<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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 000-26735
TELEMATE.NET SOFTWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-1656726
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 [X] No [ ]
The number of shares of the issuer's class of capital stock as of October 24,
2000, the latest practicable date, is as follows: 7,892,488 shares of Common
Stock, $0.01 par value.
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<PAGE> 2
TELEMATE.NET SOFTWARE, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
Page
----
<S> <C>
ITEM 1. UNAUDITED FINANCIAL STATEMENTS.
Balance Sheets as of September 30, 2000 and December 31, 1999 3
Statements of Operations for the three months ended September 30, 2000 and
1999 and for the nine months ended September 30, 2000 and 1999 4
Statements of Cash Flows for the nine months ended September 30, 2000
and 1999 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 15
ITEM 5. OTHER INFORMATION. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 15
SIGNATURES. 15
</TABLE>
Page 2 of 15
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TELEMATE.NET SOFTWARE, INC.
BALANCE SHEETS
(unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 31,107 $ 42,755
Trade accounts receivable, net of allowance for
doubtful accounts and returns...................................... 2,779 3,467
Prepaid expenses and other current assets................................. 723 518
---------- ----------
Total current assets................................................. 34,609 46,740
Long term assets:
Property and equipment, net of depreciation and amortization.............. 2,303 1,474
Other assets.............................................................. 75 60
---------- ----------
Total assets......................................................... $ 36,987 $ 48,274
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 865 $ 1,212
Accrued expenses and other liabilities.................................... 2,214 1,705
Deferred revenue.......................................................... 3,072 3,041
---------- ----------
Total current liabilities............................................ 6,151 5,958
---------- ----------
Commitments and contingencies....................................................... -- --
Shareholders' equity:
Preferred stock, $.01 par value; 19,700,000 authorized and
undesignated, no shares issued and outstanding........................ -- --
Common stock, $.01 par value; 100,000,000 shares authorized,
7,892,488 shares issued and outstanding at September 30, 2000
and 7,359,962 issued and outstanding at December 31, 1999............. 79 73
Additional paid in capital................................................ 53,068 52,537
Notes receivable and accrued interest from shareholders................... (20) (27)
Accumulated deficit....................................................... (22,291) (10,267)
---------- ----------
Total shareholders' equity................................................ 30,836 42,316
---------- ----------
Total liabilities and shareholders' equity................................ $ 36,987 $ 48,274
========== ==========
</TABLE>
See accompanying notes to financial statements
Page 3 of 15
<PAGE> 4
TELEMATE.NET SOFTWARE, INC
STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue ............................. $ 785 $ 1,797 $ 3,001 $ 4,605
Services revenue ............................ 1,696 1,685 5,370 4,301
----------- ----------- ----------- -----------
Total revenue ..................... 2,481 3,482 8,371 8,906
COST OF REVENUE:
Product costs ............................... 373 411 1,283 980
Service costs ............................... 1,042 620 2,954 1,493
----------- ----------- ----------- -----------
Total cost of revenue ............. 1,415 1,031 4,237 2,473
Gross profit ...................... 1,066 2,451 4,134 6,433
OPERATING EXPENSES:
Research and development .................... 877 611 2,711 1,411
Sales and marketing ......................... 3,358 1,724 10,921 3,997
General and administrative .................. 1,496 744 4,047 2,118
Non cash compensation charge ................ -- 153 -- 153
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES ........... 5,731 3,232 17,679 7,679
OPERATING LOSS ..................... (4,665) (781) (13,545) (1,246)
INTEREST INCOME (EXPENSE):
Increase in redeemable stock purchase
warrant ................................... -- (857) -- (1,591)
Other interest income ....................... 493 16 1,521 31
Other interest expense ...................... -- (105) -- (197)
----------- ----------- ----------- -----------
Total interest income (expense).... 493 (946) 1,521 (1,757)
----------- ----------- ----------- -----------
Loss before income taxes .......... (4,172) (1,727) (12,024) (3,003)
PROVISION FOR INCOME TAXES ..................... -- -- -- --
