<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 31, 1998
----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number 0-17754
CONSILIUM, INC.
---------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 94-2523965
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
485 Clyde Avenue, Mountain View, California 94043
- ------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 691-6100
--------------
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed under 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 the number of shares outstanding of each of the issuer's classes of
common stock as of March 10 , 1998:
Common Stock, $0.01 par value 8,471,635
- ----------------------------- -----------------------
Class Number of Shares
1
<PAGE>
CONSILIUM, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets--
January 31, 1998 and October 31, 1997................................................. 3
Condensed Consolidated Statements of Operations--
Three months ended January 31, 1998 and 1997.......................................... 4
Condensed Consolidated Statements of Cash Flows--
Three months ended January 31, 1998 and 1997.......................................... 5
Notes to Condensed Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 8
Item 3 Quantitative and Qualitative Disclosures About Market Risks ............................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 15
Item 2. Changes in Securities.................................................................... 16
Item 3. Defaults upon Senior Securities.......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders...................................... 16
Item 5. Other Information........................................................................ 16
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
Signatures............................................................................... 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
CONSILIUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 31, 1998 October 31, 1997
---------------- ----------------
(unaudited) (audited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,935 $ 7,865
Accounts receivable, net 10,310 11,014
Other current assets 551 590
--------- ---------
Total current assets 17,796 19,469
Property and equipment, net 3,721 4,312
Software development costs, net 3,023 2,688
Goodwill, net 2,476 3,092
Other assets 489 406
--------- ---------
TOTAL ASSETS $ 27,505 $ 29,967
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Line of credit / Note payable $ 3,051 $ 3,051
Accounts payable 5,043 6,587
Accrued liabilities 4,804 5,461
Deferred revenue 6,755 6,437
--------- ---------
Total current liabilities 19,653 21,536
Accrued lease obligation 100 -
Deferred revenue 334 -
--------- ---------
Total liabilities 20,087 21,536
--------- ---------
Stockholders' equity 7,418 8,431
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 27,505 $ 29,967
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CONSILIUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
January 31,
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Product $ 2,010 $ 1,820
Services 6,263 6,634
Development 120
-------- ---------
Total revenues 8,273 8,574
-------- ---------
COST OF REVENUES:
Product 347 796
Services 3,038 4,101
Development 117
-------- ---------
Total cost of revenues 3,385 5,014
-------- ---------
GROSS MARGIN 4,888 3,560
-------- ---------
OPERATING EXPENSES:
Research and development 2,260 3,232
Selling and marketing 3,009 3,345
General and administrative 697 888
-------- ---------
Total operating expenses 5,966 7,465
-------- ---------
Loss from operations (1,078) (3,905)
Interest income 37 61
Interest expense (97) (36)
-------- ---------
LOSS BEFORE
INCOME TAX PROVISION (1,138) (3,880)
PROVISION FOR INCOME TAXES 83 62
-------- ---------
NET LOSS (1,221) (3,942)
PREFERRED STOCK DIVIDENDS 366 -
-------- ---------
NET LOSS ATTRIBUTABLE TO COMMON STOCK $ (1,587)$ (3,942)
======== =========
DILUTED LOSS PER COMMON SHARE $ (0.19)$ (0.50)
======== =========
SHARES USED IN PER SHARE
CALCULATIONS 8,374 7,928
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CONSILIUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
January 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,221) $ (3,942)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 967 814
Change in assets and liabilities, net of business acquisitions:
Accounts receivable 704 (648)
Other assets (83) 473
Accounts payable (1,075) (713)
Deferred revenue 652 (134)
Accrued lease obligation 100 -
Accrued liabilities (200) 707
--------- ---------
Net cash used for operating activities (156) (3,443)
--------- ---------
Cash flows from investing activities:
Capital expenditures (68) (292)
Capitalized software development costs (566) (134)
Proceeds from the sale of short-term investments - 1,000
--------- ---------
Net cash provided by (used for) investing activities (634) 574
--------- ---------
Cash flows from financing activities:
Repayment on note payable - (125)
--------- ---------
Net cash used for financing activities - (125)
--------- ---------
Effect of exchange rate changes on cash (140) (73)
Net decrease in cash and cash equivalents (930) (3,067)
Cash and cash equivalents at beginning of period 7,865 8,094
--------- ---------
Cash and cash equivalents at end of period $ 6,935 $ 5,027
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CONSILIUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL DATA
The interim condensed consolidated financial statements of Consilium, Inc.
and its subsidiaries (the "Company") are unaudited but reflect, in the
opinion of management, all normal recurring adjustments necessary to
present fairly the financial information set forth therein. These interim
condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended October 31, 1997.
