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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-17754
CONSILIUM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2523965
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
485 CLYDE AVENUE
MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
TELEPHONE NUMBER (650) 691-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
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) has been subject to such
filing requirements for the past 90 days. YES X NO
- -
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __
The aggregate market value of Common Stock held by non-affiliates of the
Registrant as of October 31, 1997 was approximately $15,623,850.58. Shares of
Common Stock held by each executive, director and 5% or greater shareholder
have been excluded in that such persons may be deemed affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of October 31, 1997, there were approximately 8,290,290 shares of
the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement in connection with the Registrant's
Annual Meeting of Stockholders to be held March 18, 1998 are incorporated by
reference in Part III.
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<TABLE>
<CAPTION>
CONSILIUM, INC.
FORM 10-K
TABLE OF CONTENTS
PART I PAGE NO.
--------
<S> <C> <C>
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 17
Item 3. Legal Proceedings......................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 18
Item 6. Selected Financial Data................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 20
Item 8. Financial Statements and Supplementary Data............................................... 45
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................................................. 65
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 65
Item 11. Executive Compensation.................................................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 66
Item 13. Certain Relationships and Related Transactions............................................ 66
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K......................... 67
Signatures................................................................................ 72
</TABLE>
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PART I
ITEM 1. BUSINESS
Consilium is a leading independent supplier of enterprise-wide, integrated
manufacturing execution systems ("MES") software and services, based on its
revenues. MES software tracks the five essential elements of the manufacturing
plant floor -- materials, equipment, personnel, specifications/work instructions
and facility conditions--in real time, correlates the data for true visibility
and control of manufacturing operations and automates direct production
operations. This access to comprehensive, up-to-date information about the
production process enables manufacturers to identify and implement manufacturing
Best Practices in the areas of cost, quality, service, compliance and speed.
Such continuous improvement in the area of production thus enables companies to
use their manufacturing operations for competitive advantage and to optimize
performance of the business as a whole.
The Company develops, markets and sells two distinct software product
lines, aimed at different manufacturing industries. The Company's WorkStream
DFS (Distributed Factory System) product line is targeted at manufacturers who
produce their products in discrete lots or batches, particularly those in the
semiconductor and electronics industries. The Company's FlowStream product line
is targeted at regulated or complex industries that employ batch process
manufacturing such as pharmaceuticals, medical devices and specialty chemicals.
A comprehensive range of services complement these products, including pre- and
post-implementation consulting, a Customer Response Center and product training.
In addition, the Company recently added by acquisition significant service
offerings in South Asia to provide automated factory system integration
capabilities to customers.
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Through its direct sales force, the Company markets its WorkStream DFS and
FlowStream product lines in North America, Europe and Asia. The Company also
markets its products through distributors in Japan, Israel, Italy and Taiwan. To
date, software from the Company's WorkStream DFS product line has been purchased
by more than 100 companies for 250 sites in 20 countries, and the Company's
FlowStream product has been purchased by 18 companies for more than 30 sites in
eight countries.
The Company was incorporated in California in October 1978 to provide
consulting services and released its first standard software product in fiscal
1983. The Company reincorporated in the state of Delaware in March 1991.
STRATEGY
In mid-fiscal 1996, Consilium reorganized its sales and services
organization into two separate groups, in order to improve focus on its core
business areas. The resulting organizations are the Semiconductor and
Electronics Business Group and the Healthcare Products and Process Industries
Business Group. The Company's two product lines correspond to its core business
areas as follows: the WorkStream DFS product line is targeted at the
semiconductor and electronics industries, and the FlowStream product line is
targeted at the healthcare products (pharmaceuticals, medical devices and
biotechnology), chemical and other process industries.
Consilium's strategy is to offer more comprehensive manufacturing system
solutions that match the increasing automation required by most new
semiconductor fabrication facilities. To reach this goal, Consilium has begun to
offer systems integration services under its Semiconductor and Electronics
Business Group, primarily to its Asian customers. The Company integrates third-
party automation software with its own proprietary software to offer a more
comprehensive, pre-integrated solution. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS--FACTORS THAT MAY
AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK--Development of Systems
Integration Services Business and Management of Systems Integration Projects."
The Company utilizes both internal and external resources to provide systems
integration services. In July 1996, the Company acquired the Taiwan operations
of SDI, a systems integrator for the semiconductor industry. (See Note 3 of
Notes to Consolidated Financial Statements.) The Company is also utilizing Fuji
Research Institute, a Japanese systems integration firm, to provide both
automation software and systems integration services in Asia. In July 1997, the
Company acquired the systems integration operations of FAST, a Singapore
corporation, to further enhance its systems integration capabilities in Taiwan
and Singapore. (See Note 3 of Notes to Consolidated Financial Statements.) The
Company believes that its systems integration services offering enhances its
ability to market the WorkStream DFS product line, particularly in Asia, by
offering comprehensive interface solutions to its customers.
BACKGROUND
The goal of applying computer automation to the manufacturing environment
is improved efficiency and lowered costs, both direct and indirect. There are
several different computer software applications which are designed for various
stages of the product life cycle, from computer-aided engineering and design to
computer-assisted production on the plant floor.
Manufacturing execution systems are software applications specifically
designed to manage production operations on the plant floor. Some industries,
such as semiconductors, have long seen the benefit of using MES software and are
considered to have fully accepted MES as a critical tool for manufacturing.
Companies in other industries, such as pharmaceuticals, are not as familiar with
the benefits of MES, and therefore are slower to adopt what is to them a still
unproven concept. Across many industries, there is a growing need for tools
that can help improve manufacturing performance, cost, quality, customer service
and regulatory pressures on manufacturers increase.
TYPES OF MANUFACTURING
Manufacturing operations can be characterized as either discrete, batch
process, continuous process, or hybrid (combining more than one form). In
discrete operations, such as electronics manufacturing, raw material is
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processed in distinct units. Work-in-process can be tracked by lot, work order
or batch. In batch process operations, such as pharmaceutical manufacturing,
material is converted from one form or state to another through various
processing steps and is tracked by batch, lot or mass quantity. Material in
batch process-type operations may be spread across several conversion steps at
once. In continuous process operations, such as oil refining, raw material is
processed without interruption in a continuous flow. Finally, some producers,
such as specialty chemical companies, may require a combination of batch process
and discrete operations to manufacture their products.
Manufacturers track and control each step of their operations based on
requirements of regulatory compliance, quality control assurance, and cost
reduction goals. Manufacturers with production processes that are hard to
consistently replicate must be able to ascertain the precise conditions under
which each product was manufactured in order to identify and correct process
variability or other causes of defects. Other manufacturers must be able to
trace both subassemblies or intermediate products and finished goods due to
product liability concerns or potential product recall, warranty or service
obligations. In addition, certain manufacturers must certify that their
products have been processed in accordance with regulatory or customer
specifications, or other standards. Manufacturers faced with these challenges
must be able to follow raw materials through each processing stage
("traceability") and recreate the history of work-in-process from any processing
stage ("genealogy"). The collection of such data serves not only to answer
questions about a particular product or process after the fact, but acts also as
a powerful tool to improve manufacturing performance in real time during the
production process.
A manufacturing execution system such as the Company's WorkStream DFS
product line provides the tools which discrete, lot-based manufacturers need to
execute their manufacturing plan and collect the data which will enable them to
analyze and control production. Typical discrete, lot-based industries include
semiconductor, disk drive and assembly operations in the commercial aircraft,
aerospace and defense industries. Such industries benefit from MES for
different reasons. For semiconductor companies, the visibility and control
provided by MES can enable various measurements of efficiency, such as capital
equipment utilization and quality. For aerospace manufacturers, assurance of
regulatory compliance is key, and MES provides both control mechanisms and
reporting capabilities to address this. Indirect labor usage is also a critical
measurement for the aerospace and defense industries, and MES provides the tools
to both account for and reduce indirect labor usage.
Batch process manufacturers such as pharmaceutical and chemical companies
have similar requirements for information collection and analysis.
Pharmaceutical manufacturers must be able to demonstrate compliance with a host
of procedural and environmental regulations before a batch of product can be
approved for shipment to customers. They must maintain complete and accurate
batch records, detailing the history of all related elements of the
manufacturing process - materials, labor, equipment, procedures, facilities,
etc. - and guaranteeing that all actions taken, both planned and unplanned, were
in line with documented and approved manufacturing practices. In addition,
pharmaceutical manufacturers increasingly are under pressure to lower costs to
their customers, and are therefore experiencing smaller margins than they had
previously enjoyed. Manufacturing is a key area in which such companies may
lower costs.
Today, many pharmaceutical plants use paper-based systems for record
keeping. Overhead and indirect labor costs associated with the compilation and
maintenance of these records is a large and increasing expense. Therefore, an
electronic system which automates the data collection process and incorporates
proactive features to prevent deviations from the standard procedures - such as
an MES - can demonstrate value and produce a return on investment in a very
short time.
Chemical companies confront both an increasingly stringent regulatory
environment and mounting global competition in nearly all segments of the
industry. In addition, the need to package end products in multiple forms
presents a unique challenge. Therefore, in addition to tracking precisely all
materials resulting from the manufacturing process - primary products, co- and
by-products, and various forms of waste - chemical manufacturers must also amass
enough detailed information about their operations to discover ways to improve
them from the cost or quality standpoint. The process control systems currently
used by the majority of these companies cannot provide this higher level
information, nor can their Enterprise Resource Planning ("ERP") systems provide
the detail required to
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empower this continuous improvement approach. Chemical manufacturers'
competitive situation drives them to seek new and more comprehensive tools.
An MES such as the Company's FlowStream product provides pharmaceutical and
chemical manufacturers with a tool for achieving both regulatory compliance and
manufacturing improvement.
PRODUCTS
The Company develops, markets and sells two distinct software product
lines, aimed at different manufacturing industries. The Company's WorkStream DFS
product line is targeted at manufacturers who produce their products in discrete
lots or batches, particularly those in the semiconductor and electronics
industries. The Company's FlowStream product line is targeted at regulated or
complex industries that employ batch process manufacturing such as
pharmaceuticals, medical devices and specialty chemicals. Revenues from licenses
of the WorkStream DFS family of products have historically represented a
substantial majority of the Company's product revenues (approximately 76%, 82%
and 87% of the Company's total license revenue in fiscal 1995, 1996 and 1997,
respectively).
Both the WorkStream DFS and FlowStream product lines monitor and control
the five essential elements of manufacturing -- materials, equipment, personnel,
specifications/work instructions and facilities -- in real time, correlate the
data for true visibility and control of manufacturing operations and support
automation. This access to comprehensive, up-to-date information about the
production process enables manufacturers to identify and implement manufacturing
Best Practices in the areas of cost, quality, service, compliance and speed.
Such continuous improvement in the area of production thus enables companies to
use their manufacturing operations for competitive advantage, and to optimize
performance of the business as a whole.
In fiscal 1997, the average selling price for a new installation of the
WorkStream DFS product line was approximately $200,000. The average sales price
for the FlowStream product line in fiscal 1997 was approximately $182,000 for an
initial installation.
WorkStream DFS Product Line. The Company's WorkStream DFS product line
---------------------------
includes WorkStream and WorkStream Open, as well as a set of application servers
and a connecting "message bus," or network which, when used with either
WorkStream or WorkStream Open, form a WorkStream DFS system. Within WorkStream
DFS, there are available more than 20 integrated software modules sharing a
common database and graphical user interface, grouped into four benefits or
solutions areas: tracking; quality and engineering management; planning and
process automation. The application servers provide capabilities primarily in
the areas of automation and quality.
WorkStream DFS monitors and controls discrete manufacturing operations,
where product lots or batches are kept intact throughout the production process.
WorkStream DFS also provides tools to enhance productivity in indirect labor
functions such as quality control, production planning and facilities
maintenance. Discrete manufacturers most commonly use WorkStream DFS systems to:
. reduce cycle times and meet just-in-time deliveries
. lower indirect labor costs
. reduce scrap and rework; increase yield
. increase utilization of capital equipment
. improve quality
. reduce regulatory compliance costs and
. shorten response times to equipment breakdowns
The WorkStream DFS system's modular design allows customers to license only
those functions necessary for their current business needs and to add functions
as their requirements evolve.
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The WorkStream application was initially developed to run on Digital
Equipment Corporation's line of VAX computers, using Digital's proprietary VMS
operating system with Oracle Corporation's CODASYL DBMS database. In 1992,
WorkStream was ported to Hewlett-Packard Company's HP 9000 computers running
under the HP-UX UNIX operating system and the Informix relational database. The
new product was named WorkStream Open. The development of WorkStream Open
incorporated several technologies, including client/server architecture, X-
windows terminal access, Motif user interface standard, SQL database and POSIX
compliance. In early fiscal 1997, the Company announced the port of WorkStream
to Digital's Alpha platform running the Open VMS operating system, providing a
migration path for VAX users to Digital's newer technology platform.
The WorkStream and WorkStream Open systems' modules are integrated through
a common database, permitting all modules to obtain information simultaneously
from a single data source, and through a common user interface. The systems are
designed to allow distributed application processing in the Digital cluster mode
and in client/server mode. Users can access WorkStream or WorkStream Open
software directly via a terminal or workstation to enter data, view data,
initiate batch reports or analyses and view the results. Data also can be
entered using bar code wands or can be entered automatically by automated
equipment and work cell controllers.
The WorkStream DFS servers introduced in 1995 are object-oriented
applications and run in a UNIX-based environment. They are designed to operate
in a distributed software environment, use the Informix relational database and
connect to a message bus, using standard communication protocols to talk to
either WorkStream or WorkStream Open. WorkStream DFS servers are currently
available to run on Hewlett-Packard's HP 9000 line of computers with the HP-UX
operating system.
In 1995, the Company introduced a next-generation distributed technology
framework for its WorkStream DFS product line, as well as three new application
servers. The distributed technology framework is based on a software message
bus, which connects applications, software systems and manufacturing equipment
on a network. The WorkStream DFS application servers include a quality server
for on-line quality analysis and statistical quality control, a recipe
management server for centralized context-sensitive recipe management, and a
station controller for automation implementation. The next-generation additions
to the WorkStream DFS system extend the capabilities of the current WorkStream
and WorkStream Open products into a distributed, client/server environment. The
distributed nature of the WorkStream DFS system allows users to add new
functional modules or servers to their existing systems built around either
WorkStream or WorkStream Open, and to more easily integrate software
applications from other sources, as additional servers on the network. The
overall system is designed to utilize computer resources more efficiently and
operate more effectively as a result.
The Company is developing a Windows NT-based user interface and application
server for the WorkStream DFS product line. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS--FACTORS THAT MAY
AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK--New Products and
Rapid Technological Change; Risk of Product Defects."
In early fiscal 1996, Consilium announced its intent to create a total
supply chain management solution for the semiconductor industry. Total supply
chain management is an initiative adopted by manufactures in multiple industries
to improve the access to and flow of information between receipt of a customer
order and delivery of products. The first phase of the Company's two-phase
supply chain management solution was completed in 1996, with the integration of
the Company's WorkStream DFS software with Oracle Corporation's order
processing, financial and ERP systems. During 1997, Consilium completed its two-
phase supply chain management solution by integrating the Company's WorkStream
DFS software with Paragon Management Systems, Inc., advanced planning and
scheduling software. The addition of Paragon's software to the Company's total
supply chain management offering completed the link between real-time status
information of manufacturing capacity, product commitments and inventory status
with corporate systems such as order processing, sales management and financial
applications.
Under its Semiconductor and Electronics Business Group, the Company has
begun to offer system integration services, primarily to its Asian customers.
See "--Systems Integration Services." The Company believes that its systems
integration services offering enhances its ability to market the WorkStream DFS
product
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line, particularly in Asia, by offering comprehensive interface solutions to its
customers. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF
STOCK--Development of Systems Integration Services Business and Management of
Systems Integration Projects."
The following table summarizes the primary functionality of the WorkStream
DFS product family:
<TABLE>
<CAPTION>
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WorkStream DFS Functions
- --------------------------------------------------------------------------------
<S> <C>
Tracking and Control . Tracks WIP by lot, sub-lot, or serial
identifier.
. Maintains genealogy and lot traceability.
. Tracks manufacturing resources and labor and
equipment states and maintains history.
- --------------------------------------------------------------------------------
Quality Management . Collects quality, test, and environmental data
correlated by material, equipment, and
operator.
. Provides Statistical Quality Control.
. Analyzes and charts collected process data and
flags anomalous data.
. Displays job specifications in both text and
graphics at appropriate times and locations.
- --------------------------------------------------------------------------------
Planning and Scheduling . Rule-based dispatching.
. Finite capacity constraints.
. Work scheduling.
. Intra-company planning.
- --------------------------------------------------------------------------------
Process Automation . Interfaces to process equipment.
. Integrates with station controllers.
. Interfaces to material handling systems.
- --------------------------------------------------------------------------------
</TABLE>
FlowStream Product Line. In early fiscal 1992, the Company introduced and
-----------------------
sold the first copy of a second software product line, called FlowStream, aimed
at batch process manufacturers in highly regulated and/or complex industries.
FlowStream is targeted primarily at the healthcare products (pharmaceutical,
medical device and biotechnology) and chemical industries. In a batch process
manufacturing environment, product from the same batch may be spread across
several operations at once, thus requiring that different tracking methods be
used than those employed in a discrete lot-based environment. FlowStream was
built specifically to address the unique requirements of batch process
manufacturers, and supports several critical functions including production,
engineering, research and development, regulatory compliance and reporting, and
quality control. FlowStream addresses seven benefits or solutions areas: batch
operations tracking and control; inventory or materials management; quality
management; document management; planning and scheduling; costing; and
automation. FlowStream tracks work-in-process activity by work order down
through each operation or step, whether automated or manual.
Benefits of FlowStream in the batch process industries include:
. electronic batch records for regulatory compliance assurance
. operational control for regulatory compliance assurance
. improved efficiency of data collection
. reduced cost of documentation associated with compliance
. decreased cycle times
. decreased time to market
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. lowered indirect labor costs and
. shortened response times to equipment breakdowns
FlowStream software is written in the C++ language, emphasizing an object-
oriented design and runs on the Rdb and Oracle relational databases. FlowStream
runs on Digital and HP workstations and features a graphical user interface
geared to the needs of specific users, from planners and engineers to operators.
FlowStream is based upon industry-standard technologies, including X-windows,
C++ object-oriented programming, an SQL relational database, and TCP/IP
communications, which facilitate ease-of-use of the software and the transfer of
data between FlowStream software and other programs used in the manufacturing
environment. FlowStream is a distributed application that allows users to access
and share real-time information. FlowStream takes advantage of certain industry-
standard interfaces. Interfacing tools within FlowStream allow integration with
other manufacturing applications such as enterprise resource planning laboratory
information management systems and automation controllers.
The Company is developing a Windows NT-based user interface for the
FlowStream product line. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS AND
MARKET PRICE OF STOCK--New Products and Rapid Technological Changes; Risk of
Products Defects."
The following table summarizes the primary functionality of FlowStream:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FlowStream Functions
- --------------------------------------------------------------------------------
<S> <C>
Tracking and Control . Tracks WIP by work order, batch production run,
material, store, container or state.
. Maintains genealogy and lot traceability.
. Tracks manufacturing resources and labor and
equipment states and maintains history.
- --------------------------------------------------------------------------------
Quality Management . Collects quality, test, and environmental data
correlated by material, equipment, and
operator.
. Provides Statistical Quality Control.
. Analyzes and charts collected process data and
flags anomalous data.
. Displays job specifications in both text and
graphics at appropriate times and locations.
- --------------------------------------------------------------------------------
Document Management . Documentation and configuration management.
- --------------------------------------------------------------------------------
Planning and Scheduling . Rule-based dispatching.
. Finite capacity constraints.
. Work scheduling.
. Material requirements planning.
. Master production scheduler.
. Capacity planning.
- --------------------------------------------------------------------------------
Costing . Detailed model costing and reporting.
- --------------------------------------------------------------------------------
</TABLE>
MARKETS AND CUSTOMERS
Software in the WorkStream DFS product line was first used primarily by
semiconductor manufacturers whose products were sold directly into the open
market and by electronics systems companies which used the software primarily to
produce semiconductors for use in their own products. Systems from the
WorkStream DFS
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product line have also been installed by many commercial aircraft, aerospace and
defense, and electronics manufacturers for a range of diverse applications,
including electronics assembly; sheet metal fabrication; disk drive assembly;
silicon wafer fabrication; and radar and navigation systems manufacture and
assembly. Current target industries include manufacturers of semiconductors and
complex electronics such as disk drives and flat panel displays in both the
Company's installed base and new accounts.
FlowStream software is currently targeted at research and development and
manufacturing operations in the healthcare products (pharmaceutical, medical
device and biotechnology) and specialty chemical (e.g. fibers, paints, resins,
plastics and film) industries.
In fiscal 1997, the Company's ten largest customers accounted for
approximately 48% of revenue. However, no customer accounted for 10% or more of
total revenue.
SALES
Consilium markets it WorkStream DFS and FlowStream product lines in North
America, Europe and Asia/Pacific Rim through its direct sales force. The
Company's 13 sales offices also provide local customer support. In addition to
its headquarters in Mountain View, California, the Company has North American
sales offices in: Atlanta, Georgia; Bedminster, New Jersey; Dallas, Texas; and
Nashua, New Hampshire. European offices are located in: Munich, Germany;
Newbury, Berkshire, United Kingdom; and Rueil Malmaison, France. Offices in Asia
and the Pacific Rim are located in: Hsinchu City, Taiwan; Seoul, Korea;
Singapore and Tokyo, Japan.
The Company's direct sales force including support staff are organized into
two business groups: the Semiconductor and Electronics Group and the Healthcare
Products and Process Industries Group. As of October 31, 1997, the sales and
marketing organizations of both business groups consisted of 70 employees.
