<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-QSB/A
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 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
------------------------
(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: 5,406,512 shares of Common Stock, Par
Value $.001.
<PAGE> 2
EXPLANATORY STATEMENT
This is Amendment No. 1 to the Company's Form 10-QSB for the quarter ended
September 30, 1998. The purpose of this amendment is to provide revised
financial statements pursuant to Item 1, which reflect the results of
additional analyses with respect to the allocation of purchase price to the
assets acquired in the recent acquisitions of Boss Associates, Ltd. and REVIVE
Technologies, Incorporated.
The revisions consist of the determination of the value of certain intangible
assets, based upon the results of an independent valuation of such acquired
assets. This has resulted in the recording of $ 5.467 million net of
amortization of "Customer lists and other intangible assets, net." which were
preliminarily shown as "Goodwill" in the asset section of the Company's
previously filed balance sheet. The net result is a reduction in the "goodwill"
line item from the $ 16.281 million in the previously filed balance sheet to $
10.814 million in the revised balance sheet and a corresponding increase in the
"Customer List" line item (renamed "Customer list and other intangible assets,
net") from $ 12.692 million in the previously filed balance sheet to $ 18.159
million in the accompanying revised balance sheet.
There have been no revisions to the Company's other financial statements,
including its Statements of Operations.
<PAGE> 3
ENTERPRISE SOFTWARE, INC.
INDEX
PART I. FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
Item 1. Financial Statements:
Page
No.
<S> <C>
Consolidated Condensed Balance Sheets --
September 30, 1998 and March 31, 1998................................... 1
Consolidated Condensed Statements of Operations -Three and
Six Months Ended September 30, 1998 and 1997 ........................... 3
Consolidated Condensed Statements of Changes in Stockholders'
Equity -- Six-months Ended September 30, 1998........................... 4
Consolidated Condensed Statements of Cash Flows --
Six-months Ended September 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........................................................... 10
PART II. OTHER INFORMATION................................................................ 13
</TABLE>
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,157,953 $ 6,169,383
Accounts and other receivables, net 6,122,580 4,142,186
Notes receivable, current portion 743,061 745,213
Marketable securities, at fair market value 324,101 1,135,000
Prepaid expenses 1,158,278 570,910
----------- -----------
Total current assets 9,505,973 12,762,692
Property and equipment, less accumulated depreciation and
amortization 3,118,527 3,142,661
Notes receivable, net of current portion 2,631,576 3,011,892
Capitalized software development costs, net 1,132,236 --
Customer list and other identifiable intangibles, net 18,159,023 13,193,465
Goodwill, net 10,814,867 6,221,592
Other long-term assets 930,840 626,549
----------- -----------
TOTAL ASSETS $46,293,042 $38,958,851
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE> 5
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 4,900,698 $ 5,273,106
Deferred income 3,161,036 3,073,557
Notes payable, current portion 339,880 3,504,519
Notes payable to related parties, current portion 796,167 779,637
Capital lease obligations, current portion 647,824 785,475
------------ ------------
Total current liabilities 9,845,605 13,416,294
Notes payable to related parties, net of current portion 14,035,467 8,976,384
Notes payable, net of current portion 5,277,842 1,088,490
Capital lease obligations, net of current portion 1,434,588 1,400,312
Other long-term liabilities - 183,432
------------ ------------
TOTAL LIABILITIES 30,593,502 25,064,912
Commitments and contingencies
Redeemable Preferred Stock:
Preferred stock, Series A, $.0001 par value
Authorized - 1,200 shares authorized, issued and
outstanding at March 31, 1998, 0 shares at September 30, 1998 - 1
Stockholders' equity:
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 5,406,512 shares at September 30, 1998
and 4,513,012 shares at March 31, 1998 5,407 18,052
Additional paid-in capital 48,695,228 43,412,279
Accumulated deficit (33,287,687) (29,873,798)
Accumulated other comprehensive income 286,592 337,405
------------ ------------
Total stockholders' equity 15,699,540 13,893,938
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,293,042 $ 38,958,851
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 6
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 7,956,248 $ 5,979,252 $ 15,458,533 $ 11,602,014
Cost of sales 3,029,850 2,809,084 5,962,433 5,437,342
------------ ------------ ------------ ------------
Gross profit 4,926,398 3,170,168 9,496,100 6,164,672
