<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File Number 0-15454
TANGRAM ENTERPRISE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214726
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5511 Capital Center Drive, Suite 400
Raleigh, NC 27606
(Address of principal executive offices)
(919) 851-6000
(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) has been
subject to such filing requirements for the past 90 days.
Yes X No
Number of shares outstanding as of November 5, 1996
Common Stock 15,664,613
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TANGRAM ENTERPRISE SOLUTIONS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Balance Sheets - September 30, 1996 (unaudited) and
December 31, 1995 3
Statements of Operations (unaudited) - Three and Nine
Months Ended September 30, 1996 and 1995 4
Statements of Cash Flows (unaudited) - Nine Months Ended
September 30, 1996 and 1995 5
Notes to the Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 9
Signatures 10
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 564 $ 92
Accounts receivable, net of
allowance of $231 in 1996
and $225 in 1995 1,650 2,853
Other current assets 287 257
--------- ---------
Total current assets 2,501 3,202
Equipment, furniture and fixtures,
net of accumulated depreciation of
$1,741 in 1996 and $1,553 in 1995 437 278
Deferred software costs, net 2,802 2,595
Costs in excess of net assets of
business acquired, net 5,334 5,903
Other assets 857 851
--------- ---------
Total assets $ 11,931 $ 12,829
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable - current portion $ 269 $ 1,319
Accounts payable 503 531
Accrued expenses 617 420
Deferred revenue 2,008 2,228
Other current liabilities 9 85
--------- ---------
Total current liabilities 3,406 4,583
Note payable 150 ---
Shareholders' equity:
Common stock, par value $.01,
authorized 48,000,000 shares,
issued and outstanding
14,719,569 in 1996 and
14,527,876 in 1995 147 145
Additional paid-in capital 44,530 44,275
Accumulated deficit (36,302) (36,174)
--------- ---------
Total shareholders' equity 8,375 8,246
--------- ---------
Total liabilities and
shareholders' equity $ 11,931 $ 12,829
========= =========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
------------------------
1996 1995
------- -------
(unaudited)
<S> <C> <C>
Revenues: $2,434 $3,495
------- -------
Costs and expenses:
Costs of software 59 129
Selling and marketing 1,343 1,896
Development 669 773
General and administrative 637 674
------- -------
Total costs and expenses 2,708 3,472
------- -------
Net income (loss) $ (274) $ 23
======= =======
(Loss) per common share $ (.02) $ ---
======= =======
Weighted average number of
common shares outstanding 14,705 16,093
======= =======
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
( in thousands, except per share amounts )
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------
1996 1995
------- -------
(unaudited)
<S> <C> <C>
Revenues: $8,388 $9,910
------- -------
Costs and expenses:
Costs of software 224 477
Selling and marketing 4,560 5,256
Development 1,865 2,089
General and administrative 1,867 1,978
------- -------
Total costs and expenses 8,516 9,800
------- -------
Net income (loss) $ (128) $ 110
======= =======
(Loss) per common share $ (.01) ---
======= =======
Weighted average number of
common shares outstanding 14,634 15,475
======= =======
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------
1996 1995
------- -------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (128) $ 110
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,608 1,709
Cash provided (used) by changes in
working capital items:
Accounts receivable 1,017 176
Other current assets (59) (169)
Other assets (5) (392)
Accounts payable (69) 223
Accrued expenses and
other current liabilities 234 16
Deferred revenue (219) (527)
------- -------
Net cash provided by operating activities 2,379 1,146
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred software costs (1,210) (1,045)
Sale of LAN division (213) ---
Expenditures for equipment, furniture and
fixtures (369) (149)
------- -------
Net cash used in investing activities (1,792) (1,194)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on notes payable (219) (428)
Other, net 104 (21)
------- -------
Net cash used in financing activities (115) (449)
------- -------
Net increase (decrease) in cash 472 (497)
Cash, beginning of year 92 614
------- -------
Cash, end of year $ 564 $ 117
======= =======
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements were prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The Summary of Accounting
Policies and Notes to Financial Statements included in the 1995 Form 10-K
should be read in conjunction with the accompanying statements. These
statements include all adjustments (consisting only of normal recurring
accruals) which the Company believes are necessary for a fair presentation
of the statements. The interim operating results are not necessarily
indicative of the results for a full year.
NOTE 2. NOTE PAYABLE TO RELATED PARTY
In order to provide a source of funds to assist the launching of the
new Asset Insight product, Safeguard Scientifics, Inc.("Safeguard"), a 71%
shareholder of the Company, has agreed to provide a $1 million line of
credit to the Company at prime rate plus 1%. During the quarter ending
September 30, 1996, the $450,000 outstanding balance under the note at
June 30, 1996 was fully repaid. Under the terms of the line of credit, any
amounts outstanding are due thirteen months after the date of demand.
