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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 Specified in Its Charter)
<TABLE>
<S> <C>
GEORGIA 58-1656726
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
4250 PERIMETER PARK SOUTH, SUITE 200 30341
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
Registrant's telephone number, including area code: (770) 936-3700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the average of the closing bid and ask quotations for
the Registrant's common stock on March 24, 2000 as reported by The Nasdaq Stock
Market, was approximately $55,575,000. The shares of common stock held by each
officer and director and by each person known to the Registrant who owns 5% or
more of the outstanding common stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of March 24, 2000,
Registrant had outstanding 7,607,462 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 31, 2000 is incorporated by reference in Part III
of this Form 10-K to the extent stated herein.
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PART I
Some of the statements contained in this report contain forward-looking
information. These statements are found in the sections entitled "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." They include statements concerning:
- our growth and operating strategy;
- liquidity and capital expenditures;
- trends in our industry; and
- payment of dividends.
Forward-looking statements can be identified by forward-looking words such
as "expect," "believe," "goal," "plan," "intend," "estimate," "may" and "will"
or similar words. Such statements are subject to known and unknown risks,
uncertainties and other factors, including those discussed in Exhibit 99.1 to
this report, that could cause actual results to differ materially from those
suggested by the forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Telemate.Net Software, Inc. provides network intelligence for the Internet
economy. Our integrated network usage management solutions enable businesses to
monitor, analyze and manage the use of both their Internet and voice networks.
Our Telemate.Net family of products enables businesses to optimize network
utilization, improve employee productivity, enhance network security, improve
e-commerce effectiveness, and control, allocate and recover network costs. We
sell our products through a combination of direct sales and third-party
resellers and distributors. We have installed our products in over 14,000
customer sites and our customers represent most major commercial, industrial and
service categories.
INDUSTRY BACKGROUND
Emergence of the Internet as a Global Communications and Commerce Medium
The Internet has emerged as a rapidly growing global communications and
commerce medium. International Data Corporation, a market research organization,
estimates that the number of users who buy and sell goods over the Internet
increased to 142 million users in 1998, and is forecast to surpass 500 million
users by 2003. This increase in use is expected to drive commerce on the
Internet to more than $1.0 trillion by 2003. The U.S. Department of Commerce
estimates that Internet traffic doubles every 100 days.
Due to the growth in the number of web users and the increasing use of the
Internet to conduct business, many organizations now recognize the Internet as
strategic to their business. Organizations are capitalizing on the global reach
of the Internet to expand into new markets and acquire and retain customers, and
are utilizing the web as a powerful distribution channel to market and deliver
goods and services. Also, businesses are increasingly using the web to interact
with suppliers, distributors and other business partners to achieve business
efficiencies. Furthermore, many businesses utilize intranets, which are networks
that use Internet technology for communications within an organization, to
disseminate information and improve operations. Internet access is also being
provided to many employees as a necessary component of their jobs. As a result,
organizations have begun to invest heavily in Internet technology and
infrastructure.
The Need for an Internet Usage Management Solution
While the Internet offers significant opportunities for businesses, the use
of the Internet involves business risks as well, including the potential for
employee abuse, reduced productivity, legal liabilities, theft or loss of data,
business interruption, capacity overloads and unnecessary expense. As a result,
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organizations are faced with the challenge of exploiting the Internet's
potential while mitigating the risks associated with this new technology.
Businesses need to be able to determine whether their employees are using the
Internet productively and how best to manage Internet traffic to meet the
constraints of the network. We believe the rapid adoption of the Internet for
business purposes will ultimately require companies to manage the costs of using
the Internet in much the same way as they manage telephone costs.
In addition, as businesses increasingly use the Internet for marketing,
e-commerce and customer support, managers need to understand how customers and
business partners are interacting with their web site. For instance, a company
can determine which visitors to the web site are purchasing products and which
pages they visited before doing so, thus providing valuable information to
managers on the effectiveness of their web marketing efforts. Gartner Group, a
market research organization, predicts that by year-end 2000, approximately 70%
of Global 1000 companies will adopt web measurement and tracking functionality,
as compared to approximately 35% of Global 1000 companies that had adopted this
functionality as of year-end 1998.
In addition, as greater network access increases exposure to network
security breaches, network managers need a software solution that can analyze
the large amounts of data collected by network security devices to help
determine if their existing Internet infrastructure is secure. Consequently,
companies are seeking a management and reporting system that provides the
network intelligence they require to maximize their investment in the Internet.
The Need for an Integrated Network Usage Management Solution
Historically, voice and data networks have developed separately, with voice
traffic carried on the telephony network and data traffic carried over the
computer network. During the 1960's, enterprises increasingly deployed private
branch exchanges, known as PBXs, that were able to collect substantial amounts
of data on telephony network usage. As a result, in the 1970's, software
solutions were developed that could access, process and analyze this data in
order for enterprises to monitor and manage telephone usage and to allocate the
costs associated with such usage. Throughout the 1980's and 1990's, emerging
technology, deregulation and increasing competition in the telecommunications
industry coupled with the growth in Internet usage and data traffic have led to
a growing trend toward convergence of voice and data networks. Today's Internet
technology enables both voice and data transmissions to be routed over computer
networks. Internet telephony has emerged as a low-cost alternative to
traditional long distance telephone communications.
