-----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, JoOgMVIUB0RGyouDf0yW820uEAMaDAwDjCDYBLAPUubvtA1BMtQ19gz80lLaw/qa TRevZtZTCYuK9UaLyX+EXg== 0000950149-99-000780.txt : 19990430 0000950149-99-000780.hdr.sgml : 19990430 ACCESSION NUMBER: 0000950149-99-000780 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENLIGHTEN SOFTWARE SOLUTIONS INC CENTRAL INDEX KEY: 0000919175 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943008888 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23446 FILM NUMBER: 99603754 BUSINESS ADDRESS: STREET 1: 999 BAKER WAY STE 390 CITY: SAN MATCO STATE: CA ZIP: 94404-1578 BUSINESS PHONE: 4155780700 FORMER COMPANY: FORMER CONFORMED NAME: SOFTWARE PROFESSIONALS INC DATE OF NAME CHANGE: 19940217 10QSB 1 QUARTERLY REPORT DATED MARCH 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - QSB (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-23446 ENLIGHTEN SOFTWARE SOLUTIONS, INC. - ------------------------------------------------------------------------------- (Exact Name as registrant specified in its charter) CALIFORNIA 94-3008888 ---------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 999 BAKER WAY, FIFTH FLOOR, SAN MATEO, CALIFORNIA 94404 - -------------------------------------------------- ------ (Address of principal executive offices) (Zip code) (650) 578-0700 --------------- (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 1999:
OUTSTANDING CLASS MARCH 31, 1999 ----- -------------- Common Stock, no par value 3,959,701
This is Pagce 1 of 21 Pages. The Index to Exhibits begins on Page 21 2 ENLIGHTEN SOFTWARE SOLUTIONS, INC. QUARTERLY REPORT ON FORM 10-QSB QUARTER ENDED MARCH 31, 1999 TABLE OF CONTENTS
PAGE NO. PART I FINANCIAL INFORMATION ------- Item 1. Financial Statements Condensed Consolidated Balance Sheets - 3 As of March 31, 1999 and December 31, 1998 Condensed Consolidated Statements of Operations - 4 Three months ended March 31, 1999 and 1998 Condensed Consolidated Statements of Cash Flows - 5 Three months ended March 31, 1999 and 1998 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
Page 2 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 1,134,053 $ 1,899,976 Short-term investments 1,280,051 1,285,551 Accounts receivable, less allowance for doubtful accounts 1,252,575 653,438 Prepaid expenses and other assets 187,778 140,170 ----------- ----------- Total current assets 3,854,457 3,979,135 Property and equipment, net 558,371 588,630 Software development costs, net 57,545 92,248 Other assets 274,409 269,409 ----------- ----------- $ 4,744,782 $ 4,929,422 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 138,475 $ 202,547 Accrued and other current liabilities 452,067 458,568 Deferred revenue 70,988 43,809 ----------- ----------- Total current liabilities 661,530 704,924 ----------- ----------- Shareholders' equity: Common stock 7,705,088 7,591,538 Accumulated other comprehensive income 51 5,551 Accumulated deficit (3,621,887) (3,372,591) ----------- ----------- Total shareholders' equity 4,083,252 4,224,498 ----------- ----------- $ 4,744,782 $ 4,929,422 =========== =========== The accompanying notes are an integral part of the condensed consolidated financial statements.
Page 3 4 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended March 31, ----------------------------- 1999 1998 ----------- ----------- Revenue: Product license $ 739,164 $ 180,130 fees Product maintenance fees 164,179 155,473 Consulting 319,600 207,817 services Royalties 42,576 157,160 ----------- ----------- Total revenue 1,265,519 700,580 Cost of revenue 169,692 173,838 ----------- ----------- Gross profit 1,095,827 526,742 ----------- ----------- Operating expenses: Research and development 511,098 276,739 Sales and 633,968 379,945 marketing General and administrative 230,077 222,345 Gain on sale of Tandem product line -- (515,487) ----------- ----------- Total operating expenses 1,375,143 363,542 ----------- ----------- Operating income (loss) (279,316) 163,200 Other income, net 30,820 7,877 ----------- ----------- Income (loss) before (248,496) 171,077 income taxes Income tax expense (benefit) 800 (40,604) ----------- ----------- Net income (loss) $ (249,296) $ 211,681 =========== =========== Other comprehensive income--unrealized gains on securities 51 13,305 ----------- ----------- Comprehensive income (loss) $ (249,245) $ 224,986 =========== =========== Basic earnings (loss) per share: Net income (loss) per share $ (0.06) $ 0.07 =========== =========== Shares used in net income (loss) per share computation 3,932,421 2,985,746 computation =========== =========== Diluted earnings (loss) per share: Net income (loss) per share $ (0.06) $ 0.06 =========== =========== Shares used in net income (loss) per share computation 3,932,421 3,468,625 =========== =========== The accompanying notes are an integral part of the condensed consolidated financial statements.
