SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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 (IRS 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 10K. ____
The aggregate market value of shares of common stock held by
nonaffiliates (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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating
to its scheduled 1996 Annual Shareholders Meeting are incorporated by
reference in Part III, Items 10, 11, 12 and 13 of this report.
<PAGE>
PART I
Item 1. Business
General
Tangram Enterprise Solutions, Inc. (the Company) develops and
markets information technology asset tracking and software
distribution products and services enabling automated enterprise-wide
information system management. The Company markets to Fortune 1000
companies and their foreign equivalents requiring enterprise-wide
management of computer assets and heterogeneous computing networks.
The Company was created from the merger of Tangram Systems
Corporation (Tangram Systems) and Rabbit Software Corporation (Rabbit)
in September 1993. Each company had over 10 years of experience in
providing software products in the mainframe connectivity market. The
merger permitted the integration of complementary technologies by
combining Tangram Systems' expertise in the area of wide area networks
with Rabbit's open systems expertise.
Background and Strategy
Historically, the Company focused on the demands of the
traditional IBM customer base with the Open Advantage (registered
trademark) UNIX SNA products, which enable microcomputer users to use
both the local capabilities of the microcomputer and the data and
software applications on a mainframe using 3270 emulation and the
Arbiter (registered trademark) product, which enables Windows, DOS and
OS/2 workstation users to access mainframe data, transfer files and
perform terminal emulation. The Company developed its AM:PM
(registered trademark) software which allows businesses to manage an
enterprise's heterogeneous computer systems, including, for example,
the automatic distribution of software and transfer of data. The
Company expanded the AM:PM product line to include asset management
capabilities. In 1994, the Company developed a LAN version of its
software. Thus, while remaining committed to the needs of the
traditional IBM market, the Company now has the ability to serve the
entire spectrum of networking environments: wide area, local area and
distributed networks. Currently the Company is continuing expansion of
AM:PM and asset management and developing a new product, expected to
be announced in the first half of 1996, which allows enterprises to
automatically track and analyze their entire base of computer hardware
and software assets.
The Company maintains an active development program that is
expanding the utility of the AM:PM product line through strategic
alliances and new product functionality. In addition, the Company has
expanded its development efforts into products that address the
information technology (IT) asset tracking needs of large computing
environments. The Consulting Services Group was formed to allow the
Company to provide its customers with turnkey solutions of its
software and has contributed to the expansion during 1995 with the
development of products which are the direct result of turnkey
installations.
The Company believes that the continued expansion of
heterogeneous computer networks and current downsizing and rightsizing
trends are forcing businesses to seek automated solutions for tracking
and managing their enterprise-wide IT assets in the increasingly
competitive environment. The Company believes this trend will continue
and that new product offerings and turnkey implementations of the
Company's software will enable the Company to maintain a leading
position in the asset tracking and electronic software distribution
market.
PRODUCTS, PRODUCT DEVELOPMENT, MAINTENANCE AND SUPPORT
Products
The Company's software and services cover both enterprise
information systems management and connectivity. The AM:PM family of
products is a leading software solution for asset tracking and
distribution, allowing customers to manage heterogeneous computer
resources across an entire enterprise. AM:PM allows companies with
thousands of remote workstations and servers to accomplish tasks
unattended. Such tasks include software distribution, data
<PAGE>
distribution and collection, and resource and asset management. AM:PM
offers a variety of connectivity options for workstations, LANs and
servers. AM:PM supports numerous operating platforms, including
Solaris, HP-UX, SCO OpenServer, AIX, Windows, Windows NT, Windows 95
(registered trademark), DOS, OS/2, MVS, NetWare and Macintosh, as well
as numerous communications protocols.
Tangram Enterprise Asset Manager, a component of AM:PM,
automatically performs software and hardware inventories and provides
timely and accurate information on software usage. The AM:PM Corporate
Safe (registered trademark) allows an end user to back up workstation
data by distributing it to a remote location for protection in case of
disaster. Product Builder (registered trademark), a recent add-on
product to AM:PM, allows users to automatically bundle software and/or
data for distribution.
