<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________
FORM 10-Q
(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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-24081
EVOLVING SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 84-1010843
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
9777 MT. PYRAMID COURT, ENGLEWOOD, COLORADO 80112
(Address of Principal Executive Offices) (Zip Code)
(303) 802-1000
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to filed such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of June 1, 1998, there were outstanding 11,573,890 shares of
Registrant's Common Stock (par value $0.001 per share).
<PAGE>
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EVOLVING SYSTEMS, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets
March 31, 1998 (unaudited) and December 31, 1997................. 3
Statements of Operations
for the three month periods ended March 31, 1998 and 1997
(unaudited)...................................................... 4
Condensed Statements of CashFlow
for the three month periods ended March 31, 1998 and 1997
(unaudited)...................................................... 5
Notes to Financial Statements (unaudited)........................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 7
PART II OTHER INFORMATION................................................. 11
Item 1. Legal Proceedings................................................... 11
Item 2. Changes in Securities............................................... 11
Item 3. Defaults on Senior Securities....................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................. 11
Item 5. Other Information................................................... 11
Item 6. Exhibits and Reports on Form 8-K.................................... 11
SIGNATURES.................................................................. 12
<PAGE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVOLVING SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 3, Dec. 31,
1998 1997
------- -------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,536 $ 1,171
Certificates of deposit 131 131
Contract receivables, net of allowance of $520,000 at
December 31, 1997 and March 31, 1998 9,041 13,344
Unbilled work-in-process 4,818 841
Deferred tax asset 1,143 1,276
Prepaid and other current assets 1,510 1,077
------- -------
Total current assets 19,179 17,840
Property and equipment, net 9,228 9,803
Other assets 213 216
------- -------
Total assets $28,620 $27,859
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 7,537 $ 3,178
Accounts payable 2,046 2,047
Accrued liabilities 1,530 1,195
Unearned revenue and customer deposits 1,961 6,054
------- -------
Total current liabilities 13,074 12,474
Long-term obligations, including related parties 12,918 13,287
Deferred income taxes 414 400
------- -------
Stockholders' equity:
Preferred stock, $.001 par value, 1,500,000 shares authorized,
no shares issued
Series A preferred stock, $.001 par value; 8,160 shares
authorized, issued and outstanding at December 31, 1997
(liquidation preference $6,250 per share)
Common stock, $.001 par value; 4,930,000 non-voting shares
authorized; 1,620,760 and 1,629,510 non-voting shares issued
and outstanding as of December 31, 1997 and March 31, 1998;
10,070,000 voting shares authorized, no voting shares issued or
outstanding as of December 31, 1997 or March 31, 1998 2 2
December 31, 1997 or March 31, 1998
Additional paid-in-capital 2,424 2,423
Deferred compensation (917) (992)
Retained earnings 705 265
------- -------
Total stockholder's equity 2,214 1,698
------- -------
Total liabilities and stockholder's equity $28,620 27,859
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
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EVOLVING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(unaudited)
Three Months Ended March 31,
----------------------------
Revenue: 1998 1997
-------- --------
License fees and related services $ 5,787 $ 2,200
Other services 7,341 5,873
-------- --------
Total revenue 13,128 8,073
Cost of revenue:
License fees and related services 1,919 1,555
Other services 4,694 4,205
-------- --------
Total cost of revenue 6,613 5,760
Gross margin 6,515 2,313
Operating expenses:
Sales and marketing 1,388 618
General and administrative 2,137 2,008
Research and development 1,962 741
-------- --------
Total operating expenses 5,487 3,367
Income (loss) from operations 1,028 (1,054)
Other expense, net (372) (365)
Income (loss) before income taxes 656 (1,419)
Provision for (benefit from) income taxes 216 (1,228)
-------- --------
Net income (loss) $ 440 $ (191)
======== ========
Basic net income (loss) per common share $ .27 $ (.12)
======== ========
Weighted average common shares outstanding 1,630 1,536
Diluted net income (loss) per common share $ .05 $ (.12)
======== ========
Weighted average common shares outstanding 9,671 1,536
The accompanying notes are an integral part of the financial statements.
