SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The aggregate market value of shares of common stock held by non-affiliates
(based on the average of the bid and ask prices on March 21, 1996, as
reported by market makers of the Company's shares) was approximately
$5,787,372. See Part II, Item 5 of this annual report for certain
assumptions on which this calculation was based.
As of March 21, 1996, there were 14,529,876 shares of the Company's common
stock outstanding.
The purpose of this amendment is to file an amendment to the Report of
Independent Auditors which is part of Item 8 and may be found on page F-2,
and to file Exhibit 23 -- Consent of Independent Auditors. The consolidated
financial statements and schedules filed with this report appear on pages F-2
through F-15, and are listed on page F-1.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements
(i) Report of Independent Auditors F-2
(ii) Balance Sheets at December 31, 1995 and 1994 F-3
(iii) Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-4
(iv) Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993 F-5
(v) Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-6
(vi) Notes to Financial Statements F-7 through F-15
(2) Financial Statement Schedules
(i) Schedule II -Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1994 and 1993 6
(3) Exhibits
See Item 14(c) of this Report.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Registrant during the
quarter ended December 31, 1995.
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation
S-K to be filed as part of this Report. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is
indicted in parentheses.
2
<PAGE>
2.1 Agreement and Plan of Reorganization among Tangram Systems
Corporation, Rabbit Software Corporation and Rabbit Acquisition,
Inc. dated as of September 22, 1993 (3) (Exhibit 2.1)
2.2 Plan of Merger of Rabbit Acquisition Corporation (A North
Carolina Corporation) With and Into Tangram Systems Corporation
(A North Carolina Corporation) (3) (Exhibit 2.2)
2.3 Plan of Merger of Tangram Systems Corporation (A North Carolina
Corporation) With and Into Rabbit Software Corporation (A
Pennsylvania Corporation) (3) (Exhibit 2.3)
2.4 Asset Purchase Agreement dated August 1, 1994 among Knozall
Systems,Inc. and Tangram Enterprise Solutions, Inc. (7) (Exhibit
2.4)
2.5 Convertible Subordinated Promissory Note dated August, 1994 by
and between Tangram Enterprise Solutions, Inc. and Knozall
Systems, Inc. (7) (Exhibit 2.5)
3.1 Articles of Incorporation of the Company, as amended (4)
(Exhibit 3a)
3.2 Articles of Amendment of Rabbit Software Corporation (3)
(Exhibit 3.2)
3.3 Articles of Amendment of the Company (7) (Exhibit 3.3)
3.4 By-Laws of the Company, as amended (4) (Exhibit 3b)
4.1 Designation of Series D Convertible Preferred Shares and Series
E Redeemable Preferred Shares of Rabbit Software Corporation (3)
(Exhibit 4.1)
4.2 Form of Certificate evidencing Common Stock, $.01 par value, of
the Company (7) (Exhibit 4.2)
4.3** Amended 1988 Stock Option Plan of the Registrant (6) (Exhibit
4c)
4.4** Form of Stock Option Agreement under Amended 1988 Stock Option
Plan (6) (Exhibit 4d)
4.5** The Company's 1988 Stock Option Plan, as amended (7) (Exhibit
4.5)