The Company also markets and supports its products through other
distribution channels in Israel, Italy, Japan and Taiwan. The Company's foreign
distributors either sublicense the Company's products directly to end users
after acquiring copies from the Company at a discount from list price, or act as
agents and receive a commission for initiating a license agreement between the
Company and the end user. Since the Company's foreign distributors are not
employees of the Company and are not required to offer the Company's products
exclusively, there can be no assurance that they will continue to market the
Company's products. Also, despite the Company's substantial dependence in the
international market upon the marketing, sales and customer support of its
foreign distributors, the Company currently has limited control over such
distributors.
Revenues from foreign customers represented 51% of total revenues in fiscal
1997, 45% of total revenues in fiscal 1996 and 34% of total revenues in fiscal
1995. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--RESULTS OF OPERATIONS" and Note 10 of Notes to
Consolidated Financial Statements. The majority of the Company's revenues are
denominated in U.S. dollars. Some foreign sales revenues are denominated in
foreign currencies and are subject to currency fluctuations during the time
between revenue recognition and receipt of funds. To date, the Company has not
hedged against such foreign currency fluctuations.
Risks inherent in the Company's international sales may include longer
payment cycles, greater difficulty in accounts receivable collection, unexpected
changes in regulatory requirements, seasonality due to the slowdown in European
business activity during the summer months, and tariffs and other trade
barriers. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE
OF STOCK--DEPENDENCE ON INTERNATIONAL SALES." In addition, the Company may be
unaware of the nature and scope of the representations made to customers by its
distributors.
Since the Company ships its standard products upon receipt of customer
orders, it generally has no material product backlog.
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As a Digital Cooperative Marketing Partner, Hewlett-Packard Independent
Software Vendor participant, and Oracle Corporation Cooperative Application
Initiative partner, the Company participates in a variety of cooperative
marketing programs including joint appearances at trade shows, joint brochures,
joint sales seminars and joint sales calls.
The sales cycle for a new installation of a WorkStream DFS system typically
ranges from nine to fifteen months from the initial identification of a
qualified potential user to the installation of the software. Based on the
Company's experience to date, the sales cycle for a pilot installation of
FlowStream typically ranges from six to fifteen months. Sales cycles for full
roll-out of FlowStream into additional installations can be significantly
longer, due to the early stage of market acceptance for MES products in general
and for FlowStream. Sales cycles for either product can be extended due to the
nature of the decision-making process for purchasing MES solutions, which
generally involves many individuals from many departments within a manufacturing
company. In addition, marketing a new product such as FlowStream into new
industries, such as pharmaceuticals and chemicals, contributes to uncertainty
about the timing of future sales order closures.
Implementation of a WorkStream DFS system, including customer training,
typically takes between four and six months. Implementation of a FlowStream
pilot installation typically takes between six and twelve months to complete and
may take longer, depending on the size, scope and complexity of the project. In
regulated industries, validation of the use of the software for the customer's
manufacturing processes typically accounts for 40% of the total implementation
time. Implementation of follow-on FlowStream sites typically take less time to
complete than initial pilots, as much of the work involved can be reused from
the pilot site. Follow-on orders for additional modules, servers, and/or sites
typically are not received until successful implementation and validation at the
initial site.
PRODUCT DEVELOPMENT
Consilium has invested significant development resources to create, enhance
and extend the functionality of its WorkStream DFS and FlowStream software
product lines. Research and development expenses were 30%, 28% and 28% of total
revenues in fiscal 1997, 1996 and 1995, respectively.
Consilium has also begun work on its next generation semiconductor offering
aimed at 300mm fully automated plants, called FAB300. Initial beta delivery is
planned for the end of 1998. No substantial revenue is expected from FAB300
until mid-to-late fiscal 1999.
The Company believes that its successful and timely migration of its
FlowStream products onto the Windows NT platform, the introduction of new
WorkStream DFS modules and the Company's new FAB300 line on the Windows NT
platform is important to continued market acceptance of such products. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK--
New Products and Rapid Technological Change; Risk of Product Defects."
The Company expects to continue to incur development expenses to maintain
and augment its current products in fiscal 1997. Development plans include the
creation of additional WorkStream DFS servers, the extension of availability of
its WorkStream and WorkStream Open software to additional platforms and
operating environments, and the enhancement of functionality of its FlowStream
product for the batch process industries.
The Company capitalizes and amortizes eligible computer software
development costs in accordance with Statement of Financial Accounting Standards
No. 86 (see Note 2 of Notes to Consolidated Financial Statements). For the
fiscal years 1997, 1996 and 1995, the Company capitalized $1,324,000, $886,000,
and $1,460,000, respectively, which represented approximately 10%, 8%, and 16%
of total spending on research and development in such periods. For the fiscal
years 1997, 1996 and 1995, the Company amortized $1,730,000, $1,725,000, and
$1,863,000, respectively, of capitalized software development costs.
11
<PAGE>
SYSTEMS INTEGRATION SERVICES
Under its Semiconductor and Electronics Business Group, the Company has
begun to offer system integration services, primarily to its Asian customers.
The Company integrates third-party automation software with its own proprietary
software to offer a more comprehensive, pre-integrated solution. This requires
the Company to resell or acquire such third-party software applications. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK--
Development of Systems Integration Services Business and Management of Systems
Integration Projects." The Company utilizes both internal and external
resources to provide systems integration services. In July 1996, the Company
acquired the Taiwan operations of Systematic Designs International, Inc.("SDI"),
a systems integrator for the semiconductor industry. (See Note 3 of Notes to
Consolidated Financial Statements.) The Company is also utilizing Fuji Research
Institute, a Japanese systems integration firm, to provide both automation
software and systems integration services in Asia. In July 1997, the Company
acquired the systems integration operations of FAST Associates, Pte. Ltd., a
Singapore corporation ("FAST"), to further enhance its systems integration
capabilities in Taiwan and Singapore. (See Note 3 of Notes to Consolidated
Financial Statements.) The Company believes that its systems integration
services offering enhances its ability to market the WorkStream DFS product
line, particularly in Asia, by offering comprehensive interface solutions to its
customers.
To complement its own products and services offerings, the Company believes
that the ability to identify and work with qualified systems integration firms
which integrate various manufacturing and other systems together is an important
component to its success. In fiscal 1996, the Company announced a certification
program to train and certify systems integration firms to integrate the
Company's WorkStream DFS and FlowStream product lines in customer
implementations.
OTHER SERVICES AND SUPPORT
The Company offers product support to its customers through comprehensive
maintenance agreements. The majority of the Company's customers purchase and
renew product support pursuant to the Company's standard maintenance agreement.
Maintenance, which consists of product enhancements and technical support, may
be purchased up to 30 days after the product order is delivered. Once purchased,
maintenance support is automatically renewable annually. Annual maintenance fees
are generally 15% of the list price of the modules or servers being maintained.
Product support services are provided worldwide by a combination of local office
technical support staff and the Company's Customer Response Center.
The Company offers a variety of training and consulting services through
its Professional Services organization. Training classes are regularly scheduled
at regional centers or customer locations. Consulting services cover pre-selling
analysis, installation, project management, customization and application
integration. These services are offered as consulting products with defined
deliverables in order to facilitate the customers' planning and budgeting. Time-
and-material-based services are also offered to augment the Company's consulting
products and to meet specialized requirements.
The Company is increasing its allocation of resources to its Professional
Services organization because it believes that this function is key to
satisfying its customers' requirements for implementation and consulting
assistance. Satisfying its customers' requirements is, in turn, critical for
maintaining a positive image in the marketplace as a successful provider of MES
solutions.
COMPETITION
The Company believes that the primary competitive factors in the market for
MES software are size of installed base and product functionality, and that
additional factors include price/performance for its WorkStream DFS product
line, ease of use, hardware and software platform, vendor reputation, and
financial stability. The Company believes that its products currently compete
favorably with other systems on the primary factors listed above, although it
may be at a competitive disadvantage against companies with greater financial,
marketing,
12
<PAGE>
services and support, and technological resources than the Company. The Company
also believes that the relative importance of these competitive factors may
change over time.
The Company continues to experience competition primarily from the
management information systems departments of its largest potential customers,
which have the capability to develop software internally. The Company believes
that acquisition of MES products will increasingly shift to external vendors as
packages, services and expertise become more widely available from third
parties. The Company continues to experience direct competition primarily in the
semiconductor and pharmaceutical industries from various competitors, including
Andersen Consulting, Base-10, FASTech, ICC, Incode, International Business
Machines, Promis, and SAP. The Company anticipates increased competition from
other MES companies.
ERP system vendors are beginning to compete with the Company in the MES
market. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF
STOCK--Competition." The first such offering was released by SAP in mid-1995.
These combined MES/ERP systems only offer basic MES functionality such as
equipment maintenance, shop floor scheduling and quality control. Although basic
MES functionality may be acceptable for industries with limited tracking and
control requirements, and some potential customers may prefer an MES package
pre-integrated with ERP over buying a separate MES package, to date, the
semiconductor manufacturing industry has not moved in that direction. The
Company believes that the development effort required for producing an MES
comparable to the Company's WorkStream DFS and FlowStream product lines presents
a significant barrier to the entrance of new competitors.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS AND
MARKET PRICE OF STOCK--Proprietary Rights." The Company generally provides its
products to end users under a non-exclusive, non-transferable license which
typically has a perpetual term unless terminated for breach. Under the Company's
current form of license agreement, the licensed software may be used solely for
internal operations at specified sites. In certain instances, the Company has
granted a customer licensed rights to any modifications made to the licensed
software by or for such a customer. The Company protects the human readable,
source code version of its WorkStream Open and FlowStream products as a trade
secret and an unpublished copyrighted work.
Consilium, FlowStream and WorkStream are registered trademarks of the
Company in the Unites States and certain other foreign jurisdictions. FAB300,
WorkStream DFS and WorkStream Open are trademarks of the Company.
The Company holds three patents, and also relies on a combination of trade
secret, copyright and trademark laws and license agreements to protect its
proprietary rights in its products. While the Company intends to protect its
patent rights vigorously, there can be no assurance that any patents held by the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company. The
Company generally enters into confidentiality or license agreements with
employees, distributors and customers, and limits access to and distribution of
its software, documentation and other proprietary information. Despite these
precautions, there can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's competitors will not independently develop similar or superior
technology, duplicate the Company's product or design around patents issued to
the Company or other intellectual property rights of the Company. In addition,
the laws of certain foreign countries in which the Company's products are or may
be tested or sold, including various countries in Asia, may not protect the
Company's products and intellectual proprietary rights to as great an extent as
do the laws of the United States.
The Company believes that, because of the rapid pace of technological
change in the computer software industry, patent, trade secret and copyright
protection are important to support the continued building up of knowledge,
ability and experience of the Company's employees. This in turn supports the
ability of the Company to provide frequent product enhancements, and deliver
quality support services in a timely manner.
13
<PAGE>
There has been substantial industry litigation regarding patent and other
intellectual property rights involving technology companies. In the future,
litigation may be necessary to protect and enforce the Company's intellectual
property rights, to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation could be costly and could divert
management's attention, which could have a material adverse effect on the
Company's business, results of operations or financial condition regardless of
the outcome of the litigation. In addition, third parties making claims against
the Company with respect to intellectual property infringement may be able to
obtain injunctive or other equitable relief that could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a claim of
infringement, the Company and its customers may be required to obtain one or
more licenses from third parties. There can be no assurance that the Company or
its customers could obtain necessary licenses from third parties at a reasonable
cost or at all.
Certain technology used by the Company's products is licensed from third
parties, generally on a non-exclusive basis. The Company believes that there are
alternative sources for each of the material components of technology licensed
by the Company from third parties. However, the termination of any of such
licenses, or the failure of the third party licensors to adequately maintain or
update their products, could result in a delay in the Company's ability to
deliver certain of its products while it seeks to implement technology offered
by alternative sources. While it may be necessary or desirable in the future to
obtain other licenses relating to one or more of the Company's products or
relating to current or future technologies, there can be no assurance that the
Company will be able to do so on commercially reasonable terms or at all.
EMPLOYEES
As of October 31, 1997, the Company had a total of 244 full-time employees,
including 66 in sales, marketing and related activities, 58 in product
development and maintenance, 100 in services and support, and 20 in management,
administration and finance. Including the increase in headcount from the SDI and
FAST acquisitions, the Company has 48 employees (excluding sales) in systems
integration services in Taiwan and Singapore. The Company also regularly
utilizes a significant number of contract personnel, primarily to assist with
software development and to staff the Company's internal computer information
services department. At October 31, 1997, the Company utilized approximately 86
contracted personnel. None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppages and believes that employee
relations are good.
Competition in the recruitment of personnel in the computer software
industry is intense. The Company believes that its future success will depend in
part on its continued ability to hire and retain qualified sales, customer
support, technical and management employees and consultants.
14
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows as of October 31,
1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- -------- ----------------------------------------------------------------
<S> <C> <C>
Jonathan J. Golovin 47 Chairman of the Board and Chief Technical Officer
Laurence R. Hootnick 55 President, Chief Executive Officer and Director
Michael J. Field 48 Senior Vice President, Chief Administrative Officer and Corporate
Secretary
Frank Kaplan 55 Senior Vice President, Software Development and Quality Assurance
Linda Kato Ujihara 38 Director, Human Resources and Administration
Edward Norton 53 Senior Vice President and President, Semiconductor and Electronics Group
Lloyd Payton 57 Senior Vice President and President, Healthcare and Process Industries Group
Clifton Wong 37 Vice President, Finance and Chief Financial Officer
</TABLE>
Dr. Golovin, the founder of Consilium, was President of the Company from
1978 to 1987, and has served as a director and Chairman of the Company since its
inception and as Secretary from January 1989 to August 1996. In April 1992, Dr.
Golovin was named Chief Technical Officer of the Company. Dr. Golovin has also
taught both graduate and undergraduate courses in operations management and
production planning at the Massachusetts Institute of Technology and the
University of California at Berkeley. Dr. Golovin holds a Ph.D. in Operations
Management from the Massachusetts Institute of Technology and a B.S. degree from
Cornell University.
Mr. Hootnick was appointed as a director of the Company in January 1996.
In June 1996, he was appointed President and Chief Executive Officer of the
Company. Mr. Hootnick was Senior Vice President, Finance and Operations for
Power Computing Corp., a computer company, from December 1995 to June 1996. From
May 1995 to December 1995, Mr. Hootnick worked as a self-employed consultant.
From August 1994 to May 1995 Mr. Hootnick served as the Chief Operating Officer
of NetManage, Inc., a software company. From May 1991 to August 1994, Mr.
Hootnick served as President and Chief Executive Officer of Maxtor Corporation,
a disk drive manufacturer. He was employed by Intel Corporation from 1973 until
1991, most recently as Senior Vice President. Mr. Hootnick holds a B.S. in
Industrial Management from the Massachusetts Institute of Technology and an
M.B.A. in Finance from the University of Maryland.
Mr. Field joined the Company in August 1996 as Senior Vice President,
General Counsel and Corporate Secretary and was promoted to Senior Vice
President and Chief Administrative Officer in October, 1997. From April 1996 to
August 1996, Mr. Field held the position of Senior Vice President, General
Counsel and Corporate Secretary at Syquest Technology, Inc., a removable disk
drive and cartridge manufacturer. From August 1992 to March 1996, Mr. Field
held various executive positions at First Pacific Networks, Inc., a
telecommunications
15
<PAGE>
networking company, including the positions of Vice President of Business
Development, Chief Legal Officer and Corporate Secretary. Prior to that, Mr.
Field was a partner in various Silicon Valley law firms. He holds a B.A. in
Psychology from San Jose State College and a J.D. from Santa Clara University.
Mr. Kaplan joined the Company in May 1994 as Vice President of Software
Development and was promoted to Senior Vice President, Software Development and
Quality Assurance in August 1996. From 1987 to 1994, he held various high level
software development positions with NEC America, Inc., a communications
technology company, including Assistant General Manager, Software Development
and Director, Software Development. Prior to NEC, Mr. Kaplan was with AT&T Bell
Laboratories, a communications technology research firm, where he was Department
Head for Operations Systems Development. Mr. Kaplan holds two Masters degrees
in Mathematics from Yale University and a B.S. in Mathematics from City College
of New York.
Ms. Kato Ujihara joined the Company in July 1985 as Executive Assistant to
Dr. Golovin. She was promoted to Personnel Manager in February 1987. In July
1990, she was promoted to Director, Human Resources. Prior to joining the
Company, Ms. Kato Ujihara worked in various customer service and personnel
positions in the Silicon Valley. She holds a B.S. in Business Administration
from San Jose State University.
Mr. Norton jointed the Company in September 1994 as Vice President of
Consulting and Services. In April 1995, he was promoted to Vice President,
International Sales and Worldwide Services. As a result of reorganization by
the Company, in January 1996 his title was changed to International Field
Operations and Worldwide Services. In August 1996 following a reorganization of
the Company's sales and services organization into two business units, he was
promoted to Senior Vice President and President, Semiconductor and Electronics
Group. Mr. Norton was with Industrial Resources, Inc. from 1993 to 1994, a
company he founded to provide investment and development services for companies
and government organizations in Asia. From 1989 to 1993, Mr. Norton held the
positions of Vice President of Asia Pacific and Vice President, Worldwide
Customer Services Division with Pyramid Technology, a computer company. Mr.
Norton's prior experience includes senior management assignments with Tolerant
Systems (now Veritas), a computer systems company, from 1983 to 1989 and
Burroughs Corporation, a computer systems company (now Unisys). He holds a B.S.
in Chemistry from Sussex University in England.
Mr. Payton joined the Company in 1993 as Western Region Sales Manager and
was promoted to Vice President, North American Sales in April 1995. As a result
of reorganization by the Company, in January 1996 his title was changed to Vice
President, American Field Operations. In August 1996 following a reorganization
of the Company's sales and services organization into two business units, he was
promoted to Senior Vice President and President, Healthcare and Process
Industries Group. From 1990 to 1993, he was an independent consultant in
factory automation and business planning. From 1984 to 1990, Mr. Payton was
Chief Executive Officer of WSI Corporation, a specialty hardware company. From
1970 to 1983, he held a variety of executive sales management positions with
Parallex Corporation, an on-line data processing services company, Xerox
Corporation, a multi-technology company, and Telecom Midwest Corporation, a
provider of on-line accounting and control systems for manufacturers. He holds a
B.A. degree in Business and English from Murray State University in Kentucky and
an M.B.A. from Wake Forest University.
Mr. Wong joined the Company as Controller in May 1995. In August 1996 he
was promoted to Vice President, Finance and Chief Financial Officer. From 1990
to 1995, he was Director of Finance at Kubota Graphics Corporation, a computer
hardware company, which was previously known as Kubota Pacific Computer, Inc.
From 1986 to 1990, he held various positions in finance with Stardent Computer,
a computer hardware company, which was previously known as Ardent Computer, most
recently serving as Operations Controller. He holds a B.A. in Accounting from
Golden Gate University in California and is a Certified Public Accountant in the
state of California.
16
<PAGE>
ITEM 2. PROPERTIES
The Company's principal administrative, marketing and product development
and support facilities are located in a building totaling 61,600 square feet in
Mountain View, California. The Company believes that its current facilities are
adequate for its current needs and that suitable additional space will be
available as required. See Note 6 of Notes to Consolidated Financial Statements
for information regarding the Company's obligations under its facilities leases.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company may be involved in legal
proceedings. As of the date hereof, there are no material legal proceedings in
which the Company is involved or litigation pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "CSIM." Consilium's initial public offering of Common Stock was on
May 9, 1989 at $9.00 per share. The following table sets forth, for the periods
indicated, the range of quarterly high and low closing sales prices for the
Common Stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1997
Fourth Quarter................................................ $ 5.625 $3.250
Third Quarter................................................. 5.750 2.500
Second Quarter................................................ 6.625 2.875
First Quarter................................................. 8.250 5.250
Fiscal 1996
Fourth Quarter................................................ 7.000 5.000
Third Quarter................................................. 9.375 5.000
Second Quarter................................................ 11.125 7.375
First Quarter................................................. 14.938 8.375
</TABLE>
HOLDERS OF COMPANY STOCK
As of October 31, 1997, the Company had 213 stockholders of record and
believes it had at least 1,544 beneficial holders.
DIVIDENDS
The Company has not paid cash dividends on its Common Stock and does not
plan to pay cash dividends to its stockholders in the near future. The
Company's right to declare dividends is restricted under its bank agreements.
The Company presently intends to retain its earnings to finance further growth
of its business.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except net income (loss) per share amounts)
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Years ended October 31 1997 1996 1995 1994 1993
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 40,635 $ 38,147 $ 33,125 $ 27,944 $ 28,475
Income (loss) before taxes (8,463) (2,485) 664 (5,523) (4,973)
Provision for income taxes 301 974 523 725 310
Net income (loss) (8,764) (3,459) 141 (6,248) (5,283)
Net income (loss) attributable to common stock (9,069) (3,459) 141 (6,248) (5,283)
Net income (loss) per common share $ (1.13) $ (0.44) $ 0.02 $(0.85) $(0.75)
Shares used in per share calculations 8,045 7,804 7,912 7,362 7,025
Consolidated Balance Sheet Data:
At October 31 1997 1996 1995 1994 1993
---------- --------- --------- ---------- ----------
Working capital (deficit) $ (2,067) $ 3,691 $ 9,012 $ 7,345 $ 12,571
Total assets 29,967 28,993 28,668 26,998 31,643
Long-term debt, less current portion -- -- -- -- 313
Stockholders' equity $ 8,431 $ 13,337 $ 15,383 $ 13,646 $ 18,836
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this report contains, in addition to historical
information, forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These forward-
looking statements are subject to certain risks and uncertainties, including
those discussed in this report. The Company's actual results could differ
significantly from the results discussed in the forward-looking statements. In
this report the words "anticipates," "believes," "expects," "intends," "may,"
"future" and similar expressions identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The following discussion should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto.
OVERVIEW
In fiscal 1996, the Company began offering systems integration services to
the semiconductor manufacturing industry. In an effort to grow its systems
integration business, in July 1996, the Company acquired the Taiwan operations
of SDI, a privately-held Washington corporation specializing in the development
of factory automation products and systems integration services for the
semiconductor industry. The Company purchased two existing semiconductor plant
automation contracts, certain tangible and intangible assets and assumed certain
liabilities of SDI. The acquisition was accounted for as a purchase and,
accordingly, the results of the Taiwan operations of SDI since the date of
acquisition have been recorded in the Company's consolidated financial
statements. (See Note 3 of Notes to Consolidated Financial Statements.)
