-----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, ANJ7RPEs7qGefmqn83kTV2hWe/By52JABp3XouREiFuzB6SI45e8kwA51zQh5w+Z mVSofBYt9GRaJ1cKn28BOw== 0000950149-99-000604.txt : 19990402 0000950149-99-000604.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950149-99-000604 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-23446 FILM NUMBER: 99582121 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 10KSB 1 ANNUAL REPORT ON FORM 10-KSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Commission File Number 0-23446 ENLIGHTEN SOFTWARE SOLUTIONS, INC. 999 Baker Way, Fifth Floor, San Mateo, California 94404 (650) 578-0700 I.R.S. Employer Incorporated in Identification Number CALIFORNIA 94-3008888 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. The registrant's revenues for the fiscal year ended December 31, 1998 were $3,758,408. The approximate aggregate market value of the registrant's Common Stock held by nonaffiliates on February 28, 1999 was $9,028,521. This amount excludes shares held by directors, executive officers, and holders of 5% or more of the outstanding Common Stock since such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of common shares outstanding as of February 28, 1999 was 3,959,701. DOCUMENTS INCORPORATED BY REFERENCE: Form 10-KSB reference (1) Proxy Statement for Shareholder Meeting scheduled for May 20, 1999 Part III 2 PART I This report includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. In this report, the words "anticipates," "believes," "expects," "intends," "future," and similar expressions identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results or those anticipated. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Item 1 under the heading "Business Risks" on page 18 of this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. ITEM 1. BUSINESS OVERVIEW Enlighten Software Solutions, Inc. ("Enlighten Software" or the "Company") develops, markets, and supports software products for UNIX and UNIX/Windows environment workgroup administration and enterprise management. The Company's product solutions are designed for open systems distributed computing environments in the range of ten to 1,000 servers/clients. The Enlighten(R) Distributed Systems Manager(TM) ("EnlightenDSMTM") product allows companies to manage their information systems by enabling systems managers and administrators to control their systems from diverse UNIX/Windows platform vendors such as Digital Equipment Corporation ("DEC"), Hewlett-Packard ("HP"), IBM, Microsoft, Santa Cruz Operation ("SCO"), Silicon Graphics, Inc. ("Silicon Graphics"), and Sun Microsystems ("Sun"). The Company's award winning EnlightenDSM product suite provides cost-effective systems administration solutions for such open systems environments. The product suite is a fully integrated software solution providing a middle-tier framework that is a standards-based multi-function management system covering the breadth of workgroup administration and systems management disciplines. Founded in 1986, the Company was a leading provider of systems management software on the Tandem platform, providing a range of automated systems management products to over 400 companies in 30 countries. On October 1, 1997, the Company sold its Tandem operation in order to focus efforts on its UNIX/Windows product suite. RECENT DEVELOPMENTS FOR THE COMPANY Fiscal 1998 was a new beginning for Enlighten Software. Following the sale of the Tandem product line in October 1997, the Company was able to focus solely on its UNIX/Windows product line for the first time since that product line's introduction in -2- 3 late 1995. The results of that focus were demonstrated during 1998 in significant and meaningful ways. At the time of the Tandem disposition, the Company's annual revenue from the UNIX/Windows product line was less than $500,000 and the Company had no significant partner relationships. Shortly thereafter, in January 1998, Enlighten entered into its first OEM bundling agreement with Silicon Graphics. In May 1998 the Company raised $2.2 million via a secondary public offering in order to bolster its cash position and its net assets. In August 1998 the Company aligned with Access Graphics, a subsidiary of General Electric's ("GE's") IT Distribution Group. In the third quarter of 1998, Enlighten recognized its first operating profit from its UNIX/Windows product line. Most recently, during the first quarter of 1999, the Company announced the additions of Microsoft Windows95 and Windows98 to its UNIX and Microsoft NT platforms. That announcement was followed by Sun Microsystems' announcement that it had chosen EnlightenDSM as an integration partner with their Sun Enterprise SyMON(TM) performance management software. Finally, and most significantly, in February 1999 the Company and IBM announced a licensing arrangement in which EnlightenDSM will be integrated into IBM's Suites for Solaris and AIX UNIX operating system platforms. OEM Bundling Agreement On January 22, 1998, the Company entered into a three-year worldwide OEM bundling agreement with Silicon Graphics. Under the terms of the agreement, Silicon Graphics ships a bundled limited feature version of EnlightenDSM, EnlightenDSM/Workgroup, on new server and workstation product shipments as well as with operating system upgrades shipped to already installed Silicon Graphics customers. Silicon Graphics also offers and includes on its price list a full feature version of EnlightenDSM as well as agent modules to enable the management of other UNIX/Windows vendor servers and workstations. The products are supported through Silicon Graphic's global customer support organization. In addition to OEM bundling, Silicon Graphics markets the products through its telesales force, direct field organization, and authorized resellers. GE IT Distribution Group Distribution Agreement On August 28, 1998, the Company entered into a two-year global distribution agreement with two of GE's subsidiaries, Access Graphics and Integration Alliance. Under the agreement, Access Graphics and Integration Alliance offer certified resellers the EnlightenDSM/Workgroup product bundled with the businesses' high-end server offerings from Sun Microsystems and Hewlett-Packard, and offer its authorized resellers the entire Enlighten product line for distribution. This agreement extends the DSM/Workgroup product bundling opportunity beyond the Silicon Graphics platform to include all server hardware carried by Access Graphics and Integration Alliance. Access Graphics is the largest master reseller for Sun Microsystems and Silicon Graphics. Integration Alliance is the premier distributor of integrated enterprise solutions with a focus on the HP commercial computing environment. -3- 4 Sun Microsystems' SyMON Integration In February 1999 Sun Microsystems announced plans to integrate Sun Enterprise SyMON software with leading management solutions from Enlighten and other premier systems management software companies in order to simplify their customers' system management environment. With the products from Enlighten and the other companies, Sun intends to address three critical areas of system management: enterprise management, application management and operating system administration. The announcement was the result of months of working closely with the SyMON technical personnel at Sun in order to provide a seamless integration of EnlightenDSM's system administration capabilities and Sun Enterprise SyMON software. IBM Licensing Agreement In the most significant announcement by the Company since the Silicon Graphics' relationship, IBM and Enlighten announced on February 22, 1999 that they had entered into a licensing agreement for Enlighten's flagship product, EnlightenDSM. Under this agreement, IBM will integrate EnlightenDSM into the new IBM Suites for Solaris and AIX operating systems. The agreement will provide IBM's Suites customers with Enlighten's cross-platform solution for workgroup management and administration of heterogeneous UNIX and Windows systems. In addition to EnlightenDSM, the Suites includes IBM DB2 Universal Database, WebSphere Application Server, Lotus Domino, and other IBM products. IBM and its business partners will market the Suites worldwide with EnlightenDSM as an integral part. IBM Suites for Solaris and AIX are new from IBM. They are designed to provide reliability, security, and support available for connected enterprises and autonomous departments using applications on UNIX servers. Software developers, value-added distributors and resellers, system integrators and other solution providers can use the IBM Suites as a secure technology base for developing "e-business" solutions for customers in diverse industries and markets. INDUSTRY BACKGROUND In recent years there has been a significant change in the market for networked, enterprise-wide computer systems. Technology advances in hardware and software have created a new paradigm in computing based upon a client/server architecture, where the user and the information server are connected via high speed networks, locally via LANs, or remotely via communications networks. In many cases, these systems are being deployed to replace the existing mainframe systems. Yet the Company believes that, in the majority of cases, these systems are additional and complementary to an organization's existing computing capability. In the latter situations, computer systems based upon UNIX and Windows operating systems are generally being deployed at the -4- 5 divisional and departmental levels, although many companies are increasingly using UNIX and Windows systems for more critical applications used in the organization's day-to-day operations. The transition to open distributed computing has been accelerated by the adoption of Internet and Intranet technologies that utilize such open systems. The development of client/server or distributed systems has created a significant market for hardware and software companies that have developed products for these open environments based on UNIX or Windows. Sun Microsystems, Hewlett Packard, IBM, and Silicon Graphics are a few of the hardware companies that ship large quantities of UNIX workstations and servers. Database and programming development products from companies such as Oracle, Informix, Sybase, Forte, SAP, and Baan have also enjoyed success based upon the development of open systems. Open systems environments offer several benefits, such as common standards, allowing for combinations of hardware and software from a variety of vendors. These environments also provide easy portability of applications from one vendor's UNIX system to another, thereby protecting a customer's original investment. Other benefits include lower price points, cost effective networking, and a large pool of experienced technical personnel. However, managing the operations of large client/server systems can be difficult and labor intensive. As corporate customers migrate mission critical applications from mainframes to distributed UNIX and Windows systems, they are demanding the same type of management and administration tools provided in the mainframe environment. The diversity of systems and applications has increased significantly in recent years. The introduction and proliferation of the NT operating system, the increased scope of applications from core business transactional software to decision support, groupware, and Internet/Intranet products, and the advancement of requirements of a centralized information technology ("IT") department to manage systems in remote physical locations has greatly expanded the systems management expertise required within IT organizations of these companies. Additionally, an inherent characteristic of open systems is a lack of complete integration of the various vendors' products. The development of standards such as Simple Network Management Protocol ("SNMP"), the leading protocol for network management and the leading standard for information collection in multi-vendor computing environments, and OpenView provide a standard framework for systems management products in open environments, but these standards must be integrated and managed. Many hardware manufacturers have been slow to provide effective multi-vendor solutions to manage their own, let alone their competitor's hardware, creating a market need for truly heterogeneous system administration solutions. While open systems have produced significant advantages, the management of distributed, heterogeneous open systems presents a major challenge. Unlike the mainframe environments where an operations department typically has both trained resources and extensive systems utilities, the responsibility for managing open systems has become the responsibility of technicians who typically use limited system utilities and "home grown" routines. -5- 6 These market needs are currently being addressed either through manual procedures by a company's internal IT organization, or by one of three types of solutions: (i) point products, or stand-alone products designed to address one particular function or requirement; (ii) interfaced products, or a set of point products loosely coupled by a common interface but not truly integrated; and (iii) enterprise systems management frameworks, or large monolithic products designed to manage a customer's entire computing infrastructure from mainframe systems, to UNIX/Windows systems, to desktop PCs. Many products serving this market were developed by porting dated mainframe technology and architecture to the UNIX environment. These solutions are typically expensive to acquire and implement due to the extensive efforts associated with installing and configuring these products to a customer's particular environment. THE ENLIGHTEN SOFTWARE SOLUTION Enlighten Software offers a middle-tier framework for workgroup administration and systems management for UNIX and Windows open systems. Enlighten Software's mission is to provide the industry's most pervasive software solutions which help enterprises monitor, manage, and administer distributed, heterogeneous computers simply and inexpensively. The Company intends to establish a presence as a market leader for easy to use, out-of-the-box, broad-based functionality for workgroup administration and systems management across major open systems platforms. While numerous standards are being introduced and companies are vying to position themselves in the open systems management market, Enlighten Software is positioning its Enlighten product suite as the one product that is vital and affordable to open systems managers in mixed UNIX/Windows environments. Enlighten Software's systems management solution differentiates itself from other companies' systems management approaches. The Company believes that systems managers demand management tools that are simple to use, easy to install, scalable and customizable, intuitive to learn, and reasonably priced. The Enlighten product suite is targeted to the broadest segment of the open systems market: customers with ten to 1,000 workstations from a variety of the most popular vendors. The Company believes the product's key strengths that address the needs of this market niche are: - Ease of use: EnlightenDSM is designed to be easily installed, and configured. Typically, EnlightenDSM installs and begins operating in hours, and can be fully configured with customized event alarms and thresholds and integration with other third-party products in weeks. Enterprise systems management products such as Computer Associates' Unicenter and Tivoli Systems' TME are very complex and often require a substantially increased investment of time and money to make useful when compared to the Company's product. -6- 7 - Broad functionality: The customer in the Company's target market typically has a limited budget, limited resources, and limited staff. Therefore, the Company designed the product to be able to address a broad range of system management and administration needs, alleviating the customer's need to make a series of investments in point product solutions. EnlightenDSM provides a common interface for an integrated product that addresses (i) user account configuration, (ii) printer resource management, (iii) network services configuration and management, (iv) security auditing, (v) disk and file management, (vi) archive management, (vi) systems management, and (vii) event generation and monitoring. - Price performance: The Company believes its product is generally priced below comparable point products in the market, as well as enterprise framework products. - Open architecture: EnlightenDSM is based on an architecture which is designed to be easily integrated with most existing point solutions as well as solutions developed by customers internally. The product is also designed to communicate "up" to the enterprise framework products with event mechanisms or easy-to-write scripts in the product's Programmable Event Processor ("PEP"). EnlightenDSM uses Structured Query Language ("SQL") with any Open Database Connectivity ("ODBC") databases and SNMP. The product can operate as an integral part of an enterprise management environment in a larger customer environment, or as the focal point of administration and management in a smaller customer environment, or in divisions/sites of a larger customer environment. EnlightenDSM is scalable to large networks and supports the day-to-day operational requirements of networked systems, such as adding users and nodes, reconfiguring system processes, managing disk storage, and managing Internet/Intranet users. The Company believes its product suite is affordably priced, scalable from ten to 1,000 systems, designed to install within one half hour for most configurations, and will integrate with other system console and network administration products, such as Tivoli, CA Unicenter, Remedy, and many others. COMPANY STRATEGY Enlighten Software's objective is to become a market leader in integrated open systems workgroup administration and systems management. To achieve this objective, Enlighten Software has adopted a business strategy incorporating the following elements: -7- 8 Focus on the "under-served" market The Company believes that most of the products in the enterprise systems management market are currently focused toward Fortune 500 companies that can afford the time and expense, and possess the resources necessary to implement a monolithic enterprise-wide systems management solution. Mid-sized companies, and smaller sites or departments of larger companies, cannot effectively and efficiently implement these solutions and require less intrusive, more cost-effective means to manage their UNIX/Windows systems. The Company believes there are very few products to assist these organizations in managing and monitoring their open systems networks. Enlighten Software's focus for its UNIX/Windows products is this under-served market, defined as sites with ten to 1,000 UNIX or Windows workstations or servers without a large mainframe presence. The Company feels its low-cost, easy-to-use, non-intrusive workgroup administrations and systems management solution is the most effective tool for these companies to use for managing and monitoring their systems. Penetrate the market primarily through third-party relationships The Company shifted its sales and marketing focus from direct sales to indirect channels sales in late 1997 following the sale of the Tandem operation. Shortly after this shift occurred, the Company entered into the OEM bundling agreement with Silicon Graphics, which was then followed by the distribution and licensing agreements with GE's IT Distribution Group and IBM Corporation, and the integration with Sun's SyMON software. The Company's product architecture and design, price point, and ease of use of the EnlightenDSM product allow it to be effectively bundled with both a hardware manufacturer's operating system and a software company's independent applications. The relationships with these entities will allow the Company to continue penetrating the market by proliferating its products on thousands of systems, thereby providing a base within which to sell the full feature version of EnlightenDSM, as well as other products. The Company intends to continue to pursue additional partnering relationships and intends to continue to focus its sales and marketing efforts on the following: - Systems management and other software application vendors - The Company believes its product suite is complementary with several software vendors' applications. EnlightenDSM's architecture is designed to allow integration with other third-party software products with minimal engineering requirements. The Company intends to pursue relationships with software companies providing systems management, help desk software, and other "customer care" applications with which the Company's product could be integrated and sold as a combined solution. -8- 9 - Additional UNIX hardware manufacturers - The Company believes that several UNIX hardware manufacturers lack effective systems management solutions. As the competition for UNIX hardware increases and price points drop, the Company believes these manufacturers will need to differentiate themselves through the ability to offer solutions to customers that provide lower cost of ownership through ease of use and administration for their systems. With relationships established with Silicon Graphics, IBM, and Sun, the Company has successfully attracted three of the major UNIX hardware manufacturers. The Company's strategy in this area will be to leverage its relationships with its current vendors to either broaden or deepen the relationship, as well as enter into agreements other UNIX vendors. - Systems integrators and consultants - The Company also believes that companies providing systems management consulting and outsourcing services to IT organizations are in need of effective administration and management tools to provide their clients with improved efficiencies in managing heterogeneous open systems environments. - Selected end-users - The Company has shifted its primary focus from direct to indirect channels to market and distribute its product. However, it maintains a small direct sales force focused on select opportunities where the Company can provide value through stronger, more dedicated customer relationships. The preceding discussion regarding the Company's response to the systems management market and its product and marketing strategy contains forward-looking statements, and actual results may vary substantially depending upon a variety of factors, including, but not limited to, the development of emerging markets for systems management and administration software, competition, technological change, changing customer needs, evolving industry standards, any product development delays, and the ability of the Company to manage future growth and new distribution channels, if any. These and other factors are more fully discussed under the caption "Business Risks" on page 18 of this report. PRODUCTS Enlighten Software offers software products designed to automate the management and administration of computer systems. Set forth below is a summary of the Company's principal product offerings by product family. -9- 10 OPEN SYSTEMS MANAGEMENT In the fast-paced UNIX/Windows environment, millions of new computers are being deployed annually. All system administrators must learn to manage networks in which users are added on a regular and continuous basis. The tools these system administrators need to effectively perform their jobs should be simple, easy to implement, and intuitive; not complex, rules-based systems management software. The Company acquired core technology for UNIX systems administration products in December 1994, and released two complementary UNIX products in the second quarter of 1995. The features of these two products were combined in EnlightenDSM version 2.0, which was released in May 1996. The Company is currently shipping version 2.7 of EnlightenDSM. Product license fees from the Company's open systems product family represented 100% and 27% of total product license fees in 1998 and 1997, respectively. Enlighten Distributed Systems Manager (EnlightenDSM) EnlightenDSM is a standards-based, multi-function management system covering the following disciplines: user administration, file system management, Internet/Intranet management, printer management, security checking, archiving, subsystem monitoring, event generation/tracking, and other system functions. EnlightenDSM runs on a variety of open systems computer platforms, including HP/UX, SUN/Solaris, IBM/AIX, Intel 486/SCO, Silicon Graphics/IRIX, Digital UNIX, and Microsoft Windows. Cross-platform functionality enables the management of diverse and distributed systems from a centralized console. EnlightenDSM automatically collects and saves status, configuration, performance, and capacity information and makes it available for monitoring by most commercial SNMP managers. The product monitors system resources including peripheral devices, processes, resources, and services. Thresholds can be set to generate alarms that warn users of an error or problem about to occur. The product can also be set to take corrective action automatically. EnlightenDSM monitors and reports changes in system inventory and can track the addition or removal of memory, disk drives, tape drives, and other devices, thereby reducing costly downtime and improving system performance. TANDEM SYSTEMS MANAGEMENT The Company was originally a provider of software tools and utilities to more effectively manage the performance of Tandem computer systems. Beginning with one product in 1986, the Company expanded to seven products that were used by over 400 customers in 30 countries. As the Company shifted its strategic focus away from the Tandem platform and toward the UNIX/Windows environment, the Company's Tandem products were sold. Product license fees from the Company's Tandem product line accounted for 0% and 73% of total product license fees in 1998 and 1997, respectively. -10- 11 In October 1997, the Company sold all of the technology and operating assets associated with its Tandem product line to New Dimension Software, Inc. ("NDS"). SALES AND DISTRIBUTION The Company's revenues are derived from four sources: product license fees, product maintenance fees, consulting services, and royalties. Product license fees During 1998, Enlighten Software marketed its products through third party distributors and OEMs and, to a lesser extent, a direct field sales force. The direct sales of the Company's products were marketed primarily throughout North America and Europe by its product sales organization located at the Company's headquarters in San Mateo, California. Product license fees in 1998 consisted primarily of revenue from the granting of perpetual licenses and from the licensing of product upgrades necessary when customers upgrade their system hardware. Product license fees include license fees from third party distribution relationships as well as license fees from end-users licensed directly by the Company. Revenue from third parties is recognized in the quarter in which the third party has shipped product. Revenue from end-user licenses is payable in full at the commencement of the license period and is recognized after all of the following events have occurred: (i) a product evaluation has been shipped to the customer; (ii) the customer elects to purchase the software following an evaluation period; and (iii) the customer signs the related contract. Product license fees represented 65% and 34% of total revenue in 1998 and 1997, respectively. Following the disposition of its Tandem product line during the fourth quarter of 1997, the Company shifted its sales strategy to one based primarily upon third-party distributors and restructured its sales department as a result of this shift. This restructuring included personnel changes as well as the closing of field sales offices in the Chicago and New York areas, as well as the U.K. sales and support office. Enlighten Software then built its sales, marketing, and customer support organizations with a focus on delivery of its products to OEM partners, resellers, system integrators, and select end-users. An essential element of the Company's sales and marketing strategy has been and will continue to be the development of indirect distribution channels, such as original equipment manufacturers ("OEMs"), independent software vendors ("ISVs"), and value added resellers ("VARs"), as well as other systems management and application software vendors whose products are complementary with those of the Company. -11- 12 In January 1998, the Company established its first OEM relationship with Silicon Graphics. Under the agreement, Silicon Graphics incorporates a limited version of EnlightenDSM bundled with its operating system on new servers and workstations as well as with operating system upgrades shipped to already installed Silicon Graphics customers. Silicon Graphics also offers and includes in their price book licenses for the full-feature version of EnlightenDSM as well as agent modules to enable the management of other UNIX/Windows vendor's servers and workstations as optional enhancements. The products are supported through Silicon Graphic's global customer support organization. In addition to OEM bundling, Silicon Graphics markets the products through its telesales force, direct field organization, and authorized resellers. The Company receives a license fee for each copy distributed by Silicon Graphics to its customers. In August 1998, the Company entered into a distribution agreement with Access Graphics and Integration Alliance, two of GE's subsidiaries in their IT Distribution Group. Under the agreement, the companies offer certified resellers the EnlightenDSM/Workgroup product bundled with the businesses' high-end server offerings from Sun Microsystems and Hewlett-Packard, and offer its authorized resellers the entire Enlighten product line for distribution. The Company receives a license fee and support revenue from Access Graphics and Integration Alliance for each copy of EnlightenDSM licensed by their resellers to end-users. In February 1999 Sun Microsystems reached an agreement with the Company that will integrate Sun Enterprise SyMON software with EnlightenDSM and other leading management solutions from other software companies. Sun will participate in co-marketing activities with the Company and will cooperatively work with Enlighten's sales and marketing team in end-user sales opportunities. Also in February 1999, the Company entered into a licensing agreement with IBM. Under this agreement, IBM will integrate EnlightenDSM into the new IBM Suites for Solaris and AIX operating systems. The agreement will provide IBM's Suites customers with Enlighten's cross-platform solution for workgroup management and administration of heterogeneous UNIX and Windows systems. In addition to EnlightenDSM, the Suites includes IBM DB2 Universal Database, WebSphere Application Server, Lotus Domino, and other IBM products. IBM and its business partners will market the Suites worldwide with EnlightenDSM as an integral part. Enlighten will receive a license fee equal to a percentage of the revenue IBM generates from the Suites products in which EnlightenDSM is integrated. The Company is currently investing, and intends to continue to invest, significant resources to develop the OEM, ISV, and VAR channels, which could have a material adverse affect on the Company's operating margins. The Company's efforts to expand its third-party channels are intended to penetrate the market and achieve widespread commercial acceptance of the Company's products as a workgroup administration -12- 13 standard. There can be no assurance that the Company will be successful in its efforts to increase the revenues represented by this channel. The Company will be dependent upon its current and future third-party relationships for a significant portion of its revenue for the foreseeable future. There is no assurance that the Company's third party distributors will effectively distribute and exploit the Company's products. The failure of existing distributors to sell the Company's products effectively, to the inability to recruit additional third parties to distribute, market, and support the Company's products could have a material adverse affect the Company's business, operating results, and financial condition. A more detailed discussion of these and other risks associated with the Company's business is set forth under the caption "Business Risks" on page 18 of this report. Product maintenance fees All customers subscribing to Enlighten Software's maintenance service agreements are entitled to receive (i) technical support and consultation, primarily over the telephone, and (ii) subsequent product enhancement and maintenance releases periodically produced by the Company. Product maintenance support is provided directly to customers as well as through the Company's authorized distributors. Since the Company has shifted its sales efforts from direct to indirect channels, the Company has become more dependent on its third-party distributors for technical support and consultation to end-users. The Company will need to continue to increase its training and education efforts related to its third-party distributors to ensure the technical proficiency and knowledge of such third parties with respect to the Company's products. Product maintenance fees consist of all maintenance revenue on new and existing installed software products as well as support fees paid to the Company by its third party resellers. The Company generally charges, on an annual basis, 20% of the current list price of its products in exchange for telephone support, product updates, and product enhancements. In cases in which a third party provides support to its end-users, the Company recognizes a portion of the support fees charged by such third party to its customers. Product maintenance revenue is recognized ratably over the maintenance contract period (typically one year). Product maintenance fees accounted for 17% and 61% of total revenue in 1998 and 1997, respectively. Consulting services Revenue from consulting services consists of fees charged for contract services, product training, and other service activities. This division of the Company's technical support organization provides fee-based consulting services to the Company's customers throughout the U.S. Consulting service revenue is recognized when services are performed for time and material contracts and on a percentage of completion basis for fixed price contracts. Consulting services represented 7% and 5% of total revenue in 1998 and 1997, respectively. -13- 14 Royalties The Company recognizes royalties from NDS from product license fees and