The Company offers implementation services to major corporations
designed to facilitate implementation of AM:PM and maximize the
customers' use of the product. Service offerings include project
planning, product customization, custom application development and
hands-on training.
In late 1995, the Company began development of a new enterprise-
wide asset tracking product scheduled for general availability in the
first half of 1996.
In addition, the Company offers several mainframe connectivity
software products that provide access to IBM SNA networks, enabling
companies to run a range of mainframe interface applications at high
speeds on multiple workstation platforms. Arbiter provides a file
transfer capability and PC-to-mainframe connectivity, with an IBM
mainframe used as a LAN file server. Arbiter supports DOS, Windows and
OS/2 workstations. The Open Advantage (registered trademark) gateway
product line provides high-speed 3270 connectivity between mainframes
and LANs.
Product Development
Development resources are allocated between products according to
the need for enhancement of existing products and the development of
new products in proportion to existing revenue streams and market
trends. Existing products are enhanced to keep them current with
market requirements and to allow them to support new standards and
environments. New products are developed that are complementary to
existing products and enter new markets. Among 1995 developments were
Solaris, HP-UX, SCO OpenServer and AIX versions of AM:PM as well as
expansion of asset management capabilities to include Windows 95 and
Windows NT. In 1995, development was completed on a new release of
AM:PM MVS and AllTalk (registered trademark) which improved product
functionality and stability across multiple new communication
protocols and workstation configurations. In addition, development was
completed on interfaces to Computer Associates' CA-Unicenter
(registered trademark), Boole & Babbage's Ensign (registered
trademark) and Oracle (registered trademark) products.
Project teams handle product development from specification,
design and implementation to product release. These project teams
operate as autonomous units and include developers, product managers
from marketing, quality control managers and members of senior
management. In addition, the Consulting Services Group, as a direct
result of on-site customer implementations of the Company's software,
contributes to the product development and design process. Product
Builder is a direct result of the Consulting Services Group's efforts.
The majority of the Company's products and associated
documentation have been developed internally. The Company has acquired
in the past and intends to continue to acquire certain software
technology from others and integrate those technologies into its
product lines. The Company expended $3,115,000 for product development
costs in 1995, compared with $3,497,000 in 1994 and $2,645,000 in
1993. No material expenditures were made in 1995 for acquisition of
software technology. During 1994, the Company acquired certain
technology as a result of the purchase of Knozall Systems, Inc., an
Arizona-based software development firm specializing in LAN
technologies, in connection with which the Company incurred a non-
recurring charge totaling $1,253,000 and recorded additional
capitalized software in the amount of $185,000.
<PAGE>
Maintenance and Support
The Company offers a comprehensive customer support program on
both a fee and contract basis, with premium programs available to
customers who have extraordinary needs. The Company surveys its
customer base to ensure quality of service. The Company also offers
project planning, product installation services, customized
application development and hands-on product training. Other services
include 24-hour service coverage for all products, on-site problem
resolution and improved high-speed telecommunication links with our
worldwide customers.
CUSTOMERS, SALES AND MARKETING
Customers
The customer base is currently composed of organizations with
large computing enterprises, some with tens of thousands of connected
processors. The Company's customers are located primarily in North
America and Europe and include companies in industrial, institutional
and governmental markets. No single customer accounts for more than 10
percent of total product revenues.
Sales
The Company delivers its AM:PM products through a direct channel
in North America and through distributors internationally. The direct
channel is managed out of Raleigh, North Carolina. The primary focus
of the direct channel in 1995 was the Company's AM:PM and related
asset management products, which are sold directly to large
multilocation firms using a combination of telesales and in-person
contacts at the customer location. The Consulting Services Group,
formed in late 1994, contributed to the sales through this channel in
1995.
