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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23446
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
(Exact Name as registrant specified in its charter)
CALIFORNIA 94-3008888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
999 BAKER WAY, FIFTH FLOOR, SAN MATEO, CALIFORNIA 94404
(Address of principal executive offices) (Zip code)
(650) 578-0700
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 1998:
OUTSTANDING
CLASS SEPTEMBER 30, 1998
----- ------------------
Common Stock, no par value 3,876,064
This is Page 1 of 22 Pages.
The Index to Exhibit beings on Page 22.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 3
As of September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations - 4
Three months ended September 30, 1998 and 1997 and
Nine months ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows - 5
Nine months ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
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SIGNATURES 21
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</TABLE>
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PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,700,403 $ 1,406,141
Short-term investments 280,000 286,000
Accounts receivable, less allowance for doubtful accounts 1,166,515 240,444
Refundable income taxes -- 127,035
Prepaid expenses and other assets 148,044 449,256
----------- -----------
Total current assets 4,294,962 2,508,876
Property and equipment, net 580,822 748,736
Software development costs, net 126,952 231,063
Other assets 239,430 226,034
----------- -----------
$ 5,242,166 $ 3,714,709
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 115,686 $ 134,043
Accrued and other current liabilities 507,078 728,975
Deferred revenue 73,683 359,361
----------- -----------
Total current liabilities 696,447 1,222,379
----------- -----------
Shareholders' equity:
Common stock 7,551,744 5,079,505
Accumulated comprehensive income 14,200 --
Accumulated deficit (3,020,225) (2,587,175)
----------- -----------
Total shareholders' equity 4,545,719 2,492,330
----------- -----------
$ 5,242,166 $ 3,714,709
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product license fees $ 1,233,322 $ 365,173 $ 1,560,333 $ 1,337,803
Product maintenance fees 166,052 835,294 494,640 2,544,186
Consulting services 9,000 35,022 244,096 110,784
Royalties 98,794 -- 328,102 --
----------- ----------- ----------- -----------
Total revenue 1,507,168 1,235,489 2,627,171 3,992,773
Cost of revenue 226,505 233,577 504,879 699,503
----------- ----------- ----------- -----------
Gross profit 1,280,663 1,001,912 2,122,292 3,293,270
----------- ----------- ----------- -----------
Operating expenses:
Research and development 495,545 453,052 1,153,315 1,691,204
Sales and marketing 512,750 743,912 1,358,641 2,861,728
General and administrative 253,239 386,870 701,722 1,189,586
Gain on sale of Tandem product line -- -- (515,487) --
----------- ----------- ----------- -----------
Total operating expenses 1,261,534 1,583,834 2,698,191 5,742,518
----------- ----------- ----------- -----------
Operating income (loss) 19,129 (581,922) (575,899) (2,449,248)
Other income, net 50,697 24,323 102,245 66,728
----------- ----------- ----------- -----------
Income (loss) before income taxes 69,826 (557,599) (473,654) (2,382,520)
Income tax expense (benefit) -- -- (40,604) 1,080
----------- ----------- ----------- -----------
Net income (loss) $ 69,826 $ (557,599) $ (433,050) $(2,383,600)
=========== =========== =========== ===========
Basic earnings (loss) per share:
Net income (loss) per share $ 0.02 $ (0.19) $ (0.13) $ (0.81)
=========== =========== =========== ===========
Shares used in net income (loss) per
share computation 3,813,429 2,946,040 3,384,495 2,936,025
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Net income (loss) per share $ 0.02 $ (0.19) $ (0.13) $ (0.81)
=========== =========== =========== ===========
Shares used in net income (loss) per
share computation 4,124,473 2,946,040 3,384,495 2,936,025
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (433,050) $(2,383,600)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 399,586 523,807
Gain on sale of Tandem product line (515,487) --
Changes in operating assets and liabilities:
Accounts receivable, net (926,071) 290,892
Refundable income taxes 127,035 273,634
Prepaid expenses and other assets 287,816 22,408
Trade accounts payable (18,357) (24,693)
Accrued and other current liabilities (221,897) (330,708)
Deferred revenue (285,678) (116,897)
----------- -----------
Net cash used for operating activities (1,586,103) (1,745,157)
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (200,000) --
Sales of short-term investments 220,200 1,353,065
Proceeds from sale of Tandem product line 515,487 --
Capitalization of software development costs -- (66,449)
Purchases of property and equipment (127,561) (68,898)
----------- -----------
Net cash provided by investing activities 408,126 1,217,718
----------- -----------
Cash flows from financing activities:
Proceeds from public offering of stock, net 2,217,373 --
Proceeds from other stock transactions 254,866 137,783
----------- -----------
Net cash provided by financing activities 2,472,239 137,783
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,294,262 (389,656)
Cash and cash equivalents at beginning of period 1,406,141 689,611
----------- -----------
Cash and cash equivalents at end of period $ 2,700,403 $ 299,955
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The Consolidated Financial Statements of Enlighten Software Solutions, Inc. and
Subsidiary (the "Company") included in the Company's Form 10-KSB for the year
ended December 31, 1997 contain additional information about the Company, its
operations, and its financial statements and accounting practices, and should be
read in conjunction with this Quarterly Report on Form 10-QSB. The condensed
consolidated balance sheet at December 31, 1997 was derived from audited
financial statements; however, it does not include all disclosures required by
generally accepted accounting principles. These interim unaudited condensed
consolidated financial statements have been prepared in accordance with the
instructions for Form 10-QSB and therefore certain information and footnote
disclosures normally contained in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The interim financial information contained herein is not necessarily indicative
of results for any future period.