The Company believes the results of operations and cash flows for the three
months ended January 31, 1998 are subject to fluctuation and are not
necessarily indicative of results of operations and cash flows for any
future period.
2. COMPUTATION OF NET LOSS PER COMMON SHARE
Effective November 1, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share". All prior-period earnings per share data presented was restated to
conform with SFAS No. 128. SFAS No. 128 requires companies to compute net
income (loss) per share under two different methods, basic and diluted, and
to disclose the methodology used for the calculation.
Basic and diluted earnings per common share were computed by dividing net
loss after deduction of preferred stock dividends by the weighted average
number of shares of common stock outstanding during the period.
Potentially dilutive securities of 3,047,560 were not included in the
computation of diluted earnings per common share because to do so would
have been antidilutive for the quarters ended January 31, 1997 and 1998.
3. LINE OF CREDIT
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 January 31, 1998) and
expires on March 15, 1998. At January 31, 1998, $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 January 31, 1998 as a result of failing to meet
financial covenants relating to minimum tangible net worth and maximum
total liabilities to tangible net worth. The Company has not yet obtained
a waiver of the default from its lender. While the Company is currently
negotiating with its lender regarding a new credit facility to replace the
existing facility, the lender has indicated that it currently has no
intention to call the loan upon expiration and that it will continue in
good faith to renegotiate the line of credit. Although the Company
believes that it will obtain a waiver and negotiate a new credit facility,
there can be no assurance
6
<PAGE>
that the Company will be able to obtain the waiver or negotiate a new
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.
4. NEW ACCOUNTING PRONOUNCEMENTS
Effective November 1, 1997, the Company adopted the provisions of SFAS No.
129, "Disclosure of information about Capital Structure," which requires
companies to disclose certain information about their capital structure.
The adoption of SFAS No. 129 had no impact on the Company's financial
statements.
5. MODIFICATION TO SDI AGREEMENT
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. On
January 30, 1998, the Company entered into definitive agreements with SDI
and SDI's principal, under which the parties agreed to cancel the original
payment provisions, and all other continuing obligations, including but not
limited to financial obligations, arising under the original asset purchase
agreement, and the Company issued 100,000 unregistered shares of its Common
Stock to SDI. At the same time, the Company and SDI entered into an
amended licensing agreement under which the Company has the right to
distribute certain SDI-owned software, has the right to enhance certain of
such software and agreed to pay royalties to SDI based on a percentage of
any actual sublicense fees for that software received by the Company.
SDI's principal resigned from the Company as of December 31, 1997.
6. SUBSEQUENT EVENTS
In February 1998, the Company sold certain assets of its Healthcare
Products and Process Industries Group that focused on the FlowStream
product line (the "Healthcare Group"), pursuant to an Asset Purchase
Agreement dated February 19, 1998 (the "Asset Purchase Agreement") by and
among Base Ten FlowStream, Inc. (the "Buyer"), Base Ten Systems, Inc. (the
"Parent" and together with the Buyer, "Base Ten") and the Company, for
consideration consisting of $1,500,000 in cash, $1,350,000 of which was
paid on February 19, 1998 (the "Closing Date") and $150,000 of which is
subject to certain indemnification provisions pursuant to the Asset
Purchase Agreement and shall be paid within ninety days of the Closing
Date, 20% of all annual revenues in excess of $3,200,000 recognized by Base
Ten from the licensing of the FlowStream product line during the 1998 and
1999 calendar years, and assumption by Base Ten of substantially all of the
Healthcare Group's liabilities on a going-forward basis, with some specific
obligations being retained by the Company. Pursuant to the Asset Purchase
Agreement, Base Ten assumed certain liabilities as of the acquisition date,
purchased fixed assets with a net book value of approximately $500,000 and
assumed the Company's rights under certain contracts with customers and
other third parties relating to the FlowStream product line, except certain
patents used within the Company by both the Healthcare Group and the
Semiconductor and Electronics Business Group. With regards to these
7
<PAGE>
patents, the Company granted to Base Ten a worldwide royalty-free, non-
transferable (except with substantially all of the assets of the FlowStream
Business) license, for the lives of the patents, without the right to
sublicense, to the exclusive use of such patents for developing, producing,
manufacturing and selling manufacturing execution systems limited to the
field of healthcare products (pharmaceutical, medical device and
biotechnology) and chemical industries. In addition, the Company agreed
not to compete in the business of developing, producing, manufacturing and
selling manufacturing execution systems under the trademark of "FlowStream"
for healthcare products and chemical industries for three years. Also
pursuant to the Asset Purchase Agreement, the Company also agreed to
indemnify Base Ten for up to $1,500,000 for certain representations and
warranties relating to intellectual property and up to an unlimited amount
for certain post-closing covenants, any Excluded Obligations (as defined in
the Asset Purchase Agreement) and any Tax Losses (as defined in the Asset
Purchase Agreement).
