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 September 30, 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 27511
(Address of Principal Executive Offices)
(919) 653-6000 http://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 October 31, 1997 was 15,652,779.
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Balance Sheets - September 30, 1997 (Unaudited) and
December 31, 1996 .................................................3
Statements of Operations - Three Months Ended
September 30, 1997 and 1996 (Unaudited) ...........................4
Statements of Operations - Nine Months Ended
September 30, 1997 and 1996 (Unaudited) ...........................5
Statements of Cash Flows - Nine Months Ended
September 30, 1997 and 1996 (Unaudited) ...........................6
Notes to the Financial Statements ...................................7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................9
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ................................14
Signatures ...............................................................15
2
<PAGE>
Tangram Enterprise Solutions, Inc.
Balance Sheets
(in thousands, except per share amounts)
September 30 December 31
1997 1996
----------------------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 196 $ 176
Accounts receivable, net of allowance of
$229 and $244 in 1997 and 1996 4,143 2,991
Other 285 267
----------------------------
Total current assets 4,624 3,434
Property and equipment:
Computer equipment and software 558 595
Office equipment and furniture 127 83
Leasehold improvements 91 15
----------------------------
776 693
Less accumulated depreciation and amortization 347 205
----------------------------
Total property and equipment 429 488
Other assets:
Notes receivable - officers 1,284 784
Deferred software costs, net 3,071 3,022
Costs in excess of net assets of business
acquired, net 4,576 5,145
Other 50 73
----------------------------
Total assets $ 14,034 $ 12,946
============================
Liabilities and shareholders' equity
Current liabilities:
Notes payable $ 147 $ 356
Accounts payable 836 590
Accrued expenses 1,147 723
Deferred revenue 2,647 2,620
----------------------------
Total current liabilities 4,777 4,289
Long-term debt - shareholder 3,580 400
Other liabilities 414 --
Shareholders' equity
Common stock, par value $0.01, authorized
48,000,000 shares, 15,738,497 and 15,665,363
issued in 1997 and 1996 157 157
Additional paid-in capital 44,674 44,729
Accumulated deficit (39,068) (36,427)
Treasury stock, at cost, 86,018 shares and
32,311 shares in 1997 and 1996 (500) (202)
----------------------------
Total shareholders' equity 5,263 8,257
----------------------------
Total liabilities and shareholders' equity $ 14,034 $ 12,946
============================
See accompanying notes.
3
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
Three months ended September 30
1997 1996
----------------------------------
(unaudited)
Net revenues:
Product $ 2,439 $ 1,060
Services 1,369 1,374
----------------------------------
Total net revenues 3,808 2,434
Cost of revenues 911 903
----------------------------------
Gross profit 2,897 1,531
Operating expenses:
Sales and marketing 1,756 798
General and administrative 839 654
Research and development 978 370
----------------------------------
Total operating expenses 3,573 1,822
----------------------------------
Loss from operations (676) (291)
Other (expense) income (64) 17
----------------------------------
Loss before income taxes (740) (274)
Provision for income taxes -- --
----------------------------------
Net loss $ (740) $ (274)
==================================
Loss per common share $ (0.05) $ (0.02)
==================================
Weighted average number of common
shares outstanding 15,623 14,705
==================================
See accompanying notes
4
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
Nine months ended September 30
1997 1996
---------------------------------
(unaudited)
Net revenues:
Product $ 5,165 $ 4,367
Services 4,467 4,021
---------------------------------
Total net revenues 9,632 8,388
Cost of revenues 2,681 2,597
---------------------------------
Gross profit 6,951 5,791
Operating expenses:
Sales and marketing 4,551 3,027
General and administrative 2,504 1,895
Research and development 2,421 1,026
---------------------------------
Total operating expenses 9,476 5,948
---------------------------------
Loss from operations (2,525) (157)
Other (expense) income (116) 29
---------------------------------
Loss before income taxes (2,641) (128)
Provision for income taxes -- --
---------------------------------
Net loss $ (2,641) $ (128)
=================================
Loss per common share $ (0.17) $ (0.01)
=================================
Weighted average number of common
shares outstanding 15,620 14,634
=================================
See accompanying notes
5
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30
1997 1996
------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net loss $(2,641) $ (128)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 279 188
Amortization 1,705 1,420
Other 283 --
Cash provided by changes in working capital items:
Accounts receivable (1,152) 1,017
Other current assets (18) (59)
Accounts payable 246 (69)
Accrued expenses 424 234
Deferred revenue 27 (219)
------------------------------
Net cash (used in) provided by operating activities (847) 2,384
Investing activities
Deferred software costs (1,191) (1,210)
Expenditures for property and equipment (909) (369)
Sale-leaseback of equipment and furniture 826 --
Increase in notes receivables-officers (500) --
Increase (decrease) in other assets 23 (5)
Repayment of liabilities in connection with sale of
Knozall Systems -- (213)
------------------------------
Net cash used in investing activities (1,751) (1,797)
Financing activities
Net borrowings from shareholder 3,180 --
Net repayments on notes payable (209) (219)
Acquisition of treasury stock (500) --
Proceeds from exercise of stock options 147 104
------------------------------
Net cash provided by (used in) financing activities 2,618 (115)
------------------------------
Net increase in cash 20 472
Cash and cash equivalents, beginning of period 176 92
------------------------------
Cash and cash equivalents, end of period $ 196 $ 564
==============================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 182 $ 48
==============================
Cash paid during the period for income taxes $ -- $ --
==============================
</TABLE>
See accompanying notes.
