<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 June 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 August 1, 1996, there were 7,519,581 shares of Common Stock of the
registrant outstanding.
<PAGE>
ENTERPRISE SYSTEMS, INC.
QUARTER ENDED JUNE 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Independent Auditors' Review Report 3
Consolidated Balance Sheets as of June 30,
1996 (unaudited) and December 31, 1995 4
Consolidated Statements of Operations for
the three months and six months ended June
30, 1996 and 1995 (unaudited) 5
Consolidated Statements of Cash Flows for
the six months ended June 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 4. Submission of Matters to a Vote of Security
Holders 11
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 June 30, 1996, and the related consolidated statements of
operations for the three-month and six-month periods ended June 30, 1996 and
1995 and consolidated statements of cash flows for the six months ended June 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
July 24, 1996
3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1996 1995
------ ----------- --------------
<S> <C> <C>
(UNAUDITED)
Current assets
Cash and cash equivalents............... $ 2,601 $11,403
Short-term investment securities........ 2,122 9,220
Receivables............................. 15,814 14,321
Refundable and prepaid income taxes..... 1,605 547
Deferred income taxes................... 2,834 777
Other current assets.................... 3,291 2,299
------- -------
Total current assets................. 28,267 38,567
------- -------
Investment securities...................... 4,815 4,893
Property and equipment..................... 4,446 3,567
Purchased and developed software........... 3,947 1,498
Other assets............................... 4,078 401
------- -------
$45,553 $48,926
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable........................ $ 1,222 $ 1,285
Accrued liabilities..................... 3,394 2,240
Unearned revenue........................ 3,224 4,674
------- -------
Total current liabilities............ 7,840 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 7,519,581 and
7,357,033 shares...................... 75 74
Additional paid-in capital.............. 39,352 38,513
Retained earnings
(accumulated deficit)................. (2,367) 1,910
Deferred compensation................... (76) (91)
------- -------
Total stockholders' equity........... 36,984 40,406
------- -------
$45,553 $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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Software........................................... $ 5,576 $ 3,582 $ 9,860 $ 6,988
Services........................................... 5,532 3,907 10,454 7,240
Hardware........................................... 338 141 729 212
------- -------- -------- --------
Total revenues.................................. 11,446 7,630 21,043 14,440
------- -------- -------- --------
Operating costs and expenses
Software development............................... 2,110 1,818 4,043 3,376
Service and support............................... 3,795 2,681 6,577 5,133
Hardware........................................... 370 193 739 269
Sales and marketing................................ 2,913 2,116 5,507 4,249
Administration..................................... 1,535 970 3,114 1,831
Acquired in-process technology..................... 8,453 - 8,453 -
------- -------- -------- --------
Total operating costs and expenses.............. 19,176 7,778 28,433 14,858
------- -------- -------- --------
Loss from operations................................. (7,730) (148) (7,390) (418)
Interest income (expense), net....................... 191 (35) 467 (81)
------- -------- -------- --------
Loss before income taxes............................. (7,539) (183) (6,923) (499)
Income tax benefit................................... (2,906) (51) (2,646) (139)
------- -------- -------- --------
Net loss............................................. $(4,633) $ (132) $ (4,277) $ (360)
======= ======== ======== ========
Net loss per share................................... $ (0.62) $ (0.02) $ (0.57) $ (0.07)
======= ======== ======== ========
Shares used in computing net loss per share.......... 7,510 5,525 7,459 5,525
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ENTERPRISE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net loss......................................................... $ (4,277) $ (360)
Adjustments to reconcile net loss to
net cash used in operating activities.........................
