<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from............TO............
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)
11000 REGENCY PARKWAY - SUITE 401
CARY, NC 2511
(Address of Principal Executive Offices)
(919) 851-6000 WWW.TESI.COM
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No ____
The number of outstanding shares of Common Stock, $0.01 par value per
share, as of April 30, 1997 was 15,661,047
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED):
Balance Sheets - March 31, 1997 and December 31, 1996...............................................3
Statements of Operations - Three Months Ended
March 31, 1997 and 1996........................................................................4
Statements of Cash Flows - Three Months Ended
March 31, 1997 and 1996..........................................................................5
Notes to the Financial Statements...................................................................6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................................8
PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K...............................................................12
Signatures..............................................................................................13
</TABLE>
2
<PAGE>
Tangram Enterprise Solutions, Inc.
Balance Sheets
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
-----------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42 $ 176
Accounts receivable, net of allowance of $250 and $244 in
1997 and 1996 2,622 2,991
Other 317 267
-----------------------------------------
Total current assets 2,981 3,434
PROPERTY AND EQUIPMENT:
Computer equipment and software 1,547 1,339
Office equipment and furniture 801 493
Leasehold improvements 67 57
-----------------------------------------
2,415 1,889
Less accumulated depreciation and amortization 1,452 1,401
-----------------------------------------
Total property and equipment 963 488
OTHER ASSETS:
Notes receivable - officers 784 784
Deferred software costs, net 3,078 3,022
Costs in excess of net assets of business acquired, net 4,955 5,145
Other 73 73
=========================================
Total assets $ 12,834 $ 12,946
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 294 $ 356
Accounts payable 1,395 590
Accrued expenses 822 723
Deferred revenue 2,185 2,620
-----------------------------------------
Total current liabilities 4,696 4,289
LONG-TERM DEBT - SHAREHOLDER 800 400
SHAREHOLDERS' EQUITY
Common stock, par value $0.01, authorized 48,000,000 shares, 15,665,363
issued in 1997 and 1996 157 157
Additional paid-in capital 44,595 44,729
Accumulated deficit (37,353) (36,427)
Treasury stock, at cost, 9,743 shares in 1997 and 32,311 shares in
1996 (61) (202)
-----------------------------------------
Total shareholders' equity 7,338 8,257
-----------------------------------------
=========================================
Total liabilities and shareholders' equity $ 12,834 $ 12,946
=========================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1997 1996
-------------------------------------
<S> <C> <C>
NET REVENUES:
Product $ 1,081 $ 1,140
Services 1,522 1,344
--------------------------------------
Total net revenues 2,603 2,484
Cost of revenues 945 805
--------------------------------------
Gross profit 1,658 1,679
OPERATING EXPENSES:
Sales and marketing 1,261 1,059
General and administrative 807 561
Research and development 504 392
--------------------------------------
Total operating expenses 2,572 2,012
--------------------------------------
LOSS FROM OPERATIONS (914) (333)
Other income (expense) (12) -
--------------------------------------
Loss before income taxes (926) (333)
Provision for income taxes - -
--------------------------------------
NET LOSS $ (926) $ (333)
======================================
LOSS PER COMMON SHARE $ (0.06) $ (0.02)
======================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,638 14,532
======================================
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1997 1996
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (926) $ (333)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 99 55
Amortization 565 429
Cash provided by changes in working capital items:
Accounts receivable 369 1,027
Other current assets (50) (68)
Accounts payable 805 25
Accrued expenses 99 (26)
Deferred revenue (435) (349)
------------------------------------
Net cash provided by operating activities 526 760
INVESTING ACTIVITIES
Deferred software costs (431) (245)
Expenditures for property and equipment (574) (47)
Repayment of liabilities in connection with sale of Knozall Systems - (213)
------------------------------------
Net cash used in investing activities (1,005) (505)
FINANCING ACTIVITIES
Net borrowings on note payable to shareholder 400 -
Net repayments on notes payable (62) (60)
Proceeds from exercise of stock options 7 3
------------------------------------
------------------------------------
Net cash provided by (used in) financing activities 345 (57)
------------------------------------
Net (decrease) increase in cash (134) 198
Cash and cash equivalents, beginning of year 176 92
====================================
Cash and cash equivalents, end of year $ 42 $ 290
====================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 22 $ 24
====================================
Cash paid during the period for income taxes $ -- $ --
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation of the statements have been included. The interim operating results
are not necessarily indicative of the results that may be expected for a full
fiscal year. For further information, refer to the financial statements and
accompanying footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1996.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform to 1997 presentation. These reclassifications had no effect on net loss
or shareholders' equity as previously reported.
