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, 2000
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 (CHECK MARK) No
-------------- ---------
The number of outstanding shares of Common Stock, $0.01 par value per
share, as of May 15, 2000 was 16,234,279.
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS:
<S> <C>
Balance Sheets - March 31, 2000 (Unaudited) and December 31, 1999....................................3
Statements of Operations - Three Months Ended
March 31, 2000 and 1999 (Unaudited)..............................................................4
Statements of Cash Flows - Three Months Ended
March 31, 2000 and 1999 (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...............................................................12
Signatures..............................................................................................13
</TABLE>
2
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
-----------------------------------------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 12 $ 445
Accounts receivable, net of allowance of $361 and $509 in
2000 and 1999 3,366 5,148
Notes receivable - officers - 496
Other 396 203
-----------------------------------------
Total current assets 3,774 6,292
PROPERTY AND EQUIPMENT:
Computer equipment and software 733 715
Office equipment and furniture 120 118
Leasehold improvements 88 88
-----------------------------------------
941 921
Less accumulated depreciation and amortization (707) (670)
-----------------------------------------
Total property and equipment 234 251
OTHER ASSETS:
Deferred software costs, net 2,894 2,894
Cost in excess of net assets of business acquired, net 2,724 2,911
Other 40 40
-----------------------------------------
Total other assets 5,658 5,845
-----------------------------------------
TOTAL ASSETS $ 9,666 $ 12,388
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 372 $ 371
Accrued expenses 1,242 1,030
Deferred revenue 3,047 3,371
-----------------------------------------
Total current liabilities 4,661 4,772
LONG-TERM DEBT - SHAREHOLDER 500 1,623
OTHER LIABILITIES 408 428
SHAREHOLDERS' EQUITY:
Common stock, par value $0.01, authorized 48,000,000 shares,
16,181,791 issued and 16,171,683 outstanding in 2000 and
15,922,238 issued and outstanding in 1999 161 159
Additional paid-in capital 44,583 44,622
Accumulated deficit (40,550) (39,216)
Treasury stock, at cost, 10,108 shares in 2000 (97) -
-----------------------------------------
Total shareholders' equity 4,097 5,565
-----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,666 $ 12,388
=========================================
</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
2000 1999
---------------------------------------
(UNAUDITED)
REVENUE:
<S> <C> <C>
Licenses and products $ 1,395 $ 4,175
Services 1,716 1,727
---------------------------------------
Total revenue 3,111 5,902
COST OF REVENUE:
Cost of licenses and products 519 1,046
Cost of services 557 579
---------------------------------------
Total cost of revenue 1,076 1,625
---------------------------------------
GROSS PROFIT 2,035 4,277
OPERATING EXPENSES:
Sales and marketing 1,585 1,948
General and administrative 976 877
Research and development 802 1,052
---------------------------------------
Total operating expenses 3,364 3,877
---------------------------------------
(LOSS) INCOME FROM OPERATIONS (1,329) 400
Other expense, net (5) (46)
---------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (1,334) 354
Provision for income taxes - -
---------------------------------------
NET (LOSS) INCOME $ (1,334) $ 354
=======================================
(LOSS) EARNINGS PER COMMON SHARE:
Basic $ (0.08) $ 0.02
=======================================
Diluted $ (0.08) $ 0.02
=======================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 16,108 15,787
=======================================
Diluted 16,108 16,876
=======================================
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
2000 1999
---------------------------------------
(UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income $ (1,334) $ 354
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation 38 57
Amortization 701 665
Other 56 94
Cash provided by changes in working capital items:
Accounts receivable and other current assets 1,513 (23)
Accounts payable 1 86
Accrued expenses 212 (140)
Deferred revenue (324) (550)
---------------------------------------
Net cash provided by operating activities 863 543
INVESTING ACTIVITIES
Deferred software costs (514) (492)
Expenditures for property and equipment (21) (48)
Increase (decrease) in other assets - -
---------------------------------------
Net cash used in investing activities (535) (540)
FINANCING ACTIVITIES
Net repayments on borrowings from shareholder (1,123) (116)
Proceeds from exercise of stock options 362 10
---------------------------------------
Net cash used in financing activities (761) (106)
---------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (433) (103)
Cash and cash equivalents, beginning of period 445 245
---------------------------------------
Cash and cash equivalents, end of period $ 12 $ 142
=======================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 12 $ 114
=======================================
</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, 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-month period ended March 31, 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.
