<PAGE>
Conformed copy with exhibits
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 APRIL 30, 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)
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
--------------
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.
X
Yes _________ No _________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of June 5, 1998:
Common Stock, $0.01 par value 8,637,352
- ----------------------------- ---------
Class Number of Shares
1
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CONSILIUM, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
April 30, 1998 and October 31, 1997................... 3
Condensed Consolidated Statements of Operations
Three and six months ended April 30, 1998 and 1997.... 4
Condensed Consolidated Statements of Cash Flows
Six months ended April 30, 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 16
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........................................ 17
Item 6. Exhibits and Reports on Form 8-K......................... 17
Signatures............................................... 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
CONSILIUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
April 30, 1998 October 31, 1997
(Unaudited) ----------------
--------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,498 $ 7,865
Accounts receivable, net 9,688 11,014
Other current assets 434 590
--------- ---------
Total current assets 17,620 19,469
Property and equipment, net 2,898 4,312
Software development costs, net 1,954 2,688
Goodwill, net 2,296 3,092
Other assets 296 406
--------- ---------
TOTAL ASSETS $ 25,064 $ 29,967
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 3,051 $ 3,051
Accounts payable 3,631 6,587
Accrued liabilities 3,270 3,799
Accrued acquisition costs 600 1,662
Deferred revenue 6,058 6,437
--------- ---------
Total current liabilities 16,610 21,536
Accrued lease obligation 100 -
Deferred revenue 425 -
--------- ---------
Total liabilities 17,135 21,536
--------- ---------
Stockholders' equity 7,929 8,431
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 25,064 $ 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 SIX MONTHS ENDED
APRIL 30, APRIL 30,
1998 1997 1998 1997
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Product $2,327 $ 4,995 $ 4,337 $ 6,815
Services 5,917 5,787 12,180 12,421
Development - 310 - 430
---------- ----------- ---------- ----------
Total revenues 8,244 11,092 16,517 19,666
---------- ----------- ---------- ----------
COST OF REVENUES:
Product 503 909 850 1,705
Services 2,595 3,781 5,633 7,882
Development - 253 - 370
---------- ----------- ---------- ----------
Total cost of revenues 3,098 4,943 6,483 9,957
---------- ----------- ---------- ----------
GROSS MARGIN 5,146 6,149 10,034 9,709
---------- ----------- ---------- ----------
OPERATING EXPENSES:
Research and development 2,035 3,003 4,296 6,235
Selling and marketing 2,330 3,267 5,339 6,612
General and administrative 760 914 1,457 1,802
---------- ----------- ---------- ----------
Total operating expenses 5,125 7,184 11,092 14,649
---------- ----------- ---------- ----------
Income (loss) from operations 21 (1,035) (1,058) (4,940)
Interest income 51 3 85 64
Interest expense (82) (36) (176) (72)
Gain on sale of business 550 - 550 -
---------- ----------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION 540 (1,068) (599) (4,948)
PROVISION FOR INCOME TAXES 60 53 142 115
---------- ----------- ---------- ----------
NET INCOME (LOSS) 480 (1,121) (741) (5,063)
PREFERRED STOCK DIVIDENDS (248) - (614) -
---------- ----------- ---------- ----------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCK $ 232 $(1,121) $(1,355) $(5,063)
========== =========== ========== ==========
NET INCOME (LOSS) PER SHARE
Basic $0.03 $(0.14) $(0.16) $(0.63)
Diluted $0.03 $(0.14) $(0.16) $(0.63)
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS
Basic 8,401 7,963 8,436 7,974
Diluted 8,486 7,963 8,436 7,974
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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CONSILIUM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
April 30,
------------------------------------------
1998 1997
--------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (741) $ (5,063)
--------- -------------
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities:
Depreciation and amortization 1,880 1,761
Gain on sale of business (550) -
Provision for doubtful accounts - (9)
Change in assets and liabilities:
Accounts receivable 1,326 (4,287)
Other assets 193 (148)
Accounts payable (2,427) 336
Deferred revenue 966 3,697
Other liabilities and accrued expenses (1,014) 1,783.00
--------- -------------
Net cash used for operating activities (367) (1,930)
--------- -------------
Cash flows from investing activities:
Capital expenditures (103) (682)
Capitalized software development costs (821) (238)
Sales of short-term investments - 1,000
Cash paid for acquisition of FAST (300) -
Cash received from sale of HCP 1,350 -
--------- -------------
Net cash provided by investing activities 126 80
--------- -------------
Cash flows from financing activities:
Proceeds from line of credit - 3,051
Principal payments on note payable - (1,792)
Issuance costs of preferred stock (85) -
Proceeds from issuance of common stock and exercise of options 199 288
--------- -------------
Net cash provided by financing activities 114 1,547
--------- -------------
Effect of exchange rate changes on cash (240) (193)
--------- -------------
Net decrease in cash and cash equivalents (367) (496)
Cash and cash equivalents at beginning of period 7,865 8,094
--------- -------------
Cash and cash equivalents at end of period $ 7,498 $ 7,598
========= ============
</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 for the three and six months
ended April 30, 1998 and the cash flows for the six months ended April 30,
1998 are subject to fluctuation and are not necessarily indicative of
results of operations and cash flows for any future period.