6
<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.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS
128"). This pronouncement supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share" ("APB 15"), and specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock. SFAS 128 replaces the
presentation of primary EPS and fully diluted EPS with a presentation of basic
EPS and diluted EPS, respectively. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
The calculations of EPS under APB 15 and SFAS 128 for the three and nine months
ended September 30, 1997 were the same.
Also during 1997, The FASB issued pronouncements relating to the
presentation and disclosure of information related to the Company's capital
structure, comprehensive income and segment data. The Company is required to
adopt the provisions of these pronouncements, if applicable, for the fiscal
years beginning after December 15, 1997. The adoption of these pronouncements
will not have an impact on the Company's financial position and results of
operation but may change the presentation of certain of the Company's financial
statements and related notes and data thereto.
In October 1997, the Accounting Standards Executive Committee issued a
statement of position on software revenue recognition ("SOP 97-2") that
supercedes SOP 91-1. SOP 97-2 is effective for transactions entered into in
fiscal years beginning after December 15, 1997. The Company has reviewed the
statement of position and believes its adoption will not have a material effect
on the Company's financial position or results of operations.
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.
7
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Note 2. Research and Development Costs (continued)
Research and development costs are comprised of the following as of September 30
(in thousands):
1997 1996
-------------------------
Research and development costs $ 3,612 $ 2,236
Less - capitalized software development costs (1,191) (1,210)
-------------------------
Research and development costs, net $ 2,421 $ 1,026
=========================
Included in cost of revenues is amortization of software development costs
of $1.1 million and $840,000 in 1997 and 1996, respectively.
Note 3. Long-term Debt - Shareholder
The Company has a $6 million unsecured revolving line of credit with
Safeguard Scientifics, Inc. ("Safeguard"), a majority shareholder of the
Company, holding approximately 67% of the Company's outstanding shares. The
amount of this line of credit was increased from $1 million to $5 million in
April 1997 and to $6 million in July 1997 to finance the cost of introducing and
marketing 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 debt or equity offering. As of November 12, 1997, borrowings
under the Safeguard line of credit are $2.5 million.
Note 4. Lease
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company will sell up to $1,000,000 of computer equipment
and furniture and lease it back for a period of up to 48 months. In August, the
Company sold computer equipment and furniture with a net book value of $689,000
for approximately $826,000 under the sale-leaseback agreement. The leaseback has
been accounted for as an operating lease. The minimum monthly rental payment
under this transaction is approximately $19,900. The gain recognized in this
transaction has been deferred and will be amortized to income in proportion to
rental expense over the term of the lease.
Note 5. Related Party Transactions
During the nine months ended September 30, 1997 and 1996, the Company has
incurred administrative service fees to Safeguard totaling approximately
$185,000 and $188,000, respectively. The Company also incurred $163,000 and
$3,000 of interest costs in 1997 and 1996, respectively, under the Safeguard
revolving line of credit.
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 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.
8
<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
mid-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 automated software
distribution solution for data distribution, data 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 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 rollouts 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 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.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations
Net revenues for the three month period ended September 30, 1997 grew 56%
to $3.8 million, compared with revenues of $2.4 million for the comparable
period in 1996. The revenue increase was driven by a 130% increase in product
revenues over the comparable 1996 quarter. The Company recorded a net loss of
$740,000, or $0.05 per share, for the third quarter of 1997 as compared to a net
loss of $274,000, or $0.02 per share, for the same period in 1996. Net revenues
for the nine months ended September 30, 1997 were $9.6 million, a 15% increase
over revenues of $8.4 million for the nine months ended September 30, 1996. For
the nine months ended September 30, 1997, the Company recorded a net loss of
$2.6 million, or $0.17 per share, as compared to a net loss of $128,000, or
$0.01 per share, for the comparable period in 1996. The revenue growth is the
result of the Company's substantial expenditures towards market awareness and
channel establishment for Asset Insight. During the third quarter, the Company
received two major contracts for the purchase of its Asset Insight product that
accounted for 34% and 13% of net revenues for the three and nine months ended
September 30, 1997, respectively. While the Company has seen growth in the
number and size of proposals including asset insight, presented by its
channel partners, it is uncertain whether such proposals will result in sales
or that the Company can expect future quarterly results to benefit from large
contract awards. The increased operating expenses and the resulting net losses
reflect the substantial expenditures for research and development, 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. The Company expects to continue devoting substantial
resources to developing sales and to product research and development.
Net Revenues
Product revenues include Asset Insight sales; AM:PM and related product
revenue; and traditional mainframe product sales of Arbiter and gateways
including product upgrades and add-ons. For the three and nine months ended
September 30, 1997, product revenues increased to $2.4 million and $5.2 million,
respectively, from $1.1 million and $4.4 million, respectively, for the same
periods in 1996. Historically, the variability of the quarterly revenue is
driven by significant events that impact the recognition of product and service
revenues. Examples of such events include the timing of major enterprise-wide
sales of the 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. As mentioned above, the Company
received two major contracts for the purchase of its Asset Insight product
during the quarter, which represented 53% of the quarterly product revenues and
25% of the nine months product revenues. In comparison, in June 1996 the Company
had a $1.7 million combined sale of Asset Insight and AM:PM to a single
customer, which comprised 38% of product revenues for the nine months ended
September 30, 1996.
