-----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, T1pwKyXnk3J3lCLhs0ujXD9N+PbRMY+xrBvY7MB6gpFGbhFeO/Uw35ycsTWAGfaZ t1tB6Sr+CI74e5kRa3RJpw== 0000950149-99-002020.txt : 19991117 0000950149-99-002020.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950149-99-002020 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99753844 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 FORM 10-QSB FOR THE PERIOD ENDED 09/30/1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 0-23446 ENLIGHTEN SOFTWARE SOLUTIONS, INC. (Exact name of small business issuer as specified in its charter) ----------
CALIFORNIA 94-3008888 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 999 BAKER WAY, FIFTH FLOOR, SAN MATEO, CALIFORNIA 94404 - --------------------------------------- --------- (Address of principal executive offices) (Zip code)
(650) 578-0700 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 1999:
Outstanding Class September 30, 1999 -------------------------- ------------------ COMMON STOCK, NO PAR VALUE 4,113,522
2 ENLIGHTEN SOFTWARE SOLUTIONS, INC. QUARTERLY REPORT ON FORM 10-QSB QUARTER ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS
PAGE NO. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets: September 30, 1999 and December 31, 1998..................................................................... 3 Condensed Consolidated Statements of Operations: Three and Nine Months Ended September 30, 1999 and 1998........................................ 4 Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 30, 1999 and 1998.............................................. 5 Notes to Condensed Consolidated Financial Statements......................... 6 Item 2. Management's Discussion and Analysis or Plan of Operations................... 10 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................................ 20 Item 2. Changes in Securities and Use of Proceeds................................ 20 Item 3. Defaults Upon Senior Securities.......................................... 20 Item 4. Submission of Matters to a Vote of Security Holders...................... 20 Item 5. Other Information........................................................ 20 Item 6. Exhibits and Reports on Form 8-K......................................... 21 SIGNATURES........................................................................... 22
2 3 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents ............................... $ 1,280,400 $ 1,900,000 Short-term investments .................................. 267,700 1,285,600 Accounts receivable, less allowance for doubtful accounts 1,263,600 653,400 Prepaid expenses and other assets ....................... 104,300 140,200 ----------- ----------- Total current assets ................................. 2,916,000 3,979,200 Property and equipment, net ................................. 434,800 588,600 Software development costs, net ............................. -- 92,200 Other assets ................................................ 300,200 269,400 ----------- ----------- $ 3,651,000 $ 4,929,400 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable .................................. $ 99,800 $ 202,500 Accrued and other current liabilities ................... 313,000 458,600 Deferred revenue ........................................ 79,400 43,800 ----------- ----------- Total current liabilities ............................ 492,200 704,900 ----------- ----------- Shareholders' equity: Common stock ............................................ 7,942,400 7,591,500 Accumulated other comprehensive income (loss) ........... (12,300) 5,600 Accumulated deficit ..................................... (4,771,300) (3,372,600) ----------- ----------- Total shareholders' equity ........................... 3,158,800 4,224,500 ----------- ----------- $ 3,651,000 $ 4,929,400 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Nine months ended September 30, September 30, ---------------------------- ----------------------------- 1999 1998 1999 1998 ----------- ---------- ----------- ----------- Revenue: Product license fees .................. $ 500,100 $1,233,300 $ 1,532,000 $ 1,560,300 Product maintenance fees .............. 159,200 166,000 484,300 494,700 Consulting services ................... 9,000 9,000 328,600 244,100 Royalties ............................. 52,000 98,800 152,000 328,100 ----------- ---------- ----------- ----------- Total revenue ...................... 720,300 1,507,100 2,496,900 2,627,200 Cost of revenue ........................... 83,400 226,500 316,500 504,900 ----------- ---------- ----------- ----------- Gross profit ....................... 636,900 1,280,600 2,180,400 2,122,300 ----------- ---------- ----------- ----------- Operating expenses: Research and development .............. 519,700 495,500 1,517,400 1,153,300 Sales and marketing ................... 467,800 512,800 1,572,600 1,358,700 General and administrative ............ 154,500 253,200 593,400 701,700 Gain on sale of Tandem product line ... -- -- -- (515,500) ----------- ---------- ----------- ----------- Total operating expenses ........... 1,142,000 1,261,500 3,683,400 2,698,200 ----------- ---------- ----------- ----------- Operating income (loss) ......... (505,100) 19,100 (1,503,000) (575,900) Other income, net ......................... 25,700 50,700 93,600 102,200 ----------- ---------- ----------- ----------- Income (loss) before income taxes (479,400) 69,800 (1,409,400) (473,700) Income tax expense (benefit) .............. (11,500) -- (10,700) (40,600) ----------- ---------- ----------- ----------- Net income (loss) ............... $ (467,900) $ 69,800 $(1,398,700) $ (433,100) =========== ========== =========== =========== Basic earnings (loss) per share: Net income (loss) per share ........... $ (0.12) $ 0.02 $ (0.35) $ (0.13) =========== ========== =========== =========== Shares used in computing basic net income (loss) per share .............. 4,046,848 3,813,429 3,981,315 3,384,495 =========== ========== =========== =========== Diluted earnings (loss) per share: Net income (loss) per share ........... $ (0.12) $ 0.02 $ (0.35) $ (0.13) =========== ========== =========== =========== Shares used in computing diluted net income (loss) per share .............. 4,046,848 4,124,473 3,981,315 3,384,495 =========== ========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, ----------------------------- 1999 1998 ----------- ----------- Cash flows from operating activities: Net loss ................................................................... $(1,398,700) $ (433,100) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization ........................................... 315,100 399,600 Write-off of fixed assets ............................................... 2,500 -- Gain on sale of Tandem product line ..................................... -- (515,500) Changes in operating assets and liabilities: Accounts receivable, net ............................................. (610,200) (926,000) Refundable income taxes .............................................. -- 127,000 Prepaid expenses and other assets .................................... (2,400) 287,800 Trade accounts payable ............................................... (102,700) (18,300) Accrued and other current liabilities ................................ (145,600) (221,900) Deferred revenue ..................................................... 35,600 (285,700) ----------- ----------- Net cash used for operating activities ........................... (1,906,400) (1,586,100) ----------- ----------- Cash flows from investing activities: Purchases of short-term investments ........................................ -- (200,000) Sales of short-term investments ............................................ 1,000,000 220,200 Proceeds from sale of Tandem product line .................................. -- 515,500 Purchases of property and equipment ........................................ (64,100) (127,600) ----------- ----------- Net cash provided by investing activities ........................ 935,900 408,100 ----------- ----------- Cash flows from financing activities: Proceeds from public offering of stock, net ................................ -- 2,217,400 Proceeds from issuance of stock ............................................ 350,900 254,900 ----------- ----------- Net cash provided by financing activities ........................ 350,900 2,472,300 ----------- ----------- Net increase (decrease) in cash and cash equivalents ........................... (619,600) 1,294,300 Cash and cash equivalents at beginning of period ............................... 1,900,000 1,406,100 ----------- ----------- Cash and cash equivalents at end of period ..................................... $ 1,280,400 $ 2,700,400 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The condensed consolidated financial statements included herein have been prepared by Enlighten Software Solutions, Inc. and Subsidiary ("Enlighten"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and therefore certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. However, Enlighten believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Enlighten's Annual Report on Form 10-KSB for the Year ended December 31, 1998. The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the financial position and results as of and for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full year. The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the condensed consolidated financial statements as of December 31, 1998 and for the three and nine months ended September 30, 1998, have been reclassified to conform with the 1999 presentation. 2. Revenue Recognition Product license fees are recognized after the following events have occurred: a product evaluation has been shipped to the customer; the customer elects to purchase the software following an evaluation period; the customer signs the related contract; and collection of the sales price is probable. Royalty revenues that are contingent upon sale to an end-user by original equipment manufacturers are recognized upon receipt of a report of shipment from the original equipment manufacturer. Product maintenance fees committed as part of new product licenses and maintenance resulting from renewed maintenance contracts are deferred and recognized ratably over the contract period, generally one year. Consulting service revenue is recognized when services are performed for time and material contracts and on a percentage of completion basis for fixed price contracts. 6 7 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Cash and Cash Equivalents Enlighten considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Enlighten has classified its investments in commercial paper and U.S. Treasury notes as "held-to-maturity." All such investments mature in less than one year and are stated at amortized cost, which approximates fair value. Interest income is recorded using an effective interest rate, with the associated discount or premium amortized to interest income. Additionally, Enlighten has classified its investments in preferred stock of $267,700 as "available-for-sale." Such investments are recorded at fair value based on quoted market prices, with unrealized gains and losses reported as a separate component of stockholders' equity. 4. Comprehensive Income (Loss) "Comprehensive income (loss)" includes unrealized gains and losses that have been previously excluded from net income and reflected instead in equity. A summary of comprehensive income (loss) follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ --------------------------- 1999 1998 1999 1998 --------- -------- ----------- --------- Net income (loss) ........................ $(467,900) $ 69,800 $(1,398,700) $(433,100) Unrealized gain/(loss) on securities.. (7,600) (1,000) (17,900) 14,200 --------- -------- ----------- --------- Comprehensive income (loss) .............. $(475,500) $ 68,800 $(1,416,600) $(418,900) ========= ======== =========== =========
