SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File No. 0-23611
DSET Corporation
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-3000022
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1160 US Highway 22, Bridgewater, New Jersey 08807
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(Address of Principal Executive Offices) (Zip Code)
(908) 526-7500
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(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: X No:
---- ----
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of October 29, 1999:
Class Number of Shares
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Common Stock, no par value 10,611,888
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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
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 (audited).............. 2
Consolidated Statements of Income for the Three Months
Ended September 30, 1999 and 1998 (unaudited)............ 3
Consolidated Statements of Income for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)............ 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)............ 5
Notes to Consolidated Financial Statements (unaudited)..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 11
Forward-Looking Statements................................. 12
Results of Operations...................................... 13
Liquidity and Capital Resources............................ 15
Year 2000 Compliance....................................... 17
European Monetary Union.................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 20
PART II. OTHER INFORMATION............................................. 21
Item 2. Changes in Securities and Use of Proceeds.................. 21
Item 5. Other Information.......................................... 22
Item 6. Exhibits and Reports on Form 8-K........................... 23
SIGNATURES .............................................................. 24
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements.
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DSET CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
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ASSETS (unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 1,846,002 $ 1,159,070
Marketable securities................................ 38,015,556 43,863,980
Accounts receivable, net of allowance for doubtful
accounts of $251,403 and $175,979.................. 16,037,069 9,108,059
Deferred income taxes................................ 469,454 258,144
Prepaid expenses and other current assets............ 561,367 193,418
-------------- --------------
Total current assets............................... 56,929,448 54,582,671
Acquired technology, net............................... 4,488,108 --
Capitalized software development costs, net............ 618,649 --
Fixed assets, net...................................... 3,090,156 1,592,114
Goodwill, net.......................................... 1,501,683 129,864
Other assets........................................... 1,452,743 548,963
-------------- --------------
Total assets....................................... $ 68,080,787 $ 56,853,612
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 5,062,030 $ 3,560,994
Income taxes payable................................. 955,537 145,673
Deferred revenues.................................... 1,889,763 1,726,906
Note payable......................................... 1,068,750 111,657
Current portion of capital lease obligation.......... 126,198 --
-------------- --------------
Total current liabilities.......................... 9,102,278 5,545,230
Long term portion of capital lease obligation........ 602,219 --
Long term note payable............................... 1,282,029 --
Deferred income taxes................................ 762,131 119,127
-------------- --------------
Total liabilities.................................. 11,748,657 5,664,357
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Commitments
Shareholders' equity:
Common stock, no par value; 40,000,000 shares
authorized, 10,567,900 and 9,817,559 shares
issued and outstanding at September 30, 1999
and December 31, 1998, respectively.................. 43,735,456 41,912,361
Deferred stock compensation............................ (305,689) (494,306)
Retained earnings...................................... 13,091,437 9,731,077
Unrealized appreciation (depreciation)
on investments....................................... (189,074) 40,123
-------------- --------------
Total shareholders' equity......................... 56,332,130 51,189,255
-------------- --------------
Total liabilities and shareholders' equity......... $ 68,080,787 $ 56,853,612
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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DSET CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
1999 1998*
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<S> <C> <C>
REVENUES:
License revenues.............................. $ 6,558,838 $ 3,706,650
Service revenues.............................. 6,350,351 4,115,359
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Total revenues............................ 12,909,189 7,822,009
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COST OF REVENUES:
License revenues.............................. 622,169 392,599
Service revenues.............................. 2,078,658 1,220,544
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Total cost of revenues.................... 2,700,827 1,613,143
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Gross profit................................ 10,208,362 6,208,866
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OPERATING EXPENSES:
Sales and marketing........................... 3,351,419 2,296,794
Research and product development.............. 2,956,103 1,496,261
General and administrative.................... 1,201,819 600,391
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Total operating expenses.................. 7,509,341 4,393,446
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Operating income............................ 2,699,021 1,815,420
Amortization.................................... (16,702) (9,502)
Interest expense and other income (expense)..... (21,017) (17,117)
Interest income................................. 567,237 604,521
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Income before taxes............................. 3,228,539 2,393,322
Provision for income taxes...................... 1,093,326 849,399
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Net income...................................... $ 2,135,213 $ 1,543,923
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OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized appreciation (depreciation)
investments................................... (23,596) 56,508
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Comprehensive income............................ 2,111,617 1,600,431
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Net income per common share..................... $ 0.20 $ 0.16
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Weighted average number of common shares
outstanding................................... 10,512,423 9,556,439
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Net income per common share assuming
dilution...................................... $ 0.19 $ 0.13
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Weighted average number of common shares and
common equivalent shares outstanding.......... 11,507,859 11,451,547
============= =============
</TABLE>
*Certain amounts have been reclassified for comparative purpose
The accompanying notes are an integral part of these financial statements.
