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 October 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
(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 November 30, 1997, 26,127,628 Ordinary Shares of the Registrant's Common
Stock, 10 pence par value, were issued and outstanding.
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
FORM 10-Q
OCTOBER 31, 1997
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of October 31, 1997
and April 30, 1997 3
Consolidated Statement of Operations for the three and
six months ended October 31, 1997 and October 31, 1996 4
Consolidated Statement of Cash Flows for the six months
ended October 31, 1997 and October 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 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
October 31, April 30,
1997 1997
------------ ----------
(unaudited) (audited)
Assets
------
Current assets:
Cash and cash equivalents $ 9,335 $ 8,461
Trade accounts receivable 4,230 4,358
Other current assets 1,114 1,023
-------- --------
Total current assets 14,679 13,842
Furniture, fixture and equipment, net 1,526 1,512
-------- --------
Total assets $ 16,205 $ 15,354
======== ========
Liabilities and shareholders' equity (deficit)
----------------------------------------------
Current liabilities:
Current maturities of indebtedness $ 165 $ 745
Accounts payable 698 486
Deferred revenue 3,243 3,534
Accrued liabilities 5,585 5,778
Executive Share Option Trust indebtedness 977
-------- --------
Total current liabilities 9,691 11,520
Indebtedness 211 238
Other liabilities 6,166 8,843
-------- --------
Total liabilities 16,068 20,601
-------- --------
Shareholders' equity (deficit):
Ordinary shares, 10 pence par value 4,351 4,267
Additional paid-in capital 21,500 20,330
Executive Share Option Trust indebtedness (977)
Cumulative translation adjustment (401) (372)
Accumulated deficit (25,313) (28,495)
-------- --------
Total shareholders' equity (deficit) 137 (5,247)
-------- --------
Commitments and contingencies -------- --------
Total liabilities and shareholders'
equity (deficit) $ 16,205 $ 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 Six months ended
October 31, October 31,
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
Revenue:
Product licenses $ 4,702 $ 2,757 $ 8,752 $ 4,761
Services 1,831 2,095 3,679 5,345
------- -------- ------- --------
Total revenue 6,533 4,852 12,431 10,106
------- -------- ------- --------
Costs and expenses:
Cost of product licenses 22 11 38 69
Cost of services 842 921 1,811 2,537
------- -------- ------- --------
Total cost of revenue 864 932 1,849 2,606
------- -------- ------- --------
Gross margin 5,669 3,920 10,582 7,500
------- -------- ------- --------
Sales and marketing 2,850 2,217 5,297 6,739
Research and development 1,129 1,016 2,244 3,159
General and administrative 648 578 1,308 1,886
Restructuring charge (recovery) 17,621 (1,256) 17,621
------- -------- ------- --------
Total operating expenses 4,627 21,432 7,593 29,405
------- -------- ------- --------
Operating income (loss) 1,042 (17,512) 2,989 (21,905)
Interest income 126 119 233 242
Interest expense (10) (35) (40) (69)
Other income (expense) 11 15
------- -------- ------- --------
Income (loss) before income taxes 1,158 (17,417) 3,182 (21,717)
Income taxes (benefit)
------- -------- ------- --------
Net Income (loss) $ 1,158 $(17,417) $ 3,182 $(21,717)
======= ======== ======= ========
Income (loss) per Ordinary Share: $0.04 $(0.68) $0.12 $(0.85)
======= ======== ======= ========
Income (loss) per ADS: (1) $0.09 $(1.36) $0.24 $(1.70)
======= ======== ======= ========
Weighted average Ordinary and Ordinary Share
equivalents outstanding 26,321 25,539 26,207 25,537
======= ======== ======= ========
(1) Adjusted to reflect the ratio of one ADS to two Ordinary Shares.
The accompanying notes are an integral part of this statement.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six months ended
October 31,
----------------
1997 1996
------- --------
Cash flow from operating activities:-
Net income (loss) $ 3,182 $(21,717)
Adjustments to reconcile net income (loss) to cash
used by operating activities:
Depreciation and amortization 225 303
Write-off/(recovery) of net assets from restructuring (1,256) 2,894
Changes in current assets and liabilities, net of
the effect of net asset write-offs from restructuring:
Trade accounts receivable 128 3,835
Other current assets (91) 916
Accounts payable 212 (390)
Accrued restructuring (1,647) 10,583
Accrued legal settlement (333) (155)
Other accrued liabilities 157 (302)
Deferred revenue (291) 1,273
Other noncurrent assets and liabilities, net 180 (593)
------- --------
Net cash provided (used) by operating activities 466 (3,353)
------- --------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (239) (187)
------- --------
Net cash used by investing activities (239) (187)
------- --------
Cash flows from financing activities:
Repayments of indebtedness (1,584) (318)
Sale of ESOT Ordinary Shares, net 1,636
Issuance of Ordinary Shares, net 595 (39)
------- --------
Net cash provided (used) by financing activities 647 (357)
------- --------
Increase (decrease) in cash 874 (3,897)
Beginning cash and cash equivalents 8,461 10,960
------- --------
Ending cash and cash equivalents $ 9,335 $ 7,063
======= ========
The accompanying notes are an integral part of this statement.