5. Earnings Per Share Basic earnings (loss) per share is based on the weighted average effect of all common shares issued and outstanding, and is calculated by dividing net income (loss) by the weighted average shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding. Potentially dilutive common shares included in the dilution calculation consist of dilutive shares issuable upon the exercise of outstanding commons stock options computed using the treasury stock method. For the periods in which Enlighten had losses, potential common shares from common stock options are excluded from the computation of diluted net loss per share as their effects are antidilutive. 7 8 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following is a reconciliation of the weighted average common shares used to calculate basic earnings (loss) per share to the weighted average common and potentially dilutive common shares used to calculate diluted earnings (loss) per share:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ --------------------------- 1999 1998 1999 1998 --------- -------- ----------- --------- Weighted average common shares used to calculate basic earnings (loss) per share....................... 4,046,848 3,813,429 3,981,315 3,384,495 Stock options........................ -- 311,044 -- -- --------- --------- ----------- --------- Weighted average common and potentially dilutive common shares used to calculated diluted earnings (loss) per share....................... 4,046,848 4,124,473 3,981,315 3,384,495 ========= ========= =========== =========
Stock options to purchase 204,250 and 279,095 shares of common stock for the three months ended September 30, 1999 and 1998 and 387,415 and 106,250 shares of common stock for the nine months ended September 30, 1999 and 1998, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price was greater than the average market price of the common shares. Had Enlighten recorded net income for the three and nine months ended September 30, 1999 and for the nine months ended September 30, 1998, dilutive weighted outstanding options would have been 376,123, 330,903 and 418,193 shares, respectively. 6. Recent Accounting Pronouncements In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" which was adopted January 1, 1999. The adoption of SOP 98-1 did not have a material effect on Enlighten's financial position, results of operations, or cash flows. In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities" which was adopted January 1, 1999. 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 previously capitalized must be written off. The adoption of SOP No. 98-5 did not have a material impact on Enlighten's financial position, results of operations, or cash flows. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal years beginning after June 15, 2000, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an amendment of FASB Statement No. 133." SFAS No. 133 requires Enlighten to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges and establishes 8 9 ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS respective accounting standards for reporting changes in the fair value of the derivative instruments. Upon adoption, Enlighten will be required to adjust hedging instruments to fair value in the balance sheet and recognize the offsetting gains or losses as adjustments to be reported in net income or other comprehensive income, as appropriate. Enlighten is evaluating its expected adoption date and currently expects to comply with the requirements of SFAS 133 in fiscal year 2001. Enlighten does not expect the adoption will be material to Enlighten's financial position or results of operations since Enlighten does not participate in such investments or activities. 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. Enlighten will be required to implement SOP No.98-9 during 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 year ending December 31, 1999. Enlighten 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. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included elsewhere herein. Except for the historical information contained herein, the following discussion in this report on Form 10-QSB contains forward looking statements based on current expectations that involve risks and uncertainties. Enlighten's actual results could differ materially from the results discussed herein. Factors that could cause actual results or performance to differ materially or contribute to such differences include, but are not limited to, those discussed under the headings "Variability of Quarterly Results," "Liquidity and Capital Resources," and "Business Risks" contained herein and in Enlighten's other filings with the Securities and Exchange Commission, including but not limited to those discussed under the heading "Risk Factors" in Enlighten's 1998 Annual Report on Form 10-KSB. OVERVIEW Enlighten Software Solutions, Inc. ("Enlighten") develops, markets, and supports event monitoring and workgroup administration software products. Enlighten's product solutions are designed for open systems distributed computing environments in the range of ten to 1,000 servers and clients. The Enlighten(R) Distributed Systems Manager(TM) ("EnlightenDSM(TM)") product allows companies to manage their information systems by enabling systems managers and administrators to control their systems from diverse Unix, Linux, and Windows platform vendors such as Compaq Computers Corporation, Hewlett-Packard Company, International Business Machines Corporation, Intel Corporation, Microsoft Corporation, The Santa Cruz Operation, Inc., Silicon Graphics, Inc. ("SGI"), Sun Microsystems, Inc., and TurboLinux, Inc. ("TurboLinux"). Founded in 1986, Enlighten 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, Enlighten sold its Tandem product line to New Dimension Software, Inc. ("NDS") in order to focus efforts on its Unix, Linux, and Windows product suites. In connection with this sale, Enlighten 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 Enlighten's Tandem operation. Following the disposition of its Tandem product line, Enlighten shifted its sales strategy to one based primarily upon third-party distributors and original equipment manufacturer's ("OEM's") bundling and integration agreements. As a result, Enlighten restructured its sales department. Enlighten continues 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 Enlighten's sales and marketing strategy is the development of indirect distribution channels, such as OEMs, independent 10 11 software vendors, and value added resellers, as well as other systems management and application software vendors whose products are complementary with those of Enlighten. In September 1999, Enlighten executed an agreement with TurboLinux, in which a version of Enlighten's EnlightenDSM product will be bundled with all Linux operating system products that TurboLinux ships and Enlighten will receive license revenue based upon TurboLinux's revenue related to such shipments. VARIABILITY OF QUARTERLY RESULTS Enlighten 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 Enlighten 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 Enlighten or its competitors. Future operating results may fluctuate as a result of these and other factors, including Enlighten's ability to continue to develop, acquire, and introduce new products on a timely basis. Additionally, Enlighten's operating results may be influenced by seasonality and overall trends in the global economy. Because Enlighten 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, Enlighten has recognized a substantial portion of its license revenues in the last month of the quarter, particularly the last week. Since Enlighten'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 third quarter of 1999 totaled $720,300, a 52% decrease as compared to the same quarter in 1998. Total revenue for the nine months ended September 30, 1999, decreased 5% to $2,496,900, as compared to the same period in 1998. Revenue from product license fees decreased 59% to $500,100 for the third quarter of 1999, and decreased 2% to $1,532,000 for the nine months ended September 30, 1999, as compared to the same periods of the prior year. The decrease was primarily attributable to a decrease in Unix licenses of Enlighten's EnlightenDSM for workgroups product bundled with the IRIX operating system shipped by SGI. Enlighten and SGI entered into an OEM bundling relationship in January 1998 and SGI began shipping Enlighten's product along with their Unix servers and workstations in July 1998. During the third quarters of 1999 and 1998, revenue from SGI was approximately 57% and 50% of total revenue, respectively. During the nine months ended September 30, 1999 and 1998, revenue from SGI was approximately 48% and 42% of total revenue, respectively. 