Service revenues include software and hardware maintenance contracts,
implementation services, and training and support services not otherwise covered
under maintenance agreements. Service revenues were $1.4 million for both of the
three month periods ended September 30, 1997 and 1996. For the nine months ended
September 30, 1997 and 1996, respectively, service revenues increased 11% to 4.5
million from $4.0 million. The increase is related primarily to an increase in
maintenance revenues. For the nine months ended September 30, 1997 and 1996,
maintenance revenues accounted for 87% and 89%, respectively, of total service
revenues.
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
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Cost of Revenues (continued)
implementation and maintenance services. Cost of revenues for the three and nine
months ended September 30, 1997 increased 1% and 3%, respectively, compared to
the same periods in 1996. A significant component of cost of revenues is
attributable to the amortization of deferred development cost, which is fixed in
nature. Therefore, as a result of higher revenues in 1997, cost of revenues as a
percentage of total net revenues decreased to 24% and 28% for the three and nine
months ended September 30, 1997, respectively, from 37% and 31%, respectively,
in 1996. The overall increases in cost of revenues are due to higher
amortization of deferred development costs, primarily associated with the
development of the Asset Insight product, which became generally available to
customers in mid-1996. These increases were offset by a decrease in expenses
associated with implementation services.
Sales and Marketing Expenses
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 deliver 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. As such, sales and marketing expenses
increased 120% to $1.8 million for the three months ended September 30, 1997
from $798,000 for the comparable period in 1996. For the nine months ended
September 30, 1997 and 1996, sales and marketing expenses were $4.6 million and
$3.0 million, respectively, representing a 50% increase in 1997. Selling and
marketing expenses also increased as a percentage of net revenues for the three
and nine month periods to 46% and 47%, respectively, in 1997 from 33% and 36%,
respectively, in 1996. These increases were primarily due to the Company's
investment in sales and marketing staff, increased travel costs, and marketing
related to the launching of the Asset Insight product. The number of sales and
marketing personnel has increased two-fold during the first nine months of 1997
enabling the Company to develop an indirect sales network and to focus on
defining the market for the Asset Insight product. During the first nine months
of 1997, the Company has developed relationships with fifteen additional
resellers for the marketing of Asset Insight. The Company expects to continue to
expand its indirect sales and marketing force and to continue its product
marketing expenditures.
General and Administrative Expenses
For the three months ended September 30, 1997, general and administrative
expenses increased 28% to $839,000 from $654,000 for the same period in 1996. As
a percentage of total net revenues, general and administrative expenses
decreased to 22% in 1997 from 27% in 1996, primarily as a result of the higher
revenue base in 1997. General and administrative expenses increased for the nine
months ended September 1997 to $2.5 million, or 32%, from $1.9 million for the
comparable period in 1996. The general and administrative expenses as a
percentage of net revenues for the nine month period increased to 26% in 1997
from 23% in 1996. These increases are the result of increased expenses for
payroll-related costs, facility and other expenses related to building the
infrastructure to support the Asset Insight product rollout. In March 1997, the
Company relocated and increased its leased headquarters' square footage from
23,000 square feet to 49,600 square feet to accommodate the company-wide
staffing increases. The Company expects the current administrative staffing
level to be sufficient for the remainder of the year.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Research and Development
Associated with the Company's continuing commitment to developing
enhancements and improvements of the Asset Insight product and its other product
lines, the Company has experienced a 34% increase in the number of research and
development personnel during the first nine months of 1997. As such, gross
expenditures for research and development increased 59% to $1.3 million from
$850,000 for the three months ended September 30, 1997 and 1996, respectively.
As a percentage of net revenues, gross research and development costs were 35%
for both of the three month periods ended September 30, 1997 and 1996. Comparing
the nine months ended September 30, 1997 and 1996, gross expenditures for
research and development increased 62% to $3.6 million from $2.2 million,
respectively. For the nine months ended September 30, 1997, gross research and
development costs as a percentage of net revenues increased to 37% in 1997 from
27% in 1996.
Net research and development expenses increased to $978,000 in the three
months ended September 30, 1997 from $370,000 for the same period in 1996. Net
research and development expenses for the nine months ended September 30, 1997
increased to $2.4 million from $1.0 million in 1996. The increases are due
primarily to higher staffing costs and lower deferral of development costs. As a
percentage of gross research and development expenditures, deferred development
costs for the three and nine months ended September 30, 1997 were 28% and 33%,
respectively, as compared to 57% and 54%, respectively, in 1996. The Company
will continue to commit substantial resources to research and development
efforts in the future.
Provision for Income Taxes
There was no provision for income taxes in 1997 and 1996 as a result of
losses reported.
Liquidity and Capital Resources
The Company has funded its operations through borrowings and cash
generated from operations. At September 30, 1997, the Company had cash of
$196,000 and a working capital deficit in the amount of $153,000 compared to a
deficit of $855,000 at December 31, 1996. To fund the Company's growth plan, the
Company has arranged a $6 million unsecured revolving line of credit with
Safeguard. 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. As of November 12, 1997, borrowings under the Safeguard line of
credit are $2.5 million.
