UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
--------------------------------------------
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 November 13, 2000 was 16,457,049.
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
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Item 1 - Financial Statements:
Balance Sheets - September 30, 2000 (Unaudited) and December 31, 1999................................3
Statements of Operations - Three Months Ended
September 30, 2000 and 1999 (Unaudited)..........................................................4
Statements of Operations - Nine Months Ended
September 30, 2000 and 1999 (Unaudited).........................................................5
Statements of Cash Flows - Three Months Ended
September 30, 2000 and 1999 (Unaudited)..........................................................6
Notes to the Financial Statements....................................................................7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................10
</TABLE>
PART II. OTHER INFORMATION
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Item 6 - Exhibits and Reports on Form 8-K...............................................................15
Signatures..............................................................................................16
</TABLE>
2
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Tangram Enterprise Solutions, Inc.
Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
-----------------------------------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 164 $ 445
Accounts receivable, net of allowance of $457 and $366 in
2000 and 1999, respectively 5,027 5,148
Notes receivable - officers - 496
Other 299 203
-----------------------------------------
Total current assets 5,490 6,292
Property and equipment:
Computer equipment and software 807 715
Office equipment and furniture 128 118
Leasehold improvements 93 88
-----------------------------------------
1,028 921
Less accumulated depreciation and amortization (777) (670)
-----------------------------------------
Total property and equipment 251 251
Other assets:
Deferred software costs, net 3,004 2,894
Cost in excess of net assets of business acquired, net 2,350 2,911
Other 40 40
-----------------------------------------
Total other assets 5,394 5,845
-----------------------------------------
Total assets $ 11,135 $ 12,388
=========================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 250 $ 371
Accrued expenses 1,360 1,030
Deferred revenue 3,339 3,371
-----------------------------------------
Total current liabilities 4,949 4,772
Long-term debt - shareholder 3,900 1,623
Other liabilities 352 428
Shareholders' equity:
Common stock, par value $0.01, authorized 48,000,000 shares, 16,457,049 and
15,922,238 issued and outstanding in 2000 and
1999, respectively 164 159
Additional paid-in capital 44,916 44,622
Accumulated deficit (43,146) (39,216)
-----------------------------------------
Total shareholders' equity 1,934 5,565
-----------------------------------------
Total liabilities and shareholders' equity $ 11,135 $ 12,388
=========================================
See accompanying notes.
</TABLE>
3
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Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
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Three months ended September 30
2000 1999
---------------------------------------
(unaudited)
<S> <C> <C>
Revenue:
Licenses and products $ 2,585 $ 2,985
Services 1,654 1,851
---------------------------------------
Total revenue 4,239 4,836
Cost of revenue:
Cost of licenses and products 455 524
Cost of services 507 538
---------------------------------------
Total cost of revenue 962 1,062
---------------------------------------
Gross profit 3,277 3,774
Operating expenses:
Sales and marketing 1,782 1,851
General and administrative 648 820
Research and development 865 847
---------------------------------------
Total operating expenses 3,295 3,518
---------------------------------------
(Loss) income from operations (18) 256
Other expense, net (74) (47)
---------------------------------------
(Loss) income before income taxes (92) 209
Provision for income taxes - 9
---------------------------------------
Net (loss) income $ (92) $ 200
=======================================
(Loss) earnings per common share:
Basic and diluted $ (0.01) $ 0.01
=======================================
Weighted average number of common shares outstanding:
Basic 16,430 15,797
=======================================
Diluted 16,430 16,132
=======================================
See accompanying notes
</TABLE>
4
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Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine months ended September 30
2000 1999
---------------------------------------
(unaudited)
<S> <C> <C>
Revenue:
Licenses and products $ 4,464 $ 9,108
Services 5,069 5,633
---------------------------------------
Total revenue 9,533 14,741
Cost of revenue:
Cost of licenses and products 1,447 2,031
Cost of services 1,690 1,687
---------------------------------------
Total cost of revenue 3,137 3,718
---------------------------------------
Gross profit 6,396 11,023
Operating expenses:
Sales and marketing 5,126 5,912
General and administrative 2,614 1,518
Research and development 2,482 2,726
---------------------------------------