In August 1997, the Company again expanded its systems integration business
by acquiring certain assets of FAST, a Singapore corporation specializing in
semiconductor manufacturing automation with operations both in Singapore and
Taiwan. The Company purchased two existing semiconductor factory automation
contracts, certain tangible and intangible assets and assumed certain
liabilities of FAST. The acquisition was accounted for as a purchase and,
accordingly, the results of FAST from the date of acquisition forward have been
recorded in the Company's consolidated financial statements. (See Note 3 of
Notes to Consolidated Financial Statements.)
20
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996
(In thousands)
<TABLE>
<CAPTION>
October 31, Change
-------------------- --------------------
1997 1996 $ %
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Product $14,181 $19,073 $(4,892) (25.7%)
Services 25,940 17,268 8,672 50.2%
Development 514 1,806 (1,292) (71.5%)
-------- -------- ---------
Total revenues $40,635 $38,147 $ 2,488 6.5%
-------- -------- ---------
As a percentage of total revenues
Product 34.9% 50.0%
Services 63.8% 45.3%
Development 1.3% 4.7%
-------- --------
Total revenues 100.0% 100.0%
-------- --------
Cost of revenues:
Product $ 3,245 $ 4,461 $(1,216) (27.3%)
Services 15,449 7,437 8,012 107.7%
Development 369 1,263 (894) (70.8%)
-------- -------- ---------
Total cost of revenues $19,063 $13,161 $ 5,902
-------- -------- ---------
As a percentage of total revenues
Product 22.9% 23.4%
Services 59.6% 43.1%
Development 71.8% 69.9%
Gross Margin $21,572 $24,986 $(3,414) (13.7%)
As a percentage of total revenues 53.1% 65.5%
Research and development $12,165 $10,847 $ 1,318 12.2%
As a percentage of total revenues 29.9% 28.4%
Selling and marketing $13,739 $13,039 $ 700 5.4%
As a percentage of total revenues 33.8% 34.2%
General and administrative $ 3,993 $ 3,929 $ 64 1.6%
As a percentage of total revenues 9.8% 10.3%
Interest income $ 156 $ 425 $ (269) (63.3%)
As a percentage of total revenues 0.4% 1.1%
Interest expense $ (294) $ (81) $ (213) 263.0%
As a percentage of total revenues (0.7%) (0.2%)
Provision for income taxes $ 301 $ 974 $ (673) (69.1%)
Effective tax rate (3.6%) (39.2%)
Net loss attributable to common stock $(9,069) $(3,459)
</TABLE>
21
<PAGE>
REVENUES
Total revenues for the fiscal year ended October 31, 1997 increased 7% to
$40,635,000, compared to fiscal year 1996 total revenues of $38,147,000. The
increase in fiscal 1997 was primarily due to higher services revenues associated
with the Company's new systems integration services business in the
semiconductor and electronics industries, partially offset by lower levels of
product and development revenues from the Company's WorkStream DFS and
FlowStream product lines.
Total revenues by product line for the fiscal years ended October 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
Years ended October 31,
--------------------------------------
(In thousands) 1997 1996
---------------- ------------------
<S> <C> <C>
WorkStream DFS (Semiconductor and Electronics industries) $ 35,456 $ 31,300
Percentage of total revenues 87% 82%
FlowStream (Healthcare Products and Process industries) $ 5,179 $ 6,847
Percentage of total revenues 13% 18%
</TABLE>
Revenues attributable to the WorkStream DFS product line increased 13% to
$35,456,000 in fiscal 1997 compared with $31,300,000 in fiscal 1996. The
increase in fiscal 1997 was primarily due to higher services revenues associated
with the Company's new systems integration services business in the
semiconductor and electronics industries, partially offset by a lower level of
product revenues as a result of the overall slowdown in capital spending in the
semiconductor and electronics industries during the fiscal year. Revenues
attributable to the FlowStream product line decreased 24% to $5,179,000 in
fiscal 1997 compared with $6,847,000 in fiscal 1996. The year over year
decrease was primarily due to fluctuations in the timing of new orders for
FlowStream product from the healthcare product and process industries.
Total revenues by geographic region for the fiscal years ended October 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Years ended October 31,
--------------------------------------
(In thousands) 1997 1996
----------------- -----------------
<S> <C> <C>
North America $ 19,741 $ 20,856
Percentage of total revenues 48% 55%
Asia/Pacific Rim $ 12,930 $ 11,060
Percentage of total revenues 32% 29%
Europe $ 7,964 $ 6,231
Percentage of total revenues 20% 16%
</TABLE>
The decrease in sales to North America in fiscal 1997 was primarily due to
lower product license sales in the North America region as a result of the
continuing overall weakness in the semiconductor and electronics industries.
The increase in sales to Asia/Pacific in fiscal 1997 was primarily due to an
increase in demand in the semiconductor and electronics industries for the
Company's new systems integration services, partially offset by a decrease in
demand for the Company's WorkStream DFS products as a result of the slowdown in
the building of new semiconductor fabrications, as well as currency fluctuations
in Asia. The increase in sales to Europe in fiscal 1997 was primarily due to
higher maintenance revenues associated with a larger installed base for the
Company's WorkStream DFS product line.
International sales accounted for 51% and 45% of total revenues in fiscal
1997 and 1996, respectively. The increase in international sales was primarily
attributable to an increase in services revenues associated with the Company's
new systems integration business in the Asia/Pacific region. The Company
expects that international
22
<PAGE>
sales will continue to increase in fiscal 1998 as a result of completion of
acquired contracts and the Company's plans to further expand its product and
systems integration business in the Asia/Pacific region.
No customer accounted for more than 10% of total revenues during the fiscal
years ended October 31, 1997 and 1996.
Product Revenues. Total product revenues decreased 26% to $14,181,000 in
----------------
fiscal 1997 compared with $19,073,000 in fiscal 1996. Product revenues
attributable to products in the Company's WorkStream DFS product line
decreased 24% to $12,572,000 in fiscal 1997 compared with $16,439,000 in
fiscal 1996. The fiscal 1997 decrease was primarily due to the overall
slowdown in capital spending in the semiconductor and electronics industries
and currency fluctuation issues in Asia. Product revenues attributable to the
FlowStream product line in fiscal 1997 were $1,609,000, a decrease of 39% from
revenues of $2,634,000 in fiscal 1996. The decrease in fiscal 1997 was due to
continued lower than expected market acceptance of the Company's FlowStream
product and fluctuations in the timing of new orders for FlowStream software
from the healthcare products and process industries.
Services Revenues. Services revenues in fiscal 1997 were $25,940,000, an
-----------------
increase of 50% over $17,268,000 in fiscal 1996. Services revenues are
primarily derived from software maintenance fees, systems integration services,
resident and application consulting services and customer training. The fiscal
year 1997 increase in services revenues was primarily a result of higher
services revenues associated with the Company's new systems integration business
and higher maintenance revenue associated with a larger installed base of the
Company's WorkStream DFS product line. The Company expects that services
revenues associated with systems integration business will remain at the fiscal
1997 levels. However, the Company believes services revenues may be subject to
fluctuations primarily due to the international currency issues, the timing of
new contracts and the completion of existing projects.
Development Revenues. Development revenues decreased 72% in fiscal 1997 to
--------------------
$514,000 from $1,806,000 in fiscal 1996. Development revenues include work
associated with porting agreements and development contract work for third
parties. Under these contracts and agreements, the Company earns development
and porting revenues, with participating third parties having the right to
license and use the software, often sooner than otherwise would have occurred.
Development revenues can vary significantly from period to period, depending
upon the number of contracts which have been entered into and the state of
completion of such projects. The fiscal 1997 decrease was primarily due to the
combination of the reduction in the number of funded development projects and
completion of most existing funded development projects during the year. Based
on current internal development resource allocations and projects planned, the
Company expects that development revenues in fiscal 1998 will continue to
decrease, although the Company may take on additional development projects in
the future if business and strategic objectives of the Company are met by such
projects.
COST OF REVENUES
Cost of Product Revenues. Cost of product revenues includes amortization
------------------------
of capitalized software development costs, royalties and purchased software
which is resold to the end customer, typically along with the Company's own
software. Depending on the mix of sales of proprietary software (and the
variance in associated third party royalties) and additional third party
software relating to specific orders, the associated costs of product revenue
can vary significantly. Cost of product revenues decreased 27% to $3,245,000
in fiscal 1997, from $4,461,000 in fiscal 1996. The absolute dollar decrease
in costs of product revenues in fiscal 1997 was primarily due to lower product
license sales and lower third party software product costs. Product costs as a
percent of product revenues were 23% for both fiscal years 1997 and 1996.
Cost of Services Revenues. Cost of services revenues includes direct labor
-------------------------
and third party subcontractor costs for the systems integration services
business unit, customer response center, resident and application consulting
services and training groups within the Company. Cost of services revenues
increased 108% to $15,449,000 in fiscal 1997, compared with $7,437,000 in
fiscal 1996. The increase in absolute dollars of cost of services revenues was
primarily due to the hiring of additional services personnel, both
23
<PAGE>
permanent and sub-contracted, to add to the Company's ability to support the new
systems integration services business and to enhance the Company's ability to
meet customer requirements for customer support and consulting services. Cost
of services revenues was 60% of total services revenues in fiscal 1997,
compared with 43% in fiscal 1996. The increase in cost of services as a
percentage of services revenues from fiscal 1997 to fiscal 1996 was primarily
due to high costs in establishing the Company's new systems integration
services business in fiscal 1997, including hiring of additional services
personnel in the acquisitions of SDI and FAST.
Cost of Development Revenues. Cost of development revenues includes direct
----------------------------
labor costs associated with development contracts and porting projects as well
as third party consulting expenses. Cost of development revenues decreased 71%
to $369,000 in fiscal 1997, compared with $1,263,000 in fiscal 1996 primarily
due to lower development revenues recorded in fiscal 1997. The decrease in
absolute dollars was primarily a result of the completion of most of the
existing funded development projects during the year. Cost of development
revenues was 72% of total development revenues in fiscal 1997, compared with
70% in fiscal 1996. Cost of development revenues as a percentage of total
development revenues can vary from year to year depending on the nature of the
development projects in process during each year.
GROSS MARGIN
The Company believes gross margin as a percentage of total revenue may
fluctuate in the future due to the mix of sales of third party products versus
internally developed products, the mix and levels of product license revenues
versus service revenues and the costs associated with each development project.
OPERATING EXPENSES
Research and Development Expenses. Research and development expenses
---------------------------------
include costs associated with the development of new products and the costs of
enhancing and maintaining existing products. Research and development expenses
represented 30% of total revenues in fiscal year 1997 and 28% in fiscal 1996.
The increase in the percentage of research and development expenses as a
percentage of total revenues in fiscal 1997 was due to a higher level of overall
research and development activity. These expenses increased to $12,165,000 in
fiscal 1997, compared with $10,847,000 in fiscal 1996. The increase in absolute
dollars was due to the hiring of additional local and offshore subcontractors
during fiscal 1997 to add computing platform options and functional enhancements
to the Company's products.
The Company expects that research and development expenses will decrease in
absolute dollars in the future as it plans to move part of its software
development group to India by subcontracting with HCL Infosystems. The Company
expects that research and development expenses as a percentage of total revenues
will fluctuate depending on future revenue levels.
Software development expenditures of $1,324,000 and $886,000 were
capitalized under SFAS No. 86 in fiscal 1997 and 1996, respectively. The
amounts capitalized represented approximately 10% and 8%, respectively, of
total research and development expenditures during such periods. The increase
was due to an increase in the absolute dollar amount of software costs
capitalized during fiscal 1997.
Selling and Marketing Expenses. Selling and marketing expenses consist
------------------------------
primarily of salaries and commissions of sales and marketing personnel,
advertising and promotion expenses, and sales support costs. Selling and
marketing expenses represented 34% of total revenues in both fiscal years 1997
and 1996. Selling and marketing expenses were $13,739,000 in fiscal 1997,
compared with $13,039,000 in fiscal 1996. The increase in absolute dollars in
fiscal 1997 was due primarily to an overall increase in headcount and related
travel expenses.
The Company believes that selling and marketing expenses will decrease in
absolute dollars in the future as the Company focuses on controlling operating
expenses relative to revenues and returning the Company to profitability and
growth. The Company expects that selling and marketing expenses as a percentage
of total revenues will fluctuate depending on future revenue levels.
24
<PAGE>
General and Administrative Expenses. General and administrative expenses
-----------------------------------
include the costs of the finance, legal and administrative operations of the
Company and represented 10% of total revenues for both fiscal years 1997 and
1996. General and administrative expenses were $3,993,000 in fiscal 1997,
compared with $3,929,000 in fiscal 1996. The increase in absolute dollars in
fiscal 1997 was primarily due to an increase in insurance and legal fees,
partially offset by slight decreases in salaries and facilities expenses.
The Company believes that general and administrative expenses will decrease
in absolute dollars in the future as the Company focuses on controlling
operating expenses relative to revenues and returning the Company to
profitability and growth. The Company expects that general and administrative
expenses as a percentage of total revenues will fluctuate depending on future
revenue levels.
Interest Income and Expense. For fiscal 1997, interest income was
---------------------------
$156,000, compared with $425,000 for fiscal 1996. Lower invested cash balances
and slightly lower interest rate levels accounted for the decrease from fiscal
1996 to fiscal 1997. Interest expense was $294,000 and $81,000 in fiscal 1997
and 1996, respectively. The increase in interest expense in fiscal 1997 was
primarily due to higher outstanding short term borrowings during the year.
Provision for Income Taxes. The Company's income tax provision for fiscal
--------------------------
years 1997 and 1996 principally relates to withholding taxes on sales made in
foreign jurisdictions. The Company has not incurred domestic income tax charges
due to net losses in fiscal years 1997 and 1996. The Company has established a
valuation allowance against its deferred tax assets and periodically reviews
this allowance. At such time that the Company believes that is it more likely
than not that the deferred tax asset will be realized, the valuation allowance
will be reduced.
25
<PAGE>
YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995
(In thousands)
<TABLE>
<CAPTION>
October 31, Change
------------------------- -------------------------
1996 1995 $ %
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues
Product $ 19,073 $ 16,115 $ 2,958 18.4%
Services 17,268 15,979 1,289 8.1%
Development 1,806 1,031 775 75.2%
---------- --------- ---------
Total revenues $ 38,147 $ 33,125 $ 5,022
---------- --------- ---------
As a percentage of total revenues
Product 50.0% 48.7%
Services 45.3% 48.2%
Development 4.7% 3.1%
---------- ---------
Total revenues 100.0% 100.0%
---------- ---------
Cost of revenues:
Product $ 4,461 $ 3,022 $ 1,439 47.6%
Services 7,437 4,967 2,470 49.7%
Development 1,263 632 631 99.8%
---------- --------- ---------
Total cost of revenues $ 13,161 $ 8,621 $ 4,540
---------- --------- ---------
As a percentage of total revenues
Product 23.4% 18.8%
Services 43.1% 31.1%
Development 69.9% 61.3%
Gross Margin $ 24,986 $ 24,504 $ 482 2.0%
As a percentage of total revenues 65.5% 74.0%
Research and development $ 10,847 $ 9,246 $ 1,601 17.3%
As a percentage of total revenues 28.4% 27.9%
Selling and marketing $ 13,039 $ 12,264 $ 775 6.3%
As a percentage of total revenues 34.2% 37.0%
General and administrative $ 3,929 $ 3,119 $ 810 26.0%
As a percentage of total revenues 10.3% 9.4%
Interest income $ 425 $ 588 $ (163) (27.7%)
As a percentage of total revenues 1.1% 1.8%
Interest expense $ (81) $ (10) $ (71) 710.0%
As a percentage of total revenues (0.2%) (0.03%)
Provision for income taxes $ 974 $ 523 $ 451 86.2%
Effective tax rate (39.2%) (78.8%)
Net income (loss) $ (3,459) $ 141
</TABLE>
26
<PAGE>
REVENUES
Total revenues for the fiscal year ended October 31, 1996 increased 15% to
$38,147,000, compared to fiscal 1995 total revenues of $33,125,000. The
increase in fiscal 1996 was primarily due to higher product license revenues as
a result of an increase in demand in the semiconductor and electronics
industries for the Company's WorkStream products, higher maintenance revenues as
a result of a higher installed base of the Company's WorkStream products and
higher consulting revenues.
Total revenues by product line for the fiscal years ended October 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
Years ended October 31,
------------------------------------------
(In thousands) 1996 1995
------------------- -------------------
<S> <C> <C>
WorkStream DFS (Semiconductor and Electronics industries) $ 31,300 $ 25,249
Percentage of total revenues 82% 76%
FlowStream (Healthcare Products and Process industries) $ 6,847 $ 7,876
Percentage of total revenues 18% 24%
</TABLE>
Revenues attributable to the WorkStream DFS product line increased 24% to
$31,300,000 in fiscal 1996 compared with $25,249,000 in fiscal 1995. The
increase in fiscal 1996 was primarily due to continued demand in the
semiconductor and electronics industries for the Company's WorkStream product
line, especially in the Asia/Pacific region. Revenues attributable to the
FlowStream product line decreased 13% to $6,847,000 in fiscal 1996 compared with
$7,876,000 in fiscal 1995. The year over year decrease was due to fluctuations
in the timing and size of receipt of orders for the FlowStream product line.
Total revenues by geographic region for the fiscal years ended October 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Years ended October 31,
------------------------------------------
(In thousands) 1996 1995
------------------- -------------------
<S> <C> <C>
North America $ 20,856 $ 21,919
Percentage of total revenues 55% 66%
Asia/Pacific Rim $ 11,060 $ 5,147
Percentage of total revenues 29% 16%
Europe $ 6,231 $ 6,059
Percentage of total revenues 16% 18%
</TABLE>
The decrease in sales to North America in fiscal 1996 was primarily due to
lower product license sales in the North America region. The increase in sales
to Asia/Pacific in fiscal 1996 was primarily due to an increase in demand in the
semiconductor and electronics industries for the Company's WorkStream DFS
products in the Asia/Pacific region.
International sales accounted for 45% and 34% of total revenues in fiscal
1996 and 1995, respectively. Increased international sales were primarily
attributable to the higher level of sales in the Company's WorkStream DFS
product line in the Asia/Pacific region.
No customer accounted for more than 10% of total revenues during the fiscal
years ended October 31, 1996 and 1995.
Product Revenues. Product revenues increased 18% to $19,073,000 in fiscal
----------------
1996 compared with $16,115,000 in fiscal 1995. The fiscal 1996 increase was
due primarily to higher levels of sales in the Company's WorkStream DFS
product line in the Asia/Pacific region. In fiscal 1996, the Company
recognized $4.0 million of product license revenues associated with two
significant systems integration projects.
27
<PAGE>
Product revenues attributable to products in the Company's WorkStream DFS
product line increased 32% to $16,439,000 in fiscal 1996 compared with
$12,436,000 in fiscal 1995. The fiscal 1996 increase was primarily due to an
increase in demand in the semiconductor and electronics industries for the
Company's WorkStream Open applications and related third party products in the
Asia/Pacific region.
Product revenues attributable to the FlowStream product line in fiscal 1996
were $2,634,000, a decrease of 28% from revenues of $3,679,000 in fiscal 1995.
The decrease in fiscal 1996 from fiscal 1995 was due to fluctuations in the
size and timing of orders for FlowStream software from the healthcare products
and process industries.
Services Revenues. Services revenues in fiscal 1996 were $17,268,000, an
-----------------
increase of 8% over $15,979,000 in fiscal 1995. Services revenues are primarily
derived from software maintenance fees, specialized programming services,
resident and application consulting services and customer training. The
increase in services revenues in fiscal 1996 was primarily due to higher
maintenance revenues as a result of a higher installed base of the Company's
WorkStream DFS product line and to an increase in revenues from consulting
services.
Development Revenues. Development revenues increased 75% in fiscal 1996 to
--------------------
$1,806,000 from $1,031,000 in fiscal 1995. Development revenues include work
associated with porting agreements and development contract work for third
parties. Under these contracts and agreements, the Company earns development
and porting revenues, with participating third parties having the right to
license and use the software, often sooner than otherwise would have occurred.
Development revenues can vary significantly from period to period, depending
upon the number of contracts which have been entered into and the state of
completion of such projects. The fiscal 1996 increase was primarily due to
revenues generated by new funded development projects, partially offset by the
completion of existing projects.
COST OF REVENUES
Cost of Product Revenues. Cost of product revenues includes amortization
------------------------
of capitalized software development costs, royalties, and purchased software
which is resold to the end-customer, typically along with the Company's own
software. Depending on the mix of sales of proprietary software (and the
variance in associated third party royalties) and additional third party
software relating to specific orders, the associated costs of product revenue
can vary significantly. Cost of product revenues increased 48% to $4,461,000 in
fiscal 1996, from $3,022,000 in fiscal 1995. Product costs as a percent of
product revenue were 23% and 19% for fiscal years 1996 and 1995, respectively.
The increase in cost of product revenues in fiscal 1996 was due to higher
product revenues recorded during the year and higher third party product costs
associated with two systems integration projects.
Cost of Services Revenues. Costs of services revenues includes expenses
-------------------------
for the customer response center, resident and application consulting
services, specialized programming services, and training groups within the
Company. Cost of services revenues was 43% of total services revenues in
fiscal 1996, compared with 31% in fiscal 1995. The increase in cost of
services as a percentage of services revenues from fiscal 1996 to fiscal 1995
was due to the increased usage of third party consultants and the hiring of
additional services personnel. Cost of services revenues increased 50% from
$7,437,000 in fiscal 1996, compared with $4,967,000 in fiscal 1995. The
absolute dollar increase in cost of services from fiscal 1996 to fiscal 1995
was primarily due to the hiring of additional services personnel, both
permanent and sub-contracted, to enhance the Company's ability to meet
customer requirements for maintenance, support and consulting services. In
late fiscal 1996, the Company commenced a new systems integration services
business relating to its WorkStream DFS product line. Cost of services
revenues associated with systems integration services in fiscal 1996 was
minimal.
