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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 JUNE 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
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(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 June 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
CLASS JUNE 30, 1998
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<S> <C>
Common Stock, no par value 3,742,144
</TABLE>
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 JUNE 30, 1998
TABLE OF CONTENTS
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PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 3
As of June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations - 4
Three months ended June 30, 1998 and 1997 and
Six months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows - 5
Six months ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,098,197 $ 1,406,141
Short term investments 486,000 286,000
Accounts receivable, less allowance for doubtful accounts 352,665 240,444
Refundable income taxes -- 127,035
Prepaid expenses and other assets 172,800 449,256
------------- -------------
Total current assets 4,109,662 2,508,876
Property and equipment, net 581,155 748,736
Software development costs, net 161,656 231,063
Other assets 232,734 226,034
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$ 5,085,207 $ 3,714,709
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 214,015 $ 134,043
Accrued and other current liabilities 396,713 728,975
Deferred revenue 138,813 359,361
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Total current liabilities 749,541 1,222,379
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Shareholders' equity:
Common stock 7,410,514 5,079,505
Other comprehensive income 15,203 --
Accumulated deficit (3,090,051) (2,587,175)
------------- -------------
Total shareholders' equity 4,335,666 2,492,330
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$ 5,085,207 $ 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 Six months ended
June 30, June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Product license fees $ 146,881 $ 540,952 $ 327,011 $ 972,630
Product maintenance fees 173,115 846,687 328,588 1,708,892
Consulting services 27,279 40,711 235,096 75,762
Royalties 72,148 -- 229,308 --
------------- ------------- ------------- -------------
Total revenue 419,423 1,428,350 1,120,003 2,757,284
Cost of revenue 104,536 235,636 278,374 465,926
------------- ------------- ------------- -------------
Gross profit 314,887 1,192,714 841,629 2,291,358
------------- ------------- ------------- -------------
Operating expenses:
Research and development 381,031 541,888 657,770 1,238,152
Sales and marketing 465,946 947,271 845,891 2,117,816
General and administrative 226,138 445,113 448,483 802,716
Gain on sale of Tandem product line -- -- (515,487) --
------------- ------------- ------------- -------------
Total operating expenses 1,073,115 1,934,272 1,436,657 4,158,684
------------- ------------- ------------- -------------
Operating loss (758,228) (741,558) (595,028) (1,867,326)
Other income 43,671 41,911 51,548 42,405
------------- ------------- ------------- -------------
Loss before income taxes (714,557) (699,647) (543,480) (1,824,921)
Income tax expense (benefit) -- -- (40,604) 1,080
------------- ------------- ------------- -------------
Net loss $ (714,557) $ (699,647) $ (502,876) $ (1,826,001)
============= ============= ============= =============
Basic and diluted net loss per share $ (0.21) $ (0.24) $ (0.16) $ (0.62)
============= ============= ============= =============
Shares used in computing basic and diluted
net loss per share 3,341,951 2,937,810 3,164,720 2,931,018
============= ============= ============= =============
</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>
Six months ended
June 30,
-----------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (502,876) $ (1,826,001)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 217,899 358,431
Gain on sale of Tandem product line (515,487) --
Changes in operating assets and liabilities:
Accounts receivable, net (112,221) 407,415
Refundable income taxes 127,035 --
Prepaid expenses and other assets 352,823 13,105
Trade accounts payable 79,972 (85,098)
Accrued and other liabilities (332,262) (248,451)
Deferred revenue (220,548) (8,083)
------------- -------------
Net cash used for operating activities (905,665) (1,388,682)
------------- -------------
Cash flows from investing activities:
Purchases of short-term investments (184,796) --
Sales of short-term investments -- 953,065
Proceeds from sale of Tandem product line 515,487 --
Capitalization of software development costs -- (66,449)
Purchases of property and equipment (63,979) (72,514)
------------- -------------
Net cash provided by investing activities 266,712 814,102
------------- -------------
Cash flows from financing activities:
Proceeds from public offering of stock, net 2,219,872 --
Proceeds from other stock transactions 111,137 93,533
------------- -------------
Net cash provided by financing activities 2,331,009 93,533
------------- -------------
Net increase (decrease) in cash and cash equivalents 1,692,056 (481,047)
Cash and cash equivalents at beginning of period 1,406,141 689,611
------------- -------------
Cash and cash equivalents at end of period $ 3,098,197 $ 208,564
============= =============
</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 June 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. 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 June 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 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. The Company had 464,227
potentially dilutive shares for the three months ended June 30, 1998 compared
to 33,843 for the same period in 1997. The Company also had 444,735 potentially
dilutive shares for the six months ended June 30, 1998 compared to 112,224 for
the six months ended June 30, 1997. The potentially dilutive shares were
omitted from the earnings per share calculation as the Company was in a loss
position and such shares would have been antidilutive.