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company will sell up to $1,000,000 of computer equipment
and furniture and lease it back for a period of up to 48 months. In August, the
Company sold computer equipment and furniture with a net book value of $689,000
for approximately $826,000 under the sale-leaseback agreement. The leaseback has
been accounted for as an operating lease. The minimum monthly rental payment
under this transaction is approximately $19,900. The gain recognized in this
transaction has been deferred and is being amortized to income in proportion to
rental expense over the term of the lease.
Net cash used in operating activities was $847,000 for the nine months
ended September 30, 1997 primarily as a result of the reported net loss and the
increase in accounts receivable as the result of two large sales in the last
month of the quarter. Net cash used in investing activities was $1.8 million for
the nine months ended September 30, 1997. The primary use of these funds
included $1.2 million for deferred software costs and $909,000 for the purchase
of furniture, equipment, and leasehold improvements for the additional staff
hired to support the anticipated growth of the business, offset by $826,000
received under the sale-leaseback agreement described above. The Company also
made non-recourse, non-interest-bearing loans to certain officers of the Company
in the aggregate amount of $500,000. Net cash provided by financing activities
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
reflects $3.2 million of borrowings under the Safeguard line of credit and
proceeds from exercising of stock options of $147,000 offset by payments of
$209,000 towards debt principal repayment and $500,000 for the repurchase of
86,018 shares of common stock from officers as described below.
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,as noted
above, 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. The Company and the officers are in the
process of finalizing the documentation evidencing the terms and conditions of
the loan and stock repurchase transaction.
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
enhance, 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 $6 million line of credit to fund cash requirements, of
which $3.5 million is available for future borrowings as of November 12, 1997.
The Company can also borrow up to $1.0 million under a sale-leaseback agreement
of its furniture and equipment, of which $174,000 is available for future
borrowings as of November 12, 1997. However, the Company anticipates that these
credit facilities may not be adequate to meet the new product rollout expenses.
Although operating activities may provide cash in certain periods, to the extent
the Company experiences growth in the future, the Company anticipates that its
operating and investing activities may use cash. Consequently, any such future
growth may require the Company to obtain additional equity or debt 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 or
which may not be dilutive.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Exhibit Description
------ -------------------
10.1* Second Amended Revolving Note dated September 11, 1997,
between the Company and Safeguard Scientifics, Inc.
10.2* Master Lease Agreement and Addendum No. 1 dated July 23, 1997,
between the Company and Triangle Technology Leasing.
10.3* Guaranty dated July 25, 1997, between Safeguard Scientifics,
Inc. and Triangle Technology Leasing.
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 September 30, 1997.
14
<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 November 13, 1997 /s/ John N. Nelli
-----------------------------------------
John N. Nelli
Chief Financial Officer and Senior Vice
President (Principal Financial Officer)
/s/ Diane K. Murdock
-----------------------------------------
Diane K. Murdock
Chief Accounting Officer
(Principal Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
The following exhibits were filed with the Company's Current Report on
Form 10-Q, dated September 30, 1997.
Exhibit
Number Exhibit Description
------ -------------------
10.1 Second Amended Revolving Note dated September 11, 1997,
between the Company and Safeguard Scientifics, Inc.
10.2 Master Lease Agreement and Addendum No. 1 dated July 23, 1997,
between the Company and Triangle Technology Leasing.
10.3 Guaranty dated July 25, 1997, between Safeguard Scientifics,
Inc. and Triangle Technology Leasing.
27 Financial Data Schedule
16
EXHIBIT 10.1
SECOND AMENDED REVOLVING NOTE
Wayne, Pennsylvania
$6,000,000 September 11, 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, 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 Six Million and no/100 Dollars ($6,000,000), 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 PNC Bank, N.A. of Philadelphia, Pennsylvania (the "Prime Rate")
plus one percent (1%). All amounts advanced hereon, but not to exceed $6,000,000
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 April 2,
1997, 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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
/s/ John N. Nelli
Print Name: John N. Nelli
Title: Senior Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 10.2
TRIANGLE (Triangle Logo appears here) TECHNOLOGY LEASING
EQUIPMENT LEASE
NAME & ADDRESS OF LESSOR: NAME & ADDRESS OF LESSEE:
TRIANGLE TECHNOLOGY LEASING TANGRAM ENTERPRISE SOLUTIONS, INC.
100 PRESTON EXECUTIVE DR., SUITE 101 11000 REGENCY PKWY - SUITE 401
CARY, NORTH CAROLINA, 27513 CARY, NORTH CAROLINA, 27511
1. LEASE OF EQUIPMENT: TRIANGLE TECHNOLOGY LEASING ("Lessor") agrees to lease to
TANGRAM ENTERPRISE SOLUTIONS, INC. ("Lessee") and Lessee agrees to lease in
accordance with this Agreement, the Equipment and features described in the
Equipment Schedule(s) ("Schedule") attached hereto.
2. TERMS OF AGREEMENT: The term of this Lease, as to all Equipment designated on
any Equipment Schedule, shall commence on the Commencement Date and shall
continue for an initial period ending that number of months from the
Commencement Date as specified in the applicable Equipment Schedule. Each
Equipment Schedule shall be non-cancelable by Lessee for the full term stated
herein. This Agreement shall remain in force during the term of any Schedule or
while any Lessee obligation remains unperformed on any Schedule.
