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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______ to ________
Commission File No.: 0-18034
ENTERPRISE SOFTWARE, INC.
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(Name of Small Business Issuer in its charter)
Delaware 68-0158367
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(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation)
8415 Explorer Drive, Colorado Springs, CO 80920
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (719) 265-3200
Securities registered under to Section 12(b) of the Exchange Act: None
Securities registered under to Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
Title of Class
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No ( )
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (X)
Revenues for the issuer's most recent fiscal year ended March 31, 1999 were
$31,325,618.
As of June 18, 1999 there were 5,406,496 shares of Common Stock issued and
outstanding and the aggregate market value of the issued and outstanding Common
Stock held by non-affiliates was approximately $30 million.
Documents incorporated by reference: The information required in Part III by
Items 9, 10, 11, and 12 is incorporated by reference to the Registrant's proxy
statement in connection with the 1999 annual meeting of shareholders, which
will be filed by the Registrant within 120 days after the close of its fiscal
year.
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PART I
FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, this Annual
Report contains forward-looking statements. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in these
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any revision
to these forward-looking statements. Readers should carefully review the risk
factors described in other documents the Company files from time to time with
the Securities and Exchange Commission.
ITEM 1. BUSINESS
INTRODUCTION
Enterprise Software, Inc. (the "Company" or "ENSW") changed its name
from IndeNet, Inc. on July 2, 1998. The Company was originally founded as a
Colorado corporation on April 4, 1988 and was re-organized under the laws of the
State of Delaware on July 17, 1995. On May 16, 1996, the Company acquired Cable
Computerized Management Systems, Inc. ("CCMS") and on May 24, 1996, the Company
acquired Enterprise Systems Group Limited and its subsidiaries ("ESG"). On April
2, 1997, ESG, through one of its subsidiaries, acquired Management Information
Services Limited ("MIS"), and effective March 31, 1998, ESG, through another of
its subsidiaries acquired Boss Associates Limited ("BOSS"). On September 1,
1998, ENSW acquired Revive Technologies Incorporated ("Revive") and on April 16,
1999, sold the assets of Revive to ManTech Systems Solutions Corporation Inc.,
a Virginia corporation. All references herein to the "Company" include
Enterprise Software, Inc. and its consolidated subsidiaries, Mediatech, Starcom,
CCMS, Revive, and Enterprise Systems Group Limited and its consolidated
subsidiaries.
See "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and footnotes to the consolidated financial
statements herein for further discussions regarding the integration plan,
results of operations and financial condition.
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INDUSTRY BACKGROUND
Over the past several years, the broadcast and cable industries have
undergone significant changes primarily as a result of new technologies, an
increase in the number of television channels via the introduction of additional
delivery mechanisms (e.g. cable, satellite, etc.) and changes in industry
regulation, both in the United States and internationally. These changes have
led to a dramatic increase in the sources of television and radio broadcasts and
a corresponding increase in the amount of available advertising time. Television
and radio stations derive revenue primarily from the sale of advertising time,
the level of which is directly dependant upon the amount of available time that
is sold and the price at which such time is sold. Television and radio stations
find it increasingly difficult to sell advertising time at their required price
levels, as a result of the increase in competition for the sale of advertising
time and continued fragmentation of audiences across ever increasing channels.
This increased supply of advertising time, together with an increased ability of
advertisers to identify their target audiences, has also led to advertisers and
agencies demanding a higher quality of service, with improved targeting of
advertisements. As a result, television and radio stations require more
sophisticated methods of determining how to price, package and deliver their
inventory of advertising time. The Company believes that the products and
services it has developed address the changing information technology
requirements of the broadcast and cable industries.
RECENT DEVELOPMENTS
The Company completed the acquisition of Revive on September 1, 1998,
for approximately $13.7 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 RVT Incorporated). The acquisition was funded through a
cash payment of approximately $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 in Note 8 to the
consolidated financial statements. The shares of stock were valued using the
closing price of the Company's common stock on the date the purchase was
announced which approximated its fair value. Revive, based in Pittsburgh, PA, is
a provider of software systems and tools for the conversion of legacy software
systems into "state of the art" software systems. Following unpredictable delays
by prospective clients to make commitments to convert their legacy systems and
the resultant negative cash-flow, the board of directors authorized the sale of
the Revive business in order to eliminate the drain on
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ENSW's cash resources. The sale of the business assets of Revive was completed
on April 16, 1999. The Company received $608,000 in cash upon closing, and a
note receivable amounting to $1,105,053 payable in four quarterly installments
of $276,263 plus interest at 6.5% per annum.
On May 3, 1999, the Company received a letter from the NASDAQ Stock
Market ("NASDAQ") asserting that the Company does not meet the listing
requirements of NASDAQ with respect to minimum net tangible assets due to the
sale of Revive. On May 14, 1999, the Company informed representatives of NASDAQ
that upon consummation of a transaction with LiveWire (as described below), the
Company would delist its common stock from NASDAQ.
On October 29, 1998 the Board of Directors announced that it had
retained Schroder & Co. Inc. to explore financial and strategic alternatives to
maximize value for shareholders, including the possibility of a merger or sale
of the Company. On June 28, 1999, the Company signed a definitive merger
agreement with a wholly-owned subsidiary of LiveWire Media, L.L.C. ("LiveWire").
Under the terms of the merger agreement, LiveWire will purchase approximately
98% of the stock of the Company for $9.25 per share, in cash. Approximately 2%
of the Company's common stock will remain outstanding. The price is subject to
a possible downward adjustment of up to $.40 per share in the event of a
shortfall in certain performance criteria or in the event there should be an
adverse change in the business and operations of the Company resulting in
liability of more than $1,000,000 and not to exceed $2,900,000. Upon the
occurrence of certain events the Company has agreed to pay LiveWire a break-up
fee of $2,500,000 and its fees and expenses up to an amount not exceeding
$1,500,000. In connection with the execution of the merger agreement with
LiveWire, each member of the Board, other than Cary Fitchey who was unable to
participate in the Board meeting approving the transaction, has executed a
voting agreement pursuant to which, among other things, each of them has agreed
to vote their respective shares in favor of the Company's proposed merger with
LiveWire. The merger is subject to certain conditions, including, without
limitation, shareholder approval, approvals by applicable public and regulatory
authorities, and financing.
BUSINESS STRATEGY
The strategy of the Company is to be a leader in providing enterprise
management technology to the electronic media marketplace and to expand into
other software products through development and acquisitions. ESG and CCMS
design, develop and distribute traffic, billing, revenue, program management and
other software products for the electronic media marketplace. The Company
currently provides its software products to over 240 domestic broadcast
television and radio stations, and to a total 100 broadcast television stations
located in the United Kingdom, Western Europe, Australia, New Zealand, Southeast
Asia and South Africa. The Company has also installed approximately 300 traffic
and billing software systems for cable television operators primarily in the
U.S. Currently, ESG and CCMS jointly have an order backlog of over $95 million,
most of which consists of software licensing and out-sourcing agreements having
an average life of five years. To date, most of the Company's broadcast
television station clients have consisted of larger stations in the larger
metropolitan markets in the US. The Company's strategy is to leverage its
existing technology, its client base and its reputation to pursue additional
television broadcast clients. In addition, the Company also intends to expand
its client base into smaller broadcast stations with its CCMS products.
On April 2, 1997, the Company's subsidiary ESG, through its
subsidiary, Enterprise Air-Time Systems Limited, acquired MIS from one of the
UK's leading media conglomerates, United News & Media Plc ("UN&M"). The Company
through its ESG subsidiary entered into a seven year software license and
bureau services agreement with another of UN&M's subsidiaries, Television
Sales & Marketing Services Limited ("TSMS"), one of three of the UK's
terrestrial television sales houses. The purchase price for MIS was a total of
$2,260,710, payable $1,255,950 in cash upon completion, and $334,920 on each of
the first three anniversaries of the completion date.
To update its product offering of software and services, the Company
made a strategic acquisition of a U.K. based provider of television program
library management, planning, and scheduling software products. The
consideration for that acquisition was $1,885,600 paid in cash upon completion
and the issuance of notes to the two founder shareholders of BOSS. The notes
total $1,507,140 plus interest at the rate of 8% per annum and are repayable in
quarterly installments over two years. During fiscal 1999, ESG relocated BOSS to
the premises current occupied by ESG's other UK subsidiaries.
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OPERATIONS
ESG was incorporated in 1977 in England and Wales. ESG has offices in
the United States, UK, Australia and South Africa. ESG currently has 237
employees worldwide. CCMS was incorporated in 1983 in Michigan. CCMS,
headquartered in the City of Wyoming, Michigan, currently has 26 employees.
The Company, through its subsidiaries, designs, develops and
integrates traffic and billing, revenue management, and program management
software products for use by broadcast television, radio stations and cable
operators, in the management of advertising time and programming. The Company's
broadcast television and radio station's customers, who typically enter into a
minimum contract period of five years to license the Company's software
products, include such major television networks as NBC Television Stations,
Tribune Television Stations, Fox Television Stations, Time-Warner Cable, TCI
Cable and Pacific Telesys Cable in the United States; The Granada Sales Company,
TSMS and VTM in Europe; Network 10 in Australia; and TVNZ in New Zealand. The
Company also provides a range of related services to its customers including
hardware installation, customer support, ongoing training, and custom software
development services.
The Company believes that, based on the concentration of its customer
base in the top television markets in the United States and other parts of the
world, and the nature and extent of its contractual relationships with its
customers, it is one of the leading providers of advertising and programming
management software products in media industry clients.
In an effort to the streamline its operations and save costs, the
decision was made to relocate the Company's corporate office in Livonia,
Michigan to premises in Colorado Springs, CO currently utilized by the US
subsidiary of ESG.
On February 22, 1999 Mr. Andre A. Blay stepped down from the position
of Chairman and Chief Executive Officer, and was replaced by Mr. Richard L.
Schleufer. In an effort to settle all actual and potential claims against the
Company and its affiliates and subsidiaries related to his employment, on June
28, 1999, the Company and Mr. Blay entered into an agreement that requires the
Company to deliver to Mr. Blay the sum of $425,000. In addition, the Company
has also agreed to enter into arbitration with Mr. Blay regarding the number,
vesting schedule and the price of the stock options that he may be entitled.
PRODUCTS AND SERVICES
The Company has developed a number of integrated and interactive
computer software systems for use in specific geographic markets, both domestic
and abroad, which can also be customized to satisfy individual client
requirements. The products are made available to broadcast television and radio
clients through licensing agreements typically for a minimum of five years, and
to cable advertisers through perpetual licenses. The Company also provides a
full line of related services to its customers, including project management,
and customer training, implementation, and support.
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Broadcast Television and Radio Station Traffic and Billing Management
Software Systems. The Company's traffic and billing management software systems
for broadcast television and radio stations are designed to provide flexibility
and support for television and radio station management. The systems incorporate
a comprehensive set of programs, which provide the user with information on a
range of areas, including sales orders, program scheduling, financial records,
transmission logs, invoicing, and credit and collections. The systems can be
configured to handle a variety of operations including individual operations,
full networks and multichannel environments.
The Company's software systems enable television and radio stations'
sales teams to identify the inventory of available advertising spots and support
their sales initiatives using sales history, external market research (for
example, ratings data obtained from A.C. Nielsen Company) and pricing data. The
sales inventory is updated immediately as orders are input. The systems
automatically identify and highlight any gaps in the inventory and recommend how
the inventory can be optimized to maximize revenue. As soon as final orders and
available slots within the inventory have been matched, the systems
automatically update the station's transmission log, which contains the schedule
of programs and advertisements, downloads the log details to the transmission
equipment and updates historic sales data files and financial and accounting
records.
Program Management Software Systems. The Company's program management
software systems for broadcast television give customers control with respect to
their inventory of feature films, syndicated series, cartoons, specials and
other programs. The systems provide customers with extensive search
capabilities, leading to better management of programming decisions. Examples of
these capabilities include searches for a particular actor or theme, and
searches based on past ratings, last play date or royalty payments due. The
systems also provide information which can assist customers in purchasing
programming. Other features of the systems include monthly amortization
forecasting, comparison of program revenue with the amortized cost of the
program and cash requirements reporting.