----------- ----------- ----------- -----------
Net loss .......................... $ (4,172) $ (1,727) $ (12,024) $ (3,003)
=========== =========== =========== ===========
Net loss per share:
Basic ............................. $ (0.53) $ (0.61) $ (1.56) $ (0.97)
Diluted ........................... $ (0.53) $ (0.61) $ (1.56) $ (0.97)
Weighted average shares outstanding:
Basic ............................. 7,881,419 2,844,792 7,705,153 3,092,575
=========== =========== =========== ===========
Diluted ........................... 7,881,419 2,844,792 7,705,153 3,092,575
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
Page 4 of 15
<PAGE> 5
TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
-------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Loss .................................................................. $(12,024) $ (3,003)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 789 263
Provision for bad debts and returns ................................ 133 134
Compensation on stock options ...................................... 6 153
Accrued interest on shareholder notes .............................. (1) (13)
Amortization of discount on redeemable stock purchase warrants ..... -- 92
Accretion of redeemable stock purchase warrant ..................... -- 1,591
Changes in operating assets and liabilities:
Trade accounts receivable .................................... 555 (593)
Prepaids expenses and other current assets ................... (205) (255)
Other assets ................................................. (15) (828)
Accounts payable, accrued expenses, and
other liabilities ........................................ 162 1,794
Deferred revenue ............................................. 31 671
-------- --------
Net cash provided by (used in) operating activities ...... (10,569) 6
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ....................................... (1,618) (580)
-------- --------
Net cash used in investing activities .................... (1,618) (580)
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of Series A redeemable convertible preferred
stock, net ......................................................... -- 5,950
Proceeds from the issuance of common stock ................................ -- 500
Purchase and retirement of common stock ................................... -- (4,000)
Shareholder distributions ................................................. -- (5)
Repayment of long term borrowings ......................................... -- (1,000)
Repayment of credit facility .............................................. -- (80)
Proceeds from the exercise of stock options ............................... 531 92
Payments received on notes receivable from shareholders ................... 8 103
-------- --------
Net cash provided by financing activities ............... 539 1,560
-------- --------
Net (decrease) increase in cash and cash equivalents....................... (11,648) 986
Cash and cash equivalents at beginning of period ................................. 42,755 46
-------- --------
Cash and cash equivalents at end of period ....................................... $ 31,107 $ 1,032
-------- --------
Supplemental disclosure - cash paid for interest ................................. $ -- $ 106
======== ========
Supplemental disclosure of significant noncash investing and financing
activities:
Reduction of notes from shareholders in exchange for cash distributions ... $ -- $ 265
======== ========
Issuance of common stock in exchange for software ......................... $ -- $ 120
======== ========
Financing costs withheld from preferred stock proceeds .................... $ -- $ 50
======== ========
</TABLE>
See accompanying notes to financial statements
Page 5 of 15
<PAGE> 6
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in 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. Costs and expenses reflect
certain reclassifications. These financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1999, found in filings made by Telemate.Net Software, Inc. with the
Securities and Exchange Commission, including its Annual Report on Form 10-K
filed with the Commission on March 30, 2000.
2. Shareholders' Equity
On October 4, 1999, Telemate.Net Software, Inc. completed an initial
public offering of 3,500,000 shares of common stock including 3,284,000 newly
issued shares sold by Telemate.Net Software and 216,000 outstanding shares sold
by existing shareholders. The offered shares generated net proceeds to
Telemate.Net Software of approximately $42.8 million before offering expenses.
Subsequently, pursuant to the underwriters' exercise of their over-allotment
option, the selling shareholders sold an additional 100,000 shares and
Telemate.Net Software sold 165,000 shares. Telemate.Net Software received $2.1
million from the proceeds of the sale of the 165,000 shares on November 1, 1999.
