<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
[ ] 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: 0-18034
ENTERPRISE SOFTWARE, INC
(FORMERLY INDENET, INC.)
(Exact name of registrant as specified in charter)
Delaware 68-0158367
- -------------------------------------------------------------------------------
(State or other jurisdiction IRS Employer
of incorporation) Identification No.)
38705 Seven Mile Road, Suite 435, Livonia, MI 48152-1056
(Address of principal executive office)
- -------------------------------------------------------------------------------
Registrant's telephone number, including area code: (248) 380-6070
- -------------------------------------------------------------------------------
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
filing requirements for the past 90 days.
Yes X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,513,012 Shares of Common
Stock, Par Value $.001 as of July 30, 1998.
<PAGE> 2
ENTERPRISE SOFTWARE, INC.
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Page
No.
Consolidated Condensed Balance Sheets --
June 30, 1998 and March 31, 1998............................. 1
Consolidated Condensed Statements of Operations -Three
Months Ended June 30, 1998 and 1997.......................... 3
Consolidated Condensed Statements of Changes in Stockholders'
Equity -- Three-months Ended June 30, 1998................... 4
Consolidated Condensed Statements of Cash Flows --
Three-months Ended June 30, 1998 and 1997.................... 5
Notes to Consolidated Condensed Financial Statements......... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................................... 9
PART II. OTHER INFORMATION............................................. 12
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------------ -------------
(Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,715,862 $ 6,169,383
Accounts and other receivables, net 4,488,560 4,142,186
Notes receivable, current portion 746,809 745,213
Marketable securities, at fair market value 1,135,000 1,135,000
Prepaid expenses 818,694 570,910
------------- -------------
Total current assets 9,904,925 12,762,692
Property and equipment, less accumulated depreciation and
amortization 3,092,166 3,142,661
Notes receivable, net of current portion 2,906,706 3,011,892
Customer list, net 12,942,956 13,193,465
Goodwill, net 6,099,100 6,221,592
Other long-term assets 666,714 626,549
------------- -------------
TOTAL ASSETS $ 35,612,567 $ 38,958,851
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE> 4
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 4,855,660 $ 5,273,106
Deferred income 2,749,927 3,073,557
Notes payable, current portion 3,742,310 3,504,519
Notes payable to related parties,
current portion 780,253 779,637
Capital lease obligations, current
portion 792,367 785,475
------------ ------------
Total current liabilities 12,920,517 13,416,294
Notes payable, net of current portion 334,000 1,088,490
Notes payable to related parties, net
of current portion 8,830,019 8,976,384
Capital lease obligations, net of
current portion 1,417,654 1,400,312
Other long-term liabilities 179,680 183,432
------------ ------------
TOTAL LIABILITIES 23,681,870 25,064,912
Commitments and contingencies
Redeemable Preferred Stock:
Preferred stock, Series A, $.0001
par value
Authorized shares - 1,200 shares
issued and outstanding - 0 shares at
June 30, 1998 and 190 shares
at March 31, 1998 - 1
Stockholders' equity:
Common stock $.001 par value
Authorized - 25,000,000 shares
Issued and outstanding - 4,513,012
shares 18,052 18,052
Additional paid-in capital 41,312,280 43,412,279
Accumulated deficit (29,675,199) (29,873,798)
Accumulated other comprehensive income 275,564 337,405
------------ ------------
Total stockholders' equity 11,930,697 13,893,938
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,612,567 $ 38,958,851
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 5
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Revenue $ 7,502,286 $ 5,650,007
Cost of sales 2,932,583 2,668,352
----------- -----------
Cost of profit 4,569,703 2,981,655
Operating expenses:
Selling, general and administrative 2,660,174 2,003,860
Depreciation and amortization 662,715 482,380
Research and development 256,383 -
Corporate 380,358 353,922
----------- -----------
3,959,630 2,840,162
----------- -----------
Operating Income 610,073 141,493
Other income (expense):
Interest income 144,626 80,438
Interest expense (541,533) (327,030)
Non-recurring expenses - (860,288)
Miscellaneous, net (247) (99,184)
----------- -----------
(397,154) (1,206,064)
----------- -----------
Income/(loss) from continuing operations before income taxes 212,919 (1,064,571)
Income taxes 14,320 (2,200)
----------- -----------
Income/(loss) from continuing operations 198,599 (1,062,371)
Discontinued Operations
Loss from discontinued operations, net of taxes of $3,000 - (496,615)
----------- -----------
Net income/(loss) 198,599 (1,558,986)
Dividends to preferred shareholders - 205,800
----------- -----------
Net income/(loss) allocable to common shareholders $ 198,599 $(1,764,786)
=========== ===========
Basis and diluted earnings/(loss) per share:
Earnings/(loss) per share from continuing operations $ 0.04 $ (0.29)
=========== ===========
Earnings/(loss) per share from discontinuing operations $ - $ (0.12)
=========== ===========
Net income/(loss) per share $ 0.04 $ (0.41)
=========== ===========
Weighted average number of
common shares outstanding 4,513,012 4,295,266
=========== ===========
</TABLE>
All per share amounts has been adjusted for the 1 for 4 stock split, effective
on July 2, 1998.