The accompanying unaudited condensed consolidated financial statements of the
Company reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary to present a fair statement of the financial
position as of September 30, 1998, and the results of operations and cash flows
for the interim periods presented.
2. Revenue Recognition
Product license fees are recognized after the following events have occurred: a
product evaluation has been shipped to the customer; the customer elects to
purchase the software following an evaluation period; the customer signs the
related contract; and collection of the sales price is probable. Royalty
revenues that are contingent upon sale to an end user by original equipment
manufacturers are recognized upon receipt of a report of shipment from the
original equipment manufacturer. Product maintenance fees committed as part of
new product licenses and maintenance resulting from renewed maintenance
contracts are deferred and recognized ratably over the contract period,
generally one year. Consulting service revenue is recognized when services are
performed for time and material contracts and on a percentage of completion
basis for fixed price contracts.
3. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
The Company has classified its investments in commercial paper and U.S. Treasury
notes as "held-to-maturity." All such investments mature in less than one year
and are stated at amortized cost, which approximates fair value. Interest income
is recorded using an effective interest rate, with the associated discount or
premium amortized to interest income.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Additionally, the Company has classified its investments in preferred stock as
"available-for-sale." Such investments are recorded at fair value based on
quoted market prices, with unrealized gains and losses reported as a separate
component of stockholders' equity. As of September 30, 1998, unrealized gains
and losses were not significant.
4. Recent Accounting Pronouncements
The Company adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
adoption of this statement did not have a material affect on the periods
presented.
5. Earnings Per Common Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that would
occur from options which could result in additional common shares being issued.
The following is a reconciliation of the number of shares used in the basic and
diluted earning per share computations for the periods presented:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shares used in basic net income
(loss) per share computation 3,813,429 2,946,040 3,384,495 2,936,025
Effect of dilutive potential
common shares 311,044 -- --
--------- --------- --------- ---------
Shares used in diluted net income
(loss) per share computation 4,124,473 2,946,040 3,384,495 2,936,025
========= ========= ========= =========
</TABLE>
Potential common shares excluded from the computation for the three months ended
September 30, 1997 was 178,222 as their effect would be antidilutive. Potential
common shares excluded from the computation for the nine months ended September
30, 1998 and September 30, 1997 were 418,193 and 161,329, respectively.
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6. Gain on Sale of Tandem Product Line
On October 1, 1997, the Company sold its Tandem product line to New Dimension
Software, Inc. ("NDS") in order to focus efforts on its UNIX/NT product suite.
In connection with this sale, the Company received approximately $2.5 million in
cash, of which $1.6 million was received in 1997, and the rights to receive
royalties on Tandem related products for a period of three years based upon NDS'
licensing and support of the Tandem software products. The sale of the Tandem
product line also included the transfer to NDS of approximately 12 employees
associated with the Company's Tandem operation.
7. Recent Developments
In May 1998, the Company completed a public offering (the "Offering") of 700,000
shares of Common Stock. The net proceeds from the Offering of $2.2 million will
be used for funding 1998 operations, capital expenditures, and for other general
corporate purposes, including working capital.
8. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
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. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. For a
derivative not designated as a hedging instrument, changes in the fair value of
the derivative are recognized in earnings in the period of change. This
statement will be effective for all annual and interim periods beginning after
June 15, 1999 and management does not believe the adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.
In March 1998, the American Institute of Certified Public Accountants issued SOP
No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The Company does not expect the adoption of SOP No. 98-1 to have a material
impact on its results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion in this report on Form 10-QSB contains forward looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed under the heading "Business Risks"
contained herein and in the Company's other filings with the Securities and
Exchange Commission, including but not limited to those discussed under the
heading "Risk Factors" in the Company's 1997 Report on Form 10-KSB.
