<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 000-26735
TELEMATE.NET SOFTWARE, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
GEORGIA 58-1656726
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
</TABLE>
4250 PERIMETER PARK SOUTH, SUITE 200 30341
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (770) 936-3700
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
The number of outstanding shares of the issuer's capital stock as of November 9,
1999, the latest practicable date, is as follows: 7,339,262 shares of Common
Stock, $0.01 par value.
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<PAGE> 2
PART I
FINANCIAL INFORMATION
TELEMATE.NET SOFTWARE, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 1,032,326 $ 45,593
Trade accounts receivable, net of allowance for
doubtful accounts and returns .......................... 2,268,153 1,809,252
Prepaid expenses .............................................. 342,755 71,330
Other current assets .......................................... 2,101 55,614
----------- -----------
Total current assets ................................... 3,645,335 1,981,789
Property and Equipment, net of depreciation and
amortization ........................................... 907,486 590,910
Other assets .................................................. 1,050,347 102,218
----------- -----------
Total assets .................................................. $ 5,603,168 $ 2,674,917
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable to bank .......................................... $ -- $ 80,000
Accounts payable .............................................. 1,393,764 469,213
Accrued expenses and other liabilities ........................ 1,638,527 768,863
Deferred revenue .............................................. 3,060,951 2,390,071
----------- -----------
Total current liabilities ................................. 6,093,242 3,708,147
Long-term debt ........................................................... -- 908,310
Redeemable stock purchase warrant ........................................ -- 123,428
----------- -----------
Total liabilities ............................................. 6,093,242 4,739,885
----------- -----------
Commitments and contingencies:
Convertible preferred stock .............................................. 5,950,000 --
Shareholders' equity (deficit):
Common stock, $.01 par value; 100,000,000 shares authorized,
3,261,813 shares issued at December 31, 1998 and 2,990,262
shares issued at September 30, 1999 ........................... 29,782 32,618
Additional paid in capital .................................... 2,456,879 176,248
Retained Earnings (accumulated deficit) ....................... (8,861,529) (1,890,536)
Notes receivable and accrued interest from shareholders ....... (65,206) (383,298)
----------- -----------
Total shareholders' equity (deficit) ......................... (6,440,074) (2,064,968)
----------- -----------
Total liabilities and shareholders' equity (deficit) .......... $ 5,603,168 $ 2,674,917
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue................................. $ 1,797,804 $ 1,406,886 $ 4,604,766 $ 3,972,525
Services revenue................................ 1,685,115 1,302,690 4,301,554 3,761,058
----------- ----------- ----------- -----------
TOTAL REVENUE........................... 3,482,919 2,709,576 8,906,320 7,733,583
----------- ----------- ----------- -----------
COST OF REVENUE:
Product costs.................................. 402,360 209,901 957,715 641,888
Service costs.................................. 491,612 324,352 1,200,066 951,011
----------- ----------- ----------- -----------
TOTAL COST OF REVENUE................... 893,972 534,253 2,157,781 1,592,899
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
GROSS PROFIT............................ 2,588,947 2,175,323 6,748,539 6,140,684
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research and development....................... 584,715 494,901 1,343,764 1,375,448
Sales and marketing............................ 1,662,674 1,216,107 3,837,432 3,451,395
General and administrative..................... 969,349 710,510 2,659,622 2,233,929
Non-cash compensation.......................... 153,499 -- 153,499 --
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES................ 3,370,237 2,421,518 7,994,317 7,060,772
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS)................. (781,290) (246,195) (1,245,778) (920,088)
Other income (expense).............................. (62,127) (31,690) (139,618) (73,359)
Redeemable stock purchase warrant................... (883,674) -- (1,617,674) --
----------- ----------- ----------- -----------
NET INCOME (LOSS)....................... $(1,727,091) $ (277,885) $(3,003,070) $ (993,447)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE: BASIC $ (0.61) $ (0.09) $ (0.97) $ (0.30)
NET INCOME (LOSS) PER SHARE: DILUTED $ (0.61) $ (0.09) $ (0.97) $ (0.30)
WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 2,844,792 3,261,813 3,092,575 3,261,813
WEIGHTED AVERAGE SHARES OUTSTANDING: DILUTED 2,844,792 3,261,813 3,092,575 3,261,813
</TABLE>
See accompanying notes to financial statements.