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DSET CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
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1999 1998*
------------------------------------
<S> <C> <C>
REVENUES:
License revenues............................ $ 15,957,911 $ 9,923,234
Service revenues............................ 13,545,246 10,161,077
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Total revenues.......................... 29,503,157 20,084,311
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COST OF REVENUES:
License revenues............................ 1,183,836 1,147,305
Service revenues............................ 4,982,869 2,854,423
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Total cost of revenues.................. 6,166,705 4,001,728
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Gross profit.............................. 23,336,452 16,082,583
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OPERATING EXPENSES:
Sales and marketing......................... 8,727,551 6,392,672
Research and product development............ 7,766,042 4,596,538
General and administrative.................. 3,187,824 1,777,144
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Total operating expenses................ 19,681,417 12,766,354
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Operating income.......................... 3,655,035 3,316,229
Amortization.................................. (103,545) (28,506)
Interest expense and other income (expense)... (96,472) (44,834)
Interest income............................... 1,674,522 1,276,641
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Income before taxes........................... 5,129,540 4,519,530
Provision for income taxes.................... 1,769,180 1,632,856
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Net income.................................... $ 3,360,360 $ 2,886,674
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OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized appreciation (depreciation)
investments................................. (151,271) 56,508
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Comprehensive income.......................... 3,209,089 2,943,182
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Net income per common share................... $ 0.33 $ 0.33
============= =============
Weighted average number of common shares
outstanding................................. 10,314,884 8,757,044
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Net income per common share assuming
dilution.................................... $ 0.30 $ 0.26
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Weighted average number of common shares and
common equivalent shares outstanding........ 11,347,781 10,912,984
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</TABLE>
*Certain amounts have been reclassified for comparative purpose
The accompanying notes are an integral part of these financial statements.
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DSET CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
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1999 1998*
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 3,360,360 $ 2,886,674
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes........................... 431,694 --
Tax benefit from exercise of stock options...... 734,919 525,285
Depreciation.................................... 593,036 350,062
Amortization.................................... 231,970 28,507
Amortization of deferred stock compensation..... 188,617 246,202
Loss from joint venture......................... 36,238 18,892
Loss (gain) on disposal of assets............... 4,535 (1,716)
Changes in assets and liabilities:
Accounts receivable........................... (6,860,261) 691,800
Other assets.................................. (481,707) (38,401)
Accounts payable and accrued expenses......... 1,330,797 565,724
Income taxes payable.......................... 779,112 673,565
Deferred revenues............................. 333,096 (309,702)
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Net cash provided by operating activities.... 682,406 5,636,892
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale/maturities of marketable
securities.......................................... 102,997,655 43,151,932
Purchases of marketable securities.................. (97,378,429) (82,323,988)
Acquisition of assets:
Acquired technology............................... (3,138,072) --
Goodwill.......................................... (1,351,163) --
Capitalized software development costs.............. (634,788) --
Acquisition of fixed assets......................... (1,754,912) (474,556)
Proceeds from disposition of fixed assets........... -- 3,059
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Net cash used in investing activities........ (1,259,709) (39,643,553)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital sale/leaseback................ 402,761 --
(Loans to) repayment from officers and
shareholders, net................................. (100,000) 100,000
Repayment of note payable........................... (111,657) (165,000)
Repayments capital lease obligation................. (15,045) --
Proceeds from the issuance of common stock (net).... -- 36,082,626
Proceeds from exercise of stock options............. 1,088,176 440,529
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Net cash provided by financing activities.... 1,264,235 36,458,155
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Net increase in cash and cash equivalents.... 686,932 2,451,494
Cash and cash equivalents, beginning of period........ 1,159,070 2,081,846
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Cash and cash equivalents, end of period.............. $ 1,846,002 $ 4,533,340
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes........ $ 492,701 $ 499,394
Cash paid during the period for interest............ 55,560 10,378
Non-cash activities:
Conversion of Series A preferred stock to common
stock............................................. -- 11,603,996
Lease of fixed assets............................... 340,702 --
Issuance of note payable in acquisition............. 2,282,031 --
</TABLE>
*Certain amounts have been reclassified for comparative purpose
The accompanying notes are an integral part of these financial statements.
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DSET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION:
The consolidated information presented for September 30, 1999 and 1998, and
for the three-month and nine-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 September 30, 1999 and
the results of its operations and its cash flows for the three-month and
nine-month periods ended September 30, 1999 and 1998. 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 1998 audited
financial statements and accompanying notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 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:
CONSOLIDATION
The consolidated entity includes DSET Corporation and its wholly owned
subsidiaries, DSET Acquisition Corp., a Delaware corporation, Konark Inc., a
California corporation, PIC Technologies, Inc., a Delaware corporation, and
Chengdu DSET Science & Technology Co., Ltd. (China).
