-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J2ypy69nGlzY0Xfo6FlcwXyq05yEP+ej54Gc/sncdkmSgoXGyDIVmV6lOXUNwBXm 4w7SoZL3/ESHye6EoJMSeA== 0000950149-00-001166.txt : 20000516 0000950149-00-001166.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950149-00-001166 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENLIGHTEN SOFTWARE SOLUTIONS INC CENTRAL INDEX KEY: 0000919175 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943008888 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23446 FILM NUMBER: 633185 BUSINESS ADDRESS: STREET 1: 999 BAKER WAY STE 390 CITY: SAN MATCO STATE: CA ZIP: 94404-1578 BUSINESS PHONE: 4155780700 FORMER COMPANY: FORMER CONFORMED NAME: SOFTWARE PROFESSIONALS INC DATE OF NAME CHANGE: 19940217 10QSB 1 ENLIGHTEN SOFTWARE SOLUTIONS, INC. FORM 10-QSB 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 MARCH 31, 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 March 31, 2000:
Outstanding Class May 12, 2000 ----- ------------ COMMON STOCK, NO PAR VALUE 4,953,789
2 ENLIGHTEN SOFTWARE SOLUTIONS, INC. QUARTERLY REPORT ON FORM 10-QSB THREE MONTHS ENDED MARCH 31, 2000 TABLE OF CONTENTS
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets: March 31, 2000 and December 31, 1999........................................... 3 Condensed Consolidated Statements of Operations: Three months Ended March 31, 2000 and 1999............................... 4 Condensed Consolidated Statements of Cash Flows: Three Months Ended March 31, 2000 and 1999............................... 5 Notes to Condensed Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis or Plan of Operations..... 9 PART II OTHER INFORMATION Item 1. Legal Proceedings.............................................. 19 Item 2. Changes in Securities and Use of Proceeds...................... 19 Item 3. Defaults Upon Senior Securities................................ 19 Item 4. Submission of Matters to a Vote of Security Holders............ 19 Item 5. Other Information.............................................. 19 Item 6. Exhibits and Reports on Form 8-K............................... 19 SIGNATURES..................................................... 20
-2- 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, ASSETS 2000 1999 ----------- ------------ Current assets: Cash and cash equivalents ..................................... $ 748,500 $ 1,045,600 Short-term investments ........................................ 255,500 247,500 Accounts receivable, less allowance for doubtful accounts of $50,000 .......................................... 355,900 1,285,500 Prepaid expenses and other assets ............................. 207,700 60,900 ----------- ----------- Total current assets ........................................ 1,567,600 2,639,500 Property and equipment, net ..................................... 361,900 402,700 Software development costs, net ................................. 193,800 208,400 Other assets .................................................... 324,200 312,100 ----------- ----------- $ 2,447,500 $ 3,562,700 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable ........................................ $ 166,400 $ 177,000 Accrued and other current liabilities ......................... 361,800 335,600 Deferred revenue .............................................. 117,900 81,800 ----------- ----------- Total current liabilities ................................... 646,100 594,400 Commitments and contingencies Shareholders' equity: Preferred stock, 1,000,000 shares authorized, none issued and outstanding .................................. -- -- Common stock, no par value, 10,000,000 shares authorized, 4,235,888 and 4,217,978 issued and outstanding at March 31, 2000 and December 31, 1999, respectively ................. 8,511,500 8,410,400 Deferred stock-based compensation ............................. (101,500) (85,000) Accumulated other comprehensive income (loss) ................. (24,200) (32,200) Accumulated deficit ........................................... (6,584,400) (5,324,900) ----------- ----------- Total shareholders' equity .................................. 1,801,400 2,968,300 ----------- ----------- $ 2,447,500 $ 3,562,700 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. -3- 4 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, ------------------------------- Revenue: 2000 1999 ----------- ----------- Product license fees ............................................ $ 179,900 $ 739,200 Product maintenance fees ........................................ 172,100 164,200 Consulting services ............................................. 68,400 319,600 Royalties ....................................................... 15,800 42,600 ----------- ----------- Total revenue ................................................. 436,200 1,265,600 Cost of revenue: Product licenses ................................................ 24,800 124,100 Product maintenance ............................................. 56,800 102,200 Consulting services ............................................. 39,200 45,600 ----------- ----------- Total cost of revenue ......................................... 120,800 271,900 ----------- ----------- Gross margin ................................................ 315,400 993,700 Operating expenses: Research and development ........................................ 611,100 511,100 Sales and marketing ............................................. 686,500 531,800 General and administrative ...................................... 294,000 230,100 ----------- ----------- Total operating expenses ...................................... 1,591,600 1,273,000 ----------- ----------- Operating loss ............................................ $(1,276,200) $ (279,300) Other income, net ................................................. 18,000 30,800 ----------- ----------- Loss before income taxes .................................. $(1,258,200) $ (248,500) ----------- ----------- Provision for income taxes ........................................ 1,300 800 ----------- ----------- Net loss .................................................. $(1,259,500) $ (249,300) =========== =========== Basic and diluted net loss per share .............................. $ (0.30) $ (0.06) =========== =========== Shares used in computing basic and diluted net loss per share ..... 4,229,589 3,932,421 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. -4- 5 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, ------------------------------- 2000 1999 ----------- ----------- Cash Flows from Operating Activities: Net loss ............................................................ $(1,259,500) $ (249,300) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ..................................... 84,900 106,500 Compensation expense for stock options issued ..................... 33,500 -- Changes in operating assets and liabilities: Accounts receivable ............................................. 929,600 (599,100) Prepaid expenses and other assets ............................... (158,900) (52,600) Trade accounts payable .......................................... (10,600) (64,100) Accrued and other liabilities ................................... 26,200 (6,500) Deferred revenue ................................................ 36,100 27,200 ----------- ----------- Net cash used in operating activities ......................... (318,700) (837,900) ----------- ----------- Cash Flows from Investing Activities: Capitalization of software development costs ........................ (10,200) -- Purchases of property and equipment ................................. (19,200) (41,600) ----------- ----------- Net cash used in investing activities ......................... (29,400) (41,600) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of stock ..................................... 51,000 113,600 ----------- ----------- Net cash provided by financing activities ..................... 51,000 113,600 ----------- ----------- Net decrease in cash and cash equivalents ............................. (297,100) (765,900) Cash and cash equivalents at beginning of periods ..................... 1,045,600 1,900,000 ----------- ----------- Cash and cash equivalents at end of periods ........................... $ 748,500 $ 1,134,100 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. -5- 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 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 months ended March 31, 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 resulting from renewed maintenance contracts are deferred and recognized ratably over the contract period, generally one year. Consulting service revenue is recognized -6- 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 Enlighten considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Enlighten has classified its investments in commercial paper and U.S. Treasury notes as "held-to-maturity." All such investments mature in less than one year and are stated at amortized cost, which approximates fair value. Interest income is recorded using an effective interest rate, with the associated discount or premium amortized to interest income. Additionally, Enlighten has classified its investments in preferred stock of $255,500 as "available-for-sale." Such investments are recorded at fair value based on quoted market prices, with unrealized gains and losses reported as a separate component of stockholders' equity. 4. Comprehensive Income (Loss) "Comprehensive income (loss)" includes unrealized gains and losses that have been previously excluded from net income and reflected instead in equity. A summary of comprehensive income (loss) follows:
Three Months Ended March 31, ------------------------ 2000 1999 ----------- --------- Net loss....................................................... $(1,259,500) $(249,300) Unrealized gain (loss) on securities........................... 8,000 (5,500) ----------- --------- Comprehensive loss............................................. $(1,251,500) $(254,800) =========== =========
5. 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 commons stock options computed using the treasury stock method. For the periods in which Enlighten had losses, potential common shares from common stock options are excluded from the computation of diluted net loss per share, as their effects are antidilutive. -7- 8 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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:
Three Months Ended March 31, -------------------------- 2000 1999 --------- --------- Weighted average common shares used to calculate basic net loss per share ......................................... 4,229,589 3,932,421 Stock options .................................................. -- -- Warrants ....................................................... -- -- --------- --------- Weighted average common and potentially dilutive common shares used to calculate diluted earnings (loss) per share ....... 4,229,589 3,932,421 ========= =========
