UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-27218
Learmonth & Burchett Management Systems Plc
(Exact name of registrant as specified in its charter)
England None
(Stated or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1800 West Loop South, 9th Floor
Houston, Texas
77027-3210
(Address of principal executive offices)
(Zip Code)
(713) 625-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes [X] No
------ ------
As of August 21, 1997, 26,040,964 Ordinary Shares of the Registrant's Common
Stock, 10 pence par value, were issued and outstanding.
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
FORM 10-Q
JULY 31, 1997
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of July 31, 1997 and April 30, 1997 3
Consolidated Statement of Operations for the three months ended
July 31, 1997 and July 31, 1996 4
Consolidated Statement of Cash Flows for the three months ended
July 31, 1997 and July 31, 1996 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
July 31, April 30,
1997 1997
--------- ----------
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 10,320 $ 8,461
Trade accounts receivable 2,563 4,358
Other current assets 1,269 1,023
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Total current assets 14,152 13,842
Furniture, fixture and equipment, net 1,531 1,512
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Total assets $ 15,683 $ 15,354
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Liabilities and shareholders' deficit
-------------------------------------
Current liabilities:
Current maturities of indebtedness $ 493 $ 745
Accounts payable 729 486
Deferred revenue 4,073 3,534
Accrued liabilities 5,220 5,778
Executive Stock Option Trust indebtedness 977
-------- --------
Total current liabilities 10,515 11,520
Indebtedness 178 238
Other liabilities 5,977 8,843
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Total liabilities 16,670 20,601
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Shareholders' deficit:
Ordinary shares, 10 pence par value 4,338 4,267
Additional paid-in capital 21,423 20,330
Executive Stock Option Trust indebtedness (977)
Cumulative translation adjustment (277) (372)
Accumulated deficit (26,471) (28,495)
-------- --------
Total shareholders' deficit (987) (5,247)
-------- --------
Commitments and contingencies
-------- --------
Total liabilities and shareholders' deficit $ 15,683 $ 15,354
======== ========
The accompanying notes are an integral part of this statement.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
Three months ended
July 31,
------------------
1997 1996
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Revenue:
Product licenses $ 4,050 $ 2,004
Services 1,848 3,250
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Total revenue 5,898 5,254
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Costs and expenses:
Cost of product licenses 16 58
Cost of services 969 1,616
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Total cost of revenue 985 1,674
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Gross margin 4,913 3,580
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Sales and marketing 2,447 4,522
Research and development 1,115 2,143
General and administrative 660 1,308
Recovery of restructuring charges (1,256)
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Total operating expenses 2,966 7,973
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Operating income (loss) 1,947 (4,393)
Interest income 107 123
Interest expense (30) (34)
Other income (expense) 4
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Income (loss) from continuing operations before income taxes 2,024 (4,300)
Income taxes (benefit)
------- -------
Net income (loss) $ 2,024 $(4,300)
======= =======
Income (loss) per Ordinary Share: $0.08 $(0.17)
======= =======
Income (loss) per ADS: (1) $0.15 $(0.34)
======= =======
Weighted average Ordinary and Ordinary Share
equivalents outstanding 26,998 25,535
======= =======
(1) Adjusted to reflect the ratio of one ADS to two Ordinary Shares.
The accompanying notes are an integral part of this statement.
-4-
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended
July 31,
------------------
1997 1996
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Cash flow from operating activities:-
Net income (loss) $ 2,024 $(4,300)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 112 228
Recovery of restructuring charges (1,256)
Changes in current assets and liabilities:
Trade accounts receivable 1,795 4,554
Other current assets (246) 297
Accounts payable 243 (469)
Accrued restructuring (1,523) (98)
Accrued legal settlement (333) (155)
Other accrued liabilities (329) (848)
Deferred revenue 539 1,630
Other noncurrent assets and liabilities, net 112 (71)
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Net cash provided by operating activities 1,138 768
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Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (131) (148)
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Net cash used by investing activities (131) (148)
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Cash flows from financing activities:
Repayments of indebtedness (1,289) (155)
Sale of ESOT Ordinary Shares, net 1,636
Issuance of Ordinary Shares, net 505 (39)
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Net cash provided (used) by financing activities 852 (194)
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Increase in cash 1,859 426
Beginning cash and cash equivalents 8,461 10,960
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Ending cash and cash equivalents $10,320 $11,386
======= =======
The accompanying notes are an integral part of this statement.
-5-
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
JULY 31, 1997
Unaudited
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles of the United States
for interim financial reporting and in accordance with Form 10-Q and Rule 10.01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles of the United
States for complete financial statements. In the opinion of management, the
unaudited consolidated financial statements contained in this report reflect all
adjustments, consisting of only normal recurring adjustments considered
necessary for a fair presentation of the financial position and the results of
operations for the interim periods presented. Operating results for interim
periods are not necessarily indicative of results for the full year. These
unaudited consolidated financial statements, footnote disclosures and other
information should be read in conjunction with the financial statements and the
notes thereto included in the Company's annual 10-K filed with the Securities
and Exchange Commission on July 29, 1997.
