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 June 30, 1998
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) (Zip Code)
(919) 653-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
The number of outstanding shares of Common Stock, $0.01 par value per
share, as of August 12, 1998 was 15,773,624.
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Balance Sheets -June 30, 1998 (Unaudited) and December 31, 1997..........3
Statements of Operations - Three Months Ended
June 30, 1998 and 1997 (Unaudited)..................................4
Statements of Operations - Six Months Ended
June 30, 1998 and 1997 (Unaudited)..................................5
Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997 (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 4 - Submission of Matters to a Vote of Securities Holders...............16
Item 5 - Other Information...................................................16
Item 6 - Exhibits and Reports on Form 8-K....................................17
Signatures...................................................................18
2
<PAGE>
Tangram Enterprise Solutions, Inc.
Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
---------------------------
Assets (unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 416 $ 246
Accounts receivable, net of allowance of $1,241 and $1,149
in 1998 and 1997 4,970 2,971
Other 467 261
---------------------------
Total current assets 5,853 3,478
Property and equipment:
Computer equipment and software 677 614
Office equipment and furniture 96 127
Leasehold improvements 88 77
---------------------------
861 818
Less accumulated depreciation and amortization 430 352
---------------------------
Total property and equipment 431 466
Other assets:
Notes receivable - officers 1,284 1,284
Deferred software costs, net 3,387 3,289
Costs in excess of net assets of business acquired, net 4,033 4,407
Other 40 37
---------------------------
Total other assets 8,744 9,017
---------------------------
Total assets $15,028 $12,961
===========================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable 1,022 671
Accrued expenses 1,436 1,485
Deferred revenue 2,268 2,865
---------------------------
Total current liabilities 4,726 5,021
Long-term debt - shareholder 5,076 3,006
Other liabilities 454 451
Shareholders' equity
Common stock, par value $0.01, authorized 48,000,000 shares,
15,805,817 and 15,767,747 issued in 1998 and 1997 158 158
Additional paid-in capital 44,618 44,713
Accumulated deficit (39,728) (39,888)
Treasury stock, at cost, 47,443 shares and 86,018 shares in 1998
and 1997 (276) (500)
---------------------------
Total shareholders' equity 4,772 4,483
---------------------------
Total liabilities and shareholders' equity $15,028 $12,961
===========================
</TABLE>
See accompanying notes.
3
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended June 30
1998 1997
-------------------------
(unaudited)
<S> <C> <C>
Revenues:
Licenses and product $ 3,594 $ 1,645
Services 1,373 1,576
-------------------------
Total revenues 4,967 3,221
Cost of revenues 1,124 939
-------------------------
Gross profit 3,843 2,282
Operating expenses:
Sales and marketing 2,033 1,480
General and administrative 884 943
Research and development 700 794
-------------------------
Total operating expenses 3,617 3,217
-------------------------
Income (loss) from operations 226 (935)
Other expense (72) (40)
-------------------------
Earnings (loss) before income taxes 154 (975)
Provision for income taxes -- --
-------------------------
Net earnings (loss) $ 154 $ (975)
=========================
Earnings (loss) per common share -
Basic and diluted $ 0.01 $ (0.06)
=========================
Weighted average number of common shares outstanding:
Basic 15,739 15,599
=========================
Diluted 17,267 15,599
=========================
</TABLE>
See accompanying notes
4
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended June 30
1998 1997
-------------------------
(unaudited)
Revenues:
<S> <C> <C>
Licenses and product $ 6,097 $ 2,726
Services 3,026 3,098
-------------------------
Total revenues 9,123 5,824
Cost of revenues 2,097 1,770
-------------------------
Gross profit 7,026 4,054
Operating expenses:
Sales and marketing 3,657 2,795
General and administrative 1,648 1,665
Research and development 1,444 1,443
-------------------------
Total operating expenses 6,749 5,903
-------------------------
Income (loss) from operations 277 (1,849)
Other expense (117) (52)
-------------------------
Earnings (loss) before income taxes 160 (1,901)
Provision for income taxes -- --
-------------------------
Net earnings (loss) $ 160 $ (1,901)
=========================
Earnings (loss) per common share -
Basic and diluted $ 0.01 $ (0.12)