11 12 Product maintenance fees remained relatively flat in the third quarter of 1999 and in the nine months ended September 30, 1999, as compared to the same period of the prior year. Consulting services revenue remained relatively flat in the third quarter of 1999, as compared to the same period of the prior year. For the nine months ended September 30, 1999, consulting services revenue increased 35% to $328,600, as compared to the same period of the prior year. The increase in this period is due to non-recurring consulting work performed in the first quarter of 1999 related to Enlighten's new strategic relationship with IBM, signed in December 1998. Royalties for the third quarter of 1999 decreased 47% to $52,000, as compared to the same period of the prior year. Royalties for the nine months ended September 30, 1999 decreased 54% to $152,000, as compared to the same period of the prior year. Enlighten 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 63%, to $83,400 in the third quarter of 1999, and by 37%, to $316,500 in the first nine months of 1999 as compared to the same periods of 1998. The reduction in cost of revenue is caused primarily by the decrease in costs associated with royalties paid to third parties and a decrease in the amortization of software development costs. RESEARCH AND DEVELOPMENT Research and development expenses increased by 5%, to $519,700, in the third quarter of 1999, and by 32%, to $1,517,400, for the nine months ended September 30, 1999, when compared to the same periods of the prior year. The increase is related to increased personnel and recruiting costs. Several new development personnel were hired during the latter half 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 Enlighten's strategic partners. Enlighten 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 decreased by 9%, to $467,800, in the third quarter of 1999, and increased by 16%, to $1,572,600, for the nine months ended September 30, 1999, when compared to the same periods in 1998. During the first quarter of 1998, just following the sale of the Tandem product line, Enlighten restructured its sales and marketing department to reflect Enlighten'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, Enlighten 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 12 13 through the first half of 1998. During the remainder of 1998, Enlighten increased its sales and marketing personnel, adding both executive and staff level sales and marketing employees, and opened up a sales and support office in Denver, Colorado to better support its new third-party relationships, which are reflected in the 1999 periods. Enlighten expects sales and marketing costs to increase in absolute dollars for the foreseeable future as it seeks additional business development and partnership opportunities and, to a lesser extent, expands its ability to sell and service its products through third-party resellers and its direct sales force. GENERAL AND ADMINISTRATIVE General and administrative expenses decreased by 39%, to $154,500, in the third quarter of 1999, and by 15%, to $593,400, when compared to the same periods in 1998. The decrease is due to a decrease in administrative personnel and overhead and cost controls. GAIN ON SALE OF TANDEM PRODUCT LINE On October 1, 1997, Enlighten sold its Tandem product line to NDS. Enlighten 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, Enlighten 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, Enlighten received the balance of the cash related to the sale of the assets and recognized the balance of the gain from this transaction, or $515,500. OTHER INCOME, NET Other income, net decreased by 49%, to $25,700, in the third quarter of 1999, as compared to the same period of 1998, as a result of a decrease in interest income due to lower average balances of short-term investments. Other income, net decreased by 9%, to $93,600, for the nine months ended September 30, 1999, as compared to the same period of 1998, as a result of a decrease in net interest income as a result of lower average cash balances. INCOME TAX EXPENSE (BENEFIT) In the third quarter of 1999, Enlighten recognized a tax benefit of $11,500 as a result of receiving tax refunds on net operating loss carrybacks in excess of taxes receivable provided for by Enlighten. In the first quarter of 1998, Enlighten recognized a tax benefit of $40,600 as a result of receiving tax refunds on net operating loss carrybacks in excess of taxes receivable provided for by Enlighten. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, Enlighten's cash, cash equivalents, and short-term investments were $1,548,100, representing 42% of total assets. Enlighten's working capital as of September 30, 1999, was $2,423,800. Cash equivalents are highly liquid investments with original 13 14 maturities of ninety days or less. Enlighten's short-term investments are primarily investment grade commercial paper and are considered highly liquid. Enlighten had no debt as of September 30, 1999, other than normal trade payables and accrued liabilities. Shareholders' equity as of September 30, 1999, was $3,158,800. During the nine months ended September 30, 1999, cash used in Enlighten's operating activities increased $320,100 to $1,906,400, compared to the same period of the prior year. The change was principally caused by increases in net losses, partially offset by changes in the balances of operating assets and liabilities. Enlighten's investing activities have consisted primarily of short-term investments, the sale of Enlighten's Tandem operation, and additions to capital equipment. Investing activities provided cash of $935,900 for the nine months ended September 30, 1999, compared with providing cash of $408,100 in the same period in 1998. The increase is due to the sale of short-term investments in the third quarter of 1999 partially offset by the sale of the Tandem operation in the first quarter of 1998. Financing activities provided cash of $350,900 in the first nine months of 1999, compared with cash provided of $2,472,300 in the same period of the prior year. The decrease in cash provided from financing activities resulted from Enlighten's public offering of 700,000 shares of common stock in May 1998. Enlighten will require substantial cash flow to continue operations on a satisfactory basis and complete its research and development and its sales and marketing programs. Enlighten anticipates that working capital will provide sufficient liquidity to fund these requirements for the next twelve months. However, Enlighten'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 Enlighten's control. If Enlighten is unable to generate sufficient cash flow from operations, it may be required to obtain additional financing. There can be no assurance that Enlighten 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 we file from time to time with the Securities and Exchange Commission, the following risk factors should be considered carefully in evaluating Enlighten and our business: Our future revenues are unpredictable, our operating results are likely to fluctuate from quarter to quarter, and if we fail to meet the expectations of investors or analysts, our stock price could decline significantly We have experienced significant quarterly fluctuations in operating results and expect that these fluctuations will continue in future periods. These fluctuations have been caused by a number of factors, including the timing of new product or product enhancement introductions by us or our competitors, the development and introduction of new operating systems that require 14 15 additional development efforts, purchasing patterns of our customers, size and timing of individual orders, the rate of customer acceptance of new products, and pricing and promotion strategies undertaken by us or our competitors. Future operating results may fluctuate as a result of these and other factors, including our ability to continue to develop, acquire, and introduce new products on a timely basis, the timing and level of sales by our OEM or other third-party licensees of computer systems or software incorporating our products, technological changes in computer systems and environments, quality control of the products sold, our success in shifting its primary sales strategy from direct to indirect channels, and general economic conditions. Additionally, our operating results may be influenced by seasonality and overall trends in the global economy. Because we operate with a relatively small backlog, quarterly sales and operating results generally depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, we have recognized a substantial portion of our license revenues in the last month of the quarter, particularly the last week. Since our staffing levels and other operating expenses are based upon anticipated revenues, delays in the receipt of orders can cause significant fluctuations in income from quarter to quarter. We may not be successful in the open systems market We have derived a substantial portion of our revenue to date from our Tandem-based products. However, we sold all rights to our Tandem technology in October 1997. The future success of our business is substantially dependent on our ability to generate significant revenue from our Unix, Linux, and Windows product offering. In January 1998, Enlighten signed an OEM bundling agreement with Silicon Graphics under which Silicon Graphics will bundle a limited version of Enlighten's product on each Unix system shipped. In August 1998, we signed a distribution agreement with two of General Electric's IT Distribution Group businesses, Access Graphics and Integration Alliance. In December 1998, we signed a distribution agreement with IBM under which IBM will integrate and ship EnlightenDSM with each IBM Suites for Solaris and AIX shipped by IBM. In February 1999, we announced a partnership with Sun Microsystems in which we will produce a seamless integration between EnlightenDSM and Sun's SyMON systems management product. In September 1999, we signed a software license and distribution agreement with TurboLinux in which TurboLinux will bundle and ship EnlightenDSM with each Linux operating system product that TurboLinux ships. While significant, these are the first such agreements entered into by us. Additionally, the open systems market is characterized by rapid technological growth and intense competition. We may not have the financial or personnel resources to effectively capitalize on, and continue with, our early and limited success in this market. We are dependent on resellers and if we are not successful in expanding distribution channels, our ability to maintain or increase our revenues will be harmed In 1997, we began to shift a majority of our sales and marketing resources toward third-party resellers in the United States and internationally. Our growth will be dependent on our ability to continue to expand our third-party distribution channel to market, sell, and support our software products. We are currently investing, and intend to continue to invest, significant resources to develop this channel, which could materially adversely affect our operating margins. We have only limited experience in marketing our products through distributors. Additionally, 15 16 we will have no control over our third-party distributors, their shipping dates, or volumes of systems shipped by our OEM and other