<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23446
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
- -------------------------------------------------------------------------------
(Exact Name as registrant specified in its charter)
CALIFORNIA 94-3008888
---------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
999 BAKER WAY, FIFTH FLOOR, SAN MATEO, CALIFORNIA 94404
- -------------------------------------------------- ------
(Address of principal executive offices) (Zip code)
(650) 578-0700
---------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING
CLASS MARCH 31, 1999
----- --------------
<S> <C>
Common Stock, no par value 3,959,701
</TABLE>
This is Pagce 1 of 21 Pages.
The Index to Exhibits begins on Page 21
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ENLIGHTEN SOFTWARE SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-QSB
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I FINANCIAL INFORMATION -------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 3
As of March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - 4
Three months ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows - 5
Three months ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</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>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,134,053 $ 1,899,976
Short-term investments 1,280,051 1,285,551
Accounts receivable, less allowance for doubtful accounts 1,252,575 653,438
Prepaid expenses and other assets 187,778 140,170
----------- -----------
Total current assets 3,854,457 3,979,135
Property and equipment, net 558,371 588,630
Software development costs, net 57,545 92,248
Other assets 274,409 269,409
----------- -----------
$ 4,744,782 $ 4,929,422
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 138,475 $ 202,547
Accrued and other current liabilities 452,067 458,568
Deferred revenue 70,988 43,809
----------- -----------
Total current liabilities 661,530 704,924
----------- -----------
Shareholders' equity:
Common stock 7,705,088 7,591,538
Accumulated other comprehensive income 51 5,551
Accumulated deficit (3,621,887) (3,372,591)
----------- -----------
Total shareholders' equity 4,083,252 4,224,498
----------- -----------
$ 4,744,782 $ 4,929,422
=========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Product license $ 739,164 $ 180,130
fees
Product maintenance fees 164,179 155,473
Consulting 319,600 207,817
services
Royalties 42,576 157,160
----------- -----------
Total revenue 1,265,519 700,580
Cost of revenue 169,692 173,838
----------- -----------
Gross profit 1,095,827 526,742
----------- -----------
Operating expenses:
Research and development 511,098 276,739
Sales and 633,968 379,945
marketing
General and administrative 230,077 222,345
Gain on sale of Tandem product line -- (515,487)
----------- -----------
Total operating expenses 1,375,143 363,542
----------- -----------
Operating income (loss) (279,316) 163,200
Other income, net 30,820 7,877
----------- -----------
Income (loss) before (248,496) 171,077
income taxes
Income tax expense (benefit) 800 (40,604)
----------- -----------
Net income (loss) $ (249,296) $ 211,681
=========== ===========
Other comprehensive income--unrealized
gains on securities 51 13,305
----------- -----------
Comprehensive income (loss) $ (249,245) $ 224,986
=========== ===========
Basic earnings (loss) per share:
Net income (loss) per share $ (0.06) $ 0.07
=========== ===========
Shares used in net income (loss)
per share computation 3,932,421 2,985,746
computation
=========== ===========
Diluted earnings (loss) per share:
Net income (loss) per share $ (0.06) $ 0.06
=========== ===========
Shares used in net income (loss)
per share computation 3,932,421 3,468,625
=========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (249,296) $ 211,681
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 106,540 92,173
Gain on sale of Tandem product line -- (515,487)
Changes in operating assets and liabilities:
Accounts receivable, net (599,137) (297,467)
Refundable income taxes -- 127,035
Prepaid expenses and other assets (52,608) 156,960
Trade accounts payable (64,072) (13,934)
Accrued and other current liabilities (6,501) (255,927)
Deferred revenue 27,179 (139,823)
----------- -----------
Net cash used for operating activities (837,895) (634,789)
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments -- (186,695)
Proceeds from sale of Tandem product line -- 191,666
Purchases of property and equipment (41,578) (15,246)
----------- -----------
Net cash used for investing activities (41,578) (10,275)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock 113,550 44,352
----------- -----------
Net cash provided by financing activities 113,550 44,352
----------- -----------
Net increase (decrease) in cash and cash equivalents (765,923) (600,712)
Cash and cash equivalents at beginning of period 1,899,976 1,406,141
----------- -----------
Cash and cash equivalents at end of period $1,134,053 $ 805,429
=========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>
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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, 1998 contain additional information about the Company, its
operations, and its financial statements and accounting practices, and should be
read in conjunction with this Quarterly Report on Form 10-QSB. The condensed
consolidated balance sheet at December 31, 1998 was derived from audited
financial statements; however, it does not include all disclosures required by
generally accepted accounting principles. These interim unaudited condensed
consolidated financial statements have been prepared in accordance with the
instructions for Form 10-QSB and therefore certain information and footnote
disclosures normally contained in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
The interim financial information contained herein is not necessarily indicative
of results for any future period.