NOTE 2 - SHAREHOLDERS' EQUITY:
In the period May 1, 1997 through July 31, 1997, options to purchase 340,401
Ordinary Shares at exercise prices of $0.72 to $1.63 per share were exercised.
At July 31, 1997, there were options granted and outstanding to purchase
3,680,013 Ordinary Shares. The Company issued 89,842 Ordinary Shares to its
employees on July 1, 1997 under the Employee Stock Purchase Plan.
NOTE 3 - EARNINGS PER SHARE AND COMMON EQUIVALENT SHARE:
Earnings per Ordinary Share and earnings per ADS are computed using the weighted
average number of Ordinary Shares and Ordinary Share equivalents outstanding
during the period. Ordinary Share equivalents, to the extent they would be
dilutive, include the number of shares issuable upon exercise of stock options,
less the number of shares that could have been repurchased with the exercise
proceeds using the treasury stock method.
NOTE 4 - RESTRUCTURING CHARGE:
In August 1996, the Board of Directors approved a plan to restructure the
Company's operations. Under the approved plan, the Company recorded a
restructuring charge of $17.6 million in the three months ending October 31,
1996. At July 31, 1997, the Company had approximately $7 million of the
restructuring liabilities remaining. These primarily related to abandoned
lease costs which will be paid out through the year 2014. During the three
months ended July 31, 1997, the Company recorded a recovery of restructuring
charges previously taken of $1.3 million related to the subleasing and/or buyout
of various abandoned leases.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
When used in this discussion, the words "believes," "anticipated" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. See Item 6 - Exhibit
99 "Important Factors Regarding Forward-Looking Statements" which is
incorporated herein by reference. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
In August 1996, the Board of Directors approved a plan to restructure the
Company's operations and made certain changes to executive management. In
connection with the Company's restructuring plan, the Company recorded a $17.6
million restructuring charge in the three months ended October 31, 1996. The
restructuring charge was comprised primarily of lease costs, severance and other
employee costs and impairment of certain operating assets, principally outside
the U.S. Included in the restructuring was a shift in the Company's development
and marketing efforts to focus substantially all its resources on the Company's
Process Engineer product line, eliminating or substantially reducing its
development and marketing investment in the Systems Engineer, Insight, GUI
Guidelines and Client Server Guidelines product lines. The Company also
discontinued its direct sales and service operations outside the US, replacing
its non-U.S. operations with third-party distributor relationships. Also, the
Company discontinued its telesales operations in the US.
During the three months ended July 31, 1997, the Company recorded a recovery of
restructuring charges previously taken of $1.3 million related to the subleasing
and/or buyout of various abandoned leases. The Company expects additional
recoveries, primarily through sublease or other arrangements, however, there is
no assurance that such recoveries will actually occur.
As a result of the significant changes in the business, the results of
operations and financial position of the Company for the three months ended July
31, 1997, are substantially different than for the comparative prior period.
THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THREE MONTHS ENDED JULY 31, 1996
Total Revenue
Total revenue increased from $5.3 million in the three months ended July 31,
1996 to $5.9 million in the three months ended July 31, 1997. This increase was
attributable to increased product revenue in the U.S. partially offset by a
decrease in service revenue related to the discontinuance of direct service
operations outside the U.S. and a decrease in maintenance revenue because of the
sale of the Systems Engineer product line.
Product Licenses. The Company's product license revenue in the three months
ended July 31, 1997 was predominantly related to its Process Engineer product
line. Product license revenue increased 102% from $2.0 million in the three
months ended July 31, 1996 to $4.1 million in the three months ended July 31,
1997. This increase is substantially attributable to increased product revenue
in the U.S.
Services. The Company provides maintenance and implementation services to its
customers. Maintenance services include technical support and access to product
upgrades when and if available. Implementation services include product
installation, training and assisting customers with the effective deployment of
LBMS products. Overall services revenue decreased 43% from $3.3 million for the
three months ended July 31, 1996 to $1.8 million for the three months
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ended July 31, 1997, primarily due to the elimination of the service operations
outside the U.S. and an elimination of maintenance revenue from the Systems
Engineer product line.
Cost of Revenue
Cost of Product Licenses. Cost of product licenses consists of sublicense
fees, product media and duplication cost, manuals, packaging materials and
shipping expenses. Cost of product licenses was $58,000 and $16,000 in the
three month periods ended July 31, 1996 and 1997, respectively. The reduction
is due to the elimination of third party license fees payable on sales of the
Systems Engineer product.