third-party customers. There can be no assurance that we will be successful in our efforts to generate significant revenue from this channel, nor can there be any assurance that we will be successful in recruiting new organizations to represent us and our products. Additionally, now that we have shifted our sales efforts from direct to indirect channels, we have become more dependent on our third-party distributors for the technical support and consultation to end users. We will need to increase our training and education efforts related to our third-party distributors to enable such third parties to obtain the technical proficiency and knowledge with respect to our products. Despite these efforts, we may not be able to successfully train our third party distributors to enable them to provide adequate technical support to the customer base. This may result in, among other things, increased workload on our internal support and engineering staff, or poor customer acceptance of the products, or both, either of which would significantly harm our business. In January 1998, we signed an OEM bundling agreement with Silicon Graphics under which Silicon Graphics will bundle a limited version of our product on each Unix system shipped. In August 1998, we signed a distribution agreement with two of General Electric's IT Distribution Group businesses, Access Graphics and Integration Alliance. In December 1998, we 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, we announced a partnership with Sun Microsystems in which we will produce a seamless integration between EnlightenDSM and Sun's SyMON systems management product. In September 1999, we signed a software license and distribution agreement with TurboLinux in which TurboLinux will bundle and ship EnlightenDSM with each Linux operating system product that TurboLinux ships. While significant, these are the first such agreements entered into by us. While we believe that these arrangements will be beneficial, there can be no assurance that we will be able to deliver our products to these companies in a timely manner or that these companies will license our products in volumes anticipated by us. Further, these agreements are our only significant third-party distribution agreements to date. While our strategy is to obtain additional resellers to reduce the dependence on these vendors, we may not be able to successfully attract additional vendors to distribute our products. Any such failure would result in our having expended significant resources with little or no return on its investment, which would significantly harm our business. These additional investments and responsibilities will require us to expend substantial resources, and may require us to divert employees from other projects to provide the support services and development efforts required to provide products and services to these third party vendors and other new third parties, if any. Our market is subject to intense competition and continued competition in our market may lead to a reduction in our prices, revenues, and market share We experience intense competition from other systems management companies, and the market is rapidly changing. We believe that our ability to compete successfully depends on a 16 17 number of factors, including the performance, price, and functionality of its products relative to those of its competitors. Most of our competitors are larger and have greater financial, technical, marketing, support, and other resources than us. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements than us. In addition, the software industry is characterized by low barriers to entry. There can be no assurance that our current competitors or any new market entrants will not develop systems management products that offer significant performance, price, or other advantages over our technology. In addition, operating system vendors could introduce new or upgrade existing operating systems or environments that include systems management functionality offered by us, which could render our products obsolete and unmarketable. We may not be able to successfully compete against current or future competitors which could significantly harm our business. 100% of our license revenue is derived from a single product and if that product fails to achieve and maintain market acceptance, our business would be significantly harmed We expect that a substantial majority of our revenue in future periods will be derived from our Unix, Linux, and Windows product, EnlightenDSM. This product has accounted for 100% of our license revenue since October 1, 1997. We expect that the EnlightenDSM product and its extensions and derivatives will continue to account for a substantial majority, if not all, of our revenue for the foreseeable future. Broad market acceptance of EnlightenDSM is, therefore, critical to our future success. Failure to achieve broad market acceptance of EnlightenDSM, as a result of competition, technological change, or otherwise, would significantly harm our business. Our future financial performance will depend in significant part on the successful development, introduction, and market acceptance of EnlightenDSM and its product enhancements. There can be no assurance that we will be successful in marketing EnlightenDSM or any new products, applications, or product enhancements, and any failure to do so would significantly harm our business. The market for our products is characterized by rapid technological change and we may not be able to develop or market new products to respond to such change The market for our products is characterized by rapid technological developments, evolving industry standards, and rapid changes in customer requirements. The introduction of products embodying new technologies, including new operating systems, applications, hardware products, systems management frameworks, and network management platforms, the emergence of new industry standards, or changes in customer requirements could render our existing products obsolete and unmarketable. As a result, our success depends upon our ability to continue to enhance existing products, respond to changing customer requirements, and rapidly develop and introduce new products that keep pace with technological developments and emerging industry standards. Additionally, other operating systems, such as Windows NT, may significantly affect deployment of Unix and Linux systems for business critical applications. A significant portion of our revenue will continue to be derived from Unix-based computer systems for the foreseeable future. While we have ported our products to the Windows NT platform, the product requires customers to control systems management for their heterogeneous environment from Unix and Linux-based systems. A significant decline in sales of Unix and 17 18 Linux-based systems would decrease the demand for our products and would significantly harm our business. Finally, we may not be successful in developing and marketing, on a timely basis, product enhancements or new products that respond to technological change or evolving industry standards, we may experience difficulties that could delay or prevent the successful development, introduction, and sale of these products, and any such new products or product enhancements may not adequately meet the requirements of the marketplace and achieve market acceptance. If the open systems management market fails to grow, our business would be significantly harmed For the foreseeable future, all of our business will be in the open systems (Unix, Linux, and Windows NT) management market, which is still an emerging market. Our future financial performance will depend in large part on continued growth in the number of companies adopting systems management solutions for their client/server computing environments. The market for systems management solutions may not continue to grow. If the systems management market fails to grow or grows more slowly than we currently anticipate, or in the event of a decline in unit price or demand for our products, as a result of competition, technological change, or other factors, our business would be significantly harmed. During recent years, segments of the computer industry have experienced significant economic downturns characterized by decreased product demand, production overcapacity, price erosion, work slowdowns, and layoffs. Our operations may in the future experience substantial fluctuations from period-to-period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers, and other factors affecting capital spending. Such factors may significantly harm our business. If we or our suppliers, manufacturers, customers or service providers fail to be Year 2000 compliant, our business could be severely harmed We are 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. We have conducted Year 2000 compliance reviews for current versions of our products. The reviews include assessment, implementation, and validation testing. We believe that all of our existing products are Year 2000 compliant and new products will be designed to be Year 2000 compliant. Contingency plans for the handling of reasonably likely worst case scenarios have been developed and include procedures identifying and prioritizing how we will handle such reasonably likely worst case scenarios. Although we believe our products will be Year 2000 compliant, our products may not contain all the necessary software routines and programs for the accurate calculation, display, storage and manipulation of data involving dates. Any 18 19 failure of our products to perform, including system malfunctions due to the onset of the calendar year 2000, could result in claims against us, which could significantly harm our business. To the extent information is publicly available, we have assessed the Year 2000 compliance status of third-party suppliers and customers. If our current or future customers fail to achieve Year 2000 compliance, or if such customers divert technology expenditures to address Year 2000 compliance problems, our business could be significantly harmed. 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. Through the third quarter of 1999, we incurred approximately $10,000 in our Year 2000 remediation efforts. We expect additional remediation costs of approximately $15,000 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. 19 20 ENLIGHTEN SOFTWARE SOLUTIONS, INC. FORM 10-QSB, SEPTEMBER 30, 1999 PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders held May 20, 1999, the shareholders of Enlighten approved the following matters: 1. A proposal to elect five (5) directors of Enlighten to hold office until the 2000 Annual Meeting of Shareholders and until their successors are elected and qualified.
