<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 March 31, 1996
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[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission file number 0-26794
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Enterprise Systems, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3130103
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(State or Other (I.R.S. Employer
Jurisdiction Identification No.)
of Incorporation or
Organization)
1400 South Wolf Road, Wheeling, Illinois 60090-6524
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(Address of Principal Executive Offices, Including Zip Code)
(847) 537-4800
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(Registrant's Telephone Number, Including Area Code)
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N/A
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(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
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At May 1, 1996, there were 7,510,413 shares of Common Stock of the
registrant outstanding.
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ENTERPRISE SYSTEMS, INC.
QUARTER ENDED MARCH 31, 1996
INDEX
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<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION ----
<S> <C> <C>
Item 1. Financial Statements
Independent Auditors' Review Report 3
Consolidated Balance Sheets as of March 31,
1996 (unaudited) and December 31, 1995 4
Consolidated Statements of Operations for
the three months ended March 31, 1996 and
1995 (unaudited) 5
Consolidated Statements of Cash Flows for
the three months ended March 31, 1996 and
1995 (unaudited) 6
Notes to Consolidated Financial Statements 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
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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 March 31, 1996, and the related consolidated statements of
operations and cash flows for the three-month period ended March 31, 1996. 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 referred to above
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
April 18, 1996
3
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
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<S> <C> <C>
(UNAUDITED)
Current assets
Cash and cash equivalents.......... $ 5,769 $11,403
Short-term investment securities... 14,339 9,220
Receivables........................ 13,698 14,321
Refundable and prepaid income taxes 275 547
Deferred income taxes.............. 777 777
Other current assets............... 2,407 2,299
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Total current assets.......... 37,265 38,567
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Investment securities................... 4,854 4,893
Property and equipment.................. 4,005 3,567
Software development.................... 1,681 1,498
Other assets............................ 522 401
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$48,327 $48,926
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable................... $ 853 $ 1,285
Accrued liabilities................ 1,477 2,240
Unearned revenue................... 4,270 4,674
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Total current liabilities..... 6,600 8,199
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Deferred income taxes................... 321 321
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 7,479,575
and 7,357,033 shares............. 75 74
Additional paid-in capital......... 39,150 38,513
Retained earnings.................. 2,266 1,910
Deferred compensation.............. (85) (91)
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Total stockholders' equity... 41,406 40,406
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$48,327 $48,926
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</TABLE>
See accompanying notes to consolidated financial statements.
4
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ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
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1996 1995
---- ----
Revenues
Software........................... $4,284 $3,406
Services........................... 4,922 3,333
Hardware........................... 391 71
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Total revenues................ 9,597 6,810
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Operating costs and expenses
Software development............... 1,933 1,558
Service and support................ 2,782 2,452
Hardware........................... 369 76
Sales and marketing................ 2,594 2,133
Administration..................... 1,579 861
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Total operating costs and
expenses..................... 9,257 7,080
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Income (loss) from operations........... 340 (270)
Interest income (expense), net.......... 276 (46)
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Income (loss) before income taxes....... 616 (316)
Income taxes (benefit).................. 260 (88)
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Net income (loss)....................... $ 356 $ (228)
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Net income (loss) per share............. $ 0.04 $(0.04)
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Shares used in computing net
income (loss) per share............... 8,030 5,524
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See accompanying notes to consolidated financial statements.
5
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ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1996 1995
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<S> <C> <C>
Cash flows from operating activities
Net income (loss)........................................ $ 356 $ (228)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation........................................... 430 318
Amortization........................................... 123 19
Changes in assets and liabilities
Receivables.......................................... 623 341
Refundable and prepaid income taxes.................. 272 --
Other current assets................................. (108) (454)
Accounts payable..................................... (432) (351)
Accrued liabilities.................................. (763) 548
Unearned revenue..................................... (404) 221
Other, net........................................... (121) 2
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Net cash provided by (used in) operating
activities........................................ (24) 416
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Cash flows from investing activities
Purchase of investment securities, net................... (5,080) --
Purchase of property and equipment....................... (868) (239)
Capitalized software development......................... (300) (332)
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Net cash used in investing activities.............. (6,248) (571)
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Cash flows from financing activities
Repayment of long-term debt.............................. -- (146)
Proceeds from exercise of stock options.................. 638 46
Repurchase of common stock............................... -- (21)
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Net cash provided by (used in) financing
activities........................................ 638 (121)
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Decrease in cash and cash equivalents...................... (5,634) (276)
Cash and cash equivalents at beginning of year............. 11,403 1,588
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Cash and cash equivalents at end of
quarter................................................... $ 5,769 $1,312
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Supplemental disclosures of cash flow information
Interest paid............................................ $ -- $ 41
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</TABLE>
See accompanying notes to consolidated financial statements.
6
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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.
NOTE 2 - COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) 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. 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 offering date (using
the treasury stock method and the mid-point of the 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.
7
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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 ENDED
MARCH 31,
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1996 1995
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<S> <C> <C>
Revenues
Software.............................. 45% 50%
Services.............................. 51 49
Hardware.............................. 4 1
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Total revenues...................... 100 100
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Operating costs and expenses
Software development.................. 20 23
Service and support................... 29 36
Hardware.............................. 4 1
Sales and marketing................... 27 31
Administration........................ 16 13
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Total operating costs and expenses.. 96 104
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Income (loss) from operations........... 4 (4)
Interest income, net.................... 3 -
--- ---
Income (loss) before income taxes....... 7 (4)
Income taxes (benefit).................. 3 (1)
--- ---
Net income (loss)....................... 4% (3)%
=== ===
</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 first quarter of 1996 were $9,597,000, an increase
of $2,787,000 or 41%, as compared to $6,810,000 for the same period in 1995.