Operating expenses:
Selling, general and administrative 2,521,768 2,070,259 5,181,942 4,086,968
Depreciation and amortization 843,568 590,320 1,506,283 1,072,698
Research and development 221,641 -- 478,024 --
Corporate 587,223 436,910 967,581 790,832
Severance costs 68,700 495,527 68,700 495,527
------------ ------------ ------------ ------------
4,242,900 3,593,016 8,202,530 6,446,025
------------ ------------ ------------ ------------
Operating Income (loss) 683,498 (422,848) 1,293,570 (281,353)
Other income (expense):
Interest income 90,601 220,049 235,227 300,487
Interest expense (645,779) (327,585) (1,187,312) (655,090)
Loss on extinquishment of debt -- (24,260) -- (24,260)
Unrealized loss on marketable securities (88,303) -- (88,303) --
Loss on sale of equity securities (31,448) (499,792) (31,448) (501,607)
Non-recurring expenses (3,750,000) (61,195) (3,750,000) (921,483)
Miscellaneous, net 132,984 97,610 132,738 241
------------ ------------ ------------ ------------
(4,291,945) (595,173) (4,689,098) (1,801,712)
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes (3,608,447) (1,018,021) (3,395,528) (2,083,065)
Income taxes (benefit) 4,041 (855,400) 18,361 (848,119)
------------ ------------ ------------ ------------
Loss from continuing operations (3,612,488) (162,621) (3,413,889) (1,234,946)
Discontinued Operations
Loss from operations, net of income tax benefit of
$221,000 in 1997 -- (538,242) -- (1,024,903)
Gain on disposal of Meditech and Starcom, net of
income taxes of $ 1,057,000 in 1997 -- 9,355,442 -- 9,355,442
------------ ------------ ------------ ------------
Net income/(loss) (3,612,488) 8,654,579 (3,413,889) 7,095,593
Dividends to preferred shareholders -- 113,997 -- 319,797
------------ ------------ ------------ ------------
Net income/(loss) allocable to common shareholders $ (3,612,488) $ 8,540,582 $ (3,413,889) $ 6,775,796
============ ============ ============ ============
Basic and diluted earnings/(loss) per share:
Earnings/(loss) per share from continuing operations $ (0.75) $ (0.06) $ (0.73) $ (0.34)
============ ============ ============ ============
Earnings/(loss) per share from discontinuing operations $ -- $ 1.95 $ -- $ 1.85
============ ============ ============ ============
Net income/(loss) per share $ (0.75) $ 1.89 $ (0.73) $ 1.51
============ ============ ============ ============
Weighted average number of common shares outstanding 4,794,658 4,513,012 4,654,605 4,513,012
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 7
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended September 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)
Reverse Stock Split of 1 for 4 (13,539,035) (13,539) 13,539 -- -- --
Warrants issued in connection with
subordinated debentures -- -- 669,053 -- -- 669,053
Shares issued for purchase of Revive
Technologies, Inc. 893,500 894 6,700,356 -- -- 6,701,250
Net loss -- -- -- (3,413,889) -- (3,413,889)
Other comprehensive income,
foreign currency adjustment,net of tax -- -- -- -- (50,813) (50,813)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 5,406,512 $ 5,407 $ 48,695,228 $(33,287,687) $ 286,592 $ 15,699,540
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 8
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS For Six Months Ended September 30,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (3,413,889) $ 7,095,593
Adjustments to reconcile net income/(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,506,283 1,956,487
Loss on extinguishment of debt -- 24,260
Non-recurring expenses 3,750,000 921,483
Gain on sale of subsidiaries -- (10,412,442)
Amortization of discount on note payable to Allied Capital 108,268 --
Loss on sale of equity securities 31,448 501,607
Loss on sale of building and other property and equipment 106,196 (17,117)
Unrealized loss on equity securities 88,303 --
Unrealized loss on notes receivable due to foreign exchange -- 22,833
Changes in operating assets and liabilities (net of acquisitions):
Restricted cash -- 27,023
Accounts receivable (1,716,709) (1,112,230)
Inventories -- 53,153
Prepaid expenses (364,107) 477,216
Other assets (38,000) (115,213)
Accounts payable and accrued expenses (1,062,028) 141,461
Deferred income (127,758) 929,575
Other long-term liabilities (179,680) (56,385)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATIONS (1,311,673) 437,304
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (44,446) (231,411)
Capitalized software development costs (1,132,236) (561,337)
Collection on notes receivable 378,165 189,480
Deferred financing costs (442,582) --
Net proceeds from sale of building and other property and equipment 32,979 65,559
Net proceeds from sale of subsidiary -- 13,495,794
Proceeds from sales of equity securities 691,148 1,839,656
Purchase of customer list/businesses -- (1,427,625)
Payments for purchase of Revive Technologies, Inc. (6,671,038) --
Cash of acquired businesses (1,400) --
