<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 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 (I.R.S. Employer
incorporation 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 February 28, 1997, 25,554,720 Ordinary Shares of the Registrant's
Stock, 10 pence par value, were issued and outstanding.
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
FORM 10-Q
JANUARY 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidate Balance Sheet as of January 31, 1997 and April 30, 1996 3
Consolidated Statement of Operations for the three and nine months
ended January 31, 1997 and January 31, 1996 4
Consolidated Statement of Cash Flows for the nine months
ended January 31, 1997 and January 31, 1996 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 16
Itme 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
January 31, April 30,
1997 1996
----------- ---------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,715 $ 10,960
Trade accounts receivable 3,923 9,579
Other current assets 1,252 3,498
-------- --------
Total current assets 13,890 24,037
Furniture, fixture and equipment, net 1,469 2,982
Other assets 160
-------- --------
Total assets $ 15,359 $ 27,179
======== ========
Liabilities and shareholders' equity (deficit)
Current liabilities:
Current maturities of indebtedness $ 855 $ 1,003
Accounts payable 488 1,630
Deferred revenue 4,145 3,691
Accrued liabilities 5,749 5,344
Executive Stock Option Trust indebtedness 966 903
-------- --------
Total current liabilities 12,203 12,571
Indebtedness 240 524
Other liabilities 9,108 2,149
-------- --------
Total liabilities 21,551 15,244
-------- --------
Shareholders' equity (deficit):
Ordinary shares, 10 pence par value 4,257 4,253
Additional paid-in capital 20,291 20,323
Executive Stock Option Trust indebtedness (966) (903)
Cumulative translation adjustment (205) 439
Accumulated deficit (29,569) (12,177)
-------- --------
Total shareholders'equity (deficit) (6,192) 11,935
-------- --------
Commitments and contingencies
-------- --------
Total liabilities and shareholders'
equity (deficit) $ 15,359 $ 27,179
======== ========
The accompanying note are an integral part of this statement.
-3-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
January 31, January 31,
----------------------------------- ------------------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Product licenses $ 3,402 $ 6,045 $ 8,163 $17,885
Services 2,165 3,574 7,510 12,432
------- ------- -------- -------
Total revenue 5,567 9,619 15,673 30,317
------- ------- -------- -------
Costs and expenses:
Cost of product licenses 54 138 123 612
Cost of services 826 1,836 3,363 5,178
------- ------- -------- -------
Total cost of revenue 880 1,974 3,486 5,790
------- ------- -------- -------
Gross margin 4,687 7,645 12,187 24,527
------- ------- -------- -------
Sales and marketing 2,395 5,277 9,134 14,496
Research and development 1,104 2,058 4,263 5,847
General and administrative 584 1,505 2,470 4,104
Merger costs 468
Restructuring charge (benefit) (3,512) 14,109
------- ------- -------- -------
Total operating expenses 571 8,840 29,976 24,915
------- ------- -------- -------
Operating income (loss) 4,116 (1,195) (17,789) (388)
Interest income 85 117 327 163
Interest expense (26) (26) (95) (58)
Other income (expense) (9) 15 (8)
------- ------- -------- -------
Income (loss) from continuing operations
before income taxes 4,175 (1,113) (17,542) (291)
Income tax benefit 150 158 150
------- ------- -------- -------
Net Income (loss) $ 4,325 $ (955) $(17,392) $ (291)
======= ======= ======== =======
Income (loss) per Ordinary Share: $0.16 $(0.04) $(0.68) $(0.01)
======= ======= ======== =======
Income (loss) per ADS: (1) $0.33 $(0.08) $(1.36) $(0.02)
======= ======= ======== =======
Weighted average Ordinary and Ordinary Share
equivalents outstanding 26,322 24,792 25,543 25,528
======= ======= ======== =======
</TABLE>
(1) Adjusted to reflect the ratio of one ADS to two Ordinary Shares.
The accompanying notes are an integral part of this statement.
