UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number 0-15454
TANGRAM ENTERPRISE SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2214726
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11000 Regency Parkway, Suite 401
Cary, NC 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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_
The aggregate market value of shares of common stock held by non-affiliates
on March 23, 1998 (as reported on The Nasdaq SmallCap Market tier of The Nasdaq
Stock Market under the symbol TESI) was approximately $22,442,928.
As of March 23, 1998, there were 15,721,999 shares of the Company's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its
scheduled 1998 Annual Shareholders Meeting are incorporated by reference in Part
III, Items 10, 11, 12 and 13 of this report.
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Tangram Enterprise Solutions, Inc.
Index to Form 10-K
For the Fiscal Year Ended December 31, 1997
PART I
Page
----
Item 1 - Business 3
Item 2 - Properties 11
Item 3 - Legal Proceedings 11
Item 4 - Submission of Matters to a Vote of
Security Holders 11
- Executive Officers of the Registrant 12
PART II
Item 5 - Market For Registrant's Common Equity
and Related Stockholder Matters 13
Item 6 - Selected Financial Data 14
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7A - Quantitative and Qualitative Disclosures about
Market Risk 22
Item 8 - Financial Statements and Supplementary
Data 22
Item 9 - Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 22
PART III
Item 10 - Directors and Executive Officers of
the Registrant 23
Item 11 - Executive Compensation 23
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 23
Item 13 - Certain Relationships and Related Transactions 23
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
<PAGE>
PART I
Item 1. Business
General
Tangram Enterprise Solutions, Inc. (the "Company") develops and markets
asset tracking software and software distribution solutions that enable
automated enterprise-wide information system management. The Company markets to
Fortune 1000 companies and their foreign equivalents and to government agencies
that are managing heterogeneous enterprises and mission-critical applications.
The following discussion contains forward-looking statements that are
subject to risks and uncertainties. There are several important factors that
could cause actual results to differ materially from those anticipated by the
forward-looking statements contained in the following discussion. Readers should
pay particular attention to the risk factors set forth in this section and in
the section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Background and Strategy
The Company believes that businesses are moving toward an enterprise-wide
computing environment where more desktop personal computers will be
interconnected into large local-area and wide-area networks, as well as the
Internet, and administered by corporate MIS departments. The Company believes
that the continued expansion of heterogeneous computer networks and current
downsizing and rightsizing trends are forcing businesses to seek automated
solutions for tracking and managing their enterprise-wide information technology
("IT") assets. The Company believes this trend will continue and that its new
product, Asset Insight(R), will enable the Company to attain a leading position
in the asset tracking market.
Since early 1996, the Company has focused its business on the asset
tracking market and the launch of Asset Insight. Asset Insight is designed to
enable corporations to proactively manage their base of distributed assets
without disruption to their business. Asset Insight enables organizations to
automatically track and analyze their entire base of client/server computer
hardware and software assets across enterprises. In 1997, the Company enhanced
Asset Insight to include Year 2000 functionality, enabling organizations to
address the Year 2000 problem in the distributed enterprise. Specifically, Asset
Insight allows organizations to assess their Year 2000 risk exposure, calculate
the cost of correcting errant applications, manage their compliance initiatives,
monitor asset trends to ensure noncompliant applications are being corrected on
time, and audit the enterprise to prevent Year 2000 problems from resurfacing.
The Company is committed to maintaining its leadership position in the
asset tracking market by enhancing Asset Insight and related products and
continuing to add new products. To further extend the applicability of Asset
Insight, the Company plans to pursue technology alliances, bundling
opportunities and relationships with original equipment manufacturers ("OEMs")
of complementary hardware and software products. The Company is actively
pursuing relationships with other software vendors to create interfaces with the
Company's products. Technology partnerships allow the Company to integrate Asset
Insight with other software vendors' applications and related products in areas
such as IT asset management tools, financial accounting systems, system
management offerings, purchasing systems and help desk systems. These
relationships will allow the Company to provide a more comprehensive solution to
its customers, leverage the customer's investment in existing products and
maintain the Company's competitive edge in the asset tracking market.
The Company maintains an active development program that is expanding the
utility of the Asset Insight product line through strategic alliances, new
product functionality and business subsystems. Product development efforts focus
on providing sophisticated management reports and subsystems that assist
companies in relating their IT asset information to business goals and
opportunities. 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.
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The Company also offers AM:PM(R) software, which provides automatic
software distribution, data distribution and data collection within a
heterogeneous business environment. The AM:PM product line was expanded in 1997
to include asset management capabilities through Asset Compass(TM), a technology
integration of Tangram's asset tracking product, Asset Insight, and Tangram's
software distribution product, AM:PM.
The Company continues to service the needs of the traditional IBM customer
base with the Open Advantage(R) UNIX SNA products and Arbiter(R). The Open
Advantage UNIX SNA products enable microcomputer users to leverage both the
local capabilities of the microcomputer and the data and software applications
on a mainframe using 3270 emulation. Arbiter software enables Windows, DOS and
OS/2 workstation users to access mainframe data, transfer files and perform
terminal emulation.
The Company continually evaluates its products and corporate strategy and
has in the past and will in the future undertake organizational changes and
product and marketing strategy modifications that are designed to maximize
market penetration, maximize the use of limited resources and develop new
products and product channels. There can be no assurance that these efforts will
be successful. Further, if the Company is successful in achieving its growth
plans, such growth is likely to place a significant burden on the Company's
operating and financial systems, resulting in increased responsibility for
senior management and other personnel within the Company. The Company's ability
to manage such growth, if it occurs, will depend in part on the ability of its
officers and other key employees to implement and expand operational, customer
support and financial control systems. There can be no assurance that the
Company's existing management or any new members of management will be able to
augment or improve existing systems and controls or implement new systems and
controls in response to future growth, if any. The Company's failure to do so
could have a material adverse effect on the Company's business, operating
results and financial condition.
Products and Services
The Company is structured into two separate groups: Enterprise Solutions
and Consulting Solutions. The Enterprise Solutions group focuses on the asset
tracking market and Asset Insight. The Consulting Solutions group focuses on the
traditional lines of business and develops customized solutions tailored to meet
customer requirements.
Enterprise Solutions
Asset Insight, launched in mid-1996, delivers business and productivity
solutions that address the needs of major corporations as they manage their
distributed computing asset base. Asset Insight, an information technology asset
tracking product, allows businesses to track changes in their information
technology asset base (including hardware and software), forward plan technology
requirements, and optimize end-user productivity. The product assists in
calculating the cost of software and hardware upgrades, identifying missing
hardware components, and resolving desktop problems quickly. Asset Insight
includes an analysis function that enables organizations to make informed
decisions about their IT assets. Asset data is automatically gathered and
distilled into one-page reports that highlight exceptions, costs and trends.
Asset Insight employs an open data repository, using standard relational
database technology that gives corporations access to their data.
The Asset Insight Internet Subsystem, an add-on component to the Asset
Insight product, was also introduced in 1996. With this subsystem,
decision-makers can track Internet usage on an enterprise-wide, departmental,
and individual basis. Internet page access, hourly usage, usage byte count, and
top sites accessed can be monitored and tracked over time, assisting in the
formulation of Internet usage trends and company Internet policies.
In 1997, the Company enhanced Asset Insight to include Year 2000
functionality, enabling organizations to address the Year 2000 problem in the
distributed enterprise. Specifically, Asset Insight allows organizations to
assess their Year 2000 risk exposure, calculate the cost of correcting errant
applications, manage their compliance initiatives, monitor asset trends to
ensure noncompliant applications are being corrected on time, and audit the
enterprise to prevent Year 2000 problems from resurfacing.
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Consulting Solutions
The Consulting Solutions group offers consulting and implementation
services to major corporations designed to facilitate deployment and maximize
the use of software distribution and asset tracking solutions. In addition,
technology offerings from the consulting group include Asset Compass, a
technology integration of Tangram's asset tracking product, Asset Insight, and
Tangram's software distribution product, AM:PM, together with a graphical user
interface that facilitates task management of distribution creation, scheduling,
and tracking functions. Asset Compass is an enterprise-wide solution, allowing
for central control of distributions and asset information while allowing
end-users some amount of managed choice concerning the control of their
desktops. Service offerings include project planning, product customization,
custom application development, implementation assistance and hands-on training.
In addition, the Consulting Solutions group continues to offer the
Company's traditional line of products. The AM:PM family of products is an
automated software distribution solution, allowing companies to manage
heterogeneous computer resources across the entire enterprise. AM:PM allows
companies with thousands of remote workstations and servers to accomplish tasks
unattended. Such tasks include software distribution, distribution scheduling
and tracking, and data distribution and collection. AM:PM offers a variety of
connectivity options for workstations, LANs, and servers and supports numerous
operating platforms, including Solaris, HP-UX, SCO OpenServer, AIX, Windows,
Windows NT, Windows 95, DOS, OS/2, MVS, NetWare, and Macintosh, as well as
numerous communications protocols.
The Consulting Solutions group also offers traditional mainframe
connectivity software products that provide access to IBM SNA networks. These
products enable companies to run a range of mainframe interface applications at
high speed on multiple workstation platforms. Arbiter provides file transfer
capability and PC-to-mainframe connectivity, with an IBM mainframe used as a LAN
file server. The Open Advantage gateway product line provides high-speed 3270
connectivity between mainframes and LANs.
Product Development
Project teams handle product development from specification, design, and
implementation to product release. These project teams operate as autonomous
units and include developers, product managers from marketing, quality control
managers, and members of senior management. Each product and enhancement is
submitted through a process that determines the marketability of the product,
revenue potential, development requirements, and support requirements. Critical
technical factors are also considered in determining the viability of an Asset
Insight product or subsystem, such as scaleability, level of automation, ease of
use, support for multiple platforms, and open architecture.
