<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-23446
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
----------
<TABLE>
<CAPTION>
CALIFORNIA 94-3008888
------------------------------- ----------------------
<S> <C>
(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)
</TABLE>
(650) 578-0700
----------------------------------------------------
(Registrant's telephone number, including area code)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1999:
<TABLE>
<CAPTION>
Outstanding
Class September 30, 1999
-------------------------- ------------------
<S> <C>
COMMON STOCK, NO PAR VALUE 4,113,522
</TABLE>
<PAGE> 2
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets: September 30, 1999 and December 31,
1998..................................................................... 3
Condensed Consolidated Statements of Operations: Three and Nine Months
Ended September 30, 1999 and 1998........................................ 4
Condensed Consolidated Statements of Cash Flows: Nine Months Ended
September 30, 1999 and 1998.............................................. 5
Notes to Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis or Plan of Operations................... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 20
Item 2. Changes in Securities and Use of Proceeds................................ 20
Item 3. Defaults Upon Senior Securities.......................................... 20
Item 4. Submission of Matters to a Vote of Security Holders...................... 20
Item 5. Other Information........................................................ 20
Item 6. Exhibits and Reports on Form 8-K......................................... 21
SIGNATURES........................................................................... 22
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 1,280,400 $ 1,900,000
Short-term investments .................................. 267,700 1,285,600
Accounts receivable, less allowance for doubtful accounts 1,263,600 653,400
Prepaid expenses and other assets ....................... 104,300 140,200
----------- -----------
Total current assets ................................. 2,916,000 3,979,200
Property and equipment, net ................................. 434,800 588,600
Software development costs, net ............................. -- 92,200
Other assets ................................................ 300,200 269,400
----------- -----------
$ 3,651,000 $ 4,929,400
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable .................................. $ 99,800 $ 202,500
Accrued and other current liabilities ................... 313,000 458,600
Deferred revenue ........................................ 79,400 43,800
----------- -----------
Total current liabilities ............................ 492,200 704,900
----------- -----------
Shareholders' equity:
Common stock ............................................ 7,942,400 7,591,500
Accumulated other comprehensive income (loss) ........... (12,300) 5,600
Accumulated deficit ..................................... (4,771,300) (3,372,600)
----------- -----------
Total shareholders' equity ........................... 3,158,800 4,224,500
----------- -----------
$ 3,651,000 $ 4,929,400
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product license fees .................. $ 500,100 $1,233,300 $ 1,532,000 $ 1,560,300
Product maintenance fees .............. 159,200 166,000 484,300 494,700
Consulting services ................... 9,000 9,000 328,600 244,100
Royalties ............................. 52,000 98,800 152,000 328,100
----------- ---------- ----------- -----------
Total revenue ...................... 720,300 1,507,100 2,496,900 2,627,200
Cost of revenue ........................... 83,400 226,500 316,500 504,900
----------- ---------- ----------- -----------
Gross profit ....................... 636,900 1,280,600 2,180,400 2,122,300
----------- ---------- ----------- -----------
Operating expenses:
Research and development .............. 519,700 495,500 1,517,400 1,153,300
Sales and marketing ................... 467,800 512,800 1,572,600 1,358,700
General and administrative ............ 154,500 253,200 593,400 701,700
Gain on sale of Tandem product line ... -- -- -- (515,500)
----------- ---------- ----------- -----------
Total operating expenses ........... 1,142,000 1,261,500 3,683,400 2,698,200
----------- ---------- ----------- -----------
Operating income (loss) ......... (505,100) 19,100 (1,503,000) (575,900)
Other income, net ......................... 25,700 50,700 93,600 102,200
----------- ---------- ----------- -----------
Income (loss) before income taxes (479,400) 69,800 (1,409,400) (473,700)
Income tax expense (benefit) .............. (11,500) -- (10,700) (40,600)
----------- ---------- ----------- -----------
Net income (loss) ............... $ (467,900) $ 69,800 $(1,398,700) $ (433,100)
=========== ========== =========== ===========
Basic earnings (loss) per share:
Net income (loss) per share ........... $ (0.12) $ 0.02 $ (0.35) $ (0.13)
=========== ========== =========== ===========
Shares used in computing basic net
income (loss) per share .............. 4,046,848 3,813,429 3,981,315 3,384,495
=========== ========== =========== ===========
Diluted earnings (loss) per share:
Net income (loss) per share ........... $ (0.12) $ 0.02 $ (0.35) $ (0.13)
=========== ========== =========== ===========
Shares used in computing diluted net
income (loss) per share .............. 4,046,848 4,124,473 3,981,315 3,384,495
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................... $(1,398,700) $ (433,100)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization ........................................... 315,100 399,600
Write-off of fixed assets ............................................... 2,500 --
Gain on sale of Tandem product line ..................................... -- (515,500)
Changes in operating assets and liabilities:
Accounts receivable, net ............................................. (610,200) (926,000)
Refundable income taxes .............................................. -- 127,000
Prepaid expenses and other assets .................................... (2,400) 287,800
Trade accounts payable ............................................... (102,700) (18,300)
Accrued and other current liabilities ................................ (145,600) (221,900)
Deferred revenue ..................................................... 35,600 (285,700)
----------- -----------
Net cash used for operating activities ........................... (1,906,400) (1,586,100)
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments ........................................ -- (200,000)
Sales of short-term investments ............................................ 1,000,000 220,200
Proceeds from sale of Tandem product line .................................. -- 515,500
Purchases of property and equipment ........................................ (64,100) (127,600)
----------- -----------
Net cash provided by investing activities ........................ 935,900 408,100
----------- -----------
Cash flows from financing activities:
Proceeds from public offering of stock, net ................................ -- 2,217,400
Proceeds from issuance of stock ............................................ 350,900 254,900
----------- -----------
Net cash provided by financing activities ........................ 350,900 2,472,300
----------- -----------
Net increase (decrease) in cash and cash equivalents ........................... (619,600) 1,294,300
Cash and cash equivalents at beginning of period ............................... 1,900,000 1,406,100
----------- -----------
Cash and cash equivalents at end of period ..................................... $ 1,280,400 $ 2,700,400
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by Enlighten Software Solutions, Inc. and Subsidiary ("Enlighten"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. These condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-QSB and therefore
certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. However, Enlighten believes that the
disclosures are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in Enlighten's
Annual Report on Form 10-KSB for the Year ended December 31, 1998.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) that
are, in the opinion of management, necessary to state fairly the financial
position and results as of and for the periods presented. The results for such
periods are not necessarily indicative of the results to be expected for the
full year.
The preparation of condensed consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Certain amounts in the condensed consolidated financial statements as of
December 31, 1998 and for the three and nine months ended September 30, 1998,
have been reclassified to conform with the 1999 presentation.
2. Revenue Recognition
Product license fees are recognized after the following events have occurred: a
product evaluation has been shipped to the customer; the customer elects to
purchase the software following an evaluation period; the customer signs the
related contract; and collection of the sales price is probable. Royalty
revenues that are contingent upon sale to an end-user by original equipment
manufacturers are recognized upon receipt of a report of shipment from the
original equipment manufacturer. Product maintenance fees committed as part of
new product licenses and maintenance resulting from renewed maintenance
contracts are deferred and recognized ratably over the contract period,
generally one year. Consulting service revenue is recognized when services are
performed for time and material contracts and on a percentage of completion
basis for fixed price contracts.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Cash and Cash Equivalents
Enlighten considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Enlighten 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.
Additionally, Enlighten has classified its investments in preferred stock of
$267,700 as "available-for-sale." Such investments are recorded at fair value
based on quoted market prices, with unrealized gains and losses reported as a
separate component of stockholders' equity.