3. MONTHLY LEASE CHARGE: The Monthly Lease Charge hereunder is as set forth in
each Schedule. In addition to the Monthly Lease Charge set forth in the
Equipment Schedule(s), Lessee shall pay to Lessor an amount equal to all taxes
paid, payable or required to be collected by Lessor, however designated, which
are levied or based on the rental, on the Lease or on the Equipment or its use,
lease, operation, control or value (including, without limitation, state and
local privilege or excise taxes based on gross revenue), any penalties or
interest in connection therewith or taxes or amounts in lieu thereof paid or
payable by Lessor in respect of the foregoing, but excluding taxes based on
Lessor's income. Personal Property taxes assessed on the Equipment during the
term hereof shall be paid by Lessee. Lessee agrees to file, on behalf of Lessor,
all required property tax returns and reports concerning the Equipment with all
appropriate governmental agencies.
Interest on any past due payments shall accrue at the rate of 2% per
month, or if such rate shall exceed the maximum allowed by law, then at such
maximum rate, and shall be payable on demand. Charges for taxes, penalties and
interest shall be promptly paid by Lessee when invoiced by Lessor.
4. MAINTENANCE: (Deleted)
5. RISK OF LOSS; DAMAGE: Lessee shall be responsible for any loss or damage to
the Equipment, or caused by the Equipment, whether or not insured, arising from
any peril or circumstances whatsoever, other than the willful or negligent acts
of Lessor, its employees or agents.
In the event any Equipment is lost, stolen, destroyed, condemned,
confiscated or, in manufacturer's opinion, damaged beyond repair, Lessee shall
continue to make all payments due hereunder and shall forthwith, at Lessee's
expense, replace such Equipment with equipment of like or improved and similar
kind: the new equipment to be in substantially the same condition as the
replaced Equipment immediately prior to the event necessitating the replacement.
Title to such replacement unit shall immediately vest and remain in Lessor;
Lessee shall execute all documents necessary to vest title of replacement with
Lessor. After the Lessee has replaced the unit, and provided the Lessee is not
in default hereunder, Lessor shall pay, or cause to be paid, to the Lessee the
net insurance proceeds received by Lessor for the unit, if any.
Lessee's obligation hereunder shall commence when the Equipment is
delivered to Lessee's premises and shall terminate when the Equipment has been
returned. delivered to and accepted by Lessor.
6. INSURANCE: Lessee shall obtain and maintain, throughout the term of any
Schedule, at its own expense, on each unit of Equipment, liability insurance
(property damage and bodily injury) and insurance against loss or damage to the
Equipment including without limitation loss by fire (including so-called
extended coverage), theft and such other risks of loss in such amounts, in such
form and with such insurers as shall be satisfactory to Lessor: provided,
however, that the amount of insurance against loss or damage to the Equipment
shall not be less than the full replacement value of the Equipment. Each
insurance policy will name Lessee as an insured and Lessor and Lessor's assignee
as an additional insured and loss payee thereof as Lessor's interests may
appear, and shall contain a clause requiring the insurer to give Lessor at least
thirty (30) days prior written notice of any alteration in the terms of such
policy or of the cancellation thereof. Lessee agrees to furnish to Lessor a
certification from its insurance company which shows such insurance, shows
Lessor (and Lessor's assignee) as an additional insured and loss payee, and
provides that
<PAGE>
the insurance cannot be altered or terminated without giving Lessor thirty (30)
days prior written notice. Lessee may self-insure against risks of loss with
Lessor's written acceptance.
7. USE: The use of the Equipment will be under Lessee's exclusive management and
control. Lessee shall maintain the Equipment in good condition and repair at the
location specified in the Schedule, reasonable wear and tear expected, and shall
not remove the Equipment without prior written consent from Lessor.
8. NO WARRANTIES BY LESSOR: Lessee represents that, at the Installation Date set
forth in the applicable Schedule, it shall have [a] thoroughly inspected the
Equipment: (b] determined for itself that all items of Equipment are of a size,
design, capacity and manufacturer selected by it: and [c] satisfied itself that
the Equipment is suitable for Lessee's purpose. LESSOR SUPPLIES THE EQUIPMENT AS
IS AND NOT BEING THE MANUFACTURER OF THE EQUIPMENT. THE MANUFACTURER'S AGENT OR
THE SELLER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR
IMPLIED, AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, DESIGN, CONDITION, QUALITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS THE
PATENT INFRINGEMENT OR THE LIKE, it being agreed that all such risks, as between
Lessor and Lessee, are to be borne by Lessee. Lessee agrees to look solely to
the manufacturer for any and all warranty claims and any and all warranties made
by the manufacturer or the supplier of Lessor are hereby assigned to Lessee for
the term of the applicable Equipment Schedule. Lessee agrees that Lessor shall
not be responsible for the maintenance, operation or service of the Equipment or
for delay or inadequacy of any or all of the foregoing. Lessor shall not be
responsible for any direct or consequential loss or damage resulting from the
installation, operation or use of the Equipment or otherwise. Lessee will
defend, indemnify and hold Lessor harmless against any and all claims, demands
and liabilities arising out of or in connection with the design, manufacture,
possession, operation, selection, control, use, maintenance and return of the
Equipment.