-4-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
January 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Cash flow from operating activities:-
Net income (loss) $(17,392) $ (291)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 378 519
Write-off of assets from restructuring net of recoveries 1,412
Loss on sale of assets 15
Changes in current assets and liabilities, net of
the effect of net assets write-offs from restructuring:
Trade accounts receivable 3,869 2,280
Other current assets 1,058 (356)
Accounts payable (1,142) 770
Accrued restructuring 10,024 (3,386)
Accrued legal settlement (665) (1,580)
Other accrued liabilities (431) (320)
Deferred revenue 1,959 (1,378)
Other noncurrent assets and liabilities, net (628) (273)
-------- -------
Net cash used by operating activities (1,558) (4,000)
-------- -------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (227) (1,686)
Sale of assets 58
-------- -------
Net cash used by investing activities (227) (1,628)
-------- -------
Cash flows from financing activities:
Borrowings on indebtedness 1,020
Repayments of indebtedness (432) (574)
Issuance of Ordinary Shares, net (28) 11,923
Distributions to CCI shareholders (7)
-------- -------
Net cash provided (used) by financing activities (460) 12,362
-------- -------
Increase (decrease) in cash (2,245) 6,734
Beginning cash and cash equivalents 10,960 5,026
-------- -------
Ending cash and cash equivalents $ 8,715 $11,760
======== =======
</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, 1996.
NOTE 2 - ACQUISITIONS:
In August 1995, the Company acquired Corporate Computing Inc. (CCI), in exchange
for 700,000 Ordinary Shares of the Company. The acquisition was accounted for as
a pooling of interests. CCI's operations have been included in the consolidated
financial statements for all periods presented.
NOTE 3 - SHAREHOLDERS' EQUITY:
In the period May 1, 1996 through January 31, 1997, options to purchase 49,000
Ordinary Shares at exercise prices of .4625 to .85 Pounds Sterling per share
were exercised. At January 31, 1997, there were options to purchase 4,123,250
Ordinary Shares, including 655,450 of options related to Ordinary Shares held by
the Executive Share Option Trust which are currently outstanding for earnings
per share calculation purposes.
NOTE 4 - EARNINGS PER SHARE AND ORDINARY SHARE EQUIVALENTS:
Earnings per Ordinary Share and earnings per ADS are computed using the weighted
average number of Ordinary Shares and Ordinary Share equivalents outstanding
during the period. Ordinary Share equivalents, to the extent they would be
dilutive, include the number of shares issuable upon exercise of stock options,
less the number of shares that could have been repurchased with the exercise
proceeds using the treasury stock method.
NOTE 5 - RESTRUCTURING CHARGE/BENEFIT:
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 $17.6 million in the three months ending October 31,
1996. This charge was comprised of approximately $10.6 million in abandoned
lease costs, which are payable through 2014, $3.1 million in severance and
personnel costs and $3.9 million for the impairment of certain net operating
assets outside the U. S.
-6-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
OCTOBER 31, 1996
UNANUDITED
The amount of restructuring charge which remains accrued at January 31, 1997 is
as follows:
Accrued abandoned leaseholds and other costs $ 9,943
Current accrued restructuring costs (1,895)
------
Non-current accrued restructuring costs $ 6,956
------
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.
-7-
<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", "expects"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. See Item 6 - Exhibit
99 "Important Factors Regarding Forward-Looking Statements" which is
incorporated herein by reference. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
On August 2, 1996, the Board of Directors approved a plan to restructure the
Company's operations and made 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 System Engineer, Insight, GUI Guidelines and Client
Server Guidelines product lines. The Company also discontinued its direct sales
and service operations outside the US, replacing its non-U.S. operations with
third-party distributor relationships. There is no assurance that such
distributors will be successful. Also, the Company discontinued its telesales
operations in the US. 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 US. 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 US.
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. As a result of this charge, the Company recorded a net loss
for the nine months ended January 31, 1997 and expects to record a net loss for
the fiscal year ending April 30, 1997. 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.
-8-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 as of and for the three and
nine month periods ended January 31, 1997 are substantially different than for
the comparative prior periods.
THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1996
Total Revenue
Total revenue decreased 41% from $9.6 million in the three months ended January
31, 1996 to $5.6 million in the three months ended January 31, 1997. This
decrease was attributable to the elimination of the direct sales and service
operations outside the U.S. and a decline in Systems Engineer license revenue in
the U.S. The Systems Engineer product line was sold in December of 1996.