2. NET INCOME (LOSS) PER SHARE
In the first quarter of fiscal 1998, 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.
Basic earnings per common share were computed by dividing net income (loss)
after deduction of preferred stock dividends by the weighted average number
of shares of common stock outstanding during the second quarter and the
first six months of fiscal 1998 and 1997. Diluted earnings per share data
for the second quarter and the first six months of fiscal 1998 and 1997 has
been computed using the weighted average number of shares of common stock
outstanding and potentially dilutive common shares. Potentially dilutive
common shares include dilutive shares issuable upon the exercise of
outstanding common stock options computed using the treasury stock method.
Potentially dilutive securities of 2,608,566 and 1,713,228 were not
included in the computation of diluted earnings per common share, because
to do so would have been antidilutive for the three months ended April 30,
1998 and 1997, respectively. For the three and six months ended April 30,
1997 and for the six months ended April 30, 1998, the number of shares used
in the computation of diluted earnings per share was the same as those used
for the computation of basic earnings per share as all potential common
shares were antidilutive. For the three months ended April 30, 1998, a
reconciliation of the shares used in the computation of basic and diluted
earnings per share is as follows:
Three months ended
April 30, 1998
----------------------------
Number of Per Share
Shares Amount
--------- ---------
Basic earnings per share 8,401,452 $.03
Common stock options 84,389 .00
--------- ----
Diluted earnings per share 8,485,841 $.03
========= ====
6
<PAGE>
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 could borrow up
to $5,000,000, based on eligible accounts receivable. The Line of Credit
Agreement expired on March 15, 1998. Borrowings under the revolving line
of credit are secured by substantially all of the Company's assets and bear
interest at the bank's prime rate per annum (8.5% at April 30, 1998). At
April 30, 1998, $3,051,000 was outstanding under the revolving line of
credit. The Line of Credit Agreement required the Company to maintain
certain financial covenants. The Company was in default under its credit
facility from October 31, 1997 through March 15, 1998 as a result of
failing to meet financial covenants relating to minimum tangible net worth,
maximum total liabilities to tangible net worth, and required profitability
covenants. On May 14, 1998, the Company obtained a waiver of the past
default from its lender.
The Company is currently negotiating with its lender regarding a new credit
facility to replace the expired facility. The lender has indicated that it
currently has no intention to call the loan and that it will continue in
good faith to renegotiate the line of credit. Although the Company
believes that it will negotiate a new credit facility, there can be no
assurance that the Company will be able to negotiate a new credit facility
on terms acceptable to the Company.
4. NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 1998, 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. SALE OF HEALTH CARE AND PROCESS BUSINESS UNIT
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, 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
7
<PAGE>
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 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.
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."
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 5 - Sale of Health Care and Process Business Unit.
8
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
REVENUES. Total revenues for the second quarter of fiscal 1998 decreased 26% to
- --------
$8,244,000, compared with $11,092,000 in the second quarter of fiscal 1997.