3. Net Loss Per Common Share
Basic net loss per share was computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net
loss per share considers the effect of dilutive common stock equivalents.
Dilutive common equivalent shares consist of stock options. However, because
the inclusion of the common stock equivalents would be anti-dilutive, the
weighted average number of common shares outstanding during the period for the
basic and diluted net loss per share is the same.
Page 6 of 15
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain of the information included in this report, including
statements regarding our growth and operating strategy, liquidity and capital
expenditures, and trends in our industry, constitute "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, and
we intend that such forward-looking statements be subject to the safe harbors
created thereby. Examples of words indicating forward-looking statements include
"believes," "expects" and "will." These forward-looking statements reflect our
current views with respect to future events and financial performance, but are
subject to many uncertainties and factors relating to our operations and
business environment that may cause our actual results to be materially
different from any future results expressed or implied by such forward-looking
statements. For further information about these and other factors that could
affect our future results, please see Exhibit 99.1 entitled "Safe Harbor
Compliance Statement" attached to this quarterly report.
OVERVIEW
Telemate.Net Software, Inc. solutions enable businesses to monitor,
analyze, and manage the use of their Internet, intranet, and voice networks.
From our inception in 1986 through 1996, we focused exclusively on providing
call accounting software solutions. By the early 1990s, we had emerged as a call
accounting market leader as a result of 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 a new generation of Internet usage management software. In November
1998, we introduced our integrated network usage management products, which
allow our customers to report on both Internet usage and call accounting. In
April 2000, we expanded our product line to include e-business intelligence with
the launch of our eSpective application.
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 foregoing potential profits
and borrowing $1.0 million in 1998. The refocusing of our business resulted in
reduced call accounting revenue growth. With the proceeds from our initial
public offering, we have continued our investment in Internet products as
evidenced by the release of our eSpective application, which collects activity
data from web servers and translates the data into management analysis
reporting. In July 2000, we reorganized our company into Call Accounting and
Internet divisions in order to better focus on our Internet product line while
simultaneously maximizing the potential of our call accounting business.
Our revenue consists of product and service revenue. Our product
revenue is derived primarily from licensing our software products. We also
resell complementary hardware. 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 licensed products. Professional
services include 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, 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 typically recognized
upon shipment. Revenue generated 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.
Page 7 of 15
<PAGE> 8
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.
With the development of our Internet product, we believed that many
customers would prefer to purchase both our call accounting and Internet
solutions as an integrated solution in a single transaction. After additional
experience in the evolving Internet market, we now believe that most customers
typically have different purchasing processes and decision makers for call
accounting and Internet usage management products. Based on this market
feedback, we reorganized our business as announced on July 19, 2000 into two
business divisions - the Internet division and the Call Accounting division. As
a result, management believes that Integrated sales will decline rapidly and
that most future sales will be either dedicated call accounting or dedicated
Internet products.
We sell our products through a combination of direct sales by our sales
personnel and indirect sales primarily through resellers and distributors.
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 who 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. For
example, on March 6, 2000 we announced an OEM and Reseller Agreement with Cisco
Systems. We expect to continue to focus our sales resources on strengthening
existing relationships and creating new strategic relationships.
From our inception in 1986 until June 1999, we elected to operate
under subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable provisions of state income tax laws. An S corporation generally is
not subject to income tax at the corporate level. The S corporation's income
generally passes through to shareholders and is taxed on their personal income
tax returns. As a result, our earnings were taxed directly to our existing
shareholders. On June 16, 1999, we terminated our status as an S corporation
under the tax code upon closing of the sale of 300,000 shares of Series A
redeemable convertible preferred stock. In connection with the termination of
our S corporation status, we distributed $270,000 and we reclassified the
accumulated deficit of $296,000 through the S corporation termination date,
limited to the amount of paid in capital, to additional paid-in capital.