10.1 License and Marketing Agreement Between Systems Center, Inc.
and Tangram Systems Corporation, dated September 10, 1992 (5)
(Exhibit 10.1)
10.2 Settlement and Release of All Claims Agreement (Between Systems
Center, Inc. and Tangram Systems Corporation), dated June 22,
1993 (5) (Exhibit 10.2)
10.3 Agreement of Lease, executed by the Company and Graham
Associates Ltd, dated November 23, 1991 (5) (Exhibit 10.3)
3
<PAGE>
10.4 Agreement of Lease, executed by the Company on February 17,
1986, with Morehall Associates Limited Partnership (1) (Exhibit
10m)
10.5 First Amendment to Agreement of Lease, dated June 13, 1986,
with Morehall Associates Limited Partnership (2) (Exhibit 10i)
10.6 Second Amendment to Agreement of Lease, dated June 1, 1989,
with Morehall Associates Limited Partnership (2) (Exhibit 10j)
10.7 Third Amendment to Agreement of Lease, dated October 12, 1992,
with Morehall Associates Limited Partnership (4) (Exhibit 10d)
10.8 Administrative Services Agreement with Safeguard Scientifics,
Inc., dated December 15, 1985 (1) (Exhibit 10s)
10.9 Stock Purchase Agreement dated December 15, 1994 by and between
Safeguard Scientifics (Delaware), Inc. and Tangram Enterprise
Solutions, Inc. (7) (Exhibit 10.9)
10.10 Promissory Note dated December 15, 1994 from Tangram Enterprise
Solutions, to Safeguard Scientifics (Delaware), Inc. (7)
(Exhibit 10.10)
10.11** Employment Agreement dated August 1, 1994 by and between the
Company and Donald R. Lundell (7) (Exhibit 10.11)
10.12** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Chris Jesse (7)
(Exhibit 10.12)
10.13** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Steve Kuekes (7)
(Exhibit 10.13)
10.14** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Nancy Dunn (7)
(Exhibit 10.14)
10.15** Promissory Note, Pledge Agreement and Agreement to Transfer or
Terminate dated January 31, 1995, between the Company and Chris
Jesse (7) (Exhibit 10.15)
10.16** Promissory Note and Pledge Agreement dated January 31, 1995,
between the Company and Steve Kuekes (7) (Exhibit 10.16)
10.17** Promissory Note, Pledge Agreement and Agreement to Transfer or
Terminate dated January 31, 1995, between the Company and Nancy
Dunn (7) (Exhibit 10.17)
10.18** Memorandum of Agreement Regarding Compensation and Benefits
dated June 3, 1994 among Safeguard Scientifics, Inc., the
Company, Chris Jesse, Steven Kuekes and Nancy Dunn (7) (Exhibit
10.18)
4
<PAGE>
10.19** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994, between
the Company and Chris Jesse (7) (Exhibit 10.19)
10.20** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994, between
the Company and Steve Kuekes (7) (Exhibit 10.20)
10.21** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994, between
the Company and Nancy Dunn (7) (Exhibit 10.21)
11 Statement Re Computation of Per Share Earnings
23* Consent of Independent Auditors Page 11
27 Financial Data Schedule
* Filed herewith.
** Management contract or compensatory plan or arrangement in which
directors and/or executive officers of the registrant may
participate.
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-9525), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1989, and incorporated herein
by reference.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K
dated September 30, 1993, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1992, and incorporated herein
by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1993, and incorporated herein
by reference.
(6) Filed on March 4, 1994, as an exhibit to the Company's
Registration Statement on Form S-8 (No. 33-76066) and
incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1994, and incorporated herein
by reference.
(d) See Item 14(a) of this Report.
5
<PAGE>
<TABLE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1994 and 1993
<CAPTION>
Balance at Additions Deductions Balance
Beginning Charged to from at End
of period Costs and Reserves of Period
Expenses
-------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended Dec. 31, 1995
Allowance for
Doubtful Accounts $262,300 $169,000 $206,300 $225,000
Year ended Dec. 31, 1994
Allowance for
Doubtful Accounts $336,300 $82,000 $156,000 $262,300
Year ended Dec. 31, 1993
Allowance for
Doubtful Accounts $172,500 $232,400 $68,600 $336,300
</TABLE>
6
<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)
Dated: June , 1996 By: /s/ Nancy M. Dunn
Nancy M. Dunn
Chief Administrative Officer
7
<PAGE>
EXHIBIT INDEX
Except as indicated by footnote, all of the following exhibits were filed
with the Company's Annual Report on Form 10-K, dated December 31, 1995. For
exhibits incorporated by reference, the location of the exhibit in the
previous filing is indicated in parentheses.