=========================
Weighted average number of common shares outstanding:
Basic 15,720 15,618
=========================
Diluted 17,331 15,618
=========================
</TABLE>
See accompanying notes
5
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30
1998 1997
------------------------
(unaudited)
Operating activities
<S> <C> <C>
Net earnings (loss) $ 160 $(1,901)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Depreciation 110 207
Amortization 1,333 1,132
Other 81 15
Cash provided by changes in working capital items:
Accounts receivable (2,091) 262
Other current assets (206) (17)
Accounts payable 351 264
Accrued expenses (11) 172
Deferred revenue (597) (641)
------------------------
Net cash used in operating activities (870) (507)
Investing activities
Deferred software costs (1,057) (816)
Expenditures for property and equipment (235) (812)
Sale-leaseback of equipment and furniture 174 --
Net borrowings by officers -- (500)
(Decrease) increase in other assets (3) 27
------------------------
Net cash used in investing activities (1,121) (2,101)
Financing activities
Net borrowings from shareholder 2,070 3,250
Net repayments on notes payable (38) (136)
Acquisition of treasury stock -- (500)
Proceeds from exercise of stock options 129 82
------------------------
Net cash provided by financing activities 2,161 2,696
------------------------
Net increase in cash 170 88
Cash and cash equivalents, beginning of period 246 176
========================
Cash and cash equivalents, end of period $ 416 $ 264
========================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 94 $ 91
========================
</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, 1997.
Earnings per Share
The basic earnings per common share calculations for 1998 and 1997 are
computed based on the weighted-average number of common shares outstanding
during each period. Diluted earnings per common share reflect the potential
dilution that would occur assuming the exercise of stock options. Basic and
diluted earnings per share are the same in 1997 because the effect of inclusion
of the exercise of stock options would be to reduce the loss per common share.
If the exercise of stock options were included in 1997, the weighted-average
number of common shares outstanding would have increased by 1,576,300 shares for
the three months ended June 30, 1997 and 1,591,100 for the six months ended June
30, 1997.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform to 1998 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 (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
1998 1997 1998 1997
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Research and development costs incurred $ 1,250 $ 1,179 $ 2,501 $ 2,259
Less - capitalized software development costs (550) (385) (1,057) (816)
=========================== =========================
Research and development costs, net $ 700 $ 794 $ 1,444 $ 1,443
=========================== =========================
</TABLE>
Included in cost of revenues is amortization of software development costs
of $485,000 and $377,000 for the three months ended June 30, 1998 and 1997,
respectively. Amortization of software development costs for the six months
ended June 30, 1998 and 1997 was $959,000 and $752,000, respectively.
7
<PAGE>
Tangram Enterprise Solutions, Inc
Notes to the Financial Statements
(Unaudited)
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. 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 August 12,
1998, borrowings under the line of credit with Safeguard are $4.8 million.
Note 4. Lease
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company has received, at varying times through June 30,
1998, $1 million for computer equipment and furniture that had a net book value
of $850,000. The leaseback has been accounted for as an operating lease. The
aggregate minimum monthly rental payment under these transactions is
approximately $24,100. The gains recognized in these transactions have been
deferred and are being amortized to income in proportion to rental expense over
the term of the lease.
Note 5. Related Party Transactions
During the six months ended June 30, 1998 and 1997, the Company incurred
administrative service fees to Safeguard totaling approximately $137,000 and
$128,000, respectively. The Company also incurred $170,000 and $76,000 of
interest costs in 1998 and 1997, respectively, under the revolving line of
credit with Safeguard.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Quarterly
Report on Form 10-Q that are not purely historical, are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, including without limitation statements regarding the
Company's expectations, beliefs, intentions, or strategies regarding the future.