NOTE 2. RESEARCH AND DEVELOPMENT COSTS
The Company capitalizes certain software development costs incurred to
enhance the Company's existing software or to develop new software. Certain
software development costs incurred after technological feasibility of the
product has been established are capitalized. Such capitalized costs are
amortized on an individual product basis commencing when a product is available
for release. Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense.
Research and development costs are comprised of the following as of March 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------------- ---------------
<S> <C> <C>
Research and development costs $ 935 $ 637
Less - capitalized software development costs (431) (245)
============= ===============
Research and development costs, net $ 504 $ 392
============= ===============
</TABLE>
Included in cost of revenues is amortization of software development costs
of $375,000 and $240,000 in 1997 and 1996, respectively.
NOTE 3. LONG-TERM DEBT - SHAREHOLDER
The Company has a $5 million unsecured revolving line of credit with
Safeguard. The amount of this line of credit was increased from $1 million to $5
million in April 1997 to finance the cost of rolling out the new Asset Insight
product. Terms of the line of credit require monthly interest payments at the
prime rate plus 1%. Principal is due thirteen months after date of demand by
Safeguard or earlier in the case of a sale of substantially all of the assets of
the Company, a business combination or upon the closing of a sale of a debt or
equity offering. At March 31, 1997, the borrowings under the Safeguard line of
credit were $800,000.
6
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 1997 and 1996, the Company paid
administrative services fees to Safeguard totaling approximately $79,000 and
$38,000, respectively. The Company also incurred and paid Safeguard interest
costs under a revolving credit agreement of $17,000 in 1997.
In April 1997, the Company made non-recourse, non-interest-bearing loans to
certain officers of the Company in the aggregate amount of $500,000 and
repurchased from these officers a total of 86,018 shares of the Company's common
stock for a purchase price of $500,000. The stock was acquired at its current
market price as reflected by the average of the day's best bid and asked prices.
The stock is to be held in treasury. The loans are secured by shares of the
Company's common stock and mature at the end of three years or termination of
employment, whichever occurs first.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Tangram Enterprise Solutions, Inc. (the "Company") provides
state-of-the-art enterprise-wide solutions, including asset tracking and
electronic software distribution for large heterogeneous computing environments,
encompassing mainframe, UNIX-based mini and LAN server platforms. Asset
Insight(TM), an information technology asset tracking product launched in 1996,
allows businesses to track changes in their information technology asset base
(including hardware and software), forward plan technology requirements,
optimize end-user productivity, and calculates the cost of software and hardware
upgrades. AM:PM(R) is the Company's industry leading solution for automated
software distribution, data distribution and collection, and remote resource
management. AM:PM, along with expert consulting services, provides businesses
with solutions to manage an enterprise's heterogeneous and remote information
technology systems. The Company is a member of the Safeguard Scientifics, Inc.
("Safeguard") partnership of companies. Safeguard supports technology-driven
growth companies with an emphasis on information system markets. Safeguard owns
approximately 67% of the Company.
The Company believes that businesses are moving toward an enterprise-wide
computing environment where more desktop personal computers will be
interconnected into large local-area and wide-area networks, as well as the
Internet, and administered by corporate MIS departments. 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 information technology
("IT") assets. The Company believes this trend will continue and that its new
product, Asset Insight will enable the Company to attain a leading position in
the asset tracking market. While the Company expects the market's shift toward
enterprise and Internet products to continue, there can be no assurance that the
Company's Asset Insight products will be successful or will gain customer
acceptance.
The Company has historically experienced a certain degree of variability in
its quarterly revenue and earnings patterns. This variability is typically
driven by significant events that impact the recognition of product and
implementation service revenues. Examples of such events include the timing of
major enterprise-wide sales of the new Asset Insight product, "one-time" payment
from existing customers for license expansion rights (required to install on a
larger or an additional computer base), completion and customer acceptance of
significant implementation roll outs and the related revenue recognition.