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EVOLVING SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------------------------------
1998 1997
---------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 440 $ (191)
Adjustments to reconcile net income(loss) to net
cash provided by (used in) operating activities:
Provision for uncollectable contract receivables -- 96
Amortization of deferred compensation 75 --
Depreciation and amortization 1,119 791
Provision for deferred income taxes 147 --
Change in operating assets and liabilities:
Contract receivables 4,303 (177)
Unbilled work-in-process (3,977) 451
Prepaid and other assets (431) (1,229)
Accounts payable (1) (561)
Accrued liabilities 337
Unearned revenue and customer deposits (4,093) 3,764
-------- --------
Net cash provided by (used in) operating activities (2,081) 2,944
INVESTING ACTIVITIES:
Purchases of property and equipment (544) (358)
Net cash used in investing activities (544) (358)
FINANCING ACTIVITIES:
Proceeds from line of credit 4,500 --
Repayment of long-term obligations (510) (721)
-------- --------
Net cash provided by (used in) financing activities 3,990 (721)
-------- --------
Net increase in cash and cash equivalents 1,365 1,865
-------- --------
Cash and cash equivalents at beginning of period 1,171 3,184
Cash and cash equivalents at end of period $ 2,536 $ 5,049
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
Interim Financial Statements. The accompanying financial statements of
Evolving Systems, Inc. (the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The unaudited financial statements included herein
have been prepared on the same basis as the annual financial statements and
reflect all adjustments, which include only normal recurring adjustments,
necessary for a fair presentation in accordance with generally accepted
accounting principles. The results for the period ended March 31, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter
or full fiscal year. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto for the year ended
December 31, 1997 included in
<PAGE>
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the Company's Registration Statement on Form S-1 (No. 333-43973), which was
declared effective by the SEC on May 11, 1998.
Use of Estimates. The preparation of 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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(2) EARNINGS PER COMMON SHARE
The Company was required to apply Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," in its financial statements for fiscal
1997. Prior period earnings per common share ("EPS") were restated to conform
with the new statement. This pronouncement established new standards for
computing and presenting EPS on a basis that is more comparable to international
standards and provides for the presentation of basic and diluted EPS, replacing
the previously required primary and fully-diluted EPS. Basic EPS was computed
by dividing net income by the weighted average number of shares outstanding
during the period. Diluted EPS was computed using the weighted average number
of common plus all dilutive potential common shares outstanding during the
period.
The following is the reconciliation of the numerators and denominators of the
basic and diluted EPS computations (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1998 1997
<S> <C> <C>
Basic earnings per share:
Net income (loss) $ 440 $ (191)
Weighted average common shares outstanding 1,630 1,536
Basic net income (loss) per common share $ .27 $ (.12)
Effect of dilutive securities:
Options and warrants 1,921 -
Preferred Stock 6,120 -
------ ------
Diluted weighted average common shares outstanding 9,671 1,536
Diluted net income (loss) per common share $ .05 $ (.12)
</TABLE>
In February 1998, the Company effected a one-for-two reverse stock split the
result of which is that the Company's authorized capital stock consists of 25.0
million authorized shares of $.001 par value common stock and 2.0 million
authorized shares of $.001 par value preferred stock. All references in the
financial statements to shares, share prices, and per share amounts have been
adjusted retroactively for all periods presented to reflect the stock split.
(3) INITIAL PUBLIC OFFERING
In May 1998, the Company effected an initial public offering on Form S-1. In
connection with the offering, the Company issued 3,798,000 shares of common
stock, including shares issued to cover the Underwriters' over-allotment option,
and received net proceeds of approximately $49 million. In addition, all of the
Preferred Stock was converted into common stock upon the closing of the initial
public offering.
(4) CONTINGENCIES
On June 22, 1998, two class action lawsuits were filed in the U.S. District
Court for the District of Colorado against the Company and certain of its
officers and directors and, in one case, the Company's Underwriters on behalf of
purchasers of the Company's common stock between May 12, 1998 and June 17, 1998.
The lawsuits seek an unspecified amount of damages and allege that the
defendants disseminated false and misleading statements about the Company's
business, finances and future prospects. The Company believes it has
meritorious legal defenses with respect to these suits and intends to vigorously
defend against these actions. However, the Company is currently unable to (a)
determine the ultimate outcome of the complaints, (b) determine whether
resolution of this matter will have a material adverse impact on the Company's
financial position or results of operations, or (c) reasonably estimate the
amount of loss, if any, which may result from resolution of this matter.
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The Company is, from time to time, subject to certain other claims, assertions
or litigation by outside parties as part of its ongoing business operations.
The outcome of any such contingencies are not expected to have a material
adverse effect on the financial condition, operations or cash flows of the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
- -------
Evolving Systems, Inc. is a leading provider of selected software solutions and
services that enable telecommunications carriers to address the technical
challenges to their operational support systems created by the industry's
rapidly changing competitive and regulatory environment. The Company also
provides custom software development services to leading telecommunications
companies.