Page 4 5 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended March 31, ----------------------------- 1999 1998 ----------- ----------- Cash flows from operating activities: Net income (loss) $ (249,296) $ 211,681 Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 106,540 92,173 Gain on sale of Tandem product line -- (515,487) Changes in operating assets and liabilities: Accounts receivable, net (599,137) (297,467) Refundable income taxes -- 127,035 Prepaid expenses and other assets (52,608) 156,960 Trade accounts payable (64,072) (13,934) Accrued and other current liabilities (6,501) (255,927) Deferred revenue 27,179 (139,823) ----------- ----------- Net cash used for operating activities (837,895) (634,789) ----------- ----------- Cash flows from investing activities: Purchases of short-term investments -- (186,695) Proceeds from sale of Tandem product line -- 191,666 Purchases of property and equipment (41,578) (15,246) ----------- ----------- Net cash used for investing activities (41,578) (10,275) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of stock 113,550 44,352 ----------- ----------- Net cash provided by financing activities 113,550 44,352 ----------- ----------- Net increase (decrease) in cash and cash equivalents (765,923) (600,712) Cash and cash equivalents at beginning of period 1,899,976 1,406,141 ----------- ----------- Cash and cash equivalents at end of period $1,134,053 $ 805,429 =========== =========== The accompanying notes are an integral part of the condensed consolidated financial statements
Page 5 6 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The Consolidated Financial Statements of Enlighten Software Solutions, Inc. and Subsidiary (the "Company") included in the Company's Form 10-KSB for the year ended December 31, 1998 contain additional information about the Company, its operations, and its financial statements and accounting practices, and should be read in conjunction with this Quarterly Report on Form 10-QSB. The condensed consolidated balance sheet at December 31, 1998 was derived from audited financial statements; however, it does not include all disclosures required by generally accepted accounting principles. These interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and therefore certain information and footnote disclosures normally contained in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The interim financial information contained herein is not necessarily indicative of results for any future period. The accompanying unaudited condensed consolidated financial statements of the Company reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary to present a fair statement of the financial position as of March 31, 1999, and the results of operations and cash flows for the interim periods presented. 2. Revenue Recognition Product license fees are recognized after the following events have occurred: a product evaluation has been shipped to the customer; the customer elects to purchase the software following an evaluation period; the customer signs the related contract; and collection of the sales price is probable. Royalty revenues that are contingent upon sale to an end-user by original equipment manufacturers are recognized upon receipt of a report of shipment from the original equipment manufacturer. Product maintenance fees committed as part of new product licenses and maintenance resulting from renewed maintenance contracts are deferred and recognized ratably over the contract period, generally one year. Consulting service revenue is recognized when services are performed for time and material contracts and on a percentage of completion basis for fixed price contracts. 3. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company has classified its investments in commercial paper and U.S. Treasury notes as "held-to-maturity." All such investments mature in less than one year and are stated at amortized cost, which approximates fair value. Interest income is recorded using an effective interest rate, with the associated discount or premium amortized to interest income. Page 6 7 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Additionally, the Company has classified its investments in preferred stock as "available-for-sale." Such investments are recorded at fair value based on quoted market prices, with unrealized gains and losses reported as a separate component of stockholders' equity. As of March 31, 1999, unrealized gains and losses were not significant. 4. Recent Accounting Pronouncements The Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The adoption of this statement did not have a material affect on the periods presented. 5. Earnings Per Common Share Basic earnings (loss) per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that would occur from options which could result in additional common shares being issued. The following is a reconciliation of the number of shares used in the basic and diluted earning per share computations for the periods presented:
March 31, ------------------------- 1999 1998 --------- --------- Shares used in basic net income (loss) per share computation 3,932,421 2,985,746 Effect of dilutive potential common shares - 482,879 --------- --------- Shares used in diluted net income (loss) per share computation 3,932,421 3,468,625 ========= =========
