UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
----------------------
Commission File Number 0-15454
TANGRAM ENTERPRISE SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2214726
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11000 Regency Parkway, Suite 401
Cary, NC 27511
(Address of Principal Executive Offices) (Zip Code)
(919) 653-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
The number of outstanding shares of Common Stock, $0.01 par value per
share, as of May 12, 1998 was 15,735,799.
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Balance Sheets -March 31, 1998 (Unaudited) and December 31, 1997..........3
Statements of Operations - Three Months Ended
March 31, 1998 and 1997 (Unaudited)..................................4
Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 (Unaudited)..................................5
Notes to the Financial Statements.........................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................8
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.....................................13
Signatures....................................................................14
2
<PAGE>
Tangram Enterprise Solutions, Inc.
Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
---------------------------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 276 $ 246
Accounts receivable, net of allowance of $1,203 and $1,149
in 1998 and 1997 2,842 2,971
Other 358 261
---------------------------------
Total current assets 3,476 3,478
Property and equipment:
Computer equipment and software 590 614
Office equipment and furniture 126 127
Leasehold improvements 88 77
---------------------------------
804 818
Less accumulated depreciation and amortization 395 352
---------------------------------
Total property and equipment 409 466
Other assets:
Notes receivable - officers 1,284 1,284
Deferred software costs, net 3,322 3,289
Costs in excess of net assets of business acquired, net 4,220 4,407
Other 40 37
---------------------------------
Total other assets 8,866 9,017
---------------------------------
Total assets $ 12,751 $ 12,961
=================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable 659 671
Accrued expenses 1,105 1,485
Deferred revenue 2,291 2,865
---------------------------------
Total current liabilities 4,055 5,021
Long-term debt - shareholder 3,675 3,006
Other liabilities 460 451
Shareholders' equity
Common stock, par value $0.01, authorized 48,000,000 shares,
15,793,017 and 15,767,747 issued in 1998 and 1997 158 158
Additional paid-in capital 44,698 44,713
Accumulated deficit (39,882) (39,888)
Treasury stock, at cost, 71,018 shares and 86,018 shares in 1998
and 1997 (413) (500)
---------------------------------
Total shareholders' equity 4,561 4,483
---------------------------------
Total liabilities and shareholders' equity $ 12,751 $ 12,961
=================================
</TABLE>
See accompanying notes.
3
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31
1998 1997
---------------------------------
(unaudited)
<S> <C> <C>
Revenues:
Licenses and product $ 2,503 $ 1,081
Services 1,653 1,522
---------------------------------
Total revenues 4,156 2,603
Cost of revenues 973 831
---------------------------------
Gross profit 3,183 1,772
Operating expenses:
Sales and marketing 1,624 1,315
General and administrative 764 722
Research and development 744 649
---------------------------------
Total operating expenses 3,132 2,686
---------------------------------
Earnings (loss) from operations 51 (914)
Other (expense) income (45) (12)
---------------------------------
Earnings (loss) before income taxes 6 (926)
Provision for income taxes -- --
---------------------------------
Net (earnings) loss $ 6 $ (926)
=================================
Earnings (loss) per common share
Basic and diluted $ 0.00 $ (0.06)
=================================
Weighted average number of common shares outstanding
Basic 15,700 15,670
=================================
Diluted 17,396 15,670
=================================
</TABLE>
See accompanying notes
4
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31
1998 1997
--------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net earnings (loss) $ 6 $ (926)
Adjustments to reconcile net earnings (loss) to net cash
(used in) provided by operating activities:
Depreciation 58 99
Amortization 661 565
Other 54 13
Cash provided by changes in working capital items:
Accounts receivable 70 356
Other current assets (97) (50)
Accounts payable (12) 805
Accrued expenses (342) 99
Deferred revenue (574) (435)
--------------------------------
Net cash (used in) provided by operating activities (176) 526
Investing activities
Deferred software costs (507) (431)
Expenditures for property and equipment (161) (574)
Sale-leaseback of equipment and furniture 174 --
Increase (decrease) in other assets (3) --
--------------------------------
Net cash used in investing activities (497) (1,005)
Financing activities
Net borrowings from shareholder 669 400
Net repayments on notes payable (38) (62)
Proceeds from exercise of stock options 72 7
--------------------------------
Net cash provided by financing activities 703 345
--------------------------------
Net increase in cash 30 (134)
Cash and cash equivalents, beginning of period 246 176
================================
Cash and cash equivalents, end of period $ 276 $ 42
================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 74 $ 22
================================
</TABLE>
See accompanying notes.