Exhibit No. Description
2.1 Agreement and Plan of Reorganization among Tangram Systems
Corporation, Rabbit Software Corporation and Rabbit Acquisition,
Inc. dated as of September 22, 1993 (3) (Exhibit 2.1)
2.2 Plan of Merger of Rabbit Acquisition Corporation (A North
Carolina Corporation) With and Into Tangram Systems Corporation
(A North Carolina Corporation) (3) (Exhibit 2.2)
2.3 Plan of Merger of Tangram Systems Corporation (A North Carolina
Corporation) With and Into Rabbit Software Corporation (A
Pennsylvania Corporation) (3) (Exhibit 2.3)
2.4 Asset Purchase Agreement dated August 1, 1994 among Knozall
Systems,Inc. and Tangram Enterprise Solutions, Inc.(7) (Exhibit
2.4)
2.5 Convertible Subordinated Promissory Note dated August, 1994 by
and between Tangram Enterprise Solutions, Inc. and Knozall
Systems, Inc.(7)
3.1 Articles of Incorporation of the Company, as amended (4)
(Exhibit 3a)
3.2 Articles of Amendment of Rabbit Software Corporation (3)
(Exhibit 3.2)
3.3 Articles of Amendment of the Company (7) (Exhibit 3.3)
3.4 By-Laws of the Company, as amended (4) (Exhibit 3b)
4.1 Designation of Series D Convertible Preferred Shares and Series
E Redeemable Preferred Shares of Rabbit Software Corporation (3)
(Exhibit 4.1)
4.2 Form of Certificate evidencing Common Stock, $.01 par value, of
the Company (7) (Exhibit 4.2)
4.3** Amended 1988 Stock Option Plan of the Registrant (6) (Exhibit
4c)
4.4** Form of Stock Option Agreement under Amended 1988 Stock Option
Plan (6) (Exhibit 4d)
4.5** The Company's 1988 Stock Option Plan, as amended (7) (Exhibit
4.5)
8
<PAGE>
10.1 License and Marketing Agreement Between Systems Center, Inc.
and Tangram Systems Corporation, dated September 10, 1992 (5)
(Exhibit 10.1)
10.2 Settlement and Release of All Claims Agreement (Between Systems
Center, Inc. and Tangram Systems Corporation), dated June 22,
1993 (5) (Exhibit 10.2)
10.3 Agreement of Lease, executed by the Company and Graham
Associates Ltd, dated November 23, 1991 (5) (Exhibit 10.3)
10.4 Agreement of Lease, executed by the Company on February 17,
1986, with Morehall Associates Limited Partnership (1) (Exhibit
10m)
10.5 First Amendment to Agreement of Lease, dated June 13, 1986,
with Morehall Associates Limited Partnership (2) (Exhibit 10i)
10.6 Second Amendment to Agreement of Lease, dated June 1, 1989,
with Morehall Associates Limited Partnership (2) (Exhibit 10j)
10.7 Third Amendment to Agreement of Lease, dated October 12, 1992,
with Morehall Associates Limited Partnership (4) (Exhibit 10d)
10.8 Administrative Services Agreement with Safeguard Scientifics,
Inc., dated December 15, 1985 (1) (Exhibit 10s)
10.9 Stock Purchase Agreement dated December 15, 1994 by and between
Safeguard Scientifics (Delaware), Inc. and Tangram Enterprise
Solutions, Inc. (7) (Exhibit 10.9)
10.10 Promissory Note dated December 15, 1994 from Tangram Enterprise
Solutions, to Safeguard Scientifics (Delaware), Inc. (7)
(Exhibit 10.10)
10.11** Employment Agreement dated August 1, 1994 by and between the
Company and Donald R. Lundell (7) (Exhibit 10.11)
10.12** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Chris Jesse (7)
(Exhibit 10.12)
10.13** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Steve Kuekes (7)
(Exhibit 10.13)
10.14** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Nancy Dunn (7)
(Exhibit 10.14)
10.15** Promissory Note, Pledge Agreement and Agreement to Transfer or
Terminate dated January 31, 1995, between the Company and Chris
Jesse (7) (Exhibit 10.15)
9
<PAGE>
10.16** Promissory Note and Pledge Agreement dated January 31, 1995,
between the Company and Steve Kuekes (7) (Exhibit 10.16)
10.17** Promissory Note, Pledge Agreement and Agreement to Transfer or
Terminate dated January 31, 1995, between the Company and Nancy
Dunn (7) (Exhibit 10.17)
10.18** Memorandum of Agreement Regarding Compensation and Benefits
dated June 3, 1994 among Safeguard Scientifics, Inc., the
Company, Chris Jesse, Steven Kuekes and Nancy Dunn (7) (Exhibit
10.18)
10.19** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993 and First Amendment dated June 3, 1994, between
the Company and Chris Jesse (7) (Exhibit 10.19)
10.20** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993 and First Amendment dated June 3, 1994, between
the Company and Steve Kuekes (7) (Exhibit 10.20)
10.21** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993 and First Amendment dated June 3, 1994, between
the Company and Nancy Dunn (7) (Exhibit 10.21)
11 Statement Re Computation of Per Share Earnings
23* Consent of Independent Auditors Page 11
27 Financial Data Schedule
* Filed herewith.