Revenue Management Systems. These products place the inventory of
airtime in a station's sales system, rather than in the traffic system. This
enables clients to manipulate their inventory from a sales prospective. In
addition to traffic and billing functions, the Landmark system also incorporates
Yield Management, Deal Management, Audience Research, and a sales information
database.
Cable Television Systems. The principal product offered by the Company
to its cable industry clients is the NOVAR System, a traffic management, billing
and sales management system designed to manage all activities of the advertising
sales operation. The system is designed to incorporate the information contained
within a client's advertising contract, as well as the advertising spots
associated with each contract and the network programs within which spots are to
be scheduled. The NOVAR system can handle up to 5,000 contracts at any one time.
The Company offers a single-user version of the system, as well as a multi-user
version to allow for access by multiple users simultaneously. Certain of the
features of the NOVAR system include (i) automatic or manual scheduling of
advertising spot data, according to specific client requirements; (ii)
maintenance of client advertising insertion tape libraries and assistance with
tape editing procedures; (iii) generation of an advertising insertion schedule
and (iv) automatic reconciliation of advertising spots that have aired, and the
automatic scheduling of "make-goods" for spots that were missed.
MARKETING AND SALES
Each of the Company's subsidiaries is responsible for marketing and
sales of products and services relevant to their local marketplace. Overall
coordination is exercised from the corporate office.
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COMPETITION
The Company competes with numerous competitors, both domestically and
internationally, that provide products and services to the electronic media
marketplace. Domestically, these competitors include C/JDS, MSA, VCI, Lan
International, Visiontel and others. Internationally, they include C/JDS,
Rebus, Pilat, TSS, Star Tricom and others. In addition, there are currently
substantial amounts of in-house solutions throughout the marketplace that are
competitive with those that the Company offers. The majority of the Company's
competition exists within the television broadcasting and cable market segments.
The Company has a much smaller presence in the radio, advertising agency and
sales rep markets.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
ESG and CCMS primarily rely upon a combination of trademark,
trade-name, and confidentiality and license agreements to establish and protect
proprietary rights in their technologies. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
software, or technology, without authorization or to develop similar product
functionality independently. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries.
The Company believes that its software, trademarks and other
proprietary rights do not infringe the proprietary rights of third parties.
There can be no assurance, however, that third parties will not assert such
infringement by the Company with respect to current or future software, hardware
or services. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause software release delays or might require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company.
EMPLOYEES
As of June 1, 1999, the Company had 263 employees, of whom 237 were
employed by ESG, and 26 were employed at CCMS. The three officers of ENSW also
perform active roles within ESG and CCMS and are counted in the ESG staffing
number. Other than officers, ENSW had no other employees as of June 1, 1999.
The Company's employees are not represented by any collective bargaining
organization. The company believes that its relations with its employees to be
good.
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RESEARCH AND DEVELOPMENT
ESG and CCMS are committed to devoting a significant amount of its
resources to the development of new or enhanced traffic, billing, revenue and
program management products. For the fiscal years ended March 31, 1999 and 1998,
research and development expense was $565,164 and $139,955, respectively. In
addition, ESG spent $2,112,310 in 1999 on the development of new products for
program and broadcast presentation management, the management of advertising
spot sales for the cable television providers, and advertising sales
negotiations and bookings for television stations. ESG and CCMS intend to
continue to actively enhance their products, and they expect that the total
research and development costs will increase in future periods.
SIGNIFICANT CUSTOMERS
During the fiscal year ended March 31, 1999, there was no single
customer of either ESG or CCMS that represented more than 10% of either the
total revenue of the Company, or the individual business of either ESG or CCMS.
ITEM 2. PROPERTIES.
The Company currently maintains five office facilities in the U.S. and
abroad. All of the Company's office facilities are leased. The following is a
summary of the Company's office facilities:
LOCATION USE LESSEE
Colorado Springs, Colorado Executive offices Enterprise Systems
& office facilities, Group, Inc.*
also utilized as the
Corporate head office.
Thames Ditton, Surrey, England Executive offices,
office facilities & Enterprise Air-
computer suite Time Systems Ltd.*
French's Forest, NSW, Australia Executive offices Enterprise Systems
& office facilities Group (Australia)
Pty, Ltd.
Johannesburg, South Africa Office Facility Enterprise Air-
Time Systems Ltd.*
(South Africa
Branch)
City of Wyoming, Michigan Office Facility Cable Computerized
Management Systems,
Inc.
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* Subsidiaries or branches of Enterprise Systems Group Limited
The Company believes that these office facilities, additional or
alternative space available to it are adequate to meet its requirements for the
foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS.
The Company is subject from time to time to litigation arising in the
ordinary course of its business. The Company believes that no such litigation
is pending that would have a material adverse effect on the Company's business.
A former employee has filed suit against the Company alleging that the
Company had failed to issue shares under three option agreements entered into in
1995 and 1996. The Company denies any liability on the ground that the options
were not exercised within the time period specified in the option agreement
because the individual voluntarily terminated his employment prior to the date
of attempted exercise. The claim amounts to approximately $350,000 at March 31,
1999.
A former employee of Starcom Mediatech (which was sold by the Company on
July 18, 1997, to which the Company is providing defense and indemnity) filed
suit against the Company for wrongful termination of an employment contract
resulting from an agreement entered into by Starcom Mediatech to manage the
former employees company. The claim amounts to approximately $90,000 at
March 31, 1999.
A threat of litigation has been made by a customer. The Company
believes it can negotiate with the customer and limit the exposure to
approximately $820,000.
In connection with the acquisition of Revive, 893,484 shares of common
stock of the Company were issued to the Revive shareholders. In connection with
the Revive acquisition, the Company agreed to file a registration statement with
respect to those shares by May 31, 1999. As the Company was engaged in active
negotiations to be sold at a premium above its market price, the Company has not
filed such a registration statement. The Company has also received a letter from
counsel for the Revive shareholders noting that the Company is in breach of its
obligations. If the merger with LiveWire is consummated, the Revive
shareholders will be entitled to receive the merger consideration for their
shares of the Company's common stock. The Company believes that, on or about
August 4, 1999, most of the Revive shareholders will be able to freely transfer
their respective shares of common stock, subject to the terms of Rule 144 of the
Securities Act of 1933, as amended. One of the principal ex-shareholders of
Revive has executed a voting agreement in connection with the proposed
transaction with LiveWire that provides for a lock-up of his shares of common
stock. The Company cannot predict what actions the Revive shareholders may take
in connection with this matter.
A debtor under a note agreement has asserted a claim under the warranty
provisions of an agreement related to the sale of a former subsidiary. In
connection with this claim, the Company has recorded an allowance for
uncollectible accounts.
The Company is party to other threatened litigation which it considers
routine and incidental to its business. Management does not expect the results
of any of these threatened actions to have a material adverse effect on the
Company's business, results of operations or financial condition.
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:
Proposal I-Election of Directors:
<TABLE>
<CAPTION>
For Against Withheld
---------------- ----------- -----------
<S> <C> <C> <C>
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
</TABLE>
James S. Ware resigned in January 1999, and Irwin Schlass was appointed
to fill the resulting vacancy on the Board. In February, 1999, Thomas H. Baur
resigned and Cary S. Fitchey was appointed to fill the vacancy on the Board.
Proposal II-Approval of Company's Employee Stock Purchase and Savings
Plan:
<TABLE>
<CAPTION>
For Against Withheld
---------------- ----------- -----------
<S> <C> <C> <C>
3,395,985 73,324 143
</TABLE>
Proposal III-Ratification of the appointment of KPMG LLP as the
Company's auditors for the fiscal year ended March 31, 1999:
<TABLE>
<CAPTION>
For Against Withheld
---------------- ----------- -----------
<S> <C> <C> <C>
3,469,244 75 133
</TABLE>
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Enterprise Software, Inc.'s common stock trades on the NASDAQ National
Market under the symbol "ENSW". On June 30, 1999, the closing sale price for the
Common Stock was $8.00. The following table sets forth the high and low closing
sales prices for the Common Stock for each quarter during the past two fiscal
years.
<TABLE>
<CAPTION>
Period Ended Per Share - HIGH Per Share - LOW
---------------- ---------------
<S> <C> <C>
Quarter Ended 06/30/97 $ 8.00 $ 5.52
Quarter Ended 09/30/97 $ 14.00 $ 5.24
Quarter Ended 12/31/97 $ 12.24 $ 8.00
Quarter Ended 03/31/98 $ 10.76 $ 7.24
Quarter Ended 06/30/98 $ 12.50 $ 7.00
Quarter Ended 09/30/98 $ 12.25 $ 5.38
Quarter Ended 12/31/98 $ 7.94 $ 4.06
Quarter Ended 03/31/99 $ 7.63 $ 5.00
</TABLE>
There are approximately 560 stockholders of record. The Company believes that
there are approximately 3,000 stockholders who beneficially own the Common Stock
of the Company.
No dividends have been declared or paid by the Company on its Common
Stock since inception, and no dividends are contemplated to be paid by the
Company at any time in the foreseeable future.
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In March 1998, the Company completed a private placement of $15.0
million in Subordinated Debentures ("Debentures") to a single institutional
investors. The Debentures accrue interest at 14.5% per annum, payable monthly.
The Debentures have two tranches, both maturing in April, 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 to make certain acquisitions, redeem the
outstanding shares of Series A stock, and for working capital. Tranche B was
funded at closing on September 1, 1998 to make certain acquisitions. The
Debentures have a prepayment penalty for 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. Originally, the warrants, when exercised, would have
provided 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, and
1.65% warrants with the funding of Tranche B. The original exercise price was
$10.00 or surrender of the equivalent amount of warrants pursuant to a spread
exercise provision. In October 1998, these warrants were re-priced to $4.50 in
accordance with the terms of the warrants. Subsequent to March 31, 1999, the
investor agreed that a upon a sale of the Company, the warrants would be
cancelled and in exchange the investor would receive the greater of (i) $500,000
and (ii) 62.5% of the excess of (A) the consideration to be paid per share of
common stock upon consummation of the sale of the Company over (B) $4.50
multiplied by the number of shares of common stock subject to the warrants. The
warrants will expire ten years from the date of the final payment on the
Debentures. The warrants were valued using a fair value based model at the date
of issue to be amortized over the life of the loan.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Operations of the Company commenced through its first acquisition in
February 1995. The acquisitions completed by the Company to date are as follows:
(i) Mediatech, Inc. ("Mediatech") in February 1995, (ii) Channelmatic, Inc.
("Channelmatic") in November 1995, (iii) Starcom Television Services, Inc.
("Starcom") in February 1996, (iv) CCMS in May 1996, (v) ESG in May 1996, (vi)
Media Information Services Ltd. ("MIS") in April 1997, (vii) Boss Associates
Ltd. ("BOSS") in March 1998, and (viii) Revive in September 1998. On March 24,
1997, the Company sold its interest in Channelmatic, on July 18, 1997, the
Company sold its interests in Mediatech and Starcom, and on April 16, 1999, the
Company sold its interest in Revive.
On June 2, 1997, the Company announced the results of its strategic
review of its then businesses. The Board of the Directors of the Company decided
to focus the Company's operations on enterprise management software products and
services, particularly in the television and radio industry including broadcast
and cable. These products and services were provided by the Company's
subsidiaries ESG and CCMS. Accordingly, because the operations of certain of its
remaining subsidiaries were inconsistent with the Company's revised business
strategy, the Company sold its interests in its content delivery subsidiaries
Mediatech and Starcom.
The Company currently designs and develops traffic billing, revenue and
program management software products for the management of advertising time and
programming through its subsidiaries ESG and CCMS. The acquisitions during the
1998 and 1999 fiscal years have both broadened the products and service offering
of ESG, as well as increasing ESG's client base. The Company now operates in one
business segment. The Company operates in various countries. See Note 10 to the
consolidated financial statements.
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<PAGE> 12
The following comparison of the Company's operations for the past two fiscal
years is based on ongoing operations only, and contains no figures relating to
discontinued operations.