4. Comprehensive Income (Loss)
"Comprehensive income (loss)" includes unrealized gains and losses that have
been previously excluded from net income and reflected instead in equity. A
summary of comprehensive income (loss) follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
1999 1998 1999 1998
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss) ........................ $(467,900) $ 69,800 $(1,398,700) $(433,100)
Unrealized gain/(loss) on securities.. (7,600) (1,000) (17,900) 14,200
--------- -------- ----------- ---------
Comprehensive income (loss) .............. $(475,500) $ 68,800 $(1,416,600) $(418,900)
========= ======== =========== =========
</TABLE>
5. Earnings Per Share
Basic earnings (loss) per share is based on the weighted average effect of all
common shares issued and outstanding, and is calculated by dividing net income
(loss) by the weighted average shares of common stock outstanding during the
period. Diluted earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding plus all
potentially dilutive common shares outstanding. Potentially dilutive common
shares included in the dilution calculation consist of dilutive shares issuable
upon the exercise of outstanding commons stock options computed using the
treasury stock method. For the periods in which Enlighten had losses, potential
common shares from common stock options are excluded from the computation of
diluted net loss per share as their effects are antidilutive.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the weighted average common shares used to
calculate basic earnings (loss) per share to the weighted average common and
potentially dilutive common shares used to calculate diluted earnings (loss) per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------------
1999 1998 1999 1998
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares used to
calculate basic earnings
(loss) per share....................... 4,046,848 3,813,429 3,981,315 3,384,495
Stock options........................ -- 311,044 -- --
--------- --------- ----------- ---------
Weighted average common and
potentially dilutive common shares
used to calculated diluted earnings
(loss) per share....................... 4,046,848 4,124,473 3,981,315 3,384,495
========= ========= =========== =========
</TABLE>
Stock options to purchase 204,250 and 279,095 shares of common stock for the
three months ended September 30, 1999 and 1998 and 387,415 and 106,250 shares of
common stock for the nine months ended September 30, 1999 and 1998,
respectively, were outstanding but not included in the computation of diluted
earnings per common share because the option exercise price was greater than the
average market price of the common shares.
Had Enlighten recorded net income for the three and nine months ended September
30, 1999 and for the nine months ended September 30, 1998, dilutive weighted
outstanding options would have been 376,123, 330,903 and 418,193 shares,
respectively.
6. Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" which was adopted January 1,
1999. The adoption of SOP 98-1 did not have a material effect on Enlighten's
financial position, results of operations, or cash flows.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities" which was adopted January 1, 1999. SOP No. 98-5 requires
that all start-up costs related to new operations must be expensed as incurred.
In addition, all start-up costs that were previously capitalized must be written
off. The adoption of SOP No. 98-5 did not have a material impact on Enlighten's
financial position, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133 -- an amendment of FASB Statement No. 133." SFAS No.
133 requires Enlighten to recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. It further provides
criteria for derivative instruments to be designated as fair value, cash flow
and foreign currency hedges and establishes
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
respective accounting standards for reporting changes in the fair value of the
derivative instruments. Upon adoption, Enlighten will be required to adjust
hedging instruments to fair value in the balance sheet and recognize the
offsetting gains or losses as adjustments to be reported in net income or other
comprehensive income, as appropriate. Enlighten is evaluating its expected
adoption date and currently expects to comply with the requirements of SFAS 133
in fiscal year 2001. Enlighten does not expect the adoption will be material to
Enlighten's financial position or results of operations since Enlighten does not
participate in such investments or activities.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP No.
98-9 requires recognition of revenue using the "residual method" in a
multiple-element software arrangement when fair value does not exist for one or
more of the delivered elements in the arrangement. Under the "residual method,"
the total fair value of the undelivered elements is deferred and recognized in
accordance with SOP No. 97-2. Enlighten will be required to implement SOP
No.98-9 during the year ending December 31, 2000. SOP No. 98-9 also extends the
deferral of the application of SOP No. 97-2 to certain other multiple-element
software arrangements through the year ending December 31, 1999. Enlighten is
evaluating the provisions of SOP No. 98-9 and has not yet determined what
impact, if any, SOP No. 98-9 will have on its financial position, results of
operations or cash flows.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and notes thereto included elsewhere herein.
Except for the historical information contained herein, the following discussion
in this report on Form 10-QSB contains forward looking statements based on
current expectations that involve risks and uncertainties. Enlighten's actual
results could differ materially from the results discussed herein. Factors that
could cause actual results or performance to differ materially or contribute to
such differences include, but are not limited to, those discussed under the
headings "Variability of Quarterly Results," "Liquidity and Capital Resources,"
and "Business Risks" contained herein and in Enlighten's other filings with the
Securities and Exchange Commission, including but not limited to those discussed
under the heading "Risk Factors" in Enlighten's 1998 Annual Report on Form
10-KSB.
OVERVIEW
Enlighten Software Solutions, Inc. ("Enlighten") develops, markets, and
supports event monitoring and workgroup administration software products.
Enlighten's product solutions are designed for open systems distributed
computing environments in the range of ten to 1,000 servers and clients. The
Enlighten(R) Distributed Systems Manager(TM) ("EnlightenDSM(TM)") product allows
companies to manage their information systems by enabling systems managers and
administrators to control their systems from diverse Unix, Linux, and Windows
platform vendors such as Compaq Computers Corporation, Hewlett-Packard Company,
International Business Machines Corporation, Intel Corporation, Microsoft
Corporation, The Santa Cruz Operation, Inc., Silicon Graphics, Inc. ("SGI"), Sun
Microsystems, Inc., and TurboLinux, Inc. ("TurboLinux").
Founded in 1986, Enlighten 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, Enlighten sold its Tandem product line to New Dimension
Software, Inc. ("NDS") in order to focus efforts on its Unix, Linux, and Windows
product suites. In connection with this sale, Enlighten received approximately
$2.5 million in cash 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 Enlighten's
Tandem operation.
Following the disposition of its Tandem product line, Enlighten shifted its
sales strategy to one based primarily upon third-party distributors and original
equipment manufacturer's ("OEM's") bundling and integration agreements. As a
result, Enlighten restructured its sales department. Enlighten continues to
build its sales, marketing, and customer support organizations with a focus on
delivery of its products to OEM partners, resellers, system integrators, and
select end-users. An essential element of Enlighten's sales and marketing
strategy is the development of indirect distribution channels, such as OEMs,
independent
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software vendors, and value added resellers, as well as other
systems management and application software vendors whose products are
complementary with those of Enlighten.
In September 1999, Enlighten executed an agreement with TurboLinux, in
which a version of Enlighten's EnlightenDSM product will be bundled with all
Linux operating system products that TurboLinux ships and Enlighten will receive
license revenue based upon TurboLinux's revenue related to such shipments.
VARIABILITY OF QUARTERLY RESULTS
Enlighten 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 Enlighten 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 Enlighten or its competitors. Future
operating results may fluctuate as a result of these and other factors,
including Enlighten's ability to continue to develop, acquire, and introduce new
products on a timely basis. Additionally, Enlighten's operating results may be
influenced by seasonality and overall trends in the global economy. Because
Enlighten 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, Enlighten has
recognized a substantial portion of its license revenues in the last month of
the quarter, particularly the last week. Since Enlighten's staffing levels and
other operating expenses are based upon anticipated revenues, delays in the
receipt of orders can cause significant fluctuations in income from quarter to
quarter.
RESULTS OF OPERATIONS
TOTAL REVENUE
Revenue for the third quarter of 1999 totaled $720,300, a 52% decrease as
compared to the same quarter in 1998. Total revenue for the nine months ended
September 30, 1999, decreased 5% to $2,496,900, as compared to the same period
in 1998.
