<PAGE>
CONFORMED COPY
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 June 30, 2000
Commission File Number 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)
1160 U. S. 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: X No:
----------- ----------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of July 31, 2000:
<TABLE>
<CAPTION>
Class Number of Shares
----- ----------------
<S> <C>
Common Stock, no par value 11,450,015
</TABLE>
<PAGE>
DSET CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION.................................................................... 1
Item 1. Financial Statements............................................................. 1
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999............ 2
Consolidated Statements of Net Income and Comprehensive Income for the
Three Months Ended June 30, 2000 and 1999.................................. 3
Consolidated Statements of Net Income and Comprehensive Income for the
Six Months Ended June 30, 2000 and 1999.................................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999..................................................... 5
Notes to Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 14
Results of Operations............................................................ 17
Liquidity and Capital Resources.................................................. 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 23
PART II. OTHER INFORMATION........................................................................ 24
Item 2. Use of Proceeds.................................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders............................. 24
Item 6. Exhibits and Reports on Form 8-K................................................. 24
SIGNATURES............................................................................................. 25
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
<PAGE>
DSET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999*
------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,044,975 $ 2,212,759
Marketable securities 34,472,196 37,945,597
Accounts receivable, net of allowance for doubtful accounts
of $1,298,000 and $600,000 19,242,143 20,132,404
Income taxes receivable 430,655 --
Deferred income taxes 975,358 735,774
Prepaid licenses 696,000 25,000
Prepaid expenses and other current assets 2,477,523 1,963,944
------------ ------------
Total current assets 69,338,850 63,015,478
Acquired technology, net 4,874,563 4,343,313
Software licenses 2,500,000 --
Software development costs, net 500,300 564,854
Fixed assets, net 4,471,148 3,428,268
Goodwill, net 1,121,158 1,258,175
Other assets 825,056 885,290
------------ ------------
Total assets $ 83,631,075 $ 73,495,378
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,346,746 $ 6,067,174
Income taxes payable -- 394,206
Deferred revenues 3,459,435 1,797,675
Current portion of notes payable 945,026 1,000,000
Current portion of lease obligation 135,665 130,415
------------ ------------
Total current liabilities 12,886,872 9,389,470
Deferred income taxes 627,003 710,765
Long-term notes payable 837,004 1,310,560
Capital lease obligation 492,501 561,670
------------ ------------
Total liabilities 14,843,380 11,972,465
------------ ------------
Commitments
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, no
shares issued or outstanding at June 30, 2000 and December 31, 1999 -- --
Common stock, no par value; 40,000,000 shares authorized, 11,445,792
and 10,860,770 shares issued and outstanding at June 30, 2000
and December 31, 1999, respectively 49,560,805 45,636,672
Deferred stock compensation (130,927) (196,737)
Retained earnings 19,340,005 16,247,807
Accumulated other comprehensive income 17,812 (164,829)
------------ ------------
Total shareholders' equity 68,787,695 61,522,913
------------ ------------
Total liabilities and shareholders' equity $ 83,631,075 $ 73,495,378
============ ============
</TABLE>
* Certain amounts have been reclassified for comparative purposes.
2
<PAGE>
DSET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999*
---- ----
(UNAUDITED) (UNAUDITED)
REVENUES:
<S> <C> <C>
License revenues $ 12,205,568 $ 5,245,927
Service revenues 4,028,048 3,871,756
------------ ------------
Total revenues 16,233,616 9,117,683
------------ ------------
COST OF REVENUES:
License revenues 899,219 278,557
Service revenues 2,552,328 1,637,264
------------ ------------
Total cost of revenues 3,451,547 1,915,821
------------ ------------
Gross profit 12,782,069 7,201,862
------------ ------------
OPERATING EXPENSES:
Sales and marketing 4,245,346 2,981,478
Research and product development 4,188,071 2,464,042
General and administrative 1,509,427 1,175,691
Amortization of goodwill and other intangibles 103,284 77,341
------------ ------------
Total operating expenses 10,046,128 6,698,552
------------ ------------
Operating income 2,735,941 503,310
Interest expense and other income (expense) (40,754) (61,379)
Interest income 582,845 570,774
------------ ------------
Income before income taxes 3,278,032 1,012,705
Provision for income taxes 1,106,534 359,509
------------ ------------
Net income 2,171,498 653,196
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized appreciation/(depreciation)
on investments 85,881 (74,261)
Cumulative translation adjustment (27) (134)
------------ ------------
Comprehensive income $ 2,257,352 $ 578,801
============ ============
Net income applicable to common shares $ 2,171,498 $ 653,196
============ ============
Net income per common share $ 0.19 $ 0.06
============ ============
Weighted average number of common shares
outstanding 11,420,067 10,403,646
============ ============
Net income per common share assuming dilution $ 0.18 $ 0.06
============ ============
Weighted average number of common shares and
common equivalent shares outstanding 12,204,396 11,773,392
============ ============
</TABLE>
* Certain amounts have been reclassified for comparative purposes.