ITEM 2. 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 "LIQUIDITY AND CAPITAL RESOURCES."
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 "LIQUIDITY AND
CAPITAL RESOURCES."
8
<PAGE>
In February 1998, the Company sold certain assets associated with its FlowStream
product line to Base Ten and agreed not to compete in the FlowStream Business
for three years. See Note 6 - Subsequent Events and "LIQUIDITY AND CAPITAL
RESOURCES."
RESULTS OF OPERATIONS
- ---------------------
REVENUES. Total revenues for the first quarter of fiscal 1998 decreased 4% to
- --------
$8,273,000, compared with $8,574,000 in the first quarter of fiscal 1997. The
decrease was primarily due to lower product revenues from the Company's
WorkStream DFS product line and lower service revenues from the Company's
systems integration services business, partially offset by higher product
revenues from the Company's FlowStream(R) product line.
Total revenues for the three months ended January 31, 1998 and 1997 by
geographic region were as follows:
<TABLE>
<CAPTION>
Three months ended
January 31,
1998 1997
---- ----
<S> <C> <C>
(in thousands)
--------------
North America $4,640 $4,043
Percentage of total revenues 56% 47%
Europe $1,988 $1,219
Percentage of total revenues 24% 14%
Asia/Pacific $1,645 $3,312
Percentage of total revenues 20% 39%
</TABLE>
The increase in sales to North America and Europe during the first
quarter of fiscal 1998 was primarily due to higher levels of consulting services
provided for the Company's WorkStream customers in North America and an increase
in WorkStream license revenue in Europe. The decrease in sales to Asia/Pacific
during the first quarter of fiscal 1998 was primarily due to lower levels of
sales in the Company's systems integration services business in the Asia/Pacific
region as well as deferral of orders due to currency fluctuations in Asia.
Percentage of total revenues for the three months ended January 31,
1998 and 1997 by business unit were as follows:
<TABLE>
<CAPTION>
Three months ended
January 31,
1998 1997
---- ----
<S> <C> <C>
(in thousands)
--------------
Semiconductor and Electronics
Business Unit
(WorkStream DFS(TM)) $6,475 $7,773
78% 91%
Healthcare Products and Process
Industries Business Unit
(FlowStream(R)) $1,798 $801
22% 9%
</TABLE>
9
<PAGE>
The Company's Semiconductor and Electronics Business Unit markets and sells
WorkStream DFS products to manufacturers who produce their products in discrete
lots or batches, particularly those in the semiconductor and electronics
industries. The Company's Healthcare Products and Process Industries Business
Unit marketed and sold FlowStream products to regulated or complex industries
that employ batch process manufacturing, particularly those in the healthcare
products (pharmaceutical, medical devices and biotechnology), chemical and other
process industries until the sale of certain assets and liabilities of the
division on February 19, 1998. See Note 6 - Subsequent Events and "LIQUIDITY
AND CAPITAL RESOURCES."
Product Revenues. Product revenues for the three months ended January 31, 1998
- -----------------
increased 10% over the same period of the previous fiscal year. The increase
was primarily due to higher product revenue levels from the Company's FlowStream
product line, partially offset by lower WorkStream product license sales during
the period, as described below:
Product revenues attributable to products in the Company's WorkStream(R) DFS
product line decreased 38% to $1,100,000 during the three months ended January
31, 1998, as compared with $1,762,000 for the same period in fiscal 1997. The
decrease was primarily due to fluctuations in timing of new orders for
WorkStream products from new semiconductor fabrications, the continuing slowdown
in the semiconductor industry and currency fluctuations in Asia.
Product revenues attributable to FlowStream increased to $910,000 during the
three months ended January 31, 1998 as compared to $58,000 for the same period
in fiscal 1997. The increase was primarily attributable to fluctuations in the
size and timing of orders for FlowStream product from the healthcare products
and process industries. In January 1998, the Company received a $740,000
product license order from one customer.
Services Revenues. Services revenues for the three months ended January 31,
- ------------------
1998 decreased 6% to $6,263,000, compared with $6,634,000 for the same period of
fiscal 1997. Services revenues are derived primarily from annual software
maintenance fees, systems integration services relating to the WorkStream
DFS(TM) product line, specialized programming services, resident and application
consulting services and customer training. The decrease in services revenues
for the three months ended January 31, 1998 was primarily due to decreased
revenues derived from the Company's new systems integration business revenue
levels from the Company's WorkStream product lines. Services revenues normally
are subject to fluctuations primarily due to the timing of new contracts and the
completion of existing projects.