Cash of divested business -- (42,451)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,189,410) 13,327,665
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable, line of credit, and capitalized leases (6,909,315) (1,620,669)
Repayment of notes payable to shareholders (383,343) (4,822,958)
Proceeds from notes payable/line of credit 6,882,310 2,155,716
Net proceeds from subordinated debentures 6,000,000 --
Repurchase of Series A preferred stock (2,099,999) (1,576,000)
Purchase and cancellation of treasury stock -- (550,000)
Dividends on preferred stock -- (26,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,489,653 (6,439,911)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,011,430) 7,325,058
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 6,169,383 2,885,406
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,157,953 $ 10,210,464
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 9
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest 1,091,629 319,309
Income taxes 90,361 3,530
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the six months ended September 30, 1998, the Company incurred capital
obligations of $388,418.
During the six months ended September 30, 1998, the Company revaluated its
equity interest in DG Systems Inc. capital stock and wrote down its value
by $88,303.
On September 1, 1998, the Company issued 89,207 warrants in connection with
the issuance of subordinated debentures for $6.0 million. Warrants were
valued using a fair value pricing model.
On September 1, 1998, the Company issued approximately 893,500 shares of
common stock to purchase Revive Technologies Incorporated at a market
value of $ 7.50 per share.
See accompanying notes to consolidated financial statements
6
<PAGE> 10
ENTERPRISE SOFTWARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated condensed 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), Cable Computerized Management
Systems, Inc. ("CCMS"), Revive Technologies Incorporated (commencing with
its purchase on September 1, 1998) and Enterprise Systems Group Limited
("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 condensed 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 condensed financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to
Form 10-QSB 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 and the
amendments thereto. The results of operations for the three-month and
six-month periods ended September 30, 1998 are not necessarily indicative
of the results for the year ending March 31, 1999.
2. In March 1998, the Company completed a private placement of a $15.0
million Subordinated Debenture ("Debenture") to a single institutional
investor. The Debenture accrues interest at 14.5% per annum, payable
monthly. The Debenture has two tranches, both maturing in April 1, 2003.
Tranche A is for $9.0 million and Tranche B is for $6.0 million in the
aggregate. Tranche A was funded at closing on March 26, 1998. Tranche B
was funded September 1, 1998, and the net proceeds were used to fund a
portion of cash portion of the acquisition of Revive Technologies
Incorporated discussed below. The Debenture has a prepayment penalty
within the first three years equal to the interest the Company would have
paid on the prepaid balance during the remainder of the first three
years, discounted at the short term treasury rate at the time of
prepayment. The investor received separate and detachable warrants to
purchase the Company's common stock. The warrants, when exercised, will
provide stock ownership in the Company of 3.75% at the time of exercise.
The investor received 2.1% warrants with the funding of Tranche A on
March 26, 1998, and 1.65% warrants with the funding of Tranche B on
September 1, 1998. The exercise price will be $10 or surrender of the
equivalent amount of warrants pursuant to a spread exercise provision.
The warrants will expire ten years from the date of the final payment on
the Debenture.
3. 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 and six months ended September 30, 1998.
All per share amounts have been adjusted for the 1-for-4 stock split
effective on July 2, 1998.
4. On September 1, 1998, the Company completed its acquisition of Revive
Technologies Incorporated ("Revive") for approximately $13.5 million. The
acquisition was effected through the merger of Revive into a newly formed
wholly-owned subsidiary of the Company (which subsidiary is now named
REVIVE Technologies Incorporated). The acquisition was funded through a
cash payment of $6.8 million and the issuance of approximately 893,500
shares of the
7
<PAGE> 11
Company's common stock to the Revive shareholders. The cash portion of
the purchase price was paid from the Company's existing credit facilities
and from the proceeds of the private placement debenture discussed
above. The shares of stock were valued using the closing price of the
Company's common stock on September 1, 1998, which was approximately
$7.50 per share, its fair value.
