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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27218
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
(Exact name of registrant as specified in its charter)
England None
(Stated or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1800 West Loop South, 6th Floor
Houston, Texas
77027
(Address of principal executive offices)
(Zip Code)
(713) 625-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes X No
___ ___
As of August 31, 1996, 25,538,720 Ordinary Shares of the Registrant's Common
Stock, 10 pence par value, were issued and outstanding.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
FORM 10-Q
JULY 31, 1996
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Consolidated Balance Sheet as of July 31, 1996 and April 30, 1996 3
Consolidated Statement of Operations for the three months ended
July 31, 1996 and July 31, 1995 4
Consolidated Statement of Cash Flows for the three months ended
July 31, 1996 and July 31, 1995 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations 7
---------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
-----------------
Item 6. Exhibits and Reports on Form 8-K 10
--------------------------------
SIGNATURE 11
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
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July 31, April 30,
1996 1996
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(unaudited)
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Assets
------
Current assets:
Cash and cash equivalents $ 11,386 $ 10,960
Trade accounts receivable 5,025 9,579
Other current assets 3,201 3,498
-------- --------
Total current assets 19,612 24,037
Furniture, fixture and equipment, net 2,902 2,982
Other assets 160 160
-------- --------
Total assets $ 22,674 $ 27,179
======== ========
Liabilities and shareholders' equity
------------------------------------
Current liabilities:
Current maturities of indebtedness $ 853 $ 1,003
Accounts payable 1,161 1,630
Deferred revenue 5,321 3,691
Accrued liabilities 4,425 5,344
Executive Stock Option Trust indebtedness 926 903
-------- --------
Total current liabilities 12,686 12,571
Indebtedness 519 524
Other liabilities 1,967 2,149
-------- --------
Total liabilities 15,172 15,244
-------- --------
Shareholders' equity:
Ordinary shares, 10 pence par value 4,255 4,253
Additional paid-in capital 20,282 20,323
Executive Stock Option Trust indebtedness (926) (903)
Cumulative translation adjustment 368 439
Accumulated deficit (16,477) (12,177)
------- -------
Total shareholders' equity 7,502 11,935
------- -------
Commitments and contingencies ------- -------
Total liabilities and shareholders' equity $ 22,674 $ 27,179
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
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<CAPTION>
Three months ended
July 31,
------------------
1996 1995
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Revenue:
Product licenses $ 2,004 $ 5,376
Services 3,250 4,400
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Total revenue 5,254 9,776
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Costs and expenses:
Cost of product licenses 58 242
Cost of services 1,616 1,669
-------- -------
Total cost of revenue 1,674 1,911
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Gross margin 3,580 7,865
-------- -------
Sales and marketing 4,522 4,214
Research and development 2,143 1,902
General and administrative 1,308 1,231
-------- -------
Total operating expenses 7,973 7,347
-------- -------
Operating income (loss) (4,393) 518
Interest income 123 32
Interest expense (34) (18)
Other income (expense) 4
-------- -------
Income (loss) from continuing
operations before income taxes $ (4,300) 532
Income taxes (benefit) (73)
-------- -------
Net income (loss) $ (4,300) $ 459
======== =======
Income (loss) per Ordinary Share: $ ( 0.17) $ 0.02
======== =======
Income (loss) per ADS: (1) $ ( 0.34) $ 0.04
======== =======
Weighted average Ordinary and Ordinary Share
outstanding equivalents 25,535 23,004
======== =======
</TABLE>
(1) Adjusted to reflect the ratio of one ADS to two Ordinary Shares.