The accompanying unaudited condensed consolidated financial statements of the
Company reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary to present a fair statement of the financial
position as of March 31, 1999, and the results of operations and cash flows for
the interim periods presented.
2. Revenue Recognition
Product license fees are recognized after the following events have occurred: a
product evaluation has been shipped to the customer; the customer elects to
purchase the software following an evaluation period; the customer signs the
related contract; and collection of the sales price is probable. Royalty
revenues that are contingent upon sale to an end-user by original equipment
manufacturers are recognized upon receipt of a report of shipment from the
original equipment manufacturer. Product maintenance fees committed as part of
new product licenses and maintenance resulting from renewed maintenance
contracts are deferred and recognized ratably over the contract period,
generally one year. Consulting service revenue is recognized when services are
performed for time and material contracts and on a percentage of completion
basis for fixed price contracts.
3. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
The Company has classified its investments in commercial paper and U.S. Treasury
notes as "held-to-maturity." All such investments mature in less than one year
and are stated at amortized cost, which approximates fair value. Interest income
is recorded using an effective interest rate, with the associated discount or
premium amortized to interest income.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Additionally, the Company has classified its investments in preferred stock as
"available-for-sale." Such investments are recorded at fair value based on
quoted market prices, with unrealized gains and losses reported as a separate
component of stockholders' equity. As of March 31, 1999, 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 (loss) per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share reflects the potential
dilution that would occur from options which could result in additional common
shares being issued.
The following is a reconciliation of the number of shares used in the basic and
diluted earning per share computations for the periods presented:
<TABLE>
<CAPTION>
March 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Shares used in basic net income
(loss) per share computation 3,932,421 2,985,746
Effect of dilutive potential
common shares - 482,879
--------- ---------
Shares used in diluted net income
(loss) per share computation 3,932,421 3,468,625
========= =========
</TABLE>
Potential common shares excluded from the computation for the three months ended
March 31, 1999 were 286,046 as their effect would be antidilutive.
6. Recent Accounting Pronouncements
The Company adopted SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" effective January 1, 1999. The adoption
of SOP 98-1 did not have a material effect on the periods presented.
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ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." 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 capitalized in the past must be written off when SOP No. 98-5 is
adopted. The Company expects that the adoption of SOP No. 98-5 will have no
material impact on its financial position, results of operations or cash flows.
The Company will be required to implement SOP No. 98-5 for the year ending
December 31, 1999.
In June 1998, Financial Accounting Standard No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" was issued and is effective for
all fiscal years beginning after June 15, 1999. FAS 133 requires the Company 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 respective accounting standards for reporting changes in
the fair value of the derivative instruments. Upon adoption, the Company 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. The Company is evaluating
its expected adoption date and currently expects to comply with the requirements
of FAS 133 in fiscal year 2000. The Company does not expect the adoption will be
material to the Company's financial position or results of operations since the
Company 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. The Company will be required to implement SOP No.
98-9 for 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 Company's year ending December 31, 1999. The
Company 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.
Page 8
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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 1998 Report on Form 10-KSB.
OVERVIEW
Enlighten Software Solutions develops, markets, and supports software
products for UNIX and Windows 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 and Windows platform vendors such as, Digital
Equipment Corporation, Hewlett-Packard, IBM, Santa Cruz Operation (SCO), SGI,
Sun Microsystems, and Microsoft.
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 and
Windows product suite. In connection with this sale, the Company 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
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
management and application software vendors whose products are complementary
with those of the Company.