-5-
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
OCTOBER 31, 1996
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles of the United States
for interim financial reporting and in accordance with Form 10-Q and Rule 10.01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles of the United
States for complete financial statements. In the opinion of management, the
unaudited consolidated financial statements contained in this report reflect all
adjustments, consisting of only normal recurring adjustments considered
necessary for a fair presentation of the financial position and the results of
operations for the interim periods presented. Operating results for interim
periods are not necessarily indicative of results for the full year. These
unaudited consolidated financial statements, footnote disclosures and other
information should be read in conjunction with the financial statements and the
notes thereto included in the Company's annual 10-K filed with the Securities
and Exchange Commission on July 29, 1997.
NOTE 2 - SHAREHOLDERS' EQUITY:
In the period May 1, 1997 through October 31, 1997, options to purchase 413,178
Ordinary Shares at exercise prices of 0.4425 to 0.76 Pounds Sterling per share
were exercised. At October 31, 1997, there were options outstanding to purchase
4,407,959 Ordinary Shares. In November 1997, the shareholders formally approved
an amendment to the 1996 Stock Option Plan (the Plan) to increase the maximum
number of shares available in the Plan by 1.5 million Ordinary Shares.
In June 1997, the Company's Executive Share Option Trust completed a Private
Placement for 988,240 of restricted Ordinary Shares of the Company and repaid
approximately $1.0 million of indebtedness to a Bank with proceeds from the
sale; consequently, the Company was released from its guarantee of that
indebtedness. The Company recognized an increase of $0.7 million in Additional
Paid in Capital which represents the net proceeds of the sale after the
repayment of indebtedness and transaction cost. The Company also 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 October 31, 1997, the Company had approximately $7.0 million of the
restructuring liabilities remaining. These primarily related to abandoned lease
costs which will be paid out through the year 2014. During the six months ended
October 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 U.S., replacing
its non-U.S. operations with third-party distributor relationships. Also, the
Company discontinued its telesales operations in the U.S.
During the six months ended October 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 six months ended
October 31, 1997, are substantially different than for the comparative prior
period.
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1996
Total Revenue
Total revenue increased 35% from $4.9 million in the three months ended October
31, 1996 to $6.5 million in the three months ended October 31, 1997. This
increase was attributable to increased product sales in the U.S. partially
offset by a decrease in service revenue related to a decrease in maintenance
revenue because of the sale of the Systems Engineer product line.
Product Licenses. Product license revenue increased 71% from $2.8 million in the
three months ended October 31, 1996 to $4.7 million in the three months ended
October 31, 1997. This increase is attributable to increased product sales 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 13% from $2.1 million for the
three months ended October 31, 1996 to $1.8 million for the three months ended
October 31, 1997, primarily due to a decrease in maintenance revenue because of
the sale of the Systems
-7-
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $11,000 and $22,000 in the
three month periods ended October 31, 1996 and 1997, respectively.
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $0.9
million and $0.8 million in the three months ended October 31, 1996 and 1997,
respectively, resulting in a gross margin of 56% and 54% of the related service
revenue in each respective period. The reduction in gross margin percentage
primarily relates to a decrease in 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 increased 29%
from $2.2 million, or 46% of total revenue, in the three months ended October
31, 1996 to $2.9 million, or 44% of total revenue, for the three months ended
October 31, 1997. The increase of $0.7 million is primarily related to increased
commissions due to increased license revenue and an increase in discretionary
marketing expense.
Research and Development. Research and development expenses consist primarily
of the cost of research and development personnel and related indirect costs.
Research and development expenses were $1.0 million, or 21% of total revenue,
for the three months ended October 31, 1996 compared to $1.1 million, or 17% of
total revenue for the three months ended October 31, 1997.
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 increased 12% for
the three months ended October 31, 1997 in comparison to the 1996 period. The
increase primarily resulted from additional expenses to support the Company's
recruiting efforts, including the addition of a director of human resources, and
increased depreciation related to capital additions, principally computer
equipment.