Development Revenues. Development revenues for the three months ended January
- ---------------------
31, 1998 were zero, compared to $120,000 for the same period of fiscal 1997.
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
decrease in development revenues during the three months ended January 31, 1998
was primarily due to the completion of all funded development projects. Based
on current internal development resource allocations and projects planned, the
10
<PAGE>
Company expects that development revenues in fiscal 1998 will continue to
decrease significantly from prior year levels, 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.
COSTS AND EXPENSES
- ------------------
Cost of Product Revenues. Cost of product revenues for the three months ended
- -------------------------
January 31, 1998 decreased 56% to $347,000, compared with $796,000 for the same
period of the previous fiscal year. The absolute dollar and percentage decrease
in cost of product revenues for the three months ended January 31, 1998 was
primarily due to lower product license sales and correspondingly lower third
party software product costs, coupled with the mix of products sold, compared
with the same period of fiscal 1997. 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. Product costs as a percentage of product revenues for
the three months ended January 31, 1998 were 17% compared with 44% for the same
period of the previous year. The decrease in cost of product revenues for the
three months ended January 31, 1998 as a percentage of product revenues was
attributable to lower third party product costs and lower royalties associated
with the product revenues during the period.
Cost of Services Revenues. Cost of services revenues decreased 26% to
- -------------------------
$3,038,000 for the three months ended January 31, 1998, compared with $4,101,000
for the same period of the previous fiscal year. Due to lower third party cost
of services associated with systems integration revenue, cost of services
revenues decreased in absolute dollars and as a percentage of service revenues.
Cost of services revenues represented 49% of total services revenues for the
three months ended January 31, 1998 compared with 62% in the comparable period
of fiscal 1997.
Cost of Development Revenues. Cost of development revenues decreased to zero
- -----------------------------
for the three months ended January 31, 1998 compared with $117,000 for the same
period of the previous fiscal year. The significant decrease in cost of
development revenues for the three months ended January 31, 1998 was due to the
completion of all funded development projects prior to the beginning of the
quarter. Development costs, which may vary significantly from project to
project, include direct labor costs associated with development contracts and
porting projects as well as third party consulting expenses.
Research and Development Expenses. Research and development expenses
- ----------------------------------
represented 27% of total revenues for the three month period ended January 31,
1998 compared with 38% for the same period of the previous fiscal year. Research
and development expenses were $2,260,000 for the three months ended January 31,
1998 as compared to $3,232,000 for the same period of the previous fiscal year.
The decrease in percentage of research and development expenses as a percentage
of total revenues and the decrease in the absolute dollar amount of research and
development expenses for the three months ended January 31, 1998 was primarily
due to the continued move of its software development group to India by
subcontracting with HCL Infosystems, which is at an
11
<PAGE>
overall lower cost, an increase in software development costs eligible for
capitalization, and the reimbursement of research and development expenses of
$195,000 under an Advanced Technology Program (ATP) award from the National
Institute of Standards and Technology (NIST). Included in research and
development expenses are costs associated with the development of new products
and the costs of enhancing and maintaining existing products.
Software development expenditures of $566,000 and $134,000 were
capitalized for the three months ended January 31, 1998 and 1997, respectively.
The amounts represent approximately 25% and 4% of total research and development
expenditures during such periods. The absolute dollar and percentage increases
of software development expenditures capitalized were due to an increase in the
amount of software development costs eligible for capitalization during the
quarter ended January 31, 1998. In accordance with SFAS No. 86, the amount of
research and development expenditures capitalized in a given time period depends
upon the amount of development work performed subsequent to the establishment of
technological feasibility for a product. Accordingly, amounts capitalized may
vary from period to period.
Selling and Marketing Expenses. Selling and marketing expenses represented 36%
- ------------------------------
of total revenues for the three months ended January 31, 1998 as compared with
39% for the same period of fiscal 1997. The decrease in sales and marketing
expenses as a percentage of total revenues during the three months ended January
31, 1998 was due to a lower level of sales activities, coupled with a relatively
slight decrease in selling and marketing expenses during the period. Selling
and marketing expenses were $3,009,000 for the three months ended January 31,
1998 compared with $3,345,000 for the same period of the previous year. The
decrease in the absolute dollar amount of selling and marketing expenses for the
three months ended January 31, 1998 compared with the same period in fiscal
1997, was primarily due to an overall decrease in headcount, related travel
expenses, the Company's efforts to control overall operating expenses relative
to revenues, and lower Asian operating expenses due to devaluation of Asian
currency during the first quarter of fiscal 1998.