In late 1995, the Company began building its international
distribution channels through a network of independent distributors in
major markets outside North America. All products sold outside North
America are sold through distributors who resell to the end user. The
international channel is managed out of Washington, D.C. The Company
currently has international distributors in Great Britain,
Scandinavia, Spain, Germany, Italy, Israel, South Africa, Australia,
Belgium and Venezuela.
The indirect channel is based in Malvern, Pennsylvania and its
focus is the Company's Open Advantage product suite.
Marketing
During 1995, the Company continued to emphasize the marketing of
its software distribution and asset management software products to
Fortune 1000 and government end users throughout North America and
Europe. The Company's customer/prospect base consists of organizations
that have a heterogeneous mix of computing platforms.
The Company's marketing strategy focuses on positioning its
products as market-driven solutions that leverage customer information
systems investments, assist customers in the migration to new
technologies and provide quality solutions with a superior value-to-
price ratio. To ensure that the products reflect the changing market
requirements, all of the Company's product development efforts are
integrated with marketing and other functions in a team approach (see
Product Development).
Customer requests for enhancements to current products and the
development of new products play a significant role in the Company's
product marketing strategy. Senior management teams make regular
customer visits to gain customer feedback. In addition, the Company
receives direct feedback through its Consulting Services Group as it
<PAGE>
assists customers in applying AM:PM and asset management technology.
The Company also conducts regular customer surveys to evaluate overall
customer satisfaction as well as future product needs. The Company
promotes its products through traditional advertising and direct lead
generation. In mid-1995, a telemarketing group was formed to qualify
and follow-up on leads generated through advertising and direct mail
for its AM:PM and asset management products.
COMPETITION
The market for the Company's products is highly competitive and
is characterized by rapid changes in technology and user needs. The
Company expects to encounter competition from established companies
and new companies that are now developing or may develop and market
comparable products. Many of the Company's actual and potential
competitors have substantially greater financial, marketing and
technological resources than the Company. The Company believes that
the principal competitive factors in the industry are the
compatibility of products with the customers' computer hardware and
software, ease of use, price and the substantial base of technology
that is required to join together the various platforms in today's
heterogeneous enterprises. The quality of documentation, customer
support and installation and the ability of a family of products to
work together effectively are additional factors.
PRODUCT PROTECTION
The Company relies on a combination of trade secrets, copyright
and trademark laws, licenses, non-compete agreements and technical
measures to protect its rights in its software products. The Company
currently has no patents. The Company's products are generally
licensed to end users pursuant to a license agreement that restricts
the use of the products to a limited number of control point
processors and/or a designated site or a limited number of nodes. The
scope of legal protection available for the Company's products may
vary in certain foreign countries.
The Company protects the source code version of its products as a
trade secret and as an unpublished copyrighted work. The Company does
not allow the source code to be distributed to customers for the AM:PM
products. The Company has been required from time to time to enter
into source code escrow agreements with certain customers and
distributors for certain of its products. These agreements require the
release of source code only under very limited circumstances,
principally a breach by the Company of its support obligations or a
filing of bankruptcy.
The Company believes that patent, trade secret and copyright
protection is less significant than factors such as knowledge,
experience of the Company's personnel, new products, frequent product
enhancements, name recognition and ongoing, reliable product
maintenance.
EMPLOYEES
As of December 31, 1995, the Company employed 98 persons,
including 43 in worldwide marketing, sales and field operations; 40 in
product development and technical support; and 15 in general and
administrative. None of the Company's employees are represented by a
labor union. The Company has experienced no work stoppages and
believes that its employee relations are good.