Revenue from product license fees decreased 59% to $500,100 for the third
quarter of 1999, and decreased 2% to $1,532,000 for the nine months ended
September 30, 1999, as compared to the same periods of the prior year. The
decrease was primarily attributable to a decrease in Unix licenses of
Enlighten's EnlightenDSM for workgroups product bundled with the IRIX operating
system shipped by SGI. Enlighten and SGI entered into an OEM bundling
relationship in January 1998 and SGI began shipping Enlighten's product along
with their Unix servers and workstations in July 1998. During the third quarters
of 1999 and 1998, revenue from SGI was approximately 57% and 50% of total
revenue, respectively. During the nine months ended September 30, 1999 and 1998,
revenue from SGI was approximately 48% and 42% of total revenue, respectively.
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<PAGE> 12
Product maintenance fees remained relatively flat in the third quarter of
1999 and in the nine months ended September 30, 1999, as compared to the same
period of the prior year.
Consulting services revenue remained relatively flat in the third quarter
of 1999, as compared to the same period of the prior year. For the nine months
ended September 30, 1999, consulting services revenue increased 35% to $328,600,
as compared to the same period of the prior year. The increase in this period is
due to non-recurring consulting work performed in the first quarter of 1999
related to Enlighten's new strategic relationship with IBM, signed in December
1998.
Royalties for the third quarter of 1999 decreased 47% to $52,000, as
compared to the same period of the prior year. Royalties for the nine months
ended September 30, 1999 decreased 54% to $152,000, as compared to the same
period of the prior year. Enlighten recognizes royalties from product license
fees and product maintenance fees generated by the Tandem product line sold to
NDS in October 1997. The royalty rate decreases year over year, for a three year
period that commenced in October 1997.
COST OF REVENUE
Cost of revenue decreased by 63%, to $83,400 in the third quarter of 1999,
and by 37%, to $316,500 in the first nine months of 1999 as compared to the same
periods of 1998. The reduction in cost of revenue is caused primarily by the
decrease in costs associated with royalties paid to third parties and a decrease
in the amortization of software development costs.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by 5%, to $519,700, in the
third quarter of 1999, and by 32%, to $1,517,400, for the nine months ended
September 30, 1999, when compared to the same periods of the prior year. The
increase is related to increased personnel and recruiting costs. Several new
development personnel were hired during the latter half of 1998 following the
sale of the Tandem product line. New development personnel were required to
increase the platform coverage for the EnlightenDSM product and provide
enhancements required by Enlighten's strategic partners. Enlighten 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 9%, to $467,800, in the third
quarter of 1999, and increased by 16%, to $1,572,600, for the nine months ended
September 30, 1999, when compared to the same periods in 1998. During the first
quarter of 1998, just following the sale of the Tandem product line, Enlighten
restructured its sales and marketing department to reflect Enlighten'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, Enlighten 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
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<PAGE> 13
through the first half of 1998. During the remainder of 1998, Enlighten
increased its sales and marketing personnel, adding both executive and staff
level sales and marketing employees, and opened up a sales and support office in
Denver, Colorado to better support its new third-party relationships, which are
reflected in the 1999 periods.
Enlighten expects sales and marketing costs to increase in absolute dollars
for the foreseeable future as it seeks additional business development and
partnership opportunities and, to a lesser extent, expands its ability to sell
and service its products through third-party resellers and its direct sales
force.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by 39%, to $154,500, in the
third quarter of 1999, and by 15%, to $593,400, when compared to the same
periods in 1998. The decrease is due to a decrease in administrative personnel
and overhead and cost controls.
GAIN ON SALE OF TANDEM PRODUCT LINE
On October 1, 1997, Enlighten sold its Tandem product line to NDS.
Enlighten received approximately $2.5 million in cash and the rights to receive
royalties on Tandem related products for a period of three years. In the fourth
quarter of 1997, Enlighten 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, Enlighten received the balance of the cash related to the sale of the
assets and recognized the balance of the gain from this transaction, or
$515,500.
OTHER INCOME, NET
Other income, net decreased by 49%, to $25,700, in the third quarter of
1999, as compared to the same period of 1998, as a result of a decrease in
interest income due to lower average balances of short-term investments. Other
income, net decreased by 9%, to $93,600, for the nine months ended September 30,
1999, as compared to the same period of 1998, as a result of a decrease in net
interest income as a result of lower average cash balances.
INCOME TAX EXPENSE (BENEFIT)
In the third quarter of 1999, Enlighten recognized a tax benefit of $11,500
as a result of receiving tax refunds on net operating loss carrybacks in excess
of taxes receivable provided for by Enlighten. In the first quarter of 1998,
Enlighten recognized a tax benefit of $40,600 as a result of receiving tax
refunds on net operating loss carrybacks in excess of taxes receivable provided
for by Enlighten.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, Enlighten's cash, cash equivalents, and short-term
investments were $1,548,100, representing 42% of total assets. Enlighten's
working capital as of September 30, 1999, was $2,423,800. Cash equivalents are
highly liquid investments with original
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<PAGE> 14
maturities of ninety days or less. Enlighten's short-term investments are
primarily investment grade commercial paper and are considered highly liquid.
Enlighten had no debt as of September 30, 1999, other than normal trade payables
and accrued liabilities. Shareholders' equity as of September 30, 1999, was
$3,158,800.
During the nine months ended September 30, 1999, cash used in Enlighten's
operating activities increased $320,100 to $1,906,400, compared to the same
period of the prior year. The change was principally caused by increases in net
losses, partially offset by changes in the balances of operating assets and
liabilities.
Enlighten's investing activities have consisted primarily of short-term
investments, the sale of Enlighten's Tandem operation, and additions to capital
equipment. Investing activities provided cash of $935,900 for the nine months
ended September 30, 1999, compared with providing cash of $408,100 in the same
period in 1998. The increase is due to the sale of short-term investments in the
third quarter of 1999 partially offset by the sale of the Tandem operation in
the first quarter of 1998.
Financing activities provided cash of $350,900 in the first nine months of
1999, compared with cash provided of $2,472,300 in the same period of the prior
year. The decrease in cash provided from financing activities resulted from
Enlighten's public offering of 700,000 shares of common stock in May 1998.
Enlighten will require substantial cash flow to continue operations on a
satisfactory basis and complete its research and development and its sales and
marketing programs. Enlighten anticipates that working capital will provide
sufficient liquidity to fund these requirements for the next twelve months.
However, Enlighten'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 Enlighten's
control. If Enlighten is unable to generate sufficient cash flow from
operations, it may be required to obtain additional financing. There can be no
assurance that Enlighten 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 we file from time to time with the Securities and Exchange
Commission, the following risk factors should be considered carefully in
evaluating Enlighten and our business:
Our future revenues are unpredictable, our operating results are likely to
fluctuate from quarter to quarter, and if we fail to meet the expectations of
investors or analysts, our stock price could decline significantly
We have experienced significant quarterly fluctuations in operating results
and expect 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 us or our competitors, the
development and introduction of new operating systems that require
14
<PAGE> 15
additional development efforts, purchasing patterns of our customers, size and
timing of individual orders, the rate of customer acceptance of new products,
and pricing and promotion strategies undertaken by us or our competitors. Future
operating results may fluctuate as a result of these and other factors,
including our ability to continue to develop, acquire, and introduce new
products on a timely basis, the timing and level of sales by our OEM or other
third-party licensees of computer systems or software incorporating our
products, technological changes in computer systems and environments, quality
control of the products sold, our success in shifting its primary sales strategy
from direct to indirect channels, and general economic conditions. Additionally,
our operating results may be influenced by seasonality and overall trends in the
global economy. Because we operate 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, we
have recognized a substantial portion of our license revenues in the last month
of the quarter, particularly the last week. Since our 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.
