<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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)
(Registrant's telephone number, including area code)
(713) 625-9300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
American Depository Shares, each
representing two (2) Ordinary Shares
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
While it is difficult to determine the number of shares owned by non-affiliates,
the registrant estimates that the aggregate market value of the outstanding
Ordinary Shares on June 30, 1997, (based upon the average bid and ask prices of
the Company's ADSs on the NASDAQ National Market on June 30, 1997), held by non-
affiliates was approximately $39,900,000. For this computation, the registrant
has excluded the market value of all shares of its Common Stock reported as
beneficially owned by officers, directors and certain significant stockholders
of the registrant. Such exclusion shall not be deemed to constitute an
admission that any such stockholder is an affiliate of the registrant.
As of June 30, 1997, 25,933,622 Ordinary Shares of the Registrant's Common
Stock, 10 pence par value, were issued and outstanding.
Portions of the definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders for the year ended April 30, 1997 will be incorporated by
reference into Part III hereof.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submissions of Matters to a Vote of Security-Holders 14
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 14
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures 46
PART III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 46
Item 12. Security Ownership of certain Beneficial Owners
and Management 46
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 10-K 46
SIGNATURES 48
"LBMS", "LBMS PROCESS ENGINEER" and "DELIEVERABLES MANAGER" are registered
trademarks of the Company. This filing on Form 10-K also includes trademarks
and trade names of companies other than Learmonth & Burchett Management Systems
Plc.
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This Form 10-K contains forward-looking statements that involve risk and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Exhibit 99 attached hereto.
PART I
ITEM 1. BUSINESS
Learmonth & Burchett Management Systems Plc (LBMS Plc) conducts its operations
through one operating subsidiary, Learmonth & Burchett Management Systems, Inc.,
a Texas corporation (LBMS, Inc.), which conducts business in North America.
During its 1996 fiscal year and the first quarter of fiscal 1997, the Company
also conducted business through four additional subsidiaries. LBMS Pty. Ltd.,
which conducted business in Australia and the Pacific region, and LBMS (Hong
Kong) Limited, which conducted business in Hong Kong and Asia, are wholly-owned
subsidiaries of LBMS Holdings Limited, which is a holding company wholly-owned
by LBMS Plc. LBMS Europe Limited, which conducted business in Europe, owns the
intellectual property rights to Process Engineer, Deliverables Manager and their
related products and owned the intellectual property rights to the Systems
Engineer product line, prior to its sale. Corporate Computing, Inc. owns the
intellectual property rights to RADPath and Client/Server Guidelines (product
lines no longer actively developed and marketed). Both Corporate Computing,
Inc. and LBMS Europe Limited are owned directly by LBMS Plc. As used in this
document, except as the context otherwise requires, the terms "Company" and
"LBMS" refer to Learmonth & Burchett Management Systems Plc together with its
consolidated subsidiaries. The Company's executive offices are located at 1800
West Loop South, Ninth Floor, Houston, Texas 77027, and its telephone number at
that location is (713) 625-9300. LBMS company and product information can be
found on the World Wide Web at http://www.lbms.com.
OVERVIEW
In August 1996, the Board of Directors approved a plan to restructure the
Company's operations and made certain 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 Systems Engineer, Insight, GUI Guidelines and Client
Server Guidelines product lines. The Company also discontinued its direct sales
and service operations outside the U.S., replacing its non-U.S. operations with
third-party distributor relationships. Also, the Company discontinued its
telesales operations in 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 the abandonment of certain operating assets,
principally outside the U.S.
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During the three months ended January 31, 1997, the Company recorded a
restructuring benefit of $3.5 million. Approximately $2.1 million represented
proceeds from the sale of the Systems Engineer product line and the remainder
related to sublease arrangements and other recoveries of charges recorded in the
previous period.
As a result of the significant changes in the business, the results of
operations and financial position of the Company for the fiscal year ended April
30, 1997 and the interim quarters of such fiscal year are substantially
different than for the comparative prior periods.
PRODUCTS
LBMS's integrated line of management products provide organizations with a
library of best practices for all areas of applications development, and a
comprehensive set of tools for process management, project management, work
management and deliverables management. LBMS has an installed base of more than
30,000 users worldwide in areas such as financial service, technology,
manufacturing, retailing, oil, government and utilities. The Company also
provides maintenance and implementation services to its customers to assure
effective utilization of its products. All of the Company's products operate on
open, LAN server-based repositories, providing more consistency, integrity and
completeness in the applications development process.
Process Management Tools. Set forth below is a description of the Company's
current process management tools.
LBMS PROCESS MANAGEMENT TOOLS
<TABLE>
<CAPTION>
Initial
Products Functionality Release Date
-------- ------------- ------------
<S> <C> <C>
Process Client/server-based, interactive process management 1993
Engineer environment that automates applications development
processes; consists of six components: PE/Process
Library, PE/Process Manager, PE/Project Manager,
PE/Activity Manager, PE/Web Publisher and PE/Project
Warehouse
PE/Process Server-based process repository containing industry 1993
Library and organization best practices for software
applications development and management
PE/Process Process Authoring Tool, enables definition of best 1993
Manager practices as processes in the PE/Process Library;
used by process managers to define and continuously
improve organization processes for applications
development
</TABLE>
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<TABLE>
<CAPTION>
Initial
Products Functionality Release Date
-------- ------------- ------------
<S> <C> <C>
PE/Project Used by project managers to rapidly build project 1993
Manager plans from best practices stored in the PE/Process
Library. Provides facilities for project definition,
estimating, resourcing, scheduling, work distribution
and project control
PE/Activity Used by project team members to receive work from October 1995
Manager project managers, manage work queues, execute work
using appropriate tools deliverables, capture and
report performance metrics and to route completed
deliverables to the project manager
PE/Web Used by Process Managers to publish best practices July 1996
Publisher contained in the PE/Process Library onto a corporate
Intranet for organization wide reference
PE/Project Provides an integrated repository containing all July 1996
Warehouse project and process performance data for management
reporting, project status reporting and data analysis
for continuous process improvement
</TABLE>
Process Engineer, a market leading process management product, is used by
customers who need to manage complex applications development processes. These
organizations include Fortune 2000 companies who use the product to manage their
own development programs as well as consulting companies that use the product to
manage the delivery of development expertise to their customers. Process
Engineer, together with its support components, enables organizations to define,
deploy, measure and continuously improve development processes. At the core of
the product is a repository of processes, PE/Process Library, which contains the
enterprise's knowledge base for applications development. Unique within the
architecture of the PE/Process Library is support for reusable process
components which are used to assemble templates rapidly in order to address a
variety of application development needs. This architecture makes the
implementation of continuous process improvement a practical reality. Through
its ProcessWare program, LBMS has opened its repository to include "best
practices", or processes from a broad range of vendors including Powersoft,
SQA, Lotus, Computer Horizons Corporation and James Martin, supplementing its
own proprietary processes and techniques for applications development.
Currently there are over 150 processes available in PE/Process Library as well
as over 15 titles through the ProcessWare program. Under this program, LBMS
will continue to recruit industry subject matter experts to provide best
practices for a wide range of applications development topics delivered in the
PE/Process Library.
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The Process Engineer environment provides complete, automated integration of
process, project and work management functions within a customer's development
organization:
. The best practices of the industry or the customer are defined as
processes in the PE/Process Library by LBMS, by ProcessWare partners and
by the customer organization itself using PE/Process Manager. These
processes may be published on a corporate intranet for reference and
education purposes using PE/Web Publisher.
. Processes are selected from PE/Process Library and customized, using
PE/Project Manager, to meet the needs of a particular project.
. The project plan is estimated, resources allocated and schedules
developed to create detailed project plans.
. Project managers distribute work packets to team members using a web
based messaging transport. Each work packet contains a comprehensive set
of information including task definitions, work guidance, techniques,
tools, template deliverables, metrics, roles and responsibilities and
dependencies that provide clear information as to what is to be produced
and how it should be produced.
. Team members manage the execution of their work using the PE/Activity
Manager component. They can launch tools and invoke templates to produce
the deliverables for the project task. Actual performance may be
measured and reported to the project manager at any point. Once an
activity has been completed, all information, including completed
deliverables, is sent back to the project manager for review and possible
further routing to other team members.
. Management reports regarding the status of the project portfolio and
analysis reports regarding the usage of process data may be produced
using the PE/Project Warehouse Component.
. Once a process has been used, the process may be evaluated and its
content improved in PE/Process Library using the PE/Process Manager
component.
Deliverables Management Tools. Set forth below is a description of the
Company's product for managing application development deliverables
(Deliverables Manager).
LBMS DELIVERABLES MANAGEMENT TOOLS
<TABLE>
<CAPTION>
Initial
Products Functionality Release Date
-------- ------------- ------------
<S> <C> <C>
Deliverables Provides storage, organization, configuration June 1997
Manager management, access control and reuse brokering
facilities for all types of software development assets
</TABLE>
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Deliverables Manager is the industry's first facility for storing, managing and
reusing all types of software development deliverables, from project plans, to
requirements documents, to code and executable components. Using Deliverables
Manager, organizations are able to store all deliverables in a secure central
repository, apply configuration management, version control and change
management and realize the benefits of reuse. Deliverables Manager enables an
organization to realize the full value of its software development assets.
Deliverables Manager is sold as a stand-alone product and is also sold as a
companion product to the Process Engineer product line.
Key features of Deliverables Manager include:
INTEGRATED, SECURE STORAGE - One of the key requirements for successfully
leveraging software development deliverables is having a reliable way to
organize, locate, understand, and update common development assets.