The Company adopted the provisions of Statement of Position 97-2, "Software
Revenue Recognition," for transactions entered into after January 1, 1998. The
Company derives revenue from license fees and services under the terms of both
fixed price and time and materials contracts. License fees and related services
revenue consists of revenue from contracts that generally provide for both
licenses and services or development fees related to the Company's standard
software products. Other services revenue consists of revenue from custom
programming, systems integration of third-party products, annual maintenance
contracts and training.
License fees and related services revenue is generally recognized using the
percentage-of-completion method of accounting. The percentage-of-completion for
each contract is determined based on the ratio of direct labor hours incurred to
total estimated direct labor hours. Amounts billed in advance of services being
performed are recorded as unearned revenue. Unbilled work in-progress represents
revenue earned but not yet billable under contract terms and all such amounts
are expected to be billed and collected during the succeeding 12 months.
Services revenue provided under fixed price contracts is generally recognized
using the percentage-of-completion method of accounting described above. Revenue
from other services provided pursuant to time-and-materials contracts is
recognized as the services are performed.
Annual maintenance revenue is recorded as deferred revenue and is recognized
ratably over the service period, which is generally 12 months. Revenue from
training services is recognized as the training services are performed. When
maintenance or training services are bundled with the original license fee
arrangement, their fair value is deferred and recognized during the period such
services are provided.
The Company may encounter budget and schedule overruns on fixed-price contracts
caused by increased material, labor, or overhead costs. Adjustments to cost
estimates are made in the periods in which the facts requiring such revisions
become known. Estimated losses, if any, are recorded in the period in which
current estimates of total contract revenue and contract cost indicate a loss.
On May 15, 1998, the Company completed an initial public offering of Common
Stock that was managed by Goldman, Sachs & Company, BancAmerica Robertson
Stephens, Hambrecht & Quist, and UBS Securities. On May 11, 1998 the Commission
declared effective the Company's Registration Statement on Form S-1
(Registration Statement No. 333-43973), which should be read in conjunction with
this document for further information regarding the Company's business, risk
factors, and financial policies.
RESULTS OF OPERATIONS
- ---------------------
The following table presents, for the periods indicated, certain items in the
Company's unaudited statement of operations reflected as a percentage of total
revenue.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
(unaudited)
--------------------
Revenue: 1998 1997
--------------------
<S> <C> <C>
License fees and related services 44.1% 27.3%
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Other services 55.9% 72.7%
----- -------
Total revenue 100.0% 100.0%
Cost of revenue:
License fees and 14.6% 19.2%
related services
Other services 35.8% 52.1%
----- -------
Total cost of revenue 50.4% 71.3%
Gross margin 49.6% 28.7%
Operating expenses:
Sales and marketing 10.6% 7.6%
General and 16.3% 24.9%
administrative
Research and 14.9% 9.2%
development ----- -------
Total operating expenses 41.8% 41.7%
Income (loss) from 7.8% (13.0)%
operations
Other expense, net (2.8)% (4.5)%
Income (loss) before 5.0% (17.5)%
income taxes
Provision for (benefit 1.6% (15.2)%
from) income taxes ----- -------
Net income (loss) 3.4% (2.3)%
===== =======
</TABLE>
REVENUE. Total revenue increased $5.1 million, or 63%, to $13.1 million in the
quarter ended March 31, 1998 from $8.1 million in the quarter ended March 31,
1997. License fees and related services revenue increased by $3.6 million, or
163% to $5.8 million in the quarter ended March 31, 1998 from $2.2 million in
the quarter ended March 31, 1997, reflecting increased demand for the Company's
LNP products and services as well as completion of a high margin development
contract. Other services revenue increased by $1.5 million or 25% in the quarter
ended March 31, 1998 from $5.9 million in the quarter ended March 31, 1997
reflecting continuing growth in custom development projects with traditional
customers. As a percentage of total revenue, license fees and related services
revenue increased to 44% for the quarter ended March 31, 1998 from 27% for the
quarter ended March 31, 1997.
