<PAGE> 1
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 MARCH 31, 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 March 31, 1998:
OUTSTANDING
CLASS MARCH 31, 1998
Common Stock, no par value 3,005,435
This is Page 1 of 20 Pages.
The Index to Exhibits begins on Page 20
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ENLIGHTEN SOFTWARE SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-QSB
QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- 3
As of March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations -- 4
Three months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows -- 5
Three months ended March 31, 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
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
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SIGNATURES 19
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</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- -----------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 805,429 $ 1,406,141
Short term investments 486,000 286,000
Accounts receivable, less allowance for doubtful accounts 537,911 240,444
Refundable income taxes -- 127,035
Prepaid expenses and other assets 694,184 449,256
----------- -----------
Total current assets 2,523,524 2,508,876
Property and equipment, net 623,440 748,736
Software development costs, net 196,360 231,063
Other assets 231,034 226,034
----------- -----------
$ 3,574,358 $ 3,714,709
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 120,109 $ 134,043
Accrued and other current liabilities 473,048 728,975
Deferred revenue 219,538 359,361
----------- -----------
Total current liabilities 812,695 1,222,379
----------- -----------
Shareholders' equity:
Common stock 5,123,852 5,079,505
Unrealized gain on investments 13,305 --
Accumulated deficit (2,375,494) (2,587,175)
----------- -----------
Total shareholders' equity 2,761,663 2,492,330
----------- -----------
$ 3,574,358 $ 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
March 31,
-----------------------------
1998 1997
------------- -----------
<S> <C> <C>
Revenue:
Product license fees $ 180,130 $ 431,678
Product maintenance fees 155,473 862,205
Consulting services 207,817 35,051
Royalties 157,160 --
----------- -----------
Total revenue 700,580 1,328,934
Cost of revenue 173,838 230,290
----------- -----------
Gross profit 526,742 1,098,644
----------- -----------
Operating expenses:
Research and development 276,739 696,264
Sales and marketing 379,945 1,170,545
General and administrative 222,345 357,603
Gain on sale of Tandem product line (515,487) --
----------- -----------
Total operating expenses 363,542 2,224,412
----------- -----------
Operating income (loss) 163,200 (1,125,768)
Other income 7,877 494
----------- -----------
Income (loss) before income taxes 171,077 (1,125,274)
Income tax expense (benefit) (40,604) 1,080
----------- -----------
Net income (loss) $ 211,681 $(1,126,354)
=========== ===========
Basic earnings (loss) per share:
Net income (loss) per share $ 0.07 $ (0.39)
=========== ===========
Shares used in net income (loss) per share computation 2,985,746 2,924,226
=========== ===========
Diluted earnings (loss) per share:
Net income (loss) per share $ 0.06 $ (0.39)
=========== ===========
Shares used in net income (loss) per share computation 3,449,857 2,924,226
=========== ===========
</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>
Three months ended
March 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 211,681 $(1,126,354)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 92,173 172,286
Gain on sale of Tandem product line (515,487) --
Changes in operating assets and liabilities:
Accounts receivable, net (297,467) 5,291
Refundable income taxes 127,035 --
Prepaid expenses and other assets 156,960 35,231
Trade accounts payable (13,934) 115,708
Accrued and other liabilities (255,927) (259,924)
Deferred revenue (139,823) 341,191
----------- -----------
Net cash used for operating activities (634,789) (716,571)
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (186,695) --
Sales of short-term investments -- 550,065
Proceeds from sale of Tandem product line 191,666 --
Capitalization of software development costs -- (32,520)
Purchases of property and equipment (15,246) (51,574)
----------- -----------
Net cash provided by (used for) investing activities (10,275) 465,971
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock 44,352 65,989
----------- -----------
Net decrease in cash and cash equivalents (600,712) (184,611)
Cash and cash equivalents at beginning of period 1,406,141 689,611
----------- -----------
Cash and cash equivalents at end of period $ 805,429 $ 505,000
=========== ===========
</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 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 March 31, 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. 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 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 market value based
on quoted market prices, with unrealized gains and losses reported as a separate
component of stockholders' equity. As of March 31, 1998, unrealized gains and
losses were not significant.
