<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, 2000
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)
----------------------
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 the latest practicable date:
Outstanding
Class November 3, 2000
----- ----------------
COMMON STOCK, NO PAR VALUE 4,971,467
<PAGE> 2
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-QSB
THREE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
---------------------------------------------------------------------------------------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets: September 30, 2000 and
December 31, 1999........................................... 3
Condensed Consolidated Statements of Operations:
Three and Nine Months Ended September 30, 2000 and 1999..... 4
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2000 and 1999............... 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.............................................. 22
Item 2. Changes in Securities and Use of Proceeds...................... 22
Item 3. Defaults Upon Senior Securities................................ 22
Item 4. Submission of Matters to a Vote of Security Holders............ 22
Item 5. Other Information.............................................. 23
Item 6. Exhibits and Reports on Form 8-K............................... 23
SIGNATURES..................................................... 24
</TABLE>
-2-
<PAGE> 3
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,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................................... $ 1,534,800 $ 1,045,600
Short-term investments .......................................... 248,400 247,500
Accounts receivable, less allowance for doubtful
accounts of $50,000 ............................................ 189,700 1,285,500
Prepaid expenses and other assets ............................... 162,300 60,900
------------ ------------
Total current assets .......................................... 2,135,300 2,639,500
Property and equipment, net ....................................... 289,000 402,700
Software development costs, net ................................... 162,100 208,400
Other assets ...................................................... 352,000 312,100
------------ ------------
$ 2,938,400 $ 3,562,700
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable .......................................... $ 188,300 $ 177,000
Accrued and other current liabilities ........................... 532,400 335,600
Deferred revenue ................................................ 204,300 81,800
------------ ------------
Total current liabilities ..................................... 925,000 594,400
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized,
none issued and outstanding .................................... -- --
Common stock, no par value, 20,000,000 and 10,000,000 shares
authorized, 4,972,312 and 4,217,978 issued and outstanding at
September 30, 2000 and December 31, 1999, respectively ......... 11,264,400 8,410,400
Deferred stock-based compensation ............................... (18,300) (85,000)
Accumulated other comprehensive loss ............................ (31,300) (32,200)
Accumulated deficit ............................................. (9,201,400) (5,324,900)
------------ ------------
Total shareholders' equity .................................... 2,013,400 2,968,300
------------ ------------
$ 2,938,400 $ 3,562,700
============ ============
</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,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product license fees ................ $ 281,500 $ 500,100 $ 887,300 $ 1,532,000
Product maintenance fees ............ 103,100 159,200 464,800 484,300
Consulting services ................. 20,900 14,000 117,700 346,600
Royalties ........................... 28,200 47,000 66,700 134,000
----------- ----------- ----------- -----------
Total revenue ..................... 433,700 720,300 1,536,500 2,496,900
Cost of revenue:
Product licenses .................... 36,700 83,000 96,600 270,600
Product maintenance ................. 20,800 82,300 119,400 251,300
Consulting services ................. 2,200 400 52,900 50,300
----------- ----------- ----------- -----------
Total cost of revenue ............. 59,700 165,700 268,900 572,200
----------- ----------- ----------- -----------
Gross margin .................... 374,000 554,600 1,267,600 1,924,700
Operating expenses:
Research and development ............ 799,700 519,700 2,104,700 1,517,400
Sales and marketing ................. 632,000 385,500 1,968,600 1,316,900
General and administrative .......... 581,500 154,500 1,145,300 593,400
----------- ----------- ----------- -----------
Total operating expenses .......... 2,013,200 1,059,700 5,218,600 3,427,700
----------- ----------- ----------- -----------
Operating loss ................ $(1,639,200) $ (505,100) $(3,951,000) $(1,503,000)
Other income, net ..................... 17,100 25,700 58,900 93,600
----------- ----------- ----------- -----------
Loss before income taxes ...... $(1,622,100) $ (479,400) $(3,892,100) $(1,409,400)
----------- ----------- ----------- -----------
Income tax benefit .................... -- (11,500) (15,400) (10,700)
----------- ----------- ----------- -----------
Net loss ...................... $(1,622,100) $ (467,900) $(3,876,700) $(1,398,700)
=========== =========== =========== ===========
Basic and diluted net loss per share .. $ (0.33) $ (0.12) $ (0.84) $ (0.35)
=========== =========== =========== ===========
Shares used in computing basic and
diluted net loss per share ........... 4,966,279 4,046,848 4,636,784 3,981,315
=========== =========== =========== ===========