9. ADDITIONS AND ALTERATIONS: Upon prior written consent of Lessor. alterations
in or attachments to the Equipment may be made by Lessee. If the alterations or
attachments in any way damage or injure any Equipment or interfere with the
normal satisfactory operation or maintenance of the Equipment or increases the
cost of maintenance of such Equipment. or creates a safety hazard. Lessee will,
on notice from Lessor. promptly remove the alterations or attachments and
restore the Equipment to its original condition. In any event. upon the
termination of the Schedule with respect to any such Equipment. Lessee agrees to
remove any alterations or attachments made by Lessee and restore the Equipment
to its original condition. (ordinary wear and tear excepted) including
certification of maintainability by the Manufacturer.
10. TRANSPORTATION AND EXPENSES: All transportation and drayage charges on the
Equipment from the manufacturer's plants or Lessor's locations to Lessees
locations, are to be paid as specified on the Equipment Schedule. Lessee shall
prepare the Equipment for shipment by padded van in accordance with the
manufacturer's specifications for such preparation and load same on board
carrier as Lessor shall specify and Lessee shall ship the same, as directed by
Lessor. Payment of outbound transportation charges shall be paid by Lessee.
11. REPORTS, PATENTS & NOTICES: On request, Lessee shall permit persons
designated by Lessor to examine each piece of Equipment. Lessee shall
immediately notify Lessor if the Equipment is lost, stolen, damaged, destroyed,
condemned or confiscated, or of each accident arising out of the alleged or
apparent improper manufacturing, functioning or operation of any piece of
Equipment, the time, place and nature of the accident and damage or loss
incurred, Lessee's payments, notices and reports to Lessor under this Agreement
shall be made to Lessor's office, or to such other person and place as may be
designated by Lessor in writing,
12. QUIET POSSESSION: Lessor represents and warrants that upon execution of any
Schedule Lessor will have the right to furnish to Lessee the use of the
Equipment covered by such Schedule, and Lessor shall not disturb Lessee's right
to use the Equipment for so long as Lessee complies with the terms and
conditions of this Agreement and each Schedule.
13. COMPLETE AGREEMENT: The terms and conditions of this Agreement and each
Schedule and addendum hereto constitute the entire and complete agreement
between the parties and supersede all oral or written communications, memoranda,
correspondence, conversations, negotiations and agreements with respect to the
use of the Equipment. In the event of any conflict between this Agreement and
any Schedule, the terms of the Schedule shall prevail.
14. SUCCESSORS AND ASSIGNS: This Agreement shall be binding upon and shall inure
to the benefit of the parties to this Agreement and their respective successors
and assigns, provided, however, that this agreement may not be assigned by
Lessee without prior written consent of Lessor.
15. OWNERSHIP IN LESSOR AND ASSIGNMENT BY LESSOR: Lessee acknowledges that it
has no property rights in and to the Equipment and will not let, mortgage,
pledge, sell, convey, transfer, assign,
<PAGE>
sub-lease, encumber or dispose of any Equipment, without Lessor's prior written
consent. Lessee's sole right hereunder shall be the use of the Equipment in
accordance with this Agreement. The Equipment at all times shall remain in the
sole and exclusive property of Lessor, Lessee agrees to execute, at Lessor's
request, a UCC-1 financing statement for recording, reflecting Lessor's interest
in the lease and the Equipment. No permitted assignment or sub-lease shall
relieve Lessee from it's obligations hereunder.
Lessee agrees that Lessor may transfer or assign all or part of Lessor's
right, title and interest in, under or to the Equipment and this Lease and any
or all sums due or to become due pursuant to any of the above, to any third
party (the "Assignee") for any reason. Lessee agrees that upon receipt of
written notice from Lessor of such assignment, Lessee shall perform all of its
obligations hereunder for the benefit of Assignee and, if so directed, shall pay
all sums due or to become due hereunder directly to the Assignee or to any other
third party beneficiary of the following covenants, representations or
warranties: [i] Lessee's obligations to Assignee hereunder are absolute and
unconditional and are not subject to any abatement reduction, recoupment,
defense, offset or counterclaim available to Lessee for any reason whatsoever
including operation of law, defect in Equipment, failure of Lessor to perform
any of its obligations hereunder or for any other cause or reason whatsoever,
whether similar or dissimilar to the foregoing: [ii] Lessee shall not look to
Assignee to perform any of Lessor's obligations hereunder: [iii] Lessee will not
amend or modify this Agreement without prior written consent of the Assignee:
and [iv] Lessee will send a copy to Assignee of each notice which Lessee sends
to Lessor.
Upon receipt of notice of such assignment. Lessee agrees to execute and
deliver to Lessor such documentation as Assignee may require, including but not
limited to [i] an acknowledgment of, or consent to, assignment which may require
Lessee to make certain representations or reaffirmations as to some of the basic
terms and covenants contained in this Lease: [ii] a certified copy of
resolutions of Lessee: [iii] an opinion of counsel for Lessee: and [iv] a
Certificate of Delivery and Acceptance. Nothing contained in such documentation
required by Assignee shall be in derogation of any of the rights granted to
Lessee hereunder. Notwithstanding such assignment: [i] Lessor shall not be
relieved of any of its obligations hereunder, and [ii] the rights of the Lessee
hereunder shall not be impaired.