Total operating expenses 10,222 10,156
---------------------------------------
(Loss) income from operations (3,826) 867
Other expense, net (104) (138)
---------------------------------------
(Loss) income before income taxes (3,930) 729
Provision for income taxes - 15
---------------------------------------
Net (loss) income $ (3,930) $ 714
=======================================
(Loss) earnings per common share:
Basic $ (0.24) $ 0.05
=======================================
Diluted $ (0.24) $ 0.04
=======================================
Weighted average number of common shares outstanding:
Basic 16,263 15,792
=======================================
Diluted 16,263 16,695
=======================================
See accompanying notes
</TABLE>
5
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Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30
2000 1999
---------------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net (loss) income $ (3,930) $ 714
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 107 147
Amortization 1,952 1,942
Other 379 (655)
Cash provided by changes in working capital items:
Accounts receivable and other current assets (430) 1,083
Accounts payable (121) (514)
Accrued expenses 330 54
Deferred revenue (32) (484)
---------------------------------------
Net cash (used in) provided by operating activities (1,745) 2,287
Investing activities
Deferred software costs (1,501) (1,652)
Expenditures for property and equipment (107) (114)
Sale-leaseback of equipment - 105
---------------------------------------
Net cash used in investing activities (1,608) (1,661)
Financing activities
Net borrowings (repayments) on borrowings from shareholder 2,277 (815)
Proceeds from exercise of stock options 795 29
---------------------------------------
Net cash provided by (used in) financing activities 3,072 (786)
---------------------------------------
Net decrease in cash and cash equivalents (281) (160)
Cash and cash equivalents, beginning of period 445 245
---------------------------------------
Cash and cash equivalents, end of period $ 164 $ 85
=======================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 65 $ 168
=======================================
See accompanying notes
</TABLE>
6
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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, 1999.
Revenue Recognition
In October 1997, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 97-2 Software Revenue Recognition, as amended
in March 1998 by SOP 98-4 and October 1998 by SOP 98-9. These SOPs provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. The Company adopted SOP 97-2 for software
transactions entered into beginning January 1, 1998. Based on the current
requirements of the SOPs, application of these statements did not have a
material impact on the Company's revenue recognition policies. However, AcSEC is
currently reviewing further modifications to the SOP with the objective of
providing more definitive, detailed implementation guidelines. This guidance
could lead to unanticipated changes in the Company's operational and revenue
recognition practices.
Earnings per Share
The basic earnings per common share calculations for 2000 and 1999 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. Weighted
average number of common shares outstanding on a diluted basis for the three and
nine month periods ended September 30, 2000 does not include common stock
equivalents because the effect of inclusion of these would be to reduce the loss
per common share.
Note 2. Research and Development Costs
The Company capitalizes certain software development costs incurred to
enhance the Company's existing software or to develop new software. Certain
software development costs incurred after technological feasibility of the
product has been established are capitalized. Such capitalized costs are
amortized on an individual product basis commencing when a product is available
for release. Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense.
7
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Tangram Enterprise Solutions, Inc
Notes to the Financial Statements
(Unaudited)
Note 2. Research and Development Costs (continued)
Research and development costs are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Research and development costs incurred $ 1,378 $ 1,361 $ 3,983 $ 4,377
Less - capitalized software development costs (513) (514) (1,501) (1,651)
------------- ------------- ------------- -------------
Research and development costs, net $ 865 $ 847 $ 2,482 $ 2,726
============= ============= ============= =============
</TABLE>
Included in cost of revenues is amortization of software development costs
of $438,000 and $462,000 for the three months ended September 30, 2000 and 1999,
respectively. Amortization of software development costs for the nine months
ended September 30, 2000 and 1999 was $1.4 million for each period.
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 common stock.
Terms of the line of credit require monthly interest payments at the prime rate
plus 1%. Principal is due thirteen months after date of demand by Safeguard or
earlier in the case of a sale of substantially all of the assets of the Company,
a business combination or upon the closing of a debt or equity offering. As of
November 11, 2000, borrowings under the line of credit with Safeguard are $3.4
million.