Potential common shares excluded from the computation for the three months ended March 31, 1999 were 286,046 as their effect would be antidilutive. 6. Recent Accounting Pronouncements The Company adopted SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" effective January 1, 1999. The adoption of SOP 98-1 did not have a material effect on the periods presented. Page 7 8 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. The Company expects that the adoption of SOP No. 98-5 will have no material impact on its financial position, results of operations or cash flows. The Company will be required to implement SOP No. 98-5 for the year ending December 31, 1999. In June 1998, Financial Accounting Standard No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities" was issued and is effective for all fiscal years beginning after June 15, 1999. FAS 133 requires the Company to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges and establishes respective accounting standards for reporting changes in the fair value of the derivative instruments. Upon adoption, the Company will be required to adjust hedging instruments to fair value in the balance sheet and recognize the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. The Company is evaluating its expected adoption date and currently expects to comply with the requirements of FAS 133 in fiscal year 2000. The Company does not expect the adoption will be material to the Company's financial position or results of operations since the Company does not participate in such investments or activities. In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP No. 98-9 requires recognition of revenue using the "residual method" in a multiple-element software arrangement when fair value does not exist for one or more of the delivered elements in the arrangement. Under the "residual method," the total fair value of the undelivered elements is deferred and recognized in accordance with SOP No. 97-2. The Company will be required to implement SOP No. 98-9 for the year ending December 31, 2000. SOP No. 98-9 also extends the deferral of the application of SOP No. 97-2 to certain other multiple-element software arrangements through the Company's year ending December 31, 1999. The Company is evaluating the provisions of SOP No. 98-9 and has not yet determined what impact, if any, SOP No. 98-9 will have on its financial position, results of operations or cash flows. Page 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this report on Form 10-QSB contains forward looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading "Business Risks" contained herein and in the Company's other filings with the Securities and Exchange Commission, including but not limited to those discussed under the heading "Risk Factors" in the Company's 1998 Report on Form 10-KSB. OVERVIEW Enlighten Software Solutions develops, markets, and supports software products for UNIX and Windows environment workgroup administration and enterprise management. The Company's product solutions are designed for open systems distributed computing environments in the range of ten to 1,000 servers/clients. The EnlightenDSM product allows companies to manage their information systems by enabling systems managers and administrators to control their systems from diverse UNIX and Windows platform vendors such as, Digital Equipment Corporation, Hewlett-Packard, IBM, Santa Cruz Operation (SCO), SGI, Sun Microsystems, and Microsoft. Founded in 1986, the Company was a leading provider of systems management software on the Tandem platform, providing a range of automated systems management products to over 400 companies in 30 countries. On October 1, 1997, the Company sold its Tandem product line to New Dimension Software, Inc. ("NDS") in order to focus efforts on its UNIX and Windows product suite. In connection with this sale, the Company received approximately $2.5 million in cash and the rights to receive royalties on Tandem related products for a period of three years based upon NDS' licensing and support of the Tandem software products. The sale of the Tandem product line also included the transfer to NDS of approximately 12 employees associated with the Company's Tandem operation. Following the disposition of its Tandem product line, the Company shifted its sales strategy to one based primarily upon third-party distributors and restructured its sales department as a result of this shift. The Company intends to build its sales, marketing, and customer support organizations with a focus on delivery of its products to original equipment manufacturer ("OEM") partners, resellers, system integrators, and select end-users. An essential element of the Company's sales and marketing strategy is the development of indirect distribution channels, such as OEMs, independent software vendors ("ISVs"), and value added resellers ("VARs"), as well as other systems management and application software vendors whose products are complementary with those of the Company. Page 9 10 VARIABILITY OF QUARTERLY RESULTS The Company has experienced significant quarterly fluctuations in operating results and expects that these fluctuations will continue in future periods. These fluctuations have been caused by a number of factors, including the timing of new product or product enhancement introductions by the Company or its competitors, purchasing patterns of its customers, size and timing of individual orders, the rate of customer acceptance of new products, and pricing and promotion strategies undertaken by the Company or its competitors. Future operating results may fluctuate as a result of these and other factors, including the Company's ability to continue to develop, acquire, and introduce new products on a timely basis. Additionally, the Company's operating results may be influenced by seasonality and overall trends in the global economy. Because the Company operates with a relatively small backlog, quarterly sales and operating results generally depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, the Company has recognized a substantial portion of