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TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................ $(3,003,070) $ (993,447)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................................... 262,928 254,662
Provision for doubtful accounts and returns............................. 134,000 25,000
Compensation related to stock options................................... 153,499 --
Accrued interest on shareholder notes................................... (12,815) (19,467)
Amortization of discount on redeemable stock purchase
warrant.............................................................. 91,690 21,158
Accretion of redeemable stock purchase warrant.......................... 1,590,844 --
Loss on fixed assets disposal........................................... -- 789
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable................... (592,901) (48,016)
(Increase) decrease in prepaid expenses and other
current assets................................................. (254,981) 7,129
(Increase) decrease in other assets................................ (828,128) 78,008
Increase (decrease) in accounts payable, accrued
expenses, and other liabilities.............................. 1,794,215 (184,796)
Increase in deferred revenue....................................... 670,880 96,569
----------- -----------
Net cash provided by (used in) operating activities.................... 6,161 (762,411)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (579,504) (254,145)
Proceeds from sale of asset.................................................. -- 7,000
----------- -----------
Net cash used in investing activities.................................. (579,504) (247,145)
----------- -----------
Cash flows from financing activities:
Proceeds (payments) from/on credit facility.................................. (80,000) 80,000
Proceeds from issuance of long-term debt, net................................ -- 964,565
Proceeds from issuance of Series A redeemable
convertible preferred stock, net........................................... 5,950,000 --
Proceeds from issuance of common stock....................................... 500,000 --
Repayment of long term borrowings............................................ (1,000,000) --
Proceeds from the exercise of stock options.................................. 92,091 --
Shareholder distributions.................................................... (4,719) --
Purchase and retirement of common stock...................................... (4,000,000) --
Collections on notes receivable from shareholders............................ 102,704 --
----------- -----------
Net cash provided by financing activities.............................. $ 1,560,076 $ 1,044,565
----------- -----------
Net increase in cash................................................... $ 986,733 $ 35,009
----------- -----------
Cash and cash equivalents at beginning of period............................... $ 45,593 $ 77,724
----------- -----------
Cash and cash equivalents at end of period..................................... $ 1,032,326 $ 112,733
----------- -----------
=========== ===========
Supplemental disclosure of cash -- cash paid for interest...................... $ 105,904 $ 73,773
=========== ===========
Supplemental disclosure of significant noncash investing and
financing activities:
Discount on redeemable stock purchase warrant................................ $ -- $ 123,426
=========== ===========
Financing costs withheld from long-term debt proceeds........................ $ -- $ 35,435
=========== ===========
Reduction of notes from shareholders in exchange
for cash distributions....................................................... $ 265,272 $ --
=========== ===========
Issuance of common stock in exchange for software............................ $ 120,000 $ --
=========== ===========
Financing costs withheld from preferred stock proceeds....................... $ 50,000 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements
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<PAGE> 5
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited financial statements have been
prepared in conformity with generally accepted accounting principles
for interim financial statements. Accordingly, certain information or
footnote disclosures normally included in complete financial statements
prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of
management, the statements include all adjustments necessary (which are
of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These financial statements
should be read in conjunction with the audited financial statements for
the year ended December 31, 1998, included in the Company's
registration statement on Form S-1 declared effective by the Securities
and Exchange Commission on September 28, 1999. Operating results for
the three and nine months ended are not necessarily indicative of the
results which may be expected for the year ended December 31, 1999.
2. Shareholders' Equity (Deficit)
On October 4, 1999, Telemate.Net Software, Inc. (the
"Company") completed an initial public offering ("IPO") of 3,500,000
shares including 3,284,000 newly issued shares sold by the Company
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<PAGE> 6
and 216,000 outstanding shares sold by existing shareholders. The IPO
generated net proceeds to the Company of approximately $42.8 million
before IPO expenses. Because this transaction did not close until after
September 30, 1999, it is not reflected in the September 30, 1999
financial statements. Had the transaction been completed prior to
September 30, 1999, the balance of cash and cash equivalents would
have been approximately $43.0 million and shareholders' equity,
including the effect of the conversion of preferred stock to common
stock associated with the IPO, would have been approximately $42.0
million. In addition, certain expenses related to the IPO have been
recorded in other assets and generally are included in accounts payable
or accrued expense. These IPO expenses will be netted against the
proceeds.