At the time we terminated our S corporation status, we established our
net deferred tax assets and liabilities. In assessing the realizability of
deferred tax assets, our management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. As a
result of this assessment, we recorded a valuation allowance of 100% of our net
deferred tax asset.
In October 1999, we completed our initial public offering, which
resulted in net proceeds to us of approximately $42.8 million before payment of
related expenses. We used $1.0 million of the proceeds from our initial public
offering to repay existing indebtedness. We intend to use the remaining net
proceeds for working capital and other general corporate purposes, which may
include increasing our product development activities, and pursuing strategic
acquisitions and relationships.
Page 8 of 15
<PAGE> 9
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
(Unaudited and in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUE:
INTERNET/INTEGRATED:
Product revenue ....................... $ 351 $ 872 $1,702 $1,648
Services revenue ...................... 540 334 1,745 546
------ ------ ------ ------
TOTAL INTERNET/INTEGRATED REVENUE ..... 891 1,206 3,447 2,194
CALL ACCOUNTING:
Product revenue ....................... 434 925 1,299 2,957
Services revenue ...................... 1,156 1,351 3,625 3,755
------ ------ ------ ------
TOTAL CALL ACCOUNTING REVENUE ......... 1,590 2,276 4,924 6,712
TOTAL:
Product revenue ....................... 785 1,797 3,001 4,605
Services revenue ...................... 1,696 1,685 5,370 4,301
------ ------ ------ ------
TOTAL REVENUE .............. $2,481 $3,482 $8,371 $8,906
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUE:
INTERNET/INTEGRATED:
Product revenue ........................ 14.1% 25.0% 20.4% 18.5%
Services revenue ....................... 21.8 9.6 20.8 6.1
----- ----- ----- -----
TOTAL INTERNET/INTEGRATED REVENUE ...... 35.9 34.6 41.2 24.6
CALL ACCOUNTING:
Product revenue ........................ 17.5 26.6 15.5 33.2
Services revenue ....................... 46.6 38.8 43.3 42.2
----- ----- ----- -----
TOTAL CALL ACCOUNTING REVENUE .......... 64.1 65.4 58.8 75.4
TOTAL:
Product revenue ........................ 31.6 51.6 35.9 51.7
Services revenue ....................... 68.4 48.4 64.1 48.3
----- ----- ----- -----
TOTAL REVENUE ............... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
Our corporate restructuring by product line in July 2000 has
initially resulted in lower overall sales principally due to the
reassignment of sales people and the rebuilding of their pipelines. In
addition, the increased product focus resulting from this restructuring
has highlighted a need for several refinements in our products and
their positioning that we believe will better address evolving market
needs. We believe it will take several quarters for the corporate
restructuring and product enhancements to have an impact on sales.
Recognizing this and desiring to reduce our current fixed costs, on
October 3, 2000, we announced a reduction in our work force of
approximately 20 percent. Our management anticipates that these actions
will result in a one-time restructuring charge of approximately
$300,000 in the fourth quarter.
Page 9 of 15
<PAGE> 10
Three Months Ended September 30, 2000 and 1999
Revenue. Total revenue was $2.5 million for the three months
ended September 30, 2000, down from $3.5 million for the third quarter
of 1999. Total product revenue was $785,000, or 31.6% of total revenue,
in the three months ended September 30, 2000, representing a 56.3%
decrease from $1.8 million, or 51.6% of total revenue, for the same
period in 1999. Revenue from the resale of complementary hardware
included in product revenue represented 9.8% of total revenue for the
three months ended September 30, 2000, a decrease from 12.4% for the
same period in 1999. Total service revenue was $1.7 million, or 68.4%
of total revenue, in the three months ended September 30, 2000,
essentially flat with $1.7 million, or 48.4% of total revenue, for the
same period in 1999. During the third quarter of 2000, a sales
agreement with a third party contractor to provide software, hardware,
and installation services for a single customer at 51 different sites
represented 6.5% of total revenue, compared to 21.3% in the same
quarter of 1999. We do not believe this agreement will generate
significant revenue in the future.