ACTUAL RESULTS FOR FISCAL 1999 COMPARED TO FISCAL 1998
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
--------------------------------------
<S> <C> <C>
Revenue $ 31,325,618 $ 24,981,955
Cost of sales 12,425,443 12,365,138
Selling, general, & administrative 10,284,178 7,589,204
Depreciation & amortization 2,882,674 2,154,941
Research & development 565,164 139,955
Occupancy costs 1,448,454 1,256,683
Restructuring, impairment, & one-time charges - 5,907,321
Other income (expense), net (5,152,301) (1,699,254)
Income tax benefit expense (43,494) (819,892)
Loss from discontinued operations (1,647,255) (1,024,903)
Loss/gain on disposal of discontinued operations (13,471,007) 8,890,442
Net loss/income (16,507,364) 2,554,890
</TABLE>
Revenue
Revenue increased approximately $6,344,000 or 25% as compared to fiscal
1998. This increase resulted from an increase in revenue from domestic sales of
$5,031,000 and international sales of $1,313,000. Of the international sales,
revenue as a result of the Boss acquisition was $2,569,000. The increase in
revenue from ESG was primarily due to license income from newly installed
systems during the year.
Cost of Sales
Cost of sales increased approximately $60,000 or 0.5% from 1998. This
marginal increase in cost of sales reflects the benefits from increased license
revenues for which there is little incremental costs. The gross profit as a
percentage of revenue increased in 1999 to 60% from 50% in 1998.
Selling, General, and Administrative
Selling, general and administrative ("SG&A") expenses includes amounts
of $6,707,332 (fiscal 1998 $5,001,000) with respect to ESG, $1,600,305 (fiscal
1998 $1,127,000) with respect to CCMS, and $1,976,541 (fiscal 1998 $1,461,000)
with respect to ENSW.
SG&A expense increased by $2,695,000 in fiscal 1999 relative to
fiscal 1998. The increases in SG&A of approximately $1,706,000 or 34% for ESG,
and of approximately $473,000 or 42% for CCMS, are both due to an increased
level of business resulting in increased computer hardware and software
maintenance and running costs, together with increased travel and marketing
costs. The Company incurred staff cost increases due to wage rate increases in
the computer industry in general as a result of the demand by other companies
for skilled staff to work on the "millennium bug" together with the general
level of wage rate increases in the Colorado area as a result of the relocation
of a number of conglomerates.
The ENSW expense represents costs incurred by the parent company. These
expenses include primarily legal and professional fees of approximately
$1,042,000 as well as other costs associated with being a public listed company,
(e.g. SEC and NASDAQ fees, and printing and shareholder communication costs),
amounting to approximately $552,000. The expenses of ENSW also include the
salaries, automobile related expenses and travel costs amounting to
approximately $382,000 for two officers, one until September 1998, and the
other,
12
<PAGE> 13
the Chairman and Chief Executive, until February 1999. At the time of this
report there are no salary costs attributable to ENSW. The Corporate Office has
been relocated from Livonia to Colorado Springs in a further effort to save on
expenditures, principally rent and other general and administrative costs.
Depreciation and Amortization
Depreciation and amortization increased from approximately $2.1 million
in fiscal 1998 to approximately $2.9 million in fiscal 1999 due to the
additional amortization resulting from the acquisition of BOSS.
Research and Development
Research and development ("R&D") increased substantially from
approximately $140,000 in fiscal 1998 to approximately $565,000 in fiscal 1999.
Of this expenditure, $277,000 ($55,000 in fiscal 1998) was spent on Year 2000
(the "millennium bug") testing and remediation. Both ESG and CCMS are committed
to continued development and the improvement of their products and both expect
their R&D expenditure to increase in future periods.
Restructuring, Impairment and Other Costs
During fiscal 1998, the company incurred nonrecurring charges. The
$5.9 million Restructuring, Impairment and Other One-time Charges include $2.8
million related to asset write-downs to net realizable value of capitalized
software development costs. Management wrote-off certain capitalized software
development costs after determining that the likelihood of the future recovery
of those capitalized costs was remote. In addition, the Company wrote off
approximately $2.2 million and $847,000 in purchased in process research and
development in connection with the acquisitions of Boss and MIS, respectively.
Other Income (Expense)
Interest income decreased from fiscal 1998 to fiscal 1999 by
approximately $201,000. Interest expense increased from fiscal 1998 to fiscal
1999 by approximately $1.7 million. Both occurrences were due primarily to
decreased cash reserves and increased cash borrowings as a result of the
BOSS and Revive acquisitions, and the redemption of Series A Preferred Stock.
During fiscal 1998, the Company paid $495,527 in severance costs to its
former Chief Executive Officer upon his departure in July 1997. During fiscal
1999, the Company paid $68,700 to a Managing Director of one of the subsidiaries
of ESG upon his departure from the company in September 1998, and made a
provision for $475,000 to its former Chairman in recognition of his departure in
February 1999.
The Company has made a provision for $1.70 million with respect to four
separate claims. First, a former employee is alleging that the Company had
failed to honor certain stock options granted. Second, a former employee is
alleging that the Company had, without notice, terminated his employment. Third,
a threat of litigation has been made by a customer for breach of contract. The
Company has accrued the estimated cost of curing the breach. Finally, a company
that purchased a former subsidiary has made a claim under the warranties section
of the sales agreement and is alleging certain financial damages. While the
Company believes that it has grounds for disputing the majority of the claim, it
has made a provision for a possible uncollectible account.
The remaining Other expense in fiscal 1998 amounted to approximately
$697,000. This was reduced to approximately $234,000 in fiscal 1999.
Income Taxes
At March 31, 1999 and 1998, the Company had net operating loss
carryforwards of $23.0 million and $18.5 million for federal income tax
purposes, of which $3.3 million is subject to a separate return limitation at
March 31, 1999. The carryforwards expire in varying amounts and years through
2019. This loss carryforwards gives rise to a deferred tax asset of $7.8 million
and $6.3 million at March 31, 1999 and 1998, respectively. This
13
<PAGE> 14
deferred 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. Because
of changes in the Company's ownership, there is an annual limitation on the
usage of the net operating loss carryforwards. Income tax benefit for both
fiscal 1999 and fiscal 1998 primarily represent state taxes for the various
states in which the Company does business.
Discontinued Operations
The loss from discontinued operations in fiscal 1999 resulted from the
losses incurred by Revive during the period of ownership by the Company. The
loss from discontinued operations in fiscal 1998 resulted from the operations of
Starcom Mediatech only through the sale on July 18, 1997.
At March 31, 1999 full provision was made for the loss, net of taxes,
amounting to $13,471,007 in respect of the sale of the business of Revive on
April 16,1999. During fiscal 1998, the Company recorded a gain, net of taxes, of
$8,890,442 from the sale of its subsidiaries, Mediatech and Starcom.
Liquidity and Capital Resources
As of March 31, 1999, the Company had $5.2 million in unrestricted
cash, compared with $6.2 million at March 31, 1998, and a working capital
deficit of $2.4 million compared to a deficit at March 31, 1998 of $0.6 million.
During the year ended March 31, 1999, cash and cash equivalents decreased by
$1.0 million but the Company generated $2.3 million of cash from its operations,
primarily due to the operating profit of the Company and an increase in working
capital. The Company provided $5.0 million through its financing activities, and
used this cash primarily for the purchase by ESG of BOSS, and the purchase of
Revive by the Company, capitalized software costs, and deferred financing costs.
The Company anticipates funding its working capital needs for the next
twelve months through cash generated from operations, and lower costs associated
with license contracts for which deferred income of $3.4 million has been
recorded at March 31, 1999, compared to $3.1 million at March 31, 1998.
In order to address the cash flow problems of Revive, the Company sold
the business assets of this subsidiary on April 16, 1999. In addition, the
Company further reduced the staff at its Corporate Office and relocated the
Corporate Office to premises in Colorado Springs, Colorado, that were already
occupied by ESG's US subsidiary. Although it is anticipated that these actions,
together with the cash-flow generated from the Company's operating activities,
have significantly improved the overall cash flow, no assurance can be given
that the funds generated from operations and the cost savings will be sufficient
to offset the Company's working capital deficit. The Company has other debt
financing available to meet its anticipated cash needs in excess of cash
generated from operations.
In the year ended March 31, 1998, the Company successfully negotiated
the cancellation of the convertible notes through a cash payment of $4.675
million and the issuance of a promissory note in the amount of $825,000, which
was paid subsequent to March 31, 1998.
The Company's other debt obligations consist of debt owed by both ENSW
and by certain of its subsidiaries. The debt obligations of ENSW consist of
indebtedness owed to affiliates of the Company, convertible notes held by one
investment fund, and a long-term line of credit facility with a major clearing
bank. The debt obligations of the subsidiaries primarily finance leases for
equipment and loan notes due to the former stockholders of acquired businesses.
ENSW currently is, however, a holding company that generates no revenues and is
dependent on cash from its subsidiaries for operating proceeds. Accordingly, the
ability of ENSW to fund its debt service obligations and its working capital
expenses is dependent upon proceeds from its subsidiaries and upon its ability
to raise additional financing. During fiscal 1998, the Company did not make
certain scheduled payments on the related party notes payable. However, the
Company currently believes that cash generated by the subsidiaries from
operations is sufficient to repay the debt obligations of those subsidiaries as
such obligations become due.
14
<PAGE> 15
Since the obligations of ENSW to certain of its affiliates under its existing
debt is secured by a lien on some of the stock of two its subsidiaries, failure
to repay such indebtedness could result in the loss of a portion of ENSW's
interest in that such subsidiary. Any foreclosure by the institutional lenders
that have extended credit to the subsidiaries could result in the foreclosure of
certain of the assets of the subsidiaries.
INFLATION
The Company does not believe that inflation will have a material impact
on the Company's future operations.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" for fiscal 1999. This statement
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. This Statement
requires the classification of items of comprehensive income by their nature in
a financial statement and the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in the equity
section of the balance sheet.
During October 1997, the Accounting Standards Executive Committee
(AcSEC) of the AICPA issued SOP 97-2, "Software Revenue Recognition." SOP 97-2
replaces the SOP 91-1 method of distinguishing between significant and
insignificant vendor obligations as a basis for recording revenue with a
requirement that each element of a software licensing arrangement be separately
identified and accounted for based on relative fair values of each element.
Further, in order to recognize revenue for each element as delivered, stringent
requirements for "vendor-specific objective evidence" must be met for each
element's fair value, and no remaining undelivered elements can be essential to
the functionality of the delivered elements.
In March 1998, the AICPA issued SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition." SOP 98-4 defers,
for one year, the application of certain passages in SOP 97-2, which limit what
is considered vendor-specific objective evidence ("VSOE") necessary to recognize
revenue for software licenses in multiple-element arrangements when undelivered
elements exist. In December 1998, the AICPA issued SOP No. 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," which clarifies guidance regarding VSOE and multiple element
arrangements. SOP 98-9 amends SOP 98-4 to extend the deferral of guidance in SOP
97-2 as it relates to these matters through fiscal years beginning after March
15, 1999. The Company has evaluated the SOP and amendments and does not expect
their adoption will have a material effect on its revenue recognition practices.
In June 1998 the Financial Accounting Standards Board issued
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. As the Company does not currently engage or plan to engage in derivatives,
there will be no impact to the Company's results of operations, financial
position or cash flows upon the adoption of SFAS 133.
15
<PAGE> 16
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs having being
written using two digits rather than four digits 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) the
potential reduced expenditures on new systems by prospective customers as a
result of them spending significant amounts on the testing and remediation of
their existing information systems, which have Year 2000 problems, and the
reluctance of those prospective customers to change systems in the period
leading up to the millennium.
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 in their budgets for new software and
hardware. Such changes in customers' spending patterns could have a material
adverse impact in the Company's sales, operating results or financial condition
for the fiscal year ending March 31, 2000.
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 failures 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. In particular, little or no
response has been received from the public utilities, such as the electricity,
telephone, and water companies. As a result, this Company, along with most other
business in the United States and internationally, could be materially adversely
impacted as a direct result of the failure of these utilities not providing an
uninterrupted supply.