The majority of the Company's products and associated documentation have
been developed internally. The Company has acquired in the past, and intends to
continue to acquire, certain software technology from others and integrate those
technologies into its product lines. The Company expended $5.0 million for
product development costs in 1997, compared with $3.4 million in 1996 and $3.1
million in 1995. In accordance with Statement of Financial Accounting Standards
No. 86, the Company capitalizes certain development costs. During fiscal 1997,
1996, and 1995, the Company capitalized $1.8 million, $2.2 million, and $1.3
million, respectively, or 36%, 64%, and 41%, respectively, of total product
development costs. No material expenditures were made in fiscal 1997, 1996 or
1995 for acquisition of software technology.
The asset management software and the application suite offerings markets
are highly fragmented and are characterized by ongoing technological
developments, evolving industry standards, and rapid changes in customer
requirements. The Company's success depends upon its ability to offer a broad
range of asset tracking software products, to continue to enhance existing
products, to develop and introduce in a timely manner new products that take
advantage of technological advances, and to respond promptly to new customer
requirements. While the Company believes that it currently offers the broadest
product in the asset tracking market, this market is continuing to evolve and
customer requirements are continuing to change. As the market evolves and
competitive pressures increase, the Company believes that it will need to
further expand its product offerings. The Company has identified a number of
enhancements to its existing product offerings, which it believes are important
to its continued success in the asset tracking market. Failure by the Company in
any of these areas could materially and adversely affect its business, financial
condition, and results of operations. In addition, from time to time, the
Company or its competitors may announce new products with new or additional
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capabilities or technologies. Such announcements of new products by competitors
could have the potential to replace or shorten the life cycles of the Company's
existing products or to cause customers to defer purchasing the Company's
products.
In addition to developing new products, the Company's internal development
staff is focused on developing upgrades and updates to existing products. Future
upgrades and updates may, among other things, include additional functionality,
respond to user problems, or address issues of compatibility with changing
operating systems and environments.
The Company's product development efforts are expected to continue to
require substantial investments by the Company. There can be no assurance that
the Company will have sufficient resources to make the necessary investments.
The Company has in the past experienced development delays and may in the future
experience difficulties that prevent the successful development, introduction,
or marketing of new or enhanced products. The inability of the Company, for
technological or other reasons, to develop and introduce new and enhanced
products in a timely manner could have a material adverse effect on the
Company's business, operating results and financial condition.
Software products as complex as those offered by the Company may contain
errors that may be detected at any point in a product's life cycle. The Company
has in the past discovered software errors in certain of its products and has
experienced delays in shipment of products during the period required to correct
these errors. There can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found, resulting in loss
of, or delay in, market acceptance and sales, diversion of development
resources, injury to the Company's reputation, or increased service and warranty
costs, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition.
Customer and Technical Support
Customer support representatives answer product inquiry, customer support
and technical support calls, and respond to inquiries addressed to the Company's
Internet web page. The Company surveys its customer base to ensure quality of
service. Historically, license renewals have accounted for a significant portion
of the Company's net revenues; however, there can be no assurance that the
Company will be able to sustain historic renewal rates in the future. The
Company intends to continue to invest in customer and technical support.
The Company offers training courses in the implementation and
administration of its products. On a periodic basis, the Company offers product
training at its facility in Cary, NC for customers and channel partners. The
Company also offers on-site training and consulting services to its customers on
an hourly or packaged rate basis.
The Consulting Solutions group also offers project planning, product
installation services, customized application development, and hands-on product
training. Other services include 24-hour support coverage for all products,
on-site problem resolution, and improved high-speed telecommunication links with
our worldwide customers.
Customers
The customer base is composed of large, Fortune 1000 enterprises and
government agencies that are managing heterogeneous enterprises and
mission-critical applications. The Company's customers are located primarily in
North America and Europe and include companies in industrial, institutional, and
governmental markets. The Company operates in a single industry and is engaged
in design and sale of a limited number of software products. Approximately 10%
and 17% of the Company's 1997 and 1996 sales, respectively, were made to single
customers. No single customer accounted for more than 10% of total product
revenues in 1995.
Sales and Marketing
Sales
Early in the definition of the Asset Insight product, the Company
recognized the need for an alternate channel in order to acquire an early
presence in the market, cover the expected demand for the product, manage
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the geographically dispersed nature of the target market, and build a large
number of salespeople in the field. Therefore in 1996, the Company converted
from a direct sales force to an indirect sales channel organization. The Company
began the implementation by focusing on a single large value-added reseller
("VAR"), CompuCom Systems, Inc. The reseller agreed to assist the Company in the
development of the indirect channel program. The efforts with CompuCom have now
been duplicated in relationships with over twenty-five national, international
and regional value-added resellers, system integrators and IT service providers.
The Company employs an indirect sales force that works closely with its major
resellers and systems integrators to manage the development of the indirect
channel and product implementation. The indirect sales channel is managed out of
the corporate headquarters.
The Company is currently investing and intends to continue to invest
significant resources in developing additional sales and marketing channels
through VARs, system integrators, OEMs and other channel partners. These channel
partners also sell other products that are complementary to, or compete with,
those of the Company. While the Company encourages its channel partners to focus
on their respective products through marketing and support programs, there can
be no assurance that these channel partners will not give greater priority to
products of other suppliers, including competitors. Channel partners have no
long-term obligations to purchase products from the Company. Any failure by the
Company to establish and maintain such distribution relationships or 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 could have a material adverse effect on the Company's business,
operating results and financial condition.
The license of the Company's software generally requires the Company to
engage in a sales cycle that typically takes approximately six to nine months to
complete. The length of the sales cycle may vary depending on a number of
factors over which the Company may have little or no control, including the size
of the transaction and the level of competition that the Company encounters in
its selling activities. During the sales cycle, the Company typically provides a
significant level of education and support to prospective customers regarding
the use and benefits of the Company's products. Because of the nature of its
distribution methods, the Company generally cannot predict with accuracy when a
user will license its products. Any delays in the sale cycles of a large license
or a number of smaller licenses could have a material adverse effect on the
Company's business, operating results and financial condition.
The Consulting Solutions group sells through a direct channel. The primary
focus of the direct channel is the Company's AM:PM and related asset tracking
products, which are sold directly to large multi-location firms using a
combination of telesales and in-person contacts at the customer location. The
direct channel for the Consulting Solutions group is managed out of the
corporate headquarters.
In late 1995, the Company began building its international distribution
channels through a network of independent distributors in major markets outside
North America. International sales represented approximately 14%, 8% and 14% of
the Company's total revenues in fiscal 1997, 1996 and 1995, respectively. The
Company currently has no international office, but operates through
international distributors. The Company believes that its continued growth will
require continued expansion of its international operations, particularly in
Europe and the Pacific Rim. Accordingly, the Company intends to expand its
international operations and enter additional international markets, which will
require significant management attention and financial resources.
Marketing
During 1997, the Company focused its marketing efforts on
continuing to build the asset tracking market, educating the market
on the Asset Insight product, and generating Asset Insight leads. The
marketing organization has continued to build upon its successful
corporate marketing strategy, emphasizing the position that Asset
Insight has attained as the premier offering in the asset tracking
market. The marketing organization has also implemented a number of
enhanced programs, including speaking engagements, executive
briefings, industry trade shows, surveys, and public relations efforts.
The book, "A Journey Through Oz: The Business Leaders' Road Map to
Tracking Information Technology Assets", written by the Company
President and CEO, has proven to be a useful marketing tool. Efforts
in defining the market and creating product awareness have laid the
groundwork for the indirect sales channel efforts.
In 1997, the Company added Year 2000 functionality to Asset Insight,
assisting organizations as they identify their risks and manage their Year 2000
compliance efforts in the distributed enterprise. The Company
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President and CEO wrote a second book, "Teaching Chipmunks to Dance: The
Business Leaders' Guide to Making the Distributed Enterprise Year 2000
Compliant". This book is supporting the Company's Year 2000 marketing effort.
The Company will continue to focus on generating interest in order to move
the product through the established sales channel. In cooperation with channel
partners, the Company will move toward more targeted and active promotional
campaigns aimed at Fortune 1000 and government end users throughout North
America and Europe.
The Company's marketing strategy focuses on positioning its products as
market-driven business solutions that improve corporate productivity, leverage
customer information systems investments, assist customers in the migration to
new technologies, and provide a superior value-to-price ratio. To ensure that
the products reflect the changing market requirements, all of the Company's
product development efforts are integrated with marketing and other functions in
a team approach (see Product Development).
Customer requests for enhancements to current products and the development of
new products play a significant role in the Company's product marketing
strategy. Senior management teams make regular customer visits to gain customer
feedback. The Company also conducts regular customer surveys to evaluate overall
customer satisfaction, as well as future product needs.
Competition
The Company established asset tracking in response to an asset management
market, which can be anything from a procurement system, to a network management
solution, to a help desk tool, to a suite of products comprised of several "best
of breed" solutions. There are several vendors in the asset management market,
creating confusion and overlap between products. The Company has positioned
asset tracking as a fundamental first step to any asset management initiative.
