<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996
-------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
------------ -----------------------
Commission file number 0-26794
---------------------------------------------------
Enterprise Systems, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3130103
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1400 South Wolf Road, Wheeling, Illinois 60090-6524
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(847) 537-4800
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At November 1, 1996, there were 8,121,248 shares of Common Stock of the
registrant outstanding.
<PAGE>
ENTERPRISE SYSTEMS, INC.
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Auditors' Review Report 3
Consolidated Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 4
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1996 and 1995 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Enterprise Systems, Inc.:
We have reviewed the consolidated balance sheet of Enterprise Systems, Inc. and
subsidiary as of September 30, 1996, and the related consolidated statements of
operations for the three-month and nine-month periods ended September 30, 1996
and 1995 and consolidated statements of cash flows for the nine months ended
September 30, 1996 and 1995. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Enterprise Systems, Inc. and
subsidiary as of December 31, 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 12, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1995, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
Chicago, Illinois
October 22, 1996
3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------ ------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents.................. $ 1,813 $11,403
Short-term investment securities........... 1,197 9,220
Receivables................................ 19,778 14,321
Refundable and prepaid income taxes........ 976 547
Deferred income taxes...................... 2,834 777
Other current assets....................... 3,493 2,299
------- -------
Total current assets..................... 30,091 38,567
------- -------
Investment securities....................... 4,775 4,893
Property and equipment...................... 4,311 3,567
Purchased and developed software............ 4,038 1,498
Other assets................................ 3,883 401
------- -------
$47,098 $48,926
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Short-term debt............................ $ 300 $ --
Accounts payable........................... 714 1,285
Accrued liabilities........................ 3,718 2,240
Unearned revenue........................... 3,938 4,674
------- -------
Total current liabilities................ 8,670 8,199
------- -------
Deferred income taxes....................... 729 321
Stockholders' equity
Preferred stock, $.01 par value; authorized
1,000,000 shares; none outstanding........ -- --
Common stock, $.01 par value; authorized
30,000,000 shares; issued and outstanding
7,521,248 and 7,357,033 shares........... 75 74
Additional paid-in capital................. 39,187 38,513
Retained earnings (accumulated deficit).... (1,498) 1,910
Deferred compensation...................... (65) (91)
------- -------
Total stockholders' equity............... 37,699 40,406
------- -------
$47,098 $48,926
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Software................................... $ 6,059 $3,835 $15,919 $10,823
Services................................... 6,705 4,305 17,159 11,545
Hardware................................... 1,181 102 1,910 314
------- ------ ------- -------
Total revenues.......................... 13,945 8,242 34,988 22,682
------- ------ ------- -------
Operating costs and expenses
Software development....................... 2,640 2,110 6,683 5,486
Service and support........................ 3,837 2,784 10,414 7,917
Hardware................................... 1,161 105 1,900 374
Sales and marketing........................ 3,019 2,150 8,526 6,399
Administration............................. 1,856 953 4,970 2,784
Acquired in-process technology............. - - 8,453 -
------- ------ ------- -------
Total operating costs and expenses...... 12,513 8,102 40,946 22,960
------- ------ ------- -------
Income (loss) from operations................ 1,432 140 (5,958) (278)
Interest income (expense), net............... 70 (69) 537 (150)
------- ------ ------- -------
Income (loss) before income taxes............ 1,502 71 (5,421) (428)
Income tax expense (benefit)................. 633 28 (2,013) (111)
------- ------ ------- -------
Net income (loss)............................ $ 869 $ 43 $(3,408) $ (317)
======= ====== ======= =======
Net income (loss) per share.................. $ 0.11 $ 0.01 $ (0.46) $ (0.06)
======= ====== ======= =======
Shares used in computing net income
(loss) per share.......................... 8,017 5,520 7,480 5,553
======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities, net of acquisition
Net loss................................................. $(3,408) $ (317)
Adjustments to reconcile net loss to net cash
used in operating activities............................