Revenues for the first six months of fiscal 1998 decreased 16% to $16,518,000,
compared with $19,666,000 in the same period of fiscal 1997. The decrease for
the second quarter of fiscal 1998 was primarily due to lower product revenues
from the Company's WorkStream DFS product line, lower systems integration
services revenues, and lower overall FlowStream revenues due to the sale of the
Health Care and Process business unit. For the six months ended April 30, 1998,
the decrease in total revenues over the same period of the previous fiscal year
was primarily due to a lower level of product revenues, systems integration
services revenues and development revenues, partially offset by a higher level
of consulting and maintenance revenues.
Percentage of total revenues for the three and six months ended April
30, 1998 and 1997 by geographic region were as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
North America $4,314 $4,577 $8,954 $8,620
Percentage of total revenues 52% 41% 54% 44%
Europe $1,621 $2,264 $3,610 $3,483
Percentage of total revenues 20% 21% 22% 18%
Asia/Pacific $2,309 $4,251 $3,954 $7,563
Percentage of total revenues 28% 38% 24% 38%
</TABLE>
The proportional increase in sales to North America for the three and six
months ended April 30, 1998 was primarily due to relatively lower levels of
international revenues and higher levels of consulting services revenues in the
North America region. The decrease in sales to Europe for the three months
ended April 30, 1998 was due to lower license revenues as a result of the sale
of the Health Care and Process business unit and the timing and size of new
orders. The decrease in sales to Asia/Pacific for the three and six months
ended April 30, 1998 was primarily due to lower WorkStream license revenue and
lower systems integration services revenues in the Asia/Pacific region as a
result of the completion of existing projects, slowdown in the building of new
semiconductor fabrications, as well as currency fluctuations in Asia.
9
<PAGE>
Percentage of total revenues for the three and six months ended April 30,
1998 and 1997 by business unit were as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Semiconductor and Electronics
Business Unit
(WorkStream DFS(TM)) $8,045 $9,708 $14,520 $17,481
Percentage of total revenues 98% 88% 88% 89%
Healthcare Products and Process
Industries Business Unit
(FlowStream(R)) $ 199 $1,384 $ 1,998 $ 2,185
Percentage of total revenues 2% 12% 12% 11%
</TABLE>
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 Company sold substantially all
the assets and liabilities of the division on February 19, 1998. See Note 5
Sale of Health Care and Process Business Unit.
Product Revenues. Product revenues for the three and six months ended April
- -----------------
30, 1998 decreased 53% and 36% over the same periods of the previous fiscal
year. The decrease was primarily due to a decrease in demand for the Company's
Workstream DFS products as a result of the continuing slowdown in capital
spending in the semiconductor industry and currency fluctuations in Asia.
Product revenues attributable to products in the Company's Workstream
DFS product line decreased 51% to $2,295,000 during the three months ended April
30, 1998, as compared with $4,694,000 in the previous year quarter. For the six
months ended April 30, 1998, product revenues from the WorkStream DFS product
line decreased 47% to $3,395,000, as compared with $6,455,000 in the previous
fiscal year. The decrease was due to fluctuations in timing of new orders for
WorkStream(R) products from new semiconductor fabrications and the overall
slowdown in the semiconductor industry and currency fluctuations in Asia.
Product revenues attributable to FlowStream for the three months ended
April 30, 1998 were $0, as compared to $301,000 for the same period in fiscal
1997. The decrease was primarily attributable to the sale of the Health Care
and Process business unit in the second quarter of fiscal 1998. For the six
months ended April 30, 1998, FlowStream product revenues were $910,000, as
compared to $359,000 for the same period in the previous fiscal year. The
increase was primarily due to the receipt of a large product license order from
one customer in the first quarter of fiscal 1998.
10
<PAGE>
Services Revenues. Services revenues for the three months ended April 30, 1998
- ------------------
increased 2% to $5,917,000, compared with $5,787,000 for the same period of
fiscal 1997. The increase in services revenues for the three months ended April
30, 1998 was primarily due to higher consulting and maintenance revenues derived
from a larger installed base of the Company's WorkStream product, partially
offset by lower systems integration services revenues as a result of the
fluctuation in the timing and size of new systems integration projects. For the
six months ended April 30, 1998, services revenues decreased 2% to $12,180,000,
compared with $12,421,000 for the same period of fiscal 1997. The decrease in
services revenues for the six months ended April 30, 1998 was primarily due to
lower systems integration services revenues as a result of the size and timing
of new contracts and the completion of existing projects, partially offset by an
increase in consulting and maintenance revenues. Services revenues are
primarily from systems integration services relating to the Workstream DFS(TM)
product line, annual software maintenance fees, specialized programming
services, resident and application consulting services and customer training.