The accompanying notes are an integral part of this statement.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
Three months ended
July 31,
------------------
1996 1995
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Cash flow from operating activities:-
Net income (loss) $ (4,300) $ 459
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 228 101
Changes in current assets and liabilities, net of
the effect of business disposal:
Trade accounts receivable 4,554 560
Other current assets 297 (509)
Accounts payable (469) (5)
Accrued restructuring (98) (996)
Accrued legal settlement (155) (1,073)
Other accrued liabilities (848) 3
Deferred revenue 1,630 (42)
Other noncurrent assets and liabilities, net (71) 1
-------- -------
Net cash provided (used) by operating activities 768 (1,501)
-------- -------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (148) (570)
-------- -------
Net cash used by investing activities (148) (570)
-------- -------
Cash flows from financing activities:
Borrowings on indebtedness 195
Repayments of indebtedness (155)
Issuance of Ordinary Shares, net (39) 69
-------- -------
Net cash provided (used) by financing activities (194) 264
-------- -------
Increase (decrease) in cash 426 (1,807)
Beginning cash and cash equivalents 10,960 5,026
-------- -------
Ending cash and cash equivalents $ 11,386 $ 3,219
======== =======
</TABLE>
The accompanying notes are an integral part of this statement.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
JULY 31, 1996
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles of the United States
for interim financial reporting and in accordance with Form 10-Q and Rule 10.01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles of the United
States for complete financial statements. In the opinion of management, the
unaudited consolidated financial statements contained in this report reflect all
adjustments, consisting of only normal recurring adjustments considered
necessary for a fair presentation of the financial position and the results of
operations for the interim periods presented. Operating results for interim
periods are not necessarily indicative of results for the full year. These
unaudited consolidated financial statements, footnote disclosures and other
information should be read in conjunction with the financial statements and the
notes thereto included in the Company's annual 10-K filed with the Securities
and Exchange Commission on July 29, 1996.
NOTE 2 - ACQUISITIONS:
In August 1995, the Company acquired Corporate Computing Inc. (CCI), in exchange
for 700,000 Ordinary Shares of the Company. The acquisition was accounted for
as a pooling of interests. CCI's operations have been included in the
consolidated financial statements for all periods presented.
NOTE 3 - SHAREHOLDERS' EQUITY:
In the period May 1, 1996 through July 31, 1996, options to purchase 33,000
Ordinary Shares at exercise prices of .6425 to .85 Pounds Sterling per share
were exercised. At July 31, 1996, there were options to purchase 2,872,950
Ordinary Shares, including 508,200 of options related to Ordinary Shares held by
the Executive Share Option Trust which are currently outstanding for earnings
per share calculation purposes.
NOTE 4 - EARNINGS PER SHARE AND COMMON EQUIVALENT SHARE:
Earnings per Ordinary Share and earnings per ADS are computed using the weighted
average number of Ordinary Shares and Ordinary Share equivalents outstanding
during the period. Ordinary Share equivalents, to the extent they would be
dilutive, include the number of shares issuable upon exercise of stock options,
less the number of shares that could have been repurchased with the exercise
proceeds using the treasury stock method.
NOTE 5 - SUBSEQUENT EVENTS:
On August 2, 1996, the Board of Directors approved a plan to restructure the
Company's operations. Under the approved plan, the Company expects to record a
restructuring charge of approximately $18 million in the three months ending
October 31, 1996. This charge is expected to be comprised primarily of lease
costs, severance costs and impairment of certain operating assets outside the
U.S.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
When used in this discussion, the words "believes", "anticipated", "expects" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. See Item 6 - Exhibit
99 "Important Factors Regarding Forward-Looking Statements" which is
incorporated herein by reference. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
On August 2, 1996, the Board of Directors approved a plan to restructure the
Company's operations and made changes to executive management. Under the
approved plan, the Company expects to record a restructuring charge of
approximately $18 million in the three months ending October 31, 1996, change
its distribution model outside the U.S. from a direct sales force to a network
of independent distributors and service providers, eliminate substantially all
of its cost base outside the U.S. and realign its resources and focus to match
the potential of its various products and markets. This plan will result in a
significant reduction in the Company's cost base and total revenue; however,
management believes it will allow the Company to capitalize on its strengths,
maximize shareholder value and return the Company to profitability over the
long-term. Management does not believe the U.S. sales model or personnel
require modification at this time. This one-time charge is expected to be
comprised primarily of lease costs, impairment of certain operating assets
outside the U. S. and severance costs.
The Company's restructuring plan is extensive and results in new and increased
responsibilities for management personnel. There will be significant challenges
on the Company's new management as they attempt to implement the restructuring
plan and develop personal knowledge of the Company, its products and markets.