NOTE 3. SALE OF LAN DIVISION
In March, 1996, the Company sold the assets and liabilities of the LAN
division, acquired from Knozall Systems, Inc. in 1994, to its former owner,
who was an officer and director of the Company until the date of sale. In
exchange for the cancellation of $850,000 of the $1 million note issued in
connection with the acquisition of Knozall, the Company transferred all of
the net assets of the LAN division, made a cash payment of $213,000 at the
date of sale and issued a $300,000 note due in 24 equal installments. The
buyer elected to convert the remaining $150,000 of the $1 million note into
shares of Tangram common stock. In addition, the Company retained rights
to certain technology developed in the LAN division since August 1, 1994.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Tangram Enterprise Solutions, Inc.(the Company) develops and markets
asset tracking and electronic software distribution solutions, including
Asset Insight(TM) and AM:PM(R). Asset Insight, a new business management
solution for information technology (IT) executives, provides: 1)
automatic identification of hardware and software assets currently
installed throughout the enterprise, 2) information on historical trends
of IT assets, and 3) concise, one-page analyses that transforms raw data
into useful information for management decisions. The Company made the
first sale of its new Asset Insight product late in June, 1996. With Asset
Insight, Tangram has also launched a new indirect channel program, and
intially, Asset Insight is offered through CompuCom Systems, Inc.
Relationships with additional resellers are being developed. Safeguard
owns 50% of CompuCom and 71% of Tangram.
Previously, the Company's main product line was AM:PM which provides
distributed resource management across heterogeneous networks. AM:PM is
available for MVS, UNIX, NetWare, Windows NT, Windows 95, DOS and Macintosh
platforms. AM:PM accomplishes such tasks as software and data distribution,
data collection, asset management and remote resource management.
Beginning in the first quarter of 1996, the Company began to redirect
resources previously allocated to AM:PM in order to fill the additional
demands of preparing for the introduction and release of the Asset Insight
product. As a result, sales of AM:PM have decreased in 1996 as compared to
the prior year and this trend is expected to continue in the future.
RESULTS OF OPERATIONS
Revenues for the quarter ended September 30, 1996 declined by 30%
from same period in 1995 because sales of Asset Insight have not yet replaced
the decrease in the traditional AM:PM revenue stream.
Selling and marketing expenses for the quarter ended September 30,
1996 decreased 29% from the same period in 1995 due to elimination of the
expenses related to the LAN division which was sold in March, 1996 as well
as lower sales commissions resulting from lower revenue. Selling and
marketing expenses as a percentage of sales in the third quarter of 1996
vs. 1995 remained constant at approximately 55%. As the Company begins to
heavily promote Asset Insight, selling and marketing expenses are expected
to increase.
<PAGE>
The Company is focusing development activities primarily on the Asset
Insight product while continuing to enhance existing technologies in its
distributed resource management (AM:PM) product line. Development activity
is summarized in the table below:
<TABLE>
<CAPTION>
(in thousands)
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Development expenditures $ 849 $ 796 $2,235 $2,299
Capitalized development costs (480) (248) (1,210) (1,045)
Amortization 300 225 840 835
------- ------- ------- -------
Total development expenses $ 669 $ 773 $1,865 $2,089
======= ======= ======= =======
</TABLE>
General and administrative expenses for the quarter ended September
30, 1996 remained relatively stable compared to the same period in 1995.
However, it is anticipated that expenses will increase in the future in
order to provide additional infrastructure to support the Asset Insight
product rollout.
At December 31, 1995 the Company had net operating loss carryforwards
of approximately $25.9 million. The net operating loss carryforwards
expire in various amounts from 1998 through 2010.
LIQUIDITY
Cash generated from operations has been adequate to fund the Company's
development and finance activities. In the past, the Company has generated
cash from operating activities despite its net losses due to the signifi-
cant levels of depreciation and amortization. Cash requirements have
increased in 1996 due to the additional expenditures required for the
introduction and launching of the Asset Insight product. As stated in Note
2 above, Safeguard Scientifics, Inc. has agreed to assist the Company's
launching of the Asset Insight product by providing a $1 million line of
credit to fund cash requirements. However, the Company believes that the
line of credit may not be adequate to meet the new product rollout cash
requirements in the near future. As a result, the Company is pursuing
other sources of funds including, but not limited to, debt or equity
financing.
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
------ -----------
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the
quarter ended September 30, 1996.
<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.
Tangram Enterprise Solutions, Inc.
(Registrant)
Date: November 13, 1996 /s/ W.C. Jesse
-------------------------------
W. C. Jesse
President and Chief Executive Officer
Date: November 14, 1996 /s/Nancy M. Dunn
-------------------------------
Nancy M. Dunn
Vice President of Finance and
Chief Administrative Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Tangram Enterprise Solutions, Inc., for the
Quarter ended September 30, 1996 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-END> SEP-30-1996
<CASH> 564
<SECURITIES> 0
<RECEIVABLES> 1881
<ALLOWANCES> 231
<INVENTORY> 85
<CURRENT-ASSETS> 2501
<PP&E> 2178
<DEPRECIATION> 1741
<TOTAL-ASSETS> 11931
<CURRENT-LIABILITIES> 3406
<BONDS> 0
0
0
<COMMON> 147
<OTHER-SE> 8228
<TOTAL-LIABILITY-AND-EQUITY> 11931
<SALES> 8388
<TOTAL-REVENUES> 8388
<CGS> 224
<TOTAL-COSTS> 8292
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> (128)
<INCOME-TAX> 0
<INCOME-CONTINUING> (128)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (128)
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