product maintenance fees generated by the Tandem product line sold to NDS in October 1997. Royalties represented 11% and 0% of total revenue in 1998 and 1997, respectively. PRODUCT DEVELOPMENT The computer software industry is characterized by rapid technological change and is highly competitive in regard to timely product innovation. Accordingly, the Company believes that its future success depends on its ability to enhance current products that meet a wide range of customer needs and to develop new products rapidly to attract new customers and provide additional solutions to existing customers. In particular, the Company believes it must continue to respond quickly to users' needs for broad functionality and open systems support. Enlighten Software addresses the needs of current users through regularly scheduled maintenance and enhancement releases. At the same time, the Company seeks to acquire and develop new products to meet the needs of a broader group of users. The Company provides an integrated workgroup administration and systems management product for open systems running on six different UNIX-based systems along with Microsoft Windows NT, Windows98, and Windows95. The EnlightenDSM product consists of the following features: user administration, file system management, Internet/Intranet management, printer management, security checking, archiving, subsystem monitoring, and event alarm generation/tracking. The Company significantly enhanced its EnlightenDSM product with several releases during 1998. The new releases contained new features such as LDAP and Automount support, security enhancements to the communication layer including 40-bit DES encryption and support for the new operating system releases from the supported operating system. Appropriate adjustments were made to the EnlightenDSM product to assure proper product operation beyond the year 2000 and to support installations of language localized environments. Electronic documentation for the EnlightenDSM product was enhanced. Both the User Guide and Reference Manuals are now supplied in a single-file Adobe Acrobat format, complete with electronic hyperlinks and cross references. In addition, the Company added to its supported platforms with ports to Windows98 and Windows95. In preparation of a third-party distribution effort, the Company customized its central storage facility to integrate with the IBM DB2 Database. The Company's strategy is to continue to enhance EnlightenDSM's functionality through new releases and new feature development to meet the continually advancing systems administration and management requirements of its customers, including: -14- 15 - increased scalability and performance; - increased integration with other systems management point solutions as well as other enterprise systems management frameworks; - increased levels of automation and ease of use to further reduce administrative costs and overhead; - increased range of supported platforms; and - continued customization for the Company's current and new third-party distributors. There can be no assurance that the Company will be successful in developing and marketing new features or products that respond to technological change or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction, and marketing of any new features or products, or that its new features or products will adequately meet the requirements of the marketplace and achieve market acceptance. Additionally, the Company's product development staff will be under increased pressure as the Company's products are deployed on a significantly greater number and variety of machines by virtue of the Company's current third party relationships (or other additional third-party relationships, if any). Due to the complexity of the product and the large number of network configurations in the market, it is extremely difficult to fully test EnlightenDSM in all possible environments and, although the Company employs a continual effort to assure a quality product, there is no assurance that errors will not be found in the released commercial product resulting in delays of new feature development. If the Company is unable, due to lack of resources or for technological or other reasons, to develop and introduce new features and products in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results, and financial condition will be materially adversely affected. See "Business Risks" on page 18 of this report. As of December 31, 1998, the Company had 17 professional and technical employees engaged in research and development. During the fiscal years ended December 31, 1998 and 1997, the Company's research and development expenditures before the capitalization of software development were $1,691,950 and $2,125,944, respectively. COMPETITION The systems management market in which the Company competes is intensely competitive, highly fragmented and rapidly changing. In order to compete, the Company must enhance its current products, enhance the operability of its products with other products, management frameworks, and operating systems through a truly open architecture, develop new products in a timely fashion, and develop key strategic -15- 16 partnerships with other hardware and software vendors. Many of the Company's competitors in the open systems markets are larger and have greater financial, technical, marketing, and other resources than the Company. Because there are relatively low barriers to entry in the software market, the Company expects additional competition from other established and emerging companies. Increased competition is likely to result in price reductions, reduced gross margins, and increased difficulty in establishing market share, any of which could have a material adverse effect on the Company's business, operating results, and financial condition. See "Business Risks" on page 18 of this report. The Company's principal competition in the market for open systems workgroup administration and system management products is from enterprise systems management vendors such as Tivoli, a wholly-owned subsidiary of IBM, and Computer Associates, as well as point products from BMC Software, Inc., Platinum Technologies, Inc., Veritas Software, Inc., Compuware, and Legato Systems, Inc. The Company also faces competition from internal development groups of prospective end-user customers and OEMs, including operating system vendors, many of which have substantial internal programming resources and are capable of developing specific operating system level products for their own needs. In addition, certain operating systems vendors have already incorporated systems management capabilities into their operating system, including HP, Sun, IBM, and Microsoft, which reduces such vendors' need for the Company's products. Additional hardware manufacturers may elect to offer similar competitive products in the future. The Company believes that it competes favorably with its competitors with respect to product features and functionality, such as scalability, interoperability across multiple platforms, adherence to standards, security, as well as reliability, ease-of-use, price/performance ratio, and an ability to integrate easily with third-party vendors' products. However, given the Company's size, its recent entry into the UNIX/Windows markets, and the advantages its competition enjoys with respect to size and resources, there can be no assurances the Company can effectively compete in this market. PRODUCT PROTECTION The Company relies on a combination of copyright, trade secret and trademark laws, and software security measures, along with employee and third-party nondisclosure agreements, to protect its intellectual property rights, products, and technology. The Company's products are typically licensed on a "right to use" basis pursuant to perpetual licenses that restrict the use of the products to the customer's internal purposes. The Company distributes its software under license agreements that are signed by its end-users. Despite the precautions taken by the Company to protect its software, unauthorized parties may attempt to reverse engineer, copy, or obtain and use information the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and software piracy is expected to be a persistent problem. -16- 17 Additionally, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. The Company has entered into source code escrow agreements with some of its customers that require the release of source code to the customer in the event there is a bankruptcy proceeding by or against the Company, the Company ceases to do business, or the Company is unable to fulfill its contractual obligations with respect to support. In the event of a release of the source code, the customer is required to maintain its confidentiality and, in general, to use the source code solely for the purpose of maintaining the software's usability. The provision of source code may increase the likelihood of misappropriation or other misuse of the Company's intellectual property. The Company is not aware that its products, trademarks, or other proprietary rights infringe the proprietary rights of third parties. However, from time to time, the Company receives notices from third parties asserting that the Company has infringed their patents or other intellectual property rights. In addition, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Any such claims could be time-consuming, result in costly litigation, cause product shipment delays or lead the Company to enter into royalty or licensing agreements rather than disputing the merits of such claims. As the number of software products in the industry increases and the functionality of such products further overlap, the Company believes 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. An adverse outcome in litigation or similar proceedings could subject the Company 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 the Company to cease the marketing or use of certain products, any of which could have a material adverse effect on the Company's business, operating results, and financial condition. See "Business Risks" on page 18 of this report. EMPLOYEES As of December 31, 1998, the Company employed 35 people at its offices in San Mateo, CA and Denver, CO. Of these employees, 17 were engaged in product development, 12 in sales, marketing, and customer support, and 6 in finance and other administrative departments. The Company believes its future success depends in large part upon the continued service of its key technical and senior management personnel and its ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, as certain of these personnel have significant prior industry experience and are in great demand. There can be no assurance that the Company can retain its key technical and managerial employees or that it can attract, assimilate or retain other highly qualified technical and managerial personnel in the future. None of the Company's employees are subject to any collective bargaining -17- 18 agreements. Each employee of the Company has executed an agreement not to disclose trade secrets or other confidential information. Enlighten Software believes its employee relations are good. BUSINESS RISKS In addition to the other information in this Report on Form 10-KSB and other documents the Company files from time to time with the Securities and Exchange Commission, the following risk factors should be considered carefully in evaluating the Company and its business: Fluctuating Operating Results The Company has experienced significant quarterly fluctuations in operating results and expects that these fluctuations will continue in future periods. These fluctuations have been caused by a number of factors, including the timing of new product or product enhancement introductions by the Company or its competitors, the development and introduction of new operating systems that require additional development efforts, purchasing patterns of its customers, size and timing of individual orders, the rate of customer acceptance of new products, and pricing and promotion strategies undertaken by the Company or its competitors. Future operating results may fluctuate as a result of these and other factors, including the Company's ability to continue to develop, acquire, and introduce new products on a timely basis, the timing and level of sales by the Company's OEM or other third-party licensees of computer systems or software incorporating the Company's products, technological changes in computer systems and environments, quality control of the products sold, the Company's success in shifting its primary sales strategy from direct to indirect channels, and general economic conditions. Additionally, the Company's operating results may be influenced by seasonality and overall trends in the global economy. Because the Company operates with a relatively small backlog, quarterly sales and operating results generally depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, the Company has recognized a substantial portion of its license revenues in the last month of the quarter, particularly the last week. Since the Company's staffing levels and other operating expenses are based upon anticipated revenues, delays in the receipt of orders can cause significant fluctuations in income from quarter to quarter. Uncertainty of Success in Open Systems Market The Company has derived a substantial portion of its revenue to date from its Tandem-based products. The Company, however, sold all rights to its Tandem technology in October 1997. The future success of the Company is substantially dependent on its ability to generate significant revenue from its UNIX/Windows product offering. The Company's initial product entry into the open systems market in 1995 was -18- 19 unsuccessful. Version 2.0 of EnlightenDSM was released in mid-1996. This version and its extensions represented 100% and 27% of the Company's license revenues in 1998 and 1997, respectively. In January 1998, the Company signed an OEM bundling agreement with Silicon Graphics in which Silicon Graphics will bundle a limited version of the Company's product on each UNIX system shipped. In August 1998, the Company signed a distribution agreement with Access Graphics and Integration Alliance, distributors with approximately $2 billion annually in hardware revenue. In February 1999, the Company signed a licensing and integration agreement with IBM under which IBM will integrate EnlightenDSM with its new Suites product line for Solaris and AIX operating systems. Additionally in February 1999, Sun and the Company announced that EnlightenDSM will be integrated with Sun's SyMON systems management product. However, the open systems market is characterized by rapid technological growth and intense competition. For example, in 1998 the Linux operating system, a derivative of the UNIX operating system that has been available as "shareware" for several years, began to achieve significant commercial success. The Company does not currently have a product that operates in a Linux environment. There can be no assurance that the Company has the resources, both financial and personnel, to effectively capitalize on, and continue with, its early and limited success in this market. Expansion of New Distribution Channels; Reliance on Resellers Prior to October 1997, the Company employed primarily a direct sales model, complemented with a telesales force, for the sale of its software products. In the fourth quarter of 1997, the Company began to shift a majority of its sales and marketing resources toward third-party resellers in both the United States and internationally. The Company's growth is dependent on its ability to expand its third-party distribution channel to market, sell, and support the Company's software products. The Company is currently investing, and intends to continue to invest, significant resources to develop this channel, which could materially adversely affect the Company's operating margins. The Company has only limited experience in marketing its products through distributors. Additionally, the Company will have no control over its third-party distributors including their shipping dates or volumes of systems shipped by its OEM and other third-party customers. There can be no assurance that the Company will be successful in its efforts to generate significant revenue from this channel, nor can there can be any assurance that the Company will be successful in recruiting new organizations to represent the Company and its products. Additionally, since the Company has shifted its sales efforts from direct to indirect channels, the Company is more dependent on its third-party distributors for the technical support and consultation to end-users. The Company will need to continue to increase its training and education efforts related to its third-party distributors to enable such third parties to obtain the technical proficiency and knowledge with respect to the Company's products. Despite these efforts, there can be no assurance that the Company will successfully train its third party distributors to enable them to provide adequate technical -19- 20 support to the customer base. This may result in, among other things, increased workload on the Company's internal support and engineering staff, or poor customer acceptance of the products, or both, either of which would have a material adverse effect on the Company's business, operating results, and financial condition. In 1998 and early 1999, the Company entered into agreements with Silicon Graphics, Access Graphics and Integration Alliance, and IBM, as well as teamed with Sun Microsystems on product integration, all of which provides new distribution channels for the Company's products. While the Company believes these arrangements will be beneficial, there can be no assurance that the Company will be able to deliver its products to these vendors in a timely manner or that these vendors will license the Company's products in volumes anticipated by the Company. Further, these agreements are the Company's only significant third-party distribution agreements to date. While the Company's strategy is to obtain additional resellers to reduce the dependence on these few vendors, there can be no assurance of successfully attracting additional vendors to distribute the Company's products. Any such failure would result in the Company having expended significant resources with little or no return on its investment, which would have a material adverse effect on the Company's business, operating results, and financial condition. These additional investments and responsibilities will require the expenditure by the Company of substantial resources, including the diversion of employees from other projects to provide the support services and development efforts required to provide products and services to its current resellers and any other new third parties, if any. Intense Competition The Company experiences intense competition from other systems management companies, and the market is rapidly changing. The Company believes that its ability to compete successfully depends on a number of factors, including the performance, price, and functionality of its products relative to those of its competitors. Most of the Company's competitors are larger and have greater financial, technical, marketing, support, and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. In addition, the software industry is characterized by low barriers to entry. There can be no assurance that the Company's current competitors or any new market entrants will not develop systems management products that offer significant performance, price, or other advantages over the Company's technology. In addition, operating system vendors could introduce new or upgrade existing operating systems or environments that include systems management functionality offered by the Company, which could render the Company's products obsolete and unmarketable. There can be no assurance that the Company will be able to successfully compete against current or future competitors which could have a material adverse effect on the Company's business, operating results, and financial condition. -20- 21 Possible Volatility of Stock Price The trading price of the Company's Common Stock has been subject to significant fluctuations since its initial public offering in 1994. The trading price of the Company's Common Stock could be subject to wide fluctuations in the future due to factors such as announcements of technological innovations, new product introductions by the Company, its competitors and other third parties, quarterly variations in the Company's operating results, and market conditions in high technology industries generally and in the software industry in particular. In addition, the stock market has experienced volatility that has particularly affected the market prices of many high technology companies which has often been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Product Concentration The Company expects that a substantial majority of the Company's revenue in future periods will be derived from its UNIX/Windows product, EnlightenDSM. This product accounted for 100%, and 27% of the Company's license revenue in the years ended December 31, 1998, and 1997, respectively. The Company disposed of its Tandem product line that accounted for the balance of its license revenue in 1997. The Company expects that the EnlightenDSM product and its extensions and derivatives will continue to account for a substantial majority, if not all, of the Company's revenue for the foreseeable future. Broad market acceptance of EnlightenDSM is, therefore, critical to the Company's future success. Failure to achieve broad market acceptance of EnlightenDSM, as a result of competition, technological change, or otherwise, would have a material adverse effect on the business, operating results, and financial condition of the Company. The Company's future financial performance will depend in significant part on the successful development, introduction, and market acceptance of EnlightenDSM and its product enhancements. There can be no assurance that the Company will be successful in marketing EnlightenDSM or any new products, applications, or product enhancements, and any failure to do so would have a material adverse effect on the Company's business, operating results, and financial condition. Support Of Multiple Environments; Product Development The Company's future success will depend on the timely and successful development and introduction of new products (including new releases, applications, and enhancements). Such activities can involve substantial commitments of financial, product development, and other resources. Moreover, even if such efforts are successful, the Company might have focused on particular applications that do not achieve or maintain widespread market acceptance or whose users are predisposed to obtain their management tools from other sources. The result of such occurrence could mean that -21- 22 significant expenditures of time, effort, and funds by the Company have little or no value, which could have a material adverse effect on the Company's business, operating results, and financial condition. The Company has developed and is continuing to develop various versions of its products for the Windows NT, Windows98, and Windows95 environments. The Company also intends to expand its products to support additional applications and operate across more diverse open networks, which may encompass an increasing variety of processor, server, and workstation types and multiple operating systems. Such efforts will require significant commitments of financial and product development resources, and there can be no assurance that such efforts will be successful. The failure of such efforts or the failure of any resulting products to achieve market acceptance could have a material adverse effect on the Company's business, operating results, and financial condition. Software products as complex as those offered by the Company often contain undetected errors or failures when first introduced or as new versions are released. The Company has in the past discovered software errors in certain of its new products after their introduction and has experienced delays or lost revenues during the period required to correct these errors. Testing of the Company's products is particularly difficult because of the Company's limited ability to simulate the wide variety of computing environments in which the Company's customers may deploy such products Although the Company has not experienced material adverse effects resulting from any such errors to date, there can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could have a material adverse effect upon the Company's business, operating results, and financial condition. Rapid Technological Change The market for the Company's products is characterized by rapid technological developments, evolving industry standards, and rapid changes in customer requirements. The introduction of products embodying new technologies, including new operating systems, applications, hardware products, systems management frameworks, and network management platforms, the emergence of new industry standards, or changes in customer requirements could render the Company's existing products obsolete and unmarketable. As a result, the Company's success depends upon its ability to continue to enhance existing products, respond to changing customer requirements, and develop and introduce in a timely manner, new products that keep pace with technological developments and emerging industry standards. Additionally, there can be no assurance that other operating systems, such as Windows NT or Linux, will not significantly affect deployment of traditional UNIX systems for business critical applications. A significant portion of the Company's -22- 23 revenue will continue to be derived from UNIX-based computer systems for the foreseeable future. While the Company has ported its products to the Windows NT, Windows98, and Windows95 platforms, the product requires customers to control systems management for their heterogeneous environment from traditional UNIX-based systems. A significant decline in sales of traditional UNIX-based systems would decrease the demand for the Company's products and would have a material adverse effect on the Company's business, operating results, and financial condition. Finally, there can be no assurance that the Company will be successful in developing and marketing, on a timely basis, product enhancements or new products that respond to technological change or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction, and sale of these products, or that any such new products or product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Product Liability The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. In licensing its products, the Company relies primarily on a combination of signed license agreements that incorporate by reference "shrink wrap" licenses that are included electronically with the product. In the future, particularly in connection with any OEM and other bundling relationships, the Company will rely on "shrink wrap" licensees that are not signed by the end-users, and, therefore, such licenses may be unenforceable under the laws of certain jurisdictions. As a result of these and other factors, the limitation of liability provisions contained in the Company's license agreements may not be effective. The Company's products can be used to manage systems critical to organizations, and, as a result, the sale and support of products by the Company may entail the risk of product liability claims. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results, and financial condition. Dependence on Growth of Systems Management Market For the foreseeable future, all of the Company's business will be in the open systems (UNIX and Windows) systems management market, which is still an emerging market. The Company's future financial performance will depend in large part on continued growth in the number of companies adopting systems management solutions for their client/server computing environments. There can be no assurance that the market for systems management solutions will continue to grow. If the systems management market fails to grow or grows more slowly than the Company currently anticipates, or in the event of a decline in unit price or demand for the Company's products, as a result of competition, technological change, or other factors, the Company's business, operating results, and financial condition would be materially adversely affected. During recent years, segments of the computer industry have experienced -23- 24 significant economic downturns characterized by decreased product demand, production overcapacity, price erosion, work slowdowns, and layoffs. The Company's operations may in the future experience substantial fluctuations from period-to-period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers, and other factors affecting capital spending. There can be no assurance that such factors will not have a material adverse effect on the Company's business, operating results, and financial condition. Management Of Growth; Dependence on Key Personnel The Company's success in the future is dependent upon its ability to grow rapidly and effectively manage growth. Such growth, if any, will require increased managerial, technical, direct sales, and other personnel, expanded information systems and additional financial and administrative control procedures. Expansion of the Company's indirect and direct sales channels will require significant financial and managerial commitments by the Company. There can be no assurance that the Company will be able to effectively manage such growth, if any. Its failure to do so would have a material adverse effect on its business, operating results, and financial condition. Competition for qualified technical, sales, and other qualified personnel is intense, and there can be no assurance that the Company will be able to attract or retain highly qualified employees in the future. The Company's future success also depends in part upon the continued service of its key technical, sales and senior management personnel. The loss of the services of one or more of these key employees could have a material adverse effect on its business, operating results, and financial condition. Year 2000 Compliance The Company is aware of the issues associated with the programming code in existing computer systems as the millennium ("Year 2000") approaches. The Year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. Systems that do not properly recognize date sensitive information when the year changes to 2000 could generate erroneous data or cause a system to fail. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. The Company has conducted Year 2000 compliance reviews for current versions of its products. The reviews include assessment, implementation, and validation testing. The Company believes that all of its existing products are or will become Year 2000 compliant during fiscal 1999 and new products will be designed to be Year 2000 compliant. Contingency plans for the handling of its reasonably likely worst case scenarios will be created during fiscal 1999 to determine how the Company will handle its reasonably likely worst case scenarios. Although the Company believes its products will be Year 2000 compliant, its products may not contain all the necessary software routines and programs for the accurate calculation, display, storage and manipulation of -24- 25 data involving dates. Any failure of the Company's products to perform, including system malfunctions due to the onset of the calendar year 2000, could result in claims against the Company, which could have a material adverse effect on the Company's business, financial condition or results of operations. To the extent information is publicly available, the Company has assessed the Year 2000 compliance status of its customers. The failure of its current or future customers to achieve Year 2000 compliance, or if they divert technology expenditures to address Year 2000 compliance problems, could have a material adverse effect on the Company's business, financial condition or results of operations. We believe the software and hardware we use internally comply with Year 2000 requirements or will comply during 1999. During 1998, we replaced or upgraded much of our internal use hardware and software. In 1998, the Company incurred approximately $100,000 in its Year 2000 remediation efforts. Enlighten expects additional remediation costs of approximately $50,000 in 1999, which includes expenditures for hardware and software upgrades. In addition, we are not aware of any material operational issues or costs associated with preparing our internal use software and hardware for the Year 2000. However, serious, unanticipated negative consequences, including material costs caused by undetected errors or defects in the technology used in our internal systems may occur. The occurrence of any of the foregoing could seriously harm our business, operating results or financial condition. The Company has not yet fully developed a comprehensive contingency plan to address situations that may result if the Company is unable to achieve Year 2000 readiness of its critical operations. The cost of developing and implementing such a plan may itself be material. ITEM 2. PROPERTIES The Company leases approximately 17,000 square feet of office space in San Mateo, California under a lease which expires in March 2001 and leases a sales and support office in Denver Colorado under a lease which expires in August 1999. The Company believes that its current facilities are adequate for its needs for the foreseeable future and should additional space be needed, it will be available to accommodate the expansion of the Company's operations on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS The Company is not currently involved in any legal proceedings and is not aware of any proceedings that any party is contemplating to bring against the Company, although from time to time it may become involved in disputes in connection with the operation of its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -25- 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Since April 20, 1994, the Company's Common Stock has been traded on the Nasdaq SmallCap Market under the symbol "SFTW." As of December 31, 1998, there were 37 record holders of the Company's Common Stock. As of the same date, 3,899,761 shares of Common Stock were outstanding and 10,000,000 shares of Common Stock were authorized. The following table sets forth the range of high and low closing sale prices for each of the periods indicated for the shares of Common Stock.