To accommodate these changes, compete effectively and manage potential growth
and changes in the market place, management must continue to implement and
improve the speed and quality of its information decision and reporting systems,
procedures and controls and motivate its workforce. There can be no assurance
that the Company's personnel, procedures, systems, controls and plans will be
successful or adequate to handle the changes. Additionally, the Company faces
intense competition in hiring and retaining skilled management, technical,
marketing, and sales personnel. The loss of the services of one or more of the
Company's key employees could have a materially adverse effect on the Company's
business, operating results and financial condition. See Exhibit 99 for further
discussion of potential risk factors.
THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THREE MONTHS ENDED JULY 31, 1995
Total Revenue
Total revenue decreased 46% from $9.8 million in the three months ended July 31,
1995 to $5.3 million in the three months ended July 31, 1996. This decrease
was attributable to continued reductions in revenue from its model management
products, especially outside of the U.S., and the historical seasonal downturn
in the U.S. revenue in the first fiscal quarter.
Product Licenses. The Company's product license revenue is predominantly related
to its Systems Engineer and Process Engineer product lines. Product license
revenue decreased 63% from $5.4 million in the three months ended July 31, 1995
to $2 million in the three months ended July 31, 1996. This decline, which
reflected a reduction in the number of licenses sold, is due to a decline in the
sales of the model management product line and the historical seasonal downturn
in the U.S. revenue for the first quarter.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Services. The Company provides maintenance and implementation services to its
customers. Maintenance services include technical support and access to product
upgrades. Implementation services include product installation, training and
assisting customers with the effective deployment of LBMS products. Overall
services revenue decreased 26% from $4.4 million for the three months ended July
31, 1995 to $3.3 million for the three months ended July 31, 1996, reflecting a
decline in implementation services revenue. Maintenance and implementation
services revenue decreased 6% and 28%, respectively, for the three months ended
July 31, 1996 compared to the prior year period as a result of the decrease in
license revenue for the three months ended July 31, 1996.
Cost of Revenue
Cost of Product Licenses. Cost of product licenses consists of sublicense
fees, product media and duplication cost, manuals, packaging materials and
shipping expenses. Cost of product licenses was $0.2 million and $0.1 million
in the three months ended July 31, 1995 and 1996, respectively, resulting in a
gross margin of 95% and 97% for each respective period. The increase in margin
is the result of a change in the mix of products from products with license fees
payable to a third party licenser to products without such third party fees.
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $1.7 million
and $1.6 million in the three months ended July 31, 1995 and 1996, respectively,
resulting in a gross margin of 62% and 50% of the related service revenue in
each respective period. The reduction of the gross margin percentage
predominately reflects the reduction in service revenue described above while
personnel costs were stable.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions of sales and marketing personnel, travel and promotional
expenses and related indirect costs. Sales and marketing expenses increased 7%
from $4.2 million, or 43% of total revenue, in the three months ended July 31,
1995 to $4.5 million, or 86% of total revenue, for the same period in 1996.
This increase of $0.3 million is due to the increase in the number of marketing
activities, including trade shows and promotional expenses. Sales and marketing
expenditures are incurred based upon expected revenues levels; consequently,
sales and marketing as a percentage of total revenue increased for the three
months ended July 31, 1996 as compared to the same period in the prior year due
to total revenues not meeting management's expectations.
Research and Development. Research and development expenses consist primarily
of cost of research and development personnel and related indirect costs.
Research and development expenses were $1.9 million, or 19% of total revenue,
for the three months ended July 31, 1995 compared to $2.1 million, or 41% of
total revenue for the same quarter in fiscal 1996. The increase in the
percentage of total revenue is a result of the decline in revenue as discussed
above.
General and Administrative. General and administrative expenses consist
primarily of salaries of financial, administrative and management personnel and
related indirect costs. General and administrative expenses increased 6% from
$1.2 million to $1.3 million for the three months ended July 31, 1996 compared
to the same period in the prior year. This increase is a result of the above
discussed decline in revenue.
Operating Income
As a result of the above discussed decline in revenue and a relatively fixed
cost base, the Company generated a loss from continuing operations of $4.4
million in the three months ended July 31, 1996 compared to income from
continuing operations of $518,000 for the comparable period in 1995.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income taxes
During the three month period ended July 31, 1996, the Company did not record a
tax benefit related to the Company's losses because such benefit can not be
recognized, under the liability method, until future taxable income is
reasonably assured.