5
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation of the statements have been included. The interim operating results
are not necessarily indicative of the results that may be expected for a full
fiscal year. For further information, refer to the financial statements and
accompanying footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997.
Earnings per share
The basic earnings common share calculations for 1998 and 1997 are computed
based on the weighted-average number of common shares outstanding during each
period. Diluted earnings per common share reflect the potential dilution that
would occur assuming the exercise of stock options. Basic and diluted earnings
per share are the same in 1997 because the effect of inclusion of the exercise
of stock options would be to reduce the loss per common share. If the exercise
of stock options were included in 1997, the weighted average number of common
shares outstanding would have increased by 1,605,300 shares.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform to 1998 presentation. These reclassifications had no effect on net loss
or shareholders' equity as previously reported.
Note 2. Research and Development Costs
The Company capitalizes certain software development costs incurred to
enhance the Company's existing software or to develop new software. Certain
software development costs incurred after technological feasibility of the
product has been established are capitalized. Such capitalized costs are
amortized on an individual product basis commencing when a product is available
for release. Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense.
Research and development costs are comprised of the following as of March 31 (in
thousands):
1998 1997
----------------------------
Research and development costs $ 1,251 $ 1,080
Less - capitalized software development costs (507) (431)
============================
Research and development costs, net $ 744 $ 649
============================
Included in cost of revenues is amortization of software development costs
of $474,000 and $375,000 in 1998 and 1997, respectively.
6
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
Note 3. Long-term Debt - Shareholder
The Company has a $6 million unsecured revolving line of credit with
Safeguard Scientifics, Inc. ("Safeguard"), a majority shareholder of the
Company, holding approximately 67% of the Company's outstanding shares. Terms of
the line of credit require monthly interest payments at the prime rate plus 1%.
Principal is due thirteen months after date of demand by Safeguard or earlier in
the case of a sale of substantially all of the assets of the Company, a business
combination or upon the closing of a debt or equity offering. As of May 12,
1998, borrowings under the line of credit with Safeguard are $4.3 million.
Note 4. Lease
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company can 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 1997, 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. The leaseback has been
accounted for as an operating lease. The aggregate minimum monthly rental
payment under these transactions is approximately $24,100. The gains recognized
in these transactions have been deferred and will be amortized to income in
proportion to rental expense over the term of the lease.
Note 5. Related Party Transactions
During the three months ended March 31, 1998 and 1997, the Company incurred
administrative service fees to Safeguard totaling approximately $57,000 and
$79,000, respectively. The Company also incurred $71,000 and $17,000 of interest
costs in 1998 and 1997, respectively, under the revolving line of credit with
Safeguard.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The statements contained in this Quarterly
Report on Form 10-Q that are not purely historical, are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, including without limitation statements regarding the
Company's expectations, beliefs, intentions, or strategies regarding the future.
All forward-looking statements included in this Quarterly Report on Form 10-Q
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including, but
not limited to, those set forth in this section and those set forth in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 8, 1998.