6
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC
NOTES TO THE FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. RESEARCH AND DEVELOPMENT COSTS (CONTINUED)
Research and development costs are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
2000 1999
-------------------------------
<S> <C> <C>
Research and development costs incurred $ 1,316 $ 1,544
Less - capitalized software development costs (514) (492)
-------------------------------
Research and development costs, net $ 802 $ 1,052
===============================
</TABLE>
Included in cost of revenues is amortization of software development costs
of $514,000 and $478,000 for the three months ended March 31, 2000 and 1999,
respectively.
NOTE 3. LONG-TERM DEBT - SHAREHOLDER
The Company has a $6 million unsecured revolving line of credit with
Safeguard Scientifics, Inc. ("Safeguard"), a majority shareholder of the
Company, holding approximately 67% of the Company's outstanding shares. 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 15,
2000, borrowings under the line of credit with Safeguard are $800,000.
NOTE 4. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2000 and 1999, the Company incurred
administrative service fees to Safeguard totaling approximately $30,000 and
$88,000, respectively. The Company also incurred $11,000 and $72,000 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.
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.
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"
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.
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
financial results of the Company hereafter reflect the Company's growing
dependence on revenue generated by sales of Asset Insight. As a result, various
risks and uncertainties relating to the development of the asset tracking
business may cause the Company's actual results to differ materially from the
results contemplated. Such uncertainties include the ability of the Company to
sell its Asset Insight product to major accounts with full enterprise-wide
deployment; the possibility of the introduction of superior competitive
products; the ability of the Company to develop a sustainable stream of 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. In addition, the Company has and may
continue to encounter through the first half of 2000 potential customers that
are unwilling to purchase any additional software for their enterprise as a
result of Year 2000 initiatives. If a significant number of the Company's future
and potential prospects defer software purchases for their IT enterprise because
of Year 2000 issues, this may have an adverse effect on the Company's 2000
revenue. 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 factors, 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
8
<PAGE>
fluctuations in the timing and amounts of additional operating expenses may also
cause profitability to fluctuate from one quarter to another.
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 67% for the three month period ended March 31, 2000 to $1.4 million
from $4.2 million in 1999. Asset Insight licenses and products revenue
contributed $655,000, or 47% of total licenses and products revenue in the first
quarter of 2000 and $3.8 million, or 91% in the same period in 1999. The overall
decrease in the first quarter of 2000 was the result primarily of a decrease in
Asset Insight product sales associated with a continuation of Year 2000 (Y2K)
budget freezes. While the effects of Y2K appear to be lessening, the market is
taking longer to reinvigorate itself than expected. Revenue from AM:PM and
traditional mainframe products increased to $741,000 in the first quarter of
2000 from $384,000 in the comparable period of 1999. The Company's focus will
continue to be towards the Asset Insight product line, and as such, we
anticipate the previous year's 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.
Services revenue includes software and hardware maintenance contracts,
expert Asset Insight services, and training and support services not otherwise
covered under maintenance agreements. Services revenue remained flat at $1.7
million for the three month period ended March 31, 2000 and 1999. Asset Insight
services revenue decreased to $335,000 in the first quarter of 2000 from
$366,000 in the same period of 1999. Annual maintenance contract revenue from
the sale of the Asset Insight product line increased to $822,000 in the first
quarter of 2000 from $501,000 in the comparable period of 1999 offset by a
decrease of $304,000 in AM:PM and Arbiter maintenance renewals. As the Company
continues to focus its business on the asset tracking market and away from
automated software distribution and the traditional mainframe product lines, we
expect this trend to continue.
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. As the result of the overall decline in
sales revenue, the cost of licenses and products as a percentage of licenses and
products revenue increased to 37% for the three month period ended March 31,
2000 from 25% in the same period of 1999. In absolute dollars, cost of licenses
and products decreased 50% in the three month period ended March 31, 2000 to
$519,000 from $1.0 million for the same period in 1999. Amortization of software
development costs for the three month period ended March 31, 2000 and 1999 was
$514,000 and $478,000, respectively. Cost of licenses and products in the first
quarter of 1999 reflects $500,000 for the purchase and bundling of a third party
software product that integrate with Asset Insight.