Nominee In Favor Withheld ------- --------- -------- Michael Seashols ................ 3,418,646 76,000 Peter J. McDonald ............... 3,453,061 41,585 Bruce Cleveland ................. 3,418,646 76,000 Michael A. Morgan ............... 3,417,646 77,000 Peter J. Sprague ................ 3,418,646 76,000
2. A proposal to increase in aggregate the maximum number of shares of Enlighten's Common Stock issuable under the its 1992 Stock Option Plan by 500,000 shares, from 1,500,000 shares to 2,000,000 shares was approved by a vote of 1,302,619 for, 210,962 opposed, and 10,185 withheld. 3. A proposal for the ratification of the selection of KPMG LLP as Enlighten's independent public accountants for the year ending December 31, 1999 was approved by a vote of 3,482,534 for, 11,000 opposed, and 1,112 withheld. ITEM 5. OTHER INFORMATION None. 20 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed herewith:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.33 Agreement dated as of September 28, 1999, by and between Enlighten Software Solutions, Inc. and TurboLinux, Inc. *** Confidential treatment requested. 27.01 Financial Data Schedule
(b) Reports on Form 8-K During the quarter ended September 30, 1999, Enlighten did not file any reports on Form 8-K. 21 22 ENLIGHTEN SOFTWARE SOLUTIONS, INC. FORM 10-QSB, SEPTEMBER 30, 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: November 12, 1999 SIGNATURE: /s/ David D. Parker ----------------- ----------------------------- David D. Parker Chief Executive Officer DATE: November 12, 1999 SIGNATURE: /s/ Stephen E. Giusti ----------------- ----------------------------- Stephen E. Giusti Acting Chief Financial Officer and Controller 22 23 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.33 Agreement dated as of September 28, 1999, by and between Enlighten Software Solutions, Inc. and TurboLinux, Inc. *** Confidential treatment requested. 27.01 Financial Data Schedule
EX-10.33 2 SOFTWARE LICENSE, OEM AND DISTRIBUTION AGREEMENT 1 EXHIBIT 10.33 Confidential Treatment Requested - Edited Version SOFTWARE LICENSE, OEM AND DISTRIBUTION AGREEMENT This Software License, OEM and Distribution Agreement ("Agreement") is made as of September 28, 1999 (the "Effective Date") between TurboLinux, Inc., a Delaware corporation ("Licensee" or "TurboLinux"), having its principal place of business at 2000 Sierra Point Parkway, Suite 702, Brisbane, CA 94005 and Enlighten Software Solutions, Inc. ("ESSI"), having its principal place of business at 999 Baker Way, Fifth Floor, San Mateo, CA 94404. 1.0 DEFINITIONS. 1.1 "Bundle" shall mean the act of shipping the Program with a new TurboLinux System or TurboLinux Product. 1.2 "Confidential Information" shall mean all confidential information of a party (including without limitation technical, marketing, financial, planning or other confidential or proprietary information, as more particularly described in section B of Exhibit C). Any information disclosed by the party disclosing Confidential Information to the other party under this Agreement (the "Discloser") will be considered Confidential Information by the other party only if such information is marked as confidential at the time of disclosure, or if provided orally, identified as confidential at the time of disclosure and confirmed in writing within thirty (30) days of disclosure. Confidential Information will be subject to the limitations set forth in Section 6 below. 1.3 "Documentation" shall mean non-confidential documentation provided with the software licensed by ESSI to Licensee hereunder (including user manuals and technical information, as more particularly described in section A of Exhibit C). 1.4 "Enhancements" shall mean all modifications to the Program made solely on behalf of Licensee but do not include separate add-on products which contain no Program code. 1.5 "Infringement Action" shall mean any claim, suit, or proceeding brought for infringement of any U.S. patent, copyright, trademark, or trade secret, of a third party. 1.6 "Infringing Product" shall mean a product whose use is restricted as the result of an injunction issued in an Infringement Action. 1.7 "Intellectual Property Rights" shall mean the following rights that pertain to the Program and the Documentation: (a) Rights in all U.S. and foreign patents and any related applications, renewals, continuations, continuations-in-part, divisionals and other derivative rights; (b) Rights in the trademarks including, but not limited to, those listed in Exhibit B that are enforceable under common law, state law, federal law, or the laws of foreign countries; (c) Rights in copyrights and rights of authorship arising under any jurisdiction; and 1 2 (d) Rights in trade secrets under common law, state law, federal law, and the laws of foreign countries. 1.8 "Object Code" shall mean any machine executable code. 1.9 "Program" shall mean ESSI's TurboLinux-based version of ESSI's Distributed System Manager software, Enlighten/DSM, and any additional computer software licensed by ESSI to Licensee pursuant to this Agreement, including without limitation the Documentation, as more particularly described in Exhibit A. 1.10 "Release" shall mean a release of the Program that may be either a new Version or Revision. 1.11 "Revision" shall mean a release of the Program incorporating corrections and minor enhancements to the prior Revision that ESSI makes generally available to the public. A Revision is designated by a numeric identification of the form "N.M" where the "M" designates the Revision. 1.12 "TurboLinux Customers" shall mean Licensee customer sites that are currently using the TurboLinux platform as their primary management platform (e.g., running the Group Management Server ("GMS") portion of the Program primarily on the TurboLinux platform). 1.13 "TurboLinux Product" shall mean the TurboLinux software products set forth in Exhibit A (as such exhibit may be modified from time to time by written agreement of the parties), and any subsequent versions or releases of such products, including any user manuals provided with such software. 1.14 "TurboLinux OS" shall mean the Turbo Linux version of the Linux Operating System. 1.15 "Supported Release" shall mean those Releases supported by ESSI as an ESSI commercial product. 1.16 "Version" shall mean the Object Code releases of the Program, that ESSI makes available to Licensee under the terms of the Agreement. A Version is designated by a numeric identification of the form "N.M" where "N" designates the Version identification. 2.0 LICENSE GRANT. 2.1 Subject to the terms and conditions of this Agreement, ESSI hereby grants to Licensee, under ESSI's Intellectual Property Rights, a royalty-bearing, worldwide, non-exclusive, non-transferable (except in accordance with this section and section 12.3 below) license to use (for internal and demonstration purposes only, and not to provide services to any third party or analogous use) and reproduce the Program in Object Code, and distribute the Program, via a sublicense, Bundled with a version of the TurboLinux Product directly and indirectly to end-users, as provided in Exhibit D, in accordance with the terms of Section 4.1.3 below. 2.2 Subject to the terms and conditions of this Agreement, ESSI hereby grants to Licensee, under ESSI's Intellectual Property Rights, a [***], worldwide, non-exclusive, non-transferable (except - -------- *** Confidential treatment requested. 2 3 in accordance with this section and section 12.3 below) license in the Documentation described in section A of Exhibit C to use (for internal and demonstration purposes only, and not to provide services to any third party or analogous use), reproduce, distribute, and prepare derivative works and compilations of the Documentation, together with the right to sublicense others to do the same, solely for the purpose of developing documentation for use and distribution with the Program. 