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 short-term securities of grade A or better with maturities of two years or
less which are considered to be available for sale securities and are reported
at fair value. Unrealized depreciation on investments was $189,074 at September
30, 1999. At September 30, 1998 unrealized appreciation was $85,618.
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CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalization of software development 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 future gross revenue, estimated economic life and changes in
technology. These factors are considered on a product-by-product basis.
Amortization of software development costs is the greater of the amount computed
using (a) the ratio that current gross revenues for a product bear to the total
of current and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life ranging from
three to five years of the product including the period being reported on.
ACQUIRED TECHNOLOGY
Acquired technology represents the costs of feasible technology acquired
from external sources. At September 30, 1999, acquired technology reflects the
purchase price of certain assets of Network Programs LLC ("NPL") and Konark
Inc., as well as related costs to acquire such assets.
Amortization of acquired technology is the greater of the amount computed
using (a) the ratio that current gross revenues for a product bear to the total
of current and anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic life ranging from
three to five years of the product including the period being reported on.
REVENUE RECOGNITION
License revenue is recorded when the software has been shipped to the
Company's licensees and all significant obligations have been satisfied. Revenue
from run-time licenses is recognized as equipment using the Company's software
is deployed by the Company's customers. Custom application development service
revenue is recognized over the period in which the service is performed based on
the percentage of direct labor costs incurred to the total costs estimated.
Service revenue from maintenance contracts is deferred and recognized over
the term of the respective contracts (typically twelve months).
Software arrangements involving multiple elements are allocated to each
element based on vendor specific objective evidence of the elements.
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
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established, when necessary, to reduce the deferred tax assets to the amount
expected to be realized.
For certain stock options, the Company receives a tax deduction for the
difference between the fair market value of the Company's Common Stock on the
date of exercise of the stock option and the exercise price. To the extent the
amount deducted for income taxes exceeds the amount charged to operations for
financial statement purposes, the related tax benefits are credited to
shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts in the financial statements for cash and cash
equivalents, accounts receivable, and accounts payable and accrued expenses
approximate their market value because of the short maturity of those
instruments.
RECENTLY ISSUED ACCOUNTING STANDARDS
On September 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivatives
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after September 15, 1999 (January
1, 2000 for the Company). SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position.
NOTE 3 -- NPL ACQUISITION:
On January 25, 1999, DSET Acquisition Corp., a wholly-owned subsidiary of
the Company, consummated the acquisition of certain assets of NPL. The purchase
price consisted of $2,500,000 payable in cash to NPL.
The costs to acquire NPL are recorded as acquired technology and goodwill.
In addition, research and development costs associated with bringing the
acquired assets to market have been recorded as capitalized software development
costs. Amortization of these costs commenced with the shipment of the product in
the second quarter of 1999; amortization expense related to this asset was
$128,425 through September 30, 1999. All future development costs associated
with the product will be expensed.
NOTE 4 -- KONARK INC. ACQUISITION:
On September 30, 1999 DSET Corporation purchased the capital stock of
Konark Inc. ("Konark") and related technologies owned by an affiliate of Konark
for an aggregate of approximately $3.3 million financed through cash paid at
closing and certain deferred payments. The acquisition price, along with certain
other acquisition costs and associated deferred tax
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<PAGE>
liabilities, have been recorded as acquired technology and goodwill that will be
amortized over the next five years.
NOTE 5 -- 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."
NOTE 6 -- EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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 the denominator is 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 SEPTEMBER 30,
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1999 1998
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PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income
applicable to
common shares....... $ 2,135,213 10,512,423 $ 0.20 $ 1,543,923 9,556,439 $ 0.16
ASSUMING
DILUTION:
Net income
applicable to
common shares:
Warrants.......... -- 150,893 -- 154,634
Stock options..... -- 844,543 -- 1,740,474
----------- ---------- ----------- -----------
$ 2,135,213 11,507,859 $ 0.19 $ 1,543,923 11,451,547 $ 0.13
=========== ========== =========== ==========
</TABLE>
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<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1999 1998
------------------------------------ -------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income
applicable to
common shares....... $ 3,360,360 10,314,884 $ 0.33 $ 2,886,674 8,757,044 $ 0.33
ASSUMING
DILUTION:
Net income
applicable to
common shares:
Warrants.......... -- 152,543 -- 157,484
Stock options..... -- 880,354 -- 1,998,456
----------- ---------- ----------- -----------
$ 3,360,360 11,347,781 $ 0.30 $ 2,886,674 10,912,984 $ 0.26
=========== ========== =========== ==========
</TABLE>
NOTE 7 -- CAPITAL LEASE OBLIGATION:
In June 1999, the Company entered into a five year capital lease agreement
mainly for office furniture and fixtures in the new facilities in Bridgewater,
New Jersey and Plano, Texas at an annual interest rate of 8.21%. Annual lease
payments approximate $180,000. Assets recorded under this lease are included in
fixed assets as follows:
September 30, 1999 December 31, 1998
------------------ -----------------
Furniture and fixtures...... $ 743,462 $ --
Accumulated amortizations... (24,999) --
------------------ -----------------
$ 718,463 $ --
================== =================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
DSET is a leading provider of software solutions created specifically for
the global telecommunications marketplace. The DSET suite of electronic-bonding
gateways interconnects the operational support systems ("OSS") of competing
telecommunications providers that must trade information and share network
capabilities to serve customers. In addition, DSET's local number portability
("LNP") solutions also play a key role in enabling customers to change
telecommunications service providers without changing their local phone numbers.