Software. Software revenues for the first quarter of 1996 increased
$878,000, or 26%, as compared to the first quarter of 1995. The increase was
attributable to expansion of the Company's sales force and marketing efforts
which have led to further market penetration. Software revenues consist of
software license fees and are recognized as the installation services are
performed.
8
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Services. Services revenues for the first quarter of 1996 increased
$1,589,000, or 48%, as compared to the first quarter of 1995. The increase in
services revenues is related to the increase in software revenues coupled with
an increase in consulting services revenues and growth in recurring support
fees.
Services revenues consist of (i) up-front fees for software installation
and initial product education, (ii) annual fees for ongoing support, maintenance
and enhancements and (iii) fees for continuing product education and consulting
services. Revenues from installation services are recognized as the installation
services are performed. Ongoing support, maintenance and enhancement revenue is
recognized ratably over the time periods covered by the service agreements.
Education and consulting revenue is recognized as the services are performed.
Hardware. Hardware revenues for the first quarter of 1996 increased
$320,000 as compared to the first quarter of 1995, principally due to delivery
of the Company's TouchScan units to customers.
COSTS AND EXPENSES
Software Development. Software development expenses for the first quarter
of 1996 increased $375,000, or 24%, as compared to the first quarter of 1995.
The increases in these expenses 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. Software development expenses decreased as
a percentage of total revenues from the year earlier period. For the first
quarter of 1996, the Company capitalized $183,000 of software development costs,
net of related amortization expense, in accordance with Statement of Financial
Accounting Standards No. 86. For the first quarter of 1995, the Company
capitalized $313,000 of software development costs, net of related amortization
expense. The amounts capitalized, net of related amortization expense,
represented 9% and 17% of the total software development spending for the first
quarters of 1996 and 1995, respectively.
Service and Support. Service and support expenses for the first quarter of
1996 increased $330,000, or 13%, as compared to the first quarter of 1995. The
increases in these expenses are attributable to the hiring of additional
implementation personnel and related travel. Service and support expenses
decreased as a percentage of total revenues from the year earlier period.
Hardware. Hardware costs for the first quarter of 1996 increased $293,000,
as compared to the first quarter of 1995. The increase in hardware costs is
attributable to the increase in hardware revenue for the same period.
Sales and Marketing. Sales and marketing expenses for the first quarter of
1996 increased $461,000, or 22%, as compared to the first quarter of 1995. The
increases in these expenses are attributable to the expansion of the Company's
sales and marketing force and related sales support activities. Sales and
marketing expenses decreased as a percentage of total revenues from the year
earlier period.
Administration. Administration expenses for the first quarter of 1996
increased $718,000, or 83%, as compared to the first quarter of 1995. The
increase in administration expenses is a result of an increase in administrative
services personnel, public company related expenses and bad debt expense, which
has increased with the increase in revenues.
9
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Interest. Prior to the initial public offering of its common stock in 1995,
the Company borrowed primarily to finance seasonal working capital needs. A
portion of the proceeds from the public offering was used to repay all
outstanding debt. Interest income for the first quarter of 1996 was $276,000, as
compared to interest expense of $46,000 in the first quarter of 1995.
Income Taxes. For the first quarter of 1996, income tax expense was
$260,000, compared to an income tax benefit of $88,000 in the first quarter of
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 $8 million unsecured revolving credit line bearing interest at LIBOR plus
2.25%, which is available to fund short-term liquidity needs. As of May 1, 1996,
the Company had no outstanding borrowings 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. Management believes that the net proceeds
from this offering, 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.
10
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
15. Letter regarding unaudited interim financial information.
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a current report of Form 8-K, dated February
12, 1996, to report the resignation of Thomas R. Pirelli as
Director of Technology.
11
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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.
Enterprise Systems, Inc.
Date May 14, 1996 BY: /s/ Glen E. Tullman
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Glen E. Tullman,
Chief Executive Officer
Date May 14, 1996 BY: /s/ David B. Mullen
-------------------- ---------------------------------
David B. Mullen,
Chief Financial Officer
12
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EXHIBIT 15
LETTER REGARDING UNAUDITED
INTERIM FINANCIAL INFORMATION
Enterprise Systems, Inc.
1400 South Wolf Road
Wheeling, IL 60090
Ladies and Gentlemen:
With respect to the registration statement on Form S-8, we acknowledge our
awareness of the use therein of our report dated April 18, 1996 related to our
review of interim financial information.
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.
Very truly yours,
KPMG Peat Marwick LLP
Chicago Illinois
May 6, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,769
<SECURITIES> 14,339
<RECEIVABLES> 14,246
<ALLOWANCES> 548
<INVENTORY> 325
<CURRENT-ASSETS> 37,265
<PP&E> 8,505
<DEPRECIATION> 4,500
<TOTAL-ASSETS> 48,327
<CURRENT-LIABILITIES> 6,600
<BONDS> 0
<COMMON> 0
0
75
<OTHER-SE> 41,331
<TOTAL-LIABILITY-AND-EQUITY> 48,327
<SALES> 4,675<F1>
<TOTAL-REVENUES> 9,597
<CGS> 0
<TOTAL-COSTS> 9,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 282
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 616
<INCOME-TAX> 260
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 356
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<FN>
<F1> Includes software and hardware
</FN>
</TABLE>