OVERVIEW
Enlighten Software Solutions develops, markets, and supports software
products for UNIX and UNIX/NT environment workgroup administration and
enterprise management. The Company's product solutions are designed for open
systems distributed computing environments in the range of ten to 1,000
servers/clients. The EnlightenDSM product allows companies to manage their
information systems by enabling systems managers and administrators to control
their systems from diverse UNIX/NT platform vendors such as, Digital Equipment
Corporation, Hewlett-Packard, IBM, Santa Cruz Operation (SCO), Silicon Graphics,
Sun Microsystems, and Microsoft Windows NT.
Founded in 1986, the Company was a leading provider of systems
management software on the Tandem platform, providing a range of automated
systems management products to over 400 companies in 30 countries.
On October 1, 1997, the Company sold its Tandem product line to New
Dimension Software, Inc. ("NDS") in order to focus efforts on its UNIX/NT
product suite. In connection with this sale, the Company will receive
approximately $2.5 million in cash, of which $1.6 million was received in 1997,
and the rights to receive royalties on Tandem related products for a period of
three years based upon NDS' licensing and support of the Tandem software
products. The sale of the Tandem product line also included the transfer to NDS
of approximately 12 employees associated with the Company's Tandem operation.
Following the disposition of its Tandem product line, the Company
shifted its sales strategy to one based primarily upon third-party distributors
and restructured its sales department as a result of this shift. The Company
intends to build its sales, marketing, and customer support organizations with a
focus on delivery of its products to original equipment manufacturer ("OEM")
partners, resellers, system integrators, and select end-users. An essential
element of the Company's sales and marketing strategy is the development of
indirect distribution channels, such as OEMs, independent software vendors
("ISVs"), and value added resellers ("VARs"), as well as other systems
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management and application software vendors whose products are complementary
with those of the Company.
VARIABILITY OF QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in
operating results and expects that these fluctuations will continue in future
periods. These fluctuations have been caused by a number of factors, including
the timing of new product or product enhancement introductions by the Company or
its competitors, purchasing patterns of its customers, size and timing of
individual orders, the rate of customer acceptance of new products, and pricing
and promotion strategies undertaken by the Company or its competitors. Future
operating results may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop, acquire, and introduce
new products on a timely basis. Additionally, the Company's operating results
may be influenced by seasonality and overall trends in the global economy.
Because the Company operates with a relatively small backlog, quarterly sales
and operating results generally depend on the volume and timing of orders
received during the quarter, which are difficult to forecast. Historically, the
Company has recognized a substantial portion of its license revenues in the last
month of the quarter, particularly the last week. Since the Company's staffing
levels and other operating expenses are based upon anticipated revenues, delays
in the receipt of orders can cause significant fluctuations in income from
quarter to quarter.
RESULTS OF OPERATIONS
Total revenue. Revenue for the third quarter of 1998 totaled $1,507,000,
a 22% increase when compared to the same quarter in 1997. The increase for the
quarter is related to the increased license fees from the Company's UNIX/NT
product explained in more detail below. Total revenue for the nine months ended
September 30, 1998, decreased 34% to $2,627,000, from the same period in 1997.
The decrease for the nine month period was almost entirely due to the sale of
the Company's Tandem products on October 1, 1997, which significantly affected
product license fees and product maintenance fees. The decrease in Tandem
revenue was partially offset by an increase in revenue of $1,736,000 associated
with the Company's UNIX/NT product.
Revenue from product license fees increased 238% to $1,233,000 in the
third quarter of 1998, and increased 17% to $1,560,000 for the nine months ended
September 30, 1998, when compared to the same periods in 1997. The increase in
each period was primarily attributable to an increase in UNIX/NT licenses of the
Company's EnlightenDSM product for those respective periods. UNIX/NT license
revenue increased by $1,159,000, or 1,566%, and $1,169,000, or 299%, for the
three and nine months ended September 30, 1998, respectively. This increase in
UNIX/NT license revenue is due to the initial shipments of the
EnlightenDSM/Workgroup bundle by Silicon Graphics, Inc. The third quarter of
1998 represented the first quarter in which the Company's product was bundled
with the IRIX operating system shipped by Silicon Graphics. These
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increases were offset by the loss of Tandem product license revenue resulting
from the sale of the Tandem product line. There was no product license fee
revenue from the Company's Tandem product line in 1998, compared to $291,000 and
$947,000 in the three and the nine months ended September 30, 1997,
respectively.
