SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File No. 0-23611
DSET Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-3000022
- --------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1011 US Highway 22, Bridgewater, New Jersey 08807
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(908) 526-7500
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: No: X*
------- -------
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 30, 1998:
Class Number of Shares
----- ----------------
Common Stock, no par value 9,374,639
*Registrant became subject to the filing requirements of the Securities Exchange
Act of 1934, as amended, on March 12, 1998, when its Registration Statement on
Form 8-A became effective.
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DSET CORPORATION
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION......................................... 1
Item 1. Financial Statements.................................... 1
Balance Sheets as of March 31,1998 (unaudited) and
December 31, 1997................................... 2
Statements of Income for the Three Months Ended March
31, 1998 and 1997 (unaudited)....................... 3
Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 (unaudited)................. 4
Notes to Financial Statements (unaudited)............... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
Results of Operations................................... 10
Liquidity and Capital Resources......................... 11
PART II. OTHER INFORMATION............................................. 13
Item 2. Changes in Securities and Use of Proceeds............... 13
Item 5. Other Information....................................... 14
Item 6. Exhibits and Reports on Form 8-K........................ 14
SIGNATURES............................................................. 15
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PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
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<TABLE>
<CAPTION>
DSET Corporation
Balance Sheets
March 31, 1998 December 31, 1997
-------------- -----------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 4,225,501 $ 2,081,846
Marketable securities .............................................. 38,565,394 1,123,795
Accounts receivable, net of allowance for doubtful
accounts of $91,989 and $125,504 ................................. 4,358,286 7,564,442
Deferred income taxes .............................................. 158,681 158,681
Prepaid expenses and other current assets .......................... 57,267 243,883
------------ ------------
Total current assets ............................................. 47,365,129 11,172,647
Fixed assets, net .................................................... 1,605,735 1,560,948
Goodwill, net ........................................................ 158,371 167,873
Other assets ......................................................... 377,490 413,760
------------ ------------
Total assets ..................................................... $ 49,506,725 $ 13,315,228
============ ============
Liabilities, Cumulative Redeemable Convertible Preferred
Stock and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses .............................. $ 2,501,309 $ 2,779,954
Income taxes payable ............................................... 41,484 --
Deferred revenues .................................................. 1,826,933 1,897,039
Note payable ....................................................... 220,000 220,000
------------ ------------
Total current liabilities ........................................ 4,589,726 4,896,993
Deferred income taxes ................................................ 103,714 103,714
Note payable ......................................................... 56,657 111,657
------------ ------------
Total liabilities ............................................... 4,750,097 5,112,364
------------ ------------
Commitments
Series A cumulative redeemable convertible preferred stock,
no par value; 750,000 shares authorized, no shares issued or
outstanding at March 31, 1998; 676,361 shares issued and
outstanding at December 31, 1997; cumulative accrued and
undeclared dividends of $1,680,859 at December 31, 1997 ............ -- 11,603,996
------------ ------------
Shareholders' equity (deficit):
Preferred stock, no par value; 5,000,000 shares authorized, no
shares issued and outstanding at March 31, 1998; no shares
authorized, issued or outstanding at December 31, 1997 ............. -- --
Common stock, no par value; authorized 40,000,000 shares,
issued 9,312,467 at March 31, 1998 and 6,775,092 shares
at December 31, 1997, respectively ................................. 40,322,300 2,537,806
Deferred stock compensation .......................................... (793,768) (875,835)
Retained earnings .................................................... 5,228,096 4,936,894
Treasury stock, no shares and 3,043,625 shares of common
stock at cost at March 31, 1998 and December 31, 1997,
respectively ....................................................... -- (9,999,997)
------------ ------------
Total shareholders' equity (deficit) ............................... 44,756,628 (3,401,132)
------------ ------------
Total liabilities, cumulative redeemable convertible
preferred stock and shareholders' equity (deficit) ............. $ 49,506,725 $ 13,315,228
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
<CAPTION>
DSET Corporation
Statements of Income
(unaudited)
Three Months Ended March 31
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenues:
License revenues ....................................... $ 2,636,635 $ 1,481,530
Service revenues ....................................... 2,685,478 1,712,542