The total cost of the review and necessary modifications spent to date
has amounted to approximately $332,000. Of this amount, $277,000 was spent in
the year ended March 31, 1999. The Company expects to spend a further $157,000
to complete the remainder of the necessary modifications in the fiscal year
ending March 31, 2000. The remaining work is expected to be substantially
completed by July 1999. The current estimate of the total costs for the whole
project is now approximately 60% more than the original estimate. The
expenditures incurred by Revive, during its period of ownership, on Year 2000
reviews or modifications amounted to $1,600. All costs incurred have been
expensed.
At the time of the acquisition of BOSS Associates Limited, the Company
acquired seven clients that were using legacy systems previously supplied by
BOSS. Following that acquisition a decision was made that the Company would
neither test, nor remediate those old legacy systems at its own expense, and the
clients were notified accordingly. The Company has either already supplied or is
intending to supply compliant systems to five of those clients. Two clients have
found alternative suppliers.
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
ensue. 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements begin on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with Accountants on
Accounting and Financial Disclosures.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by this Item 9 as to directors is
incorporated by reference to the information captioned "Election of Directors"
included in the Registrant's definitive proxy statement in connection with the
1999 meeting of shareholders. The information regarding compliance with Section
16 of the Exchange Act of 1934 and the Rules promulgated thereunder is
incorporated by reference therein to the Company's definitive proxy statement in
connection with the 1999 meeting of shareholders.
Item 10. Executive Compensation.
The information required by this Item 10 is incorporated by reference
to the information captioned "Executive Compensation" included in the
Registrant's definitive proxy statement in connection with the 1999 meeting of
shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 11 is incorporated by reference
to the information captioned "Security Ownership of Certain Beneficial Owners
and Management" included in the Registrant's definitive proxy statement in
connection with the 1999 meeting of shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 12 is incorporated by reference
to the information captioned "Compensation Committee Interlocks and Insider
Participation" included in the Registrant's definitive proxy statement in
connection with the 1999 meeting of shareholders.
16
<PAGE> 17
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibit Index
Exhibit Number Description
- --------------------------------------------------------------------------------
3.1 Enterprise Software, Inc. Certificate of
Incorporation (Incorporated by reference to
Exhibit 3.1 of the Registration Statement on
Form S-3 (File No. 333-1205)
3.2 Enterprise Software, Inc. Bylaws
(Incorporated by reference to Exhibit No. 3.2
of registration statement on Form S-3 (File
No. 333-1205)
4.1 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)
10.5 Registration Rights Agreement (Incorporated
by reference to Exhibit I to the Form 8-K for
event which occurred on February 29, 1996)
10.7 Cable Computerized Management Systems, Inc.
Agreement and Plan of Merger (Incorporated by
reference to Exhibit 99 to Report on Form 8-K
for event dated May 16, 1996)
10.8 Enterprise Systems Group Limited Share
Purchase Agreement (Incorporated by reference
to Exhibit 99 to Report on Form 8-K for event
dated May 24, 1996)
10.9 Certificate of Designation of Series C
Preferred Stock (Incorporated by reference to
Appendix A of Proxy Statement (File No.
333-1205)
23 Consent of KPMG LLP
27 Financial Data Schedule
17
<PAGE> 18
(b) REPORTS ON FORM 8-K
The Registrant filed eight reports on Form 8-K during the last quarter
of the fiscal year ended March 31, 1999, as follows:
(i) A report on Form 8-K filed on May 15, 1999, reporting under
Item 5 the announcement of the Company signing a non-binding
letter of intent with LiveWire Ventures, LLC regarding a
proposed transaction whereby LiveWire would acquire up to 100%
of the outstanding common stock of the Company.
(ii) A report on Form 8-K filed on April 30, 1999, reporting under
Item 2 the announcement of the completion of the sale of
Revive Technologies Incorporated to ManTech International
Corporation.
(iii) A report on Form 8-K filed on March 5, 1999, reporting under
Item 5 the announcement of the Chairman and chief executive
officer would be leaving and his responsibilities would be
assumed by Richard L. Schleufer.
(iv) A report on form 8-K filed on February 16, 1999, reporting
under Item 5 the announcement of the resignation of Thomas A.
Baur from the Board of Directors of the Company and the
election of Cary S. Fitchey to fill such vacancy.
(v) A report on form 8-K filed on February 4, 1999, reporting
under Item 5 the announcement of the election of Irwin Schlass
to fill a vacancy on the Board of Directors of the Company
created by the resignation of James S. Ware.
(vi) A report on form 8-K filed on January 21, 1999, reporting
under Item 5 the terms of that certain Investment and Loan
Agreement, dated as of March 26, 1998, by and between the
Company and Allied Capital Corporation, as amended, and the
documents delivered by the Company in relation thereto.
(vii) A report on form 8-K filed on January 21, 1999, reporting
under Item 5 amendments to the Company's Stock Appreciation
Rights Plan.
(viii) A report on form 8-K filed on January 4, 1999 reporting under
Item 5 the nomination for election of Joseph J. Porfeli to
the Board of Directors of the Company, and the entering into
of employment agreements with certain executive officers of
the Company and its subsidiaries.
18
<PAGE> 19
ENTERPRISE SOFTWARE, INC.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENTERPRISE SOFTWARE, INC.
Signed July 9, 1999 By: /s/ Richard L. Schleufer
Richard L. Schleufer
Chairman of the Board and Chief
Executive Officer
July 9, 1999 By: /s/ D. W. Martin
David W. Martin,
Chief Financial Officer
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: July 9, 1999 By: /s/ Joseph Porfeli
Joseph Porfeli, Director
Date: July 9, 1999 By: /s/ H. Bradley Eden
H. Bradley Eden, Director and
Corporate Secretary
Date: July 9, 1999 By: /s/ Cary Fitchey
Cary Fitchey, Director
Date: July 9, 1999 By: /s/ Irwin Schlass
Irwin Schlass, Director
Date: July 9, 1999 By: /s/ Robert Beaureguard
Robert Beaureguard, Director
19
<PAGE> 20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of KPMG LLP, Independent Certified Public Accountants................ F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998................... F-3
Consolidated Statements of Operations for the years ended March 31,
1999 and 1998.......................................................... F-5
Consolidated Statements of Stockholders' Equity for the years
ended March 31, 1999 and 1998.......................................... F-6
Consolidated Statements of Cash Flows for the years ended March 31,
1999 and 1998......................................................... F-7
Notes to Consolidated Financial Statements.................................. F-9
F-1
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Enterprise Software, Inc.
We have audited the accompanying consolidated balance sheets of Enterprise
Software, Inc. and subsidiaries as of March 31, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Enterprise Software, Inc. and subsidiaries as of March 31, 1999 and 1998 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG LLP
Detroit, Michigan
May 21, 1999 except for Note 18
which is as of June 28, 1999
F-2
<PAGE> 22
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,233,587 $ 6,169,383
Accounts and other receivables, net of allowance of doubtful
accounts of $ 341,110 and $ 288,699 in 1999 and 1998, respectively 3,594,948 4,142,186
Notes receivable, current portion 443,615 745,213
Marketable securities, at fair market value - 1,135,000
Prepaid expenses and deferred taxes 1,355,443 570,910
----------- -----------
Total current assets 10,627,593 12,762,692
Property and equipment, less accumulated depreciation and amortization 3,007,857 3,142,661
Notes receivable, net of current portion 2,290,557 3,011,892
Capitalized software development costs 2,682,025 -
Customer list and other identifiable assets, net of accumulated amortization
of $ 2,875,928 and $ 1,837,065 in 1999 and 1998, respectively 14,103,386 14,063,563
Goodwill, net of accumulated amortization of $ 913,497 and $ 336,703 in
1999 and 1998, respectively 4,774,701 5,351,494
Other long-term assets 731,921 626,549
----------- -----------
TOTAL ASSETS $38,218,040 $38,958,851
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 23
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 7,559,362 $ 5,273,106
Deferred revenue 3,420,046 3,073,557
Notes payable, current portion 522,860 3,504,519
Notes payable to related parties, current portion 763,240 779,637
Capital lease obligations, current portion 713,409 785,475
------------ ------------
Total current liabilities 12,978,917 13,416,294
Notes payable, net of current portion 7,322,860 1,088,490
Notes payable to related parties, net of current portion 13,994,617 8,976,384
Capital lease obligations, net of current portion 1,124,235 1,400,312
Other long-term liabilities 400,000 183,432
------------ ------------
TOTAL LIABILITIES 35,820,629 25,064,912
Commitments and contingencies - -
Redeemable Preferred Stock:
Preferred stock, Series A, $.0001 par value
Authorized - 1,200 shares authorized,
issued and outstanding -0 and 190 shares
in 1999 and 1998, respectively - 1
Stockholders' equity:
Common stock $.001 par value
Authorized - 100,000,000 shares
Issued and outstanding - 5,406,496 and 4,513,012 shares in
1999 and 1998, respectively 5,406 4,513
Additional paid-in capital 48,695,228 43,425,818
Accumulated deficit (46,381,162) (29,873,798)
Accumulated other comprehensive income 77,939 337,405
------------ ------------
Total stockholders' equity 2,397,411 13,893,938
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,218,040 $ 38,958,851
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 24
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For Years Ended March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue $ 31,325,618 $ 24,981,955
Cost of sales 12,425,443 12,365,138
------------ ------------
Gross profit 18,900,175 12,616,817
Operating expenses:
Selling, general and administrative 10,284,178 7,589,204
Depreciation and amortization 2,882,674 2,154,941
Research and development 565,164 139,955
Restructuring, impairment and other nonrecurring charges - 5,907,321
Occupancy costs 1,448,454 1,256,683
------------ ------------
15,180,470 17,048,104
------------ ------------
Operating Income (Loss) 3,719,705 (4,431,287)
Other income (expense):
Interest income 380,626 581,542
Interest expense (2,789,879) (1,088,323)
Severance and settlement cost (2,509,497) (495,527)
Net gain on extinguishment of debt - 2,986
Realized loss on foreign exchange (17,104) (35,661)
Loss on sale of marketable securities (27,660) (501,607)
Miscellaneous, net (188,787) (162,664)
------------ ------------
(5,152,301) (1,699,254)
------------ ------------
Loss from continuing operations before income taxes (1,432,596) (6,130,541)
Income tax benefit (43,494) (819,892)
------------ ------------
Loss from continuing operations (1,389,102) (5,310,649)
Discontinued Operations
Loss from discontinued operations, net of tax benefit of
$ 443,700 and $ 221,000 in 1999 and 1998, respectively (1,647,255) (1,024,903)
Gain/(loss) on disposal of Subsidiaries, net of taxes
of $ 560,000 and $1,057,000 in 1999 and
1998, respectively (13,471,007) 8,890,442
------------ ------------
Net income/(loss) (16,507,364) 2,554,890
Dividends to preferred shareholders - 392,233
------------ ------------
Net income/(loss) allocable to common shareholders $(16,507,364) $ 2,162,657
============ ============
Basic and diluted earnings/(loss) per share:
Earnings/(loss) per share from continuing operations $ (0.28) $ (1.30)
============ ============
Earnings/(loss) per share from discontinued operations $ (3.01) $ 1.79
============ ============
Net income/(loss) per share $ (3.29) $ 0.49
============ ============
Weighted average number of
common shares outstanding 5,029,519 4,399,710
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 25
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Series C Preferred Stock Common Stock
-------------------------------------------------- Additional
Number of Preferred Number of Common Paid-in
Shares Stock Shares Stock Capital
--------- ------------ ---------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1997 789 $ 1 4,295,266 $ 4,295 $ 49,222,808
Conversion of Series B Preferred
Stock to Common Stock - - 98,113 98 (75)
Repurchase of Series C Preferred stock (789) (1) 147,926 148 (6,574,206)
Cashless exercise of employee stock options - - 38,143 38 (38)
Purchase and cancellation of treasury shares - - (66,436) (66) (549,934)
Amount to be paid in Common stock related to
stated accretion on Series A and Series C
Preferred Stock - - - - 366,233
Warrants issued in connection with
subordinated debentures 961,030
Preferred stock dividends - - - - -
Net income - - - - -
Other comprehensive income,
foreign currency adjustment,net of tax - - - - -
-------- --------- ---------- ------- ------------
Balance at March 31, 1998 - $ - 4,513,012 $ 4,513 $ 43,425,818
Redemption of Preferred
Stock, Series A - - - - (2,099,999)
Warrants issued in connection with
subordinated debentures - - - - 669,053
Shares issued for purchase of Revive
Technologies, Inc. - - 893,484 893 6,700,356
Net loss - - - - -
Other comprehensive income,
foreign currency adjustment,net of tax - - - - -
-------- --------- ---------- ------- ------------
Balance at March 31, 1999 - $ - 5,406,496 $ 5,406 $ 48,695,228
======== ========= ========== ======= ============
</TABLE>
<TABLE>
<CAPTION>
Foreign
Currency
Accumulated Translation
Deficit Adjustment Total
-------------------------------------------
<S> <C> <C> <C>
Balances at March 31, 1997 $(32,036,455) $ 456,976 $ 17,647,625
Conversion of Series B Preferred
Stock to Common Stock - - 23
Repurchase of Series C Preferred stock - - (6,574,059)
Cashless exercise of employee stock options - - -
Purchase and cancellation of treasury shares - - (550,000)
Amount to be paid in Common stock related to
stated accretion on Series A and Series C
Preferred Stock - - 366,233
Warrants issued in connection with
subordinated debentures 961,030
Preferred stock dividends (392,233) - (392,233)
Net income 2,554,890 - 2,554,890
Other comprehensive income,
foreign currency adjustment,net of tax (119,571) (119,571)
------------ --------- ------------
Balance at March 31, 1998 $(29,873,798) $ 337,405 $ 13,893,938
Redemption of Preferred
Stock, Series A - - (2,099,999)
Warrants issued in connection with
subordinated debentures - - 669,053
Shares issued for purchase of Revive
Technologies, Inc. - - 6,701,249
Net loss (16,507,364) - (16,507,364)
Other comprehensive income,
foreign currency adjustment,net of tax - (259,466) (259,466)
------------ --------- ------------
Balance at March 31, 1999 $(46,381,162) $ 77,939 $ 2,397,411
============ ========= ============
</TABLE>
The above reflects the 1 for 4 stock split effective July 2, 1998.