<PAGE>
Item 2. Properties
<TABLE>
The Company leases all of its facilities. The following table
sets forth summary data on the Company's leased facilities:
<CAPTION>
Location Approximate Use Lease
Square Feet Expiration
<S> <C> <C> <C>
Raleigh, NC 23,000 Executive,sales, April 30, 1997
development,marketing,
customer support,
distribution,
computing center
Malvern, PA* 16,500 Sales,development, April 30, 1998
marketing and
customer support
Regional 400 Sales Various dates
Offices (3) in 1996
</TABLE>
* The Company subleases 6,500 square feet of these premises to a third
party under an agreement expiring May 1, 1996.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the
Company or any of its subsidiaries is a party or of which any of their
property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
Additional Information
The following information is furnished in this Part I pursuant to
Instruction 3 to Item 401(b) of Regulation S-K:
Executive Officers of the Registrant
<TABLE>
The following persons were executive officers of the Company at
March 25, 1996:
<CAPTION>
Name Age Position
<S> <C> <C>
W. Christopher Jesse 45 President, Chief Executive
Officer and Director
Steven F. Kuekes 37 Vice President of
Technology, Vice President
and Director
Nancy M. Dunn 47 Chief Financial Officer,
Vice President of Finance,
and Assistant Secretary
</TABLE>
W. Christopher Jesse has served as President, Chief Executive
Officer and a director of the Company since October 1993. From March
1990 until September 1993, Mr. Jesse served as President, Chief
Executive Officer and a director of Tangram Systems. From 1986 until
he joined Tangram Systems, Mr. Jesse was Vice President of Federal
Operations of Prime Computer Incorporated.
Steven F. Kuekes has served as the Company's Vice President of
Technology and as a director since October 1993. Mr. Kuekes also
served as Vice President of Enterprise Computing Products and Services
from November 1994 until December 1995. Mr. Kuekes was a founder of
Tangram Systems and served as Vice President of Product Development
and Technology and as a director of Tangram Systems from 1988 until
September 1993.
Nancy M. Dunn has served as the Company's Vice President of
Finance, Chief Financial Officer and Assistant Secretary since October
1993. Ms. Dunn served as Vice President of Finance of Tangram Systems
from April 1990 through September 1993 and Controller of Tangram
Systems from October 1985 through March 1990.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
<TABLE>
(a) The Company's common stock is quoted in the over-the-counter
market in what are commonly referred to as the "pink sheets" under the
symbol "TESI." The following table sets forth the high and low bid
quotations of the Company's common stock from January 1, 1994, through
December 31, 1995, as provided by the market makers of the Company's
common stock.
<CAPTION>
1995 High Low
<S> <C> <C>
Fourth Quarter $2.25 $1.25
Third Quarter $2.88 $1.88
Second Quarter $2.63 $.50
First Quarter $1.19 $.56
1994
Fourth Quarter $1.44 $.88
Third Quarter $1.38 $.75
Second Quarter $1.63 $1.13
First Quarter $2.75 $1.50
</TABLE>
The high and low bid quotations for the Company's common stock
for the period from January 1, 1994, through December 31, 1995,
reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
(b) Holders. On March 1, 1996, there were approximately 3,000
beneficial owners of the Company's common stock.
(c) Dividends. Holders of the common stock are entitled to
receive such dividends as may be declared by the Company's Board of
Directors. No dividends on the common stock have been paid by the
Company. The Company intends to retain all future earnings for the
expansion of its business and consequently does not presently intend
to pay cash dividends on its common stock.
(d) Assumptions Regarding Non-Affiliates. In calculating the
aggregate market value of voting stock held by non-affiliates as shown
on the cover page of this report, the Company has included all of its
directors, executive officers and Safeguard as affiliates of the
Company.
<PAGE>
<TABLE>
Item 6. Selected Financial Data
<CAPTION>
Year Ended December 31
1995 1994 1993 1992 1991
Statements of (In thousands, except per share data)
operations data:
<S> <C> <C> <C> <C> <C>
Revenues $12,538 $12,778 $13,733 $16,767 $13,934
Net income(loss) (1) (1,185) (599) (226) 1,271 (1,910)
Net income(loss) per (.08) (.04) (.06) .04 (.17)
common share (2)
Average common 14,459 14,216 13,942 15,418 13,929
outstanding
December 31
1995 1994 1993 1992 1991
Balance sheet data: (In thousands)
Total assets $12,829 $15,048 $15,787 $15,181 $14,091
Working capital (1,379) (25) 1,568 95 826
(deficit)
Long-term debt, 1,319 1,472 6,594 7,419
including current
portion
Shareholders'
equity (3) 8,246 9,368 10,715 2,197 923
<FN>
(1)One-time charges for purchased research and development expenses
(associated with the acquisition of Knozall) of $1,253,000 or $.09 per
share are included in the 1994 results, and merger and restructuring
expenses of $2,500,000 or $.18 per share are included in the 1993
results.