Product Licenses. The Company's product license revenue in the three months
ended January 31, 1997 was predominantly related to its Process Engineer product
line. Product license revenue decreased 44% from $6.0 million in the three
months ended January 31, 1996 to $3.4 million in the three months ended January
31, 1997. This decline, which reflected a reduction in the number of licenses
sold, is due to the elimination of the direct sales and service operations
outside the U.S. and a decline in Systems Engineer license revenue in the U.S.
The Systems Engineer product line was sold in December of 1996.
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 39% from $3.6 million for the three months ended
January 31, 1996 to $2.2 million for the three months ended January 31, 1997,
primarily due to the elimination of the direct sales and service operations
outside the U.S. The sale of the Systems Engineer product line may result a
reduction in service revenue in fiscal 1998.
Cost of Revenue
Cost of Product Licenses. Cost of product licenses consists of sublicense fees,
product media and duplication cost, manuals, packaging materials and shipping
expenses. Cost of product licenses was $0.1 million in each of the three month
periods ended January 31, 1996 and 1997.
-9-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $1.8
million and $.8 million in the three months ended January 31, 1996 and 1997,
respectively, resulting in a gross margin of 49% and 62% of the related service
revenue in each respective period. The improvement in gross margin percentage
predominately reflects a reduction in implementation and training costs and an
improvement in implementation and training personnel utilization.
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 55%
from $5.3 million, or 55% of total revenue, in the three months ended January
31, 1996 to $2.4 million, or 43% of total revenue, for the three months ended
January 31, 1997. This decrease of $2.9 million is due to the elimination of
sales and marketing costs outside the U.S.
Research and Development. Research and development expenses consist primarily of
cost of research and development personnel and related indirect costs. Research
and development expenses were $2.1 million, or 21% of total revenue, for the
three months ended January 31, 1996 compared to $1.1 million, or 20% of total
revenue for the three months ended January 31, 1997. The decrease in research
and development expenses reflect the elimination or substantial reduction in
development efforts related to the Systems Engineer, Insight, GUI Guidelines and
Client Server Guidelines products. Development headcount and expenses related to
the Process Engineer product line were increased in the three months ended
January 31, 1997 compared to the three months ended January 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 61% from
$1.5 million for the three months ended January 31, 1996 to $0.6 million for the
three months ended January 31, 1997. The decrease resulted from the elimination
of general and administrative expenses outside the U.S. and a reduction of
general and administrative expenses, principally leasehold costs, in the U.S.
Operating Income. The Company generated income from operations of $4.1 million,
including a restructuring benefit of $3.5 million, in the three months ended
January 31, 1997 compared to a loss from operations of $1.2 million for the
comparable period in 1996.
Income taxes. During the three month period ended January 31, 1997, the Company
recorded a tax benefit of $0.2 million related to recovery of taxes paid in
prior years. The Company did not record a income tax expense for income
recognized in the three month period ended January 31, 1997, due to the Company
has losses for the nine months ended January 31, 1997.
-10-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 31, 1997 COMPARED TO NINE MONTHS ENDED
JANUARY 31, 1996
Total Revenue
Total revenue decreased 48% from $30.3 million in the nine months ended January
31, 1996 to $15.7 million in the nine months ended January 31, 1997. This
decrease was attributable to the elimination of the direct sales and service
operations outside the U.S. and a decline in Systems Engineer license revenue in
the U.S. The Systems Engineer product line was sold in December 1996.
Product Licenses. The Company's product license revenue in the nine months ended
January 31, 1997 was predominantly related to its Process Engineer product line.
Product license revenue decreased 54% from $17.9 million in the nine months
ended January 31, 1996 to $8.2 million in the nine months ended January 31,
1997. This decline, which reflected a reduction in the number of licenses sold,
is due to the elimination of the direct sales and service operations outside the
U.S. and a decline in Systems Engineer license revenue in the U.S. The Systems
Engineer product line was sold in December 1996.
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 40% from $12.4 million for the nine months ended
January 31, 1996 to $7.5 million for the nine months ended January 31, 1997,
primarily due to the elimination of the direct sales and service operations
outside the U.S. The sale of the Systems Engineer product line may result a
reduction in service revenue in fiscal 1998.
