<PAGE>
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, 1997
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, 9th Floor
Houston, Texas
77027-3210
(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 21, 1997, 26,040,964 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, 1997
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of July 31, 1997 and April 30, 1997 3
Consolidated Statement of Operations for the three months ended
July 31, 1997 and July 31, 1996 4
Consolidated Statement of Cash Flows for the three months ended
July 31, 1997 and July 31, 1996 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>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
July 31, April 30,
1997 1997
--------- ----------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 10,320 $ 8,461
Trade accounts receivable 2,563 4,358
Other current assets 1,269 1,023
-------- --------
Total current assets 14,152 13,842
Furniture, fixture and equipment, net 1,531 1,512
-------- --------
Total assets $ 15,683 $ 15,354
======== ========
Liabilities and shareholders' deficit
-------------------------------------
Current liabilities:
Current maturities of indebtedness $ 493 $ 745
Accounts payable 729 486
Deferred revenue 4,073 3,534
Accrued liabilities 5,220 5,778
Executive Stock Option Trust indebtedness 977
-------- --------
Total current liabilities 10,515 11,520
Indebtedness 178 238
Other liabilities 5,977 8,843
-------- --------
Total liabilities 16,670 20,601
-------- --------
Shareholders' deficit:
Ordinary shares, 10 pence par value 4,338 4,267
Additional paid-in capital 21,423 20,330
Executive Stock Option Trust indebtedness (977)
Cumulative translation adjustment (277) (372)
Accumulated deficit (26,471) (28,495)
-------- --------
Total shareholders' deficit (987) (5,247)
-------- --------
Commitments and contingencies
-------- --------
Total liabilities and shareholders' deficit $ 15,683 $ 15,354
======== ========
</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,
------------------
1997 1996
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Revenue:
Product licenses $ 4,050 $ 2,004
Services 1,848 3,250
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Total revenue 5,898 5,254
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Costs and expenses:
Cost of product licenses 16 58
Cost of services 969 1,616
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Total cost of revenue 985 1,674
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Gross margin 4,913 3,580
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Sales and marketing 2,447 4,522
Research and development 1,115 2,143
General and administrative 660 1,308
Recovery of restructuring charges (1,256)
------- -------
Total operating expenses 2,966 7,973
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Operating income (loss) 1,947 (4,393)
Interest income 107 123
Interest expense (30) (34)
Other income (expense) 4
------- -------
Income (loss) from continuing operations before income taxes 2,024 (4,300)
Income taxes (benefit)
------- -------
Net income (loss) $ 2,024 $(4,300)
======= =======
Income (loss) per Ordinary Share: $0.08 $(0.17)
======= =======
Income (loss) per ADS: (1) $0.15 $(0.34)
======= =======
Weighted average Ordinary and Ordinary Share
equivalents outstanding 26,998 25,535
======= =======
</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)
<TABLE>
<CAPTION>
Three months ended
July 31,
------------------
1997 1996
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Cash flow from operating activities:-
Net income (loss) $ 2,024 $(4,300)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 112 228
Recovery of restructuring charges (1,256)
Changes in current assets and liabilities:
Trade accounts receivable 1,795 4,554
Other current assets (246) 297
Accounts payable 243 (469)
Accrued restructuring (1,523) (98)
Accrued legal settlement (333) (155)
Other accrued liabilities (329) (848)
Deferred revenue 539 1,630
Other noncurrent assets and liabilities, net 112 (71)
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Net cash provided by operating activities 1,138 768
------- -------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (131) (148)
------- -------
Net cash used by investing activities (131) (148)
------- -------
Cash flows from financing activities:
Repayments of indebtedness (1,289) (155)
Sale of ESOT Ordinary Shares, net 1,636
Issuance of Ordinary Shares, net 505 (39)
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Net cash provided (used) by financing activities 852 (194)
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Increase in cash 1,859 426
Beginning cash and cash equivalents 8,461 10,960
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Ending cash and cash equivalents $10,320 $11,386
======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
JULY 31, 1997
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, 1997.