(2)Net income (loss) per common share is after dividends on preferred
stock of $570,000, $610,000 and $480,000 for the years 1993, 1992 and
1991, respectively. No dividends were paid in 1994 or 1995.
(3)The increase in shareholders' equity in 1993 includes the
contribution to capital of a $5.4 million note from the Company to
Safeguard and $3.3 million of additional paid-in capital resulting
from the merger (see Note 1 to the Company's financial statements).
</TABLE>
<PAGE>
Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Tangram Enterprise Solutions, Inc. (the Company) develops and
markets information technology asset tracking and software
distribution products and services. AM:PM provides asset management
solutions across heterogeneous networks, accomplishing such tasks as
software distribution, asset tracking, data distribution, data
collection and remote resource management. AM:PM is available for
Solaris, HP-UX, SCO OpenServer, AIX, MVS, NetWare, Windows, OS/2,
Windows NT, DOS, Windows 95 and Macintosh platforms.
Tangram is a subsidiary of Safeguard Scientifics, Inc.
(Safeguard), a $1.5 billion entreprenurial technology company listed
on the New York Stock Exchange. Currently, Safeguard owns
approximately 72% of the Company.
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, for book value. In addition,
the Company retained rights to certain technology developed in the LAN
division since August 1, 1994. In August 1994, the Company had
acquired the assets and certain liabilities of Knozall for $1.5
million in cash and notes. As a result of the purchase, the Company
incurred a non-recurring charge totaling $1,253,000, which is shown
separately on the statement of operations as purchased research and
development costs.
On September 30, 1993, the Company merged with Tangram Systems
Corporation. In connection with the merger, the Company incurred
certain non-recurring charges totaling $2,500,000. The charges
consisted of severance payments, costs associated with duplicative 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 statement of
operations as merger and restructuring charges. See Note 1 to the
Company's financial statements included in this report for additional
information concerning the merger.
Results of Operations
Revenues
Software revenues for the year ended December 31, 1995, modestly
decreased to $12.5 million from $12.8 million for the same period in
1994. Revenues from the AM:PM product line, including related
consulting and maintenance fees, increased 23% in 1995. This was
offset by a 23% decrease in revenues from the traditional mainframe
product lines, including gateways, which accounted for most of the
decrease, and from Arbiter, which decreased slightly. The increase in
AM:PM revenue in 1995 reflects the expansion of sales coverage, a
broadening of the Company's AM:PM product and consulting offerings,
and the continued growth in the IT asset management market. The
decrease in the mainframe product line reflects the continued
weakening demand in the connectivity market. Revenues from LAN
products increased in 1995 due to the comparison of full year results
in 1995 to partial year results in 1994, but is not material to total
revenues in either year. LAN revenues will be insignificant in 1996
due to the sale of the LAN division in March 1996.
The Company believes that its AM:PM and asset management products and
its new asset tracking products will represent the predominant portion
of the Company's revenues. Consulting revenues had a significant
impact on AM:PM and asset management revenues in 1995, and management
expects this trend to continue. Revenues from gateway products
continue to decline as expected; however, revenues from Arbiter have
declined more slowly than expected.
<PAGE>
Maintenance fee revenues for 1995 were approximately 38% of total
software revenues as compared to approximately 29% for 1994 and 26%
for 1993. The continuing increase in maintenance fee revenues is due
to the historical upward trend of software sales on which these fees
are based, in addition to the strong renewal history the Company has
experienced.