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. Cost of services
in absolute dollars and as a percentage of services revenue for the three month
period ended March 31, 2000 and 1999 remained relatively the same.
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 19% to $1.6 million for the three month period ended March
31, 2000 from $1.9 million for the same period in 1999. As a percentage of
revenue, sales and marketing expenses were 51% and 33% in the first quarter of
2000 and 1999, respectively. The reduction in absolute dollars and change as a
percentage of revenue in 2000 is directly attributable to lower sales
commissions paid as the result of the overall decline in sales revenue.
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
increased 11% for the three month period ended March 31 2000 to $976,000 from
$877,000 for the same period in 1999. This increase reflects
9
<PAGE>
consultant fees and business costs associated with the Company's initiative to
investigate, formalize and pursue a new e-business strategy. The Company
anticipates that it will incur additional costs associated with this initiative
over the next two quarters. As a percentage of total revenue, general and
administrative expenses increased to 31% for the three month period ended March
31, 2000 from 15% for the same period of 1999 due in part to the increased
spending level explained above and the overall decline in sales revenue.
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 decreased 15% in the first
quarter of 2000 to $1.3 million from $1.5 million in the same period of 1999.
Net research and development expenses decreased 24% to $802,000 in the first
quarter of 2000 from $1.1 million in 1999. Deferred development costs were
$514,000 and $491,000 in the first quarter of 2000 and 1999, respectively. As a
percentage of gross research and development expenditures, deferred development
costs were 39% and 32% in the first quarter of 2000 and 1999, respectively. 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 months ended March
31, 2000 and 1999, respectively, due to a net loss in the first quarter of 2000
and the result of the net operating loss carryforwards available for the first
quarter of 1999.
NET (LOSS) EARNINGS
The Company recorded a net loss of $1.3 million, or $0.08 per share, in the
three month period ended March 31, 2000 compared to net earnings of $354,000, or
$0.02 per share (diluted), in the comparable period of 1999. The first quarter
2000 net loss is the result primarily of the revenue decline and incremental
cost associated with the Company's e-business strategy initiative, as noted
above, mitigated in part by cost control measures employed by the Company.
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.
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.
10
<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 business 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 15, 2000, borrowings under the line of credit with Safeguard are $800,000.
Net cash provided by operating activities consisted primarily of non-cash
expenses offset by the net change in working capital items. The increase in net
cash provided by operating activities in the first quarter of 2000 was primarily
due to a lower accounts receivable balance at March 31, 2000 offset by a
decrease in other working capital items when compared to the same period in
1999. The lower accounts receivable balance is primarily attributable to
improved collection efforts and lower revenue in the first quarter of 2000.
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. The reduction in net cash used in investing activities from the first
quarter of 1999 to the comparable period in 2000 was primarily due to the
repayment on notes receivable due from officers on January 10, 2000 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 that day's average
high and low prices.
Net cash used in financing activities in the first quarter of 2000 and 1999
consisted primarily of repayments on borrowings under the Safeguard line of
credit used to fund the Company's operations.
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
$5.2 million is available for future borrowings as of May 15, 2000. Although
operating activities may provide cash in certain periods, 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.
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.
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.
11
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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, 2000.
12
<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 15, 2000 /s/ John N. Nelli
------------ -----------------
John N. Nelli
Senior Vice President and Chief Financial Officer
(Principal Financial & Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
The following exhibits were filed with the Company's Current Report on Form
10-Q, dated March 31, 2000.
Exhibit
Number Exhibit Description
------ -------------------
27* Financial Data Schedule
* Filed herewith
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 12
<SECURITIES> 0
<RECEIVABLES> 3,727
<ALLOWANCES> (361)
<INVENTORY> 93
<CURRENT-ASSETS> 3,774
<PP&E> 941
<DEPRECIATION> (707)
<TOTAL-ASSETS> 9,666
<CURRENT-LIABILITIES> 4,661
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 3,936
<TOTAL-LIABILITY-AND-EQUITY> 9,666
<SALES> 1,395
<TOTAL-REVENUES> 3,111
<CGS> (519)
<TOTAL-COSTS> 2,661
<OTHER-EXPENSES> 1,778
<LOSS-PROVISION> 76
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (1,334)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,334)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