See accompanying notes to consolidated financial statements
3
<PAGE> 6
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Foreign
--------------------------- Additional Currency
Number of Common Paid-in Accumulated Translation
Shares Stock Capital Deficit Adjustment Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1998 18,052,047 $ 18,052 $43,412,279 $(29,873,798) $ 337,405 $13,893,938
Redemption of Preferred
Stock, Series A - - (2,099,999) - - (2,099,999)
1 for 4 reverse stock split (13,539,035) - - - - -
Net Income - - - 198,599 - 198,599
Other comprehensive income,
net of tax, foreign currency
translation adjustment - - - - (61,841) (61,841)
---------- ----------- ----------- ------------ ---------- -----------
Balance at June 30, 1998
4,513,012 $ 18,052 $41,312,280 $(29,675,199) $ 275,564 $11,930,697
========== =========== =========== ============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 7
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<Caption)
For Three Months Ended June 30,
---------------------------------
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 198,599 $ (1,558,986)
Adjustments to reconcile net income/(loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 662,715 1,167,454
Non-cash writedown of assets 860,288
Amortization of Discount on note payable 48,051 -
Gain on sale of building and other property
and equipment 4,614 -
Realized/Unrealized loss on notes receivable
due to foreign exchange 9,387 69,915
Changes in operating assets and liabilities:
Restricted cash - 5,565
Accounts receivable (347,501) 290,077
Inventories - 8,578
Prepaid expenses (233,559) 400,906
Other assets (38,105) (114,256)
Accounts payable and accrued expenses (457,452) (852,046)
Deferred income (324,958) (7,318)
Other long-term liabilities (3,751) (56,298)
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (481,960) 213,879
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (66,529) (359,556)
Capitalized software development costs (81,249) (285,938)
Collection on notes receivable 111,702 76,989
Net proceeds from sale of building and other
property and equipment 32,979 -
Payments for purchase of Media Information Services - (1,444,809)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (3,097) (2,013,314)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable, line of credit, and
capitalized leases (4,036,728) (723,973)
Repayment of notes payable to shareholders (190,045) 1,757,822
Deferred financing costs (50,000) -
Proceeds from notes payable/Line Of Credit 3,408,310 -
Redemption of Series A preferred stock (2,100,000) -
Dividends on preferred stock - (19,500)
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,968,463) 1,014,349
----------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,453,520) (785,086)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 6,169,382 2,885,406
----------- ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 2,715,862 $ 2,100,320
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 8
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest 396,922 319,309
Income taxes 208,363 3,530
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the threee months ended June 30, 1998, the Company incurred capital
lease obligations of $337,283.
See accompanying notes to consolidated financial statements
6
<PAGE> 9
ENTERPRISE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements include the accounts
of Enterprise Software, Inc., plus the accounts of its subsidiaries
during the periods that such subsidiaries were owned by Enterprise
Software, Inc. The subsidiaries include its wholly-owned subsidiaries
of Mediatech (through its sale on July 18, 1997), Starcom (through its
sale on July 18, 1997), CCMS and Enterprise together with Enterprise's
subsidiary companies, (collectively "the Company"). The Company changed
its name from IndeNet, Inc. to Enterprise Software, Inc.
effective July 2, 1998.
In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments, consisting solely of adjustments of
a normal recurring nature, necessary to present fairly the financial
position, results of operations and cash flows for the periods
presented. These unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not contain all
the information and footnotes required in a complete set of financial
statements. These statements should be read in conjunction with the
Company's consolidated financial statements and footnotes thereto as of
March 31,1998 included in the Company's Form 10-KSB. The results of
operations for the three-month period ended June 30, 1998 are not
necessarily indicative of the results for the year ending March 31,
1999.
2. Net income/loss per share was determined by taking the sum of the net
profit/loss less preferred stock dividends divided by the weighted
average number of common shares outstanding. The impact of common share
equivalents on the determination of basic and diluted earnings per
share is not material for the three months ended June 30, 1998. All per
share amounts have been adjusted for the 1-for-4 stock split effective
on July 2, 1998.
3. In April 1998, the Company repurchased 190 remaining shares of its
Series A Preferred Stock "(Series A") for $2.1 million in cash. The
$2.1 million was comprised of stated value of $1.9 million, plus
$200,000 in accrued accretion.