NOTE 2 - SHAREHOLDERS' EQUITY:
In the period May 1, 1997 through July 31, 1997, options to purchase 340,401
Ordinary Shares at exercise prices of $0.72 to $1.63 per share were exercised.
At July 31, 1997, there were options granted and outstanding to purchase
3,680,013 Ordinary Shares. The Company issued 89,842 Ordinary Shares to its
employees on July 1, 1997 under the Employee Stock Purchase Plan.
NOTE 3 - 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 4 - RESTRUCTURING CHARGE:
In August 1996, the Board of Directors approved a plan to restructure the
Company's operations. Under the approved plan, the Company recorded a
restructuring charge of $17.6 million in the three months ending October 31,
1996. At July 31, 1997, the Company had approximately $7 million of the
restructuring liabilities remaining. These primarily related to abandoned
lease costs which will be paid out through the year 2014. During the three
months ended July 31, 1997, the Company recorded a recovery of restructuring
charges previously taken of $1.3 million related to the subleasing and/or buyout
of various abandoned leases.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
When used in this discussion, the words "believes," "anticipated" 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
In August 1996, the Board of Directors approved a plan to restructure the
Company's operations and made certain changes to executive management. In
connection with the Company's restructuring plan, the Company recorded a $17.6
million restructuring charge in the three months ended October 31, 1996. The
restructuring charge was comprised primarily of lease costs, severance and other
employee costs and impairment of certain operating assets, principally outside
the U.S. 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, eliminating or substantially reducing its
development and marketing investment in the Systems Engineer, Insight, GUI
Guidelines and Client Server Guidelines product lines. The Company also
discontinued its direct sales and service operations outside the US, replacing
its non-U.S. operations with third-party distributor relationships. Also, the
Company discontinued its telesales operations in the US.
During the three months ended July 31, 1997, the Company recorded a recovery of
restructuring charges previously taken of $1.3 million related to the subleasing
and/or buyout of various abandoned leases. The Company expects additional
recoveries, primarily through sublease or other arrangements, however, there is
no assurance that such recoveries will actually occur.
As a result of the significant changes in the business, the results of
operations and financial position of the Company for the three months ended July
31, 1997, are substantially different than for the comparative prior period.
THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THREE MONTHS ENDED JULY 31, 1996
Total Revenue
Total revenue increased from $5.3 million in the three months ended July 31,
1996 to $5.9 million in the three months ended July 31, 1997. This increase was
attributable to increased product revenue in the U.S. partially offset by a
decrease in service revenue related to the discontinuance of direct service
operations outside the U.S. and a decrease in maintenance revenue because of the
sale of the Systems Engineer product line.
Product Licenses. The Company's product license revenue in the three months
ended July 31, 1997 was predominantly related to its Process Engineer product
line. Product license revenue increased 102% from $2.0 million in the three
months ended July 31, 1996 to $4.1 million in the three months ended July 31,
1997. This increase is substantially attributable to increased product revenue
in the U.S.
Services. The Company provides maintenance and implementation services to its
customers. Maintenance services include technical support and access to product
upgrades when and if available. Implementation services include product
installation, training and assisting customers with the effective deployment of
LBMS products. Overall services revenue decreased 43% from $3.3 million for the
three months ended July 31, 1996 to $1.8 million for the three months
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ended July 31, 1997, primarily due to the elimination of the service operations
outside the U.S. and an elimination of maintenance revenue from the Systems
Engineer product line.
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 $58,000 and $16,000 in the
three month periods ended July 31, 1996 and 1997, respectively. The reduction
is due to the elimination of third party license fees payable on sales of the
Systems Engineer product.
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $1.6
million and $1.0 million in the three months ended July 31, 1996 and 1997,
respectively, resulting in a gross margin of 50% and 48% of the related service
revenue in each respective period. The reduction in gross margin percentage
predominately reflects the elimination of maintenance revenue from the Systems
Engineer product line.