Note 4. Related Party Transactions
Up until May, 2000 the Company was a party to an administrative support
agreement with Safeguard under which the Company paid to Safeguard a fee equal
to 1/4 of 1% of net sales, up to a maximum of $200,000 annually, including
reimbursement of certain out-of-pocket expenses incurred by Safeguard. The
administrative support services included consultation regarding our general
management, investor relations, financial management, certain legal services,
insurance programs administration, and tax research and planning, but did not
cover extraordinary services or services that were contracted out. During the
nine months ended September 30, 2000 and 1999, the Company incurred
administrative service fees to Safeguard totaling approximately $71,000 and
$149,000, respectively. The Company also incurred $118,100 and $213,500 of
interest costs in 2000 and 1999, respectively, under the revolving line of
credit with Safeguard.
The Company had non-recourse, non-interest bearing loans due from certain
officers of the Company totaling $496,000 at December 31, 1999. These loans were
secured by shares of the Company's common stock owned by the officers and
matured at various dates through April 15, 2000 or termination of employment,
whichever occurred first. In January 2000, these loans were repaid in full
through the surrender of 51,501 shares of common stock of the Company based on
the current market price of the Company's common stock as reflected by the
average of the high and low prices on January 10, 2000.
8
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Tangram Enterprise Solutions, Inc
Notes to the Financial Statements
(Unaudited)
Note 4. Related Party Transactions (continued)
The Company has severance and non-competition agreements with certain
officers of the Company that provide for continued health and dental benefits
for up to one year and severance payments equal to one year of their respective
base salaries upon termination of employment for any reason other than cause or
voluntary termination. The Company may, at its discretion, provide these
benefits upon termination for cause or voluntary termination. Each officer has
agreed to refrain from competing with the Company for one year after termination
during which time severance payments and health benefits would continue to be
paid by Tangram. On January 3, 2000, the former CEO voluntarily resigned and the
board exercised its option to grant the benefits provided under the severance
and non-competition agreement with the executive. On June 30, 2000, the former
senior vice president of legal voluntarily resigned and the board exercised its
option to grant the benefits provided under the severance and non-competition
agreement with the executive.
9
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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"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including, among others, statements
containing the words "believes," "anticipates," "estimates," "expects" and words
of similar import. Such statements are subject to certain risks and
uncertainties, which include but are not limited to those important factors
discussed in cautionary statements throughout the section below and those set
forth in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 29, 2000, and are qualified in their entirety by
those cautionary statements.
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 UNIX-based mini, LAN server and mainframe 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 an automated software distribution, data distribution and
collection, and remote resource management solution that provides businesses
with solutions to manage an enterprise's heterogeneous and remote information
technology systems. The Company focuses most of its resources toward the Asset
Insight product line, and as such, the Company anticipates the trend of reduced
AM:PM and traditional mainframe product revenues to continue. The Company is no
longer actively marketing or selling the AM:PM and traditional mainframe product
lines. Tangram is a partner company of Safeguard Scientifics, Inc. (NYSE:SFE)
("Safeguard"). Safeguard incubates and operates premier developing technology
companies in the Internet infrastructure market with a focus on three sectors:
software, communications and eServices. Safeguard's network of Internet
infrastructure companies offers solutions, seamless connectivity and eServices
to businesses engaged in electronic commerce. Safeguard owns approximately 67%
of the outstanding voting securities of the Company.
During the first nine months of 2000, the Company has been evaluating its
products and corporate strategy. Recently the Company announced that it will
expand and enhance its flagship asset tracking solution, Asset Insight, to
support full lifecycle asset management. The Company will continue to enhance
its industry-leading asset tracking technology to ensure customers can
effectively manage new and emerging technologies, such as wireless and PDA
devices. These asset tracking features remain the foundation of every asset
management initiative. Additionally, the Company will expand its central asset
repository to support financial and contractual data, including software
licenses, leases, contracts, warranties, maintenance agreements, retirements and
disposals. Further, in support of the commitment to make Asset Insight a fully
Web- enabled solution, all new features will be Web-based, allowing customers to
access and analyze their diverse asset information directly from their Web
browsers. As part of the Company's new lifecycle asset management offering, the
Company will expand its services offering whereby it will work closely with
customers to prioritize their asset management requirements, pinpoint the
necessary process and technology changes and execute a phased asset management
implementation plan that delivers significant value during each step of the
deployment. The tailored services will cover specific disciplines, such as
software license management; enterprise moves, adds and changes; and lease
management. Declines in Asset Insight sales in the first half of 2000 have
negatively impacted the Company's financial performance and cash requirements
(see Liquidity and Capital Resources section) and as such may have an impact on
the Company's plan to pursue its business strategy. Therefore, there can be no
assurance that these efforts will be successful or delivered to the market on a
timely basis.