All forward-looking statements included in this Quarterly Report on Form 10-Q
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including, but
not limited to, those set forth in this section and those set forth in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 8, 1998.
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(R), 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 calculate 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. Asset Advantage(TM) is a fully automated, enterprise-wide
electronic software distribution solution that creates a standardized work flow
process across multiple platforms and is integrated with Asset Insight. 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
assets. 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 licenses, product
and implementation service revenues. Examples of such events include: the timing
of major enterprise-wide sales of the Asset Insight product; "one-time" payments
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;
budgeting cycles of its potential customers; changes in the mix of software
products and services sold; the cancellations of licenses or maintenance
agreements; software defects and other product quality problems; and personnel
changes. Additionally, the Company has often recognized a substantial portion of
its revenues in the last month or weeks of a quarter. As a result, license
revenues in any quarter are substantially dependent on orders booked and shipped
in the last month or weeks of that quarter. Due to the foregoing factors,
quarterly revenues and operating results are not predictable with any
significant degree of accuracy. Additionally, fluctuations in the timing and
amounts of additional operating expenses may also cause profitability to
fluctuate from one quarter to another. Also, during a significant product
launching, such as the Asset Insight product, increases in sales and marketing
and general and administrative expenses will occur prior to the realization of
incremental revenues. Historically, renewals have accounted for a significant
portion of the Company's net revenue, however, there can be no assurance that
the Company will be able to sustain current renewal rates in the future.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
Although Asset Insight includes Year 2000 analyses that enable organizations to
assess at-risk assets, determine the cost of correcting at-risk software, manage
the correction process, and audit the enterprise to ensure problems are not
re-emerging, the Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues. Many companies are
expending significant resources to correct their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company.
Since early 1996, the Company has refocused its business on the asset
tracking market and the launch of its Asset Insight product. The financial
results of the Company hereafter reflect the Company's growing dependence on
revenues generated by sales of Asset Insight. As a result, various risks and
uncertainties relating to the development of the asset tracking business 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
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.
Results of Operations
Revenues
Revenues for the three month period ended June 30, 1998 grew 54% to $5.0
million, compared with revenues of $3.2 million for the comparable period in
1997. The revenue increase was driven by a 600% increase in Asset Insight
revenues in 1998 over the comparable 1997 quarter. Revenues increased 57% for
the six month period ended June 30, 1998 to $9.1 million from $5.8 million for
the comparable period in 1997. As of June 30, 1998, the Company has expanded its
total number of channel partners that promote and resell Asset Insight from 12
in June 1997 to 46 national and regional value-added resellers, system
integrators and other channel partners. In addition, the number of channel
partners contributing to the Asset Insight revenue increased to 20 in 1998
compared to 6 in 1997.
License and product revenues include Asset Insight sales; AM:PM and related
product revenues; and traditional mainframe product sales of Arbiter and
gateways including product upgrades and add-ons. For the three and six months
ended June 30, 1998, product revenues increased to $3.6 million and $6.1
million, respectively, compared to $1.7 million and $2.7 million for the
comparable periods in 1997. The 1998 revenues reflect a $3.8 million increase in
Asset Insight sales offset by a $440,000 decrease in AM:PM and Arbiter product
sales compared to the six months ended June 30, 1997. 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
future sales.
Service revenues include software and hardware maintenance contracts,
implementation services, and training and support services not otherwise covered
under maintenance agreements. Service revenues for the quarter decreased 13% to
$1.4 million in 1998 from $1.6 million in 1997. The decrease is due principally
to lower maintenance renewals from the AM:PM and Arbiter product lines offset by
an increase in Asset Insight maintenance revenues. For the six months ended June
30, 1998 and 1997, respectively service revenues decreased 2% to $3.0 million
from $3.1 million for the reasons stated above. As the Company continues to
refocus its business on the asset tracking market and away from automated
software distributing and the traditional mainframe product lines, it expects
this trend to continue.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Revenues (continued)
International sales (including maintenance contracts) represented
approximately 14% and 6% of the Company's total revenues in 1998 and 1997,
respectively. In 1998, the Company recognized revenue related to the final phase
of a contract awarded in September 1997 for an enterprise-wide Asset Insight
implementation. To date, international revenue has been denominated in United
States currency and the Company has not otherwise experienced material adverse
effects associated with doing business overseas. If the Company's international
sales grow, the Company will be exposed to risks inherent with international
revenue. Some of the risk factors include the impact of longer payment cycles,
greater difficulty in accounts receivable collection, and unexpected changes in
regulatory requirements and tariffs. If future international sales are
denominated in local currency, there is an additional risk associated with
fluctuating exchange rates.