The convergence of voice and data networks has created additional
challenges for organizations. As voice over the Internet, or VoIP, applications
are implemented, we believe companies increasingly will want to manage their
use, just as they have for traditional PBX networks. Organizations are also
encountering security risks as employees have the ability to access the Internet
directly over voice lines, thereby bypassing established security firewalls. To
address this converging network environment, we believe businesses will need a
monitoring and reporting system capable of providing usage information for both
their Internet and voice networks. Businesses require this integrated network
usage management solution to:
- provide flexible reporting capabilities that can be easily modified to
obtain the desired information;
- be easy to implement and use;
- interface with a large number of data sources from a wide range of
manufacturers;
- collect data in a variety of formats;
- process large volumes of detailed data and track this data to specific
departments and individuals within the organization or visitors to the
network; and
- be scalable to accommodate the needs of businesses of all sizes.
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THE TELEMATE.NET SOLUTION
Our Telemate.Net family of products provide an integrated solution that
enables businesses to monitor, analyze and manage the use of their Internet and
voice networks. We believe our patent-pending software is the first product to
integrate Internet usage management and call accounting capabilities. The
Telemate.Net solution provides the following key advantages:
Network Optimization. Telemate.Net can be used by managers throughout an
organization to maximize the effectiveness of their Internet and voice networks.
For example:
- information technology managers can monitor network usage, resolve
network bottlenecks and be alerted to security breaches;
- financial officers can manage and allocate network costs;
- human resources managers can monitor compliance with network use policies
and detect improper use of the network;
- sales managers can measure productivity of Internet and telephone-based
sales activities; and
- marketing managers can analyze the effectiveness of Internet marketing
campaigns.
Comprehensive Reporting. Telemate.Net's reporting engine incorporates over
300 standard report templates and provides access not only to summary data on
network usage and activity but also to the detailed information supporting the
summary data. For example, a network manager can use the summary information to
detect network bottlenecks and access detailed data to identify which
department, individual or type of usage has caused the bottleneck. Our solutions
also provide a filtering capability that allows users to modify the standard
report templates to incorporate additional information or exclude unwanted data.
The automation capabilities of Telemate.Net's reporting engine also allow users
to define who receives reports and schedule how and when they are delivered.
Ease of Implementation and Use. Telemate.Net is designed to simplify
product installation and use. We have embedded the Microsoft SQL Server(TM)
database within Telemate.Net, eliminating the need for customers to install
their own database. Telemate.Net's data collection engine can easily import data
directly from a wide variety of network devices. In addition, Telemate.Net's
simple, point-and-click, multi-panel user interface allows customers to easily
access, analyze and process this data.
Flexible Data Collection and Reformatting. The Telemate.Net data
collection and reformatting module extracts data in many formats from a variety
of sources and converts this data into a standard format. Once standardized,
data from many sources can be integrated into a single database to enable
consolidated reporting. We initially developed this technology to allow us to
collect data from a wide variety of PBX types and formats. The flexibility of
the Telemate.Net technology enabled us to quickly develop data collection and
reformatting capabilities for additional network devices such as proxy servers,
intrusion detection products and firewalls. We are currently developing these
capabilities for web servers, VoIP devices, VPN servers and e-mail servers. We
refer to all of these devices as data sources.
Robust Data Storage, Management and Processing. Telemate.Net's database
can efficiently store large amounts of detailed data gathered by networking and
network security devices. Telemate.Net's processing and database module
incorporates an organizational directory that tracks network usage data by user,
department or other group within the organization. This organizational directory
also maintains historical links between users and their network activity. The
database also allows Telemate.Net to provide extensive cost allocation based on
user-determined parameters.
Scalability. Telemate.Net provides an integrated solution for network
usage management that is highly scalable to accommodate the needs of enterprises
of all sizes. Its database is scalable from a low volume, desktop application to
a high volume, high performance network environment. An organization can select
the model with the capacity, functionality, reports and number of data sources
to meet its current needs, and as these needs change, the organization can
easily upgrade to other models and additional data sources using a simple
activation code.
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STRATEGY
Our objective is to capitalize on our expertise in call accounting and
early entry into Internet usage management to become the leading provider of
Internet usage management e-business intelligence software. Our strategy to
achieve this objective includes the following:
Capitalize on Our Technology. We believe that Telemate.Net offers the
highest level of network usage reporting detail, flexibility and scalability
available today. We believe we are currently the only company offering an
integrated product that provides both Internet usage management and telephone
call accounting capabilities. We intend to capitalize on the core technology of
our existing products to provide additional functionality, such as management
and analysis of data from web servers, VoIP switches and routers, VPN servers
and e-mail servers. We believe that our experience in the network usage
management industry and flexible core technology will enable us to continue to
adapt our solutions as the network usage management needs of enterprises evolve.
Expand Our Direct Sales Force and Capitalize on Our Direct Sales Approach.
Our direct sales organization currently consists of 61 sales professionals
employing telephone, online and on site sales approaches. We routinely close
transactions ranging from $1,000 to $50,000 over the telephone. Orders over
$50,000 typically require direct visits with the customer. To expand and
facilitate these larger sales we have located sales personnel in major cities
across the United States and Europe. Web-based marketing is making our direct
sales operation more productive by delivering sales information and trial
products in a more timely and efficient manner. We intend to continue to expand
our direct sales force rapidly in the next few years to increase sales of our
Internet and integrated products.
Increase Sales to Existing Customers. We have installed our products in
over 14,000 customer locations. Prior to 1999, our sales efforts were focused
primarily on call accounting. As a result, over 75% of our customers have only
purchased our call accounting products. We have been successful selling call
accounting upgrades to this customer base in a cost effective manner. We believe
this large base of existing call accounting customers represents an excellent
opportunity to sell Internet usage management products as well. In 1999, we
began to focus a portion of our direct sales force on generating additional
sales from our existing customer base. This group will continue to place primary
emphasis on selling our Internet and integrated network usage management
solutions.