While this positioning has been successful, Asset Insight has experienced some
marginal overlap with complementary products that fall into different segments
of the asset management arena. Such products are very diverse, ranging from
low-end discovery tools (such as Tally's NetCensus, Intel's LANDesk, and Network
Associates' Site Inventory) to Discovery/Ownership Management tools with modules
for tracking procurement, contracts, licenses, and other information (such as
Asset Software International's (ASI) AssetPro, and Apsylog's Asset Manager) to
full product suites with a long list of features (such as IBM Tivoli's TME 10,
Microsoft's SMS, and Computer Associates' Unicenter). Asset Insight remains the
only product that is exclusively in the asset tracking market, where we maintain
a strong competitive advantage in functionality and features. Because barriers
to entry in the software market are relatively low, the Company anticipates
additional competition from other established and emerging companies as the
market for asset tracking and asset management tools expand.
In the future, vendors of asset management software or application suite
offerings, such as those identified above, may continue to enhance their
products (including separate products that are bundled together) to include
functionality that is currently provided most often by asset tracking and
low-end discovery tool software. The widespread inclusion of such comparable
functionality could impair the marketability of the Company's Asset Insight
products. Furthermore, even if the asset tracking functionality provided as
standard features by asset management software or application suite offerings is
more limited than that of the Company's Asset Insight products, there can be no
assurance that a significant number of customers would not elect to accept such
functionality in lieu of purchasing additional software.
The Company expects software industry consolidation to occur in the future,
and it is possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. Increased competition may
result in price reductions, reduced gross margins and loss of market share.
Further, the Company competes with other software companies for access to the
channels of distribution. Some of the Company's current and many of its
potential competitors have significantly greater financial, technical,
marketing, and other resources than the Company. As a result, they may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion, and
sale of their products than the Company. Although the Company believes that it
currently competes favorably with respect to such factors, there can be no
assurance that the Company will maintain its competitive position.
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In the electronic software distribution ("ESD") market, the Company
competes with large software companies that offer systems management solutions,
that include ESD as an ancillary component. The Company is distinguished by its
offering of a fully integrated ESD and asset tracking solution, as well as
comprehensive consulting services. Many of the Company's actual and potential
competitors in this market have substantially greater financial, marketing, and
technological resources than the Company. The Company believes that the
principal competitive factors in the industry segment are the compatibility of
products with the customers' computer hardware and software, ease of use, price,
and the substantial base of technology that is required to join together the
various platforms in today's heterogeneous enterprises. The quality of
documentation, customer support and installation, and the ability of a family of
products to work together effectively are additional factors.
Intellectual Property
The Company's success is in part dependent upon proprietary technology. The
Company relies primarily on a combination of copyright and trademark laws,
confidentiality procedures, and contractual provisions to protect its
proprietary rights. The Company's products are generally licensed to end users
pursuant to a license agreement that restricts the use of the products to a
limited number of control point processors and/or a designated site or a limited
number of nodes. The Company does not allow the source code to be distributed to
customers for the AM:PM products. The Company has been required from time to
time to enter into source code escrow agreements with certain customers and
distributors for certain of its products. These agreements require the release
of source code only under very limited circumstances, principally a breach by
the Company of its support obligations or a filing of bankruptcy. The Company
seeks to protect its software, documentation, and other written materials under
trademark and copyright laws, which provide only limited protection. Despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy aspects of its current or future products or to obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar or
superior technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States.
There has also been substantial industry litigation regarding intellectual
property rights of technology companies. The Company is not aware that any of
its software product offerings infringes the proprietary rights of third
parties. In addition, as the Company may acquire a portion of software included
in future products from third parties, its exposure to infringement actions may
increase because the Company must rely upon such third parties as to the origin
and ownership of any software being acquired. In the future, litigation may be
necessary to enforce and protect intellectual property rights owned by the
Company. The Company may also be subject to litigation to defend it against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others. Any such litigation could be
costly and divert management's attention, either of which could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Adverse determinations in such litigation could result in the loss
of the Company's proprietary rights, subject the Company to significant
liabilities, require the Company to seek licenses from third parties, or prevent
the Company from selling its products, any one of which could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Furthermore, there can be no assurance that any necessary licenses
will be available on reasonable terms, or at all.
The Company believes that patent, trade secret,and copyright protection is
less significant than factors such as knowledge, experience of the Company's
personnel, new products, frequent product enhancements, name recognition, and
ongoing, reliable product maintenance.
Asset Insight, AM:PM, Arbiter, Tangram, and the Tangram puzzle are
registered trademarks of Tangram Enterprise Solutions, Inc. Other products and
brand names may be trademarks of their respective holders.
Employees
As of March 23, 1998, the Company employed 136 persons, including 52 in
worldwide marketing, sales, and field operations; 66 in product development and
technical support; and 18 in general and administrative. None of the Company's
employees are represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.
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The Company believes that its future success will depend in large part on
its ability to attract and retain additional highly skilled technical, sales,
management, and marketing personnel. Competition for such personnel in the
computer software industry is intense, and the Company has at times in the past
experienced difficulty in recruiting qualified personnel. New employees hired by
the Company generally require substantial training in the use and implementation
of the Company's products. In particular, a number of the Company's sales
personnel have been with the Company for only a limited period of time. There
can be no assurance that the Company will be successful in attracting, training,
and retaining qualified personnel, and the failure to do so could have a
material adverse effect on the Company's business, operating results, and
financial condition.
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Item 2. Properties
The Company leases all of its facilities. The following table sets forth
summary data on the Company's leased facilities:
<TABLE>
<CAPTION>
Location Approximate Square Feet Use Lease Expiration
-------- ----------------------- --- ----------------
<S> <C> <C> <C>
Cary, NC 49,600 Executive, administrative, September 30, 2004
sales, development, marketing,
customer support, and
distribution center
Malvern, PA 7,400 Sales, development, marketing February 28, 2000
and customer support
Regional Office 1,000 Sales July 31, 1998
</TABLE>
Item 3. Legal Proceedings
On February 20, 1998, the Company filed a complaint against State Farm
Mutual Automobile Insurance Company ("State Farm") in the United States District
Court for the Eastern District of North Carolina. The complaint seeks damages
from State Farm in the amount of $1,116,000 due to State Farm's breach of its
obligations to the Company under a software licensing agreement due to State
Farm's failure to pay for software products sold and delivered by the Company.
The complaint also asks for a declaratory judgment declaring that the Company is
not in default of any warranty obligations owed to State Farm under the
agreement and that State Farm is not entitled to any payments or refunds from
the Company. The Company continues to seek a negotiated resolution of the
dispute and will continue this litigation only if those attempts at negotiation
prove unsuccessful. While it is impossible to predict with any certainty the
outcome of the litigation if pursued, the Company believes that there is
substantial merit to its claims.
There are no other material pending legal proceedings to which the Company
is a party or of which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
None.
11
<PAGE>
Additional Information
The following information is furnished in this Part I pursuant to
Instruction 3 to Item 401(b) of Regulation S-K:
Executive Officers of the Registrant
The following persons were executive officers of the Company at March 23,
1998:
Name Age Position
---- --- --------
W. Christopher Jesse 47 President, Chief Executive Officer
and Director
Nancy M. Dunn 49 Senior Vice President,
Tangram Enterprise Solutions, Inc.
and President, Tangram Consulting
Solutions Division
Steven F. Kuekes 39 Senior Vice President, Chief
Technology Officer and Director
John N. Nelli 40 Senior Vice President and Chief
Financial Officer
W. Christopher Jesse has served as President, Chief Executive Officer, and
a director of the Company since October 1993. From March 1990 until September
1993, Mr. Jesse served as President, Chief Executive Officer, and a director of
Tangram Systems.
Nancy M. Dunn served as the Company's Vice President of Finance, Chief
Financial Officer, and Assistant Secretary since October 1993 and was promoted
to her current position in January 1997. Ms. Dunn served as Vice President of
Finance of Tangram Systems from April 1990 through September 1993.
Steven F. Kuekes has served as the Company's Senior Vice President, Chief
Technology Officer, and as a director since October 1993. Mr. Kuekes also served
as Vice President of Enterprise Computing Products and Services from November
1994 until December 1995. Mr. Kuekes was a founder of Tangram Systems and served
as Vice President of Product Development and Technology and as a director of
Tangram Systems from 1988 until September 1993.
John N. Nelli joined the Company as Senior Vice President and Chief
Financial Officer in February 1997. Before joining the Company, Mr. Nelli held
various positions at FAC Realty, Inc., a publicly traded real estate investment
trust, from February 1995 to January 1997, including Chief Financial Officer,
Senior Vice President - Finance, Chief Accounting Officer, and Treasurer. From
September 1993 to June 1994, Mr. Nelli served as the Chief Financial Officer of
Litchfield Theatres, Ltd., a regional motional picture exhibitor and developer.
Prior to September 1993, Mr. Nelli served as interim President and a director of
Natter Manufacturing, Inc., a precision sheetmetal manufacturer, a company he
joined as Chief Financial Officer in 1989. Mr. Nelli is a certified public
accountant.
12
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
(a) The Company's common stock is quoted on The Nasdaq SmallCap Market tier
of The Nasdaq Stock Market under the symbol "TESI". Prior to June 12, 1996, the
Company's common stock was quoted in the over-the-counter market in what are
commonly referred to as the "pink sheets". The following table sets forth the
high and low bid quotations of the Company's common stock from June 12, 1996
through December 31, 1997 as reported on the National Association of Securities
Dealers, Automated Quotations System ("Nasdaq"), and the high and low bid
quotations from January 1, 1996 through June 11, 1996 as provided by the market
makers of the Company's common stock.
1997 High Low
---- ---- ---
Fourth Quarter $8.50 $5.38
Third Quarter $9.38 $5.50
Second Quarter $7.63 $4.50
First Quarter $8.38 $4.50
1996
Fourth Quarter $8.50 $4.88
Third Quarter $13.50 $5.75
Second Quarter $17.88 $2.00
First Quarter $2.63 $1.25
The high and low bid quotations for the Company's common stock for the
period covered above, reflect inter-dealer prices without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
(b) Holders. On March 23, 1998, there were approximately 3,000 beneficial
owners of the Company's common stock.