Cost of Development Revenues. Cost of development revenues includes direct
----------------------------
labor costs associated with development contracts and porting projects as well
as third party consulting expenses. Cost of development revenues was 70% of
total development revenues in fiscal 1996, compared with 61% in fiscal 1995.
The increase in cost of development as a percentage of development revenues in
fiscal 1996 was due primarily to relatively high development costs associated
with two development projects during the fiscal year. Development costs
increased
28
<PAGE>
100% from $632,000 in fiscal 1995 to $1,263,000 in fiscal 1996 as a result of
higher development revenues recorded in fiscal 1996 and higher costs associated
with two development projects in fiscal 1996.
GROSS MARGIN
The Company believes gross margin as a percentage of total revenue may
fluctuate in the future due to the mix of sales of third party products versus
internally developed products, the mix and levels of product license revenues
versus service revenues and the costs associated with each development project.
OPERATING EXPENSES
Research and Development Expenses. Research and development expenses
---------------------------------
includes costs associated with the development of new products and the costs of
enhancing and maintaining existing products. Research and development expenses
represented 28% of total revenues in fiscal years 1996 and 1995. These
expenses increased to $10,847,000 in fiscal 1996 compared with $9,246,000 in
fiscal 1995. The absolute dollars increase in research and development expense
from fiscal 1995 to fiscal 1996 was due to a higher level of overall research
and development activity primarily to add computing platform options and
functional enhancements for the Company's products.
Software development expenditures of $886,000 and $1,460,000 were
capitalized under SFAS No. 86 in fiscal 1996 and 1995, respectively. The
amounts capitalized represented approximately 8% and 14%, respectively, of total
research and development expenditures during such periods. The percentage
decrease was due to a decline in the absolute dollar amount of software costs
capitalized during these periods coupled with a higher level of overall research
and development expenditures.
Selling and Marketing Expenses. Selling and marketing expenses consist
------------------------------
primarily of salaries and commissions of sales and marketing personnel,
advertising and promotion expenses, and customer service and support costs.
Selling and marketing expenses represented 34% of total revenues in fiscal 1996,
compared with 37% in fiscal 1995. Selling and marketing expenses increased to
$13,039,000 in fiscal 1996 from $12,264,000 in fiscal 1995. The increase in
absolute dollars in fiscal 1996 was due primarily to an increase in commission
expenses, related travel expenses, advertising and promotion expenses. The
decrease in sales and marketing expense as a percentage of total revenues in
fiscal 1996 was due to the increase in revenues while holding headcount and
other costs relatively stable.
General and Administrative Expenses. General and administrative expenses
-----------------------------------
include the costs of the finance, legal and administrative operations of the
Company and represented 10%, and 9% of total revenues for fiscal years 1996 and
1995, respectively. General and administrative expenses increased to $3,929,000
in fiscal 1996 from $3,119,000 in fiscal 1995. The increase from fiscal 1995 to
fiscal 1996 was due to an increase in headcount, an increase in legal and
accounting related expenses primarily related to the costs of the fiscal year
1995 restatement which occurred during fiscal 1996 and costs associated with a
relocation of the Company's headquarters in February 1996.
Restructuring Charge. During the third quarter of fiscal 1994, the Company
--------------------
announced a worldwide consolidation of its operations and recorded a
restructuring charge of $1,407,000. The consolidation primarily affected
several field offices. Major cost components associated with the restructuring
were severance pay amounts for terminated employees, lease and rental costs
associated with the consolidation of sales offices and the consolidation of
operations at the Company's headquarters. The balance was comprised of fixed
asset write-offs in the offices affected, as well as travel and legal fees. The
consolidation was designed to improve efficiencies and bring operational
expenses in line with revenues. During the third quarter of fiscal 1995, the
Company reevaluated the status of its restructuring activities in light of
results of operations that had improved substantially since the commencement of
the restructuring. As a result of that reevaluation, the Company decided to
discontinue subsequent restructuring activities and reversed the remaining
restructuring reserve of $211,000 in fiscal 1995.
29
<PAGE>
Interest Income and Expense. For fiscal 1996, interest income was
---------------------------
$425,000, compared with $588,000 for fiscal 1995. Lower invested cash balances
and slightly lower interest rate levels accounted for the decrease from fiscal
1995 to fiscal 1996. Interest expense was $81,000 and $10,000 in fiscal 1996
and 1995, respectively. The increase in interest expense in fiscal 1996 was
primarily due to interest on a $2,000,000 promissory note obtained with a bank
in April 1996.
Provision for Income Taxes. The Company's income tax provision for fiscal
--------------------------
years 1996 and 1995 principally relates to withholding taxes on sales made in
foreign jurisdictions. The Company has not incurred domestic income tax charges
due to net losses in fiscal years 1996 and utilization of net operating loss
carryforwards in fiscal year 1995. The Company has established a valuation
allowance against its deferred tax assets and periodically reviews this
allowance. At such time that the Company believes that is it more likely than
not that the deferred tax asset will be realized, the valuation allowance will
be reduced.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
As of October 31,
--------------------------------------------------------------
(In thousands) 1997 1996 1995
------------------- ----------------- ------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 7,865 $ 8,094 $ 10,686
Short-term investments $ -- $ 1,000 $ 1,478
Net cash (used for) provided by operating activities $ (3,115) $ (797) $ 1,702
Net cash used for investing activities $ (1,396) $ (5,000) $ (981)
Net cash provided by financing activities $ 4,590 $ 3,251 $ 1,283
</TABLE>
As of October 31, 1997, the Company had $7,865,000 in cash and cash
equivalents, as compared with $9,094,000 in cash and cash equivalents and short
term investments at October 31, 1996. The fiscal 1997 decrease was due
primarily to the use of cash to fund operations. During fiscal 1997, the
Company has funded its operations primarily through bank borrowings and the
proceeds from a preferred stock issuance.
Net cash used for operating activities in fiscal 1997 was $3,115,000,
compared with net cash used by operating activities of $797,000 in fiscal
1996. Net cash used for operations in fiscal 1997 primarily consisted of a net
loss in fiscal 1997 of $8,764,000, combined with an increase in accounts
receivable, partially offset by an increase in non-cash charges for
depreciation and amortization and an increase in accounts payable and deferred
revenue. Higher levels of sales on systems integration services which have
relatively longer collection cycles contributed to the increase in accounts
receivable and accounts payable.
Net cash used for operating activities in fiscal 1996 was $797,000,
compared with net cash provided by operating activities of $1,702,000 in fiscal
1995. Net cash used for operations in fiscal 1996 primarily consisted of a net
loss in fiscal 1996 of $3,459,000, combined with an increase in accounts
receivable and other assets and a decrease in other liabilities and accrued
expenses, partially offset by non-cash charges for depreciation and amortization
and an increase in accounts payable. Higher levels of sales contributed to the
increase in accounts receivable and accounts payable and the purchase of SDI
(see Note 3 of Notes to Consolidated Financial Statements) accounted for the
increase in other assets. Lower accrued compensation levels contributed to the
decrease in other liabilities and accrued expenses.
Net cash used for investing activities was $1,396,000, $5,000,000 and
$981,000 in fiscal years 1997, 1996 and 1995, respectively. The change from
fiscal 1996 to 1997 was due to a decrease in investments in capital equipment,
and a decrease in short-term investments, partially offset by an increase in
capitalized software development costs. The change from fiscal 1995 to 1996
was due to an increase in investments in capital equipment relating to the
Company's relocation to its new facility, offset by a decrease in short-term
investments and a decrease in expenditures on capitalized software development
costs.
Net cash provided by financing activities was $4,590,000, $3,251,000 and
$1,283,000 in fiscal years 1997, 1996 and 1995, respectively. The change from
fiscal 1996 to 1997 was due to net proceeds from the issuance of Convertible
Series A Preferred Stock of $2,799,000 and proceeds from borrowings on the new
revolving line of credit of $3,051,000 less debt repayments of $1,792,000. The
change from fiscal 1995 to fiscal 1996 was primarily due to cash received from a
$2,000,000 promissory note obtained in fiscal 1996.
Under the asset purchase agreement to purchase certain tangible and
intangible assets from FAST, the Company may be required to make additional
annual performance-based payments (in cash, stock, or cash and stock at the
Company's option) over a three year period ending on August 1, 2000. Such
performance-based payments will be based upon specified percentages of systems
integration and related services net operating margin, and net product license
and
31
<PAGE>
maintenance revenue recognized by the Company in certain countries in Asia for a
period of three years ending on August 1, 2000, as follows: 45% of systems
integration/services net operating margin, 10% of product license net revenue,
and 2.5% of product maintenance net revenue. Such payments may be made in cash
or Common Stock, at the option of the Company. $1,500,000 of the performance
payments are guaranteed. As of November 1, 1997, $600,000 of these guaranteed
performance payments have been paid by issuance of 156,931 shares of the
Common Stock. Three additional payments of cash or common stock valued
nominally at $300,000 each will be paid at intervals of ninety days, beginning
February 1, 1998. FAST has certain registration rights with respect to the
Common Stock. Such registration rights for the 276,931 shares of Common Stock
issued in fiscal 1997 are in the process of being registered by the Company in
fiscal 1998.
Under the original asset purchase agreement of the Taiwan operations of
SDI, the Company was required to make additional performance-based payments in
cash or cash and stock over a two-year period ending on July 8, 1998.
Subsequent to October 31, 1997, the Company renegotiated the major terms of the
agreement with SDI, subject to the execution of definitive agreements, such that
no additional performance-based payment would be made.
In April 1997, the Company entered into a Line of Credit Agreement with
Imperial Bancorp under which it can borrow up to $5,000,000, based on eligible
accounts receivable. The revolving line of credit is secured by substantially
all of the Company's assets, bears interest at the bank's prime rate per annum
(8.5% at October 31, 1997) and expires on March 15, 1998. At October 31, 1997,
$3,051,000 was outstanding under the revolving line of credit and the Company
had borrowings available of $1,949,000, subject to compliance with financial
covenants and borrowing base limitations. The Line of Credit Agreement requires
the Company to maintain certain financial covenants. The Company was in default
under its credit facility at October 31, 1997 as a result of failing to meet
financial covenants relating to minimum tangible net worth, maximum total
liabilities to tangible net worth and amount of the loss for the fiscal year.
See "--FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK--History
of Financial Covenant Breaches" and Note 5 of Notes to Consolidated Financial
Statements. The Company has not yet obtained a waiver of the default from its
lender. The Company is currently negotiating with its lender regarding a new
credit facility to replace the existing facility. Although the Company believes
that it will obtain a waiver and negotiate a new credit facility, there can be
no assurance that the Company will be able to obtain either the waiver or a
credit facility on terms acceptable to the Company. In connection with this line
of credit, the Company granted the bank warrants to purchase 70,000 shares of
the Common Stock at an exercise price of $3.98 per share. The warrant agreement
with the bank includes antidilution provisions. However, in no event shall the
number of shares issued under this warrant exceed 100,000, nor shall the price
be less than $3.00 per share. Such warrants are fully exercisable and expire in
April 2002. The bank has certain registration rights with respect to the
underlying Common Stock.
In August 1997, the Company entered into 8% Convertible Preferred Stock
Subscription Agreements (the "Subscription Agreements") with Libertyview Fund
LLC, Libertyview Plus Fund and CPR (USA), Inc. (collectively, the "Purchasers")
pursuant to which the Company sold to the Purchasers on August 19, 1997 an
aggregate of 3,000 newly issued shares of Series A Preferred Stock of the
Company at a price of $1,000 per share for aggregate gross proceeds to the
Company of $3,000,000, before deducting expenses. See Note 7 of Notes to
Consolidated Financial Statements for a description of the rights, preferences
and privileges of the holders. The Series A Preferred Stock has the right to
cumulative dividends at 8% per annum through conversion. The Series A Preferred
Stock cannot be converted for six months following the closing and will
automatically convert, if not earlier converted by the holders, no later than 24
months following the closing. The holders of Series A Preferred Stock have
certain registration rights with respect to the underlying Common Stock. In the
event a registration statement relating to the underlying Common Stock is not
declared effective by the Commission within one hundred eighty (180) days from
the Closing Date (August 19, 1997), then the Company will pay Purchasers two
(2%) percent of the principal amount per month thereafter in cash, stock, or
cash and stock at the Company's option (the first month shall be pro rated on a
weekly basis) until the Company procures registration of the Convertible
Preferred Registrable Securities. In connection with the issuance of Series A
Preferred Stock (See Note 7 of Notes to Consolidated Financial Statements), the
Company granted the placement agents warrants to purchase an aggregate of
150,000 shares of the Common Stock at an exercise price of $6.33 per share. The
warrants are fully exercisable and expire in August, 2002.
Management believes the existing cash and cash equivalents and cash
expected to be generated from operations will be sufficient to meet the
Company's working capital and capital expenditure requirements for the next
twelve months.
32
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Continuing Operating Losses. Consilium has incurred significant operating
---------------------------
losses ranging from $533,000 to $3.9 million in the seven consecutive quarters
ended October 31, 1997, primarily as a result of lower revenues due to reduced
capital expenditures by semiconductor manufacturers, including reduced new
construction and expansion of fabrication facilities, particularly in Asia,
international currency fluctuations, the relatively immature market for the
Company's FlowStream product line coupled with market demand for Windows NT
FlowStream products not yet available, unpredictability in timing of receipt of
orders, as well as costs from continuing investments by the Company in
technology and costs incurred in the Company's software development site in
Chennai, India, its recent acquisitions and its systems integration business. At
October 31, 1997, Consilium had an accumulated deficit of $20.6 million. The
achievement of profitability is primarily dependent upon renewed capital
expenditures by semiconductor manufacturers, stronger market acceptance of the
Company's FlowStream products in its target industries, successful introduction
of the Company's proposed Windows NT FlowStream products, market acceptance and
successful management of the Company's new systems integration services business
and the Company's ability to manage costs in accordance with anticipated
revenues. There can be no assurance as to whether or when achievement of
profitable operations will occur.
Dependence Upon Semiconductor Industry; Current Slowdown and Volatility in
--------------------------------------------------------------------------
the Semiconductor Industry. The Company is dependent upon the capital
- --------------------------
expenditures of semiconductor manufacturers, including the construction and
expansion of semiconductor fabrication facilities, which in turn depend on the
current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. This industry is characterized by rapid
technological change, short product life cycles, fluctuations in manufacturing
capacity and pricing and gross margin pressures. This industry is highly
cyclical and has periodically experienced significant downturns, often in
connection with, or in anticipation of, declines in general economic conditions
during which the capital expenditures by such manufacturers often decreases. The
semiconductor industry is currently experiencing a slowdown in terms of product
demand and volatility in terms of product pricing. The slowdown and volatility
have caused the semiconductor industry to reduce capital expenditures. In
addition, semiconductor manufacturers in Asia have reduced capital expenditures
as a result of financial instability and international currency fluctuations.
These conditions adversely affected Consilium's revenues and operating results
by reducing WorkStream DFS product license revenues and demand for the Company's
new systems integration services. There can be no assurance that this downturn
will not continue or that the Company will not continue to be impacted adversely
by this or future downturns in the semiconductor industry.
Losses in Health Care Products and Process Industries Business Unit.
-------------------------------------------------------------------
Consilium has been marketing its FlowStream product line to batch process
manufacturers, primarily in the healthcare products (pharmaceutical, medical
device and biotechnology) and specialty chemical (fibers, paints, resins,
plastics and film) industries since fiscal 1992. These types of manufacturers
have been generally slow to accept the benefits of manufacturing automation or
MES offerings like the Company's FlowStream product. In addition, the Company
believes that its successful and timely completion and migration of its
FlowStream products onto the Windows NT platform is critical to continued market
acceptance of such products. There is no assurance that such industries will
develop into a strong market for Consilium's FlowStream product line in the
foreseeable future. Consilium expects significant fluctuation in revenue for
this business unit until there is a stronger level of acceptance of the
FlowStream products by these target industries. Although Consilium significantly
reduced expenses in this business unit in fiscal 1997, continued
unpredictability
33
<PAGE>
in timing of orders resulted in continued losses for the business unit and such
losses may continue unless the business unit is able to achieve significant
recurring revenues as a result of increased market acceptance of computer
automated manufacturing in these target industries generally, and particularly
market acceptance of the Company's FlowStream product.
Dependence on Single Product Line. Revenues from licenses of the
---------------------------------
WorkStream family of products historically have represented a substantial
majority of the Company's product revenues (approximately 77%, 86% and 89% of
the Company's total license revenue in fiscal 1995, 1996 and 1997,
respectively). Although the Company introduced its FlowStream products in fiscal
1992, the Company expects that revenues from the license of WorkStream DFS
products will continue to account for at least a substantial portion of the
Company's license revenues for the foreseeable future. Declines in the demand
for the WorkStream family of products, whether as a result of reduced capital
expenditures by semiconductor manufacturers, international currency fluctuation,
competition, technological change, price reductions or otherwise, could have a
material adverse effect on the Company's business, operating results and
financial condition.
Furthermore, the Company has observed an increasing relationship between
its ability to perform systems integration work related to WorkStream DFS
products as part of an automated factory solution and sales of licenses of
WorkStream DFS products. The Company has limited experience to date in the
systems integration business, and if it is not able to perform such systems
integration work to the satisfaction of its customers, such failure may have a
material adverse effect on the Company's ability to license its WorkStream DFS
products as well as to market its systems integration business.
Development of Systems Integration Services Business and Management of
----------------------------------------------------------------------
Systems Integration Projects. Consilium has begun a systems integration
- ----------------------------
services business centered on its WorkStream DFS product line, providing more
comprehensive solutions to improve efficiencies for semiconductor manufacturing.
See "--Risks Related to Acquisitions." Consilium had insignificant revenues from
this business in fiscal 1996 and revenues of $7.8 million from this business in
fiscal 1997. The Company believes that the successful marketing of its
WorkStream DFS product line will depend increasingly on the ability of Consilium
to offer these systems integration services and to offer an automated factory
solution. The successful management of systems integration projects depends on
the timely availability and quality of key component products, the availability
of appropriately skilled personnel, the ability to integrate different products
from a variety of vendors effectively, and the management of difficult
scheduling and delivery problems. Most of the Company's systems integration
projects use fixed-price contracts. The pricing of fixed-price contracts
requires accurate cost estimation in order to be profitable and therefore
involves more risk than time-and-materials contracts, as unanticipated costs may
result in reduced profit or even a loss for the Company if the cost of the
project exceeds the fee. The Company has limited experience to date in the
management of systems integration projects, and there can be no assurance that
the Company will be able to manage successfully the various complexities
encountered in systems integration projects. Consilium's success will depend in
part on its strategic relationships with other vendors in key systems
integration projects, and there can be no assurance that such relationships will
develop or continue for any significant time period. In addition, the Company's
margins in its systems integration projects are typically lower than its margins
from sales of its WorkStream and FlowStream products and maintenance contracts
for such products. Therefore, the Company believes an increase in systems
integration revenue will cause a corresponding decrease in overall margins. The
Company expects that revenues from its systems integration services will
continue at 1997 levels and may continue to be impacted by the issues associated
with international currency fluctuation.
Availability of Additional Financing. Consilium has experienced negative
------------------------------------
cash flow from operations and may continue to experience negative cash flow. On
August 19, 1997, the Company completed a private placement (the "Private
Placement") of 3,000 shares of Series A Preferred Stock of the Company.
34
<PAGE>
See "--LIQUIDITY and CAPITAL RESOURCES." The Company also entered into a
line of credit agreement with a lender in April 1997, providing a new $5.0
million credit facility secured by the Company's personal property, accounts
receivable, equipment and inventory. The Company was in default under its credit
facility at October 31, 1997 as a result of failing to meet financial covenants
relating to minimum tangible net worth, maximum total liabilities to tangible
net worth and amount of the loss for the fiscal year. At December 31, 1997, the
Company had $3,051,000 in outstanding borrowings under this facility. The
Company has not yet obtained a waiver of the default from its lender. The
Company is currently negotiating with its lender regarding a new credit facility
to replace the existing facility which expires on March 15, 1998. Although the
Company believes that it will obtain a waiver and negotiate a new credit
facility, there can be no assurance that the Company will be able to obtain
either the waiver or a credit facility on terms acceptable to the Company.
Management believes the existing cash and cash equivalents, combined with its
borrowing capacity and cash generated from operations will be sufficient to meet
the Company's working capital and capital expenditure requirements for the next
twelve months.
Nevertheless, the Company may require additional financing. Management of
Consilium is currently exploring financing alternatives to supplement
Consilium's cash position. Potential sources of additional financing for
Consilium include private equity financings, mergers, strategic investments,
strategic partnerships or various forms of debt financings. If additional funds
are raised by Consilium through the issuance of equity securities or securities
convertible into or exercisable for equity securities, the percentage ownership
of the then current stockholders of Consilium will be reduced. Consilium may
issue additional series of Preferred Stock with rights, preferences or
privileges senior to those of the Common Stock. Consilium has no commitments or
arrangements to obtain any additional funding and there can be no assurance that
any required financing of Consilium will be available on acceptable terms, if at
all. The unavailability or timing of any financing, if needed, could prevent or
delay the continued development and marketing of Consilium's products and may
require curtailment of various operations of Consilium.
The Company has received an Advanced Technology Program award from the
National Institute of Standards and Technology of up to $2.0 million over two
years to develop technology for enabling the next generation of advanced
applications for manufacturing, including 300 mm semiconductor wafer fabrication
and pharmaceutical production; however, there can be no assurance that the
Company will satisfy the criteria required to receive reimbursement pursuant to
this grant or that government funds will exist for the $0.8 million of the $2.0
million approved for payment in the second year, even if the Company does meet
the criteria. The Company has budgeted the receipt of $1.2 million of the $2.0
million award; the Company's failure to receive at least a significant portion
of the $1.2 million grant could have a material adverse effect on the Company
and its results of operations.