Internet/Integrated Revenue. Total Internet/integrated revenue
was $891,000, or 35.9% of total revenue, in the three months ended
September 30, 2000, a 26.1% decrease from $1.2 million, or 34.6% of
total revenue, for the same period in 1999. Internet/integrated product
revenue was $351,000, or 14.1% of total revenue, in the three months
ended September 30, 2000, representing a 59.7% decrease from $872,000
or 25.0% of total revenue, for the same period in 1999.
Internet/integrated service revenue was $540,000, or 21.8% of total
revenue, in the three months ended September 30, 2000, representing a
61.7% increase from $334,000, or 9.6% of total revenue, for the same
period in 1999. The decrease in Internet/integrated product revenue
resulted predominantly from a decrease in the sale of software and
hardware to the major customer referred to under Revenue above. Service
revenue increased due primarily to higher maintenance fees. The
increase in Internet/integrated revenue as a percentage of total
revenue was due to the focus of our sales force on the
Internet/integrated products.
Call Accounting Revenue. Total call accounting revenue was
$1.6 million, or 64.1% of total revenue, for the three months ended
September 30, 2000, a 30.1% decrease from $2.3 million, or 65.4% of
total revenue, for the same period in 1999. Call accounting product
revenue was $434,000, or 17.5% of total revenue, for the three months
ended September 30, 2000, representing a 53.1% decrease from $925,000,
or 26.6% of total revenue, for the same period in 1999. Call accounting
service revenue was $1.2 million, or 46.6% of total revenue, in the
three months ended September 30, 2000, representing a 14.4% decrease
from $1.4 million, or 38.8% of total revenue, for the same period in
1999. Management believes the decline in call accounting revenue in
both absolute dollars and as a percentage of total revenue resulted
from our decision to emphasize the Internet products in our marketing
and sales efforts.
Cost of Product Revenue. Cost of product revenue was $373,000
or 15.0% of total revenue, in the three months ended September 30,
2000, a 9.2% decrease from $411,000, or 11.8% of total revenue, for the
same period in 1999. The increase in product cost as a percentage of
total revenue was attributable to an increase in the percentage of
product revenue derived from hardware sales, increases in software
royalties and higher amortization costs for purchased software.
Management believes the hardware component of revenue will return to
the historical levels of prior years for the remainder of this year and
that service revenue will continue to produce a higher percentage of
total revenue.
Cost of Service Revenue. Cost of service revenue was $1.0
million, or 42.0% of total revenue, for the three months ended
September 30, 2000, representing a 68.1% increase from $620,000, or
17.8% of total revenue, for the same period in 1999. The increase in
both absolute dollars and as a percentage of revenue resulted from
increased service staffing levels to improve the service level to
existing customers and in anticipation of future support and service
requirements. As part of the company's reduction in force in October
2000, management reduced service staff levels to correspond more
directly with current revenue levels. Management believes this
reduction will result in improved margins on service revenue while
maintaining service levels.
Page 10 of 15
<PAGE> 11
Research and Development Expenses. Research and development
expenses were $877,000, or 35.3% of total revenue, for the three months
ended September 30, 2000, representing a 43.5% increase from $611,000,
or 17.5% of total revenue, for the same period in 1999. The increase in
total research and development expenses reflects increased research and
development personnel to accelerate new product development. We expect
research and development expenses to increase as we continue to commit
substantial resources to enhancing existing product functionality and
to developing new products.