Development Expenses
<TABLE>
Development activity is summarized in the table below:
<CAPTION>
(In thousands)
1995 1994 1993
<S> <C> <C> <C>
Development expenditures $3,115 $3,497 $2,645
Capitalized development costs (1,286) (1,442) (1,042)
Amortization 1,060 1,226 1,581
_______ _______ _______
Development expenses $2,889 $3,281 $3,184
====== ====== ======
</TABLE>
During 1995, the Company focused its energies on enhancing its
AM:PM and asset management solutions. The Company's product line was
expanded to support Windows 95, Solaris, HP-UX, SCO OpenServer and AIX
environments. The Company intends to continue to focus on its core
products and eliminate development expenses on non-strategic products.
In late 1995, the Company began development of an enterprise-wide
asset tracking product, which the Company expects to begin marketing
in 1996. As a percentage of software revenues, development expenses
were 23% for 1995, 25% for 1994 and 23% for 1993.
Selling and Marketing Expenses
Selling and marketing expenses increased as a percentage of
software revenues from 33% in 1993 to 43% in 1994 to 54% in 1995. In
absolute dollars for 1995, these expenses increased 22% to $6.7
million from $5.5 million in 1994 and increased 21% in 1994 from $4.6
million in 1993. The increase in these expenses in dollars and as a
percentage of revenues during 1995 was due primarily to the marketing
campaign to promote the new UNIX, LAN and MVS versions of AM:PM and
asset management. In addition, the increase reflects the cost of the
Consulting Services Group formed in late 1994 to assist customers with
the implementation of the Company's products, the expansion of sales
coverage needed to address the market for the Company's products, and
the selling and marketing expenses of the LAN division. The increases
in 1994 and 1993 were due to the expense of rebuilding the marketing
and sales organizations following the termination of a marketing
agreement with Systems Center, Inc. in the second half of 1993 and
certain duplicative expenses attributable to the merger in 1993 and
the acquisition in 1994.
The Company expects to continue to commit the necessary resources
to address the market for its products, and therefore selling and
marketing expenses in dollars should continue to increase. The Company
plans a channel marketing program and infrastructure to support its
strategic partnership efforts. In addition, the advertising campaign
that began in 1995 will continue to focus on the Company's newest
products.
General and Administrative Expenses
General and administrative expenses have declined from $2.9
million to $2.7 million to $2.5 million in 1993, 1994 and 1995,
respectively. As a percentage of revenues, general and administrative
expenses have remained constant at 21% in 1993 and 1994 and 20% in
1995. The 7% decline in general and administrative expenses in each of
1995 and 1994 reflects the Company's efforts to leverage
infrastructure while investing in selling and marketing expenses. The
Company believes that sales levels can increase without requiring
significant additional expenditures for infrastructure.
<PAGE>
Liquidity and Capital Resources
Historically, cash provided from operating activities has been
adequate to fund the Company's development and finance activities,
including the payment of the note payable to Safeguard for the
redemption of the remaining Series D Preferred Stock during 1995. The
Company generated cash from operating activities despite its net
losses in the past three years due to the significant levels of
depreciation and amortization. In October 1995, the Company extended
the maturity date of its bank term loan to October 1996. The Company
believes that its existing cash resources, together with cash provided
by operations, will be adequate to meet its cash requirements through
1996. Should the business grow more rapidly than anticipated, or if
funds are required for technology purchases or acquisitions, the
Company believes these funds will be available using debt, equity or
other sources.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and schedule filed with
this report appear on pages F-2 through F-15, and are listed on page F-
1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE>
PART III
Incorporated by Reference
The information called for by Item 10 Directors and Executive
Officers of the Registrant (other than the information concerning
executive officers set forth after Item 4 herein), Item 11 Executive
Compensation, Item 12 Security Ownership of Certain Beneficial Owners
and Management and Item 13 Certain Relationships and Related
Transactions is incorporated herein by reference to the Company's
definitive proxy statement for its 1996 Annual Shareholders Meeting,
which is expected to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year to
which this report relates.
<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 F15
(2) Financial Statement Schedules
(i) Schedule II -Valuation and Qualifying Accounts for
the years ended December 31, 1995, 1994 and 1993 18
(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.