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
DSET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999*
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES:
License revenues $ 20,300,987 $ 9,399,073
Service revenues 7,531,042 7,194,896
------------ ------------
Total revenues 27,832,029 16,593,969
------------ ------------
COST OF REVENUES:
License revenues 1,698,438 561,666
Service revenues 4,787,973 2,904,212
------------ ------------
Total cost of revenues 6,486,411 3,465,878
------------ ------------
Gross profit 21,345,618 13,128,091
------------ ------------
OPERATING EXPENSES:
Sales and marketing 6,955,349 5,376,132
Research and product development 7,606,422 4,809,940
General and administrative 2,803,927 1,986,004
Amortization of goodwill and other intangibles 206,568 86,844
------------ ------------
Total operating expenses 17,572,266 12,258,920
------------ ------------
Operating income 3,773,352 869,171
Interest expense and other income (expense) (96,053) (75,378)
Interest income 981,280 1,107,209
------------ ------------
Income before income taxes 4,658,579 1,901,002
Provision for income taxes 1,566,381 675,854
------------ ------------
Net income 3,092,198 1,225,148
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized appreciation/(depreciation)
on investments 183,388 (127,675)
Cumulative translation adjustment (747) (219)
------------ ------------
Comprehensive income $ 3,274,839 $ 1,097,254
============ ============
Net income applicable to common shares $ 3,092,198 $ 1,225,148
============ ============
Net income per common share $ 0.28 $ 0.12
============ ============
Weighted average number of common shares
outstanding 11,228,763 10,216,115
============ ============
Net income per common share assuming dilution $ 0.26 $ 0.11
============ ============
Weighted average number of common shares and
common equivalent shares outstanding 12,056,417 11,502,543
============ ============
* Certain amounts have been reclassified for comparative purposes.
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
DSET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999*
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,092,198 $ 1,225,148
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (208,544) (119,444)
Tax benefit from exercise of stock options 2,117,448 1,273,083
Amortization of deferred stock compensation 65,810 128,456
Depreciation 546,163 366,442
Loss from joint venture -- 36,238
Loss (gain) on disposal of assets 463 (120)
Amortization 692,617 86,843
Bad debt expense 698,000 47,685
Changes in assets and liabilities:
Accounts receivable 192,261 (1,219,343)
Prepaid licenses (671,000) 16,667
Prepaid assets and other current assets (513,579) (863,457)
Other assets (9,318) (165,529)
Accounts payable and accrued expenses 1,001,044 (104,999)
Income taxes payable (824,861) (1,029,641)
Deferred revenues 1,661,760 110,952
------------ ------------
Net cash provided by operating activities 7,840,462 (211,019)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (18,059,148) (7,274,969)
Redemption of marketable securities 21,601,135 7,617,248
Acquisitions of businesses -- (3,303,963)
Purchase of acquired technology (952,746) --
Acquisition of software licenses (1,250,000) --
Acquisition of fixed assets (1,590,506) (1,025,314)
Proceeds on disposition of fixed assets 1,000 --
------------ ------------
Net cash used in investing activities (250,265) (3,986,998)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from capital sale/leaseback -- 279,101
Repayment from officers and shareholders -- 907
Repayment of notes payable (500,000) (111,657)
Repayments capital lease obligation (63,919) --
Proceeds from the exercise of stock options 1,806,685 833,238
------------ ------------
Net cash provided by financing activities 1,242,766 1,001,589
------------ ------------
Effect of foreign exchange rate changes on cash (747) (219)
------------ ------------
Net (decrease) increase in cash and cash equivalents 8,832,216 (3,196,647)
------------ ------------
Cash and cash equivalents, beginning of period 2,212,759 9,198,270
------------ ------------
Cash and cash equivalents, end of period $ 11,044,975 $ 6,001,623
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 673,150 $ 490,472
Cash paid during the period for interest $ 27,820 $ 39,198
Non-cash activities:
Lease of fixed assets $ -- $ 399,071
Deferred payment of software licenses $ 1,250,000 $ --
* Certain amounts have been reclassified for comparative purposes.