Depreciation.................................................. 928 659
Amortization.................................................. 249 100
Deferred income taxes......................................... (1,649) (217)
Acquired in-process technology................................ 8,453 -
Changes in assets and liabilities
Receivables............................................... (353) 872
Refundable and prepaid income taxes....................... (1,058) 54
Prepaid commissions and other current assets.............. (843) (379)
Accounts payable.......................................... (63) (333)
Accrued liabilities....................................... (77) 415
Unearned revenue.......................................... (1,450) (1,111)
Other, net................................................ (272) 1
---------- --------
Net cash used in operating activities................. (412) (299)
---------- --------
Cash flows from investing activities
Payment for acquisition.......................................... (13,892) -
Maturities of investment securities.............................. 7,176 -
Purchase of property and equipment............................... (1,614) (753)
Capitalized software development................................. (900) (438)
---------- --------
Net cash used in investing activities................. (9,230) (1,191)
---------- --------
Cash flows from financing activities
Proceeds from note payable....................................... - 1,300
Repayment of long-term debt...................................... - (291)
Proceeds from exercise of stock options.......................... 840 73
Repurchase of common stock....................................... - (101)
---------- --------
Net cash provided by financing activities............. 840 981
---------- --------
Decrease in cash and cash equivalents............................... (8,802) (509)
Cash and cash equivalents at beginning of period.................... 11,403 1,588
Cash and cash equivalents at end of the period...................... $ 2,601 $ 1,079
========== ========
Supplemental disclosures of cash flow information
Interest paid.................................................... $ 13 $ 106
========== ========
Income taxes paid................................................ $ - $ 43
========== ========
</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 six months ended June 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 LOSS PER SHARE
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 six month periods
ended June 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 - SUBSEQUENT EVENTS
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. Of the shares being offered, 900,000
shares are being offered by the Company and 825,000 are being offered by selling
stockholders.
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 ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Software .................................. 49% 47% 47% 49%
Services .................................. 48 51 50 50
Hardware .................................. 3 2 3 1
--- --- --- ---
Total revenues ........................ 100 100 100 100
--- --- --- ---
Operating costs and expenses
Software development ...................... 18 24 19 23
Service and support ....................... 33 35 31 35
Hardware .................................. 4 3 4 2
Sales and marketing ....................... 25 27 26 29
Administration ............................ 13 13 15 13
Acquired in-process technology ............ 75 - 40 -
--- --- --- ---
Total operating costs and expenses .... 168 102 135 102
--- --- --- ---
Loss from operations .......................... (68) (2) (35) (2)
Interest income (expense) net ................. 2 - 2 (1)
--- --- --- ---
Loss before income taxes ...................... (66) (2) (33) (3)
Income tax benefit ............................ (26) - (13) (1)
--- --- --- ---
Net loss ...................................... (40)% (2)% (20)% (2)%
=== === === ====
</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
second quarter of 1996 were $11,446,000, an increase of $3,816,000 or 50%, as
compared to $7,630,000 for the same period in 1995. Total revenues for the first
six months of 1996 were $21,043,000, an increase of $6,603,000 or 46%, as
compared to $14,440,000 for the first six months of 1995.
Software. Software revenues for the second quarter of 1996 increased
$1,994,000, or 56%, as compared to the second quarter of 1995. For the first six
months of 1996, software revenues increased $2,872,000, or 41%, 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 second quarter of 1996 increased
$1,625,000, or 42%, as compared to the second quarter of 1995. For the first
six months of 1996, services revenues increased $3,214,000, or 44%, as compared
to the same period in 1995. The increases in services revenues are related to
the increase in software revenues coupled with an increase in consulting
services revenues and growth in recurring support fees.
Hardware. Hardware revenue for the second quarter of 1996 increased
$197,000, as compared to the second quarter of 1995. For the first six months
of 1996, hardware revenue increased $517,000, as compared to the same period in
1995. The increases in hardware revenues are principally attributable to sales
of TouchScan, which was introduced in 1995.
COSTS AND EXPENSES
Software Development. Software development expenses for the second quarter
of 1996 increased $292,000, or 16%, as compared to the second quarter of 1995.
For the first six months of 1996, these expenses increased $667,000, or 20%, 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. For the first six months of 1996, software development expenses
decreased as a percentage of total revenues from the year earlier period,
however, because a larger percentage of development effort was related to new
products, rather than enhancement of existing products, more software
development expenditures were capitalized in that period.
For the second quarter and first six months of 1996, the Company
capitalized $483,000 and $666,000, 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 second quarter and first six months of 1995, the Company capitalized
$25,000 and $338,000, respectively, of software development costs, net of
related amortization expense. Amounts capitalized, net of amounts amortized,
represent 14% and 9% of total software development expenditures for the six
months ended June 30, 1996 and 1995.
Service and Support. Service and support expenses for the second quarter
of 1996 increased $1,114,000, or 42%, as compared to the second quarter of 1995.