Sales and Marketing Expenses. Sales and marketing expenses
were $3.4 million, or 135.3% of total revenue, for the three months
ended September 30, 2000, representing a 94.8% increase from $1.7
million, or 49.5% of total revenue, for the same period in 1999. The
increases in both absolute dollars and as a percentage of total revenue
were due to several factors, primarily the addition of sales and
marketing personnel and initiation of marketing lead generation
programs in an effort to accelerate our revenue growth following our
initial public offering. We expect sales and marketing expenses to
decrease in both absolute dollars and as a percentage of revenue in the
fourth quarter of 2000 due to the reduction of sales and marketing
staff that occurred in October 2000 and due to a decrease in our
promotional activities.
General and Administrative Expenses. General and
administrative expenses were $1.5 million, or 60.3% of total revenue,
in the three months ended September 30, 2000, representing a 101.1%
increase from $744,000, or 21.4% of total revenue, for the same period
in 1999. This increase was primarily due to staff related costs,
insurance and professional service fees largely related to the
requirements of being a public company. We expect general and
administrative costs for the next several quarters to be relatively
flat with the current quarter in absolute dollars.
Non-cash Compensation Expenses. Non-cash compensation charges
were zero in 2000, as compared to $153,000, or 4.4% of total revenue,
for the third quarter of 1999. This charge was in connection with stock
options granted at a price below market value, primarily to an
executive officer.
Redeemable Stock Purchase Warrant. The charges for the
increase in value of our redeemable common stock purchase warrant
was $857,000, or 24.6% of total revenue, for the third quarter of
1999. This charge represents the increase in the value of the
warrant granted in connection with the $1,000,000 loan. The warrant
was exercised and the loan was repaid in September 1999.
Other Interest Income. Other interest income was $493,000, or
19.9% of total revenue, for the three months ended September 30, 2000,
compared to $16,000, or less than 1% of total revenue, for the same
quarter of 1999. Proceeds from investment of the funds received in the
initial public offering account for the interest income.
Other Interest Expense. Other interest expense was zero in the
three months ended September 30, 2000, compared to $105,000 for the
same period in 1999. We repaid all outstanding debt with the proceeds
from our initial public offering.
Nine Months Ended September 30, 2000 and 1999
Revenue. Total revenue was $8.4 million for the nine months
ended September 30, 2000, representing a 6.0% decrease from $8.9
million for the same period in 1999. Total product revenue was $3.0
million, or 35.9% of total revenue in the nine months ended September
30, 2000, representing a 34.8% decrease from $4.6 million, or 51.7% of
total revenue, for the same period in 1999. Included in product revenue
are revenues from the resale of complementary hardware, which has
historically accounted for less than 10% of our total annual revenue.
For the nine months ended September 30, 2000, our hardware
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sales represented 12.2% of revenue. In the third quarter, our hardware
sales represented 9.8% of total revenue. We expect this percentage to
be at historical levels during the fourth quarter. Total service
revenue was $5.4 million, or 64.1% of total revenue, in the nine months
ended September 30, 2000, representing a 24.9% increase from $4.3
million, or 48.3% of total revenue, for the same period in 1999. The
increase in service revenue was due to increases in fees from both
maintenance and professional services components related to our
Internet and integrated products. Impacting revenue was a sales
agreement with a third party contractor to provide software, hardware,
and installation services for one customer at 51 different sites.
During the first nine months of the year, this sales agreement
represented 12.9% of revenue, compared to 10% of revenue for the same
period in 1999. We do not believe this agreement will generate
significant revenue in the future.
Internet/Integrated Revenue. Total Internet/integrated revenue
was $3.4 million, or 41.2% of total revenue, in the nine months ended
September 30, 2000, representing a 57.1% increase from $2.2 million, or
24.6% of total revenue, for the same period in 1999. Internet/
integrated product revenue was $1.7 million, or 20.4% of total revenue,
in the nine months ended September 30, 2000, representing a 3.3%
increase from $1.6 million, or 18.5% of total revenue, for the same
period in 1999. Internet/integrated service revenue was $1.7 million,
or 20.8% of total revenue, in the nine months ended September 30, 2000,
representing a 219.6% increase from $546,000, or 6.1% of total revenue,
for the same period in 1999. The increase in Internet/integrated
revenue was driven by the sale of hardware and delivery of professional
services related to the sales agreement mentioned under Revenue above,
as well as our decision in the fourth quarter of 1999 to emphasize our
Internet products in our marketing and sales efforts.