Fluctuations in the timing and amounts of additional sales and marketing and
general and administrative expenses may also cause profitability to fluctuate
from one quarter to another. Also, during a significant product launching, such
as the Asset Insight product, increase in sales and marketing and general and
administrative expenses will occur prior to the realization of incremental
revenues.
Since early 1996, the Company has refocused its business on the asset
tracking market and the launch of its new Asset Insight product. The results of
the Company hereafter, and the forward-looking statements contained in the
following discussion, are therefore subject to various risks and uncertainties
relating to the development of the asset tracking business, which may cause the
Company's actual results to differ materially from the results contemplated.
Such uncertainties include the ability of the Company to sell its new Asset
Insight product to major accounts with full enterprise-wide deployment, the
reliability of the Asset Insight product to work in major corporate enterprises,
the possibility of the introduction of superior competitive products, the length
of time required for the Company to realize sufficient revenue from sales of the
product through the reseller sales channel, the ability of the Company to absorb
the increase in sales and marketing expenses and other operational expenses of
launching the Asset Insight product, the length of time required to develop a
sustainable stream of revenue from the sale of the Asset Insight product, the
ability to recruit key technical, sales and marketing personnel and the ability
of the Company to secure adequate financing on reasonable terms or at all.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
The Company reported a net loss of $926,000, or $0.06 per share, on
revenues of $2.6 million for the three month period ended March 31, 1997 as
compared to a net loss of $333,000, or $0.02 per share, on revenue of $2.5
million for the comparable period in 1996. The increase in the net loss in 1997
when compared to the comparable period in 1996 is primarily as a result of the
Company's substantial investment in marketing its Asset Insight product and the
personnel increases to support the Asset Insight rollout. First quarter
operating expenses and the resulting net loss reflects the substantial
expenditures to the marketing campaign, staffing and infrastructure development
to support the Asset Insight product rollout. In cooperation with channel
partners, the Company's marketing efforts to date have been directed towards
defining the market and creating product awareness. In the second quarter, the
product marketing campaigns will move toward more targeted and active
promotional campaigns aimed at Fortune 1000 and government end users throughout
North America and Europe. The Company expects to continue to devote substantial
resources to developing sales.
NET REVENUES
Total net revenues increased 5% to $2.6 million in 1997 from $2.5 million
in 1996. Product revenues, which include product upgrades and add-ons, decreased
5% in 1997 to $1.1 million from $1.2 million in 1996. Product revenues of the
new Asset Insight product, which was first sold in June 1996, contributed
$158,000 of the 1997 product revenues. Revenue from AM:PM and related products
was $166,000 in 1997 compared to $51,000 in 1996. Revenues from the traditional
mainframe product lines, including gateways and Arbiter, remained flat at
$800,000 in 1997 and 1996. LAN product revenues contributed $292,000 in the
first quarter of 1996. The LAN division was sold in March, 1996.
Service revenues include software and hardware maintenance contracts,
implementation services, and training and support services not otherwise covered
under maintenance agreements that provide customers with updates and
enhancements developed by the Company and access to the Company's toll-free
telephone support services. Service revenues increased by 13% to $1.5 million in
1997 from $1.3 million in 1996 due principally to higher revenues from
consulting and maintenance fees.