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VARIABILITY OF QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in
operating results and expects that these fluctuations will continue in future
periods. These fluctuations have been caused by a number of factors, including
the timing of new product or product enhancement introductions by the Company or
its competitors, purchasing patterns of its customers, size and timing of
individual orders, the rate of customer acceptance of new products, and pricing
and promotion strategies undertaken by the Company or its competitors. Future
operating results may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop, acquire, and introduce
new products on a timely basis. Additionally, the Company's operating results
may be influenced by seasonality and overall trends in the global economy.
Because the Company operates with a relatively small backlog, quarterly sales
and operating results generally depend on the volume and timing of orders
received during the quarter, which are difficult to forecast. Historically, the
Company has recognized a substantial portion of its license revenues in the last
month of the quarter, particularly the last week. Since the Company's staffing
levels and other operating expenses are based upon anticipated revenues, delays
in the receipt of orders can cause significant fluctuations in income from
quarter to quarter.
RESULTS OF OPERATIONS
Total revenue. Revenue for the first quarter of 1999 totaled $1,266,000,
an 81% increase when compared to the same quarter in 1998. The increase for the
quarter is related to the increased license fees from the Company's OEM
relationship with SGI, entered into during the first quarter of 1998. An
increase in consulting fees, as a result of the IBM relationship discussed
below, was entirely offset by a decrease in royalties from the sale of the
Tandem product line.
Revenue from product license fees increased 310% to $739,000 in the
first quarter of 1999. The increase was primarily attributable to an increase in
UNIX licenses of the Company's EnlightenDSM product resulting from its
relationship with SGI. The Company and SGI entered into an OEM bundling
agreement in January 1998. SGI began shipping the Company's product along with
their UNIX servers and workstations in July 1998. Thus, in the first quarter of
1998 there was no comparable revenue from SGI.
Product maintenance fees increased 6%, to $164,000, in the first quarter
of 1999. The increase is due to increased UNIX and Windows license fees over the
prior year.
Consulting services revenue increased 54%, to $320,000, in the first
quarter of 1999 when compared with the first quarter of 1998. The increase in
this period is due to non-recurring consulting work performed in the first
quarter of 1999 related to the Company's new strategic relationship with IBM,
signed in December 1998.
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Royalties for the first quarter of 1999 were $43,000, compared to
$157,000 in the first quarter of 1998, a decrease of $115,000, or 73%. The
Company 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 2%, or $4,000, to $170,000
in the first quarter of 1999. 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.
Research and development. Net research and development expenses
increased by 85%, to $511,000, in the first quarter of 1999 when compared to the
first quarter of 1998. The increase in this quarter is related to increased
personnel and recruiting costs. Several new development personnel were hired
during the latter three quarters 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 the
Company's strategic partners. 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 increased by 67% to
$634,000 in the first quarter of 1999, when compared to the same period in 1998.
During the first quarter of 1998, just following the sale of the Tandem product
line, the Company restructured its 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. During the remainder of 1998, the Company increased its sales
and marketing personnel, adding a Vice President, Business Development and
Marketing and sales and marketing consultants, and opened up a sales and support
office in Denver, CO to better support its new third-party relationships. These
additional costs are reflected in the first quarter 1999 numbers.
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
increased by 3% to $230,000 in the first quarter of 1999 when compared to the
same period in 1998. The increase is due to overhead increases as they relate to
the expansion of other departments and the Company in general.
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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 and the rights to receive royalties on Tandem related products
for a period of three years. In the fourth quarter of 1997, the Company
recognized a gain on the sale of the operating assets of the Tandem product line
of approximately $2.2 million. In the first quarter of 1998, the Company
received the balance of the cash related to the sale of the assets and
recognized the balance of the gain from this transaction, or $515,000.
Other income, net. Other income, net increased by $23,000 in the first
quarter of 1999 as a result of an increase in net interest income associated
with higher average cash balances.
Income tax expense (benefit). Tax expense in the first quarter of 1999
reflects minimum state franchise taxes. In the first quarter of 1998, the
Company recognized a tax benefit of $41,000 as a result of receiving tax refunds
on net operating loss carrybacks in excess of taxes receivable provided for by
the Company.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's cash, cash equivalents, and short-term
investments were $2,414,000, representing 51% of total assets. The Company's
working capital as of March 31, 1999, was $3,193,000. Cash equivalents are
highly liquid investments with original maturities of ninety days or less. The
Company's short-term investments are primarily investment grade commercial paper
and are highly liquid. The Company had no debt as of March 31, 1999, other than
normal trade payables and accrued liabilities. Shareholders' equity as of March
31, 1999, was $4,083,000.