The Telecommunications Act of 1996 encourages competition among providers of
local phone services by requiring the incumbent regional Bell operating
companies to allow competitive local exchange carriers ("CLECs") to lease
portions of the incumbents' networks and access their OSSs. Hundreds of CLECs
are vying to win customers from the incumbents by offering better pricing and
service. With DSET solutions, CLECs can complete key tasks that assist
"provisioning" or "service-fulfillment" of phone service for new customers in
days rather than weeks. In addition, DSET solutions help CLECs maintain a higher
level quality of service for their customers.
Historically, the Company has focused on the creation of applications that
could be distributed among many processors in order to solve highly complex
problems in the network management arena. Additionally, the Company developed
extensive knowledge of requirements for multiple protocols and multi-vendor
communications as well as real time operating systems. From this knowledge base
the Company created suites of tools that facilitate the development of
Telecommunications Management Network ("TMN") solutions. These tools and related
services are predominately sold to network equipment vendors, both domestically
and internationally. Until 1999, substantially all the Company's revenues had
been derived from application development tools and applications or services
based on TMN standards.
The Company's continued success will depend on continued growth in the
market for advanced telecommunications products and services such an LNP
solutions and OSS interconnect products.
The Company's revenues are generated from two sources: license and service
revenues from CLECs and license and service revenues from network equipment
vendors.
For the quarters ended September 30, 1999 and 1998, the Company derived
approximately 50.8% and 47.4%, respectively, of its total revenues from license
revenues and approximately 49.2% and 52.6%, respectively, of its total revenues
from service revenues. During the third quarter of 1999, revenues generated from
CLECs were approximately $7.4 million. Revenues generated from network equipment
vendors for tools and related services were approximately $5.5 million.
The Company had no customer accounting for more than 10% of revenues for
the quarter ending September 30, 1999, and one customer which
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accounted for 18.3% of revenues for the quarter ending September 30, 1998. The
Company had no customer accounting for more than 10% of revenues for the nine
months ending September 30, 1999 and one customer which accounted for 16.8% of
revenues for the nine months ending September 30, 1998. 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 portion of its revenues from international sales
which constituted approximately 4.7% and 9.5% of the Company's total revenues in
the quarters ended September 30, 1999 and 1998, 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.
On January 25, 1999, DSET Acquisition Corp., a wholly-owned subsidiary of
the Company, consummated the acquisition of certain assets of Network Programs
LLC ("NPL"). The purchase price consisted of $2.5 million payable in cash to
NPL. NPL provided specialized software to CLECs.
On September 30, 1999, the Company completed the purchase of the capital
stock of Konark Inc. ("Konark") and related technologies owned by an affiliate
of Konark for an aggregate of approximately $3.3 million financed through cash
paid at closing and certain deferred payments.
FORWARD-LOOKING STATEMENTS
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 (the "Exchange Act").
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. In particular, the Company's statements relating to the Year 2000
compliance of its products and internal systems are forward-looking statements
intended to qualify for the safe harbor provided by the Exchange Act. Such
forward-looking statements involve risks and uncertainties, including, but not
limited to: (i) the Company's dependence on the rapidly evolving
telecommunications industry in general, and the local exchange carrier market in
particular, (ii) the Company's dependence on the TMN industry standard, (iii)
rapid technological change in the Company's industry, (iv) risks associated with
the development and marketing of new products, including carrier-to-carrier
applications, such as LNP or OSS gateways, (v) risks associated with
acquisitions of businesses by the Company, including risks relating to
unanticipated liabilities or expenses or lower than expected revenues of such
acquired businesses, and (vi) risks and variables, including engineering costs,
associated with the remediation of certain of the Company's products which are
not Year 2000 compliant. The success of the Company depends to a large degree
upon increased utilization of its carrier-to-carrier applications, such as LNP
or OSS interconnection gateways, by telecommunications carriers and network
equipment vendors, the buying patterns of CLECs and the continued demand for
application development tools and custom application development services. As a
result of such risks and others expressed from time to time in the Company's
filings with the Securities and Exchange Commission (the
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<PAGE>
"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 SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES. Total revenues increased 65.0% to $12.9 million in the third
quarter of 1999 from $7.8 million in the third quarter of 1998. License revenues
increased 76.9% to $6.6 million in the third quarter of 1999 from $3.7 million
in the third quarter of 1998. This increase was primarily attributable to sales
of carrier-to-carrier products. Service revenues increased 54.3% to $6.3 million
in the third quarter of 1999 from $4.1 million in the third quarter of 1998.
