<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27218
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
(Exact name of registrant as specified in its charter)
England None
(Stated or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1800 West Loop South, 9th Floor
Houston, Texas
77027
(Address of principal executive offices)
(Zip Code)
(713) 625-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of November 30, 1997, 26,127,628 Ordinary Shares of the Registrant's Common
Stock, 10 pence par value, were issued and outstanding.
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
FORM 10-Q
OCTOBER 31, 1997
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of October 31, 1997
and April 30, 1997 3
Consolidated Statement of Operations for the three and
six months ended October 31, 1997 and October 31, 1996 4
Consolidated Statement of Cash Flows for the six months
ended October 31, 1997 and October 31, 1996 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
October 31, April 30,
1997 1997
------------ ----------
(unaudited) (audited)
Assets
------
Current assets:
Cash and cash equivalents $ 9,335 $ 8,461
Trade accounts receivable 4,230 4,358
Other current assets 1,114 1,023
-------- --------
Total current assets 14,679 13,842
Furniture, fixture and equipment, net 1,526 1,512
-------- --------
Total assets $ 16,205 $ 15,354
======== ========
Liabilities and shareholders' equity (deficit)
----------------------------------------------
Current liabilities:
Current maturities of indebtedness $ 165 $ 745
Accounts payable 698 486
Deferred revenue 3,243 3,534
Accrued liabilities 5,585 5,778
Executive Share Option Trust indebtedness 977
-------- --------
Total current liabilities 9,691 11,520
Indebtedness 211 238
Other liabilities 6,166 8,843
-------- --------
Total liabilities 16,068 20,601
-------- --------
Shareholders' equity (deficit):
Ordinary shares, 10 pence par value 4,351 4,267
Additional paid-in capital 21,500 20,330
Executive Share Option Trust indebtedness (977)
Cumulative translation adjustment (401) (372)
Accumulated deficit (25,313) (28,495)
-------- --------
Total shareholders' equity (deficit) 137 (5,247)
-------- --------
Commitments and contingencies -------- --------
Total liabilities and shareholders'
equity (deficit) $ 16,205 $ 15,354
======== ========
The accompanying notes are an integral part of this statement.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
October 31, October 31,
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 4,702 $ 2,757 $ 8,752 $ 4,761
Services 1,831 2,095 3,679 5,345
------- -------- ------- --------
Total revenue 6,533 4,852 12,431 10,106
------- -------- ------- --------
Costs and expenses:
Cost of product licenses 22 11 38 69
Cost of services 842 921 1,811 2,537
------- -------- ------- --------
Total cost of revenue 864 932 1,849 2,606
------- -------- ------- --------
Gross margin 5,669 3,920 10,582 7,500
------- -------- ------- --------
Sales and marketing 2,850 2,217 5,297 6,739
Research and development 1,129 1,016 2,244 3,159
General and administrative 648 578 1,308 1,886
Restructuring charge (recovery) 17,621 (1,256) 17,621
------- -------- ------- --------
Total operating expenses 4,627 21,432 7,593 29,405
------- -------- ------- --------
Operating income (loss) 1,042 (17,512) 2,989 (21,905)
Interest income 126 119 233 242
Interest expense (10) (35) (40) (69)
Other income (expense) 11 15
------- -------- ------- --------
Income (loss) before income taxes 1,158 (17,417) 3,182 (21,717)
Income taxes (benefit)
------- -------- ------- --------
Net Income (loss) $ 1,158 $(17,417) $ 3,182 $(21,717)
======= ======== ======= ========
Income (loss) per Ordinary Share: $0.04 $(0.68) $0.12 $(0.85)
======= ======== ======= ========
Income (loss) per ADS: (1) $0.09 $(1.36) $0.24 $(1.70)
======= ======== ======= ========
Weighted average Ordinary and Ordinary Share
equivalents outstanding 26,321 25,539 26,207 25,537
======= ======== ======= ========
</TABLE>
(1) Adjusted to reflect the ratio of one ADS to two Ordinary Shares.