** Management contract or compensatory plan or arrangement in which
directors and/or executive officers of the registrant may
participate.
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-9525), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1989, and incorporated herein
by reference.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K
dated September 30, 1993, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1992, and incorporated herein
by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1993, and incorporated herein
by reference.
(6) Filed on March 4, 1994, as an exhibit to the Company's
Registration Statement on Form S-8 (No. 33-76066) and
incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K
for fiscal year ended December 31, 1994, and incorporated herein
by reference.
10
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Forms S-8 No. 33-39266, No. 33-45127, No. 33-31852 and No. 33-
76066) pertaining to the 1988 Stock Option Plan of Tangram Enterprise
Solutions, Inc. of our report dated February 15, 1996, with respect to
the financial statements and schedule of Tangram Enterprise Solutions,
Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1995.
Ernst & Young LLP
Raleigh, North Carolina
June 18, 1996
11
<PAGE>
Tangram Enterprise Solutions, Inc.
Index to Audited Financial Statements
Report of Independent Auditors F-2
Audited Financial Statements
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 through F-15
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Tangram Enterprise Solutions, Inc.
We have audited the balance sheet of Tangram Enterprise Solutions, Inc. as of
December 31, 1995, and the related statements of operations, shareholders'
equity, and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the Index at Item 14 (a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit. The balance sheet of Tangram
Enterprise Solutions, Inc. for the year ended December 31, 1994, and the
related statements of operations, shareholders' equity and cash flows for the
years ended December 31, 1994 and 1993, were audited by other auditors whose
report dated February 23, 1995, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1995 financial statements referred to above present
fairly, in all material respects, the financial position of Tangram
Enterprise Solutions, Inc. as of December 31, 1995, and the results of its
operations and cash flows for the year then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Raleigh, North Carolina
February 15, 1996
F-2
<PAGE>
<TABLE>
Tangram Enterprise Solutions, Inc.
Balance Sheets
<CAPTION>
December 31
1995 1994
(In thousands, except share
and per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 92 $ 614
Accounts receivable, net of allowance of $225
in 1995 and $262 in 1994 2,853 3,350
Deferred tax assets, net - 884
Other current assets 257 212
---------------------
Total current assets 3,202 5,060
Equipment, furniture and fixtures, net of
accumulated depreciation of $1,553 in 1995
and $4,563 in 1994 278 500
Deferred software costs, net 2,595 2,370
Costs in excess of net assets of business
acquired, net 5,903 6,661
Notes receivable - officers 784 392
Other assets 67 65
---------------------
Total assets $ 12,829 $ 15,048
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to shareholder $ - $ 606
Note payable - current portion 1,319 972
Accounts payable 531 491
Accrued expenses 418 460
Deferred revenue 2,228 2,448
Other current liabilities 85 108
---------------------
Total current liabilities 4,581 5,085
Note payable - 500
Capital lease obligations 2 95
Shareholders' equity:
Common stock, par value $.01, authorized
48,000,000 shares, issued 14,527,876 in 1995
and 14,332,217 in 1994 145 143
Additional paid-in capital 44,275 44,214
Accumulated deficit (36,174) (34,989)
---------------------
Total shareholders' equity 8,246 9,368
---------------------
Total liabilities and shareholders' equity $ 12,829 $ 15,048
=====================
<FN>
See accompanying notes.
</TABLE>
F-3
<PAGE>
<TABLE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
<CAPTION>
Year Ended December 31
1995 1994 1993
------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Software revenues $ 12,538 $ 12,778 $ 13,733
Costs and expenses:
Costs of software 616 938 1,147
Development 2,889 3,281 3,184
Selling and marketing 6,727 5,511 4,554
General and administrative 2,543 2,744 2,870
Purchased research and development - 1,253 -
Merger and restructuring costs - - 2,500
Other (income) expenses, net 70 (366) 337
----------------------------------
Total costs and expenses 12,845 13,361 14,592
----------------------------------
Loss before income taxes (307) (583) (859)
Benefit (provision) for income taxes (878) (16) 633
----------------------------------
Net loss $ (1,185) $ (599) $ (226)
==================================
Loss per common share $ (.08) $ (.04) $ (.06)
==================================
Weighted average number of common
shares outstanding 14,459 14,216 13,942
==================================
<FN>
See accompanying notes.