Revive is a global software conversion company located in Carnegie,
Pennsylvania. Revive provides legacy conversion services and technologies
to large corporate entities. The principle assets acquired consisted of
Revive's software, in-process technologies, accounts receivable and
computer equipment.
The acquisition was accounted for by the purchase method and,
accordingly, the results of operations of Revive have been included in
accompanying financial statements from September 1, 1998. Based on
appraised value, $3.7 million of the purchase price was allocated to
purchased in-process research and development, which resulted in a
pre-tax charge to the Company's operations in the quarter ended September
30, 1998. Approximately $4 million of the purchase price was allocated to
other identifiable intangibles, such as customer lists, work force and
current technology. These other intangibles are being amortized on a
straight-line basis over 7 years. The excess of the purchase price over
the net assets of approximately $5.8 million is included in goodwill and
is being amortized on a straight-line basis over 7 years. The Company, at
each balance sheet date, will evaluate whether events and circumstances
warrant revised estimates of amortization and whether the respective
goodwill has a continuing value.
5. Condensed unaudited pro forma results of operations of the Company
are presented as if the purchase of Revive occurred at the beginning of
the period. The unaudited pro forma results of operations are not
necessarily indicative of what would have occurred had the acquisition
been completed as of that date or of any results that may occur in the
future. The column labeled "Acquisitions" consists of operations of
Revive for the five months ended August 31, 1998.
Pro forma adjustments include amortization of allocated costs in
connection with the purchase and interest expense on the additional debt
to fund the cash portion of the purchase price.
<TABLE>
<CAPTION>
The Company 6 Combined 6 Pro Forma 6
Months Ended Months Ended Pro Forma Months Ended
9/30/98 Acquisitions 9/30/98 Adjustments 9/30/98
------------------ --------------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenue $ 15,458,533 $ 922,542 $ 16,381,075 $ 16,381,075
Net Loss (3,413,889) (1,366,012) (4,779,901) (1,086,028) (5,865,929)
Net Loss Per
Share $ (.73) $ (1.08)
Number of
Shares 4,654,605 5,406,512
</TABLE>
8
<PAGE> 12
6. Comprehensive income is computed as follows:
<TABLE>
<CAPTION>
Six Months Ended September 30,
1998 1997
----------------- --------------
<S> <C> <C>
Net income/(loss) $ (3,612,488) $ 7,095,593
Other comprehensive income,
Net of tax
Foreign currency translation (50,813) (4,210)
----------------- --------------
Comprehensive income $ (3,663,301) $ 7,091,383
</TABLE>
7. The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Loss from continuing operations $(3,612,488) $ (162,621) $(3,413,889) $(1,234,946)
Gain from discontinued operations -- 8,817,200 -- 8,330,539
--------------------------------------------------------------
Net income/(loss) (3,612,488) 8,654,579 (3,413,889) 7,095,593
Dividends to preferred shareholders -- 113,997 -- 319,797
--------------------------------------------------------------
Net income/(loss) allocable to
common shareholders $(3,612,488) $ 8,540,582 $(3,413,889) $ 6,775,796
Weighted average shares 4,794,658 4,513,012 4,654,605 4,513,012
Effect of dilutive securities -- -- -- --
--------------------------------------------------------------
Adjusted weighted average shares 4,794,658 4,513,012 4,654,605 4,513,012
</TABLE>
9
<PAGE> 13
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 and six months ended September 30, 1998
include the operations of Enterprise and CCMS, and include the operations of
Revive for the month of September 1998. For the three and six-months ended
September 30, 1997, the operations of the Company were conducted through
Enterprise and CCMS, together with Starcom Mediatech and the Digital Network.
Starcom Mediatech and Digital Network 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
Revenue increased approximately 33% in comparison to the revenue for the three
months ended September 30, 1997. This increase was due to increased sales for
the Company's software systems from additional clients. In addition,
approximately $340,000 or 6% of the increase in revenue was attributable to the
acquisition of Revive on September 1, 1998.