Depreciation............................................ 1,598 1,176
Amortization............................................ 878 182
Deferred income taxes................................... (1,649) (217)
Acquired in-process technology.......................... 8,453 --
Changes in assets and liabilities
Receivables........................................... (1,497) (1)
Refundable and prepaid income taxes................... (429) (133)
Other current assets.................................. (920) (1,392)
Accounts payable...................................... (571) (200)
Accrued liabilities................................... 23 1,401
Unearned revenue...................................... (3,556) (1,855)
Other, net............................................ (312) (5)
------- -------
Net cash used in operating activities............... (1,390) (1,361)
------- -------
Cash flows from investing activities
Payment for acquisition.................................. (13,892) --
Maturities of investment securities...................... 8,141 --
Purchase of property and equipment....................... (2,249) (1,374)
Capitalized software development......................... (1,350) (635)
------- -------
Net cash used in investing activities............... (9,350) (2,009)
------- -------
Cash flows from financing activities
Proceeds from short-term debt............................ 300 3,700
Repayment of long-term debt.............................. -- (291)
Proceeds from exercise of stock options.................. 850 73
Repurchase of common stock............................... -- (493)
------- -------
Net cash provided by financing activities........... 1,150 2,989
------- -------
Decrease in cash and cash equivalents..................... (9,590) (381)
Cash and cash equivalents at beginning of period.......... 11,403 1,588
------- -------
Cash and cash equivalents at end of the period............ $ 1,813 $ 1,207
======= =======
Supplemental disclosures of cash flow information
Interest paid............................................ $ 28 $ 168
======= =======
Income taxes paid........................................ $ -- $ 273
======= =======
Supplemental disclosures of non-cash activity
Accrued offering expenses................................ $ 175 $ --
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
ENTERPRISE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
reflect all adjustments which, in the opinion of management, are necessary for a
fair presentation of the results of the interim periods presented. All such
adjustments are of a normal recurring nature.
These consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for
the year ended December 31, 1995, included in the Form 10-K filed by the Company
with the Securities and Exchange Commission.
The results of operations for the three and nine months ended September 30,
1996, are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 1996.
NOTE 2 - COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income per share is based on the weighted average number of shares
outstanding and includes the dilutive effect of unexercised stock options using
the treasury stock method. Net loss per share is based on the weighted average
number of shares outstanding and does not include the dilutive effect of
unexercised stock options under the treasury stock method. For the three and
nine month periods ended September 30, 1995, pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, options for common stock granted by
the Company during the twelve months immediately preceding the initial public
offering (using the treasury stock method and the mid-point of the then proposed
public offering price) have been included in the calculation of common and
common equivalent shares as if they were outstanding for all periods presented.
NOTE 3 - COMMON STOCK OFFERING
On July 26, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission in connection with a public offering of
1,725,000 shares of its common stock. Due to market conditions, the Company
withdrew its filing on August 28, 1996.
On October 18, 1996, the Company completed a private placement of its
common stock in which 600,000 shares were sold by the Company, resulting in net
proceeds of approximately $13 million.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations. The following table sets forth revenue and expense
items as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Software................................ 43% 47% 45% 48%
Services................................ 48 52 49 51
Hardware................................ 9 1 6 1
---- ---- ---- ----
Total revenues......................... 100 100 100 100
---- ---- ---- ----
Operating costs and expenses
Software development.................... 19 26 19 24
Service and support..................... 28 34 30 35
Hardware................................ 8 1 6 2
Sales and marketing..................... 22 26 24 28
Administration.......................... 13 11 14 12
Acquired in-process technology.......... -- -- 24 --
---- ---- ---- ----
Total operating costs and expenses..... 90 98 117 101
---- ---- ---- ----
Income (loss) from operations............ 10 2 (17) (1)
Interest income (expense), net........... 1 (1) 1 (1)
---- ---- ---- ----
Income (loss) before income taxes........ 11 1 (16) (2)
Income tax expense (benefit)............. 5 -- (6) (1)
---- ---- ---- ----
Net income (loss)........................ 6% 1% (10)% (1)%
==== ==== ==== ====
</TABLE>
REVENUES
The Company derives its revenues from software licenses, installation
services, ongoing support, maintenance and enhancement services, product
education, consulting and the sale of computer hardware. Total revenues for the
third quarter of 1996 were $13,945,000, an increase of $5,703,000 or 69%, as
compared to $8,242,000 for the same period in 1995. Total revenues for the first
nine months of 1996 were $34,988,000, an increase of $12,306,000 or 54%, as
compared to $22,682,000 for the first nine months of 1995.
Software. Software revenues for the third quarter of 1996 increased
$2,224,000, or 58%, as compared to the third quarter of 1995. For the first nine
months of 1996, software revenues increased $5,096,000, or 47%, as compared to
the same period in 1995. The increases are primarily attributable to expansion
of the Company's sales force and marketing efforts.