The Company believes services revenues may be subject to fluctuation in future
periods primarily due to fluctuation in the timing and size of new projects and
economic instability in Asia resulting in currency fluctuations.
Development Revenues. Development revenues for the three and six months ended
- ---------------------
April 30, 1998 were zero compared to $310,000 and $430,000 for the same periods
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 and six months
ended April 30, 1998 was primarily due to the completion of all funded
development projects. Based on current internal development resource
allocations and projects planned, the Company expects that the Company will not
have any significant development revenues in fiscal 1998, 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
- -------------------------
April 30, 1998 decreased 45% to $503,000, compared with $909,000 for the same
period of the previous fiscal year. For the six months ended April 30, 1998,
cost of product revenues decreased 50% to $850,000, compared with $1,705,000 for
the same period of fiscal 1997. The decrease in cost of product revenues for
the three and six months ended April 30, 1998 was primarily due to decreased
product license sales during the periods. 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 and six months ended April 30, 1998 were 22% and 20%, respectively,
compared with 18% and 25% for the same periods of the previous year. The
increase in cost of product revenues for the three months ended April 30, 1998
as a percentage of product revenue was due to higher purchased third party
software product costs. The decrease in cost of product revenues for the
11
<PAGE>
six months ended April 30, 1998 as a percentage of product revenues was
attributable to a change in the mix of product revenues.
Cost of Services Revenues. Cost of services revenues decreased 31% to
- -------------------------
$2,585,000 for the three months ended April 30, 1998, compared with $3,781,000
for the same period of the previous fiscal year. For the six months ended April
30, 1998, cost of services revenues decreased 29% to $5,633,000, compared with
$7,882,000 for the same period of the previous fiscal year. The decrease in
absolute dollars and percentage of cost of services revenues was primarily due
to lower systems integration services revenues and lower FlowStream services
revenue as a result of the sale of the Health Care and Process business unit in
the second quarter of fiscal 1998. Cost of services revenues was 44% and 46% of
total services revenues for the three and six months ended April 30, 1998,
respectively, compared with 65% and 63% in the comparable periods of fiscal
1997. The decrease in cost of services revenues as a percentage of services
revenues was primarily due to an increase in maintenance and services revenues
with higher margins and systems integration projects with higher margins in
fiscal 1998.
Cost of Development Revenues. Cost of development revenues decreased to zero
- -----------------------------
for the three and six months ended April 30, 1998, compared with $253,000 and
$370,000 for the same periods of the previous fiscal year. The significant
decrease in cost of development revenues for the three and six months ended
April 30, 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. Based on current internal development resource allocations
and projects planned, the Company expects that the Company will not have any
significant development revenues in fiscal 1998, 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.
Research and Development Expenses. Research and development expenses
- ----------------------------------
represented 25% and 26% of total revenues for the three and six month periods
ended April 30, 1998, respectively, compared with 27% and 32% for the same
periods of the previous fiscal year. Research and development expenses were
$2,035,000 and $4,296,000 for the three and six months ended April 30, 1998,
respectively, as compared to $3,003,000 and $6,235,000 for the same periods of
the previous fiscal year. The decrease in the 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 and
six months ended April 30, 1998 was due to lower overall research and
development activities as a result of the sale of the Health Care and Process
business unit coupled with the continued move of the Company's software
development group to India by subcontracting with HCL Infosystems, which is at
an overall lower cost, an increase in software development costs eligible for
capitalization, and the reimbursement of research and development expenses of
$264,000 under an Advanced Technology Program (ATP) award form 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 $256,000 and $103,000 were
capitalized for the three months ended April 30, 1998 and 1997, respectively.
The amounts represent approximately 13% and 3% of total research and development
expenditures during such periods. The absolute dollar and percentage increases
were due to an increase in the absolute dollar amount of software development
costs eligible for capitalization during the quarter ended April 30, 1998,
coupled with a lower level of overall research and development expenditures. 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
12
<PAGE>
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 28%
- ------------------------------
and 32% of total revenues for the three and six months ended April 30, 1998,
respectively, as compared with 29% and 34% for the same periods of fiscal 1997.