4. Effective April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income for the Company is
comprised of the following:
Three Months Ended June 30,
1998 1997
------------------ ----------------
Net income(loss) $198,599 $(1,558,986)
Other comprehensive income,
Net of tax
Foreign currency translation (61,841) (43,559)
------------------ ----------------
Comprehensive income $ 136,758 $(1,602,545)
7
<PAGE> 10
5. On August 4, 1998, the Company announced that it signed a definitive
agreement to acquire Revive Technologies, Inc. Revive, a privately held
company based in Carnegie, Pennsylvania, is a leader in automated
software conversion from legacy systems to newer technologies. The
acquisition will be funded by the use the company's current credit line
arrangements and the issuance of approximately 893,500 shares of common
stock. It is anticipated that the acquisition will be completed during
the second fiscal quarter.
6. The following table sets forth the computation of basic and diluted
earnings per share:
1998 1997
----------------- ---------------
Income/(loss) from continuing operations $ 198,599 $(1,062,371)
Loss from discontinued operations (496,615)
-
----------------- ---------------
Net income/(loss) 198,599 (1,558,986)
Dividends to preferred shareholders 205,800
-
----------------- ---------------
Net income/(loss) allocable to common
shareholders $ 198,599 $(1,764,786)
Weighted average shares 4,513,012 4,295,266
Effect of dilutive securities 119,664 -
----------------- ---------------
Adjusted weighted average shares 4,632,676 4,295,266
================= ===============
8
<PAGE> 11
ENTERPRISE SOFTWARE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations for the three-months ended June 30, 1998 include the
operations of Enterprise and CCMS. For the three-months ended June 30,
1997, the operations of the Company were conducted through the aforementioned
subsidiaries, Enterprise and CCMS, together with Starcom Mediatech, and the
Digital Network, all of which were sold on July 18, 1997 to Digital Generation
Systems, Inc., a California Corporation.
Except for historical information contained herein, statements in this report
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecast results. Reference is made to the risks identified
elsewhere in this Report and in the Company's other reports and registration
statements on file with the Securities and Exchange Commission.
Revenue
The revenue from Enterprise and CCMS for the three months ended June 30, 1998
increased by 33% in comparison to the revenue of those subsidiaries for the
three months ended June 30, 1997. Approximately $700,000 of the increase was
due to the acquisition of Boss at March 31, 1998. The remaining increase was
due to increased sales for its software systems from a growing client base on
a consolidated basis. It is anticipated that revenue in future periods for the
Company on a consolidated basis will continue to increase, as the business
increases.
Cost of Sales
Cost of sales increased by approximately $264,000 for the three months ended
June 30, 1998 compared to the same period from the prior year. However, cost of
sales decreased as a percentage of sales by approximately 7%. The underlying
decrease as a percentage of sales was the result of a reduction in computer
maintenance following a re-equipment last year with new machines for the
computer bureau. Additionally, a significant portion of the increase in sales
was due to increases in license rental revenue. There was little incremental
cost associated with this increase in sales and as a result, the gross profit
margin increased accordingly. It is anticipated that cost of sales in future
periods for the Company on a consolidated basis will increase in future periods,
but it is expected that the gross profit margin will also increase as the volume
of software license income increases.
9
<PAGE> 12
Selling, General and Administrative Expenses
There was an increase in selling, general and administrative expenses of
approximately $656,000 for the period ended June 30, 1998 in comparison to the
same period last year. The increase in S,G&A expenses for the current three
month period was partially the result of the acquisition of Boss. In
addition, an increase in the headcount of the Company resulted in an increase in
salaries and related expenses. There was also an increase in wage rates and
employee benefits for computer staff that resulted in an increase of 9% in
salaries and related benefits. In keeping with other computer companies, the
Company expects in future periods to continue to be under pressure to increase
wage rates in order to retain qualified staff, particularly through the Year
2000. It is anticipated that other general and administrative expenses will
increase in future periods due to the expanding business of the Company.
Depreciation and Amortization
Depreciation and amortization increased by approximately $140,000. The increase
was due to the amortization of the goodwill associated with the acquisition of
Boss, and the result of the purchase of new computer equipment during fiscal
1998. It is not anticipated that depreciation and amortization in future periods
will significantly change in comparison to depreciation and amortization of the
current period.
Research and Development
The Company is committed to continued development and improvement of its
products. Total expenditure in the three-months ended June 30, 1998 amounted to
$0.4 million, of which $0.3 was expensed. The Company expects its R&D
expenditure will be substantial in future periods due to new product development
and planned enhancements of existing products.