Liquidity and Capital Resources
At July 31, 1996, the Company had cash and equivalents of $11.4 million and
working capital of $6.9 million. Additionally, the Company has revolving lines
of credit available approximating $2 million. At August 31, 1996, approximately
$700,000 is available to be drawn from on these credit facilities. The Company
generated $1.0 million in cash from operations for the three months ended July
31, 1996 before payments of $0.2 million related to the Company's previous
restructuring activities and legal settlement. The Company had capital
expenditures of $0.1 million for the three months ended July 31, 1996 compared
to $0.6 million for the same period in the prior year. The Company does not
currently have any significant capital commitments.
The implementation of the Company's restructuring plan will consume significant
amounts of cash over the remainder of the fiscal year. Management believes the
cash requirements related to the expected restructuring charge for the remainder
of the fiscal year could be as much as $7.5 million. These requirements are to
fund anticipated severance costs, lease costs and costs associated with the
elimination of the Company's cost base outside the U.S. Additionally, the
decline in revenue for the quarter ended July 31, 1996 will cause the Company to
use cash for operations during its second fiscal quarter until it can generate
increased revenue. While management believes sufficient cash reserves currently
exist to sustain the anticipated restructured operations for the remainder of
the fiscal year, there is no assurance that the Company will have adequate
liquidity and capital resources for the current fiscal year, that it will be
allowed to draw on its existing credit facilities or that it will be able to
find alternative credit facilities or capital resources with terms that
management believes are acceptable if so required to do so. See Exhibit 99 for
further discussions about potential risk factors.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings: - From time to time the Company has legal
or administrative proceedings which are generally incidental
to its normal business activities. While the outcome of any
such proceeding can not be accurately predicted, the Company
does not believe the ultimate resolution of any such existing
matters should have a material adverse effect on its financial
position or results of operations.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 Important Factors Regarding Forward-Looking Statements.
(b) Reports on Form 8-K
Not Applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 15, 1996 LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
By: /s/ Michael S. Bennett
-----------------------------------------------
Michael S. Bennett, Chief Executive Officer
By: /s/ Stephen E. Odom
-----------------------------------------------
Stephen E. Odom, Chief Financial Officer and
Senior Vice President - Finance and
Administration
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<PAGE>
Exhibit 99
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this exhibit
in order to do so. Accordingly, the Company hereby identifies the following
important factors which could cause the Company's actual financial results to
differ materially from any such results which might be projected, forecast or
estimated by the Company in forward-looking statements.
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time. Reference is
also made to the "Risk Factors" described in the Company's Prospectus dated
November 22, 1995 and the Company's Form 10-K for its fiscal year ended April
30, 1996, as filed with the Securities and Exchange Commission.
(a) On August 22, 1996, the Company announced a restructuring of the business.
Included in the restructuring was a shift in the Company's development and
marketing efforts to focus substantially all its resources on the Company's
Process Engineer product line. Also, the Company discontinued its
telesales operations in the US and discontinued its operations outside the
US. The Company's future ability to generate sustained profitability is
reliant on the Company's Process Engineer product line and the Company's
direct sales operations in the US. There is no assurance that the Company
will be able to generate or sustain profitability. The Company's plan is
to replace its international operations with third-party distributor
relationships. There is no assurance that the Company will be able to
reach agreements with third-party distributors or that such distributors
will be successful. The Company has not historically been successful in
selling its Process Engineer product line outside the US.
In connection with the Company's restructuring plan, the Company announced
that it expects to record an estimated $18 million one-time restructuring
charge in the three months ended October 31, 1996. It is expected that this
charge will result in the Company recording a loss for the three months
ended October 31, 1996 and for the year ended April 30, 1997. The estimated
restructuring charge will result in a substantial reduction in the
Company's cash balance from July 31, 1996 through the next several
quarters. The estimated cash requirements associated with the restructuring
charge exceed the Company's cash balance at July 31, 1996, therefore if the
Company does not generate cash from ongoing operations over the next
several quarters the Company will require additional external financing.