16. EVENTS OF DEFAULT AND REMEDIES: The occurrence of any one of the following
shall constitute an Event of Default hereunder:
[a] Lessee fails to pay any installment of rent on or before the tenth
(10th) day following the date when the same becomes due and payable.
[b] Lessee attempts to remove, sell, transfer, encumber, sublet or part
with possession of the Equipment or any items thereof, except as expressly
permitted herein.
[c] Lessee shall fail to observe or perform any of the other obligations
required to be observed or performed by Lessee hereunder and such failure shall
continue uncured for ten (10) days after written notice thereof to Lessee by
Lessor.
[d] Lessee ceases doing business as a going concern, makes an assignment
for the benefit of creditors, admits in writing its inability to pay its debts
as they become due, files a voluntary petition in bankruptcy, is adjudicated as
bankrupt or as insolvent, files a petition seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar arrangement under any present or future statute, law or regulation or
filed an answer admitting the material allegations of a petition filed against
it in any such proceeding, consents to or acquiesces in the appointment of a
trustee, receiver, or liquidator of it or of all or any substantial part of its
assets or properties, or if it or its shareholders shall take any action looking
for its dissolution or liquidation.
[e] Within thirty (30) days after the commencement of any proceedings
against Lessee seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statue, law or
regulation, such proceedings shall not have been dismissed, or if within thirty
(30) days after the appointment without Lessee's consent or acquiesces in the
appointment of a trustee, receiver or liquidator of it or of all or any part of
its assets and properties, such appointment shall not be vacated.
[f] If any warranty or representation made to or furnished by or on
behalf of Lessee is false in any material respect when made or furnished.
Upon occurrence of an Event of Default, Lessor may at its option do any
or all of the following: [i] by notice to Lessee terminate this Lease as to any
or all Schedules: [ii] whether or not this Lease is terminated as to any or all
Schedules, take possession of any or all of the Equipment listed on any or all
Schedules, wherever situated, and for such purpose, enter upon any premises
without liability for so doing or Lessor may cause Lessee and Lessee hereby
agrees, to return said Equipment to Lessor as provided in this Lease. [iii]
recover from Lessee, as liquidated damages for loss of a bargain and not a
penalty, an amount equal to the present value of all monies to be paid by Lessee
during the remaining term or any successive period then in effect, discounted at
the rate of six percent (6:). which payment shall become immediately due and
payable: [iv] sell, dispose of, hold, use or lease any Equipment as Lessor in
its sole discretion may determine (and Lessor shall not be obligated to give
preference to the sale, lease or disposition of the Equipment over the sale,
lease or other disposition of similar equipment owned or leased by Lessor). In
any event Lessee shall, without further demand, pay to Lessor an amount equal to
all sums due and payable for all periods up to and including the date on which
Lessor has declared this Lease to be in default.
In the event that Lessee shall have paid to Lessor the liquidated
damages as referred to in [iii] above, Lessor hereby agrees to pay to Lessee,
promptly after receipt thereof, all rentals and proceeds received from the
reletting or sale of the Equipment during the balance of the term (after
deduction of all costs, expenses
<PAGE>
and attorneys fees incurred by Lessor), said amount never to exceed the amount
of the liquidated damages paid by Lessee. Lessee agrees that Lessor shall have
no obligation to sell the Equipment. Lessee shall in any event remain fully
liable for reasonable damages as provided by law and for all costs and expenses
incurred by Lessor on account of such default included but not limited to all
courts and reasonable attorney's fees. Lessee hereby agrees that, in any event,
it will be liable for any deficiency after any sale, lease or other disposition
by Lessor. The rights afforded Lessor hereunder shall not be deemed to be
exclusive, but shall be in addition to any rights or remedies provided by law,
No express or implied waiver of any default shall constitute a waiver of
any of Lessor's rights, nor shall any delay by Lessor in enforcing any of its
rights hereunder be deemed a waiver thereof,
17. MISCELLANEOUS: In the event any of the provisions contained herein shall be
deemed contrary to the law, the remaining provisions of this Agreement shall
remain in full force and effect. Lessee agrees to provide to Lessor, upon
Lessor's request, Lessee's most current financial statement.
This Agreement shall be deemed to have been made in North Carolina, and shall be
governed by the laws of the State of North Carolina.
The parties have executed this Agreement on July 23, 1997.
LESSEE: TANGRAM ENTERPRISE SOLUTIONS, INC.
BY: /s/ John N. Nelli
ITS: Chief Financial Officer
DATE: July 23, 1997
LESSOR: TRIANGLE TECHNOLOGY LEASING
BY: /s/ Brooks Barbee
ITS: Vice President
DATE: July 23, 1997
<PAGE>
ADDENDUM NO. 1
TO LEASE SCHEDULE 1, DATED JULY 23, 1997
EQUIPMENT LEASE AGREEMENT DATED JULY 23, 1997
BETWEEN
TANGRAM ENTERPRISE SOLUTIONS, INC., AS LESSEE
AND
TRIANGLE TECHNOLOGY LEASING, AS LESSOR
LESSEE, upon 90 days written notification, may exercise any or all of the
options listed below. LESSOR, will use it's best efforts to finalize any of
these requests in as expediently as possible, but in no case in more than 90
days.