its license revenues in the last month of the quarter, particularly the last week. Since the Company's staffing levels and other operating expenses are based upon anticipated revenues, delays in the receipt of orders can cause significant fluctuations in income from quarter to quarter. RESULTS OF OPERATIONS Total revenue. Revenue for the first quarter of 1999 totaled $1,266,000, an 81% increase when compared to the same quarter in 1998. The increase for the quarter is related to the increased license fees from the Company's OEM relationship with SGI, entered into during the first quarter of 1998. An increase in consulting fees, as a result of the IBM relationship discussed below, was entirely offset by a decrease in royalties from the sale of the Tandem product line. Revenue from product license fees increased 310% to $739,000 in the first quarter of 1999. The increase was primarily attributable to an increase in UNIX licenses of the Company's EnlightenDSM product resulting from its relationship with SGI. The Company and SGI entered into an OEM bundling agreement in January 1998. SGI began shipping the Company's product along with their UNIX servers and workstations in July 1998. Thus, in the first quarter of 1998 there was no comparable revenue from SGI. Product maintenance fees increased 6%, to $164,000, in the first quarter of 1999. The increase is due to increased UNIX and Windows license fees over the prior year. Consulting services revenue increased 54%, to $320,000, in the first quarter of 1999 when compared with the first quarter of 1998. The increase in this period is due to non-recurring consulting work performed in the first quarter of 1999 related to the Company's new strategic relationship with IBM, signed in December 1998. Page 10 11 Royalties for the first quarter of 1999 were $43,000, compared to $157,000 in the first quarter of 1998, a decrease of $115,000, or 73%. The Company recognizes royalties from product license fees and product maintenance fees generated by the Tandem product line sold to NDS in October 1997. The royalty rate decreases year over year, for a three year period that commenced in October 1997. Cost of revenue. Cost of revenue decreased by 2%, or $4,000, to $170,000 in the first quarter of 1999. The reduction in cost of revenue is caused primarily by the decrease in costs associated with royalties paid to third parties and amortization of software development and acquisition costs. Research and development. Net research and development expenses increased by 85%, to $511,000, in the first quarter of 1999 when compared to the first quarter of 1998. The increase in this quarter is related to increased personnel and recruiting costs. Several new development personnel were hired during the latter three quarters of 1998 following the sale of the Tandem product line. New development personnel were required to increase the platform coverage for the EnlightenDSM product and provide enhancements required by the Company's strategic partners. The Company expects its research and development expenditures to increase in absolute dollars as it expands that operation to facilitate expected product demands associated with its third-party resellers. Sales and marketing. Sales and marketing expenses increased by 67% to $634,000 in the first quarter of 1999, when compared to the same period in 1998. During the first quarter of 1998, just following the sale of the Tandem product line, the Company restructured its sales and marketing department to reflect the Company's strategy of selling through third parties as opposed to selling directly. All sales and support personnel associated with the Tandem product line were transferred to NDS as part of the sale of that operation. Additionally, the Company closed all remote sales operations in the U.S. and the U.K. during the fourth quarter of 1997, significantly reducing sales and marketing costs. During the remainder of 1998, the Company increased its sales and marketing personnel, adding a Vice President, Business Development and Marketing and sales and marketing consultants, and opened up a sales and support office in Denver, CO to better support its new third-party relationships. These additional costs are reflected in the first quarter 1999 numbers. The Company expects sales and marketing costs to increase in absolute dollars for the foreseeable future as it expands its ability to sell and service its products through third-party resellers and, to a lesser extent, expands its direct sales force. General and administrative. General and administrative expenses increased by 3% to $230,000 in the first quarter of 1999 when compared to the same period in 1998. The increase is due to overhead increases as they relate to the expansion of other departments and the Company in general. Page 11 12 Gain on sale of Tandem product line. On October 1, 1997, the Company sold its Tandem product line to NDS. The Company received approximately $2.5 million in cash and the rights to receive royalties on Tandem related products for a period of three years. In the fourth quarter of 1997, the Company recognized a gain on the sale of the operating assets of the Tandem product line of approximately $2.2 million. In the first quarter of 1998, the Company received the balance of the cash related to the sale of the assets and recognized the balance of the gain from this transaction, or $515,000. Other income, net. Other income, net increased by $23,000 in the first quarter of 1999 as a result of an increase in net interest income associated with higher average cash balances. Income tax expense (benefit). Tax expense in the first quarter of 1999 reflects minimum state franchise taxes. In the first quarter of 1998, the Company recognized a tax benefit of $41,000 as a result of receiving tax refunds on net operating loss carrybacks in excess of taxes receivable provided for by the Company. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company's cash, cash equivalents, and short-term investments were $2,414,000, representing 51% of total assets. The Company's working capital as of March 31, 1999, was $3,193,000. Cash equivalents are highly liquid investments with original maturities of ninety days or less. The Company's short-term investments are primarily investment grade commercial paper and are highly liquid. The Company had no debt as of March 31, 1999, other than normal trade payables and accrued liabilities. Shareholders' equity as of March 31, 1999, was $4,083,000. During the first three months of 1999, the Company's operating activities used cash of $838,000, compared to cash used by operating activities of $635,000 in the same period of the prior year. The change was principally caused by an increase in accounts receivable. The Company's investing activities have consisted primarily of short-term investments, the sale of the Company's Tandem operation, and additions to capital equipment. Investing activities used cash of $42,000 for the three months ended March 31, 1999, compared with $10,000 in the same period in 1998. The change is primarily due to an increase in the purchase of property and equipment during the first quarter of 1999 when compared to the first quarter of 1998. Financing activities provided cash of $114,000 in the first three months of 1999, compared with cash provided of $44,000 in the same period of the prior year. The increase in cash provided from financing activities resulted from an increase in proceeds from the exercise of employee stock options. Page 12 13 In May 1998, the Company completed a public offering (the "Offering") of 700,000 shares of common stock. The net proceeds from the Offering of $2.2 million were used for funding operations and capital expenditures and for other general corporate purposes, including working capital. The Company will require substantial cash flow to continue operations on a satisfactory basis and complete its research and development and its sales and marketing programs. The Company anticipates that cash and short term investments will provide sufficient liquidity to fund these requirements for the next twelve months. However, the Company's continued ability to fund operations and meet its other obligations depends on its future performance, which, in turn, is subject to general economic conditions, and business and other factors beyond the Company's control. If the Company is unable to generate sufficient cash flow from operations, it may be required to obtain additional financing. There can be no assurance that the Company would be able to obtain such financing, or that any financing would result in a level of net proceeds required. BUSINESS RISKS In addition to the other information in this Report on Form 10-QSB and other documents the Company files from time to time with the Securities and Exchange Commission, the following risk factors should be considered carefully in evaluating the Company and its business: Fluctuating Operating Results The Company has experienced significant quarterly fluctuations in operating results and expects that these fluctuations will continue in future periods. These fluctuations have been caused by a number of factors, including the timing of new product or product enhancement introductions by the Company or its competitors, the development and introduction of new operating systems that require additional development efforts, purchasing patterns of its customers, size and timing of individual orders, the rate of customer acceptance of new products, and pricing and promotion strategies undertaken by the Company or its competitors. Future operating results may fluctuate as a result of these and other factors, including the Company's ability to continue to develop, acquire, and introduce new products on a timely basis, the timing and level of sales by the Company's OEM or other third-party licensees of computer systems or software incorporating the Company's products, technological changes in computer systems and environments, quality control of the products sold, the Company's success in shifting its primary sales strategy from direct to indirect channels, and general economic conditions. Additionally, the Company's operating results may be influenced by seasonality and overall trends in the global economy. Because the Company operates with a relatively small backlog, quarterly sales and operating results generally depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, the Company has recognized a substantial portion of its license revenues in the last month of the quarter, particularly the last week. Since the Company's Page 13 14 staffing levels and other operating expenses are based upon anticipated revenues, delays in the receipt of orders can cause significant fluctuations in income from quarter to quarter. Uncertainty of Success in Open Systems Market The Company has derived a substantial portion of its revenue to date from its Tandem-based products. The Company, however, sold all rights to its Tandem technology in October 1997. The future success of the Company is substantially dependent on its ability to generate significant revenue from its UNIX and Windows product offering. The Company's initial product entry into the open systems market in 1995 was unsuccessful. Version 2.0 of EnlightenDSM was released in mid-1996 and represented 27% and 22% of the Company's license revenues in 1997 and 1996, respectively. In January 1998, the Company signed