Deliverables Manager provides a comprehensive repository environment for
storing, cataloging, searching, and securing all deliverable components
including project plans, requirements documents, design models, test cases,
source code and reusable components (ActiveX, OLE objects, Java Classes,
etc.). Deliverables Manager may also be used to store organization
template deliverables to enable the implementation of consistent standards
throughout the organization. In addition, Deliverables Manager provides
Visual Links which graphically cross-reference components and clearly
define their relationships.
Deliverables Manager uses industry-standard relational databases that
easily fit existing development environments and can be used effectively by
individuals, teams, or entire enterprises.
COMPREHENSIVE CONFIGURATION MANAGEMENT AND VERSION CONTROL - The
configuration management of all project deliverables, not just code files,
provides significant benefits for the whole development organization.
Using Deliverables Manager, project managers, team members and the whole
development organization can feel secure that all deliverables are stored,
controlled, versioned and can be easily retrieved. In addition,
Deliverables Manager provides comprehensive security facilities ensuring
only authorized users are enabled to change project deliverables.
Deliverables Manager enables snapshots of the complete set of project
deliverables to be taken at any point in the project. It retains this
snapshot as a baseline for future reference. Branching and Merging
facilities are provided to enable parallel working on a project.
DESKTOP TOOL INTEGRATION - Deliverables Manager provides integration with
common desktop development tools such as the Microsoft Office (Word, Excel,
Powerpoint, Project, etc.) and Microsoft Developer Studio (Visual Basic,
Visual C++, Visual J++, etc.) suites. This enables team members to
retrieve and store deliverables directly from their development tools,
enabling transparent use of Deliverables Manager facilities. This
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avoids the overhead associated with using traditional software
configuration management tools.
REUSE BROKERING - The collection and reuse or re-cycling of "development
assets" is a key factor in increasing project productivity. Deliverables
Manager acts as a broker, or "clearinghouse", of reusable objects where
multiple projects can share components with minimal overhead.
Project team members can start by searching the Deliverables Manager for
useful components to reuse or for deliverables from other projects to
recycle. As revisions are made to components, Deliverables Manager creates
graphical revision indicators, notifying and allowing other team members to
selectively update the components. Deliverables Manager in effect creates
a dynamic "use and improve" environment-project teams coordinate the use
of common software assets and continuously improve them in the process.
INTEGRATION WITH PROCESS ENGINEER - Deliverables Manager is completely
integrated into the Process Engineer environment. This integration
provides Process Engineer users with facilities for:
. setting up a repository for storing all organizational standard
deliverables
. creating project folders for all project deliverables, using
organizational standard deliverables as a baseline
. configuration management and version control of all project deliverables
. browsing deliverables to find reusable components
. checking in and out deliverables for use on tasks assigned in
PE/Activity Manager
. viewing and editing deliverables using the appropriate development tool
MAINTENANCE AND IMPLEMENTATION SERVICES
The Company believes that a high level of customer support is important to the
successful marketing and sale of its products. The Company provides maintenance
and implementation services to its customers for all of its products. Typically,
when purchasing the Company's products, a majority of customers enter into
separate maintenance agreements. To address technical support issues, the
Company has established support by telephone, e-mail and facsimile. Technical
"hotlines" are staffed by trained technical support personnel during extended
business hours each day. Implementation services provided by the Company include
product installation, training and assisting customers with the effective
deployment of LBMS products.
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CUSTOMERS
The Company targets its products to major corporations and governmental entities
worldwide. Typical prospective customers have identified the need to improve
the quality, productivity and economics of the application development process
and require an integrated process, project, work and deliverables management
environment to enable this improvement.
MARKETING, SALES AND DISTRIBUTION
In North America, the Company sells its products and services directly to its
customers using a sales team approach. Each sales team generally consists of
three persons: a sales manager, an inside sales person and a sales engineer.
The sales manager is responsible for coordinating the efforts of the sales team
and for finalizing customer requirements and closing the sale. The inside sales
person is responsible for maintaining contact with existing customers as well as
prospecting for and qualifying potential new customers. The sales engineer is a
highly skilled technical employee responsible for supporting product sales,
including all technical aspects related to sales of the Company's products. The
Company believes that the use of sales teams has enabled it to sell its products
and services more effectively. Leveraging on its existing infrastructure, the
Company intends to add sales professionals to its existing sales teams so it can
reach a broader market and increase its sales revenue.
Outside of North America, the Company sells its products and services to its
customers via a network of distributors and services contractors. The Company
intends to add various revenue channels to enable it to increase its penetration
of existing international markets as well as entering into markets not currently
served. The timing of such expansion and the rate at which new channels and
markets become productive is difficult to forecast and may cause fluctuations in
quarterly operating results.
The Company conducts comprehensive marketing activities such as advertising in
trade journals and general business press, direct mail, and telemarketing to
generate sales leads. The Company also runs sales seminars and participates in
industry conferences and trade shows to introduce prospective customers to its
products.
RESEARCH AND DEVELOPMENT
LBMS believes that the timely development of new products and enhancements to
current products is essential to maintaining its competitive position as a
technological leader. The Company conducts research and development activities
to enhance its existing products and to design new products complementary to its
existing product lines.
In determining customer needs and developing products to address those needs,
the Company relies heavily on market feedback. LBMS establishes focus groups
consisting of selected customers to aid in the product development process, both
in determining the need for products or applications and in testing new products
or applications under development.
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Following these initial research stages the Company documents certain themes for
new products or applications. The Company then works to develop prototypes and
product specifications for new products engendered by the research process.
Once a new product idea is tested and sufficient positive user feedback is
received, LBMS begins to implement the development plan for the product.
COMPETITION
The process management tools market is extremely competitive, fragmented and
rapidly changing. The Company believes that its ability to compete depends on
many factors both within and outside of its control, including corporate and
product reputation, breadth of coverage with an integrated product line, product
architecture, functionality and features, product quality, performance, ease-of-
use, quality of support, availability of product implementation and training
services, and price.
The Company's competitors include companies that offer applications development
tools, process management tools and project management tools and consulting
firms offering development methodologies. The Company believes that the primary
competition to its process management tools come from companies such as Platinum
Technologies, MCI Systemhouse, James Martin, Applied Business Technologies,
Ernst & Young, and Coopers & Lybrand. The Company believes that the primary
competition to its deliverables management tools comes from companies such as
Platinum Technologies, Intersolv, PCDocs and Softlab. 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 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 software development tools market may add to their
products some or all of the functionality that the Company's products provide 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 and 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 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 or 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. The
proliferation of software products to meet the needs of the applications
development market may have a downward pressure on the prices of such products.
Such downward pressure on product prices could have
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an impact on the Company's operating margins. There can be no assurance that the
Company could avoid these price pressures.
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
usage, copying and transferring of the licensed program. In addition, the
Company relies on a combination of trade secret, copyright and trademark laws,
nondisclosure 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 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 has various trademarks including LBMS, LBMS Process Engineer and
LBMS Deliverables Manager. The Company is not aware that any of these products
and trademarks 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, results of operations and financial condition. See
Exhibit 99 for discussion of additional risk factors.
EMPLOYEES
As of April 30, 1997, the Company had a total of 131 employees. Of the total,
71 were engaged in software sales and technical support, 5 in marketing, 17 in
administration and management, and 38 in research and development. All of the
Company's employees are in the U.S.
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The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael S. Bennett 45 Chief Executive Officer and Director
Stephen E. Odom 45 Chief Financial Officer, Senior Vice President-Finance and
Administration and Company Secretary
Peter Combe 46 Senior Vice President-North American Operations
Rick Pleczko 39 Senior Vice President-Product Management and Marketing
</TABLE>
Mr. Bennett has served as the President, Chief Executive Officer and Director
since August 1996. Mr. Bennett served as the President and Chief Executive
Officer of Summagraphics until the time of its acquisition by Lockheed Martin's
CalComp subsidiary. Prior to Summagraphics, Mr. Bennett served as Senior
Executive with Dell Computer and Chief Executive Officer of several high
technology organizations. He also has spent over 12 years in various capacities
with Digital Equipment Corporation in both domestic and international positions.
Mr. Odom has served as Chief Financial Officer and Senior Vice President-Finance
and Administration of the Company since April 1995. Mr. Odom was appointed as
Company Secretary in July 1995. From 1988 to April 1995, Mr. Odom was a Partner
with Price Waterhouse LLP. Mr. Odom is a certified public accountant.
Mr. Combe has served as Senior Vice President-North American Operations of the
Company since July 1994. Prior to that he served as Vice President-Sales from
1991 to 1994. Mr. Combe joined the Company in 1985.
Mr. Pleczko has served Senior Vice President-Marketing and Product Development
since November 1996. From 1994 to 1996 he served as Senior Vice President-
Product Management of the Company. From 1990 to 1994, Mr. Pleczko served as
Vice President-Product Services of LBMS, Inc. Mr. Pleczko joined the Company in
1984.
The Company has experienced an extended period of significant changes (i.e.,
refocusing of the business, relocation of a significant portion of the
development personnel, stock registration on the U.S. NASDAQ, etc.) which have
increased the pressure of the viability and scope of its operating and financial
systems. The changes have resulted in new and increased responsibilities for
management personnel and has placed a significant strain upon the Company's
management, operating and financial controls and resources. To accommodate
recent changes, compete effectively and manage potential future growth and
changes in the market place, the Company must continue to implement and improve
the speed and quality of its information decision systems, management decisions,
reporting systems, procedures and controls and further expand, train and
motivate its workforce. There can be no assurance that the Company's personnel,
procedures, systems and controls will be adequate to support the Company's
future operations. Additionally, the Company faces intense competition in
hiring and retaining skilled management, technical, marketing, and sales
personnel. The loss of services of one or more of the Company's
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key employees could have a material adverse effect on the Company's business,
operating results and financial condition. The Company intends to hire a
significant number of additional sales, service and technical personnel in
fiscal 1998. Competition for the hiring of such personnel in the software
industry is intense, and the Company from time to time experiences difficulty in
locating candidates with appropriate qualifications, particularly within the
desired geographic locations. None of the Company's employees is represented by
a labor union or covered by a collective bargaining agreement, and the Company
considers its relations with its employees to be good.