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 implementation and
maintenance services. A significant component of cost of revenues is
attributable to the amortization of deferred development costs, which is fixed
in nature. Therefore, as a result of higher revenues in 1998, cost of revenues
as a percentage of total revenues for the three months ended June 30, 1998
decreased to 23% from 29% for the comparable period in 1997. Cost of revenues
for the quarter increased 20% to $1.1 million in 1998 from $939,000 in 1997. The
overall increase in the amount of cost of revenues is due to higher amortization
of deferred development costs, primarily associated with the development of the
Asset Insight product, and higher product costs resulting from increased sales.
Amortization of software development costs of $485,000 and $377,000 for the
three months ended June 30, 1998 and 1997, respectively. For the six months
ended June 30, 1998, cost of revenues as a percentage of total revenues
decreased to 23% from 30% for the comparable period in 1997. Cost of revenues
for the six months ended June 30, 1998 increased 18% to $2.1 million from $1.8
million for the reasons stated above. Amortization of software development costs
for the six months ended June 30, 1998 and 1997 was $959,000 and $752,000,
respectively.
Sales and Marketing Expenses
Sales and marketing expenses consist principally of salaries, commissions
and benefits for sales, marketing, and channel support personnel, and the costs
associated with product promotions and related travel. 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 38% to $2.0 million for
the three month period ended June 30, 1998 from $1.5 million for the comparable
period in 1997. For the six months ended June 30, 1998 and 1997, sales and
marketing expenses increased to $3.7 million from $2.8 million, respectively,
representing a 31% increase. Sales and marketing expenses however, decreased as
a percentage of revenue for the three and six months ended June 30, 1998 to 41%
and 40%, respectively, from 46% and 48%, respectively, in 1997. The increase in
absolute dollars was primarily due to the Company's continuing investment in
staffing, marketing and increased travel costs to promote market awareness of
the Asset Insight product. The number of sales and marketing personnel has
increased 27% since June 1997. The Company has developed a total of 46 channel
partner relationships to date for the promotion and sale of Asset Insight. The
Company is currently investing and intends to continue to invest significant
resources in developing additional sales and marketing channels through
value-added resellers ("VARs"), system integrators, original equipment
manufacturers ("OEMs"), and other channel partners. There can be no assurance
that the Company will be able to attract channel partners that will be able to
market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service. Any failure by the
Company to establish and maintain such distribution relationships could have a
material adverse effect on the Company's business, operating results and
financial condition.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
General and Administrative Expenses
General and administrative expenses consist principally of salaries and
benefit costs for administrative personnel, general operating costs and legal,
accounting and other professional services. General and administrative expenses
for the three months ended June 30, 1998 decreased 6% to $884,000 from $943,000
for the comparable period in 1997. For the six months ended June 30, 1998,
general and administrative expenses decreased 1% to $1.6 million from $1.7
million for the same period in 1997. As a percentage of total revenues, general
and administrative expenses decreased for the three and six months ended June 30
to 18% for both periods in 1998 from 29% for both periods in 1997, principally
as a result of a larger revenue base in 1998.
Research and Development
Research and development expenses consist primarily of salaries and
benefits for the Company's software development and technical support staff and,
to a lesser extent, costs associated with independent contractors. The Company
capitalizes certain software development costs incurred to develop new software
or to enhance the Company's existing software. Such capitalized costs are
amortized on an individual product basis commencing when a product is generally
available for release. Costs incurred prior to the establishment of
technological feasibility are charged to research and development expense.