</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,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $(3,876,700) $(1,398,700)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 252,000 315,100
Loss on disposal of property and equipment ..................... 1,500 --
Write-off of fixed assets ...................................... -- 2,500
Stock-based compensation ....................................... 51,800 --
Changes in operating assets and liabilities:
Accounts receivable .......................................... 1,095,800 (610,200)
Prepaid expenses and other assets ............................ (141,300) (2,400)
Trade accounts payable ....................................... 11,300 (102,700)
Accrued and other current liabilities ........................ 196,800 (145,600)
Deferred revenue ............................................. 122,600 35,600
----------- -----------
Net cash used in operating activities ...................... (2,286,200) (1,906,400)
----------- -----------
Cash flows from investing activities:
Capitalization of software development costs ..................... (48,600) --
Sales of short-term investments .................................. -- 1,000,000
Purchases of property and equipment .............................. (44,900) (64,100)
----------- -----------
Net cash (used in) provided by investing activities ........ (93,500) 935,900
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock, net ............................. 2,868,900 350,900
----------- -----------
Net cash provided by financing activities .................. 2,868,900 350,900
----------- -----------
Net increase (decrease) in cash and cash equivalents ............... 489,200 (619,600)
Cash and cash equivalents at beginning of period ................... 1,045,600 1,900,000
----------- -----------
Cash and cash equivalents at end of period ......................... $ 1,534,800 $ 1,280,400
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-5-
<PAGE> 6
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 1999.
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 of operations 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, 1999 and for the three and nine months ended September 30, 1999,
have been reclassified to conform with the 2000 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 fees resulting from renewed maintenance
contracts are deferred and recognized ratably over the contract period,
generally one year. Consulting service revenue is recognized
-6-
<PAGE> 7
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and Short-Term Investments
Enlighten considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Enlighten classifies 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
$248,400 as of September 30, 2000 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. Offering of Common Stock
On April 28, 2000, Enlighten completed a private placement of 715,885 units each
consisting of one share of common stock and one redeemable purchase warrant to
purchase one share of common stock for gross proceeds of approximately
$3,114,100. Enlighten sold the common stock at $4.225 and the warrants at
$0.125, for an aggregate of $4.35 per unit. The price for the common stock was
determined based on the five-day average closing price of the Company's common
stock from April 17 through April 24, 2000. The private placement was completed
entirely with accredited investors as defined in Regulation D promulgated under
the Securities Act of 1933. The warrants have an exercise price of approximately
$4.65 per share and a term of five years.
5. Comprehensive Income (Loss)
Comprehensive income (loss) includes unrealized gains and losses on
"available-for-sale" short-term investments that have been excluded from net
income and reflected in equity. A summary of comprehensive loss follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss .............................. $(1,622,100) $ (467,900) $(3,876,700) $(1,398,700)
Unrealized gain (loss) on securities .. 1,800 (7,600) 900 (17,900)
----------- ----------- ----------- -----------
Comprehensive loss .................... $(1,620,300) $ (475,500) $(3,875,800) $(1,416,600)
=========== =========== =========== ===========
</TABLE>
-7-
<PAGE> 8
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Net Loss Per Share
Basic net loss per share is based on the weighted average number of all common
shares issued and outstanding, and is calculated by dividing net loss per share
by the weighted average shares of common stock outstanding during the period.
Diluted net loss per share is calculated by dividing net 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
common 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.
The following is a reconciliation of the weighted average common shares used to
calculate basic net loss per share to the weighted average common and
potentially dilutive common shares used to calculate diluted net loss per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares used to
calculate basic net loss per share ....... 4,966,279 4,046,848 4,636,784 3,981,315
Stock options .......................... -- -- -- --
Warrants ............................... -- -- -- --
--------- --------- --------- ---------
Weighted average common and potentially
dilutive common shares used to calculate
diluted earnings (loss) per share ........ 4,966,279 4,046,848 4,636,784 3,981,315
========= ========= ========= =========
</TABLE>
Weighted average stock options and warrants to purchase 103,954 and 204,250
shares of common stock for the three months ended September 30, 2000 and 1999,
respectively, and 690,782 and 387,415 shares of common stock for the nine months
ended September 30, 2000 and 1999, respectively, were outstanding but not
included in the computation of diluted earnings per common share because they
are antidilutive as a result of Enlighten's net loss.
7. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In March 2000, the SEC issued SAB No. 101A that delayed the
implementation date of SAB No. 101. In June 2000, the SEC issued SAB No. 101B
that further delayed the implementation date of SAB No. 101. Enlighten must
adopt SAB No.
-8-
<PAGE> 9
ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
101 no later than in the fourth quarter of 2000. Enlighten does not expect
SAB No. 101 to have a significant impact on its financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion No.
25." This Interpretation clarifies the application of Opinion 25 for certain
issues including: (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. In
general, this Interpretation is effective July 1, 2000. The adoption of
Interpretation No. 44 did not have a material effect on Enlighten's consolidated
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued 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. If 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, 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.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following discussion and analysis in conjunction
with our financial statements and the notes thereto included elsewhere herein.
Except for historical information contained herein, the following discussion
contains forward-looking statements based on current expectations that involve
certain risks and uncertainties. Such forward-looking statements include, among
others, those statements including the words "expects," "anticipates,"
"intends," "believes" and similar language. Our actual results could differ
materially from those 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 below in "Factors That May Affect Future
Results," "Disclosures about Market Risk," and "Liquidity and Capital
Resources."
OVERVIEW
We provide software products that allow the user to automate
administration and management tasks and to monitor critical performance and
operational characteristics of computer servers and workstations in the
commercial environment. Our products allow the user to manage many computers
through a single console view of their computer infrastructure. Our product is
available for multiple operating systems with three distinct categories of
computer and software architecture, including Linux, Unix and Windows. Linux is
a free, open source alternative to proprietary Unix operating systems. "Open
source" means that this software has had its internal source code made open to
the public for viewing, copying, examining, modifying and commercial purposes.
Our products enable users of computer servers and workstations that are
networked together or Internet based to manage their operations across various
sites. Our core product, the Enlighten(R) Distributed Systems Manager or
EnlightenDSM(TM), allows companies to manage their mission critical computer
servers and workstations by enabling system managers and administrators to
standardize the management of diverse computer operating systems, such as Linux,
Unix and Windows and to monitor the on-going performance and availability of
many different systems running together.
Our software manages products from vendors such as Compaq Computer
Corporation, Hewlett-Packard Company, International Business Machines
Corporation, Intel Corporation, Microsoft Corporation, The Santa Cruz Operation,
Silicon Graphics, Sun Microsystems, Red Hat, TurboLinux, Caldera Systems, and
SuSE. Our award winning EnlightenDSM product suite is a fully integrated,
cross-platform software solution.
The key elements of our strategy include enabling the integration of
Linux into the corporate environment, focusing on the mid-sized organization and
departments of larger companies, adding timely effective manageability to web
based application environments and distributing our products through third-party
relationships such as software vendors, hardware vendors, Linux distributors,
systems management service providers and Linux appliance manufacturers.
-10-
<PAGE> 11
Our products are suited for quick, effective implementation to provide
management infrastructure that matches today's needs for immediate, flexible
solutions in the Internet business environment. Our mission is to provide the
industry's most pervasive software solutions to help corporate enterprises
simply and inexpensively monitor, manage and administer computers that are
spread among many locations and consist of many different operating systems. We
intend to be a market leader for easy to use, out-of-the-box, broad-based
functionality for event monitoring and systems administration across major
operating systems platforms. While numerous standards are being introduced and
companies are vying to position themselves in the open systems management
market, we are positioning our EnlightenDSM product suite as the one product
that is vital and affordable to open systems managers in mixed Linux, Unix and
Windows environments.
HISTORICAL RESULTS OF OPERATIONS
Net Revenue
Net revenue decreased $286,600, or 40%, to $433,700 in the third quarter
of 2000, as compared to the same period in 1999. This decrease is due primarily
to a decrease in revenues from SGI. Total revenue for the nine months ended
September 30, 2000, decreased $960,400, or 38% from the same period in 1999. The
decrease is due in part to Enlighten's change in reporting revenues from our OEM
relationship with SGI. For the first quarter of 2000, revenues from our
relationship with SGI were not included in operating results. In prior quarters,
SGI provided Enlighten with revenue information prior to the issuance of
Enlighten's interim financial information and thus, revenue had been recorded in
the period in which SGI shipped its servers and workstations. During the first
quarter of 2000, SGI did not report revenue prior to the issuance of Enlighten's
interim financial information and beginning in the second quarter of 2000
revenues from SGI are recorded in the quarter in which the report is received
from SGI.