We may not be successful in the open systems market
We have derived a substantial portion of our revenue to date from our
Tandem-based products. However, we sold all rights to our Tandem technology in
October 1997. The future success of our business is substantially dependent on
our ability to generate significant revenue from our Unix, Linux, and Windows
product offering. In January 1998, Enlighten signed an OEM bundling agreement
with Silicon Graphics under which Silicon Graphics will bundle a limited version
of Enlighten's product on each Unix system shipped. In August 1998, we signed a
distribution agreement with two of General Electric's IT Distribution Group
businesses, Access Graphics and Integration Alliance. In December 1998, we
signed a distribution agreement with IBM under which IBM will integrate and ship
EnlightenDSM with each IBM Suites for Solaris and AIX shipped by IBM. In
February 1999, we announced a partnership with Sun Microsystems in which we will
produce a seamless integration between EnlightenDSM and Sun's SyMON systems
management product. In September 1999, we signed a software license and
distribution agreement with TurboLinux in which TurboLinux will bundle and ship
EnlightenDSM with each Linux operating system product that TurboLinux ships.
While significant, these are the first such agreements entered into by us.
Additionally, the open systems market is characterized by rapid technological
growth and intense competition. We may not have the financial or personnel
resources to effectively capitalize on, and continue with, our early and limited
success in this market.
We are dependent on resellers and if we are not successful in expanding
distribution channels, our ability to maintain or increase our revenues will be
harmed
In 1997, we began to shift a majority of our sales and marketing resources
toward third-party resellers in the United States and internationally. Our
growth will be dependent on our ability to continue to expand our third-party
distribution channel to market, sell, and support our software products. We are
currently investing, and intend to continue to invest, significant resources to
develop this channel, which could materially adversely affect our operating
margins. We have only limited experience in marketing our products through
distributors. Additionally,
15
<PAGE> 16
we will have no control over our third-party distributors, their shipping dates,
or volumes of systems shipped by our OEM and other third-party customers. There
can be no assurance that we will be successful in our efforts to generate
significant revenue from this channel, nor can there be any assurance that we
will be successful in recruiting new organizations to represent us and our
products.
Additionally, now that we have shifted our sales efforts from direct to
indirect channels, we have become more dependent on our third-party distributors
for the technical support and consultation to end users. We will need to
increase our training and education efforts related to our third-party
distributors to enable such third parties to obtain the technical proficiency
and knowledge with respect to our products. Despite these efforts, we may not be
able to successfully train our 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 our internal support and engineering
staff, or poor customer acceptance of the products, or both, either of which
would significantly harm our business.
In January 1998, we signed an OEM bundling agreement with Silicon Graphics
under which Silicon Graphics will bundle a limited version of our product on
each Unix system shipped. In August 1998, we signed a distribution agreement
with two of General Electric's IT Distribution Group businesses, Access Graphics
and Integration Alliance. In December 1998, we signed a distribution agreement
with IBM in which IBM will integrate and ship EnlightenDSM with each IBM Suites
for Solaris and AIX shipped by IBM. In February 1999, we announced a partnership
with Sun Microsystems in which we will produce a seamless integration between
EnlightenDSM and Sun's SyMON systems management product. In September 1999, we
signed a software license and distribution agreement with TurboLinux in which
TurboLinux will bundle and ship EnlightenDSM with each Linux operating system
product that TurboLinux ships. While significant, these are the first such
agreements entered into by us. While we believe that these arrangements will be
beneficial, there can be no assurance that we will be able to deliver our
products to these companies in a timely manner or that these companies will
license our products in volumes anticipated by us. Further, these agreements are
our only significant third-party distribution agreements to date. While our
strategy is to obtain additional resellers to reduce the dependence on these
vendors, we may not be able to successfully attract additional vendors to
distribute our products. Any such failure would result in our having expended
significant resources with little or no return on its investment, which would
significantly harm our business.
These additional investments and responsibilities will require us to expend
substantial resources, and may require us to divert employees from other
projects to provide the support services and development efforts required to
provide products and services to these third party vendors and other new third
parties, if any.
Our market is subject to intense competition and continued competition in our
market may lead to a reduction in our prices, revenues, and market share
We experience intense competition from other systems management companies,
and the market is rapidly changing. We believe that our ability to compete
successfully depends on a
16
<PAGE> 17
number of factors, including the performance, price, and functionality of its
products relative to those of its competitors. Most of our competitors are
larger and have greater financial, technical, marketing, support, and other
resources than us. As a result, they may be able to respond more quickly to new
or emerging technologies and changes in customer requirements than us. In
addition, the software industry is characterized by low barriers to entry. There
can be no assurance that our current competitors or any new market entrants will
not develop systems management products that offer significant performance,
price, or other advantages over our technology. In addition, operating system
vendors could introduce new or upgrade existing operating systems or
environments that include systems management functionality offered by us, which
could render our products obsolete and unmarketable. We may not be able to
successfully compete against current or future competitors which could
significantly harm our business.
100% of our license revenue is derived from a single product and if that product
fails to achieve and maintain market acceptance, our business would be
significantly harmed
We expect that a substantial majority of our revenue in future periods will
be derived from our Unix, Linux, and Windows product, EnlightenDSM. This product
has accounted for 100% of our license revenue since October 1, 1997. We expect
that the EnlightenDSM product and its extensions and derivatives will continue
to account for a substantial majority, if not all, of our revenue for the
foreseeable future. Broad market acceptance of EnlightenDSM is, therefore,
critical to our future success. Failure to achieve broad market acceptance of
EnlightenDSM, as a result of competition, technological change, or otherwise,
would significantly harm our business. Our 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 we will be successful in marketing EnlightenDSM or any new
products, applications, or product enhancements, and any failure to do so would
significantly harm our business.
The market for our products is characterized by rapid technological change and
we may not be able to develop or market new products to respond to such change
The market for our 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 our existing
products obsolete and unmarketable. As a result, our success depends upon our
ability to continue to enhance existing products, respond to changing customer
requirements, and rapidly develop and introduce new products that keep pace with
technological developments and emerging industry standards.
Additionally, other operating systems, such as Windows NT, may
significantly affect deployment of Unix and Linux systems for business critical
applications. A significant portion of our revenue will continue to be derived
from Unix-based computer systems for the foreseeable future. While we have
ported our products to the Windows NT platform, the product requires customers
to control systems management for their heterogeneous environment from Unix and
Linux-based systems. A significant decline in sales of Unix and
17
<PAGE> 18
Linux-based systems would decrease the demand for our products and would
significantly harm our business. Finally, we may not be successful in developing
and marketing, on a timely basis, product enhancements or new products that
respond to technological change or evolving industry standards, we may
experience difficulties that could delay or prevent the successful development,
introduction, and sale of these products, and any such new products or product
enhancements may not adequately meet the requirements of the marketplace and
achieve market acceptance.
If the open systems management market fails to grow, our business would be
significantly harmed
For the foreseeable future, all of our business will be in the open systems
(Unix, Linux, and Windows NT) management market, which is still an emerging
market. Our 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. The market for systems management
solutions may not continue to grow. If the systems management market fails to
grow or grows more slowly than we currently anticipate, or in the event of a
decline in unit price or demand for our products, as a result of competition,
technological change, or other factors, our business would be significantly
harmed. 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. Our
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. Such factors may significantly harm our
business.
If we or our suppliers, manufacturers, customers or service providers fail to be
Year 2000 compliant, our business could be severely harmed
We are aware of the issues associated with the programming code in existing
computer systems as the millennium ("Year 2000") approaches. The Year 2000
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. Systems
that do not properly recognize date sensitive information when the year changes
to 2000 could generate erroneous data or cause a system to fail. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
We have conducted Year 2000 compliance reviews for current versions of our
products. The reviews include assessment, implementation, and validation
testing. We believe that all of our existing products are Year 2000 compliant
and new products will be designed to be Year 2000 compliant. Contingency plans
for the handling of reasonably likely worst case scenarios have been developed
and include procedures identifying and prioritizing how we will handle such
reasonably likely worst case scenarios. Although we believe our products will be
Year 2000 compliant, our products may not contain all the necessary software
routines and programs for the accurate calculation, display, storage and
manipulation of data involving dates. Any
18
<PAGE> 19
failure of our products to perform, including system malfunctions due to the
onset of the calendar year 2000, could result in claims against us, which could
significantly harm our business.