an OEM bundling agreement with Silicon Graphics in which Silicon Graphics will bundle a limited version of the Company's product on each UNIX system shipped. In August 1998, the Company signed a distribution agreement with two of General Electric's IT Distribution Group businesses, Access Graphics and Integration Alliance. In December 1998, the Company signed a distribution agreement with IBM in which IBM will integrate and ship EnlightenDSM with each IBM Suites for Solaris and AIX shipped by IBM. In February 1999, the Company announced a partnership with Sun Microsystems in which the Company and Sun will produce a seamless integration between EnlightenDSM and Sun's SyMON systems management product. While significant, these are the first such agreements entered into by the Company. Additionally, the open systems market is characterized by rapid technological growth and intense competition. There can be no assurance that the Company has the resources, both financial and personnel, to effectively capitalize on, and continue with, its early and limited success in this market. Expansion of New Distribution Channels; Reliance on Resellers Prior to October 1997, the Company employed primarily a direct sales model, complemented with a telesales force, for the sale of its software products. In the fourth quarter of 1997, the Company began to shift a majority of its sales and marketing resources toward third-party resellers in both the United States and internationally. The Company's growth will be dependent on its ability to expand its third-party distribution channel to market, sell, and support the Company's software products. The Company is currently investing, and intends to continue to invest, significant resources to develop this channel, which could materially adversely affect the Company's operating margins. The Company has only limited experience in marketing its products through distributors. Additionally, the Company will have no control over its third-party distributors including their shipping dates or volumes of systems shipped by its OEM and other third-party customers. There can be no assurance that the Company will be successful in its efforts to generate significant revenue from this channel, nor can there can be any assurance that the Company will be successful in recruiting new organizations to represent the Company and its products. Page 14 15 Additionally, now that the Company has shifted its sales efforts from direct to indirect channels, the Company has become more dependent on its third-party distributors for the technical support and consultation to end users. The Company will need to increase its training and education efforts related to its third-party distributors to enable such third parties to obtain the technical proficiency and knowledge with respect to the Company's products. Despite these efforts, there can be no assurance that the Company will successfully train its third party distributors to enable them to provide adequate technical support to the customer base. This may result in, among other things, increased workload on the Company's internal support and engineering staff, or poor customer acceptance of the products, or both, either of which would have a material adverse effect on the Company's business, operating results, and financial condition In January 1998, the Company signed an OEM bundling agreement with Silicon Graphics in which Silicon Graphics will bundle a limited version of the Company's product on each UNIX system shipped. In August 1998, the Company signed a distribution agreement with two of General Electric's IT Distribution Group businesses, Access Graphics and Integration Alliance. In December 1998, the Company signed a distribution agreement with IBM in which IBM will integrate and ship EnlightenDSM with each IBM Suites for Solaris and AIX shipped by IBM. In February 1999, the Company announced a partnership with Sun Microsystems in which the Company and Sun will produce a seamless integration between EnlightenDSM and Sun's SyMON systems management product. While significant, these are the first such agreements entered into by the Company. While the Company believes that these arrangements will be beneficial, there can be no assurance that the Company will be able to deliver its products to these companies in a timely manner or that these companies will license the Company's products in volumes anticipated by the Company. Further, these agreements are the Company's only significant third-party distribution agreements to date. While the Company's strategy is to obtain additional resellers to reduce the dependence on these vendors, there can be no assurance of successfully attracting additional vendors to distribute the Company's products. Any such failure would result in the Company having expended significant resources with little or no return on its investment, which would have a material adverse effect on the Company's business, operating results, and financial condition. These additional investments and responsibilities will require the expenditure by the Company of substantial resources, including the diversion of employees from other projects to provide the support services and development efforts required to provide products and services to these third party vendors and other new third parties, if any. Intense Competition The Company experiences intense competition from other systems management companies, and the market is rapidly changing. The Company believes that its ability to compete successfully depends on a number of factors, including the performance, price, Page 15 16 and functionality of its products relative to those of its competitors. Most of the Company's competitors are