UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 11, 2000 was 16,442,249
<PAGE>
TANGRAM ENTERPRISE SOLUTIONS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999............3
Statements of Operations - Three Months Ended
June 30, 2000 and 1999 (Unaudited)......................................4
Statements of Operations - Six Months Ended
June 30, 2000 and 1999 (Unaudited)......................................5
Statements of Cash Flows - Six Months Ended
June 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.........................................9
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K...................................15
Signatures..................................................................16
2
<PAGE>
Tangram Enterprise Solutions, Inc.
Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
-----------------------------------------
<S> <C> <C>
Assets (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 334 $ 445
Accounts receivable, net of allowance of $603 and $509 in
2000 and 1999 2,700 5,148
Notes receivable - officers - 496
Other 396 203
-----------------------------------------
Total current assets 3,430 6,292
Property and equipment:
Computer equipment and software 805 715
Office equipment and furniture 123 118
Leasehold improvements 93 88
-----------------------------------------
1,021 921
Less accumulated depreciation and amortization (751) (670)
-----------------------------------------
Total property and equipment 270 251
Other assets:
Deferred software costs, net 2,930 2,894
Cost in excess of net assets of business acquired, net 2,537 2,911
Other 40 40
-----------------------------------------
Total other assets 5,507 5,845
-----------------------------------------
Total assets $ 9,207 $ 12,388
=========================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 256 $ 371
Accrued expenses 1,265 1,030
Deferred revenue 3,296 3,371
-----------------------------------------
Total current liabilities 4,817 4,772
Long-term debt - shareholder 2,125 1,623
Other liabilities 370 428
Shareholders' equity:
Common stock, par value $0.01, authorized 48,000,000 shares, 16,369,949
issued and outstanding in 2000 and 15,922,238 issued
and outstanding in 1999 163 159
Additional paid-in capital 44,787 44,622
Accumulated deficit (43,054) (39,216)
-----------------------------------------
Total shareholders' equity 1,895 5,565
-----------------------------------------
Total liabilities and shareholders' equity $ 9,207 $ 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 June 30
2000 1999
---------------------------------------
(unaudited)
<S> <C> <C>
Revenue:
Licenses and products $ 483 $ 1,948
Services 1,699 2,055
---------------------------------------
Total revenue 2,182 4,003
Cost of revenue:
Cost of licenses and products 473 461
Cost of services 625 570
---------------------------------------
Total cost of revenue 1,098 1,031
---------------------------------------
Gross profit 1,084 2,972
Operating expenses:
Sales and marketing 1,759 2,113
General and administrative 990 (179)
Research and development 814 827
---------------------------------------
Total operating expenses 3,563 2,761
---------------------------------------
(Loss) income from operations (2,479) 211
Other expense, net (25) (45)
---------------------------------------
(Loss) income before income taxes (2,504) 166
Provision for income taxes - 6
---------------------------------------
Net (loss) income $ (2,504) $ 160
=======================================
(Loss) earnings per common share:
Basic and diluted $ ( 0.15) $ 0.01
=======================================
Weighted average number of common shares outstanding:
Basic 16,248 15,794
=======================================
Diluted 16,248 16,825
=======================================
</TABLE>
See accompanying notes.
4
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended June 30
2000 1999
---------------------------------------
(unaudited)
<S> <C> <C>
Revenue:
Licenses and products $ 1,878 $ 6,123
Services 3,416 3,782
---------------------------------------
Total revenue 5,293 9,905
Cost of revenue:
Cost of licenses and products 992 1,507
Cost of services 1,182 1,149
---------------------------------------
Total cost of revenue 2,174 2,656
---------------------------------------
Gross profit 3,119 7,249
Operating expenses:
Sales and marketing 3,344 4,061
General and administrative 1,967 698
Research and development 1,616 1,879
---------------------------------------
Total operating expenses 6,927 6,638
---------------------------------------
(Loss) income from operations (3,808) 611
Other expense, net (30) (91)
---------------------------------------
(Loss) income before income taxes (3,838) 520
Provision for income taxes - 6
---------------------------------------
Net (loss) income $ (3,838) $ 514
=======================================
(Loss) earnings per common share:
Basic and diluted $ (0.24) $ 0.03
=======================================
Weighted average number of common shares outstanding:
Basic 16,179 15,790
=======================================
Diluted 16,179 16,852
=======================================
</TABLE>
See accompanying notes.