Since early 1996, the Company has focused its business on the asset
tracking market and the introduction and sale of its Asset Insight product. The
Company is committed to maintaining its leadership position in the asset
tracking market by supporting an active development program that expands the
utility of the Asset Insight product line through strategic alliances, new
product functionality, and business subsystems. The financial results of the
Company hereafter reflect the Company's growing dependence on revenue generated
by sales of Asset Insight. In addition to reversing the recent revenue trend
noted above, various risks and uncertainties relating to the sales and marketing
of the asset tracking business may cause the Company's actual results to differ
materially from the results contemplated. Such uncertainties include the ability
of the Company to sell its Asset Insight product into major accounts with full
enterprise-wide deployment; the possibility of the introduction of superior
competitive products; the ability of the Company to develop and maintain a
sustainable stream of
10
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revenue from the sale of the Asset Insight product; the ability to recruit and
retain key technical, sales, and marketing personnel; and the ability of the
Company to secure adequate financing on reasonable terms or at all.
The Company has been and will continue to be dependent on closing large
Asset Insight product sales in a given quarter. The license of the Company's
software generally requires the Company to engage in a sales cycle that
typically takes approximately three to nine months to complete. The length of
the sales cycle may vary depending on factors over which the Company has little
or no control, such as the size of the transaction, the internal activities of
potential customers, and the level of competition that the Company encounters in
selling its products. As such, the Company has historically experienced a
certain degree of variability in its quarterly revenue and earnings patterns.
This variability, in addition to the foregoing reason, is typically driven by
significant events that impact the recognition of licenses, product, and
implementation services revenue. Examples of such events include: the timing of
major enterprise-wide sales of the Asset Insight product; "one-time" payments
from existing customers for license expansion rights (required to install on a
larger or an additional computer base); completion and customer acceptance of
significant implementation rollouts and the related revenue recognition;
budgeting cycles of its potential customers; changes in the mix of software
products and services sold; organizational changes within the Company's channel
partners; and software defects and other product quality problems. Historically,
renewals have accounted for a significant portion of the Company's revenue;
however, there can be no assurance that the Company will be able to sustain
current renewal rates in the future. Additionally, the Company has often shipped
and booked a substantial portion of its product revenue in the last month or
weeks of a quarter. Due to the foregoing factor, quarterly revenue is not
predictable with any significant degree of accuracy. In addition, the Company is
experiencing increased market pressure in hiring and retaining personnel. The
Company's growth and success depends to a significant extent on the continued
service of its senior management and other key employees and the hiring of new
qualified employees. Competition for highly skilled business, product
development, technical, and other personnel is increasingly intense due to lower
overall unemployment rates and the boom in information technology spending.
Accordingly, the Company expects to experience increased compensation costs that
may not be offset through either improved productivity or higher prices. These
fluctuations in the timing and amounts of additional operating expenses may also
cause profitability to fluctuate from one quarter to another.
The Company's revenues are derived from product licensing and services.
Services are comprised of maintenance, professional services, and training.
License fees are generally due upon the granting of the license and typically
include a warranty period as part of the license agreement. The Company also
provides ongoing maintenance services, which include technical support and
product enhancements, for an annual fee based upon the current price of the
product.
Revenues from license agreements are recognized currently, provided that
all of the following conditions are met: a noncancelable license agreement has
been signed, the product has been delivered, the fee is fixed or determinable,
there are no material uncertainties regarding customer acceptance, collection of
the resulting receivable is deemed probable and the risk of concession is deemed
remote, and no other significant vendor obligations exist. Revenues from
post-contract support services are recognized ratably over the term of the
support period, generally one year. Maintenance revenues when and if bundled
with license agreements are unbundled using vendor-specific objective evidence.
Consulting revenues are primarily related to implementation services most often
performed on a time and material basis under separate service agreements for the
installation of our products. Revenues from consulting and training services are
recognized as the respective services are performed.