For the first six months of 1996, these expenses increased $1,444,000, or 28%,
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.
Hardware. Hardware costs for the second quarter of 1996 increased
$177,000, as compared to the second quarter of 1995. For the first six months
of 1996, hardware costs increased $470,000, 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 second quarter
of 1996 increased $797,000, or 38%, as compared to the second quarter of 1995.
For the first six months of 1996, these expenses increased $1,258,000 or 30%, 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 second quarter of 1996
increased $565,000, or 58%, as compared to the second quarter of 1995. For the
first six months of 1996, these expenses increased $1,283,000, or 70%, as
compared to the same period in 1995. The increases in administration expenses
are a result of an increase in administrative services personnel, public company
related expenses, amortization of intangible assets (acquired in the purchase of
the materials management division of Continental Healthcare Systems, Inc.) and
the provision for bad debts, which has increased with the increase in revenues.
9
<PAGE>
Acquired In-Process Technology. The Company recorded a non-recurring
charge of $8,453,000 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 second quarter of 1996 was $191,000,
as compared to net interest expense of $35,000 in the second quarter of 1995.
For the first six months of 1996, net interest income was $467,000, as compared
to net interest expense of $81,000 the same period in 1995. The increase in net
interest income is attributable to the investment of a portion of the initial
public offering proceeds in interest bearing securities.
Income Taxes. For the second quarter of 1996, the income tax benefit was
$2,906,000, compared to an income tax benefit of $51,000 in the second quarter
of 1995. For the first six months of 1996, income tax benefit was $2,646,000,
compared to an income tax benefit of $139,000 for the same period in 1995.
Liquidity and Capital Resources
Prior to its initial public offering in 1995, the Company has 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
LIBOR plus 1.25% to 1.75%, which is available to fund short-term liquidity needs
and other general corporate purposes. As of July 22, 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.
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. Increases
in prepaid and deferred income taxes arise as a result of the tax benefits from
the write-off of acquired in-process technology.
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 $400,000 has been paid.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 21, 1996, the Company held its Annual Meeting of Stockholders. At
the Annual Meeting, the stockholders re-elected Mr. Compton and Mr. Goldstein as
directors to serve until the 1999 Stockholders Meeting.
<TABLE>
<CAPTION>
Number of Votes
Name of Nominee For Withheld
- ----------------- --- --------
<S> <C> <C>
Robert A. Compton 6,310,792 7,500
Bernard Goldstein 6,310,792 7,500
</TABLE>
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 May 28,
1996, to report the acquisition of Matkon, the materials
management division of Continental Healthcare Systems, Inc.
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 August 13, 1996 BY: /s/ Glen E. Tullman
----------------------------------------
Glen E. Tullman, Chief Executive Officer
Date August 13, 1996 BY: /s/ David B. Mullen
----------------------------------------
David B. Mullen, Chief Financial Officer
12
<PAGE>
ENTERPRISE SYSTEMS, INC.
QUARTER ENDED JUNE 30, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBITS ----
<S> <C> <C>
Item 15.1 Letter regarding unaudited interim financial information 14
Item 27 Financial data schedule 15
</TABLE>
13
<PAGE>
ITEM 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 July
24, 1996 related to our review of interim financial information as of June 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
August 12, 1996
14
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,601
<SECURITIES> 2,122
<RECEIVABLES> 16,639
<ALLOWANCES> 825
<INVENTORY> 601
<CURRENT-ASSETS> 28,267
<PP&E> 9,445
<DEPRECIATION> 4,999
<TOTAL-ASSETS> 45,553
<CURRENT-LIABILITIES> 7,840
<BONDS> 0
<COMMON> 75
0
0
<OTHER-SE> 36,909
<TOTAL-LIABILITY-AND-EQUITY> 45,553
<SALES> 10,589<F1>
<TOTAL-REVENUES> 21,043
<CGS> 0
<TOTAL-COSTS> 19,511
<OTHER-EXPENSES> 8,453<F2>
<LOSS-PROVISION> 469
<INTEREST-EXPENSE> (467)
<INCOME-PRETAX> (6,923)
<INCOME-TAX> (2,646)
<INCOME-CONTINUING> (4,277)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,277)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
<FN>
<F1> Includes software and hardware
<F2> Write-off of acquired in process technology
</FN>
</TABLE>