----------- -----------
Total revenues ..................................... 5,322,113 3,194,072
----------- -----------
Cost of revenues:
License revenues ....................................... 240,629 69,806
Service revenues ....................................... 701,995 688,720
----------- -----------
Total cost of revenues ............................. 942,624 758,526
----------- -----------
Gross profit ........................................... 4,379,489 2,435,546
----------- -----------
Operating expenses:
Sales and marketing .................................... 1,982,994 791,923
Research and product development ....................... 1,494,900 709,175
General and administrative ............................. 529,701 648,799
----------- -----------
Total operating expenses ........................... 4,007,595 2,149,897
----------- -----------
Operating income ....................................... 371,894 285,649
Amortization of goodwill ............................... 9,502 --
Interest and other expense ............................. (36,051) --
Interest and other income .............................. 111,556 20,204
----------- -----------
Income before income taxes ............................. 437,897 305,853
Provision for income taxes ............................. 146,695 100,931
----------- -----------
Net income ............................................. 291,202 204,922
Less: accrued preferred stock dividends ............... -- 214,889
----------- -----------
Net income (loss) applicable to common shares .......... $ 291,202 $ (9,967)
=========== ===========
Net income per common share ............................ $ 0.04 $ 0.00
=========== ===========
Weighted average number of common shares outstanding ... 7,310,539 3,467,873
=========== ===========
Net income per common share assuming dilution .......... $ 0.03 $ 0.00
=========== ===========
Weighted average number of common shares and common
equivalent shares outstanding ...................... 9,846,772 3,467,873
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
<CAPTION>
DSET Corporation
Statements of Cash Flows
(unaudited)
Three Months Ended March 31
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 291,202 $ 204,922
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ............................................... 115,236 85,833
Amortization ............................................... 9,502 37,290
Deferred stock compensation ................................ 82,067 --
Loss from joint venture .................................... 36,270 --
Changes in assets and liabilities:
Accounts receivable ........................................ 3,206,156 275,192
Other assets ............................................... 86,616 29,802
Accounts payable and accrued expenses ...................... (278,645) (53,468)
Income taxes payable ....................................... 41,484 21,883
Deferred revenues .......................................... (70,106) (24,033)
------------ ------------
Net cash provided by operating activities .............. 3,519,782 577,421
------------ ------------
Cash flows from investing activities:
Repayment by officers and shareholders ..................... 100,000 --
Purchases of marketable securities, net .................... (37,441,599) (3,552)
Acquisition of fixed assets ................................ (160,023) (145,246)
Loan repayments ............................................ (55,000) --
------------ ------------
Net cash used in investing activities .................. (37,556,622) (148,798)
------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock (net) ........... 36,082,230 --
Proceeds from exercise of stock options .................... 98,265 120,426
------------ ------------
Net cash provided by financing activities .............. 36,180,495 120,426
------------ ------------
Net increase in cash and cash equivalents .............. 2,143,655 549,049
Cash and cash equivalents, beginning of period ............. 2,081,846 758,048
------------ ------------
Cash and cash equivalents, end of period ................... $ 4,225,501 $ 1,307,097
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............... $ 74,401 $ 145,212
Cash paid during the period for interest ................... 4,145 --
Non-cash activities:
Accrued dividends on Series A preferred stock .............. $ -- $ 214,889
Conversion of Series A preferred stock to common stock ..... 11,603,996 --
The accompanying notes are an integral part of these financial statements.
</TABLE>
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DSET CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION:
The information presented for March 31, 1998 and 1997, and for the
three-month periods then ended, is unaudited, but, in the opinion of DSET
Corporation's (the "Company") management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for the fair presentation of
the Company's financial position as of March 31, 1998 and the results of its
operations and its cash flows for the three-month periods ended March 31, 1998
and 1997. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1997,
which were included as part of the Company's Registration Statement on Form S-1
(Registration No. 333-43827), as declared effective by the Securities and
Exchange Commission (the "Commission") on March 12, 1998.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Marketable Securities
---------------------
The marketable securities portfolio held by the Company consists primarily
of money market funds which are considered to be available-for-sale securities
and are reported at fair value. Unrealized holding gains and losses were not
significant at March 31, 1998 and 1997.