Results of Operations
Revenue
Licenses and products revenue include the sales of Asset Insight, AM:PM and
related products, and the traditional mainframe products of Arbiter and
gateways, including product upgrades and add-ons. Licenses and products revenue
decreased 13% for the three month period ended September 30, 2000 to $2.6
million from $3.0 million in 1999. Licenses and products revenue decreased 51%
for the nine month period ended September 30, 2000 to $4.5 million from $9.1
million in 1999. Asset Insight licenses and products revenue contributed $2.5
million, or 97% of total licenses and products revenue in the third quarter of
2000 up from $2.4 million, or 79% in the same period in 1999. Asset Insight
licenses and products revenue decreased 49% for the nine month period ended
September 30, 2000 to $3.6 million from $7.1 million in 1999. The decline year
to date in Asset Insight product sales in 2000 has been impacted by a
continuation of Year 2000 (Y2K) budget freezes, competitive pressures and
disruption in the Company's indirect sales channels and direct sales force.
While the effects of Y2K appears to be over, the market took longer to recover
than expected. Revenue from AM:PM and traditional mainframe products decreased
to $67,000 in the third quarter of 2000 from $615,000 in the comparable period
of 1999. Revenue from
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AM:PM and traditional mainframe products decreased to $829,000 during the nine
months ended September 30, 2000 from $2.0 million in the comparable period of
1999. The Company is no longer actively marketing or selling the AM:PM and
traditional mainframe product lines, and as such, we anticipate the trend of
reduced AM:PM and traditional mainframe product revenues to continue.
Services revenue includes software and hardware maintenance contracts,
Asset Insight implementation services, and training and support services not
otherwise covered under maintenance agreements. Total services revenue for the
third quarter decreased 11% to $1.7 million in 2000 from $1.9 million in 1999.
For the nine months ended September 30, 2000 and 1999, respectively, services
revenue decreased 10% to $5.1 million from $5.6 million. Maintenance contract
revenue for the three month period ended September 30, 2000 was $1.6 million
compared to $1.5 million in 1999. The overall increase was the result of a
$343,000 increase in Asset Insight maintenance contract revenue offset by a
$282,000 decrease in AM:PM and Arbiter maintenance renewals. For the three month
period ended September 30, 2000, Asset Insight maintenance contract revenue was
$1.1 million compared to $777,000 in 1999. For the nine month period ended
September 30, 2000, maintenance contract revenue was $4.3 million compared to
$4.5 million in 1999. Asset Insight maintenance contract revenue increased 55%,
or $1.0 million, for the nine months ended September 30, 2000 to $2.8 million
from $1.8 million in 1999 offset by a decrease of $1.2 million in AM:PM and
Arbiter maintenance renewals. As noted above, we expect this trend to continue.
Asset Insight services revenue decreased to $87,000 in the third quarter of 2000
from $332,000 in the same period of 1999. For the nine months ended September
30, 2000 and 1999, respectively, Asset Insight services revenue decreased 28% to
$814,000 from $1.1 million. The decline in Asset Insight services revenue is
directly correlated to the decline in the first two quarters of 2000 in Asset
Insight licenses and products revenue.
Cost of Revenue
Cost of licenses and products includes costs related to the distribution of
licensed software and hardware products and the amortization of capitalized
software development costs. A significant component of cost of licenses and
products is attributable to the amortization of deferred development costs,
which is generally fixed in nature. The cost of licenses and products as a
percentage of licenses and products revenue remained at 18% for the three month
periods ended September 30, 2000 and 1999. Cost of licenses and products
decreased 13% in the three month period ended September 30, 2000 to $455,000
from $524,000 for the same period in 1999. Amortization of software development
costs for the three month periods ended September 30, 2000 and 1999 was $438,000
and $462,000, respectively. For the nine month period ended September 30, 2000,
the cost of licenses and products as a percentage of licenses and products
revenue increased to 32% from 22% in the same period of 1999. In absolute
dollars, costs of licenses and products for the nine months ended September 30,
2000 decreased 29% to $1.4 million from $2.0 million in 1999 principally because
in the first quarter of 1999, costs of licenses and products reflects $500,000
for the purchase and bundling of a third-party software product that integrates
with Asset Insight. Amortization for the nine months ended September 30, 2000
and 1999, remained at $1.4 million.
