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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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)
<TABLE>
<S> <C>
Delaware 84-1010843
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
9777 Mt. Pyramid Court, Englewood, Colorado 80112
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(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 September 30, 2000, there were outstanding 12,808,663 shares of
Registrant's Common Stock (par value $0.001 per share).
1
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EVOLVING SYSTEMS, INC.
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Balance Sheets
September 30, 2000 and December 31, 1999 (unaudited)...................................................... 3
Statements of Operations
for the three-month and nine-month periods ended September 30,
2000 and September 30, 1999 (unaudited)................................................................... 4
Condensed Statements of Cash Flow
for the nine-month periods ended September 30, 2000 and
September 30, 1999 (unaudited)............................................................................ 5
Notes to Financial Statements (unaudited)....................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 6
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 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES.............................................................................................................. 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVOLVING SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,661 $ 4,266
Short-term investments - unrestricted 6,724 12,087
Short-term investments - restricted - 5,920
Contract receivables, net 17,139 9,624
Unbilled work-in-progress 11,052 8,349
Prepaid and other current assets 1,461 1,575
--------- ---------
Total current assets 38,037 41,821
Property and equipment, net 5,561 6,260
Deferred tax assets 1,547 1,547
--------- ---------
Total assets $ 45,145 $ 49,628
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 318 $ 640
Accounts payable and accrued liabilities 3,925 2,999
Unearned revenue and customer deposits 5,584 9,278
--------- ---------
Total current liabilities 9,827 12,917
Long-term obligations 1 170
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares
authorized, no shares issued ___ ___
Common stock, $.001 par value; 25,000,000 shares authorized;
12,808,663 and12,446,965 shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively 13 12
Additional paid-in-capital 52,787 51,774
Deferred compensation (56) (89)
Accumulated deficit (17,427) (15,156)
--------- ---------
Total stockholders' equity 35,317 36,541
--------- ---------
Total liabilities and stockholders' equity $ 45,145 $ 49,628
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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EVOLVING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Revenue: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
License fees and related services $ 3,496 $ 3,130 $ 12,214 $ 4,434
Other services 7,918 7,652 24,991 25,013
--------- --------- ---------- ----------
Total revenue 11,414 10,782 37,205 29,447
========= ========= ========== ==========
Cost of revenue:
License fees and related services 2,767 2,051 6,624 6,120
Other services 6,570 4,302 18,395 14,177
--------- --------- ---------- ----------
Total cost of revenue 9,337 6,353 25,019 20,297
========= ========= ========== ==========
Gross margin 2,077 4,429 12,186 9,150
Operating expenses:
Sales and marketing 2,111 1,231 6,431 2,813
General and administrative 3,115 2,585 8,445 7,400
Research and development 130 504 130 897
--------- --------- ---------- ----------
Total operating expenses 5,356 4,320 15,006 11,110
========= ========= ========== ==========
Income (loss) from operations (3,279) 109 (2,820) (1,960)
Other income (expense), net 113 271 567 (2,681)
--------- --------- ---------- ----------
Income (loss) before income taxes (3,166) 380 (2,253) (4,641)
Provision for income taxes 18 - 18 -
--------- --------- ---------- ----------
Net income (loss) $ (3,184) $ 380 $ (2,271) $ (4,641)
========= ========= ========== ==========
Earnings per common share:
Basic $ (0.25) $ .03 $ (0.18) $ (.38)
Diluted $ (0.25) $ .03 $ (0.18) $ (.38)
Weighted average shares outstanding:
Basic shares outstanding 12,744 12,192 12,620 12,100
Diluted shares outstanding 12,744 13,182 12,620 12,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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EVOLVING SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (2,271) $ (4,641)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of deferred compensation 33 196
Depreciation and amortization 2,512 2,274
Loss on disposal of property and equipment 62 ---
Change in operating assets and liabilities:
Net contract receivables (7,515) 5,470
Unbilled work-in-progress (2,703) (3,747)
Prepaid and other assets 114 924
