<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d)of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 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: 5,406,496 shares of Common
Stock, Par Value $.001.
<PAGE> 2
ENTERPRISE SOFTWARE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Page
No.
<S> <C>
Consolidated Condensed Balance Sheets --
December 31, 1998 and March 31, 1998................................. 1
Consolidated Condensed Statements of Operations -Three and
Nine Months Ended December 31, 1998 and 1997 ........................ 3
Consolidated Condensed Statements of Changes in Stockholders'
Equity - Nine months Ended December 31, 1998......................... 4
Consolidated Condensed Statements of Cash Flows --
Nine months Ended December 31, 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........................................................ 11
PART II. OTHER INFORMATION............................................................. 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,057,534 $ 6,169,383
Accounts and other receivables, net 5,241,257 4,142,186
Notes receivable, current portion 999,531 745,213
Marketable securities, at fair market value - 1,135,000
Prepaid expenses 995,813 570,910
----------------- -----------------
Total current assets 11,294,135 12,762,692
Property and equipment, less accumulated depreciation and
amortization 3,017,853 3,142,661
Notes receivable, net of current portion 2,359,353 3,011,892
Capitalized software development costs, net 2,038,294 -
Customer list and other identifiable assets, net 17,704,021 13,193,465
Goodwill, net 10,428,917 6,221,592
Other long-term assets 778,083 626,549
----------------- -----------------
TOTAL ASSETS $ 47,620,656 $ 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>
December 31, March 31,
1998 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 4,140,072 $ 5,273,106
Deferred income 3,099,959 3,073,557
Notes payable, current portion 1,081,980 3,504,519
Notes payable to related parties, current portion 781,074 779,637
Capital lease obligations, current portion 698,634 785,475
----------------- -----------------
Total current liabilities 9,801,719 13,416,294
Notes payable to related parties, net of current portion 14,106,578 8,976,384
Notes payable, net of current portion 6,781,980 1,088,490
Capital lease obligations, net of current portion 1,240,118 1,400,312
Other long-term liabilities - 183,432
----------------- -----------------
TOTAL LIABILITIES 31,930,395 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 December 31, 1998 - 1
Stockholders' equity:
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 5,406,496 shares at December 31, 1998
and 4,513,012 shares at March 31, 1998 5,406 4,513
Additional paid-in capital 48,695,228 43,425,818
Accumulated deficit (33,231,054) (29,873,798)
Accumulated other comprehensive income 220,681 337,405
----------------- -----------------
Total stockholders' equity 15,690,261 13,893,939
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,620,656 $ 38,958,851
================= =================
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 5
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenue $ 8,346,230 $ 6,248,537
Cost of sales 3,574,636 2,754,031
----------- -----------
Gross profit 4,771,594 3,494,506
Operating expenses:
Selling, general and administrative 2,619,610 1,950,147
Depreciation and amortization 1,133,030 505,219
Research and development 87,140 139,955
Corporate 105,193 362,192
Severance costs - -
----------- -----------
3,944,973 2,957,513
----------- -----------
Operating income 826,621 536,993
Other income (expense):
Interest income 72,427 128,758
Interest expense (801,084) (160,653)
Loss on extinquishment of debt - -
Gain/(loss) on sale of equity securities 92,091 -
Non-recurring expenses - (804,995)
Miscellaneous, net (127,822) (126,590)
----------- -----------