(c) Dividends. Holders of the common stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors. No dividends
on the common stock have been paid by the Company. The Company intends to retain
all future earnings for the expansion of its business and consequently does not
presently intend to pay cash dividends on its common stock.
13
<PAGE>
Item 6. Selected Financial Data
The following selected financial data of the Company have been derived from
the Company's audited financial statements. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7 of this report and with the
Company's financial statements and the related notes thereto included in Item 8
of this report.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Summary of Operations: (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 14,074 $ 11,142 $ 12,538 $ 12,778 $ 13,733
Net loss (1) (3,461) (253) (1,185) (599) (226)
Net loss per common share - (0.22) (0.02) (0.08) (0.04) (0.06)
basic and diluted (2)
Average common shares 15,631 14,811 14,459 14,216 13,942
outstanding - basic and
diluted
<CAPTION>
December 31
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Financial Position: (In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $ 12,961 $ 12,946 $ 12,829 $ 15,048 $ 15,787
Long-term debt, including 3,044 756 1,319 1,472 --
current portion
Shareholders' equity (3) 4,483 8,257 8,246 9,368 10,715
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) One-time charges for purchased research and development expenses
(associated with the acquisition of Knozall Systems, Inc.) of $1,253, or
$0.09 per share, are included in the 1994 results, and merger and
restructuring expenses of $2,500, or $0.18 per share, are included in the
1993 results.
(2) Net loss per common share in 1993 is after dividends on preferred stock of
$570. No dividends were paid in 1997, 1996, 1995 or 1994.
(3) The increase in shareholders' equity in 1993 includes the contribution to
capital of a $5,400 note from the Company to Safeguard and $3,300 of
additional paid-in capital resulting from the merger.
14
<PAGE>
Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Annual Report
on Form 10-K 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 Annual Report on Form 10-K 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 in the section of this
report entitled "Item 1. Business."
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, 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 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 Compass 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. 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"
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.
15
<PAGE>
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 new 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
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.
Results of Operations
Net Revenues
Net revenues increased 26% to $14.1 million in 1997 from $11.1 million in
1996. The revenue increase was driven by a 34% increase in licenses and product
revenues in 1997 primarily as a result of $3.8 million of Asset Insight sales
offset by a decrease in AM:PM and traditional mainframe product revenues. Net
revenues in 1996 decreased 11% from $12.5 million in 1995. This decrease was due
primarily to a decrease in consulting services revenues as a result of the
decline in AM:PM and traditional mainframe product sales and the related
decrease in demand for high-level consulting skills and implementation services
by users of these products.
Licenses and product revenues, which include product upgrades and add-ons,
increased 34% in 1997 to $8.0 million from $6.0 million in 1996. Product
revenues of the new Asset Insight product, which was first sold in 1996,
contributed $3.8 million in 1997 compared to $1.4 million in 1996. Revenue from
Asset Insight represented 47% of total licenses and product revenues in 1997
compared to 24% in 1996. Revenue from AM:PM and related products decreased
slightly to $1.3 million in 1997 from $1.4 million in 1996. Revenue from AM:PM
and related products represented 17% of total 1997 licenses and product
revenues, down from 24% in 1996. Revenues from the traditional mainframe product
lines, including gateways and Arbiter, increased 3% to $2.9 million in 1997 from
$2.8 million in 1996. This product line represented 36% of 1997 licenses and
product revenues, down from 47% in 1996. As a percentage of total revenues, the
decrease in AM:PM and traditional mainframe product revenues reflects the
Company's decision to allocate more resources toward the Asset Insight product
line and the continued decrease in overall demand in the mainframe connectivity
market.
In 1996, licenses and product revenues increased 6% to $5.9 million from
$5.6 million in 1995. Licenses and product revenues for the new Asset Insight
product were $1.4 million in 1996, which represented 24% of total product
revenues. Revenue from AM:PM and related products decreased 27% to $1.4 million
in 1996 from $1.9 million in 1995. As a percentage of total product revenues,
AM:PM and related products revenues decreased to 24% in 1996 from 34% in 1995.
Traditional mainframe product revenues, including gateways and Arbiter,
decreased 5% in 1996 to $2.8 million from $3.0 million. These products
represented 47% of total
16
<PAGE>
product revenues in 1996 compared to 53% in 1995. The decrease in AM:PM and
traditional mainframe product revenues was due primarily to the ongoing
reallocation of resources toward the launch of the Asset Insight product line
and reflects the continued decrease in overall demand in the mainframe
connectivity market.
International sales (including maintenance contracts) represented
approximately 14% and 8% of the Company's total revenues in fiscal 1997 and
fiscal 1996, respectively. 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 continue to 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.
Service revenues include software and hardware maintenance contracts,
implementation services, and training and support services not otherwise covered
under maintenance agreements. Service revenues increased by 18% to $6.1 million
in 1997 from $5.2 million in 1996 primarily as a result of an increase in
implementation services and maintenance revenues associated with the increased
sales of the Asset Insight product.
In 1996, service revenues decreased by 25% to $5.2 million from $6.9
million in 1995. The decrease in service revenues was primarily a result of the
decline in AM:PM and traditional mainframe product sales and the related
decrease in demand for high-level consulting skills and implementation services
by users of these products.
Cost of Revenues
Cost of revenues includes costs principally related to the distribution of
licensed software and hardware products and the amortization of capitalized
software development costs. Cost of revenues also reflects the cost of the
direct labor force, including the associated personnel, travel and subsistence,
and occupancy costs incurred in connection with providing consulting and
maintenance services. 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 25% in 1997 from 33% in 1996.
Additionally, amortization of deferred development costs in 1996 reflected the
accelerated amortization of approximately $287,000 of deferred development costs
of non-strategic products. In 1997, cost of revenues decreased to $3.5 million
from $3.7 million in 1996 as a result of the accelerated amortization described
above and changes in the product mix.
Cost of revenues decreased to $3.7 million in 1996 from $3.8 million in
1995 due to changes in product mix offset by the higher amortization of deferred
development expense in 1996. As a percentage of total net revenues, cost of
revenues increased to 33% in 1996 from 30% in 1995.
Sales and Marketing Expenses
Sales and marketing expenses consist principally of salary, 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 61% to $6.6 million in
1997 from $4.1 million in 1996. Sales and marketing expenses also increased as a
percentage of revenue to 47% in 1997 from 37% in 1996. The increases were
primarily due to the Company's investment in sales and marketing staff and
increased travel costs to promote market awareness of the Asset Insight product.
The number of sales and marketing personnel doubled during 1997, enabling the
Company to develop an indirect sales network and to focus on defining the market
for the Asset Insight product. During 1997, the Company has developed
17
<PAGE>
relationships with twenty additional resellers for the marketing 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.
In 1996, sales and marketing expenses decreased 11% to $4.1 million from
$4.6 million in 1995. Excluding the cost associated with the LAN division that
was sold in March 1996, total selling and marketing expenses increased 16% in
1996 from 1995 and increased as a percentage of total net revenues to 36% from
27% in 1995. These increases were primarily due to the Company's investment in
marketing staff and advertising related to the launching of the new Asset
Insight product.
General and Administrative Expenses
General and administrative expenses consist principally of salary and
benefit costs for administrative personnel, general operating costs and legal,
accounting and other professional fees. General and administrative expenses
increased 71% in 1997 from $2.4 million to $4.2 million. As a percentage of
total net revenues, general and administrative expenses increased to 30% in 1997
from 22% in 1996. General and administrative expenses in 1997 include a charge
for $949,000 as the result of claims by a customer arising out of a consulting
project for electronic software distribution that have called into question the
collectability of a receivable that was outstanding at December 31, 1997. The
remainder of the increase in 1997 general and administrative expenses can be
attributed to increased payroll-related costs, facility, and other expenses
largely a result of a concerted effort to strengthen the infrastructure of the
Company to accommodate its growth in revenue. 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 intends to continue to make investments in its general
and administrative infrastructure, and, as a result, expects general and
administrative expenses to increase in absolute dollars.
General and administrative expenses remained relatively unchanged in 1996
from 1995. Excluding the expenses related to the LAN division in both 1995 and
1996, general and administrative expenses increased 3%, and as a percentage of
total net revenues, increased to 22% in 1996 from 20% in 1995. This increase is
the result of the lower overall revenue base and increased expenses for
payroll-related costs, professional fees, and other expenses related to building
the infrastructure for launching the Asset Insight product line.
Research and Development
Research and development expenses consist primarily of salary 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.
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 27% increase in the number of research and development
personnel in 1997. As such, gross expenditures for research and development
increased 46% to $5.0 million in 1997 from $3.4 million in 1996. As a percentage
of net revenues, gross research and development costs were 35% for 1997 compared
to 30% for 1996. Net research and development expenses increased to $3.2 million
in 1997 from $1.2 million in 1996. These 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 were 36% and
64% in 1997 and 1996, respectively. The Company anticipates that research and
development expenses will continue to increase in absolute dollars but may
fluctuate as a percentage of net revenues. Gross research and development costs
increased 9% in 1996 to $3.4 million from $3.1 million in 1995. As a percentage
of net revenues, gross research and development costs were 30% in 1996 compared
to 25% in 1995. The increase was due to the Company's investment in its new
product line, Asset Insight, and
18
<PAGE>
continuing enhancements of its other product lines. Net research and development
expenses decreased by 33% to $1.2 million in 1996 from $1.8 million in 1995. As
a percentage of total net revenues, research and development expenses decreased
to 11% in 1996 from 15% in 1995. The decrease was due primarily to the increase
in capitalized software costs related to the development of the new Asset
Insight product in 1996, as well as the decreased expenses resulting from the
sale of the LAN division. As a percentage of gross research and development
expenditures, deferred development costs were 64% in 1996 compared to 41% in
1995.