Accounts payable and accrued liabilities 926 (1,134)
Unearned revenue and customer deposits (3,694) 5,735
-------- --------
Net cash provided by (used in) operating activities (12,536) 5,077
-------- --------
Investing activities:
Purchases of property and equipment, net (1,875) (1,300)
Maturities (purchases) of short-term investments 11,283 (14,534)
-------- --------
Net cash provided by (used in) investing activities 9,408 (15,834)
-------- --------
Financing activities:
Repayment of long-term obligations (491) (1,030)
Proceeds from issuance of common stock 1,014 408
-------- --------
Net cash provided by (used in) financing activities 523 (622)
-------- --------
Net decrease in cash and cash equivalents (2,605) (11,379)
Cash and cash equivalents at beginning of period 4,266 11,707
-------- --------
Cash and cash equivalents at end of period $ 1,661 $ 328
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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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 accounting principles generally accepted in the
United States 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 audited
annual financial statements and reflect all adjustments, which include only
normal recurring adjustments, necessary for a fair presentation in accordance
with accounting principles generally accepted in the United States. The results
for the period ended September 30, 2000 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, 1999 and filed
with the SEC March 21, 2000.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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 (Loss) Per Common Share
Basic EPS was computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted EPS was
computed using the weighted average number of common shares plus all dilutive
potential common shares outstanding during the period unless the effect of the
potential common shares is anti-dilutive. There were 398,472 shares excluded
from the calculation of weighted average common shares because these options are
out of the money and thus antidilutive in the weighted calculation.
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>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income (loss) $(3,184) $ 380 $ (2,271) $ (4,641)
Weighted average common shares outstanding 12,744 12,192 12,620 12,100
Basic net income (loss) per common share $ (.25) $ .03 $ (.18) $ (.38)
Effect of dilutive securities:
Options and warrants - 990 - -
Diluted weighted average common shares outstanding 12,744 13,182 12,620 12,100
Diluted net income (loss) per common share $ (.25) $ .03 $ (.18) $ (.38)
</TABLE>
(3) Contingencies, Litigation Settlement and Legal Fees
In June 1998, four securities class action complaints were filed against
the Company and certain of its current and former officers and directors in the
Federal Court for the District of Colorado alleging violations of the federal
securities laws. The Company denied the allegations. The parties reached a
settlement of $10 million, of which the Company paid $2.5 million in April 1999.
The Company incurred approximately $719,000 in legal costs associated with the
lawsuit. This charge was recorded in the first quarter of 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
-------
Evolving Systems provides the telecommunications industry with solutions
comprised of software products and systems integration services for a full range
of operational support systems, and network element software and wireless data
applications.
6
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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 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 generated from fixed price
contracts that provide for both licenses and services. Revenue under these
arrangements, where the services are essential to the functionality of the
delivered software, 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 the terms of the fixed price contracts and all
such amounts are expected to be billed and collected during the succeeding 12
months.
In arrangements where the services are not essential to the functionality
of the delivered software, the Company recognizes license revenue when a license
agreement has been signed, delivery has occurred, the fee is fixed or
determinable, collectibility is probable and the customer has accepted the
software. Where applicable, fees from multiple element arrangements are
unbundled and recorded as revenue as the elements are delivered to the extent
that vendor specific objective evidence of fair value exists. If vendor specific
objective evidence of fair value does not exist, fees from such arrangements are
deferred until the earlier of the date that vendor specific objective evidence
of fair value does exist or all of the elements are delivered.
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
periods 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 costs indicate a
loss.