To the extent information is publicly available, we have assessed the Year
2000 compliance status of third-party suppliers and customers. If our current or
future customers fail to achieve Year 2000 compliance, or if such customers
divert technology expenditures to address Year 2000 compliance problems, our
business could be significantly harmed.
We believe the software and hardware we use internally comply with Year
2000 requirements or will comply during 1999. During 1998, we replaced or
upgraded much of our internal use hardware and software. Through the third
quarter of 1999, we incurred approximately $10,000 in our Year 2000 remediation
efforts. We expect additional remediation costs of approximately $15,000 in
1999, which includes expenditures for hardware and software upgrades. In
addition, we are not aware of any material operational issues or costs
associated with preparing our internal use software and hardware for the Year
2000. However, serious, unanticipated negative consequences, including material
costs caused by undetected errors or defects in the technology used in our
internal systems may occur. The occurrence of any of the foregoing could
seriously harm our business, operating results, or financial condition.
19
<PAGE> 20
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, SEPTEMBER 30, 1999
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held May 20, 1999, the shareholders
of Enlighten approved the following matters:
1. A proposal to elect five (5) directors of Enlighten to hold office until
the 2000 Annual Meeting of Shareholders and until their successors are
elected and qualified.
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------- --------- --------
<S> <C> <C>
Michael Seashols ................ 3,418,646 76,000
Peter J. McDonald ............... 3,453,061 41,585
Bruce Cleveland ................. 3,418,646 76,000
Michael A. Morgan ............... 3,417,646 77,000
Peter J. Sprague ................ 3,418,646 76,000
</TABLE>
2. A proposal to increase in aggregate the maximum number of shares of
Enlighten's Common Stock issuable under the its 1992 Stock Option Plan by
500,000 shares, from 1,500,000 shares to 2,000,000 shares was approved by a
vote of 1,302,619 for, 210,962 opposed, and 10,185 withheld.
3. A proposal for the ratification of the selection of KPMG LLP as
Enlighten's independent public accountants for the year ending December 31,
1999 was approved by a vote of 3,482,534 for, 11,000 opposed, and 1,112
withheld.
ITEM 5. OTHER INFORMATION
None.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.33 Agreement dated as of September 28, 1999, by and between
Enlighten Software Solutions, Inc. and TurboLinux, Inc.
*** Confidential treatment requested.
27.01 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the quarter ended September 30, 1999, Enlighten did not file
any reports on Form 8-K.
21
<PAGE> 22
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, SEPTEMBER 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Enlighten Software Solutions, Inc.
DATE: November 12, 1999 SIGNATURE: /s/ David D. Parker
----------------- -----------------------------
David D. Parker
Chief Executive Officer
DATE: November 12, 1999 SIGNATURE: /s/ Stephen E. Giusti
----------------- -----------------------------
Stephen E. Giusti
Acting Chief Financial Officer
and Controller
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.33 Agreement dated as of September 28, 1999, by and between
Enlighten Software Solutions, Inc. and TurboLinux, Inc.
*** Confidential treatment requested.
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.33
Confidential Treatment Requested - Edited Version
SOFTWARE LICENSE, OEM AND DISTRIBUTION AGREEMENT
This Software License, OEM and Distribution Agreement ("Agreement") is made as
of September 28, 1999 (the "Effective Date") between TurboLinux, Inc., a
Delaware corporation ("Licensee" or "TurboLinux"), having its principal place of
business at 2000 Sierra Point Parkway, Suite 702, Brisbane, CA 94005 and
Enlighten Software Solutions, Inc. ("ESSI"), having its principal place of
business at 999 Baker Way, Fifth Floor, San Mateo, CA 94404.
1.0 DEFINITIONS.
1.1 "Bundle" shall mean the act of shipping the Program with a new
TurboLinux System or TurboLinux Product.
1.2 "Confidential Information" shall mean all confidential information of a
party (including without limitation technical, marketing, financial,
planning or other confidential or proprietary information, as more
particularly described in section B of Exhibit C). Any information
disclosed by the party disclosing Confidential Information to the other
party under this Agreement (the "Discloser") will be considered
Confidential Information by the other party only if such information is
marked as confidential at the time of disclosure, or if provided orally,
identified as confidential at the time of disclosure and confirmed in
writing within thirty (30) days of disclosure. Confidential Information
will be subject to the limitations set forth in Section 6 below.
1.3 "Documentation" shall mean non-confidential documentation provided with
the software licensed by ESSI to Licensee hereunder (including user
manuals and technical information, as more particularly described in
section A of Exhibit C).
1.4 "Enhancements" shall mean all modifications to the Program made solely
on behalf of Licensee but do not include separate add-on products which
contain no Program code.
1.5 "Infringement Action" shall mean any claim, suit, or proceeding brought
for infringement of any U.S. patent, copyright, trademark, or trade
secret, of a third party.
1.6 "Infringing Product" shall mean a product whose use is restricted as the
result of an injunction issued in an Infringement Action.
1.7 "Intellectual Property Rights" shall mean the following rights that
pertain to the Program and the Documentation:
(a) Rights in all U.S. and foreign patents and any related
applications, renewals, continuations, continuations-in-part,
divisionals and other derivative rights;
(b) Rights in the trademarks including, but not limited to, those
listed in Exhibit B that are enforceable under common law, state
law, federal law, or the laws of foreign countries;
(c) Rights in copyrights and rights of authorship arising under any
jurisdiction; and
1
<PAGE> 2
(d) Rights in trade secrets under common law, state law, federal
law, and the laws of foreign countries.
1.8 "Object Code" shall mean any machine executable code.
1.9 "Program" shall mean ESSI's TurboLinux-based version of ESSI's
Distributed System Manager software, Enlighten/DSM, and any additional
computer software licensed by ESSI to Licensee pursuant to this
Agreement, including without limitation the Documentation, as more
particularly described in Exhibit A.
1.10 "Release" shall mean a release of the Program that may be either a new
Version or Revision.
1.11 "Revision" shall mean a release of the Program incorporating corrections
and minor enhancements to the prior Revision that ESSI makes generally
available to the public. A Revision is designated by a numeric
identification of the form "N.M" where the "M" designates the Revision.
1.12 "TurboLinux Customers" shall mean Licensee customer sites that are
currently using the TurboLinux platform as their primary management
platform (e.g., running the Group Management Server ("GMS") portion of
the Program primarily on the TurboLinux platform).
1.13 "TurboLinux Product" shall mean the TurboLinux software products set
forth in Exhibit A (as such exhibit may be modified from time to time by
written agreement of the parties), and any subsequent versions or
releases of such products, including any user manuals provided with such
software.
1.14 "TurboLinux OS" shall mean the Turbo Linux version of the Linux
Operating System.
1.15 "Supported Release" shall mean those Releases supported by ESSI as an
ESSI commercial product.
1.16 "Version" shall mean the Object Code releases of the Program, that ESSI
makes available to Licensee under the terms of the Agreement. A Version
is designated by a numeric identification of the form "N.M" where "N"
designates the Version identification.
2.0 LICENSE GRANT.
2.1 Subject to the terms and conditions of this Agreement, ESSI hereby
grants to Licensee, under ESSI's Intellectual Property Rights, a
royalty-bearing, worldwide, non-exclusive, non-transferable (except in
accordance with this section and section 12.3 below) license to use (for
internal and demonstration purposes only, and not to provide services to
any third party or analogous use) and reproduce the Program in Object
Code, and distribute the Program, via a sublicense, Bundled with a
version of the TurboLinux Product directly and indirectly to end-users,
as provided in Exhibit D, in accordance with the terms of Section 4.1.3
below.