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 $2.3
million will be used for funding 1998 operations, capital expenditures, and for
other general corporate purposes, including working capital.
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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 second quarter of 1998 totaled $419,000,
a 71% decrease when compared to the same quarter in 1997. Total revenue for the
six months ended June 30, 1998, decreased 59% to $1,120,000, from the same
period in 1997. The decrease for the quarter and the six months ended June 30,
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 73% to $147,000 in the
second quarter of 1998, and decreased 66% to $327,000 for the six months ended
June 30, 1998, when compared to the same periods in 1997. The decrease in each
period 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 in
1998, compared to $283,000 and $655,000 in the second quarter of 1997 and the
six months ended June 30, 1997, respectively. The decrease in Tandem product
license fees was partially offset by an increase in license fees from the
Company's UNIX/NT product, EnlightenDSM.
Product maintenance fees decreased 80%, to $173,000, in the second
quarter of 1998, and decreased 81% to $329,000 for the six months ended June 30,
1998, when
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compared to the same periods in 1997. The decline is due to the disposition of
the Tandem product line on October 1, 1997. Product maintenance fees for
EnlightenDSM increased by $153,000, or 765%, and by $297,000, or 928%, for the
second quarter and the first six months of 1998, respectively, when compared to
the second quarter and the first six months of 1997. This increase was primarily
a result of support fees recognized in connection with the Company's OEM
relationship.
Consulting services revenue decreased 33%, to $27,000, in the second
quarter of 1998 when compared with the second quarter of 1997. The decrease in
this period is due to Tandem consulting projects in existence in the second
quarter of 1997 and terminated prior to the second quarter of 1998. Consulting
services revenue increased 210%, to $235,000, for the six months ended June 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 second quarter of 1998 and the first six months of
1998 were $72,000 and $229,000, 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 $131,000, or 56%, to
$105,000 in the second quarter of 1998, and by $188,000, or 40%, to $278,000 for
the six months ended June 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 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 30% to $381,000 in the second quarter of 1998, and by 47% to
$658,000 for the six months ended June 30, 1998, when compared to the same
periods 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, thus 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 51% to
$466,000 in the second quarter of 1998, and by 60% to $846,000 for the six
months ended June 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
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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 49% to $226,000 in the second quarter of 1998, and by 44% to
$448,000 for the six months ended June 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 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 of $515,000.
Other income. Other income increased by $2,000 and $9,000 in the second
quarter of 1998 and the six months ended June 30, 1998, respectively, as a
result of an increase in net interest income.
Income tax expense (benefit). 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 June 30, 1998, the Company's cash, cash equivalents, and short term
investments were $3,584,000, representing 70% of total assets. The Company's
working capital as of June 30, 1998, was $3,360,000. 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
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debt as of June 30, 1998, other than normal trade payables and accrued
liabilities. Shareholders' equity as of June 30, 1998, was $4,336,000.