Provision for Income Taxes
There was no provision for income taxes in 1997 and 1996 due to current
year losses. In 1995, the Company recorded a $878,000 tax provision for a
valuation allowance against a previously recorded deferred tax asset.
At December 31, 1997, the Company has net operating loss carryforwards for
U.S. federal income tax purposes of approximately $28 million, which are
available to offset future federal taxable income and expire in various amounts
from 1998 through 2012.
Net Loss
The Company recorded a net loss of $3.5 million, or $0.22 per share, in
1997 compared to a net loss of $253,000, or $0.02 per share, in 1996. The
resulting net losses reflect the reserve charge taken in 1997 as the result of
the uncertainty regarding the collection of a receivable and the increased
operating expenses in 1997 and 1996 associated with the substantial expenditures
for research and development, the sales and marketing campaign, increased
staffing, and infrastructure development to support the Asset Insight product
rollout. In 1995, the Company recorded a net loss of $1.2 million, or $0.08 per
share. The 1995 net loss includes a $878,000 tax provision charge for a
valuation allowance against a previously recorded deferred tax asset.
Impact of Recently Issued Accounting Standards
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 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.
19
<PAGE>
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
March 23, 1998, borrowings under the Safeguard line of credit are $3.1 million.
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company will sell up to $1.0 million 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. Under this
agreement, in March 1998, the Company received proceeds of $174,000 for the sale
of computer equipment with a net book value of $161,000.
Net cash provided by operating activities consisted primarily of non-cash
expenses plus the net change in working capital items offset by the net loss.
The decrease in net cash provided by operating activities between 1997 and 1996
was primarily due to the larger net loss reported in 1997.
Net cash used in investing activities for 1997 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. The Company also made non-recourse, non-interest-bearing loans to certain
officers of the Company. Net cash used in investing activities for 1996 was
primarily for software development costs and the purchase of furniture and
equipment.
Net cash provided by financing activities in 1997 consisted primarily of
borrowings under the Safeguard line of credit offset by payments towards debt
principal repayment and for the repurchase of 86,018 shares of common stock. Net
cash provided by financing activities for 1996 was primarily net debt
borrowings.
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.
20
<PAGE>
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 $2.9 million is available for
future borrowings as of March 23, 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.
21
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Not applicable pursuant to General Instruction 1 to Item 305 of Regulation
S-K.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and schedule filed with this report
appear on pages F-2 through F-17, and are listed on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
22
<PAGE>
PART III
Incorporated by Reference
The information called for by Item 10. Directors and Executive Officers of
the Registrant (other than the information concerning executive officers set
forth after Item 4 herein), Item 11. Executive Compensation, Item 12. Security
Ownership of Certain Beneficial Owners and Management and Item 13. Certain
Relationships and Related Transactions is incorporated herein by reference to
the Company's definitive proxy statement for its 1998 Annual Shareholders
Meeting, which is expected to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year to which
this report relates.
23
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements
<TABLE>
<S> <C>
(i) Report of Independent Auditors....................................................................F-2
(ii) Balance Sheets at December 31, 1997 and 1996......................................................F-3
(iii) Statements of Operations for the years ended
December 31, 1997, 1996 and 1995..................................................................F-4
(iv) Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995..................................................................F-5
(v) Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995..................................................................F-6
(vi) Notes to Financial Statements........................................................F-7 through F-15
(2) Financial Statement Schedules
(i) Schedule I -Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995.................................................................F-17
</TABLE>
(3) Exhibits
See Item 14(c) of this Report.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed by the Registrant during the
quarter ended December 31, 1997.
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation
S-K to be filed as part of this Report. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is
indicated in parentheses.
24
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------ -------------------
3.1 Articles of Incorporation of the Company, as amended (4) (Exhibit
3a)
3.2 Articles of Amendment of Rabbit Software Corporation (3) (Exhibit
3.2)
3.3 Articles of Amendment of the Company (5) (Exhibit 3.3)
3.4 By-Laws of the Company, as amended (4) (Exhibit 3b)
4.1 Form of Certificate evidencing Common Stock, $0.01 par value, of
the Company (5) (Exhibit 4.2)
4.2** The Company's 1988 Stock Option Plan, as amended (5) (Exhibit 4.5)
4.3** The Company's 1997 Equity Compensation Plan (7) (Exhibit 4.1)
10.1 Agreement of Lease, executed by the Company on December 23, 1996,
with Rexford LLC (6) (Exhibit 10.1)
10.2 Agreement of Lease, executed by the Company on February 17, 1986,
with Morehall Associates Limited Partnership (1) (Exhibit 10m)
10.3 First Amendment to Agreement of Lease, dated June 13, 1986, with
Morehall Associates Limited Partnership (2) (Exhibit 10i)
10.4 Second Amendment to Agreement of Lease, dated June 1, 1989, with
Morehall Associates Limited Partnership (2) (Exhibit 10j)
10.5 Third Amendment to Agreement of Lease, dated October 12, 1992,
with Morehall Associates Limited Partnership (4) (Exhibit 10d)
10.6 Fourth Amendment to Agreement of Lease, dated January 28, 1997,
with Morehall Associates Limited Partnership (6) (Exhibit 10.6)
10.7 Fifth Amendment to Agreement of Lease, dated March 10, 1997, with
Morehall Associates Limited Partnership (6) (Exhibit 10.7)
10.8 Administrative Services Agreement with Safeguard Scientifics,
Inc., dated December 15, 1985 (1) (Exhibit 10s)
10.9 Second Amended Revolving Note dated September 11, 1997, between
the Company and Safeguard Scientifics, Inc. (8) (Exhibit 10.1)
10.10** Promissory Note dated August 19, 1994, and Pledge Agreement dated
July 22, 1994, between the Company and Chris Jesse (5) (Exhibit
10.12)
10.11** Promissory Note dated August 19, 1994, and Pledge Agreement dated
July 22, 1994, between the Company and Steve Kuekes (5) (Exhibit
10.13)
25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------ -------------------
10.12** Promissory Note dated August 19, 1994, and Pledge Agreement dated
July 22, 1994, between the Company and Nancy Dunn (5) (Exhibit
10.14)
10.13** Promissory Note, Pledge Agreement and Agreement to Transfer or
Terminate dated January 31, 1995, between the Company and Chris
Jesse (5) (Exhibit 10.15)
10.14** Promissory Note and Pledge Agreement dated January 31, 1995,
between the Company and Steve Kuekes (5) (Exhibit 10.16)
10.15** Promissory Note, Pledge Agreement and Agreement to Transfer or
Terminate dated January 31, 1995, between the Company and Nancy
Dunn (5) (Exhibit 10.17)
10.16** Memorandum of Agreement Regarding Compensation and Benefits dated
June 3, 1994 among Safeguard Scientifics, Inc., the Company, Chris
Jesse, Steven Kuekes and Nancy Dunn (5) (Exhibit 10.18)
10.17** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994, between
the Company and Chris Jesse (5) (Exhibit 10.19)
10.18** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994, between
the Company and Steve Kuekes (5) (Exhibit 10.20)
10.19** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994, between
the Company and Nancy Dunn (5) (Exhibit 10.21)
10.20 Master Lease Agreement and Addendum No.1 dated July 23, 1997
between the Company and Triangle Technology Leasing (8) (Exhibit
10.2)
23.1* Consent of Ernst & Young LLP
27.1* Financial Data Schedule for the year ended December 31, 1997
27.2* Restated Financial Data Schedule for the three months ended June
30, 1996
* Filed herewith.
** Management contract or compensatory plan or arrangement in which
directors and/or executive officers of the registrant may
participate.
26
<PAGE>
EXHIBIT INDEX
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-9525), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal
year ended December 31, 1989, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K dated ended
September 30, 1993, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10K for fiscal
year ended December 31,1992, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal
year ended December 31, 1994, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal
year ended December 31, 1996, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997, and incorporated herein by reference.
(d) See Item 14(a) of this Report.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TANGRAM ENTERPRISE SOLUTIONS, INC.
Dated: April 06, 1998 By: /s/ William C. Jesse
-----------------------------------
William C. Jesse,
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Dated: April 06, 1998 /s/ William C. Jesse
--------------------------------------
William C. Jesse,
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Dated: April 06, 1998 /s/ John N. Nelli
--------------------------------------
John N. Nelli,
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: April 06, 1998 /s/ Diane K. Murdock
--------------------------------------
Diane K. Murdock,
Chief Accounting Officer
(Principal Accounting Officer)
Dated: April 06, 1998 /s/ Charles A. Root
--------------------------------------
Charles A. Root,
Chairman of the Board of Directors
Dated: April 06, 1998 /s/ Steven F. Kuekes
--------------------------------------
Steven F. Kuekes,
Senior Vice President, Chief
Technology Officer and Director
Dated: April 06, 1998 /s/ Michael H. Forster
--------------------------------------
Michael H. Forster,
Director
Dated: April 06, 1998 /s/ John F. Owens
--------------------------------------
John F. Owens,
Director
Dated: April 06, 1998 /s/ Carl G. Sempier
--------------------------------------
Carl G. Sempier,
Director
28
<PAGE>
Dated: April 06, 1998 /s/ Harry Wallaesa
--------------------------------------
Harry Wallaesa,
Director
Dated: April 06, 1998 /s/ Carl Wilson
--------------------------------------
Carl Wilson,
Director
29
<PAGE>
EXHIBIT INDEX
Except as indicated by footnote, all of the following exhibits were filed
with the Company's Annual Report on Form 10-K, dated December 31, 1997. For
exhibits incorporated by reference, the location of the exhibit in the previous
filing is indicated in parentheses.