COST OF REVENUE. Cost of license fees and related services increased by
$364,000, or 23%, to $1.9 million for the quarter ended March 31, 1998 from $1.6
million for the quarter ended March 31, 1997. As a percentage of total revenue,
cost of license fees and related services decreased to 15% for the quarter ended
March 31, 1998 from 19% for the quarter ended March 31, 1997. These increased
costs in absolute dollars reflected growth in the Company's product and related
services business but the percentage of revenue decline reflects greater
efficiencies in related services due to product maturity, employee productivity
increases, and the previously mentioned $1.5 million contract with little
associated cost. Cost of other services increased $489,000, or 12% to $4.7
million for the quarter ended March 31, 1998 from $4.2 million for the quarter
ended March 31, 1997. As a percentage of total revenue, cost of other services
decreased to 36% for the quarter ended March 31, 1998 from 52% for the quarter
ended March 31, 1997. These decreased costs reflected the Company's reassignment
of personnel from custom development projects to research and development,
increased productivity of remaining personnel, and cost containment efforts.
SALES AND MARKETING. Sales and marketing expenses increased by $770,000, or
125%, to $1.4 million in the quarter ended March 31, 1998 from $618,000 in the
quarter ended March 31, 1997. As a percentage of revenue, sales and marketing
expenses increased to 11% in the quarter ended March 31, 1998 from 8% in the
quarter ended March 31,1997. This increase reflects increases in sales and
marketing personnel from 13 to 21, incorporating the staffing of a direct sales
force and increased product marketing expenses related to the Company's product
strategy.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$129,000, or 6%, to $2.1 million in the quarter ended March 31, 1998 from $2.0
million in the quarter ended March 31, 1997. As a percentage of revenue,
general and administrative expenses decreased to 16% in the quarter ended March
31, 1998 from 25% in the quarter ended March 31,1997. This slight increase in
absolute dollars is attributable to general cost increases in outside services;
the decline in percentage of revenue is attributable to higher revenue in the
quarter ended March 31, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by $1.2
million, or 165%, to $2.0 million in the quarter ended March 31, 1998 from
$741,000 in the quarter ended March 31, 1997. As a percentage of revenue,
research and development expenses increased to 15% in the quarter ended March
31, 1998 from 9% in the quarter ended March 31,1997. This absolute dollar
increase in spending is largely a result of a significant increase in personnel
involved in product research and spending on MetOSS development efforts.
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OTHER EXPENSE, NET. Other expense, net increased by $7,000, or 2%, to $372,000
in the quarter ended March 31, 1998 from $365,000 in the quarter ended March 31,
1997. As a percentage of revenue, other income (expense) decreased to 3% in the
quarter ended March 31, 1998 from 5% in the quarter ended March 31,1997. This
expense is largely interest expense related to funding the Company's operations
and was fundamentally unchanged from the comparable period.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company recorded an income tax
provision of $216,000 for the quarter ended March 31, 1998. The change from the
benefit recorded in the first quarter of 1997 was a result of the Company's pre-
tax loss coupled with significant research and development tax credits generated
in the March 31,1997 quarter.
LIQUIDITY AND CAPITAL RESOURCES.
The Company has historically financed its operations through a combination of
cash flow from operations and borrowings. At March 31, 1998, the Company's
principal sources of liquidity included $2.6 million in cash and cash
equivalents, a $10.0 million secured bank line of credit and an equipment term
loan agreement of $1.5 million, both of which expire in September 1998. As of
March 31, 1998, the Company had an outstanding balance under the line of credit
in the amount of approximately $4.7 million and $664,000 outstanding with
respect to the equipment term loan agreement. The Company is required under the
credit line to comply with certain financial covenants regarding tangible net
worth, performance ratios relating to profitability, debt, asset performance and
working capital. At March 31, 1998, the Company was in compliance with such
covenants or had obtained waivers.
At March 31, 1998, the Company had senior promissory notes payable to
stockholders in the amount of $6.8 million bearing semi-annual interest payments
at a rate of 9% beginning April 1996, and principal repayments of $1.6 million
due semi-annually beginning in 2000. The Company also has notes payable to
stockholders in the amount of $5.1 million bearing annual interest payments of
7.25%, with the principal due in 2006. Following the Company's initial public
offering in May 12, 1998, these notes and accrued interest obligations were
retired.
Net cash used in operating activities was $2.1 million in the three months ended
March 31, 1998 compared to a positive contribution of $2.9 million in the three
months ended March 31, 1997. The main contributors to the usage of cash by
operations in the March 31, 1998 quarter were an increase in unbilled work-in-
process by $4.0 million reflecting t milestone extensions which must be met
prior to final invoicing, and a decline in customer deposits and unearned
revenue by $4.1 million, primarily the result of the completion of several large
LNP projects. Receivables provided cash of $4.3 million during this period
reflecting increased collections on significant accounts. In the three months
ended March 31, 1997, the cash contribution by operations was largely the result
of an increase of $3.8 million in customer deposits and unearned revenue due to
large LNP contracts entered into during that period.