4. Earnings Per Common Share
Basic earnings per share is based on the weighted effect of all common shares
issued and outstanding, and is calculated by dividing net income available to
common stockholders by the weighted average shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income
available to common stockholders by the weighted average number of common shares
used in the basic earnings per share calculation plus the number of common
shares that would be issued assuming conversion of all potentially dilutive
common shares outstanding. All historical earnings per share data have been
restated to conform to this presentation. Below is the calculation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ 211,681 $(1,126,354)
========== ===========
Weighted average shares outstanding -- Basic 2,985,746 2,924,226
Employee stock options 464,111 --
---------- -----------
Weighted average shares outstanding -- Diluted 3,449,857 2,924,226
========== ==========
Earnings per common share:
Basic $ 0.07 $ (0.39)
Diluted $ 0.06 $ (0.39)
</TABLE>
5. 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.
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6. Subsequent Event
On April 22, 1998, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell 575,000 shares of its common stock in connection with a
proposed public offering.
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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 first quarter of 1998 totaled $701,000, a
47% decrease when compared to the same quarter in 1997. This decrease was
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
associated with the Company's UNIX/NT product.
Revenue from product license fees decreased 58% to $180,000 in the first
three months of 1998, compared to $432,000 for the same period in 1997. The
decrease was primarily attributable to the sale of the Tandem product line.
There was no product license fee revenue from the Company's Tandem product line
compared to $372,000 in the first quarter of 1997. The decrease in Tandem
product license fees during the first three months of 1998 was partially offset
by an increase of $120,000, or 200%, from the Company's UNIX/NT product,
EnlightenDSM, when compared to the same period in 1997.
Product maintenance fees decreased 82%, to $155,000, in the first quarter
of 1998 when compared to the same period in 1997. This decline is entirely due
to the disposition of the Tandem product line on October 1, 1997. Product
maintenance fees for EnlightenDSM increased by $148,000, for the first quarter
of 1998, compared to the first
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quarter of 1997. This increase was primarily a result of support fees recognized
in connection with the Company's OEM relationship.
Consulting services revenue increased by $173,000, to $208,000 in the first
quarter of 1997 when compared with the first quarter of 1996. The increase is
primarily due to non-recurring consulting work 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. Royalties for the first quarter of 1997 were $157,000. 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 the first quarter of 1997.
Cost of revenue. Cost of revenue decreased by $56,000, or 24%, to $174,000
in the first quarter of 1997. 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.
Research and development. Net research and development expenses decreased
by 60% to $277,000 in the first quarter of 1998 when compared to the first
quarter of 1997. This 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, thus there were no comparable expenses
associated with Tandem development in the first quarter of 1998 when compared to
the same period in 1997. 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 68%, to
$380,000, 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.
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General and administrative. General and administrative expenses decreased
by $135,000, or 38%, in the first quarter of 1998 when compared to the same
period 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 (expense). Other income and expense (net) increased by $7,000
as a result of an increase in net interest income.
Income tax expense (benefit). Due to the Company's loss and credit
carryforwards no tax is due on the first 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 the first quarter of 1997 is due to taxes paid to foreign
jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company's cash, cash equivalents, and short term
investments were $1,292,000, representing 36% of total assets. The Company's
working capital as of March 31, 1998, was $1,711,000. 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 March 31, 1998, other than normal
trade payables and accrued liabilities. Shareholders' equity as of March 31,
1998, was $2,762,000.
During the first quarter of 1998, the Company's operating activities used
cash of $635,000, compared to cash used by operating activities of $717,000 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, an
increase in accounts receivable, and decreases in accrued liabilities and
deferred revenue.
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 used cash of $10,000 in the first quarter of 1998, compared with
providing cash of $466,000 in the
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same period in 1997. The decrease is primarily due to sales of short-term
investments made in the first quarter of 1997 for which there were no comparable
transactions in the first quarter of 1998. The cash received for the sale of the
Tandem operation in the first quarter of 1998 was almost entirely offset by
purchases of short-term investments.
