment, until
December 31, 2002. Terms of the private placement require the Company to
register the shares of Common Stock and warrants "the securities" and the
Company could be required to issue additional consideration if certain
conditions are not met. In the event that sales under the Registration Statement
are unavailable to the Investors for any period, in excess of 75 consecutive
days or 100 total days, during the period from the date of effectiveness until
December 31, 1999, for each 30 days or portion thereof in excess of either of
such amounts, whichever is greater, the Company shall either (at the Company's
election) (i) issue, at no additional cost, to each of the Original Investors
additional shares of Common Stock and Warrants equal to one percent (1%) of the
amounts issued under the Securities Purchase Agreement (SPA) and held by each
such Original Investor as of the date of the Company's obligation to issue
additional securities or (ii) pay to each Original Investor an amount in cash
equal to $81.8 multiplied by such Original Investor's pro rata share. To the
extent an Original Investor no longer holds shares of Common Stock originally
issued under the SPA, the number of additional shares of Common Stock or
Warrants to be issued, or the amount of any cash to be paid, by the Company
shall be proportionately reduced. The SPA also contains anti-dilution provisions
and piggyback registration rights.
(B) STOCK OPTION PLAN
Pursuant to the 1995 Stock Option Plan (the 1995 Plan), the Company may
grant statutory and non-statutory options to purchase an aggregate of up to
1,500 shares of Common Stock. During 1997 the Board of Directors and
stockholders amended and restated the 1995 Plan to increase the number of shares
issuable under the 1995 Plan to a total of 4,500 and the Company has
specifically reserved such shares. Options may be granted under the
discretionary option program to employees, consultants, independent advisors and
non-employee directors. Options are automatically granted to non-employee
directors under the automatic option grant programs. Options granted under the
discretionary grant program would have an exercise price of not less than 85% of
the fair market value of the Common Stock on the grant date. Options granted
under the automatic grant program would have an exercise price of 100% of the
fair market value on the grant date. All options granted under the 1995 Plan
expire ten years from the date of grant (or five years for statutory options
granted to 10% stockholders), unless terminated earlier. Options generally vest
over a four-year period, however, options to purchase 1,000 shares of common
stock were granted in 1997 and such options become immediately vested upon the
occurrence of certain events.
In April 1998, the Company adopted the 1998 Stock Option Plan (the 1998
Plan). Pursuant to the 1998 Plan, the Company may grant stock options or stock
appreciation rights to purchase an aggregate of up to 1,500 shares of Common
Stock. Options may be granted under the discretionary option program to
employees and consultants of the Company and its subsidiaries not to exceed 200
shares during any
56
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(9) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
calendar year except that in the first year of employment, the maximum grant
will not exceed 400 shares. Non-employee directors will receive an automatic
grant of stock options to purchase 20 shares of Common Stock upon date of
commencement of service as a non-employee director and; thereafter, 10 shares on
the date of each annual meeting of stockholders, provided that on, and as of,
such date, such individual has been a non-employee director for the previous
twelve month period. No option may have an exercise price less than the fair
market value of the Common Stock at the time of grant. As of December 31, 1998,
no stock options have been granted under the 1998 Plan.
A summary of stock option activity under the 1995 Plan is as follows:
NUMBER OF EXERCISE PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- ----------------- ----------------
BALANCE, DECEMBER 31, 1995...................................................... 930 $1.17 - 13.00 $2.79
Exercised....................................................................... (58) 1.17 - 1.90 1.43
Canceled........................................................................ (110) 1.17 - 13.00 6.33
--------- ----------------- -----
BALANCE, DECEMBER 31, 1996...................................................... 762 1.17 - 13.00 2.27
Granted......................................................................... 3,209 1.00 - 3.62 1.89
Exercised....................................................................... (14) 1.17 1.17
Canceled........................................................................ (124) 1.17 - 13.00 4.95
--------- ----------------- -----
BALANCE, DECEMBER 31, 1997...................................................... 3,833 1.00 - 13.00 1.84
Granted......................................................................... 1,853 0.87 - 2.75 2.03
Exercised....................................................................... (17) 1.17 - 1.90 1.42
Canceled........................................................................ (1,485) 0.87 - 13.00 2.62
--------- ----------------- -----
BALANCE, DECEMBER 31, 1998...................................................... 4,184 0.87 - 13.00 1.75
--------- ----------------- -----
Exercisable, December 31, 1998.................................................. 1,269 $0.94 - 13.00 $1.62
--------- ----------------- -----
The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options granted in 1996, 1997 and 1998 using the Black-Scholes
option pricing model prescribed by SFAS No. 123.
The assumptions used and the weighted average information for the years
ended December 31, 1996, 1997 and 1998 are as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
----------- ---------- -----------
Risk-free interest rates................................................... 6.01% 6.01% 5.50%
Expected dividend yield.................................................... -- -- --
Expected lives............................................................. 5 years 7 years 7 years
Expected volatility........................................................ 50% 50% 105%
Weighted-average grant date fair value of options granted during the
period................................................................... -- $1.17 $1.50
Weighted-average remaining contractual life of options outstanding......... 7.25 years 9.0 years 7.33 years
Weighted-average exercise price of 455,646 and 1,269 options exercisable at
December 31, 1996, 1997 and 1998, respectively........................... $1.82 $1.61 $1.62
57
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(9) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The effect of applying SFAS No. 123 would be as follows:
1996 1996 1997 1997 1998 1998
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- ----------- ----------- -----------
Net loss..................................... $ (31,847) $ (32,059) $ (13,645) $ (13,987) $ (9,043) $ (9,972)
Basic and diluted net loss per common
share...................................... $ (1.53) $ (1.54) $ (0.65) $ (0.67) $ (0.38) $ (0.42)
(10) PROFIT SHARING PLAN
The Company's Profit Sharing Plan (the Plan) is a defined contribution plan.