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 decreased 46%
from $4.5 million, or 86% of total revenue, in the three months ended July 31,
1996 to $2.4 million, or 41% of total revenue, for the three months ended July
31, 1997. This decrease of $2.1 million is due to the elimination of sales and
marketing costs outside the U.S.
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 $2.1 million, or 41% of total revenue,
for the three months ended July 31, 1996 compared to $1.1 million, or 19% of
total revenue for the three months ended July 31, 1997. The decrease in
research and development expenses reflect the elimination or substantial
reduction in development efforts related to the Systems Engineer, Insight, GUI
Guidelines and Client Server Guidelines products. Development headcount and
expenses related to the Process Engineer product line were increased in the
three months ended July 31, 1997 compared to the three months ended July 31,
1996.
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 decreased 50% from
$1.3 million for the three months ended July 31, 1996 to $0.7 million for the
three months ended July 31, 1997. The decrease resulted from the elimination of
general and administrative expenses outside the U.S. and a reduction of general
and administrative expenses, principally leasehold costs, in the U.S.
Operating Income. The Company generated income from operations of $1.9 million,
including a recovery of restructuring charges from previous periods of $1.3
million, in the three months ended July 31, 1997 compared to a loss from
operations of $4.4 million for the comparable period in 1996.
Income taxes. The Company did not record an income tax expense for income
recognized in the three month period ended July 31, 1997, due to prior period
losses. For the three months ended July 31, 1996, no tax benefit was recognized
due to the historical tax losses experienced; consequently, there was no
assurance that the Company's operations would generate taxable income to utilize
these losses.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At July 31, 1997, the Company had cash and cash equivalents of $10.3 million and
working capital of $3.6 million. The Company generated cash from operating
activities of $1.1 million in the three months July 31, 1997.
The Company's investing activities consist primarily of purchases of equipment.
The Company had capital expenditures of $0.1 million, in each of the three
months ended July 31, 1997 and 1996. The Company does not currently have any
significant capital commitments.
The Company has available lines of credit from a bank in the U.S. in the amounts
of $2.5 million. Approximately $0.2 million was outstanding under this line of
credit at July 31, 1997. This credit facility requires the Company to comply
with certain restrictive covenants and maintain certain financial ratios. At
July 31, 1997, the Company was in violation of certain restrictive covenants and
obtained a waiver from the Bank. In June 1997, the Company's Executive Stock
Option Trust repaid approximately $1 million of indebtedness to a Bank with
proceeds from the sale of the shares held by the Trust and consequently, the
Company was released from its guarantee of that indebtedness.
The Company believes that its existing cash will be adequate to finance its
operations for at least the next 12 months.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 128 " Earnings per Share" (SFAS
128) which becomes effective for periods ending after December 15, 1997,
establishes new standards for computing and presenting earnings per share (EPS).
The new standard requires the presentation of basic EPS and diluted EPS. Basic
EPS is calculated by dividing income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common shareholders by
the weighted average number of common shares outstanding adjusted to reflect
potentially dilutive securities. Previously reported EPS amounts must be
restated under the new standard when it becomes effective.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accoounting Standards No. 130, "Reporting for Comprehensive Income"
and No. 131 "Disclosure about Segments of an Enterprise and Related
Information." These statements are effective for financial statements issued
for periods beginning after December 15, 1997. The Company has not yet analyzed
the impact of adopting these statements.
The American Institute of Certified Public Accountants has issued an exposure
draft to amend the provisions of Statement of Position 91-1, "Software Revenue
Recognition." The adoption of the standards in the current version of the
exposure draft will not have a significnat impact on the Company's results of
operations or financial position.
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<PAGE>
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
27 Financial Data Schedule.
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 Section 13 0r 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.