</TABLE>
F-4
<PAGE>
<TABLE>
Tangram Enterprise Solutions, Inc.
Statements of Shareholders' Equity
<CAPTION>
(In thousands, except number of shares)
Preferred Common Addt'l Share
Stock Stock Paid-in Accum. Treasury Holders
Shares Amt Shares Amt Cap Deficit Stock Equity
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
Dec. 31,
1992 8,871 $887 14,124,459 $141 $35,093 $(33,764) $(160) $2,197
Dividends -
pref. shares 220 22 - - (22) - - -
Dividends -
redeemable
pref. shares - - - - - (400) - (400)
Exercise emp.
stock options - - 113,288 1 61 - - 62
Paid-in capital
resulting from
merger - - - - 3,726 - - 3,726
Contributed cap.- - - - 5,356 - - 5,356
Net loss - - - - - (226) - (226)
- -----------------------------------------------------------------------------
Balance at
Dec. 31,
1993 9,091 909 14,237,747 142 44,214 (34,390) (160) 10,715
Redemption
ofpref.
stock (9,091) (909) - - - - - (909)
Exercise of
employee stock
options - - 94,470 1 - - 160 161
Net loss - - - - - (599) - (599)
- -----------------------------------------------------------------------------
Balance at Dec.
31, 1994 - - 14,332,217 143 44,214 (34,989) - 9,368
Exercise of
employee stock
options - - 195,659 2 61 - - 63
Net loss - - - - - (1,185) - (1,185)
- -----------------------------------------------------------------------------
Balance at
Dec. 31, 1995 - $ - 14,527,876 $145 $44,275 $(36,174) $ - $8,246
=============================================================================
<FN>
See accompanying notes.
</TABLE>
F-4
<PAGE>
<TABLE>
Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
<CAPTION>
Year Ended December 31
1995 1994 1993
-------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,185) $ (599) $(226)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 2,219 2,511 3,564
Merger and restructuring costs - - 451
Purchased research and development - 1,253 -
Decrease (increase) in deferred
tax assets 884 - (884)
Cash provided (used) by changes in
working capital items:
Accounts receivable 497 (126) 1,923
Other current assets (45) 284 (49)
Other assets (2) (35) 108
Accounts payable 40 (260) (401)
Accrued expenses and other
current liabilities (65) (457) (91)
Deferred revenue (220) 463 236
-------------------------------
Net cash provided by operating activities 2,123 3,034 4,631
-------------------------------
INVESTING ACTIVITIES
Deferred software costs (1,286) (1,257) (1,042)
Expenditures for equipment, furniture
and fixtures (178) (69) (338)
Acquisition of Knozall Systems - (498) -
Other (392) (351) -
-------------------------------
Net cash used in investing activities (1,856) (2,175) (1,380)
-------------------------------
FINANCING ACTIVITIES
Net repayments on note payable to shareholder (606) - (1,238)
Net (repayments) borrowings on notes payable (153) 472 -
Repayment of capital lease obligations (93) (84) (78)
Dividends on Series E Preferred Stock - - (400)
Redemption of preferred stock - (1,516) (984)
Proceeds from exercise of employee
stock options 63 131 62
-------------------------------
Net cash used in financing activities (789) (997) (2,638)
-------------------------------
Net (decrease) increase in cash (522) (138) 613
Cash, beginning of year 614 752 139
-------------------------------
Cash, end of year $ 92 $ 614 $ 752
==================================
<FN>
See accompanying notes.
</TABLE>
F-6
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Tangram Enterprise Solutions, Inc. (the Company) develops and markets
enterprise network software. AM:PM, the Company's leading product, provides
distributed resource management across heterogeneous networks, accomplishing
such tasks as software and data distribution, data collection, asset
management and remote resource management. AM:PM is available for MVS, UNIX,
NetWare, Windows, OS/2, Windows NT, Windows 95, DOS and Macintosh platforms.
Tangram Enterprise Solutions, Inc. is the result of the merger between Rabbit
Software Corporation (Rabbit) and Tangram Systems Corporation (Tangram
Systems), effective September 30, 1993. Safeguard Scientifics, Inc.