SERVICE OF PROCESS
LBMS Plc is a public limited company incorporated under the laws of England in
1977. Two of its directors are not subject to the jurisdiction of the U.S.
because they are neither citizens nor residents of the U.S. All or a
substantial portion of the assets of such persons and certain of the assets of
LBMS Plc are located in jurisdictions outside the U.S. As a result, it may not
be possible for investors to effect service of process within the U.S. upon such
persons or upon LBMS Plc or any of its subsidiaries (other than its U.S.
subsidiaries) or to realize upon judgments of U.S. courts predicated upon civil
liability under the U.S. federal or state securities laws. LBMS Plc has been
advised by English solicitors, that there is doubt as to the enforceability in
the U.K. against LBMS Plc or any of its subsidiaries (other than its U.S.
subsidiaries) or any of their respective directors, controlling persons or
executive officers who are not residents of the U.S., in actions for enforcement
of judgments of U.S. courts of liabilities predicated upon, or in original
actions predicated solely upon, U.S. federal or state securities laws.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately 20,000
square feet of leased space in Houston, Texas. As of April 30, 1997, the
Company also leased office space in London, Bristol and Stockport, England and
Edinburgh, Scotland and Brisbane, Australia, which has been abandoned by the
Company. (See further discussion in the Notes to the Consolidated Financial
Statements contained herein). In support of its North American field sales and
support operations, the Company also leases offices in Ann Arbor, Atlanta,
Boston, Chicago, Dallas, Iselin (New Jersey), Los Angeles, Minneapolis, New
York, Philadelphia, Pleasanton (California), Seattle and Toronto. The Company
believes that its current facilities are adequate for its existing needs
although additional facilities will be required as the Company expands into
additional North American cities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings at April 30, 1997;
however, 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.
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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 fiscal 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal trading market for the Company's American Depository Shares
(ADSs), each representing two (2) Ordinary Shares, is The NASDAQ National Market
(NASDAQ) under the symbol LBMSY. Until December 1996, the principal trading
market for the Company's Ordinary Shares was the U.K. Unlisted Securities Market
(USM), on which the Ordinary Shares had traded since June 1987. At the end of
December 1996, the USM was discontinued by the London Stock Exchange. At that
time, the Company determined that NASDAQ would serve as its only public trading
market. A holder of Ordinary Shares may convert such shares into ADSs. The
conversion results in an assessment to the holder for taxes payable to the U.K.
government (equal to approximately 1.5% of the market value of ADSs issued) and
an administrative fee payable to the ADS facility manager (equal to
approximately $0.05 per ADS issued).
The table below sets forth, for the periods indicated, the reported high and low
prices for the Ordinary Shares on the USM. See "Exchange Rate Data" with
respect to exchange rates applicable to the periods set forth below.
<TABLE>
<CAPTION>
Price Per Equivalent Price
Ordinary Share Per ADS(1)
-------------------- ---------------------
Fiscal Period High Low High Low
------------- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1995
Quarter ended July 31 (Pounds) 1.32 (Pounds) 0.68 $ 4.02 $2.08
Quarter ended October 31 1.06 0.92 3.34 2.90
Quarter ended January 31 1.00 0.77 3.14 2.42
Quarter ended April 30 1.53 0.77 4.90 2.46
1996
Quarter ended July 31 2.87 1.54 9.18 4.92
Quarter ended October 31 3.85 2.58 12.19 8.10
Quarter ended January 31 3.71 2.86 11.64 8.83
Quarter ended April 30 3.24 1.23 9.89 3.76
1997
Quarter ended July 31 2.55 0.85 7.71 2.65
Quarter ended October 31 1.25 0.70 3.88 2.18
Quarter beginning November 1
(through December 31) 1.19 0.60 3.98 1.98
</TABLE>
14
<PAGE>
(1) Translated solely for convenience of reference into U.S. dollars on the
respective dates on which the prices shown were reported on the USM or on
the following date if such date was a U.S. holiday at the closing buying
rate from Reuters Interbank System.
The table below sets forth, for the periods indicated, the reported high and low
prices for the American Depository Shares (ADSs) on NASDAQ.
<TABLE>
<CAPTION>
Price Per Equivalent Price Per
ADSs Ordinary Share
-------------------- --------------------
Fiscal Period High Low High Low
------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
1996
Period beginning November 23
(through January 31) $10.63 $8.75 $5.32 $4.38
Quarter ended April 30 9.75 3.88 4.88 1.94
1997
Quarter ended July 31 8.00 2.38 4.00 1.19
Quarter ended October 31 4.13 2.25 2.06 1.13
Quarter ended January 31 5.25 2.00 2.63 1.00
Quarter ended April 30 5.75 3.38 2.88 1.69
1998
Period beginning May 1
(through June 30) 6.00 4.13 3.00 2.06
</TABLE>
The trading price of the Company's shares is subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its competitors, as
well as other events or factors. In addition, the stock market has from time to
time experienced extreme price and volume fluctuations, which have particularly
affected the market price of many high technology companies and which often have
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely effect the market price of the Company's
shares.
As of June 30, 1997, the last reported sales price on the NASDAQ for the ADSs
was $4.94. On June 30, 1997, there were 686 and 67 holders of record of the
Ordinary Shares and ADS, respectively.
The Company has not paid any cash dividends on its Ordinary Shares in the last
three fiscal years and does not currently intend to pay any cash dividends in
the foreseeable future. LBMS currently intends to retain its earnings, if any,
for the continued growth of its business. LBMS, Inc. is party to a loan
agreement that limits the amount of cash transferable outside the U.S. during
any fiscal year to 50% of its net income during such fiscal year. Consequently,
the Company's ability to pay dividends on the Ordinary Shares or ADSs may be
limited by such restrictions.
15
<PAGE>
EXCHANGE RATE DATA
The table below sets forth for information purposes, for the periods indicated,
the high, low, average and end of period noon buying rates for pounds sterling
expressed in U.S. dollars per (Pounds)1.00 reported by the Federal Reserve Bank
of New York ("Noon Buying Rate").
<TABLE>
<CAPTION>
Average End of
Years Ended April 30 High Low Rate(1) Period
-------------------- ---- ---- ------- ------
<S> <C> <C> <C> <C>
1994 $ 1.57 $ 1.46 $ 1.50 $ 1.51
1995 1.64 1.49 1.57 1.61
1996 1.64 1.50 1.56 1.50
1997 1.72 1.49 1.60 1.63
1998 (through June 30, 1997)(2) 1.68 1.60 1.64 1.68
</TABLE>
(1) The average of the noon Buying Rates for each month during the relevant
period.
(2) The closing Rate on June 30, 1997 was $1.6775 per (Pounds)1.00.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended April 30
-------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product licenses $15,451 $17,980 $21,629 $25,077 $ 12,170
Services 17,020 18,670 18,857 16,081 9,691
------- ------- ------- ------- --------
Total revenue 32,471 36,650 40,486 41,158 21,861
------- ------- ------- ------- --------
Cost of revenue:
Product licenses 975 1,401 1,399 838 195
Services 8,339 10,187 8,417 6,975 4,218
------- ------- ------- ------- --------
Total cost of revenue 9,314 11,588 9,816 7,813 4,413
------- ------- ------- ------- --------
Gross profit 23,157 25,062 30,670 33,345 17,448
------- ------- ------- ------- --------
Operating expenses:
Sales and marketing 9,627 13,984 16,100 20,045 11,704
Research and development 5,981 7,196 8,578 8,059 5,296
General and administrative 5,180 5,288 5,430 5,724 3,108
Merger expense 468
Restructuring charge - - 4,418 - 14,109
------- ------- ------- ------- --------
Total operating expenses 20,788 26,468 34,526 34,296 34,217
------- ------- ------- ------- --------
Operating income (loss) 2,369 (1,406) (3,856) (951) (16,769)
Interest income (expense), net (286) (22) 53 167 301
------- ------- ------- ------- --------
Income (loss) from continuing
operations before income taxes 2,083 (1,428) (3,803) (784) (16,468)
Income tax benefit (provision) (682) 272 36 - 150
------- ------- ------- ------- --------
Income (loss) from continuing
operations 1,401 (1,156) (3,767) (784) (16,318)
Discontinued operations:
Income (loss) from operations 238 155 (4,074)
Loss on disposal - - (834)
------- ------- ------- ------- --------
Net income (loss) $ 1,639 $(1,001) $(8,675) $ (784) $(16,318)
======= ======= ======= ======= ========
Income (loss) per Ordinary Share:
Continuing operations $0.08 $(0.06) $(0.17) $(0.03) $(0.64)
Discontinued operations 0.02 0.01 (0.23)
------- ------- ------- ------- --------
$0.10 $(0.05) $(0.40) $(0.03) $(0.64)
======= ======= ======= ======= ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended April 30
-------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Weighted average Ordinary and
Ordinary Share equivalents
outstanding 16,178 18,760 21,844 23,858 25,551
Income (loss) from continuing
operations per ADS $0.16 $(0.12) $(0.34) $(0.07) $(1.28)
Balance Sheet Data:
Cash and cash equivalents $ 3,398 $ 297 $ 5,026 $10,960 $ 8,461
Working capital 5,458 4,134 2,119 11,466 2,322
Total assets 20,141 17,716 20,921 27,179 15,354
Total indebtedness (1) 314 417 1,803 1,527 983
Shareholders' (deficit) equity 7,651 6,241 490 11,935 (5,247)
</TABLE>
(1) Does not include indebtedness of the Executive Stock Option Trust which has
been guaranteed by the Company.