Strengthen and Expand Strategic Distribution and Marketing
Relationships. A number of leading network and network security product vendors
help us distribute and market 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 also sell our
products worldwide through a growing number of network resellers, systems
integrators and distributors. We intend to pursue additional strategic
distribution and marketing relationships both domestically and internationally,
and to expand the scope of our existing relationships in order to complement our
direct sales capabilities and expand our customer base.
Increase Brand and Application Awareness. We are expanding our marketing
programs to create both brand and application awareness. We are using a
combination of public relations, print advertising, direct mail lead generation
and web based marketing. We intend to continue to use the Internet to build our
brand awareness, generate leads for our direct sales force and resellers and
generate web sales. We utilize a variety of web-based advertising and marketing
programs along with web site links and traditional marketing programs to attract
prospects and customers to our web site. In addition to obtaining general
information about our products, users are able to download a demonstration
version of our products. Our web site has proved to be the most productive
source of prospects for our direct sales force, and therefore we expect to
significantly expand our web marketing programs.
Enhance Service Offerings. In addition to our annual support contracts, we
offer professional services including on-site installation and training to
larger customers. We intend to expand our professional services to offer
consulting assistance to help customers integrate our applications into their
business
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operations. We are also planning to offer our solution on an applications
service provider basis allowing customers to use our solution as a service
rather than licensing and installing our product.
PRODUCTS
We market our Telemate.Net products as three distinct applications, two of
which are available at four levels of functionality. Our applications are as
follows:
eSpective(TM) eBusiness Intelligence -- for managing eBusiness
eSpective collects activity data from web servers and other network
data sources, translates it into summary and detailed e-marketing, web
performance and management analysis reports. eSpective is only available
with Enterprise functionality.
NetSpectives(TM) Internet Usage Management -- for managing enterprise
Internet access.
NetSpectives provides both summary and detailed reporting on Internet
usage that enterprises can use to improve employee productivity.
Additionally, NetSpectives enables bandwidth management, control and
allocation of network costs, and enhanced Internet network security.
Telemate(TM) Call Accounting -- for managing enterprise telecommunication
networks.
Telemate Call Accounting provides both summary and detailed
telecommunications network usage reports that enable managers to improve
employee productivity, control and allocate telecommunications costs and
enhance telecommunication network security.
Our available levels of functionality are as follows:
QuickView is designed for organizations that require data collection from a
single data source, have moderate requirements for the storage of usage data and
are satisfied with basic usage reports. Because QuickView operates on
Microsoft's Windows 95, 98 and NT operating systems, it is suitable for most
small business users. Customers may choose to report on one of the following
data sources from a variety of manufacturers: firewalls, proxy servers,
intrusion detection products or PBXs. Quick View may be easily upgraded to
QuickView Plus, WorkGroup or Enterprise using an activation code.
Quick View Plus is designed for customers that have basic reporting needs
and moderate data storage requirements but also require reporting on multiple
data sources. QuickView Plus allows a user to collect, analyze and report on
usage data from multiple firewalls, proxy servers, intrusion detection devices
or PBXs. Data sources may be of a single type or a combination of types and
manufacturers. QuickViewPlus may be easily upgraded to Workgroup or Enterprise
using an activation code.
WorkGroup is designed for small to mid-size organizations that require
large volumes of data storage and seek extensive network usage reporting. It
provides the same general features as QuickView and also provides information
and reports on usage, traffic and security violations. WorkGroup allows
allocation of Internet usage costs and includes more than one hundred standard
reports. WorkGroup integrates the features of the QuickView products to provide
one solution for multiple data sources. WorkGroup may be easily upgraded to
Enterprise using an activation code.
Enterprise is designed for most mid-size to large enterprises seeking a
more complete network usage management solution. It includes over 200 reports, a
URL categorization database, third-party billing, allocation of equipment and
overhead costs, and a custom report writing tool, currently Seagate Software,
Inc.'s Crystal Reports Professional 7, in addition to the general features found
in WorkGroup.
In addition, we offer the following add-on functionality:
Additional Data Source Modules. Additional data source modules may be
purchased to expand Quick View, Quick View Plus, WorkGroup or Enterprise to
collect data from additional firewalls, proxy servers, intrusion detection
products, web servers or PBXs.
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URL Categorization. Telemate.Net offers a uniform resource locator, or
URL, categorization database, which groups hundreds of thousands of Internet
addresses into 28 categories such as travel, shopping, hate and discrimination,
pornography, sports, gambling and employment agency sites. Telemate.Net then
reports on Internet usage by category, thus allowing companies to identify
misuse and abuse of their networks. These URLs are updated on a daily basis.
Advanced Asset Manager. Advanced Asset Manager is a cable and connectivity
management software solution that allows network managers to graphically view
the location of network cables and circuits within the business' facility.
Advanced Asset Manager documents cable and circuit routes, multiple network
layouts, availability of spare circuits, work orders, technician assignment, and
hardware inventory.
SERVICES
We currently provide installation, training and technical support services
for our customers. These services have been a growing source of recurring
revenue for us. We intend to continue to improve our support staff's technical
knowledge and problem solving abilities to ensure that our customers remain
satisfied with our products and services. In addition, we intend to develop
web-based training, installation and custom report generation services that will
expand current customer training seminars and installation services. Technical
support is provided under annual maintenance contracts that provide customers
with access to telephone support and product updates. In addition, we intend to
expand the customer service capabilities of our web site to enable customers to
initiate service requests, obtain answers to frequently asked questions and
obtain product updates over the Internet. We also plan to offer business
integration consulting services and to make our solution available on an
application service provider basis.