2.3 [***] 2.4 Except as set forth herein, ESSI retains all right, title, and interest in the Program and Documentation. Although Licensee is not required to pursue any enforcement measures with relation to the Program, Licensee agrees to take commercially reasonable measures to protect ESSI's proprietary rights in the Program and Documentation; in the event that Licensee seeks to pursue enforcement measures with respect to the Program, Licensee will obtain ESSI's prior written authorization before doing so. Except as set forth herein, Licensee is not granted any other rights or license to patents, copyrights, trade secrets, or trademarks with respect to the Program or Documentation or other ESSI Confidential Information. Each party shall notify the other party in writing upon its discovery of any unauthorized use or claim of infringement of the Program or Documentation or either party's patents, copyrights, trade secrets, trademarks, or other intellectual property rights, and use commercially reasonable efforts to assist the other party, at the other party's expense in relation thereto. 3.0 PAYMENTS. 3.1 Royalties. 3.1.1 [***] 3.1.2 Subject to the terms of Section 3.1.1 and Exhibit E, Licensee shall pay ESSI a royalty in accordance with the schedule attached as Exhibit E for each copy of the Program sold, distributed or otherwise disposed of, either internally or externally, by Licensee or its sublicensees, for the rights granted in section 2.1 above. 3.2 General Terms of Payment. 3.2.1 Royalty payments due ESSI for a given calendar quarter (or portion thereof) shall be made within [***] days after the end of such quarter, and payments which are not so paid will be subject to interest at the rate of [***] per month until paid in full. Payments shall be accompanied by a report detailing how such royalties were calculated. 3.2.2 Licensee shall maintain true and accurate records, in accordance with generally accepted accounting principles, for the calculation of royalties during the term of this Agreement and for [***] months thereafter. During the term of this Agreement, and for a period of [***] thereafter, ESSI may, at its expense, engage an independent auditor reasonably acceptable to Licensee to review such records (to a maximum of [***] months prior) and verify royalty - -------- *** Confidential treatment requested. 3 4 payments, provided that the auditors execute Licensee's confidentiality agreement and provided that ESSI may not conduct said audits more than [***] in any calendar year. In the event that the audit reveals an underpayment of royalties, Licensee shall pay ESSI [***] of any royalties due and any interest accrued thereon if the underpayment exceeds [***] of the total royalties due, and reimburse ESSI for the reasonable cost of the audit. 3.2.3 Licensee shall be solely responsible for all taxes on royalties and other fees required to be paid to ESSI under this Agreement, including state and local use, sales, property, and other taxes, excluding only taxes calculated solely on ESSI's income. 4.0 MARKETING, DELIVERY AND MANUFACTURING. 4.1 Licensee shall, at its own expense, use commercially reasonable efforts to market the Program as Bundled with the TurboLinux Product. Licensee shall have the right to customize the Documentation for its own marketing, distribution, sales, and support efforts. 4.1.1 Marketing Plan. During each calendar quarter, Licensee and ESSI shall meet in order to develop a joint marketing plan showing planned marketing activities and the sales forecast for the quarter. 4.1.2 Licensee Training. Within thirty (30) days after the Effective Date, Licensee and ESSI shall jointly develop a training plan to effectively train TurboLinux personnel on the use of the Program. ESSI will provide to Licensee or Licensee's designee up to one week of training without cost; additional training will be made available to Licensee or its designee at rates to be agreed. 4.1.3 Bundling Requirement. Licensee agrees, for the term of this Agreement, to Bundle the Program with all new TurboLinux Products as soon as ESSI completes the version of the Program specific to each TurboLinux Product and notifies TurboLinux that each version of the Program is ready to ship. 4.2 This Agreement does not create any partnership, agency, or other relationship other than that of licensee and licenser in accordance with the express provisions of this Agreement. 4.3 ESSI agrees to make the TurboLinux OS a "Reference Platform" for the Program. As used herein, Reference Platform shall mean that any Versions of the Program during the term of this Agreement shall be released on the then-current version of the TurboLinux OS either before, or within [***] days after, the release of the Program on any other Linux, UNIX or Windows operating system. 5.0 SUPPORT. 5.1 As between Licensee and ESSI, ESSI shall, during the term of this Agreement, support the use of the Program distributed to end users by TurboLinux hereunder as set forth in this Section 5. ESSI will provide support for the [***] Release of the Program. Supported Releases shall operate, at a minimum, on the [***] Release of the TurboLinux Products. - -------- *** Confidential treatment requested. 4 5 5.2 Prior to transferring any end users of the TurboLinux Product to ESSI for support, TurboLinux or its designee will perform Entitlement and License Verification with respect to the TurboLinux Products. ESSI agrees to provide installation support to verified registered purchasers of the TurboLinux Product Bundled with the Program. This support will be offered to end users of verified TurboLinux Products for sixty (60) days from date of registration with TurboLinux. Additional end user support options will be offered for purchase to sublicensees of the Program directly from ESSI and Licensee shall provide reasonable contact information to ESSI for such purposes. 6.0 CONFIDENTIAL INFORMATION. 6.1 A recipient of Confidential Information shall protect the Information by using the same degree of care, but no less than a reasonable degree of care, to prevent any unauthorized use, dissemination, or publication as the recipient uses to protect its own Confidential Information of a like nature. The recipient shall restrict access to the Confidential Information to those of its employees having a need to know. The recipient's obligations under this section 6.1 shall continue for three (3) years from the expiration or termination of this Agreement, except for Source Code which may be received hereunder, which must be protected for five (5) years from the expiration or termination of this Agreement. 6.2 A recipient of Confidential Information acknowledges and agrees that: (a) The Discloser will be irreparably injured by the disclosure or threatened disclosure of any Confidential Information in violation of this Agreement; and (b) In addition to any other remedies available at law or in equity, the Discloser may obtain an injunction to prevent such disclosure or the continuation of such disclosure. 6.3 Confidential Information does not include information that: (a) Was rightfully in the recipient's possession before receipt from the Discloser; (b) Is or becomes a matter of public knowledge through no fault of the recipient; (c) Is rightfully received by the recipient from a third party without a duty of confidentiality; (d) Is disclosed by the Discloser to a third party without a duty of confidentiality on the third party; or (e) Is independently developed by individuals without access to, or knowledge of, Confidential Information. 6.4 Confidential Information may be disclosed under operation of law or pursuant to a subpoena or other judicial or administrative order, provided the recipient gives the Discloser prior notice of such required disclosure and cooperates with the Discloser at the Discloser's expense, in any lawful action to contest or limit the scope of disclosure. 7.0 PROPRIETARY NOTICES. 5 6 7.1 ESSI shall include within the Program any trademark and copyright notices as applicable. Licensee shall reproduce such notices when marketing and distributing the Program. 7.2 Documentation distributed by Licensee shall include the following notice: "Copyright (C) 1994, 1995, 1996, 1997, 1998, 1999 by Enlighten Software Solutions, Inc. All Rights Reserved." 8.0 ENHANCEMENTS. 8.1 ESSI shall own all right, title, and interest to any Enhancements and derivative works of the Program created by either party. 9.0 [***] 9.1 [***] 9.2 TurboLinux has its own set of system administration and configuration tools that are an existing part of its current products. TurboLinux will be free to continue to develop these tools. 