COST OF REVENUES
Cost of revenues includes costs principally related to the distribution of
licensed software and hardware products and the amortization of capitalized
software development costs. Cost of revenues also reflects the cost of the
direct labor force, including the associated personnel, travel and subsistence,
and occupancy costs incurred in connection with providing consulting and
maintenance services. As a percentage of total net revenues, cost of revenues
increased to 36% in 1997 from 32% in 1996 due primarily to higher amortization
of deferred development costs associated with the development of the Asset
Insight product.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased 19% to $1.3 million in 1997 from
$1.1 million in 1996. Selling and marketing expenses also increased as a
percentage of total revenues to 48% in 1997 from 43% in 1996. These increases
were primarily due to the Company's investment in marketing staff and
advertising related to the launching of the new Asset Insight product. With the
introduction of Asset Insight, the Company converted from a direct sales channel
to an indirect sales organization for the distribution of this product. By
developing relationships with resellers, systems integrators and other
third-party vendors that provide consulting and integration services and
delivers products developed for this market, the Company seeks to acquire an
early presence in the market, cover the expected demand for the product, manage
the geographically dispersed nature of the target market, and build a large
number of salespeople in the field. The Company expects to continue to expand
its indirect sales and marketing force and increase its expenditures towards
product marketing.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 44% to $807,000 in 1997 from
$561,000 in 1996. As a percentage of total net revenues, general and
administrative expenses increased to 31% in 1997 from 23% in 1996. This increase
is the result of increased expenses for salaries, facility costs, and other
expenses related to building the infrastructure to support the Asset Insight
product rollout. In March 1997, the Company increased its leased headquarters'
square footage from 23,000 square feet to 49,600 square feet. The Company
expects to continue to expand its administrative staff and incur higher costs
ahead of the anticipated revenue stream of the Asset Insight product.
RESEARCH AND DEVELOPMENT
Gross research and development costs increased 47% in 1997 to $935,000 from
$637,000 in 1996. The increase is due to personnel increases and the related
staffing costs associated with the Company's investment in its new Asset Insight
product line and continuing enhancements of its other product lines. The Asset
Insight product line became generally available to customers in mid-1996. Gross
research and development costs increased as a percentage of net revenues to 36%
in 1997 from 26% in 1996, for the aforementioned reasons. The Company will
continue to commit substantial resources to research and development in the
future. Net research and development expenses increased by 28% to $504,000 in
1997 from $392,000 in 1996. The increase was due primarily to higher
staffing cost.
PROVISION FOR INCOME TAXES
There was no provision for income taxes in 1997 and 1996 due to the losses
reported for the periods.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations through cash flow from operations and
borrowings. At March 31, 1997, the Company had cash of $42,000 and a working
capital deficit in the amount of $1.7 million compared to a deficit of $855,000
at December 31, 1996. The Company has a $5 million unsecured revolving line of
credit with Safeguard. The amount of this line of credit was increased from $1
million to $5 million in April 1997 to finance the cost of rolling out the new
Asset Insight product. Terms of the line of credit require monthly interest
payments at the prime rate plus 1%. Principal is due thirteen months after date
of demand by Safeguard or earlier in the case of a sale of substantially all of
the assets of the Company, a business combination or upon the closing of a sale
of a debt or equity offering. At March 31, 1997, the borrowings under the
Safeguard line of credit were $800,000 and have increased to $2.6 million as of
April 30, 1997. On April 30, 1997, the amount available for borrowing under the
line of credit was $2.4 million.
At March 31, 1997, notes payable included a promissory note with an
outstanding balance of $150,000. Principal and interest payments are due monthly
with interest at 6%. The note matures in March 1998. In addition, the Company
has a loan with a bank with an outstanding balance of $144,000 at March 31,
1997. Interest and principal payments are due monthly with interest at the prime
rate plus 1/4%. The loan is collateralized by the assets of the Company and
matures in November 1997.
Net cash provided by operating activities was $526,000 for the three months
ended March 31, 1997. Net cash used in investing activities was $1 million for
the three months ended March 31, 1997. The primary use of these funds included
$431,000 for deferred software costs and $574,000 for property and equipment as
result of the increase staffing to support the anticipated growth of the
business. Net cash provided by financing reflects $400,000 of borrowings under
the Safeguard line of credit offset by payments of $62,000 towards debt
principal repayment.
In April 1997, the Company made non-recourse, non-interest-bearing loans to
certain officers of the Company in the aggregate amount of $500,000 and
repurchased from these officers a total of 86,018 shares of the Company's common
stock for a purchase price of $500,000. The stock was acquired at its current
market price as reflected by the average of the day's best bid and asked prices.
The loans are secured by shares of the Company's common stock and mature at the
end of three years or termination of employment, whichever occurs first. The
loans and stock buyback were made for the purpose of assisting the
aforementioned officers in satisfying their 1996 tax obligation arising from the
exercise of stock options in 1996.