General and Administrative Expenses. General and administrative expenses
- ------------------------------------
include the costs of the finance, accounting, legal and administrative
operations of the Company and represented 8% of total revenues for the three
month period ended January 31, 1998 as compared with 10% for the same period of
the previous fiscal year. General and administrative expenses were $697,000 for
the three months ended January 31, 1998 compared to $888,000 for the same period
in fiscal 1997. The decrease in absolute dollars for the three months ended
January 31, 1998 was primarily due to an overall decrease in headcount and the
Company's efforts to control operating expenses relative to revenues.
Interest Income and Expense. Interest income was $37,000 for the three months
- ---------------------------
ended January 31, 1998 compared to $61,000 for the same period in the previous
fiscal year. Lower invested cash balances and slightly lower interest rate
levels accounted for the decrease in interest income. Interest expense was
$97,000 for the three months ended January 31, 1998 compared to $36,000 and for
the same period in fiscal 1997. The increase in interest expense was primarily
due to higher outstanding short term borrowings during the first quarter of
fiscal 1998.
Provision for Income Taxes. The income tax provision for the three months ended
- --------------------------
January 31, 1998 represents taxes on earnings of certain foreign subsidiaries,
which are profitable, and taxes paid in certain foreign jurisdictions. The
Company has established a 100% valuation allowance against its deferred tax
asset and reviews this allowance on a periodic basis. At such
12
<PAGE>
time that the Company believes that it is more likely than not that a portion of
the deferred tax asset will be realized, the valuation allowance will be
reduced.
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 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 expense 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 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.
LIQUIDITY AND CAPITAL RESOURCES. As of January 31, 1998, the Company had
- --------------------------------
$6,935,000 in cash and cash equivalents, as compared with $7,865,000 in cash and
cash equivalents at October 31, 1997. The Company used $155,000 for operating
activities during the three months ended January 31, 1998, compared with
$3,443,000 used for operating activities in the same period of the previous
fiscal year. Net cash used for operating activities for the three months ended
January 31, 1998 primarily resulted from the net loss from the period, offset by
noncash expenses of depreciation and amortization.
13
<PAGE>
Net cash used for investing activities was $634,000 during the first
three months of fiscal 1998, as compared with $574,000 of net cash provided by
investing activities for the same period in fiscal 1997. The $634,000 net cash
used for investing activities during the three months ended January 31, 1998
represented capital expenditures and capitalized software development costs of
$68,000 and $566,000, respectively.
The Company did not generate any cash from financing activities during
the first three months of fiscal 1998, as compared to $125,000 of net cash used
by financing activities for the same period in fiscal 1997 for the repayment of
notes payable.
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. Such performance-based payments will be
based upon specified percentages of systems integration and related services net
operating margin, and net product license and 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. The first $1,500,000 of the performance payments are guaranteed.
As of January 31, 1998, $600,000 of these guaranteed performance payments have
been paid by issuance of 156,931 shares of the Common Stock. Three additional
payments of $300,000 each of cash or common stock (aggregate of $900,000) will
be paid at intervals of ninety days, beginning February 1, 1998. FAST has
certain registration rights with respect to the Common Stock issued. Such
registration rights for the 276,931 shares of common stock issued in fiscal 1997
have been 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. On
January 30, 1998, the Company entered into definitive agreements with SDI and
SDI's principal, under which the parties agreed to cancel the original payment
provisions, and all other continuing obligations, including but not limited to
financial obligations, arising under the original asset purchase agreement, and
the Company issued 100,000 unregistered shares of its Common Stock to SDI. At
the same time, the Company and SDI entered into an amended licensing agreement
under which the Company has the right to distribute certain SDI-owned software,
has the right to enhance certain of such software and agreed to pay royalties to
SDI based on a percentage of any actual sublicense fees for that software
received by the Company. SDI's principal resigned from the Company as of
December 31, 1997.