Exhibit No. Exhibit Description
3.1 Articles of Incorporation of the Company, as amended (4)
(Exhibit 3a)
3.2 Articles of Amendment of Rabbit Software Corporation (3)
(Exhibit 3.2)
3.3 Articles of Amendment of the Company (5) (Exhibit 3.3)
3.4 By-Laws of the Company, as amended (4) (Exhibit 3b)
4.1 Form of Certificate evidencing Common Stock, $0.01 par value,
of the Company (5) (Exhibit 4.2)
4.2** The Company's 1988 Stock Option Plan, as amended (5) (Exhibit
4.5)
4.3** The Company's 1997 Equity Compensation Plan (7) (Exhibit 4.1)
10.1 Agreement of Lease, executed by the Company on December 23,
1996, with Rexford LLC (6) (Exhibit 10.1)
10.2 Agreement of Lease, executed by the Company on February 17,
1986, with Morehall Associates Limited Partnership (1) (Exhibit
10m)
10.6 First Amendment to Agreement of Lease, dated June 13, 1986,
with Morehall Associates Limited Partnership (2) (Exhibit 10i)
10.7 Second Amendment to Agreement of Lease, dated June 1, 1989,
with Morehall Associates Limited Partnership (2) (Exhibit 10j)
10.8 Third Amendment to Agreement of Lease, dated October 12, 1992,
with Morehall Associates Limited Partnership (4) (Exhibit 10d)
10.6 Fourth Amendment to Agreement of Lease, dated January 28, 1997,
with Morehall Associates Limited Partnership (6) (Exhibit 10.6)
10.7 Fifth Amendment to Agreement of Lease, dated March 10, 1997,
with Morehall Associates Limited Partnership (6) (Exhibit 10.7)
10.8 Administrative Services Agreement with Safeguard Scientifics,
Inc., dated December 15, 1985 (1) (Exhibit 10s)
10.9 Second Amended Revolving Note dated September 11, 1997, between
the Company and Safeguard Scientifics, Inc. (8) (Exhibit 10.1)
10.10** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Chris Jesse (5)
(Exhibit 10.12)
30
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
10.11** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Steve Kuekes (5)
(Exhibit 10.13)
10.12** Promissory Note dated August 19, 1994, and Pledge Agreement
dated July 22, 1994, between the Company and Nancy Dunn (5)
(Exhibit 10.14)
10.13** Promissory Note, Pledge Agreement and Agreement to Transfer or
Terminate dated January 31, 1995, between the Company and Chris
Jesse (5) (Exhibit 10.15)
10.14** Promissory Note and Pledge Agreement dated January 31, 1995,
between the Company and Steve Kuekes (5) (Exhibit 10.16)
10.15** Promissory Note, Pledge Agreement and Agreement to Transfer or
Terminate dated January 31, 1995, between the Company and Nancy
Dunn (5) (Exhibit 10.17)
10.16** Memorandum of Agreement Regarding Compensation and Benefits
dated June 3, 1994 among Safeguard Scientifics, Inc., the
Company, Chris Jesse, Steven Kuekes and Nancy Dunn (5) (Exhibit
10.18)
10.17** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994,
between the Company and Chris Jesse (5) (Exhibit 10.19)
10.18** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994,
between the Company and Steve Kuekes (5) (Exhibit 10.20)
10.19** Employee Non-Disclosure and Non-Competition Agreement dated
October 4, 1993, and First Amendment dated June 3, 1994,
between the Company and Nancy Dunn (5) (Exhibit 10.21)
10.20 Master Lease Agreement and Addendum No.1 dated July 23, 1997
between the Company and Triangle Technology Leasing (8)
(Exhibit 10.2)
23.1* Consent of Ernst & Young LLP
27.1* Financial Data Schedule for the year ended December 31, 1997
27.2* Restated Financial Data Schedule for the three months ended
June 30, 1996
* Filed herewith.
** Management contract or compensatory plan or arrangement in
which directors and/or executive officers of the registrant may
participate.
31
<PAGE>
EXHIBIT INDEX
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-9525), and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal
year ended December 31, 1989, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K dated ended
September 30, 1993, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10K for fiscal
year ended December 31,1992, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal
year ended December 31, 1994, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal
year ended December 31, 1996, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997, and incorporated herein by reference.
32
<PAGE>
Audited Financial Statements
and Additional Financial Information
Tangram Enterprise Solutions, Inc.
Years ended December 31, 1997, 1996, and 1995
with Report of Independent Auditors
<PAGE>
Tangram Enterprise Solutions, Inc.
Audited Financial Statements
and Additional Financial Information
Years ended December 31, 1997, 1996, and 1995
Contents
Report of Independent Auditors............................................. F-2
Audited Financial Statements
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Shareholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
Additional Financial Information
Schedule I - Valuation and Qualifying Accounts............................. F-17
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Tangram Enterprise Solutions, Inc.
We have audited the balance sheets of Tangram Enterprise Solutions, Inc. as of
December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tangram Enterprise Solutions,
Inc. as of December 31, 1997 and 1996, and the results of its operations and
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Raleigh, North Carolina
January 23, 1998
F-2
<PAGE>
Tangram Enterprise Solutions, Inc.
Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 246 $ 176
Accounts receivable, net of allowance of $1,149 and
$244 in 1997 and 1996 2,971 2,991
Other 261 267
-------------------------
Total current assets 3,478 3,434
Property and equipment:
Computer equipment and software 614 595
Office equipment and furniture 127 83
Leasehold improvements 77 15
-------------------------
818 693
Less accumulated depreciation and amortization 352 205
-------------------------
Total property and equipment 466 488
Other assets:
Notes receivable - officers 1,284 784
Deferred software costs, net 3,289 3,022
Cost in excess of net assets of business acquired, net 4,407 5,145
Other 37 73
-------------------------
Total assets $ 12,961 $ 12,946
=========================
Liabilities and shareholders' equity Current liabilities:
Notes payable $ 38 $ 356
Accounts payable 671 590
Accrued expenses 1,447 723
Deferred revenue 2,865 2,620
-------------------------
Total current liabilities 5,021 4,289
Long-term debt - shareholder 3,006 400
Other liabilities 451 --
Shareholders' equity:
Common stock, par value $0.01, authorized 48,000,000 shares,
15,767,747 issued and 15,681,729 outstanding in 1997 and
15,665,363 issued and 15,633,032 outstanding in 1996 158 157
Additional paid-in capital 44,713 44,729
Accumulated deficit (39,888) (36,427)
Treasury stock, at cost, 86,018 shares and 32,331 shares in
1997 and 1996 (500) (202)
-------------------------
Total shareholders' equity 4,483 8,257
-------------------------
Total liabilities and shareholders' equity $ 12,961 $ 12,946
=========================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Net revenues:
Licenses and product $ 7,968 $ 5,955 $ 5,624
Services 6,106 5,187 6,914
---------------------------------------------------------
Total net revenues 14,074 11,142 12,538
Cost of revenues 3,483 3,703 3,819
---------------------------------------------------------
Gross profit 10,591 7,439 8,719
Operating expenses:
Sales and marketing 6,545 4,068 4,584
General and administrative 4,160 2,428 2,543
Research and development 3,192 1,228 1,829
---------------------------------------------------------
Total operating expenses 13,897 7,724 8,956
---------------------------------------------------------
Loss from operations (3,306) (285) (237)
Other (expense) income (155) 32 (70)
---------------------------------------------------------
Loss before income taxes (3,461) (253) (307)
Provision for income taxes -- -- (878)
---------------------------------------------------------
Net loss $ (3,461) $ (253) $ (1,185)
=========================================================
Basic and diluted loss per common share $ (0.22) $ (0.02) $ (0.08)
=========================================================
Weighted average number of common shares
outstanding 15,631 14,811 14,459
=========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Shareholders' Equity
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------------------ Paid-in Accumulated ---------------------- Shareholders'
Shares Amount Capital Deficit Shares Amount Equity
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 14,332,217 $ 143 $ 44,214 $ (34,989) -- $ -- $ 9,368
Exercise of stock options 195,659 2 61 -- -- -- 63
Net loss -- -- -- (1,185) -- -- (1,185)
------------------------------------------------------------------------------------------------
Balance at December 31, 1995 14,527,876 145 44,275 (36,174) -- -- 8,246
Exercise of stock options 1,028,396 11 305 -- (32,331) (202) 114
Conversion of debt 109,091 1 149 -- -- -- 150
Net loss -- -- -- (253) -- -- (253)
------------------------------------------------------------------------------------------------
Balance at December 31, 1996 15,665,363 157 44,729 (36,427) (32,331) (202) 8,257
Exercise of stock options 102,384 1 (16) -- 32,331 202 187
Acquisition of treasury stock -- -- -- -- (86,018) (500) (500)
Net loss -- -- -- (3,461) -- -- (3,461)
------------------------------------------------------------------------------------------------
Balance at December 31, 1997 15,767,747 $ 158 $ 44,713 $ (39,888) (86,018) $ (500) $ 4,483
================================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $(3,461) $ (253) $(1,185)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 286 281 401
Amortization 2,248 2,333 1,818
Reserve for doubtful accounts 1,018 56 169
Other 314 -- --
Decrease in deferred tax assets -- -- 884
Cash provided by changes in working capital items:
Accounts receivable (998) (470) 328
Other current assets 6 44 (47)
Accounts payable 81 87 40
Accrued expenses 724 337 (65)
Deferred revenue 245 392 (220)
------------------------------
Net cash provided by operating activities 463 2,807 2,123
Investing activities
Deferred software costs (1,777) (2,164) (1,286)
Expenditures for property and equipment (953) (501) (178)
Sale-leaseback of equipment and furniture 826 -- --
Increase in notes receivable-officers (500) -- (392)
Decrease (increase) in other assets 36 (213) --
------------------------------
Net cash used in investing activities (2,368) (2,878) (1,856)
Financing activities
Net borrowings (repayments) on note payable to shareholder 2,606 400 (606)
Repayments on notes payable (318) (264) (153)
Repayment of capital lease obligations -- (95) (93)
Acquisition of treasury stock (500) -- --
Proceeds from exercise of stock options 187 114 63
------------------------------
Net cash provided by (used in) financing activities 1,975 155 (789)
------------------------------
Net increase (decrease) in cash 70 84 (522)
Cash and cash equivalents, beginning of year 176 92 614
------------------------------
Cash and cash equivalents, end of year $ 246 $ 176 $ 92
=============================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 208 $ 52 $ 140
=============================
Cash paid during the period for income taxes $ 9 $ 7 $ 18
=============================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Tangram Enterprise Solutions, Inc., (the "Company") provides enterprise wide
solutions, including asset tracking and electronic software distribution for
large heterogeneous computing environments, encompassing mainframe, UNIX-based
mini and LAN server platforms. The Company's common stock trades on The Nasdaq
SmallCap Market tier of The Nasdaq Stock Market under the symbol TESI. 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 is the majority shareholder of
the Company holding approximately 67% of the Company's outstanding common
shares.