ITEM 7. 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 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 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. 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 U.S., replacing 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
18
<PAGE>
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 actions have resulted and may continue to
result in a substantial reduction in the Company's cash balance. The estimated
total cash requirements associated with the restructuring actions exceed the
Company's cash balances, however, currently, such cash requirements extend over
many 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.
During the three months ended January 31, 1997, the Company recorded a
restructuring benefit of $3.5 million. Approximately $2.1 million represented
proceeds from the sale of the Systems Engineer product line and the remainder
related to sublease arrangements and other recoveries of charges recorded in the
previous period. 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 fiscal year ended April
30, 1997 and the interim quarters of such fiscal year are substantially
different than for the comparative prior periods.
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. This resulted in a restructuring charge of
$4.4 million, primarily related to the abandonment of excess U.K.-based
facilities and assets, employee severance costs and employee relocation costs.
In connection with the discontinuance of its consulting business, the Company
disposed of its U.K.-based General Consultancy Division (the Division) and
ceased all other similar consulting activities across the business. The
consulting business had provided services that included custom systems
development, strategic planning and other traditional systems integration
activities principally for mainframe environments. The operating results from
the consulting business are included in the financial statements as discontinued
operations. In connection with the disposal of the Division, the Company ceased
all other similar consulting activities across the business. The operating
results of the Company's consulting business and the loss from the sale of that
business are shown in the accompanying financial statements as Discontinued
operations. In accordance with accounting principles generally accepted in the
U.S., only direct costs associated with the consulting business have been used
to determine the results of operations for that business. The loss on disposal
of the Division included incremental direct costs consisting of $1.4 million
related to the abandonment of U.K.-based facilities and assets formerly utilized
by the Division, as well as approximately $0.9 million of employee severance and
related costs, net of proceeds of $1.5 million from the sale.
19
<PAGE>
As part of the Company's efforts to expand its software products business, in
August 1995, the Company acquired Corporate Computing Inc. (CCI), a provider of
entry-level, client/server process management software products, in exchange for
700,000 Ordinary Shares of the Company. The acquisition was accounted for as a
pooling of interests. The accompanying Consolidated Financial Statements of the
Company include the effects of this acquisition for all periods presented.
The Company's revenue is derived from license fees for its software products and
related maintenance and implementation fees. The Company recognizes revenue in
accordance with the provisions of American Institute of Certified Public
Accountants Statement of Position No. 91-1, "Software Revenue Recognition". The
Company licenses its software products on a perpetual, fully paid-up basis.
Product license revenue is recognized upon shipment of the product. Product
returns are estimated and provided for at the time of sale. The Company's
revenue from maintenance services, which includes technical support, is
generally based on a percentage of the product license fee. Maintenance fee
revenue is recognized ratably over the term of the maintenance agreement, which
typically runs for 12 months. The Company's revenue from implementation
services, which includes product installation, training and assisting customers
with the effective deployment of LBMS products, is based on daily rates and is
recognized as services are provided. Implementation services generally are not
provided under long-term contracts. The Company historically has recognized a
substantial portion of its revenue in the last weeks of its quarters. Since a
substantial portion of the Company's revenues are generated in the last weeks of
each respective quarter, a large portion of the Company's revenues for the
quarter remain uncollected at the end of the period because they are not yet due
under normal trade terms.
The Company's fiscal year ends April 30. References herein to a specific year
refer to the year ended April 30 of the year cited.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of total
revenue for the periods indicated (subtotals not adjusted for rounding):
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue:
Product licenses 53% 61% 56%
Services 47 39 44
---- ---- ----
Total revenue 100 100 100
---- ---- ----
Cost of revenue:
Product licenses 3 2 1
Services 21 17 19
---- ---- ----
Total cost of revenue 24 19 20
---- ---- ----
Gross margin 76 81 80
---- ---- ----
Operating expenses:
Sales and marketing 40 49 54
Research and development 21 20 24
General and administrative 13 14 14
Merger expense - 1 -
Restructuring charge 11 - 65
---- ---- ----
Total operating expenses 85 83 157
---- ---- ----
Operating loss (10) (2) (77)
Interest income (expense), net - - 1
---- ---- ----
Loss from continuing operations before
income taxes (10) (2) (75)
Income tax benefit - - 1
---- ---- ----
Loss from continuing operations (10)% (2)% (75)%
Discontinued operations:
Loss from operations (10) - -
Loss on disposal (2) - -
---- ---- ----
Net loss (21)% (2)% (75)%
==== ==== ====
Gross margin:
Product licenses 94% 97% 98%
Services 55% 57% 56%
</TABLE>
21
<PAGE>
FISCAL YEARS 1995, 1996 AND 1997
Total Revenue
Total revenue increased 2% from $40.5 million in 1995 to $41.2 million in 1996
and decreased 47% to $21.9 million in 1997. The increase from 1995 to 1996 was
primarily due to increased license fee revenue due to expansion of sales offices
and personnel. The decrease from 1996 to 1997 was attributable to the
elimination of the direct sales and service operations outside the U.S. after
the three months ended July 31, 1996 and a decline in Systems Engineer license
revenue in the U.S. The Systems Engineer product line was sold in December
1996.
Product Licenses. Product license revenue increased 16% to $25.1 million in
1996 and decreased 52% to $12.2 million in 1997. U.S. product license revenue
constituted 66%, 78% and 94% of total Company product license revenue in 1995,
1996 and 1997, respectively. U.S. product license revenue increased 36% from
1995 to 1996 and decreased 41% from 1996 to 1997. The increase in product
license revenue in the U.S. from 1995 to 1996, was primarily attributable to
increases in sales of the Process Engineer product line. The decrease in
product license revenue in the U.S. from 1996 to 1997, was primarily
attributable to the decline in revenue from and subsequent sale of the Systems
Engineer product line.
Direct sales of product licenses outside the U.S. were via third-party
distributors subsequent to the three months ended July 31, 1996.
Services. Service revenue decreased 15% to $16.1 million from 1995 to 1996 and
decreased 40% to $9.7 million in 1997. From 1995 to 1996, the Company
experienced decreases in implementation service revenues in all geographic
areas. The decrease in the U.S. was attributable to a decrease in
implementation service personnel. The decrease outside the U.S. was
attributable to the decrease in product license revenue. From 1996 to 1997, the
service revenue decrease was attributable to the elimination of direct service
operations outside the U.S. subsequent to July 1996. U.S. service revenue was
generally flat from 1996 to 1997.
Cost of Revenue
Cost of Product Licenses. Cost of product licenses was $1.4 million, $0.8
million and $0.2 million in 1995, 1996 and 1997, respectively, resulting in a
gross margin of 94%, 97% and 98% of the related product license revenue for each
respective period. In 1995, license fees payable to a third party licensor were
a higher percentage of product license revenue than in 1996 and 1997. This
decrease is due to a higher percentage of license revenue being generated by
products for which no such license fees are paid in 1996 and 1997.
Cost of Services. Cost of services was $8.4 million, $7.0 million and $4.2
million in 1995, 1996 and 1997, respectively, resulting in a gross margin of
55%, 57% and 56% of the related service revenue for each respective period. The
decrease in cost of services from 1995 to 1996 is attributable to a decrease in
implementation service personnel. The decrease from 1996 to 1997 is
attributable to the elimination of service operations outside the U.S.
subsequent to July 1996.
22
<PAGE>
Operating Expenses
Sales and Marketing. Sales and marketing expenses were $16.1 million, $20
million and $11.7 million, or 40%, 49% and 54% of total revenue, in 1995, 1996
and 1997, respectively. The increase in sales and marketing expenses in dollar
amount and as a percentage of revenue from 1995 to 1996 was primarily due to the
addition of two sales offices and related personnel in the U.S. and increased
marketing headcount and activities. The increase in sales and marketing expense
as a percentage of revenue from 1996 to 1997 is attributable to the Company's
revenue performance in the three months ended July 31, 1996. Sales and
marketing expense was 86% of revenues during the three months ended July 31,
1996 compared to a range of 42%-46% in each of the three fiscal quarters
subsequent to the first fiscal quarter. The decrease in sales and marketing
expense in dollars from 1996 to 1997 is due to the elimination of all direct
sales personnel and activities outside the U.S. subsequent to July 31, 1996.
Research and Development. Research and development expenses were $8.6 million,
$8.1 million and $5.3 million in 1995, 1996 and 1997, respectively. Research
and development costs have been expensed as incurred and have not been
capitalized because capitalizable costs have not been material. The decrease
from 1995 to 1996 was primarily the result of cost efficiencies and headcount
reduction through consolidation of certain of the Company's development
activities in the U.S. The decrease from 1996 to 1997 resulted from elimination
or substantial reduction in the development and investment in the Systems
Engineer, GUI Guidelines and Client Server Guidelines product lines.
General and Administrative. General and administrative expenses were $5.4
million, $5.7 million and $3.1 million in 1995, 1996 and 1997, respectively.
General and administrative expenses in dollar amount remained relatively
constant from 1995 to 1996. The decrease in general and administrative expense
from 1996 to 1997 was attributable to the restructuring plan implemented in
August 1996, including the elimination of direct operations outside the U.S.
General and administrative expenses as a percentage of total revenue have
remained relatively constant over the three fiscal periods.