Call Accounting Revenue. Total call accounting revenue was
$4.9 million, or 58.8% of total revenue, for the nine months ended
September 30, 2000, representing a 26.6% decrease from $6.7 million, or
75.4% of total revenue, for the same period in 1999. Call accounting
product revenue was $1.3 million, or 15.5% of total revenue, for the
nine months ended September 30, 2000, representing a 56.1% decrease
from $3.0 million, or 33.2% of total revenue, for the same period in
1999. Call accounting service revenue was $3.6 million, or 43.3% of
total revenue, in the nine months ended September 30, representing a
3.5% decrease from $3.8 million, or 42.2% of total revenue, for the
same period in 1999. The decline in call accounting revenue in absolute
dollars and as a percentage of total revenue was due in part to our
decision in the fourth quarter of 1999 to emphasize our Internet
products in our marketing and sales efforts.
Cost of Product Revenue. Cost of product revenue was $1.3
million, or 15.3% of total revenue, in the nine months ended September
30, 2000, representing a 30.9% increase from $980,000, or 11.0% of
total revenue, for the same period in 1999. This increase in both
absolute dollars and as a percentage of revenue was primarily
attributable to a mix change toward hardware and away from software
licenses driven by several large sales with a large hardware component,
including some hardware sales to the major customer referred to under
Revenue above. Furthermore, increases in royalty payments for
third-party licensing and amortization of a software license also
contributed to the increase. Our management believes the hardware
component of revenue will be at historical levels for the remainder of
the year.
Cost of Service Revenue. Cost of service revenue was $3.0
million, or 35.3% of total revenue, for the nine months ended September
30, 2000, representing a 97.9% increase from $1.5 million, or 16.8% of
total revenue, for the same period in 1999. The increase in absolute
dollars and as a percentage of revenue was the result of an increase in
service staff hired to meet our anticipated support and service
requirements and to improve service levels. At the beginning of the
fourth quarter, management reduced service staff levels to correspond
more directly with revenue results. Our management believes this
reduction will result in improved margins on service revenue while
maintaining service levels.
Research and Development Expenses. Research and development
expenses were $2.7 million, or 32.4% of total revenue, for the nine
months ended September 30, 2000, representing a 92.1% increase from
$1.4 million, or 15.8% of total revenue, for the same period in 1999.
The increase in total research and development expenses reflects
increased research and development personnel during the first three
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quarters of 2000 as we accelerated our new product development. We expect
research and development expenses to be relatively stable as we continue to
enhance existing product functionality and develop new products.
Sales and Marketing Expenses. Sales and marketing expenses were $10.9
million, or 130.5% of total revenue, for the nine months ended September 30,
2000, representing a 173.2% increase from $4.0 million, or 44.9% of total
revenue, for the same period in 1999. The increases in both absolute dollars and
as a percentage of total revenue were due to several factors, including the
addition of sales personnel in the second half of 1999 and the first half of
2000 in an effort to accelerate our revenue growth and the establishment of
additional sales offices both domestically and in Europe. The increases were
also due to our initiation of significant advertising and marketing programs in
the first three quarters of 2000 and increased marketing staffing to manage
these activities. We expect sales and marketing expenses to decrease in both
absolute dollars and as a percentage of revenue in the fourth quarter of 2000
due to the reduction of staff that occurred at the beginning of the fourth
quarter and a decrease in promotional activities.