2.2 Subject to the terms and conditions of this Agreement, ESSI hereby
grants to Licensee, under ESSI's Intellectual Property Rights, a [***],
worldwide, non-exclusive, non-transferable (except
- --------
*** Confidential treatment requested.
2
<PAGE> 3
in accordance with this section and section 12.3 below) license in the
Documentation described in section A of Exhibit C to use (for internal
and demonstration purposes only, and not to provide services to any
third party or analogous use), reproduce, distribute, and prepare
derivative works and compilations of the Documentation, together with
the right to sublicense others to do the same, solely for the purpose of
developing documentation for use and distribution with the Program.
2.3 [***]
2.4 Except as set forth herein, ESSI retains all right, title, and interest
in the Program and Documentation. Although Licensee is not required to
pursue any enforcement measures with relation to the Program, Licensee
agrees to take commercially reasonable measures to protect ESSI's
proprietary rights in the Program and Documentation; in the event that
Licensee seeks to pursue enforcement measures with respect to the
Program, Licensee will obtain ESSI's prior written authorization before
doing so. Except as set forth herein, Licensee is not granted any other
rights or license to patents, copyrights, trade secrets, or trademarks
with respect to the Program or Documentation or other ESSI Confidential
Information. Each party shall notify the other party in writing upon its
discovery of any unauthorized use or claim of infringement of the
Program or Documentation or either party's patents, copyrights, trade
secrets, trademarks, or other intellectual property rights, and use
commercially reasonable efforts to assist the other party, at the other
party's expense in relation thereto.
3.0 PAYMENTS.
3.1 Royalties.
3.1.1 [***]
3.1.2 Subject to the terms of Section 3.1.1 and Exhibit E, Licensee
shall pay ESSI a royalty in accordance with the schedule attached as
Exhibit E for each copy of the Program sold, distributed or otherwise
disposed of, either internally or externally, by Licensee or its
sublicensees, for the rights granted in section 2.1 above.
3.2 General Terms of Payment.
3.2.1 Royalty payments due ESSI for a given calendar quarter (or portion
thereof) shall be made within [***] days after the end of such quarter,
and payments which are not so paid will be subject to interest at the
rate of [***] per month until paid in full. Payments shall be
accompanied by a report detailing how such royalties were calculated.
3.2.2 Licensee shall maintain true and accurate records, in accordance
with generally accepted accounting principles, for the calculation of
royalties during the term of this Agreement and for [***] months
thereafter. During the term of this Agreement, and for a period of [***]
thereafter, ESSI may, at its expense, engage an independent auditor
reasonably acceptable to Licensee to review such records (to a maximum
of [***] months prior) and verify royalty
- --------
*** Confidential treatment requested.
3
<PAGE> 4
payments, provided that the auditors execute Licensee's confidentiality
agreement and provided that ESSI may not conduct said audits more than
[***] in any calendar year. In the event that the audit reveals an
underpayment of royalties, Licensee shall pay ESSI [***] of any
royalties due and any interest accrued thereon if the underpayment
exceeds [***] of the total royalties due, and reimburse ESSI for the
reasonable cost of the audit.
3.2.3 Licensee shall be solely responsible for all taxes on royalties
and other fees required to be paid to ESSI under this Agreement,
including state and local use, sales, property, and other taxes,
excluding only taxes calculated solely on ESSI's income.
4.0 MARKETING, DELIVERY AND MANUFACTURING.
4.1 Licensee shall, at its own expense, use commercially reasonable efforts
to market the Program as Bundled with the TurboLinux Product. Licensee
shall have the right to customize the Documentation for its own
marketing, distribution, sales, and support efforts.
4.1.1 Marketing Plan. During each calendar quarter, Licensee and ESSI
shall meet in order to develop a joint marketing plan showing planned
marketing activities and the sales forecast for the quarter.
4.1.2 Licensee Training. Within thirty (30) days after the Effective
Date, Licensee and ESSI shall jointly develop a training plan to
effectively train TurboLinux personnel on the use of the Program. ESSI
will provide to Licensee or Licensee's designee up to one week of
training without cost; additional training will be made available to
Licensee or its designee at rates to be agreed.
4.1.3 Bundling Requirement. Licensee agrees, for the term of this
Agreement, to Bundle the Program with all new TurboLinux Products as
soon as ESSI completes the version of the Program specific to each
TurboLinux Product and notifies TurboLinux that each version of the
Program is ready to ship.
4.2 This Agreement does not create any partnership, agency, or other
relationship other than that of licensee and licenser in accordance with
the express provisions of this Agreement.
4.3 ESSI agrees to make the TurboLinux OS a "Reference Platform" for the
Program. As used herein, Reference Platform shall mean that any Versions
of the Program during the term of this Agreement shall be released on
the then-current version of the TurboLinux OS either before, or within
[***] days after, the release of the Program on any other Linux, UNIX or
Windows operating system.
5.0 SUPPORT.
5.1 As between Licensee and ESSI, ESSI shall, during the term of this
Agreement, support the use of the Program distributed to end users by
TurboLinux hereunder as set forth in this Section 5. ESSI will provide
support for the [***] Release of the Program. Supported Releases shall
operate, at a minimum, on the [***] Release of the TurboLinux Products.
- --------
*** Confidential treatment requested.
4
<PAGE> 5
5.2 Prior to transferring any end users of the TurboLinux Product to ESSI
for support, TurboLinux or its designee will perform Entitlement and
License Verification with respect to the TurboLinux Products. ESSI
agrees to provide installation support to verified registered purchasers
of the TurboLinux Product Bundled with the Program. This support will be
offered to end users of verified TurboLinux Products for sixty (60) days
from date of registration with TurboLinux.
Additional end user support options will be offered for purchase to
sublicensees of the Program directly from ESSI and Licensee shall
provide reasonable contact information to ESSI for such purposes.
6.0 CONFIDENTIAL INFORMATION.
6.1 A recipient of Confidential Information shall protect the Information by
using the same degree of care, but no less than a reasonable degree of
care, to prevent any unauthorized use, dissemination, or publication as
the recipient uses to protect its own Confidential Information of a like
nature. The recipient shall restrict access to the Confidential
Information to those of its employees having a need to know. The
recipient's obligations under this section 6.1 shall continue for three
(3) years from the expiration or termination of this Agreement, except
for Source Code which may be received hereunder, which must be protected
for five (5) years from the expiration or termination of this Agreement.
6.2 A recipient of Confidential Information acknowledges and agrees that:
(a) The Discloser will be irreparably injured by the disclosure or
threatened disclosure of any Confidential Information in
violation of this Agreement; and
(b) In addition to any other remedies available at law or in equity,
the Discloser may obtain an injunction to prevent such
disclosure or the continuation of such disclosure.
6.3 Confidential Information does not include information that:
(a) Was rightfully in the recipient's possession before receipt from
the Discloser;
(b) Is or becomes a matter of public knowledge through no fault of
the recipient;
(c) Is rightfully received by the recipient from a third party
without a duty of confidentiality;
(d) Is disclosed by the Discloser to a third party without a duty of
confidentiality on the third party; or
(e) Is independently developed by individuals without access to, or
knowledge of, Confidential Information.
6.4 Confidential Information may be disclosed under operation of law or
pursuant to a subpoena or other judicial or administrative order,
provided the recipient gives the Discloser prior notice of such required
disclosure and cooperates with the Discloser at the Discloser's expense,
in any lawful action to contest or limit the scope of disclosure.
7.0 PROPRIETARY NOTICES.
5
<PAGE> 6
7.1 ESSI shall include within the Program any trademark and copyright
notices as applicable. Licensee shall reproduce such notices when
marketing and distributing the Program.
7.2 Documentation distributed by Licensee shall include the following
notice:
"Copyright (C) 1994, 1995, 1996, 1997, 1998, 1999 by Enlighten Software
Solutions, Inc. All Rights Reserved."
8.0 ENHANCEMENTS.
8.1 ESSI shall own all right, title, and interest to any Enhancements and
derivative works of the Program created by either party.