This increase was primarily attributable to increased custom development
projects for network equipment vendors, CLECs and other carriers. In the
quarters ended September 30, 1999 and 1998, the Company derived approximately
50.8% and 47.4%, respectively, of its total revenues from license revenues and
approximately 49.2% and 52.6%, respectively, of its total revenues from service
revenues.
GROSS PROFIT. The Company's gross profit increased 64.4% to $10.2 million
in the third quarter of 1999 from $6.2 million in the third quarter of 1998.
Gross profit percentage decreased slightly to 79.1% of total revenues in the
third quarter of 1999 from 79.4% in the third quarter of 1998. Gross profit
percentage for license revenues increased to 90.5% for the third quarter of 1999
from 89.4% in the third quarter of 1998 due to less third party software as a
component of revenues and sales of more internally developed products. Gross
profit percentage for service revenues decreased to 67.3% in the third quarter
of 1999 from 70.3% in the third quarter of 1998. This decrease was primarily
attributable to increased use of outside consultants to complete custom
development projects. The Company anticipates that it will continue to
experience downward pressure relative to service revenues due to such
outsourcing.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 45.9%
to $3.4 million in the third quarter of 1999 from $2.3 million in the third
quarter of 1998, and decreased to 26.0% of total revenues in the third quarter
of 1999 from 29.3% of total revenues in the third quarter of 1998. The increase
in such costs in absolute dollars was primarily attributable to the hiring of
additional personnel for the Company's sales force and the marketing
departments.
RESEARCH AND PRODUCT DEVELOPMENT EXPENSES. Research and product development
expenses increased 97.6% to $3.0 million in the third quarter of 1999 from $1.5
million in the third quarter of 1998, and increased to 22.9% of total revenues
in the third quarter of 1999 from 19.1% of total revenues in the third quarter
of 1998. This increase in research and product development expenses both in
absolute dollars and as a precentage of revenues was due primarily to the hiring
of former NPL employees and additional personnel expenses attributable to an
increase in staffing due to expansion in the number of projects under
development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 100.2% to $1.2 million in the third quarter of 1999 from $600,391 in
the third quarter of 1998, and increased to 9.3% of total revenues in the third
quarter of 1999 from 7.7% of total revenues in the third quarter of 1998. The
increase of general and administrative expenses was due to planned additional
staffing, recruiting and relocation costs and outside services costs.
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<PAGE>
INTEREST INCOME. Interest income decreased to $567,237 from $604,521 for
the quarter ending September 30, 1999 reflecting lower interest rates and lower
average daily balances in 1999 as compared to the corresponding period in 1998.
INTEREST EXPENSE AND OTHER INCOME AND EXPENSES, NET. Net interest expense
and other income and expense increased to $21,017 for the quarter ending
September 30, 1999 from $17,117 from the quarter ending September 30, 1998.
INCOME TAXES. The Company's effective tax rate was 33.9% and 35.5% for each
of the quarters ended September 30, 1999 and 1998, respectively. Such effective
tax rates are lower than statutory tax rates due primarily to research and
development tax credits. As of September 30, 1999, the research and development
tax credit has not been renewed. All indications are that it will be renewed. If
this provision is not retroactively renewed to June 30, 1999, the loss of this
credit will result in a higher effective tax rate for the Company in future
periods. The higher rate in 1998 was due to the non-deductible nature of
deferred stock compensation associated with the issuance of stock options.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES. Total revenues increased 46.9% to $29.5 million for the nine
months ending September 30, 1999 from $20.1 million for the nine months ending
September 30, 1998. License revenues increased 60.8% to $16.0 million for the
nine months ending September 30, 1999 from $9.9 million for the nine months
ending September 30, 1998. The increase in revenue is due to the sale of
carrier-to-carrier products. Service revenues increased 33.3% to $13.5 million
for the nine months ending September 30, 1999 from $10.2 million for the nine
months ending September 30, 1998. This increase was primarily attributable to an
increase in custom development projects and maintenance fees. In the nine months
ending September 30, 1999 and 1998, the Company derived approximately 54.1% and
49.4%, respectively, of its total revenues from license revenues and
approximately 45.9% and 50.6%, respectively, of its total revenues from service
revenues.