General and Administrative Expenses. General and administrative
expenses were $4.0 million, or 48.3% of total revenue, in the nine months ended
September 30, 2000, representing a 91.1% increase from $2.1 million, or 23.8% of
total revenue, for the same period in 1999. This increase was primarily due to
staff related costs, insurance, and professional service fees largely associated
with the requirements of being a public company. We expect general and
administrative costs to remain relatively stable in absolute dollars.
Non-cash Compensation Expenses. Non-cash compensation charges were zero
in 2000, as compared to $153,000, or 1.7% of total revenue, for the first nine
months of 1999. This charge was in connection with stock options granted at a
price below market value, primarily to an executive officer.
Redeemable Stock Purchase Warrant. Charges for the increase in value of
our redeemable common stock purchase warrant were zero in 2000, as compared to
$1.6 million, or 17.9% of total revenue, in the first nine months of 1999. This
charge represents the increase in the value of the warrant granted in connection
with the $1,000,000 loan. The warrant was exercised and the loan was repaid in
September 1999.
Other Interest Income. Other interest income was $1.5 million or 18.2%
of total revenue, for the nine months ended September 30, 2000, compared to
$31,000, or less than 1% of revenue, for the same period in 1999. Proceeds from
investment of the funds received in the initial public offering account for the
interest income.
Other Interest Expense. Other interest expense was zero in the nine
months ended September 30, 2000, compared to $197,000 for the same period in
1999. We repaid all outstanding debt with the proceeds from our initial public
offering.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations from cash generated from
operations and the issuance of long-term debt. However, in October 1999, we
completed our initial public offering that provided us approximately $42.8
million in net cash proceeds. We had cash and cash equivalents of $31.1 million
at September 30, 2000 and $1.0 million at September 30, 1999.
Cash used in operating activities during the nine months ended
September 30, 2000 was $10.6 million. Cash provided by operating activities
during the nine months ended September 30, 1999 was $6,000. This change reflects
the net impact of increases in our net loss, and smaller changes in accounts
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receivable, accounts payable and deferred revenue, as well as the recording of
accretion of the redeemable common stock put warrant related to our loan in
1999.
Our investing activities primarily include expenditures for fixed
assets to support our expanding operations. Net cash used in investing
activities increased to $1.6 million in the first nine months of 2000, compared
to $580,000 for the same period in 1999.
Net cash provided by financing activities was $539,000 for the nine
month period ended September 30, 2000, compared to $1.6 million for the period
ended September 30, 1999. This change in 2000 was due primarily to issuance of
common stock resulting from the exercise of options. Net cash provided by
financing activities in 1999 resulted from the issuance of preferred stock and
common stock for $6.0 million and $500,000, respectively; the repurchase of
common shares for $4.0 million; the repayment of a $1.0 million loan to Sirrom
Investments, Inc.; the repayment of $80,000 on our bank line of credit, which
expired in November 1999; the issuance of common stock resulting from the
exercise of options; and $103,000 from shareholder payments.
Because 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 our initial public
offering, 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 our initial public offering 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, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to a number of market risks in the ordinary course of
our business, such as foreign currency exchange risk resulting from our
international operations. These risks arise in the normal course of business
rather than from trading. In addition, some of our traded assets are exposed to
market risks such as interest rate fluctuations. Our management has examined our
exposures to all of these risks and has concluded that none of our exposures in
these areas is material to fair values, cash flows or results of operations.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No events occurred during the quarter covered by this Report that would
require response to this item.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
No events occurred during the quarter covered by this Report that would
require response to this item.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No events occurred during the quarter covered by this 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 this Report that would
require response to this item.
ITEM 5. OTHER INFORMATION.
No events occurred during the quarter covered by this 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 Schedule (for SEC use only)
Exhibit 99.1 Safe Harbor Compliance Statement
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
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.
Date: November 14, 2000 /s/ Richard L. Mauro
-----------------------------------------------
Richard L. Mauro
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 /s/ Janet Van Pelt
-----------------------------------------------
Janet Van Pelt
Senior Vice President - Finance and Operations,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
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