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 January 31, 1998) and expires on March 15,
1998. At January 31, 1998, $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 January 31, 1998 as a
result of failing to meet financial covenants relating to minimum tangible net
worth and maximum total liabilities to tangible net worth. The Company has not
yet
14
<PAGE>
obtained a waiver of the default from its lender. While the Company is currently
negotiating with its lender regarding a new credit facility to replace the
existing facility, the lender has indicated that it currently has no intention
to call the loan upon expiration and that it will continue in good faith to
renegotiate the line of credit. 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 the waiver or negotiate a new 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 February 1998, the Company sold certain assets of its Healthcare
Products and Process Industries Group that focused on the FlowStream product
line (the "Healthcare Group"), pursuant to an Asset Purchase Agreement dated
February 19, 1998 (the "Asset Purchase Agreement") by and among Base Ten
FlowStream, Inc. (the "Buyer"), Base Ten Systems, Inc. (the "Parent" and
together with the Buyer, "Base Ten") and the Company, for consideration
consisting of $1,500,000 in cash, $1,350,000 of which was paid on February 19,
1998 (the "Closing Date") and $150,000 of which is subject to certain
indemnification provisions pursuant to the Asset Purchase Agreement and shall be
paid within ninety days of the Closing Date, 20% of all annual revenues in
excess of $3,200,000 recognized by Base Ten from the licensing of the FlowStream
product line during the 1998 and 1999 calendar years, and assumption by Base Ten
of substantially all of the Healthcare Group's liabilities on a going-forward
basis, with some specific obligations being retained by the Company. Pursuant
to the Asset Purchase Agreement, Base Ten assumed certain liabilities as of the
acquisition date, purchased fixed assets with a net book value of approximately
$500,000 and assumed the Company's rights under certain contracts with customers
and other third parties relating to the FlowStream product line, except certain
patents used within the Company by both the Healthcare Group and the
Semiconductor and Electronics Business Group. With regards to these patents,
the Company granted to Base Ten a worldwide royalty-free, non-transferable
(except with substantially all of the assets of the FlowStream Business)
license, for the lives of the patents, without the right to sublicense, to the
exclusive use of such patents for developing, producing, manufacturing and
selling manufacturing execution systems limited to the field of healthcare
products (pharmaceutical, medical device and biotechnology) and chemical
industries. In addition , the Company agreed not to compete in the business of
developing, producing, manufacturing and selling manufacturing execution systems
under the trademark of "FlowStream" for healthcare products and chemical
industries for three years. Also pursuant to the Asset Purchase Agreement, the
Company also agreed to indemnify Base Ten for up to $1,500,000 for certain
representations and warranties relating to intellectual property and up to an
unlimited amount for certain post-closing covenants, any Excluded Obligations
(as defined in the Asset Purchase Agreement) and any Tax Losses (as defined in
the Asset Purchase Agreement).
Management believes the existing cash and cash equivalents including
cash generated from operations, combined with its borrowing capacity will be
sufficient to meet the Company's working capital and capital expenditure
requirements for the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
-----------------------------------------------------------
Not applicable
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
On January 30, 1998, the Company entered into a Settlement Agreement
with SDI and SDI's principal, ;under which the Company agreed to issue
100,000 shares of its Common Stock to SDI.
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
------------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). List of Exhibits
Exhibit
Number Exhibit Title
------ -------------
2.1 Asset Purchase Agreement for the acquisition of FAST
Associates, Pte. Dated July 31, 1997. /3/
3.1 Certificate of Incorporation of the Company. /2/
3.2 By-Laws of the Company. /2/
3.3 Certificate of Designation of Series A Convertible
Preferred Stock. /3/
4.1 Form of Warrant Agreement dated April 1, 1997 between the
Company and Imperial Bank. /3/
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. /3/
4.3 Form of Warrant Agreement dated August 19, 1997 between the
Company and certain placement agents. /3/
10.2 Master Lease Agreement, dated December 2, 1988, between the
Company and General Electric Capital Corporation, with
schedules. /1/
16
<PAGE>
10.3 Letter Agreement, dated July 22, 1987, with respect to the
employment of Thomas Tomasetti. /1,6/
10.5 Agreement between the Company and Honeywell, Inc.,
Industrial Automation and Control, dated April 1, 1993.