In March 1996, the Company sold the assets and liabilities of the LAN division,
formerly Knozall Systems, Inc. ("Knozall") to its former owner, who was an
officer and director of the Company until the date of sale. In exchange for the
cancellation of $850,000 of a $1 million note due the buyer issued in connection
with the 1994 acquisition of Knozall, the Company transferred all of the net
assets of the LAN division, made a cash payment of $213,000 and issued a
$300,000 note due in 24 equal installments. The buyer elected to convert the
remaining $150,000 of the $1 million note into 109,091 shares of Tangram common
stock. In addition, the Company retained rights to certain technology developed
in the LAN division since August 1, 1994.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results can differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents.
Revenue Recognition
In October 1997, the AICPA issued Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition", which supersedes Statement of Position 91-1. The
Company will be required to adopt SOP 97-2 for software transactions entered
into beginning January 1, 1998, and retroactive application to years prior to
adoption is prohibited. The Company's management anticipates that the adoption
of SOP 97-2 will not have a material impact on the Company's results of
operations. The Company generates revenues from licensing the rights to use its
software products primarily to end-users. The Company also generates revenues
from post-contract support (maintenance), consulting and training services
performed for customers who license its products.
F-7
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Net license and product revenues include software license fees under perpetual
licensing agreements and revenues from the sale of gateway and other products,
which include both hardware and software. Revenues from software license
agreements and product sales are recognized currently, provided that all of the
following conditions are met: a non-cancelable license agreement has been
signed, the software has been delivered, there are no material uncertainties
regarding customer acceptance, collection of the resulting receivable is deemed
probable, and no other significant vendor obligations exist. Revenues from
maintenance services are recognized ratably over the term of the maintenance
period, generally one year. Maintenance revenues that are bundled with license
agreements are unbundled and allocated to each component. Consulting revenues
are primarily related to implementation services performed on a time and
material basis under separate service agreements for the installation of the
Company's software products. Revenues from consulting and training services are
recognized as the respective services are performed.
Cost of Revenue
Cost of revenues includes cost principally related to the distribution of
licensed software and hardware products and amortization of capitalized software
development costs. Costs of revenues also includes the cost of the direct labor
force, including the associated personnel, travel and subsistence, and occupancy
costs incurred in connection with providing consulting and maintenance services.
Sales and Concentration of Credit Risk
The Company operates in a single industry and is engaged in design and sale of a
limited number of software products. During 1997 and 1996, approximately 10% and
17% of sales were made to the Company's largest customer. No single customer
accounted for more than 10% of total revenues in 1995. One of the Company's
customers represented 21% of the accounts receivable balance at December 31,
1997.
International sales (including maintenance contracts) represented approximately
14%, 8%, and 14% of the Company's total revenues in fiscal years 1997, 1996, and
1995, respectively. To date, international revenue has been denominated in
United States currency; therefore, the Company's results of operations have not
been affected by currency fluctuation.
The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable, which are unsecured. The Company performs
ongoing credit evaluations of its customer's financial condition. Management
believes that the concentration of credit risk with respect to trade receivables
is further mitigated as the Company's customer base consists primarily of
Fortune 1000 companies. The Company maintains reserves for credit losses and
such losses historically have been within management estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment is provided using the straight-line method over estimated
useful lives ranging from three to seven years.
F-8
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Intangible Assets
Intangible assets are amortized by the methods and over the estimated lives as
set forth in Note 2.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes". Under SFAS 109, the liability method is used in accounting for income
taxes and deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities.
Loss Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per
Share". This pronouncement supersedes Accounting Principles Board Opinion No. 15
("APB 15"),"Earnings per Share" and specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock equivalents. 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 and requires restatement of EPS for all prior periods
reported. The new standard requires additional informational disclosures, and
also makes certain modifications to the currently applicable EPS calculations
defined in APB 15. The calculations of loss per share under APB 15 and SFAS 128
for the three years ended December 31, 1997, 1996 and 1995 were the same. The
loss per common share calculations are computed based on the weighted average
number of common shares actually outstanding during each period. Diluted EPS is
not presented 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, the weighted average number of common shares outstanding would
have increased by 1,622,000, 2,362,000 and 1,360,000 shares for the three years
ended December 31, 1997, 1996 and 1995, respectively.
Accounting for Stock Options
In 1996, the Company adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation" which gives companies
the option to adopt the fair value method for expense recognition of employee
stock options and other stock-based awards or to continue to account for such
items using the intrinsic value method as outlined under Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" with
pro forma disclosures of net income (loss) and net income (loss) per share as if
the fair value method had been applied. The Company has elected to continue to
apply APB 25 for stock options and other stock based awards and has disclosed
pro forma net loss and net loss per share as if the fair value method had been
applied.
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform with 1997 presentation. These reclassifications had no effect on net
loss or shareholders' equity as previously reported.
F-9
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
2. Intangible Assets
Intangible assets consist of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
Amortization Estimated
Method Lives 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost in excess of net assets of
business acquired Straight-line 10-15 years $ 8,588 $ 8,588
Software development costs Straight-line 3 years 6,276 6,199
----------------------------
14,864 14,787
Less accumulated amortization 7,168 6,620
----------------------------
$ 7,696 $ 8,167
============================
</TABLE>
The Company assesses the recoverability of the excess of cost over net assets of
business acquired based on management's projections of future cash flow of the
respective operations.
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed". Costs associated with the
planning and designing phase of software development, including coding and
testing activities necessary to establish technological feasibility, are
classified as product development and expensed as incurred. Once technological
feasibility has been determined, additional costs incurred in development,
including coding, testing, and product quality assurance, are capitalized.
Amortization is provided on a product-by-product basis over the estimated
economic life of the software, not to exceed three years, using the
straight-line method. Amortization commences when a product is available for
general release to customers. During 1997, approximately $1,700,000 of fully
amortized software development costs were removed from intangible assets and
accumulated amortization.
Research and development costs are comprised of the following as of December 31
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Research and development costs incurred $ 4,969 $ 3,392 $ 3,115
Less - capitalized software development costs (1,777) (2,164) (1,286)
--------------------------------------------
Research and development costs, net $ 3,192 $ 1,228 $ 1,829
============================================
</TABLE>
Included in cost of revenues is amortization of software development costs of
$1,510,000, $1,575,000 and $1,060,000 in 1997, 1996 and 1995, respectively.
F-10
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
3. Debt
The Company has a $6 million unsecured revolving line of credit with Safeguard.
The amount of this line of credit was increased from $1 million to $5 million in
April 1997 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.
Total interest expense was $256,000, $57,000 and $158,000 for the years ended
1997, 1996 and 1995, respectively.
4. Leases
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 lease 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 as a reduction to rent
expense over the term of the lease.
The Company leases its facilities and certain equipment under several
non-cancelable operating lease agreements that expire at various times through
2004. Rental expense under these leases for the years ended December 31, 1997,
1996 and 1995 totaled approximately $1,184,000, $751,000 and $759,000,
respectively.
Future minimum lease payments under noncancelable operating leases at December
31, 1997 are as follows (in thousands):
1998 $ 1,258
1999 1,275
2000 1,094
2001 921
2002 935
Thereafter 1,755
--------------
$ 7,238
==============
F-11
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
5. Stock Options
The Company has granted incentive and non-qualified stock options to employees
and directors, both under and outside of formal option plans. The Company has
three outstanding stock option plans: the 1988 Stock Option Plan (the "1988
Plan"), the Stock Option Plan for Directors (the "Directors' Plan") and the 1997
Equity Compensation Plan (the "1997 Plan").