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 Nine Months Ended
------------------ -----------------
September 30, September 30,
------------ ------------
(unaudited) (unaudited)
----------- ----------
<S> <C> <C> <C> <C>
Revenue: 2000 1999 2000 1999
---- ---- ---- ----
License fees and related services 30.6% 29.0% 32.8% 15.1%
Other services 69.4 71.0 67.2 84.9
-------- ------- ------ -------
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
License fees and related services 24.2 19.0 17.8 20.8
Other services 57.6 39.9 49.4 48.1
-------- ------- ------ -------
Total cost of revenue 81.8 58.9 67.2 68.9
Gross margin 18.2 41.1 32.8 31.1
Operating expenses:
Sales and marketing 18.5 11.4 17.3 9.6
General and administrative 27.3 24.0 22.7 25.1
Research and development 1.1 4.7 0.3 3.0
-------- ------- ------ -------
Total operating expenses 46.9 40.1 40.3 37.7
Income (loss) from operations (28.7) 1.0 (7.5) (6.6)
Other income (expense), net 1.0 2.5 1.5 (9.1)
-------- ------- ------ -------
Income (loss) before income taxes (27.7) 3.5 (6.0) (15.7)
Provision for (benefit from) income taxes 0.2 0.0 0.1 0.0
-------- ------- ------ -------
</TABLE>
7
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) (27.9)% 3.5% (6.1)% (15.7)%
===== ===== ====== =====
</TABLE>
The three months ended September 30, 2000 compared to the three months ended
September 30, 1999
Revenue. Total revenue increased $632,000 or 6% to $11.4 million in the three
months-ended September 30, 2000 from $10.8 million in the three months ended
September 30, 1999. License fees and related services revenue increased by
$366,000 or 12% to $3.5 million in the three months ended September 30, 2000
from $3.1 million in the three months ended September 30, 1999, reflecting an
increase in major Local Number Portability ("LNP") projects in 2000 and
increased demand for LNP in the three months ended September 30, 2000 due to new
features offered in the LNP product suite. The increase was expected to be
significantly higher based upon the expected receipt of a major contract from a
Regional Bell Operating Company (RBOC) customer. The contract was delayed due to
a longer than expected sales cycle. Other services revenue increased by $266,000
or 3% to $7.9 million in the three months ended September 30, 2000 from $7.7
million in the three months ended September 30, 1999. As a percentage of total
revenue license fees and related services revenue increased to 31% for the three
months ended September 30, 2000 from 29% for the three months ended September
30, 1999.
Cost of revenue. Total cost of revenue increased by $3.0 million or 47% to $9.3
million in the three months ended September 30, 2000 from $6.4 million in the
three months ended September 30, 1999. As a percentage of total revenue, costs
increased to 82% of revenue for the three months ended September 30, 2000 from
59% of revenue in the three months ended September 30, 1999. Cost of license
fees and related services increased by $716,000 or 35% to $2.8 million for the
three months ended September 30, 2000 from $2.1 million for the three months
ended September 30, 1999, due to effort expended on software enhancements.
As a percentage of total revenue, cost of license fees and related services
increased to 24% for the three months ended September 30, 2000 from 19% in the
three months ended September 30, 1999. The increase in costs of license fees and
related services reflects the increases in subcontractor personnel assigned to
LNP product development and maintenance efforts related to new functionality in
the LNP suite. Cost of other services increased by $2.3 million or 53% to $6.6
million for the three months ended September 30, 2000 from $4.3 million for the
three months ended September 30, 1999. The increase in costs is due primarily to
the recent increases in the cost of labor. Increases specifically are due to
increasing salary expense for existing staff and the cost of additional
subcontracted labor in India to produce new features and functionality.
The Company experienced an 18% gross margin. This is a decrease in total gross
margin in the three months ended September 30, 2000 of 23% from 41% for the
three months ended September 30, 1999. The decrease in gross margin is related
to the increasing salary expense and the cost of subcontracted labor in India.
The gross margin continues to be affected by the fact that substantially all of
the Company's R&D activity has traditionally been done under contract for
customers and accounted for as a cost of revenue.
The Company's expense levels are based in significant part on its expectations
regarding future revenues. 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.
Sales and marketing. Sales and marketing expenses increased by $880,000 or 71%
to $2.1 million in the three months ended September 30, 2000 from $1.2 million
in the three months ended September 30, 1999. As a percentage of revenue, sales
and marketing increased to 19% of revenue in the three months ended September
30, 2000 from 11% in the three months ended September 30, 1999. This percentage
increase reflects management's decision to increase the sales staff in 2000 to
increase sales of the Company's products and services. The sales and marketing
headcount for the three months ended September 30, 2000 was 32 compared to 25
for the three months ended September 30, 1999.