Net cash used in investing activities during the three months ended March 31,
1998 and March 31, 1997 was roughly equivalent with $544,000 being invested in
equipment to support operations in the 1998 period, and $358,000 in the 1997
period.
Financing activities provided $4.0 million in cash in the three months ended
March 31, 1998 compared to using $721,000 in the three months ended March 31,
1997. The Company utilized its line of credit facilities for approximately $4.5
million during the quarter ended March 31, 1998. Following the Company's initial
public offering, all such advances were repaid and the Company currently owes
nothing on its line of credit facilities. Long term lease obligations were
reduced by a use of $528,000 in the quarter ended March 31, 1998 compared to a
reduction of $721,000 in the quarter ended March 31, 1997.
The Company believes that its current cash and short-term investments, together
with anticipated cash flow from operations and its existing credit facilities
and the net proceeds from the initial public offering will be sufficient to meet
its working capital and capital expenditure requirements for at least the next
12 months. Thereafter, the Company may require additional funds to support such
activity through public or private equity financing or from other sources. There
can be no assurance that additional financing will be available at all or that
if available, such financing will be obtainable on terms favorable to the
Company and would not be dilutive.
FACTORS THAT MIGHT EFFECT OPERATING RESULTS.
The Company's operating results have fluctuated significantly in the past and
are likely to continue to fluctuate significantly in the future. Fluctuations in
operating results may result in volatility in the price of the Company's Common
Stock. There can be no assurance that the Company will continue to be profitable
in the future or that the Company's level of profitability will not vary
significantly between quarters. These quarterly fluctuations may result from a
number of factors, including the magnitude, timing and signing of new contracts;
the Company's rate of progress under such contracts; the timing of customer and
market acceptance of the Company's product and service offerings; actual or
anticipated changes in government laws and regulations related to the
telecommunications market or judicial or administrative actions with respect to
such laws or regulations; the nature and pace of enforcement of the
Telecommunications Act of 1996; product lifecycles; the Company'' success in
effecting its planned transition to a product-based business; the mix of
products and services sold; changes in demand for the Company's products and
services; the timing of third-party contractors' delivery of software and
hardware; budgeting cycles of the Company's customers; changes in the renewal
rate of support agreements; the timing and amount of expenditures made by the
Company for research and development and sales, general and administrative
expenses; competition by existing and emerging
<PAGE>
Page 10
competitors in the telecommunications software markets; the Company's success in
developing and marketing new products, controlling costs, attracting and
retaining qualified personnel and expanding its sales and marketing programs;
regional office expansion; software defects and other product quality problems;
changes in the Company's strategy; the extent of industry consolidation;
expansion of the Company's international operations, and general economic
conditions.
A significant portion of the Company's revenue has been and is expected to
continue to be derived from a small number of customers. Accordingly, the loss
of any significant customer, delays in delivery or acceptance of any of the
Company's products or delays in the performance of services could have a
material adverse effect on the Company's business, financial condition and
results of operations. Historically, the Company has generally recognized both
license fees and service fee revenue under its customer contracts using the
percentage-of-completion method. The Company is broadening its strategy to
include the development and sale of software products. To the extent that the
Company is successful in doing so, the Company expects that it may be able to
record future revenue from license fees upon the delivery of a software product
to a customer. The Company's ability to recognize revenue on software licenses
as packaged software solutions at the time of delivery depends on its ability to
engage third parties to implement its software and to separately license the
software and separately sell implementation services, as well as technical
factors and customer expectations and requirements. There can be no assurance
that the Company will be able to achieve or maintain a sales model that allows
the Company to record license fees when software products are delivered to
customers. Software companies that account for revenue from license fees upon
delivery of software products may be exposed to increased risk of quarterly
fluctuations. To the extent that this pattern develops at the Company, any
failure or delay in the delivery of orders during any given quarter could have a
material adverse effect on the Company's business, financial condition and
results of operations. The timing of revenue recognition from the Company's
contracts has caused, and may continue to cause, material fluctuations in the
Company's operating results, particularly on a quarterly basis.