1997 Quarter Ended - ------------- March 31, 1997 $5.25 $2.75 June 30, 1997 $3.25 $1.38 September 30, 1997 $3.50 $0.94 December 31, 1997 $3.00 $2.00
1998 Quarter Ended - ------------- March 31, 1998 $5.25 $3.00 June 30, 1998 $4.50 $2.75 September 30, 1998 $3.69 $2.13 December 31, 1998 $3.81 $1.91
DIVIDEND POLICY The Company has never paid cash dividends and does not anticipate paying cash dividends in the foreseeable future. The Company anticipates that it will retain earnings, if any, for future growth and expansion of its business. -26- 27 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following statements regarding the Company's future revenues, revenue sources, operating expenses, and capital expenditures include forward-looking information. Actual results may vary substantially depending upon a variety of factors including those described in "Item 1 - Business Business Risks" on page 18 of this report, or elsewhere in this report. OVERVIEW Enlighten Software Solutions develops, markets, and supports software products for UNIX and UNIX/Windows environment workgroup administration and enterprise management. The Company's product solutions are designed for open systems distributed computing environments in the range of ten to 1,000 servers/clients. The EnlightenDSM product allows companies to manage their information systems by enabling systems managers and administrators to control their systems from diverse UNIX/Windows platform vendors such as DEC, HP, IBM, SCO, Silicon Graphics, Sun, and Microsoft. Founded in 1986, the Company was a leading provider of systems management software on the Tandem platform, providing a range of automated systems management products to over 400 companies in 30 countries. On October 1, 1997, the Company sold its Tandem product line to NDS in order to focus efforts on its UNIX/Windows product suite. In connection with this sale, the Company received approximately $2.5 million in cash, of which $1.6 million was received in 1997, and the rights to receive royalties on Tandem related products for a period of three years based upon NDS' licensing and support of the Tandem software products. The sale of the Tandem product line also included the transfer to NDS of approximately 12 employees associated with the Company's Tandem operation. Following the disposition of its Tandem product line, the Company shifted its sales strategy to one based primarily upon third-party distributors and restructured its sales department as a result of this shift. The Company intends to build its sales, marketing, and customer support organizations with a focus on delivery of its products to OEM partners, resellers, system integrators, and select end-users. An essential element of the Company's sales and marketing strategy is the development of indirect distribution channels, such as OEMs, ISVs, and VARs, as well as other systems management and application software vendors whose products are complementary with those of the Company. -27- 28 VARIABILITY OF QUARTERLY RESULTS The Company has experienced significant quarterly fluctuations in operating results and expects that these fluctuations will continue in future periods. These fluctuations have been caused by a number of factors, including the timing of new product or product enhancement introductions by the Company or its competitors, purchasing patterns of its customers, size and timing of individual orders, the rate of customer acceptance of new products, and pricing and promotion strategies undertaken by the Company or its competitors. Future operating results may fluctuate as a result of these and other factors, including the Company's ability to continue to develop, acquire, and introduce new products on a timely basis. Additionally, the Company's operating results may be influenced by seasonality and overall trends in the global economy. Because the Company operates with a relatively small backlog, quarterly sales and operating results generally depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, the Company has recognized a substantial portion of its license revenues in the last month of the quarter, particularly the last week. Since the Company's staffing levels and other operating expenses are based upon anticipated revenues, delays in the receipt of orders can cause significant fluctuations in income from quarter to quarter. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND 1997 Total revenue. Total revenue decreased 11% from $4,231,000 in 1997, to $3,758,000 in 1998. This decrease was primarily due to the sale of the Company's Tandem products on October 1, 1997, which primarily affected product license fees and product maintenance fees. Total revenue from the Company's UNIX/Windows product line increased 538% from $506,000 in 1997, to $3,229,000 in 1998. Total revenue from the Company's disposed Tandem product line decreased 86% from $3,725,000 in 1997, to $529,000 in 1998. Revenue from product license fees increased 68% from $1,439,000 in 1997, to $2,417,000 in 1998. The increase was primarily attributable to the revenue associated with license fees from the Silicon Graphics OEM relationship, signed in January 1998, which more than offset the decrease in revenue from the Company's disposed Tandem product line. Revenue from the Company's UNIX/Windows product license fees increased by 518%, from $391,000 in 1997, to $2,417,000 in 1998. There was no revenue from the Company's Tandem product license fees in 1998 compared to $1,047,000 in 1997. Product maintenance fees decreased by $1,943,000, or 75%, to $656,000 in 1998 compared to 1997. This decline is entirely due to the disposition of the Tandem product line on October 1, 1997. There were no product maintenance fees from the Tandem -28- 29 product line in 1998, compared to $2,515,000 in 1997. This decrease was partially offset by an increase in product maintenance fees for the Company's UNIX/Windows product line of $572,000, or 686%, for the year ended December 31, 1998, when compared to 1997. Consulting services revenue increased by $67,000, or 35%, to $261,000 in 1998 when compared with 1997. The increase is primarily attributable to consulting project work performed in association with Silicon Graphics. The Company recognizes royalties from NDS from product license fees and product maintenance fees generated by the Tandem product line sold to NDS in October 1997. Royalties were $426,000 in 1998 and there were no comparable amounts in 1997. Cost of revenue. Cost of revenue consists of royalties paid to third parties, amortization of software development and acquisition costs, product packaging and documentation, software media, and the costs of employees and contractors providing consulting services. Cost of revenue decreased by $307,000, or 31%, to $670,000 in 1998. The reduction in cost of revenue is caused primarily by the decrease in costs associated with royalties and technology amortization related to the Company's Tandem product line. Costs associated with royalties decreased by 37%, to $201,000, while costs associated with technology amortization decreased 74%, to $139,000. Both these decreases were a result of the disposition of the Tandem product line. Research and development. Research and development expenses consist of personnel expenses and associated overhead, and costs of short-term independent contractors required in connection with the Company's product development efforts, less amounts capitalized. Net research and development expenses decreased by 18% from $2,059,000, or 49% of revenue in 1997, to $1,692,000, or 45% of revenue in 1998. This decrease is solely attributable to the decrease in development costs associated with the Company's disposed Tandem product line. The decrease in Tandem-related development costs were partially offset by an increase in development costs in connection with the UNIX/Windows product line. Costs incurred in the research and development of new software products are expensed as incurred until technological feasibility is established. Recently, the establishment of technological feasibility of the Company's EnlightenDSM product and general release substantially coincided. As a result, the Company has capitalized a lesser portion of its software development costs since a majority of such costs have not been significant. The Company expects research and development expenses to increase in absolute dollars as the Company 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, -29- 30 travel and entertainment, and other selling and marketing costs. Sales and marketing expenses decreased by 49%, from $3,820,000, or 90% of revenue in 1997, to $1,959,000, or 52% of revenue in 1998. The decrease is attributable to the Company's restructuring of the sales and marketing department related to the shift in sales strategy from primarily a direct sales approach to an indirect channels approach. This shift occurred during the fourth quarter of 1997. During the fourth quarter of 1997, the Company closed its field sales offices in the Chicago and New York areas and in the U.K. For the foreseeable future, the Company expects sales and marketing costs to increase in absolute dollars as it expands its sales and marketing force to enhance its ability to sell and service its products through third-party resellers. 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, decreased by 40%, from $1,551,000, or 37% of revenue in 1997, to $930,000, or 25% of revenue in 1998. The decrease in expense is primarily related to decreased legal fees associated with an arbitration hearing settled in 1997, and other reduced infrastructure costs associated with the disposed Tandem operations. Gain on sale of Tandem product line. On October 1, 1997, the Company sold its Tandem product line to NDS. The Company recognized a gain on the sale of the operating assets of the Tandem product line of $515,000 and $2,158,000 in 1998 and 1997, respectively. The Company received approximately $2.5 million in cash and the rights to receive royalties on Tandem related products for a period of three years. The Tandem operations contributed revenue, excluding royalties, of $104,000 and $3,725,000 in 1998 and 1997, respectively. The sale of the Tandem product line also included the transfer to NDS of approximately 12 employees associated with the Company's Tandem operation. Other income (expense). 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 interest on the Company's savings accounts and short-term interest-bearing securities. Interest expense is comprised of interest on bank notes and capital leases of computer equipment. Other income and expense (net) increased by $105,000, or 174%, in 1998 when compared to 1997 as a result of increased cash balances, resulting in an increase in interest income from cash reserves. Income tax expense (benefit). The Company recognized a tax benefit of $41,000 in 1998 as a result of receiving tax refunds on net operating loss carrybacks in excess of amounts previously provided for by the Company. The tax benefit was partially offset by a $15,000 tax expense incurred as a result of the filing of the final tax return for the U.K. operations. The Company's tax expense recognized in 1997 is primarily due to taxes paid to foreign jurisdictions. No tax benefit, other than that stated above, was recognized in either year due to the uncertainty related to the Company's ability to recognize a tax benefit for loss and credit carryforwards. -30- 31 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company's cash, cash equivalents, and short term investments were $3,186,000, representing 65% of total assets. The Company's working capital as of December 31, 1998, was $3,274,000. Cash equivalents are highly liquid investments with purchased maturities of ninety days or less. The Company's short term investments are primarily investment grade commercial paper and other highly liquid investments. The Company had no debt as of December 31, 1998, other than normal trade payables and accrued liabilities. Shareholders' equity as of December 31, 1998, was $4,224,000. The Company's operating activities used cash of $1,334,000 in 1998, compared to cash used by operating activities of $1,915,000 in the prior year. The decrease in cash used by operating activities was principally caused by decreased net losses. This was partially offset by an increase in accounts receivable, a decrease in accrued and other liabilities, and a decrease in deferred revenue. The Company's investing activities have consisted primarily of the disposition of the Tandem operation, short-term investments, and additions to capital equipment. Investing activities used cash of $684,000 in 1998, compared with providing cash of $2,473,000 in 1997. The decrease is primarily due to an increase in purchases of short-term investments and the decrease in proceeds from the sale of the Tandem operation. Financing activities provided cash of $2,512,000 in 1998, compared with cash provided of $158,000 in the prior year. The increase in cash provided from financing activities resulted from the Company's issuance and sale of 700,000 shares of Common Stock in a public offering. In May 1998, the Company completed a public offering (the "Offering") of 700,000 shares of common stock. The net proceeds from the Offering of $2.2 million were, and will be used for funding operations and capital expenditures and for other general corporate purposes, including working capital. On October 1, 1997, the Company sold its Tandem product line to New Dimension Software, Inc. ("NDS"). The Company received approximately $2.5 million in cash and the rights to receive royalties on Tandem related products for a period of three years. The Company received $1.6 million in cash in 1997, which included a $300,000 prepayment of future royalties. The Company will require substantial cash flow to continue operations on a satisfactory basis and complete its research and development and its sales and marketing programs. The Company anticipates that cash and short-term investments and net proceeds from the Offering will provide sufficient liquidity to fund these requirements for the next twelve months. However, the Company's continued ability to fund operations -31- 32 and meet its other obligations depends on its future performance, which, in turn, is subject to general economic conditions, and business and other factors beyond the Company's control. If the Company is unable to generate sufficient cash flow from operations, it may be required to obtain additional financing. There can be no assurance that the Company would be able to obtain such financing, or that any financing would result in a level of net proceeds required. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA See Consolidated Financial Statements included herein beginning on page F-1. ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -32- 33 Certain information required by Part III is omitted from this report, in that the Company will file its Proxy Statement for its Annual meeting of Shareholders with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information included therein is incorporated herein by reference. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 9 is set forth in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 20, 1999, under the captions "Directors and Executive Officers" and "Section 16(b) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION The information required by this Item 10 is set forth in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 20, 1999, under the caption "Executive Compensation and Other Matters," and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 11 is set forth in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 20, 1999, under the caption "Stock Ownership of Certain Beneficial Owners and Management," and is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 12 is set forth in the Company's Proxy Statement for its Annual Meeting of Shareholders to be held on May 20, 1999, under the caption "Certain Relationships and Related Transactions," and is incorporated herein by reference. -33- 34 PART IV ITEM 13. FINANCIAL STATEMENTS, EXHIBITS, SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: Independent Auditors' Report F-1 Consolidated Balance Sheets: December 31, 1998 and 1997 F-2 Consolidated Statements of Operations: Years ended December 31, 1998 and 1997 F-3 Consolidated Statements of Shareholders' Equity: Years ended December 31, 1998 and 1997 F-4 Consolidated Statements of Cash Flows: Years ended December 31, 1998 and 1997 F-5 Notes to Consolidated Financial Statements F-6 (a)(2) Exhibits:
See Exhibits Index on Page 35. The Exhibits listed in the accompanying Exhibits Index are filed or incorporated by reference as part of this report. Exhibit Nos. 10.28, 10.29, 10.31, and 10.32 are compensatory plans or arrangements. (b) Reports on Form 8-K: None -34- 35 EXHIBITS INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1(1) Amended and Restated Articles of Incorporation. 3.2(1) By Laws. 10.27(2) Agreement dated as of September 22, 1997, by and among Enlighten Software Solutions, Inc., Peter J. McDonald, and New Dimension Software, Inc. 10.28(4)(@) Employment letter, dated July 3, 1997, by and between Enlighten Software Solutions, Inc. and Mike Seashols. 10.29(4)(@) Employment letter, dated August 28, 1997, by and between Enlighten Software Solutions, Inc. and David D. Parker. 10.30(4) Agreement dated as of January 21, 1998, by and between Enlighten Software Solutions, Inc. and Silicon Graphics, Inc. 10.31(@) Employment letter, dated July 15, 1998, by and between Enlighten Software Solutions, Inc. and Bill Bradley. 10.32(@) Employment letter, dated January 15, 1999, by and between Enlighten Software Solutions, Inc. and Tim Gardner. 10.33 Agreement dated as of December 31, 1998, by and between Enlighten Software Solutions, Inc. and International Business Machines. 21.1(3) Subsidiaries of the Company. 23.1 Consent of KPMG LLP. 27.1 Financial Data Schedule .