GROSS PROFIT. The Company's gross profit increased 45.1% to $23.3 million
for the nine months ending September 30, 1999 from $16.1 million for the nine
months ending September 30, 1998. Gross profit percentage decreased to 79.1% of
total revenues for the nine months ending September 30, 1999 from 80.1% for the
nine months ending September 30, 1998. Gross profit percentage for license
revenues increased to 92.6% for the nine months ending September 30, 1999 from
88.4% for the nine months ending September 30, 1998 due to less third party
software as a component of revenues and sales of more internally developed
products. Gross profit percentage for service revenues decreased to 63.2% for
the nine months ending September 30, 1999 from 71.9% for the nine months ending
September 30, 1998. This decrease was primarily attributable to increased use of
outside consultants to complete custom development projects. The Company
anticipates that it will continue to experience downward pressure relative to
service revenues due to such outsourcing.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 36.5%
to $8.7 million for the nine months ending September 30, 1999 from $6.4 million
for the nine months ending September 30, 1998, and decreased to 29.6% of total
revenues for the nine months ending September 30, 1999 from 31.8% of total
revenues for the nine months ending September 30,
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<PAGE>
1998. This increase in costs was primarily due to the hiring of additional
personnel for the Company's sales force and the marketing department and a
provision for bad debts. The decrease as a percentage of revenue is attributable
to lower commission rates associated with employed sales personnel as compared
to outside agents' commission.
RESEARCH AND PRODUCT DEVELOPMENT EXPENSES. Research and product development
expenses increased 69.0% to $7.8 million for the nine months ending September
30, 1999 from $4.6 million for the nine months ending September 30, 1998, and
increased to 26.3% of total revenues for the nine months ending September 30,
1999 from 22.9% of total revenues for the nine months ending September 30, 1998.
This increase in research and product development expenses both in absolute
dollars and as a percentage of revenues was due primarily to the hiring of NPL
employees, the hiring of additional outside consultants and additional personnel
expenses attributable to an increase in staffing due to an expansion in the
number of projects under development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 79.4% to $3.2 million for the nine months ending September 30, 1999
from $1.8 million for the nine months ending September 30, 1998, and increased
to 10.8% of total revenues for the nine months ending September 30, 1999 from
8.9% of total revenues for the nine months ending September 30, 1998. The
increase of general and administrative expenses was due to additional staffing,
recruiting and relocation costs and outside services costs.
INTEREST INCOME. Interest income increased to $1.7 million from $1.3
million for the nine months ending September 30, 1999 due primarily to interest
earned on higher cash and short-term investment balances available as a result
of the Company's initial public offering of its Common Stock in March 1998.
INTEREST EXPENSE AND OTHER INCOME AND EXPENSES, NET. Net interest expense
and other income and expense increased to $96,472 for the nine months ending
September 30, 1999 from $44,834 from the nine months ending September 30, 1998,
reflecting higher interest, a larger loss from the Company's European joint
venture and other miscellaneous cost increases.
INCOME TAXES. The Company's effective tax rate was 34.5% and 36.1% for each
of the nine months ending September 30, 1999 and 1998, respectively. Such
effective tax rates were lower than the statutory tax rates due primarily to
research and development tax credits. The rate is higher in 1998 due to the
non-deductibility of deferred stock compensation associated with the issuance of
stock options. As of September 30, 1999, the research and development tax credit
has not been renewed. All indications are that it will be renewed. If this
provision in the tax code is not retroactively renewed to June 30, 1999, the
loss of this credit will result in a higher effective tax rate for the Company
in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1989, the Company has financed its operations
primarily through cash generated by operations and cash raised through its March
1998 initial public offering. At September 30, 1999, the Company's cash, cash
equivalents and marketable securities aggregated approximately $39.9 million, of
which cash and cash equivalents aggregated approximately $1.8 million. The
Company's working capital was $48.8 million at September 30, 1999.
-15-
<PAGE>
Accounts receivable increased to $16.0 million at September 30, 1999 from
$9.1 million at December 31, 1998 as a result of increased unbilled project
revenue and delays in the collection of certain accounts receivable. Included in
accounts receivable was approximately $4.3 million of unbilled project revenue
at September 30, 1999 as compared to $1.5 million at December 31, 1998.
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 have been experienced in certain Asian
markets, although no assurance can be made that the Company will not experience
difficulty collecting accounts receivable from such customers in the future.
Accounts receivable at September 30, 1999 includes approximately $753,865 from
customers in this region.
The Company's capital expenditures were approximately $2.1 million and
$474,556 for the nine months ending September 30, 1999 and 1998, respectively.
The increase in equipment and facilities-related expenditures are primarily the
result of the move to an expanded corporate headquarters facility in
Bridgewater, New Jersey and the move of the Texas office to accommodate current
and future growth.
In June 1999, the Company entered into a five year capital lease agreement
at an annual interest rate of 8.21%. Assets recorded under this lease are
included in fixed assets. Annual lease payments approximate $180,000.
In August 1997, the Company obtained 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 aggregate principal 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 September 30,
1999. This credit facility contains, among other provisions, covenants which (i)
mandate the amount of working capital the Company must maintain at the end of
each calendar quarter and (ii) restrict the Company's ability to pay cash
dividends. The unsecured revolving credit facility expires on August 5, 2000.