Dilutive weighted average stock options and warrants to purchase 898,142 and 286,046 shares of common stock for the three months ended March 31, 2000 and 1999, respectively, were outstanding but not included in the computation of diluted earnings per common share because they are anti-dilutive as a result of Enlighten's net loss. 6. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The objective of this SAB is to provide further guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. Enlighten is required to follow the guidance in the SAB no later than the second quarter of 2000. The SEC has recently indicated it intends to issue further guidance with respect to adoption of specific issues addressed by SAB No. 101. Until such time as this additional guidance is issued, Enlighten is unable to assess the impact, if any, it may have, however based on current guidance Enlighten believes adoption of the SAB will not have a material impact on Enlighten's financial position or results of operations. 7. Subsequent Event On April 28, 2000, Enlighten completed a private placement of 715,885 units each consisting of one share of common stock and on 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. -8- 9 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 automate administrative tasks and monitor critical performance and operational characteristics for commercial servers and workstations. Our products provide a single console management view of customers mixed technology environments consisting of Linux, Unix and Windows. Our products enable integrated, coordinated operations and management of networked and web based servers and workstations. Our products are designed for distributed computing environments in the range of ten to 1,000 servers and workstations. Our core product, the Enlighten(R) Distributed Systems Manager or EnlightenDSM(TM), allows companies to manage their mission critical servers and workstations by enabling information technology ("IT") staffs to standardize the management of diverse Linux, Unix and Windows systems 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 ("IBM"), Intel Corporation ("Intel"), Microsoft Corporation, The Santa Cruz Operation, Inc., Silicon Graphics, Inc. ("SGI"), Sun Microsystems, Inc. ("Sun"), Red Hat, Inc. ("Red Hat"), TurboLinux, Inc. ("TurboLinux"), Caldera Systems, Inc. and SuSE, Inc. 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. VARIABILITY OF QUARTERLY RESULTS We have experienced significant quarterly fluctuations in our operating results and expect that these fluctuations will continue in future periods. These fluctuations have been -9- 10 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 OEMs 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 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. HISTORICAL RESULTS OF OPERATIONS Net Revenue Net revenue decreased $829,400, or 66%, to $436,200 in the first quarter of 2000, as compared to 1999. 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. SGI is not required to report revenue prior to the issuance of Enlighten's interim financial information and, due to SGI's ongoing restructuring process, SGI does not expect to report earlier than required. Beginning in the second quarter of 2000, and as a result of later reporting by SGI, revenues from SGI will be recorded in the quarter in which the revenue is reported. Revenue from product license fees decreased $559,300, or 76%, to $179,900 in the first quarter of 2000, as compared to 1999. The decrease was primarily attributable to revenues from the SGI OEM relationship not included for the quarter. License fees from SGI are derived from SGI's Unix server and workstation sales on a per unit shipped basis. Product maintenance fees increased slightly by $7,900, or 5%, to $172,100 in the first quarter of 2000, as compared to 1999, due mainly to an increased end user customer base. Consulting services revenue decreased by $251,200, or 79%, to $68,400 in the first quarter of 2000, as compared to 1999. This decrease was primarily due to the 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. -10- 11 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 $26,800, or 63%, to $15,800 in the first quarter of 2000, as compared to 1999. This decrease was primarily due to a lower royalty rate used during 2000 than 1999. Enlighten is entitled to receive royalties from BMC through September 2000. Cost of Revenue Cost of license revenue consists of royalties paid to third parties, amortization of software acquisition costs, product packaging and documentation, and software media. Cost of license revenue decreased by $99,300, or 80%, in the first quarter of 2000, as compared to 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 the first quarter of 2000. Cost of maintenance revenue includes customer support costs, such as hot-line and on-site support. Cost of maintenance revenue decreased by $45,400, or 44%, in the first quarter of 2000, as compared to 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 decreased by $6,400, or 14%, in the first quarter of 2000, as compared to 1999. This decrease is due primarily to a decrease in royalties paid to third party software vendors and a decrease in packaging and documentation costs due to the distribution of documentation in electronic format and the distribution of software over the Internet. Research and Development Research and development expenses consist of personnel expenses and associated overhead, the costs of short-term independent contractors required in connection with product development efforts and amortization of software development costs less amounts capitalized. Enlighten's investment in research and development, prior to the reduction for capitalization of software development costs, was $621,300 and $511,100, respectively, representing 142% and 40% of total revenue for 2000 and 1999, respectively. The increase of $110,200, or 22%, in the first quarter of 2000, as compared to 1999, was primarily attributable to increases in employee recruiting and contract labor costs. Enlighten capitalized approximately $10,200 of software development costs in 2000 which represented approximately 2% of total research and development expenditures incurred during the quarter. There were no software development costs capitalized in the first quarter of 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. Enlighten expects research and -11- 12 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, customer service and technical support, travel and entertainment, and other selling and marketing costs. Sales and marketing expenses increased by $154,700, or 29%, to $686,500 in the first quarter of 2000, as compared to 1999. This increase was primarily due to increases in recruiting and trade show expenses, offset by a decrease in personnel related expenses. 