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
DSET CORPORATION AND SUBSIDIARIES
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated information presented as of June 30, 2000 and for the
three-month and six-month periods ended June 30, 2000 and 1999 is
unaudited, but in the opinion of DSET Corporation's (the "Company")
management, contains 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 June 30, 2000 and
the results of its operations for the three-month and six-month periods
ended June 30, 2000 and 1999 and its cash flows for the six-month periods
ended June 30, 2000 and 1999. 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 1999
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, 1999. The December 31, 1999 balance sheet data was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all wholly-owned
subsidiaries from the respective dates of their acquisition or formation.
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). All intercompany
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The marketable securities portfolio held by the Company are considered to
be available-for-sale securities and are reported at fair value.
Unrealized appreciation was $19,272 (net of deferred taxes of $12,064) at
June 30, 2000. Cost is determined on a specific identification basis.
6
<PAGE>
DSET CORPORATION
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
FIXED ASSETS
Equipment, furniture and purchased software are stated at cost less
accumulated depreciation. Depreciation is calculated using a straight-line
method over estimated useful lives ranging from three to seven years.
Leasehold improvements are amortized over the lesser of the estimated
useful life or the lease term.
GOODWILL
The Company amortizes goodwill using a straight-line method over its
estimated useful life of five years. The Company periodically assesses the
realizability of the asset based on estimated future cash flows.
Accumulated amortizaton was $305,014 as of June 30, 2000.
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 judgement by management with respect to certain
factors, including the anticipated future gross revenues, 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 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. Accumulated amortization
was $896,602 as of June 30, 2000.
ACQUIRED TECHNOLOGY
Acquired technology represents the costs of feasible technology acquired
from external sources. At June 30, 2000, acquired technology mainly
reflects the purchase of certain assets of Network Programs LLC ("NPL")
and Konark Inc.("Konark"), as well as related costs to acquire such
assets. Accumulated amortization was $771,776 as of June 30, 2000.
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.
SOFTWARE LICENSES
Software licenses represent the costs to acquire software licenses from
external sources, a number of which were purchased in June of 2000.
Amortization of software licenses is the greater of the amount computed
using (a) the ratio of current gross revenues for products generated from
these licenses to the total of current and anticipated future gross
revenues for
7
<PAGE>
DSET CORPORATION
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
products related to these licenses or (b) the straight line
method over the remaining estimated economic life of five years from the
date of the license agreement.
RESEARCH AND PRODUCT DEVELOPMENT
Research and development costs are charged to expense as incurred.
However, the costs incurrred for the development of computer software that
will be sold, leased, or otherwise marketed are capitalized when
technological feasibility has been established.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
REVENUE RECOGNITION
License revenues are recorded when the software has been shipped to the
Company's licensees and all significant obligations have been satisfied.
Any contract holdbacks or contingent charges are recognized as revenue
when they are satisfied. Revenues from run-time licenses are recognized as
equipment using the Company's software is deployed by the Company's
customers. Notification is typically received from customers pursuant to
quarterly reports or via purchase orders for individual licenses.
Custom application development and gateway development 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 estimated
direct labor costs. When the engineering of a product is not yet
completed, revenue is recognized on orders for that product using the
percentage of completion method as defined above. Any revenue recognized
in excess of amounts invoiced to the customer for progress billings are
recorded as unbilled accounts receivable.
Service revenue from maintenance contracts is deferred and recognized over
the term of the respective contracts (typically twelve months).
Revenues under software arrangements involving multiple elements of a sale
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 established, when necessary, to reduce the
deferred tax assets to the amount expected to be realized.
8
<PAGE>
DSET CORPORATION
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
For certain stock options, the Company receives a tax deduction for the
difference between the fair market value of the Company's common stock at
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, accounts payable and accrued expenses,
and notes payable approximate their market value because of the short
maturity of those instruments.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Estimates are used when accounting for certain items such as
the allowance for doubtful accounts, depreciation and amortization, and
income taxes. Additionally, the Company evaluates the useful lives of its
acquired technology and software development costs based upon changes in
technology and industry conditions.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 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 June
15, 2000 (January 1, 2001 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB 101"). A second amendment to SAB 101 has been issued
by the Securities and Exchange Commission which delays the implemtation
date of SAB 101 to no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company is currently evaluating the
impact of SAB 101 on its results of operations.
9
<PAGE>
DSET CORPORATION
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. DEBT OBLIGATIONS
a) 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 rate of 8.21%.