During the first three months of 1999, the Company's operating
activities used cash of $838,000, compared to cash used by operating activities
of $635,000 in the same period of the prior year. The change was principally
caused by an increase in accounts receivable.
The Company's investing activities have consisted primarily of
short-term investments, the sale of the Company's Tandem operation, and
additions to capital equipment. Investing activities used cash of $42,000 for
the three months ended March 31, 1999, compared with $10,000 in the same period
in 1998. The change is primarily due to an increase in the purchase of property
and equipment during the first quarter of 1999 when compared to the first
quarter of 1998.
Financing activities provided cash of $114,000 in the first three months
of 1999, compared with cash provided of $44,000 in the same period of the prior
year. The increase in cash provided from financing activities resulted from an
increase in proceeds from the exercise of employee stock options.
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In May 1998, the Company completed a public offering (the "Offering") of
700,000 shares of common stock. The net proceeds from the Offering of $2.2
million were used for funding operations and 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
will provide sufficient liquidity to fund these requirements for the next twelve
months. However, the Company's continued ability to fund operations and meet its
other obligations depends on its future performance, which, in turn, is subject
to general economic conditions, and business and other factors beyond the
Company's control. If the Company is unable to generate sufficient cash flow
from operations, it may be required to obtain additional financing. There can be
no assurance that the Company would be able to obtain such financing, or that
any financing would result in a level of net proceeds required.
BUSINESS RISKS
In addition to the other information in this Report on Form 10-QSB and
other documents the Company files from time to time with the Securities and
Exchange Commission, the following risk factors should be considered carefully
in evaluating the Company and its business:
Fluctuating Operating Results
The Company has experienced significant quarterly fluctuations in
operating results and expects that these fluctuations will continue in future
periods. These fluctuations have been caused by a number of factors, including
the timing of new product or product enhancement introductions by the Company or
its competitors, the development and introduction of new operating systems that
require additional development efforts, purchasing patterns of its customers,
size and timing of individual orders, the rate of customer acceptance of new
products, and pricing and promotion strategies undertaken by the Company or its
competitors. Future operating results may fluctuate as a result of these and
other factors, including the Company's ability to continue to develop, acquire,
and introduce new products on a timely basis, the timing and level of sales by
the Company's OEM or other third-party licensees of computer systems or software
incorporating the Company's products, technological changes in computer systems
and environments, quality control of the products sold, the Company's success in
shifting its primary sales strategy from direct to indirect channels, and
general economic conditions. Additionally, the Company's operating results may
be influenced by seasonality and overall trends in the global economy. Because
the Company operates with a relatively small backlog, quarterly sales and
operating results generally depend on the volume and timing of orders received
during the quarter, which are difficult to forecast. Historically, the Company
has recognized a substantial portion of its license revenues in the last month
of the quarter, particularly the last week. Since the Company's
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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 and Windows product offering. The Company's initial product entry into the
open systems market in 1995 was unsuccessful. Version 2.0 of EnlightenDSM was
released in mid-1996 and represented 27% and 22% of the Company's license
revenues in 1997 and 1996, respectively. In January 1998, the Company signed an
OEM bundling agreement with Silicon Graphics in which Silicon Graphics will
bundle a limited version of the Company's product on each UNIX system shipped.
In August 1998, the Company signed a distribution agreement with two of General
Electric's IT Distribution Group businesses, Access Graphics and Integration
Alliance. In December 1998, the Company 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, the Company announced a
partnership with Sun Microsystems in which the Company and Sun will produce a
seamless integration between EnlightenDSM and Sun's SyMON systems management
product. While significant, these are the first such agreements entered into by
the Company. Additionally, the open systems market is characterized by rapid
technological growth and intense competition. There can be no assurance that the
Company has the resources, both financial and personnel, to effectively
capitalize on, and continue with, its early and limited success in this market.