Dependence on International Sales. International sales, primarily in
---------------------------------
Europe, Korea, Singapore and Taiwan accounted for approximately 34%, 45% and 51%
of the Company's total revenues in fiscal 1995, 1996 and 1997, respectively.
Increasing revenues from international sales were a result of the new systems
integration business partially offset by the reduction in capital expenditures,
including construction of new or expanded fabrication facilities, by
semiconductor manufacturers in Asia and international currency fluctuations. In
addition, the Company's FlowStream product line did not generate significant
international revenue due to the lack of a mature market for the FlowStream
product. The Company expects that international sales will continue to account
for a significant portion of its revenue and the future performance of the
Company will be dependent, in part, on its ability to continue to compete in
Asia, one of the largest markets for the sale of MES software to semiconductor
manufacturers. The Company also plans to continue its systems integration
business internationally, through its recent acquisition of FAST and otherwise.
The net sales and income from international sales may be adversely impacted by
fluctuations in currency exchange rates. The Company's international contracts
are denominated primarily in U.S. dollars, and significant fluctuations in
currency exchange rates against the U.S. dollar, particularly the recent
significant fluctuations in Asian currencies, have caused, and may continue to
cause, deferrals, delays and cancellation of orders. The financial systems in
Japan, South Korea, Taiwan, Singapore, and other Asian nations have experienced
significant turmoil. Recently announced financial failures by leading Asian
financial institutions have increased concerns over Asian economic stability.
Such turmoil in the financial markets has caused semiconductor manufacturers in
these countries to delay or defer capital expenditures. Diminished economic
growth in Asia could reduce consumer demand for products using semiconductor
chips and further dampen capital expenditures by such semiconductor
manufacturers, including construction of new or expanded fabrication facilities.
35
<PAGE>
Consilium's ability to compete in this region in the future will depend on
the continuation of favorable trading relationships between the region and the
United States, and the continuing ability of Consilium to maintain
satisfactory relationships with leading semiconductor companies in the region.
Dependence on revenues from international sales involves a number of inherent
risks, including economic slowdown and/or downturn in the semiconductor and
electronics industries in Asia, international currency fluctuations, general
strikes or other disruptions in working conditions, political instability,
trade restrictions, changes in tariffs, the difficulties associated with
staffing and managing international operations, generally longer receivables
collection periods, unexpected changes in or impositions of legislative or
regulatory requirements, reduced protection for intellectual property rights
in some countries, potentially adverse taxes, delays resulting from difficulty
in obtaining export licenses for certain technology, seasonality due to the
slowdown in European business activity during the summer months and other
trade barriers. International sales will also be impacted by the specific
economic conditions in each country. Certain of these factors have in the past
had a material adverse effect on the Company's international sales and,
consequently, on the Company's results of operations and there can be no
assurance that these factors will not materially and adversely impact
international sales for the Company in the future.
History of Financial Covenant Breaches. In each of the last seven
--------------------------------------
quarters, the Company has breached at least one of the financial covenants in
its then existing line of credit agreement. As a result of the difficulties
encountered in complying with the financial covenants included in its previous
line of credit agreement, in April 1997, the Company entered into a $5.0 million
line of credit agreement with a new lender secured by the Company's personal
property, accounts receivable, equipment and inventory in which the Company
renegotiated its covenants. However, the Company was in breach of the financial
covenants of this new credit agreement at April 30, July 31 and October 31,
1997. Prior to the October 31, 1997 breach, the Company was able to obtain a
waiver of each such breach from the lender. The Company was in default under its
credit facility at October 31, 1997 as a result of failing to meet financial
covenants relating to minimum tangible net worth, maximum total liabilities to
tangible net worth and amount of the loss for the fiscal year. At December 31,
1997, the Company had $3,051,000 in outstanding borrowings under this facility.
The Company has not yet obtained a waiver of the October 31, 1997 default from
its lender. The Company is currently negotiating with its lender regarding a new
credit facility to replace the existing facility which expires on March 15,
1998. Although the Company believes that it will obtain a waiver and negotiate a
new credit facility, there can be no assurance that the Company will be able to
obtain either the waiver or a credit facility on terms acceptable to the
Company. In addition, there can be no assurance that such breaches of financial
covenants will not occur in the future, or that, if they occur, the Company's
lender will waive any such breach. Any failure to obtain such a waiver would
result in a default that would have a material adverse effect on the Company. In
addition, the loss of the services of Laurence Hootnick, the Company's President
and Chief Executive Officer, qualifies as a default under the Company's current
line of credit agreement. See "--Dependence on Key Personnel." There can be no
assurance that the Company would be able to repay any outstanding amounts under
its line of credit upon any default or be able to obtain an equivalent, or any,
replacement line of credit.
New Products and Rapid Technological Change; Risk of Product Defects. The
--------------------------------------------------------------------
MES industry is characterized by rapid technological change, frequent new
product introductions and enhancements, evolving industry standards and rapidly
changing customer requirements. The development of more complex manufacturing
facilities embodying new technologies will require increasingly sophisticated
MES software. The Company's future results of operations will depend in part
upon its ability and its third party suppliers' ability to enhance current
products and to develop and introduce new products on a timely and cost-
effective basis that will keep pace with technological developments and evolving
industry standards and methodologies, as well as address the increasingly
sophisticated needs of the Company's customers. The Company has experienced in
the past and may experience in the future delays in new product development and
product enhancements. There can be no assurance that any new products will gain
market acceptance or that the Company will be successful in developing and
marketing product enhancements or new products that respond to technological
change, evolving industry standards and changing customer requirements, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products or product
enhancements, or that its new products and product enhancements will adequately
meet the requirements of the marketplace and achieve any significant degree of
market acceptance.
Failure of the Company, for technological or other reasons, to develop and
introduce new products and product enhancements in a timely and cost-effective
manner could have a material adverse effect on the Company's business, operating
results and financial condition. Even during periods of reduced revenues the
36
<PAGE>
Company must continue to invest in research and development, although at reduced
levels, in order to remain competitive, and such costs could adversely affect
financial results in periods of lower revenues. In addition, the introduction
or even announcement of products by the Company or one or more of its
competitors embodying new technologies or changes in industry standards or
customer requirements could render the Company's existing products obsolete or
unmarketable. For example, the Company believes that its successful and timely
migration of its FlowStream products onto the Windows NT platform, the
introduction of new WorkStream DFS modules and the Company's new FAB300 line on
the Windows NT platform is important to continued market acceptance of such
products. There can be no assurance that the introduction or announcement of
new product offerings by the Company or one or more of its competitors will not
cause customers to defer purchases of existing Company products. For example,
the Company recently announced its current development of a new FAB300 product
line, which is being designed to provide the features necessary to support 300
mm integrated circuit manufacturing, which the Company believes will be a new
industry standard. Potential customers of the Company's products may defer
purchasing currently available products in order to evaluate the FAB300 product
when it becomes available, or any competitive 300 mm manufacturing product that
may be developed. Such deferral of purchases could have a material adverse
effect on the Company's business, operating results or financial condition.
Software products as complex as those offered by the Company may contain
defects or failures when introduced or when new versions are released. The
Company has discovered in the past software defects in certain of its products
and may experience delays or lost revenue to correct such defects in the future.
Although the Company has not experienced material adverse effects resulting from
any such defects to date, there can be no assurance that, despite testing by the
Company, errors will not be found in new products or releases after commencement
of commercial shipments, resulting in loss of market share or failure to achieve
market acceptance. Any such occurrence could have a material adverse effect
upon the Company's business, operating results or financial condition.
Dependence on Third Parties. The Company depends on third parties for
---------------------------
performing certain processes and providing a variety of the components and
materials necessary for the production of its products. The Company has
contracted with a company in Chennai, India for a substantial portion of its
continuing research and development, including the development of updates and
new releases for its WorkStream maintenance customers and the continuing
development of its FlowStream product line. The failure of this contractor to
produce current WorkStream and FlowStream products in the specified manner or to
produce new releases of the WorkStream product in a timely manner, or at all, or
production of WorkStream releases or FlowStream products of inferior quality,
would have a material adverse effect on the Company. In addition, because the
Company currently depends on the development work produced in Chennai, the
termination of the contract for such research and development services could
have a material adverse effect on the Company. The current contract requires one
year's written notice of termination, however, there can be no assurance that
this time period would be sufficient to locate replacement development services,
either through employees or another third-party research and development
contract.
The Company's products contain embedded software that is developed and
licensed to it by third parties. Any changes made to such embedded software or
any discontinuance of such software or the license to such software, could have
a material adverse effect on the Company by causing the Company to ensure that
its product functions properly with the changed software or to find or develop
replacement software. In addition, the Company may be required by a systems
integration customer to use a third party's software in a particular project.
If such software does not function properly in the project, the Company may be
required to incur unexpected costs in order to integrate the software, which
would adversely impact its margins in a fixed-price contract. See "--Development
of Systems Integration Services Business and Management of Systems Integration
Projects."
Additionally, although the Company believes that all of its products will
record, store, process, calculate and present calendar dates falling on or after
(and if applicable, spans of time including) January 1, 2000, and will calculate
any information dependent on or relating to such dates in the same manner, and
with the same functionality, data integrity and performance, as such products
record, store, process, calculate and present
37
<PAGE>
calendar dates on or before December 31, 1999, or calculate any information
dependent on or relating to such dates (collectively, "Year 2000 Compliant"),
Year 2000 Compliant issues may arise with respect to products furnished by
third-party suppliers in connection with the Company's systems integration
business that may result in unforeseen costs or delays to the Company and
therefore may have a material adverse effect on the Company.
Dependence on Key Personnel. The Company's success depends to a
---------------------------
significant extent upon a number of key technical and management employees, and
in particular, upon Laurence Hootnick, the Company's President and Chief
Executive Officer. The Company does not currently have "key man" life insurance
on Mr. Hootnick or any other employees. The loss of services of Mr. Hootnick or
any of the Company's other key employees could have a material adverse effect on
the Company. Furthermore, the loss of Mr. Hootnick's services would qualify as a
default under the Company's line of credit agreement, which would have a
material adverse effect on the Company. There can be no assurance that the
Company would be able to repay any outstanding amounts under its line of credit
upon such a default or obtain an equivalent, or any, replacement line of credit.
See "--History of Financial Covenant Breaches."
The Company's success will depend in large part on its ability to attract
and retain highly-skilled technical, managerial, sales and marketing personnel.
Competition for such personnel is intense. There can be no assurance that the
Company will be successful in retaining its key technical and management
personnel and in attracting and retaining the personnel it requires to continue
to grow.
Risks Related to Acquisitions. The Company has recently completed two
-----------------------------
acquisitions, SDI in late fiscal 1996 and FAST during fiscal 1997. The
successful integration of these companies will require substantial additional
attention from management. The majority of the costs associated with these
acquisitions have already been incurred, but the anticipated benefits of these
acquisitions will not be achieved unless the operations are successfully
combined with the Company's in a timely manner. The diversion of the attention
of management from the day-to-day operations of the Company, or difficulties
encountered in the transition and integration process, as well as the loss of
key personnel in those acquired companies, could have a material adverse effect
on the business, financial condition and results of operations of the Company.
To implement its business plans, the Company may make further acquisitions
in the future. Acquisitions require significant financial and management
resources both at the time of the transaction and during the process of
integrating the newly-acquired business into the Company's operations. The
Company's operating results could be adversely affected it if is unable to
successfully integrate such new companies into its operations. There can be no
assurance that any acquired products, technologies or businesses will contribute
at anticipated levels to the Company's sales or earnings, or that sales and
earnings from combined businesses will not be adversely affected by the
integration process. Certain acquisitions or strategic transactions may be
subject to approval by the other party's board or stockholders, domestic or
foreign governmental agencies, or other third parties. Accordingly, there is a
risk that important acquisitions or transactions could fail to be concluded as
planned. Future acquisitions by the Company could also result in issuances of
equity securities or the rights associated with the equity securities, which
could potentially dilute earnings per share. In addition, future acquisitions
could result in the incurrence of additional debt, taxes, contingent
liabilities, amortization expenses related to goodwill and other intangible
assets and expenses incurred to align the accounting policies and practices of
the acquired companies with those of the Company. These factors could adversely
affect the Company's future operating results, financial position and cash
flows. As some of the Company's competitors have pursued a strategy of growth
through acquisition, there is a risk that future acquisitions could be more
expensive due to competition among bidders for target companies.
Competition. The MES software market in which the Company competes is
-----------
intensely competitive and subject to rapid technological change. The Company
believes that the primary competitive factors in the market for MES software
38
<PAGE>
are the size of installed base and the product functionality, and that
additional factors include price/performance for its WorkStream DFS product
line, ease of use, hardware and software platform, vendor reputation and
financial stability. Failure of the Company to successfully compete with
respect to any of these or other factors could have a material adverse effect on
the Company's business, financial condition or results of operations. The
Company believes that its products currently compete favorably with other
systems on the primary factors listed above, although it may be at a competitive
disadvantage against companies with greater financial, marketing, services and
support, and technological resources than the Company. The Company also
believes that the relative importance of these competitive factors may change
over time.
The Company continues to experience competition primarily from the
management information systems departments of its largest potential customers,
which have the capability to develop software internally. The Company believes
that acquisition of MES products will increasingly shift to external vendors as
packages, services and expertise become more widely available from third
parties. The Company continues to experience direct competition primarily in
the semiconductor and pharmaceutical industries from various competitors,
including Andersen Consulting, Base-10, FASTech, ICC, Incode, International
Business Machines, Promis and SAP. The Company anticipates increased
competition from other MES companies.
ERP systems are another primary software application for planning and
executing production once a product is designed. ERP systems help manufacturers
translate forecasted demand or order backlog into a manufacturing plan of raw
materials, gross capacity and production orders for the plant floor. They also
track the associated financial and accounting paperwork. Since ERP systems only
collect historical yield and cost data and do not provide real-time
comprehensive information about the complete status of operations and resources,
they do not support the proactive or ongoing management of the actual production
process as it occurs. However, ERP system vendors are beginning to compete with
the Company. The first such offering was released by SAP in mid-1995. Although
ERP systems typically offer only a basic shop floor control package with limited
MES functionality, this basic MES functionality may be acceptable for potential
customers, especially companies with limited tracking and control requirements.
In addition, pre-integration with ERP may be a compelling reason for some
potential customers to buy an ERP system with basic MES capabilities instead of
a separate MES package.
Current and potential competitors may determine, for strategic reasons, to
consolidate, lower the prices of their products or bundle their products with
other products. Current and potential competitors have established or may
establish financial or strategic relationships among themselves or with existing
or potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire market share.
Concentration of Product Revenues in Small Number of Customers; High
--------------------------------------------------------------------
Average Selling Price; Lengthy Sales Cycle. Consilium's product revenues
- ------------------------------------------
historically have been concentrated in a relatively small number of customers
and its products have a high average selling price. During fiscal 1997, the
percentage of product license revenue derived from the Company's ten largest
customers was approximately 57%, compared to approximately 75% in fiscal 1996
and 60% in fiscal 1995, although no one customer accounted for more than 10% of
the Company's product revenues in any of these fiscal years. Consilium derives
most of its revenues from a relatively small number of software orders which can
range from $10,000 to over $1,000,000, and these products have a relatively long
sales cycle. The average sales price in fiscal 1997 for a new installation of
the WorkStream DFS product line was approximately $200,000. The average sales
price for the FlowStream product line in fiscal 1997 was approximately $182,000
for an initial installation. The receipt of fewer orders than anticipated in any
quarter can have a substantial negative impact on any quarter's operating
results. The licensing and sales of the Company's software products generally
involves a significant commitment of capital by prospective customers, with the
attendant delays frequently associated with large capital expenditures and
lengthy acceptance procedures. For these and other reasons, the sales cycle
associated with the licensing of the Company's products is typically lengthy and
subject to a number of significant risks over which the Company has little or no
control. Because the timing of customer orders is hard to predict, the Company
believes that its quarterly operating results are likely to vary significantly
in
39
<PAGE>
the future. Actual results of the Company could vary materially as a result of
a variety of factors, including, without limitation, the high average selling
price and long sales cycle for the Company's products, the relatively small
number of orders per quarter, dependence on sales to a limited number of large
customers, timing of receipt of orders, successful product introduction and
acceptance of the Company's products and increased competition. Fluctuations in
demand and changes in the timing of receipt of orders may significantly affect
the Company's operating results in any fiscal quarter.
Potential Fluctuations in Quarterly Operating Results. The Company's
-----------------------------------------------------
results of operations historically have fluctuated on a quarterly basis due to
numerous factors. Factors that may affect operating results of the Company
materially and unpredictably include: the economic conditions in the
semiconductor and electronics industries generally and in the Company's
geographic markets; the relatively high average selling price of the Company's
products; the relatively small number of transactions; the size and timing of
receipt of orders from customers; the timing of operating expenditures; the
level of market acceptance for the Company's products; the successful management
of systems integration projects; reduced margins from systems integration
projects; changes in average selling price and product mix; exchange rate
fluctuations; increased competition; new product announcements and releases by
the Company and its competitors and subsequent deferrals in sales orders as new
or competitive products are evaluated by prospective customers; the timing of
co-development products with customers; gain or loss of significant customers;
expense levels; renewal of maintenance contracts; pricing changes by the Company
or its competitors; and personnel changes. Any unfavorable change in these or
other factors could have a material adverse effect on the Company's operating
results for a particular quarter.
The Company's expense levels will be based, in part, on expectations of
future revenues. If revenue levels in a particular quarter do not meet
expectations, operating results could be adversely affected. The slowdown in
the semiconductor industry and in the construction of new wafer fabrication
facilities has resulted in Consilium experiencing rescheduled orders, a
reduction or delay in orders for WorkStream DFS and lower than expected demand
for systems integration services; there can be no assurance that this slowdown
will not continue. Quarterly revenue and operating results will therefore
depend on the volume and timing of orders received during the quarter, which are
difficult to forecast accurately. Historically, the Company has often
recognized a substantial portion of its license revenues in the last month of
the quarter, with these revenues frequently concentrated in the last two weeks
of the quarter. Operating results would be disproportionately affected by a
reduction in revenue because only a small portion of the Company's expenses vary
with its revenue. In addition, the Company's margins in its systems integration
projects are typically lower than its margins from sales of its WorkStream and
FlowStream products and maintenance contracts for such products. The Company
expects that revenues from its systems integration services will continue to
increase as a percentage of overall revenues, and that its overall margins will
correspondingly decrease. Operating results in any period should not be
considered indicative of the results to be expected for any future period, and
there can be no assurance that the Company's revenues will increase or that the
Company will achieve profitability.
Possible Volatility of Stock Price. The market price of the Common Stock
----------------------------------
has been volatile. Future announcements concerning the Company or its
competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction or market acceptance of new products
or changes in product pricing policies by the Company or its competitors,
proprietary rights or other litigation, changes in earnings estimates by
analysts or other factors could cause the market price of the Common Stock to
fluctuate substantially. In addition, the stock market has experienced from time
to time significant price and volume fluctuations that have affected
particularly the market prices for the common stocks of technology companies and
that have often been unrelated to the operating performance of particular
companies. These broad market fluctuations also may adversely affect the market
price of the Common Stock. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
occurred against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and divert management attention and
resources, which could have a material adverse effect on the Company's
40
<PAGE>
business, financial condition and results of operations. Any adverse
determination in such litigation could also subject the Company to significant
liabilities.
Compliance with NASDAQ Listing Requirements; Disclosure Relating to Low-
------------------------------------------------------------------------
Priced Stock. The Common Stock is quoted on the Nasdaq National Market.
- ------------
However, in order to continue to be included in the Nasdaq National Market, a
company must maintain, among other things, two market makers, a minimum bid
price of $1.00 per share, $4,000,000 in net tangible assets (total assets less
total liabilities and goodwill) and a $5,000,000 market value of the public
float (excluding shares held directly or indirectly by any officer or director
of the company and by any person holding beneficially more than 10% of the
company's outstanding shares). Although the Company currently meets the Nasdaq
National Market maintenance criteria, if the Company's stock price declines
below $1.00, the Company would not meet the minimum bid price requirement.
Failure to meet these maintenance criteria in the future may result in the
delisting of the Common Stock from the Nasdaq National Market and the quotation
of the Common Stock on the Nasdaq SmallCap Market (the "SmallCap Market") if the
requirements for inclusion on the Small Cap Market are met. As a result of
quotation on the SmallCap Market, an investor may find it more difficult to
dispose of the Common Stock.
A company must have $4,000,000 in net tangible assets, $50,000,000 market
or capitalization or $750,000 net income in two of the last three years,
$5,000,000 market value of the public float and a minimum bid price of $4.00 per
share for inclusion in the SmallCap Market, unless any of such requirements are
waived by the Nasdaq Stock Market, Inc. ("Nasdaq"). Failure to meet the
SmallCap Market inclusion criteria, or the failure to meet the SmallCap Market
maintenance criteria if the initial SmallCap Market inclusion criteria are met,
may result in the delisting of the Common Stock from Nasdaq. Trading, if any,
in the Common Stock would thereafter be conducted in the non-Nasdaq over-the-
counter market. As a result of such delisting, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of, the Common Stock.
In addition, if the Common Stock were delisted from trading on a Nasdaq
market and the trading price of the Common Stock was less than $5.00 per share,
trading in the Common Stock would also be subject to certain rules promulgated
under the Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage broker-
dealers from effecting transactions in the Common Stock, which could severely
limit the market liquidity of the Common Stock and the ability of purchasers in
this offering to sell the Common Stock in the secondary market.