Revenue from product license fees decreased $218,600, or 44%, to
$281,500 in the third quarter of 2000, as compared to 1999. The decrease was
primarily attributable to a decrease in revenues from our relationship with SGI.
Total revenue from product license fees for the nine months ended September 30,
2000 decreased $644,700, or 42%, from the same period in 1999. The change in
reporting SGI revenues as discussed above, is partially attributable for this
decrease. License fees from SGI are derived from SGI's Unix server and
workstation sales on a per unit shipped basis. Additionally, SGI has reported
lower revenues from its Unix server and workstation shipments, thereby lowering
the license fees we receive from SGI.
Product maintenance fees decreased by $56,100, or 35%, to $103,100 in
the third quarter of 2000, and decreased $19,500, or 4%, to $464,800 in the nine
months ended September 30, 2000, as compared to the same periods in 1999. The
decrease was due to a decrease in maintenance fees received from SGI pursuant to
our amended agreement with SGI, partially offset by an increase in end-user
maintenance fees due to a larger customer base. Product maintenance fees from
SGI during the fourth quarter of 2000 will be the same as during the third
quarter of 2000.
-11-
<PAGE> 12
Consulting services revenue increased by $11,900, or 132%, to $20,900,
in the third quarter of 2000, as compared to 1999. This increase was primarily
due to the increase in professional services sold to our customers. For the nine
months ended September 30, 2000 consulting services revenue decreased by
$210,900, or 64%, to $117,700 due to a decrease in non-recurring engineering
revenues related to Enlighten's 1999 strategic relationship with IBM compared to
the Enlighten's 2000 OEM relationship with Intel.
Royalties consist primarily of royalties from BMC Corporation ("BMC"),
formerly New Dimensions Software, Inc., from product license fees and product
maintenance fees generated by the Tandem product line sold to BMC in October
1997. Total royalties decreased by $18,800, or 40%, to $28,200 in the third
quarter of 2000 and decreased $67,300, or 50%, to $66,700 in the nine months
ended September 30, 2000, as compared to the same periods in 1999. This decrease
was primarily due to a lower royalty rate used during 2000 than 1999. Enlighten
was entitled to receive royalties from BMC through September 2000, there will be
no royalties from BMC in future periods.
Cost of Revenue
Cost of license revenue consists of royalties paid to third parties,
amortization of software development costs, product packaging and documentation,
and software media. Cost of license revenue decreased by $46,300, or 56%, in the
third quarter of 2000, and $174,000, or 64%, in the nine months ended September
30, 2000, as compared to the same periods in 1999. This decrease was primarily
due to a decrease in royalties paid to third parties and a decrease in the
quantity of hardcopy product documentation shipped during 2000.
Cost of maintenance revenue includes customer support costs, such as
hot-line and on-site support. Cost of maintenance revenue decreased by $61,500,
or 75%, in the third quarter of 2000, and $132,000, or 53%, in the nine months
ended September 30, 2000, as compared to same periods in 1999. This decrease was
due primarily to a decrease in customer support headcount and personnel related
costs.
Cost of consulting services revenue consists of the direct costs
required to provide the consulting services. Cost of consulting services
revenues increased by $1,800 in the third quarter of 2000 and $2,500 in the nine
months ended September 30, 2000, as compared to the same periods in 1999. This
increase is due primarily to an increase in customers that require consulting
services.
Research and Development
Research and development expenses consist of personnel expenses and
associated overhead, and the costs of short-term independent contractors
required in connection with product development efforts. Enlighten's investment
in research and development, prior to capitalization of software development
costs, was $799,600 and $519,700 respectively, representing 184% and 72% of
total revenue for the third quarter of 2000 and 1999, respectively. For the nine
months ended September 30, 2000 and 1999,
-12-
<PAGE> 13
Enlighten's investment in research and development, prior to capitalization of
software development costs, was $2,153,300 and $1,517,400, respectively,
representing 140% and 61% of total revenue. The increase of $280,000, or 54%, in
the third quarter of 2000, and the increase of $635,900, or 42%, in the nine
months ending September 30, 2000, when compared to the same periods in 1999, was
primarily attributable to higher personnel related expenses due to higher
headcount and increases in contract labor costs and employee recruiting.