10.0 WARRANTIES. 10.1 ESSI warrants that it has full power and authority to grant the rights under this Agreement. The Program will (i) process without error information and/or data that includes or refers to dates and/or time ("Date Data") on any day during any year in, before and after the twenty-first century, including any leap day or year, (ii) maintain a consistent relationship with the real (external) time and date, and (iii) when used in combination with other products not provided by ESSI, correctly and accurately exchange Date data, to the extent that such other products correctly and accurately exchange Date Data. For purposes of this paragraph, "process" includes, but is not limited to, manipulate, output, receive, retrieve, store, sort, transmit, transform, and verify Date Data. 10.2 ESSI shall defend at ESSI's expense any Infringement Action in relation to the Program and pay any awarded damages and costs of settlement provided that Licensee gives ESSI prompt notice of any Infringement Action, as well as all authority, information, and reasonable assistance (at ESSI's expense) necessary to defend the Infringement Action. With respect to any Infringing Product, ESSI may, at its expense and option: (a) Procure for Licensee the right to continue using the Program; (b) Replace the Program with a non-infringing product of substantially equivalent (or better) function or performance; (c) Modify the Program to be non-infringing of substantially equivalent (or better) function or performance; or (d) If ESSI reasonably determines that none of the foregoing alternatives is feasible, terminate Licensee's rights to the Program but only to the extent necessary to avoid the infringement; upon such termination, ESSI shall refund to Licensee the royalties paid by Licensee which are associated with those rights of Licensee that are terminated. - -------- *** Confidential treatment requested. 6 7 10.3 Section 10.2 states the entire liability of ESSI for infringement of Intellectual Property Rights by the Program or Documentation. Notwithstanding Section 10.2, ESSI shall have no liability under this Agreement for any claim, suit, or proceeding which is based upon, and which could have been avoided but for: (a) Any combination, operation, or use of the Program or Documentation with equipment, software, documentation, or other items not supplied by ESSI; (b) Any modification of the Program or Documentation by Licensee not at ESSI's direction; or (c) Any use by Licensee of other than the most current Release of the Program if such claim would have been avoided by the use of such Release, provided Licensee had a reasonable opportunity to upgrade to the most current Release. 10.4 ESSI warrants that the Program shall be substantially compliant with the description contained in Exhibit A (including the Documentation referenced therein), as modified from time to time as allowed under this Agreement. 10.5 ESSI MAKES NO OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, REGARDING THE PROGRAM AND THE DOCUMENTATION, INCLUDING WITHOUT LIMITATION AS TO THEIR MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE OR NON-INFRINGEMENT OF THIRD PARTY RIGHTS. NO PERSON, INCLUDING LICENSEE, IS AUTHORIZED TO MAKE ANY OTHER WARRANTY OR REPRESENTATION CONCERNING THE PROGRAM ON ESSI'S BEHALF. LICENSEE SHALL BE SOLELY RESPONSIBLE FOR ANY CLAIMS, WARRANTIES, OR REPRESENTATIONS MADE BY LICENSEE OR ITS EMPLOYEES OR AGENTS. 10.6 Licensee shall defend at Licensee's expense any Infringement Action in relation to the Licensee-proprietary portions of the TurboLinux Product (except for Infringement Actions related solely to the Program) and pay any finally awarded damages and costs of settlement provided that ESSI gives Licensee prompt notice of any Infringement Action, as well as all authority, information and assistance (at Licensee's expense) necessary to defend the Infringement Action. This Section 10.6 states the entire liability of Licensee for infringement of Intellectual Property Rights by the TurboLinux Product. 10.7 EXCEPT TO THE EXTENT SPECIFICALLY SET FORTH IN SECTION 10.2 OR 10.6, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING BUT NOT LIMITED TO LOSS OF PROFITS) ARISING OUT OF ANY PERFORMANCE OF THIS AGREEMENT, THE PROGRAM, OR ANY RELATED MATTER, OR IN FURTHERANCE OF THE PROVISIONS AND OBJECTIVES OF THIS AGREEMENT, WHETHER SUCH DAMAGES ARE BASED ON TORT, CONTRACT, OR ANY OTHER LEGAL THEORY AND WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 11.0 TERM AND TERMINATION. 11.1 This Agreement shall commence on the Effective Date and shall expire one (1) year thereafter, unless earlier terminated for cause. This Agreement will automatically renew for successive one 7 8 (1) year terms unless one party gives the other party sixty (60) days' written notice of its intent not to renew. 11.2 Either party may terminate this Agreement if the other party materially breaches any provision of this Agreement and if such breach is not cured within thirty (30) days of written notice from the non-breaching party advising of such breach. For purposes of this section 11.2, to the extent permitted by applicable law, a party will be deemed to be in material breach of this Agreement if the party: (a) Is the subject of a petition in bankruptcy, whether voluntary or involuntary; (b) Is or becomes insolvent; or (c) Ceases to do business in the normal course. 11.3 Upon the termination of this Agreement, (i) if ESSI has terminated this Agreement for Licensee's breach of Sections 2.3, 2.4, 6, 7, or 8, Licensee shall immediately cease reproducing or distributing the Program and Documentation, and will return to ESSI (or, at ESSI's direction, destroy) all copies of the Program and Documentation in its possession; (ii) if the Agreement has expired or has terminated for any reason other than as set forth in the foregoing subsection (i), Licensee shall cease reproducing the Program and Documentation to be Bundled with TurboLinux Product as of the effective date of the termination of this Agreement, and shall have [***] days after the effective date of termination to distribute any remaining inventory, and thereafter shall will return to ESSI (or, at ESSI's direction, destroy) all copies of the Program and Documentation in its possession; and (iii) each party will return to the other party (or destroy at the other party's direction) all Confidential Information of the other party. 11.4 Notwithstanding any expiration or termination of this Agreement, the following provisions expressly survive: Sections 2.4 (as to ownership of the Program and Documentation by ESSI), 3, 6, 8, 10, 11.3, 11.4 and 12. Further, the expiration or termination shall not affect any sublicense agreements validly granted by Licensee as of the date of expiration or termination. 12.0 MISCELLANEOUS PROVISIONS. 12.1 Notices. All notices required under this Agreement shall be in writing and shall be considered given upon personal delivery or delivery by electronic means (e.g., fax or electronic mail, if a confirmation hard copy is sent as provided in this Section 12.1), two business days after sending by air courier, or three business days after deposit in the United States Mail, certified mail return receipt requested, addressed to the appropriate Account Manager as specified below: Licensee: TurboLinux, Inc 2000 Sierra Point parkway Brisbane, CA 94005 Attention: Legal Services Phone Number: (650) 244-7777 Fax Number: (650) 244-7766 - -------- *** Confidential treatment requested. 8 9 ESSI: Enlighten Software Solutions, Inc. 999 Baker Way, Fifth Floor San Mateo, CA 94404 Attention: Legal Phone Number: (650) 578-0700 Fax Number: (650) 524-5952 12.2 Confidentiality of Agreement. Neither party shall disclose to any third party the terms of this Agreement other than its existence in general; provided, however, that either party may disclose the terms of this Agreement to its attorneys, accountants, bankers, advisors, and investors, and to potential investors and their attorneys, accountants, bankers and advisors. 12.3 Assignment. Neither party may assign nor transfer its rights or responsibilities set forth in this Agreement without the prior written consent of the other party, which shall not be unreasonably withheld, except in the case of merger or acquisition of all or substantially all of the stock or assets of a party, in which case such consent will not be required. 