Cost of Revenue
Cost of Product Licenses. Cost of product licenses consists of sublicense fees,
product media and duplication cost, manuals, packaging materials and shipping
expenses. Cost of product licenses was $0.6 million and $0.1 million in the nine
months ended January 31, 1996 and 1997, respectively, resulting in a gross
margin of 97% and 99% for each respective period. The increase in margin is the
result of a change in the mix of products from products with license fees
payable to a third party licenser to products without such third party fees.
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $5.2 million
and $3.7 million in the nine months ended January 31, 1996 and 1997,
respectively, resulting in a gross margin of 58% and 55% of the related service
revenue in each respective period. The reduction of the gross margin percentage
predominately reflects the reduction in implementation and training revenue
without a corresponding decrease in implementation and training costs,
principally in the three months ended July 31, 1996.
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 37%
from $14.5 million, or 48% of total revenue, in the nine months ended January
31, 1996 to $9.1
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
million, or 58% of total revenue, for the nine months ended January 31, 1997.
This decrease of $5.4 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
cost of research and development personnel and related indirect costs. Research
and development expenses were $5.8 million, or 19% of total revenue, for the
nine months ended January 31, 1996 compared to $4.3 million, or 27% of total
revenue for the nine months ended January 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 subsequent to July 31, 1996. Development
headcount and expenses related to the Process Engineer product line were
increased in the nine months ended January 31, 1997 compared to the nine months
ended January 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 40% from
$4.1 million for the nine months ended January 31, 1996 to $2.5 million for the
nine months ended January 31, 1997. The decrease resulted from the elimination
of general and administrative expenses outside the U.S. and a reduction of
general and administrative expenses, principally leasehold costs, in the U.S.
subsequent to July 31, 1996.
Operating Income. The Company generated a loss from operations of $17.8 million,
including a restructuring charge (net of benefit) of $14.1 million, in the nine
months ended January 31, 1997 compared to a loss from operations of $0.4
million, including a $0.5 million charge for merger costs, for the comparable
period in 1995.
Income taxes. During the nine month period ended January 31, 1997, the Company
recorded a tax benefit of $0.2 million related to recovery of taxes paid in
prior years. No additional tax benefit was recorded related to the Company's
losses because such benefit can not be recognized, under the liability method,
until future taxable income is reasonably assured.
Liquidity and Capital Resources
At January 31, 1997, the Company had cash and equivalents of $8.7 million and
working capital of $1.7 million. The Company has revolving lines of credit
available approximating $2 million. At February 28, 1997, approximately $500,000
is available to be drawn from on these credit facilities. The Company generated
approximately $1.9 million in cash from operations for the nine months ended
January 31, 1997 before payments of approximately $3.4 million related to the
Company's restructuring activities and a prior period legal settlement. The
Company had capital expenditures of $0.2 million for the nine months ended
January 31, 1997 compared to $1.7 million for the same period in the prior year.
The Company does not currently have any significant capital commitments.
The implementation of the Company's restructuring plan has consumed significant
amounts of cash during the six months ended January 31, 1997 and may continue to
consume cash over the remainder of the fiscal year. Management believes the cash
requirements related to the restructuring charge for the remainder of fiscal
1997 could be as much as $0.7 million. These requirements are to fund
anticipated lease costs and costs associated with
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the elimination of the Company's cost base outside the U.S. While management
believes sufficient cash reserves currently exist to sustain the anticipated
restructured operations for the remainder of the fiscal year, there is no
assurance that the Company will have adequate liquidity and capital resources
for fiscal 1998, if the Company is not successful in generating cash from on-
going operations and recovering future lease costs through sublease or other
arrangements. See Exhibit 99 for further discussions about potential risk
factors.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings: - From time to time the Company has legal or
administrative proceedings which are generally incidental to its normal business
activities. While the outcome of any such proceeding can not be accurately
predicted, the Company does not believe the ultimate resolution of any such
existing matters should have a material adverse effect on its financial position
or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders: -
The Annual General Meeting of Learmonth & Burchett Management Systems Plc (the
"Company") was held at the Company's executive offices located at 1800 West Loop
South, Suite 900, Houston, Texas, on November 15, 1996 at 11:00 a.m. central
standard time for the following purposes:
As ORDINARY BUSINESS:
1. To adopt the Directors' Report and the audited accounts for the year
ended April 30, 1996.