See accompanying notes to consolidated financial statements
F-6
<PAGE> 26
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS For Years Ended March 31,
------------------------------
1999 1998
--------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(16,507,364) $ 2,554,890
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities:
Depreciation and amortization 2,923,164 3,038,729
Gain on extinguishment of debt - (2,986)
Non-recurring expenses - 5,408,350
Reserve for loss on note receivables 438,000 -
Loss (gain) on sale of subsidiaries 13,471,007 (10,412,442)
Amortization of discount on note payable 277,359 -
Loss on sale of marketable securities 27,660 501,607
Gain on sale of property and equipment (43,374) (38,410)
Unrealized loss on notes receivable due to foreign exchange - 148,605
Changes in operating assets and liabilities (net of acquisitions):
Restricted cash - 214,876
Accounts and other receivable 810,924 18,209
Inventories - 53,153
Prepaid expenses and deferred taxes (554,066) 494,127
Other assets 71,000 (111,724)
Accounts payable and accrued expenses 1,415,338 (1,089,175)
Deferred revenue 199,534 29,870
Other long-term liabilities (179,680) 767,995
------------ ------------
NET CASH PROVIDED BY OPERATIONS 2,349,502 1,575,674
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (279,026) (646,669)
Capitalized software development costs (2,682,025) (2,159,782)
Collection on notes receivable 568,605 429,490
Deferred financing costs (472,582) (595,595)
Net proceeds from sale of building and other property and equipment 128,365 598,202
Net proceeds from sale of subsidiary - 13,495,794
Proceeds from sales of marketable securities 1,107,340 1,839,655
Acquisition net of cash received - (3,932,625)
Payments for purchase of Revive Technologies, Inc. (6,671,038) -
Cash of acquired businesses (1,400) 120,600
Cash of divested business - (42,451)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (8,301,761) 9,106,619
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and capitalized leases (10,867,128) (7,119,659)
Repayment of notes payable to related parties (607,757) (4,819,518)
Proceeds from notes payable 12,591,348 2,690,916
Net proceeds from subordinated debentures 6,000,000 9,000,000
Repurchase of Series A preferred stock (2,100,000) (6,574,055)
Purchase and cancellation of treasury stock - (550,000)
Dividends on preferred stock - (26,000)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,016,463 (7,398,316)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (935,796) 3,283,977
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 6,169,383 2,885,406
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 5,233,587 $ 6,169,383
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 27
ENTERPRISE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Cash paid during the period for:
<S> <C> <C>
Interest Expense 2,624,993 857,074
Income taxes 99,000 3,910
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended March 1999, the Company incurred capital lease
obligations of $ 692,853.
On September 1, 1998, the Company issued 107,970 warrants in connection
with the issuance of subordinated debentures for $ 6 million. The
warrants were valued using a fair value pricing model.
On September 1, 1998, the Company issued 893,484 shares of stock to
purchase Revive Technologies, Inc. at a market value of $ 7.50 per
share, or $ 6,701,249.
During the year ended March 31, 1998, the company entered into an agreement
with a creditor of the company, to reduce their note payable by $15,000
of principal and $12,246 of related interest due to an acceleration of
payment.
During the year ended March 31, 1998, the Company incurred capital lease
obligations of $2.6 million.
During the year ended March 31, 1998, the Company increased its hedging
loss by $1.3 million, with an offset to Restricted Cash. In March 1998,
the loan and the restricted cash was reduced by $2.6 million.
Effective April 1, 1997, in connection with a Share Purchase agreement with
United News and Media Plc ("UN&M") the Company acquired Media
Information Services Limited ("MIS") from United in exchange for
$1,300,000 in cash and a note payable of $1,000,000.
Effective March 31, 1998, in connection with a Share Purchase agreement
with a Boss Associates Limited, ("Boss") the Company received assets of
approximately $981,000 and assumed liabilities of approximately $788,000
in exchange for $1,900,000 in cash and notes payable of $1,500,000.
During the year ended March 31, 1998, the Company recorded deferred
accretion charges of $86,000 related to Series A Preferred Stock and
$280,233 related to Series C Preferred Stock.
At March 1998, the Company revalued marketable securities to their fair
market value and recognized a loss of $465,000.
On March 26,1998, the Company issued 94,775 warrants in connection with the
issuance of subordinated debentures for $9 million. The warrants were
valued using a fair value pricing model.
See accompanying notes to consolidated financial statements
F-8
<PAGE> 28
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
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.
(collectively "the Company"). The subsidiaries include its wholly-owned
subsidiaries of Mediatech, Inc. ("Mediatech") (through its sale on July 18,
1997), Starcom Television Services, Inc. ("Starcom") (through its sale on July
18, 1997), Cable Computerized Management Systems, Inc. ("CCMS") (since its
acquisition on May 16, 1996), Enterprise Systems Group Limited ("ESG") (since
its acquisition on May 24, 1996), Media Information Services Limited ("MIS")
(since its acquisition April 2, 1997), Boss Associates Limited ("Boss") (since
its acquisition on March 31, 1998), and RVT Incorporated (formerly known as
Revive Technologies Incorporated ("Revive")) (since its acquisition on September
1, 1998). All material intercompany transactions and balances have been
eliminated.
ORGANIZATION AND BUSINESS
The Company, a Delaware corporation, changed its name from IndeNet,
Inc. to Enterprise Software, Inc. effective July 2, 1998. The Company designs,
develops, sells and supports traffic, billing, revenue and program management
software products for the electronic media marketplace. With the acquisition of
Revive, the Company also was an automated software conversion company that helps
enterprises migrate critical business processes and data to run on new hardware,
database and operating system environments. The Company believes that all of its
current operations should be considered one business segment. The Company's
customers are located throughout the world and are serviced by operating
facilities located in Colorado Springs, Colorado; Grand Rapids, Michigan;
Thames Ditton, England; Sydney, Australia; and Johannesburg, South Africa.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Company's foreign subsidiaries is the
local currency. The assets and liabilities of subsidiaries whose functional
currencies are other than the U.S. dollar are translated into U.S. dollars at
the current exchange rate in effect at the balance sheet date. Income and
expense items are translated using the average exchange rate during the year.
Cumulative translation adjustments are reflected as a separate component of
stockholders' equity, until there is a realized gain or loss of the investment
in the foreign operations, in which case the transaction gains and losses are
included in results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is provided using the
straight-line method. The estimated useful lives are as follows:
<TABLE>
<CAPTION>
<S> <C>
Building and improvements 10-20 years
Equipment 3-7 years
Furniture and fixtures 5-7 years
Vehicles 4 years
</TABLE>
Leasehold improvements are written-off over their estimated useful life
or the life of the related lease, whichever is shorter.
F-9
<PAGE> 29
SOFTWARE DEVELOPMENT COSTS
Software development costs related to the Company's software products
are capitalized upon the establishment of technological feasibility until ready
for sale. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable judgement
by management with respect to certain external factors such as anticipated
future revenue, estimated economic life and changes in software and hardware
technologies. At each balance sheet date, using an undiscounted cash flow
method, the Company evaluates whether events and circumstances warrant revised
estimates of amortization and whether the capitalized software development costs
have a continuing value.
Amortization of capitalized software development costs is provided on a
product-by-product basis computed on the straight-line method over the estimated
useful life of the products not to exceed five years, which is not significantly
different from the estimated revenue stream to be generated. The Company wrote
off capitalized development costs of $2.8 million during the fiscal year ended
March 31, 1998. Approximately $2 million of the write-off was recorded in the
fourth quarter. The Company wrote-down those assets as it determined that the
carrying value of those assets would not be recoverable due to management's
change in product strategy.
All other research and development costs are charged to research and
development expense in the period incurred.
GOODWILL
Goodwill represents the excess of cost over the fair value of the
identifiable net assets acquired in connection with the acquisitions of CCMS,
MIS, Boss, and Revive. Goodwill is amortized on a straight-line basis over
periods ranging from 7 to 20 years.
At each balance sheet date, using an undiscounted cash flow method, the
Company evaluates whether events and circumstances warrant revised estimates of
amortization and whether the respective goodwill has a continuing value. At
March 31, 1999, the Company wrote-down approximately $5.1 million of goodwill in
connection with the pending sale of Revive. See Note 2 for further
discussion regarding the disposal of Revive.
CUSTOMER LIST AND OTHER IDENTIFIABLE ASSETS
Customer List and other identifiable assets represent identifiable
intangible assets acquired in connection with the acquisition of ESG, Boss, and
Revive. The Customer List is supported by long-term contracts held by ESG.
Customer List and other identifiable assets are being amortized on a
straight-line basis ranging from 7 to 15 years.
At each balance sheet date, using an undiscounted cash flow method, the
Company evaluates whether events and circumstances warrant revised estimates of
amortization and whether the Customer List and the other identifiable assets
have a continuing value. At March 31, 1999, the Company wrote-down approximately
$3.2 million of other identifiable assets in connection with the pending sale of
Revive. See Note 2 for further discussion regarding the disposal of
Revive.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of Position
97-2 (SOP 97-2), "Software Revenue Recognition." Revenue from software license
sales is recognized upon shipment to the customer or installation, provided that
the Company's remaining obligations, if any, are insignificant and
collectibility is probable. Any remaining insignificant vendor obligations are
accrued at the time the revenue is recognized. Revenue from the conversion of
software programs is recognized primarily on the percentage of completion method
of accounting for contract revenue. Under this method, portions of the total
estimated contract revenues and costs are reflected in income each period based
on the proportion of the contract work completed in each period. When the
Company receives advance payments for software
F-10
<PAGE> 30
products or consulting, such payments are reported as advances from customers
until all conditions for revenue recognition are met. Maintenance revenue is
deferred and recognized on a pro rata basis over the life of the related
agreement. The unrecognized portion of maintenance revenue is included in
deferred revenue. Revenue from other sources, principally training and
consulting, is recognized in the period in which the services are rendered.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standard No. 109 (SFAS 109) "Accounting for Income
Taxes." SFAS 109 requires a company to recognize deferred tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect for the years in which
the differences are expected to reverse.