General and administrative. General and administrative expenses increased by
$530,000 or 21% to $3.1 million in the three months ended September 30, 2000
from $2.6 million in the three months ended September 30, 1999. As a percentage
of revenue, general and administrative expenses increased to 27% in the three
months ended September 30, 2000 from 24% in the three months ended September 30,
1999. The increase is primarily a result of increasing salary and fringe costs,
depreciation and an increase in the allowance for bad debt in absolute dollars.
Research and development. Research and development expenses decreased by
$374,000, or 74%, to $130,000 in the three months ended September 30, 2000 from
$504,000 in the three months ended September 30, 1999, reflecting the continuing
company strategy to develop new products under contract with customers. The
Company records the cost of research and development in cost of revenue as the
Company records revenue related to these projects. As a percentage of revenue,
research and development expenses decreased to 1% in the three months ended
September 30, 2000 from 5% in the three months ended September 30, 1999
reflecting the Company's strategy to develop new products under contract with
customers.
Other income (expense), net. Other income (expense), net, reflected decreased
income of $158,000, or 58%, to $113,000 in the three months ended September 30,
2000 from $271,000 in the three months ended September 30, 1999. While interest
expense declined as debt was paid down, interest income for the three months
ended September 30, 2000
8
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compared to the three months ended September 30, 1999, also declined due to the
decreased interest earned on a lower cash balance. Cash and cash equivalents and
short-term investments were $21.8 million on September 30,1999 compared to $8.4
million on September 30, 2000.
In June 1998, four securities class action complaints were filed against
the Company and certain of its current and former officers and directors in the
Federal Court for the District of Colorado alleging violations of the federal
securities laws. The Company denied these allegations. The parties reached a
settlement of $10 million, of which the Company paid $2.5 million in April 1999.
The settlement was approved by the Court on October 4, 1999. The Company
incurred approximately $719,000 in legal costs associated with the lawsuit.
Provision for (benefit from) income taxes. The Company has recorded a partial
valuation allowance against its carryforward tax benefits to the extent that it
believes that it is more likely than not that all of such benefits will not be
realized in the foreseeable future. The Company's assessment of this valuation
allowance was made using all available evidence, both positive and negative. In
particular, the Company considered both its historical results and its
projections of profitability for only reasonably foreseeable future periods.
Management deems it inappropriate to record any additional tax until projected
operating results reflect greater certainty of profitability and the ability to
realize such benefits. The Company's realization of its recorded net deferred
tax assets is dependent on future taxable income and therefore, the Company is
not assured that such benefits will be realized. An $18,000 expense was recorded
for anticipated Alternative Minimum Tax (AMT) due in the three months ended
September 30, 2000.
The nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999
Revenue. Total revenue increased $7.8 million or 26% to $37.2 million in the
nine months ended September 30, 2000 from $29.4 million in the nine months ended
September 30, 1999. License fees and related services revenue increased by $7.8
million or 175% to $12.2 million in the nine months ended September 30, 2000
from $4.4 million in the nine months ended September 30, 1999, reflecting
growing LNP product demand since the prior period. Other services revenue
remained constant at $25.0 million in the nine months ended September 30, 2000
from the nine months ended September 30, 1999. As a percentage of total revenue,
other services revenue decreased to 67% for the nine months ended September 30,
2000 from 85% for the nine months ended September 30, 1999.
Cost of revenue. Cost of revenue increased $4.7 million or 23% to $25.0 million
in the nine months ended September 30, 2000 from $20.3 million in the nine
months ended September 30, 1999. License fees and related services cost
increased by $504,000 or 8% to $6.6 million for the nine months ended September
30, 2000 from $6.1 million for the nine months ended September 30, 1999. The
increase in costs of license fees and related services reflects the increases in
subcontractor personnel assigned, including subcontracted labor in India, for
LNP product development and maintenance efforts. Other services cost increased
$4.2 million or 30% to $18.4 million in the nine months ended September 30, 2000
from $14.2 million in the nine months ended September 30, 1999. The increase in
costs is due primarily to the recent increases in the cost of labor.