There is no assurance that the Company will generate cash from ongoing
operations in adequate amounts to fund the restructuring plan and there is
no assurance that, should it be required, the Company could obtain adequate
and suitable additional financing. Further, the Company's restructuring
plan could result in additional claims or liabilities which the Company has
not anticipated or included in the restructuring charge. Unanticipated
claims or liabilities could result in additional cash needs for the
Company.
Publicity concerning the Company's announced loss for the three months
ended July 31, 1996, the announced restructuring plan and the estimated
restructuring charge expected to be recorded in the three months ended
October 31, 1996, could adversely affect the Company's operations and
financial position including the ability to complete product sales and
retain or attract key management and other personnel.
(b) Fluctuations in Operating Results; Seasonality. The Company has experienced
substantial fluctuations in quarterly operating results in the past, and
future operating results could vary substantially from quarter to quarter.
Fluctuations in operating results may result in volatility in the price of
the ADSs. The Company generally fulfills orders as received and as a result
typically has little or no product license backlog. Quarterly revenue and
operating results therefore depend on the volume and timing of orders
received during the quarter, which are difficult to forecast. In addition,
the Company historically has recognized a substantial portion of its
revenue in the last weeks of a quarter. To the extent this trend continues,
the failure to achieve such revenue in the last weeks of any given quarter
may have a material adverse effect on the Company's financial results for
that quarter. The timing of sales and related revenue recognition is
influenced by a number of other factors, including seasonal customer buying
patterns, changes in product development and sales and marketing
expenditures, and compensation incentives for
<PAGE>
sales teams. Because the Company's staffing and operating expenses are
based on anticipated revenue levels and a high percentage of the Company's
costs are fixed in the short-term, small variations in timing of
recognition of specific revenue can cause significant variations in
operating results from quarter to quarter. In addition, the first quarter
has historically been comparatively weaker than the fourth quarter of the
preceding fiscal year. Results from quarter to quarter may not be
indicative of future results. There can be no assurance that the Company
will be able to sustain profitability on an annual or quarterly basis.
(c) Prior Losses; Risks Associated with Management of a Changing Business. The
Company experienced losses in fiscal 1994, 1995, 1996 and the three months
ended July 31, 1996. Based on the loss in the first quarter in fiscal 1997
and the expected restructuring charge, management expects that the Company
will experience a loss for the 1997 fiscal year. Over the last several
years, the Company's strategic orientation has evolved from that of a U.K.-
based provider of computer-related consulting services to a U.S.-based
provider of software products and directly related services. In fiscal
1995, the Board of Directors of the Company decided to focus exclusively on
its software products business, center that activity in the U.S. and
discontinue its consulting business. Accordingly, the Company relocated its
operational headquarters and the majority of its U.K.-based research and
development activities to the U.S. In connection with the discontinuance of
its consulting business, the Company disposed of its U.K.-based consulting
business and ceased all other remaining consulting activities across the
business. The Company has previously announced that it intends, subject to
satisfactory resolution of tax and regulatory issues, including, if needed,
approval of the Company's shareholders, to change its legal domicile from
the U.K. to the U.S., such change in legal domicile may be affected by the
restructuring plan discussed in (a) above. While the Company has refocused
its strategy, there can be no assurance that such reorientation will result
in sustained profitability. Furthermore, in connection with such
reorientation, the Company has experienced and will continue to experience
a period of transition. This transition has placed, and may continue to
place, a significant strain on its resources, including its personnel. If
Company management is unable to manage these changes effectively, the
Company's business, financial condition and results of operations will be
materially adversely affected.
(d) Need for Market Acceptance of Process Management. The Company's product
lines are designed specifically for Process Management in the client/server
environment. The Company's future financial performance will depend in
large part on continued growth in the number of organizations using process
management for development management. The Company believes that while the
market for process management tools is growing, it is still immature. Even
if broader market acceptance is achieved, there can be no assurance that
the market will continue to grow or that the Company will be able to
respond effectively to the evolving requirements of the market. The
Company's reduced focus and investment on products other than process
management could result in reduced opportunities for sales of process
management products and adversely affect operational results.