Votes for Votes Against
--------- -------------
10,707,822 0
2. To re-elect Gerald N. Christopher, who was appointed as a Director on
August 2, 1996.
Votes for Votes Against
--------- -------------
10,707,822 0
3. To re-elect Michael S. Bennett, who was appointed as a Director on
August 2, 1996.
Votes for Votes Against
--------- -------------
10,707,822 0
4. To re-elect David B. Rodway, who retires as a Director by rotation.
Votes for Votes Against
--------- -------------
10,706,822 1,000
5. To re-elect Rainer H. Burchett, who retires as a Director by rotation.
Votes for Votes Against
--------- -------------
10,704,822 3,000
The following directors are not up for re-election until the next annual
Shareholder meeting:
Roger A. Learmonth
G. Felda Hardymon
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
6. To re-appoint the auditors Price Waterhouse to hold office until the
next Annual General Meeting and to authorize the Directors to fix their
remuneration.
Votes for Votes Against
--------- -------------
10,707,822 0
7. To approve the payment of fees to the non-Executive Directors of the
Company of an aggregate of up to (Pounds)55,000 in the year to April
30, 1997 (being in excess of the (Pounds)40,000 limit currently set
forth in the Company's Articles of Association).
Votes for Votes Against
--------- -------------
10,690,784 17,038
As SPECIAL BUSINESS, Resolutions 8, 9, 10, 11 and 12 to be treated as
Ordinary Resolutions and Resolution 13 to be treated as a Special
Resolution:
8. To adopt the 1996 Equity Incentive Plan.
Votes for Votes Against
--------- -------------
10,704,660 3,162
9. To adopt the 1996 U.S. Employee Stock Purchase Plan.
Votes for Votes Against
--------- -------------
10,704,660 3,162
10. To adopt the 1996 Non-employee Directors' Share Option Plan.
Votes for Votes Against
--------- -------------
10,702,986 4,836
11. To amend the Executive Share Option Scheme and certain option
certificates relating to options granted thereunder.
Votes for Votes Against
--------- -------------
10,694,381 13,441
12. To authorize the Directors to allot shares.
Votes for Votes Against
--------- -------------
10,693,381 14,441
13. To approve disapplication of preemptive rights of holders of
ordinary shares.
Votes for Votes Against
--------- -------------
10,689,166 18,656
No broker non-votes were recorded.
-15-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
ITEM 5. Other Information: - The London Stock Exchange (the Exchange) closed
the USM at the end of 1996. The Company previously announced that it has decided
to rely upon the Nasdaq National Market as the Company's principal market for
its Ordinary Shares upon the closing of the USM on December 31, 1996.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 Important Factors Regarding Forward-Looking Statements.
(b) Reports on Form 8-K
Not Applicable.
-16-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
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: March 15, 1997 LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
By: /s/ Michael S. Bennett
_______________________________________
Michael S. Bennett,
Chief Executive Officer
By: /s/ Stephen E. Odom
_______________________________________
Stephen E. Odom,
Chief Financial Officer and Senior Vice
President - Finance and Administration
-17-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JANUARY 31,
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STATEMENTS.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
Exhibit 99
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement. The
Company desires to take advantage of the new " safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this exhibit
in order to do so. Accordingly, the Company hereby identifies the following
important factors which could cause the Company's actual financial results to
differ materially from any such results which might be projected, forecast or
estimated by the Company in forward-looking statements.
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time. Reference is
also made to the "Risk Factors" described in the Company's Prospectus dated
November 22, 1995 and the Company's Form 10-K for its fiscal year ended April
30, 1996, as filed with the Securities and Exchange Commission.
(a) On August 2, 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 discontinued its
direct sales and service operations outside the US. 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 US. 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 US. 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 US.
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. As a result of this charge,
the Company recorded a net loss for the nine months ended January 31, 1997
and expects to record a net loss for the fiscal year ending April 30, 1997.
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 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.
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<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
Publicity concerning the Company's reported loss for the nine months ended
January 31, 1997 and expected loss for fiscal 1997, 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) Prior Losses; Risks Associated with Management of a Changing Business. The
Company experienced losses in fiscal 1994, 1995, 1996 and for nine months
ended January 31, 1997. Based on the loss in the first nine months of
fiscal 1997, management expects that the Company will experience a loss for
the 1997 fiscal year. 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.