Subsequently, pursuant to the underwriters' exercise of their
over-allotment option, selling shareholders sold an additional 100,000
outstanding shares and the Company sold an additional 165,000 newly
issued shares. The Company received $2.1 million from the proceeds of
the sale of the 165,000 shares on November 1, 1999.
3. Net Income (Loss) Per Share
The Company has presented net income (loss) per share pursuant
to SFAS No. 128, Earnings Per Share, and the Securities and Exchange
Commission Staff Accounting bulletin No. 98. Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock and convertible preferred
stock issued for nominal consideration, prior to the effective date of
the initial public offering ("IPO"), are required to be included in the
calculation of basic and diluted net income (loss) per share, as if
they were outstanding for all periods presented. The Company has not
had any such issuances or grants for nominal consideration. Potentially
dilutive securities include stock options and Series A redeemable
convertible preferred stock.
4. Long-Term Debt and Redeemable Stock Purchase Warrant
In anticipation of receipt of the proceeds from the IPO, the
Company retired approximately $1.0 million of long-term debt on
September 29, 1999. In connection with the issuance of the $1.0 million
note payable, the Company issued a warrant for the purchase of common
stock at an exercise price of $.003 per share. On September 23, 1999,
the debt holder exercised the warrant for 122,448 shares. Based on the
fair value of $14.00 per share, the Company increased the redeemable
stock purchase warrant and recorded a charge to interest expense of
$883,674 in the third quarter. For the nine months ended September 30,
1999, the Company recorded a charge to interest expense of $1,617,674
to reflect the increased value of the warrant. Upon exercise of the
warrant, and the Company's repayment of the debt, the warrant was no
longer redeemable; accordingly, the redeemable stock purchase warrant
was reclassified to common stock and additional paid in capital.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain information included in this report constitutes
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements
reflect the Company's current views with respect to future events and
financial performance, but are subject to many uncertainties and risk
factors relating to the Company's operations and business environment
that may cause the actual results of the Company to be materially
different from future results expressed or implied by such
forward-looking statements. Reference is made in particular to the
discussion set forth below and set forth in the section entitled "Risk
Factors" in the Company's Registration Statement on Form S-1 declared
effective by the Securities and Exchange Commission on September 28,
1999.
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OVERVIEW
Telemate.Net provides integrated network usage management solutions.
From our inception in 1986, through 1996, we focused exclusively on providing
call accounting software solutions. By the early 1990's, we had emerged as a
call accounting market leader by evolving our product line to meet the
functionality and price performance requirements of our customers. In 1996,
seeking to capitalize on the opportunity the Internet would present, we began
researching and developing an Internet usage management solution. In May 1997,
we released the initial version of our Internet usage management solution, which
we believe was the first such product on the market. In May 1998, we began
shipping our latest generation of Internet usage management software. In
November 1998, we introduced our integrated network usage management products,
which can be used by our customers for Internet usage management only, call
accounting only, or a combination of both.
In 1996, our management decided to invest the cash flow from our call
accounting business in the development of an Internet usage management solution.
Our focus on developing an Internet product included sacrificing potential
profits and borrowing $1.0 million in 1998. The refocusing of our business
resulted in reduced call accounting revenue growth. From 1996 through 1998,
average annual call accounting revenue growth was 17%, which is significantly
lower than the call accounting revenue growth from 1990 through 1995. We believe
the investments we have made have positioned us for future growth in emerging
integrated network usage management market.
Our revenue consists of product and service revenue. Our product
revenue is derived primarily from licensing our software products. We also
resell complementary hardware, which has historically accounted for less than
10% of our total annual revenue. For the three months the Company's hardware
sales represented 13.1% of revenue due to a number of large product sales
requiring an unusually high amount of hardware. These sales also resulted in
hardware accounting for 10.6% of revenue for the nine months ended September 30,
1999. We expect the hardware revenue percentage to be within our historical
range for the year. Support service revenue consists of fees paid for
maintenance services, product updates, and professional services. Maintenance
services include diagnosis and correction of errors in the current version of
the product and telephone consultation to discuss general support questions.