(e) Risks Relating to New Product Releases and Product Enhancements. The
Company's future success will depend, in large part, upon the Company's
ability to enhance its current process management product line and develop
and introduce new products to meet customers' process management tool needs
as well as emerging industry standards. There can be no assurance that the
Company will be able successfully to develop and market a broader line of
such products or that the Company will not encounter unexpected
difficulties and delays in enhancing its existing products. Furthermore,
there can be no assurance that such new products or product enhancements
will meet the requirements of the marketplace or achieve market acceptance.
Software products such as the products offered by the Company often
encounter development delays and may contain undetected errors or failures
when introduced or when new versions are released. Because of the
complexity of the Company's products and the possibility of unforeseen
technical problems in the development process, the Company risks missing
announced delivery dates for new products or product enhancements. The
Company has in the past and may in the future experience delays in the
introduction of new products and product enhancements. There can be no
assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of
a new product or product enhancement or its functioning after release.
Substantial delays in the availability of any of the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, products such as those
offered by the Company may contain undetected or unresolved software errors
when they are first introduced or as new or enhanced versions are released.
The Company has in the past discovered software errors in certain of its
new products and product enhancements. Although the Company has not
experienced any
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<PAGE>
material adverse effects resulting from any such errors to date, 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 releases
after commencement of commercial shipments resulting in loss of or delay in
market acceptance, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
(f) Rapid Technological Change. The market for process management tools is
characterized by rapid technological advances, evolving industry standards,
changes in customer requirements and frequent new product introductions and
enhancements. The Company's future success will depend in part on its
ability to enhance its existing products and introduce new products that
address changing customer requirements and emerging industry standards,
such as new operating systems, including Windows 95. Any failure by the
Company to anticipate or respond adequately to technology developments and
customer requirements, or any significant delays in product development or
introduction, could result in a loss of competitiveness or revenue. In
addition, from time to time the Company or others may announce products,
features or technologies which have the potential to shorten the life cycle
or replace the Company's existing products. Such announcements could cause
customers to defer the decision to buy, or determine not to buy, the
Company's products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
(g) Competition. The client/server applications development and specifically
the process management tools market is extremely competitive, fragmented
and rapidly changing, and is characterized by a lack of standards and
numerous competitors in the areas of tools, methodologies and services. The
Company believes that its ability to compete depends on many factors both
within and outside of its control, including corporate and product
reputation, product architecture, functionality and features, product
quality, performance, ease-of-use, quality of support, availability of
product implementation and training services, and price.
In addition, because of the complexities inherent in software development,
software companies and the information technology departments of other
business organizations may determine that it is more cost effective to
develop their own software development and process management tools
offering similar solutions to those products offered by the Company.
Furthermore, the Company faces the risk that vendors of tools, databases
and other elements of the client/server development market may add to their
products some or all of the functionality that the Company's products
provided to customers, thereby reducing the number of prospective customers
in need of the Company's products. There can be no assurance that the loss
of customers will not have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company expects competition from existing and additional competitors to
increase. Many of the Company's competitors have, and new competitors may
have, larger technical staffs, more established and larger marketing and
sales organizations, better developed distribution systems and
significantly greater financial resources than the Company. There can be no
assurance that either existing or new competitors will not develop products
that are superior to the Company's products or that achieve greater market
acceptance. There can be no assurance that future competition will not have
a material adverse effect on the Company's business, financial condition
and results of operations. In addition, distribution channels, technical
requirements and levels and bases of competition may differ as the Company
introduces new products, and there can be no assurance that the Company
will be able to compete favorably. In addition, a proliferation of software
products to meet the needs of the client/server applications development
and specifically the process management market may have a downward pressure
on the prices of such products. Such downward pressure on product prices
could have an impact on the Company's operating margins. There can be no
assurance that the Company could avoid these price pressures.