At a point when LESSEE has achieved a positive cash flow in four consecutive
fiscal quarters, Safeguard Scientific can be removed as guarantor. A new lease
payment will be established based on a rate not to exceed 375 basis points over
like term Treasury Notes, as published in the Wall Street Journal.
At any point prior to achieving four consecutive quarters of positive cash flow,
LESSEE and/or Safeguard Scientific can request the removal of Safeguard
Scientific as guarantor. LESSOR will use its best efforts to secure financing
without a guaranty from Safeguard. Rates will be market rates based on LESSEE's
then current financial condition and will be disclosed to LESSEE at that time.
LESSEE will then have the opportunity to exercise this option or continue with
the existing lease.
LESSOR will allow LESSEE to trade in leased equipment at any point after 36
months during the 48 month term when this leased equipment is replaced with
additional equipment leased from LESSOR or purchased by LESSEE. The remaining
balance for early termination purposes will be determined to be the installments
remaining unpaid on the Lease, discounted to present value using a rate of
interest determined by adding 1.00% to the rate for US Treasury Obligations with
a maturity closest to the date that represents 60 percent of the days remaining
from date of prepayment to the maturity of the Note.
LESSOR will use its best efforts to sell the returned equipment. All proceeds
remaining after LESSOR recoups its lease costs will be credited towards the
remaining balance owed by LESSEE.
THIS ADDENDUM REFERS ONLY TO SCHEDULE 1 OF THE EQUIPMENT LEASE AGREEMENT
REFERENCED ABOVE. ANY FUTURE LEASE SCHEDULES BETWEEN LESSOR AND LESSEE SHALL NOT
BE GOVERNED BY THIS ADDENDUM.
LESSEE: LESSOR:
TANGRAM ENTERPRISE SOLUTIONS, INC. TRIANGLE TECHNOLOGY LEASING
By: /s/ John N. Nelli By: /s/ Brooks Barbee
Title: Chief Financial Officer Title: Vice President
Date: July 23, 1997 Date: July 23, 1997
EXHIBIT 10.3
<PAGE>
GUARANTY
In consideration for Triangle Technology Leasing (as "Lessor") entering into
the Master Lease Agreement dated July 23, 1997 and all of its related
Equipment Schedules issued pursuant thereto (the "Lease") with Tangram
Enterprise Solutions, Inc., a PA Corporation (as "Lessee"), a subsidiary of
the undersigned, the undersigned hereby guarantees the prompt and complete
performance by said Lessee of all the terms and conditions of said Lease to
be performed by it, including but not limited to, the prompt payment of all
rentals and other sums payable thereunder. Without limitation, the foregoing
includes all payments due from Lessee under any indemnification and hold
harmless obligation which is set forth in the Lease, including attorneys
fees and court costs, which Lessor and its successors and assigns, may incur
or sustain by reason of the failure of said Lessee to fully perform and
comply with the terms and conditions of said Lease;
This is a continuing, absolute and unconditional guaranty of performance and
payment and not of collection. The undersigned specifically waives any right
to subrogation, setoff or counterclaim, and any defense for changes in
applicable law or any other circumstances which might constitute a legal or
equitable defense or discharge of a guarantor or surety. The undersigned
waives any right to require a proceeding first against the Lessee or to
exhaust any security for the performance of the obligations of the Lessee,
and waives notice of acceptance hereof and of defaults thereunder. The
undersigned agrees that the liability of the undersigned shall not be
affected or decreased by any amendment, termination, extension, renewal,
waiver or modification of said Lease or the rejection or disaffirmation
thereof in bankruptcy or like proceedings and that certain obligations under
the Lease may be accelerated upon any nonpayment thereof by the Lessee. This
Guaranty shall be specifically assignable to and inure to the benefit of
Lessor's Assignee and Secured Party as set forth in the Lease and is
irrevocable so long as there are any obligations of Lessee remaining under
the Lease.
Notwithstanding anything to the contrary herein contained, in the event the
Lessee interest in the Lease is ever held by an entity which is not a wholly
owned subsidiary of the Guarantor, then Guarantor may give notice thereof to
Lessor and following receipt by Lessor of such notice, (i) Guarantor shall
not be bound by any amendments, extensions, restatements of other Lease
modifications thereafter made, unless Guarantor has given its express
written consent thereto in each instance, and (ii) Guarantor shall be
entitled to the same notice period in which to effect a cure of any Lessee
default as is granted to Lessee pursuant to the Lease or applicable law.
Lessor shall always accept payment or performance by Guarantor. All
defenses, other than those relating to Lessee's insolvency or bankruptcy,
which are available to Lessee against the enforcement of the Lease by
Lessor, or against any remedy which the Lessor may elect to pursue shall
also be available to Guarantor.
Dated: July 25, 1997
Safeguard Scientifics, Inc.
(Guarantor - Exact Legal Name)
By: /s/ Michael W. Miles
Title: Vice President
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 196
<SECURITIES> 0
<RECEIVABLES> 4,372
<ALLOWANCES> (229)
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0
0
<COMMON> 157
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<CGS> 1,311
<TOTAL-COSTS> 7,232
<OTHER-EXPENSES> 4,925
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<INCOME-PRETAX> (2,641)
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