TECHNOLOGY
Our core technology is designed to allow businesses to easily extract
needed data from a wide range of network data sources and translate it into a
standardized format. This standardized data is then enhanced by linking it to an
organizational directory and other relevant information and storing it in a
database. Our flexible and powerful reporting engine extracts the specific
information needed and generates a report, which can then be distributed to
management in a variety of formats.
Telemate.Net's core technology has four major modules:
Data Collection and Reformatting Module. The data collection and
reformatting module extracts data from a variety of data sources. Because the
data is initially extracted in different formats, Telemate.Net converts the data
into a standard format so it can be integrated for use within our application.
Processing and Database Module. The processing and database module has the
following components:
- Directory: The directory allows Telemate.Net to link sources of network
activity, such as user identifications, Internet addresses and telephone
extensions, to specific individuals, departments, divisions and
companies. The directory also contains a history function that keeps
track of these links as they change so that these sources are properly
linked to the owner of the source at that time.
- Costing: Our costing capability assigns a cost to each voice or data
transaction, which allows organizations to allocate network expenses. A
variety of costing methods are available that can be tailored to the
organization's needs and preferences.
- Alarms: Our product has the ability to establish PBX activity levels and,
if these levels are exceeded, alert management of this occurrence via
e-mail or beeper. This feature aids in the detection of hacking and
potential fraud conditions. In the first quarter of 2000, we added alarm
functionality for Internet data sources.
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- Domain Name Server Lookup: Telemate.Net performs several types of Domain
Name Server, or DNS, lookup. A DNS maintains a database that correlates
numerical Internet addresses with the equivalent URL, or "www.", address.
If the data collected from a data source includes only the numerical
Internet address of a destination web site, Telemate.Net will search the
external DNS to obtain the equivalent URL address and include it in the
data record. For example, if the data collected reveals a numerical
address of 209.17.193.130, the DNS lookup function will provide the more
commonly used URL address of www.telemate.net.
- URL Categorization: We provide a database of several hundred thousand
URLs that is updated daily. These URLs are grouped into 28 different
categories. This allows companies to detect unwanted usage of their
networks. As information from a data source is added to the activity
database, this URL categorization database is searched and the proper
category is added to the record.
- Automated Operations: Most application functions can be executed
automatically on a specific schedule set by the user. Such functions
include:
-- collection of data from a data source;
-- processing of that data;
-- generation and distribution of specific reports to management; and
-- purging of processed data to manage the size of the database.
For example, the user can specify that on the tenth day of each month the
system will purge all of the detailed records older than 60 days, or that every
Monday the system will distribute a weekly departmental summary via e-mail to
all department managers.
- Embedded Database: Under an original equipment manufacturer agreement
with Microsoft, we embed Microsoft's SQL database in our Telemate.Net
products. Our QuickView product includes the Microsoft SQL 7.0 MSDE
desktop database while our WorkGroup and Enterprise products include the
full Microsoft SQL 7.0 Server database. Telemate.Net is designed to allow
us to efficiently integrate other databases, such as a UNIX-based Oracle
database, in the future.
- Multiprocessing: As the number of data sources and the volume of data on
a network increase, Telemate.Net has the ability to distribute both
processing and reporting onto multiple PCs to balance the workload and
further enhance scalability.
Reporting Engine Module. Our reporting engine is currently designed for
use with Seagate's Crystal Reports, a reporting tool. This means that users do
not have to learn Crystal's command language or the structure of the SQL Server
database in order to use our products. Telemate.Net's reporting engine:
- incorporates more than 300 standard reports and templates designed and
refined over time with input from our customers;
- provides a filtering capability that allows the user to easily modify the
standard reports thereby customizing the report to provide the specific
information needed;
- allows users to create new reports or to modify existing report templates
using Crystal Reports Professional; and
- allows any customized report format to be stored and accessed at a future
time or scheduled for automated execution and distribution.
Interface Module. Telemate.Net employs an easy to use, functionally rich
user interface, featuring the multi-paneled style used in Windows applications.
We utilize third-party interface tools to create a familiar "look and feel" to
the product. The interface is designed so that users can operate our application
and generate reports with a minimal amount of training.
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CUSTOMERS
We have installed our products in over 14,000 customer sites. Our customers
represent most major commercial, industrial and service categories and typically
have more than 100 employees. In 1999, we entered into a sales agreement with a
third party contractor to provide software, hardware and installation services
for 51 different sites. This sales agreement comprised 13.9% of total revenue in
1999. We do not believe that this agreement will generate this level of revenue
in the future.
SALES AND MARKETING
We conduct our sales efforts through a combination of direct sales and
arrangements with network resellers, systems integrators and distributors. Our
direct sales force primarily employs telephone, online and on-site sales
approaches and prior to 1999 was primarily focused on the sale of our call
accounting applications. We have sales teams focused on large account sales,
government agency sales, mid-size customer sales, and sales of additional
products and functionality to our existing customer base. In addition to
Atlanta, we have sales personnel located in London and a number of major cities
across the United States.
Large Enterprise and Government Sales. We expect that enterprises with
more than 1,000 employees will comprise almost half of the revenue opportunity
in the network usage management market over the next five years. According to
the most recent U.S. census data, these 6,700 large enterprise represent more
than 650,000 potential installations in the United States. In recent years we
have enhanced the scalability and functionality of our products to better
address the needs of these large enterprises. As a result, our sales to large
enterprises have increased over the past several years, leading to an increase
in our average sales price.
Mid-size Enterprise Sales. We continue to focus on enterprises with 100 to
1,000 employees. We expect these mid-size enterprises will represent almost half
of the revenue opportunity in the network usage management market over the next
five years. According to estimates from the U.S. Census Bureau, this market
includes over 70,000 companies. We intend to increase our use of web-based
marketing to pursue these mid-size enterprises.