Enlighten capitalized approximately $48,600 of software development costs for
the nine months ended September 30, 2000, which represented approximately 2% of
total research and development expenditures incurred. There were no software
development costs capitalized in the third quarter of 2000 or 1999. The amount
of capitalized software development costs in any given period may vary depending
on the nature of the development performed.
Costs incurred in the research and development of new software products
are expensed as incurred until technological feasibility is established in the
form of a working model. Enlighten expects research and development expenses to
continue to increase in absolute dollars as Enlighten continues to invest in the
enhancement of existing products and the development of new products.
Sales and Marketing
Sales and marketing expenses include costs of sales and marketing
personnel, advertising and promotion expenses, travel and entertainment, and
other selling and marketing costs. Sales and marketing expenses increased by
$246,500 or 64%, to $632,000 in the third quarter of 2000, and by $651,700 or
50%, to $1,968,600 in the nine months ended September 30, 2000, when compared to
the same periods in 1999. The increases were primarily due to higher personnel
related expenses due to higher headcount, and increases in trade show expenses,
employee recruiting, and travel costs.
General and Administrative
General and administrative expenses, which include personnel costs for
finance, administration, information systems, and general management, as well as
professional fees, legal expenses, and other administrative costs, increased by
$427,000, or 276%, to $581,500 in the third quarter of 2000, and by $551,900, or
93%, to $1,145,300 in the nine months ended September 30, 2000, when compared to
the same periods in 1999. The increases were primarily due to a final royalty
payment made on a portion of the EnlightenDSM product, additional legal fees
related to the amended SGI agreement and exploring strategic alternatives,
higher compensation expense on stock options granted to consultants and higher
investor relations expenses.
Other Income, Net
Other income and expense includes interest income net of interest
expense. Interest income is primarily derived from short-term interest-bearing
securities and money market accounts. Other income, net decreased by $8,500, or
33%, to $17,100 in the third quarter of
-13-
<PAGE> 14
2000, and $34,700, or 37%, to $58,900 in the nine months ended September 30,
2000, when compared to the same periods in 1999, primarily due to a decrease in
interest income due to a lower average balance of invested cash and short-term
investments.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists of the minimum state income taxes
due in California and New Jersey offset by refunds received in 2000 from net
operating loss carrybacks realized for Enlighten's subsidiary in the United
Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, our cash and cash equivalents and short-term
investments were $1,783,200, representing 62% of total assets. Cash equivalents
are highly liquid investments with original maturities of ninety days or less.
Our short-term investments are primarily highly liquid investment grade
preferred stock. Our working capital was $1,210,300 as of September 30, 2000. We
had no debt as of September 30, 2000, other than normal trade payables and
accrued liabilities. Shareholders' equity as of September 30, 2000 was
$2,013,400.
During the nine months ended September 30, 2000, cash used in operating
activities increased $379,800 to $2,286,200, 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 consisted primarily of sales of
short-term investments, additions to capital equipment and the capitalization of
software development costs, which combined represented $93,500 of cash used in
investing activities during the nine months ended September 30, 2000 and
$935,900 of cash provided by investing activities during the nine months ended
September 30, 1999. The decrease is primarily due to the sale of short-term
investments in the third quarter of 1999.
Financing activities provided cash of $2,868,900 in the first nine
months of 2000, compared with cash provided of $350,900 in the same period of
1999. The increase in cash provided from financing activities resulted from
Enlighten's April 2000 private placement offering of 715,885 units, each
consisting of one share of common stock and one redeemable purchase warrant to
purchase one share of common stock.
We believe that our existing capital resources, including the private
placement, are adequate to maintain our current operations through December
2000. However, in order to continue to fund and expand our operations and meet
our other obligations through 2001, we will be required to obtain additional
financing. There can be no assurance that we would be able to obtain such
financing, or that any financing would result in a level of net proceeds
required.