Product maintenance fees decreased 80%, to $166,000, in the third
quarter of 1998, and decreased 81% to $495,000 for the nine months ended
September 30, 1998, when compared to the same periods in 1997. The decline is
almost entirely due to the disposition of the Tandem product line on October 1,
1997. Product maintenance fees for EnlightenDSM increased by $142,000, or 592%,
and by $439,000, or 784%, for the third quarter and the first nine months of
1998, respectively, when compared to the third quarter and the first nine months
of 1997. This increase was primarily a result of support fees recognized in
connection with the Company's OEM relationship with Silicon Graphics, Inc.
Consulting services revenue decreased 74%, to $9,000, in the third
quarter of 1998 when compared with the third quarter of 1997. The decrease in
this period is due to Tandem consulting projects in existence in the third
quarter of 1997 and terminated prior to the third quarter of 1998. Consulting
services revenue increased 120%, to $244,000, for the nine months ended
September 30, 1998, when compared with the same period in 1997. The increase is
primarily due to non-recurring consulting work performed in the first quarter of
1998 related to the Company's new OEM relationship as well as consulting
performed for NDS in connection with the Company's sale of the Tandem product
line.
Royalties for the third quarter of 1998 and the first nine months of
1998 were $99,000 and $328,000, respectively. The Company recognizes royalties
from product license fees and product maintenance fees generated by the Tandem
product line sold to NDS in October 1997. There were no comparable royalties in
1997.
Cost of revenue. Cost of revenue decreased by 3%, or $7,000, to $227,000
in the third quarter of 1998, and by 28%, or $195,000, to $505,000 for the nine
months ended September 30, 1998. The reduction in cost of revenue is caused
primarily by the decrease in costs associated with royalties paid to third
parties and amortization of software development and acquisition costs. Costs
associated with these two areas decreased as a result of the sale of the Tandem
product line. These cost reductions were partially offset by hardware costs
associated with the non-recurring consulting services performed in connection
with the Company's OEM relationship and increased product packaging costs
related to the Company's EnlightenDSM product.
Research and development. Net research and development expenses
increased by 9% to $496,000 in the third quarter of 1998, when compared to the
third quarter of 1997. The increase in this quarter is related to increased
personnel and recruiting costs. Several new development personnel were hired in
the third quarter. Although total development headcount remained relatively
equal compared to the year ago quarter, UNIX/NT
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development personnel were hired, replacing former Tandem development personnel.
Net research and development expenses decreased by 32% to $1,153,000 for the
nine months ended September 30, 1998, when compared to the same period in 1997.
The decrease is attributable to the sale of the Tandem product line on October
1, 1997. All Tandem research and development personnel were transferred to NDS
in October 1997. Prior to the hiring that took place in the current quarter,
there were no comparable expenses associated with Tandem development in 1998.
The Company expects its research and development expenditures to increase in
absolute dollars as it expands that operation to facilitate expected product
demands associated with its third-party resellers.
Sales and marketing. Sales and marketing expenses decreased by 31% to
$513,000 in the third quarter of 1998, and by 53% to $1,359,000 for the nine
months ended September 30, 1998, when compared to the same periods in 1997. The
decrease is primarily due to the sale of the Tandem product line in October 1997
and the restructuring of the sales and marketing department to reflect the
Company's strategy of selling through third parties as opposed to selling
directly. All sales and support personnel associated with the Tandem product
line were transferred to NDS as part of the sale of that operation.
Additionally, the Company closed all remote sales operations in the U.S. and the
U.K. during the fourth quarter of 1997, significantly reducing sales and
marketing costs.
The Company expects sales and marketing costs to increase in absolute
dollars for the foreseeable future as it expands its ability to sell and service
its products through third-party resellers and, to a lesser extent, expands its
direct sales force.
General and administrative. General and administrative expenses
decreased by 35% to $253,000 in the third quarter of 1998, and by 41% to
$702,000 for the nine months ended September 30, 1998, when compared to the same
periods in 1997. The decrease in expense is primarily related to decreased
overhead associated with the disposed Tandem operation.
Gain on sale of Tandem product line. On October 1, 1997, the Company
sold its Tandem product line to NDS. The Company received approximately $2.5
million in cash ($1.6 million of which was received in the fourth quarter of
1997) and the rights to receive royalties on Tandem related products for a
period of three years. In the fourth quarter of 1997, the Company recognized a
gain on the sale of the operating assets of the Tandem product line of
approximately $2.2 million. In the first quarter of 1998, the Company received
the balance of the cash related to the sale of the assets and recognized the
balance of the gain from this transaction, or $515,000.
Other income, net. Other income, net increased by $26,000 and $36,000 in
the third quarter of 1998 and the nine months ended September 30, 1998,
respectively, as a result of an increase in net interest income.