(764,388) (963,480)
----------- -----------
Income/(loss) from continuing operations before income taxes 62,233 (426,487)
Income taxes (benefit) 5,600 -
----------- -----------
Income/(loss) from continuing operations 56,633 (426,487)
Discontinued Operations
Loss from operations, net of income tax benefit of
$221,000 in 1997 - -
Gain on disposal of Meditech and Starcom, net of
income taxes of $1,057,000 in 1997 - -
----------- -----------
Net income/(loss) 56,633 (426,487)
Dividends to preferred shareholders - 72,436
----------- -----------
Net income/(loss) allocable to common shareholders $ 56,633 $ (498,923)
=========== ===========
Basic and diluted earnings/(loss) per share:
Earnings/(loss) per share from continuing operations $ 0.01 $ (0.11)
=========== ===========
Earnings/(loss) per share from discontinuing operations $ - $ -
=========== ===========
Net income/(loss) per share $ 0.01 $ (0.11)
=========== ===========
Weighted average number of common shares outstanding 5,406,496 4,440,464
=========== ===========
<CAPTION>
Nine Months Ended December 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue $ 23,804,763 $ 17,850,551
Cost of sales 9,537,069 8,191,373
------------ ------------
Gross profit 14,267,694 9,659,178
Operating expenses:
Selling, general and administrative 7,801,552 6,037,115
Depreciation and amortization 2,639,314 1,577,917
Research and development 565,164 139,955
Corporate 1,072,774 1,153,024
Severance costs 68,700 495,527
------------ ------------
12,147,504 9,403,538
------------ ------------
Operating income 2,120,190 255,640
Other income (expense):
Interest income 307,654 429,245
Interest expense (1,988,396) (815,743)
Loss on extinquishment of debt - (24,260)
Gain/(loss) on sale of equity securities (27,660) (501,607)
Non-recurring expenses (3,750,000) (1,726,478)
Miscellaneous, net 4,917 (126,349)
------------ ------------
(5,453,485) (2,765,192)
------------ ------------
Income/(loss) from continuing operations before income taxes (3,333,295) (2,509,552)
Income taxes (benefit) 23,961 (848,119)
------------ ------------
Income/(loss) from continuing operations (3,357,256) (1,661,433)
Discontinued Operations
Loss from operations, net of income tax benefit of
$221,000 in 1997 - (1,024,903)
Gain on disposal of Meditech and Starcom, net of
income taxes of $1,057,000 in 1997 - 9,355,442
------------ ------------
Net income/(loss) (3,357,256) 6,669,106
Dividends to preferred shareholders - 392,233
------------ ------------
Net income/(loss) allocable to common shareholders $ (3,357,256) $ 6,276,873
============ ============
Basic and diluted earnings/(loss) per share:
Earnings/(loss) per share from continuing operations $ (0.68) $ (0.46)
============ ============
Earnings/(loss) per share from discontinuing operations $ - $ 1.85
============ ============
Net income/(loss) per share $ (0.68) $ 1.39
============ ============
Weighted average number of common shares outstanding 4,906,145 4,513,012
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended December 31, 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 4,513,012 $ 4,513 $ 43,425,818 $ (29,873,798) $ 337,405 $ 13,893,938
Redemption of Preferred
Stock, Series A - - (2,099,999) - - (2,099,999)
Warrants issued in connection with
subordinated debentures - - 669,053 - - 669,053
Shares issued for purchase of Revive
Technologies Incorporated 893,484 893 6,700,356 - - 6,701,249
Net loss - - - (3,357,256) - (3,357,256)
Other comprehensive income,
foreign currency adjustment, net of tax - - - - (116,724) (116,724)
------------- -------------- --------------- ---------------- ----------- ---------------
Balance at December 31, 1998 5,406,496 $ 5,406 $ 48,695,228 $ (33,231,054) $ 220,681 $ 15,690,261
============= ============== =============== ================ =========== ===============
</TABLE>
The above reflects the 1 for 4 stock split effective July 2, 1998.