larger and have greater financial, technical, marketing, support, and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements. In addition, the software industry is characterized by low barriers to entry. There can be no assurance that the Company's current competitors or any new market entrants will not develop systems management products that offer significant performance, price, or other advantages over the Company's technology. In addition, operating system vendors could introduce new or upgrade existing operating systems or environments that include systems management functionality offered by the Company, which could render the Company's products obsolete and unmarketable. There can be no assurance that the Company will be able to successfully compete against current or future competitors which could have a material adverse effect on the Company's business, operating results, and financial condition. Product Concentration The Company expects that substantial majority of the Company's revenue in future periods will be derived from its UNIX and Windows product, EnlightenDSM. This product has accounted for 100% of the Company's license since October 1, 1997. The Company expects that the EnlightenDSM product and its extensions and derivatives will continue to account for a substantial majority, if not all, of the Company's revenue for the foreseeable future. Broad market acceptance of EnlightenDSM is, therefore, critical to the Company's future success. Failure to achieve broad market acceptance of EnlightenDSM, as a result of competition, technological change, or otherwise, would have a material adverse effect on the business, operating results, and financial condition of the Company. The Company's future financial performance will depend in significant part on the successful development, introduction, and market acceptance of EnlightenDSM and its product enhancements. There can be no assurance that the Company will be successful in marketing EnlightenDSM or any new products, applications, or product enhancements, and any failure to do so would have a material adverse effect on the Company's business, operating results, and financial condition. Rapid Technological Change The market for the Company's products is characterized by rapid technological developments, evolving industry standards, and rapid changes in customer requirements. The introduction of products embodying new technologies, including new operating systems, applications, hardware products, systems management frameworks, and network management platforms, the emergence of new industry standards, or changes in customer requirements could render the Company's existing products obsolete and unmarketable. As a result, the Company's success depends upon its ability to continue to enhance existing products, respond to changing customer requirements, and develop and introduce in a timely manner, new products that keep pace with technological developments and emerging industry standards. Page 16 17 Additionally, there can be no assurance that other operating systems, such as Windows NT, will not significantly affect deployment of UNIX systems for business critical applications. A significant portion of the Company's revenue will continue to be derived from UNIX-based computer systems for the foreseeable future. While the Company has ported its products to the Windows NT platform, the product requires customers to control systems management for their heterogeneous environment from UNIX-based systems. A significant decline in sales of UNIX-based systems would decrease the demand for the Company's products and would have a material adverse effect on the Company's business, operating results, and financial condition. Finally, there can be no assurance that the Company will be successful in developing and marketing, on a timely basis, product enhancements or new products that respond to technological change or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction, and sale of these products, or that any such new products or product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. Dependence on Growth of Systems Management Market For the foreseeable future, all of the Company's business will be in the open systems (UNIX and Windows NT) systems management market, which is still an emerging market. The Company's future financial performance will depend in large part on continued growth in the number of companies adopting systems management solutions for their client/server computing environments. There can be no assurance that the market for systems management solutions will continue to grow. If the systems management market fails to grow or grows more slowly than the Company currently anticipates, or in the event of a decline in unit price or demand for the Company's products, as a result of competition, technological change, or other factors, the Company's business, operating results, and financial condition would be materially adversely affected. During recent years, segments of the computer industry have experienced significant economic downturns characterized by decreased product demand, production overcapacity, price erosion, work slowdowns, and layoffs. The Company's operations may in the future experience substantial fluctuations from period-to-period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers, and other factors affecting capital spending. There can be no assurance that such factors will not have a material adverse effect on the Company's business, operating results, and financial condition. Year 2000 Compliance The Company is aware of the issues associated with the programming code in existing computer systems as the millennium ("Year 2000") approaches. The Year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. Systems that do not Page 17 18 properly recognize date sensitive information when the year changes to 2000 could generate erroneous data or cause a system to fail. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. The Company has conducted Year 2000 compliance reviews for current versions of its products. The reviews include assessment, implementation, and validation testing. The Company believes that all of its existing products are or will become Year 2000 compliant during fiscal 1999 and new products will be designed to be Year 2000 compliant. Contingency plans for the handling of its reasonably likely worst case scenarios will be created during fiscal 1999 to determine how the Company will handle its reasonably likely worst case scenarios. Although the Company believes its products will be Year 2000 compliant, its products may not contain all the necessary software routines and programs for the accurate calculation, display, storage and manipulation of data involving dates. Any failure of the Company's products to perform, including system malfunctions due to the onset of the calendar year 2000, could result in claims against the Company, which could have a material adverse effect on the Company's business, financial condition or results of operations. To the extent information is publicly available, the Company has assessed the Year 2000 compliance status of its customers. The failure of its current or future customers to achieve Year 2000 compliance, or if they divert technology expenditures to address Year 2000 compliance problems, could have a material adverse effect on the Company's business, financial condition or results of operations. We believe the software and hardware we use internally comply with Year 2000 requirements or will comply during 1999. During 1998, we replaced or upgraded much of our internal use hardware and software. In the first quarter of 1999, the Company incurred approximately $10,000 in its Year 2000 remediation efforts. Enlighten expects additional remediation costs of approximately $40,000 in 1999, which includes expenditures for hardware and software upgrades. In addition, we are not aware of any material operational issues or costs associated with preparing our internal use software and hardware for the Year 2000. However, serious, unanticipated negative consequences, including material costs caused by undetected errors or defects in the technology used in our internal systems may occur. The occurrence of any of the foregoing could seriously harm our business, operating results or financial condition. The Company has not yet fully developed a comprehensive contingency plan to address situations that may result if the Company is unable to achieve Year 2000 readiness of its critical operations. The cost of developing and implementing such a plan may itself be material. Page 18 19 ENLIGHTEN SOFTWARE SOLUTIONS, INC. FORM 10-QSB, MARCH 31, 1999 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The exhibits listed in the accompanying Index of Exhibits on Page 21 are filed or incorporated by reference as part of this report. Exhibit numbers 10.28, 10.29, 10.31, and 10.32 are management contracts or compensatory plans or arrangements. (b) Reports on Form 8-K During the quarter ended March 31, 1999, the Company did not file any reports on Form 8-K. ITEMS 1, 2, 3, 4, AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE. Page 19 20 ENLIGHTEN SOFTWARE SOLUTIONS, INC. FORM 10-QSB, MARCH 31, 1999 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Enlighten Software Solutions, Inc. DATE: April 29, 1999 SIGNATURE: /s/ David D. Parker -------------------------- ------------------------ David D. Parker Chief Executive Officer DATE: April 29, 1999 SIGNATURE: /s/ Michael A. Morgan -------------------------- ------------------------ Michael A. Morgan Chief Financial Officer Page 20 21 ENLIGHTEN SOFTWARE SOLUTIONS, INC. FORM 10-QSB, MARCH 31, 1999 INDEX TO EXHIBITS
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(3)@ Employment letter, dated July 3, 1997, by and between Enlighten Software Solutions, Inc. and Mike Seashols. 10.29(3)@ Employment letter, dated August 28, 1997, by and between Enlighten Software Solutions, Inc. and David D. Parker. 10.30(3) Agreement dated as of January 21, 1998, by and between Enlighten Software Solutions, Inc. and Silicon Graphics, Inc. 10.31(4)@ Employment letter, dated July 15, 1998, by and between Enlighten Software Solutions, Inc. and Bill Bradley. 10.32(4)@ Employment letter, dated January 15, 1999, by and between Enlighten Software Solutions, Inc. and Tim Gardner. 10.33(4) Agreement dated as of December 31, 1998, by and between Enlighten Software Solutions, Inc. and International Business Machines. 27.1 Financial Data Schedule.
- ------------------------------- (1) Incorporated by reference from exhibits of the same number in the Company's Registration Statement on Form S-1, which became effective April 19, 1994. (2) Incorporated by reference from exhibit 10.27 in the Company's Current Report on Form 8-K dated October 1, 1997. (3) Incorporated by reference from an exhibit of the same number in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. (4) Incorporated by reference from an exhibit of the same number in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998. @ Compensatory or employment arrangement. Page 21 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,134,053 1,280,051 1,252,575 0 0 3,854,457 1,559,785 1,001,414 4,744,782 661,530 0 0 0 7,705,091 51 4,744,782 1,265,519 1,265,519 169,692 169,692 1,375,143 0 0 (248,496) 800 (249,296) 0 0 0 (249,296) (0.06) (0.06)
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