<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)
10.4 Agreement of Lease, executed by the Company on February 17,
1986, with Morehall Associates Limited Partnership (1)
(Exhibit 10m)
<PAGE>
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)
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)
<PAGE>
10.21** Employee Non-Disclosure and NonCompetition 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
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.
<PAGE>
<TABLE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1994 and 1993
<CAPTION>
Additions
Balance at Charged Deductions Balance
Beginning to Costs from at End
of Period and Expenses Reserves of Period
<S> <C> <C> <C> <C>
Year ended December $262,300 $169,000 $206,300 $225,000
31, 1995 - Allowance
for Doubtful Accounts
Year ended December $336,300 $82,000 $156,000 $262,300
31, 1994 - Allowance
for Doubtful Accounts
Year ended December $172,500 $232,400 $68,600 $336,300
31, 1993 - Allowance
for Doubtful Accounts
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TANGRAM ENTERPRISE SOLUTIONS, INC.
Dated: March 28, 1996 By: /s/ W. C. Jesse
W. C. Jesse
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates
indicated.
Dated: March 28, 1996 /s/ W. C. Jesse
W. C. Jesse
President, Chief Executive Officer,
and Director
(Principal Executive Officer)
Dated: March 28 1996 /s/ Nancy M. Dunn
Nancy M. Dunn
Chief Financial Officer and Assistant
Secretary
(Principal Financial and Accounting
Officer)
Dated: March 28, 1996 /s/ Charles A. Root
Charles A. Root
Chairman of the Board of Directors
Dated: March 28, 1996 /s/ Steven F. Kuekes
Steven F. Kuekes
Director
Dated: March 29, 1996 /s/ John F. Owens
John F. Owens
Director
Dated: March 28, 1996 /s/ Carl Wilson
Carl Wilson
Director
Dated: March 28, 1996 /s/ Carl G. Sempier
Carl G. Sempier
Director
<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)
(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 ByLaws 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)
<PAGE>
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)
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)
<PAGE>
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
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.
<PAGE>
<TABLE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Years ended December 31, 1995, 1994 and 1993
Exhibit 11
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net income(loss) $(1,185,000) $(598,800) $(225,600)
Preferred stock - - (570,000)
dividend ____________ __________ __________
$(1,185,000) $(598,800) $(795,600)
Average common 14,459,000 14,216,000 13,941,600
shares outstanding (1)
Net income(loss) per $ (.08) $ (.04) $ (.06)
common share
<FN>
(1) Common share equivalents (options and convertible preferred) would
be antidilutive.
</TABLE>
<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
<PAGE>
Report of Independent Auditors
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. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements 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.
Ernst & Young LLP
Raleigh, North Carolina
February 15, 1996
<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 $1,553 278 500
in 1995 and $4,563 in 1994
Deferred software costs, net 2,595 2,370
Costs in excess of net assets of 5,903 6,661
business acquired, net
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 14,332,217 145 143
in 1994
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' $12,829 $15,048
equity ======= =======
<FN>
See accompanying notes.
</TABLE>
<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 2,543 2,744 2,870
administrative
Purchased research and - 1,253 -
development
Merger and restructuring - - 2,500
costs
Other (income) expenses, 70 (366) 337
net
_______ _______ _______
Total costs and expenses 12,845 13,361 14,592
_______ _______ _______
Loss before income taxes (307) (583) (859)
Benefit (provision) for (878) (16) 633
income taxes _______ _______ _______
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>
<PAGE>
<TABLE>
Tangram Enterprise Solutions, Inc.