-14-
<PAGE> 15
ENLIGHTEN RETAINS HOULIHAN LOKEY HOWARD & ZUKIN TO EXAMINE STRATEGIC OPTIONS
Enlighten has retained the investment banking firm of Houlihan Lokey
Howard & Zukin, San Francisco, California to advise the Board of Directors
regarding its strategic alternatives for maximizing shareholder value which
could include strategic investment, merger or acquisition.
There is no assurance that a transaction will be consummated. If a
transaction is consummated, there can be no assurance as to the price or other
terms at which such a transaction might be concluded.
-15-
<PAGE> 16
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "intends," "expects" and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995. Actual results could vary materially from those expressed in those
statements. Readers are referred to "Products," "Sales and Distribution,"
"Product Development," "Competition," "Product Protection" and "Management's
Discussion and Analysis or Plan of Operation" sections contained herein as well
as the factors described below, which identify some of the important factors or
events that could cause actual results or performance to differ materially from
those contained in the forward looking statements.
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
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 our 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
-16-
<PAGE> 17
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 NOW DERIVE ALL OF OUR REVENUES FROM THE OPEN SYSTEMS MARKET AND WE MAY NOT BE
SUCCESSFUL IN THAT MARKET
The future success of our business is substantially dependent on our
ability to generate significant revenue from our Linux, Unix and Windows product
offering. Although we have entered into a number of agreements with others to
bundle or integrate our products into theirs, we may not be successful in our
efforts to generate significant revenue from these agreements.
WE CONTINUE TO NEED ADDITIONAL CAPITAL, AND THERE IS NO CERTAINTY OF ADDITIONAL
FINANCING
During the last five years we have financed our operations primarily
through sales of equity securities and the sale of a prior product line. We
believe that our existing capital resources, including our recent financing
where we raised $3,114,100, are adequate to maintain our current operations
through December 2000. In order to maintain our current operations beyond
December 2000 and to continue to fund and expand our operations and meet our
other obligations through 2001, we will be required to obtain additional
financing. The extent of our need for additional financing depends on our future
performance, which, in part, is subject to general economic conditions and other
factors beyond our control. We may not be able to obtain such financing, or
financing in the level of net proceeds required for us to remain in business.
A SIGNIFICANT PERCENTAGE OF OUR REVENUES IS ATTRIBUTED TO SALES TO ONE OF OUR
CUSTOMERS
Our largest customer accounts for a substantial percentage of our
revenues. During the nine months ended September 30, 2000 and the year ended
December 31, 1999, approximately 39% and 60%, respectively, of our revenues
consisted of license and maintenance fees received under our OEM relationship
with SGI to bundle a subset of features of the EnlightenDSM product with each
Unix server and workstation that SGI ships. License fees from SGI decreased
during the nine months ended September 30, 2000 when compared to 1999 and during
1999 when compared to 1998. If these license fees continue to decline, our
revenues and financial results may be harmed.
WE ARE DEPENDENT ON RESELLERS AND IF THEY ARE NOT SUCCESSFUL MARKETING OUR
TECHNOLOGY, OUR ABILITY TO MAINTAIN OR INCREASE OUR REVENUES WILL BE HARMED
We sell primarily through resellers in the United States and abroad. We
have no control over our third-party distributors, their shipping dates, or the
volumes of systems shipped by them. These companies may not license our products
in volumes anticipated by us. If they fail to do so, our revenues will be
harmed.
-17-
<PAGE> 18
IF OUR RESELLERS ARE NOT SUCCESSFUL IN EXPANDING DISTRIBUTION CHANNELS, OUR
ABILITY TO MAINTAIN OR INCREASE OUR REVENUES MAY BE HARMED
Our growth depends 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. We may not be successful in recruiting new organizations
to represent us and our products.
WE RELY ON THIRD PARTIES FOR TECHNICAL SUPPORT, AND IF THEY DON'T PROVIDE
ADEQUATE SERVICE, OUR BUSINESS MAY BE HARMED
We are dependent on our third-party distributors for technical support
and consultation to end-users. We must educate our third-party distributors so
that they obtain technical proficiency and knowledge with respect to our
products. This may result in, among other things, an increased workload for our
internal support and engineering staff, or poor customer acceptance of our
products, or both, either of which would significantly harm our business.