Proprietary Rights. The Company's success and ability to compete depends
------------------
in part upon its proprietary rights. The Company holds three patents and also
relies on a combination of trade secret, copyright and trademark laws and
license agreements to protect its proprietary rights in its products. While the
Company intends to protect its patent rights vigorously, there can be no
assurance that any patents held by the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. The Company generally provides its
products to end users under a non-exclusive, non-transferable license which
typically has a perpetual term unless terminated for breach. In addition, the
Company generally enters into confidentiality or license agreements with
employees, distributors and customers, and limits access to and distribution of
its software, documentation and other proprietary information. Despite these
precautions, there can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's competitors will not independently develop similar or superior
technology, duplicate the Company's product or design around patents issued to
the Company or other intellectual property rights of the
41
<PAGE>
Company. In addition, the laws of certain foreign countries in which the
Company's products are or may be tested or sold, including various countries in
Asia, may not protect the Company's products and intellectual proprietary rights
to as great an extent as do the laws of the United States.
There has been substantial industry litigation regarding patents and other
intellectual property rights involving technology companies. In the future,
litigation may be necessary to protect and enforce the Company's intellectual
property rights, to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation could be costly and could divert
management's attention, which could have a material adverse effect on the
Company's business, results of operations or financial condition regardless of
the outcome of the litigation. In addition, third parties making claims against
the Company with respect to intellectual property infringement may be able to
obtain injunctive or other equitable relief that could effectively block the
Company's ability to sell its products in the United States and abroad, and
could result in an award of substantial damages. In the event of a claim of
infringement, the Company and its customers may be required to obtain one or
more licenses from third parties. There can be no assurance that the Company or
its customers could obtain necessary licenses from third parties at a reasonable
cost or at all.
Concentration of Stock Ownership. The present directors, executive
--------------------------------
officers and 5% stockholders of the Company and their affiliates beneficially
own approximately 51.54% of the outstanding Common Stock. As a result, these
stockholders may be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.
Potential Anti-Takeover Effects. Certain provisions of Consilium's
-------------------------------
Certificate of Incorporation and Delaware law could discourage potential
acquisition proposals and could delay a change of control of Consilium not
approved by Consilium's Board of Directors. Such provisions diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit fluctuations in the market price of the
Common Stock that could result from takeover attempts. The Company is also
afforded the protections of Section 203 of the Delaware General Corporation Law,
which could delay or prevent a change in control of the Company or could impede
a merger, consolidation, takeover or other business combination involving the
Company or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company. In addition, the Board of
Directors has authority to issue up to 4,000,000 shares of Preferred Stock of
the Company, par value $0.01 per share ("Preferred Stock") of which 3,000 shares
have been designated as Series A Preferred Stock and issued in the Private
Placement and to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares without any vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the Common Stock. The Company has no present plan to issue shares of Preferred
Stock. The Company's Certificate of Incorporation provides that directors are
removable only for cause, and so long as the Board of Directors consists of more
than two directors, the Board of Directors will be divided into three classes of
directors serving staggered three-year terms. As a result, only one of the three
classes of the Company's Board of Directors will be elected each year. The
classified board structure may have the effect of delaying or inhibiting any
attempt to acquire control of the Company. Furthermore, the Company has entered
into change of control agreements with certain officers of the Company pursuant
to which such officers shall be entitled to payments and accelerated vesting of
options upon the change of control of the Company. In addition, stockholders of
Consilium are not permitted to call special meetings or take action by written
consent. These
42
<PAGE>
provisions may have the effect of delaying hostile takeovers or delaying changes
in control or management of the Company.
43
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 will become effective in the first quarter of the
Company's fiscal year ending October 31, 1998. Upon adoption, all prior-period
earnings per share data presented will be restated to conform with SFAS No.
128. SFAS No. 128 requires companies to compute net income per share under two
different methods, basic and diluted, and to disclose the methodology used for
the calculation. Net income (loss) per share amounts assuming SFAS No. 128 had
been adopted at the beginning of fiscal 1997, 1996 and 1995 would not be
different from the net income (loss) per share amounts as previously reported
in the Company's consolidated financial statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of information
about Capital Structure," which requires companies to disclose certain
information about their capital structure. SFAS No. 129 will become effective
in the first quarter of the Company's fiscal year ending October 31, 1998 and
its adoption is not expected to have a material effect on the financial
statements of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 will become effective for the Company's fiscal year ending October
31, 1999. The Company anticipates additional disclosure requirements on
comprehensive income upon adoption of SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
disclosure of segment information. SFAS No. 131 will become effective for the
Company's fiscal year ending October 31, 1999. The Company anticipates
additional disclosure requirements on segment information upon adoption of SFAS
No. 131.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited quarterly financial information
for the Company's last eight quarters. The Company's results of operations
historically have fluctuated on a quarterly basis due to numerous factors. See
- --FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK--Potential
Fluctuations in Quarterly Operating Results." This unaudited information has
been prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, includes all adjustments necessary for the
fair presentation of the information for the periods presented.
The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as any
indication of future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------
1996 1997
----------------------------------------- -----------------------------------------
(In thousands, except per share JAN. 31 APR. 30 JUL. 31 OCT. 31 Jan. 31 Apr. 30 Jul. 31 Oct. 31
amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $9,159 $ 7,779 $10,715 $10,494 $ 8,574 $11,092 $10,909 $10,060
Cost of revenues 2,264 2,577 3,830 3,831 5,014 4,943 4,371 4,735
------- ------- ------- ------- ------ ------- ------- -------
Gross margin 6,895 5,202 6,885 6,663 3,560 6,149 6,538 5,325
Operating expenses 6,571 7,434 7,262 7,207 7,465 7,184 7,504 7,744
Income(loss) before income taxes 470 (2,152) (326) (477) (3,880) (1,068) (1,034) (2,481)
Provision for income taxes 248 124 207 395 62 53 147 39
Net income(loss) 222 (2,276) (533) (872) (3,942) (1,121) (1,181) (2,520)
Net income(loss) attributable
to common stock 222 (2,276) (533) (872) (3,942) (1,121) (1,181) (2,825)
Net income (loss) per common share $ 0.03 $ (0.29) $ (0.07) $ (0.11) $ (0.50) $ (0.14) $ (0.15) $ (0.34)
Shares used in per share calculation 8,260 7,773 7,838 7,895 7,928 7,963 8,018 8,254
</TABLE>
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
FINANCIAL STATEMENTS OF CONSILIUM, INC.
Reports of Independent Public Accountants..................................................... 46
Consolidated Balance Sheets................................................................... 48
Consolidated Statements of Operations......................................................... 49
Consolidated Statements of Stockholders' Equity............................................... 50
Consolidated Statements of Cash Flows......................................................... 51
Notes to Consolidated Financial Statements.................................................... 52
</TABLE>
45
<PAGE>
Report of Independent Public Accountants
To Consilium, Inc.:
We have audited the accompanying consolidated balance sheets of Consilium,
Inc. (a Delaware Corporation) and subsidiaries as of October 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consilium, Inc. and
subsidiaries as of October 31, 1997 and 1996 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(b) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
December 3, 1997
46
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders
Consilium, Inc. and Subsidiaries
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Consilium, Inc. and subsidiaries for the year ended
October 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated results of
operations and cash flows of Consilium, Inc. and subsidiaries for the year ended
October 31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
December 6, 1995
<PAGE>
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
October 31,
-----------------------
1997 1996
------------ ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,865 $ 8,094
Short-term investments - 1,000
Accounts receivable, net of allowance
for doubtful accounts of $300 and $705
in 1997 and 1996, respectively 11,014 9,139
Other current assets 590 1,114
------- -------
Total current assets 19,469 19,347
Property & equipment, net 4,312 4,827
Software development costs, net 2,688 3,094
Goodwill, net 3,092 1,345
Other assets 406 380
------- -------
$29,967 $28,993
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit / Note payable $ 3,051 $ 1,792
Accounts payable 6,587 4,114
Other current liabilities and accrued expenses 3,799 3,910
Accrued acquisition costs 1,662 105
Deferred revenue 6,437 5,735
------- -------
Total current liabilities 21,536 15,656
------- -------
Commitments and contingencies (Notes 3 and 6)
Stockholders' equity:
Preferred stock, $.01 par value
Authorized: 4,000,000 shares
Issued and outstanding: 3,000 shares
in 1997 and none in 1996; aggregate liquidation
preference of $3,050 -- --
Common stock, $.01 par value:
Authorized: 25,000,000 shares
Issued and outstanding: 8,290,290 shares
in 1997 and 7,928,051 shares in 1996 83 79
Additional paid-in capital 29,261 24,794
Accumulated deficit (20,559) (11,490)
Cumulative translation adjustment (354) (46)
------- -------
Total stockholders' equity 8,431 13,337
------- -------
$29,967 $28,993
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years ended October 31,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Product $ 14,181 $ 19,073 $ 16,115
Services 25,940 17,268 15,979
Development 514 1,806 1,031
------------ ------------ -------------
Total revenues 40,635 38,147 33,125
------------ ------------ -------------
COST OF REVENUES:
Product 3,245 4,461 3,022
Services 15,449 7,437 4,967
Development 369 1,263 632
------------ ------------ -------------
Total cost of revenues 19,063 13,161 8,621
------------ ------------ -------------
GROSS MARGIN 21,572 24,986 24,504
------------ ------------ -------------
OPERATING EXPENSES:
Research and development 12,165 10,847 9,246
Selling and marketing 13,739 13,039 12,264
General and administrative 3,993 3,929 3,119
Restructuring charge --- --- (211)
------------ ------------ -------------
Total operating expenses 29,897 27,815 24,418
------------ ------------ -------------
INCOME (LOSS) FROM OPERATIONS (8,325) (2,829) 86
------------ ------------ -------------
Interest income 156 425 588
Interest expense (294) (81) (10)
------------ ------------ -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (8,463) (2,485) 664
PROVISION FOR INCOME TAXES 301 974 523
------------ ------------ -------------
NET INCOME (LOSS) (8,764) (3,459) 141
PREFERRED STOCK DIVIDENDS (305) --- ---
------------ ------------ -------------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCK $ (9,069) $ (3,459) $ 141
============ ============ =============
NET INCOME (LOSS) PER COMMON SHARE $ (1.13) $ (0.44) $ 0.02
============ ============ =============
SHARES USED IN
PER SHARE CALCULATIONS 8,045 7,804 7,912
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
(In thousands) Shares Amount Shares Amount Paid-in Capital
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 31, 1994 --- $ --- 7,429 $ 74 $ 21,744
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of stock pursuant to employee
stock purchase plan --- --- 136 1 708
Exercise of common stock options --- --- 131 2 885
Net income --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 31, 1995 --- --- 7,696 77 23,337
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of stock pursuant to employee
stock purchase plan --- --- 145 1 934
Exercise of common stock options --- --- 87 1 523
Translation adjustment --- --- --- --- ---
Net loss --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 31, 1996 --- --- 7,928 79 24,794
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of Series A convertible preferred stock,
net of issuance costs of $201 3 --- --- --- 2,799
Issuance of common stock in connection with
the acquisition of Fast Associates Pte. Ltd. --- --- 195 2 774
Issuance of stock pursuant to employee
stock purchase plan --- --- 166 2 527
Exercise of common stock options --- --- 1 --- 3
Issuance of warrants to bank to purchase common stock --- --- --- --- 109
Preferred stock dividends --- --- --- --- ---
Accretion of preferred stock discount --- --- --- --- 137
Accretion of fair value of warrants --- --- --- --- 118
Translation adjustment --- --- --- --- ---
Net loss --- --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 31, 1997 3 $ --- 8,290 $ 83 $ 29,261
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Cumulative
Accumulated Translation
Deficit Adjustment Total
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 31, 1994 $ (8,172) $ --- $ 13,646
- ----------------------------------------------------------------------------------------------------------------------
Issuance of stock pursuant to employee
stock purchase plan --- --- 709
Exercise of common stock options --- --- 887
Net income 141 --- 141
- ----------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 31, 1995 (8,031) --- 15,383
- ----------------------------------------------------------------------------------------------------------------------
Issuance of stock pursuant to employee
stock purchase plan --- --- 935
Exercise of common stock options --- --- 524
Translation adjustment --- (46) (46)
Net loss (3,459) --- (3,459)
- ----------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 31, 1996 (11,490) (46) 13,337
- ----------------------------------------------------------------------------------------------------------------------
Issuance of Series A convertible preferred stock,
net of issuance costs of $201 --- --- 2,799
Issuance of common stock in connection with
the acquisition of Fast Associates Pte. Ltd. --- --- 776
Issuance of stock pursuant to employee
stock purchase plan --- --- 529
Exercise of common stock options --- --- 3
Issuance of warrants to purchase common stock --- --- 109
Preferred stock dividends (50) --- (50)
Accretion of preferred stock discount (137) --- ---
Accretion of fair value of warrants (118) --- ---
Translation adjustment --- (308) (308)
Net loss (8,764) --- (8,764)
- ----------------------------------------------------------------------------------------------------------------------
BALANCES, OCTOBER 31, 1997 $ (20,559) $ (354) $ 8,431
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
50
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended October 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
- --------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (8,764) $ (3,459) $ 141
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization 4,009 3,083 3,332
Provision for doubtful accounts receivable --- 55 324
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (1,875) (1,616) (2,721)
Other assets 543 (589) 190
Accounts payable 2,473 2,314 591
Deferred revenue 702 (61) 138
Other liabilities and accrued expenses (203) (524) (293)
-------- -------- --------
Total adjustments 5,649 2,662 1,561
-------- -------- --------
Net cash (used for) provided by operating activities (3,115) (797) 1,702
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,072) (3,722) (1,543)
Capitalized software development costs (1,324) (886) (1,460)
Purchases of short-term investments --- (2,000) (1,708)
Sales of short-term investments 1,000 2,478 3,730
Cash paid for acquisition of the Taiwan operations of SDI --- (870) ---
-------- -------- --------
Net cash used for investing activities (1,396) (5,000) (981)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable 3,051 2,000 ---
Principal payments on note payable (1,792) (208) ---
Principal payments on capital leases --- --- (313)
Net proceeds from issuance of preferred stock 2,799 --- ---
Proceeds from issuance of common stock and exercise of options 532 1,459 1,596
-------- -------- --------
Net cash provided by financing activities 4,590 3,251 1,283
-------- -------- --------
Effect of exchange rate changes on cash (308) (46) ---
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (229) (2,592) 2,004
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,094 10,686 8,682
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,865 $ 8,094 $ 10,686
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 230 $ 81 $ 10
======== ======== ========
Income taxes $ 175 $ 43 $ 13
======== ======== ========
Non-cash financing activities:
Common stock issued for the acquisition of Fast
Associates Pte. Ltd. $ 776 $ --- $ ---
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE 1: NATURE OF OPERATIONS AND ORGANIZATION
Consilium, Inc. was incorporated in October 1978 and designs and licenses
integrated manufacturing execution systems (MES) software for the manufacturing
plant floor. The Company also provides consulting, implementation and training
services for its software products as well as system integration services for
plant automation. The Company markets its products worldwide to the
semiconductor, electronics, healthcare products and process industries.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Preparation
- ----------------------------------------------------
The consolidated financial statements include the accounts of Consilium,
Inc. and its wholly owned subsidiaries after elimination of intercompany
accounts and transactions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Foreign Currencies
- ------------------
The functional currency of the Company's wholly owned German subsidiary is
the local currency. Gains and losses resulting from the translation of the
subsidiary's financial statements are reported as a separate component of
stockholders' equity. The functional currency of the Company's other wholly
owned foreign subsidiaries is the U.S. dollar. Accordingly, translation
gains and losses, which have not been material, are reflected in the
accompanying statements of operations. Exchange gains and losses arising from
transactions denominated in foreign currencies have not been material to date.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Short-term Investments
- ----------------------
At October 31, 1996, the Company's investments were classified as
available-for-sale and were recorded at fair market value, which approximated
amortized cost and, as such, gross unrealized holding gains and losses were not
material. The fair value of the investments was determined based on quoted
market prices at the reporting dates for those instruments. Realized gains and
losses have not been material to date. The carrying value of the Company's
available for sale investments by major security type consisted of the following
as of October 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Description 1996
---------------------------- ------
<S> <C>
Preferred Auction Securities $1,000
Commercial Paper 1,000
Municipal Bonds 3,500
------
$5,500
======
</TABLE>
Approximately $4,500,000 of the total investments in debt securities as of
October 31, 1996 are included in cash and cash equivalents. The remaining
balance is classified as short-term investments. The Company did not have any
investments in debt and equity securities as of October 31, 1997.
52
<PAGE>
Depreciation and Amortization
- -----------------------------
Property and equipment are stated at cost and depreciated on a straight-
line basis over their estimated useful lives of three to five years. Leasehold
improvements are amortized over their estimated useful lives of five years or
the remaining term of the related lease, if shorter.
Goodwill
- --------
Goodwill arising from the Company's acquisitions (see Note 3) is amortized
on a straight-line basis over four to five years. Accumulated amortization was
$496,000 and $65,000 at October 31, 1997 and 1996, respectively.
Software Development Costs
- --------------------------
The Company capitalizes eligible computer software development costs upon
establishment of technological feasibility. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain external
factors including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amortization of capitalized software development costs begins when
the products are available for general release to customers and is generally
computed on license revenues recognized during the year in relation to total
anticipated license revenues; however, the annual amortization expense, at a
minimum, will not be less than 20% of the capitalized costs.
Revenue Recognition and Deferred Revenue
- ----------------------------------------
Product revenues consist principally of revenues earned under software
license agreements and are generally recognized when the software has been
shipped, the Company has a right to invoice the customer, collection of the
receivable is probable and there are no significant obligations remaining. If
significant post-delivery obligations exist, the product revenue is deferred
until no significant obligations remain. With respect to sales made through
foreign distributors, revenue is recognized either upon verification of receipt
of a firm purchase order between the distributor and the end user or upon
installation of the software at the end user's facility.
Service revenue primarily consists of software maintenance revenue and
revenue earned for software installation, systems integration and customer
training. Software maintenance revenue consists of fees for providing
unspecified upgrades, user documentation and technical support for software
products. Maintenance revenue is recognized ratably over the term of the
maintenance period. All other service revenue is either recognized as the
services are performed or on the percentage-of-completion method of accounting,
depending upon the nature of the project. If a transaction includes both license
and service elements, license revenue is recognized upon shipment of the
software, provided services do not include significant customization or
modification of the base product and payment terms for the license fee are not
subject to acceptance criteria for the service element, as well as having met
all other product revenue recognition criteria. If these criteria are not met,
the license and service fees are both recognized on the percentage-of-completion
method of accounting.
Deferred revenue consists primarily of the unrecognized portion of revenue
under maintenance and support contracts and systems integration projects and
advance payment of software development fees and license fees.
The Company will adopt Statement of Position (SOP) 97-2, "Software Revenue
Recognition" in the first quarter of fiscal 1998. The Company expects that the
adoption of SOP 97-2 will not have a significant impact on its financial
position or results of operations.
53
<PAGE>
Concentrations of Credit Risk
- -----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit cash
investments to short-term, low risk investments. With respect to trade
receivables, the Company generally does not require collateral as the majority
of the Company's customers are large, well established companies in the
semiconductor, electronics and healthcare products and process industries. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
Stock-based Compensation
- ------------------------
Effective November 1, 1996, the Company adopted the disclosure provisions
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." In accordance with the provisions of SFAS No. 123,
the Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option and employee stock purchase plans.
Computation of Net Income (Loss) per Common Share
- -------------------------------------------------
Net income per common share is computed by dividing net income by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of the
dilutive effect of stock options as computed using the treasury stock method.
Net loss per common share is computed by dividing net loss after deduction of
preferred stock dividends by the weighted average number of common shares
outstanding during the period. Common equivalent shares have not been included
in the calculation of net loss per share as their inclusion would be
antidilutive.
Reclassifications
- -----------------
Certain reclassifications were made to prior year amounts to conform to the
1997 presentation. These reclassifications did not change the previously
reported net income (loss), total assets or total cash flows of the Company for
prior years.
Recent Accounting Pronouncements
- --------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 will become effective in the
first quarter of the Company's fiscal year ending October 31, 1998. Upon
adoption, all prior-period earnings per share data presented will be restated to
conform with SFAS No. 128. SFAS No. 128 requires companies to compute net
earnings per share under two different methods, basic and diluted, and to
disclose the methodology used for the calculation. Basic and diluted net income
(loss) per share under SFAS No. 128 for fiscal 1997, 1996 and 1995 would not be
different from the net income (loss) per share amounts as reported in the
Company's consolidated statements of operations.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of information
about Capital Structure," which requires companies to disclose certain
information about their capital structure. SFAS No. 129 will become effective in
the first quarter of the Company's fiscal year ending October 31, 1998 and its
adoption is not expected to have a material effect on the financial statements
of the Company.
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. SFAS
No. 130 will become effective for the Company's fiscal year ending October 31,
1999. The Company anticipates additional disclosure requirements on
comprehensive income upon adoption of SFAS No. 130.
54
<PAGE>
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
disclosure of segment information. SFAS No. 131 will become effective for the
Company's fiscal year ending October 31, 1999. The Company anticipates
additional disclosure requirements on segment information upon adoption of SFAS
No. 131.
NOTE 3: ACQUISITIONS
On August 1, 1997, the Company acquired certain assets of Fast Associates
Pte. Ltd. (FAST), a Singapore corporation specializing in semiconductor factory
automation. The Company purchased two existing semiconductor factory automation
contracts, certain tangible and intangible assets and assumed certain
liabilities of FAST. The purchase price consisted of an initial 120,000 shares
of Common Stock valued at $476,000 and an additional guaranteed amount of
$1,500,000 to be paid in five equal quarterly installments of $300,000 each.
Such guaranteed amounts may be payable in cash or settled by issuing shares of
Common Stock with a fair market value equal to the quarterly installment amount,
at the option of the Company. As of October 31, 1997, the first installment of
$300,000 was settled by issuing 75,586 shares of Common Stock. The four
remaining payments will be paid at intervals of ninety days, beginning
November 1, 1997. As of October 31, 1997, the Company has recorded in Accrued
Liabilities a liability of $1,200,000 for the remaining four installments
related to this acquisition. The acquisition was accounted for as a purchase
and, accordingly, the results of FAST from the date of acquisition forward
have been recorded in the Company's consolidated financial statements. The
excess of the purchase price over the estimated fair value of the net assets
acquired of $1,821,000 has been recorded as goodwill and will be amortized on
a straight-line basis over four years.