8
<PAGE>
Services. Services revenues for the third quarter of 1996 increased
$2,400,000, or 56%, as compared to the third quarter of 1995. For the first nine
months of 1996, services revenues increased $5,614,000, or 49%, as compared to
the same period in 1995. The increases in services revenues are related to the
increase in software revenues, consulting services revenues and growth in
recurring support fees as well as the impact of services revenues from the
Matkon Acquisition for the full three month period in 1996.
Hardware. Hardware revenues for the third quarter of 1996 increased
$1,079,000, as compared to the third quarter of 1995. For the first nine months
of 1996, hardware revenues increased $1,596,000, as compared to the same period
in 1995. The increases in hardware revenues are principally attributable to
TouchScan and TS2000 sales, and Matkon hardware sales.
COSTS AND EXPENSES
Software Development. Software development expenses for the third quarter
of 1996 increased $530,000, or 25%, as compared to the third quarter of 1995.
For the first nine months of 1996, these expenses increased $1,197,000, or 22%,
as compared to the same period in 1995. The increases in these expenses are
primarily related to development work on new releases of each of the Company's
product lines and the ongoing conversion of its DOS-based products to a Windows-
based platform as well as development related expenditures of Matkon. For the
first nine months of 1996, software development expenses decreased as a
percentage of total revenues from the year earlier period as recently introduced
products have begun to generate higher levels of revenues.
For the third quarter and first nine months of 1996, the Company
capitalized $289,000 and $955,000, respectively, of software development costs,
net of related amortization expense, in accordance with Statement of Financial
Accounting Standards No. 86. Capitalized software development costs are
amortized over the estimated life of the related products (up to four years).
For the third quarter and first nine months of 1995, the Company capitalized
$115,000 and $453,000, respectively, of software development costs, net of
related amortization expense. Amounts capitalized, net of amounts amortized,
represent 12% and 7% of total software development expenditures for the nine
months ended September 30, 1996 and 1995, respectively. Since a larger
percentage of the development effort was related to new products, rather than
enhancement of existing products, more software development expenditures were
capitalized during 1996 than 1995.
Service and Support. Service and support expenses for the third quarter of
1996 increased $1,053,000, or 38%, as compared to the third quarter of 1995. For
the first nine months of 1996, these expenses increased $2,497,000, or 32%, as
compared to the same period in 1995. The increases in these expenses are
primarily attributable to the hiring of additional implementation personnel and
related travel and additional service personnel from the Matkon Acquisition.
Hardware. Hardware costs for the third quarter of 1996 increased
$1,056,000, as compared to the third quarter of 1995. For the first nine months
of 1996, hardware costs increased $1,526,000, as compared to the same period in
1995. The increase in hardware costs is attributable to the proportionate
increase in hardware revenues.
Sales and Marketing. Sales and marketing expenses for the third quarter of
1996 increased $869,000, or 40%, as compared to the third quarter of 1995. For
the first nine months of 1996, these expenses increased $2,127,000 or 33%, as
compared to the same period in 1995. The increases in these expenses are
primarily attributable to the expansion of the Company's sales force and related
sales support and marketing activities.
Administration. Administration expenses for the third quarter of 1996
increased $903,000, or 95%, as compared to the third quarter of 1995. For the
first nine months of 1996, these expenses increased $2,186,000, or 79%, as
compared to the same period in 1995. The increases in administration expenses
are a result of an increase in public company related expenses, amortization of
intangible assets
9
<PAGE>
(acquired in the purchase of the materials management division of Continental
Healthcare Systems, Inc.) and an increase in administrative services personnel.
Acquired In-Process Technology. The nine months ended September 30, 1996
reflect a non-recurring charge of $8,453,000 recorded in the quarter ended June
30, 1996 for acquired in-process technology in connection with the acquisition
of the materials management division of Continental Healthcare Systems, Inc.
Interest. Net interest income for the third quarter of 1996 was $70,000, as
compared to net interest expense of $69,000 in the third quarter of 1995. For
the first nine months of 1996, net interest income was $537,000, as compared to
net interest expense of $150,000 for the same period in 1995. The increase in
net interest income in 1996 is attributable to the investment of a portion of
the 1995 initial public offering proceeds in interest bearing securities.