Overview
Tangram Enterprise Solutions, Inc. (the "Company") provides
state-of-the-art enterprise-wide solutions, including asset tracking and
electronic software distribution for large heterogeneous computing environments,
encompassing mainframe, UNIX-based mini, and LAN server platforms. Asset
Insight(R), an information technology asset tracking product launched in 1996,
allows businesses to track changes in their information technology asset base
(including hardware and software), forward plan technology requirements,
optimize end-user productivity, and calculate the cost of software and hardware
upgrades. AM:PM(R) is the Company's industry-leading solution for automated
software distribution, data distribution and collection, and remote resource
management. AM:PM, along with expert consulting services, provides businesses
with solutions to manage an enterprise's heterogeneous and remote information
technology systems. Asset Advantage(TM) is a fully automated, enterprise-wide
electronic software distribution solution that creates a standardized work flow
process across multiple platforms and is integrated with Asset Insight. The
Company is a member of the Safeguard Scientifics, Inc. ("Safeguard") partnership
of companies. Safeguard supports technology-driven growth companies with an
emphasis on information system markets. Safeguard owns approximately 67% of the
Company.
The Company believes that businesses are moving toward an enterprise-wide
computing environment where more desktop personal computers will be
interconnected into large local-area and wide-area networks, as well as the
Internet, and administered by corporate MIS departments. The Company believes
that the continued expansion of heterogeneous computer networks and current
downsizing and rightsizing trends are forcing businesses to seek automated
solutions for tracking and managing their enterprise-wide information technology
assets. 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century. dates. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
Although Asset Insight includes Year 2000 analyses that enable organizations to
assess at-risk assets, determine the cost of correcting at-risk software, manage
the correction process, and audit the enterprise to ensure problems are not
re-emerging, the Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues. Many companies are
expending significant resources to correct their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company.
Since early 1996, the Company has refocused its business on the asset
tracking market and the launch of its 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
Revenues
Revenues for the three month period ended March 31, 1998 grew 60% to $4.2
million, compared with revenues of $2.6 million for the comparable period in
1997. The revenue increase was driven by a 132% increase in product revenues,
principally the sale of Asset Insight, in 1998 over the comparable 1997 quarter.
As of March 31, 1998, the Company has expanded its total number of channel
partners that resell Asset Insight from seven in March 1997 to 34 national and
regional value-added resellers, system integrators and other channel partners.
In addition, the number of channel partners contributing to the quarterly
revenues increased to 14 in 1998 compared to 3 in 1997.
License and product revenues include Asset Insight sales; AM:PM and related
product revenues; and traditional mainframe product sales of Arbiter and
gateways including product upgrades and add-ons. Product revenues increased to
$2.5 million in 1998 from $1.1 million in 1997. The product revenue increase was
primarily the result of a $1.3 million increase in Asset Insight sales. While
the Company has seen growth in the number and size of proposals including Asset
Insight, presented by its channel partners, it is uncertain whether such
proposals will result in future sales.
Service revenues include software and hardware maintenance contracts,
implementation services, and training and support services not otherwise covered
under maintenance agreements. Service revenues increased 9% to $1.7 million in
1998 from $1.5 million in 1997 due in part to higher maintenance revenues
generated by Asset Insight sales offset by a decrease in implementation
services.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Revenues (continued)
International sales (including maintenance contracts) represented
approximately 24% and 10% of the Company's total revenues in 1998 and 1997,
respectively. In 1998, the Company recognized revenue related to the final phase
of a contract awarded in September 1997 for an enterprise-wide Asset Insight
implementation. To date, international revenue has been denominated in United
States currency and the Company has not otherwise experienced material adverse
effects associated with doing business overseas. If the Company's international
sales 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.
Cost of Revenues
Cost of revenues includes costs principally related to the distribution of
licensed software and hardware products and the amortization of capitalized
software development costs. Cost of revenues also reflects the cost of the
direct labor force, including the associated personnel, travel and subsistence,
and occupancy costs incurred in connection with providing implementation and
maintenance services. A significant component of cost of revenues is
attributable to the amortization of deferred development cost, which is fixed in
nature. Therefore, as a result of higher revenues in 1998, cost of revenues as a
percentage of total revenues decreased to 23% from 32% in 1997. Cost of revenues
increased 17% to $973,000 in 1998 from $831,000 in 1997. The overall increase in
the amount of cost of revenues is due to higher amortization of deferred
development costs, primarily associated with the development of the Asset
Insight product, and increased payroll and related costs for additional
personnel hired to provide customer support and service to Asset Insight channel
partners and end-users.
