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
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.
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:
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.
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:
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:
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.
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
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
- 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.
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
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
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
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
"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
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
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.
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
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.
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
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:
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(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,
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
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.
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.
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.
ITEM 4.
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.
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:
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.
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
and Results of Operations" and the consolidated financial statements of the Company, as restated, and related notes thereto included elsewhere in this report.
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(1) The consolidated financial data for 1994 and 1995 has been restated. See Note 2 of Consolidated Financial Statements.
ITEM 7.
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."
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.
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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain operating data as a percentage of total revenues:
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
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.
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).
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
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.
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.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates herein by reference the information concerning executive compensation contained in the 1999 Proxy Statement.
ITEM 12.
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.
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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(A) CONSOLIDATED FINANCIAL STATEMENTS:
(C) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1998:
None
(D) EXHIBITS.
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.
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.
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
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)
COMPUTRON SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
COMPUTRON SOFTWARE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
- ------------------------
(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.
COMPUTRON SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
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
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.
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.
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.
(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.
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:
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:
(4) LONG-TERM DEBT
The Company's long term debt consists of the following:
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.
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:
(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.
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:
(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.
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:
The provision for income taxes is as follows:
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:
The principal components of the Company's deferred taxes are as follows:
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.
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
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:
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:
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:
(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:
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:
- ------------------------
(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.
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)
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
SCHEDULE II
COMPUTRON SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(a) Cash payments to effect restructuring