In the past, the Company has generated cash from operating activities to
fund development and finance activities despite its net losses due to
significant levels of depreciation and amortization. However, cash requirements
are forecasted to continue to increase through 1997 due to the planned
expenditures for the launching, marketing and the increase staffing required to
support and market the Asset Insight product. As stated above, Safeguard has
agreed to assist the Company's launching of the Asset Insight product by
providing a $5 million line of credit to fund cash requirements. However, the
Company anticipates that the line of credit may not be adequate to meet the new
product rollout expenses. As a result, the Company is pursuing other sources of
funds including, but not limited to, debt or equity financing. However, the
Company has no present understanding, commitment, or agreement with respect to
any such transaction. Accordingly, there can be no assurance that the Company
will have access to adequate debt or equity financing or that, if available, it
will be under terms and conditions satisfactory to the Company.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit
Number Exhibit Description
10.1* First Amended Revolving Note dated April 2, 1997,
between the Company and Safeguard Scientifics, Inc.
27* Financial Data Schedule
* Filed herewith.
b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the
quarter ended March 31, 1997.
12
<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.
DATE MAY 13, 1997 /s/ John N. Nelli
----------- -----------------
John N. Nelli
Chief Financial Officer
(Principal Financial and Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
Except as indicated by footnote, all of the following exhibits were filed
with the Company's Current Report on Form 10-Q, dated March 31, 1997. For
exhibits incorporated by reference, the location of the exhibit in the previous
filing is indicated in parentheses.
Exhibit No. Exhibit Description
10.1* First Amended Revolving Note dated April 2, 1997,
between the Company and Safeguard Scientifics, Inc.
27* Financial Data Schedule
* Filed herewith.
14
<PAGE>
FIRST AMENDED REVOLVING NOTE
Wayne, Pennsylvania
$5,000,000 April 2, 1997
FOR VALUE RECEIVED, Tangram Enterprise Solutions, Inc., a Pennsylvania
corporation (the "Borrower"), having an office at 11000 Regency Parkway, Suite
401, Cary, North Carolina 27511-8504, hereby promises to pay to the order of
Safeguard Scientifics (Delaware), Inc., a Delaware corporation (the "Lender") or
its registered assigns, at the Lender's office located at 435 Devon Park Drive,
Wayne, Pennsylvania 19087 or at such other place in the continental United
States as the Lender may designate in writing, upon demand, in lawful money of
the United States, and in immediately available funds, the principal sum of up
to Five Million and no/100 Dollars ($5,000,000), or so much thereof as shall
have been advanced by the Lender to the Borrower as hereinafter set forth and
then be outstanding, and to pay interest thereon monthly in arrears on the first
business day of each calendar month at an annual rate equal to the announced
prime rate of Midlantic Bank, N.A. of Philadelphia, Pennsylvania (the "Prime
Rate") plus one percent (1%). All amounts advanced hereon, but not to exceed
$5,000,000 at any one time outstanding in the aggregate, shall be so advanced
upon the request of the Borrower. All amounts so advanced hereon and all
payments made on account of the principal hereof shall be recorded in the books
of the Lender, which records shall be final and binding, but failure to do so
shall not release the Borrower from any of its obligations hereunder.
This Note is issued in substitution for a Revolving Note dated June 18,
1996, and shall evidence all outstanding indebtedness thereunder existing as of
the date hereof and any additional indebtedness incurred in the future.
Borrower's obligations under this Note, regardless of whether demand
for payment has been made by Lender, are subject and subordinate to all of
Borrower's obligations to Wachovia Bank of North Carolina, N.A. ("Wachovia
Bank"), and all liens and security interests granted by Borrower to Wachovia
Bank. Upon the occurrence of an event of default by Borrower under any note,
loan agreement or related agreement or instrument between Borrower and Wachovia
Bank, Borrower shall immediately notify Lender, regardless of whether demand for
payment has been made by Lender, and Lender shall not exercise any of its rights
or remedies against Borrower, and Borrower shall not make any payments to Lender
hereunder, for a period of 90 days thereafter without the consent of Wachovia
Bank. So long as there is no uncured event of default outstanding under any
Wachovia Bank loan, Borrower may make all required payments to Lender under this
Note.