The Company may no longer grant options under the 1988 Plan or the Directors'
Plan. In April 1997, the Board of Directors proposed and, in May 1997, the
stockholders adopted the 1997 Equity Compensation Plan and reserved 2,000,000
shares of the Company's common stock for possible issuance. Through December 31,
1997 the Company had options outstanding of 1,931,600, 198,000 and 212,500
shares, respectively, under these plans. Under the plans, the Board of Directors
determines the option exercise price on a per-grant basis, but the price shall
not be less than fair market value on the date of grant. Generally, outstanding
options vest over periods not exceeding 4 years after the date of grant and
expire 10 years after the date of grant. All options granted under the plans to
date have been at prices which have been equal to fair market value at date of
grant. At December 31, 1997, the Company reserved approximately 4,129,000 shares
of common stock for future issuance under the plans.
Option activity under the Company's plans are summarized below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- -----------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,219 $1.65 2,968 $1.12 2,972 $0.39
Options granted 290 6.73 350 2.25 347 2.17
Options exercised (134) 1.39 (1,028) 0.31 (196) 0.32
Options canceled (33) 6.55 (71) 1.82 (155) 1.55
-------------------------------------------------------------------------
Outstanding at end of year 2,342 $2.27 2,219 $1.65 2,968 $1.12
=========================================================================
Options exercisable at year-end 1,652 1,280 1,778
Shares available for future grant 1,787 161 441
</TABLE>
The following summarizes information about the Company's stock options
outstanding at December 31, 1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------
Range of Number Weighted. Weighted Number Weighted
Exercise Outstanding Avg. Remaining Avg. Exercise Exercisable Avg. Exercise
Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.25 443 6.8 yrs. $ 1.14 300 $ 1.08
$1.50 - $1.75 1,316 6.3 1.50 1,223 1.50
$2.19 - $2.50 236 7.5 2.19 99 2.19
$4.69 - $6.13 124 9.0 5.28 27 6.05
$7.00- $8.13 213 9.3 7.38 0 0.00
$10.25 10 8.4 10.25 3 10.25
------------------------------------------------------------------------------------
2,342 6.9 yrs. $ 2.27 1,652 $ 1.55
====================================================================================
</TABLE>
F-12
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
5. Stock Options (continued)
The Company applies APB 25 and related interpretations in accounting for its
various stock option plans. Had compensation expense been recognized consistent
with SFAS 123, the Company's net loss would have been increased to $3,959,000 or
$0.25 per share, in 1997, $561,000, or $0.04 per share, in 1996 and $1,258,000,
or $0.09 per share, in 1995.
The per share weighted-average fair value of stock options issued by the Company
during 1997, 1996 and 1995 was $5.26, $1.67 and $2.04, respectively, on the
dates of grant.
The following assumptions were used by the Company to determine the fair value
of stock options granted using the Black-Scholes option-pricing model:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 100% 116% to 138% 112% to 115%
Expected option life 5 to 10 years 4 to 10 years 4 to 10 years
Risk-free interest rate 5.9% to 6.8% 6.1% to 6.9% 5.8% to 5.9%
</TABLE>
Pro forma net loss reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation expense for stock options
under SFAS 123 is not reflected in the pro forma net loss amounts presented
above because compensation expense is reflected over the options' vesting period
and compensation expense for options granted prior to January 1, 1995 is not
considered.
6. Related Party Transactions
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 owned by the officers and mature at the end of three years or
termination of employment, whichever occurs first. In addition, during 1995 and
1994, the Company made non-recourse, non-interest bearing loans to certain
officers of the Company totaling $784,000. The loans are secured by shares of
the Company's common stock owned by the officers and mature at the end of five
years or termination of employment, whichever occurs first. The total loans
outstanding at December 31, 1997 and 1996, were $1,284,000 and $784,000,
respectively.
During the years ended December 31, 1997, 1996 and 1995, the Company paid
administrative services fees to Safeguard totaling approximately $254,000,
$261,000 and $187,000, respectively. The Company also incurred and paid
Safeguard interest costs under a revolving credit agreement of $186,000, $7,000
and $45,000 in 1997, 1996 and 1995, respectively.
F-13
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
7. Income Taxes
The Company had no income tax expense in 1997 or 1996 due to current year
losses. In 1995, the Company recorded a $878,000 tax provision for a valuation
allowance against a previously recorded deferred tax asset.
The components of net deferred taxes as of December 31 are as follows (in
thousands):
1997 1996
--------------------------------------
Deferred tax assets
Tax loss carryforwards $ 9,652 $ 9,186
Tax credit carryforwards 455 464
Deferred software costs (777) (61)
Purchased research and development 0 357
Allowance for doubtful accounts 391 83
Other 297 101
--------------------------------------
Total gross deferred tax assets 10,018 10,130
Valuation allowance (10,018) (10,130)
--------------------------------------
Net deferred tax assets $ -- $ --
======================================
The actual income tax expense for 1997, 1996 and 1995 differs from the
"expected" amount (computed by applying the statutory federal income tax rate of
34% to the loss before income taxes) as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax benefit $ (868) $ (86) $ (108)
Non-deductible amortization 251 257 257
Change in valuation allowance (112) (187) 724
Other 729 16 5
----------------------------------------------------------
Actual tax expense $ -- $ -- $ 878
==========================================================
</TABLE>
F-14
<PAGE>
Tangram Enterprise Solutions, Inc.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $28 million. The net operating loss carryforwards expire in
various amounts from 1998 through 2012. The Tax Reform Act of 1986 contains
provisions that limit the ability to utilize net operating loss carryforwards in
the case of certain events including significant changes in ownership interests.
As there was a significant change in ownership interests (as defined) on June
29, 1989, the Company is limited in its ability to utilize approximately $18
million of net operating loss carryforwards. The annual limitation for the
utilization of these carryforwards is approximately $1.3 million, and any unused
amount can be utilized in subsequent years within the carryforward period.
At December 31, 1997, the Company had available approximately $426,000 and
$29,000 of research and development and investment credit carryforwards,
respectively, which expire in varying amounts from 1998 through 2003.
8. Employee Benefit Plan
The Company has a retirement plan which is qualified under Section 401(k) of the
Internal Revenue Code. This plan covers substantially all employees who meet
minimum age requirements and allows participants to defer a portion of their
annual compensation on a pre-tax basis. Company contributions to the plan may be
made at the discretion of the Board of Directors. No Company contributions have
been made through December 31, 1997.
The Company does not offer post-retirement or post-employment benefits.
9. Contingencies
In February, 1998, the Company filed a suit that seeks damages in the amount of
$1.1 million due to a customer's breach of its obligations to the Company under
a software licensing agreement due to that customer's failure to pay for
software products sold and delivered by the Company. The complaint also asks for
a declaratory judgment declaring that the Company is not in default of any
warranty obligations owed under the agreement and that the customer is not
entitled to any payments or refunds from the Company. As the result of claims by
the customer that have called into question the collectability of a receivable
that was outstanding at December 31, 1997, the Company has provided a reserve of
approximately $1.0 million. The Company continues to seek a negotiated
resolution of the dispute and will continue this litigation only if those
attempts at negotiation prove unsuccessful. While it is impossible to predict
with any certainty the outcome of the litigation if pursued, the Company
believes that there is substantial merit to its claims.
There are no other material pending legal proceedings to which the Company is a
party or of which any of its property is subject.
F-15
<PAGE>
Additional Financial Information
F-16
<PAGE>
Tangram Enterprise Solutions, Inc.
Schedule I - Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Balance at Additions
Beginning of Charged to Costs Deductions from Balance at End of
Period and Expenses Reserves Period
------------------- -------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $ 244,100 $ 1,017,900 $ 113,400 $ 1,148,600
Year ended December 31, 1996:
Allowance for doubtful accounts 225,000 55,500 36,400 244,100
Year ended December 31, 1995:
Allowance for doubtful accounts 262,300 169,000 206,300 225,000
</TABLE>
Other schedules have been omitted because they are inapplicable, immaterial,
or not required, as the information is included in the audited financial
statements or notes thereto.
F-17
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-31852, No. 33-39266, No. 33-45127 and No. 33-76066)
pertaining to the 1988 Stock Option Plan of Tangram Enterprise Solutions,
Inc. of our report dated January 23, 1998, with respect to the financial
statements and schedule of Tangram Enterprise Solutions, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Raleigh, North Carolina
April 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 246
<SECURITIES> 0
<RECEIVABLES> 4,120
<ALLOWANCES> (1,149)
<INVENTORY> 95
<CURRENT-ASSETS> 3,478
<PP&E> 818
<DEPRECIATION> (352)
<TOTAL-ASSETS> 12,961
<CURRENT-LIABILITIES> 5,021
<BONDS> 3,006
0
0
<COMMON> 158
<OTHER-SE> 4,325
<TOTAL-LIABILITY-AND-EQUITY> 12,961
<SALES> 7,968
<TOTAL-REVENUES> 14,074
<CGS> 1,705
<TOTAL-COSTS> 10,028
<OTHER-EXPENSES> 7,352
<LOSS-PROVISION> 1,018
<INTEREST-EXPENSE> 155
<INCOME-PRETAX> (3,461)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,461)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,461)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 194
<SECURITIES> 0
<RECEIVABLES> 3,382
<ALLOWANCES> 240
<INVENTORY> 71
<CURRENT-ASSETS> 3,646
<PP&E> 2,077
<DEPRECIATION> 1,677
<TOTAL-ASSETS> 13,049
<CURRENT-LIABILITIES> 3,844
<BONDS> 600
0
0
<COMMON> 147
<OTHER-SE> 8,458
<TOTAL-LIABILITY-AND-EQUITY> 13,049
<SALES> 3,574
<TOTAL-REVENUES> 5,954
<CGS> 706
<TOTAL-COSTS> 3,923
<OTHER-EXPENSES> 1,897
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 146
<INCOME-TAX> 0
<INCOME-CONTINUING> 146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 146
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