(h) Risks Relating to Expansion of Indirect Sales Channels. An important
aspect of the Company's future sales and marketing strategy is to expand
indirect sales channels through distributors and resellers in order to
provide it with market coverage outside the U.S. Although the Company
currently sells its products through indirect sales channels, revenue from
such sales represent only a small portion of the Company's total revenue
and there can be no assurance that the Company will be able to expand its
use of indirect sales channels by attracting distributors and resellers
that will be able to market and support the Company's software tools
effectively. There can be no assurance that any distributor or reseller of
the Company's products will continue to represent the Company's products,
and the inability to recruit or retain a significant number of resellers or
distributors could adversely affect the Company's business, financial
condition and results of operations. The Company's strategy of marketing
its
-3-
<PAGE>
products directly to end-users and indirectly through distributors and
resellers may result in distribution channel conflicts. The Company's
direct sales efforts may compete with those of its indirect channels and to
the extent different resellers target the same customers, resellers may
also come into conflict with each other. Although the Company attempts to
allocate the markets for its products among its distribution channels in a
manner to avoid potential conflicts, there can be no assurance that channel
conflict will not materially and adversely affect its relationships with
existing distributors and resellers or adversely affect its ability to
attract new distributors and resellers.
(i) Dependence on Proprietary Technology. The Company's success is heavily
dependent upon proprietary technology. The Company's products are licensed
to customers under signed license agreements containing, among other
things, provisions protecting against the unauthorized use, copying and
transfer of the licensed program. In addition, the Company relies on a
combination of trade secret, copyright and trademark laws, non-disclosure
agreements and contractual provisions to protect its proprietary rights in
its products and technology. 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, particularly in international markets
and as a result of the growing use of the Internet. 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 U.K. and the U.S. There can be no
assurance that the steps taken by the Company to protect its proprietary
rights will be adequate or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technologies.
The Company is not aware that any of its products, trademarks or other
proprietary rights infringe the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to
current or future products. As the number of software products in the
market increases and the functionality of these products further overlap,
software developers may become increasingly subject to infringement claims.
Any such claims against the Company, with or without merit, could be time-
consuming and expensive to defend, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty
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, financial condition and results of operations.
(j) Dependence on Key Personnel. The Company's future success depends to a
significant extent on the performance of a number of key management and
technical personnel, the loss of one or more of whom could have a material
adverse effect on the Company. The Company recently announced the
appointment of a new Chief Executive Officer and a new Chairman of the
Board. Although these individuals have extensive management experience in
technology based companies, their experience in the Company's specific
process management product line is limited. The Company's success will also
depend in part on its ability to attract and retain qualified professional,
technical, managerial, sales and marketing and customer support personnel.
Competition for such personnel in the software industry is intense. There
can be no assurance that the Company will be successful in attracting and
retaining the personnel it requires to develop new and enhanced products
and to conduct its operations successfully.
(k) Risks Associated with Global Operations. Although the Company's
restructuring strategy (discussed in (a) above) relies primarily on the
U.S. marketplace, the Company's current and future efforts outside the U.S.
are subject to risks inherent in international business activities,
including, in particular, general economic conditions in each such country,
overlapping of differing tax structures, managing an organization spread
over various jurisdictions, unexpected changes in regulatory requirements
and complying with a variety of foreign laws and regulations. Other risks
associated with operations outside the U.S. in general include import and
export licensing requirements, trade restrictions and changes in tariff and
freight rates. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's non-U.S. sales have historically been denominated in foreign
currencies. To date, the Company has not established an exchange rate
hedging policy and has not engaged in any significant exchange rate hedging
-4-
<PAGE>
activities to minimize the risks of exchange rate fluctuations. The Company
may seek to implement hedging techniques in the future with respect to its
foreign currency transactions. There can be no assurance that the Company
will be successful in such hedging activities. Gains and losses on the
translation and/or conversion of foreign transactions into U.S. dollars may
contribute to fluctuations in the Company's results of operations. Although
the Company has not experienced any material adverse impact to date from
fluctuations in foreign currencies, there can be no assurance that the
Company will not experience a material adverse effect on its business,
financial condition and results of operations from fluctuations in foreign
currencies in the future.
Many of the foregoing factors discussed have been discussed in the Company's
prior SEC filings and, had the Act become effective at a different time, would
have been discussed in an earlier SEC filing instead of this 10-Q. The
foregoing review of factors pursuant to the Private Litigation Securities Reform
Act of 1995 should not be construed as exhaustive or as any admission regarding
the adequacy of disclosures made by the Company prior to the effective date of
said Act.
-5-
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<PAGE>
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This schedule contains summary financial information extracted from
the July 31, 1996 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<FISCAL-YEAR-END> APR-30-1996
<PERIOD-START> MAY-01-1996
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