Expansion of New Distribution Channels; Reliance on Resellers
Prior to October 1997, the Company employed primarily a direct sales
model, complemented with a telesales force, for the sale of its software
products. In the fourth quarter of 1997, the Company began to shift a majority
of its sales and marketing resources toward third-party resellers in both the
United States and internationally. The Company's growth will be dependent on its
ability to expand its third-party distribution channel to market, sell, and
support the Company's software products. The Company is currently investing, and
intends to continue to invest, significant resources to develop this channel,
which could materially adversely affect the Company's operating margins. The
Company has only limited experience in marketing its products through
distributors. Additionally, the Company will have no control over its
third-party distributors including their shipping dates or volumes of systems
shipped by its OEM and other third-party customers. There can be no assurance
that the Company will be successful in its efforts to generate significant
revenue from this channel, nor can there can be any assurance that the Company
will be successful in recruiting new organizations to represent the Company and
its products.
Page 14
<PAGE> 15
Additionally, now that the Company has shifted its sales efforts from
direct to indirect channels, the Company has 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 signed an OEM bundling agreement with
Silicon Graphics in which Silicon Graphics will bundle a limited version of the
Company's product on each UNIX system shipped. In August 1998, the Company
signed a distribution agreement with two of General Electric's IT Distribution
Group businesses, Access Graphics and Integration Alliance. In December 1998,
the Company 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, the Company announced a partnership with Sun Microsystems in
which the Company and Sun will produce a seamless integration between
EnlightenDSM and Sun's SyMON systems management product. While significant,
these are the first such agreements entered into by the Company. While the
Company believes that these arrangements will be beneficial, there can be no
assurance that the Company will be able to deliver its products to these
companies in a timely manner or that these companies will license the Company's
products in volumes anticipated by the Company. Further, these agreements are
the Company's only significant third-party distribution agreements to date.
While the Company's strategy is to obtain additional resellers to reduce the
dependence on these vendors, there can be no assurance of successfully
attracting additional vendors to distribute the Company's products. Any such
failure would result in the Company having expended significant resources with
little or no return on its investment, which would have a material adverse
effect on the Company's business, operating results, and financial condition.
These additional investments and responsibilities will require the
expenditure by the Company of substantial resources, including the diversion of
employees from other projects to provide the support services and development
efforts required to provide products and services to these third party vendors
and other new third parties, if any.
Intense Competition
The Company experiences intense competition from other systems
management companies, and the market is rapidly changing. The Company believes
that its ability to compete successfully depends on a number of factors,
including the performance, price,
Page 15
<PAGE> 16
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 and Windows product,
EnlightenDSM. This product has accounted for 100% of the Company's license since
October 1, 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. Broad market
acceptance of EnlightenDSM is, therefore, critical to the Company's future
success. Failure to achieve broad market acceptance of EnlightenDSM, as a result
of competition, technological change, or otherwise, would have a material
adverse effect on the business, operating results, and financial condition of
the Company. The Company's future financial performance will depend in
significant part on the successful development, introduction, and market
acceptance of EnlightenDSM and its product enhancements. There can be no
assurance that the Company will be successful in marketing EnlightenDSM or any
new products, applications, or product enhancements, and any failure to do so
would have a material adverse effect on the Company's business, operating
results, and financial condition.
Rapid Technological Change
The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, and rapid changes in
customer requirements. The introduction of products embodying new technologies,
including new operating systems, applications, hardware products, systems
management frameworks, and network management platforms, the emergence of new
industry standards, or changes in customer requirements could render the
Company's existing products obsolete and unmarketable. As a result, the
Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements, and develop and introduce
in a timely manner, new products that keep pace with technological developments
and emerging industry standards.
Page 16
<PAGE> 17
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 Windows NT) systems management market, which is still an
emerging market. The Company's future financial performance will depend in large
part on continued growth in the number of companies adopting systems management
solutions for their client/server computing environments. There can be no
assurance that the market for systems management solutions will continue to
grow. If the systems management market fails to grow or grows more slowly than
the Company currently anticipates, or in the event of a decline in unit price or
demand for the Company's products, as a result of competition, technological
change, or other factors, the Company's business, operating results, and
financial condition would be materially adversely affected. During recent years,
segments of the computer industry have experienced significant economic
downturns characterized by decreased product demand, production overcapacity,
price erosion, work slowdowns, and layoffs. The Company's operations may in the
future experience substantial fluctuations from period-to-period as a
consequence of such industry patterns, general economic conditions affecting the
timing of orders from major customers, and other factors affecting capital
spending. There can be no assurance that such factors will not have a material
adverse effect on the Company's business, operating results, and financial
condition.