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 $63,900, or 28%, to $294,000 in the first quarter of 2000, as compared to 1999. The increase was primarily due to higher compensation expense on stock options granted to consultants. Other income, net Other income and expense includes interest income net of interest expense and gains and losses on foreign currency transactions. Interest income is primarily derived from short-term interest-bearing securities and money market accounts. Other income, net decreased by $12,800, or 42%, to $18,000 in the first quarter of 2000, as compared to 1999, primarily due to a decrease in interest income due to a lower average balance of invested cash and short-term investments. Provision for income taxes Provision for income taxes consists of the minimum state income taxes due for 2000 and 1999, for incorporation in California and New Jersey. No tax benefits were recognized during these quarters due to the uncertainty related to Enlighten's ability to recognize a tax benefit for loss and credit carryforwards. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, our cash and cash equivalents and short-term investments were $1,004,000, representing 41% 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 commercial paper. Our working capital was $921,500 as of March 31, 2000. We had no debt as of March 31, 2000, other than normal trade payables and accrued liabilities. Shareholders equity as of March 31, 2000 was $1,801,400. -12- 13 During the three months ended March 31, 2000, cash used in operating activities decreased $519,200 to $318,700, compared to the same period of the prior year. The change was principally caused by an increase in the net loss partially offset by a decrease in accounts receivable. Enlighten's investing activities consisted primarily of additions to capital equipment and the capitalization of software development costs, which combined represented $29,400 and $41,600 of cash used for investing activities during the three months ended March 31, 2000 and 1999, respectively. Financing activities provided cash of $51,000 in the first three months of 2000, compared with cash provided of $113,600 in the same period of 1999. Cash provided from financing activities consisted of the exercise of employee stock options and the employee stock purchase plan. On April 28, 2000, Enlighten completed a private placement of 715,884 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. 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 may be required to obtain additional financing. Our need for additional financing depends on our future performance, which, in turn, is subject to general economic conditions, and business and other factors beyond our control. 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. 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. FURTHER CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING During the last five years we have financed our operations primarily through sales of equity securities and the sale of our Tandem product line. Our existing capital resources are adequate to fund and expand our current operations through December 2000. However, we may -13- 14 require substantial additional financing to further our current plans to expand our operations and fund our long-term product development. On April 28, 2000, we completed a private placement of 715,884 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. If we are unable to obtain additional financing as needed, our long-term product development and commercialization programs would be delayed or prevented and we may be required to curtail our operations. 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 our license revenues in the last month of the quarter, particularly the last week. Since our staffing levels and other operating expenses are based upon anticipated revenues, delays in the receipt of orders can cause significant fluctuations in income from quarter to quarter. WE MAY NOT BE SUCCESSFUL IN THE OPEN SYSTEMS MARKET Through 1997, we derived a substantial portion of our revenue from our Tandem-based products. However, we sold all rights to our Tandem technology in October 1997. The future success of our business is substantially dependent on our ability to generate significant revenue from our Linux, Unix and Windows product offering. In January 1998, we signed an OEM bundling agreement with Silicon Graphics under which Silicon Graphics bundles a limited version of our product on each Unix system shipped. In December 1998, we entered into an agreement with IBM to integrate the EnlightenDSM product into IBM Suites for Solaris and AIX. In January 1999, we entered into an agreement with Sun Microsystems to produce a product that will seamlessly integrate into the Sun Management Center product (formerly Sun's Enterprise SyMON). In September 