See accompanying notes to consolidated financial statements
4
<PAGE> 7
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Nine Months Ended December 31,
----------------------------------
1998 1997
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (3,357,256) $ 6,669,106
Adjustments to reconcile net income/(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,639,314 2,461,705
Loss on extingusihment of debt - 24,260
Non-recurring expenses 3,750,000 1,826,478
Gain on sale of subsidiaries - (10,412,442)
Amortization of discount on note payable to Allied Capital Corporation 192,813 -
Loss on sale of equity securities 27,660 501,607
Loss on sale of building and other property and equipment 156,483 (22,417)
Unrealized loss on equity securities - -
Unrealized loss on notes receivable due to foreign exchange - 106,796
Changes in operating assets and liabilities (net of acquisitions):
Restricted cash - 146,039
Accounts receivable (785,386) 249,808
Inventories - 53,153
Prepaid expenses (201,642) 336,011
Other assets 9,000 (187,349)
Accounts payable and accrued expenses (1,874,995) (1,067,773)
Deferred income (191,503) 324,642
Other long-term liabilities (179,680) (57,571)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATIONS 184,808 952,053
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (282,372) (440,554)
Capitalized software development costs (2,038,294) (1,000,813)
Collection on notes receivable 398,221 339,480
Deferred financing costs (442,582) -
Net proceeds from sale of building and other property and equipment 32,979 -
Net proceeds from sale of subsidiary - 13,495,794
Proceeds from sales of equity securities 1,107,340 1,839,655
Purchase of customer list/businesses - (1,427,625)
Payments for purchase of Revive Technologies Incorporated (6,671,038) -
Cash of acquired businesses (1,400) -
Cash of divested business - (42,451)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,897,146) 12,763,486
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable, line of credit, and capitalized leases (7,650,700) (5,108,752)
Repayment of notes payable to shareholders (393,159) (4,821,059)
Proceeds from notes payable/line of credit 9,744,348 1,454,616
Net proceeds from subordinated debentures 6,000,000 -
Repurchase of Series A preferred stock (2,100,000) (5,001,072)
Purchase and cancellation of treasury stock - (550,000)
Dividends on preferred stock - (26,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,600,489 (14,052,267)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,111,849) (336,728)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 6,169,383 2,885,406
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 4,057,534 $ 2,548,678
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 8
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest Expense Paid 1,808,198 778,545
Income taxes 127,660 250,167
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended December 1998, the Company incurred capital
obligations of $388,418.
On September 1, 1998, the Company issued 89,207 warrants to Allied Capital
Corporation ("Allied") in connection with the issuance of subordinated
debentures for $6 million. Warrants were valued using a fair value
pricing model.
On September 1, 1998, the Company issued 893,484 shares of common stock at
to purchase Revive Technologies, Inc. at market value was $7.50 per
share.
See accompanying notes to consolidated financial statements
6
<PAGE> 9
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,
Ltd. ("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 nine-month periods ended December
31, 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 on September 1, 1998, and the net proceeds were
used to fund 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% on a fully diluted basis 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 repayment 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 nine months ended December 31,
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
7
<PAGE> 10
a cash payment of $6.8 million and the issuance of 893,484 shares of
the 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, with a subsidiary company in the United Kingdom. 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, work-force 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, $3.75 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 Combined Pro Forma
9 Months Ended 9 Months Ended Pro Forma 9 Months
12/31/98 Acquisitions 12/31/98 Adjustments Ended 12/31/98
------------------ --------------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenue $23,804,763 $ 922,542 $24,727,305 $24,727,305
Acquisition Related
nonrecurring expense (3,750,000) (3,750,000)
Net Loss (3,357,256) (1,366,012) (4,723,268) (1,086,028) (5,809,296)
Net Loss Per
Share $ (.68) $ (1.07)
Number of
Shares 4,906,145 5,406,512
</TABLE>
8
<PAGE> 11
6. Stock Appreciation Rights
During November 1998, the Company granted to key employees and
directors approximately 644,000 stock appreciation rights at a strike
price of $4.50 per right. 25% of the rights become exercisable on
each of the first through fourth anniversaries of the grant date, but
all rights would become immediately exercisable upon a change in
control of the Company (as defined in the grant documents). Each right
entitles the holder, upon exercise, to receive in cash (immediately or
over a period not to exceed five years, at the Company's election) the
increase in the market price of a share of common stock at the date of
the exercise over the strike price. A compensation expense of $9,600,
based on the increase in the market price since the date of grant, was
provided for in the three months and nine-months ended December 31,
1998.