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Income tax expense (benefit). Due to the Company's loss and tax credit
carryforwards no tax is due on the third quarter's net income. The Company
recognized a tax benefit of $41,000 in the first quarter of 1998 as a result of
receiving tax refunds on net operating loss carrybacks in excess of taxes
receivable provided for by the Company. Since the Company does not expect to
have a tax liability in 1998, the full benefit of the excess tax refund received
was recognized in the first quarter of 1998. The Company's tax expense
recognized in 1997 is due to taxes paid to foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's cash, cash equivalents, and short
term investments were $2,980,000, representing 57% of total assets. The
Company's working capital as of September 30, 1998, was $3,599,000. Cash
equivalents are highly liquid with original maturities of ninety days or less.
The Company's short term investments are primarily investment grade commercial
paper and highly liquid. The Company had no debt as of September 30, 1998, other
than normal trade payables and accrued liabilities. Shareholders' equity as of
September 30, 1998, was $4,546,000.
During the first nine months of 1998, the Company's operating activities
used cash of $1,586,000, compared to cash used by operating activities of
$1,745,000 in the same period of the prior year. The change was principally
caused by decreased net losses, excluding the gain on the sale of the Tandem
operation, partially offset by the change in accounts receivable.
The Company's investing activities have consisted primarily of
short-term investments, the sale of the Company's Tandem operation,
capitalization of software development costs, and additions to capital
equipment. Investing activities provided cash of $408,000 for the nine months
ended September 30, 1998, compared with $1,218,000 in the same period in 1997.
The change is primarily due to sales of short-term investments made in the first
nine months of 1997 in excess of the net sales and purchases of short-term
investments in the first nine months of 1998. The change attributable to sales
and purchases of short-term investments was partially offset by proceeds
received in the first nine months of 1998 from the sale of the Tandem
operations.
Financing activities provided cash of $2,472,000 in the first nine
months of 1998, compared with cash provided of $138,000 in the same period of
the prior year. The increase in cash provided from financing activities resulted
from the Company's issuance and sale of 700,000 shares of Common Stock in a
public offering.
In May 1998, the Company completed a public offering (the "Offering") of
700,000 shares of common stock. The net proceeds from the Offering of $2.2
million will be used for funding 1998 operations and capital expenditures and
for other general corporate purposes, including working capital.
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The Company will require substantial cash flow to continue operations on
a satisfactory basis and complete its research and development and its sales and
marketing programs. The Company anticipates that cash and short-term investments
and net proceeds from the Offering will provide sufficient liquidity to fund
these requirements for the next twelve months. However, the Company's continued
ability to fund operations and meet its other obligations depends on its future
performance, which, in turn, is subject to general economic conditions, and
business and other factors beyond the Company's control. If the Company is
unable to generate sufficient cash flow from operations, it may be required to
obtain additional financing. There can be no assurance that the Company would be
able to obtain such financing, or that any financing would result in a level of
net proceeds required.
BUSINESS RISKS
In addition to the other information in this Report on Form 10-QSB and
other documents the Company files from time to time with the Securities and
Exchange Commission, the following risk factors should be considered carefully
in evaluating the Company and its business:
Fluctuating Operating Results
The Company has experienced significant quarterly fluctuations in
operating results and expects that these fluctuations will continue in future
periods. These fluctuations have been caused by a number of factors, including
the timing of new product or product enhancement introductions by the Company or
its competitors, the development and introduction of new operating systems that
require additional development efforts, purchasing patterns of its customers,
size and timing of individual orders, the rate of customer acceptance of new
products, and pricing and promotion strategies undertaken by the Company or its
competitors. Future operating results may fluctuate as a result of these and
other factors, including the Company's ability to continue to develop, acquire,
and introduce new products on a timely basis, the timing and level of sales by
the Company's OEM or other third-party licensees of computer systems or software
incorporating the Company's products, technological changes in computer systems
and environments, quality control of the products sold, the Company's success in
shifting its primary sales strategy from direct to indirect channels, and
general economic conditions. Additionally, the Company's operating results may
be influenced by seasonality and overall trends in the global economy. Because
the Company operates with a relatively small backlog, quarterly sales and
operating results generally depend on the volume and timing of orders received
during the quarter, which are difficult to forecast. Historically, the Company
has recognized a substantial portion of its license revenues in the last month
of the quarter, particularly the last week. Since the Company's staffing levels
and other operating expenses are based upon anticipated revenues, delays in the
receipt of orders can cause significant fluctuations in income from quarter to
quarter.