Annual lease payments approximate $180,000. Assets recorded under this
lease are included in fixed assets as follows:
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
<S> <C> <C>
Furniture and fixtures $ 743,462 $ 743,462
Accumulated amortization (109,806) (51,550)
--------- ---------
$ 633,656 $ 691,912
========= =========
</TABLE>
b) LINES OF CREDIT
In August 2000, the Company renewed an unsecured revolving credit facility
with a bank increasing the line of credit to $5 million. Borrowings under
this line of credit bear interest at the bank's prime rate (9.50% at June
30, 2000) less 0.25% on amounts outstanding of less than $1 million and at
the bank's prime rate for aggregate principal amounts exceeding $1
million. No borrowings under this line were outstanding at June 30, 2000
or December 31, 1999. This credit facility contains, among other
provisions, a covenant which restricts the Company's ability to pay cash
dividends.
c) NOTES PAYABLE
On September 30, 1999, as part of the acquisition of Konark, the Company
paid $1.0 million in cash and issued a $2.5 million non-interest bearing
note payable which has been discounted at 8.25%. Interest expense is
accreted monthly and totalled approximately $28,000 for the three months
ended June 30, 2000. The note is payable in five installments and matures
on March 1, 2002.
10
<PAGE>
DSET CORPORATION
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
As of June 30, 2000, future payments under the notes are as follows:
<TABLE>
<CAPTION>
Principal
Year Ending December 31, Payments
------------------------ --------
<S> <C>
2000 $ 500,000
2001 1,000,000
2002 500,000
------------
2,000,000
Less: Unamortized interest (217,970)
------------
Present value of notes payable 1,782,030
Less: Current portion (945,026)
------------
Long-term portion $ 837,004
============
</TABLE>
4. ACQUISITIONS
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 and
professional fees of $158,416.
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 technology was approximately $96,000 for the three months ended
June 30, 2000.
The following is a summary of the purchase price allocation:
<TABLE>
<CAPTION>
<S> <C>
Acquired technology $2,458,416
Goodwill 200,000
----------
Total $2,658,416
==========
</TABLE>
On September 30, 1999, the Company purchased Konark and related
technologies for approximately $3.3 million in cash and certain deferred
payments plus professional fees and the related deferred tax liabilities.
The acquisition price, along with certain other acquisition costs and
associated deferred tax liabilities have been recorded as acquired
technology, other assets and goodwill that will be amortized over five
years.
11
<PAGE>
DSET CORPORATION
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
The following is a summary of the purchase price allocation and consideration:
Purchase Price Allocation
<TABLE>
<S> <C>
Acquired technology $ 2,195,507
Other assets 695,507
Goodwill 1,036,015
-----------
$ 3,927,029
===========
Consideration
Cash $(1,120,000)
Notes payable-current (971,470)
Long-term notes payable (1,310,559)
Deferred income taxes (525,000)
-----------
$(3,927,029)
===========
</TABLE>
5. REVENUE CONCENTRATION
The Company derives a portion of its revenues from international sales
which constituted approximately 3% and 14.8% of the Company's total
revenues in the second quarter of 2000 and 1999, respectively.
International sales are derived from Europe (primarily Italy and Germany)
and Asia (primarily Korea, China and Japan). 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.
6. EARNINGS PER SHARE
The Company calculates, presents and discloses earnings per share ("EPS")
in accordance with SFAS No. 128, "Earnings per Share". The statement
defines two earnings per share calculations, basic and assuming dilution.
The objective of basic EPS is to measure the performance of an entity over
the reporting period by dividing net 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:
12
<PAGE>
DSET CORPORATION
JUNE 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
----------------------------------- ----------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Amount Amount
------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income
applicable to
common shares $ 2,171,498 11,420,067 $ 0.19 $ 653,196 10,403,646 $0.06
ASSUMING
DILUTION:
Warrants -- 41,477 -- 150,871
Stock options -- 742,852 -- 1,218,875
----------- ----------- ----------- -----------
$ 2,171,498 12,204,396 $ 0.18 $ 653,196 11,773,392 $0.06
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999
---------------------------------- ---------------------------------
Income Shares Per Share Income Shares Per Share
------ ------ --------- ------ ------ ---------
Amount Amount
------ ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
Net income
applicable to
common shares $ 3,092,198 11,228,763 $ 0.28 $ 1,225,148 10,216,115 $ 0.12
ASSUMING
DILUTION:
Warrants -- 42,390 -- 153,367
Stock options -- 785,264 -- 1,133,061
----------- ----------- ----------- -----------
$ 3,092,198 12,056,417 $ 0.26 $ 1,225,148 11,502,343 $ 0.11
=========== =========== =========== ===========
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
DSET is a leading provider of business-to-business e-commerce
connectivity software solutions created specifically for the global
telecommunications marketplace. The DSET suite of electronic-bonding gateways
interconnects the operations support systems ("OSSs") of competing
telecommunications service providers ("Telecom Service Providers"), such as
Competitive Local Exchange Carriers ("CLECs") and Data Local Exchange Carriers
("DLECs") that must trade information and share network capabilities to serve
customers. In addition, DSET's local number portability ("LNP") solutions play a
key role in enabling customers to change Telecom Service Providers without
changing their local phone numbers. The Telecommunications Act of 1996 ("Telecom
Act") encourages competition among providers of local phone services by
requiring incumbent local exchange carriers ("ILECs") to allow new Telecom
Service Providers to lease portions of the incumbents' networks and access their
OSSs. Hundreds of Telecom Service Providers are vying to win customers from the
incumbents by offering better pricing and service. With DSET solutions, Telecom
Service Providers 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 Telecom Service Providers 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. These applications are predominantly
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 Telecommunications
Management Network ("TMN") standards. However, the Company is actively moving
away from selling these application development tools.