Product updates include error correction and minor enhancements to the product
models purchased, and periodic updates to tariff information for call accounting
products. Substantially all of our license agreements are perpetual. Support
agreements are typically for a term of one year and renew automatically upon
payment of an annual maintenance fee by the customer. This support fee typically
represents 20% of the current list price of the products licensed. Professional
services includes installation, training and custom report generation.
We recognize revenue from software licenses in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2,
Software Revenue Recognition, Statement of Position 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2 and Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions. Revenue derived from software license fees and hardware is
recognized upon shipment. Revenue derived from software support services
primarily involves annual contracts and is recognized ratably over the service
period. Revenue related to professional services is recognized as services are
provided. Deferred revenue generally represents advance payments received from
customers and billings invoiced to customers for software support and
professional services in advance of the time revenue is recognized.
We identify revenue as call accounting revenue or Internet/integrated
revenue based upon the types of data sources licensed and the delivery of call
accounting product features. If a customer is delivered tariff information for
all data sources they have licensed, the product revenue is identified as call
accounting. All other product revenue is identified as Internet/integrated.
Service revenue is identified based on the associated product identification.
We sell our products through a combination of direct sales by our sales
personnel and indirect sales primarily through resellers and distributors. While
our direct sales force is expected to continue to generate a large
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proportion of future revenue, we are increasingly utilizing indirect
distribution channels, such as network resellers, systems integrators and
distributors, as an important complement to our direct sales force. We expect to
grow our international distribution significantly in the next few years and have
added several European distributors this year. Distributors and resellers
purchase the product for resale at a discount from our standard price list. This
discount ranges from 20% to 65% and varies based on a number of factors
including their volume of business, whether they distribute to other resellers
and whether they provide product support.
We also maintain relationships with leading networking and network
security product vendors that help to market and distribute our products. These
vendors assist in the sales and marketing of our products by bundling them with
their own products, selling our products through their sales forces and
promoting our products at trade shows, seminars and through their web sites. We
intend to continue to focus sales resources on strengthening existing
relationships and creating new relationships with strategic organizations.
RESULTS OF OPERATIONS
The following tables set forth our Internet/integrated and call accounting
revenue, both in absolute dollars and as a percentage of total revenue:
Revenue Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Internet/integrated
Product revenue ........................ $ 872,225 $ 333,849 $1,647,716 $ 642,439
Service revenue ........................ $ 428,685 $ 25,249 $ 640,611 $ 46,410
---------- ---------- ---------- ----------
Total Internet/integrated revenue....... $1,300,910 $ 359,098 $2,288,327 $ 688,849
Call Accounting
Product revenue ........................ $ 925,579 $1,073,037 $2,957,050 $3,330,086
Service revenue ........................ $1,256,430 $1,277,441 $3,660,943 $3,714,648
---------- ---------- ---------- ----------
Total call accounting revenue:.......... $2,182,009 $2,350,478 $6,617,993 $7,044,734
Total
Product revenue ........................ $1,797,804 $1,406,886 $4,604,766 $3,972,525
Service revenue ........................ $1,685,115 $1,302,690 $4,301,554 $3,761,058
---------- ---------- ---------- ----------
Total Revenues............... $3,482,919 $2,709,576 $8,906,320 $7,733,583
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------- ---------------------
<S> <C> <C>
Percentage of total revenue:
Internet/integrated
Product revenue ...................... 25.0% 12.3% 18.5% 8.3%
Service revenue ...................... 12.3% 1.0% 7.2% 0.6%
----- ----- ----- -----
Total Internet/integrated revenue.... 37.3% 13.3% 25.7% 8.9%
Call Accounting
Product revenue ...................... 26.6% 39.6% 33.2% 43.1%
Service revenue ...................... 36.1% 47.1% 41.1% 48.0%
----- ----- ----- -----
Total call accounting revenue:....... 62.7% 86.7% 74.3% 91.1%
Total
Product revenue....................... 51.6% 51.9% 51.7% 51.4%
Service revenue....................... 48.4% 48.1% 48.3% 48.6%
----- ----- ----- -----
Total Revenues................ 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
</TABLE>
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<PAGE> 9
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998
Revenue. Total revenue was $3.5 million for the three months ended
September 30, 1999, representing a 28.5% increase from $2.7 million for the same
period in 1998. Total product revenue was $1.8 million, or 51.6% of total
revenue, in the three months ended September 30, 1999, representing a 27.8%
increase from $1.4 million, or 51.9% of total revenue, for the same period in
1998. Total service revenue was $1.7 million, or 48.4% of total revenue, in the
three months ended September 30, 1999, representing a 29.4% increase from $1.3
million, or 48.1% of total revenue, for the same period in 1998. The increase in
total revenue was the result of the increase in Internet/integrated product and
service revenue for the period.