(Safeguard) was the majority shareholder of both companies prior to the
merger and continues to hold approximately 72% of the Company.
The merger was accounted for as an exchange of ownership interests between
entities under common control. To the extent of Safeguard's ownership in
Tangram Systems prior to the merger, the transfer of the net assets of
Tangram Systems was at historical cost, similar to a pooling of interests.
The remaining minority interests' share of Tangram Systems' net assets was
transferred at fair value, which resulted in costs in excess of net business
assets acquired of approximately $3.3 million. In addition, to the extent
that Safeguard recorded goodwill from its acquisition of Tangram Systems,
such goodwill was pushed-down to the books of the Company.
In connection with the merger, the Company incurred certain non-recurring
charges totaling $2,500,000. These charges consisted of severance payments,
costs associated with duplicate pre-merger costs, professional fees
associated with the merger and the elimination of non-strategic products,
including $1,200,000 of accelerated software amortization relating to various
gateway products that have been eliminated. These items are shown on the
1993 statement of operations as merger and restructuring costs.
On August 1, 1994, the Company acquired the assets and certain liabilities of
Knozall Systems, Inc. (Knozall) for $1,500,000 in cash and notes. The
acquisition was accounted for as a purchase, and the results of operations
and other financial data include the acquired operations of Knozall from the
date of acquisition. As a result of the purchase, the Company incurred non-
recurring charges related to in-process research and development totaling
$1,253,000, which are shown separately on the statement of operations as
purchased research and development costs (see Note 9).
F-7
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results can differ from those estimates.
Revenue Recognition
The Company licenses its computer software under perpetual licensing
agreements. The licenses are sometimes sold with related consulting services
for the implementation of the software. Revenues under these licensing
agreements are recognized after the software and services have been accepted
by the customer. Revenues pursuant to renewals of annual licenses are
deferred and recognized over the renewal periods. The Company recognizes
revenues from post contract customer support agreements, including
maintenance bundled with software licenses, ratably over the term of the
related agreements. In addition, the Company sells certain other computer
software and hardware. Revenue from these sales is recognized upon shipment.
As products are shipped, the Company provides for warranty expense based on
historical warranty experience.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are stated at cost, net of accumulated
depreciation. Depreciation of equipment, furniture and fixtures, including
items held under capital leases, is provided using the straight-line method
over estimated useful lives ranging from two to five years.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or settled.
F-8
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Loss Per Share
The loss per common share calculations are based on the weighted average
number of shares outstanding in each period including common stock
equivalents (unless antidilutive), which would arise from the exercise of
stock options. The loss per share calculation for the year ended December
31, 1993, includes the effect of accumulated dividends on preferred stock of
$570,000. There were no dividends in 1995 and 1994.
Reclassifications
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to conform with the 1995 presentation. These reclassifications
had no effect on net income or shareholders' equity as previously reported.
Costs in Excess of Net Assets of Business Acquired
Costs in excess of net assets of business acquired ("goodwill") is amortized
on a straight-line basis over 10 years. Accumulated amortization at December
31, 1995 and 1994, was approximately $2,685,000 and $1,927,000, respectively.
Assessment of the carrying amount of goodwill is made when changing facts and
circumstances suggest that the carrying value of goodwill or other assets may
be impaired.
Deferred Software Costs
Certain costs to enhance the Company's existing software or to develop new
software have been capitalized. Deferred costs are amortized using the
straight-line method over the products' estimated useful lives, generally
three years. During the years ended December 31, 1995, 1994 and 1993, total
costs incurred (excluding amortization of deferred costs) for software
development activities (excluding the development agreement with Safeguard -
see Note 6) were approximately $3,115,000, $3,497,000 and $2,645,000,
respectively; total capitalized development costs were $1,286,000, $1,442,000
and $1,042,200, respectively; and amortization of capitalized costs was
$1,060,000, $1,225,500, and $1,581,600, respectively. Accumulated
amortization of deferred software at December 31, 1995 and 1994, was
approximately $2,120,824 and $3,196,600, respectively. As a result of the
merger in 1993, approximately $1,200,000 of deferred software was written off
due to the elimination of various gateway products.
F-9
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
Statement of Cash Flows
The Company incurred and paid interest totaling approximately $139,900,
$52,000 and $391,000 during the years ended December 31, 1995, 1994 and 1993,
respectively. The Company made income tax payments totaling $18,000, $17,000
and $405,000 during the years ended December 31, 1995, 1994 and 1993,
respectively.