Corporate
The corporate overhead represents general and administrative expenses related to
the administration of the Company, exclusive of the expenses of the
subsidiaries. These expenses for three-months ended June 30, 1998 compared to
the comparative prior period increased. The increase was substantially due to an
increase in legal and professional fees in connection with the audit of the
Company, corporate accounting, and legal fees in defense of lawsuits. A
reduction of personnel, as well as a reduction of occupancy and marketing costs
also mitigated the increased cost of legal and professional fees. Future
periods' expenses are expected to remain consistent with the current period.
Interest Income
Interest income increased in the current quarter due to increased cash resources
invested as a result of the issuance of subordinated debentures to Allied
Capital Corporation on March 26, 1998. The initial draw of $9 million was
utilized to settle other debt, fund the cash element of the Boss acquisition,
with the remaining cash being invested in an interest bearing account.
10
<PAGE> 13
Interest Expense
Interest expense increased from the prior period as a result in the issuance of
the subordinated debentures to Allied Capital Corporation and the issuance of
notes payable to the founders of Boss. Interest expense is not expected to
significantly change in future periods, unless the company increases the
outstanding debt to finance any acquisitions.
Income Tax Expense
At June 30, 1998, the Company has a net operating loss carryforward of
approximately $17.0 million for federal income tax purposes. The carryforward
expires in varying amounts and years through 2012. This loss carryforward also
gives rise to a deferred tax asset of approximately $5.8 million. This tax asset
has a valuation allowance as the Company cannot determine if it is more likely
than not that the deferred tax asset will be realized. Due to changes in the
Company's ownership, there is an annual limitation on the usage of the net
operation loss carryforward. Income tax expense for the three months ended June
30, 1998 includes state taxes paid for various states in which the Company does
business.
Discontinued Operations
Loss from discontinued operations for the three months ended June 30, 1997
represented the results of operations for Starcom Mediatech and the Digital
Network. These subsidiaries were sold on July 18, 1997, and as a result have no
operations to report for the three months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had $2.7 million in cash and cash equivalents.
In June 1998, the company obtained a $7 million line of credit facility, of
which $3.6 million was available at June 30, 1998. The Company's working capital
deficit was $3.1 million at June 30, 1998. During the three-months ended June
30, 1998, cash and cash equivalents decreased $3.4 million. The Company used
$1.1 million to reduce debt and lines of credit. An additional $2.1 million was
used to repurchase 190 shares of Series A Preferred Stock.
Based on the projected operations of the Company's subsidiaries (Enterprise and
CCMS), the Company currently believes that its consolidated operations will
generate sufficient cash to fund the subsidiaries working capital needs for the
next twelve months. Such projections are based on projected benefits to be
derived from the operations of the subsidiaries. No assurance can be given that
the projected operations or projected benefits will be realized.
Any future acquisitions will be funded from equity and/or debt financing.
Payments on promissory notes and notes payable in respect of recent acquisitions
are expected to be met from the funds generated from operations. There is no
assurance given that anticipated future capital financings will be successful or
that funds will be available from Enterprise's subsidiaries to meet capital
requirements.
11
<PAGE> 14
ENTERPRISE SOFTWARE, INC.
PART II: OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of shareholders on July 2,
1998 to consider and act upon proposals to (a) effect a reverse stock split of
the company's common stock, (b) amend the Company's existing stock option plan,
and (c) change the name of the Company to "Enterprise Software, Inc." The
reverse stock split and the name change was approved by the stockholders,
however the amendment of the existing stock option plan was not approved. The
following represents the results of the special meeting:
For Against Abstain
---------------------------------------------------
Reverse Stock Split 14,478,812 2,145,211 144,366
Stock Option Plan 5,793,901 6,051,058 110,786
Name Change 15,351,314 1,269,103 147,972
As a result of the above reverse stock split, the number of shares deliverable
upon exercise of the warrants and options under the Stock Option Plan of the
Registrant have been adjusted accordingly.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENTERPRISE SOFTWARE, INC.
Date: August 7, 1998 By: /s/ D. W. Martin
------------------------
David W. Martin
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 2,715,862
<SECURITIES> 1,135,000
<RECEIVABLES> 4,488,560
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,904,925
<PP&E> 5,193,817
<DEPRECIATION> 2,101,651
<TOTAL-ASSETS> 35,612,567
<CURRENT-LIABILITIES> 12,920,517
<BONDS> 0
0
0
<COMMON> 18,052
<OTHER-SE> 11,912,645
<TOTAL-LIABILITY-AND-EQUITY> 35,612,567
<SALES> 7,502,286
<TOTAL-REVENUES> 7,502,286
<CGS> 2,932,583
<TOTAL-COSTS> 2,932,583
<OTHER-EXPENSES> 3,959,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 541,533
<INCOME-PRETAX> 212,919
<INCOME-TAX> 14,320
<INCOME-CONTINUING> 198,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,599
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