9.0 [***]
9.1 [***]
9.2 TurboLinux has its own set of system administration and configuration
tools that are an existing part of its current products. TurboLinux will
be free to continue to develop these tools.
10.0 WARRANTIES.
10.1 ESSI warrants that it has full power and authority to grant the rights
under this Agreement. The Program will (i) process without error
information and/or data that includes or refers to dates and/or time
("Date Data") on any day during any year in, before and after the
twenty-first century, including any leap day or year, (ii) maintain a
consistent relationship with the real (external) time and date, and
(iii) when used in combination with other products not provided by ESSI,
correctly and accurately exchange Date data, to the extent that such
other products correctly and accurately exchange Date Data. For purposes
of this paragraph, "process" includes, but is not limited to,
manipulate, output, receive, retrieve, store, sort, transmit, transform,
and verify Date Data.
10.2 ESSI shall defend at ESSI's expense any Infringement Action in relation
to the Program and pay any awarded damages and costs of settlement
provided that Licensee gives ESSI prompt notice of any Infringement
Action, as well as all authority, information, and reasonable assistance
(at ESSI's expense) necessary to defend the Infringement Action. With
respect to any Infringing Product, ESSI may, at its expense and option:
(a) Procure for Licensee the right to continue using the Program;
(b) Replace the Program with a non-infringing product of
substantially equivalent (or better) function or performance;
(c) Modify the Program to be non-infringing of substantially
equivalent (or better) function or performance; or
(d) If ESSI reasonably determines that none of the foregoing
alternatives is feasible, terminate Licensee's rights to the
Program but only to the extent necessary to avoid the
infringement; upon such termination, ESSI shall refund to
Licensee the royalties paid by Licensee which are associated
with those rights of Licensee that are terminated.
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6
<PAGE> 7
10.3 Section 10.2 states the entire liability of ESSI for infringement of
Intellectual Property Rights by the Program or Documentation.
Notwithstanding Section 10.2, ESSI shall have no liability under this
Agreement for any claim, suit, or proceeding which is based upon, and
which could have been avoided but for:
(a) Any combination, operation, or use of the Program or
Documentation with equipment, software, documentation, or other
items not supplied by ESSI;
(b) Any modification of the Program or Documentation by Licensee not
at ESSI's direction; or
(c) Any use by Licensee of other than the most current Release of
the Program if such claim would have been avoided by the use of
such Release, provided Licensee had a reasonable opportunity to
upgrade to the most current Release.
10.4 ESSI warrants that the Program shall be substantially compliant with the
description contained in Exhibit A (including the Documentation
referenced therein), as modified from time to time as allowed under this
Agreement.
10.5 ESSI MAKES NO OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, REGARDING THE
PROGRAM AND THE DOCUMENTATION, INCLUDING WITHOUT LIMITATION AS TO THEIR
MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE OR NON-INFRINGEMENT
OF THIRD PARTY RIGHTS. NO PERSON, INCLUDING LICENSEE, IS AUTHORIZED TO
MAKE ANY OTHER WARRANTY OR REPRESENTATION CONCERNING THE PROGRAM ON
ESSI'S BEHALF. LICENSEE SHALL BE SOLELY RESPONSIBLE FOR ANY CLAIMS,
WARRANTIES, OR REPRESENTATIONS MADE BY LICENSEE OR ITS EMPLOYEES OR
AGENTS.
10.6 Licensee shall defend at Licensee's expense any Infringement Action in
relation to the Licensee-proprietary portions of the TurboLinux Product
(except for Infringement Actions related solely to the Program) and pay
any finally awarded damages and costs of settlement provided that ESSI
gives Licensee prompt notice of any Infringement Action, as well as all
authority, information and assistance (at Licensee's expense) necessary
to defend the Infringement Action. This Section 10.6 states the entire
liability of Licensee for infringement of Intellectual Property Rights
by the TurboLinux Product.
10.7 EXCEPT TO THE EXTENT SPECIFICALLY SET FORTH IN SECTION 10.2 OR 10.6, IN
NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING BUT NOT LIMITED TO LOSS
OF PROFITS) ARISING OUT OF ANY PERFORMANCE OF THIS AGREEMENT, THE
PROGRAM, OR ANY RELATED MATTER, OR IN FURTHERANCE OF THE PROVISIONS AND
OBJECTIVES OF THIS AGREEMENT, WHETHER SUCH DAMAGES ARE BASED ON TORT,
CONTRACT, OR ANY OTHER LEGAL THEORY AND WHETHER OR NOT ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
11.0 TERM AND TERMINATION.
11.1 This Agreement shall commence on the Effective Date and shall expire one
(1) year thereafter, unless earlier terminated for cause. This Agreement
will automatically renew for successive one
7
<PAGE> 8
(1) year terms unless one party gives the other party sixty (60) days'
written notice of its intent not to renew.
11.2 Either party may terminate this Agreement if the other party materially
breaches any provision of this Agreement and if such breach is not cured
within thirty (30) days of written notice from the non-breaching party
advising of such breach. For purposes of this section 11.2, to the
extent permitted by applicable law, a party will be deemed to be in
material breach of this Agreement if the party:
(a) Is the subject of a petition in bankruptcy, whether voluntary or
involuntary;
(b) Is or becomes insolvent; or
(c) Ceases to do business in the normal course.
11.3 Upon the termination of this Agreement, (i) if ESSI has terminated this
Agreement for Licensee's breach of Sections 2.3, 2.4, 6, 7, or 8,
Licensee shall immediately cease reproducing or distributing the Program
and Documentation, and will return to ESSI (or, at ESSI's direction,
destroy) all copies of the Program and Documentation in its possession;
(ii) if the Agreement has expired or has terminated for any reason other
than as set forth in the foregoing subsection (i), Licensee shall cease
reproducing the Program and Documentation to be Bundled with TurboLinux
Product as of the effective date of the termination of this Agreement,
and shall have [***] days after the effective date of termination to
distribute any remaining inventory, and thereafter shall will return to
ESSI (or, at ESSI's direction, destroy) all copies of the Program and
Documentation in its possession; and (iii) each party will return to the
other party (or destroy at the other party's direction) all Confidential
Information of the other party.
11.4 Notwithstanding any expiration or termination of this Agreement, the
following provisions expressly survive: Sections 2.4 (as to ownership of
the Program and Documentation by ESSI), 3, 6, 8, 10, 11.3, 11.4 and 12.
Further, the expiration or termination shall not affect any sublicense
agreements validly granted by Licensee as of the date of expiration or
termination.
12.0 MISCELLANEOUS PROVISIONS.
12.1 Notices. All notices required under this Agreement shall be in writing
and shall be considered given upon personal delivery or delivery by
electronic means (e.g., fax or electronic mail, if a confirmation hard
copy is sent as provided in this Section 12.1), two business days after
sending by air courier, or three business days after deposit in the
United States Mail, certified mail return receipt requested, addressed
to the appropriate Account Manager as specified below:
Licensee: TurboLinux, Inc
2000 Sierra Point parkway
Brisbane, CA 94005
Attention: Legal Services
Phone Number: (650) 244-7777
Fax Number: (650) 244-7766
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8
<PAGE> 9
ESSI: Enlighten Software Solutions, Inc.
999 Baker Way, Fifth Floor
San Mateo, CA 94404
Attention: Legal
Phone Number: (650) 578-0700
Fax Number: (650) 524-5952
12.2 Confidentiality of Agreement. Neither party shall disclose to any third
party the terms of this Agreement other than its existence in general;
provided, however, that either party may disclose the terms of this
Agreement to its attorneys, accountants, bankers, advisors, and
investors, and to potential investors and their attorneys, accountants,
bankers and advisors.
12.3 Assignment. Neither party may assign nor transfer its rights or
responsibilities set forth in this Agreement without the prior written
consent of the other party, which shall not be unreasonably withheld,
except in the case of merger or acquisition of all or substantially all
of the stock or assets of a party, in which case such consent will not
be required.