1999, we signed a software license and distribution agreement with TurboLinux in which TurboLinux will bundle a single user copy of the -14- 15 EnlightenDSM product with its Linux operating system distributions. In October 1999, we signed a software license agreement with Intel in which we will integrate a subset of the Linux version of the EnlightenDSM product into Intel's LANDesk(R) Server Manager product. While significant, there can be no assurance that we will be successful in our efforts to generate significant revenue from these agreements. Additionally, the open systems market is characterized by rapid technological growth and intense competition. We may not have the financial or personnel resources to effectively capitalize on, and continue with, our early and limited success in this market. WE ARE DEPENDENT ON RESELLERS AND IF WE ARE NOT SUCCESSFUL IN EXPANDING DISTRIBUTION CHANNELS, OUR ABILITY TO MAINTAIN OR INCREASE OUR REVENUES WILL BE HARMED In 1997, we began to shift a majority of our sales and marketing resources toward third-party resellers in the United States and internationally. Our growth will be dependent on our ability to continue to expand our third-party distribution channel to market, sell and support our software products. We are currently investing, and intend to continue to invest, significant resources to develop this channel, which could materially adversely affect our operating margins. We have only limited experience in marketing our products through distributors. Additionally, we will have no control over our third-party distributors, their shipping dates, or volumes of systems shipped by our OEM and other third-party customers. There can be no assurance that we will be successful in our efforts to generate significant revenue from this channel, nor can there be any assurance that we will be successful in recruiting new organizations to represent us and our products. Additionally, we have become more dependent on our third-party distributors for the technical support and consultation to end-users. We will need to increase our training and education efforts related to our third-party distributors to enable such third parties to obtain the technical proficiency and knowledge with respect to our products. Despite these efforts, we may not be able to successfully train our third party distributors to enable them to provide adequate technical support to the customer base. This may result in, among other things, increased workload on our internal support and engineering staff, or poor customer acceptance of the products, or both, either of which would significantly harm our business. In January 1998, we signed an OEM bundling agreement with Silicon Graphics under which Silicon Graphics will bundle a limited version of our product on each Unix system shipped. In December 1998, we entered into an agreement with IBM to integrate the EnlightenDSM product into IBM Suites for Solaris and AIX. In January 1999, we entered into an agreement with Sun Microsystems to produce a product that will seamlessly integrate into the Sun Management Center product (formerly Sun's Enterprise SyMON). In September 1999, we signed a software license and distribution agreement with TurboLinux in which TurboLinux will bundle a single user copy of the EnlightenDSM product with its Linux operating system distributions. In October 1999, we signed a software license agreement with Intel in which we will integrate a subset of the Linux version of the EnlightenDSM product into Intel's LANDesk(R) Server Manager product. While we believe that these arrangements will be beneficial, there can be no assurance that we will be able to deliver our products to these -15- 16 companies in a timely manner or that these companies will license our products in volumes anticipated by us. Further, these agreements are our only significant third-party distribution agreements to date. While our strategy is to obtain additional resellers to reduce the dependence on these vendors, we may not be able to successfully attract additional vendors to distribute our products. Any such failure would result in our having expended significant resources with little or no return on its investment, which would significantly harm our business. These additional investments and responsibilities will require us to expend substantial resources and may require us to divert employees from other projects to provide the support services and development efforts required to provide products and services to these third party vendors and other new third parties, if any. OUR MARKET IS SUBJECT TO INTENSE COMPETITION AND CONTINUED COMPETITION IN OUR MARKET MAY LEAD TO A REDUCTION IN OUR PRICES, REVENUES AND MARKET SHARE We experience intense competition from other systems management companies and the market is rapidly changing. We believe that our ability to compete successfully depends on a 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, the software industry is characterized by low barriers to entry. There can be no assurance that our current competitors or any new market entrants will not develop systems management products that offer significant performance, price, or other advantages over our technology. In addition, operating system vendors could introduce new or upgrade existing operating systems or environments that include systems management functionality offered by us, which could render our products obsolete and unmarketable. We may not be able to successfully compete against current or future competitors, which could significantly harm our business. 