Cost of Sales
Cost of sales increased by approximately $220,000, including $151,000 for
Revive, for the three months ended September 30, 1998 compared to the same
period from the prior year. However, cost of sales decreased as a percentage of
sales by approximately 9%. The underlying decrease as a percentage of sales was
the result of a reduction in computer maintenance following a replacement of
older equipment with newer machines last year. 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.
Selling, General and Administrative Expenses
There was an increase in selling, general and administrative expenses of
approximately $452,000, representing a 22% increase, for the three-months ended
September 30, 1998 in comparison to the same period last year. This includes
$188,000 (9%) due to the acquisition of Revive. The increase in SG&A expenses
for the current three month period was partially the result of the Company's
September 1, 1998 acquisition of Revive and the March 31, 1998 acquisition of
Boss Associates Ltd ("Boss"). The percentage increase in SG&A expenses for the
period is comparable with the percentage growth in revenues for same period. As
with the previous quarter, increases in wage rates and employee benefits for
computer staff resulted in an increase of 9% in salaries and related benefits.
In keeping
10
<PAGE> 14
with other software 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 $253,000. The increase
was primarily due to the amortization of the goodwill associated with the
acquisitions of Boss and Revive, 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, other than with respect to
the Revive acquisition.
Research and Development
The Company is committed to continued development and improvement of its
products. Total expenditure in the three months ended September 30, 1998
amounted to approximately $700,000, of which $220,000 was expensed.
Approximately $480,000 has been capitalized in accordance with FAS 86, and will
be amortized in future periods as the resultant revenue is recognized. The
Company's products are under constant review and the Company expects that
development expenditures will continue to increase in future periods. Revive is
currently committed to spend approximately $490,000 over the next six months to
complete the development of its new product range.
Corporate
The corporate overhead represents general and administrative expenses related to
the administration of the Company, exclusive of the expenses of the Company's
subsidiaries. There was an overall increase in the expenses for the three months
ended September 30, 1998 compared to the prior period. The increase was
substantially due to an increase in legal and professional fees in connection
with the audit of the Company, corporate accounting, legal fees in defense
of lawsuits, and the special meeting of shareholders held in July 1998. A
reduction of personnel, as well as a reduction of occupancy and marketing costs,
mitigated the increased cost of legal and professional fees.
Interest Income
Interest income decreased in the current quarter due to a decrease in cash
balances, primarily as a result of the acquisitions of Boss and Revive.
Interest Expense
Interest expense increased from the prior period as a result of the issuance of
the subordinated debenture to Allied Capital Corporation, the issuance of notes
payable to the founders of Boss, and the increase in the line of credit to fund
a portion of the acquisition of Revive.
11
<PAGE> 15
Nonrecurring Expenses
The nonrecurring charges in 1998 of approximately $3.75 million represent a
portion of the purchase price of Revive that relates to a write off of acquired
in-process research and development costs. In fiscal 1997, the Company wrote off
certain capitalized development software when management determined that the
likelihood of the future recovery of those capitalized costs was remote.
Income Tax Expense
At September 30, 1998, the Company has a net operating loss carryforward of
approximately $19.8 million, of which $3.7 million is subject to a separate
return limitation for federal income tax purposes. The carryforward expires in
varying amounts and years through 2018. This loss carryforward also gives rise
to a deferred tax asset of approximately $6.7 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 six months ended
September 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 September 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 September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $1.2 million in cash and cash
equivalents. In June 1998, the Company obtained a $7.0 million revolving credit
facility, of which $2.3 million was available at September 30, 1998. The
Company's working capital deficit was approximately $340,000 at September 30,
1998. During the three months ended September 30, 1998, cash and cash
equivalents decreased $1.5 million.
Based on the projected operations of the Company's subsidiaries (Enterprise,
CCMS and Revive), the Company currently believes that its consolidated
operations will generate sufficient cash to fund the working capital needs of
the Company and its subsidiaries for the next twelve months. Such projections
are based on projected benefits to be derived from the operations of its
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 that anticipated future capital financings will be successful or
that funds will be available from the Company's subsidiaries to meet capital
requirements.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather that four to define the applicable year. If systems do not
correctly recognize date information when the year changes to 2000, there could
be an adverse impact on the Company.
The risk for the Company exists in four areas: (1) systems used by the Company
to run its business, (2) systems used by the Company's suppliers, (3) potential
support or other claims from the Company's customers, and (4)
12
<PAGE> 16
the potential reduced spending by customers and prospective customers on
computer solutions as a result of significant information systems spending on
Year 2000 remediation.