The unpaid principal balance of the Note shall be paid on the date
which is one year and one month after the date of demand for payment by the
Lender; provided that, in the event of a sale of substantially all of the assets
of Borrower, a merger or consolidation of Borrower with or into a third party,
or the acquisition of a majority of Borrower's outstanding voting stock by a
"person" (as such term is defined under Section 13 of the Securities Exchange
Act of 1934, as amended) other than Safeguard Scientifics, Inc. or any of its
wholly-owned subsidiaries, the unpaid principal balance of the Note shall be
paid on the date which is five days after the date of demand for payment by the
Lender. In addition, upon the closing of a sale of debt or equity securities by
the Company to any third party, the Company shall apply the proceeds (net of
underwriting discounts and commissions) in excess of $2,500,000 first to the
repayment of the then outstanding obligations under this Note.
All payments made on this Note (including, without limitation,
prepayments) shall be applied, at the option of the Lender, first to late
charges and collection costs, if any, then to accrued interest and then to
principal. Interest payable hereunder shall be calculated for actual days
elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be due
and payable upon maturity of this Note. After maturity or in the event of
default, interest shall continue to accrue on the Note at the rate set forth
above and shall be payable on demand of the Lender.
15
<PAGE>
Unless there is an uncured event of default under any Wachovia Bank
loan, the outstanding principal amount of this Note may be prepaid by the
Borrower upon notice to the Lender in whole at any time or in part from time to
time without any prepayment penalty or premium; provided, that upon such payment
any interest due to the date of such prepayment on such prepaid amount shall
also be paid.
Notwithstanding anything in this Note, the interest rate charged hereon
shall not exceed the maximum rate allowable by applicable law. If any stated
interest rate herein exceeds the maximum allowable rate, then the interest rate
shall be reduced to the maximum allowable rate, and any excess payment of
interest made by the Borrower at any time shall be applied to the unpaid balance
of any outstanding principal of this Note.
An event of default hereunder shall consist of:
(i) a default in the payment by the Borrower to the Lender of principal
or interest under this Note as and when the same shall become due and
payable;
(ii) an event of default by the Borrower under any other obligation,
instrument, note or agreement for borrowed money, beyond any applicable
notice and/or grace period;
(iii) institution of any proceeding by or against the Borrower under
any present or future bankruptcy or insolvency statute or similar law and,
if involuntary, if the same are not stayed or dismissed within sixty (60)
days, or the Borrower's assignment for the benefit of creditors or the
appointment of a receiver, trustee, conservator or other judicial
representative for the Borrower or the Borrower's property or the Borrower's
being adjudicated a bankrupt or insolvent.
Upon the occurrence of any event of default, interest shall accrue on the
outstanding balance of this Note at the Prime Rate plus three percent (3%), the
entire unpaid principal amount of this Note and all unpaid interest accrued
thereon shall, at the sole option of the Lender, without notice, become
immediately due and payable, and the Lender shall thereupon have all the rights
and remedies provided hereunder or now or hereafter available at law or in
equity.
Any action, suit or proceeding where the amount in controversy as to at
least one party, exclusive of interest and costs, exceeds $1,000,000 ("Summary
Proceeding"), arising out of or relating to this Agreement, or the breach,
termination or validity thereof, shall be litigated exclusively in the Superior
Court of the State of Delaware (the "Delaware Superior Court") as a summary
proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any
successor rules (the "Summary Proceeding Rules"). Each of the parties hereto
hereby irrevocably and unconditionally (i) submits to the jurisdiction of the
Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence
any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and
agrees not to plead or to make, any objection to the venue of any Summary
Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead
or to make, any claim that any Summary Proceeding brought in the Delaware
Superior Court has been brought in an improper or otherwise inconvenient forum,
(v) waives, and agrees not to plead or to make, any claim that the Delaware
Superior Court lacks personal jurisdiction over it, (vi) waives its right to
remove any Summary Proceeding to the federal courts except where such courts are
vested with sole and exclusive jurisdiction by statute and (vii) understands and
agrees that it shall not seek a jury trial or punitive damages in any Summary
Proceeding based upon or arising out of or otherwise related to this Agreement
waives any and all rights to any such jury trial or to seek punitive damages.