Internet/Integrated Revenue. Total Internet/integrated revenue was $1.3
million, or 37.3% of total revenue, in the three months ended September 30,
1999, representing a 262.3% increase from $359,000, or 13.3% of total revenue,
for the same period in 1998. Internet/integrated product revenue was $872,000,
or 25.0% of total revenue, in the three months ended September 30, 1999,
representing a 161.3% increase from $334,000, or 12.3% of total revenue, for the
same period in 1998. Internet/integrated service revenue was $429,000, or 12.3%
of total revenue, in the three months ended September 30, 1999, representing a
1,597.8% increase from $25,000, or 1.0% of total revenue, for the same period in
1998. The increase in Internet/integrated product revenue and the increase as a
percentage of total revenue were due to the sales of our integrated product,
which was first released in the fourth quarter of 1998. The increase in
Internet/integrated service revenue was driven by the services associated with
the increase in Internet/integrated product sales.
Call Accounting Revenue. Total call accounting revenue was $2.2
million, or 62.7% of total revenue, for the three months ended September 30,
1999, representing a 7.2% decrease from $2.4 million, or 86.7% of total revenue
for the same period in 1998. Call accounting product revenue was $926,000, or
26.6% of total revenue, for the three months ended September 30, 1999,
representing a 13.7% decrease from $1.1 million, or 39.6% of total revenue, for
the same period in 1998. Call accounting service revenue was $1.26 million, or
36.1% of total revenue, in the three months ended September 30, 1999,
representing a 1.6% decrease from $1.28 million, or 47.1% of total revenue, for
the same period in 1998. The decline in call accounting revenue and percentage
share of total revenue in the third quarter of 1999 was due to the focus of our
sales force on selling Internet/integrated products and the conversion of call
accounting product customers to integrated product customers. The integrated
product was released in the fourth quarter of 1998.
Cost of Product Revenue. Cost of product revenue was $402,000, or 11.6%
of total revenue, in the three months ended September 30, 1999, representing a
91.7% increase from $210,000, or 7.7% of total revenue, for the same period in
1998. This increase in cost and the corresponding increase in percentage of
revenue were primarily attributable to an increase in hardware costs related to
increased sales, and royalty payments for third-party licensing incurred since
the release of our fourth generation call accounting and integrated products in
the fourth quarter of 1998.
Cost of Service Revenue. Cost of service revenue was $492,000, or 14.1%
of total revenue, for the three months ended September 30, 1999, representing a
51.6% increase from $324,000, or 12.0% of total revenue, for the same period in
1998. This increase was due to an increase in staff to handle the expansion of
the number of companies under annual maintenance contracts and the increase in
professional services sold.
Research and Development Expenses. Research and development expenses
were $585,000, or 16.8% of total revenue, for the three months ended September
30, 1999, representing an 18.1% increase from $495,000, or 18.3% of total
revenue, for the same period in 1998. The increase in research and development
expenses reflects
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<PAGE> 10
the expansion of our use of outside contractor to accelerate the development of
our product line. In the third quarter of 1998 we were reducing our use of
contractors as we were completing the development of our initial version of our
Internet/integrated product.
Sales and Marketing Expenses. Sales and marketing expenses were $1.7
million, or 47.7% of total revenue, for three months ended September 30, 1999,
representing a 36.7% increase from $1.2 million, or 44.9% of total revenue, for
the same period in 1998. The increase reflects higher commission expense related
to increased sales revenue, and increased compensation costs due to expansion of
the sales and marketing staff.
General and Administrative Expenses. General and administrative
expenses were $969,000, or 27.8% of total revenue, in the three months ended
September 30, 1999, representing a 36.4% increase from $711,000, or 26.2% of
total revenue, for the same period in 1998. This increase was primarily due to
increased recruiting fees, travel expenses and compensation related charges.
Non-cash Compensation Expenses. Non-cash compensation of $153,000, or
4.4% of total revenue, was charged in connection with stock options granted at a
price below market value, primarily to an executive officer.