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, are invested in short-term,
investment-grade, interest-bearing instruments.
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<PAGE>
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.
ACQUISITIONS
On January 25, 1999, DSET Acquisition Corp., a wholly owned subsidiary of
the Company, acquired certain assets of NPL for $2.5 million. NPL was a New
Jersey-based company which specialized in software aimed at reducing the time
necessary for a CLEC to provide prospective customers with sales proposals that
clearly define the CLEC's current service offering compared to the incumbent
local exchange carrier's current service offering.
On September 30, 1999, DSET Corporation purchased the capital stock of
Konark and related technologies owned by an affiliate of Konark for an aggregate
of approximately $3.3 million financed through cash paid at closing and certain
deferred payments. The purchase provided DSET with all rights to: (i) two
electronic-bonding gateways that the Company previously had been reselling; and
(ii) a new Electronic Access Ordering product. Electronic Access Ordering
facilitates the ordering of high-speed access circuits by a CLEC from an
incumbent local exchange carrier enabling the CLEC to rapidly activate new
service for its customers.
YEAR 2000 COMPLIANCE
ASSESSMENT. The Company believes that its exposure to Year 2000 problems
lies primarily in the following areas: (i) its internal operating systems; (ii)
its tool suites, custom applications and pre-built electronic bonding gateways
and network management applications; and (iii) systems of third parties with
whom the Company has material relationships. The Company has completed its
assessment with respect to its internal operating systems and tool suites. The
Company continues to evaluate its exposure with respect to certain custom
applications and its relationships with third parties.
INTERNAL OPERATING SYSTEMS. The Company believes its internal operating
computer systems and management information system are currently Year 2000
compliant, and the Company does not believe that there will be future
significant costs related to future maintenance of such compliance.
TOOL SUITES AND PRE-BUILT APPLICATIONS. The Company has conducted an
internal review and believes that its tool suites (and their update if
applicable) developed after May 27, 1997 have been tested and are Year 2000
compliant. These products include:
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PRODUCT NAME VERSION
------------ -------
ASN.C/C++ 3.5.3 and later
Agent Tester 2.0.1 and later
CMIP Translator 1.0.1 and later
Distributed Systems Generator 4.2.0 and later
GDMO Agent Emulator 2.0.0 and later
GDMO Agent Toolkit 2.0.0 and later
GDMO Compiler 3.0.0 and later
LNP Test Extensions 2.0.0 and later
Manager Code Generator 1.0.4 and later
Manager Toolkit 1.0.0 and later
Marben OSIAM Stack 2.6f/2.6g and later
Visual Agent Builder 1.0.0 and later
LSMS 2.0.1 and later
The Company's pre-built electronic bonding gateways and network management
applications have been tested for Year 2000 compliance. All modifications to
these applications are analyzed for Year 2000 compliance prior to their release.
CUSTOM APPLICATIONS. In November 1998, the Company determined that certain
custom applications developed and delivered to approximately ten customers were
not Year 2000 compliant. All of these customers were notified of such Year 2000
compliance status in November 1998. The Company has also analyzed the extent to
which any of the affected custom applications were integrated by customers into
other products which may expose the Company to claims from its customers. The
Company has agreed to assist each of these customers with any and all
remediation solutions required to achieve Year 2000 compliance with the
Company's products. To date, the Company's remediation has not significantly or
materially adversely affected the Company's financial condition and results of
operations. The Company has incurred certain remediation expenses related to
such compliance, pursuant to the warranty provisions of the applicable
agreements. A failure to properly implement any correction, or problems with any
correction, could cause errors in customers' products which may materially
impact the functionality of those products.
THIRD PARTY RELATIONSHIPS. The Company is dependent on various third party
software and hardware vendors and suppliers. The Company is also dependent on
third party service providers and partners such as telephone companies, banks,
insurance carriers, auditors and marketing partners. The failure of such third
parties to deliver Year 2000 compliant products or to remediate their internal
systems could jeopardize the Company's ability to meet its obligations to its
customers. As a result, the Company is presently conducting inquiries of its
outside vendors, suppliers, service providers and marketing partners to identify
and resolve Year 2000 exposure. To date, the Company has identified one company
whose product is not Year 2000 certified. Tests are planned to verify Year 2000
compliance for this product. Upon
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<PAGE>
completion of the testing, the Company will be able to assess such exposure and
financial inpact, if any, should such party fail to be Year 2000 compliant.