In addition, the Company may be obligated to pay future contingent
performance-based consideration equal to specified percentages of systems
integration and related services net operating margin, and net product license
and maintenance revenue related to FAST recognized by the Company in certain
countries in Asia for a period of three years ending on August 1, 2000, as
follows: 45% of systems integration/services net operating margin, 10% of
product license net revenue, and 2.5% of product maintenance net revenue. Such
payments may also be made in cash or the Common Stock, at the option of the
Company, and will be accounted for as compensation and expensed in the periods
such amounts are earned.
The following unaudited pro forma information shows the results of
operations for the fiscal years ended October 31, 1997 and 1996 as if the FAST
acquisition had occurred at the beginning of each period presented. The
results are not necessarily indicative of what would have occurred had the
acquisition actually been made at the beginning of the period or of future
operations of the combined companies. The pro forma results for fiscal 1996
combine the Company's results for the year ended October 31, 1996 with the
results of FAST for the year ended December 31, 1996. The pro forma results
for fiscal 1997 combine the Company's results for the year ended October 31,
1997 with the results of FAST for the period from January 1, 1997 through the
date of acquisition. The following unaudited pro forma results include the
straight-line amortization of goodwill over a period of four years (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Revenues $ 41,195 $ 42,912
Net loss $ (9,148) $ ( 2,485)
Net loss per share $ (1.11) $ (0.31)
Weighted average common shares outstanding 8,223 7,919
</TABLE>
In July 1996, the Company acquired the Taiwan operations of Systematic
Designs International, Inc. (SDI), a privately-held Washington corporation
specializing in the development of factory automation products and systems
integration services for the semiconductor industry. The Company purchased two
existing semiconductor plant automation contracts and certain tangible and
intangible assets and assumed certain liabilities of SDI. The total purchase
price of the acquisition was $1,305,000 paid in cash. Under the terms of the
original acquisition agreement, the Company was required to make additional
performance-based payments, in cash or cash and stock, over a two-year period
ending on July 8, 1998. To the extent such performance-based payments were made,
such amounts were recorded as an adjustment of the purchase price, and which
increased goodwill. As of October 31, 1997 and 1996, performance-based payments
of approximately $462,000 and $105,000 had been earned. Subsequent to October
31, 1997, the Company renegotiated the major terms of the agreement with SDI,
subject to the execution of definitive agreements, such that no additional
performance-based payment would be paid. The acquisition was accounted for as a
purchase
55
<PAGE>
and, accordingly, the results of the Taiwan operations of SDI since the date of
acquisition have been recorded in the Company's consolidated financial
statements. The excess of the purchase price over the estimated fair value of
the net assets acquired ($1,767,000 at October 31, 1997) has been recorded as
goodwill and is being amortized on a straight-line bases over five years. The
excess of the purchase price over the estimated fair value of the net assets
acquired ($1,767,000 at October 31, 1997) has been recorded as goodwill and is
being amortized as a straight-line basis over five years. Comparative pro forma
information has not been presented because the Taiwan operations of SDI are not
material to the Company's consolidated financial statements.
NOTE 4: BALANCE SHEET DETAIL
Property and Equipment:
<TABLE>
<CAPTION>
October 31,
---------------------------------
(In thousands) 1997 1996
---------- ----------
<S> <C> <C>
Computer equipment $ 7,594 $ 8,475
Office equipment 1,490 1,527
Purchased software 2,138 1,906
Leasehold improvements 1,062 1,000
--------- ----------
12,284 12,908
Less: accumulated depreciation and amortization (7,972) (8,081)
---------- ----------
$ 4,312 $ 4,827
========== ==========
</TABLE>
Property and equipment at October 31, 1997 and 1996 includes computer
equipment acquired under capital leases with a cost of $1,131,000. Such
equipment was fully depreciated as of October 31, 1997 and 1996.
Software Development Costs:
<TABLE>
<CAPTION>
October 31
(In thousands) 1997 1996
--------- ---------
<S> <C> <C>
Software development costs $ 17,385 $ 16,061
Less: accumulated amortization (14,697) (12,967)
--------- ---------
$ 2,688 $ 3,094
========= =========
</TABLE>
Other Current Liabilities and Accrued Expenses:
<TABLE>
<CAPTION>
October 31,
----------------------------------
(In thousands) 1997 1996
------------ ------------
<S> <C> <C>
Accrued compensation $ 1,547 $ 1,567
Accrued income taxes 817 955
Other 1,435 1,388
------------ ------------
$ 3,799 $ 3,910
============ ============
</TABLE>
NOTE 5: LINE OF CREDIT/NOTE PAYABLE
In April 1997, the Company entered into a revolving line of credit
agreement (the "Line of Credit Agreement") under which it can borrow up to
$5,000,000, based on eligible accounts receivable. The revolving line of credit
is secured by substantially all of the Company's assets, bears interest at the
bank's prime rate per annum (8.5% at October 31, 1997) and expires on March 15,
1998. At October 31, 1997, $3,051,000 was outstanding under the revolving line
of credit and $1,949,000 was available for future borrowings subject to
compliance with financial covenants and borrowing base limitations. The Line of
Credit Agreement requires the Company to maintain certain financial covenants.
The Company was in default under its credit facility at October 31, 1997 as a
result of failing to meet financial covenants relating to minimum tangible net
worth, maximum total liabilities to tangible net worth and amount of the loss
for the fiscal year. The Company has not yet obtained a waiver of the default
from its lender. The Company is currently negotiating with its lender regarding
a new credit facility to replace the existing facility. Although the Company
believes that it will obtain a waiver and negotiate a new credit facility, there
can be no assurance that the Company will be able to obtain either the waiver or
a credit facility on terms acceptable to the Company. Additionally, while the
Company is currently negotiating with the bank an extension to the expiration
date of the Line of Credit Agreement, there can be no assurance that the Company
will be successful in negotiating such an extension. In connection with this
line of credit, the Company granted the bank a warrant to purchase 70,000 shares
of the Common Stock at an exercise price of $3.98 per share. The warrant
agreement with Imperial includes antidilution provisions. However, in no event
shall the number of shares issued under this warrant exceed 100,000, nor shall
the exercise price be less than $3.00 per share. Such warrants are fully
exercisable and expire in April 2002. The bank has certain registration rights
with respect to the underlying Common Stock.
56
<PAGE>
In April 1996, the Company signed a $2.0 million promissory note, payable
to a bank in equal monthly installments of approximately $41,667 plus interest.
This note was secured by certain assets of the Company. All amounts due under
the promissory note were repaid in April 1997 when the Company obtained the
above mentioned Line of Credit.
NOTE 6: COMMITMENTS AND CONTINGENCIES
The Company leases its headquarters, research and development facility,
sales offices and certain equipment under noncancelable operating leases. The
major facility leases expire at various dates from 1997 through 2009.
Future minimum lease payments under operating leases at October 31, 1997,
are as follows:
<TABLE>
<CAPTION>
Year Ending October 31,
----------------------------------
(In thousands)
<S> <C>
1998 $ 818
1999 704
2000 543
2001 555
2002 584
Thereafter 1,041
------
Total minimum lease payments $4,245
======
</TABLE>
Rental expense was approximately $1,170,000, $1,256,000, and $1,245,000 for
the years ended October 31, 1997, 1996 and 1995, respectively.
On December 15, 1995, the Company entered into an agreement with Electronic
Data Systems Corporation to out-source the Company's computer data center and
telecommunication services. The contract has a 10-year term beginning December
1995. In the event the Company decides to terminate the contract before the
expiration of the term, the Company will be required to pay a termination fee
which declines over the term of the agreement.
Future minimum obligations under this contract are as follows:
<TABLE>
<CAPTION>
Year Ending October 31,
(In thousands)
Service Termination
Obligation Fee
---------- -----------
<S> <C> <C>
1998 $ 2,947 $1,098
1999 2,998 968
2000 3,085 738
2001 3,177 608
2002 3,273 378
Thereafter 10,647 668
-------
Total service obligations $26,127
=======
</TABLE>
In the ordinary course of business, legal actions and claims pending have
been filed against the Company. In the opinion of management, the ultimate
liability, if any, with respect to these matters will not materially affect the
results of operations or financial position of the Company.
57
<PAGE>
NOTE 7: PREFERRED STOCK:
In August 1997, the Company sold 3,000 shares of Series A Preferred Stock
to three private institutional investors at a price of $1,000 per share.
Proceeds from the sales were approximately $ 2,799,000, net of cash offering
costs of approximately $201,000. Additionally, in connection with the preferred
stock issuance, the Company granted the placement agents warrants to purchase
150,000 shares of common stock at a price of $6.33 per share. Such warrants are
immediately exercisable and expire in 2002.
The rights, preferences and privileges of the Series A Preferred
Stockholders are as follows:
Dividends. The holders of Series A Preferred Stock are entitled to
cumulative dividends of $80 per annum per share for the period that such share
of the Series A Preferred Stock is outstanding. Dividends on shares of Series A
Preferred Stock shall be fully cumulative and shall accrue without regard to
whether or not such dividends have been declared and whether or not there are
any funds available for the payment of dividends. If dividends are declared on
the common stock, the holders of Series A Preferred Stock are each entitled to
receive the dividends that they would have received had their preferred stock
been converted into common stock. Dividends on the shares of Series A Preferred
Stock shall be payable in cash, common stock or any combination thereof, as
determined by the Company. For the year ended October 31, 1997, the Company
accrued $50,000 of preferred stock dividends.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, the holders of Series A Preferred Stock are entitled to receive
$1,000 per share plus any declared but unpaid dividends, prior and in preference
to any distribution to the holders of common stock.
Consolidation and Merger. If the Company entered into any consolidation,
merger, combination or other transaction in which the shares of common stock are
exchanged for or changed into other stock or securities, cash and/or other
property, the holders of Series A Preferred Stock are each entitled to acquire
the kind and amount of shares of stock, securities, cash/or other property
receivable upon such consolidation, merger, combination or other transaction as
if their convertible preferred stock had been converted into common stock
immediately prior to such transaction.
Conversion and Registration Rights. Each share of Series A Preferred Stock
is convertible, without the payment of any further consideration, into shares of
common stock of the Company, as follows:
A. Six months after August 19, 1997 (the "Closing Date"), provided that
the closing bid price of the Common Stock of the Company as reported
on the Nasdaq National Stock Market ("Nasdaq") on the date of
conversion (the "Closing Bid Price") is $5.00 or greater, each
Purchaser may convert each of its Preferred Shares into a number of
shares of Common Stock of the Company equal to (a) $1,000 divided by
(b) the average closing bid price of the Common Stock of the Company
as reported on Nasdaq for the five consecutive trading days prior to
the date of conversion, discounted by 15%, but in any case no less
than $1.95 and no greater than (i) the difference between the Closing
Bid Price and $1.95, plus (ii) the Closing Bid Price; provided,
however, that the Company shall not be obligated, at any time prior to
nine months after the Closing Date, to convert, in the aggregate, more
than 25% of the total Preferred Shares.
B. Nine months after the Closing Date, provided that the Closing Bid
Price is $5.00 or greater, each Purchaser may convert each of its
Preferred Shares into a number of shares of Common Stock of the
Company equal to (a) $1,000 divided by (b) the average closing bid
price of the Common Stock of the Company as reported on Nasdaq for the
five consecutive trading days prior to the date of conversion,
discounted by 17%, but in any case no less than $1.95 and no greater
than (i) the difference between the Closing Bid Price and $1.95 plus
(ii) the Closing Bid Price; provided, however, that the Company shall
not be obligated, at any time prior to one year after the Closing
Date, to convert, in the aggregate, more than 50% of the total
Preferred Shares.
58
<PAGE>
C. One year after the Closing Date, each Purchaser may convert each of
its Preferred Shares into a number of shares of Common Stock of the
Company equal to (a) $1,000 divided by (b) the average closing bid
price of the Common Stock of the Company as reported on Nasdaq for the
five consecutive trading days prior to the date of conversion,
discounted by 18%; but in any case no less than $1.95 and no greater
than (i) the difference between the Closing Bid Price and $1.95 plus
(ii) the Closing Bid Price.
The Preferred Stock cannot be converted for six months following the
Closing Date and will automatically convert, if not earlier converted by the
holders, no later than 24 months following the Closing Date (August 19, 1997).
The holders of Series A Preferred Stock have certain registration rights with
respect to the underlying common stock. In the event the registration statement
to be filed by the Company is not declared effective by the Commission within
one hundred eighty (180) days from the Closing Date, then the Company will pay
Purchasers two (2%) percent of the principal amount per month thereafter in
cash, stock, or cash and stock at the Company's option (the first month shall be
pro rated on a weekly basis) until the Company procures registration of the
Convertible Preferred Registrable Securities.
The Preferred Stock contains certain conversion discount features as
discussed above. As of October 31, 1997, the Company has accreted on a ratable
basis $137,000 of the total maximum discount of $658,000 as additional dividends
in the accompanying consolidated financial statements. The remaining discount
will be accrued as additional dividends in fiscal year 1998. The total maximum
discount of 18% assumes the Preferred Stock would not be converted prior to one
year after the Closing.
NOTE 8: COMMON STOCK
Employee Stock Purchase Plan
- ----------------------------
Under the Company's 1989 Employee Stock Purchase Plan (the "Purchase
Plan"), 880,000 shares of Common Stock of the Company have been reserved for
issuance. Under the Purchase Plan, employees may purchase common stock through
payroll deductions at 85% of the lesser of the fair market value on the first or
last day of six-month offering periods. At October 31, 1997, there are no
remaining shares available for purchase under the Purchase Plan.
Employee Stock Option Plans
- ---------------------------
The 1983 and 1993 Employee Stock Option Plans (the "1983 and 1993 Plans")
were terminated in December 1996 and there are no further options available for
issuance under these plans. Both qualified and non-qualified options have been
granted to employees at prices not less than the fair market value at date of
grant under the 1983 and 1993 Plans. All options granted under the 1983 and 1993
Plans are exercisable immediately and generally expire five years from date of
grant. Options generally vest over four years and, if exercised prior to
vesting, are subject to repurchase at the original purchase price. At October
31, 1997, a total of 280,112 options were vested under the 1983 and 1993 Plans.
In December 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"). The Company has authorized 390,000 shares of common stock for issuance
under the 1996 Plan. In addition, all authorized, but unissued, canceled or
reacquired shares under the 1983 and 1993 Plans will be available for issuance
under the 1996 Plan. Under the terms of the 1996 Plan, the Company may grant
stock incentive stock options or non-statutory stock options to employees,
officers, directors and consultants at prices not less than fair market value at
date of grant. Options granted under the 1996 Plan generally become exercisable
at a rate of one-fourth of the shares subject to the option at the end of the
first year and 1/48 of the shares subject to the option at the end of each
calendar month thereafter. The maximum term of a stock option under the 1996
Plan is ten years, but if the optionee at the time of grant has voting power
over more than 10% of the Company's outstanding capital stock, the maximum term
is five years. As of October 31, 1997, a total of 156,895 options were vested
under the 1996 Plan.
In March 1997, upon approval by the Company's Board of Directors, the
Company repriced 873,642 options originally issued at prices ranging from $6.00
to $12.141. The options were repriced at the then current market value of the
Common Stock of $3.75.
59
<PAGE>
Option activity under the 1983, 1993 and 1996 Employee Stock Option Plans
was as follows:
(In thousands, except price per share)
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------------
Weighted
Number Average
Options of Exercise
Available Options Price Per Share Price
------------ --------------------- -------------------------- ----------
<S> <C> <C> <C> <C>
Balance at October 31,1994 643 1,098 $4.500 - $15.000 $6.650
Granted (438) 438 6.375 - 12.140 7.977
Exercised - (131) 4.500 - 8.750 6.792
Canceled 215 (215) 4.500 - 12.500 7.464
------- -------- -------- ------- -------
Balance at October 31, 1995 420 1,190 4.500 - 15.000 6.980
Additional shares authorized 400 - - - -
Granted (725) 725 6.000 12.000 7.215
Exercised - (87) 4.500 8.750 6.012
Canceled 248 (248) 4.500 8.750 6.912
------- -------- -------- ------- -------
Balance at October 31, 1996 343 1,580 4.500 15.000 7.136
Additional shares authorized 425(*) - - - -
Granted (1,807) 1,807 2.563 6.500 3.747
Exercised - (1) 3.750 3.750 3.750
Canceled 1,403 (1,403) 2.625 15.000 6.851
------- -------- -------- ------- -------
Balance at October 31,1997 364 1,983 $2.563 $ 8.750 $4.309
======= ======== ======== ======= =======
</TABLE>
- --------------
* Includes 35,000 shares issued outside of the Plan.
In addition, the Company has a separate nonqualified stock option agreement
with an employee for 103,000 shares at exercise prices ranging from $2.625 to
$6.50 per share. As of October 31, 1997, a total of 17,875 shares were vested
under the terms of the option agreement.
Outside Director Stock Option Plan: In 1990, the Company adopted a stock
-----------------------------------
option plan under which options for a total of up to 100,000 shares of Common
Stock may be granted to non-executive directors of the Company (the "Outside
Director Plan"). The Outside Director Plan provides for the granting of
nonqualified stock options at the average of the high and low prices on the date
of grant. Options expire 10 years after the date of grant. At October 31,
1997, a total of 92,500 options had been granted at exercise prices ranging
between $4.00 and $11.75 per share, of which none were exercised. In addition,
the Company has separate option agreements with non-executive directors which
totaled 7,500 shares at an exercise price of $6.25 per share. As of October 31,
1997, a total of 43,750 shares were vested under the terms of these option
agreements.
Stock-Based Compensation Plans: The Company applies APB Opinion No. 25
------------------------------
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for the Purchase Plan, the 1983 and 1993 Plans, the 1996 Plan and the
Outside Director Plan (the "Plans") described above. Accordingly, no
compensation cost has been recognized for the Plans. If compensation cost for
the Plans had been determined consistent with SFAS No. 123 "Accounting for
Stock-Based Compensation," the Company's net loss and net loss per share would
have been adjusted to the following pro forma amounts (in thousands, except per
share amounts):
60
<PAGE>
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Net loss attributable to common stock:
As reported $ (9,069) $(3,459)
Pro forma $(10,777) $(3,859)
Net loss per common share:
As reported $ (1.13) $ (0.44)
Pro forma $ (1.34) $ (0.49)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for fiscal years 1997 and 1996: risk-free interest rates in the
range of 5.52% to 6.49%, expected dividend yields of zero; expected volatility
factor of the market price of the Common Stock of 75.4%; and expected lives of
the option of one year and 0.57 years after vest date, respectively. Because the
method of accounting prescribed by SFAS No. 123 has not been applied to options
granted prior to November 1, 1995, and because the Black-Scholes option
valuation model was developed for traded options and requires the input of
subjective assumptions, the resulting pro forma effect of compensation cost may
not be representative of that to be expected in future years.
The following table summarizes the stock options outstanding as of
October 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -----------------------------------
Weighted Average Weighted Weighted
Number remaining Average Number Average
Average Range of Outstanding Contractual Life Exercise Exercisable Exercise
Exercise Prices at 10/31/97 (in years) Price at 10/31/97 Price
- ---------------------- ----------------- ------------------------ -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$2.563 - $ 3.500 564,600 9.59 $2.744 27,083 $2.625
$3.750 1,039,004 9.40 $3.750 151,896 $3.750
$4.000 - $ 8.500 547,169 3.14 $6.678 496,335 $6.793
$8.750 - $ 11.750 34,958 7.75 $9.126 12,458 $9.465
------------ ------------ ------------ ------------------ --------------
$2.563 - $ 11.750 2,185,731 7.86 $4.309 687,772 $6.005
============ ==================
</TABLE>
Warrants
- --------
In connection with the Line of Credit Agreement (See Note 5), the
Company granted the bank a warrant to purchase 70,000 shares of the Common Stock
at an exercise price of $3.98 per share. The warrant agreement with Imperial
includes antidilution provisions. However, in no event shall the number of
shares issued under this warrant exceed 100,000, nor shall the exercise price be
less than $3.00 per share. Such warrant is fully exercisable and expires in
April 2002. The fair value of the warrant was estimated to be approximately
$109,000 on the date of grant using the Black-Scholes option pricing model with
the following assumptions: risk-free interest rate of 6.5%; expected dividends
yields of zero; expected volatility factor of the market price of the Common
Stock of 75%; and expected life of the warrant of 2 years.
The Company is amortizing the fair value of the warrants of $109,000
over the term of the Line of Credit of one year as additional interest expense.
For the fiscal year ended October 31, 1997, $65,000 had been amortized and is
reflected in interest expense in the accompanying statement of operations.
In connection with the issuance of Series A Convertible Preferred Stock
(See Note 7), the Company granted the placement agents warrants to purchase an
aggregate of 150,000 shares of the Common Stock at an exercise price of $6.33.
The warrants are fully exercisable and expire in August 2002. The fair value of
the warrants was estimated to be approximately $282,000 on the date of grant
using the Black-Scholes option pricing
61
<PAGE>
model with the following assumptions: risk-free interest rate of 6.5%; expected
dividends yields of zero; expected volatility factor of the market price of the
Common Stock of 75%; and expected life of the warrants of 2 years.
The fair value of the warrants issued to the placement agents is being
accreted as additional Preferred Stock dividends over the period beginning with
the issuance of the warrants to the earliest date of conversion of the Preferred
Stock. As of October 31, 1997, the Company had accreted $118,000 of the total
fair value of the warrants of $282,000 as additional dividends in the
accompanying consolidated financial statements. The remaining discount will be
accreted as additional dividends in the first two quarters of fiscal year 1998.