12.4 Waiver. A party's failure to exercise any of its rights under this
Agreement shall not constitute a waiver or forfeiture of any such rights
nor of any other rights.
12.5 Export. The parties acknowledge that the export of the Program,
Documentation and ESSI Confidential Information may be subject to
regulations which may prohibit the export of such information to certain
foreign countries or the disclosure of such information to certain
foreign nationals and Licensee agrees to obtain any such approval or
equivalent document in relation thereto, with the reasonable assistance
of ESSI. The parties, therefore, agree to comply strictly with all
applicable export laws, regulations, executive orders and the like.
12.6 Exhibits. In the event of any conflict between an Exhibit and the main
body of this Agreement, the latter shall control. The following Exhibits
are incorporated in full into this Agreement by the first reference to
each such Exhibit:
(a) Exhibit A, Program Description;
(b) Exhibit B, ESSI Trademarks;
(c) Exhibit C, Documentation;
(d) Exhibit D, [***];
(e) Exhibit E, Royalty Schedule and Payment Terms; and
(f) Exhibit F, Add On Sales Opportunity.
12.7 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California, U.S.A., without
giving effect to the principles of conflict of law. The United Nations
Convention on Contracts for the International Sale of Goods is
specifically excluded from application to this Agreement.
12.8 Injunctive Relief. Unauthorized use of the Program, any information
contained therein, or other Confidential Information will diminish the
value to either party of the trade secrets and proprietary information
that are the subject of this Agreement. Therefore, if either party
breaches
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9
<PAGE> 10
any of its obligations hereunder, the affected party shall be entitled
to equitable relief to protect its interests therein, including but not
limited to injunctive relief, as well as monetary damages.
12.9 Entire Agreement. This Agreement and the Exhibits represent the entire
agreement between the parties as to the matters set forth and integrates
all prior or contemporaneous discussions and understanding between them.
This Agreement may only be modified by a written instrument signed by an
authorized representative of both Licensee and ESSI.
TURBOLINUX, INC. ENLIGHTEN SOFTWARE SOLUTIONS, INC.
By: /s/ Rok Sosic By: /s/ David D. Parker
--------------------------- ----------------------------
Name: Rok Sosic Name: David D. Parker
--------------------------- ----------------------------
Title: Chief Technology Officer Title: Chief Executive Officer
--------------------------- ----------------------------
10
<PAGE> 11
EXHIBIT A
PRODUCT DESCRIPTIONS
1. PROGRAM
The Program and feature functionality is fully described by the ESSI Distributed
System Manager ("DSM") version 3.B documentation set. As of the Effective Date,
the current version of DSM is 3.2.0. This version will be used as a reference
when the Program as referenced in the Agreement.
The Program for the TurboLinux Product will consist of the following elements:
[***]
It is ESSI's intention to continue to enhance and evolve the Program over time.
Some features and functions may be added or modified in the course of this
process. ESSI retains the right to modify the graphical user interface (GUI),
command line interface (CLI), the application program interface (API), and/or
the underlying architecture of the Program without incurring any liability to
Licensee therefor.
2. TURBO LINUX PRODUCT
In US:
Currently:
TurboLinux Workstation 3.6
Starting in Q4 (approximately October):
TurboLinux Workstation 4.1
TurboLinux Server 4.1
TurboCluster Server 4.0
In Japan:
Currently:
TurboLinux Workstation 4.0
TurboLinux Workstation Pro 4.0
TurboLinux Server 4.2
In China:
Currently:
TurboLinux Workstation 4.0
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11
<PAGE> 12
EXHIBIT B
ESSI RIGHTS
Licensee shall include a trademark acknowledgment in all copies of the Program
and documentation derived from Documentation. Such acknowledgment shall specify
that the Program and documentation are based on ESSI's Program and shall be
worded as follows:
Enlighten is a registered trademark of Enlighten Software Solutions, Inc.
Enlighten for UNIX/Distributed Systems Manager and Enlighten/DSM are trademarks
of Enlighten Software Solutions, Inc. All information contained in the manual
for Enlighten for UNIX/Distributed Systems Manager is proprietary to Enlighten
Software Solutions, Inc., and all rights are reserved.
12
<PAGE> 13
EXHIBIT C
DOCUMENTATION
Section A - Sublicensable Documentation
ESSI will provide both printed and electronic forms of the end-user
Documentation currently delivered with the Program when purchased by an ESSI
customer, including, but not limited to:
(1) Enlighten/DSM User's Manual
Section B - Confidential Documentation
This shall include any technical and business information relating to inventions
or products, research and development, product planning methodologies,
manufacturing and engineering processes, costs, profit, or margin information,
employee skills and salaries, finances, customers, marketing and production and
future business plans of the Discloser. Confidential Documentation may also
include confidential proprietary and/or trade secret information that is owned
by third parties who may have disclosed such information to either party in the
course of such party's business.
13
<PAGE> 14
EXHIBIT D
[***]
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14
<PAGE> 15
EXHIBIT E
ROYALTY SCHEDULE AND PAYMENT TERMS
Subject to Section 3.1.1 of the Agreement, for each copy of the Program
reproduced by Licensee for distribution via sublicense as authorized in the
Agreement, Licensee will pay to ESSI the following amounts:
[***] for the TurboLinux Workstation product
[***] for the TurboLinux Server product
[***] for the TurboLinux TurboCluster product
Notwithstanding the foregoing, in no event will the fees paid by TurboLinux to
ESSI exceed [***] of the gross revenue (net of only channel discount) invoiced
by TurboLinux for each sale of TurboLinux Products. (For purposes of applying
the [***] formula set forth above, royalties shall be calculated separately for
each such OEM, distributor, or other sublicensee (i.e., deal-by-deal), and shall
not be aggregated across more than one sublicensee.) In the event that the
amount paid by TurboLinux is less than the amounts set forth above, TurboLinux
will provide reasonable documentation in its quarterly report to justify the
reduction in royalty.
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15
<PAGE> 16
EXHIBIT F
ADD ON SALES OPPORTUNITY
Add On or additional sale opportunity exists for ESSI and TurboLinux in the form
of additional products. These are sale opportunities for end user customers who
receive the Program along with a TurboLinux Product to upgrade to a more
advanced version or product offered by ESSI. Add on Sales Opportunity may exist
in the form of:
[***]
Regarding upsell opportunities, TurboLinux will provide references or leads for
these opportunities as it becomes aware of them. ESSI will actively prospect for
these opportunities and will have full responsibility for prosecuting these
sales and providing ongoing support and maintenance. During any given contract
year (defined as a 12 month period commencing on the Effective Date or any
anniversary thereof), TurboLinux will receive a percentage of the gross amounts
received by ESSI for the sale of the Program and/or other ESSI proprietary
software programs to leads provided by TurboLinux to ESSI, as indicated in this
paragraph, as follows:
<TABLE>
<S> <C> <C>
First [***] TurboLinux [***] ESSI [***]
[***] to [***] TurboLinux [***] ESSI [***]
[***] and up ... TurboLinux [***] ESSI [***]
</TABLE>
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16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,280,400
<SECURITIES> 267,700
<RECEIVABLES> 1,288,600
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,916,000
<PP&E> 1,566,500
<DEPRECIATION> 1,131,700
<TOTAL-ASSETS> 3,651,000
<CURRENT-LIABILITIES> 492,200
<BONDS> 0
0
0
<COMMON> 7,942,400
<OTHER-SE> (4,783,600)
<TOTAL-LIABILITY-AND-EQUITY> 3,651,000
<SALES> 2,496,900
<TOTAL-REVENUES> 2,496,900
<CGS> 316,500
<TOTAL-COSTS> 316,500
<OTHER-EXPENSES> 3,683,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,409,400)
<INCOME-TAX> (10,700)
<INCOME-CONTINUING> (1,409,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,398,700)
<EPS-BASIC> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