The accompanying notes are an integral part of this statement.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
October 31,
----------------
1997 1996
------- --------
<S> <C> <C>
Cash flow from operating activities:-
Net income (loss) $ 3,182 $(21,717)
Adjustments to reconcile net income (loss) to cash
used by operating activities:
Depreciation and amortization 225 303
Write-off/(recovery) of net assets from restructuring (1,256) 2,894
Changes in current assets and liabilities, net of
the effect of net asset write-offs from restructuring:
Trade accounts receivable 128 3,835
Other current assets (91) 916
Accounts payable 212 (390)
Accrued restructuring (1,647) 10,583
Accrued legal settlement (333) (155)
Other accrued liabilities 157 (302)
Deferred revenue (291) 1,273
Other noncurrent assets and liabilities, net 180 (593)
------- --------
Net cash provided (used) by operating activities 466 (3,353)
------- --------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (239) (187)
------- --------
Net cash used by investing activities (239) (187)
------- --------
Cash flows from financing activities:
Repayments of indebtedness (1,584) (318)
Sale of ESOT Ordinary Shares, net 1,636
Issuance of Ordinary Shares, net 595 (39)
------- --------
Net cash provided (used) by financing activities 647 (357)
------- --------
Increase (decrease) in cash 874 (3,897)
Beginning cash and cash equivalents 8,461 10,960
------- --------
Ending cash and cash equivalents $ 9,335 $ 7,063
======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
-5-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
OCTOBER 31, 1996
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles of the United States
for interim financial reporting and in accordance with Form 10-Q and Rule 10.01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles of the United
States for complete financial statements. In the opinion of management, the
unaudited consolidated financial statements contained in this report reflect all
adjustments, consisting of only normal recurring adjustments considered
necessary for a fair presentation of the financial position and the results of
operations for the interim periods presented. Operating results for interim
periods are not necessarily indicative of results for the full year. These
unaudited consolidated financial statements, footnote disclosures and other
information should be read in conjunction with the financial statements and the
notes thereto included in the Company's annual 10-K filed with the Securities
and Exchange Commission on July 29, 1997.
NOTE 2 - SHAREHOLDERS' EQUITY:
In the period May 1, 1997 through October 31, 1997, options to purchase 413,178
Ordinary Shares at exercise prices of 0.4425 to 0.76 Pounds Sterling per share
were exercised. At October 31, 1997, there were options outstanding to purchase
4,407,959 Ordinary Shares. In November 1997, the shareholders formally approved
an amendment to the 1996 Stock Option Plan (the Plan) to increase the maximum
number of shares available in the Plan by 1.5 million Ordinary Shares.
In June 1997, the Company's Executive Share Option Trust completed a Private
Placement for 988,240 of restricted Ordinary Shares of the Company and repaid
approximately $1.0 million of indebtedness to a Bank with proceeds from the
sale; consequently, the Company was released from its guarantee of that
indebtedness. The Company recognized an increase of $0.7 million in Additional
Paid in Capital which represents the net proceeds of the sale after the
repayment of indebtedness and transaction cost. The Company also issued 89,842
Ordinary Shares to its employees on July 1, 1997 under the Employee Stock
Purchase Plan.
NOTE 3 - EARNINGS PER SHARE AND COMMON EQUIVALENT SHARE:
Earnings per Ordinary Share and earnings per ADS are computed using the weighted
average number of Ordinary Shares and Ordinary Share equivalents outstanding
during the period. Ordinary Share equivalents, to the extent they would be
dilutive, include the number of shares issuable upon exercise of stock options,
less the number of shares that could have been repurchased with the exercise
proceeds using the treasury stock method.
NOTE 4 - RESTRUCTURING CHARGE:
In August 1996, the Board of Directors approved a plan to restructure the
Company's operations. Under the approved plan, the Company recorded a
restructuring charge of $17.6 million in the three months ending October 31,
1996. At October 31, 1997, the Company had approximately $7.0 million of the
restructuring liabilities remaining. These primarily related to abandoned lease
costs which will be paid out through the year 2014. During the six months ended
October 31, 1997, the Company recorded a recovery of restructuring charges
previously taken of $1.3 million related to the subleasing and/or buyout of
various abandoned leases.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
When used in this discussion, the words "believes," "anticipated" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. See Item 6 - Exhibit
99 "Important Factors Regarding Forward-Looking Statements" which is
incorporated herein by reference. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
In August 1996, the Board of Directors approved a plan to restructure the
Company's operations and made certain changes to executive management. In
connection with the Company's restructuring plan, the Company recorded a $17.6
million restructuring charge in the three months ended October 31, 1996. The
restructuring charge was comprised primarily of lease costs, severance and other
employee costs and impairment of certain operating assets, principally outside
the U.S. Included in the restructuring was a shift in the Company's development
and marketing efforts to focus substantially all its resources on the Company's
Process Engineer product line, eliminating or substantially reducing its
development and marketing investment in the Systems Engineer, Insight, GUI
Guidelines and Client Server Guidelines product lines. The Company also
discontinued its direct sales and service operations outside the U.S., replacing
its non-U.S. operations with third-party distributor relationships. Also, the
Company discontinued its telesales operations in the U.S.