Other income (expense). Other income (expense) was $62,000, or 1.8% of total
revenue, in the three months ended September 30, 1999, representing a 96.0%
increase from $32,000, or 1.2% of total revenue, for the same period in 1998.
The accelerated amortization of the balance of the initial stock purchase
warrant charge in conjunction with the repayment of the $1,000,000 loan
accounts for this increase.
Nine months Ended September 30, 1999 and 1998
Revenue. Total revenue was $8.9 million for the first nine months of
1999, representing a 15.2% increase from $7.7 million for the same period in
1998. Total product revenue was $4.6 million, or 51.7% of total revenue, in the
first nine months of 1999, representing a 15.9% increase from $4.0 million, or
51.4% of total revenue, for the same period in 1998. Total service revenue was
$4.3 million, or 48.3% of total revenue, in the first nine months of 1999,
representing a 14.4% increase from $3.8 million, or 48.6 % of total revenue, for
the same period in 1998. The increase in total revenue was the result of the
increase in sales of Internet/integrated products and services in the first nine
months of the year.
Internet/Integrated Revenue. Total Internet/integrated revenue was $2.3
million, or 25.7% of total revenue, in the first nine months of 1999,
representing a 232.2% increase from $689,000, or 8.9% of total revenue, for the
same period in 1998. Internet/integrated product revenue was $1.6 million, or
18.5% of total revenue, in the first nine months of 1999, representing a 156.5%
increase from $642,000, or 8.3% of total revenue, for the same period in 1998.
Internet/integrated service revenue was $641,000, or 7.2% of total revenue, in
the first nine months of 1999, representing a 1,280.3% increase from $46,000, or
0.6% of total revenue, for the same period in 1998. The increase in
Internet/integrated product revenue and the increase as a percentage of total
revenue were due to the sales of our integrated product, which was first
released in the fourth quarter of 1998. The increase in Internet/integrated
service revenue was driven by the increase in Internet/integrated product sales.
Call Accounting Revenue. Total call accounting revenue was $6.6
million, or 74.3% of total revenue, for the first nine months of 1999,
representing a 6.1% decrease from $7.0 million, or 91.1% of total revenue for
the same period in 1998. Call accounting product revenue was $3.0 million, or
33.2% of total revenue, for the first nine months of 1999, representing a 11.2%
decrease from $3.3 million, or 43.1% of total revenue, for the same period in
1998. Call accounting service revenue was $3.7 million, or 41.1% of total
revenue, in the first nine months of 1999, representing 1.4% decrease from $3.7
million, or 48.0% of total revenue, for the same period in 1998. The decline in
call accounting revenue and percentage share of total revenue in the first nine
months of 1999 was due to the increased focus of our sales force on selling
Internet/integrated products as compared to selling call accounting only
products and an increase in the provision for product returns.
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<PAGE> 11
Cost of Product Revenue. Cost of product revenue was $958,000, or 10.8%
of total revenue, in the first nine months of 1999, representing a 49.2%
increase from $642,000, or 8.3% of total revenue, for the same period in 1998.
This increase in cost and the corresponding increase in percentage of total
revenue was primarily attributable to an increase in hardware costs related to
increased sales volumes and royalty payments for third-party licensing incurred
since the release of our fourth generation call accounting and integrated
products in the fourth quarter of 1998.
Cost of Service Revenue. Cost of service revenue was $1.2 million, or
13.5% of total revenue, for the first nine months of 1999, representing a 26.2%
increase from $951,000, or 12.3% of total revenue, for the same period in 1998.
This increase was due to an increase in staff to handle the expansion of the
number of companies under annual maintenance contracts and the increase in
professional services sold.
Research and Development Expenses. Research and development expenses
were $1.3 million, or 15.1% of total revenue, for the first nine months of 1999,
representing a 2.3% decrease from $1.4 million, or 17.8% of total revenue, for
the same period in 1998. The decrease in total research and development
expenditures reflects the reduction in expenditures for outside contractors that
were used in 1998 to accelerate the development of our Internet/integrated
product line.
Sales and Marketing Expenses. Sales and marketing expenses include
salaries and related costs, commissions, travel, facilities, communications
costs and promotional expenses for our sales organizations and marketing staff.