Sales and Marketing Expenses
Sales and marketing expenses consist principally of salaries, commissions
and benefits for sales, marketing, and channel support personnel, and the costs
associated with product promotions and related travel. With the introduction of
Asset Insight, the Company converted from a direct sales channel to an indirect
sales organization for the distribution of this product. By developing
relationships with resellers, systems integrators, and other third-party vendors
that provide consulting and integration services and deliver products developed
for this market, the Company seeks to acquire an early presence in the market,
cover the expected demand for the product, manage the geographically dispersed
nature of the target market, and build a large number of salespeople in the
field. As such, sales and marketing expenses increased 24% to $1.6 million for
the three month period ended March 31, 1998 from $1.3 million for the comparable
period in 1997. Sales and marketing expenses, however, decreased as a percentage
of revenue to 39% in 1998 from 51% in 1997. The increase in absolute dollars was
primarily due to the Company's continuing investment in staffing, marketing and
increased travel costs to promote market awareness of the Asset Insight product.
The number of sales and marketing personnel has increased 66% over the
comparable 1997 quarter. The Company has developed a total of 38 reseller
relationships to date 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.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and
benefit costs for administrative personnel, general operating costs and legal,
accounting and other professional fees. General and administrative expenses
increased 6% in 1998 to $764,000 from $722,000 in 1997. As a percentage of total
revenues, general and administrative expenses decreased to 18% in 1998 from 28%
in 1997 principally as a result of a larger revenue base in 1998.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Research and Development
Research and development expenses consist primarily of salaries and
benefits for the Company's software development and technical support staff and,
to a lesser extent, costs associated with independent contractors. The Company
capitalizes certain software development costs incurred to develop new software
or to enhance the Company's existing software. Such capitalized costs are
amortized on an individual product basis commencing when a product is generally
available for release. Costs incurred prior to the establishment of
technological feasibility are charged to research and development expense. Gross
expenditures for research and development increased 16% to $1.3 million in 1998
from $1.1 million in 1997. The increase is due to personnel increases and the
related staffing costs associated with the Company's continuing commitment to
developing enhancements and improvements of the Asset Insight product and its
other product lines. As a percentage of revenues, gross research and development
costs were 30% for 1998 compared to 41% for 1997. Net research and development
expenses increased to $744,000 in 1998 from $649,000 in 1997. This increase was
due primarily to higher staffing costs. As a percentage of total revenues, net
research and development expenses decreased to 18% in 1998 from 25% in 1997. The
Company anticipates that research and development expenses will continue to
increase in absolute dollars but may fluctuate as a percentage of revenues.
Provision for Income Taxes
There was no provision for income taxes in 1998 and 1997, as result of the
net operating loss carryforwards available for 1998 and the loss reported in
1997.
Net Earnings (Loss)
The Company recorded net income of $6,000, or $0.00 per share, for the
first quarter of 1998 as compared to a net loss of $926,000, or $0.06 per share,
for the comparable period in 1997. The revenue growth and the increase in
operating expenses in 1998 are the result of the Company's substantial
expenditures towards market awareness, channel establishment and continued
product development of Asset Insight. The Company expects to continue devoting
substantial resources to developing sales and to product research and
development.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard No. 131, ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". The Company was required to adopt the
provisions of this pronouncement, if applicable, for the fiscal year ending
December 31, 1998. The adoption of this pronouncement is not expected to have an
impact on the Company's financial position and results of operation nor is it
expected to significantly change the presentation of the Company's financial
statements and related notes and data thereto.