During the six months ended October 31, 1997, the Company recorded a recovery of
restructuring charges previously taken of $1.3 million related to the subleasing
and/or buyout of various abandoned leases. The Company expects additional
recoveries, primarily through sublease or other arrangements; however, there is
no assurance that such recoveries will actually occur.
As a result of the significant changes in the business, the results of
operations and financial position of the Company for the six months ended
October 31, 1997, are substantially different than for the comparative prior
period.
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1996
Total Revenue
Total revenue increased 35% from $4.9 million in the three months ended October
31, 1996 to $6.5 million in the three months ended October 31, 1997. This
increase was attributable to increased product sales in the U.S. partially
offset by a decrease in service revenue related to a decrease in maintenance
revenue because of the sale of the Systems Engineer product line.
Product Licenses. Product license revenue increased 71% from $2.8 million in the
three months ended October 31, 1996 to $4.7 million in the three months ended
October 31, 1997. This increase is attributable to increased product sales in
the U.S.
Services. The Company provides maintenance and implementation services to its
customers. Maintenance services include technical support and access to product
upgrades when and if available. Implementation services include product
installation, training and assisting customers with the effective deployment of
LBMS products. Overall services revenue decreased 13% from $2.1 million for the
three months ended October 31, 1996 to $1.8 million for the three months ended
October 31, 1997, primarily due to a decrease in maintenance revenue because of
the sale of the Systems
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Engineer product line.
Cost of Revenue
Cost of Product Licenses. Cost of product licenses consists of sublicense
fees, product media and duplication cost, manuals, packaging materials and
shipping expenses. Cost of product licenses was $11,000 and $22,000 in the
three month periods ended October 31, 1996 and 1997, respectively.
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $0.9
million and $0.8 million in the three months ended October 31, 1996 and 1997,
respectively, resulting in a gross margin of 56% and 54% of the related service
revenue in each respective period. The reduction in gross margin percentage
primarily relates to a decrease in maintenance revenue from the Systems
Engineer product line.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions of sales and marketing personnel, travel and promotional
expenses and related indirect costs. Sales and marketing expenses increased 29%
from $2.2 million, or 46% of total revenue, in the three months ended October
31, 1996 to $2.9 million, or 44% of total revenue, for the three months ended
October 31, 1997. The increase of $0.7 million is primarily related to increased
commissions due to increased license revenue and an increase in discretionary
marketing expense.
Research and Development. Research and development expenses consist primarily
of the cost of research and development personnel and related indirect costs.
Research and development expenses were $1.0 million, or 21% of total revenue,
for the three months ended October 31, 1996 compared to $1.1 million, or 17% of
total revenue for the three months ended October 31, 1997.
General and Administrative. General and administrative expenses consist
primarily of salaries of financial, administrative and management personnel and
related indirect costs. General and administrative expenses increased 12% for
the three months ended October 31, 1997 in comparison to the 1996 period. The
increase primarily resulted from additional expenses to support the Company's
recruiting efforts, including the addition of a director of human resources, and
increased depreciation related to capital additions, principally computer
equipment.
Operating Income. The Company generated income from operations of $1.0 million,
in the three months ended October 31, 1997 compared to income from operations of
$0.1 million before a restructuring charge of $17.6 million for the comparable
period in 1996.
Income taxes. The Company did not record an income tax expense for income
recognized in the three month period ended October 31, 1997, due to prior period
losses. For the three months ended October 31, 1996, no tax benefit was
recognized due to the historical tax losses experienced; consequently, there was
no assurance that the Company's operations would generate taxable income to
utilize these losses.
SIX MONTHS ENDED OCTOBER 31, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1996
Total Revenue
Total revenue increased 23% from $10.1 million in the six months ended October
31, 1996 to $12.4 million in the six months ended October 31, 1997. This
increase was attributable to increased product sales in the U.S. partially
offset by a decrease in service revenue related to the discontinuance of direct
service operations outside the U.S. and a decrease in maintenance revenue
because of the sale of the Systems Engineer product line.