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<PAGE> 15
Uncertainty of Success in Open Systems Market
The Company has derived a substantial portion of its revenue to date
from its Tandem-based products. The Company, however, sold all rights to its
Tandem technology in October 1997. The future success of the Company is
substantially dependent on its ability to generate significant revenue from its
UNIX/NT product offering. The Company's initial product entry into the open
systems market in 1995 was unsuccessful. Version 2.0 of EnlightenDSM was
released in mid-1996 and represented 27% and 22% of the Company's license
revenues in 1997 and 1996, respectively. In January 1998, the Company signed an
OEM bundling agreement with Silicon Graphics in which Silicon Graphics will
bundle a limited version of the Company's product on each UNIX system shipped.
In August 1998, the Company signed a distribution agreement with two of General
Electric's IT Distribution Group businesses, Access Graphics and Integration
Alliance. These were the first such agreements entered into by the Company.
However, the open systems market is characterized by rapid technological growth
and intense competition. There can be no assurance that the Company has the
resources, both financial and personnel, to effectively capitalize on, and
continue with, its early and limited success in this market.
Expansion of New Distribution Channels; Reliance on Resellers
Prior to October 1997, the Company employed primarily a direct sales
model, complemented with a telesales force, for the sale of its software
products. In the fourth quarter of 1997, the Company began to shift a majority
of its sales and marketing resources toward third-party resellers in both the
United States and internationally. The Company's growth will be dependent on its
ability to expand its third-party distribution channel to market, sell, and
support the Company's software products. The Company is currently investing, and
intends to continue to invest, significant resources to develop this channel,
which could materially adversely affect the Company's operating margins. The
Company has only limited experience in marketing its products through
distributors. Additionally, the Company will have no control over its
third-party distributors including their shipping dates or volumes of systems
shipped by its OEM and other third-party customers. There can be no assurance
that the Company will be successful in its efforts to generate significant
revenue from this channel, nor can there can be any assurance that the Company
will be successful in recruiting new organizations to represent the Company and
its products.
Additionally, as the Company shifts its sales efforts from direct to
indirect channels, the Company will become more dependent on its third-party
distributors for the technical support and consultation to end users. The
Company will need to increase its training and education efforts related to its
third-party distributors to enable such third parties to obtain the technical
proficiency and knowledge with respect to the Company's products. Despite these
efforts, there can be no assurance that the Company will successfully train its
third party distributors to enable them to provide adequate technical support to
the customer base. This may result in, among other things, increased workload
Page 15
<PAGE> 16
on the Company's internal support and engineering staff, or poor customer
acceptance of the products, or both, either of which would have a material
adverse effect on the Company's business, operating results, and financial
condition
In January 1998, the Company entered into a Software License, OEM, and
Distribution Agreement with Silicon Graphics which will provide a new
distribution channel for the Company's products. The Company has agreed to
provide a limited feature version of the EnlightenDSM product which will be
bundled with Silicon Graphic's IRIX operating system. In August of 1998, the
Company entered into a distribution agreement with two of General Electric's IT
Distribution Group businesses, Access Graphics and Integration Alliance. Under
this agreement, the two companies will offer certified resellers the Company's
EnlightenDSM/Workgroup product bundled with such certified resellers' high-end
server offerings from Sun Microsystems and Hewlett Packard, and offer all of its
authorized resellers the entire EnlightenDSM product line for distribution.
While the Company believes that these arrangements with Silicon Graphics, Access
Graphics, and Integration Alliance will be beneficial, there can be no assurance
that the Company will be able to deliver its products to these companies in a
timely manner or that these companies will license the Company's products in
volumes anticipated by the Company. Further, these agreements are the Company's
only significant third-party distribution agreements to date. While the
Company's strategy is to obtain additional resellers to reduce the dependence on
two vendors, there can be no assurance of successfully attracting additional
vendors to distribute the Company's products. Any such failure would result in
the Company having expended significant resources with little or no return on
its investment, which would have a material adverse effect on the Company's
business, operating results, and financial condition.
These additional investments and responsibilities will require the
expenditure by the Company of substantial resources, including the diversion of
employees from other projects to provide the support services and development
efforts required to provide products and services to these third party vendors
and other new third parties, if any.
Intense Competition
The Company experiences intense competition from other systems
management companies, and the market is rapidly changing. The Company believes
that its ability to compete successfully depends on a number of factors,
including the performance, price, and functionality of its products relative to
those of its competitors. Most of the Company's competitors are larger and have
greater financial, technical, marketing, support, and other resources than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. In addition, the
software industry is characterized by low barriers to entry. There can be no
assurance that the Company's current competitors or any new market entrants will
not develop systems management products that offer significant performance,
price, or other advantages over the Company's technology. In addition, operating
system vendors could introduce new or upgrade existing operating systems or
environments that include
Page 16
<PAGE> 17
systems management functionality offered by the Company, which could render the
Company's products obsolete and unmarketable. There can be no assurance that the
Company will be able to successfully compete against current or future
competitors which could have a material adverse effect on the Company's
business, operating results, and financial condition.