Cost of services reflects the cost of the direct labor force, including the
associated personnel, travel and subsistence, and occupancy costs incurred in
connection with providing consulting and maintenance services. As a percentage
of services revenue, cost of services increased to 31% for the three months
ended September 30, 2000 from 29% for the comparable period in 1999. Cost of
services for the quarter decreased to $507,000 in 2000 from $538,000 in 1999. In
absolute dollars, cost of services as a percentage of services revenue for the
nine months ended September 30, 2000 and 1999 was 33% and 30% for the respective
periods. Cost of services for the nine months ended September 30, 2000 and 1999
remained the same at $1.7 million. The overall increase in cost of services as a
percentage of services revenue is primarily a result of the higher percentage
use in 2000 of consultants who are subcontractors of the Company which generally
cost significantly more than the consultants employed by the Company.
Sales and Marketing
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. Sales and marketing
expenses decreased 4% to $1.8 million for the three month period ended September
30, 2000 from $1.9 million for the comparable period in 1999. For the nine
months ended September 30, 2000, sales and marketing expenses decreased to $5.1
million from $5.9 million for the same period in 1999, representing an 13%
decrease. Sales and marketing expenses increased as a percentage of revenue for
the three and nine months ended September 30, 2000 to 42% and 54%, respectively,
from 38% and 40% in 1999, principally resulting from lower revenues realized in
the three and nine months ended September 30, 2000. The reduction in absolute
dollars in 2000 is directly attributable to lower sales commission, marketing
costs and related sales travel as a result of the overall decline in sales
revenue. Competition for highly skilled sales and marketing personnel is
increasingly
12
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intense. Accordingly, the Company has experienced increased market pressure
related to hiring and retaining qualified personnel, resulting in undesirable
turnover in the sales organization and increased staffing cost. Furthermore, the
Company expects this trend of increased market pressure and rising compensation
costs to continue.
General and Administrative
General and administrative expenses consist principally of salaries and
benefit costs for administrative personnel, general operating costs, legal,
accounting and other professional services. General and administrative expenses
decreased to $648,000 for the three month period ended September 30, 2000 from
$820,000 for the same period in 1999. For the nine months ended September 30,
2000, general and administrative expenses increased 72% to $2.6 million from
$1.5 million for the comparable period in 1999. In May 1999, the Company and a
customer reached an amicable resolution to a collection dispute that resulted in
the recovery of $925,000 of an outstanding receivable, which is reflected in the
1999 statement of operations as a reduction to general and administrative
expenses. Excluding this recovery, general and administrative expenses increased
7% for the nine months ended September 30, 2000 when compared to 1999. The
increase in the nine month numbers reflects consultant fees and business costs
associated with the Company's initiative in 2000 to investigate, formalize and
pursue a new business strategy. The Company does not anticipate that it will
incur additional costs associated with this initiative.
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 in the third quarter of
2000 and 1999 remained relatively constant at $1.4 million. Comparing the nine
months ended September 30, 2000 and 1999, gross research and development costs
decreased 9% to $4.0 million from $4.4 million, respectively. The decrease in
cost for the nine months ended September 30, 2000 can be attributable to lower
staffing levels and personnel related costs when compared to the same periods in
1999. Net research and development expenses decreased 2% to $865,000 in the
third quarter of 2000 from $847,000 in 1999. Net research and development
expenses for the nine months ended September 30, 2000 and 1999, respectively,
decreased 9% to $2.5 million from $2.7 million. Deferred development costs were
$513,000 and $514,000 in the third quarter of 2000 and 1999, respectively.
Deferred development costs for the nine months ended September 30, 2000 were
$1.5 million and $1.7 million in 1999. As a percentage of gross research and
development expenditures, deferred development costs were 37% and 38% in the
third quarter of 2000 and 1999, respectively. Deferred development costs as a
percentage of gross research and development expenditures remained constant at
38% for the nine month periods ending September 30, 2000 and 1999. As a result
of rapid technological change in the industry, our position in existing markets
can be eroded rapidly by product advances. The life cycles of our products are
difficult to estimate. Our growth and future financial performance depend in
part upon our ability to improve existing products and develop and introduce new
products that keep pace with technological advances, meet changing customer
needs, and respond to competitive products. As such, the Company will continue
to commit substantial resources to research and development efforts in the
future.