The Company's continued success will depend on continued growth in the
market for advanced telecommunications products, OSS interconnection products
and services and LNP solutions.
The Company's revenues are generated from two sources: license and
service revenues from Telecom Service Providers and license and service revenues
from network equipment vendors.
For the quarters ended June 30, 2000 and 1999, the Company derived
approximately 75.2% and 57.5%, respectively, of its total revenues from license
revenues and approximately 24.8% and 42.5%, respectively, of its total revenues
from service revenues. During the second quarter of 2000, revenues generated
from Telecom Service Providers were approximately $12.0 million. Revenues
generated from network equipment vendors for LNP solutions, application
development tools and related services were approximately $4.2 million in the
second quarter of
14
<PAGE>
2000. Revenues generated from Telecom Service Providers were $2.2 million in the
second quarter of 1999, and revenues generated from network equipment vendors
were $6.9 million in the second quarter of 1999.
DSET's license revenues from Telecom Service Providers are derived from
the sale of electronic-bonding gateways to carriers under contracts that provide
for license fees. Prices for licenses of the Telecom Service Providers'
solutions and other applications range from $75,000 to $500,000, depending on
the number of licensed components. License revenues are recorded when the
software has been shipped to the customer and all significant obligations have
been satisfied. Any contract holdbacks or contingent charges are recognized as
revenue when they are satisfied.
License revenues derived from the sale of LNP solutions and
application development tools to customers under contracts generally provide for
license fees and run-time royalty fees. Prices for development licenses of the
Company's LNP solutions tool suites can range from approximately $150,000 to
$400,000 and prices for tool suites typically range from approximately $150,000
to $250,000 depending on the number of licensed components and development
users. The Company's license agreements for development tools also typically
provide for run-time royalty fees that are earned at the time of deployment by
equipment vendors to telecommunications carriers of network devices which have
embedded applications built with the Company's software. A run-time license
permits an equipment vendor to incorporate applications developed with the
Company's software tools in such vendor's telecommunications network devices.
License revenues from development licenses are recognized at the time the
product is shipped to the customer. Run-time royalty fees are recognized as the
Company is notified of such deployment. Notification is typically received from
customers pursuant to quarterly reports or via purchase orders for individual
licenses.
The Company's service revenues are comprised of fees derived from
custom application development products and services, maintenance fees,
installation and training fees and other revenues generated from customer
support services. The Company's application development services are generally
individually negotiated and contracted for on a fixed price basis. Prices for
such projects vary depending upon the size and scope of the project and
estimated time and effort to completion. Revenues from application development
services are generally recognized on a percentage of completion basis calculated
as direct labor costs are incurred in relation to estimated total costs at
completion for each project. The impact of revisions in percentage of completion
estimates is reflected in the period in which the revisions are made.
Maintenance services, for which the Company typically charges between 15% and
30% annually of the list price of the products licensed by the customer, may be
purchased at the customer's option. Maintenance fees are recognized as service
revenue over the term of the maintenance period, which is typically a 12-month
term.
The Company had no customer accounting for 10% of revenues for the
quarter ended June 30, 2000 and one customer which accounted for more than 10%
of revenues for the quarter ended June 30, 1999. 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
15
<PAGE>
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's costs of license revenues consist primarily of royalties
paid to third party software companies and the amortization of acquired
technology and capitalized software costs.
DSET has signed a strategic alliance agreement with Daleen
Technologies, Inc. ("Daleen") under which DSET and Daleen will engage in joint
marketing, selling and other strategic activities. As part of the strategic
relationship, Daleen has granted DSET license to certain of Daleen's electronic
bonding gateways optimized for the Canadian market and exclusive distribution
rights in Canada. The alliance allows DSET access to the Canadian market with
products matched to the technical standards existing in Canada.