In 1998, the Accounting Standards Executive Committee issued a statement of
position on accounting for the costs of computer software developed or obtained
for internal use ("SOP 98-1"). SOP 98-1 is effective for transactions entered
into in fiscal years beginning after December 15, 1998. The Company has reviewed
the statement of position and believes its adoption will not have a material
effect on the Company's financial position or results of operations.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources
The Company has funded its operations through borrowings and cash generated
from operations. To fund the Company's growth plan, the Company has arranged a
$6.0 million unsecured revolving line of credit with Safeguard. Terms of the
line of credit require monthly interest payments at the prime rate plus 1%.
Principal is due thirteen months after date of demand by Safeguard or earlier in
the case of a sale of substantially all of the assets of the Company, a business
combination or upon the closing of a sale of a debt or equity offering. As of
May 12, 1998, borrowings under the line of credit with Safeguard are $4.3
million.
In July 1997, the Company entered into a sale-leaseback agreement. Under
the arrangement, the Company can 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 1997, 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 used in operating activities consisted primarily of non-cash
expenses offset by the net change in working capital items. The decrease in net
cash provided by operating activities between 1998 and 1997 was primarily due to
an increase in working capital requirements in 1998 offset by the net loss
reported in 1997.
Net cash used in investing activities for 1998 consisted primarily of the
investment associated with the Company's ongoing commitment to developing
enhancements and improvements of the Asset Insight product and the purchase of
furniture and equipment to support the anticipated growth of the business,
offset by the proceeds received under the sale-leaseback agreement described
above.
Net cash provided by financing activities in 1998 consisted primarily of
borrowings under the Safeguard line of credit.
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.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
In the past, the Company has generated cash from operating activities to
fund development and finance activities despite its net losses due to
significant levels of depreciation and amortization. However, cash requirements
are forecasted to continue to increase through 1998 due to the planned
expenditures for marketing and the increased staffing required to enhance,
support and market the Asset Insight product. As stated above, Safeguard has
agreed to assist in funding the Company's projected cash requirements by
providing a $6.0 million line of credit, of which $1.7 million is available for
future borrowings as of May 12, 1998. However, the Company anticipates that this
credit facility may not be adequate to meet the Asset Insight product rollout
expenses. Although operating activities may provide cash in certain periods, to
the extent the Company experiences growth in the future, the Company anticipates
that its operating and investing activities may use cash. Consequently, any such
future growth may require the Company to obtain additional equity or debt
financing. However, the Company has no present understanding, commitment, or
agreement with respect to any such transaction. Accordingly, there can be no
assurance that the Company will have access to adequate debt or equity financing
or that, if available, it will be under terms and conditions satisfactory to the
Company or which may not be dilutive.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Exhibit Description
------ -------------------
27* Financial Data Schedule
* Filed herewith
b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the quarter
ended March 31, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tangram Enterprise Solutions, Inc.
Date May 14, 1998 /s/ John N. Nelli
------------ -------------------------------------------------
John N. Nelli
Chief Financial Officer and Senior Vice President
(Principal Financial Officer)
/s/ Diane K. Murdock
-------------------------------------------------
Diane K. Murdock
Chief Accounting Officer
(Principal Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
The following exhibits were filed with the Company's Current Report on Form
10-Q, dated March 31, 1998.
Exhibit
Number Exhibit Description
------ -------------------
27* Financial Data Schedule
* Filed herewith
j 16
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 276
<SECURITIES> 0
<RECEIVABLES> 4,045
<ALLOWANCES> (1,203)
<INVENTORY> 95
<CURRENT-ASSETS> 3,476
<PP&E> 804
<DEPRECIATION> (395)
<TOTAL-ASSETS> 12,751
<CURRENT-LIABILITIES> 4,055
<BONDS> 3,675
0
0
<COMMON> 158
<OTHER-SE> 4,403
<TOTAL-LIABILITY-AND-EQUITY> 12,751
<SALES> 2,503
<TOTAL-REVENUES> 4,156
<CGS> 532
<TOTAL-COSTS> 2,597
<OTHER-EXPENSES> 1,508
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> 6
<INCOME-TAX> 0
<INCOME-CONTINUING> 6
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