Sales and marketing expenses were $3.8 million, or 43.1% of total revenue, in
the first nine months of 1999, representing an 11.2% increase from $3.5 million,
or 44.6% of total revenue, for the same period in 1998. The increase reflects
higher commission expense related to the increased sales revenue, and increased
compensation costs due to expansion of the sales and marketing staffs.
General and Administrative Expenses. General and administrative
expenses include administration salaries and related benefits, depreciation and
amortization , management recruiting fees, as well as legal and professional
fees. General and administrative expenses were $2.7 million, or 29.9% of total
revenue, in the first nine months of 1999, representing a 19.1% increase from
$2.2 million, or 28.9% of total revenue, for the same period in 1998. This
increase was primarily due to an increased provision for uncollectible accounts,
an increase in sales taxes, and recruiting fees.
Non-cash Compensation Expenses. Non-cash compensation of $153,000, or
1.7% of total revenue, was charged in connection with stock options granted at a
price below market value, primarily to an executive officer.
Other income (expense). Other income (expense) was $140,000, or 1.6% of
total revenue, for the first nine months of 1999, representing a 90.3% increase
from $73,000, or 0.9% of total revenue, for the same period in 1998. Interest
expense relating to $1,000,000 borrowed from Sirrom Investments, Inc. in March
1998 and repaid in September 1999 accounts for this increase.
Redeemable Stock Purchase Warrant. Charges for the increase in value of
the redeemable stock purchase warrant were $1.6 million, or 18.2% of total
revenue, in the first nine months of 1999. There was no similar charge in 1998.
This charge represents the increase in the value of the warrant granted Sirrom
Investments, Inc. in connection with the $1,000,000 loan from Sirrom. The
warrant was exercised and the loan was repaid in September 1999.
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<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations from cash generated from
operations and the issuance of long-term debt. We had cash and cash equivalents
of $1.0 million at September 30, 1999, and $113,000 at September 30, 1998.
Cash provided by (used in) operating activities during the nine months
ended September 30, 1999 and September 30, 1998 was $6,000, and $(762,000),
respectively. This increase reflects the net impact of increases in our net loss
and in accounts receivable, which were offset by an increase in accounts payable
and accrued expenses, the recording of accretion of the redeemable common stock
warrant related to our loan with Sirrom Investments, Inc. and an increase in
deferred revenue.
Our investing activities primarily include expenditures for fixed
assets in support of our product development activities and infrastructure. Net
cash used in investing activities increased to $580,000 in the nine months ended
September 30, 1999, compared to $247,000 for the same period in 1998. This
increase resulted primarily from an increase in fixed assets purchased.
Net cash provided by financing activities was $1.6 million in
the nine months ended September 30, 1999, compared to $1.0 million for the same
period in 1998. This change was due primarily to the sale of Series A redeemable
convertible preferred stock for $6.0 million, the redemption of common stock for
$4.0 million, the repayment of the loan from Sirrom Investments, Inc. for $1.0
million, and the sale of common stock for $500,000 in the nine months ended
September 30, 1999, and the issuance of long-term debt in 1998. We also have a
$750,000 bank line of credit with Silicon Valley Bank, which expires in November
1999. As of September 30, 1999, there was $750,000 available under this line of
credit.
Since we have not generated significant revenue from sales outside the
United States, we have not sustained material foreign currency exchange losses
and presently do not attempt to hedge our exposure to fluctuations in foreign
currency exchange rates. Should our revenue from international sales increase,
and should such sales be denominated in foreign currencies, we intend to adopt a
hedging strategy against foreign currency fluctuations.
We believe that our existing liquidity and capital resources, including
the proceeds resulting from the sale of our common stock in the IPO, will be
sufficient to satisfy our cash requirements for at least the next 12 months.
Beyond the next 12 months, we expect income from operations and the remaining
proceeds from the IPO to provide sufficient liquidity and capital resources, and
we are not aware of any events that may cause our liquidity to increase or
decrease in a material way. However, our business strategies will require a
substantial increase in expenditures. To the extent that income from operations
is insufficient to implement our business strategies, or if we identify
additional strategic investments in our business, technology or products, we may
be required to raise additional funds through equity or debt financing. If
adequate funds are not available on acceptable terms or at all, our ability to
implement our business strategies or take advantage of unanticipated
opportunities or otherwise respond to competitive pressures would be limited.