16
<PAGE>
In the event any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs, does not
exceed $1,000,000 (a "Proceeding"), arising out of or relating to this Agreement
or the breach, termination or validity thereof is brought, the parties to such
Proceeding agree to make application to the Delaware Superior Court to proceed
under the Summary Proceeding Rules. Until such time as such application is
rejected, such Proceeding shall be treated as a Summary Proceeding and all of
the foregoing provisions of this Section relating to Summary Proceedings shall
apply to such Proceeding.
If a Summary Proceeding is not available to resolve any dispute
hereunder, the controversy or claim shall be settled by arbitration conducted on
a confidential basis, under the U.S. Arbitration Act, if applicable, and the
then current Commercial Arbitration Rules of the American Arbitration
Association (the "Association") strictly in accordance with the terms of this
Agreement and the substantive law of the State of Delaware. The arbitration
shall be conducted at the Association's regional office located closest to the
Borrower's principal place of business by three arbitrators, at least one of
whom shall be knowledgeable in software design, programming and implementation
and one of whom shall be an attorney. Judgment upon the arbitrators' award may
be entered and enforced in any court of competent jurisdiction. Neither party
shall institute a proceeding hereunder unless at least 60 days prior thereto
such party shall have given written notice to the other party of its intent to
do so.
Neither party shall be precluded hereby from securing equitable
remedies in courts of any jurisdiction, including, but not limited to, temporary
restraining orders and preliminary injunctions to protect its rights and
interests but shall not be sought as a means to avoid or stay arbitration or
Summary Proceedings.
The Borrower hereby waives presentment, demand, protest and notice of
dishonor and protest, and also waives all other exemptions; and agrees that
extension or extensions of the time of payment of this Note or any installment
or part thereof may be made before, at or after maturity by agreement by the
Lender. Upon default hereunder the Lender shall have the right to offset the
amount owed by the Borrower against any amounts owed by the Lender in any
capacity to the Borrower, whether or not due, and the Lender shall be deemed to
have exercised such right of offset and to have made a charge against any such
account or amounts immediately upon the occurrence of an event of default
hereunder even though such charge is made or entered on the books of the Lender
subsequent thereto. The Borrower shall pay to the Lender, upon demand, all costs
and expenses, including, without limitation, attorneys' fees and legal expenses,
that may be incurred by the Lender in connection with the enforcement of this
Note.
Notices required to be given hereunder shall be deemed validly given
(i) three business days after sent, postage prepaid, by certified mail, return
receipt requested, (ii) one business day after sent, charges paid by the sender,
by Federal Express Next Day Delivery or other guaranteed delivery service, (iii)
when sent by facsimile transmission, or (iv) when delivered by hand:
If to the Lender: Safeguard Scientifics (Delaware), Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Attn: Michael W. Miles
Vice President and Chief Financial Officer
If to the Borrower: Tangram Enterprise Solutions, Inc.
11000 Regency Parkway
Suite 401
Cary, North Carolina 27511-8504
Attn: John Nelli, Chief Financial Officer
or to such other address, or in care of such other person, as the holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
17
<PAGE>
Any failure by the Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon the
Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of the Borrower and shall inure to the benefit
of the Lender, its successors and assigns.
This Note shall be governed by and interpreted in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, the Borrower, by its duly authorized officer
intending to be legally bound hereby, has duly executed this First Amended
Revolving Note as of the date first written above.
-------------------------------
Print Name:
Title:
18
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 42
<SECURITIES> 0
<RECEIVABLES> 2,872
<ALLOWANCES> (250)
<INVENTORY> 47
<CURRENT-ASSETS> 2,981
<PP&E> 2,415
<DEPRECIATION> (1,452)
<TOTAL-ASSETS> 12,834
<CURRENT-LIABILITIES> 4,696
<BONDS> 800
0
0
<COMMON> 157
<OTHER-SE> 7,181
<TOTAL-LIABILITY-AND-EQUITY> 12,834
<SALES> 1,081
<TOTAL-REVENUES> 2,603
<CGS> 945
<TOTAL-COSTS> 2,206
<OTHER-EXPENSES> 1,311
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (926)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