Operating Income
The Company posted an operating losses of $3.8 million, $0.8 million and $16.3
million in 1995, 1996 and 1997, respectively. Included in the Company's
operating losses were net restructuring charges of $4.4 million and $14.1
million in 1995 and 1997, respectively. Included in the operating loss in 1996
was $0.5 million of merger costs.
Income Taxes
In 1995, 1996 and 1997, the Company recognized approximately $8.7 million, $0.8
million and $16.5 million in pre-tax losses, respectively, for financial
statement purposes. A substantial portion of these losses have been recognized
in the Company's tax returns or will be recognized in future years. Given the
historical tax losses experienced in 1995, 1996 and 1997, there can be no
assurance that the Company's operations will generate taxable income to utilize
these losses,
23
<PAGE>
therefore, as of April 30, 1997, the Company has recorded a full valuation
allowance for the deferred tax assets related to the future benefits, if any,
for these losses. In 1997, the Company recognized a tax benefit of $150,000
based on carryback benefits recognized in the U.S.
Discontinued Operations
The income from operations of the General Consultancy Division (the Division),
net of related taxes, was $155,000 in 1994. In 1995, the Company recognized a
loss of $4.1 million related to the discontinued operations of the Division.
This loss includes a provision of $3.9 million related to the settlement of
litigation in connection with an asserted failure to fulfill contractual
obligations related to an unsuccessful consulting project of the Division. The
Company paid $1.0 million of the settlement in June 1995, and the remaining $2.9
million is to be paid in installments through June 1999. The Company believes
that it is remote that further claims or payments will be required with regard
to this or other consulting project. In addition, the customer associated with
the settlement has indemnified the Company against any related future claims.
The Company is no longer a party to similar consulting projects as a result of
its disposal of the Division and is not aware of any asserted or unasserted
claims of this nature.
Liquidity and Capital Resources
At April 30, 1997, the Company had cash and cash equivalents of $8.5 million and
working capital of $2.3 million. The Company generated cash from operating
activities of $0.7 million in 1995. The Company used $4.8 million and $1.6
million in cash for operating activities in 1996 and 1997, respectively. During
1997, the Company used cash of approximately $5.2 million related to the
Company's restructuring activities and a prior period legal settlement.
The Company completed a rights offerings for its Ordinary Shares in 1995. The
rights offering in 1995 generated $3.5 million in net proceeds. Also, in 1995,
the Company received $1.5 million in net proceeds from the sale of the Division.
The proceeds from the 1995 rights issue and Division sale were used to fund
approximately $1.3 million of expenditures related to the Company's
restructuring activities, the initial payment of approximately $1.0 million in
June 1995 related to the settlement of litigation, continued expansion of its
development, marketing and selling activities and to improve the Company's cash
position. In 1996, the Company completed an issuance of American Depository
Shares (ADS) (one ADS represents two Ordinary Shares) generating net proceeds to
the Company of approximately $11.8 million.
The Company's investing activities consist primarily of purchases of furniture,
fixtures and equipment. The Company had capital expenditures of $1.4 million,
$1.9 million and $0.3 million, for 1995, 1996 and 1997, respectively. 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 and $0.5 million. Approximately $0.5 million was outstanding
under these lines of credit at April 30, 1997. These credit facilities require
the Company to comply with certain restrictive covenants and maintain certain
financial ratios. At April 30, 1997, the Company was in violation
24
<PAGE>
of certain restrictive covenants and obtained a waiver from the Bank. The
Company has guaranteed approximately $0.9 million of indebtedness of the
Company's Executive Stock Option Trust. In June 1997, the Company's Executive
Stock Option Trust repaid, with proceeds from the sale of the shares held by the
Trust, this indebtedness and the Company was released from its guarantee.
The Company is contractually obligated to make payments totaling (Pounds)1.0
million (approximately $1.6 million at April 30, 1997) in connection with
settlement of litigation related to the Division. Such payments include
(Pounds)0.4 million (approximately $0.7 million at April 30, 1997) in each of
1998 and 1999 and (Pounds)0.2 million (approximately $0.3 million at April 30,
1997) in 2000. The Company is also obligated to make cumulative lease payments
under certain noncancellable operating leases of approximately $1.5 million
through 2002.
The Company believes that its existing cash will be adequate to finance its
operations for at least the next 12 months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements
<S> <C>
Page
----
Report of Independent Accountants.............................................. 26
Consolidated Balance Sheet as of April 30, 1996 and 1997....................... 27
Consolidated Statement of Operations for the three years ended April 30, 1997.. 28
Consolidated Statement of Shareholders' (Deficit) Equity for the three years
ended April 30, 1997.......................................................... 29
Consolidated Statement of Cash Flows for the three years ended April 30, 1997.. 30
Notes to Consolidated Financial Statements..................................... 31
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserve.................. 45
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Learmonth & Burchett Management Systems Plc
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Learmonth & Burchett Management Systems Plc and its subsidiaries (the Company)
at April 30, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended April 30, 1997, in
conformity with generally accepted accounting principles. 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 audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
June 7, 1997
26
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS,
EXCEPT FOR PAR VALUE INFORMATION)
April 30,
--------------------
1996 1997
--------- ---------
ASSETS
------
Current assets:
Cash and cash equivalents $ 10,960 $ 8,461
Trade accounts receivable, net of allowance for
returns of $526 and $780 9,579 4,358
Other current assets 3,498 1,023
-------- --------
Total current assets 24,037 13,842
Furniture, fixtures and equipment, net 2,982 1,512
Other assets 160
-------- --------
Total assets $ 27,179 $ 15,354
======== ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
Current liabilities:
Current maturities of indebtedness $ 1,003 $ 745
Accounts payable 1,630 486
Deferred revenue 3,691 3,534
Accrued liabilities 5,344 5,778
ESOT indebtedness 903 977
-------- --------
Total current liabilities 12,571 11,520
Indebtedness 524 238
Other liabilities 2,149 8,843
-------- --------
Total liabilities 15,244 20,601
-------- --------
Shareholders' (deficit) equity:
Ordinary Shares, 10 pence par value, 33,500 shares
authorized, 25,531 and 25,611 shares issued
and outstanding 4,253 4,267
Additional paid-in capital 20,323 20,330
Adjustment for ESOT (903) (977)
Cumulative translation adjustment 439 (372)
Accumulated deficit (12,177) (28,495)
-------- --------
Total shareholders' (deficit) equity 11,935 (5,247)
-------- --------
Commitments and contingencies (Note 12)
Total liabilities and shareholders' (deficit) equity $ 27,179 $ 15,354
======== ========
The accompanying notes are an integral part of this statement.
27
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
Year ended April 30,
------------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Revenue:
Product licenses $21,629 $ 25,077 $ 12,170
Services 18,857 16,081 9,691
------- -------- --------
Total revenue 40,486 41,158 21,861
------- -------- --------
Costs of revenue:
Cost of product licenses 1,399 838 195
Cost of services 8,417 6,975 4,218
------- -------- --------
Total costs of revenue 9,816 7,813 4,413
------- -------- --------
Gross margin 30,670 33,345 17,448
------- -------- --------
Operating expenses:
Sales and marketing 16,100 20,045 11,704
Research and development 8,578 8,059 5,296
General and administrative 5,430 5,724 3,108
Merger expense 468
Restructuring charge (Note 3) 4,418 14,109
------- -------- --------
Total operating expenses 34,526 34,296 34,217
------- -------- --------
(3,856) (951) (16,769)
Interest income 162 301 445
Interest expense (99) (83) (159)
Other income (expense), net (10) (51) 15
------- -------- --------
Loss from continuing operations before income taxes (3,803) (784) (16,468)
Income tax benefit 36 150
------- -------- --------
Loss from continuing operations (3,767) (784) (16,318)
Discontinued operations (Note 2):
Loss from operations of General Consultancy
Division (net of applicable income tax provision of $0) (4,074)
Loss on disposal of General Consultancy Division (834)
------- -------- --------
Net loss $(8,675) $ (784) $(16,318)
======= ======== ========
Income (loss) per share:
Continuing operations $(.17) $(.03) $(.64)
Discontinued operations (.23)
------- -------- --------
Net loss per share $(.40) $(.03) $(.64)
======= ======== ========
Weighted average ordinary and ordinary
equivalent shares outstanding 21,844 23,639 25,551
======= ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
28
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
Additional Adjustment Cumulative
Ordinary Shares paid-in for translation Accumulated
--------------------- ----------- ----------- ------------ ------------
Shares Par value capital ESOT adjustment deficit Total
---------- --------- ----------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1994 18,837,350 $3,219 $ 5,919 $(172) $ (39) $ (2,686) $ 6,241
Issuance of shares in connection
with rights issue 3,627,470 554 2,871 3,425
Exercise of stock options 84,100 13 38 51
Executive Stock Option Trust
borrowings (763) (763)
Distribution to CCI
shareholders (32) (32)
Cumulative translation
adjustment 243 243
Net loss (8,675) (8,675)
---------- ------ ------- ----- ----- -------- --------
Balance, April 30, 1995 22,548,920 3,786 8,828 (935) 204 (11,393) 490
Public share offering, net 2,900,000 452 11,382 11,834
Exercise of stock options 81,800 15 113 128
Reductions from translation
of foreign exchange 32 32
Cumulative translation
adjustment 235 235
Net loss (784) (784)
---------- ------ ------- ----- ----- -------- --------
Balance, April 30, 1996 25,530,720 4,253 20,323 (903) 439 (12,177) 11,935
Public offering cost (47) (47)
Exercise of stock options 80,000 14 54 68
Increases from translation
of foreign exchange (74) (74)
Cumulative translation
adjustment (811) (811)
Net loss (16,318) (16,318)
---------- ------ ------- ----- ----- -------- --------
Balance, April 30, 1997 25,610,720 $4,267 $20,330 $(977) $(372) $(28,495) $ (5,247)
========== ====== ======= ===== =========== =========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
29
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended April 30,
-----------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:-
Net loss $(8,675) $ (784) $(16,318)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation 1,006 580 453
Gain (loss) on sale of assets (834) 94
Write-off from restructuring, net 2,894
Changes in current assets and liabilities,
net of the effect of the business disposal:
Trade accounts receivable 1,997 1,055 3,434
Other current assets (411) (753) 1,287
Accounts payable (1,828) (512) (1,144)
Deferred revenue 1,161 (11) 1,348
Accrued restructuring charges 3,608 (3,488) 8,706
Accrued legal settlement 3,922 (1,815) (665)
Other accrued liabilities 774 952 (1,136)
Other 2 (92) (490)
------- ------- --------
Net cash provided (used) by operating
activities 722 (4,774) (1,631)
------- ------- --------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment, net (1,437) (1,906) (345)
Proceeds from sale of General Consulting Division 1,537
Other (160)
------- ------- --------
Net cash used by investing activities (60) (1,906) (345)
------- ------- --------
Cash flows from financing activities:
Issuance of Ordinary Shares, net 3,476 11,962 21
Proceeds from indebtedness 623 1,219
Repayments of indebtedness (560) (544)
Distribution to CCI shareholders (32) (7)
------- ------- --------
Net cash provided (used) by
financing activities 4,067 12,614 (523)
------- ------- --------
Increase (decrease) in cash and cash equivalents 4,729 5,934 (2,499)
Beginning cash and cash equivalents 297 5,026 10,960
------- ------- --------
Ending cash and cash equivalents $ 5,026 $10,960 $ 8,461
======= ======= ========
Supplemental cash flow disclosures:-
Cash paid for:
Interest $ 99 $ 104 $ 150
Income taxes 348 282
Noncash transactions:
Impairment of furniture, fixtures and equipment 600
Executive Stock Option Trust borrowings 763
</TABLE>
The accompanying notes are an integral part of this statement.