EARNINGS OR LOSS PER SHARE
Basic earnings or loss per share is calculated by taking the net income
or loss minus preferred stock dividends divided by the weighted average number
of common shares outstanding. Dilutive earnings per share recognize common stock
equivalents, such as stock options, warrants and convertible preferred stock in
determining the amount of common shares outstanding.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
trading equity securities, accounts payable, accrued expenses, and notes payable
approximates fair value due to the short maturities of these instruments. The
fair value of the Company's notes receivable and long-term debt is estimated
based on the quoted market price for the same or similar financial instruments
issued, or on the current rates offered to the Company for financial instruments
of the same remaining maturities.
STOCK-BASED COMPENSATION
The Company utilizes the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), which establishes a fair value method of accounting for stock-based
compensation plans. In accordance with SFAS 123, the Company has chosen to
continue to account for stock-based compensation utilizing the intrinsic value
method prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
compensation is measured at the grant date based on the value of the award and
recognizes this cost over the service period. The value of the stock-based award
is determined using a pricing model whereby compensation cost is the excess of
the fair market value of the stock as determined by the model at grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
F-11
<PAGE> 31
MARKETABLE SECURITIES
Marketable securities consist of common stock at March 31, 1998 and are
stated at market value as determined by the most recently traded price of the
securities. The securities are classified as trading securities in accordance
with Statement of Financial Accounting Standards No. ("SFAS") 115, Accounting
for Certain Investments in Debt and Equity Securities. Realized and unrealized
gains and losses are included in other income or expense.
REVERSE STOCK SPLIT
On July 2, 1998, the Board approved a 1 for 4 reverse stock split
which effect has been retroactively applied to the consolidated financial
statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements in the prior year to conform to the current year's presentation.
2. ACQUISITIONS AND SALES OF ASSETS
REVIVE TECHNOLOGIES INCORPORATED
On September 1, 1998, the Company completed its acquisition of Revive
for approximately $13.7 million. The acquisition was effected through the merger
of Revive into a newly formed wholly owned subsidiary of the Company (which
subsidiary in now named Revive Technologies Incorporated). The acquisition was
funded through a cash payment of approximately $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 in
Note 8. The shares of stock issued in connection with the purchase were valued
using the closing price of the Company's common stock on the date the purchase
was announced.
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. The excess of the purchase
price over the net assets of approximately $5.8 million was included in goodwill
and was being amortized on a straight-line basis over 7 years. In addition,
approximately $4.7 million of the purchase price was allocated to other
identifiable intangibles, such as customer list, work force and current
technology. These other intangibles are being amortized on a straight-line basis
over 7 years.
Subsequent to March 31, 1999, the Company sold the assets and certain
liabilities of Revive to ManTech Systems Solutions Corporation ("ManTech"), a
Virginia corporation for $1.65 million, plus $108,000 reimbursement for
expenses. The total consideration consisted of (i) $608,000 in cash and (ii)
ManTech's unsecured promissory note, dated April 16, 1999, in the amount of
$1,105,053. The promissory note is payable in four quarterly installments of
$276,263 plus interest at 6.5% per annum. As a result of the sale of Revive, the
Company wrote-down the assets of Revive to their net realizable value. The
Company recorded a loss with respect to this transaction of $13.5 million (net
of $560,000 of income taxes) and is included in the loss on disposal of
subsidiary in the accompanying consolidated statement of operations. The net
assets of Revive were approximately $9.4 million at March 31, 1999, before
write-down to their net realizable value. The Company realized a gain for tax
purposes on the sale of Revive's net realizable assets due to structuring the
acquisition as a tax free merger which requires the Company to carryover the
Seller's tax basis in the assets.
BOSS ASSOCIATES, LIMITED
Effective March 31, 1998, the Company completed its acquisition of Boss
for approximately $3.4 million. Under the terms of the agreement, the Company
paid approximately $1.9 million in cash and issued promissory notes for the
remainder of the purchase price. The promissory notes are payable in quarterly
installments including interest at 8% per annum beginning June 30, 1998 and
maturing March 31, 2000. The acquisition was accounted for as a purchase. Based
on appraised value, a portion of the purchase price was allocated to purchased
in process research and development, which resulted in a pre-tax charge of
approximately $2.2 million to the Company's operations in the fourth quarter of
fiscal 1998. The excess of the purchase price over the net assets of
approximately $805,000 is included in goodwill and is being amortized on a
straight-line basis over 7 years. In addition, approximately $395,000 of the
purchase
F-12
<PAGE> 32
price was allocated to other identifiable intangible assets, such as work force,
current technologies and customer list. These other intangibles are being
amortized on a straight-line basis over 7 years.
MEDIA INFORMATION SERVICES LIMITED
In April 1997, the Company completed its acquisition of MIS for
approximately $2.3 million. The acquisition was accounted for as a purchase. In
connection with the acquisition, the Company signed a software licensing and
bureau services agreement for a period of seven years. Based on appraised value,
a portion of the purchase price was allocated to purchased in process research
and development, which had not reached technological feasibility and had no
alternative future use. The allocation resulted in a pre-tax charge of
approximately $847,000. Approximately $1.4 million was recorded as goodwill with
this acquisition. The goodwill is being amortized on a straight-line basis over
a 7 year period.
STARCOM
On April 1, 1997, Starcom and Mediatech were merged to form Starcom
Mediatech, Inc. On July 18, 1997, all of the stock of Starcom Mediatech, Inc.
was sold. See the following discussion for further discussion of details related
to the sale of Starcom.
MEDIATECH
On July 18, 1997, the Company sold all of the issued and outstanding
shares of capital stock of StarCom Mediatech, Inc. to Digital Generation
Systems, Inc., a California corporation ("Digital"). The initial consideration
paid by Digital for the shares consisted of the following: (1) $13.75 million in
cash; (2) 324,355 restricted shares of Digital common stock valued at $1.6
million; (3) Digital's Subordinated Promissory Note, dated July 18, 1997
("Subordinated Note") in an adjusted amount of $1.6 million; and (4) assumption
of an aggregate of $2.2 million owed by the Company to Thomas H. Baur, Chairman
of Mediatech and a director and stockholder of the Company. The Subordinated
Note is payable in installments of $150,000 plus accrued interest on December
31, 1997, June 30, 1998, December 31, 1998 and June 30, 1999, with the remaining
installments payable on the last day of each successive calendar quarter
thereafter until fully paid on March 31, 2001. The Company recorded a gain with
respect to this transaction of $9.9 million and is included in gain on disposal
of discontinued operations in the accompanying consolidated statement of
operations.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---------------------------------------------------------------------
<S> <C> <C>
Equipment $5,583,523 $ 3,682,959
Leasehold improvements 68,635 21,160
Furniture and fixtures 216,428 369,496
Vehicles 438,755 390,297
---------------------------------------------------------------------
6,307,341 4,463,912
Less accumulated depreciation and
amortization 3,299,484 1,321,251
---------------------------------------------------------------------
Property and equipment, net $ 3,007,857 $ 3,142,661
---------------------------------------------------------------------
</TABLE>
Depreciation and amortization related to property and equipment was
$1.2 million for both the years ended March 31, 1999 and 1998.
F-13
<PAGE> 33
4. NOTES PAYABLE, LONG-TERM DEBT AND LINES-OF-CREDIT
Debts consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes payable - former shareholders of Mediatech; bearing interest at
8.0%; one note due in monthly installments of $40,658 through
November 2002, was paid off in July 1997; other notes due in
aggregate quarterly installments of $4,587 through February 2005;
unsecured 167,432 172,123
Notes payable - former shareholders of ESG; bearing interest at
8.0%; due in quarterly installments of $3,483 through May 2000,
secured by a nominal percentage of the capital stock of ESG 35,105 37,788
Revolving credit line, interest payable monthly at .75% above the
bank's floating prime rate (8.50% at March 31, 1999).
Borrowings may not exceed $7,000,000. The agreement is
renewable in October 2000. The line is secured by the assets
of ESG and CCMS. The Company was not in compliance with
certain financial covenants at March 31, 1999, which events of
default were waived by the bank 7,000,000 -
Line of credit, interest at the bank's base rate plus 2% (9.25% at
March 31, 1998). The line was secured by the assets of ESG and
was not renewed by the Company. - 1,255,950
Line of credit, bearing interest at the bank's base rate plus 2%
(9.25% at March 31, 1998). Borrowings may not exceed
$1,675,000. At March 31, 1998, $1,052,799 in borrowing
capacity remained available. The line was secured by the
assets of ESG and was not renewed by the Company - 622,201
Note payable - bank, bearing interest at bank's base rate plus 2.5%
(9.5% at March 31, 1998); - 62,798
Note payable - bearing interest at 6%, due September 1998, interest
payable quarterly. - 810,000
Note payable - bearing no interest, due in annual installments of
$322,860 through April 2000. 645,720 1,004,760
Note payable - bearing interest at 14.5% due March 2003, interest
payable monthly, secured by all assets of the Company, face
amount of note is $15,000,000. The Company was not in compliance
with certain financial covenants at March 31, 1999, which events
of default were waived by the lender. 13,647,276 8,038,970
Note payable - bearing interest at 10% payable monthly, due July 1,
1999. 200,000 -
Note payable - Founders of Boss Associates, Ltd., bearing interest
at 8%, due in quarterly installments including interest of
$204,492 secured by guarantee of the Company. 908,044 1,507,140
Note payable - bank, bearing interest at bank's base rate plus 2%
(9.5% at March 31, 1999); due in quarterly installments of
$62,798 through March 2000 - 837,300
----------------------------------------------------------------------------------------------------
Notes payable 22,603,577 14,349,030
Less current portion 1,286,100 4,284,156
----------------------------------------------------------------------------------------------------
Notes payable, less current portion $21,317,477 $ 10,064,874
----------------------------------------------------------------------------------------------------
</TABLE>
The carrying amount of the above debt instruments to third parties
approximates the fair value of the instruments.
F-14
<PAGE> 34
As of March 31, 1999, the aggregate amounts of long-term debt maturing
in succeeding years are as follows:
<TABLE>
<CAPTION>
Years ended
March 31, Related Parties Other Total
----------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 763,240 $ 522,860 $ 1,286,100
2001 190,534 322,860 513,394
2002 6,016 7,000,000 7,006,016
2003 13,653,802 - 13,653,802
2004 7,079 - 7,079
2005 137,186 - 137,186
Thereafter - - -
----------------------------------------------------------------------------
$ 14,757,857 $ 7,845,720 $ 22,603,577
</TABLE>
5. CAPITAL LEASE OBLIGATIONS
The following is a schedule of future minimum lease payments of
capitalized leases, representing underlying property and equipment having an
unamortized cost of $2.3 million, together with the present value of the net
minimum lease payments as of March 31, 1999:
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------------
<S> <C>
2000 $ 869,605
2001 683,095
2002 413,449
2003 220,275
2004 41,191
---------------
Total minimum lease payments 2,227,615
Less amount representing interest (effective
interest ranging from 4% to 18.7%) 389,971
----------------------------------------------------------------
Present value of minimum capital lease
obligations 1,837,644
Less - current portion 713,409
----------------------------------------------------------------
Capital lease obligations, net of current
portion $ 1,124,235
----------------------------------------------------------------
</TABLE>
6. INCOME TAXES
At March 31, 1999 and 1998, the Company has net operating loss
carryforwards of $23.0 million and 18.5 million, respectively for income tax
purposes of which $3.3 million is subject to a separate return limitation at
March 31, 1999. The carryforwards expires in varying amounts and years through
2019. These loss carryforwards give rise to a deferred tax asset of $7.8 million
and $6.3 million at March 31, 1999 and 1998, respectively. This deferred 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. Because of
changes in the Company's ownership, there is an annual limitation on the usage
of the net operating loss carryforwards. Income tax expense for fiscal years
1999 and 1998 represent state taxes for the various states in which the Company
does business.