The Company has completed a comprehensive in-house review of its software
products. The review has identified the need for modifications which have been
or are in the process of being completed. The Company is also in the process of
contacting its critical suppliers to determine if the suppliers' operations and
the products and services they provide are Year 2000 compliant. Where
practicable, the Company will attempt to mitigate the risks with respect to the
failure of suppliers to be Year 2000 ready. In the event that suppliers are not
Year 2000 compliant, the Company will seek alternative sources of supplies.
However, such failures remain a possibility and could have an adverse impact on
the Company' results of operations or financial condition.
The cost of the review to date has amounted to approximately $138,000. The
Company expects the remainder of its software can be reviewed and modified, if
necessary, for a cost of approximately $246,000. The work is expected to be
completed by June, 1999. All costs incurred have been expensed.
Although the Company believes that its products will be Year 2000 compliant, not
all customer situations can be totally anticipated, particularly those involving
third party hardware and software. The Company may therefore see an increase in
support and other claims as a result of the millennium transition. Thereafter,
litigation regarding Year 2000 compliance issues may escalate. For these
reasons, the impact of customer claims could have a material adverse impact on
the Company's business, financial condition, and results of operations.
Year 2000 compliance is an issue for virtually all businesses whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies including customers of the Company owning and
operating such systems may plan to devote a substantial portion of their
information systems' spending to fund such upgrades and modifications and divert
spending otherwise allocated to their software and hardware budgets. Such
changes in customers' spending patterns could have a material adverse impact on
the Company's sales, operating results or financial condition.
PART II: OTHER INFORMATION
ITEM 2. Changes to Securities and Use of Proceeds
On September 1, 1998, the Company issued approximately 893,500 shares ("Revive
shares") of previously unregistered shares of common stock and warrants to
purchase approximately 89,200 shares of common stock ("Allied warrants") in
connection with the acquisition of Revive. The sale of the Revive shares were
exempt from registration pursuant to Rule 506 of Regulation D because the
Company reasonably believed they were sold only to accredited investors (as
defined in Regulation D). The warrants were issued to Allied Capital Corporation
and were exempt from registration pursuant to Section 4 (2) of the Securities
Act because they were sold to a sophisticated institutional investor in a
privately negotiated transaction. The Revive shares were issued as part of the
purchase price to acquire Revive, and the Allied warrants were issued in
connection with the issuance of the debenture used to partially finance the
purchase price of Revive. The exercise price of the warrants will be $10 or
surrender of the equivalent amount of warrants pursuant to a spread exercise
provision. The common stock and the warrants were valued at $7.50 per share,
which was the closing price of the common stock the day preceding the
acquisition date. Reference is made to footnote 2 and 4 of this Form 10QSB
describing the issuance of the warrants and the common stock.
13
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K
(a). Financial Data Schedule
(b). Reports on Form 8-K. On August 11, 1998, the Company filed a Form
8-K to report the signing of a definitive agreement to purchase Revive. On
September 15, 1998, the Company filed a Form 8-K to report the closing
of the acquisition of Revive. This Form 8-K was amended on November 13, 1998 to
include the proforma financial information required to be filed with respect
to that acquisition.
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: December 29, 1998 By: /s/ D. W. Martin
------------------------
David W. Martin
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
14
<PAGE> 18
Index to Exhibits
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 1,157,953
<SECURITIES> 324,101
<RECEIVABLES> 6,122,580
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,505,973
<PP&E> 5,220,178
<DEPRECIATION> 2,101,651
<TOTAL-ASSETS> 46,293,042
<CURRENT-LIABILITIES> 9,845,605
<BONDS> 0
0
0
<COMMON> 18,946
<OTHER-SE> 15,680,594
<TOTAL-LIABILITY-AND-EQUITY> 46,293,042
<SALES> 15,458,533
<TOTAL-REVENUES> 15,458,533
<CGS> 5,962,433
<TOTAL-COSTS> 5,962,433
<OTHER-EXPENSES> 8,202,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,187,312
<INCOME-PRETAX> (3,608,447)
<INCOME-TAX> 4,041
<INCOME-CONTINUING> (3,612,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,612,488)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