7. Contingencies
A debtor under a note agreement has asserted a claim in excess of
$500,000 under the warranty provisions of an agreement for the sale of
a former subsidiary. Management is currently reviewing the
documentation regarding the claim and intends to vigorously defend the
Company's position in this matter.
8. Comprehensive income is computed as follows:
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1997
------------------ ----------------
<S> <C> <C>
Net income/(loss) $(3,357,256) $6,276,873
Other comprehensive income,
Net of tax
Foreign currency translation (116,724) (54,977)
------------------ ----------------
Comprehensive income $(3,473,980) $6,221,896
</TABLE>
9
<PAGE> 12
9. The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------------- ----------------------------------
1998 1997 1998 1997
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Income/(loss) from continuing
operations $56,633 $ (426,487) $(3,357,256) $ (1,661,433)
Gain from discontinued operations - - - 8,330,539
----------------- ---------------- ----------------- ----------------
Net income/(loss) 56,633 (426,487) (3,357,256) 6,669,106
Dividends to preferred shareholders - 72,436 - 392,233
----------------- ---------------- ----------------- ----------------
Net income/(loss) allocable to
common shareholders $56,633 $ (498,923) $(3,357,256) $ 6,276,873
Weighted average shares 5,406,496 4,440,464 4,906,145 4,513,012
Effect of dilutive securities - - - -
----------------- ---------------- ----------------- ----------------
Adjusted weighted average shares 5,406,496 4,440,464 4,906,145 4,513,012
</TABLE>
10
<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 nine months ended December 31, 1998
include the operations of Enterprise and CCMS, and include the operations of
Revive. For the three and nine-months ended December 31, 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 34% during the third quarter 1999 from the
corresponding quarter a year ago. Revenue for the nine months ended December 31,
1998 increased approximately 33% compared with the same period last year. The
increase in the quarter and the nine months was due to increased sales of the
Company's software systems to new clients. Approximately 11% of the increase for
the nine months ended December 31, 1998 was attributable to the acquisition of
Boss on April 1, 1998. In addition, approximately 5% of the increase for the
three months ended December 31, 1998 was attributable to the acquisition of
Revive on September 1, 1998.
Cost of Sales
Cost of sales increased by approximately 30% during the three months ended
December 31, 1998 compared to the same period from the prior year. Cost of sales
increased by approximately 33% for the nine months ended December 31, 1998
compared with the same period last year. Approximately 6% of the increase for
the three months ended December 31, 1998 was attributable to the acquisition of
Revive on September 1, 1998. Cost of sales as a percentage of sales remained
relatively constant for the quarter ended December 31, 1998 and decreased by
approximately 4% for the nine months ended December 31, 1998 as compared with
the previous periods. This increased profit margin resulted from an increase in
license rental revenue for which there is little incremental cost. The profit
margin decreased during the three months ended December 31, 1998 as a result of
the start up efforts at Revive. 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
Selling, general and administrative expenses ("SG&A") as a percentage of revenue
remained relatively constant at approximately 31% for both the three months
ended December 31, 1998 and December 31, 1997, and at approximately 33% for both
periods of nine months ended December 31, 1998 and 1997. The acquisition of
Revive accounted for 32% of additional SG&A expenses in the three month period
ending
11
<PAGE> 14
December 31, 1998, otherwise the Company would have seen a reduction in
expenses compared to revenue for that quarter.
Although expenses have been maintaining a constant percentage compared to
revenue, the Company believes that, in keeping with other software companies, it
will be under pressure to increase wage rates in order to retain qualified
staff, particularly through the 2000. It is anticipated that SG&A expenses will
increase in future periods due to the expanding businesses of the Company.