5
<PAGE>
Tangram Enterprise Solutions, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30
2000 1999
---------------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net (loss) income $ (3,838) $ 514
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation 81 109
Amortization 1,326 1,292
Other 214 (947)
Cash provided by changes in working capital items:
Accounts receivable and other current assets 1,983 2,379
Accounts payable (115) (189)
Accrued expenses 235 (330)
Deferred revenue (75) (927)
---------------------------------------
Net cash (used in) provided by operating activities (189) 1,901
Investing activities
Deferred software costs (988) (1,137)
Expenditures for property and equipment (100) (111)
Sale-leaseback of equipment and furniture - 106
---------------------------------------
Net cash used in investing activities (1,088) (1,142)
Financing activities
Net borrowings (repayments) on borrowings from shareholder 502 (765)
Proceeds from exercise of stock options 664 29
---------------------------------------
Net cash provided by (used in) financing activities 1,166 (736)
---------------------------------------
Net decrease in cash and cash equivalents (111) 23
Cash and cash equivalents, beginning of period 445 245
---------------------------------------
Cash and cash equivalents, end of period $ 334 $ 268
=======================================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 163 $ 162
=======================================
</TABLE>
See accompanying notes.
6
<PAGE>
Tangram Enterprise Solutions, Inc
Notes to the Financial Statements
(Unaudited)
Note 1. Basis of Presentation
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation of the statements have been included. The interim operating results
are not necessarily indicative of the results that may be expected for a full
fiscal year. For further information, refer to the financial statements and
accompanying footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 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.
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 second 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.
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
six month periods ended June 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
<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 June 30 Six months ended June 30
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Research and development costs incurred $ 1,288 $ 1,472 $ 2,604 $ 3,016
Less - capitalized software development costs (474) (645) (988) (1,137)
------------- ------------- ------------- --------------
Research and development costs, net $ 814 $ 827 $ 1,616 $ 1,879
============= ============= ============= ==============
</TABLE>
Included in cost of revenues is amortization of software development costs
of $438,000 and $441,000 for the three months ended June 30, 2000 and 1999,
respectively. Amortization of software development costs for the six months
ended June 30, 2000 and 1999 was $953,000 and $919,000, 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 August 11,
2000, borrowings under the line of credit with Safeguard are $2.8 million.
Note 4. Related Party Transactions
During the six months ended June 30, 2000 and 1999, the Company incurred
administrative service fees to Safeguard totaling approximately $71,000 and
$119,000, respectively. The Company also incurred $40,000 and $144,000 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains "forward-looking statements"
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.
The Company is currently evaluating its products and corporate strategy,
including the Company's initiative to investigate, formalize and pursue a new
e-business strategy, and is likely to undertake organizational changes and
product and marketing strategy modifications. Recent declines in Asset Insight
sales 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 a new business strategy. Therefore,
there can be no assurance that these efforts will be successful.
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 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
9
<PAGE>
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 encountered
through the first half of 2000 potential customers that were 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 continue to 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 fluctuations in the
timing and amounts of additional operating expenses may also cause profitability
to fluctuate from one quarter to another.
The Company 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, 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 75% for the three month period ended June 30, 2000 to $483,000 from
$1.9 million in 1999. Licenses and products revenue decreased 69% for the six
month period ended June 30, 2000 to $1.9 million from $6.1 million in 1999.
Asset Insight licenses and products revenue contributed $461,000, or 95% of
total licenses and products revenue in the second quarter of 2000 and $1.5
million, or 78% in the same period in 1999. Asset Insight licenses and products
revenue decreased 76% for the six month period ended June 30, 2000 to $1.1
million from $4.7 million in 1999. The decline 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 appear to be lessening, the
market is taking longer to recover than expected. Revenue from AM:PM and
traditional mainframe products decreased to $22,000 in the second quarter of
2000 from $432,000 in the comparable period of 1999. Revenue from AM:PM and
traditional mainframe products decreased to $763,000 during the six months ended
June 30, 2000 from $1.4 million 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 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,
Asset Insight implementation services, and training and support services not
otherwise covered under maintenance agreements. Total services revenue for the
second quarter decreased 17% to $1.7 million in 2000 from $2.1 million in 1999.