Product Concentration
The Company expects that a substantial majority of the Company's revenue
in future periods will be derived from its UNIX/NT product, EnlightenDSM. This
product accounted for 100%, and 29% of the Company's license revenue in the nine
months ended September 30, 1998, and 1997, respectively. The Company has
disposed of its Tandem product line that accounted for the majority of its
license revenue in each period prior to October 1997. The Company expects that
the EnlightenDSM product and its extensions and derivatives will continue to
account for a substantial majority, if not all, of the Company's revenue for the
foreseeable future as a result of its strategic decision to divest itself of its
Tandem technology in order to focus its financial and other resources to
selling, servicing, and supporting EnlightenDSM. Broad market acceptance of
EnlightenDSM is, therefore, critical to the Company's future success. Failure to
achieve broad market acceptance of EnlightenDSM, as a result of competition,
technological change, or otherwise, would have a material adverse effect on the
business, operating results, and financial condition of the Company. The
Company's future financial performance will depend in significant part on the
successful development, introduction, and market acceptance of EnlightenDSM and
its product enhancements. There can be no assurance that the Company will be
successful in marketing EnlightenDSM or any new products, applications, or
product enhancements, and any failure to do so would have a material adverse
effect on the Company's business, operating results, and financial condition.
Rapid Technological Change
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, and rapid changes in
customer requirements. The introduction of products embodying new technologies,
including new operating systems, applications, hardware products, systems
management frameworks, and network management platforms, the emergence of new
industry standards, or changes in customer requirements could render the
Company's existing products obsolete and unmarketable. As a result, the
Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements, and develop and introduce
in a timely manner, new products that keep pace with technological developments
and emerging industry standards.
Additionally, there can be no assurance that other operating systems,
such as Windows NT, will not significantly affect deployment of UNIX systems for
business critical applications. A significant portion of the Company's revenue
will continue to be
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<PAGE> 18
derived from UNIX-based computer systems for the foreseeable future. While the
Company has ported its products to the Windows NT platform, the product requires
customers to control systems management for their heterogeneous environment from
UNIX-based systems. A significant decline in sales of UNIX-based systems would
decrease the demand for the Company's products and would have a material adverse
effect on the Company's business, operating results, and financial condition.
Finally, there can be no assurance that the Company will be successful in
developing and marketing, on a timely basis, product enhancements or new
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction, and sale of these products, or that
any such new products or product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance.
Dependence on Growth of Systems Management Market
For the foreseeable future, all of the Company's business will be in the
open systems (UNIX and NT) systems management market, which is still an emerging
market. The Company's future financial performance will depend in large part on
continued growth in the number of companies adopting systems management
solutions for their client/server computing environments. There can be no
assurance that the market for systems management solutions will continue to
grow. If the systems management market fails to grow or grows more slowly than
the Company currently anticipates, or in the event of a decline in unit price or
demand for the Company's products, as a result of competition, technological
change, or other factors, the Company's business, operating results, and
financial condition would be materially adversely affected. During recent years,
segments of the computer industry have experienced significant economic
downturns characterized by decreased product demand, production overcapacity,
price erosion, work slowdowns, and layoffs. The Company's operations may in the
future experience substantial fluctuations from period-to-period as a
consequence of such industry patterns, general economic conditions affecting the
timing of orders from major customers, and other factors affecting capital
spending. There can be no assurance that such factors will not have a material
adverse effect on the Company's business, operating results, and financial
condition.
Delisting of Securities from Nasdaq National Market
The Company's Common Stock was quoted on the National Market tier of the
Nasdaq Stock Market ("Nasdaq") until October 23, 1998, at which time the
Company's stock was moved to the Nasdaq SmallCap Market. Nasdaq recently imposed
new maintenance criteria for companies listed on the National Market. In order
to continue to be included on the National Market, a company must, among other
things, maintain $4,000,000 in net tangible assets and a $5,000,000 market value
of its public float. As of March 31, 1998, the Company was not in compliance
with the revised Nasdaq National Market continued listing criteria as to minimum
net tangible assets. In connection with
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<PAGE> 19
the adoption of such new criteria, Nasdaq National Market listed companies had
until February 23, 1998 to comply. As of September 30, 1998, the Company is in
compliance with all continued listing requirements for inclusion on the National
Market tier of Nasdaq. The Company applied to Nasdaq for a temporary exception
to the National Market continued listing requirements. In July 1998, the Company
was informed that despite its current compliance with the listing requirements,
its application for exception to the continued listing requirements was denied.