Income Taxes. For the third quarter of 1996, income tax expense was
$633,000, compared to income tax expense of $28,000 in the third quarter of
1995. For the first nine months of 1996, income tax benefit was $2,013,000,
compared to an income tax benefit of $111,000 for the same period in 1995.
Liquidity and Capital Resources
Prior to its initial public offering in 1995, the Company met its capital
needs through a combination of cash flow from operations and proceeds from
issuance of common stock in 1993 ($1.1 million) and 1994 ($3.5 million). The
seasonality of the Company's business has historically necessitated the use of
short-term borrowings at various times during the year. The Company currently
has an $18 million unsecured revolving credit line bearing interest at the prime
rate less 0.5% or LIBOR plus 1.25% to 1.75%, which is available to fund short-
term liquidity needs and other general corporate purposes. As of September 30,
1996, the Company had $300,000 outstanding under the line of credit.
On October 25, 1995, the Company completed an initial public offering of
its common stock. The initial public offering resulted in net proceeds to the
Company of approximately $31,282,000. On October 18, 1996, the Company completed
a private placement of its common stock in which 600,000 shares were sold by the
Company, resulting in net proceeds to the Company of approximately $13 million.
Management believes that the net proceeds from these offerings, together with
existing cash and cash equivalents, cash flow from operations and borrowings
under its line of credit, will be sufficient to meet the Company's currently
anticipated working capital and capital expenditure requirements for at least
the next twelve months.
On May 28, 1996, the Company completed the acquisition of Matkon, the
materials management division of Continental Healthcare Systems, Inc., for a
cash purchase price of approximately $13.9 million. The Matkon division
develops, markets, installs and services a line of hospital materials management
software products which primarily run on a UNIX platform. This acquisition
resulted in declines in cash and investment securities, and increases in a
number of asset accounts reflecting the acquisition of tangible and intangible
assets.
The Company has no outstanding material purchase commitments. The Company
is obligated to make minimum royalty payments in the aggregate amount of
approximately $3.2 million under certain license agreements, of which
approximately $500,000 has been paid through September 30, 1996.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
15.1 Letter regarding unaudited interim financial information.
27. Financial data schedule.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K, dated July 26,
1996, to report the financial statements of Matkon, the materials
management division of Continental Healthcare Systems, Inc. that
was acquired by the Company. On November 12, 1996, the Company
filed a current report on Form 8-K/A to amend the aforementioned
financial statements.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Enterprise Systems, Inc.
Date: November 13, 1996 BY: /s/ Glen E. Tullman
-----------------------------------------
Glen E. Tullman, Chief Executive Officer
Date: November 13, 1996 BY: /s/ David B. Mullen
-----------------------------------------
David B. Mullen, Chief Financial Officer
12
<PAGE>
ENTERPRISE SYSTEMS, INC.
QUARTER ENDED SEPTEMBER 30, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
EXHIBITS
Exhibit 15.1 Letter regarding unaudited interim financial
information 14
Exhibit 27 Financial data schedule 15
</TABLE>
13
<PAGE>
EXHIBIT 15.1
ACKNOWLEDGMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
REGARDING INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Enterprise Systems, Inc.:
With respect to the Registration Statements on Form S-8 of Enterprise Systems,
Inc., we acknowledge our awareness of the use therein of our report dated
October 22, 1996 related to our review of interim financial information as of
September 30, 1996.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
KPMG PEAT MARWICK LLP
Chicago, Illinois
November 11, 1996
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Company's Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,813
<SECURITIES> 1,197
<RECEIVABLES> 20,434
<ALLOWANCES> 656
<INVENTORY> 395
<CURRENT-ASSETS> 30,091
<PP&E> 9,979
<DEPRECIATION> 5,668
<TOTAL-ASSETS> 47,098
<CURRENT-LIABILITIES> 8,670
<BONDS> 0
<COMMON> 75
0
0
<OTHER-SE> 37,624
<TOTAL-LIABILITY-AND-EQUITY> 47,098
<SALES> 17,829<F1>
<TOTAL-REVENUES> 34,980
<CGS> 0
<TOTAL-COSTS> 32,493
<OTHER-EXPENSES> 8,453<F2>
<LOSS-PROVISION> 496
<INTEREST-EXPENSE> 537
<INCOME-PRETAX> (5,421)
<INCOME-TAX> (2,013)
<INCOME-CONTINUING> (3,408)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,408)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
<FN>
<F1> Includes software and hardware
<F2> Write-off of acquired in process technology
</FN>
</TABLE>