The Company generally is not contractually obligated to make minimum
royalty payments. Costs of service revenues include primarily payroll, related
benefit costs, personnel and other operating expenses. Sales and marketing
expenses consist of salaries, commissions and bonuses paid to sales and
marketing personnel, as well as travel and promotional expenses. Research and
product development expenses encompass primarily software engineering personnel
costs, costs of third-party equipment, costs associated with customer
satisfaction and quality and software utilized for development purposes.
Research and product development expenses are generally charged to operations as
such costs are incurred. The Company's research and development projects are
evaluated for technological feasibility in order to determine whether they meet
capitalization requirements. General and administrative expenses are comprised
of personnel costs and occupancy costs for administrative, executive and finance
personnel.
During the year ended December 31, 1997, deferred stock compensation of
$876,000 was recorded for options granted. This amount has been amortized to
compensation expense over the vesting period of the options (two to four years).
At June 30, 2000, the remaining unamortized deferred stock compensation balance
was approximately $131,000.
The Company primarily markets and sells its products and services
through a direct sales force in North America.
The Company derives a portion of its revenues from international sales
which constituted approximately 3% and 14.8% of the Company's total revenues in
the second quarter of 2000 and 1999, respectively. International sales are
derived from Europe (primarily Italy and Germany) and Asia (primarily Korea,
China and Japan). 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.
16
<PAGE>
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," "should," "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 substantial variability of the Company's quarterly operating
results, (ii) the Company's dependence on the rapidly evolving
telecommunications industry, (iii) rapid technological change in the Company's
industry, (iv) the limited number of customers for a significant portion of the
Company's revenue, (v) risks associated with market acceptance of the Company's
new OSS gateways interconnection and LNP products, (vi) risks associated with
intense competition in the industry, including competition for qualified
technical personnel and (vii) 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. The
success of the Company depends to a large degree upon increased demand by
Telecom Service Providers for its new OSS Interconnection products and by
network equipment vendors for its LNP products. 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 "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 June 30, 2000 Compared to the Three Months Ended
June 30, 1999
Revenues. Total revenues increased 78.0% to $16.2 million in the second
quarter of 2000 from $9.1 million in the second quarter of 1999. License
revenues increased by 132.7% to $12.2 million in the second quarter of 2000 from
$5.2 million in the second quarter of 1999. This increase was primarily
attributable to an increase in the sale of OSS gateway licenses to Telecom
Service Providers. Service revenues increased 4.0% to $4.0 million in the second
quarter of 2000 from $3.9 million in the second quarter of 1999. This increase
was attributable primarily to custom application development projects for OSS
interconnection and LNP solutions, offset by a decrease in projects for network
equipment vendors. Revenues recorded using the percentage of completion method
of contract accounting amounted to $2.1 million in the second quarter of 2000 as
compared to $2.4 million in the second quarter of 1999.
Gross profit. The Company's gross profit increased 77.5% to $12.8
million in the second quarter of 2000 from $7.2 million in the second quarter of
1999. Gross profit percentage for license revenues decreased to 92.6% in the
second quarter of 2000 from 94.7% in the second quarter of 1999 due to an
increase of third party royalties and amortization of acquired technology and
capitalized software costs. Gross profit percentage for service revenues
decreased to 36.6% in the second quarter of 2000 from 57.7% in the second
quarter of 1999. The decreases in gross profit percentages were primarily
attributable to higher implementation costs
17
<PAGE>
arising from the use of third party resources, less application development
service revenue, other support costs associated with satisfying customer
requirements and the amortization of acquired technology and capitalized
software.
Sales and marketing expenses. Sales and marketing expenses increased
42.4% to $4.2 million in the second quarter of 2000 from $3.0 million in the
second quarter of 1999. The increase in sales and marketing expenses was
primarily attributable to increased personnel and related costs resulting from
the increase in the Company's sales force and provision for bad debt expense and
higher agent commission expense related to increased sales from previous year.
Research and product development expenses. Research and product
development expenses increased 70.0% to $4.1 million in the second quarter of
2000 from $2.5 million in the second quarter of 1999. The increase in research
and product development expenses was due primarily to an expansion in the number
of new products under development and the hiring of additional outside
consultants.
General and administrative expenses. General and administrative
expenses increased 28.4% to $1.5 million in the second quarter of 2000 from $1.2
million in the second quarter of 1999. The increase in general and
administrative expenses was due primarily to recruiting, personnel and related
costs and professional fees.