30
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Learmonth & Burchett Management Systems Plc (LBMS or the Company) designs,
develops, markets and supports client/server software development management
tools. The Company also provides services such as maintenance, training,
consulting and support services related to its products directly in North
America and via distributors in Europe, United Kingdom and Asia.
Consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. In August 1995, the Company acquired Corporate
Computing Inc. (CCI). The Company exchanged 700,000 newly issued Ordinary
Shares for all the outstanding interests of CCI in a transaction accounted for
as a pooling of interests. These consolidated financial statements have been
restated to include CCI for all periods presented. All significant intercompany
accounts and transactions have been eliminated. These financial statements have
been prepared under the historical cost convention and in accordance with
accounting principles generally accepted in the U.S. using U.S. dollars as the
reporting currency.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue recognition
The Company recognizes revenue in accordance with the provisions of American
Institute of Certified Public Accountants Statement of Position No. 91-1,
"Software Revenue Recognition". Product revenue is recognized when products are
shipped. Product returns are estimated and provided for at the time of sale.
Training and implementation services revenue is recognized as services are
provided. Revenue from support and maintenance agreements is recognized ratably
over the term of the agreement which is typically 12 months.
31
<PAGE>
Deferred revenue
Deferred revenue represents advance payments for training and implementation and
support and maintenance services.
Furniture, fixtures and equipment
Furniture, fixtures and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized on a straight-line basis
over the shorter of the estimated useful life or lease term.
Research and development
Research and development costs are charged to operations as incurred. The
Company considers technological feasibility to have been established once a
working model of a product has been produced and tested. To date, the Company
has not capitalized software development costs since costs incurred subsequent
to the establishment of technological feasibility have not been material.
Income taxes
Deferred income taxes are provided using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company's assets and liabilities. Deferred income taxes are measured based on
the tax rates expected to be in effect when differences are expected to be
included in the Company's tax returns.
Loss per share
Loss per share is computed by dividing net loss by the weighted average number
of Ordinary Shares and dilutive Ordinary Share equivalents outstanding during
the period. Ordinary Share equivalents include the number of shares issuable
upon the exercise of stock options, less the number of shares that could have
been repurchased with the exercise proceeds using the Treasury stock method.
Statement of cash flows
The Company considers all investments with original maturities of three months
or less at the date acquired by the Company as cash equivalents. The effect of
exchange rates on cash balances was not material for any of the periods
presented.
32
<PAGE>
Financial instruments
The Company records all financial instruments at cost. The fair values of
accounts receivable, accounts payable, accrued liabilities and indebtedness
approximate cost due to their short-term nature or adjustable interest rates.
Foreign currency translation
The functional currency for the Company's subsidiaries is the applicable local
currency. Accordingly, monetary assets and liabilities are translated at
period-end exchange rates. Income and expense accounts are translated at the
average exchange rates during the period. Gains and losses from translation are
recorded as a separate component of shareholders' equity. Transaction gains and
losses are included in current operations and were not significant for any of
the periods presented.
Concentration of credit risk
Financial instruments that subject the Company to credit risk consist of cash
and cash equivalents and accounts receivable. The Company's investment policy
limits its exposure to credit risk for cash and cash equivalents. The Company
sells its products primarily to major corporations in a number of industries.
Collateral or deposits generally are not required from customers who demonstrate
creditworthiness. Credit risk is considered limited for accounts receivable.
The Company provides a reserve for returns and such returns have not been
significant in any of the periods presented. During fiscal 1997, the Company's
five largest customers accounted for approximately 21% of it total revenues.
Although the particular customers may change from period to period, the Company
expects that large sales to a limited number of customers will continue to
account for a significant percentage of its revenues in any particular period
for the foreseeable future. In fiscal 1996 and 1995, the Company's five largest
customers did not represent a significant percentage of revenue.
Reclassifications
Certain amounts in the prior year's consolidated financial statements have been
reclassified to conform to the current year's presentation.
NOTE 2 - DISCONTINUED OPERATIONS:
In the first quarter of fiscal 1995, the Company discontinued its general
consulting business and disposed of its U.K.-based General Consultancy Division
for $1,537 in cash, resulting in a loss from disposition of $834 after
considering provisions for costs directly related to the disposition. The loss
from operations of the discontinued consulting business include a charge for a
legal settlement and related costs (Notes 5 and 7). Revenue from the
discontinued consulting business was $632 for the year ended April 30, 1995.
33
<PAGE>
NOTE 3 - RESTRUCTURING CHARGES:
During fiscal 1995, the Company decided to focus exclusively on its software
products business, center that activity in the U.S. and discontinue its
consulting business (Notes 2 and 7). Accordingly, the Company relocated its
operational headquarters and the majority of its U.K.-based research and
development activities to the U.S. This resulted in a restructuring charge of
$4,418, primarily related to the abandonment of U.K.-based facilities and assets
and employee severance and relocation costs. The restructuring charge included
$2,670 related to employee severance and relocation costs. At April 30, 1997,
all restructuring cost had been paid except for $755 of abandoned lease cost
which will be paid out through 1999.
On August 2, 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 $17,621. This charge was comprised of approximately
$10,278 in abandoned lease costs which is payable through 2014, $4,449 in
severance, personnel and other costs and $2,894 for the abandonment of certain
net operating assets predominately outside the U.S. The following table
illustrates the restructure charge taken in the quarter ended October 31, 1996:
<TABLE>
<CAPTION>
Provision Reserves
during Impact of at
quarter ended Foreign April 30,
October 31, 1996 Payments Recoveries Exchange 1997
---------------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Abandoned leasehold $10,278 $(1,035) $(1,143) $354 $8,454
Employee severance
and other related cost 2,986 (2,986)
Other costs 1,463 (522) (339) 602
------- ------- ------- ---- ---------
Restructuring reserve 14,727 $(4,543) $(1,482) $354 $9,056
======= ======= ==== =========
Write-off of operating
assets 2,894
-------
Total restructuring
charge $17,621
=======
</TABLE>
In December 1996, the Company released $3,512 of the amount previously accrued
to reflect the sublease of abandoned properties, the sale of the Systems
Engineer product line and reduction in related costs.
Minimum lease commitments related to the rental agreements before existing
subleases which have been abandoned for fiscal years ending April 30 are as
follows:
1998 $ 1,778
1999 1,872
2000 1,375
2001 606
2002 352
Thereafter 4,413
-------
Total $10,396
=======
34
<PAGE>
Sublease income from noncancellable sublease agreements related to the rental
agreements which have been abandoned for fiscal years ending April 30 are as
follows:
1998 $ 435
1999 443
2000 80
2001 57
2002 57
Thereafter 115
------
Total $1,187
======
NOTE 4 - FURNITURE, FIXTURES AND EQUIPMENT:
- ------------------------------------------
Furniture, fixtures and equipment at April 30 are as follows:
Estimated
useful life 1996 1997
----------- -------- --------
Furniture and equipment 3-7 years $ 4,531 $ 3,061
Leasehold improvements 5 years 814 14
Real estate 50 years 102 98
------- -------
5,447 3,173
Less - accumulated depreciation (2,465) (1,661)
------- -------
$ 2,982 $ 1,512
======= =======
NOTE 5 - ACCRUED LIABILITIES:
Accrued expenses at April 30 are summarized as follows:
1996 1997
------ ------
Accrued compensation $1,375 $1,245
Accrued restructuring 602
Accrued abandoned leaseholds 424 1,343
Accrued legal settlement and related costs 602 651
Other accrued expenses 2,943 1,937
------ ------
$5,344 $5,778
====== ======
35
<PAGE>
The accrued abandoned leaseholds relate to provisions made for both the
discontinued operations (Note 2) and the restructuring charges (Note 3).