For the six months ended June 30, 2000 and 1999, respectively, services revenue
decreased 10% to $3.4 million from $3.8 million. Maintenance contract revenue
for the three month period ended June 30, 2000 was $1.3 million compared to $1.6
million in 1999. The overall decrease was the result of a $596,000 decrease in
AM:PM and Arbiter maintenance renewals offset in part by a $323,000 increase in
Asset Insight maintenance contract revenue. For the three month period ended
June 30, 2000 Asset Insight maintenance contract revenue
10
<PAGE>
was $835,000 compared to $512,000 in 1999. Maintenance contract revenue
for the six month period ended June 30, 2000 was $2.7 million compared to $2.9
million in 1999. Asset Insight maintenance contract revenue increased 63%, or
$644,000, for the six months ended June 30, 2000 to $1.7 million from $1.0
million in 1999 offset by a decrease of $900,000 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. Asset
Insight services revenue decreased to $385,000 in the first quarter of 2000 from
$460,000 in the same period of 1999. For the six months ended June 30, 2000 and
1999, respectively, Asset Insight services revenue decreased 11% to $726,000
from $816,000. The decline in Asset Insight services revenue is directly
correlated to the decline in 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 total revenue increased to 22% for the three month period ended
June 30, 2000 from 12% in the same period of 1999 primarily the result of lower
revenues. In absolute dollars, cost of licenses and products increased 3% in the
three month period ended June 30, 2000 to $473,000 from $461,000 for the same
period in 1999. Amortization of software development costs for the three month
period ended June 30, 2000 and 1999 was $438,000 and $441,000, respectively. The
cost of licenses and products as a percentage of total revenue increased to 19%
for the six month period ended June 30, 2000 from 15% in the same period of
1999. In absolute dollars, costs of licenses and products for the six months
ended June 30, 2000 decreased 34% to $992,000 from $1.5 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. For the six months ended June 30,
2000 and 1999, respectively, amortization of software development costs was
$953,000 and $919,000.
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 29% for the three months
ended June 30, 2000 from 14% for the comparable period in 1999. Cost of services
for the quarter increased to $625,000 in 2000 from $570,000 in 1999. The overall
increase in cost of services is primarily a result of the higher use in 2000 of
consultants who are subcontractors of the Company which generally cost
significantly more than the consultants employed by the Company. Cost of
services as a percentage of services revenue for the six months ended June 30,
2000 and 1999 was 22% and 12% for the respective periods. Cost of services for
the six months ended June 30, 2000 increased to $1.2 million from $1.1 million
for the comparable period in 1999.
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 17% to $1.8 million for the three month period ended June 30,
2000 from $2.1 million for the comparable period in 1999. For the six months
ended June 30, 2000, sales and marketing expenses decreased to $3.3 million from
$4.1 million for the same period in 1999, representing an 18% decrease. Sales
and marketing expenses increased as a percentage of revenue for the three and
six months ended June 30, 2000 to 81% and 63%, respectively, from 53% and 41% in
1999, principally resulting from lower revenues realized in the three and six
months ended June 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 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
increased to $990,000 for the three month period ended June 30, 2000 from
($179,000) for the same period in 1999. For the six months ended June 30, 2000,
general and administrative expenses increased to $2.0 million from $698,000 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 33% and 21% for the
three
11
<PAGE>
and six months ended June 30, 2000 when compared to 1999. In June 2000,
the Company took a charge to operations of $155,000 to reflect the risk
associated with the collectibility of an accounts receivable balance from an
international channel partner who filed for Chapter 11 protection and has stated
that it does not intend to continue to maintain operations. Additionally, the
increase reflects 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.
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 13% in the second
quarter of 2000 to $1.3 million from $1.5 million in the same period of 1999.
Comparing the six months ended June 30, 2000 and 1999, gross research and
development costs decreased 14% to $2.6 million from $3.0 million, respectively.
The decrease in cost for the three and six months ended June 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 $814,000 in the second quarter of 2000 from $827,000 in 1999. Net research
and development expenses for the six months ended June 30, 2000 and 1999,
respectively, decreased 14% to $1.6 million from $1.9 million. Deferred
development costs were $474,000 and $646,000 in the second quarter of 2000 and
1999, respectively. Deferred development costs for the six months ended June 30,
2000 were $988,000 and $1.1 million in 1999. As a percentage of gross research
and development expenditures, deferred development costs were 37% and 44% in the
second quarter of 2000 and 1999, respectively. Deferred development costs as a
percentage of gross research and development expenditures remained constant at
38% for the six month periods ending June 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 six months ended
June 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 $2.5 million, or ($0.15) per share, and
$3.8 million, or ($0.24) per share, in the three and six month periods ended
June 30, 2000, respectively, compared to net earnings of $160,000, or $0.01 per
share (diluted), and $514,000, or $0.03 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 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.
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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 second 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 August 11, 2000, borrowings under the line of credit with
Safeguard are $2.8 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.
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 half 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. 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
$3.2 million is available for future borrowings as of August 11, 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.
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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 June 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 August 11, 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 June 30, 2000.
Exhibit
Number Exhibit Description
------ -------------------
27* Financial Data Schedule
* Filed herewith
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