Capitalized Software Development Costs
--------------------------------------
Capitalization of costs begins on establishment of technological
feasibility. Costs incurred prior to establishment of technological feasibility
are charged to research and product development expense. The ongoing assessment
of recoverability of capitalized costs requires considerable judgment by
management with respect to certain factors including the anticipated
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future gross revenue, estimated economic life and changes in technology. These
factors are considered on a product-by-product basis.
Amortization of capitalized software costs is calculated using a
straight-line method over the estimated useful life of the respective product
(five years). Amortization expense related to capitalized software costs was
approximately $-0- and $37,000 for the three months ended March 31, 1998 and
1997, respectively.
Revenue Recognition
-------------------
License revenues are recorded when the software has been delivered to the
Company's licensees and all significant obligations have been satisfied.
Revenues from run-time licenses are recognized as equipment using the Company's
software is deployed by the Company's customers. Service revenues are recognized
over the period in which the service is performed based on the percentage of
direct labor costs incurred to the total costs estimated. Revenues from
maintenance contracts are deferred and recognized over the term of the
respective contracts (typically twelve months).
Income Taxes
------------
The Company utilizes an asset and liability approach to financial
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to the period in
which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce the deferred tax assets to
the amount expected to be realized.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts in the financial statements for cash and cash
equivalents, marketable securities, accounts receivable, and accounts payable
and accrued expenses approximate their market value because of the short
maturity of those instruments.
Recently Issued Accounting Standards
------------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
applies to entities with publicly held common stock or potential common stock
and is effective for financial statements issued for periods ending after
December 15, 1997. Accordingly, the Company implemented SFAS No. 128 for the
year ended December 31, 1997 (see Note 5).
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 applies
to all companies and is effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes
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standards for the reporting and display of comprehensive income in a set of
financial statements. Comprehensive income is defined as the change in net
assets of a business enterprise during a period from transactions generated from
non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Management believes that the adoption of SFAS No. 130 has not had a material
impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 applies to all public companies and is effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that
business segment financial information be reported in the financial statements
utilizing the management approach. The management approach is defined as the
manner in which management organizes the segments within the enterprise for
making operating decisions and assessing performance. The Company has only one
operating segment - providing software products and services to the
telecommunications industry. Management believes the adoption of SFAS No. 131
has not had a material impact on the financial statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition," which is
effective for transactions entered into in fiscal years beginning after December
15, 1997. The Statement of Position governs the recognition of revenue by
enterprises that license, sell, lease or otherwise market software, except where
software is incidental to the products or services being offered as a whole.
Application of this Statement of Position has not had a material impact on the
financial statements.
NOTE 3 -- INITIAL PUBLIC OFFERING:
On March 18, 1998, the Company consummated an initial public offering of
3,500,000 shares of its Common Stock at a price to the public of $16.00 per
share, of which 2,500,000 shares were issued and sold by the Company and
1,000,000 shares were sold by certain shareholders of the Company (the "Selling
Shareholders"). The net proceeds to the Company from the offering were
approximately $36.1 million. On April 7, 1998, certain Selling Shareholders sold
an additional 525,000 shares of the Company's Common Stock at a price to the
public of $16.00 per share upon the consummation of the exercise of the
Underwriters' over-allotment option. The Company did not receive any of the
proceeds from the sale of shares by the Selling Shareholders.
The net proceeds received by the Company upon the consummation of such
offering, pending specific application, were invested in short-term,
investment-grade, interest-bearing instruments. See "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
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NOTE 4 -- CUMULATIVE REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In December 1995, the Company issued 676,361 shares of cumulative,
convertible Series A Preferred Stock. Upon consummation of the Company's initial
public offering, the shares of Series A Preferred Stock were converted into an
aggregate of 3,043,625 shares of the Company's Common Stock.