Statements of Shareholders' Equity
(In thousands, except number of shares)
<CAPTION>
Preferred Common Additional
Stock Stock Paid-in Acc. Treasury SH
Shares Amt Shares Amt Cap Deficit Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance 8,871 $887 14,124,459 $141 $35,093 $(33,764) $(160) $2,197
at Dec. 31,
1992
Dividends - 220 22 (22)
pref. shares
Dividends -
redeemable (400) (400)
pref. shares
Exercise emp.
stock options 113,288 1 61 62
Paid-in capital
from merger 3,726 3,726
Contributed cap. 5,356 5,356
Net loss (226) (226)
__________________________________________________________
Balance 9,091 909 14,237,747 142 44,214 (34,390) (160)10,715
at Dec. 31,
1993
Redemption (9,091)(909) (909)
of pref.
stock
Exercise emp.
stock options 94,470 1 160 161
Net loss (599) (599)
__________________________________________________________
Balance 14,332,217 143 44,214 (34,989) 9,368
at Dec. 31,
1994
Exercise emp.
stock options 195,659 2 61 63
Net loss (1,185) (1,185)
__________________________________________________________
Balance at $ - 14,527,876 $145 $44,275 $(36,174) $ - $8,246
December 31,
1995
<FN>
See accompanying notes.
</TABLE>
<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 884 - (884)
tax assets
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 (65) (457) (91)
current liabilities
Deferred revenue (220) 463 236
__________________________
Net cash provided by operating 2,123 3,034 4,631
activities __________________________
Investing activities
Deferred software costs (1,286) (1,257) (1,042)
Expenditures for equipment, (178) (69) (338)
furniture,and fixtures
Acquisition of Knozall Systems - (498) -
Other (392) (351) -
___________________________
Net cash used in investing (1,856) (2,175) (1,380)
activities ___________________________
Financing activities
Net repayments on note payable to (606) - (1,238)
shareholder
Net (repayments) borrowings on (153) 472 -
notes payable
Repayment of capital lease (93) (84) (78)
obligations
Dividends on Series E Pref. Stock - - (400)
Redemption of pref. stock - (1,516) (984)
Proceeds from exercise of employee 63 131 62
stock options
__________________________
Net cash used in financing (789) (997) (2,638)
activities ___________________________
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>
<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 nonrecurring 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).
<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 straightline 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.
<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.
<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.
<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 noncancelable 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.
<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 150,000 34,279 1,602,591 1,786,870
December 31, 1993
Options granted 4,000 1,620,433 1,624,433
Canceled/exchanged (104,800) (104,800)
Exercised (14,279) (319,656) (333,935)
_____________________________________________
Options outstanding 150,000 24,000 2,798,568 2,972,568
December 31, 1994
Options granted 10,000 336,974 346,974
Canceled (155,616) (155,616)
Exercised (195,659) (195,659)
_____________________________________________
Options outstanding 150,000 34,000 2,784,267 2,968,267
December 31,
1995
Options vested 120,000 17,000 1,641,087 1,778,087
December 31, 1995
Options available 66,000 374,925 440,925
to be granted
Average exercise $ 1.00 $ 1.26 $ 1.12 $ 1.12
price
<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.
<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> <C> <C>
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>
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statement (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 $ (108) $ (198) $ (292)
benefit
Non deductible 257 257 159
amortization
Change in valuation 724 (44) (682)
allowance
Other 5 1 182
______________________________
Actual tax expense $ 878 $ 16 $ (633)
(benefit)
</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.
<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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TANGRAM ENTERPRISE SOLUTIONS, INC., FOR THE YEAR ENDED
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 92
<SECURITIES> 0
<RECEIVABLES> 3,078
<ALLOWANCES> 225
<INVENTORY> 126
<CURRENT-ASSETS> 3,202
<PP&E> 1,831
<DEPRECIATION> 1,553
<TOTAL-ASSETS> 12,829
<CURRENT-LIABILITIES> 4,581
<BONDS> 0
<COMMON> 145
0
0
<OTHER-SE> 8,101
<TOTAL-LIABILITY-AND-EQUITY> 12,829
<SALES> 12,538
<TOTAL-REVENUES> 12,538
<CGS> 616
<TOTAL-COSTS> 12,684
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161
<INCOME-PRETAX> (307)
<INCOME-TAX> (878)
<INCOME-CONTINUING> (1,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,185)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0
</TABLE>