Financing activities provided cash of $44,000 in the first quarter of 1998,
compared with cash provided of $66,000 in the same period of the prior year. The
decrease in cash provided from financing activities resulted from a reduction in
cash provided by the exercise of employee stock options.
On April 22, 1998, the Company filed a registration statement with the
Securities and Exchange Commission to sell up to 575,000 shares of its Common
Stock in connection with a proposed public offering.
The Company believes that its cash, cash equivalents, and short term
investment balances, the proceeds from the sale of Common Stock, and funds from
operations will satisfy the Company's projected working capital and capital
expenditure requirements through the next twelve months.
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
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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 revenue 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 revenue, delays in the receipt of orders can cause significant
fluctuations in income from quarter to quarter.
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. This was the first
such OEM agreement 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
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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 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. While the Company believes
that this arrangement with Silicon Graphics will be beneficial, there can be no
assurance that the Company will be able to deliver its products to Silicon
Graphics in a timely manner or that Silicon Graphics will license the Company's
products in volumes anticipated by the Company. Further, the agreement with
Silicon Graphics is the Company's only significant third-party distribution
agreement to date. While the Company's strategy is to obtain additional
resellers to reduce the dependence on one vendor, 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 Silicon Graphics 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 systems management functionality offered by the
Company, which could render the Company's products obsolete and unmarketable.
There can be no assurance that the
Page 15
<PAGE> 16
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 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 14% of the Company's license revenue in the
three months ended March 31, 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 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
Page 16
<PAGE> 17
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.
Page 17
<PAGE> 18
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, MARCH 31, 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
15 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 March 31, 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 18
<PAGE> 19
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, MARCH 31, 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: SIGNATURE: /s/ David D. Parker
----------------------- -----------------------------
David D. Parker
Chief Executive Officer
DATE: SIGNATURE: /s/ Michael A. Morgan
----------------------- -----------------------------
Michael A. Morgan
Chief Financial Officer
Page 19
<PAGE> 20
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, MARCH 31, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.21.1(1)@ 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(1)@ Termination and Change in Control Agreement, dated April 24,
1996, by and between Enlighten Software Solutions, Inc. and
Michael A. Morgan.
10.25(1)@ Employment letter, dated December 27, 1996, by and between
Enlighten Software Solutions, Inc. and Mark Himelstein.
10.26(1)@ Nonqualified Stock Option Agreement, dated December 27, 1996, by
and between Enlighten Software Solutions, Inc. and Mark
Himelstein.
10.27(2) Agreement dated as of September 22, 1997, by and among Enlighten
Software Solutions, Inc., Peter J. McDonald, and New Dimension
Software, Inc.
10.28(3)@ Employment letter, dated July 3, 1997, by and between Enlighten
Software Solutions, Inc. and Michael Seashols.
10.29(3)@ Employment letter, dated August 28, 1997, by and between
Enlighten Software Solutions, Inc. and David D. Parker.
10.30(3) 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,
1996.
(2) Incorporated by reference from exhibit 10.27 in the Company's Current
Report on Form 8-K dated October 1, 1997.
(3) 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.
@ Compensatory or employment arrangement.
Page 20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 805,429
<SECURITIES> 486,000
<RECEIVABLES> 537,911
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,523,524
<PP&E> 1,328,000
<DEPRECIATION> 704,560
<TOTAL-ASSETS> 3,574,358
<CURRENT-LIABILITIES> 812,695
<BONDS> 0
5,123,856
0
<COMMON> 0
<OTHER-SE> 13,305
<TOTAL-LIABILITY-AND-EQUITY> 3,574,360
<SALES> 700,580
<TOTAL-REVENUES> 700,580
<CGS> 173,838
<TOTAL-COSTS> 173,838
<OTHER-EXPENSES> 363,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 171,077
<INCOME-TAX> (40,604)
<INCOME-CONTINUING> 211,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211,681
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.06
</TABLE>