Provision for Income Taxes
There was no provision for income taxes for the three and nine months ended
September 30, 2000 due to a net loss in the first half of 2000 and the result of
the net operating loss carryforwards available.
Net (Loss) Earnings
The Company recorded net losses of $92,000, or ($0.01) per share, and $3.9
million, or ($0.24) per share, in the three and nine month periods ended
September 30, 2000, respectively, compared to net earnings of $200,000, or $0.01
per share (diluted), and $714,000, or $0.04 per share (diluted), in the
comparable period of 1999. The net loss in 2000 is the result primarily of the
revenue decline and incremental cost associated with the Company's business
strategy initiative, as noted above, mitigated in part by cost control measures
employed by the Company.
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Impact of Recently Issued Accounting Standards
In October 1997, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 97-2 Software Revenue Recognition, as amended
in March 1998 by SOP 98-4 and October 1998 by SOP 98-9. These SOPs provide
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. The Company adopted SOP 97-2 for software
transactions entered into beginning January 1, 1998. Based on the current
requirements of the SOPs, application of these statements did not have a
material impact on the Company's revenue recognition policies. However, AcSEC is
currently reviewing further modifications to the SOP with the objective of
providing more definitive, detailed implementation guidelines. This guidance
could lead to unanticipated changes in the Company's operational and revenue
recognition practices. Such changes may have a material adverse effect on the
Company's reported revenue, increase administrative costs, or otherwise
adversely modify existing operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101, as
amended, is effective no later than the third calendar quarter of fiscal 2001.
The Company is in the process of evaluating the potential impact of SAB No. 101,
but anticipates that the impact to the Company's financial statements, if any,
will be insignificant.
The Company does not expect the adoption of other recently issued
accounting pronouncements to have a significant impact on our results of
operations, financial position or cash flows.
Liquidity and Capital Resources
The Company currently has 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 November 11, 2000, borrowings under the line of credit
with Safeguard are $3.4 million. Although in the past the Company has funded its
operations through borrowings and cash generated from operations, the recent
trend of declining revenue quarter to quarter may require the Company to seek
other sources of capital.
The decline in revenue and increased net losses have resulted in the
Company using $1.7 million in cash from operating activities compared to $2.3
million in cash provided from operating activities in 1999. This decline was
offset in part by improved collection efforts and a decrease in other working
capital items since the beginning of the year.
Net cash used in investing activities for the first quarter of 2000 and
1999 consisted primarily of the investment associated with the Company's ongoing
commitment to developing enhancements and improvements of the Asset Insight
product. Net cash provided by financing activities in the first half of 2000
consisted primarily of borrowings under the Safeguard line of credit used to
fund the Company's operations and proceeds provided from the exercise of stock
options.
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
$2.6 million is available for future borrowings as of November 11, 2000.
Although operating activities may provide cash in certain periods, the Company
anticipates that its operating and investing activities may use additional cash.
Consequently, operations 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.
Year 2000 Disclosure
The Company has assessed its computer systems for year 2000 readiness, and
replaced all systems and software it found to be not compliant. These
replacements were generally part of a regular upgrade program. In addition, the
Company has tested all of its systems and software and has obtained
verifications from its vendors that the systems they supplied are year 2000
ready. The Company has not incurred any material extraordinary expense in
connection with its year 2000 program. The Company believes that any year 2000
problem is unlikely to arise in the future, and that if any problem does arise,
it will be able to fix the problem quickly and without material expenses.
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To date, the Company has not experienced any disruptions of operations due
to year 2000 problems, nor has it received notice from any of its customers
about problems resulting from non-year 2000 compliant software.
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 September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tangram Enterprise Solutions, Inc.
---------------------------------
Date November 13, 2000 /s/ John N. Nelli
----------------- --------------------------------------------------
John N. Nelli
Senior Vice President and Chief Financial Officer
(Principal Financial & Accounting Officer)
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EXHIBIT INDEX
The following exhibits were filed with the Company's Current Report on Form
10-Q, dated September 30, 2000.
Exhibit
Number Exhibit Description
------ -------------------
27* Financial Data Schedule
* Filed herewith
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