F-15
<PAGE> 35
The Company's total deferred tax assets, valuation allowance and
deferred tax liabilities consist of the following:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
---------------------------------------------------------------------------------
<S> <C> <C>
Net current deferred tax assets:
Loss carryforwards $ 7,820,000 $ 6,300,000
Tax effects of temporary differences:
Accrued litigation - 11,000
Accrued restructuring expenses - 50,000
Depreciation and amortization - 60,000
Accrued expenses and reserves 848,200 179,000
Accounts and notes receivable 172,800 -
---------------------------------------------------------------------------------
Total gross deferred tax assets 8,841,000 6,600,000
Valuation allowance (7,905,000) (6,400,000)
----------------------------------
Net current deferred tax assets $ 936,000 $ 200,000
Net non-current deferred tax liability:
Fixed assets and capitalized software $ (400,000) -
Deferred gain on sale of subsidiary (536,000) -
----------- -----------
Total gross deferred tax liability (936,000) -
----------------------------------
Net deferred tax assets $ 0 $ 200,000
=================================================================================
</TABLE>
A valuation allowance has been provided since the Company cannot
determine if it is more likely than not that a portion of the deferred tax
assets will be realized. The consolidated effective tax rate differs from the
statutory U.S. federal tax rate for the following reasons and by the indicated
percentages:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Statutory U.S. federal benefit (34%) 34%
Goodwill amortization and write-offs not
deductible for tax purposes 4% 24%
Expenses related to convertible notes not
deductible for tax purposes 1% 8%
Taxable gain (loss) on sale of subsidiary stock
not recognized for book 25% 50%
Other (4%) (2%)
Change in valuation allowance 9% (113%)
---------------------------------------------------------------------------------------
Effective tax rate 1% 1%
---------------------------------------------------------------------------------------
</TABLE>
7. REDEEMABLE PREFERRED STOCK
On April 29, 1996, the Company completed a private placement under
Regulation S of Series A Preferred Stock ("Series A") for $12.0 million. The net
proceeds, after costs of approximately $800,000, were used primarily for the
acquisitions of CCMS and ESG. The placement consisted of 1,200 shares of Series
A stock with a 6% annual accretion. For accounting purposes, the accretion is
being treated as a dividend. The Series A was convertible into common stock
based on 85% of the average closing bid price of the Company's Common Stock for
the five days immediately preceding the conversion date, but not to exceed
$28.00 per share. The Common Stock carried registration rights and the Company
had the option to repurchase the Series A at the time of conversion at an 18%
premium to the principal amount and has the right to call the Series A at a 30%
premium to the principal amount after 12 months declining to a 15% premium after
30 months. As of March 31, 1997, $2.9 million of the Series A plus accrued
accretion had been converted, resulting in the issuance of 258,121 shares of the
Company's Common Stock. In April 1998, the Company redeemed the remaining 190
shares of Series A for approximately $2.1 million in cash.
F-16
<PAGE> 36
Effective September 30, 1996, the Company and the holders of 76%, or
$7.71 million of the then $10.2 million outstanding Series A Preferred Stock
agreed to exchange their shares for a new Series C Preferred Stock ("Series C").
Series C shares the following features: conversion into common stock is fixed at
$20.00 per share, no conversions can occur for six months, it is non-voting and
bears an 8% accretion rate. For accounting purposes, the accretion is being
treated as a dividend.
From October 1, 1997 to January 31, 1998, the holders of the Series C
shares were entitled to require the Company to redeem up to 25% per month of
their remaining shares at a rate of 105% of each share plus accrued accretion
for cash or common stock - at the Company's option - valued at market at the
time of the redemption. During this period, the Company redeemed all of the 789
shares of Series C stock for approximately $6.6 million in cash, and the
issuance of approximately 148,000 shares of common stock.
Series B Preferred Stock ("Series B") provided monthly dividends of 1%
of the Liquidation Preference ($3.00 per share). After July 1, 1997, the Series
B were convertible at the option of the holder into common stock at a rate based
on the quotient of $3.00 plus accrued dividends divided by the lesser of $3.00
or the average market value for the prior twenty consecutive business days
preceding the redemption. On July 22, 1997 the holder of Series B elected to
convert all 216,667 shares outstanding into 98,113 shares of common stock.
During the year ended March 31, 1998, the Company recorded deferred
accretion charges of $86,000 related to Series A and $280,233 related to Series
C and fully amortized the amounts into dividends. Cash dividends paid on Series
B totaled $26,000.
8. EQUITY
Private Placements
F-17
<PAGE> 37
1) On October 1, 1997, the Company entered into an agreement with the
holder of two convertible notes in the principal amount of $4.285 million,
whereby the Company paid the holder $4.675 million in cash and issued a
promissory note for $825,000, interest payable quarterly in arrears beginning
December 31, 1997 at 6% per annum, and a balloon payment due on September 30,
1998. The Company recorded $799,000 in other expense as a result of the premium
paid to purchase the notes. In April, 1998, the $825,000 note payable was
renegotiated and discounted to $810,000, including accrued interest and the
Company paid the entire $810,000 note balance.
2) In March 1998, the Company completed a private placement of a $15.0
million Subordinated Debentures ("Debentures") to a single institutional
investor. The Debentures 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 to make certain acquisitions, redeem the
outstanding shares of Series A stock, and for working capital. Tranche B was
funded on September 1, 1998, and the net proceeds were used to fund a portion of
the cash required by the acquisition Revive discussed in Note 2. 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. Originally, the warrants, when exercised, would have
provided 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, and
1.65% warrants with the funding of Tranche B. The original exercise price was
$10.00 or surrender of the equivalent amount of warrants pursuant to a spread
exercise provision. In October 1998, these warrants were re-priced to $4.50 in
accordance with the terms of the warrants. Subsequent to March 31, 1999, the
investor agreed that a upon a sale of the Company, the warrants would be
cancelled and in exchange the investor would receive the greater of (i) $500,000
and (ii) 62.5% of the excess of (A) the consideration to be paid per share of
common stock upon consummation of the sale of the Company over (B) $4.50
multiplied by the number of shares of common stock subject to the warrants. The
warrants will expire ten years from the date of the final payment on the
Debentures. The warrants were valued using a fair value based model at the date
of issue to be amortized over the life of the loan.
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. A compensation expense of $9,600, based on the increase in the
market price since the date of grant was provided for in the quarter ended
December 31, 1998. During March 1999, the Board of Directors rescinded the Stock
Appreciation Rights plan. Accordingly, the previously recorded compensation
expense was reversed.
Other Stock Issuances
On September 1, 1998, the Company issued 893,484 shares of common stock
in connection with the acquisition of Revive. See Note 2 for further discussion
of the Revive acquisition.
Stock Options and Warrants
The Company has a stock option plan for officers and employees of
subsidiaries, which provides for the grant of nonqualified stock options. The
Board of Directors determined the option price (not to be less than fair market
value) at the date of grant. Options granted generally vest over three years and
expire five years from the date of grant.
F-18
<PAGE> 38
The following table summarizes the transactions related to the
Company's stock option plan:
<TABLE>
<CAPTION>
Weighted-
Number of Average Aggregate
Shares Exercise Price Value
----------- -------------- -----------
<S> <C> <C> <C>
Balance at March 31, 1997 588,183 $ 12.20 $ 7,162,933
Options granted 52,500 7.68 403,625
Options exercised (117,725) 8.68 (1,022,525)
Options expired/exchanged (291,500) 16.76 (4,889,299)
----------- -----------
Balance at March 31, 1998 231,458 7.16 1,654,734
Options granted 164,750 4.50 741,375
Options expired/exchanged (150,083) 8.59 (1,288,546)
----------- -----------
Balance at March 31, 1999 246,125 4.50 1,107,563
=========== ===========
Options exercisable (vested) at
March 31, 1999 44,250 199,125
=========== ===========
</TABLE>
All options issued during the fiscal years ended March 31, 1999 and
1998 had exercise prices that were at fair market value at the grant date.
During the year, certain options were re-priced by the Board of Directors. As a
result, all of the outstanding options as of March 31, 1999 have an exercise
price of $4.50 per share.
During fiscal 1998, various employees of the Company effected the
cashless exercises of a total of 117,725 options at exercise prices ranging from
$6.52 to $9.00 per share, resulting in the issuance of 38,208 shares of common
stock.
The following table summarizes the transactions related to the
Company's warrants to purchase common stock:
<TABLE>
<CAPTION>
Weighted-
Number of Average Aggregate
Shares Exercise Price Value
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1997 160,854 $ 15.50 $ 2,542,886
Warrants granted 109,832 9.88 1,086,877
Warrants canceled or expired (40,647) 12.00 (487,758)
---------- -----------
Balance at March 31, 1998 230,039 13.64 3,142,005
Warrants granted 107,970 4.50 124,506
Warrants canceled or expired (15,057) 9.24 (298,904)
---------- -----------
Balance at March 31, 1999 322,952 4.50 2,967,607
========== ===========
Warrants exercisable (vested) at
March 31, 1999 322,952 2,967,607
========== ===========
</TABLE>
F-19
<PAGE> 39
In July 1997, the holders of Series B Convertible Preferred Stock
converted its 216,667 shares into 98,113 shares of common stock.
The warrants issued during the fiscal years ended March 31, 1999 and
1998 had exercise prices that were repriced at the fair market value of the date
of repricing.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumption used for grants in fiscal 1999 and 1998: dividend
yield of zero percent; expected volatility of 27 percent in 1999 and 21 percent
in 1998; risk-free interest rate of 5.75 percent in 1999 and 6.00 percent in
1998; and expected lives ranging between three and ten years. Under the
accounting provisions of FASB Statement 123, the Company's net loss and loss per
share for the fiscal years would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Net income (loss) 1999 1998
--------------------------------------------------------------
<S> <C> <C>
As reported $(16,507,364) $2,554,890
Pro forma $(16,706,764) $1,754,152
Earnings (loss) per share
--------------------------------------------------------------
As reported $ (3.29) $ .49
Pro forma $ (3.32) $ .40
</TABLE>
Due to the fact that the Company's stock option programs vest over many
years and additional awards may be made each year; the above pro forma numbers
are not indicative of the financial impact had the disclosure provisions of FASB
123 been applicable to all years of previous grants.
The following table summarizes information about stock options and
warrants outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Number Options and Warrants
Outstanding Outstanding
and Weighted-Average
Range of Exercisable Remaining Weighted-Average
Exercise Prices at 3/31/99 Contractual Life Exercise Price
----------------------------------------------------------------------
<S> <C> <C> <C>
$ 0 - 4.50 448,870 5.46 4.50
5.00 - 9.00 50,000 2.00 9.00
16.00 - 28.00 70,208 2.14 21.51
----------------------------------------------------------------------
4.50 - 28.00 569,078 3.20 11.67
</TABLE>
F-20
<PAGE> 40
9. RESTRUCTURING, IMPAIRMENT AND OTHER ONE TIME CHARGES
During fiscal 1998, the company incurred nonrecurring charges. The $5.9
million Restructuring, Impairment and Other One-Time Charges including $2.8
million related to asset write-downs to net realizable value of capitalized
software development costs. In addition, as previously discussed in Note 2, the
Company wrote off approximately $2.2 million and $847,000 in purchased in
process research and development in connection with the acquisitions of Boss and
MIS, respectively.
10. BUSINESS SEGMENT AND MAJOR CUSTOMER INFORMATION
There were no customers representing over 10% of the Company's business
for 1999 or 1998.
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 supersedes SFAS No. 14 by establishing a new
framework on which to base segment reporting and introduces requirements for
interim reporting of segment information.