Date: September 15, 1997 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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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JULY 31, 1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 10,320
<SECURITIES> 0
<RECEIVABLES> 3,049
<ALLOWANCES> (486)
<INVENTORY> 0
<CURRENT-ASSETS> 14,152
<PP&E> 3,304
<DEPRECIATION> (1,773)
<TOTAL-ASSETS> 15,683
<CURRENT-LIABILITIES> 10,515
<BONDS> 0
0
0
<COMMON> 4,338
<OTHER-SE> (5,325)
<TOTAL-LIABILITY-AND-EQUITY> 15,683
<SALES> 4,050
<TOTAL-REVENUES> 5,898
<CGS> 985
<TOTAL-COSTS> 2,966
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 2,024
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,024
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
<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 in Company
filings with the Securities and Exchange Commission.
(a) Restructuring - In August 1996, the Board of Directors approved a plan to
restructure the Company's operations and made changes to executive
management. 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, eliminating or substantially
reducing its development and marketing investment in the System Engineer,
Insight, GUI Guidelines and Client Server Guidelines product lines, and to
discontinue its direct sales and service operations outside the U.S. The
Company replaced its non-U.S. operations with third-party distributor
relationships. There is no assurance that such distributors will be
successful. Also, the Company discontinued its telesales operations in the
U.S. The Company's future ability to generate sustained profitability is
dependent on the Company's Process Engineer product line and the Company's
direct sales operations in the U.S. There is no assurance that the Company
will be able to generate or sustain profitability. The Company has not
historically been successful in selling its Process Engineer product line
outside the U.S.
In connection with the Company's restructuring plan, the Company recorded a
$17.6 million restructuring charge in the three months ended October 31,
1996. The restructuring charge was comprised primarily of lease costs,
severance and other employee costs and impairment of certain operating
assets, principally outside the U.S. The restructuring
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<PAGE>
actions may result in a substantial reduction in the Company's cash balance.
The estimated total cash requirements associated with the restructuring
actions is substantial, however, currently, such cash requirements extend
over several years. Additionally, 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 reported loss for 1997 and losses
reported in previous years, 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 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.
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) 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 tools to manage their development processes. 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
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products and adversely affect the Company's business, financial condition
and results of operations.
(d) 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 to successfully 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. The Company has introduced a
new product, Deliverables Manager, which has required and will continue to
require substantial development, marketing, management and other investment.
There can be no assurance that Deliverables Manager or other 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 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.
(e) Rapid Technological Change. The market for process and asset management
tools is characterized by rapid technological advances, evolving industry
standards, changes in customer requirements and frequent new product
introductions and enhancements.
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<PAGE>
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.
(f) Competition. The process and asset 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 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
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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 process and asset management tools 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.
(g) Risks Relating to Indirect Sales Channels. An important aspect of the
Company's future sales and marketing strategy is to increase the
effectiveness of current indirect sales channels outside the U.S. and
develop indirect channels inside the U.S. Although the Company currently
sells its products through indirect sales channels outside the U.S., revenue
from such sales, in particularly since the restructuring, has been minimal.
There can be no assurance that the Company will be able to increase revenue
from its current indirect sales channels or establish new indirect sales
channels. There can be no assurance that any current distributor of the
Company's products will continue to represent the Company's products, and
the inability to improve the effectiveness of current indirect sales
channels or establish new indirect sales channels could adversely affect the
Company's business, financial condition and results of operations. The
Company's strategy of marketing its products directly to end-users and
indirectly through distributors may result in distribution channel
conflicts, particularly in the U.S. The Company's direct sales efforts may
compete with those of its indirect channels and to the extent different
distributors target the same customers, distributors 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.
(h) 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,
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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.
(i) 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'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.
(j) 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.
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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
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 affect on its business,
financial condition and results of operations from fluctuations in foreign
currencies in the future.
(k) Prior Losses; Risks Associated with Management of a Changing Business. The
Company experienced losses in fiscal 1994, 1995, 1996 and 1997. 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.
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 earlier SEC filings. 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.
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