Depreciation and Amortization
Depreciation and amortization increased by approximately 20% for the quarter
ended December 31, 1998 compared to the comparative quarter of the previous
year. The increase for the nine months ended December 31, 1998 was approximately
67% compared to the same period for the prior year. The increase for both
periods were primarily due to the amortization of the goodwill and other
intangibles associated with the acquisitions of Boss and Revive. The
amortization of intangible assets expensed with regard to the acquisitions of
Boss and Revive amounts to approximately $450,000 per quarter. It is not
anticipated that depreciation and amortization in future periods will
significantly change in comparison to depreciation and amortization for 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 December 31, 1998 amounted
to approximately $985,000 of which approximately $87,000 was expensed.
Approximately $898,000 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 $240,000 over the next three 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 decrease in the expenses for the three months
ended December 31, 1998 compared to the prior period. The decrease was
substantially due to management's efforts to control costs with respect to the
legal and professional fees. A reduction of corporate office personnel also
assisted the overall decrease in corporate costs. Following the appointment of
Schroders & Company, Inc. as the Company's investment bankers, together with
recent additional legal work, it is anticipated that these costs will increase
in the next quarters.
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.
12
<PAGE> 15
Nonrecurring Expenses
The nonrecurring charges for the nine months ended December 31, 1998 amounting
to approximately $3.75 million represent a portion of the purchase price of
Revive that relates to in-process research and development. There were no
nonrecurring charges in the three months ended December 31, 1998. 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 December 31, 1998, the Company has a net operating loss carryforward of
approximately $19 million, of which $3.3 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 three and nine-months ended December
31, 1998 includes state taxes paid for various states in which the Company does
business.
Discontinued Operations
Loss from discontinued operations for the nine months ended December 31, 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 and nine-months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $4 million in cash and cash
equivalents. In June 1998, the Company obtained a $7 million revolving credit
facility, and subsequent to December 31, 1998, the Company has negotiated an
increase in this facility to $9 million. The Company's working capital amounted
to approximately $1.5 million at December 31, 1998. This is compared to a
working capital deficit of approximately $340,000 at September 30, 1998. During
the three months ended December 31, 1998, cash and cash equivalents increased
$2.9 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.
STOCK APPRECIATION RIGHTS
During November 1998, the Company granted to key employees and directors
approximately 644,000 stock appreciation rights at a strike price of $4.50 per
right. 25% of the rights become exercisable on each of the first through fourth
anniversaries of the grant date, but all rights would become immediately
exercisable upon a change in control of the Company (as defined in the grant
documents). Each right entitles the holder, upon exercise, to receive in cash
(immediately or over a period not to exceed five years, at the Company's
election) the increase in the market price of a share of common stock at the
date of the exercise over the strike price. A compensation expense of $9,600,
based on the increase in the market price since the date of grant, was provided
for in the three months and nine-months ended December 31, 1998. Because of the
uncertainty of the future price of the Company's common stock, there exists an
unquantifiable potential future liability of the Company to the certain key
employees and directors who have been awarded the stock appreciation rights.
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.
13
<PAGE> 16
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) the potential
reduced spending by customers and prospective customers on computer solutions as
a result of significant information systems spending on Year 2000 remediation,
and the reluctance of prospective customers to change systems in the period
leading up to the millenium.
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 budgets for new software and
hardware. Such changes in customers' spending patterns could have a material
adverse impact of the Company's sales, operating results or financial condition.
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 has contacted 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 total cost of the review and necessary modifications to December 31, 1998
has amounted to approximately $225,000. The Company expects to spend another
$90,000 to complete the remainder of the review and modifications. The remaining
work is substantially expected to be completed by June, 1999. The current
estimate of the total costs for the whole project is within 4% of the original
estimate. No expenditure has needed to be incurred by Revive, since its
acquisition, on Year 2000 reviews or modifications. 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.
PART II: OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of stockholders on January 6,
1999.
(b) Each of the persons named in the Proxy Statement as a nominee for
director was elected and the proposals listed below were approved.