Installed Base Sales. We have established a separate sales team that
focuses exclusively on selling additional products to our existing customers. We
believe there is a significant opportunity to upgrade our installed base of
customers to the latest generation of our software. In addition, as our
customers' networks grow, we expect to sell additional functionality and data
sources to these customers. As we expand our web-based marketing and customer
support activities, we expect to be able to more efficiently identify qualified
prospects for upgrades.
E-Commerce Sales. To augment our direct sales efforts, we are expanding
our capabilities to market and execute sales transactions via our web site. Our
initial e-commerce sales focus will address support contract renewals,
low-priced product upgrades and sales of entry-level products. Over time, as
customers become accustomed to e-commerce transactions, we expect that some of
our mid-sized and large enterprises business will flow through our web site.
Because existing customers can easily upgrade features or add data sources
utilizing an activation code, we expect installed base e-commerce to grow
rapidly over the next few years.
Network Resellers and Distributors. While our direct sales force is
expected to continue to generate a large proportion of our future revenue, we
are increasingly employing indirect distribution channels worldwide as an
important complement to our direct sales force. We have established a team of
distribution sales representatives that is developing relationships with and
providing sales support to network resellers, systems integrators and
distributors. While most of our efforts have been focused within the United
States, we added five international distributors during 1999. We intend to
accelerate the expansion of both our international and domestic distribution
channels over the next few years. In late 1999, we established a sales staff in
the United Kingdom to focus on signing new system integrators and distributors.
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Strategic Distribution and Marketing Relationships. Leading networking and
network security product vendors, including AXENT Technologies, Check Point
Software, Cisco Systems, Lucent Technologies, Microsoft and Network Associates,
help to market and distribute our products. These companies 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. However, because we do not have
written agreements with most of these parties, we cannot guarantee that these
relationships will continue at all or on terms acceptable to us. We are
currently working to expand our existing relationships and develop additional
strategic relationships.
Marketing. Our marketing efforts are focused on creating brand and
application awareness and attracting prospective customers to our web site.
While a large portion of our marketing budget will be dedicated to web-based and
electronic marketing, we will continue to employ traditional marketing programs
such as direct mail, trade shows, public relations and print advertising.
However, these traditional marketing programs will focus on encouraging
customers and prospects to visit our web site. As we expand our web-based
marketing activities and add content relating to network usage management, we
expect to attract more customers and prospective customers to our site. We
anticipate this will generate qualified leads for our sales force to pursue as
well as direct e-commerce business.
COMPETITION
We believe that we are the only company that has developed an integrated
network usage management solution for the Internet and voice networks. However,
we do experience competition with companies that offer either Internet usage
management or call accounting software. Our Internet usage management products
primarily compete with other providers of Internet management software,
including WebTrends, Accrue Software, the SecureIT division of VeriSign, Elron
Software, Talley Systems and Sequel Technology. Many of our competitors offer
point products that only address a small segment of the market or only provide
low-end summarization capabilities. Telemate.Net is scalable to large numbers of
users while maintaining substantial amounts of data on each user and provides
significantly more detail, history, organizational linking and flexible
reporting capabilities than competing solutions. Our primary call accounting
software competitors include IntegraTrak, ISI, MicroTel, Switchview, Telco
Research, Verimark, Xiox and Xtend. Most of these companies offer products that
are functionally similar to Telemate.Net's prior generation of software. With
the introduction of our integrated Internet usage management and call accounting
product, we believe we have a competitive advantage over those companies that
offer call accounting-only software.
INTELLECTUAL PROPERTY
We currently have a pending United States patent application that seeks to
protect inventions underlying the integration of voice and network data
reporting technology in our Telemate.Net product. We currently do not have any
issued patents. We have obtained federal registration for the Telemate and
Telemate.Net marks. We view our technology as proprietary and rely on a
combination of trade secret, copyright, patent and trademark laws,
non-disclosure agreements and contractual provisions to establish and protect
our proprietary rights. When we license our products, we use a signed license
agreement with a select number of our customers and a standard printed or
electronic license containing confidentiality terms customary in the industry
for all other users in order to protect the proprietary rights in our
technology. We license our products in a format that does not permit the user to
change the software code. In addition, because we treat the source code for our
products as a trade secret, all employees and third parties who require access
to the source code are first required to sign non-disclosure agreements.
HUMAN RESOURCES
As of March 1, 2000, we employed 216 persons, including 28 in product
development, 67 in services and support, 90 in sales and marketing, 5 in
operations and 26 in finance and administration. None of our employees is
subject to a collective bargaining agreement. We consider our relations with our
employees to be good.
9
<PAGE> 11
EXECUTIVE OFFICERS
Our executive officers and their respective ages as of March 30, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David H. Couchman...................... 54 Chairman of the Board
Richard L. Mauro....................... 57 Chief Executive Officer, President and
Director
Richard J. Post........................ 44 Senior Vice President -- Finance and
Operations, Chief Financial Officer and
Treasurer
James A. Kranzusch..................... 55 Senior Vice President -- Sales
Dean D. Rau............................ 64 Senior Vice President -- Technology
L. Mark Newton......................... 46 Senior Vice President -- Information
Systems
Vijay Balakrishnan..................... 45 Senior Vice President -- Marketing
Charles B. Wilkinson................... 33 Vice President -- Customer Services
Douglas B. Spencer..................... 39 Vice President -- Development
</TABLE>
David H. Couchman is our founder and has served as Chairman of our Board of
Directors since our inception in January 1986. Mr. Couchman served as our Chief
Executive Officer from January 1986 until December 1996. Mr. Couchman has 30
years of computer sales and product management experience. Before founding
Telemate.Net, Mr. Couchman held a number of executive systems, sales and
marketing positions in several large corporations and startup companies,
including Burroughs Corporation, a computer products company, (now Unisys) and
On-Line Software International, an applications software company (acquired by
Computer Associates). Mr. Couchman holds a bachelor's degree in Business
Administration and Industrial Relations from the University of Maryland.