-19-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
(d) Need for Market Acceptance of Process Management. The Company's product
lines are designed specifically for Process Management in the client/server
environment. The Company's future financial performance will depend in
large part on continued growth in the number of organizations using process
management for development management. The Company believes that while the
market for process management tools is growing, it is still immature. Even
if broader market acceptance is achieved, there can be no assurance that
the market will continue to grow or that the Company will be able to
respond effectively to the evolving requirements of the market. The
Company's reduced focus and investment on products other than process
management could result in reduced opportunities for sales of process
management products and adversely affect operational results.
(e) Risks Relating to New Product Releases and Product Enhancements. The
Company's future success will depend, in large part, upon the Company's
ability to enhance its current process management product line and develop
and introduce new products to meet customers' process management tool needs
as well as emerging industry standards. There can be no assurance that the
Company will be able successfully to develop and market a broader line of
such products or that the Company will not encounter unexpected
difficulties and delays in enhancing its existing products. Furthermore,
there can be no assurance that such new products or product enhancements
will meet the requirements of the marketplace or achieve market acceptance.
Software products such as the products offered by the Company often
encounter development delays and may contain undetected errors or failures
when introduced or when new versions are released. Because of the
complexity of the Company's products and the possibility of unforeseen
technical problems in the development process, the Company risks missing
announced delivery dates for new products or product enhancements. The
Company has in the past and may in the future experience delays in the
introduction of new products and product enhancements. There can be no
assurance that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of
a new product or product enhancement or its functioning after release.
Substantial delays in the availability of any of the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, products such as those
offered by the Company may contain undetected or unresolved software errors
when they are first introduced or as new or enhanced versions are released.
The Company has in the past discovered software errors in certain of its
new products and product enhancements. Although the Company has not
experienced any material adverse effects resulting from any such errors to
date, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products
or releases after commencement of commercial shipments resulting in loss of
or delay in market acceptance, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
(f) Rapid Technological Change. The market for process management tools is
characterized by rapid technological advances, evolving industry standards,
changes in customer requirements and frequent new product introductions and
enhancements. The Company's future success will depend in part on its
ability to enhance its existing products and introduce new products that
address changing customer requirements and emerging industry standards,
such as new operating systems, including Windows 95. Any failure by the
Company to anticipate or respond adequately to technology developments and
customer requirements, or any significant delays in product development or
introduction, could result in a loss of competitiveness or revenue. In
addition,
-20-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
from time to time the Company or others may announce products, features or
technologies which have the potential to shorten the life cycle or replace
the Company's existing products. Such announcements could cause customers
to defer the decision to buy, or determine not to buy, the Company's
products, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
(g) Competition. The client/server applications development and specifically
the process management tools market is extremely competitive, fragmented
and rapidly changing, and is characterized by a lack of standards and
numerous competitors in the areas of tools, methodologies and services. The
Company believes that its ability to compete depends on many factors both
within and outside of its control, including corporate and product
reputation, product architecture, functionality and features, product
quality, performance, ease-of-use, quality of support, availability of
product implementation and training services, and price.
In addition, because of the complexities inherent in software development,
software companies and the information technology departments of other
business organizations may determine that it is more cost effective to
develop their own software development and process management tools
offering similar solutions to those products offered by the Company.
Furthermore, the Company faces the risk that vendors of tools, databases
and other elements of the client/server development market may add to their
products some or all of the functionality that the Company's products
provided to customers, thereby reducing the number of prospective customers
in need of the Company's products. There can be no assurance that the loss
of customers will not have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company expects competition from existing and additional competitors to
increase. Many of the Company's competitors have, and new competitors may
have, larger technical staffs, more established and larger marketing and
sales organizations, better developed distribution systems and
significantly greater financial resources than the Company. There can be no
assurance that either existing or new competitors will not develop products
that are superior to the Company's products or that achieve greater market
acceptance. There can be no assurance that future competition will not have
a material adverse effect on the Company's business, financial condition
and results of operations. In addition, distribution channels, technical
requirements and levels and bases of competition may differ as the Company
introduces new products, and there can be no assurance that the Company
will be able to compete favorably. In addition, a proliferation of software
products to meet the needs of the client/server applications development
and specifically the process management market may have a downward pressure
on the prices of such products. Such downward pressure on product prices
could have an impact on the Company's operating margins. There can be no
assurance that the Company could avoid these price pressures.