-8-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Product Licenses. Product license revenue increased 84% from $4.8 million in the
six months ended October 31, 1996 to $8.8 million in the six months ended
October 31, 1997. This increase is attributable to increased product sales in
the U.S.
Services. The Company provides maintenance and implementation services to its
customers. Maintenance services include technical support and access to product
upgrades. Implementation services include product installation, training and
assisting customers with the effective deployment of LBMS products. Overall
services revenue decreased 31% from $5.3 million for the six months ended
October 31, 1996 to $3.7million for the six months ended October 31, 1997,
due to the decrease in service revenue related to the discontinuance
of direct service operations outside the U.S. and a decrease in maintenance
revenue because of the sale of the Systems Engineer product line.
Cost of Revenue
Cost of Product Licenses. Cost of product licenses consists of sublicense
fees, product media and duplication cost, manuals, packaging materials and
shipping expenses. Cost of product licenses was $69,000 and $38,000 for the
six month periods ending October 31, 1996 and 1997, respectively.
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $2.5
million and $1.8 million in the six months ended October 31, 1996 and 1997,
respectively, resulting in a gross margin of 53% and 51% of the related service
revenue in each respective period. The reduction of the gross margin percentage
predominately reflects the reduction in maintenance revenue as a percentage of
total service revenue due to the sale of the Systems Engineer product line.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions of sales and marketing personnel, travel and promotional
expenses and related indirect costs. Sales and marketing expenses decreased 21%
from $6.7 million, or 67% of total revenue, in the six months ended October 31,
1996 to $5.3 million, or 43% of total revenue, for the six months ended October
31, 1997. This decrease of $1.4 million is due to the elimination of sales and
marketing costs outside the U.S.
Research and Development. Research and development expenses consist primarily
of the cost of research and development personnel and related indirect costs.
Research and development expenses were $3.2 million, or 31% of total revenue,
for the six months ended October 31, 1996 compared to $2.2 million, or 18% of
total revenue for the six months ended October 31, 1997. The decrease in
research and development expenses reflect the elimination or substantial
reduction in development efforts related to the Systems Engineer, Insight, GUI
Guidelines and Client Server Guidelines products beginning in the three months
ended October 31, 1996 . Development headcount and expenses related to the
Process Engineer product line were increased in the six months ended October 31,
1997 compared to the six months ended October 31, 1996.
General and Administrative. General and administrative expenses consist
primarily of salaries of financial, administrative and management personnel and
related indirect costs. General and administrative expenses decreased 31% from
$1.9 million for the six months ended October 31, 1996 to $1.3 million for the
six months ended October 31, 1997. The decrease resulted from the elimination
of general and administrative expenses outside the U.S. beginning with the three
months ended October 31. 1996.
Operating Income. The Company generated operating income of $3.0 million,
including the benefit of a $1.3 million recovery of a previously recorded
restructuring charge, compared to a loss from operations of $21.9 million,
including a restructuring charge of $17.6 million, for the comparable period in
1996.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income taxes. The Company did not record an income tax expense for income
recognized in the six month period ended October 31, 1997, due to prior period
losses. During the six month period ended October 31, 1996, the Company did not
record a tax benefit related to the Company's losses because such benefit could
not be recognized, under the liability method, until future taxable income is
reasonably assured.
Liquidity and Capital Resources
- -------------------------------
At October 31, 1997, the Company had cash and cash equivalents of $9.3 million
and working capital of $5.0 million. The Company generated approximately $2.5
million in cash from operations for the six months ended October 31, 1997 before
payments of approximately $2.0 million related to the Company's restructuring
activities and legal settlement.
The Company's investing activities consist primarily of purchases of equipment.
The Company had capital expenditures of $0.2 million for the six months ended
October 31, 1997, substantially the same as the prior year comparable period.
The Company does not currently have any significant capital commitments.
The Company has an available line of credit from a bank in the U.S. in the
amount of $2.5 million. During the six months ended October 31, 1997, the
Company repaid approximately $0.25 million outstanding under the line of credit.
This credit facility requires the Company to comply with certain restrictive
covenants and maintain certain financial ratios. At July 31, 1997, the Company
was in violation of certain restrictive covenants and obtained a waiver from the
Bank. In September 1997, the Company renewed its credit facilities and modified
certain of the restrictive covenants and financial ratios requirements. As of
October 31, 1997 and November 30, 1997, the Company was in compliance with all
credit facility covenants.