During the first six months of 1998, the Company's operating activities
used cash of $906,000, compared to cash used by operating activities of
$1,389,000 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 $267,000 for the six months
ended June 30, 1998, compared with providing cash of $814,000 in the same period
in 1997. The decrease in cash provided is primarily due to sales of short-term
investments made in the first six months of 1997 for which there were no
comparable transactions in the first six months of 1998. The decrease
attributable to sales of short-term investments was partially offset by proceeds
received in the first six months of 1998 from the sale of the Tandem operation.
Financing activities provided cash of $2,331,000 in the first six months
of 1998, compared with cash provided of $94,000 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 $2.3
million will be used for funding 1998 operations, capital expenditures, and for
other general corporate purposes, including working capital.
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
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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.
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.
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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 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
Page 14
<PAGE> 15
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 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 33% of the Company's license revenue in the six
months ended June 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
Page 15
<PAGE> 16
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 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
Page 16
<PAGE> 17
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.
Possible Delisting of Securities from Nasdaq National Market
The Company's Common Stock is currently quoted on the National Market
tier of the Nasdaq Stock Market ("Nasdaq"). Nasdaq has recently imposed new
maintenance criteria. 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 recently revised Nasdaq National
Market continued listing criteria as to minimum net tangible assets. In
connection with the adoption of such new criteria, Nasdaq National Market listed
companies had until February 23, 1998 to comply. As of June 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 has appealed this decision. Such appeal
will be heard in September 1998 and will be decided upon sometime thereafter. If
the Company's appeal is denied, the Company's securities will be listed on the
Nasdaq SmallCap Market. As a result of such change in listing from the Nasdaq
National Market to the Nasdaq SmallCap Market, an investor may find it more
difficult to acquire and dispose of the Company's securities.
Page 17
<PAGE> 18
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, JUNE 30, 1998
PART II: OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on May 20, 1998. The
following matters were submitted to a vote of shareholders:
(a) Election of Directors
<TABLE>
<CAPTION>
Date of Term Votes
Name Expiration Votes Withheld
----------------- ------------------- --------- --------
<S> <C> <C> <C>
Michael Seashols 1999 Annual Meeting 2,914,093 9,080
Michael A. Morgan 1999 Annual Meeting 2,912,993 10,180
Peter J. McDonald 1999 Annual Meeting 2,913,093 10,080
Peter J. Sprague 1999 Annual Meeting 2,914,093 9,080
Bruce Cleveland 1999 Annual Meeting 2,913,993 9,180
</TABLE>
(b) Bylaws Amendment
A. proposal was submitted to amend the Company's Bylaws to provide for
an increase in the maximum number of board seats to a range of from (5)
to (7). Approved by a vote of 1,542,714 shares in favor, 24,269 shares
against, 10,100 shares abstaining, and 1,346.090 broker non-votes.
(c) Appointment of Independent Auditors
A proposal to ratify the appointment of KPMG Peat Marwick LLP as
independent auditors for the Company for the fiscal year ending December
31, 1998. Approved by a vote of 2,915,110 shares in favor, 1,601 shares
against, 6,462 shares abstaining, and no broker non-votes.
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 June 30, 1998, the Company did not file any
reports on Form 8-K.
ITEMS 1, 2, 3 AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE.
Page 18
<PAGE> 19
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, JUNE 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: 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, JUNE 30, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.21.(11)@ 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,098,197
<SECURITIES> 486,000
<RECEIVABLES> 352,665
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,109,662
<PP&E> 1,376,733
<DEPRECIATION> 795,578
<TOTAL-ASSETS> 5,085,207
<CURRENT-LIABILITIES> 749,541
<BONDS> 0
0
0
<COMMON> 7,410,514
<OTHER-SE> 15,203
<TOTAL-LIABILITY-AND-EQUITY> 5,085,207
<SALES> 1,120,003
<TOTAL-REVENUES> 1,120,003
<CGS> 278,374
<TOTAL-COSTS> 278,374
<OTHER-EXPENSES> 1,436,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (543,480)
<INCOME-TAX> (40,604)
<INCOME-CONTINUING> (502,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (502,876)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