Richard L. Mauro has served as our Chief Executive Officer and President
since December, 1996. He has served as a director of Telemate.Net since June
1999. He was President and Chief Operating Officer from March 1994, when he
joined Telemate.Net, until December 1996. Mr. Mauro has 36 years of general
management and sales, marketing, and engineering management experience. Prior to
joining Telemate.Net, Mr. Mauro served as Chief Executive Officer and President
of Insight Marketing Partners, Inc., a marketing and management consulting
company he founded that focused on assisting early-stage software companies,
from March 1990 until March 1994. From January 1986 until March 1990, Mr. Mauro
was Vice President-Marketing for INFORUM, a technology center in Atlanta. He
began his career with the IBM Corporation in June 1964 where he held a variety
of engineering, sales and product marketing management positions. During his
last eight years at IBM, he focused on PC-related products, including leading
the PC merchandising function for IBM's retail product centers. Mr. Mauro holds
a bachelor's degree in Electronic Engineering from Manhattan College and a
master's degree in Industrial Administration from Union College.
Richard J. Post has served as our Senior Vice President -- Finance and
Operations, Chief Financial Officer, and Treasurer since June 1999. From
September 1996 until February 1999, Mr. Post served as Senior Vice President,
Chief Financial Officer, Secretary and Treasurer of MedCath Incorporated, a
cardiovascular services company. From 1986 to 1996, Mr. Post was employed as an
investment banker, assisting clients with a wide variety of public and private
debt and equity financings and merger and acquisition transactions. From January
1994 until September 1996, he served as Senior Vice President, Investment
Banking, Corporate Finance Group of Price Waterhouse LLP, an accounting and
consulting firm. From February 1992 until January 1994, he served as Senior
Manager in the Corporate Finance Department of Ernst & Young, an accounting and
consulting firm. From August 1988 until February 1992, he served as Vice
President in the Investment Banking Department of Bear, Stearns & Co., Inc., an
investment banking and securities brokerage firm. From September 1986 until
August 1988, Mr. Post was an Investment Banking Associate at The First Boston
Corporation, an investment banking and securities brokerage firm. Prior to his
investment banking career, Mr. Post served as a Military Intelligence Officer
10
<PAGE> 12
in the United States Army. Mr. Post holds a bachelor's degree in English and
Philosophy from the University of Notre Dame and an MBA from the Harvard
Business School.
James A. Kranzusch has served as our Senior Vice President-Sales since
March 1998. Mr. Kranzusch has 30 years of sales management experience with both
large corporations and early-stage ventures. Prior to joining Telemate.Net, Mr.
Kranzusch served as founder and President of ClientView, Inc., an Atlanta sales
consulting company, from March 1995 until March 1998. From March 1992 to March
1995, Mr. Kranzusch was Director of Major Accounts at Carter & Associates, a
commercial real estate company in Atlanta. From September 1985 until February
1992, he was Executive Vice-President and General Manager for INFORUM, a
technology center in Atlanta. Mr. Kranzusch was employed by the IBM Corporation
from March 1970 until August 1985, most recently as Division Sales Director. Mr.
Kranzusch holds a bachelor's degree in Business Administration from Auburn
University and a master's degree in Business Policy from Columbia University.
Dean D. Rau has served as our Senior Vice President-Technology since
September 1996. Mr. Rau has 40 years of experience managing the planning,
design, development, testing and support of software products. Prior to joining
Telemate.Net, Mr. Rau served as a Senior Project Manager with the Atlanta
Committee for the Olympic Games from May 1993 until August 1996. Mr. Rau also
served as Vice President-Development with Coin Dealership Systems, Inc., a
software company, from August 1990 until May 1993. In addition, Mr. Rau was
employed by the IBM Corporation from June 1959 until December 1989 in a number
of application development management positions, including Senior Applications
Development Manager. Mr. Rau holds a bachelor's degree in Business
Administration from the University of Washington.
L. Mark Newton has served as our Senior Vice President-Customer Support
Services since September 1988. Mr. Newton has more than 20 years of experience
in systems development and support management services. Prior to joining
Telemate.Net, Mr. Newton served as Director of Telecommunications and Biomedical
Electronics with Southern Baptist Hospital in New Orleans from February 1981
until September 1988. Mr. Newton has an associate's degree in Electronics
Technology from the Oklahoma City Technical Center.
Vijay Balakrishnan has served as our Senior Vice President -- Marketing
since September 1999. Prior to joining Telemate.Net, Mr. Balakrishnan served as
Vice President in charge of marketing for Equifax Secure, Inc., an e-commerce
security company, from May 1997 until August 1999. From November 1994 until
March 1997, Mr. Balakrishnan served as Vice President in charge of international
business development for Deluxe Corp., a provider of financial services
infrastructure. Mr. Balakrishnan holds a master's degree in Electrical
Engineering from the University of Illinois and an MBA from the Wharton School
of Business at the University of Pennsylvania.