Amortization of goodwill. Amortization expense increased to
approximately $103,000 in the second quarter of 2000 as compared to $77,000 in
the second quarter of 1999. This increase was due primarily to amortization of
goodwill from the Konark and NPL acquisitions.
Interest expense and other income (expense). Interest expense and other
income and expense decreased to $41,000 for the second quarter of 2000 from
$61,000 for the second quarter of 1999, due primarily to expenses resulting from
the Company's European joint venture in the second quarter of 1999. The Company
did not incur this expense in the second quarter 2000.
Interest income. Interest income increased to approximately $583,000 in
the second quarter of 2000 as compared to approximately $571,000 in the second
quarter of 1999. This increase was due primarily to higher cash balances to be
invested.
Income taxes. The Company's effective tax rate was 33.8% and 35.5% for
the second quarter of 2000 and 1999, respectively. In the second quarter of
2000, the effective tax rate was lower than the statutory tax rates due to the
increased utilization of research and development and foreign tax credits.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Revenues. Total revenues increased 67.7% to $27.8 million in the six
months ended June 30, 2000 from $16.6 million in the six months ended June 30,
1999. License revenues increased by 116.0% to $20.3 million in the six months
ended June 30, 2000 from $9.4 million in the six
18
<PAGE>
months ended June 30, 1999. This increase was primarily attributable to an
increase in the sale of OSS gateway licenses to Telecom Service Providers.
Service revenues increased 4.7% to $7.5 million in the six months ended June 30,
2000 from $7.2 million in the six months ended June 30, 1999. This increase was
attributable primarily to custom application development projects for OSS
interconnection and LNP solutions. Revenues recorded using the percentage of
completion method of contract accounting amounted to $4.4 million in the six
months ended June 30, 2000 as compared to $4.3 million in the six months ended
June 30, 1999.
Gross profit. The Company's gross profit increased 62.6% to $21.3
million in the six months ended June 30, 2000 from $13.1 million in the six
months ended June 30, 1999. Gross profit percentage for license revenues
decreased to 91.7% in the six months ended June 30, 2000 from 94.0% in the six
months ended June 30, 1999 due to an increase of third party royalties and
amortization of acquired technology and capitalized software costs. Gross profit
percentage for service revenues decreased to 36.4% in the six months ended June
30, 2000 from 59.6% in the six months ended June 30, 1999. The decreases in
gross profit percentages were primarily attributable to higher implementation
costs arising from the use of third party resources, less application
development service revenue, other support costs associated with satisfying
customer requirements and the amortization of acquired technology and
capitalized software.
Sales and marketing expenses. Sales and marketing expenses increased
29.4% to $7.0 million in the six months ended June 30, 2000 from $5.4 million in
the six months ended June 30, 1999. The increase in sales and marketing expenses
was primarily attributable to increased personnel and related costs resulting
from the increase in the Company's sales force and provision for bad debt
expense and higher agent commission expense related to increased sales from
previous years.
Research and product development expenses. Research and product
development expenses increased 58.1% to $7.6 million in the six months ended
June 30, 2000 from $4.8 million in the six months ended June 30, 1999. The
increase in research and product development expenses was due primarily to an
expansion in the number of new products under development and the hiring of
additional outside consultants.
General and administrative expenses. General and administrative
expenses increased 41.2% to $2.8 million in the six months ended June 30, 2000
from $2.0 million in the six months ended June 30, 1999. The increase in general
and administrative expenses was due primarily to recruiting, personnel and
related costs and professional fees.
Amortization of goodwill. Amortization expense increased to
approximately $207,000 in the six months ending June 30, 2000 as compared to
$87,000 in the six months ended June 30, 1999. This increase was due primarily
to amortization of goodwill from the Konark and NPL acquisitions.
Interest expense and other income (expense). Interest expense and other
income and expense increased to $96,000 for the six months ended June 30, 2000
from $75,000 for the six
19
<PAGE>
months ended June 30, 1999, reflecting higher interest cost incurred with the
capital lease agreement and other miscellaneous cost increases.
Interest Income. Interest income decreased to $981,000 in the six
months ended June 30, 2000 as compared to $1.1 million in the six months ended
June 30, 1999. This decrease was due primarily to lower interest rates.
Income taxes. The Company's effective tax rate was 33.6% and 35.6% for
the six months ended 2000 and 1999, respectively. In the six months ended June
30, 2000, the effective tax rate was lower than the statutory tax rates due to
the increased utilization of research and development and foreign tax credits.