- ---------- (1) Incorporated by reference from exhibits of the same number in the Company's Registration Statement on Form S-1, which became effective April 19, 1994. (2) Incorporated by reference from exhibit 10.27 in the Company's Current Report on Form 8-K dated October 1, 1997. (3) Incorporated by reference from an exhibit of the same number in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (4) Incorporated by reference from an exhibit of the same number in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. (@) Compensatory or employment arrangement. -35- 36 ENLIGHTEN SOFTWARE SOLUTIONS, INC. FORM 10-KSB, DECEMBER 31, 1998 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. ENLIGHTEN SOFTWARE SOLUTIONS, INC. /s/ David D. Parker ------------------------------------ David D. Parker Chief Executive Officer /s/ David D. Parker - ------------------------------------ David D. Parker, March 31, 1999 Chief Executive Officer /s/ Michael A. Morgan - ------------------------------------ Michael A. Morgan, March 31, 1999 Chief Financial Officer /s/ Michael Seashols - ------------------------------------ Michael Seashols, March 31, 1999 Chairman of the Board /s/ Peter J. McDonald - ------------------------------------ Peter J. McDonald, March 31, 1999 Director /s/ Peter J. Sprague - ------------------------------------ Peter J. Sprague, March 31, 1999 Director /s/ Bruce Cleveland - ------------------------------------ Bruce Cleveland, March 31, 1999 Director -36- 37 INDEPENDENT AUDITORS' REPORT The Board of Directors Enlighten Software Solutions, Inc.: We have audited the consolidated financial statements of Enlighten Software Solutions, Inc. and subsidiary as listed in the index under Item 13(a)(1). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Enlighten Software Solutions, Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Mountain View, California February 5, 1999 F-1 38 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Years ended December 31, 1998 and 1997
ASSETS 1998 1997 ----------- ----------- Current assets: Cash and cash equivalents $ 1,899,976 $ 1,406,141 Short term investments 1,285,551 286,000 Accounts receivable, less allowance for doubtful accounts of $25,000 and $125,000 respectively 653,438 240,444 Refundable income taxes -- 127,035 Prepaid expenses and other assets 140,170 449,256 ----------- ----------- Total current assets 3,979,135 2,508,876 Property and equipment, net 588,630 748,736 Acquired technology and software development costs, net 92,248 231,063 Other assets 269,409 226,034 ----------- ----------- $ 4,929,422 $ 3,714,709 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 202,547 $ 134,043 Accrued and other current liabilities 458,568 728,975 Deferred revenue 43,809 359,361 ----------- ----------- Total current liabilities 704,924 1,222,379 ----------- ----------- Shareholders' equity: Preferred stock; 1,000,000 shares authorized; none issued and outstanding -- -- Common stock; 10,000,000 shares authorized; 3,899,761 and 2,963,635 shares issued and outstanding in 1998 and 1997, respectively 7,591,538 5,079,505 Accumulated other comprehensive income 5,551 -- Accumulated deficit (3,372,591) (2,587,175) ----------- ----------- Total shareholders' equity 4,224,498 2,492,330 ----------- ----------- $ 4,929,422 $ 3,714,709 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-2 39 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Consolidated Statement of Operations
Years ended December 31, --------------------------------- 1998 1997 ----------- ----------- Revenue: Product license fees $ 2,416,725 $ 1,438,805 Product maintenance fees 655,510 2,598,679 Consulting services 260,596 193,358 Royalties 425,577 -- ----------- ----------- Total revenue 3,758,408 4,230,842 ----------- ----------- Cost of revenue: Product licenses 550,511 698,714 Product maintenance 7,115 182,096 Consulting services 111,976 95,525 ----------- ----------- Total cost of revenue 669,602 976,335 ----------- ----------- Gross profit 3,088,806 3,254,507 ----------- ----------- Operating expenses: Research and development 1,691,950 2,059,495 Sales and marketing 1,958,827 3,819,738 General and administrative 929,683 1,551,457 Gain on sale of Tandem product line (515,487) (2,157,827) ----------- ----------- Total operating expenses 4,064,973 5,272,863 ----------- ----------- Operating loss (976,167) (2,018,356) Other income, net 165,357 60,323 ----------- ----------- Loss before income taxes (810,810) (1,958,033) Income taxes (25,394) 2,390 ----------- ----------- Net loss (785,416) (1,960,423) Other comprehensive income - unrealized gains on securities 5,551 -- ----------- ----------- Comprehensive loss $ (779,865) $(1,960,423) =========== =========== Basic and diluted net loss per share $ (0.22) $ (0.67) =========== =========== Shares used in computing basic and diluted net loss per share 3,508,258 2,944,228 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-3 40 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity Years ended December 31, 1998 and 1997
Accumulated Other Total Common Stock Comprehensive Accumulated Shareholders' Shares Amount Income Deficit Equity ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1996 2,910,956 $ 4,921,208 $ -- $ (626,752) $ 4,294,456 Stock options exercised 27,963 125,215 -- -- 125,215 Employee stock purchase plan shares issued 24,716 33,082 -- -- 33,082 Net loss -- -- -- (1,960,423) (1,960,423) ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1997 2,963,635 5,079,505 -- (2,587,175) 2,492,330 Stock options exercised 184,449 242,055 -- -- 242,055 Employee stock purchase plan shares issued 51,677 52,606 -- -- 52,606 Stock offering, net 700,000 2,217,372 -- -- 2,217,372 Unrealized gain on investments -- -- 5,551 -- 5,551 Net loss -- -- -- (785,416) (785,416) ----------- ----------- ----------- ----------- ----------- Balances at December 31, 1998 3,899,761 $ 7,591,538 $ 5,551 $(3,372,591) $ 4,224,498 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 41 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows
Years ended December 31, ------------------------------ 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss $ (785,416) $(1,960,423) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 504,374 813,636 Gain on sale of Tandem product line (515,487) (2,157,827) Loss on disposal of property and equipment -- 38,422 Changes in operating assets and liabilities: Accounts receivable (412,994) 1,259,607 Refundable income taxes 127,035 273,634 Prepaid expenses and other assets 265,711 (251,087) Trade accounts payable 68,504 (210,223) Accrued and other liabilities (270,407) 133,724 Deferred revenue (315,552) 145,359 ----------- ----------- Net cash used for operating activities (1,334,232) (1,915,178) ----------- ----------- Cash flows from investing activities: Purchases of short-term investments (1,200,000) -- Sales of short-term investments 206,000 1,353,065 Proceeds from sale of Tandem product line 515,487 1,285,378 Capitalization of software development costs -- (66,449) Purchases of property and equipment (205,453) (98,583) ----------- ----------- Net cash (used in) provided by investing activities (683,966) 2,473,411 ----------- ----------- Cash flows from financing activities: Proceeds from public offering of stock, net 2,217,372 -- Proceeds from issuance of stock 294,661 158,297 ----------- ----------- Net cash provided by financing activities 2,512,033 158,297 ----------- ----------- Net increase in cash and cash equivalents 493,835 716,530 Cash and cash equivalents at beginning of year 1,406,141 689,611 ----------- ----------- Cash and cash equivalents at end of year $ 1,899,976 $ 1,406,141 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-5 42 ENLIGHTEN SOFTWARE solutions, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Years ended December 31, 1998 and 1997 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Enlighten Software Solutions develops, markets, and supports software products for UNIX and UNIX/Windows environment workgroup administration and enterprise management. The Company's product solutions are designed for open systems distributed computing environments in the range of ten to 1,000 servers/clients. Founded in 1986, the Company was a leading provider of systems management software on the Tandem platform, providing a range of automated systems management products to over 400 companies in 30 countries. On October 1, 1997, the Company sold its Tandem product line to New Dimension Software, Inc. ("NDS"), a subsidiary of New Dimension Software, Ltd. in order to focus efforts on its UNIX/NT product suite. The Company recognized a gain on the sale of the operating assets of the Tandem product line of approximately $0.5 million and $2.2 million, in 1998 and 1997, respectively. In addition, NDS is required to pay the Company royalties through September 2000 from NDS' licensing and support of the Tandem software products. The sale of the Tandem product line included the transfer of property and equipment, purchased and internally developed software, and deferred maintenance revenue with net book values of $141,000, $248,000, and $1,261,000, respectively. The sale of the Tandem product line also included the transfer to NDS of approximately 12 employees associated with the Company's Tandem operation. F-6 43 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Principles of Consolidation The accompanying consolidated financial statements include the accounts of Enlighten Software Solutions, Inc. and its wholly-owned subsidiary, a field sales office in Europe. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition The Company adopted the provisions of Statement of Position No. 97-2, or SOP No. 97-2, Software Revenue Recognition, as amended by Statement of Position No. 98-4, Deferral of the Effective Date of Certain Provisions of SOP No. 97-2, effective January 1, 1998. SOP No. 97-2 supersedes Statement of Position No. 91-1, Software Revenue Recognition. SOP No. 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on its relative fair value. The fair value of the element must be based on objective evidence that is specific to the vendor. If the vendor does not have objective evidence of the fair value of all elements in a multiple-element arrangement, all revenue from the arrangement must be deferred until such evidence exists or until all elements have been delivered. Under SOP No. 97-2, the Company recognizes license revenue upon shipment if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and product returns are reasonably estimable. 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 OEMs are recognized upon receipt of a report of shipment. Product maintenance fees committed as part of new product licenses and maintenance resulting from renewed maintenance contracts are deferred and recognized ratably over the contract period, generally one year. Consulting service revenue is recognized when services are performed for time and material contracts and on a percentage of completion basis for fixed price contracts. The adoption of SOP No. 97-2 did not have a material effect on the Company's operating results. Cash Equivalents and Short Term Investments The Company considers all liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company has classified its investments in commercial paper and U.S. Treasury notes as "held-to-maturity." All such investments mature in less than one year and are stated at amortized cost, which approximates fair value. Interest income is recorded using an effective interest rate, with the associated discount or premium amortized to interest income. F-7 44 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Additionally, the Company has classified its investments in preferred stock and municipal bonds as "available-for-sale." Such investments are recorded at fair market value based on quoted market prices, with unrealized gains and losses reported as a separate component of stockholders' equity. As of December 31, 1998 and 1997, unrealized gains and losses were not significant. The cost of securities sold is determined based on the specific identification method. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, generally five years. Leasehold improvements are amortized on a straight-line basis over the lease term or the estimated useful life of the asset, whichever is less. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property and equipment is measured by comparison of its carrying amount to future net undiscounted cash flows the property and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property and equipment exceeds its fair value. To date, the Company has made no impairment adjustments to the carrying values of its property and equipment. Acquired Technology and Software Development Costs Acquired technology represents amounts paid by the Company for the rights to use certain completed software that is either incorporated into the Company's products or sold as a stand-alone product, and is amortized using the straight-line method over the estimated useful lives of the related products, generally three years. Software development costs incurred subsequent to the determination of product technological feasibility are capitalized and amortized over the products' estimated useful lives, generally three years. Costs related to computer software development incurred prior to establishing product technological feasibility are expensed as incurred. The Company periodically assesses the recoverability of these intangible assets by comparing their amortized cost to the net realizable value of the related products. The amount by which the unamortized costs exceed the net realizable value is written off. Foreign Currency Translation The functional currency for the Company's foreign subsidiary is the U.S. dollar. Accordingly, this entity remeasures monetary assets and liabilities at year-end exchange F-8 45 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements rates while nonmonetary items are remeasured at historical rates. Income and expense accounts are remeasured at the average rates in effect during the year, except for depreciation which is remeasured at historical rates. Transaction gains and losses are recognized in income in the period of occurrence. Use of Estimates The Company's management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results may differ from those estimates. Stock Based Compensation The Company uses the intrinsic value-based method to account for all of its employee stock-based compensation plans. Fair Value of Financial Instruments and Concentration of Credit Risk The fair value of the Company's cash, cash equivalents, accounts receivable, and accounts payable approximate the carrying amount due to the relatively short maturity of these items. The fair value of the Company's short term investments are based on quoted market prices. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of short term investments and trade account receivables. The Company has investment policies that limit the amount of credit exposure to any one financial institution and restrict placement of these investments to financial institutions evaluated as credit worthy. Substantially all of the Company's accounts receivable are derived from sales to large OEM partners and select end-users. Other Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130, or SFAS 130, Accounting for Comprehensive Income, during the fiscal year ended 1998. This statement establishes standards for reporting and display of comprehensive income and its components (including revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Company's unrealized gains on investments represent the only component of comprehensive income which is excluded from net income for 1998 and prior years. The Company's comprehensive income has been presented in the consolidated financial statements. As of December 31, 1998 and 1997, the tax effects F-9 46 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements allocated to the component of other comprehensive income and accumulated other comprehensive income balances were not significant. Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by an allowance to an amount whose realization is more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Loss Per Share Basic net earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding for the period, if any. Common equivalent shares from stock options outstanding (see Note 7) have not been included as their effect would be antidilutive. Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. The Company expects that the adoption of SOP No. 98-1 will have no material impact on its financial position, results of operations or cash flows. The Company will be required to implement SOP No. 98-1 for the year ending December 31, 1999. In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. The Company expects that the adoption of SOP No. 98-5 will have no material impact on its financial position, results of operations or cash flows. The Company will be required to implement SOP No. 98-5 F-10 47 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements for the year ending December 31, 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 established methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because the Company currently holds no derivative instruments and does not engage in hedging activities, the Company expects that the adoption of SFAS No. 133 will have no material impact on its financial position, results of operations or cash flows. The Company will be required to implement SFAS No. 133 for the year ending December 31, 2000. In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP No. 98-9 requires recognition of revenue using the "residual method" in a multiple-element software arrangement when fair value does not exist for one or more of the delivered elements in the arrangement. Under the "residual method," the total fair value of the undelivered elements is deferred and recognized in accordance with SOP No. 97-2. The Company will be required to implement SOP No. 98-9 for the year ending December 31, 2000. SOP No. 98-9 also extends the deferral of the application of SOP No. 97-2 to certain other multiple element software arrangements through the Company's year ending December 31, 1999. The Company is evaluating the provisions of SOP No. 98-9 and has not yet determined what impact, if any, SOP No. 98-9 will have on its financial position, results of operations or cash flows. (2) CASH, CASH EQUIVALENTS, AND SHORT TERM INVESTMENTS Cash and cash equivalents consisted of the following:
December 31, --------------------------- 1998 1997 ---------- ---------- Cash $ 833,927 $ 400,794 Money market funds 1,066,049 1,005,347 ---------- ---------- $1,899,976 $1,406,141 ========== ========== Short term investments consisted of the following: Equity securities $ 285,551 $ 286,000 Municipal bonds 1,000,000 -- ---------- ---------- $1,285,551 $ 286,000 ========== ==========
F-11 48 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (3) PROPERTY AND EQUIPMENT A summary of property and equipment follows:
December 31, --------------------------- 1998 1997 ---------- ---------- Equipment $1,090,062 $1,224,991 Furniture and fixtures 285,907 271,511 Leasehold improvements 142,238 136,669 ---------- ---------- 1,518,207 1,633,171 Less accumulated depreciation and amortization 929,577 884,435 ---------- ---------- $ 588,630 $ 748,736 ========== ==========
(4) ACQUIRED TECHNOLOGY AND SOFTWARE DEVELOPMENT COSTS A summary of acquired technology and software development costs follows:
December 31, ----------------------- 1998 1997 -------- -------- Acquired technology $416,444 $416,444 Less accumulated amortization 324,196 185,381 -------- -------- $ 92,248 $231,063 ======== ========
On October 1, 1997, the Company sold its Tandem product line and as a result, the Company sold developed software with a gross cost of $838,316 and accumulated amortization of $691,203. The Company also sold acquired technology with a gross cost of $475,000 and accumulated amortization of $374,375. In 1997, the Company also had a write-off related to certain products which totaled $324,422 of gross developed software that had an accumulated amortization balance of $174,086. These products were not expected to generate sufficient future revenue which would be required for the Company to realize the carrying value of the assets. F-12 49 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (5) INCOME TAXES Income taxes consist of:
Current Deferred Total ------ ------ ------ Year ended December 31, 1998: Federal $(40,604) $ -- $(40,604) State and local 800 -- 800 Foreign 14,410 -- 14,410 -------- ------ -------- $(25,394) $ -- $(25,394) ======== ====== ======== Year ended December 31, 1997: Federal $ -- $ -- $ -- State and local 800 -- 800 Foreign 1,590 -- 1,590 -------- ------ -------- $ 2,390 $ -- $ 2,390 ======== ====== ========
The Company's income tax expense differed from the expected tax benefit computed by applying the statutory U.S. federal income tax rate (34%) to loss before income taxes as a result of the following:
Year ended December 31, -------------------------- 1998 1997 --------- --------- Computed "expected" tax benefit $(275,675) $(665,731) Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal benefit 528 528 Change in valuation allowance 229,832 673,086 Foreign taxes 14,410 1,590 Other 5,511 (7,083) --------- --------- $ (25,394) $ 2,390 ========= =========
F-13 50 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The tax expense recognized in 1998 was due to the Company's inability to recognize a tax benefit for loss and credit carryforwards. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
December 31, ------------------------------ 1998 1997 ----------- ----------- Deferred tax assets: Allowance for doubtful accounts $ 10,035 $ 50,173 Covenant not to compete 62,647 64,189 Accrued compensation 22,645 18,144 Credit carryforward 500,535 326,212 Loss carryforward 851,132 784,782 ----------- ----------- Deferred tax assets 1,446,994 1,243,500 Valuation allowance (1,342,962) (1,072,526) ----------- ----------- Net deferred tax assets 104,032 170,974 ----------- ----------- Deferred tax liabilities: Software development costs 37,026 92,744 Depreciation and amortization 67,006 78,320 ----------- ----------- Total deferred tax liabilities 104,032 170,974 ----------- ----------- Net deferred tax asset $ -- $ -- =========== ===========
The Company has recorded a valuation allowance of $1,342,962 with respect to the deferred tax assets as of December 31, 1998. Management has determined that such portion of deferred tax assets may not be realized. The Company has federal and state net operating loss carryforwards of approximately $2,852,000 and $2,458,000, respectively, that may be used to offset future taxable income and federal and state research tax credits of approximately $398,000 and $212,000, respectively, that may be used to offset future tax liability. If unused, both the net operating loss and research credit carryforwards will expire in the year 2013. F-14 51 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (6) ACCRUED AND OTHER CURRENT LIABILITIES Accrued and other current liabilities consisted of the following:
December 31, ----------------------- 1998 1997 -------- -------- Accrued employee compensation $147,287 $250,747 Deferred rent 51,613 51,141 Royalty payable 45,415 3,820 Other 214,253 423,267 -------- -------- $458,568 $728,975 ======== ========
(7) SHAREHOLDERS' EQUITY (a) Preferred Stock The Board of Directors has the authority to issue, without further action by the shareholders, up to 1,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges, and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms, and the number of shares constituting any series or the designation of such series. (b) Employee Stock Option and Purchase Plans As of December 31, 1998, the Company had authorized 1,500,000 shares of Common Stock for issuance under the 1992 Employee Stock Option Plan (the Option Plan). The Option Plan may be administered by the Board of Directors or a committee of the Board, which determines the terms of the options granted under the Option Plan, including exercise price, number of shares subject to each option, and the exercisability thereof. The vesting periods determined by the Board of Directors generally provides for shares to vest ratably over 3.5 years and expire over 10 years. F-15 52 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The Company's option activity was as follows:
Number of Weighted-average shares exercise price Balance at December 31, 1996 689,108 $3.06 Granted 869,655 1.70 Exercised (27,963) 2.47 Terminated (607,876) 2.95 -------- Balance at December 31, 1997 922,924 1.87 Granted 393,750 2.71 Exercised (184,449) 1.37 Terminated (65,432) 2.76 --------- Balance at December 31, 1998 1,066,793 2.21 ========= Available for grant at December 31, 1998 357,847 =========
The following table summarizes information about stock options outstanding at December 31, 1998:
Options outstanding Options exercisable ---------------------------------------------------- ----------------------------------------------- Range Weighted- Weighted- Weighted- of average average average exercise Number remaining exercise Number exercise prices of shares contractual life price of shares price ------ ----------- ---------------- ----- ----------- ----- $1.00 - 1.88 328,503 6.8 Years $1.36 232,681 $1.42 1.91 - 2.06 339,040 8.3 1.93 107,055 1.95 2.25 - 4.68 399,250 8.9 3.15 128,882 3.43 --------- ------- 1.00 - 4.68 1,066,793 8.1 2.21 468,618 2.09 ========= =======
Under the Company's 1994 Employee Stock Purchase Plan (the Purchase Plan) a total of 96,465 shares of common stock remain reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not be less than 1% nor exceed 10% of an employee's compensation, not to exceed shares with a fair market value of $25,000. The price of F-16 53 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements stock purchased under the Purchase Plan must be at least 85% of the lower of the fair market value of the common stock at the beginning of each six-month offering period or at the end of the present purchasing period. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically upon termination of employment with the Company. (c) Accounting for Stock-Based Compensation Plans The Company has elected to use the intrinsic value-based method in accounting for its Plan. Accordingly, no compensation cost has been recognized in the accompanying consolidated financial statements because the exercise price of each option equaled or exceeded the fair value of the underlying common stock as of the grant date for each option. Had compensation cost for the Company's stock options been determined in a manner consistent with SFAS No. 123, the Company's net loss and net loss per share as reported would have been increased to the pro forma amounts indicated below (in thousands, except per share amounts):
1998 1997 ---- ---- Reported net loss $ (785) $ (1,960) Pro forma net loss $ (1,302) $ (2,408) Reported net loss per share $ (0.22) $ (0.67) Pro forma net loss per share $ (0.37) $ (0.82)
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 1998 - an expected life of 3.5 years, risk-free interest rates of 4.62%, 117.3% expected volatility, and no dividend yield; 1997 - an expected life of 3.5 years, risk-free interest rates of 5.84%, 140.4% expected volatility, and no dividend yield. The weighted-average fair value of options granted during the period at an exercise price equal to market price at grant date was $2.25 and $1.57 for the periods ended December 31, 1998 and 1997, respectively. The fair value of employees' stock purchase rights under the Purchase Plan was estimated by calculating the difference between the share purchase price and the fair market value of the share at the date of the purchase. Pro forma net income reflects only options granted since the beginning of 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because F-17 54 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements compensation cost is reflected over the options' vesting period of 3.5 years and compensation cost for options granted prior to January 1, 1995 is not considered. (8) COMMITMENTS Leases The Company leases office space, automobiles, and certain office equipment under noncancelable leases expiring through 2001. Future minimum lease payments under these leases aggregate approximately $407,092, $421,340, and $142,048 in 1999, 2000, and 2001. Rent expense was $279,266 and $459,108 in 1998 and 1997, respectively. Royalties The Company has license agreements with unrelated third parties covering certain of its products requiring royalty payments ranging from 10% to 50% of product license and maintenance fees. Royalties related to these agreements were $201,196 and $320,818 in 1998 and 1997, respectively. (9) FOREIGN OPERATIONS The Company has adopted the provisions of statement of financial accounting standards No. 131 "Disclosures about Segments of an Enterprise and Related Information." The Company operates in one segment and accordingly has provided only the required enterprise wide disclosures. For the year ended December 31, 1998, sales to one customer exceeded 10% of gross revenues. Sales to Silicon Graphics Inc. as a percentage of gross revenues were 68% for the year ended December 31, 1998. There were no sales to customers that exceeded 10% of gross revenues in 1997. The Company's operations outside of the United States consisted solely of a sales office in the United Kingdom. During 1997, the Company restructured its sales force and closed the sales office in the United Kingdom. Domestic operations are responsible for F-18 55 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements the design, development, and licensing of all products. Following are selected financial data, categorized by primary geographic area:
Year ended December 31, ------------------------------ 1998 1997 ----------- ----------- Sales to unaffiliated customers: North America $ 3,758,408 $ 3,189,407 United Kingdom -- 1,041,435 ----------- ----------- Total $ 3,758,408 $ 4,230,842 =========== =========== Operating income (loss): North America $ (976,167) $(2,052,865) United Kingdom -- 34,509 ----------- ----------- Total $ (976,167) $(2,018,356) =========== =========== Total assets: North America $ 4,929,422 $ 3,400,998 United Kingdom -- 313,711 ----------- ----------- Total $ 4,929,422 $ 3,714,709 =========== =========== Export sales $ 59,519 $ 310,594 =========== ===========
F-19 56 EXHIBITS INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1(1) Amended and Restated Articles of Incorporation. 3.2(1) By Laws. 10.27(2) Agreement dated as of September 22, 1997, by and among Enlighten Software Solutions, Inc., Peter J. McDonald, and New Dimension Software, Inc. 10.28(4)(@) Employment letter, dated July 3, 1997, by and between Enlighten Software Solutions, Inc. and Mike Seashols. 10.29(4)(@) Employment letter, dated August 28, 1997, by and between Enlighten Software Solutions, Inc. and David D. Parker. 10.30(4) Agreement dated as of January 21, 1998, by and between Enlighten Software Solutions, Inc. and Silicon Graphics, Inc. 10.31(@) Employment letter, dated July 15, 1998, by and between Enlighten Software Solutions, Inc. and Bill Bradley. 10.32(@) Employment letter, dated January 15, 1999, by and between Enlighten Software Solutions, Inc. and Tim Gardner. 10.33 Agreement dated as of December 31, 1998, by and between Enlighten Software Solutions, Inc. and International Business Machines. 21.1(3) Subsidiaries of the Company. 23.1 Consent of KPMG LLP. 27.1 Financial Data Schedule .