NOTE 5 -- EARNINGS PER SHARE:
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
(EPS), which specifies the computation, presentation and disclosure requirements
for earnings per share of entities with publicly held company stock or potential
common stock. The statement defines two earnings per share calculations, basic
and diluted. The objective of basic EPS is to measure the performance of an
entity over the reporting period by dividing income available to common stock by
the weighted average shares outstanding. The objective of diluted EPS is
consistent with that of basic EPS, that is to measure the performance of an
entity over the reporting period, while giving effect to all dilutive potential
common shares that were outstanding during the period. The calculation of
diluted EPS is similar to basic EPS except both the numerator and denominator
are increased for the conversion of potential common shares. The following table
is a reconciliation of the numerator and denominator under each method:
<TABLE>
<CAPTION>
For the three months ended March 31, 1998
-------------------------------------------
Per Share
Income Shares Amount
------------ ----------- ---------
<S> <C> <C> <C>
Basic EPS:
Net income applicable to common shares ...... $ 291,202 7,310,539 $ 0.04
Assuming dilution:
Net income applicable to common shares
Warrants ................................ -- 156,959
Stock options ........................... -- 2,379,274
----------- - -----------
$ 291,202 9,846,772 $ 0.03
============ ===========
</TABLE>
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
GENERAL
DSET designs, develops, markets and supports standards-based application
development tools, custom application development services, Local Number
Portability solutions and OSS Gateway products for the global telecommunications
industry. From its founding in 1989, the Company has focused on distributed
concurrent object technology and the creation of applications that could be
distributed among many processors. Additionally, the Company developed extensive
knowledge of requirements for multiple protocols and multi-vendor communications
as well as real time operating systems. In the early 1990's, the Company made a
strategic decision to focus on creating suites of tools that facilitate the
development of solutions based upon the Telecommunications Management Network
("TMN") standard. Substantially all of the Company's revenues to date have been
derived from application development tools and services based on TMN standards.
The Company's success will depend on continued growth in the market for advanced
telecommunications products and services.
The Company had one and four significant customers which accounted for
24.6% and 56.6%, respectively, of total revenues for the three months ended
March 31, 1998 and 1997, respectively. The Company anticipates that its results
of operations in any given period will continue to depend to a significant
extent upon sales to a small number of customers. As a result of this customer
concentration, the Company's revenues from quarter to quarter and business,
financial condition and results of operations may be subject to substantial
period-to-period fluctuations.
The Company derives a large portion of its revenues from international
sales which constituted approximately 31.6% and 18.9% of the Company's total
revenues in the quarters ended March 31, 1998 and 1997, respectively. The
Company's international sales currently are United States dollar-denominated. As
a result, an increase in the value of the United States dollar relative to
foreign currencies could make the Company's products and services less
competitive in international markets.
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 Company's dependence on the TMN industry standard and (iii) rapid
technological change in the Company's industry. The success of the Company
depends to a large degree upon increased utilization of its application
development tools, custom application development services and
carrier-to-carrier applications by telecommunications carriers and network
equipment vendors. As a result of such risks and
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others expressed from time to time in the Company's filings with the Commission,
the Company's actual results may differ materially from the results discussed in
or implied by the forward-looking statements contained herein.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
- -------------------------------------------------------------------------------
Revenues. Total revenues increased 66.6% to $5.3 million in the first
quarter of 1998 from $3.2 million in the first quarter of 1997. License revenues
increased 77.9% to $2.6 million in the first quarter of 1998 from $1.5 million
in the first quarter of 1997. This increase was primarily attributable to an
increased demand for the Company's TMN-based agent tools. Service revenues
increased 56.8% to $2.7 million in the first quarter of 1998 from $1.7 million
in the first quarter of 1997. This increase was primarily attributable to
professional services projects and an increase in fees from consulting services
and training courses. In the quarters ended March 31, 1998 and 1997, the Company
derived approximately 49.5% and 46.4%, respectively, of its total revenues from
license revenues and approximately 50.5% and 53.6%, respectively, of its total
revenues from service revenues.
Gross profit. The Company's gross profit increased 79.8% to $4.4 million
in the first quarter of 1998 from $2.4 million in the first quarter of 1997.