(h) Risks Relating to 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. Although
the Company currently sells its products through indirect sales channels,
revenue from such sales, in particularly since the restructuring, have been
minimal. There can be no assurance that the Company will be able to
increase revenue from its current 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 could adversely affect
the Company's business, financial
-21-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
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. 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.
(i) Dependence on Proprietary Technology. The Company's success is heavily
dependent upon proprietary technology. The Company's products are licensed
to customers under signed license agreements containing, among other
things, provisions protecting against the unauthorized use, copying and
transfer of the licensed program. In addition, the Company relies on a
combination of trade secret, copyright and trademark laws, non-disclosure
agreements and contractual provisions to protect its proprietary rights in
its products and technology. The Company has no patents or patent
applications pending, and existing trade secrets and copyright laws afford
only limited protection. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products
is difficult, and while the Company is unable to determine the extent to
which piracy of its software products exists, software piracy can be
expected to be a persistent problem, particularly in international markets
and as a result of the growing use of the Internet. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the U.K. and the U.S. There can be no
assurance that the steps taken by the Company to protect its proprietary
rights will be adequate or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technologies.
The Company is not aware that any of its products, trademarks or other
proprietary rights infringe the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to
current or future products. As the number of software products in the
market increases and the functionality of these products further overlap,
software developers may become increasingly subject to infringement claims.
Any such claims against the Company, with or without merit, could be time-
consuming and expensive to defend, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty
agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
(j) Dependence on Key Personnel. The Company's future success depends to a
significant extent on the performance of a number of key management and
technical personnel, the loss of one or more of whom could have a material
adverse effect on the Company. The Company recently announced the
appointment of a new Chief Executive Officer and a new Chairman of the
Board. Although these individuals have extensive management experience in
technology based companies, their experience in the Company's specific
process management product line is limited. The Company's success will also
depend in part on its ability to attract and retain qualified professional,
technical, managerial, sales and marketing and customer support personnel.
Competition for such personnel in the software industry is intense. There
can be no assurance that the Company
-22-
<PAGE>
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
will be successful in attracting and retaining the personnel it requires to
develop new and enhanced products and to conduct its operations
successfully.
(k) Risks Associated with Global Operations. Although the Company's
restructuring strategy (discussed in (a) above) relies primarily on the
U.S. marketplace, the Company's current and future efforts outside the U.S.
are subject to risks inherent in international business activities,
including, in particular, general economic conditions in each such country,
overlapping of differing tax structures, managing an organization spread
over various jurisdictions, unexpected changes in regulatory requirements
and complying with a variety of foreign laws and regulations. Other risks
associated with operations outside the U.S. in general include import and
export licensing requirements, trade restrictions and changes in tariff and
freight rates. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's non-U.S. sales have historically been denominated in foreign
currencies. To date, the Company has not established an exchange rate
hedging policy and has not engaged in any significant exchange rate hedging
activities to minimize the risks of exchange rate fluctuations. The Company
may seek to implement hedging techniques in the future with respect to its
foreign currency transactions. There can be no assurance that the Company
will be successful in such hedging activities. Gains and losses on the
translation and/or conversion of foreign transactions into U.S. dollars may
contribute to fluctuations in the Company's results of operations. Although
the Company has not experienced any material adverse impact to date from
fluctuations in foreign currencies, there can be no assurance that the
Company will not experience a material adverse effect on its business,
financial condition and results of operations from fluctuations in foreign
currencies in the future.
Many of the foregoing factors discussed have been discussed in the Company's
prior SEC filings and, had the Act become effective at a different time, would
have been discussed in an earlier SEC filing instead of this 10-Q. The foregoing
review of factors pursuant to the Private Litigation Securities Reform Act of
1995 should not be construed as exhaustive or as any admission regarding the
adequacy of disclosures made by the Company prior to the effective date of said
Act.
-23-