Operating Income. The Company generated income from operations of $1.0 million,
in the three months ended October 31, 1997 compared to income from operations of
$0.1 million before a restructuring charge of $17.6 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 October 31, 1997, due to prior period
losses. For the three months ended October 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.
SIX MONTHS ENDED OCTOBER 31, 1997 COMPARED TO SIX MONTHS ENDED OCTOBER 31, 1996
Total Revenue
Total revenue increased 23% from $10.1 million in the six months ended October
31, 1996 to $12.4 million in the six months ended October 31, 1997. This
increase was attributable to increased product sales 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.
-8-
LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Product Licenses. Product license revenue increased 84% from $4.8 million in the
six months ended October 31, 1996 to $8.8 million in the six months ended
October 31, 1997. This increase is attributable to increased product sales 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. Implementation services include product installation, training and
assisting customers with the effective deployment of LBMS products. Overall
services revenue decreased 31% from $5.3 million for the six months ended
October 31, 1996 to $3.7million for the six months ended October 31, 1997,
due to the 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.
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 $69,000 and $38,000 for the
six month periods ending October 31, 1996 and 1997, respectively.
Cost of Services. Cost of services consists primarily of personnel costs for
implementation, training and customer support. Cost of services was $2.5
million and $1.8 million in the six months ended October 31, 1996 and 1997,
respectively, resulting in a gross margin of 53% and 51% of the related service
revenue in each respective period. The reduction of the gross margin percentage
predominately reflects the reduction in maintenance revenue as a percentage of
total service revenue due to the sale of 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 21%
from $6.7 million, or 67% of total revenue, in the six months ended October 31,
1996 to $5.3 million, or 43% of total revenue, for the six months ended October
31, 1997. This decrease of $1.4 million is due to the elimination of sales and
marketing costs outside the U.S.
Research and Development. Research and development expenses consist primarily
of the cost of research and development personnel and related indirect costs.
Research and development expenses were $3.2 million, or 31% of total revenue,
for the six months ended October 31, 1996 compared to $2.2 million, or 18% of
total revenue for the six months ended October 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 beginning in the three months
ended October 31, 1996 . Development headcount and expenses related to the
Process Engineer product line were increased in the six months ended October 31,
1997 compared to the six months ended October 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 31% from
$1.9 million for the six months ended October 31, 1996 to $1.3 million for the
six months ended October 31, 1997. The decrease resulted from the elimination
of general and administrative expenses outside the U.S. beginning with the three
months ended October 31. 1996.
Operating Income. The Company generated operating income of $3.0 million,
including the benefit of a $1.3 million recovery of a previously recorded
restructuring charge, compared to a loss from operations of $21.9 million,
including a restructuring charge of $17.6 million, for the comparable period in
1996.
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LEARMONTH & BURCHETT MANAGEMENT SYSTEMS PLC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income taxes. The Company did not record an income tax expense for income
recognized in the six month period ended October 31, 1997, due to prior period
losses. During the six month period ended October 31, 1996, the Company did not
record a tax benefit related to the Company's losses because such benefit could
not be recognized, under the liability method, until future taxable income is
reasonably assured.
Liquidity and Capital Resources
- -------------------------------
At October 31, 1997, the Company had cash and cash equivalents of $9.3 million
and working capital of $5.0 million. The Company generated approximately $2.5
million in cash from operations for the six months ended October 31, 1997 before
payments of approximately $2.0 million related to the Company's restructuring
activities and legal settlement.
The Company's investing activities consist primarily of purchases of equipment.
The Company had capital expenditures of $0.2 million for the six months ended
October 31, 1997, substantially the same as the prior year comparable period.
The Company does not currently have any significant capital commitments.
The Company has an available line of credit from a bank in the U.S. in the
amount of $2.5 million. During the six months ended October 31, 1997, the
Company repaid approximately $0.25 million outstanding under the line of credit.
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 September 1997, the Company renewed its credit facilities and modified
certain of the restrictive covenants and financial ratios requirements. As of
October 31, 1997 and November 30, 1997, the Company was in compliance with all
credit facility covenants.
In June 1997, the Company's Executive Share Option Trust repaid approximately $1
million of indebtedness to a Bank with proceeds from the sale of the shares held
by the Trust; 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.
See Exhibit 99 for further discussions about potential risk factors.
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. The Company has not
yet analyzed the impact of adopting this statement.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting 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 a new
Statement of Position to amend the provisions of Statement of Position 91-1,
"Software Revenue Recognition." The adoption of this standard will not have a
significant impact on the Company's results of operations or financial position.
-10-
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
10 Employment Agreement with Michael S. Bennett as Chief Executive
Officer
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking Statements.
(b) Reports on Form 8-K
Not Applicable.
-11-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 10, 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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