RISKS OF YEAR 2000 ISSUES. The Company expects to identify and resolve all
Year 2000 problems that could materially adversely affect its business,
financial condition or results of operations. However, the Company believes that
it is not possible to determine with complete certainty that all Year 2000
problems affecting the Company have been identified or corrected. Further, the
Company cannot accurately predict how many failures related to the Year 2000
Problem will occur or the severity, duration or financial consequences of such
failures. The Company believes that the most reasonably likely worst case Year
2000 scenario would include a combination of some or all of the following:
o The Company's internal operating systems may fail or provide erroneous
information. Such failure could result in: reduced utilization of
technical or other personnel; the inability to timely generate
financial reports and statements; and improper billing and record
keeping;
o A number of system failures that may require significant efforts
by the Company or its customers to prevent or alleviate material
business disruptions; and
o Failure in HVAC, lighting, telephone, security and similar systems on
which the Company relies.
Additionally, the Company cannot guarantee that its products will not be
used by other companies, or its customers, to build applications which might not
be Year 2000 compliant, or that the Company's products or applications built
with the Company's products will not be integrated by the Company or its
customers or interact with non-compliant software or other products which may
expose the Company to claims from its customers.
COSTS. Other than time spent by the Company's personnel, the costs
associated with remediating non-compliant custom applications and assessing Year
2000 compliance issues have not been significant to date. The Company believes
that the continued analysis of compliance of new releases of products and
evaluation of potential Year 2000 problems will result in aggregate expenditures
of less than $100,000.
CONTINGENCY PLANS. The Company believes its plans for addressing the Year
2000 Problem are adequate. The Company does not believe it will incur a material
financial impact from system failures, or from the costs associated with
assessing the risks of failure, arising from the Year 2000 Problem. The Company
has assembled a response team which will be on 24 hour call during the change of
1999 to the year 2000. Consequently, the Company does not intend to create a
detailed contingency plan. In the event that the Company does not adequately
identify and resolve its Year 2000 issues, the absence of a detailed contingency
plan may materially adversely affect the Company's business, financial condition
and results of operations.
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<PAGE>
EUROPEAN MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing currencies and the euro.
At such time, these participating countries adopted the euro as their common
legal currency. The eleven participating countries now issue sovereign debt
exclusively in euros and will redenominate outstanding sovereign debt. The
legacy currencies will continue to be used as legal tender through January 1,
2002, at which point the legacy currencies will be canceled and euro bills and
coins will be used for cash transactions in the participating countries.
The Company does not denominate its international revenues in foreign
currencies. The Company currently does not believe that the euro conversion will
have a material impact on the Company's results of operations or financial
condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that it is not subject to a material impact to its
financial position or results of operations relating to market risk associated
with derivative securities.
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<PAGE>
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:
OPTION GRANTS
1. During the third quarter of 1999, the Company granted stock options
pursuant to its 1998 Stock Plan which were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). All of
such option grants were granted at the then current fair market value
of the Common Stock. The following table sets forth certain
information regarding such grants during the quarter:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
227,750 $11.38
COMMON STOCK ISSUANCES
2. During the third quarter of 1999, the Company issued shares of Common
Stock pursuant to exercises of stock options granted under its 1993
Stock Option Plan and 1998 Stock Plan which were not registered under
the Securities Act. The following table sets forth certain
information regarding such issuances during the quarter:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
99,943 $2.63
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 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 Securities 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.
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<PAGE>
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
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 September 30, 1999, all of the $36.1
million in net proceeds received by the Company upon consummation of such
offering, pending specific application, were invested in short-term,
investment-grade, interest-bearing instruments.
On January 25, 1999, DSET Acquisition Corp., a wholly-owned subsidiary of
the Company, consummated the acquisition of certain assets of NPL. The purchase
price consisted of $2.5 million payable in cash to NPL. NPL provided specialized
software to CLECs.
On September 30, 1999, DSET Corporation purchased the capital stock of
Konark and related technologies owned by an affiliate of Konark for an aggregate
of approximately $3.3 million financed through cash paid at closing and certain
deferred payments. Konark provided software which enabled CLECs to rapidly
activate new services for their customers.
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.
RESIGNATION OF DIRECTOR
Effective September 20, 1999, Mr. John Thibault resigned his position as
member of the Company's Board of Directors to pursue other interests.
APPOINTMENT OF DIRECTOR
On September 14, 1999, Charles Daniel Yost joined the Company's Board of
Directors. Mr. Yost currently serves as the president and chief operating
officer of Allegiance Telecom, Inc. Prior to joining Allegiance Telecom, Mr.
Yost was the president and chief operating officer of NETCOM On-Line
Communication Services, Inc. Prior to that, Mr. Yost served as the president of
the Southwest Region of AT&T Wireless Services, Inc.
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<PAGE>
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.
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<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: November 15, 1999 By: /s/ William P. McHale, Jr.
-----------------------------------
William P. McHale, Jr.
President and Chief Executive
Officer
(Principal Executive Officer)
DATE: November 15, 1999 By: /s/ Bruce M. Crowell
-----------------------------------
Bruce M. Crowell
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<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
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q.
</LEGEND>
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