During fiscal 1995, the Company reached a settlement with a third party over
claims related to a consulting project of the Company's discontinued consulting
business. A settlement charge of $3,922 was included in the loss from
discontinued operations in fiscal 1995. The Company paid the third party
(Pounds)1,000 and (Pounds)400 in 1996 and 1997, respectively. The settlement
provides for remaining payments to be made to the third party of (Pounds)400 in
fiscal 1998 and 1999 and (Pounds)200 on or before June 30, 1999. The Company
believes it is remote that further claims or payments will be required with
regard to this consulting project. In addition, the customer associated with
the settlement has indemnified the Company against any related future claims.
The Company is no longer a party to similar consulting projects as a result of
its disposal of the Division and is not aware of any asserted or unasserted
claims of this nature.
NOTE 6 - INDEBTEDNESS:
Indebtedness at April 30 consists of the following:
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
Revolving line of credit facilities with a bank which mature in
September 1997, interest is payable monthly at prime (8.5% at April
30, 1997), secured by substantially all the assets of the U.S.
Company $ 475 $ 500
Notes payable to a bank, monthly principal instalments totaling
$45, interest payable monthly at prime plus 1% (9.5% at April 30,
1997), maturing at various dates from June 1997 through April
1999, secured by substantially all the assets of the U.S. Company 742 448
Note payable to a bank, monthly principal instalments of $20 until
December 1996, interest payable monthly at prime plus 1%, secured
by substantially all of the assets of the U.S. Company 160
Other 150 35
------- -----
1,527 983
Less - current maturities (1,003) (745)
------- -----
$ 524 $ 238
====== =====
</TABLE>
Bank lines of credit
The Company has two revolving line of credit facilities with a U.S. bank
amounting to $2,500 and $500. At April 30, 1997, there is $325 and $175
outstanding under the respective facilities. The credit facilities subject the
Company to certain restrictive and financial covenants including
36
<PAGE>
limitations of distributions and maintaining certain financial ratios. At April
30, 1997, the Company was in violation of certain covenants and obtained a
waiver from the Bank.
The Company has guaranteed certain indebtedness incurred by the LBMS Executive
Share Option Trust (the Trust) ($977 at April 30, 1997) in connection with the
Trust's purchase of Company Ordinary Shares and, accordingly, the Company has
reflected the amount of its guarantee of the indebtedness as a reduction of
shareholders' equity in the accompanying financial statements. Subsequent to
year end, the Trust indebtedness was repaid with proceeds from the sale of the
shares held by the Trust and the Company's guarantee was relinquished (Note 9).
Maturities
Future principal payments of indebtedness for the fiscal years ending April 30
are as follows:
1998 $745
1999 181
2000 13
2001 2
2002 2
Thereafter 40
----
$983
====
NOTE 7 - OTHER LIABILITIES:
Other liabilities at April 30 consist of the following:
1996 1997
------ ------
Abandoned leaseholds (Note 2 and 3) $ 644 $7,866
Accrued legal settlement (Note 5) 1,505 977
------ ------
$2,149 $8,843
====== ======
The accrued abandoned leaseholds relate to provisions made for both the
discontinued operations (Note 2) and the restructuring charges (Note 3).
37
<PAGE>
NOTE 8 - INCOME TAXES:
The current income tax benefit (provision) for the year ended April 30 consists
of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
U.S. $ (174) $ 98 $ 102
U.K. 201
Other 9 (98) 48
------- ------- --------
$ 36 $ $ 150
======= ======= ========
Components of book pretax loss were as follows for the year ended April 30:
1995 1996 1997
------- ------- --------
U.K. $(7,210) $(1,898) $ (7,146)
Other 3,407 1,114 (9,172)
------- ------- --------
$(3,803) $ (784) $(16,318)
======= ======= ========
The Company's effective tax rate reconciliation is as follows for the year ended
April 30:
1995 1996 1997
-------- -------- ---------
Benefit at U.K. statutory rates 33% 33% 33%
Restructuring reserve (15) 121 (17)
Net operating losses not
benefited (11) (188) (12)
Other, net (6) 34 (3)
---- ---- ----
Tax benefit 1% % 1%
==== ==== ====
</TABLE>
The statutory tax rates in U.K., U.S. and Australia are 33%, 34% and 33%,
respectively.
38
<PAGE>
The tax effects of the principal temporary differences between financial
reporting and income tax reporting at April 30 are as follows:
1996 1997
-------- ---------
Accrued restructuring $ 840 $ 3,934
Net operating loss carryforwards 3,071 5,731
Related party interest expense 486
Tax credit carryforwards 160 160
Other 279
------- --------
4,071 10,590
Depreciation (239) (382)
------- --------
3,832 10,208
Valuation allowance (3,832) (10,208)
------- --------
Net deferred taxes $ $
======= ========
At April 30, 1997, the Company has net operating loss carryforwards of
approximately $9,500 for income tax purposes outside of the U.S. and $6,700
available for U.S. income tax purposes which expire from 2006 through 2012. In
addition, the Company has $160 of General Business Credit carryforwards
available in the U.S. Certain of the U.S. carryforwards relate to
preacquisition net operating losses and tax credit carryforwards of acquired
companies and are subject to limitations under Section 382 of the U.S. Internal
Revenue Code. Given the historical tax losses experienced in 1995, 1996 and
1997, there can be no assurance that operations will generate future taxable
income to utilize the net operating losses and future deductions related to the
restructuring reserve. Accordingly, the Company has provided a valuation
allowance against its deferred tax assets.
NOTE 9 - SHAREHOLDERS' EQUITY:
Stock Option Plans
The Company's various Stock Option Plans (Option Plans) provide for the grant of
incentive and nonstatutory stock options, as determined by the Board of
Directors. Options are generally granted at an exercise price of not less than
the fair value per Ordinary Share on the date of grant. The vesting and
exercise provisions are determined by the Board of Directors with a maximum term
of ten years. Options granted under the Plans are immediately exercisable and
generally vest over an eighteen month to five year period. Information related
to share options granted to directors, officers
39
<PAGE>
and employees under various plans is as follows (share amounts in thousands,
prices translated at April 30, 1997 exchange rate):
<TABLE>
<CAPTION>
Shares Exercise Weighted-average
under option Price exercise price
------------- -------------- ----------------
<S> <C> <C> <C>
Options outstanding April 30, 1994 470 $0.62 to $2.64 $1.91
Granted 2,412 $1.27 to $2.12 1.83
Canceled (105) $0.62 to $2.64 1.19
Exercised (84) $0.62 to $0.64 0.63
------ -------------- -----
Options outstanding April 30, 1995 2,693 $0.62 to $2.64 1.91
Granted 814 $2.00 to $4.84 2.56
Canceled (485) $0.98 to $4.84 2.80
Exercised (116) $0.62 to $2.75 1.72
------ -------------- -----
Options outstanding at April 30, 1996 2,906 $0.70 to $2.75 1.95
Granted 2,499 $1.19 to $2.69 1.23
Canceled (1,200) $1.03 to $2.75 1.73
Exercised (105) $0.71 to $1.36 1.19
------ -------------- -----
Options outstanding at April 30, 1997 4,100 $0.71 to $2.69 1.60
====== ============== =====
Options exercisable at April 30, 1995 147 $0.65 to $2.64 1.40
====== ============== =====
Options exercisable at April 30, 1996 165 $0.70 to $2.75 1.66
====== ============== =====
Options exercisable at April 30, 1997 1,722 $0.71 to $2.37 1.53
====== ============== =====
</TABLE>
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" which defines a fair value-based method of accounting for an
employee stock option plans or similar equity instruments. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Entities electing to remain with the accounting prescribed
in APB No. 25 must make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in the statement
had been applied.
The Company has elected to account for its stock-based compensation plan under
APB No. 25. The Company has computed for pro forma disclosure purposes the
value of all options granted during 1996 and 1997 using the Black-Scholes option
pricing model as prescribed by SFAS No. 123. The following weighted average
assumptions used for grants in 1996 and 1997 were:
Risk-free interest rate 6.0% - 6.3%
Expected dividend yield 0%
Expected lives 18 to 84 months
Expected volatility 73%
40
<PAGE>
The total value under SFAS 123 of the options granted during the years ended
April 30, 1996 and 1997 was computed to be approximately $1,395 and $2,199,
respectively. Under SFAS 123, these amounts would be amortized over the vesting
period of the options. If the company had accounted for these plans in
accordance with SFAS 123, the Company's reported net loss and net loss per
Ordinary Share for the years ended April 30, would have increased to the
following pro forma amounts:
1996 1997
------- ---------
Pro forma net loss:
As reported in the statement of operations $ (784) $(16,318)
Pro forma in accordance with SFAS 123 (858) (18,190)
Pro forma net loss per Ordinary Share and
Ordinary Share equivalents:
As reported in the statement of operations (0.03) (0.64)
Pro forma in accordance with SFAS No. 123 (0.04) (0.71)
Because SFAS 123 is applicable only to awards granted subsequent to May 1, 1995,
its pro forma effect will not be fully reflected until all options granted prior
to that date have vested and is not expected to be indicative of the effect on
net loss and net loss per share in future years.