- ---------- (1) Incorporated by reference from exhibits of the same number in the Company's Registration Statement on Form S-1, which became effective April 19, 1994. (2) Incorporated by reference from exhibit 10.27 in the Company's Current Report on Form 8-K dated October 1, 1997. (3) Incorporated by reference from an exhibit of the same number in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (4) Incorporated by reference from an exhibit of the same number in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. (@) Compensatory or employment arrangement. EX-10.31 2 EMPLOYMENT LETTER, BILL BRADLEY 1 EXHIBIT 10.31 July 15, 1998 Mr. Bill Bradley 3535 S. Sherman Street, Suite 700 Englewood, CO 80110 Dear Bill: I am pleased to offer you a position with Enlighten Software Solutions, Inc. (the "Company") as Vice President, Business Development (pending Board approval), commencing on July 28, 1998. Your compensation is outlined in Attachment A to this letter, which will be paid in accordance with the Company's normal payroll procedures. As an Enlighten Software Solutions employee, you may also receive, in accordance with each applicable plan document, certain employee benefits including: incentive stock options (60,000 options initially, additional options may be granted annually), participation in the employee stock purchase plan, medical insurance, dental insurance, 401(k) plan, an accrued 20 days paid personal time off during each year of employment (to be used as vacation, sick leave, etc.), plus paid public holidays recognized by the Company. The grant date and price of the incentive stock options will be set at the next Board of Directors meeting following your start date. You should be aware that your employment with Enlighten Software Solutions is for no specific period. As a result, you are free to resign at any time, for any reason or no reason. Similarly, the Company is free to conclude its relationship with you at any time, with or without cause. For purposes of federal immigration law, you will be required to provide to Enlighten Software Solutions documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. In the event of any dispute or claim relating to or arising out of our employment relationship, you and Enlighten Software Solutions agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association in San Mateo, California, HOWEVER, we agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of Enlighten Software Solutions' trade secrets or proprietary information. (a) You agree that, while you are an Enlighten Software Solutions employee, you will not, directly or indirectly, work for, advise, consult, render services to or invest directly or indirectly in any individual or entity (in any capacity) which directly or indirectly engages in any business in which Enlighten Software Solutions is engaged at the time of such work, advice, consultation, rendering of services or investment. None of the forgoing shall restrict any direct or indirect investments in any publicly traded company, provided such investment does not exceed 5% of the company's total voting shares. 2 Enlighten Software Solutions, Inc. Page 2 (b) You further agree that for a period of two (2) years after termination of your employment with Enlighten Software Solutions, you will not, directly or indirectly, hire, or in any other manner persuade an employee, dealer or customer of the Company to discontinue that person's relationship with or to Enlighten Software Solutions as an employee, dealer or customer, as the case may be. (c) We both agree that: (i) the services to be rendered by you are special, unique, and of an extraordinary character; (ii) because of the nature of the business of Enlighten Software Solutions, and the types of information which you will obtain with respect to the business of Enlighten Software Solutions, it would be impractical or extremely difficult to determine actual damages in the event of a breach of you promises in this letter; and (iii) resulting damages would not adequately compensate Enlighten Software Solutions. Accordingly, if you commit such a breach or threaten such a breach the Company shall have the right to have the provisions of this agreement specifically enforced by any court having equity jurisdiction without the posting of a bond or other security, since such a breach or threatened breach would cause irreparable injury to Enlighten Software Solutions. (d) The above mentioned right is an addition to, and not in lieu of, any other rights and remedies available to Enlighten Software Solutions under law or in equity. (e) This covenant shall be construed as a series of separate covenants, one for each of the fifty-eight (58) counties in California, for each state in the United States, and for each nation outside the United States. To indicate your acceptance of Enlighten Software Solutions' offer, please sign and date both letters in the space provided below and return them to me. This letter, between you and Enlighten Software Solutions, sets forth the terms of your employment with Enlighten Software Solutions and supersedes any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by Enlighten Software Solutions and by you. This offer will remain valid until July 22, 1998. We look forward to working with you at Enlighten Software Solutions. Welcome Aboard! AGREED TO AND ACCEPTED AGREED TO AND ACCEPTED - -------------------------------- -------------------------------- David D. Parker Bill Bradley President and CEO Dated:________/________/_______ Dated:________/________/_______ 3 Enlighten Software Solutions, Inc. Page 3 ATTACHMENT A VICE PRESIDENT, BUSINESS DEVELOPMENT 1998 COMPENSATION PROGRAM This document defines the compensation program for the position of Vice President, Business Development at Enlighten Software Solutions, Inc. This position is responsible for identification, engagement and closure of key business alliances. These business alliances are intended to provide revenue opportunities for the Company through bundling or distribution partnerships, and/or business opportunities for the Company through merger or acquisition. The total targeted compensation is made up of your base salary and quarterly bonuses. COMPENSATION 1. Base Salary: Your base salary is $100,000 per year, this will be paid through the regular semi-monthly company payroll at $4,166.66 per pay period. 2. Quarterly Bonuses: For the year ending December 31, 1998, you will earn quarterly bonuses of $7,500.00 each quarter provided the Company attains predetermined earnings targets established by the Company's Compensation Committee. The current earnings targets for each remaining quarter of 1998 will be provided to you. TERMINATION PROVISIONS 3. Benefits Upon Voluntary Termination: In the event that you voluntarily resign from your employment with the Company or in the event that your employment terminates as a result of your death or disability, you shall be entitled to no compensation or benefits from the Company other than those earned under paragraphs 1 and 2 above through the date of your termination. 4. Termination Following a Change in Control: (i) In the event of a Change in Control and your employment is terminated by the Company or its successor within ninety (90) days of such Change in Control, other than for cause, or you terminate your employment because of a change in duties, you shall be entitled to the following: A. a termination severance package equal to six (6) months of your then current base salary, or $50,000, whichever is greater. Such severance package shall be payable within thirty (30) days of your termination of employment with the Company. 4 Enlighten Software Solutions, Inc. Page 4 (ii) For purposes of this Agreement a "Change of Control" shall mean an Ownership Change in which the shareholders of the Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficiary interest in the voting stock of the Company after such transaction or in which the Company is not the surviving corporation. For purposes of this Agreement an "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Company: A. the direct or indirect sale or exchange by the shareholders of the Company of more than fifty percent (50%) of the stock of the Company; B. a merger or consolidation in which the Company is a party; C. the sale, exchange, or transfer of all or substantially all of the assets of the Company; or D. a liquidation or dissolution of the Company. 5. Accelerated Vesting Following a Change in Control: (i) In the event of a Change in Control you shall be entitled to the following: B. full vesting of the 60,000 stock options granted to you upon your hiring. 6. Exclusive Remedy: Subject to paragraph 4 above, you shall be entitled to no further compensation for any damage or injury arising out of the termination of your employment by the Company. 7. Successors and Assigns: This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. In view of the personal nature of the services to be performed by you under this Agreement, you shall not have the right to assign or transfer any of your rights, obligations, or benefits under this Agreement. EX-10.32 3 EMPLOYMENT LETTER, TIM GARDNER 1 EXHIBIT 10.32 January 15, 1999, Mr. Tim Gardner Enlighten Software Solutions, Inc. 999 Baker Way, 5th floor San Mateo, CA 94404 Dear Tim: I am pleased to offer you a position with Enlighten Software Solutions, inc. (the "Company") as Vice President, Sales commencing upon your written acceptance below. Your compensation is outlined in Attachment A to this letter, which will be paid in accordance with the Company's normal payroll procedures. As an Enlighten Software Solutions employee, you may also receive, in accordance with each applicable plan document, certain employee benefits including: incentive stock options (40,000 options initially, additional options may be granted annually), participation in the employee stock purchase plan, medical insurance, dental insurance, 401(k) plan, an accrued 20 days paid personal time off during each year of employment (to be used as vacation, sick leave, etc.), plus paid public holidays recognized by the Company. The grant date and price of the incentive stock options will be set at the next Board of Directors meeting following your start date. You should be aware that your employment with Enlighten Software Solutions is for no specific period. As a result, you are free to resign at any time, for any reason or no reason. Similarly, the Company is free to conclude its relationship with you at any time, with or without cause. For purposes of federal immigration law, you will be required to provide to Enlighten Software Solutions documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated. In the event of any dispute or claim relating to or arising out of our employment relationship, you and Enlighten Software Solutions agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association in San Mateo, California, HOWEVER, we agree that this arbitration provision shall not apply to any disputes or claims relating to or arising out of the misuse or misappropriation of Enlighten Software Solutions' trade secrets or proprietary information. (a) You agree that, while you are an Enlighten Software Solutions employee, you will not, directly or indirectly, work for, advise, consult, render services to or invest directly or indirectly in any individual or entity (in any capacity) which directly or indirectly engages in any business in which Enlighten Software Solutions is engaged at the time of such work, advice, consultation, rendering of services or investment. None of the forgoing shall restrict any direct or indirect investments in any publicly traded company, provided such investment does not exceed 5% of the company's total voting shares. 2 Enlighten Software Solutions, Inc. Page 2 (b) You further agree that for a period of two (2) years after termination of your employment with Enlighten Software Solutions, you will not, directly or indirectly, hire, or in any other manner persuade an employee, dealer or customer of the Company to discontinue that person's relationship with or to Enlighten Software Solutions as an employee, dealer or customer, as the case may be. (c) We both agree that: (i) the services to be rendered by you are special, unique, and of an extraordinary character; (ii) because of the nature of the business of Enlighten Software Solutions, and the types of information which you will obtain with respect to the business of Enlighten Software Solutions, it would be impractical or extremely difficult to determine actual damages in the event of a breach of you promises in this letter; and (iii) resulting damages would not adequately compensate Enlighten Software Solutions. Accordingly, if you commit such a breach or threaten such a breach the Company shall have the right to have the provisions of this agreement specifically enforced by any court having equity jurisdiction without the posting of a bond or other security, since such a breach or threatened breach would cause irreparable injury to Enlighten Software Solutions. (d) The above mentioned right is an addition to, and not in lieu of, any other rights and remedies available to Enlighten Software Solutions under law or in equity. (e) This covenant shall be construed as a series of separate covenants, one for each of the fifty-eight (58) counties in California, for each state in the United States, and for each nation outside the United States. To indicate your acceptance of Enlighten Software Solutions' offer, please sign and date both letters in the space provided below and return them to me. This letter, between you and Enlighten Software Solutions, sets forth the terms of your employment with Enlighten Software Solutions and supersedes any prior representations or agreements, whether written or oral. This letter may not be modified or amended except by a written agreement, signed by Enlighten Software Solutions and by you. This offer will remain valid until 5 p.m. today. We look forward to working with you at Enlighten Software Solutions. Welcome Aboard! AGREED TO AND ACCEPTED David D. Parker Tim Gardner President and CEO Dated: 1/15/99 Dated: 1/15/99 3 Enlighten Software Solutions, Inc. Page 3 ATTACHMENT A VICE PRESIDENT, SALES 1999 COMPENSATION PROGRAM This document defines the compensation program for the position of Vice President, Sales at Enlighten Software Solutions, Inc. This position is responsible for identification, engagement and closure of key business alliances. These business alliances are intended to provide revenue opportunities for the Company through bundling or distribution partnerships, and/or business opportunities for the Company through merger or acquisition. The total targeted compensation is made up of your base salary and quarterly bonuses. COMPENSATION 1. Base Salary: Your base salary is $110,000 per year, this will be paid through the regular semi-monthly company payroll at $4,583.33 per pay period. 2. Quarterly Bonuses: For the year ending December 31, 1999, you will be targeted to earn quarterly incentive compensation of $15,000.00 each based on sales objectives that you will participate in determining. TERMINATION PROVISIONS 3. Benefits Upon Voluntary Termination: In the event that you voluntarily resign from your employment with the Company or in the event that your employment terminates as a result of your death or disability, you shall be entitled to no compensation or benefits from the Company other than those earned under paragraphs 1 and 2 above through the date of your termination. 4. Termination Following a Change in Control: (i) In the event of a Change in Control and your employment is terminated by the Company or its successor within ninety (90) days of such Change in Control, other than for cause, or you terminate your employment because of a change in duties, or any reason stated in paragraph 4(c), you shall be entitled to the following: A. a termination severance package equal to four (4) months of your then current base salary, or $40,000, whichever is greater. Such severance package shall be payable within thirty (30) days of your termination of employment with the Company; and B. full vesting of the 40,000 stock options granted to you upon your hiring; and 4 Enlighten Software Solutions, Inc. Page 4 (ii) For purposes of this Agreement a "Change of Control" shall mean an Ownership Change in which the shareholders of the Company before such Ownership Change do not retain, directly or indirectly, at least a majority of the beneficiary interest in the voting stock of the Company after such transaction or in which the Company is not the surviving corporation. For purposes of this Agreement an "Ownership Change" shall be deemed to have occurred in the event any of the following occurs with respect to the Company: A. the direct or indirect sale or exchange by the shareholders of the Company of more than fifty percent (50%) of the stock of the Company; B. a merger or consolidation in which the Company is a party; C. the sale, exchange, or transfer of all or substantially all of the assets of the Company; or D. a liquidation or dissolution of the Company. 5. Involuntary Termination (i) In the event that the company decides to terminate your employment prior to December 31, 1999, unless that termination is based on gross negligence or malfeasance or dereliction, then you shall be entitled to the following: A. a termination severance package equal to four (4) months of your then current base salary, or $40,000, whichever is greater. Such severance package shall be payable within thirty (30) days of your termination of employment with the Company; and B. no accelerated vesting of your stock. 6. Exclusive Remedy: Subject to paragraphs 4 and 5 above, you shall be entitled to no further compensation for any damage or injury arising out of the termination of your employment by the Company. 7. Successors and Assigns: This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. In view of the personal nature of the services to be performed by you under this Agreement, you shall not have the right to assign or transfer any of your rights, obligations, or benefits under this Agreement. EX-10.33 4 AGREEMENT BETWN ENLIGHTEN & IBC DATED 12/31/98 1 EXHIBIT 10.33 LICENSED & DEVELOPED WORKS AGREEMENT [*] [*] This Agreement effective as of December 31, 1998 ("EFFECTIVE DATE"), between International Business Machines Corporation ("BUYER") and Enlighten Software Solutions, Inc. ("SUPPLIER"), establishes the basis for a multinational procurement relationship under which Supplier provides to Buyer the Deliverables and Services described in SOWs issued under this Agreement. 1.0 DEFINITIONS: "AFFILIATES" means entities that control, are controlled by, or are under common control with a party to this Agreement. "AGREEMENT" means this agreement and any relevant Statements of Work ("SOW"), Work Authorizations ("WA"), and other attachments or appendices specifically referenced in this Agreement. "APPEARANCE DESIGN" means the appearance presented by an object, formed in hardware or by software, that creates a visual impression on an observer. Appearance Design refers to the ornamental and not the functional aspects of the object. "BUYER" means either IBM or one of its Affiliates which purchases or licenses Deliverables or Services under this Agreement. "BUYER PERSONNEL" means agents, employees, contractors or remarketers engaged by Buyer. "CODE" means computer programming code, including both "OBJECT CODE" (computer programming code substantially in binary form that is directly executable by a computer after processing, but without compilation or assembly) and "SOURCE CODE" (computer programming code that may be displayed in a form readable and understandable by a programmer of ordinary skill, excluding Object Code). "DELIVERABLE" means any item that Supplier prepares for or provides to Buyer as described in a SOW. Deliverables include Developed Works, Licensed Works, Preexisting Materials, and Tools. "DERIVATIVE WORK" means a work that is based on an underlying work and that would be a copyright infringement if prepared without the authorization of the copyright owner of the underlying work. "DEVELOPED WORKS" means Deliverables including their Externals, developed in the performance of this Agreement that Buyer will own, and does not include Licensed Works, Preexisting Materials, Tools, or items specifically excluded in a SOW. "ENHANCEMENTS" means changes or additions, other than Error Corrections, to the Deliverables. If an Enhancement adds substantial value to the Deliverables and is offered to customers for an additional charge it will be considered a "MAJOR ENHANCEMENT", and all other Enhancements, including those that support new releases of operating systems and devices, will be considered "BASIC ENHANCEMENTS". "ERROR CORRECTIONS" means revisions (including workarounds) that correct errors and deficiencies (collectively referred to as "errors") in the Deliverables. "EXTERNALS" means any pictorial, graphic, or audiovisual works generated by execution of code and any programming interfaces, languages or protocols implemented in code to enable interaction with other computer programs or end users. Externals do not include the code that implements them. "HARMFUL CODE" is any computer Code, programming instructions, or set of instructions that is constructed for the purpose of damaging, interfering with, or otherwise adversely affecting computer programs, data files, or hardware, without the consent or intent of the computer user. This definition includes, but is not limited to, self-replicating and self-propagating programming instructions commonly called "viruses" and "worms." "INVENTION" means any idea, design, concept, technique, invention, discovery or improvement, whether or not patentable, conceived or reduced to practice by Supplier or Supplier Personnel in the course of creation of a Developed Work. "JOINT INVENTION" means any Invention made by Supplier or Supplier Personnel with Buyer Personnel. "LICENSED WORK" is any material described in or that conforms to the Description of Licensed Work in the relevant SOW and includes Object Code (and if specified in the applicable SOW, Source Code), associated documentation, Externals, Error Corrections, and Enhancements. "PERSONNEL" means agents, employees or subcontractors engaged by a party to this Agreement. "PREEXISTING MATERIALS" means items including their Externals, contained within a Deliverable, in which the copyrights are owned by a third party or that Supplier prepared or had prepared outside the scope of this Agreement. Preexisting Materials exclude Tools, but may include material that is created by the use of Tools. "PRICES" means the agreed upon payments and currency for Deliverables and Services, including all applicable fees, royalty payments and taxes, as specified in the relevant SOW. "PRODUCTS" means an offering to customers or other users, whether or not branded by Buyer or its Affiliates, that includes a Deliverable or a Derivative Work of a Deliverable. A SOW may provide a more restrictive definition of "Products" for the purposes of such SOW. "SERVICES" means the services identified in the relevant SOW. "STATEMENT OF WORK" or "SOW" means any document attached to or included in this Agreement which describes the Deliverables and Services, including any requirements, specifications or schedules. "SUPPLIER" means either Supplier or one of its Affiliates. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works Agreement 1 of 8 Form Release: 8/98 Revision: 11/98 2 LICENSED & DEVELOPED WORKS AGREEMENT [*] [*] "TOOLS" means not commercially available software, and their Externals, required for the development, maintenance or implementation of a software Deliverable. "WORK AUTHORIZATION" or "WA" means a purchase order or other Buyer designated document, in either electronic or hard copy form, issued by Buyer's procurement personnel, and is the only authorization for Supplier to perform any work under this Agreement. A SOW is a WA only if designated as such in writing by Buyer. 2.0 STATEMENT OF WORK 2.1 LICENSED WORKS: Supplier will deliver to Buyer: (i) one complete copy of the Deliverables described in the relevant SOW; (ii) a completed Certificate of Originality in the form specified in the SOW with the Deliverables and with each Enhancement to the Deliverables; (iii) complete copies of all Tools, including updates to Tools as soon as practical; and (iv) a complete list of all commercially available software required for the development, maintenance or implementation of a software Deliverable, including updates to the list as soon as practicable. 2.2 ADDITIONAL DELIVERABLES: Supplier will provide the Deliverables and Services as specified in the relevant SOW only when specified in a WA. Supplier will begin work only after receiving written authorization from Buyer. Buyer may request changes to a SOW and Supplier will submit to Buyer the impact of such changes. Changes accepted by Buyer will be specified in an amended SOW or change order signed by both parties. 2.3 ENHANCEMENTS AND ERROR CORRECTIONS: Supplier will provide to Buyer, at no charge, Basic Enhancements and Error Corrections for the Deliverables beginning when Buyer accepts the Deliverables and [*] Enhancements to the Deliverables that Supplier creates or authorizes others to create at terms no less favorable than those offered to Supplier's most favored customers. If Buyer accepts Supplier's offer, Buyer will amend the relevant SOW to include such charges, terms and conditions, and the Major Enhancements will become part of the Deliverables. 3.0 TERM AND TERMINATION 3.1 TERM: Deliverables and Services acquired by Buyer on or after the Effective Date will be covered by this Agreement. This Agreement will remain in effect until terminated. 