The decrease in sales and marketing expenses as a percentage of total revenues
during the three and six months ended April 30, 1998, compared with the same
periods last year was due to a lower level of sales activities partially offset
by lower revenues as a result of the sale of the Health Care and Process
business unit. Selling and marketing expenses were $2,330,000 and $5,339,000
for the three and six months ended April 30, 1998, respectively, compared with
$3,267,000 and $6,612,000 for the same periods of the previous year. The
decrease in the absolute dollar amount of selling and marketing expenses for the
three and six months ended April 30, 1998, compared with the same periods in
fiscal 1997, was primarily due to an overall decrease in headcount, and related
travel expenses as a result of the sale of the Health Care and Process business
unit and the Company's efforts to control overall operating expenses relative to
revenues, and lower Asian operating expenses due to devaluation of Asian
currency.
General and Administrative Expenses. General and administrative expenses
- ------------------------------------
represented 9% of total revenues for the three and six month periods
ended April 30, 1998, respectively, as compared with 8% and 9% for the same
periods of the previous fiscal year. General and administrative expenses
decreased to $760,000 and $1,457,000 for the three and six months ended April
30, 1998, compared to $914,000 and $1,802,000 for the same periods in fiscal
1997. The decreases in absolute dollars for the three and six months ended
April 30, 1998 were primarily due to an overall decrease in headcount and the
Company's efforts to control operating expenses relative to revenues. General
and administrative expenses include the costs of the finance, accounting and
administrative operations of the Company.
Interest Income and Expense. Interest income was $52,000 and $85,000 for the
- ---------------------------
three and six months ended April 30, 1998, respectively, compared to $3,000 and
$64,000 for the same periods in the previous fiscal year. Higher invested cash
balances accounted for the increase. Interest expense was $82,000 and $176,000
for the three and six months ended April 30, 1998, respectively, compared to
$36,000 and $72,000 for the same periods of the previous year. The increase in
interest expense was primarily due to higher outstanding short-term borrowings
in fiscal 1998.
Provision for Income Taxes. The income tax provision for the six months ended
- --------------------------
April 30, 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 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
13
<PAGE>
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 April 30, 1998, the Company had
- --------------------------------
$7,498,000 in cash and cash equivalents, as compared with $7,865,000 in cash and
cash equivalents and short term investments at October 31, 1997. The Company
used $367,000 for operating activities during the six months ended April 30,
1998, compared with $1,930,000 used for operating activities in the same period
of the previous fiscal year. Net cash used for operating activities for the six
months ended April 30, 1998 primarily resulted from the net loss from the
period, which was partially offset by non-cash expenses and the net change in
operating assets and liabilities.
Net cash provided by investing activities was $126,000 during the
first six months of fiscal 1998, as compared with $80,000 net cash provided by
investing activities for the same period in fiscal 1997. The $126,000 net cash
provided by investing activities during the six months ended April 30, 1998
represented cash received from the sale of the Health Care and Process business
unit, offset by capital expenditures, capitalized software development costs,
and FAST acquisition costs of $103,000, $821,000 and $300,000, respectively.
14
<PAGE>
Net cash provided by financing activities was $114,000 during the
first six months of fiscal 1998, which represented proceeds from the issuance of
common stock of $199,000, offset by preferred stock issuance costs of $85,000.
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 April 30, 1998, $900,000 of these guaranteed performance payments have
been paid, $600,000 by issuance of 156,931 shares of the Common Stock and one
cash payment of $300,000. Two additional payments of $300,000 each of cash or
common stock (aggregate of $600,000) will be paid at intervals of ninety days,
beginning May 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.
In April 1997, the Company entered into a revolving line of credit
agreement (the "Line of Credit Agreement") under which it could borrow up to
$5,000,000, based on eligible accounts receivable. The Line of Credit Agreement
expired on March 15, 1998. Borrowings under the revolving line of credit are
secured by substantially all of the Company's assets and bear interest at the
bank's prime rate per annum (8.5% at April 30, 1998). At April 30, 1998,
$3,051,000 was outstanding under the revolving line of credit. The Line of
Credit Agreement required the Company to maintain certain financial covenants.