Gross expenditures for research and development for the three months ended
June 30, 1998 and 1997 remained constant at $1.2 million for both periods.
Comparing the six months ended June 30, 1998 and 1997; gross research and
development costs increased 11% to $2.5 million from $2.3 million, respectively.
The increase is due to personnel increases and the related staffing costs
associated with the Company's continuing commitment to developing enhancements
and improvements of the Asset Insight product and its other product lines. For
the three and six months ended June 30, gross research and development costs
decreased as a percentage of revenues to 25% and 27%, respectively, in 1998 from
37% and 39%, respectively, in 1997. Net research and development expenses
decreased to $700,000 for the three months ended June 30, 1998 from $794,000 for
the same period in 1997. Net research and development expenses for the six
months ended June 30, 1998 and 1997 remained constant at $1.4 million. As a
percentage of gross research and development expenditures, deferred development
costs for the three and six months ended June 30, 1998 were 44% and 42%,
respectively, compared to 33% and 36%, respectively, in 1997. This increase was
due primarily to higher deferral of development costs relating to the
introduction of some major components in Asset Insight version 2.5 which was
generally available for release in the second quarter. 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 1998 and 1997, as result of the
net operating loss carryforwards available for 1998 and the loss reported in
1997.
Net Earnings (Loss)
The Company recorded net income of $154,000, or $0.01 per share (diluted),
for the three months ended June 30, 1998 as compared to a net loss of $975,000,
or $0.06 per share, for the comparable period in 1997. For the six months ended
June 30, 1998, the Company reported net income of $160,000, or $0.01 per share
(diluted), compared to a net loss of $1.9 million, or $0.12 per share, for the
same period in 1997. The revenue growth and the increase in operating expenses
in 1998 are the result of the Company's substantial expenditures towards market
awareness, channel establishment and continued product development of Asset
Insight. The Company expects to continue devoting substantial resources to
developing sales and to product research and development.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Impact of Recently Issued Accounting Standards (continued)
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 131, ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". The Company was required to adopt the
provisions of this pronouncement, if applicable, for the fiscal year ending
December 31, 1998. The adoption of this pronouncement is not expected to have an
impact on the Company's financial position and results of operation nor is it
expected to significantly change the presentation of the Company's financial
statements and related notes and data thereto.
In 1998, the Accounting Standards Executive Committee issued a statement of
position on accounting for the costs of computer software developed or obtained
for internal use ("SOP 98-1"). SOP 98-1 is effective for transactions entered
into in fiscal years beginning after December 15, 1998. 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.
13
<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 borrowings and cash generated
from operations. To fund the Company's growth plan, the Company has arranged a
$6.0 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
August 12, 1998, borrowings under the line of credit with Safeguard were reduced
to $4.8 million.
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company has received $1 million for computer equipment and
furniture that had a net book value of $850,000. The leaseback has been
accounted for as an operating lease. The aggregate minimum monthly rental
payment under these transactions is approximately $24,100. The gains recognized
in these transactions have been deferred and are being amortized to income in
proportion to rental expense over the term of the lease.
Net cash used in operating activities consisted primarily of non-cash
expenses offset by the net change in working capital items. The decrease in net
cash provided by operating activities between 1998 and 1997 was primarily due to
an increase in working capital requirements in 1998, primarily accounts
receivable, offset by the net loss reported in 1997. The increase in accounts
receivable is the result of increased sales and the high percentage of sales
recognized in the final weeks of the quarter.
Net cash used in investing activities for 1998 consisted primarily of the
investment associated with the Company's ongoing commitment to developing
enhancements and improvements of the Asset Insight product and the purchase of
furniture and equipment to support the anticipated growth of the business,
offset by the proceeds received under the sale-leaseback agreement described
above.