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. Our ability to compete successfully depends on a number of factors,
including the performance, price and functionality of our products relative to
those of our 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, our industry is
characterized by low barriers to entry. Other competitors can easily enter the
market. Our current competitors or any new market entrants may develop systems
management products that offer significant performance, price, or other
advantages over our technology. In addition, we sell our products through
operating system vendors. These same operating system vendors could introduce
new or upgrade existing operating systems or environments that include systems
which perform the same functions as the products offered by us. This could
render our products obsolete and unmarketable. If we are not able to
successfully compete against current or future competitors, our revenues or
profits could be harmed.
ALL OF OUR LICENSE REVENUE IS DERIVED FROM A SINGLE PRODUCT FAMILY AND IF THOSE
PRODUCTS FAIL TO ACHIEVE AND MAINTAIN MARKET ACCEPTANCE, OUR BUSINESS WOULD BE
SIGNIFICANTLY HARMED
Our EnlightenDSM products have accounted for all of our license revenue
since October 1, 1997. We expect that the EnlightenDSM product family 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,
-18-
<PAGE> 19
introduction and market acceptance of EnlightenDSM and its product enhancements.
If we are not successful in marketing EnlightenDSM or any new products,
applications or product enhancements, our revenues would be significantly
reduced.
THE MARKET FOR OUR PRODUCTS IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, AND
IF WE ARE NOT ABLE TO DEVELOP OR MARKET NEW PRODUCTS TO RESPOND TO SUCH CHANGE,
OUR REVENUE WOULD BE SIGNIFICANTLY AFFECTED.
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. We may not be
successful in developing and marketing, on a timely basis, product enhancements
or new products that respond to technological change, evolving industry
standards or changing customer demands.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS COULD SERIOUSLY HARM
OUR BUSINESS
We generally rely on copyrights, trademarks, trade secret laws and
software security measures, along with employee and third-party nondisclosure
agreements, to establish and protect our proprietary intellectual property
rights, products and technology. Our products are typically licensed on a "right
to use" basis pursuant to licenses that restrict the use of the products to the
customer's internal purposes. We distribute our software under license
agreements that are signed by our end-users. We also distribute our software to
our OEM partners under similar software license and distribution agreements.
Despite our precautions taken to protect our software, unauthorized parties may
attempt to reverse engineer, copy, or obtain and use information we regard as
proprietary. Policing unauthorized use of our products is difficult and software
piracy is a persistent problem. Additionally, the laws of some foreign countries
do not protect our proprietary rights to the same extent as do the laws of the
United States. We cannot assure you that our reliance on licenses to third
parties, or copyright, trademark, trade secret protection or our software
security measures, will be enough to be successful and profitable in the
industry in which we compete.
WE MAY BE REQUIRED TO RELEASE OUR SOURCE CODE TO CERTAIN CUSTOMERS IF WE FAIL TO
FULFILL OUR CONTRACTUAL OBLIGATIONS, WHICH COULD RESULT IN THE MISUSE OF OUR
INTELLECTUAL PROPERTY
We have entered into source code escrow agreements with some of our
customers that require the release of source code to the customer in the event
there is a bankruptcy proceeding by or against us, we cease to do business, or
we are unable to fulfill our contractual support obligations. In the event of a
release of the source code, the customer is required to maintain confidentiality
of the code and, in general, to use the source code solely for the purpose of
-19-
<PAGE> 20
maintaining the software's usability. Releasing source code to customers may
increase the likelihood of misappropriation or other misuse of our intellectual
property. If our source code was misused or misappropriated, it could
significantly harm our business.
INTELLECTUAL PROPERTY INFRINGEMENT BY OR AGAINST US COULD SIGNIFICANTLY HARM OUR
BUSINESS
From time to time, we receive notices from third parties asserting that
we have infringed their patents or other intellectual property rights. In
addition, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the validity of our
proprietary rights. Any such claims could be time-consuming, result in costly
litigation, cause product shipment delays or lead us to enter into royalty or
licensing agreements rather than dispute the merits of such claims. As the
number of software products in the industry increases and the functionality of
such products further overlap, we believe that software developers may become
increasingly subject to infringement claims. Any such claims, with or without
merit, can be time consuming and expensive to defend. In addition, an adverse
outcome in litigation could subject us to significant liabilities to third
parties, require expenditure of significant resources to develop non-infringing
technology, require disputed rights to be licensed from others, or require us to
cease the marketing or use of certain products. Such a result could have a
material adverse effect on our business, operating results and financial
condition.