The Company appealed this decision. In October 1998 the Company was notified
that such appeal had been denied. The Company is currently appealing this
decision as well. The Company has not been notified of its appeal date. During
this appeal process, the Company's shares were moved to the Nasdaq SmallCap
Market. If the Company's current appeal is denied, the Company's securities will
remain listed on the Nasdaq SmallCap Market. If the stock remains listed on the
SmallCap Market, an investor may find it more difficult to acquire and dispose
of the Company's securities.
Year 2000 Compliance
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administration functions. To the extent
that these software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000," some level of
modification or even replacement of such source code or applications will be
necessary. The Company is in the process of identifying the software
applications that are not "Year 2000"compliant. Given the information known at
this time about the Company's systems, coupled with the Company's ongoing
efforts to upgrade or replace business critical systems as necessary, it is
currently not anticipated that these "Year 2000" costs will have a material
adverse impact on the Company's business, financial condition and results of
operations. However, the Company is still analyzing its software applications
and, to the extent they are not fully "Year 2000" compliant, there can be no
assurance that the costs necessary to update software or potential systems
interruptions would not have a material adverse effect on the Company's
business, financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
Page 19
<PAGE> 20
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, SEPTEMBER 30, 1998
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the accompanying Index of Exhibits on Page
22 are filed or incorporated by reference as part of this report.
Exhibit numbers 10.21, 10.21.1, 10.22, 10.23, 10.24, 10.25, and
10.26 are management contracts or compensatory plans or
arrangements.
(b) Reports on Form 8-K
During the quarter ended September 30, 1998, the Company did not
file any reports on Form 8-K.
ITEMS 1, 2, 3, 4, AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE.
Page 20
<PAGE> 21
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Enlighten Software Solutions, Inc.
DATE: November 9, 1998 SIGNATURE: /s/ David D. Parker
------------------ ----------------------------
David D. Parker
Chief Executive Officer
DATE: November 9, 1998 SIGNATURE: /s/ Michael A. Morgan
------------------ ----------------------------
Michael A. Morgan
Chief Financial Officer
Page 21
<PAGE> 22
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, SEPTEMBER 30, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1(1) Amended and Restated Articles of Incorporation.
3.1(1) By Laws.
10.21.1(2)(@) Amendment to Employment letter and Termination and Change in
Control Agreement, dated November 6, 1996, by and between
Enlighten Software Solutions, Inc. and Byron E. Jacobs.
10.24(2)(@) Termination and Change in Control Agreement, dated April 24,
1996, by and between Enlighten Software Solutions, Inc. and
Michael A. Morgan.
10.25(2)(@) Employment letter, dated December 27, 1996, by and between
Enlighten Software Solutions, Inc. and Mark Himelstein.
10.26(2)(@) Nonqualified Stock Option Agreement, dated December 27, 1996, by
and between Enlighten Software Solutions, Inc. and Mark
Himelstein.
10.27(3) Agreement dated as of September 22, 1997, by and among Enlighten
Software Solutions, Inc., Peter J. McDonald, and New Dimension
Software, Inc.
10.28(1)(@) Employment letter, dated July 3, 1997, by and between Enlighten
Software Solutions, Inc. and Michael Seashols.
10.29(1)(@) Employment letter, dated August 28, 1997, by and between
Enlighten Software Solutions, Inc. and David D. Parker.
10.30(1) Agreement dated as of January 21, 1998, by and between Enlighten
Software Solutions, Inc. and Silicon Graphics, Inc.
</TABLE>
- -------------------
(1) Incorporated by reference from an exhibit of the same number in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997.
(2) Incorporated by reference from an exhibit of the same number in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1996.
(3) Incorporated by reference from exhibit 10.27 in the Company's Current
Report on Form 8-K dated October 1, 1997.
(@) Compensatory or employment arrangement.
Page 22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,700,403
<SECURITIES> 280,000
<RECEIVABLES> 1,166,515
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,294,962
<PP&E> 1,477,351
<DEPRECIATION> 882,665
<TOTAL-ASSETS> 5,242,166
<CURRENT-LIABILITIES> 696,447
<BONDS> 0
0
0
<COMMON> 7,551,744
<OTHER-SE> 14,200
<TOTAL-LIABILITY-AND-EQUITY> 5,242,166
<SALES> 2,627,171
<TOTAL-REVENUES> 2,627,171
<CGS> 504,879
<TOTAL-COSTS> 504,879
<OTHER-EXPENSES> 2,698,191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (473,654)
<INCOME-TAX> (40,604)
<INCOME-CONTINUING> (433,050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (433,050)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