The Company has determined that it has a single reportable segment
consisting of the development, design, sale and support of traffic, billing,
revenue, program management, and other software products. Management uses one
measurement of profitability and does not disaggregate its business for internal
reporting. Information about the Company's domestic and international operations
for each fiscal year is as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Domestic $ 18,685,107 $ 13,654,762
International (including U.S. exports) 12,640,511 11,327,193
-----------------------------------------------------------------------------
$ 31,325,618 $ 24,981,955
-----------------------------------------------------------------------------
Operating income (loss):
Domestic $ 3,650,945 $ 2,651,734
International (including U.S. exports) 912,962 (3,759,999)
-----------------------------------------------------------------------------
4,563,907 (1,108,265)
Unallocated expenses and eliminations (844,202) (3,323,022)
-----------------------------------------------------------------------------
$ 3,719,705 $ (4,431,287)
-----------------------------------------------------------------------------
Identifiable assets:
Domestic $ 8,697,975 $ 5,810,843
International 7,403,505 7,755,268
-----------------------------------------------------------------------------
$ 16,101,480 $ 13,566,111
Corporate assets 22,116,560 25,392,740
-----------------------------------------------------------------------------
$ 38,218,040 $ 38,958,851
-----------------------------------------------------------------------------
</TABLE>
Unallocated expenses and eliminations include corporate administrative
expenses and eliminations of intercompany income and expenses. Identifiable
assets are those used directly in the operations, and exclude non-operating,
corporate and deferred tax assets. Sales between geographic areas are not
material and are made primarily at cost plus a markup.
11. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" for fiscal 1999. This statement
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. This Statement
requires the classification of items of comprehensive income by their nature in
a financial statement and the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in the equity
section of the balance sheet.
F-21
<PAGE> 41
During October 1997, the Accounting Standards Executive Committee
(AcSEC) of the AICPA issued SOP 97-2, "Software Revenue Recognition." SOP 97-2
replacing SOP 91-1 method of distinguishing between significant and
insignificant vendor obligations as a basis for recording revenue with a
requirement that each element of a software licensing arrangement be separately
identified and accounted for based on relative fair values of each element.
Further, in order to recognize revenue for each element as delivered, stringent
requirements for "vendor-specific objective evidence" must be met for each
element's fair value, and no remaining undelivered elements can be essential to
the functionality of the delivered elements.
In March 1998, the AICPA issued SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition." SOP 98-4 defers,
for one year, the application of certain passages in SOP 97-2, which limit what
is considered vendor-specific objective evidence ("VSOE") necessary to recognize
revenue for software licenses in multiple-element arrangements when undelivered
elements exist. In December 1998, the AICPA issued SOP No. 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," which clarifies guidance regarding VSOE and multiple element
arrangements. SOP 98-9 amends SOP 98-4 to extend the deferral of guidance in SOP
97-2 as it relates to these matters through fiscal years beginning after March
15, 1999. The Company has evaluated the SOP and amendments and does not expect
their adoption will have a material effect on its revenue recognition practices.
In June 1998 the Financial Accounting Standards Board issued
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. As the Company does not currently engage or plan to engage in derivatives,
there will be no impact to the Company's results of operations, financial
position or cash flows upon the adoption of SFAS 133.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C>
Income (loss) from Continuing Operations $(1,389,102) $ (5,310,649)
Loss from Discontinued Operations (1,647,255) (1,024,903)
Gain (loss) on Disposal of Discontinued Operations (13,471,007) 8,890,442
-----------------------------------
Net Income (Loss) (16,507,364) 2,554,890
Dividend to Preferred Shareholders - 392,233
-----------------------------------
Net Income (Loss) Allocable to Common Shareholders
$ (16,507,364) $ 2,162,657
============== ==============
Weighted Average Shares 5,029,519 4,399,710
Effect of Dilutive Securities - 43,445
-----------------------------------
Adjusted Weighted Average Shares 5,029,519 4,443,155
-----------------------------------
</TABLE>
F-22
<PAGE> 42
13. UNAUDITED PRO FORMA RESULTS OF OPERATIONS
Condensed unaudited pro forma results of operations of the Company and
Boss Associates, Limited as if the purchase occurred at the beginning of the
fiscal year ended March 31, 1998, are presented below. The unaudited pro forma
financial statements have been prepared for comparative purposes only and are
not necessarily indicative of what would have occurred had the acquisitions been
completed as of those dates or of any results that may occur in the future.
UNAUDITED
<TABLE>
<CAPTION>
Fiscal 1998
----------------------------------------------------------------
<S> <C>
Revenue $26,743,011
Loss from continuing operations (5,823,008)
Net income 1,821,531
Net income allocable to common shareholders 852,358
Net loss from continuing operations per share
- basic and diluted
(.35)
</TABLE>
Pro forma adjustments include adjustments to (i) reflect amortization
of goodwill for Boss Associates Limited, (ii) reflect interest expense related
to the notes payable to the former shareholders, and (iii) depreciation expense
on property and equipment acquired.
Condensed unaudited pro forma results of operations of the Company and
Boss Associates, Limited as if the purchase occurred at the beginning of the
fiscal year ended March 31, 1998 and as if the sale of Mediatech and
Channelmatic occurred at the beginning of the fiscal year ended March 31, 1998,
respectively, are presented below. The unaudited pro forma financial statements
have been prepared for comparative purposes only and are not necessarily
indicative of what would have occurred had the acquisitions been completed as of
those dates or of any results that may occur in the future.
UNAUDITED
<TABLE>
<CAPTION>
Fiscal 1998
----------------------------------------------------------------
<S> <C>
Revenue $26,743,011
Loss from continuing operations (5,823,008)
Net income 3,756,945
Net income allocable to
common shareholders 2,787,772
Net loss from continuing operations per share -
basic and diluted (.35)
</TABLE>
Pro forma adjustments include (a) adjustments to reflect the
elimination of amortization and depreciation of goodwill and basis step-up of
equipment for Mediatech and (b) an adjustment to reflect the elimination of
interest expense related to a note payable to the shareholders of Mediatech.
14. COMMITMENTS, CONTINGENCIES AND LITIGATION
Leases
The Company leases equipment and office and warehouse facilities under
various operating lease agreements. In addition to monthly rentals, the Company
is responsible for insurance, property taxes, utilities and normal maintenance
of the facilities.
F-23
<PAGE> 43
Future minimum lease payments under non-cancelable operating leases as
of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Total
--------------------------------------------------------------------
<S> <C>
2000 $ 727,581
2001 728,987
2002 553,267
2003 436,866
2004 445,886
Thereafter 996,889
--------------------------------------------------------------------
$3,889,476
====================================================================
</TABLE>
Rental expense on operating leases amounted to $659,230 and $377,220
for the fiscal years 1999 and 1998.
In February 1999, the chairman and chief executive officer stepped down
from his positions. The Company has recorded an accrual for severance and
related cost.
A former employee has filed suit against the Company alleging that the
Company had failed to issue shares under three option agreements entered into in
1995 and 1996. The Company denies any liability on the ground that the options
were not exercised within the time period specified in the option agreement
because the individual voluntarily terminated employment prior to the date of
attempted exercise. The claim amounts to approximately $350,000 at March 31,
1999.
A former employee of Starcom Mediatech (which was sold by the Company
on July 18, 1997, to which the Company is providing defense and indemnity) filed
suit against the Company for wrongful termination of an employment contract
resulting from an agreement entered into by Starcom Mediatech to manage the
former employees company. The claim amounts to approximately $90,000 at March
31, 1999.
A threat of litigation has been made by a customer for breach of
contract. The Company has accrued the estimated cost of curing the breach.
A debtor under a note agreement has asserted a claim under the warranty
provisions of an agreement related to sale of a former subsidiary. In
connection with this claim, the Company has recorded an allowance for
uncollectible accounts.
The Company is subject to various lawsuits and claims arising out of
the normal course of its business. In the opinion of management, the ultimate
liability to the Company as a result of any legal proceedings will not have a
material effect on the financial position of the Company.
15. 401(K) PLAN, PROFIT PARTICIPATION PROGRAM AND PENSION PLAN
Starcom Mediatech had a 401(k) defined contribution plan covering
substantially all of its full-time employees. The company matched a percentage
of the participants' contributions of approximately $2,600 for the year ended
March 31, 1998.
ESG has a 401(k) plan for its domestic employees and a defined
contribution pension plan for all other non-domestic employees. The assets of
both plans are held separately in independently administered funds.
Contributions amounted to $413,160 and $579,519 for the years ended March 31,
1999 and 1998, respectively. ESG also has a discretionary profit sharing plan
whereby generally 10% of pre-tax earnings are paid to certain ESG employees. The
profit sharing amount paid to the employees for fiscal 1999 and 1998 was
$743,340 and $364,528, respectively.
CCMS has a profit sharing plan whereby generally 5% of the pre-tax
profits excluding the profit sharing expense are paid to the employees of CCMS.
The profit sharing amount for fiscal 1999 and 1998 was $79,217 and $31,575,
respectively.
CCMS has a 401(k) defined contribution plan covering substantially all
of its full-time employees. CCMS contributes a percentage of the participants'
earnings to the plan. Contributions amounted to approximately $19,600 and 13,000
for the years ended March 31, 1999 and 1998, respectively.
F-24
<PAGE> 44
16. COMPREHENSIVE INCOME
Comprehensive income is computed as follows:
<TABLE>
<CAPTION>
For Years Ended March 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net Income/(loss) $(16,507,364) $2,554,890
Other comprehensive income,
net of tax:
Foreign currency translation
adjustments (259,466) (119,571)
------------ -----------
Comprehensive Income $(16,766,830) $2,435,319
============ ===========
</TABLE>
17. NASDAQ REQUIREMENTS
As previously discussed in Note 2, the Company wrote-down the assets of
Revive to their net realizable value as of March 31, 1999. As a result, the
Company's net worth fell below the requirements for listing under the rules of
the National Market System of NASDAQ. The Company has responded to preliminary
inquiries from NASDAQ regarding this matter and the Company's common stock
could possibly be de-listed from trading on the NASDAQ market.
18. SUBSEQUENT EVENT
On June 28, 1999, the Company announced that it had signed a
definitive merger agreement with LiveWire Media, L.L.C. ("LiveWire"). Under the
terms of the merger agreement, LiveWire will purchase approximately 98 percent
of the stock of the Company for $9.25 in cash. Approximately 2 percent of the
Company's stock will remain outstanding. The price is subject to a possible
downward adjustment of up to $0.40 per share in the event of a shortfall in
certain performance criteria. LiveWire has indicated that it intends to repay
or refinance approximately $25 million of the Company's debt (and related
expenses). The definitive merger agreement supercedes the non- binding letter
of intent that the two companies had entered into on May 5, 1999, under which
LiveWire had reserved the right to offer shares in the surviving company for up
to 7 percent of the proposed $10.00 price for the Company's common stock.
F-25
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP
Board of Directors and Stockholders
Enterprise Software, Inc.:
We consent to incorporation by reference in the registration statements, No.
333-24513 on Form S-3, No. 333-71787 on Form S-8 of Enterprise Software, Inc. of
our report dated May 21, 1999 except for note 18 which is as of June 28, 1999,
relating to the consolidated balance sheet of Enterprise Software, Inc. and
subsidiaries as of March 31, 1999 and 1998 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended which report appears in the March 31, 1999, annual report
on Form 10-KSB of Enterprise Software, Inc.
Detroit, Michigan
July 2, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1998
<CASH> 5,233,587
<SECURITIES> 0
<RECEIVABLES> 3,936,058
<ALLOWANCES> 341,110
<INVENTORY> 0
<CURRENT-ASSETS> 10,627,593
<PP&E> 6,307,341
<DEPRECIATION> 3,299,484
<TOTAL-ASSETS> 38,218,040
<CURRENT-LIABILITIES> 12,978,917
<BONDS> 0
0
0
<COMMON> 5,406
<OTHER-SE> 2,391,005
<TOTAL-LIABILITY-AND-EQUITY> 38,218,040
<SALES> 31,325,618
<TOTAL-REVENUES> 31,325,618
<CGS> 12,425,443
<TOTAL-COSTS> 15,180,470
<OTHER-EXPENSES> 2,362,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,789,879
<INCOME-PRETAX> (1,432,596)
<INCOME-TAX> (43,494)
<INCOME-CONTINUING> (1,389,102)
<DISCONTINUED> (15,118,262)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,507,364)
<EPS-BASIC> (3.29)
<EPS-DILUTED> (3.29)
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