All employees with three months of service and who are at least 21 years of age
are eligible to become participants in the Plan and to make voluntary
contributions based on a percentage of their compensation within certain Plan
limitations.
The Plan falls under the provisions of Section 401(k) of the Internal
Revenue Code. Employees may elect to contribute a percentage of their pretax
salary, subject to statutory limitations, as well as certain percentages of
their after-tax salary, to the Plan. The Company was obligated to contribute 25%
of the employees' first 6% of pretax salary contribution through November 30,
1997. Beginning December 1, 1997, the Company increased its matching percentage
from 25% to 50% of the employees first 6% of pretax salary contribution. The
Company's contributions charged to operations in the accompanying consolidated
statements of operations were approximately $242, $160 and $378 for the years
ended December 31, 1996, 1997, and 1998, respectively
In addition, the Company may make additional contributions at the discretion
of the Board of Directors, which would be allocated among all participants in
proportion to each participant's compensation, as defined. As of December 31,
1998, no additional contributions were made under the Plan.
(11) FINANCIAL INFORMATION BY GEOGRAPHIC AREA
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. Financial statement disclosures for prior periods are
required to be restated.
Domestic and export sales by destination as a percentage of total revenues
are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
United States........................................................ 60.8% 56.6% 52.9%
Europe............................................................... 27.6 33.1 34.0
Other................................................................ 11.6 10.3 13.1
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
58
COMPUTRON SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(11) FINANCIAL INFORMATION BY GEOGRAPHIC AREA (CONTINUED)
The Company's operations are conducted in one business segment.
Revenues and long-lived assets for the Company's United States, United
Kingdom and other international operations are as follows:
UNITED UNITED
STATES KINGDOM OTHER CONSOLIDATED
--------- ----------- --------- ------------
1996
- -------------------------------------------------------------------
Revenues(1)........................................................ $ 35,121 $ 5,342 $ 13,932 $ 54,395
Long-lived assets.................................................. 2,790 350 1,247 4,387
1997
- -------------------------------------------------------------------
Revenues(1)........................................................ $ 39,733 $ 8,554 $ 19,304 $ 67,591
Long-lived assets.................................................. 2,422 355 1,287 4,064
1998
- -------------------------------------------------------------------
Revenues(1)........................................................ $ 34,958 $ 7,903 $ 20,660 $ 63,521
Long-lived assets.................................................. 1,947 271 952 3,170
- ------------------------
(1) Revenues are attributed to locations based on location of sales office.
The Company does not believe there are any legal or other restrictions upon
the repatriation of international earnings to the parent company.
(12) RESTRUCTURING COSTS
During its fiscal second quarter of 1998, the Company committed itself to a
plan whereby it eliminated 32 positions in the United States, which were
rendered redundant through a reengineering process, and eliminated 16 positions
outside the United States, which were servicing legacy products. Of the 48
positions eliminated, all were terminated prior to December 31, 1998 except as
follows: six people resigned prior to being terminated and one position was
terminated subsequent to December 31, 1998. Accordingly, the Company recorded a
net charge to operations in 1998 totaling approximately $1.0 million ($1.3
million in the second quarter of 1998 reduced in the third quarter of 1998 by
$0.3 million for anticipated savings attributable to resignations) reflecting
the termination costs of those personnel. As of December 31, 1998 the Company
had incurred cash outlays of $0.8 million. It is expected that the remaining
$0.2 million included in accrued expenses will be satisfied through cash outlays
during 1999.
59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
TO COMPUTRON SOFTWARE, INC.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated statements of operations, comprehensive loss, stockholders'
equity (deficit) and cash flows for the year ended December 31, 1996 of
Computron Software, Inc. included in this Form 10-K, and have issued our report
thereon dated April 16, 1997. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in Item 14(b)
of the index is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly state, in all material
respects, the supplemental financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 16, 1997
(except with respect to the
matter discussed in
Note 6, as to which the
date is March 6, 1998)
60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders:
Computron Software, Inc.:
Under date of January 29, 1999, except as to note 4, which is as of March 8,
1999, we reported on the consolidated balance sheets of Computron Software, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, comprehensive loss, stockholders' equity (deficit),
and cash flows for the years then ended, as contained in the 1998 annual report
on Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule for 1997 and 1998 as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
for 1997 and 1998 based on our audits.
In our opinion, such financial statement schedule for 1997 and 1998, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Short Hills, New Jersey
January 29, 1999,
except as to Note 4,
which is as of March 8, 1999
61
SCHEDULE II
COMPUTRON SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
BALANCE AT CHARGED TO AMOUNTS BALANCE
BEGINNING COSTS AND WRITTEN AT END
ALLOWANCE FOR DOUBTFUL ACCOUNTS: OF YEAR EXPENSES OFF OF YEAR
- --------------------------------------------------------------------- ----------- ----------- --------- ---------
YEAR ENDED DECEMBER 31, 1996......................................... $ 2,028 $ 4,803 $ (1,747) $ 5,084
YEAR ENDED DECEMBER 31, 1997......................................... $ 5,084 $ 300 $ (2,328) $ 3,056
YEAR ENDED DECEMBER 31, 1998......................................... $ 3,056 $ 114 $ (978) $ 2,192
RESTRUCTURING RESERVE:
- ---------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998......................................... $ -- $ 1,025 $ 858(a) $ 167
(a) Cash payments to effect restructuring
62