Net cash provided by financing activities in 1998 consisted primarily of
borrowings under the Safeguard line of credit to fund the Company's growth plan.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failure. The Company is currently in
the process of evaluating its computer software and databases to determine
whether or not modifications will be required to prevent problems related to the
Year 2000. This process includes analyzing and assembling a list of both
internally developed and purchased software that utilize embedded date codes
that may experience operational problems when the year 2000 is reached. The
Company will also be communicating with suppliers, channel partners, financial
institutions and others with which it does business to coordinate Year 2000
conversion. The Company expects to make the required corrections to the
identified software during 1998 and test the changes in 1999. The Company does
not have an estimate of the total cost of evaluating and fixing these potential
problems. However, most of the costs incurred in addressing the Year 2000
problems are expected to be expensed as incurred, in compliance with generally
accepted accounting principles. The Company does believe that a portion of the
cost will be handled through the normal course of software upgrades and
replacements; however, the project may impact capital expenditure budgets,
through increased expenditures for software and computer hardware.
The Company's Asset Insight product was developed to be Year 2000
compliant; however, the risk does exist that certain code may not be compliant.
As such, the Company has established a project to perform an analysis of its
products and undertake any work necessary to ensure that they continue to
operate correctly when the year 2000 is reached. The expense associated with
this project will be expensed as incurred. The Company is unable to quantify the
resources that may have to be committed to modify software and is unable at this
time to determine if such expense will be material to the Company.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
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 1998 due to the planned
expenditures for marketing and the increased staffing required to enhance,
support and market the Asset Insight product. As stated above, Safeguard has
agreed to assist in funding the Company's projected cash requirements by
providing a $6.0 million line of credit, of which $1.2 million is available for
future borrowings as of August 12, 1998. However, the Company anticipates that
this credit facility may not be adequate to meet the Asset Insight 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 3, 1998, the Annual Meeting of Shareholders of the Company was held
at which the following matters were submitted to and the requisite number of
shares of Common Stock of the Company were voted on by the stockholders, with
the results set forth below:
a) The following persons were elected to the Board of Directors to serve as
directors until the next annual meeting of shareholders in 1999 and until
their respective successors are duly elected and qualified. Each person
received the number of votes set forth next to their names below:
PROPOSAL I - ELECTION OF DIRECTORS
FOR WITHHELD
--- --------
W. Christopher Jesse 15,257,304 11,462
Steven F. Kuekes 15,257,304 11,462
John F. Owens 15,258,603 10,163
Charles A. Root 15,257,421 11,345
Carl G. Sempier 15,257,603 11,163
Harry Wallaesa 15,258,537 10,229
Carl Wilson 15,258,603 10,163
Michael H. Forster 15,257,346 11,420
Item 5. Other Information
Shareholders intending to present proposals at the next Annual Meeting of
Shareholders to be held in 1999 must notify the Company of the proposal no later
than December 30, 1998 if they wish to include the proposal on the Company's
proxy card and, along with any supporting statement, in the Company's proxy
statement. As to any proposal presented by a shareholder at the Annual Meeting
of Shareholders that has not been included in the Proxy Statement, the
management proxies will be allowed to use their discretionary voting authority
unless notice of such proposal is received by the Company no later than March
15, 1999.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Exhibit Description
------ -------------------
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 June 30, 1998.
17
<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 August 13, 1998 /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)
18
<PAGE>
EXHIBIT INDEX
The following exhibits were filed with the Company's Current Report on Form
10-Q, dated June 30, 1998.
Exhibit
Number Exhibit Description
------ -------------------
27* Financial Data Schedule
* Filed herewith
19
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
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<RECEIVABLES> 6,211
<ALLOWANCES> 1,241
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<CURRENT-ASSETS> 5,853
<PP&E> 861
<DEPRECIATION> (430)
<TOTAL-ASSETS> 15,028
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0
0
<COMMON> 158
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<INTEREST-EXPENSE> 173
<INCOME-PRETAX> 160
<INCOME-TAX> 0
<INCOME-CONTINUING> 160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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