Year 2000 Compliance
The Company is 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
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<PAGE> 18
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.
The Company has conducted Year 2000 compliance reviews for current
versions of its products. The reviews include assessment, implementation, and
validation testing. The Company believes that all of its existing products are
or will become Year 2000 compliant during fiscal 1999 and new products will be
designed to be Year 2000 compliant. Contingency plans for the handling of its
reasonably likely worst case scenarios will be created during fiscal 1999 to
determine how the Company will handle its reasonably likely worst case
scenarios. Although the Company believes its products will be Year 2000
compliant, its products may not contain all the necessary software routines and
programs for the accurate calculation, display, storage and manipulation of data
involving dates. Any failure of the Company's products to perform, including
system malfunctions due to the onset of the calendar year 2000, could result in
claims against the Company, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
To the extent information is publicly available, the Company has
assessed the Year 2000 compliance status of its customers. The failure of its
current or future customers to achieve Year 2000 compliance, or if they divert
technology expenditures to address Year 2000 compliance problems, could have a
material adverse effect on the Company's business, financial condition or
results of operations.
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. In the first quarter of
1999, the Company incurred approximately $10,000 in its Year 2000 remediation
efforts. Enlighten expects additional remediation costs of approximately $40,000
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.
The Company has not yet fully developed a comprehensive contingency plan
to address situations that may result if the Company is unable to achieve Year
2000 readiness of its critical operations. The cost of developing and
implementing such a plan may itself be material.
Page 18
<PAGE> 19
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, MARCH 31, 1999
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the accompanying Index of Exhibits on Page
21 are filed or incorporated by reference as part of this report.
Exhibit numbers 10.28, 10.29, 10.31, and 10.32 are management
contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, the Company did not file
any reports on Form 8-K.
ITEMS 1, 2, 3, 4, AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE.
Page 19
<PAGE> 20
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, MARCH 31, 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: April 29, 1999 SIGNATURE: /s/ David D. Parker
-------------------------- ------------------------
David D. Parker
Chief Executive Officer
DATE: April 29, 1999 SIGNATURE: /s/ Michael A. Morgan
-------------------------- ------------------------
Michael A. Morgan
Chief Financial Officer
Page 20
<PAGE> 21
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, MARCH 31, 1999
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1(1) Amended and Restated Articles of Incorporation.
3.2(1) By Laws.
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 Mike 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.
10.31(4)@ Employment letter, dated July 15, 1998, by and between Enlighten
Software Solutions, Inc. and Bill Bradley.
10.32(4)@ Employment letter, dated January 15, 1999, by and between Enlighten
Software Solutions, Inc. and Tim Gardner.
10.33(4) Agreement dated as of December 31, 1998, by and between Enlighten Software
Solutions, Inc. and International Business Machines.
27.1 Financial Data Schedule.
</TABLE>
- -------------------------------
(1) Incorporated by reference from exhibits of the same number in the
Company's Registration Statement on Form S-1, which became effective
April 19, 1994.
(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.
(4) 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,
1998.
@ Compensatory or employment arrangement.
Page 21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,134,053
<SECURITIES> 1,280,051
<RECEIVABLES> 1,252,575
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,854,457
<PP&E> 1,559,785
<DEPRECIATION> 1,001,414
<TOTAL-ASSETS> 4,744,782
<CURRENT-LIABILITIES> 661,530
<BONDS> 0
0
0
<COMMON> 7,705,091
<OTHER-SE> 51
<TOTAL-LIABILITY-AND-EQUITY> 4,744,782
<SALES> 1,265,519
<TOTAL-REVENUES> 1,265,519
<CGS> 169,692
<TOTAL-COSTS> 169,692
<OTHER-EXPENSES> 1,375,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (248,496)
<INCOME-TAX> 800
<INCOME-CONTINUING> (249,296)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (249,296)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