Sales and marketing. Sales and marketing expenses increased by $3.6 million or
129% to $6.4 million in the nine months ended September 30, 2000 from $2.8
million in the nine months ended September 30, 1999. As a percentage of revenue,
sales and marketing expenses increased to 17% of revenue in the nine months
ended September 30, 2000 from 10% in the nine months ended September 30, 1999.
This percentage increase reflects management's decision to increase the sales
staff in 2000 to increase sales of the Company's products and services. The
sales and marketing headcount for the nine months ended September 30, 2000 was
32 compared to 25 for the nine months ended September 30, 1999.
General and administrative. General and administrative expenses increased by
$1.0 million or 14% to $8.4 million in the nine months ended September 30, 2000
from $7.4 million in the nine months ended September 30, 1999. General and
administrative expenses as a percentage of revenues was lower than the nine
months ended the previous year due to increasing revenues. As a percentage of
revenue, general and administrative expenses decreased to 23% in the nine months
ended September 30, 2000 from 25% in the nine months ended September 30, 1999.
The increase in absolute dollars is primarily the result of the increasing
salary and fringe costs, depreciation and an increase in the allowance for bad
debt.
Research and development. Research and development expenses decreased by
$767,000 or 86%, to $130,000 in the nine months ended September 30, 2000 from
$897,000 in the nine months ended September 30, 1999. As a percentage of
revenue, research and development expenses decreased to 0.3% in the nine months
ended September 30, 2000 from 3% in the nine months ended September 30, 1999,
reflecting the company strategy to develop new products under contract with
customers. The Company records the cost of research and development in cost of
revenue as the Company records revenue related to these projects.
Other income (expense), net. Other income (expense), net, increased by $3.2
million or 121%, to income of $567,000 in the nine months ended September 30,
2000 from an expense of $(2.7) million in the nine months ended September 30,
1999. This income (expense) change resulted from a decline in interest expense
as debt was paid down and a one-time charge of $3.3 million for the company's
portion of the settlement of the shareholder suit, in the nine months ended
September 30, 1999.
Benefit from income taxes. The Company has recorded a partial valuation
allowance against its carry forward tax benefits to the extent that it believes
that it is more likely than not that all of such benefits will not be realized
in the foreseeable
9
<PAGE>
future. The Company's assessment of this valuation allowance was made using all
available evidence, both positive and negative. In particular, the Company
considered both its historical results and its projections of profitability for
only reasonably foreseeable future periods. Management deems it inappropriate to
record any additional tax until projected operating results reflect greater
certainty of profitability and the ability to realize such benefits. The
Company's realization of its recorded net deferred tax assets is dependent on
future taxable income and therefore, the Company is not assured that such
benefits will be realized. An $18,000 expense was recorded for anticipated
Alternative Minimum Tax (AMT) due in the nine months ended September 30, 2000.
Liquidity and Capital Resources.
The Company has historically financed its operations through a combination
of cash flow from operations, bank borrowings and its initial public offering in
May 1998. At September 30, 2000, the Company's principal sources of liquidity
included $1.7 million in cash and cash equivalents, and $6.7 million in short-
term investments. The Company's $5.0 million secured bank line of credit expired
in September 2000.
Net cash used by operating activities was $12.5 million in the nine months
ended September 30, 2000 compared to $5.1 million provided by operations in the
nine months ended September 30, 1999. The primary uses of cash by operations in
the nine months ended September 30, 2000 were an increase in contract
receivables, net, of $7.5 million, a decrease in unearned revenue and customer
deposits of $3.7 million, and an increase of $2.7 million in unbilled work-in-
process. The significant increase in unbilled work-in-process is due primarily
to the timing of milestone payments per contract terms compared to revenue
recognized based on a percentage of completion basis
Net cash provided by investing activities during the nine months ended
September 30, 2000 was $9.4 million compared to $15.8 million used by investing
activities in the nine months ended September 30, 1999. Purchases of property
and equipment, net, to support operations accounted for a use of $1.9 million in
the nine months ended September 30, 2000 compared to $1.3 million for the nine
months ended September 30, 1999. The maturities of $11.3 million in short-term
investments provided cash during the nine months ended September 30, 2000
compared to a use of $14.5 million in cash to purchase short-term investments
during the nine months ended September 30, 1999.