3.2 TERMINATION OF THIS AGREEMENT: Either party may terminate this Agreement in a signed writing, without any cancellation charge, for a material breach of the Agreement by the other party or if the other party becomes insolvent or files or has filed against it a petition in bankruptcy (each of such circumstances referred to herein as "Cause"), to the extent permitted by law. Such termination will be effective at the end of a ninety (90) day written notice period if and only if the Cause remains uncured. Either party may terminate this Agreement in a signed writing without Cause when there are no outstanding SOWs. 3.3 TERMINATION OF A SOW OR WA: [*] Either party may terminate this Agreement in a signed writing, without any cancellation charge, for Cause, to the extent permitted by law. Such termination for Cause will be effective at the end of a ninety (90) day written notice period if and only if the Cause remains uncured. Upon the effective date of termination, in accordance with Buyer's written direction, Supplier will immediately cease work on any Services under the terminated SOW(s). In the event [*] Supplier terminates for Cause, Buyer will compensate Supplier for the actual and reasonable expenses (including actual and reasonable time expended at the non-recurring expense ("NRE") rates specified in the applicable SOW) incurred by Supplier for NRE work in process authorized by Buyer in a written SOW up to and including the effective date of termination, provided such expenses do not exceed the Prices for such NRE work. 3.4 EFFECT OF TERMINATION: (a) For the purposes of this Agreement and any SOW(s) entered into hereunder, "Continuing Rights and Obligations" shall mean all rights, licenses and obligations of the parties hereto under this Agreement and any SOW(s) entered into hereunder except for: [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works Agreement 2 of 8 Form Release: 8/98 Revision: 11/98 3 LICENSED & DEVELOPED WORKS AGREEMENT [*] [*] (i) Buyer's licenses (A) to prepare and have prepared Derivative Works of documentation included in the Deliverables in source form, and (B) to prepare Derivative Works of the Deliverables by bundling, incorporating and/or combining the Deliverables (including Derivative Works of documentation included in the Deliverables in source form) into Products; (ii) acceptance and testing criteria and procedures with respect to Deliverables delivered by Supplier after the effective date of termination; and (iii) Supplier's support obligations under this Agreement and any SOW entered into hereunder for the Deliverables with respect to APAR Severity Level 3 and 4 Errors (as defined in the applicable SOW(s)). (b) Notwithstanding any termination of this Agreement or any SOW, all of the Continuing Rights and Obligations shall survive any termination of the Agreement or any SOW entered into hereunder and shall continue until the later of (i) the scheduled end of the term(s) during which the termination occurs (which may be initial term(s) or renewal term(s)) of the SOW(s) being terminated, and (ii) the ninetieth (90th) day following the effective date of the termination. (c) Notwithstanding any termination of this Agreement or any SOW, the rights and licenses granted to Buyer in the Deliverables shall survive any such termination and shall continue perpetually for the sole purpose of permitting Buyer to perform maintenance and support for Deliverables it directly or indirectly distributes as permitted by this Agreement or the applicable SOW(s). (d) Subject to termination under Section 3.4(a)(i) of this Agreement of Buyer's licenses to create Derivative Works of Deliverables, no termination of this Agreement or a SOW shall affect any license in Deliverables granted or distributed by IBM prior to the effective date of the termination to a third party as permitted by this Agreement or the applicable SOW(s). (e) Except as expressly provided in this Section or Section 14.12 of this Agreement, termination of this Agreement or a SOW revokes and terminates all rights and obligations thereunder, including all rights and licenses granted therein. 4.0 PRICING: Supplier will provide Deliverables and Services to Buyer for the Prices. Except for pre-approved expenses specified in the relevant SOW, the Prices for Deliverables and Services specified in a WA and accepted by Buyer will be the only amount due to Supplier from Buyer. 5.0 PAYMENTS AND ACCEPTANCE 5.1 ACCEPTANCE: Payment of royalties or invoices will not be deemed acceptance of Deliverables or Services, but rather such Deliverables or Services will be subject to inspection, test and rejection in accordance with the acceptance or completion criteria as specified in the relevant SOW. Buyer shall not unreasonably withhold acceptance of Deliverables or Services. Buyer may, at its option, either reject Deliverables or Services that do not comply with the acceptance or completion criteria for a refund, or require Supplier, upon Buyer's written instruction, to repair or replace such Deliverables or re-perfom such Services, without charge and in a timely manner. 5.2 ROYALTY PAYMENTS: Royalties for Deliverables will be specified in the relevant SOW. Buyer may suspend payments to Supplier for a Deliverable if Supplier does not provide a properly completed Certificate of Originality. Payment will resume upon Buyer's receipt of an acceptable Certificate. If Supplier fails to perform any of its obligations, Buyer may reduce any amounts due Supplier by an amount equal to the value not received, or have Supplier reimburse Buyer for the value not received. 5.3 ROYALTY CALCULATIONS: Royalties, if any, are paid against revenue recorded by Buyer for a royalty payment quarter. Payment will be made [*] following the royalty payment quarter. In the U.S., a royalty payment quarter ends on the last business day of the calendar quarter. Outside of the U.S., a royalty payment quarter is defined according to Buyer's current administrative practices. Royalties will be paid less adjustments and refunds due to Buyer. Buyer will provide a statement summarizing the royalty calculation with each payment. All payments will be made in U.S. dollars. Payments based on foreign revenue will be converted to U.S. dollars on a monthly basis at the rate of exchange published by Reuters Financial Service on approximately the same day each month. Terms for payment of any non-royalty payments will be specified in the relevant SOW or WA. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works Agreement 3 of 8 Form Release: 8/98 Revision: 11/98 4 LICENSED & DEVELOPED WORKS AGREEMENT [*] [*] 5.4 EXCEPTIONS TO ROYALTY PAYMENT OBLIGATIONS: Buyer has no royalty obligation for: (a) the Deliverables or its Derivative Works used for: (i) development, maintenance or support activities conducted by Buyer or Buyer Personnel; (ii) marketing demonstrations, customer testing or trial periods (including early support, prerelease, encrypted or locked sampler distributions not resulting in a license for full productive use, or other similar programs), Product training or education; or (iii) backup and archival purposes; (b) a copy of the Product installed by a licensed end user on an alternate work station (e.g., home terminal or laptop), provided the end user may not use the Product on both work stations at the same time; (c) the Deliverables (or a functionally equivalent work) that becomes available generally by Supplier to third parties without a payment obligation; (d) documentation provided with, contained in, or derived from the Deliverables; (e) Error Corrections or Basic Enhancements; (f) warranty replacement copies of the Product; and (g) Externals. 5.5 TAXES: Each party will be solely responsible for any taxes incurred by the party, directly or indirectly, associated with its performance of this Agreement. To clarify and fulfill the forgoing stated intent, Buyer shall reimburse Supplier for any valid sales, use, excise, import or export or similar taxes (excluding any taxes based on Supplier's income, and any penalties and interest) ("Taxes") arising from distribution and sale transactions by Buyer of licenses to copies of Products including the Deliverables under which transactions Supplier is deemed a retailer to Buyer thereby causing such taxes to be assessed against Seller (i.e., internal use by Buyer of Products including the Deliverables). Buyer shall provide Supplier with reimbursement for Taxes within thirty (30) days of receipt by Buyer of an invoice from Supplier. The terms of any such invoice shall not be binding upon Buyer. All such invoices must include the following information: (a) this Agreement number; (b) Supplier's company and remit to address; (c) a short description for which payment is due; and (d) Buyer's Purchase Order number, Supplier's invoice number and its date. All such invoices will be addressed to Buyer and sent to the following address: IBM Corporation, National Accounts Payable Center, P.O. Box 9005, 1701 North Street, Endicott, New York 13761-9005. 5.6 OUTSOURCING LICENSE: In the event Buyer provides outsourcing services to any licensee of a Product, Buyer will [*] of a license to such Product or for transfer of the applicable Product to a Buyer computer system which is of like configuration as the computer system for which the Product was licensed provided such licensee maintains a license for all copies of the Product which Buyer accesses or receives during the period of such access or possession. The foregoing is subject to Buyer providing Supplier notice of such Product to be managed by Buyer and provided the Product will only be used on behalf of the licensee. Upon expiration or termination of the agreement to provide outsourcing services to the licensee, Buyer's right to use that copy of the Product will end. 6.0 ONGOING WARRANTIES: Supplier makes the following ongoing representations and warranties: (i) it has the right to enter into this Agreement and its performance of this Agreement will not violate the terms of any contract, obligation, law, regulation or ordinance to which it is or becomes subject; (ii) no claim, lien, or action exists or, to Supplier's knowledge, is threatened against Supplier that would interfere with Buyer's rights under this Agreement; (iii) upon its final acceptance by Buyer, each Deliverable conforms or will conform with the warranties, specifications and requirements in this Agreement and applicable SOWs, provided that a performance defect in a Deliverable shall not constitute a breach of this Section 6.0(iii) if such defect is corrected by Supplier within the applicable correction time set forth in applicable SOWs and such defect does not constitute a breach of an additional representation or warranty in this Agreement or an applicable SOW; (iv) Services will be performed using reasonable care and skill and in accordance with the relevant SOW; (v) Deliverables and Services are Year 2000 ready such that they are capable of, when used in accordance with its associated documentation, correctly processing, providing, receiving and displaying date data, as well as exchanging accurate date data with all products with which the Deliverables or Services are intended to be used within and between the twentieth and twenty-first centuries, provided that all other products (e.g., hardware, software and firmware) used in combination with the Deliverables or Services properly exchange date data with it; (vi) Deliverables and Services are euro-ready such that they will correctly process, send, receive, present, store, and convert monetary data in the euro denomination, respecting the euro currency formatting conventions (including the euro symbol); (vii) Deliverables will be tested for, and do not contain, Harmful Code; (viii) Deliverables and Services do not infringe any privacy, publicity, reputation or intellectual property right of a third party; and (ix) all authors have executed agreements which duly and validly assigned to Supplier all right, title and interest in and to the Deliverables, to the extent permitted by law. THE WARRANTIES AND CONDITIONS IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS, EXPRESS, IMPLIED, OR STATUTORY INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGMENT. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR IN A SOW, ALL SUCH WARRANTIES ARE EXPRESSLY DISCLAIMED. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works Agreement 4 of 8 Form Release: 8/98 Revision: 11/98 5 LICENSED & DEVELOPED WORKS AGREEMENT [*] [*] 7.0 DELIVERY: Deliverables or Services will be delivered as specified in the relevant SOW. If Supplier cannot comply with a delivery commitment, Supplier will promptly notify Buyer of a revised delivery date and Buyer may: (i) cancel without charge Deliverables or Services not yet delivered if delivery on the revised delivery date would constitute a significant delay with reference to Buyer's development schedule; and (ii) exercise all other remedies provided at law, in equity and in this Agreement. 8.0 INTELLECTUAL PROPERTY 8.1 LICENSES: Supplier grants Buyer the rights in the Deliverables, Licensed Works, Preexisting Materials, Tools, names, trademarks, patents and other matters as specified in the relevant SOW. Subject to Supplier's ownership of the Licensed Work and Tools, Buyer will own any Derivative Works it creates which are authorized by this Agreement or a SOW. 8.2 WORK MADE FOR HIRE: All Developed Works belong exclusively to Buyer and are works made for hire. If any Developed Works are not considered works made for hire owned by Buyer by operation of law, Supplier assigns the ownership of copyrights in such works to Buyer. 8.3 INVENTION RIGHTS: Supplier will promptly provide to Buyer a complete written disclosure for each Invention which identifies the features or concepts which Supplier believes to be new or different. Inventions are owned by Supplier, except for Joint Inventions and Inventions relating to an Appearance Design. Supplier grants to Buyer an irrevocable, nonexclusive, worldwide, paid-up license under these Inventions (including any patent applications filed on or patents issued claiming Inventions). The license scope is to make, have made, use, have used, sell, license or transfer items and to practice and have practiced methods. Supplier assigns to Buyer all Inventions, and patents issuing on them, relating to an Appearance Design. 8.4 JOINT INVENTION RIGHTS: The parties will jointly own all Joint Inventions and resulting patents. Either party may license others under Joint Inventions (including any patent applications filed on or patents issued claiming Joint Inventions) without accounting to or consent from the other. 8.5 PERFECTION OF COPYRIGHTS: Upon request, Supplier will provide to Buyer a "Certificate of Originality" or equivalent documentation to verify authorship of Deliverables. Supplier will confirm assignment of copyright for Developed Works using the "Confirmation of Assignment of Copyright" form and will assist Buyer in perfecting such copyrights. Supplier will be responsible for registration, maintenance and enforcement of copyrights for Deliverables, Licensed Works and Preexisting Materials. 8.6 PERFECTION OF INVENTION RIGHTS: Supplier will identify all countries in which it will seek patent protection for each Invention. Supplier authorizes Buyer to act as its agent in obtaining patent protection for the Inventions in countries where Supplier does not seek patent protection. Supplier will, at Buyer's expense, assist in the filing of patent applications on Inventions and have required documents signed. 9.0 INDEMNIFICATION 9.1 GENERAL INDEMNIFICATION: Each party will defend, hold harmless and indemnify, including reasonable attorney's fees, the other party and the other party's Personnel against claims that arise or are alleged to have arisen as a result of negligent or intentional acts or omissions of the indemnifying party or its Personnel or by a material breach by Supplier of the representations and warranties of Section 6.0 of this Agreement. 9.2 INTELLECTUAL PROPERTY INDEMNIFICATION: Supplier will defend hold harmless and indemnify, including reasonable attorney's fees, Buyer and Buyer Personnel from claims that Supplier's Deliverables or Services infringe the intellectual property rights of a third party. Buyer will provide reasonably prompt notice to Supplier of any such claim received and will allow Supplier to control, and will cooperate with Supplier in the defense of, the claim and settlement negotiations, provided that Buyer may participate in the defense of such claim at its expense. Buyer's failure to give reasonably prompt notice to the Supplier of any claim Buyer receives which may give rise to a right of indemnification hereunder shall relieve the Supplier of any liability which it may have to the Buyer only to the extent the failure to give such notice prejudiced the Supplier. If such a claim has a reasonable likelihood of success and is or is reasonably likely to be made, Supplier will, at its own expense, exercise the first of the following remedies that is reasonably practicable, in the following order of preference: (i) obtain for Buyer the right to continue to use, sell and license the Deliverables and Services consistent with this Agreement; (ii) modify Deliverables and Services so they are non-infringing and in compliance with this Agreement; (iii) replace the Deliverables and Services with non-infringing ones that comply with this Agreement; or (iv) at Buyer's request if the forgoing remedies will not cure the claim within six (6) months, accept the cancellation of infringing Services and the return of [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works Agreement 5 of 8 Form Release: 8/98 Revision: 11/98 6 LICENSED & DEVELOPED WORKS AGREEMENT [*] [*] infringing Deliverables and refund an amount equal to the amount of the claim (the "Refund Amount") from the amounts paid to Supplier by Buyer. Buyer will deliver to Supplier a certificate setting forth the Refund Amount, together with a brief explanation of Buyer's basis for such Refund Amount. The Refund Amount shall be final and binding on the parties hereto unless, no later than the fifteenth (15th) business day after the delivery of the certificate setting forth the Refund Amount to Supplier, Supplier shall notify Buyer in writing of its objections to the Refund Amount, specifically listing its estimate of the Refund Amount and the basis for its estimate. If Supplier provides such timely notification, Supplier and Buyer shall use their reasonable, good faith efforts to resolve by written agreement such objections. If Supplier and Buyer resolve all such objections, the Refund Amount, as adjusted by Buyer and Supplier, shall be final and binding as the Refund Amount. If Supplier and Buyer are unable to resolve all such objections within thirty (30) days after the timely delivery of Seller's notification of its objections, the remaining objections shall be referred to an independent accounting firm. As promptly as possible and in any event no later than the thirtieth (30th) day after the date of such referral, the independent accounting firm shall resolve all such remaining objections in accordance with this Agreement and accounting principles and deliver written notice thereof to Buyer and Seller setting forth its resolution of the objections and its estimate of the Refund Amount. The Refund Amount, after giving effect to the adjustments by Buyer and Seller and the resolution of disputed items by the independent accounting firm, shall be final and binding upon the parties hereto as the Refund Amount. If the independent accounting firm does not provide for an equitable allocation to Seller and Buyer of its fees and expenses, if any, incurred in connection with its resolution of such disputed items, then each of Buyer and Seller shall pay one-half of such fees and expenses. Refund Amounts paid by Supplier to Buyer shall become Buyer's property, free and clear of all encumbrances, provided that Supplier shall not be liable to Buyer with respect to the claim for which Buyer was paid a Refund Amount except to the extent damages actually incurred by Buyer (including reasonable attorney's fees) with respect to such claim exceed the Refund Amount. 9.3 EXCEPTIONS TO INDEMNIFICATION: Supplier will have no obligation to indemnify Buyer or Buyer Personnel for claims that Supplier's Deliverables or Services infringe the intellectual property rights of a third party to the extent such claims arise as a result of Supplier's implementation of a Buyer originated design, Buyer's modification of the Deliverables, or combination of the Deliverables with hardware and software not provided by Supplier. 10.0 LIMITATION OF LIABILITY: Neither Buyer nor Supplier shall be liable to each other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages. Notwithstanding any other provision of this Agreement, (a) Supplier's total liability to Buyer under this Agreement shall be limited to the greater of (i) [*] and (ii) [*], and (b) Buyer's total liability to Supplier under this Agreement shall be limited to the greater of (i) [*] and (ii) [*]. 11.0 SUPPLIER AND SUPPLIER PERSONNEL: Supplier is an independent contractor and this Agreement does not create an agency relationship between Buyer and Supplier or Buyer and Supplier Personnel. Buyer assumes no liability or responsibility for Supplier Personnel. Supplier will: (i) be responsible for compliance by it and Supplier Personnel with all applicable laws, regulations, ordinances, and licensing requirements; (ii) be responsible for the supervision, control, compensation, withholdings, health and safety of Supplier Personnel; (iii) ensure Supplier Personnel performing Services on Buyer's premises comply with the On Premises Guidelines; and (iv) inform Buyer if, to the best knowledge of Supplier, a former employee of Buyer will be assigned work under this Agreement, such assignment subject to Buyer approval, which shall not be unreasonably withheld. 12.0 ELECTRONIC COMMERCE: Supplier will use reasonable efforts to participate in Electronic Data Interchange ("EDI") or other electronic commerce approach, under which the parties will electronically transmit and receive legally binding purchase and sale obligations ("Documents"), including electronic credit entries transmitted by Buyer to the Supplier account specified in the relevant SOW. Each party, at its own expense, will provide and maintain the equipment, software, services and testing necessary for it to effectively and reliably transmit and receive such Documents. Either party may use a third party service provider for network services, provided the other party is given sixty (60) days prior written notice of any changes to such services. A Document will be deemed received upon arrival at the receiving party's mailbox or Internet address and the receiving party will promptly send an acknowledgment of such receipt. The receiving party will promptly notify the originating party if a Document is received in an unintelligible form, provided that the originating party can be identified. In the absence of such notice, the originating party's record of the contents of such Document will prevail. Each party will authenticate Documents using a digital signature or User ID, as specified by Buyer, and will maintain security procedures to prevent its unauthorized use. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works Agreement 6 of 8 Form Release: 8/98 Revision: 11/98 7 LICENSED & DEVELOPED WORKS AGREEMENT [*] [*] 13.0 RECORDKEEPING AND AUDIT RIGHTS: Buyer and Supplier will maintain relevant records to support invoices and other payments under this Agreement. The records will be retained and made available for three years from the date of the related payment. If Buyer or Supplier requests, then Buyer and Supplier will make these records available to an independent certified public accountant chosen and compensated (other than on a contingency basis) by the requesting party. The request will be in writing, will provide [*] prior notice, and will not occur more than once each year. The audit will be conducted during normal business hours in such a manner as not to interfere with normal business activities. The auditor will sign a confidentiality agreement and will only disclose any amounts overpaid or underpaid for the period examined. 14.0 GENERAL 14.1 ENTIRE AGREEMENT; AMENDMENTS: This Agreement, and any SOWs executed by the parties hereunder, represent the entire agreement of the parties hereto with respect to their subject matter, and may only be amended by a writing specifically referencing this Agreement which has been signed by authorized representatives of the parties. 14.2 ASSIGNMENT: Neither party will assign their rights or delegate or subcontract their duties under this Agreement to third parties or affiliates without the prior written consent of the other party, such consent not to be withheld unreasonably, except that Buyer may assign this Agreement in conjunction with the sale of a substantial part of its business utilizing this Agreement, and Supplier may assign this Agreement in conjunction with the sale of all or substantially all of its assets. In addition, without limiting the generality of the forgoing, the parties agree that a sale of all or substantially all of the capital stock of Buyer or Supplier shall not constitute an assignment, delegation or subcontracting within the meaning of this Section. Any unauthorized assignment of this Agreement is void. 14.3 CHOICE OF LAW AND FORUM; WAIVER OF JURY TRIAL; LIMITATION OF ACTION: This Agreement and the performance of transactions under this Agreement will be governed by the laws of the country in which the transaction is performed, except that the laws of the State of New York applicable to contracts executed in and performed entirely within that State will apply if any part of the transaction is performed within the United States. The parties expressly waive any right to a jury trial regarding disputes related to this Agreement. Unless otherwise provided by local law without the possibility of contractual waiver or limitation, any legal or other action related to a breach of this Agreement must be commenced no later than two (2) years from the date of the breach in a court sited within the country in which the breach occurred, or in a court sited in the State of New York if any part of the transaction is performed within the United States. 14.4 COMMUNICATIONS: All communications between the parties regarding this Agreement will be conducted through the parties' representatives as specified in the relevant SOW. 14.5 COUNTERPARTS: This Agreement may be signed in one or more counterparts, each of which will be deemed to be an original and all of which when taken together will constitute the same agreement. Any copy of this Agreement made by reliable means is considered an original. 