Charles B. Wilkinson, Jr. has served as our Vice President, Customer
Services since March 2000. Mr. Wilkinson has over 12 years of professional
services experience in Big 6 accounting, consulting and corporate software
environments. Prior to joining Telemate.Net, Mr. Wilkinson was with Geac, a
Canadian software conglomerate, as a Director of Consulting Services for SQL
applications, formerly the Clarus Corporation ERP product suite, from October
1999 until March 2000. Mr. Wilkinson was with Clarus Corporation from August
1994 until October 1999, most recently serving as the Managing Director,
Customer Services - ERP applications. From November 1993 until July 1994, Mr.
Wilkinson was a Senior Associate with Ferguson Associates, a regional consulting
firm in Norfolk, Virginia. Mr. Wilkinson was with KPMG Peat Marwick, an
accounting and consulting firm, from May 1987 until November 1993 where he
served as a manager in their middle market consulting practice. Mr. Wilkinson
holds a bachelor's degree from Old Dominion University and is a Certified Public
Accountant.
Douglas B. Spencer has served as our Vice President-Technology since March
2000. Mr. Spencer has 18 years of international leadership experience in both
start-up and corporate environments. Prior to joining Telemate.Net until March
2000, Mr. Spencer served as the Vice President of Product Solutions for eShare
Technologies in Norcross, Georgia -- a predictive dialer and web contact
solutions provider. From May 1994 to March 1999 Mr. Spencer held several key
positions with global enterprise solutions provider
11
<PAGE> 13
Compuware. Most recently Mr. Spencer served as Compuware's Director of Business
Development for Europe, the Mid-East and Africa while based in Amsterdam, The
Netherlands, where he enhanced his international operations expertise. Prior to
that he served as Director of Technology for Compuware's UNIFACE, a market
leading Enterprise Application Development environment, also based in Amsterdam.
In addition, Mr. Spencer has held a variety of technical and leadership roles
prior to Compuware, including 8 years with Intergraph Corporation, a leading
global CAD vendor. Mr. Spencer holds a bachelor's degree in Computer Science
from the University of Tennessee and an MBA from the Culverhouse School of
Business at the University of Alabama.
ITEM 2. PROPERTIES.
We are headquartered in Atlanta, Georgia, where we lease approximately
50,000 square feet under a lease agreement expiring in September 2003. We have
options to lease additional space in our current office complex, which should
allow us to accommodate growth in the immediately foreseeable future. The vast
majority of our employees work in the corporate headquarters, but we also have
sales personnel located in five other states and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
last quarter of the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Our common stock is traded on the Nasdaq National Market under the symbol
"TMNT". The price per share reflected in the table below represents the range of
low and high closing sale prices for our common stock as reported by The Nasdaq
Stock Market for the quarters indicated:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH PRICE LOW PRICE
- ------------- ---------- ---------
<S> <C> <C>
September 30, 1999.......................................... $14.1875 $14.00
December 31, 1999........................................... 20.9375 12.00
</TABLE>
The closing sale price of the Company's common stock as reported by The
Nasdaq Stock Market on March 24, 2000 was $12.3125.
The number of shareholders of record of the Company's common stock as of
March 24, 2000, was approximately 3,964.
We did not declare or pay cash dividends during the last quarter of the
year ended December 31, 1999, and we do not have any plans to declare or pay
cash dividends in the foreseeable future.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth our selected financial data and other
operating information. We derived the selected financial data from our financial
statements and related notes included in another part of this Annual Report on
Form 10-K. You should read the selected financial data together with our
financial statements and related notes and the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report. KPMG LLP, independent auditors, audited our
financial statements for the period from January 1, 1996 to December 31, 1999.
The selected financial data of Telemate.Net set forth below for each of the
four years ended December 31, 1996, 1997, 1998 and 1999, and the balance sheet
data as of December 31, 1996, 1997, 1998 and 1999, are derived from, and are
qualified by reference to, our audited financial statements. The financial
information for the year ended December 31, 1995 is derived from our unaudited
financial statements. In the opinion of management, the unaudited financial
information has been prepared on a basis consistent with the annual audited
financial statements that appear elsewhere in this document, and include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair statement of the financial position and results of operations for these
unaudited years. Historical results are not necessarily indicative of results to
be expected in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue.................... $ 3,750 $ 3,785 $ 4,890 $ 5,450 $ 6,731
Service revenue.................... 2,549 3,114 4,058 4,932 6,234
---------- ---------- ---------- ---------- ----------
Total revenue.............. 6,299 6,899 8,948 10,382 12,965
Cost of revenue:
Product costs...................... 609 574 736 923 1,380
Service costs...................... 514 761 1,053 1,274 1,768
---------- ---------- ---------- ---------- ----------
Total cost of revenue...... 1,123 1,335 1,789 2,197 3,148
---------- ---------- ---------- ---------- ----------
Gross profit......................... 5,176 5,564 7,159 8,185 9,817
Operating expenses:
Research and development........... 480 603 1,387 1,845 2,108
Sales and marketing................ 2,120 2,979 3,522 4,613 6,552
General and administrative......... 1,526 1,861 2,231 2,926 4,124
Non-cash compensation.............. -- -- -- -- 188
---------- ---------- ---------- ---------- ----------
Total operating expenses... 4,126 5,443 7,140 9,384 12,972
---------- ---------- ---------- ---------- ----------
Operating income (loss).............. 1,050 121 19 (1,199) (3,155)
Increase in redeemable stock
purchase warrant................ -- -- -- -- (1,590)
Other income (expense)............. 26 15 19 (107) 336
---------- ---------- ---------- ---------- ----------
Net income (loss).......... $ 1,076 $ 136 $ 38 $ (1,306) $ (4,409)
========== ========== ========== ========== ==========
Basic net income (loss) per share.... $ 0.34 $ 0.04 $ 0.01 $ (0.40) $ (1.07)
========== ========== ========== ========== ==========
Diluted net income (loss) per
share.............................. $ 0.34 $ 0.04 $ 0.01 $ (0.40) $ (1.07)
========== ========== ========== ========== ==========
Weighted average shares outstanding
Basic.............................. 3,156,150 3,201,744 3,261,813 3,261,813 4,102,999
========== ========== ========== ========== ==========
Diluted.............................. 3,156,150 3,434,403 3,732,768 3,261,813 4,102,999
========== ========== ========== ========== ==========
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 818 $ 245 $ 78 $ 46 $42,755
Working capital (deficit)......................... (449) (1,429) (1,472) (1,726) 40,782
Total assets...................................... 2,273 2,186 2,582 2,675 48,274
Long-term liabilities............................. 12 -- -- 1,032 --
Total shareholders' equity (deficit).............. (163) (686) (743) (2,065) 42,316
</TABLE>
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Financial
Statements of Telemate.Net Software, Inc. and notes thereto included elsewhere
in this report.