In June 1997, the Company's Executive Share Option Trust repaid approximately $1
million of indebtedness to a Bank with proceeds from the sale of the shares held
by the Trust; consequently, the Company was released from its guarantee of that
indebtedness.
The Company believes that its existing cash will be adequate to finance its
operations for at least the next 12 months.
See Exhibit 99 for further discussions about potential risk factors.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 128 " Earnings per Share" (SFAS
128) which becomes effective for periods ending after December 15, 1997,
establishes new standards for computing and presenting earnings per share (EPS).
The new standard requires the presentation of basic EPS and diluted EPS. Basic
EPS is calculated by dividing income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common shareholders by
the weighted average number of common shares outstanding adjusted to reflect
potentially dilutive securities. Previously reported EPS amounts must be
restated under the new standard when it becomes effective. The Company has not
yet analyzed the impact of adopting this statement.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting for Comprehensive Income" and
No. 131 "Disclosure about Segments of an Enterprise and Related Information."
These statements are effective for financial statements issued for periods
beginning after December 15, 1997. The Company has not yet analyzed the impact
of adopting these statements.
The American Institute of Certified Public Accountants has issued a new
Statement of Position to amend the provisions of Statement of Position 91-1,
"Software Revenue Recognition." The adoption of this standard will not have a
significant impact on the Company's results of operations or financial position.
-10-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings: - From time to time the Company has legal or
administrative proceedings which are generally incidental to its
normal business activities. While the outcome of any such proceeding
can not be accurately predicted, the Company does not believe the
ultimate resolution of any such existing matters should have a
material adverse effect on its financial position or results of
operations.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Employment Agreement with Michael S. Bennett as Chief Executive
Officer
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking Statements.
(b) Reports on Form 8-K
Not Applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of 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: December 10, 1997 LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
By: /s/ Michael S. Bennett
-------------------------------------------
Michael S. Bennett, Chief Executive Officer
By: /s/ Stephen E. Odom
-------------------------------------------
Stephen E. Odom, Chief Financial Officer and
Senior Vice President - Finance and Administration
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<PAGE>
EXHIBIT 10
Learmonth & Burchett Management Systems Plc
1800 West Loop South, 6th Floor
Houston, TX 77027
July 1, 1997
Mr. Michael S. Bennett
5105 Cuesta Verde
Austin, TX 78746
Dear Mike:
This letter sets forth our understanding concerning your compensation as
President and Chief Executive Officer of Learmonth & Burchett Management Systems
Plc ("the Company"), and a member of the Company's Board of Directors. An
important part of the Board agreeing to this package and to this extension is
the acknowledgment that you have done an extraordinary job despite living in
Austin. We are extending the offer with the understanding that we will begin the
hard work of strengthening the management team under you so that this living
arrangement can continue to be successful for the time being. Therefore, you
have agreed to initiate a search for a senior level technology officer.
1. Your base salary shall continue at the rate of $200,000 per year,
payable in installments in accordance with the Company's normal practice. Such
salary shall be subject to annual review by the Board of Directors.
2. You will be entitled to a bonus of $175,000 per year earned and payable
in accordance with the regular executive bonus plan but capped at $200,000 in
the event of performance beyond the targets. Such bonus shall be subject to
annual review by the Board of Directors.
3. You and your family will be included in LBMS, Inc.'s medical plan.
4. LBMS, Inc. will provide you with an apartment, or reimburse you for the
cost of an apartment, and reasonable living expenses (including tax
consequences, if applicable) in the Houston area, and for reasonable travel for
yourself and your family between the Austin area and Houston. LBMS, Inc. will
also provide you with a car allowance equal to that of other executive officers,
currently $750.00 per month, and transportation while in Houston. LBMS, Inc.
will also reimburse you for the tax consequences thereof.
5. The Company will issue you options to purchase 200,000 American
Depositary Shares, at an exercise price of $3.00 per ADS. Such options shall
vest as to 66,668 ADSs on
<PAGE>
Mr. Michael Bennett July 1, 1997
August 1, 1998, and as to an additional 5,556 ADSs on the first day of each
month thereafter until such options are fully vested. Any unvested options in
this package will accelerate 60% on Change of Control and 40% over the twelve
months following a Change of Control except in cases where the acquiring company
either (i) does not hire you in a full time permanent position, or (ii) that
position is less in responsibility than your current position. In these two
exception cases, your shares will vest 100% upon Change of Control.