100% OF OUR LICENSE REVENUE IS DERIVED FROM A SINGLE PRODUCT FAMILY AND IF THOSE PRODUCTS FAIL TO ACHIEVE AND MAINTAIN MARKET ACCEPTANCE, OUR BUSINESS MAY BE SIGNIFICANTLY HARMED We expect that a substantial majority of our revenue in future periods will be derived from our EnlightenDSM products. These products have accounted for 100% 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, introduction and market acceptance of EnlightenDSM and its product enhancements. There can be no assurance that we will be successful in marketing EnlightenDSM or any new products, applications or product enhancements, and any failure to do so would significantly harm our business. -16- 17 THE MARKET FOR OUR PRODUCTS IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND WE MAY NOT BE ABLE TO DEVELOP OR MARKET NEW PRODUCTS TO RESPOND TO SUCH CHANGE The market for our products is characterized by rapid technological developments, evolving industry standards and rapid changes in customer requirements. The introduction of products embodying new technologies, including new operating systems, applications, hardware products, systems management frameworks and network management platforms, the emergence of new industry standards, or changes in customer requirements could render our existing products obsolete and unmarketable. As a result, our success depends upon our ability to continue to enhance existing products, respond to changing customer requirements and rapidly develop and introduce new products that keep pace with technological developments and emerging industry standards. Additionally, other operating systems, such as Windows NT, may significantly affect deployment of Unix and Linux systems for business critical applications. A significant portion of our revenue will continue to be derived from Unix and Linux based computer systems for the foreseeable future. While we have ported our products to the Windows NT platform, the product requires customers to control systems management for their heterogeneous environment from Unix and Linux based systems. A significant decline in sales of Unix and Linux based systems would decrease the demand for our products and would significantly harm our business. Finally, we may not be successful in developing and marketing, on a timely basis, product enhancements or new products that respond to technological change or evolving industry standards, we may experience difficulties that could delay or prevent the successful development, introduction and sale of these products, and any such new products or product enhancements may not adequately meet the requirements of the marketplace and achieve market acceptance. IF THE OPEN SYSTEMS MANAGEMENT MARKET FAILS TO GROW, OUR BUSINESS WOULD BE SIGNIFICANTLY HARMED For the foreseeable future, all of our business will be in the open systems (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, or in the event of a decline in unit price or demand for our products, as a result of competition, technological change, or other factors, our business would be significantly harmed. During recent years, segments of the computer industry have experienced significant economic downturns characterized by decreased product demand, production overcapacity, price erosion, work slowdowns and layoffs. Our operations may in the future experience substantial fluctuations from period-to-period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers and other factors affecting capital spending. Such factors may significantly harm our business. -17- 18 WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FURTHER SIGNIFICANT LOSSES AND CANNOT ASSURE YOU THAT WE WILL ACHIEVE PROFITABILITY We have incurred significant operating losses each of the last five fiscal years and cannot be certain that we will 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 cannot be certain when or if we will 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. See "Management's Discussion and Analysis or Plan of Operation." 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 1999, approximately 60% of our revenues consisted of license fees received under our OEM relationship with Silicon Graphics to bundle a subset of features of the EnlightenDSM product with each Unix server and workstation that SGI ships. License fees from SGI decreased in 1999 when compared to 1998. If these license fees continue to decline, our revenues and financial results may be harmed. -18- 19 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Enlighten is subject to certain legal actions that have arisen in the ordinary course of business. Management believes that the ultimate outcome of these actions will not have a material affect on Enlighten's consolidated financial statements or results of operations, although there can be no assurance as to the outcome of such litigation. 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 None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.27 Financial Data Schedule (b) Reports on Form 8-K: None -19- 20 ENLIGHTEN SOFTWARE SOLUTIONS, INC. FORM 10-QSB, MARCH 31, 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: May 12, 2000 SIGNATURE: /s/ Bill Bradley ---------------------------- Bill Bradley President and Chief Executive Officer DATE: May 12, 2000 SIGNATURE: /s/ Stephen E. Giusti ---------------------------- Stephen E. Giusti Vice President, Finance and Administration and Chief Financial Officer -20- 21 EXHIBIT INDEX
EXHIBIT NO. - ----------- 10.27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 748,500 255,500 405,900 50,000 0 1,567,600 1,621,000 1,259,100 2,447,500 646,100 0 0 0 8,511,500 (6,710,100) 2,447,500 436,200 436,200 120,800 120,800 1,591,600 0 0 (1,258,200) 1,300 0 0 0 0 (1,259,500) (0.30) (0.30)
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