10QSB 1 f67101e10qsb.txt ENLIGHTEN SOFTWARE SOLUTIONS, INC. 10QSB 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 2 ENLIGHTEN SOFTWARE SOLUTIONS, INC. QUARTERLY REPORT ON FORM 10-QSB THREE MONTHS ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS
PAGE NO. --------------------------------------------------------------------------------------------- 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
-2- 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, ASSETS 2000 1999 ------------ ------------ 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 ============ ============
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 Nine months ended September 30, September 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
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)
Nine Months Ended September 30, ------------------------------ 2000 1999 ----------- ----------- 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 =========== ===========
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 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- 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:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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) =========== =========== =========== ===========
-7- 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:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2000 1999 2000 1999 --------- --------- --------- --------- 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 ========= ========= ========= =========
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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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.
Nominee In Favor Withheld ------- --------- -------- 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
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- 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- 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-