The Company's financing activities provided for $523,000 in cash through a
combination of the issuance of common stock upon the exercise of stock options
for $1.0 million and $491,000 in repayments for capital lease obligations for
the nine months ended September 30, 2000. This compares to $622,000 in cash used
in financing activities in the nine months ended September 30, 1999 for the
repayment of capital leases partially offset by the proceeds from the issuance
of stock in connection with the exercise of stock options.
The Company believes that its current cash and short-term investments,
together with anticipated cash flow from operations will be sufficient to meet
its working capital and capital expenditure requirements for at least the next
twelve 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.
Recent Accounting Pronouncements
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", in
December 1999, providing further interpretive guidance for public companies on
the recognition, presentation, and disclosure of revenue in financial
statements. On June 26, 2000, the SEC issued SAB No. 101B, delaying he
implementation of SAB No. 101 until the Company's fourth quarter of fiscal 2000.
In addition, on October 13, 2000, the SEC issued a Frequently Asked Question
("FAQ") with additional guidance regarding the implementation of SAS No. 101.
the Company is currently evaluating the guidance to determine the impact on
future operations.
Factors that might affect 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 continue to result in volatility in the
price of the Company's Common Stock. There can be no assurance that the Company
will 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; changes in management; sale of the Company's
software in an application service provider (ASP) model; product lifecycles; the
Company' success in building 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 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 into international markets, and
general economic conditions.
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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 standard, packaged software products and
expects to offer its software under ASP arrangements. To the extent that the
Company is successful in its strategy, the Company expects that it may record
future revenue from license fees upon the acceptance of a software product by
customers, or as monthly payments are invoiced under an ASP arrangement.
Software companies that account for revenue from license fees upon acceptance of
software products may be exposed to increased risk of quarterly fluctuations.
Likewise, software companies that adopt an ASP licensing model, in lieu of
recording revenue upon acceptance, may have temporary revenue reductions until
the ASP licensing model is fully realized. To the extent that this pattern
develops at the Company, any failure or delay in the delivery and acceptance of
orders during any given quarter, or any signing of an ASP licensing arrangement
in lieu of delivery of the packaged software up front, 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 that similar to the results for the quarter ended September 30,
2000, 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.
These results should be read in conjunction with the risk factors defined
in the Company's Form 10-K for the year ended December 31, 1999. Statements
contained in this Form 10-Q with respect to future revenue and expenses are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results may differ. Among the factors
that could cause actual results to differ are the following: (i) delays
associated with customers' internal approval and contracting procedures,
procurement practices, and testing and acceptance process including but not
limited to (ii) delays in enforcement and implementation of the
Telecommunications Act of 1996; (iii) customer's acceptance of the Company
products, (iv) the Company's dependence on the rapidly evolving
telecommunications industry, (v) changes in management and ability to attract
and retain personnel; and (vi) rapid technological change and intense
competition in the Company's industry.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June 1998, four securities class action complaints were filed against
the Company and certain of its current and former officers and directors in the
Federal Court for the District of Colorado alleging violations of the federal
securities laws. The Company denied these allegations. The parties reached a
settlement of $10 million, of which the Company paid $2.5 million in April 1999.
The Company incurred approximately $719,000 in legal costs associated with the
lawsuit. The charge was recorded in the first quarter of 1999.
From time to time the Company is involved in various legal proceedings
arising in the normal course of business operations. Management does not expect
that any such proceedings will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
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 March 15, 2000, the Company solicited the written consent of its
security holders with respect to (a) Election of Directors; (b) Amendment of the
Company's Stock Option Plan; (c) Amendment to the Company's Employee Stock
Purchase Plan; and (d) Ratification of PricewaterhouseCoopers LLP as the
independent accountants of the Company. All motions were passed by the
shareholders.
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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
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: 11/10/2000 s/ David R. Johnson
-----------------------------------
David R. Johnson
Senior Vice President of Finance, Chief
Financial Officer, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)
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