12.4 Waiver. A party's failure to exercise any of its rights under this Agreement shall not constitute a waiver or forfeiture of any such rights nor of any other rights. 12.5 Export. The parties acknowledge that the export of the Program, Documentation and ESSI Confidential Information may be subject to regulations which may prohibit the export of such information to certain foreign countries or the disclosure of such information to certain foreign nationals and Licensee agrees to obtain any such approval or equivalent document in relation thereto, with the reasonable assistance of ESSI. The parties, therefore, agree to comply strictly with all applicable export laws, regulations, executive orders and the like. 12.6 Exhibits. In the event of any conflict between an Exhibit and the main body of this Agreement, the latter shall control. The following Exhibits are incorporated in full into this Agreement by the first reference to each such Exhibit: (a) Exhibit A, Program Description; (b) Exhibit B, ESSI Trademarks; (c) Exhibit C, Documentation; (d) Exhibit D, [***]; (e) Exhibit E, Royalty Schedule and Payment Terms; and (f) Exhibit F, Add On Sales Opportunity. 12.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, U.S.A., without giving effect to the principles of conflict of law. The United Nations Convention on Contracts for the International Sale of Goods is specifically excluded from application to this Agreement. 12.8 Injunctive Relief. Unauthorized use of the Program, any information contained therein, or other Confidential Information will diminish the value to either party of the trade secrets and proprietary information that are the subject of this Agreement. Therefore, if either party breaches - -------- *** Confidential treatment requested. 9 10 any of its obligations hereunder, the affected party shall be entitled to equitable relief to protect its interests therein, including but not limited to injunctive relief, as well as monetary damages. 12.9 Entire Agreement. This Agreement and the Exhibits represent the entire agreement between the parties as to the matters set forth and integrates all prior or contemporaneous discussions and understanding between them. This Agreement may only be modified by a written instrument signed by an authorized representative of both Licensee and ESSI. TURBOLINUX, INC. ENLIGHTEN SOFTWARE SOLUTIONS, INC. By: /s/ Rok Sosic By: /s/ David D. Parker --------------------------- ---------------------------- Name: Rok Sosic Name: David D. Parker --------------------------- ---------------------------- Title: Chief Technology Officer Title: Chief Executive Officer --------------------------- ---------------------------- 10 11 EXHIBIT A PRODUCT DESCRIPTIONS 1. PROGRAM The Program and feature functionality is fully described by the ESSI Distributed System Manager ("DSM") version 3.B documentation set. As of the Effective Date, the current version of DSM is 3.2.0. This version will be used as a reference when the Program as referenced in the Agreement. The Program for the TurboLinux Product will consist of the following elements: [***] It is ESSI's intention to continue to enhance and evolve the Program over time. Some features and functions may be added or modified in the course of this process. ESSI retains the right to modify the graphical user interface (GUI), command line interface (CLI), the application program interface (API), and/or the underlying architecture of the Program without incurring any liability to Licensee therefor. 2. TURBO LINUX PRODUCT In US: Currently: TurboLinux Workstation 3.6 Starting in Q4 (approximately October): TurboLinux Workstation 4.1 TurboLinux Server 4.1 TurboCluster Server 4.0 In Japan: Currently: TurboLinux Workstation 4.0 TurboLinux Workstation Pro 4.0 TurboLinux Server 4.2 In China: Currently: TurboLinux Workstation 4.0 - -------- *** Confidential treatment requested. 11 12 EXHIBIT B ESSI RIGHTS Licensee shall include a trademark acknowledgment in all copies of the Program and documentation derived from Documentation. Such acknowledgment shall specify that the Program and documentation are based on ESSI's Program and shall be worded as follows: Enlighten is a registered trademark of Enlighten Software Solutions, Inc. Enlighten for UNIX/Distributed Systems Manager and Enlighten/DSM are trademarks of Enlighten Software Solutions, Inc. All information contained in the manual for Enlighten for UNIX/Distributed Systems Manager is proprietary to Enlighten Software Solutions, Inc., and all rights are reserved. 12 13 EXHIBIT C DOCUMENTATION Section A - Sublicensable Documentation ESSI will provide both printed and electronic forms of the end-user Documentation currently delivered with the Program when purchased by an ESSI customer, including, but not limited to: (1) Enlighten/DSM User's Manual Section B - Confidential Documentation This shall include any technical and business information relating to inventions or products, research and development, product planning methodologies, manufacturing and engineering processes, costs, profit, or margin information, employee skills and salaries, finances, customers, marketing and production and future business plans of the Discloser. Confidential Documentation may also include confidential proprietary and/or trade secret information that is owned by third parties who may have disclosed such information to either party in the course of such party's business. 13 14 EXHIBIT D [***] - -------- *** Confidential treatment requested. 14 15 EXHIBIT E ROYALTY SCHEDULE AND PAYMENT TERMS Subject to Section 3.1.1 of the Agreement, for each copy of the Program reproduced by Licensee for distribution via sublicense as authorized in the Agreement, Licensee will pay to ESSI the following amounts: [***] for the TurboLinux Workstation product [***] for the TurboLinux Server product [***] for the TurboLinux TurboCluster product Notwithstanding the foregoing, in no event will the fees paid by TurboLinux to ESSI exceed [***] of the gross revenue (net of only channel discount) invoiced by TurboLinux for each sale of TurboLinux Products. (For purposes of applying the [***] formula set forth above, royalties shall be calculated separately for each such OEM, distributor, or other sublicensee (i.e., deal-by-deal), and shall not be aggregated across more than one sublicensee.) In the event that the amount paid by TurboLinux is less than the amounts set forth above, TurboLinux will provide reasonable documentation in its quarterly report to justify the reduction in royalty. - -------- *** Confidential treatment requested. 15 16 EXHIBIT F ADD ON SALES OPPORTUNITY Add On or additional sale opportunity exists for ESSI and TurboLinux in the form of additional products. These are sale opportunities for end user customers who receive the Program along with a TurboLinux Product to upgrade to a more advanced version or product offered by ESSI. Add on Sales Opportunity may exist in the form of: [***] Regarding upsell opportunities, TurboLinux will provide references or leads for these opportunities as it becomes aware of them. ESSI will actively prospect for these opportunities and will have full responsibility for prosecuting these sales and providing ongoing support and maintenance. During any given contract year (defined as a 12 month period commencing on the Effective Date or any anniversary thereof), TurboLinux will receive a percentage of the gross amounts received by ESSI for the sale of the Program and/or other ESSI proprietary software programs to leads provided by TurboLinux to ESSI, as indicated in this paragraph, as follows: First [***] TurboLinux [***] ESSI [***] [***] to [***] TurboLinux [***] ESSI [***] [***] and up ... TurboLinux [***] ESSI [***]
- -------- *** Confidential treatment requested. 16 EX-27.01 3 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1,280,400 267,700 1,288,600 25,000 0 2,916,000 1,566,500 1,131,700 3,651,000 492,200 0 0 0 7,942,400 (4,783,600) 3,651,000 2,496,900 2,496,900 316,500 316,500 3,683,400 0 0 (1,409,400) (10,700) (1,409,400) 0 0 0 (1,398,700) (0.35) (0.35)
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