The Company's expense levels are based in significant part on its expectations
regarding future revenue. The Company's revenue is difficult to forecast because
the market for the Company's products and services is rapidly evolving, and the
Company's sales cycle and the size and timing of significant contracts vary
substantially among customers. Accordingly, the Company may be unable to adjust
spending in a timely manner to compensate for any unexpected shortfall in
revenue. Any significant shortfall from anticipated levels of demand for the
Company's products and services could have a material adverse effect on the
Company's business, financial condition and results of operations.
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter-to-quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Furthermore, the
Company believes it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business or generally,
the market price of the Company's Common Stock would likely be materially
adversely affected.
The Company has experienced and is expected to continue to experience a
significant degree of seasonality, with a lower percentage of the Company's
revenue and net income being recognized in its first quarter. The Company
believes that such seasonality is the result of buying patterns that are linked
to the capital appropriation process of companies in the telecommunications
industry. The Company's costs, particularly personnel and infrastructure, are
largely fixed and are based on projected annual revenue levels. As a result,
quarter-to-quarter shortfalls or increases in revenue may affect quarterly
operating results.
These results should be read in conjunction with the risk factors defined in the
Company's Registration Statement on Form S-1 (No. 333-43973) which was declared
effective by the SEC on May 11, 1998. Statements contained in this Form 10-Q
that are not based on historical fact are "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may," "will," "expect," "estimate," "anticipate,"
"continue," or similar terms, variations of such terms or the negative of those
terms. Such forward-looking statements involve risks and uncertainties,
including, but not limited to: (i) the Company's dependence on the rapidly
evolving telecommunications industry, (ii) the customer's acceptance of Local
Number Portability Products, (iii) delays associated with customers' internal
approval and contracting procedures, procurement practices, and testing and
acceptance process, and (iv) rapid technological change and intense competition
in the Company's industry.
IMPACT OF THE YEAR 2000 ISSUE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and/or
software used by many companies may need to be upgraded to comply with such Year
2000 requirements. Significant uncertainty exists in the software industry
concerning the potential effects associated with such compliance.
The Company currently offers software products that are designed to be Year 2000
compliant and the Company's current contracts with its customers require that
the Company warrant Year 2000 capability. Although the Company has designed its
products to be Year 2000 capable and tests third-party software that is
incorporated with the Company's products, there can be no assurance that the
Company's software products, particularly when such products incorporate third-
party software, contain all necessary date code changes. The Company is
continuing its review of its
<PAGE>
Page 11
products to ensure compliance. The Company's operations may be at risk if its
suppliers and other third-parties fail to adequately address the problem or if
software conversions result in system incompatibilities with these third-
parties. This issue could result in system failures or generation of erroneous
information and could significantly disrupt business activities.
The Company utilizes off-the-shelf and custom software developed internally and
by third parties. To the extent that such software and systems do not comply
with Year 2000 requirements, there can be no assurance that potential systems
interruptions or the cost necessary to update such software will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has initiated correspondence with suppliers and is continuing to
review what actions will be required to make all software systems used
internally Year 2000 compliant as well as to mitigate its vulnerability to
problems with the systems used by its suppliers and other third parties. Such
actions include a review of vendor contracts and formal communication with
suppliers to request certification that products are Year 2000 compliant. The
total cost and time associated with the impact of Year 2000 compliance cannot
presently be estimated but is not expected to have a material impact.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 22, 1998, two class action lawsuits were filed in the United States
District Court of the District Court of Colorado against the Company and certain
of its officers and directors. The actions are purportedly brought on behalf of
purchasers of the Company's common stock between May 12, 1998 and June 17, 1998.
The claims allege violations of Sections 11 and 12 of the Securities Act of 1933
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The actions
seek compensatory and punitive damages, interest, attorneys' fees and other
costs. The Company believes that it has meritorious defenses to both actions and
intends to vigorously defend the actions.
Item 2. Changes in Securities
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On January 28, 1998, the Company solicited the written consent of its security
holders with respect to (a) Election of Directors; (b) One-for-two reverse stock
split; (c) Amendments to Articles of Incorporation; (d) Amendment of the
Company's Stock Option Plan; (e) Adoption of the Company's Employee Stock
Purchase Plan; (f) Adoption of Amended and Restated Bylaws; and (g) Approval of
Standard Indemnification Agreement. 8,160 shares of Series A Preferred Stock
were voted in favor of such proposal, no shares of Series A Preferred Stock were
voted against such proposal.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
Page 12
SIGNATURES
Pursuant to the requirements of the Securities exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: 6/25/98 /s/ Roger A. Barnes
--------------------------------------------
Roger A. Barnes
Senior Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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