14.6 EXCHANGE OF INFORMATION: Unless required otherwise by law, all information exchanged by the parties will be considered non-confidential. If the parties require the exchange of confidential information, such exchange will be made under a written confidentiality agreement including, by way of example, the terms and conditions of the Confidential Disclosure Agreement # [*] between Buyer and Supplier. Neither party shall publicize the terms or conditions of this Agreement in any advertising, marketing or promotional materials without the prior written consent of the other party (which shall not unreasonably be withheld) except as may be required by law, provided the party publicizing obtains any confidentiality treatment available. Supplier will use information regarding this Agreement only in the performance of this Agreement. 14.7 FREEDOM OF ACTION: This Agreement is nonexclusive and either party may design, develop, manufacture, acquire or market competitive products or services. Buyer will independently establish prices for resale of Deliverables or Services and is not obligated to announce or market any Products or Services and does not guarantee the success of its marketing efforts, if any. 14.8 FORCE MAJEURE: Neither party will be in default or liable for any delay or failure to comply with this Agreement due to any act beyond the control of the affected party, excluding labor disputes, provided such party immediately notifies the other. 14.9 PRIOR COMMUNICATIONS AND ORDER OF PRECEDENCE: This Agreement replaces any prior oral or written agreements or other communication between the parties with respect to the subject matter of this Agreement, excluding any confidential [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works Agreement 7 of 8 Form Release: 8/98 Revision: 11/98 8 LICENSED & DEVELOPED WORKS AGREEMENT [*] [*] disclosure agreements. In the event of any conflict in these documents, the order of precedence will be: (i) the quantity, payment and delivery terms of the relevant WA; (ii) the relevant SOW; (iii) this agreement; and (iv) the remaining terms of the relevant WA. 14.10 COMPLIANCE WITH LAWS: Both parties agree to comply with all applicable laws, rules and regulations, including all applicable United States and foreign export laws and regulations, in connection with the performance of this Agreement. 14.11 SEVERABILITY: If any term in this Agreement is found by competent judicial authority to be unenforceable in any respect, the validity of the remainder of this Agreement will be unaffected, provided that such unenforceability does not materially affect the parties' rights under this Agreement. 14.12 SURVIVAL: The provisions set forth in the following Sections and Subsections of this Agreement will survive after termination of this Agreement and will remain in effect until fulfilled: "Ongoing Warranties", "Intellectual Property", "Indemnification", "Limitation of Liability", "Record Keeping and Audit Rights", "Choice of Law and Forum; Waiver of Jury Trial; Limitation of Action", "Exchange of Information", and "Prior Communications and Order of Precedence". 14.13 WAIVER: An effective waiver under this Agreement must be in writing signed by the party waiving its right. A waiver by either party of any instance of the other party's noncompliance with any obligation or responsibility under this Agreement will not be deemed a waiver of subsequent instances. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: By: By: ------------------------------ -------------------------------------- Buyer Signature Date Supplier Signature Date Herman Graham, Jr. David D. Parker - --------------------------------- ----------------------------------------- Printed Name Printed Name Software Contract Account Manager President & CEO, Enlighten Software - --------------------------------- ----------------------------------------- Title & Organization Title & Organization 3039 Cornwallis Rd., VRDA/002, 999 Baker Way, Fifth Floor, RTP, NC 27709 San Mateo, CA 94404 - --------------------------------- ----------------------------------------- Buyer Address: Supplier Address: [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works Agreement 8 of 8 Form Release: 8/98 Revision: 11/98 9 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] This Statement of Work ("SOW") # [*] adopts and incorporates by reference the terms and conditions of Licensed and Developed Works Agreement # [*] ("Agreement") between International Business Machines ("Buyer") and Enlighten Software Solutions, Inc. ("Supplier") and shall be effective as of December 31, 1998. Transactions performed under this SOW will be conducted in accordance with and be subject to the terms and conditions of this SOW, the Agreement and any applicable Work Authorizations. This SOW is a WA when executed by both parties. 1.0 SCOPE OF WORK Under the terms and conditions of this SOW, Buyer licenses from Supplier a computer software program known as EnlightenDSM which enables system management servers, administration, and clients as described Section 3.0 of this SOW. 2.0 DEFINITIONS Capitalized terms in this SOW have the following meanings: 2.1 "APAR" is the completed form entitled "Authorized Program Analysis Report" that is used to report suspected code or documentation errors and to request their correction. 2.2 "APAR CORRECTION TIMES" are the objectives that the Supplier shall use reasonable efforts to achieve for resolution of Errors and distribution of the Error Corrections to Buyer. These objectives apply to problems reported by Buyer's external customers. a. SEVERITY 1 requires diligent effort support until an emergency fix or bypass is developed and available for shipment to Buyer. The objective will be to provide response to the customer within [*] and provide a final solution or fix within [*]; b. SEVERITY 2 must be resolved within [*]; c. SEVERITY 3 must be resolved within [*]; and d. SEVERITY 4 must be resolved as mutually determined by the Technical Coordinators. The calendar days begin when Supplier receives the APAR and supporting documentation and end when the Error Correction or other resolution is shipped to Buyer. The Buyer will consider exceptions from these objectives when warranted by technical or business considerations. 2.3 "APAR SEVERITY LEVELS" are designations assigned by Buyer and its customers to Errors to indicate the seriousness of the Error based on the impact that the Error has on the customer's operation: a. SEVERITY 1 is a "critical problem." The program is unusable and the error severely impacts the customer's operation; b. SEVERITY 2 is a "major problem." Important function is not available. The error severely restricts operations; c. SEVERITY 3 is a "minor problem." Inability to use a function occurs but it does not seriously affect the customer; and d. SEVERITY 4 is a "minor problem" that is not significant to the customer's operations. The customer may be able to circumvent the problem. 2.4 "DESIGN CHANGE REQUEST" ("DCR") is the process defined in this SOW where either party may submit technical change proposals for the Deliverables. 2.5 "TEST CORRECTION TIMES" are the objectives that the Supplier shall use reasonable efforts to achieve for resolution of test Errors and distribution of the test Error Corrections to Buyer. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 1 of 30 Form Release: 8/98 Revision: 11/98 10 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] a. Severity 1 test problems shall be addressed by Supplier within [*] from the time of beta test through Golden Master, and a fix shall be distributed by Supplier to Buyer within [*] thereafter. b. Severity 2 test problems shall be addressed by Supplier within [*] from the time of beta test through Golden Master, and a fix shall be distributed by Supplier to Buyer within [*] thereafter. c. Severity 3 and Severity 4 test problems shall be addressed by Supplier within [*], and a fix shall be distributed by Supplier to Buyer by the time agreed to by their Technical Coordinators. 2.6 "TEST SEVERITY LEVELS" are designations assigned by Buyer to test Errors to indicate the seriousness of the Error. a. SEVERITY 1 test problems are any problems that block all the remaining testing for a product/function. b. SEVERITY 2 test problems are problems that block a large percentage of the remaining testing for a product/function. c. SEVERITY 3 test problems are problems that block a small percentage of the remaining testing for a product/function. d. SEVERITY 4 test problems are any problems that do not block testing. 2.7 "TESTING LEVELS" a. SYSTEM TEST. The primary focus of system test is to ensure that the product under test operates properly in the supported environment(s) in accordance with the stated expectations of reliability, performance, availability and serviceability under stress and multiple user conditions. In addition, system test is to ensure that all Error Corrections/enhancements, as well as base Object Code functions from previous versions/releases, work properly in customer-like environments created. Buyer shall be given the opportunity to review and comment on any and all system test plans produced by or for Supplier for the Deliverables under this SOW. b. FUNCTION TEST. The primary focus of function test is to ensure that each function of the product under test operates properly in a single user environment. Functions to be tested include, but are not limited to: installation, configuration, information presentations, error path exercising, and general functional characteristics. c. UNIT TEST. The primary focus of unit test is to ensure that each sub-function and module of the functions under test operate properly in a development user environment. Unit testing includes parameter checking, error return codes, and general module flow. 2.8 "DISTRIBUTORS" are those authorized or licensed by Buyer, Buyer Subsidiaries or Buyer Distributors to license or distribute Products. 2.9 A "PRODUCT" (for the purpose of this SOW) shall mean one of IBM's middleware suite products, including, by way of example, its IBM Suite, IBM Business Integration Suite and IBM Enterprise Suite products. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 2 of 30 Form Release: 8/98 Revision: 11/98 11 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 3.0 LICENSED WORK AND RELATED DELIVERABLES AND SERVICES 3.1 DESCRIPTION OF LICENSED WORK a. GENERAL DESCRIPTION OF DELIVERABLES: The Deliverables provided by Supplier hereunder shall be deemed Licensed Works, Preexisting Materials or Tools, as applicable, and shall not be deemed to include any Developed Works. The FlexLM from Globetrotter Software included in the Deliverables, and all Deliverables created prior to the execution of the Agreement are Preexisting Materials. All other Deliverables shall be deemed Licensed Works or Tools, as applicable. The Deliverables to be provided by Supplier under this SOW shall consist of: i) Supplier's software product known as EnlightenDSM, release 2.7 or later; and shall be delivered in Object Code format only, electronically or on CD-ROM suitable for installation by an installation program. Supplier's EnlightenDSM is a multifunction systems management system product covering essential functions for the administration and management of heterogeneous, networked UNIX, Windows NT, Windows 95, and Window 98 systems. The functions of this product include system administration, file distribution, performance measuring, security auditing, storage management and event management. ii) The following documentation for the product, provided in HTML (preferred) or PDF format: 1) EnlightenDSM User Guide 2) EnlightenDSM Reference Manual iii) Source files for the following additional Documentation provided for inclusion in the Buyer's "Getting Started" Manual: 3) EnlightenDSM Quick Install Guide iv) Any Tools. v) Deliverable shall contain easily accessible on-line context-sensitive help information which must be available for each user interaction program window. vi) Error Corrections and Enhancements described in Sections 3.3 through 3.5 below. b. SPECIFIC DESCRIPTION OF DELIVERABLES: The Deliverables provided by Supplier described in Section 3.1(a)(i) above: i) shall consist of a customized recent release version of EnlightenDSM based on at least the EnlightenDSM Version 2.7 or later. ii)shall be provided as [*] suitable for server installation on [*], and client installation on Windows NT 4.0 with service pack 3, Windows 95, and Windows 98. iii) must support the functionality described in the then-current EnlightenDSM product documentation, and, to the extent not described in such documentation, the following functionality: 1) [*] utilizing the [*] product as a [*]. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 3 of 30 Form Release: 8/98 Revision: 11/98 12 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 2) Centralized event configuration and management, including: a) Programmable events; b) Operating system parameters; c) Virtual memory metrics; d) Network packet counts; and e) User defined events. 3) Setup and management of [*] Domain Name Servers (DNS), Network Information Servers (NIS), Network Information Servers Plus (NIS+), NIS slave servers, and NIS+ replica servers. 4) [*] Network File System (NFS) management. 5) Network printer and print spooler management . 6) Hardware and software inventory reporting.. 7) [*] security auditing.. 8) [*] disk and file system management. 9) [*] Logical resource pooling. 10) [*] user account management. 11) [*] crontab management. 12) [*], Archive scheduler. 13) Remote file distribution. 14) Application log file monitoring. 15) A scaleable, customizable administration utility based on [*]. 16) Software program launch of [*] from the administration utility. 17) Disk Space Analysis and Management. 18) Process Management. 19) Remote system shutdown and reboot. 20) Remote system virtual Memory usage. 21) Remote system clock Management. 22) Host configuration / network parameters. 23) User/Group Management [*] 24) Data Archiving [*] iv) [*]. v) [*]. vi) must include server and agent components which are installable [*]. Agent components must be installable [*]. The server component installation routine must meet the following requirements: 1) Be enabled for [*] and [*]; 2) Accommodate a single Buyer Product install with a single reboot for a clean target server; 3) Check for previous installed versions of EnlightenDSM and handle upgrades via a separate utility or within the install process; 4) Accommodate [*] as mutually agreed to by the Buyer and Supplier; 5) Eliminate any [*] except as required for [*] [*] and [*]; 6) Support locale specific installation [*]; and [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 4 of 30 Form Release: 8/98 Revision: 11/98 13 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 7) Support the database path [*] vii) can be provided as English only, but must operate when installed on locales based on the following national languages: 1) English; 2) German; 3) French; 4) Italian; 5) Spanish; 6) Portuguese and Brazilian Portuguese; 7) Japanese; 8) Korean; 9) Simplified Chinese; 10) Traditional Chinese; 11) Dutch; 12) Norwegian; 13) Danish; 14) Finnish; and 15) Swedish. viii) must be Year 2000 compliant as required by Section 6.0 of the Agreement; and 3.2 CERTIFICATE OF ORIGINALITY: Supplier will deliver a completed Certificate of Originality in the form attached hereto (i) with each Deliverable in accordance with the schedule set forth in Section 9 below, (ii) with the Major Enhancements described in Section 3.5 of this SOW in accordance with the schedule set forth in Section 9 below, and (iii), for each subsequent Major Enhancement, [*] such Major Enhancement. Buyer will provide Supplier the Exhibit: Certificate of Originality for these purposes. 3.3 ERROR CORRECTION WARRANTY PERIOD During the term of this SOW, Supplier will provide Buyer [*], Basic Enhancements and Error Corrections for each Deliverable made generally available by Supplier beginning when Buyer accepts such Deliverable. Supplier will offer to Buyer, as soon as reasonably practical [*], all Basic Enhancements and Error Corrections to any Deliverable that Supplier creates or authorizes others to create in Object Code form. 3.4 MAJOR ENHANCEMENT WARRANTY PERIOD During the term of this SOW, Supplier will provide Buyer, [*], Major Enhancements to each Deliverable made generally available by Supplier beginning when Buyer accepts such Deliverable. Supplier will offer to Buyer, as soon as reasonably practical [*] all Major Enhancements to any Deliverable that Supplier creates or authorizes others to create in Object Code form. 3.5 REQUIRED MAJOR ENHANCEMENTS [*] the following Major Enhancements to the Deliverable described in Section 3.1(a)(i) [*]. Such Major Enhancements will be provided in Object Code form on CD-ROM [*]. In addition, such Major Enhancements must be [*] is generally available [*] delivery of such Major Enhancements to the Buyer. In any case, Supplier must support the most current version of an operating system, as defined [*], and [*] [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 5 of 30 Form Release: 8/98 Revision: 11/98 14 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] version of the operating system. The Major Enhancements [*] Deliverables for the [*]: a) [*] with [*]; b) [*] for [*], defined by [*], and the associated [*] by the informational [*]; c) [*], [*], and [*], [*], and [*] must enable [*] of [*], from a new [*] to complete [*] like a [*] or [*]. It [*] also [*] types of [*] for [*] (Workstation and Server), [*], as well as follow-on [*], including [*], [*] and [*]. This feature [*]: 1) A reference machine [*] and the before [*]. A set of [*] are prepared that will [*], with allowances for [*]. This set of [*] onto a [*] on the [*], and [*] are [*] from the [*]; and 2) Using the principle of [*] made to a [*] of the [*] enables the user [*] from any [*]. A [*] may be required for [*] 3.6 MAINTENANCE AND SUPPORT SERVICES During the term of this SOW, [*] Supplier will provide maintenance and support Services in accordance with the Testing, Maintenance and Support Attachment attached hereto. 4.0 NON-RECURRING EXPENSE (NRE) 4.1 Supplier will [*], on a non-recurring expense ("NRE") basis, to provide [*] Deliverable described in Section 3.1(a)(i): i) to [*] ; ii) to [*]; iii) to [*]; and iv) to [*]. 4.2 During the term of this Agreement, additional development on an NRE basis to support Major Enhancements may be negotiated by the parties under a separate agreement. Supplier and Buyer mutually agree to meet on a periodic basis, but in no event less than quarterly, to share product directions/roadmaps for their respective products (i.e., the Deliverables and the Product), to jointly assess where there may exist differences in either customer requirements and/or roadmap timelines, and to provide input to each other regarding development of each Party's roadmaps/timelines to more effectively align the Product and the Deliverables. For features and/or functionality which are required by Buyer for its Product that contain the Deliverables and are not on Supplier's roadmap for inclusion with the Deliverables, at Buyer's request, Buyer and Supplier shall mutually work to develop an appropriate SOW for the development and inclusion of such features and/or functionality in the Deliverables. During the term of this SOW, [*] Except for the work performed on an NRE basis under Section 4.1 above of this SOW, no work to be performed on an NRE basis is authorized [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 6 of 30 Form Release: 8/98 Revision: 11/98 15 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] unless specifically requested by the IBM Contract Coordinator in a signed writing and Supplier receives a WA and/or a purchase order from Buyer to cover cost for any additional work performed on an NRE basis. 5.0 RIGHTS IN LICENSED WORKS 5.1 DELIVERABLES: During the term of this SOW, Supplier grants Buyer and Buyer Personnel a nonexclusive, worldwide license (revocable only to the extent set forth in Sections 3.2 through 3.4 of the Agreement): (i) to prepare and have prepared Derivative Works of documentation included in the Deliverables in source form, (ii) to prepare Derivative Works of the Deliverables solely by bundling, incorporating and/or combining the Deliverables (including Derivative Works of documentation included in the Deliverables in source form) into Products, (iii) to use, have used, execute, reproduce, transmit, display, perform, transfer, distribute, and sublicense the Deliverables and such Derivative Works, in Object Code form only, and documentation, in any medium or distribution technology, subject to the limitations of Section 8(j) of this SOW, (iv) to grant its Affiliates and contractors all the rights granted herein for the sole purpose of allowing such Affiliates and contractors to assist Buyer in the exercise of its rights under the Agreement and this SOW, provided that Buyer shall remain primarily obligated for the performance of the Agreement and this SOW, and (v) to grant others the rights granted in subsection (iii) of this sentence. Except for the rights set forth in the Agreement and this SOW to create the Derivative Works permitted by the immediately preceding sentence, Supplier does not grant to Buyer any license to create Derivative Works of the Deliverables. Except as expressly set forth in the Agreement and this SOW, Supplier does not grant to Buyer any right or license to any patent, copyright, trade name, trade secret, trademark or other intellectual property right with respect to the Deliverables; and Buyer acknowledges and agrees that no Developed Works or Joint Inventions shall be created under this SOW. Except as may be permitted under the Escrow Agreement (as defined below), Buyer agrees not to reverse compile or otherwise attempt to discover the source code of Deliverables to be provided under this SOW only in Object Code form. Buyer acknowledges and agrees that Supplier retains ownership of all Deliverables bundled, incorporated and/or combined into any Products and any Derivative Works of Deliverables which Buyer creates, and that Buyer's ownership of such Products and Derivative Works of Deliverables shall be subject to Supplier's exclusive ownership of the Deliverables. 5.2 TOOLS: Supplier grants Buyer a nonexclusive, worldwide, perpetual, irrevocable, paid-up, license to prepare and have prepared Derivative Works of Tools, and to use, have used, execute, reproduce, transmit, display and perform Tools or their Derivative Works solely to permit Buyer's exercise and enjoyment of the rights and licenses in Section 5.1 of this SOW. 5.3 PATENTS: The grant of rights and licenses to the Deliverables and Tools includes a nonexclusive, worldwide, perpetual, irrevocable, paid-up license under any patents and patent applications that are owned or licensable by Supplier now or in the future and are (1) required to make, have made, use and have used the Deliverables or permitted Derivative Works thereof or (2) required to license or transfer the Deliverables or permitted Derivative Works thereof. This license applies to the Deliverables and permitted Derivative Works thereof operating alone or in combination with equipment or Code. The license scope is to make, have made, use, have used, sell, license or transfer items, and to practice and have practiced methods, to the extent required to exercise the rights granted hereunder to the Deliverables, Tools and permitted Derivative Works thereof. 5.4 NAMES AND TRADEMARKS: Supplier grants Buyer an irrevocable, nonexclusive, worldwide, paid-up license to use the names and trademarks Supplier uses to identify any Deliverable solely for Buyer's marketing of Products including Deliverables and permitted Derivative Works thereof. This license does not permit Buyer to create a new trademark by combining Supplier's names or trademarks with other marks, and Supplier retains any goodwill attaching to Supplier's names and trademarks. If Supplier objects to Buyer's improper use of Supplier's names or trademarks, Buyer will take reasonable steps necessary to resolve Supplier's objections. Supplier may reasonably monitor the quality of Product bearing its trademark under this license. Buyer agrees that Products bearing Supplier's names and trademarks must be of a general level of quality consistent with generally prevailing industry standards. Buyer agrees to provide Supplier with specimens of materials using Supplier's names or trademarks upon request. Any goodwill attaching to Buyer's trademarks, service marks, or trade names belongs to Buyer and this Agreement does not grant Supplier any right to use them. Buyer shall provide attribution to Supplier for the first use in text of any name or trademark of Supplier in any materials using such name or trademark. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 7 of 30 Form Release: 8/98 Revision: 11/98 16 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 5.5 EXTERNALS: Supplier grants Buyer and Buyer Personnel an irrevocable, nonexclusive, worldwide, perpetual, irrevocable, paid-up license to prepare and have prepared Derivative Works of the Externals of the Deliverables, and to use, have used, execute, reproduce, transmit, display, perform, transfer, distribute, and sublicense the Externals of the Deliverables and such Derivative Works, in any medium or distribution technology, and to grant others the rights granted herein. 6.0 SUPPLIER'S RESPONSIBILITIES 6.1 In addition to delivering the Deliverables as defined in Section 3.1, the Major Enhancements listed in Section 3.5, and any other Error Corrections, Enhancements and Services on schedule, Supplier will: a. participate in progress reviews, as requested by Buyer, to demonstrate Supplier's performance of its obligations; b. maintain records to verify authorship of the Deliverables for four (4) years after the termination or expiration of this SOW. On request, Supplier will deliver or otherwise make available this information in a form specified by Buyer; and c. design and implement processes to prevent the introduction in or existence of Harmful Code in the Deliverables, Major Enhancements, Basic Enhancements, and Error Corrections. d. provide Marketing Support for Product as outlined in the Marketing Activities Attachment. 6.2 TESTING a. Supplier will perform the following tests prior to each delivery of a Deliverable: i. component testing; ii. functional verification testing; iii. system testing; and iv. compatibility testing. Upon Buyer's request, the details of such testing will be mutually agreed to by the parties. b. Upon request of the Buyer, the Supplier will provide to Buyer concurrent with each delivery of a Deliverable summary test reports associated with the pre-delivery testing. c. Upon receipt of a Deliverable by Buyer, [*]: v. the Deliverables [*]; vi. the Deliverables [*] this SOW; and vii. Buyer [*] [*] by Buyer. Buyer's testing does not relieve Supplier of its obligations under this SOW. Buyer has no obligation to identify errors. 6.3 Source Code Escrow. Supplier will enter into an escrow agreement in the form attached hereto as Attachment 04 (the "Escrow Agreement") with a recognized third-party escrow agent [*], of the following escrowed materials ("Escrowed Materials"): (i[*]; (ii) a [*] (including [*] [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 8 of 30 Form Release: 8/98 Revision: 11/98 17 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] [*] etc.); (iii) a [*]; (iv) the [*]; (v) [*]; and (vi) a [*] of [*]. Supplier will update the Escrowed Materials [*], and to [*] [*] to be [*] Agreement or this SOW. [*]. 7.0 ACCEPTANCE a. In order to qualify for acceptance, Supplier must provide Deliverables which conform to the specifications described in this SOW and to the following criteria: 1. [*]; 2. [*]; and 3. [*]. 4. Demo criteria: [*]. b. Initial acceptance criteria for the documentation included in the Deliverable: 1. The documentation [*]; 2. [*]; and 3. A [*]. c. Buyer will accept or reject a Deliverable or error correction for a Deliverable [*] of the Deliverable or error correction. Buyer may notify Supplier of its acceptance or rejection of a Deliverable by electronic means (including by electronic mail) delivered to Supplier's Technical Coordinator. If Buyer does not notify Supplier during this time period, such Deliverable will be deemed accepted. d. [*] acceptance testing of the Deliverables [*] Supplier with the [*] [*]: 1. A [*]; 2. [*]; 3. A [*]; and 4. The [*]. e. Supplier [*] of the [*] Deliverable to Buyer according [*]. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 9 of 30 Form Release: 8/98 Revision: 11/98 18 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 8.0 BUYER'S RESPONSIBILITIES The Buyer will: a) identify a primary technical contact for Supplier. b) [*] to Supplier to assist Supplier with it's development efforts hereunder: I. Buyer's [*] Guide II. Other material as necessary (Code design guidelines, etc.) c) [*] and, from time to time, [*] products to Supplier to [*] efforts hereunder. d) Ensure that the Buyer [*]. e) Ensure that the Buyer [*] by the Deliverables. f) [*] in Deliverables [*] end users. g) Provide Marketing Support for Product as outlined in the Marketing Activities Attachment. h) Accept or reject a Deliverable upon the conclusion of the review period in accordance with the acceptance procedures outlined in this SOW. i) Place appropriate copyright and government restricted rights notices on Products. j) [*] except (i) [*], (ii) for the [*], and (iii) to [*] under this SOW. 9.0 SCHEDULE Supplier shall provide the Deliverables to Buyer according to the following schedule of milestones, completion dates, and terms:
MILESTONES DATE 1. [*] [*] 2. [*] [*] 3. [*] [*] 4. [*] [*] 5. [*] [*] 6. [*] [*] 7. [*] [*] 8. [*] [*]
10.0 TERM AND FINANCIALS 10.1 TERM: The initial term of this SOW [*] may renew this SOW [*] by giving written notice to Supplier [*] of this SOW. This SOW is not terminable by [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 10 of 30 Form Release: 8/98 Revision: 11/98 19 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] either party without Cause, provided that nothing in the Agreement or this SOW shall be construed as obligating Buyer to include any Deliverable in any Product. 10.2 ROYALTY PAYMENTS: (a) [*] (b) [*]. (c) [*] 10.3 NON-RECURRING ENGINEERING EXPENSE: [*] 10.4 Supplier will submit an invoice for the expenses described in Section 10.3 [*] Deliverables described in Section 3.1(a)(i) through (v). Buyer will pay [*] the Supplier. All dollar amounts referenced are in United States dollars. 10.5 All invoices from Supplier under this SOW will include the following information: a. this Agreement number; b. Supplier's company and remit to address; c. a short description for which payment is due; and d. Buyer's Purchase Order number, Supplier's invoice number and its date. 10.6 All invoices from Supplier under this SOW will be addressed to Buyer and sent to the following address: IBM Corporation National Accounts Payable Center P.O. Box 9005 1701 North Street Endicott, NY 13761-9005 [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 11 of 30 Form Release: 8/98 Revision: 11/98 20 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 11.0 COMMUNICATIONS COORDINATORS All communications between the parties will be carried out through the following designated coordinators:
- -------------------------------------------------------------------------------------------------- BUSINESS COORDINATORS - -------------------------------------------------------------------------------------------------- FOR SUPPLIER FOR BUYER - -------------------------------------------------------------------------------------------------- Name Bill Bradley Name Herman Graham, Jr. - -------------------------------------------------------------------------------------------------- Title Vice President, Business Title Software Contract Account Development Manager - -------------------------------------------------------------------------------------------------- Address 1873 South Bellaire, Suite 900 Address 3039 Cornwallis Rd Denver, CO 80222 VRDA/002 RTP,NC 27709 - -------------------------------------------------------------------------------------------------- Phone (303) 691-0975 Phone (919) 543-7065 - -------------------------------------------------------------------------------------------------- Fax (303) 756-4441 Fax (919) 543-1119 - -------------------------------------------------------------------------------------------------- Email bill_bradley@sftw.com@internet Email hgraham@us.ibm.com - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- LEGAL COORDINATORS - -------------------------------------------------------------------------------------------------- FOR SUPPLIER FOR BUYER - -------------------------------------------------------------------------------------------------- Name Michael Morgan Name Andrew W. Wright - -------------------------------------------------------------------------------------------------- Title CFO Title Attorney, General Legal - -------------------------------------------------------------------------------------------------- Address 999 baker Way, Fifth Floor Address 3039 Cornwallis Rd., San mateo, CA 94404 TL3B/062 RTP, NC 27709 - -------------------------------------------------------------------------------------------------- Phone (650) 578-0700 Phone (919) 254-1276 - -------------------------------------------------------------------------------------------------- Fax (650) 524-5952 Fax (919) 254-4330 - -------------------------------------------------------------------------------------------------- Email mike_morgan@sftw.com@internet Email drewww@us.ibm.com - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- TECHNICAL COORDINATORS - -------------------------------------------------------------------------------------------------- FOR SUPPLIER FOR BUYER - -------------------------------------------------------------------------------------------------- Name Robert Goosey Name William W. Waskom - -------------------------------------------------------------------------------------------------- Title Director of Engineering Title Senior Software Engineer - -------------------------------------------------------------------------------------------------- Address 999 Baker Way, Fifth Floor Address 3039 Cornwallis Rd., San mateo, CA 94404 PE9A/500 RTP, NC 27709 - -------------------------------------------------------------------------------------------------- Phone (650) 578-0700 Phone (919) 254-0342 - -------------------------------------------------------------------------------------------------- Fax (650) 578-0118 Fax (919) 543-5519 - -------------------------------------------------------------------------------------------------- Email robert_goosey@sftw.com@internet Email wwaskom@us.ibm.com - --------------------------------------------------------------------------------------------------
12.0 ELECTRONIC COMMERCE
- -------------------------------------------------------------------------------------------------- SUPPLIER ACCOUNT INFORMATION FOR ELECTRONIC CREDIT TRANSACTIONS - -------------------------------------------------------------------------------------------------- Name on Account Enlighten Software Solutions, Inc. - -------------------------------------------------------------------------------------------------- Financial Institution Silicon Valley Bank - -------------------------------------------------------------------------------------------------- City, State Zip 3000 Lakeside Dr. Santa Clara, CA 95054 - -------------------------------------------------------------------------------------------------- Contact Name/Title [*] - -------------------------------------------------------------------------------------------------- Contact Phone Number [*] - -------------------------------------------------------------------------------------------------- City, State/Zip 3000 Lakeside Dr. Santa Clara, CA 95054 - -------------------------------------------------------------------------------------------------- Account Number (max 17) [*] - -------------------------------------------------------------------------------------------------- Bank Routing/Transit Code [*] (max 9) - --------------------------------------------------------------------------------------------------
[*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 12 of 30 Form Release: 8/98 Revision: 11/98 21 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: By: By: ------------------------------- -------------------------------------- Buyer Signature Date Supplier Signature Date Herman Graham, Jr. David D. Parker - ----------------------------------- ----------------------------------------- Printed Name Printed Name Software Contract Account Manager President & CEO, Enlighten Software - ----------------------------------- ----------------------------------------- Title & Organization Title & Organization 3039 Cornwallis Rd., VRDA/002, 999 Baker Way, Fifth Fl, RTP, NC 27709 San Mateo, CA 94404 - ----------------------------------- ----------------------------------------- Buyer Address: Supplier Address: [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 13 of 30 Form Release: 8/98 Revision: 11/98 22 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] ATTACHMENT 01 PAGE 1 OF 5 TESTING, MAINTENANCE AND SUPPORT 1.0 DEFINITIONS Capitalized terms in this Attachment have the following meanings. 1.1 APAR is the completed form entitled "Authorized Program Analysis Report" that is used to report suspected Code or documentation errors, and to request their correction. 1.2 APAR CLOSING CODES are the established set of codes used to denote the final resolution of an APAR. Buyer will identify APAR Closing Codes prior to the start of the maintenance obligations. 1.3 DEVELOPER TEST SYSTEMS are an appropriate configuration of installed hardware and software that Supplier maintains which is representative of typical customer installations for the Product. These Developer Test Systems will contain, at a minimum, the following: a. the [*]; b. the [*] to Supplier; and c. specific [*] 1.4 THE DEVELOPER TEST SYSTEMS will consist of the appropriate configured workstations only unless Buyer specifies and provides [*]. 1.5 BUYER TEST SYSTEMS are an appropriate configuration of installed hardware and software that Buyer maintains which is representative of typical Buyer customer installations using the Product. [*] 1.6 MAINTENANCE LEVEL SERVICE is the service provided when a customer identifies an error. a. LEVEL 1 is the service [*]. b. LEVEL 2 is the service [*]. c. LEVEL 3 is the service [*] 1.7 PROBLEM DETERMINATION is the process of determining whether a problem is being caused by hardware, software or documentation. 1.8 PROBLEM MANAGEMENT RECORD ("PMR") is a record created when a customer makes the initial support request. This record becomes a part of the Problem Management System database and records the essential information about the customer question or problem. 1.9 PROBLEM MANAGEMENT SYSTEM ("PMS") is an internal Buyer developed software system used to record customer demographic information and encode data about the reported question or problem. The PMS will handle the dispatching of the call record. The PMS will provide management reports of the call activity, and the recording and tracking of all questions and problems to final resolution. The PMS will verify that each customer is "entitled" to program support. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 14 of 30 Form Release: 8/98 Revision: 11/98 23 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 1.10 PROBLEM SOURCE IDENTIFICATION is the process of determining which software or documentation component is failing or attributing the failure to some external cause such as a customer error or no trouble found. 1.11 READER COMMENT FORM ("RCF") is the form which is used to record errors and comments on the documentation. The RCF is generally the last page of a manual or brochure. The customer completes it and mails it to the address specified. 2.0 MAINTENANCE AND SUPPORT RESPONSIBILITIES 2.1 The parties will agree to the specific details of the process flow each will follow to resolve customer calls [*] 2.2 Supplier will provide Buyer [*] [*] of such Deliverable. 2.3 Product customers will initiate requests for support by contacting Buyer. [*] LEVEL 1. Buyer will: (a) [*]. Buyer will [*]. LEVEL 2. Buyer will: (1) [*]. Buyer will be the primary customer contact point for questions, problems and assistance concerning the Product. [*]. 2.4 [*], Supplier will [*] 2.5 LEVEL 3. Supplier will [*]: (1) [*] [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 15 of 30 Form Release: 8/98 Revision: 11/98 24 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] [*] 2.6 [*], Supplier will provide a corrected version of each Deliverable that includes all available Error Corrections to the Deliverable. Additional corrected versions of the Deliverables will be provided as determined and mutually agreed to by Buyer and Supplier in the event they become necessary due to the frequency or severity of newly discovered defects. In order to provide Error Corrections, Supplier will maintain a current copy of the Product. 2.7 Supplier will maintain procedures to ensure that new Error Corrections are compatible with previous Error Corrections using Supplier's normal policies for such compatibility. In any event, Supplier will ensure that Error Corrections are compatible with the current version of Products and with the immediate previous version of the Products. 2.8 Packaging of Error Corrections and migration Code will be done as mutually agreed to by Buyer and Supplier . 3.0 APAR ORIGINATION AND CORRECTION 3.1 Generally, APARs will originate from Buyer and customers reporting problems or sending in Reader Comment Forms. Supplier will also report to Buyer as APARs all valid errors discovered by Supplier or its customers contained within a Deliverable. After receiving an APAR, Buyer will assign an APAR number and Severity Level, and forward the APAR to Supplier for action. 3.2 For verified APARs for the Deliverables, [*] a. [*]. 3.3 Reader Comment Forms received by Buyer that do not form the basis of an APAR will be forwarded to Supplier for proper and prompt handling as appropriate. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 1 of 30 Form Release: 8/98 Revision: 11/98 25 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 4.0 TRAINING a. [*]. This training will be provided [*] Level 1 and 2 defect support education. Such training [*]. At a time to be mutually agreed to by the Parties, [*], Supplier will provide product training materials to Buyer and training to Buyer personnel and third parties identified by Buyer and agreed to by Supplier on the following topics related to the Deliverables: - Overall functionality - Typical customer environments and utilization - Overall installation - Configuration - Operation - Frequently asked questions and support issues [*] b. Supplier [*]. At a time to be mutually agreed to by the Parties, [*] Supplier will provide marketing and sales training materials to Buyer and training to Buyer personnel and third parties identified by Buyer and agreed to by Supplier on the following topics related to the Deliverables. This training will include, but not be limited to: - Deliverable overview - Value proposition - Deliverable positioning - Key messages - Sales Kit for Buyer sales force and Buyer authorized Business Partners attending the training session - Overall functionality - Typical customer environments and utilization - Competitive comparison with industry leading System Management offerings [*] c. Supplier Training Buyer [*] The training will consist [*] Product including the Deliverables. [*]. 5.0 GENERAL 5.1 [*]. Supplier's normal working hours are defined as 8:00 AM to 5:00 PM, Monday through Friday, Pacific Time. [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 17 of 30 Form Release: 8/98 Revision: 11/98 26 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 5.2 [*]. 5.3 It is desirable that Buyer report APARs and status requests to Supplier via an electronic interface and that Supplier send APAR Error Corrections, status updates and requests for additional documentation to Buyer via the same interface. Buyer and Supplier will jointly plan the electronic system. [*] 5.4 Critical situations may require the parties to use the telephone for immediate communications. The parties will follow such communications via the electronic interface for tracking and recording purposes[*] 5.5 In circumstances where materials have to be exchanged using facsimile or courier services, each party [*] 5.6 Supplier will participate in monthly telephone conference calls with Buyer to review the status and performance of the parties' obligations. These calls may be scheduled more or less frequently as agreed to by the Technical Coordinators. [*] [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 18 of 30 Form Release: 8/98 Revision: 11/98 27 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] ATTACHMENT 02 PAGE 1 OF 2 MARKETING ACTIVITIES Buyer and Supplier understand the benefits of working together to maximize Buyer's ability to successfully market the Buyer Products that contain the Deliverables. As marketing opportunities arise, Buyer and Supplier agree to collaborate in a manner that promotes the Buyer Products that contain the Deliverables and supports the market image of Supplier. Some of the activities on which Buyer and Supplier intend to cooperate are: 1. Marketing Activities (i) Announcements, tradeshows, and forums as agreed to by the Marketing Coordinators. (ii) At Buyer's sole discretion, Buyer may invite Supplier marketing personnel to participate in marketing activities for the Buyer Products that contain the Deliverables. At Supplier's sole discretion, Supplier may invite marketing personnel for the Buyer Products that contain the Deliverables to participate in Supplier marketing activities. 2. Marketing and Sales Training Marketing and sales training will be as specified in Section 4.0 of the Testing, Maintenance, and Support Attachment. 3. Collateral "Collateral" refers to marketing materials for EnlightenDSM which will support the EnlightenDSM presence and value add to the Buyer Products that contain the Deliverables. In general, Collateral will cover topics that emphasize to the customer the strengths of Buyer's and Supplier's joint solution; i.e., the Buyer Product(s) that contain the Deliverables. References may extend beyond EnlightenDSM as a part of the Buyer Product(s) to include the strength of the combination of the Buyer Product(s) that contain the Deliverables. Supplier may provide Buyer with appropriate Collateral as agreed to by the Marketing Coordinators. The specific Collateral requirements may vary based on the marketing activity and/or audience. The Marketing Coordinators will agree on the specific items required, whether Buyer or Supplier will reproduce the materials, and delivery dates associated with such items and marketing activities. 4. Attribution If Buyer specifically identifies other components of a Buyer Product which includes the Deliverables by origin (name of the licensed components, if applicable) in any marketing materials, Buyer shall include appropriate text and/or logo acknowledging, at a minimum, (i) that Supplier is the source for such Deliverables, and (ii), if the functions of other components of such Product are described, that the Deliverables provide system management functionality for such Product. Not withstanding the above, if Buyer does not specifically identify other components of the Buyer Product by origin, or if in a focus campaign, Buyer is focusing on a function or functions other than System Management, Buyer will not be required to include the Enlighten text and / or logo attribution. 4.1 Buyer shall refer to the Deliverables only as "EnlightenDSM" as appropriate. 4.2 Examples of an acceptable way to use text attribution: "Buyer Product includes the EnlightenDSM software." [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 19 of 30 Form Release: 8/98 Revision: 11/98 28 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] 4.3 Buyer shall identify the EnlightenDSM logo as Enlighten's trademarks as follows: "The EnlightenDSM logo is a trademark of Enlighten Software Technologies, Inc." [*] The Marketing Coordinators responsible for administration of all sales and marketing activities related to this Agreement are: FOR BUYER: FOR SUPPLIER: Name: Scott Handy Name: Bill Bradley Title: Marketing Manager Title: Vice President, Business Development Address: Address: 1873 South Bellaire, Suite 900 Rt. 100 Denver, CO 80222 4th Floor, Office 4J15 Somers, NY 10589 Phone: 914-766-1716 Phone: (303) 691-0975 Fax: 914-766-9147 Fax: (303) 756-4441 E-mail: shandy@us.ibm.com E-mail: bill_bradley@sftw.com@internet [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 20 of 30 Form Release: 8/98 Revision: 11/98 29 LICENSED & DEVELOPED WORKS AGREEMENT AGREEMENT # [*] STATEMENT OF WORK SOW # [*] ATTACHMENT 03 The Certificate of Originality questionnaire may be used to cover one complete Licensed Work or Developed Works, even if that Licensed Work or Developed Works includes multiple modules. Write "not applicable" or "N/A" if a question is not relevant to the furnished software material. 1. The following Certificate of Originality applies to all Licensed Work or Developed Works described in this Statement of Work. 2. Was any portion of the software material written by anyone other than you or your employees within the scope of their employment? YES _____ NO _____ If YES, identify the author and the circumstances: A) Indicate if the whole software material or only a portion thereof was written by such party, and identify such portion: i. Specify for each involved party the name, address, and citizenship: ii. If the party is a company, how did it acquire title to the software material (e.g., software material was written by company's employees within the scope of their employment)? iii. If the party is an individual, did he/she create the software material while employed by or under contractual relationship with another party? YES _____ NO ______ If YES, provide name and address of the other party and explain the nature of the contractual relationship: B) How did you acquire title to the software material written by the other party? 3. Are any copyright, confidentiality, or proprietary notice(s) present on the software material(s)? YES _____ NO ______ If YES, please describe such notice(s). 4. Was any portion of the software material (e.g., Code, associated documentation or Externals) derived from preexisting works (either yours or a third party's), including any code from freeware, shareware, electronic bulletin boards, or the Internet? YES _____ NO ______ If YES, please identify the material, author, owner and copyright notice, if any, for each of the preexisting materials. 5. Does any of the software materials (e.g., Code, associated documentation or Externals) include recognizable voices, pictures or other likenesses? YES ____ NO ______ If YES, how did you acquire rights to use such recognizable voices, pictures or other likenesses? 6. Provide an explanation of any other circumstance which might affect Buyer's ability to reproduce, distribute and market this software material, including whether your software material was prepared from any preexisting materials which have any: a) confidentiality or trade secret restrictions to others; b) known or possible royalty obligations to others; and c) used other preexisting materials developed for another party or customer (including government) where you may not have retained full rights to such other preexisting materials. Authorized Signature: Name: ______________________________ Title: ______________________________ Date: _______________________________ _______________________________ [*]=Confidential Treatment Requested--Edited Copies Form Title: Licensed & Developed Works SOW (LDWA_SOW) Page 21 of 30 Form Release: 8/98 Revision: 11/98 EX-23.1 5 CONSENT OF KPMG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Enlighten Software Solutions, Inc.: We consent to incorporation by reference in the registration statement (No. 33-73588) on Form S-8 of Enlighten Software Solutions, Inc. of our report dated February 5, 1999, relating to the consolidated balance sheets of Enlighten Software Solutions, Inc. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1998, which report appears in the December 31, 1998, annual report on Form 10-KSB of Enlighten Software Solutions, Inc. KPMG LLP Mountain View, California March 30, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,899,976 1,285,551 628,438 25,000 0 3,979,135 1,518,207 929,577 4,929,422 704,924 0 7,591,538 0 0 5,551 4,929,422 3,758,408 3,758,408 669,602 669,602 4,064,973 0 0 (810,810) (25,394) (785,416) 0 0 0 (785,416) (0.22) (0.22)
-----END PRIVACY-ENHANCED MESSAGE-----