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 June 30, 2000, the Company's cash, cash
equivalents and marketable securities aggregated approximately $45.5 million, of
which cash and cash equivalents aggregated approximately $11.0 million and
marketable securities aggregated approximately $34.5 million. Marketable
securities at June 30, 2000 were comprised of fixed income government securities
and corporate bonds. The Company's working capital was $59.0 million and $53.6
million at June 30, 2000 and December 31, 1999, respectively.
Accounts receivable, net decreased to $19.2 million at June 30, 2000
from $20.1 million at December 31, 1999, primarily as a result of increased
collection efforts, an increase in allowance for doubtful accounts and more
favorable contract terms. Included in accounts receivable in the second quarter
of 2000 was $18.1 million for trade receivables and $3.4 million for unbilled
project revenue as compared to $16.8 million for trade receivables and $4.8
million for unbilled project revenue at December 31, 1999. Unbilled project
revenue is the excess amount of revenue recognized through percentage of
completion that has not been billed to the customer. Payment terms to customers
are generally net zero to net ninety days.
The Company bills its foreign customers 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 June 30,
2000 includes approximately $509,532 from customers in this region.
The Company's capital expenditures were approximately $547,000 and $1.2
million for the three months ended June 30, 2000 and 1999, respectively. The
decrease in capital expenditures is due to the move of the corporate facility in
Bridgewater, NJ in 1999.
In June 1999, the Company entered into a five-year capital lease
agreement at an annual interest rate of 8.21% for equipment, furniture and
fixtures at its new office facilities. Assets
20
<PAGE>
recorded under this lease are included in fixed assets. Annual lease payments
approximate $180,000.
During August 2000, the Company renewed an unsecured revolving credit
facility with a bank pursuant to which the Company may borrow up to a maximum
of $5.0 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 June 30, 2000. 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, 2004.
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.
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.
IMPACT OF THE YEAR 2000
Although the rollover has passed from December 31, 1999 to January 1,
2000, the Company still faces risks to the extent that suppliers of products,
services, and systems purchased by the Company or the suppliers of others with
whom the Company transacts business cannot timely provide products, components,
services, or systems that meet Year 2000 requirements. 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.
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
21
<PAGE>
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.
In November 1998, we 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 has not been notified of any Year 2000 problems that have
occurred in these custom applications. However, 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.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 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 June 15, 2000 (January 1,
2001 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"). A second amendment to SAB 101 has been issued by the Securities
and Exchange Commission which delays the implemtation date of SAB 101 to no
later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. The Company is currently evaluating the impact of SAB 101 on its
results of operations.
22
<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.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. USE OF PROCEEDS
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 June 30, 2000, 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company (the "Meeting") was
held on May 24, 2000.
There were present at the Meeting in person or by proxy shareholders
holding an aggregate of 10,320,932 shares of Common Stock. The results of the
vote taken at such Meeting with respect to each nominee for director were as
follows:
<TABLE>
<CAPTION>
Common Stock Nominees For Withheld
--------------------- --- --------
<S> <C> <C>
William P. McHale, Jr. 10,103,400 217,532
Bruce R. Evans 10,103,400 217,532
Jacob J. Goldberg 10,103,400 217,532
C. Daniel Yost 10,103,400 217,532
Andrew D. Lipman 10,103,400 217,532
</TABLE>
In addition, a vote of the shareholders was taken at the Meeting on the
proposal to amend the Company's 1998 Stock Plan to increase the maximum
aggregate number of shares of Common Stock available for issuance thereunder
from 1,800,000 shares to 2,500,000 shares and to reserve an additional 700,000
shares of Common Stock of the Company for issuance in connection with awards
granted under the 1998 Stock Plan. Of the shares present at the Meeting in
person or by proxy, 4,557,150 shares of Common Stock were voted in favor of
such proposal, 2,860,384 shares of Common Stock were voted against such proposal
and 12,400 shares of Common Stock abstained from voting.
In additon, a vote of the shareholders was taken at the Meeting on the
proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
independent auditors of the Company for the fiscal year ending December 31,
2000. Of the shares present at the Meeting in person or by proxy, 10,304,055
shares of Common Stock were voted in favor of such proposal, 9,722 shares of
Common Stock wre voted against such proposal and 7,155 shares of Common Stock
abstained from voting.
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.
24
<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: August 14, 2000 By: /s/ William P. McHale, Jr.
----------------------------------------
William P. McHale, Jr., President
and Chief Executive Officer
(Principal Executive Officer)
DATE: August 14, 2000 By: /s/ Bruce M. Crowell
----------------------------------------
Bruce M. Crowell
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
25