Gross profit percentage increased to 82.2% of total revenues in the first
quarter of 1998 from 76.2% in the first quarter of 1997. Gross profit percentage
for license revenues decreased to 90.9% for the first quarter of 1998 from 95.3%
for the comparable 1997 period. This decrease was attributable to the royalty
costs associated with the Company's sale of third party software. Gross profit
percentage for service revenue increased to 73.9% in the first quarter of 1998
from 59.8% in the first quarter of 1997. This increase was attributable to
higher margins associated with consulting services and training revenues.
Sales and marketing expenses. Sales and marketing expenses increased
150.4% to $2.0 million in the first quarter of 1998 from $792,000 in the first
quarter of 1997, and increased to 37.3% of total revenues in the first quarter
of 1998 from 24.8% of total revenue in the first quarter of 1997. This increase
was attributable primarily to increased personnel costs resulting from the
increase in the Company's sales force and an increase in commissions paid in
connection with foreign sales through distributors.
Research and product development expenses. Research and product
development expenses increased 110.8% to $1.5 million in the first quarter of
1998 from $709,000 in the first quarter of 1997, and increased to 28.1% from
22.2% of total revenues over the respective periods. This increase in research
and product development expenses both in absolute dollars and as a percentage of
revenues was due primarily to additional personnel expenses attributable to an
increase in staffing and an expansion in the number of projects under
development.
General and administrative expenses. General and administrative expenses
decreased 18.3% to $529,000 in the first quarter of 1998 from $649,000 in the
first quarter of 1997, and
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decreased to 9.9% from 20.3% of total revenues for the respective periods. The
reduction of general and administrative expenses in the first quarter of 1998 as
compared to the corresponding period in 1997 was due to the non-recurring cost
of hiring two executives in 1997. Further reduction of these expenses is due to
the transition of the Chief Technical Officer from administrative functions to
technical functions.
Interest income. Net interest income increased to $75,500 for the first
quarter of 1998 compared to $20,000 for the first quarter of 1997. This increase
was due to higher balances in cash and short-term investments as a result of the
Company's initial public offering of its Common Stock in March of 1998.
Income taxes. The Company's effective tax rate was 33.5% and 33.0% for
each of the quarters ended March 31, 1998 and 1997, respectively. Such effective
tax rates were lower than the statutory tax rates due primarily to research and
development tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1989, the Company has financed its operations
primarily through cash generated by operations. At March 31, 1998, the Company's
cash, cash equivalents and marketable securities aggregated approximately $42.8
million, of which cash and cash equivalents aggregated approximately $4.2
million. The Company's working capital was $42.8 million at March 31, 1998.
Accounts receivable decreased to $4.4 million at March 31, 1998 from $7.6
million at December 31, 1997 primarily as a result of increased collection
efforts on aged accounts.
The Company bills its customers, several of which are based in Korea and
Japan, in U.S. dollars at agreed-upon contractual terms. The Company has not
experienced any significant negative effects on its liquidity as a result of the
volatility and devaluation trends that recently have been experienced in certain
Asian markets. Accounts receivable at March 31, 1998 includes approximately
$850,000 from customers in this region.
The Company's capital expenditures were approximately $160,000 and
$145,000 for the three months ended March 31, 1998 and 1997, respectively.
Although the Company anticipates higher levels of equipment and
facilities-related expenditures in the foreseeable future, such future
expenditures are not anticipated to be significantly higher as a percentage of
total revenues as compared to prior periods.
The Company has an unsecured revolving credit facility with a bank
pursuant to which the Company may borrow up to a maximum of $3.0 million.
Borrowings under this line of credit bear interest at the bank's prime rate less
0.25% on amounts outstanding of less than $1.0 million and at the bank's prime
rate for aggregate principal amounts exceeding $1.0 million. No borrowings under
this line were outstanding as of March 31, 1998. This credit facility contains,
among other provisions, covenants which (i) mandate the amount of working
capital the
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Company must maintain at the end of each calendar quarter and (ii) restrict the
Company's ability to pay cash dividends.