Also, if terminated by the Company without cause prior to the end of the
first year (August 1, 1998), one-third of this grant will vest and must be
exercised within 6 months of the date of termination.
For the purposes of this Agreement and the agreement between us dated
October 15, 1996, "Change of Control" shall have the meaning set forth in
Section 7.3 of the Company's 1996 Equity Incentive Plan.
6. You will be entitled to the following severance payments:
(a) One year base pay plus benefits (to be paid in accordance with the
Company's normal payroll periods) and all previously earned but
unpaid bonuses, including bonuses for operating performance, also
including special bonuses as defined in Section 7 and the bonus for
hiring your successor described in Section 6(c) (payable as a lump
sum), if terminated by the Company without cause.
(b) In case of a Change of Control you will receive all the benefits as
defined in 6(a) (including the special bonuses defined in Section 7
whether or not earned). However, if terminated by the acquiring
company, or your position changes, all of the severance payments set
forth in Section 6(a) will be paid in a lump sum at the time of
termination.
(c) If you voluntarily terminate your employment and you have recruited a
successor as CEO who has joined the Company, you will be entitled to
receive one year base salary and any earned bonuses (paid in
accordance with the Company's normal payroll period) payable in the
usual way and usual timing, and benefits, plus $150,000 (payable in a
lump sum) at that time.
(d) LBMS, Inc. will continue your medical and other insurance benefits
for one year following any termination of your employment.
7. You will be eligible for additional bonuses totaling $150,000 as
follows:
(a) $50,000 upon the hiring of a senior technology officer, payable in
three installments at the end of each of the first three months he is
with the Company
-2-
<PAGE>
Mr. Michael Bennett July 1, 1997
and living in Houston* (i.e. if he leaves after month 2, the third
installment is held until his replacement is on board and has been in
Houston for a month.)
*The Board can waive the living in Houston requirement for good
reason (i.e. the CTO's house is for sale and he can't move until the
end of the school year.
(b) $50,000 for achieving quarterly revenue targets at or above plan for
four quarters, to be paid quarterly at $12,500 per quarter following
the release of earnings.
(c) $50,000 for achieving the targeted quarterly EPS as calculated
against the number of shares outstanding reflected in the operating
plan for four quarters, to be paid quarterly at $12,500 per quarter
following the release of earnings.
This $150,000, or what is remaining, becomes payable as a bonus (paid in
lump sum) upon Change of Control regardless of anything else.
8. You understand that you are an employee at will.
If the above reflects your understanding of our agreement, please execute
the enclosed copy of this letter and return it to the undersigned.
Very truly yours,
Learmonth & Burchett Management Systems Plc
/s/ GERALD N. CHRISTOPHER
-----------------------------------
By: Gerald N. Christopher, Chairman
Agreed and accepted:
/s/ MICHAEL S. BENNETT
- -------------------------------
Michael S. Bennett
-3-
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OCTOBER 31,
1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
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<RECEIVABLES> 5,267
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<CURRENT-ASSETS> 14,679
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0
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<TOTAL-LIABILITY-AND-EQUITY> 16,205
<SALES> 4,702
<TOTAL-REVENUES> 6,533
<CGS> 864
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</TABLE>
<PAGE>
Exhibit 99
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the new " safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this exhibit
in order to do so. Accordingly, the Company hereby identifies the following
important factors which could cause the Company's actual financial results to
differ materially from any such results which might be projected, forecast or
estimated by the Company in forward-looking statements.
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time in Company
filings with the Securities and Exchange Commission.
(a) Restructuring - In August 1996, the Board of Directors approved a plan to
restructure the Company's operations and made changes to executive
management. Included in the restructuring was a shift in the Company's
development and marketing efforts to focus substantially all its resources
on the Company's Process Engineer product line, eliminating or substantially
reducing its development and marketing investment in the System Engineer,
Insight, GUI Guidelines and Client Server Guidelines product lines, and to
discontinue its direct sales and service operations outside the U.S. The
Company replaced its non-U.S. operations with third-party distributor
relationships. There is no assurance that such distributors will be
successful. Also, the Company discontinued its telesales operations in the
U.S. The Company's future ability to generate sustained profitability is
dependent on the Company's Process Engineer product line and the Company's
direct sales operations in the U.S. There is no assurance that the Company
will be able to generate or sustain profitability. The Company has not
historically been successful in selling its Process Engineer product line
outside the U.S.