The Company was in default under its credit facility from October 31, 1997
through March 15, 1998 as a result of failing to meet financial covenants
relating to minimum tangible net worth, maximum total liabilities to tangible
net worth, and required profitability covenants. On May 14, 1998, the Company
obtained a waiver of the past default from its lender.
The Company is currently negotiating with its lender regarding a new credit
facility to replace the expired facility. The lender has indicated that it
currently has no intention to call the loan and that it will continue in good
faith to renegotiate the line of credit. Although the Company believes that it
will negotiate a new credit facility, there can be no assurance that the Company
will be able to negotiate a new credit facility on terms acceptable to the
Company.
Management believes the existing cash and cash equivalents including
cash generated from operations will be sufficient to meet the Company's working
capital and capital expenditure requirements for the next twelve months.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on March 18, 1998.
The stockholders voted on proposals to:
1. Elect two (2) Class I Directors.
2. Amend the Company's 1989 Employee Stock Purchase Plan.
3. Amend the Company's 1990 Outside Directors Stock Option Plan.
4. Amend the Company's 1996 Stock Option Plan.
5. Appoint Arthur Andersen LLP as Independent Accountants for the
fiscal year ending October 31, 1998.
The proposals were approved by the following votes:
<TABLE>
<CAPTION>
Authority
Withheld/ Broker
For Against Abstain Non-votes
----------- ----------------------- ----------------------- -------------------------
<S> <C> <C> <C> <C>
1. Election of Class I
Directors,
Robert C. Fink 7,536,037 35,541 -- --
Robert Horne 7,527,795 43,783 -- --
2. Amend Company's 1989
Employee Stock
Purchase
Plan 5,365,675 264,256 23,252 1,918,395
3. Amend Company's 1990
Outside
Directors
Stock
Option Plan 5,303,256 327,654 22,273 1,918,395
4. Amend Company's 1996
Stock Option
Plan 5,236,603 391,078 25,502 1,918,395
5. Appoint Arthur
Andersen LLP 7,507,453 51,425 12,700 --
</TABLE>
16
<PAGE>
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on
Form 8-K
-----------------------
(a). List of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ---------- --------------------------
<S> <C>
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)
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)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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)
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.(6,17)
10.27 Asset Purchase Agreement for the acquisition of FAST Associates,
Pte. Dated July 31, 1997. (14)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.28 Agreement between the Company and HCL America, Inc., dated
May 21, 1997. (15,16)
27 Financial Data Schedule (available in EDGAR format only).
</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 exhibits 3.1, 3.2 and 10.19,
respectively, in 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 in
Registrant's Quarterly Report on Form 10-Q for the Quarter ended July
31, 1997.
(4) Incorporated by reference from exhibit 10.6 in 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 in
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 in
Registrant's Annual Report on Form 10-K for the Year ended October 31,
1996.
(10) Incorporated by reference from exhibit 2.1 in 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 in 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.
(14) Incorporated by reference from exhibit 2.1 in Registrant's Quarterly
Report on Form 10-Q for the Quarter ended July 31, 1997.
19
<PAGE>
(15) Incorporated by reference from exhibit 10.24 in Registrant's Annual
Report on Form 10-K/A for the Year ended October 31, 1997.
(16) The Company has filed a request for confidential treatment for
portions of this document with the Securities and Exchange Commission.
(17) Incorporated by reference from exhibits of the same number in
Registrant's Quarterly Report on Form 10-Q for the Quarter ended
January 31, 1998.
(b). Reports on Form 8-K
None
20
<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 June 12, 1998 by: /s/ Clifton Wong
------------------------ ---------------------------
Clifton Wong
Vice President, Finance and
Chief Financial Officer
21
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 7,498
<SECURITIES> 0
<RECEIVABLES> 9,688
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,620
<PP&E> 2,898
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,064
<CURRENT-LIABILITIES> 16,610
<BONDS> 0
0
0
<COMMON> 7,929
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,064
<SALES> 16,517
<TOTAL-REVENUES> 16,517
<CGS> 6,483
<TOTAL-COSTS> 6,483
<OTHER-EXPENSES> 11,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176
<INCOME-PRETAX> (599)
<INCOME-TAX> 142
<INCOME-CONTINUING> (1,058)
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