A DECLINE IN SALES OF UNIX OR LINUX SYSTEMS WILL RESULT IN A DECREASE IN
REVENUES
A significant portion of our revenue will be derived from Unix and Linux
based computer systems for the foreseeable future. While we have also released
versions of our products for the Windows NT platform, the product's graphical
user interface is available only on Unix and Linux based systems, and,
therefore, users must manage their environments from these types of systems. A
significant decline in sales of Unix and Linux based systems would decrease the
demand for our products and would significantly harm our business.
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 (Linux, Unix 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, our business
would be significantly harmed.
OUR SUCCESS IS TIED TO THE SUCCESS OF OTHER SEGMENTS OF THE COMPUTER INDUSTRY
Our products are marketed to users of computer products. 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.
-20-
<PAGE> 21
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.
WE HAVE A HISTORY OF LOSSES, AND WE MAY NOT ACHIEVE PROFITABILITY
We have a history of losses and anticipate further significant losses.
We may not achieve profitability. We have incurred significant operating losses
each of the last five fiscal years and we may not realize sufficient revenue to
achieve profitability. We expect to continue to incur significant losses for the
foreseeable future and these losses may be higher than our current losses. We
may not achieve profitability. Failure to become and remain profitable may
adversely affect the market price or our common stock and our ability to raise
capital and continue operations.
OUR FAILURE TO ATTRACT, TRAIN, MOTIVATE, AND RETAIN KEY EMPLOYEES MAY HARM OUR
BUSINESS
The competition for highly skilled employees is intense. Our business
depends on the efforts and abilities of our senior management, our research and
development staff and other key sales, support, technical, and services
personnel. Our failure to attract, train, motivate, and retain such employees
would impair our development of new products, our ability to provide technical
services and the management of our business. This would seriously harm our
business, operating results, and financial position.
-21-
<PAGE> 22
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 August 30, 2000 and September
21, 2000, the shareholders of Enlighten approved the following matters:
1. A proposal to elect five (5) directors of Enlighten to serve for the
ensuing year and until their successors are elected or until such
director's earlier resignation or removal.
<TABLE>
<CAPTION>
Nominee In Favor Withheld
------- --------- --------
<S> <C> <C>
Michael Seashols........................ 4,232,569 78,670
David D. Parker......................... 4,059,199 252,040
Peter J. McDonald....................... 4,231,369 79,870
Michael A. Morgan....................... 4,229,911 81,328
Peter J. Sprague........................ 4,059,199 252,040
</TABLE>
2. A proposal for approval and the ratification of an amendment to
Enlighten's Restated Articles of Incorporation increasing the number
of authorized shares of Common Stock from 10,000,000 shares to
20,000,000 shares of Common Stock was approved by a vote of
4,157,409 for, 137,730 opposed, and 659,495 withheld.
3. A proposal for approval and the ratification of the adoption of an
increase in aggregate the maximum number of shares of Enlightens
Common Stock issuable under its 1992 Stock Option Plan by 1,000,000
shares, from 2,000,000 shares to 3,000,000 of Common Stock was
approved by a vote of 1,438,435 for, 263,750 opposed, and 3,252,449
withheld.
-22-
<PAGE> 23
4. A proposal for approval and the ratification of the adoption of an
increase in aggregate the maximum number of shares of Enlighten's
Common Stock issuable under its 1994 Employee Stock Purchase Plan by
100,000 shares, from 200,000 to 300,000 shares of Common Stock was
approved by a vote of 1,656,848 for, 75,097 opposed, and 3,222,689
withheld.
5. A proposal for approval and the ratification of the selection of
KPMG LLP as independent public accountants for the year ending
December 31, 2000 was approved by a vote of 4,288,289 for, 7,050
opposed, and 659,295 withheld.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.01 Financial Data Schedule
(b) Reports on Form 8-K:
None
-23-
<PAGE> 24
ENLIGHTEN SOFTWARE SOLUTIONS, INC.
FORM 10-QSB, SEPTEMBER 30, 2000
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 13, 2000 SIGNATURE: /s/ Bill Bradley
----------------- --------------------------------
Bill Bradley
President and
Chief Executive Officer
DATE: November 13, 2000 SIGNATURE: /s/ Stephen E. Giusti
----------------- --------------------------------
Stephen E. Giusti
Vice President, Finance and
Administration and
Chief Financial Officer
-24-