In connection with the Company's restructuring plan, the Company recorded a
$17.6 million restructuring charge in the three months ended October 31,
1996. The restructuring charge was comprised primarily of lease costs,
severance and other employee costs and impairment of certain operating
assets, principally outside the U.S. The restructuring actions may result in
a substantial reduction in the Company's
<PAGE>
cash balance. The estimated total cash requirements associated with the
restructuring actions is substantial, however, currently, such cash
requirements extend over several years. Additionally, the Company's
restructuring plan could result in additional claims or liabilities which
the Company has not anticipated or included in the restructuring charge.
Unanticipated claims or liabilities could result in additional cash needs
for the Company.
Publicity concerning the Company's reported loss for fiscal 1997 and losses
reported in previous years, could adversely affect the Company's operations
and financial position including the ability to complete product sales and
retain or attract key management and other personnel.
(b) Fluctuations in Operating Results; Seasonality. The Company has experienced
substantial fluctuations in quarterly operating results in the past, and
future operating results could vary substantially from quarter to quarter.
Fluctuations in operating results may result in volatility in the price of
the ADSs. The Company generally fulfills orders as received and as a result
typically has little or no product license backlog. Quarterly revenue and
operating results therefore depend on the volume and timing of orders
received during the quarter, which are difficult to forecast. In addition,
the Company historically has recognized a substantial portion of its revenue
in the last weeks of a quarter. To the extent this trend continues, the
failure to achieve such revenue in the last weeks of any given quarter may
have a material adverse effect on the Company's financial results for that
quarter. The timing of sales and related revenue recognition is influenced
by a number of other factors, including seasonal customer buying patterns,
changes in product development and sales and marketing expenditures, and
compensation incentives for sales teams. Because the Company's staffing and
operating expenses are based on anticipated revenue levels and a high
percentage of the Company's costs are fixed in the short-term, small
variations in timing of recognition of specific revenue can cause
significant variations in operating results from quarter to quarter.
Results from quarter to quarter may not be indicative of future results.
There can be no assurance that the Company will be able to sustain
profitability on an annual or quarterly basis.
(c) Need for Market Acceptance of Process Management. The Company's product
lines are designed specifically for process management in the client/server
environment. The Company's future financial performance will depend in large
part on continued growth in the number of organizations using process
management tools to manage their development processes. The Company believes
that while the market for process management tools is growing, it is still
immature. Even if broader market acceptance is achieved, there can be no
assurance that the market will continue to grow or that the Company will be
able to respond effectively to the evolving requirements of the market. The
Company's reduced focus and investment on products other than process
<PAGE>
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 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
<PAGE>
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
have, larger technical staffs, more established and larger marketing and
sales organizations, better developed distribution systems and significantly
greater financial resources than the Company. There can be no assurance that
either existing or new competitors will not develop products that are
superior to the Company's products or that achieve greater market
acceptance. There can be no assurance that future competition will not have
a material adverse effect on the Company's business, financial condition and
<PAGE>
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, particularly since the restructuring, has been minimal.
There can be no assurance that the Company will be able to increase revenue
from its current indirect sales channels or establish new indirect sales
channels. There can be no assurance that any current distributor of the
Company's products will continue to represent the Company's products, and
the inability to improve the effectiveness of current indirect sales
channels or establish new indirect sales channels could adversely affect the
Company's business, financial condition and results of operations. The
Company's strategy of marketing its products directly to end-users and
indirectly through distributors may result in distribution channel
conflicts, particularly in the U.S. The Company's direct sales efforts may
compete with those of its indirect channels and to the extent different
distributors target the same customers, distributors may also come into
conflict with each other. Although the Company attempts to allocate the
markets for its products among its distribution channels in a manner to
avoid potential conflicts, there can be no assurance that channel conflict
will not materially and adversely affect its relationships with existing
distributors.
(h) Dependence on Proprietary Technology. The Company's success is heavily
dependent upon proprietary technology. The Company's products are licensed
to customers under signed license agreements containing, among other things,
provisions protecting against the unauthorized use, copying and transfer of
the licensed program. In addition, the Company relies on a combination of
trade secret, copyright and trademark laws, non-disclosure agreements and
contractual provisions to protect its proprietary rights in its products and
technology. The Company has no patents or patent applications pending, and
existing trade secrets and copyright laws afford only limited protection.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products
or to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and while
the Company is
<PAGE>
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 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
<PAGE>
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.