The following are the voting results of the proposals:
14
<PAGE> 17
Proposal I-Election of Directors:
For Against Withheld
------------- ----------- -----------
Andre A. Blay 3,437,669 750 31,033
Thomas H. Baur 3,469,452 - -
H. Bradley Eden 3,438,419 - 31,033
Richard Schleufer 3,469,452 - -
Robert Beauregard 3,438,419 - 31,033
Joseph J. Porfeli 3,469,377 - 75
James S. Ware 3,438,419 - 31,033
James S. Ware resigned January 1999, and Irwin Schlass was appointed
to fill the resulting vacancy on the Board.
Proposal II-Approval of Company's Employee Stock Purchase and Savings
Plan:
For Against Withheld
--------------- ----------- -------------
3,395,985 73,324 143
Proposal III-Ratification of the appointment of KPMG Peat Marwick, LLP
as the Company's auditors for the fiscal year ended March 31, 1999:
For Against Withheld
--------------- ----------- -------------
3,469,244 75 133
ITEM 6. Exhibits and Reports on Form 8-K
(a).
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(a) Registrant's Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 of Registration Statement on Form
S-3 (File No. 333-1205))
(3)(b) Amendment to Registrant's Certificate of
Incorporation (Incorporated by reference to Exhibit
(4)(b) of Registration Statement on Form S-8 (File No.
333-71787))
(3)(c) Certificate of Designation of Series A Preferred Stock
(Incorporated by reference to Exhibit 4.1 of
Registration Statement on Form S-3 (File No. 333-
1205))
(3)(d) Certificate of Designation of Series B Preferred Stock
(Incorporated by reference to Exhibit (4)(d) of Registration
Statement on Form S-8 (File No. 333-71787))
(3)(e) Certificate of Designation of Series C Preferred Stock
(Incorporated by reference to Appendix A of Proxy Statement
(File No. 333-1205))
(3)(f) Registrant's Bylaws (Incorporated by reference to Exhibit
No. 3.2 of Registration Statement on Form S-3 (File No. 333-
1205))
(24) Powers of attorney (contained in the signature pages hereto)
(27) Financial Data Schedule
(b). Reports on Form 8-K. On January 4, 1999, the Company filed a Form
8-K to report the signing of the employment agreements with executive officers
of the Company. On January 21, 1999, the Company filed a Form 8-K to report the
adoption of a Stock Appreciation Rights Plan. On January 21, 1999, the Company
filed a Form 8-K to file as exhibits various loan documents entered into
between the Company and Allied Capital Corporation. On February 4, 1999, the
Company filed a Form 8-K to report the election of a new board member to fill a
vacancy on the Board.
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: February 10, 1999 By: /s/ D. W. Martin
------------------------
David W. Martin
Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
15
<PAGE> 18
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(a) Registrant's Certificate of Incorporation (Incorporated by
reference to Exhibit 3.1 of Registration Statement on Form
S-3 (File No. 333-1205))
(3)(b) Amendment to Registrant's Certificate of
Incorporation (Incorporated by reference to Exhibit
(4)(b) of Registration Statement on Form S-8 (File No.
333-71787))
(3)(c) Certificate of Designation of Series A Preferred Stock
(Incorporated by reference to Exhibit 4.1 of
Registration Statement on Form S-3 (File No. 333-
1205))
(3)(d) Certificate of Designation of Series B Preferred Stock
(Incorporated by reference to Exhibit (4)(d) of Registration
Statement on Form S-8 (File No. 333-71787))
(3)(e) Certificate of Designation of Series C Preferred Stock
(Incorporated by reference to Appendix A of Proxy Statement
(File No. 333-1205))
(3)(f) Registrant's Bylaws (Incorporated by reference to Exhibit
No. 3.2 of Registration Statement on Form S-3 (File No. 333-
1205))
(24) Powers of attorney (contained in the signature pages hereto)
(27) Financial Data Schedule
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
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