Shares Reserved For Future Issuance
- -----------------------------------
As of October 31, 1997, the Company has reserved the following shares
of authorized but unissued common stock for future issuance:
<TABLE>
<S> <C>
Series A Preferred Stock 1,595,639
Common Stock Warrants 220,000
1983 and 1993 Stock Option Plans 384,127
1996 Stock Option Plan 1,963,434
1990 Directors Stock Option Plan 100,000
Nonqualified stock options 110,500
---------------
4,373,700
===============
</TABLE>
NOTE 9: INCOME TAXES
The provision for income taxes consists entirely of currently payable
foreign withholding and income taxes. The reconciliation between the provision
for income taxes calculated at the effective tax rate and at the statutory
federal income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
--------------------------------
1997 1996 1995
---------- -------- ---------
<S> <C> <C> <C>
Federal income tax statutory rate (35.0%) (35.0%) 34.0%
Foreign taxes 3.6% 39.2% 78.8%
Increase (decrease) in valuation allowance 35.0% 35.0% (34.0%)
---------- -------- ---------
Effective tax rate 3.6% 39.2% 78.8%
========== ======== =========
</TABLE>
The major components of the deferred tax asset and liability are as
follows:
<TABLE>
<CAPTION>
(In thousands)
October 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Current deferred tax asset:
Reserves not currently deductible $ 164 $ 328
Accrued expenses 518 651
Deferred revenue -- 156
Valuation allowance (682) (1,135)
--------- ---------
Net current deferred tax asset $ -- $ --
========= =========
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Non-current deferred tax asset (liability):
- -------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 8,957 $ 4,426
Tax credit carryforwards 7,271 6,416
Depreciation 262 (165)
Amortization (1,049) (1,229)
Other (671) (479)
Valuation allowance (14,770) (8,969)
---------- ---------
Net non-current deferred tax asset $ -- $ --
========== =========
</TABLE>
The Company has recorded a valuation allowance against its net deferred
tax assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on a quarterly basis the recoverability of the deferred tax
assets and the level of the valuation allowance. The valuation allowance will be
reduced at such time that it is determined that it is more likely than not that
the deferred tax assets are realizable.
At October 31, 1997, the Company has federal net operating loss
carryforwards of approximately $23,523,000 and state net operating loss
carryforwards of approximately $7,786,000. In addition, the Company has
approximately $3,469,000 and $1,120,189 in general business credit carryforwards
for federal tax and state tax reporting purposes, respectively, as well as
approximately $2,682,000 of foreign tax credits. These carryforwards and credits
expire between 1998 and 2012 for both federal and state purposes, if not used
before such time to offset future taxable income or taxes payable.
NOTE 10: PRODUCT LINE, EXPORT SALES AND SIGNIFICANT CUSTOMER INFORMATION
The Company designs, markets and sells two distinct integrated
manufacturing execution systems (MES) software product lines, aimed at different
manufacturing industries. The Company's WorkStream DFS (Distributed Factory
System) product line is targeted at manufacturers who produce their products in
discrete lots or batches, primarily those in the semiconductor and electronics
industries. The Company's FlowStream product line is targeted for industries
that employ batch process manufacturing, primarily those in the healthcare
product and process industries. Total revenues for each product line for the
most recent three years are as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------------------
(In thousands) 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
WorkStream DFS $ 35,456 $ 31,300 $ 25,249
FlowStream 5,179 6,847 7,876
---------- ---------- ----------
Total revenues $ 40,635 $ 38,147 $ 33,125
========== ========== ==========
</TABLE>
The Company markets and services its products in the United States and
foreign countries through its direct sales organization and through distribution
channels. The Company's foreign operations primarily consist of sales support
and services. Total export sales were as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------------------
(In thousands) 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Asia/Pacific Rim $ 12,930 $ 11,060 $ 5,147
Europe 7,964 6,231 6,059
---------- ---------- ----------
Total export sales $ 20,894 $ 17,291 $ 11,206
========== ========== ==========
</TABLE>
63
<PAGE>
No customer accounted for more than 10% of total revenues for fiscal
years 1997, 1996 and 1995. During fiscal 1997, the percentage of total revenues
derived from the Company's ten largest customers was approximately 48% compared
with 42% in fiscal 1996 and 42% in fiscal 1995.
64
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On July 12, 1996, Coopers & Lybrand L.L.P. ("Coopers"), the independent
accountant engaged to audit the financial statements of the Company during the
Company's fiscal year ended October 31, 1995 and prior thereto, resigned. The
reports of Coopers for the fiscal year ended October 31, 1995, including the
restatement reported in the Company's Form 10-K/A for the year ended October 31,
1995, contained no adverse opinion or disclaimer of opinion, and were not
qualified as to other uncertainties, audit scope, or accounting principles.
Coopers did not inform the Audit Committee, the Board of Directors or
management of its intent to resign prior to delivery of its resignation.
Accordingly, neither the Audit Committee nor the Board of Directors nor
management made any recommendation with respect to Coopers' resignation. After
Coopers' resignation, Coopers identified to the Company a disagreement required
to be reported in accordance with Item 304 of Regulation S-K. This disagreement
identified by Coopers was resolved to the satisfaction of Coopers and was
reflected in the Company's Notes to Consolidated Financial Statements in the
Company's Form 10-Q for the three month period ended April 30, 1996, the
Company's Form 10-K/A for the year ended October 31, 1995 and Form 10-Q/A for
the three month period ended January 31, 1996. The disagreement was identified
as follows: During the week of May 13, 1996, the Company received a letter
dated May 6, 1996 from Honeywell, Inc. alleging claims for unidentified breaches
of contract, misrepresentation, and fraud. The letter did not set forth any
basis for the claims, did not allege an amount at issue, and asserted an intent
to litigate unless satisfactory progress was made toward resolution of the
claim. In early June 1996, after consulting counsel, who had been unable to
obtain information from Honeywell concerning the materiality of the claim,
management believed that disclosure of the Honeywell letter would be premature
and that the Company should first investigate the matter to determine
materiality and to understand the basis for the claims, and accordingly
considered at that time omitting disclosure from the Company's Form 10-Q, Form
10-K/A and Form 10-Q/A. On June 11, 1996, Coopers advised the Company's Audit
Committee that Coopers disagreed with management's proposed omission of a
description of such letter in the Company's Form 10-Q for the three month period
ended April 30, 1996. The Audit Committee and management concurred with
Coopers' recommendation and the Company included disclosure of the receipt of
such letter in the Company's Quarterly Report on Form 10-Q for the three months
ended April 30, 1996 filed on June 14, 1996, and the Company's Form 10-K/A for
the year ended October 31, 1995 and the Company's Form 10-Q/A for the three
month period ended January 31, 1996, each filed July 2, 1996.
During the Company's two most recent fiscal years and the interim period
preceding resignation, Coopers has not advised management, the Audit Committee
or the Board of Directors of the Company of any issues regarding significant
internal control matters, problems with management's representations or
financial statements, requirements for expanded audit scope or information that
materially impacts the fairness or reliability of the Company's financial
statements. During the two previous fiscal years and the interim period through
the date of resignation, there were no other disagreements between the Company
and Coopers on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which if not resolved to
the satisfaction of Coopers would have caused it to make reference to the
subject matter of the disagreement in connection with its report.
On August 2, 1996, the Company engaged Arthur Andersen LLP ("Arthur
Andersen") as its principal accountant to audit the Company's financial
statements for the fiscal year ended October 31, 1996. The engagement of Arthur
Andersen was approved by the Company's Audit Committee. The Company has not
consulted with Arthur Andersen during the previous two fiscal years and the
interim period to date on any matter which was the subject of any disagreement
or with respect to any "reportable event" as defined in Item 304 of Regulation
S-K or on the application of accounting principles to any specified transaction,
whether completed or proposed, or the type of audit opinion which might be
rendered on the Company's financial statements.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item other than information regarding
executive officers is set forth under the
65
<PAGE>
section of the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders entitled "ELECTION OF DIRECTORS" and "EXECUTIVE COMPENSATION AND
OTHER MATTERS." Information regarding the Company's executive officers may be
found in the section entitled "Executive Officers" in Part I of this 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated herein by reference from
the section of the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders entitled "EXECUTIVE COMPENSATION AND OTHER MATTERS."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated herein by reference from
the section of the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders entitled "GENERAL INFORMATION--Stock Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated herein by reference from
the section of the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders entitled "EXECUTIVE COMPENSATION AND OTHER MATTERS--Compensation
Interlocks and Insider Participation."
66
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements.
--------------------
Report of Independent Public Accountants (Arthur Andersen
LLP) dated December 3, 1997.
Report of Independent Accountants (Coopers & Lybrand L.L.P.)
dated December 6, 1995.
Consolidated Statements of Operation - Years Ended October
31, 1997, 1996 and 1995.
Consolidated Balance Sheets - October 31, 1997 and 1996.
Consolidated Statements of Stockholder's Equity - Years
Ended October 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows - Years Ended October
31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule.
----------------------------
The following financial statement schedule of Consilium, Inc.
is filed as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Consilium, Inc.
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
67
<PAGE>
3. Exhibits.
--------
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
---------- -----------------------------------------------------------------------
<S> <C>
2.1 Asset Purchase Agreement for the acquisition of FAST Associates, Pte. dated
July 31, 1997. /1/,/2/
3.1 Certificate of Incorporation of the Company. /3/
3.2 By-Laws of the Company. /3/
3.3 Certificate of Designation of Series A Convertible Preferred Stock. /4/
4.1 Form of Warrant Agreement dated April 1, 1997 between the Company and
Imperial Bank. /4/
4.2 Form of 8% Convertible Preferred Stock Subscription Agreement for the Sale of
an Aggregate $3 million worth of Preferred Shares to certain private
institutional investors dated August 19, 1997. /4/
4.3 Form of Warrant Agreement dated August 19, 1997 between the Company and
certain placement agents. /4/
10.2 Master Lease Agreement, dated December 2, 1988, between the Company and
General Electric Capital Corporation, with schedules. /1/
10.3 Letter Agreement, dated July 22, 1987, with respect to the employment of
Thomas Tomasetti. /1/,/7/
10.5 Agreement between the Company and Honeywell, Inc., Industrial Automation and
Control, dated April 1, 1993. /3/,/6/
10.6 Form of Director and Officer Indemnity Agreement. /5/
10.7 Amended and Restated 1983 Stock Option Plan. /7/,/8/
10.8 Forms of Stock Option Agreement used in conjunction with the 1983 Stock
Option Plan. /7/,/8/
10.9 1990 Outside Director's Stock Option Plan. /7/,/8/
10.10 Forms of Outside Directors Stock Option Agreement used in conjunction with
the 1990 Outside Director's Stock Option Plan. /7/,/8/
10.11 Lease agreement for the Company's principal facility, dated August 2, 1995,
among the Company and The Prudential Insurance Company of America. /8/
10.12 Letter Agreement, dated August 5, 1994, with respect to the employment of
Edward Norton. /7/,/8/
10.13 Letter Agreement, dated September 28, 1994, with respect to the employment of
Richard Van Hoesen. /7/,/8/
10.14 Letter Agreement, dated July 12, 1996 , with respect to the resignation of
Thomas Tomasetti. /7/,/9/
10.15 Letter Agreement dated June 3, 1996, with respect to the employment of
Laurence R. Hootnick. /7/,/9/
10.16 Asset Purchase Agreement for the acquisition of the Taiwan operations of
Systematic Designs International, Inc. dated July 2, 1996. /11/
10.17 Letter Agreement dated August 6, 1996, with respect to the employment of Wynn
Bowman. /7/,/10/
10.18 Letter Agreement dated August 6, 1996, with respect to the employment of
Michael J. Field. /7/,/10/
10.19 Change of Control Agreement with Laurence R. Hootnick. /7/,/12/
10.20 Change of Control Agreement with Jonathan J. Golovin. /7/,/12/
10.21 Form of Change of Control Agreement for Executive Officers. /7/,/12/
10.22 1996 Stock Option Plan and Forms of Stock Option Agreement. /7/,/12/
10.23 Security and Loan Agreement dated April 1, 1997 between the Company and
Imperial Bank. /4/
21.1 Schedule of Subsidiaries. /13/
23.1 Consent of Independent Accountants (Coopers & Lybrand L.L.P.).
23.2 Consent of Independent Public Accountants (Arthur Andersen LLP).
24.1 Power of Attorney (See page 72).
</TABLE>
68
<PAGE>
- ------------------
1 Incorporated by reference from exhibits of the same number in Registrant's
Registration Statement on Form S-1 (File No. 33-27947), effective May 9,
1989.
2 Incorporated by reference from exhibit 10.3 to Registrant's Annual Report
on Form 10-K for the Year ended October 31, 1990.
3 Incorporated by reference from exhibits 3.1, 3.2 and 10.19, respectively,
to Registrant's Quarterly Report on Form 10-Q for the Quarter ended April
30, 1993.
4 Incorporated by reference from exhibits of the same number to Registrant's
Quarterly Report on Form 10-Q for the Quarter ended July 31, 1997.
5 Incorporated by reference from exhibit 10.6 to Registrant's Quarterly
Report on Form 10-Q for the Quarter ended July 31, 1994.
6 The Securities and Exchange Commission has granted confidential treatment
for portions of this document.
7 Compensatory or employment arrangement.
8 Incorporated by reference from exhibits of the same number to Registrant's
Annual Report on Form 10-K for the Year ended October 31, 1995.
9 Incorporated by reference from exhibits of the same number in Registrant's
Quarterly Report on Form 10-Q for the Quarter ended July 31, 1996.
10 Incorporated by reference from exhibits of the same number to Registrant's
Annual Report on Form 10-K for the Year ended October 31, 1996.
11 Incorporated by reference from exhibit 2.1 to Registrant's Report on Form
8-K filed on July 26, 1996 for the acquisition of the Taiwan operations of
Systematic Designs International, Inc.
12 Incorporated by reference from exhibits of the same number in Registrant's
Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997.
13 Incorporated by reference from exhibits of the same number in Registration
Statement on Form S-1 (File No. 333-44743), filed January 22, 1998.
4. Reports on Form 8-K.
-------------------
Report under Item 2 dated August 15, 1997 regarding the Asset
Purchase Agreement with Fast Associates Pte., Ltd. and three amendments thereto
under Item 7 dated September 9, 1997, October 15, 1997 and December 19, 1997.
69
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Consilium, Inc. and Subsidiaries
Our report on the consolidated statements of operations, stockholders' equity
and cash flows of Consilium, Inc. and subsidiaries is included in this Annual
Report on Form 10-K. In connection with our audit of such financial
statements, we have also audited the related financial statement schedule
listed in the index of this Annual Report on Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
December 6, 1995
70
<PAGE>
CONSILIUM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------- ------------ ------------ ------------ -----------
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
- ----------------------------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Year ended October 31, 1995:
Allowance for doubtful accounts $ 625,000 $ 323,873 $ 298,873 $ 650,000
Year ended October 31, 1996:
Allowance for doubtful accounts $ 650,000 $ 59,557 $ 4,516 $ 705,041
Year ended October 31, 1997:
Allowance for doubtful accounts $ 705,041 $ -- $ 405,041 $ 300,000
</TABLE>
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Mountain View, State of California, on the 29th day of January, 1998.
CONSILIUM, INC.
By: /s/ LAURENCE R. HOOTNICK
-------------------------------
Laurence R. Hootnick
President and Chief Executive Officer
POWER OF ATTORNEY
Each of the officers and directors of Consilium, Inc. whose signature
appears below hereby constitutes and appoints Laurence R. Hootnick and Clifton
Wong, and each of them, their true and lawful attorneys and agents, with full
power of substitution, each with power to act alone, to sign and execute on
behalf of the undersigned any amendment or amendments to this Report on
Form 10-K and to perform any acts necessary in order to file such amendments,
and each of the undersigned does hereby ratify and confirm all that said
attorneys and agents, or their or his substitutes, shall do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below on January 29, 1998 by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ JONOTHAN J. GOLOVIN Chairman of the Board and Chief Technical
- ------------------------------------ Officer
Jonothan J. Golovin
/s/ LAURENCE R. HOOTNICK President, Chief Executive Officer and
- ------------------------------------ Director
Laurence R. Hootnick (Principal Executive Officer)
/s/ CLIFTON WONG Chief Financial Officer and Vice President
- ------------------------------------ (Principal Financial Officer)
Clifton Wong
/s/ ROBERT C. FINK
- ------------------------------------ Director
Robert C. Fink
/s/ ROBERT HORNE
- ------------------------------------ Director
Robert Horne
/s/ THOMAS A. TOMASETTI
- ------------------------------------ Director
Thomas A. Tomasetti
/s/ FREDERICK M. O'SUCH
- ------------------------------------ Director
Frederick M. O'Such
</TABLE>
72
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ---------- -----------------------------------------------------------------
<C> <S>
2.1 Asset Purchase Agreement for the acquisition of FAST Associates,
Pte. dated July 31, 1997./1/,/2/
3.1 Certificate of Incorporation of the Company./3/
3.2 By-Laws of the Company./3/
3.3 Certificate of Designation of Series A Convertible Preferred
Stock./4/
4.1 Form of Warrant Agreement dated April 1, 1997 between the Company
and Imperial Bank./4/
4.2 Form of 8% Convertible Preferred Stock Subscription Agreement for
the Sale of an Aggregate $3 million worth of Preferred Shares to
certain private institutional investors dated August 19, 1997./4/
4.3 Form of Warrant Agreement dated August 19, 1997 between the
Company and certain placement agents./4/
10.2 Master Lease Agreement, dated December 2, 1988, between the
Company and General Electric Capital Corporation, with schedules.
/1/
10.3 Letter Agreement, dated July 22, 1987, with respect to the
employment of Thomas Tomasetti./1/,/7/
10.5 Agreement between the Company and Honeywell, Inc., Industrial
Automation and Control, dated April 1, 1993./3/,/6/
10.6 Form of Director and Officer Indemnity Agreement./5/
10.7 Amended and Restated 1983 Stock Option Plan./7/,/8/
10.8 Forms of Stock Option Agreement used in conjunction with the 1983
Stock Option Plan./7/,/8/
10.9 1990 Outside Director's Stock Option Plan./7/,/8/
10.10 Forms of Outside Directors Stock Option Agreement used in
conjunction with the 1990 Outside Director's Stock Option Plan.
/7/,/8/
10.11 Lease agreement for the Company's principal facility, dated
August 2, 1995, among the Company and The Prudential Insurance
Company of America./8/
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ---------- ------------------------------------------------------------
<C> <S>
10.12 Letter Agreement, dated August 5, 1994, with respect to the
employment of Edward Norton./7/,/8/
10.13 Letter Agreement, dated September 28, 1994, with respect to the
employment of Richard Van Hoesen./7/,/8/
10.14 Letter Agreement, dated July 12, 1996 , with respect to the
resignation of Thomas Tomasetti./7/,/9/
10.15 Letter Agreement dated June 3, 1996, with respect to the
employment of Laurence R. Hootnick./7/,/9/
10.16 Asset Purchase Agreement for the acquisition of the Taiwan
operations of Systematic Designs International, Inc. dated July
2, 1996./11/
10.17 Letter Agreement dated August 6, 1996, with respect to the
employment of Wynn Bowman./7/,/10/
10.18 Letter Agreement dated August 6, 1996, with respect to the
employment of Michael J. Field./7/,/10/
10.19 Change of Control Agreement with Laurence R. Hootnick./7/,/12/
10.20 Change of Control Agreement with Jonathan J. Golovin./7/,/12/
10.21 Form of Change of Control Agreement for Executive Officers./7/,/12/
10.22 1996 Stock Option Plan and Forms of Stock Option Agreement./7/,/12/
10.23 Security and Loan Agreement dated April 1, 1997 between the
Company and Imperial Bank./4/
21.1 Schedule of Subsidiaries. /13/
23.1 Consent of Independent Accountants (Coopers & Lybrand L.L.P.).
23.2 Consent of Independent Public Accountants (Arthur Andersen LLP).
24.1 Power of Attorney (See page 72).
</TABLE>
_________________________
1 Incorporated by reference from exhibits of the same number in Registrant's
Registration Statement on Form S-1 (File No. 33-27947), effective May 9,
1989.
2 Incorporated by reference from exhibit 10.3 to Registrant's Annual Report
on Form 10-K for the Year ended October 31, 1990.
3 Incorporated by reference from exhibits 3.1, 3.2 and 10.19, respectively,
to Registrant's Quarterly Report on Form 10-Q for the Quarter ended April
30, 1993.
4 Incorporated by reference from exhibits of the same number to Registrant's
Quarterly Report on Form 10-Q for the Quarter ended July 31, 1997.
5 Incorporated by reference from exhibit 10.6 to Registrant's Quarterly
Report on Form 10-Q for the Quarter ended July 31, 1994.
6 The Securities and Exchange Commission has granted confidential treatment
for portions of this document.
<PAGE>
7 Compensatory or employment arrangement.
8 Incorporated by reference from exhibits of the same number to Registrant's
Annual Report on Form 10-K for the Year ended October 31, 1995.
9 Incorporated by reference from exhibits of the same number in Registrant's
Quarterly Report on Form 10-Q for the Quarter ended July 31, 1996.
10 Incorporated by reference from exhibits of the same number to Registrant's
Annual Report on Form 10-K for the Year ended October 31, 1996.
11 Incorporated by reference from exhibit 2.1 to Registrant's Report on Form
8-K filed on July 26, 1996 for the acquisition of the Taiwan operations of
Systematic Designs International, Inc.
12 Incorporated by reference from exhibits of the same number in Registrant's
Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997.
13 Incorporated by reference from exhibits of the same number in Registrant's
Registration Statement on Form S-1 (File No. 333-44743), filed on January
22, 1998.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements on
Form S-3 (File No. 333-44743) and Form S-8 (File Nos. 33-30381, 33-30382, 33-
35363, 33-41312, 33-63346, 33-63512, 33-79458, 333-09885 and 333-14347) of our
reports dated December 6, 1995, on our audit of the consolidated statements of
operations, stockholders' equity and cash flows and the financial statement
schedule of Consilium, Inc. and subsidiaries as of October 31, 1995 and for the
year then ended, which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 28, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
registration statements on Form S-8 (File Nos. 33-30381, 33-30382, 33-35363,
33-41312, 33-63346, 33-63512, 33-79474, 333-09885 and 333-14347).
ARTHUR ANDERSEN LLP
San Jose, California
January 28, 1998