On March 18, 1998, the Company consummated an initial public offering of
3,500,000 shares of its Common Stock at a price to the public of $16.00 per
share, of which 2,500,000 shares were issued and sold by the Company and
1,000,000 shares were sold by certain Selling Shareholders. The net proceeds to
the Company from the offering were approximately $36.1 million. On April 7,
1998, certain Selling Shareholders sold an additional 525,000 shares of the
Company's Common Stock at a price to the public of $16.00 per share upon the
consummation of the exercise of the Underwriters' over-allotment option. The
Company did not receive any of the proceeds from the sale of shares by the
Selling Shareholders.
The net proceeds received by the Company upon the consummation of such
offering, pending specific application, were invested in short-term,
investment-grade, interest-bearing instruments.
The Company believes that its existing available cash, credit facility and
the cash flow expected to be generated from operations, together with the
proceeds from its initial public offering, will be adequate to satisfy its
current and planned operations for at least the next 12 months. There can be no
assurance, however, that the Company will not require additional financing prior
to such time to fund its operations or possible acquisitions.
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PART II. OTHER INFORMATION
--------------------------
Item 2. Changes in Securities and Use of Proceeds
CHANGES IN SECURITIES
The following information relates to all securities of the Company sold by
the Company within the past quarter which were not registered under the
securities laws at the time of grant, issuance and/or sale:
1. The Company has, during the first quarter of 1998, granted stock
options pursuant to its 1993 Stock Option Plan which, at the time of
grant, had not yet been registered under the securities laws. The
following table sets forth certain information regarding such grants
during the quarter:
Number Exercise
of shares Price
--------- --------
175,000 $13.00
227,000 $15.00
The Company did not employ an underwriter in connection with the issuance
of the securities described above. The Company believes that the issuance of the
foregoing securities was exempt from registration under either (i) Section 4(2)
of the Securities Act of 1933, as amended (the "Act"), as transactions not
involving any public offering and such securities having been acquired for
investment and not with a view to distribution, or (ii) Rule 701 under the Act
as transactions made pursuant to a written compensatory benefit plan or pursuant
to a written contract relating to compensation. All recipients had adequate
access to information about the Company.
USE OF PROCEEDS
On March 12, 1998, the Commission declared effective the Company's
Registration Statement (Registration Statement No. 333-43827) as filed with the
Commission in connection with the Company's initial public offering of Common
Stock, which was managed by BT Alex. Brown Incorporated, BancAmerica Robertson
Stephens and SoundView Financial Group, Inc. Pursuant to such Registration
Statement, the Company registered and sold an aggregate of 2,500,000 shares of
its Common Stock, for a gross aggregate offering price of $40.0 million. The
Company incurred underwriting discounts and commissions of approximately $2.8
million. In connection with such offering, the Company incurred total expenses
of approximately $1.1 million. As of March 31, 1998, all of the $36.1 million in
net proceeds received by the Company
-13-
<PAGE>
upon consummation of such offering, pending specific application, were invested
in short-term, investment-grade, interest-bearing instruments.
For working capital restrictions and limitations on the payment of
dividends, see "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Item 5. Other Information.
INITIAL PUBLIC OFFERING
On March 18, 1998, the Company consummated an initial public offering of
3,500,000 shares of its Common Stock at a price to the public of $16.00 per
share, of which 2,500,000 shares were issued and sold by the Company and
1,000,000 shares were sold by certain Selling Shareholders. The net proceeds to
the Company from the offering were $36.1 million. On April 7, 1998, certain
Selling Shareholders sold an additional 525,000 shares of the Company's Common
Stock at a price to the public of $16.00 per share upon the consummation of the
exercise of the Underwriters' over-allotment option. The Company did not receive
any of the proceeds from the sale of shares by the Selling Shareholders.
The net proceeds received by the Company upon the consummation of such
offering, pending specific application, were invested in short-term,
investment-grade, interest-bearing instruments.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report on Form 10-Q is filed.
-14-
<PAGE>
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.
DSET Corporation
DATE: May 15, 1998 By: /s/ William P. McHale, Jr.
-------------------------------------
William P. McHale, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
DATE: May 15, 1998 By: /s/ Paul A. Lipari
-------------------------------------
Paul A. Lipari
Chief Financial Officer
(Principal Financial and Accounting
Officer)
- 15 -
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE UNAUDITED
FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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<NAME> DSET Corporation
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