There can be no assurance that we will be able to raise these additional funds
on terms acceptable to us, or at all.
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
State of Readiness of our Products. All new products introduced by us
will be year 2000 compliant. We have been testing our existing products for use
in the year 2000 and beyond. The results suggest that current versions of our
products are year 2000 compliant. However, our testing does not cover every
possible computing environment. Accordingly, some customers may have year 2000
problems with products that we believe are 2000 compliant.
Previous purchasers may be using older versions of our products. We
believe problems encountered by such users could be quickly remedied with our
year 2000 upgrades for those products. In addition, we have not
-12-
<PAGE> 13
tested discontinued products for year 2000 compliance, some of which are still
in use. We have identified and attempted to inform customers that rely on such
discontinued products of their lack of compliance and are working with them to
provide alternate operating arrangements. We cannot guarantee that we will be
able to locate all users of our older, non-compliant products. Our experience in
developing year 2000 compliant versions of our existing products suggests that
we can correct year 2000 problems in our discontinued products without incurring
material expenses.
State of Readiness of our Internal Systems. We may be affected by year
2000 issues related to non-compliant internal systems developed by us or by
third-party vendors. We have completed testing all material internal systems for
year 2000 compliance. We are not currently aware of any year 2000 problem
relating to any internal systems material to the operation of our business. We
have also received assurances from our third-party vendors for all material
systems in use by us that such systems are year 2000 compliant, except with
respect to an application for customer order tracking. We anticipate that the
non-compliant application for customer order tracking will be made year 2000
compliant or replaced before December 31, 1999.
Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers, and
service providers. We believe that absent a critical failure beyond our control,
such as a prolonged loss of electrical or telephone service, year 2000 problems
experienced by third parties will not have a material impact on us. We have no
contingency plan for critical failures in third-party products. Our contingency
plan in the event of non-critical failure is to establish relationships with
alternative suppliers or vendors to replace failed suppliers or vendors.
Cost. We do not separately track expenditures relating to year 2000
compliance. Such expenditures are primarily absorbed with our development
organization. To date, our costs related to year 2000 compliance have not been
material relative to our overall development expenditures. Furthermore, based on
our experience to date, and our assessment that all material internal systems
other than the order tracking application and all currently marketed products
are year 2000 compliant, we do not anticipate that costs associated with
remediating our non-compliant products or internal systems will be material.
Risks. We believe the most likely consequences of a failure by us to
make our products year 2000 compliant would be a decrease in sales of our
products, an increase in allocation of resources to address year 2000 problems
of our customers without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by our
customers due to such year 2000 problems. We believe the most likely
consequences of a failure of our internal systems or the systems of third-party
suppliers or service providers would be our inability to process orders, issue
invoices, and develop products. Should any of these problems occur, we could be
required to devote significant resources to correct them. Aside from the
possibility of having to establish relationships with alternative suppliers or
vendors to replace failed suppliers of vendors, we do not currently anticipate
having to develop a contingency plan for handling any year 2000 problems that
are not detected or corrected prior to their occurrence. Due to the general
uncertainty inherent in the year 2000 computer problem, resulting for the
uncertainty of the year 2000 readiness of third-party suppliers and vendors, we
are unable to determine at this time whether the consequences of year 2000
failures will have a material impact on our business, results or operations and
financial condition.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No events occurred during the quarter covered by the Report that would
require response to this item.
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<PAGE> 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Proceeds from the Company's IPO have been used for the
repayment of $1,000,000.00 of indebtedness, and the remainder will be
used for working capital and other general corporate purposes,
including increasing our sales and marketing, and product development
activities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No events occurred during the quarter covered by the Report that would
require response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No events occurred during the quarter covered by the Report that would
require response to this item.
ITEM 5. OTHER INFORMATION.
No events occurred during the quarter covered by the Report that would
require response to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibit is filed with this Report:
Exhibit 27.1 Financial Data
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
quarter ended September 30, 1999
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.
TELEMATE.NET SOFTWARE, INC.
/s/ Richard L. Mauro
Date: November 12, 1999 -----------------------------------------------
Richard L. Mauro
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Richard J. Post
Date: November 12, 1999 -----------------------------------------------
Richard J. Post
Senior Vice President - Finance and Operations,
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
-14-
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