/2,5/
10.6 Form of Director and Officer Indemnity Agreement. /4/
10.7 Amended and Restated 1983 Stock Option Plan. /6,7/
10.8 Forms of Stock Option Agreement used in conjunction with
the 1983 Stock Option Plan. /6,7/
10.9 1990 Outside Director's Stock Option Plan. /6,7/
10.10 Forms of Outside Directors Stock Option Agreement used in
conjunction with the 1990 Outside Director's Stock Option
Plan. /6,7/
10.11 Lease agreement for the Company's principal facility, dated
August 2, 1995, among the Company and The Prudential
Insurance Company of America. /7/
10.12 Letter Agreement, dated August 5, 1994, with respect to the
employment of Edward Norton. /6,7/
10.13 Letter Agreement, dated September 28, 1994, with respect to
the employment of Richard Van Hoesen. /6,7/
10.14 Letter Agreement, dated July 12, 1996 , with respect to the
resignation of Thomas Tomasetti. /6,8/
10.15 Letter Agreement dated June 3, 1996, with respect to the
employment of Laurence R. Hootnick. /6,8/
10.16 Asset Purchase Agreement for the acquisition of the Taiwan
operations of Systematic Designs International, Inc. dated
July 2, 1996. /10/
10.17 Letter Agreement dated August 6, 1996, with respect to the
employment of Wynn Bowman./6,9/
10.18 Letter Agreement dated August 6, 1996, with respect to the
employment of Michael J. Field./6,9/
10.19 Change of Control Agreement with Laurence R. Hootnick.
/6,11/
10.20 Change of Control Agreement with Jonathan J. Golovin./6,11/
10.21 Form of Change of Control Agreement for Executive
Officers./6,11/
17
<PAGE>
10.22 1996 Stock Option Plan and Forms of Stock Option
Agreement./6,11/
10.23 Security and Loan Agreement dated April 1, 1997 between the
Company and Imperial Bank. /3/
10.24 Settlement Agreement, dated January 30, 1998, among the
Company, Consilium Taiwan, Inc., Systematic Designs
International, Inc. and Jen-Shih Jessi Niou./12/
10.25 Asset Purchase Agreement, dated February 19, 1998, among
the Company, Base Ten FlowStream, Inc. and Base Ten
Systems, Inc. /13/
10.26 Letter Agreement dated January 13, 1998, with respect to
the employment of Jim Macek./6/
27 Financial Data Schedule (available in EDGAR format only).
/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 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.
/3/ 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.
/4/ Incorporated by reference from exhibit 10.6 to Registrant's Quarterly
Report on Form 10-Q for the Quarter ended July 31, 1994.
/5/ The Securities and Exchange Commission has granted confidential
treatment for portions of this document.
/6/ Compensatory or employment arrangement.
/7/ 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.
/8/ 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.
/9/ 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.
18
<PAGE>
/10/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.
/11/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.
/12/Incorporated by reference from exhibits of the same number in
Registration Statement on Form S-1 (File No. 333-44743), filed January
22, 1998.
/13/Incorporated by reference from exhibit 2.1 to the Registrant's Report
on Form 8-K filed on March 3, 1998 for the sale of assets of the
Healthcare Products and Process Industries Group.
(b). Reports on Form 8-K
Report under Items 2 and 7 filed on March 3, 1998 regarding the
Asset Purchase Agreement with Base Ten FlowStream, Inc. and Base
Ten Systems, Inc.
19
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, a duly authorized officer and the chief financial officer of the
registrant.
CONSILIUM, INC.
---------------------------
(Registrant)
Date March 16, 1998 by: /s/ Clifton Wong
-------------------- ------------------------
Clifton Wong
Vice President, Finance and
Chief Financial Officer
20
<PAGE>
EXHIBIT 10.26
January 13, 1998
Jim Macek
4604 Wild Briar Pass
Austin, TX 78746
(512) 328-4422
Re: Employment Agreement
Dear Jim:
We are pleased to offer you the positions of Executive Vice President of
Consilium, Inc. (the "Company") and President of the Company's Semiconductor and
Electronics Business Unit (the "Unit"). You will work out of Austin, Texas, and
report directly to the Company's President and CEO, Larry Hootnick. Your
employment will start on a mutually agreed upon date (hereinafter known as the
"Hire Date"), and is contingent upon the satisfactory completion of the
Company's standard investigation of your background.
This letter sets forth the terms of your employment with the Company as
well as our understanding with respect to any termination of that employment
relationship. By signing this letter on the space provided on the last page,
you accept employment with the Company on the terms and conditions set forth in
this Agreement, and you agree to devote your full business time, energy and
skills to your duties at the Company.
During your employment with the Company, you will receive the following
compensation and benefits:
1. $20,000 per month base salary ($240,000 on an annualized basis) paid
semi-monthly in accordance with the Company's payroll procedures, less
applicable withholding. The Company will provide you with tax consultation
through its auditors, Arthur Andersen, to assist you with Texas resident tax
advice.
2. You will be eligible to receive a quarterly revenue/margin results
bonus of $20,000 per quarter during FY98 based on meeting or exceeding quarterly
revenue/margin targets and profitability targets for the Unit. The applicable
targets will be reviewed and
<PAGE>
approved by the Company's Compensation Committee and provided to you in writing
by the Company within 30 days of your Hire Date. You must be employed by the
Company for the entire quarter in order to earn any bonus for that quarter.
During FY98, you will receive a guaranteed bonus of $5,000 per quarter under
this bonus arrangement.
In addition, you will be paid a one-time special FY98 year-end bonus of
$12,000 less applicable withholding.
3. Subject to the approval of the Compensation Committee of the Board of
Directors, you will be granted a stock option pursuant to the Company's 1996
Stock Option Plan (the "Option Plan") to purchase 200,000 shares of the
Company's common stock at an exercise price per share equal to its fair market
value on the date of your written employment acceptance, in accordance with the
Option Plan or modified Option Plan as agreed upon by you and the Company. Your
option will be subject to and governed by the terms of the Company's standard
form of stock option agreement or modified agreement which you will be required
to sign as a condition of the option grant.