During 1994, the Company redeemed all of the Series D Convertible Preferred
Stock for $303,000 cash and the assumption of a $606,100 note payable to
Safeguard. The note was repaid during 1995. In 1994, the Company also
purchased $185,000 of deferred software costs, $1,253,000 of research and
development costs and $62,000 of other assets and liabilities from Knozall
with $500,000 in cash and a $1 million note payable.
Stock Options
In October 1995, FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"), which gives companies the option to adopt the
fair value method for expense recognition of employee stock options or to
continue to account for stock options and stock-based awards using the
intrinsic value method as outlined under Accounting Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), with pro forma
disclosures of net income and net income per share as if the fair value
method had been applied. The Company has selected to continue to apply APB
25 for future stock options and stock-based awards.
2. Note Payable
The note payable consists of a $1,000,000 promissory note issued in
connection with the Knozall acquisition, with interest payable quarterly at a
rate of 6%. The note matures in July 1996. The note was cancelled in March
of 1996 in conjunction with the sale of the LAN division.
The Company also has a term loan with a bank with an outstanding balance of
$318,885 at December 31, 1995. Interest and principal payments are due
monthly with interest at the prime rate plus 1/4% (8.65% at December 31,
1995). The loan is collateralized by the assets of the Company and matures
in October 1996.
F-10
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
3. Leases
The Company leases its facilities and certain equipment under several non-
cancelable operating lease agreements that expire at various times through
2000. Rental expense under these leases for the years ended December 31,
1995, 1994 and 1993, totaled approximately $758,800, $760,000 and $807,400,
respectively. Future minimum lease payments under non-cancelable operating
leases at December 31, 1995, are approximately $708,000, $159,900, $36,600,
$31,800 and $25,200 for 1996, 1997, 1998, 1999 and 2000, respectively.
The Company also leases certain equipment under capital leases. Equipment
held under capital leases had a cost and related accumulated depreciation of
$422,500 and $345,000, respectively, at December 31, 1995 and $422,500 and
$260,500 respectively, at December 31, 1994. The amount included in
depreciation expense related to these assets for the years ended December 31,
1995, 1994 and 1993, was $84,500.
4. Preferred Stock
In December 1994, the Company redeemed the Series D Convertible Preferred
Stock at liquidation value of $909,000 (or $100 per share) for $303,000 in
cash and a promissory note in the amount of $606,000, which was paid in 1995.
5. Stock Options
The Company has granted incentive and non-qualified stock options to
employees, directors and other persons, both under and outside of formal
option plans. The number of shares authorized under the Plan is 2,400,000.
The following table summarizes information of stock option activity since
December 31, 1993, and the status of stock options as of December 31, 1995.
F-11
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
<TABLE>
5. Stock Options (continued)
<CAPTION>
Non-Qualified Options
Not Under Under Incentive
Plan Plan Options Total
-------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding -
Dec. 31, 1993 150,000 34,279 1,602,591 1,786,870
Options granted 4,000 1,620,433 1,624,433
Canceled or exchanged (104,800) (104,800)
Exercised (14,279) (319,656) (333,935)
-------------------------------------------------
Options outstanding -
Dec. 31, 1994 150,000 24,000 2,798,568 2,972,568
Options granted 10,000 336,974 346,974
Canceled (155,616) (155,616)
Exercised (195,659) (195,659)
-------------------------------------------------
Options outstanding -
Dec. 31, 1995 150,000 34,000 2,784,267 2,968,267
Options vested -
Dec. 31, 1995 120,000 17,000 1,641,087 1,778,087
Options available to
be granted - 66,000 374,925 440,925
Average exercise price $ 1.00 $ 1.26 $ 1.12 $ 1.12
<FN>
Shares reserved for issuance under stock option plans total 3,409,192.
</TABLE>
6. Related Party Transactions
On December 15, 1994, the Company entered into a Preferred Stock Purchase
Agreement with Safeguard to redeem the Series D Preferred Stock held by
Safeguard. Under the terms of the agreement, the Company paid the purchase
price of $909,000 in three equal installments of $303,000 each in December
1994, July 1995 and December 1995.