For options outstanding as of the latest balance sheet, the range of exercise
prices, the weighted-average exercise price and the weighted-average remaining
contractual life is provided in the schedule below. The number and weighted-
average exercise price of options currently exercisable is also included in the
schedule below:
<TABLE>
<CAPTION>
Weighted- Weighted-
average Weighted- average
Range of remaining average exercise price
exercise prices Outstanding contractual life exercise price Exercisable of Exercisable options
- ----------------- ----------- ---------------- -------------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
$0.00 - $1.00 73 4.63 $0.89 72 $0.89
$1.01 - $2.00 2,966 8.98 1.22 1,318 1.23
$2.01 - $3.00 1,061 8.53 2.20 332 2.26
----- ---- ----- ----- -----
4,100 8.83 $1.60 1,722 $1.53
===== ==== ===== ===== =====
</TABLE>
41
<PAGE>
1996 Employee Stock Purchase Plan
In November 1996, the Board adopted and the shareholders approved the 1996
Employee Stock Purchase Plan (the "Purchase Plan"). The Company has reserved
500,000 shares of Ordinary Shares (250,000 ADSs) for issuance under the Purchase
Plan. The Purchase Plan will enable eligible employees to purchase ADSs at 85%
of the lower of the fair market value of the Company's ADSs on the first or the
last day of each offering period.
Executive Share Option Trust
The Company has established the LBMS Executive Share Option Trust (the Trust).
The Trust purchases shares to be issued to satisfy the exercise of certain stock
options. During 1995, the Trust purchased at market price, 311,000 and 134,000
shares from two directors of the Company, respectively. The Trust held
1,024,000 shares at April 30, 1997. The trustees of the Trust have designated
that certain options representing 643,000 Ordinary Shares will be satisfied
through the issuance of shares held by the Trust (Note 6).
The Trust completed a Private Placement for 988,240 of restricted Ordinary
Shares of the Company on June 5, 1997 and the outstanding indebtedness of $994
was repaid. The Company recognized a increase of $661 in Additional Paid in
Capital which represents the net proceeds of the transaction after approximately
$75 in legal and professional fees.
U.S. Registration of Shares
In December of 1995, the Company completed its initial U.S. offering of
1,450,000 American Depository Shares (ADS). Proceeds from the offering were
$13,485 before expenses of approximately $1,700. Each ADS represents two
Ordinary Shares.
NOTE 10 - EMPLOYEE BENEFIT PLANS:
The Company contributed $67 into a defined contribution plan on behalf of its
employees in fiscal 1997. In prior years, the Company maintained two
contribution plans and contributed a total of $355 and $241 for the years
ended April 30, 1995 and 1996, respectively.
42
<PAGE>
NOTE 11 - SEGMENT INFORMATION:
Starting in fiscal 1995 (Note 2), the Company began operating in a single
industry segment. Selected information regarding the Company's continuing
operations by geographic region are as follows:
Year ended April 30,
------------------------------
1995 1996 1997
-------- -------- ----------
Revenues:
U.S. $24,292 $28,029 $ 19,871
U.K. and Europe 10,848 8,858 1,310
Australia and Asia 5,346 4,271 680
------- ------- --------
$40,486 $41,158 $ 21,861
======= ======= ========
Operating income (loss):
U.S. $ 2,471 $ 2,626 $ (7,119)
U.K. and Europe (4,579) (1,509) (7,411)
Australia and Asia 7 (74) (1,210)
------- ------- --------
(2,101) 1,043 (15,740)
Corporate general and administrative (1,755) (2,045) (1,014)
Interest income, net 53 218 286
------- ------- --------
Loss from continuing operations
before income taxes $(3,803) $ (784) $(16,468)
======= ======= ========
April 30,
-------------------
1996 1997
------- --------
Identifiable assets:
U.S. $12,241 $ 6,739
U.K. and Europe 3,994 147
Australia and Asia 1,444 7
------- --------
17,679 6,893
Corporate cash 9,500 8,461
------- --------
$27,179 $ 15,354
======= ========
43
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES:
The Company has entered into certain noncancelable operating leases for office
space which expire through 2001. Rent expense totaled $2,703, $ 2,400 and
$1,250 for the years ended April 30, 1995, 1996 and 1997. Minimum lease
commitments related to these rental agreements, exclusive of amounts related to
abandonment leaseholds (Note 3), for the fiscal years ending April 30 are as
follows:
1998 $ 513
1999 345
2000 328
2001 291
2002 70
Thereafter
------
Total $1,547
======
44
<PAGE>
SCHEDULE II
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR RETURNS
(In thousands)
Year ended April 30,
------------------------
1995 1996 1997
------ ------- ------
Balance, beginning of period $ 177 $ 369 $ 526
Additions charged to revenue 897 1,341 957
Reductions (705) (1,184) (703)
----- ------- -----
Balance, end of period $ 369 $ 526 $ 780
===== ======= =====
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report because the
registrant will file a definitive Proxy Statement pursuant to Regulations 14A
(the Proxy Statement) not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's executive officers required by this
Item is included in the section in Item I hereof entitled "Employees". The
information concerning the Company's directors required by this Item will be
incorporated by reference to the Company's Proxy Statement under the heading
"Election of Directors - Nominees".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be incorporated by reference to the
Company's Proxy Statement under the heading "Executive Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be incorporated by reference to the
Company's Proxy Statement under the heading "Certain Transactions with
Management".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. See index at Item 8.
46
<PAGE>
2. Financial Statement Schedules. See index at Item 8.
3. Exhibits. The following exhibits are filed as a part of this report:
(a) The following is a list of exhibits to be filed during fiscal 1997.
<TABLE>
<CAPTION>
Exhibit
No. Description of
--- --------------
<S> <C>
**3.1 Memorandum of Association of the Company
**3.2 Articles of Association of the Company
**4.1 Specimen Ordinary Share Certificate
**4.2 Form of Deposit Agreement among the Company, Morgan Guaranty Trust
Company of New York, as Depositary, and the holders from time to time
of American Depositary Receipts issued thereunder
**4.3 Form of American Depositary Receipt (included in Exhibit 4.2)
**4.4 Registration Rights Agreement dated August 5, 1995 among the Company,
Christine Comaford, Infinity Plus Consulting, Inc. and Kimball Atwood
**10.1 1996 Equity Incentive Plan
**10.2 1996 U.S. Employee Stock Purchase Plan
**10.3 1996 Non-Employee Directors' Share Option Plan
**10.4 The ESOP Share Option Scheme
**10.5 The Executive Share Option Scheme
**10.6 Lease Agreement dated May 20, 1993, as amended June 1, 1995, between
Learmonth & Burchett Management Systems, Inc. and CDI/East Houston
Venture I, L.P. relating to the Houston office.
**21 Subsidiaries of the Company
CE-23.1 Consent of Independent Accountants
CE-27 Financial Data Schedule
CE-99 Important Factors Regarding Forward-Looking Statements
** Previously filed.
CE Electronically filed.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
47
<PAGE>
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.
Date: July 28, 1997 LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
By: /s/ Michael S. Bennett
----------------------
Michael S. Bennett, Chief Executive Officer
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 and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Michael S. Bennett Chief Executive Officer and Director (Principal July 28, 1997
- --------------------- Executive Officer)
Michael S. Bennett
/s/ Stephen E. Odom Chief Financial Officer and Senior Vice- July 28, 1997
- --------------------- President-Finance and Administration
Stephen E. Odom (Principal Financial and Accounting Officer)
/s/ Gerald Christopher Chairman of the Board July 28, 1997
- ---------------------
Gerald Christopher
/s/ Rainer H. Burchett Director July 28, 1997
- ---------------------
Rainer H. Burchett
/s/ Felda Hardymon Director July 28, 1997
- ---------------------
Felda Hardymon
/s/ Roger A. Learmonth Director July 28, 1997
- ---------------------
Roger A. Learmonth
</TABLE>
48
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-24225) of Learmonth & Burchett Management
Systems Plc of our report dated June 7, 1997 appearing on page 26 of the
Learmonth & Burchett Management Systems Plc Annual Report on Form 10-K for the
year ended April 30, 1997.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
July 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMAITON EXTRACTED FROM THE
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC CONSOLIDATED FINANCIAL STATEMENTS AT
AND FOR THE YEAR ENDED APRIL 30, 1997 AND IS QUALIFIFED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 8,461
<SECURITIES> 0
<RECEIVABLES> 5,138
<ALLOWANCES> (780)
<INVENTORY> 0
<CURRENT-ASSETS> 13,842
<PP&E> 3,173
<DEPRECIATION> (1,661)
<TOTAL-ASSETS> 15,354
<CURRENT-LIABILITIES> 11,520
<BONDS> 0
0
0
<COMMON> 4,267
<OTHER-SE> (9,514)
<TOTAL-LIABILITY-AND-EQUITY> 15,354
<SALES> 12,170
<TOTAL-REVENUES> 21,861
<CGS> 195
<TOTAL-COSTS> 4,413
<OTHER-EXPENSES> 34,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 159
<INCOME-PRETAX> (16,468)
<INCOME-TAX> 150
<INCOME-CONTINUING> (16,318)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,318)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</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. Reference is
also made to the "Risk Factors" described in the Company's Prospectus dated
November 22, 1995, the Company's Form 10-K for its fiscal year ended April 30,
1996, and other Company information as filed 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
Systems 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 is comprised primarily of lease costs,
severance and other employee costs and impairment of certain operating
assets, principally outside the U.S. The restructuring actions have
resulted and may continue to result in a
<PAGE>
EXHIBIT 99
substantial reduction in the Company's cash balance. The estimated total
cash requirements associated with the restructuring actions exceed the
Company's cash balances, 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. In addition, the first quarter of each fiscal year 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) 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
<PAGE>
EXHIBIT 99
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 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
<PAGE>
EXHIBIT 99
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. 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
<PAGE>
EXHIBIT 99
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 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 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
<PAGE>
EXHIBIT 99
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.
(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
<PAGE>
EXHIBIT 99
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
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.