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $1.6
million and $1.0 million in the three months ended July 31, 1996 and 1997,
respectively, resulting in a gross margin of 50% and 48% of the related service
revenue in each respective period. The reduction in gross margin percentage
predominately reflects the elimination of maintenance revenue from the Systems
Engineer product line.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions of sales and marketing personnel, travel and promotional
expenses and related indirect costs. Sales and marketing expenses decreased 46%
from $4.5 million, or 86% of total revenue, in the three months ended July 31,
1996 to $2.4 million, or 41% of total revenue, for the three months ended July
31, 1997. This decrease of $2.1 million is due to the elimination of sales and
marketing costs outside the U.S.
Research and Development. Research and development expenses consist primarily
of cost of research and development personnel and related indirect costs.
Research and development expenses were $2.1 million, or 41% of total revenue,
for the three months ended July 31, 1996 compared to $1.1 million, or 19% of
total revenue for the three months ended July 31, 1997. The decrease in
research and development expenses reflect the elimination or substantial
reduction in development efforts related to the Systems Engineer, Insight, GUI
Guidelines and Client Server Guidelines products. Development headcount and
expenses related to the Process Engineer product line were increased in the
three months ended July 31, 1997 compared to the three months ended July 31,
1996.
General and Administrative. General and administrative expenses consist
primarily of salaries of financial, administrative and management personnel and
related indirect costs. General and administrative expenses decreased 50% from
$1.3 million for the three months ended July 31, 1996 to $0.7 million for the
three months ended July 31, 1997. The decrease resulted from the elimination of
general and administrative expenses outside the U.S. and a reduction of general
and administrative expenses, principally leasehold costs, in the U.S.
Operating Income. The Company generated income from operations of $1.9 million,
including a recovery of restructuring charges from previous periods of $1.3
million, in the three months ended July 31, 1997 compared to a loss from
operations of $4.4 million for the comparable period in 1996.
Income taxes. The Company did not record an income tax expense for income
recognized in the three month period ended July 31, 1997, due to prior period
losses. For the three months ended July 31, 1996, no tax benefit was recognized
due to the historical tax losses experienced; consequently, there was no
assurance that the Company's operations would generate taxable income to utilize
these losses.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At July 31, 1997, the Company had cash and cash equivalents of $10.3 million and
working capital of $3.6 million. The Company generated cash from operating
activities of $1.1 million in the three months July 31, 1997.
The Company's investing activities consist primarily of purchases of equipment.
The Company had capital expenditures of $0.1 million, in each of the three
months ended July 31, 1997 and 1996. The Company does not currently have any
significant capital commitments.
The Company has available lines of credit from a bank in the U.S. in the amounts
of $2.5 million. Approximately $0.2 million was outstanding under this line of
credit at July 31, 1997. This credit facility requires the Company to comply
with certain restrictive covenants and maintain certain financial ratios. At
July 31, 1997, the Company was in violation of certain restrictive covenants and
obtained a waiver from the Bank. In June 1997, the Company's Executive Stock
Option Trust repaid approximately $1 million of indebtedness to a Bank with
proceeds from the sale of the shares held by the Trust and consequently, the
Company was released from its guarantee of that indebtedness.
The Company believes that its existing cash will be adequate to finance its
operations for at least the next 12 months.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 128 " Earnings per Share" (SFAS
128) which becomes effective for periods ending after December 15, 1997,
establishes new standards for computing and presenting earnings per share (EPS).
The new standard requires the presentation of basic EPS and diluted EPS. Basic
EPS is calculated by dividing income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common shareholders by
the weighted average number of common shares outstanding adjusted to reflect
potentially dilutive securities. Previously reported EPS amounts must be
restated under the new standard when it becomes effective.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accoounting Standards No. 130, "Reporting for Comprehensive Income"
and No. 131 "Disclosure about Segments of an Enterprise and Related
Information." These statements are effective for financial statements issued
for periods beginning after December 15, 1997. The Company has not yet analyzed
the impact of adopting these statements.
The American Institute of Certified Public Accountants has issued an exposure
draft to amend the provisions of Statement of Position 91-1, "Software Revenue
Recognition." The adoption of the standards in the current version of the
exposure draft will not have a significnat impact on the Company's results of
operations or financial position.
-9-
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
PART II. - OTHER INFORMATION
ITEM 1. Legal Proceedings: - From time to time the Company has legal or
administrative proceedings which are generally incidental to its
normal business activities. While the outcome of any such proceeding
can not be accurately predicted, the Company does not believe the
ultimate resolution of any such existing matters should have a
material adverse effect on its financial position or results of
operations.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
99 Important Factors Regarding Forward-Looking Statements.
(b) Reports on Form 8-K
Not Applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 0r 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: September 15, 1997 LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
By: /s/ Michael S. Bennett
----------------------
Michael S. Bennett, Chief Executive Officer
By: /s/ Stephen E. Odom
-------------------
Stephen E. Odom, Chief Financial Officer
and Senior Vice President - Finance
and Administration
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