4. The Company anticipates that Larry Hootnick will be elevated to the
position of Chairman of the Board/CEO within six months to one year after the
Hire Date. Should that occur and provided that your performance in the
positions described above has been to the Company's satisfaction, you will be
elevated to the position of President and COO of the Company and nominated to
its Board of Directors in accordance with current Company by-laws and processes.
5. The Company will reimburse you for mutually agreed upon monthly housing
and transportation expenses in the Bay Area as agreed upon by you and the
Company. In addition, the Company will provide you with additional business
equipment in Austin as agreed upon by you and the Company.
6. In the event that the Company terminates your employment for reasons
other than cause, or your death or disability, you shall not be entitled to any
further compensation or benefits (other than as earned through the date of your
termination), except that if you sign a general release of known and unknown
claims in form satisfactory to the Company, you shall receive the following
severance benefits: (a) six months' base salary continuation at your then
current salary paid in accordance with the Company's payroll procedures, less
applicable withholding, and (b) upon your election of COBRA, the Company will
pay your COBRA premiums for a period of six months.
If your employment is terminated by the Company for cause as defined below,
or as a result of your death or disability, you shall be entitled to no
compensation or benefits from the Company other than those earned through the
date of your termination. For purposes of this agreement, a termination for
"cause" occurs if you are terminated for any of the following reasons.
2
<PAGE>
a. theft, dishonesty, misconduct, or falsification of any employment
or Company records;
b. improper disclosure of the Company's confidential or proprietary
information;
c. any intentional act by you which has a material detrimental effect
on the Company's reputation or business;
d. your failure or inability to perform any reasonable duties assigned
to you by the Company after written notice of, and a reasonably
opportunity to cure, such failure or inability; or
e. your conviction of any criminal act that impairs your inability to
perform your duties for the Company.
7. In the event that your employment is terminated by the Company under
certain circumstances following a "change of control," you will be entitled to
participate in the Company's Change of Control program at a level established
for Senior Vice Presidents if you sign the Company's standard form of change of
control agreement. That agreement will be presented to you shortly after the
Hire Date.
8. Upon your execution of the Company's standard form of indemnity
agreement, you will be eligible to participate in the Company's Directors and
Officers insurance program.
9. You will be eligible for medical, dental, vision, life and disability
insurance as described in the enclosed Benefits Summary once you meet the
eligibility requirements under the applicable programs.
10. You will be eligible to participate in the Company's Employee Stock
Purchase Plan in accordance with its terms.
11. You will be eligible to participate in the Company's 401(k) plan in
accordance with its terms.
Your employment with the Company is voluntarily entered into and is for no
specified period of time. As a result, you are free to resign at any time, for
any reason or for no reason. Similarly, the Company is free to terminate its
at-will employment relationship with you at any time, with or without cause.
Thirty days' notice of termination (or pay in lieu of notice) shall be provided
by you or the Company in the event that either elects to terminate the
employment relationship for any reason other than cause. During such thirty-day
period you shall continue to provide full and proper service to the Company in
your then current employment capacity unless the Company waives such notice
period.
3
<PAGE>
In the event of any dispute or claim relating to or arising out of our
employment relationship, this agreement or the termination of our employment
relationship (including, but not limited to, any claims of breach of contract,
wrongful termination or age or other discrimination), you and the Company agree
that all such disputes shall be fully and finally resolved by binding
arbitration conducted by an employment lawyer selected by the American
Arbitration Association in San Jose, California, and we waive our rights to have
such disputes or claims tried by a court or jury. However, we agree that this
arbitration provision shall not apply to any requests for injunctive relief that
may be made by you or the Company.
This letter agreement, the Company's standard employment proprietary rights
agreement, and the other agreements referred to above, all of which you agree to
sign as a condition of your employment, define the terms of your employment and
supersede all prior agreements, both written and verbal. This agreement cannot
be modified or amended except in a writing that is signed by an authorized
Company representative and you.
We are happy to confirm your employment offer with this letter, and we look
forward to your joining Consilium. Please indicate your acceptance of this
offer by signing one copy of this letter and returning it to me.
Sincerely,
Linda Kato Ujihara
Director of Human Resources
cc: L. Hootnick
I agree to and accept employment with Consilium on the terms set out above, and
I certify that I have responded fully and accurately to all inquiries made of me
by Consilium during the pre-employment process.
_______________________________
Jim Macek
_______________________________
Date
4
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