F-12
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
6. Related Party Transactions (continued)
During the years ended December 31, 1995, 1994 and 1993, the Company paid
administrative services fees to Safeguard totaling approximately $187,000,
$193,000 and $188,000, respectively. In addition, in 1994 and 1993, the
Company reimbursed Safeguard for $135,000 and $180,000, respectively, of
investment services fees related to a 1992 transaction which Safeguard paid
on the Company's behalf. The Company also incurred and paid to Safeguard
$309,200 in interest costs in 1993 under a revolving credit agreement.
Under a development agreement between the Company and Safeguard, Safeguard
contracted with the Company for development of an enterprise gateway product
and in a separate agreement granted marketing rights for the technology to
the Company. In 1994 and 1995, the Company elected to use the underlying
technology to improve several product sets rather than market the technology
as a single stand-alone product. In 1994 and 1995, the Company paid $200,000
in royalties to Safeguard for this technology.
During 1995 and 1994, the Company made non-recourse, non-interest-bearing
loans to certain officers of the Company. The total loans outstanding at
December 31, 1995 and 1994, were $784,000 and $392,000, respectively. The
loans are secured by shares of the Company's common stock and mature at the
end of five years or termination of employment, whichever occurs first.
7. Income Taxes
<TABLE>
The components of income tax expense (benefit) for the years ended December
31, 1995, 1994 and 1993, consisted of the following:
<CAPTION>
1995 1994 1993
---------------------------------------
<S> <C> <S> <S>
Current expense:
Federal $ - $ - $ 248
State (6) 16 3
---------------------------------------
(6) 16 251
Deferred expense (benefit):
Federal 884 - (884)
State - - -
---------------------------------------
884 - (884)
---------------------------------------
Total $ 878 $ 16 $ (633)
=======================================
</TABLE>
F-13
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
<TABLE>
The Company has no deferred tax liabilities at December 31, 1995 or 1994.
The components of net deferred tax assets as of December 31 are as follows:
<CAPTION>
1995 1994
(In thousands)
----------------------
<S> <C> <C>
Deferred tax assets
Tax loss carryforwards $ 8,838 $ 8,630
Tax credit carryforwards 464 464
Deferred software costs 384 763
Purchased research and development 385 414
Allowance for doubtful accounts 77 89
Other 169 117
----------------------
Total gross deferred tax assets 10,317 10,477
Valuation allowance (10,317) (9,593)
----------------------
Deferred tax assets $ - $ 884
======================
</TABLE>
<TABLE>
The actual income tax expense (benefit) for 1995, 1994 and 1993 differs from
the "expected" amount (computed by applying the statutory federal income tax
rate of 34% to income before income taxes as follows:
<CAPTION>
1995 1994 1993
(In thousands)
------------------------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (108) $ (198) $ (292)
Non deductible amortization 257 257 159
Change in valuation allowance 724 (44) (682)
Other 5 1 182
------------------------------------
Actual tax expense (benefit) $ 878 $ 16 $ (633)
====================================
</TABLE>
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $25.9 million. The net operating loss carryforwards expire in
various amounts from 1998 through 2010. The Tax Reform Act of 1986 contains
provisions that limit the ability to utilize net operating loss carryforwards
in the case of certain events including significant changes in ownership
interests. As there was a significant change in ownership interests (as
defined) on June 29, 1989, the Company is limited in its ability to utilize
approximately $18 million of net operating loss carryforwards. The annual
limitation for the utilization of these carryforwards is approximately $1.3
million, and any unused amount can be utilized in subsequent years within the
carryforward period.
F-14
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
At December 31, 1995, the Company had available approximately $431,000 and
$33,000 of research and development and investment credit, respectively,
which expire in varying amounts from 1997 through 2003.
8. Employee Benefit Plan
The Company has a defined contribution plan [401(k)], under which all
eligible employees meeting certain specified criteria as to age and service
may contribute a percentage of their basic compensation to the plan. The
Company does not make matching contributions to the plan.
9. Subsequent Event
On March 21, 1996, the Company sold the assets and liabilities of the LAN
division, formerly Knozall Systems, Inc., to its former owner, an officer and
director of the Company. In exchange for the cancellation of $850,000 of the
$1 million note from the 1994 acquisition of Knozall due the buyer, 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. In addition, the Company retained rights to certain
technology developed in the LAN division since August 1, 1994.
F-15
<PAGE>