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. In 1999, our hardware sales represented 9.9% of
revenue due to a number of large product sales requiring an unusually high
amount of 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 the products licensed. 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 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2. 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
maintenance and professional services billed 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
15
<PAGE> 17
a large 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. For example, in
March 2000 we announced an OEM and Reseller Agreement with Cisco Systems. We
intend to continue to focus sales resources on strengthening existing
relationships and creating new relationships with strategic organizations.
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 have been taxed directly to our existing
shareholders. On June 16, 1999, we terminated our status as an S corporation
under the tax code. In connection with the termination of our S corporation
status, we distributed approximately $269,000 and we reclassified the
accumulated deficit of approximately $296,000 through the S corporation
termination date, limited to the amount of paid in capital, to additional
paid-in capital.
On June 16, 1999, our S corporation status terminated upon closing of the
sale of 300,000 shares of Series A redeemable convertible preferred stock. At
that time, we established our net deferred tax assets and liabilities; no net
deferred tax assets or liabilities were recorded because the realization of
deferred tax assets was not considered to be likely.
In October 1999, we completed our initial public offering which resulted in
net proceeds to us of approximately $43.0 million before payment of related
expenses. We used $1.0 million of the proceeds from our initial public offering
to repay existing indebtness. We intend to use the remaining net proceeds for
working capital and other general corporate purposes, which may include
increasing our sales and marketing activities, increasing our product
development activities, and pursuing strategic acquisitions and relationships.
RESULTS OF OPERATIONS
The following tables set forth our call accounting and Internet/integrated
revenue, both in absolute dollars and as a percentage of total revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Call accounting:
Product revenue....................................... $4,620 $ 4,479 $ 3,785
Service revenue....................................... 4,053 4,850 5,132
------ ------- -------
Total call accounting revenue.................... 8,673 9,329 8,917
Internet/integrated:
Product revenue....................................... 270 971 2,946
Service revenue....................................... 5 82 1,102
------ ------- -------
Total Internet/integrated revenue................ 275 1,053 4,048
------ ------- -------
Total revenue.................................... $8,948 $10,382 $12,965
====== ======= =======
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Percentage of total revenue:
Call accounting:
Product revenue........................................ 51.6% 43.1% 29.2%
Service revenue........................................ 45.3 46.7 39.6
----- ----- -----
Total call accounting revenue..................... 96.9 89.8 68.8
Internet/integrated:
Product revenue........................................ 3.0 9.4 22.7
Service revenue........................................ 0.1 0.8 8.5
----- ----- -----
Total Internet/integrated revenue................. 3.1 10.2 31.2
----- ----- -----
Total revenue..................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table sets forth for the periods indicated statement of
operations data expressed as a percentage of total revenue:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue........................................... 54.6% 52.5% 51.9%
Service revenue........................................... 45.4 47.5 48.1
----- ----- -----
Total revenue..................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Product costs............................................. 8.2 8.9 10.6
Service costs............................................. 11.8 12.3 13.6
----- ----- -----
Total cost of revenue............................. 20.0 21.2 24.2
----- ----- -----
Gross profit................................................ 80.0 78.8 75.8
Operating expenses:
Research and development.................................. 15.5 17.8 16.3
Sales and marketing....................................... 39.4 44.4 50.5
General and administrative................................ 24.9 28.2 31.8
Non cash compensation..................................... 0.0 0.0 1.5
----- ----- -----
Total operating expenses.......................... 79.8 90.4 100.1
----- ----- -----
Operating income (loss)..................................... 0.2 (11.6) (24.3)
----- ----- -----
Other income (expense)...................................... 0.2 (1.0) 2.6
Increase in redeemable stock purchase warrant............... -- -- (12.3)
----- ----- -----
Net income (loss)................................. 0.4% (12.6)% (34.0)%
===== ===== =====
</TABLE>
Years Ended December 31, 1999 and 1998
Total Revenue. Total revenue was $13.0 million in 1999, representing a
24.9% increase from $10.4 million in 1998. Total product revenue was $6.7
million, or 51.9% of total revenue, in 1999, representing a 23.5% increase from
$5.4 million, or 52.5% of total revenue, in 1998. Total service revenue was $6.2
million, or 48.1% of total revenue, in 1999, representing a 26.4% increase from
$4.9 million, or 47.5% of total revenue, in 1998. This increase was the result
of the increase in Internet/integrated revenue and professional services sold.
Part of the increase was attributable to one sales agreement with a third party
contractor to provide software, hardware and installation services for 51
different sites. This sales agreement comprised 13.9% of total revenue in 1999.
We do not believe that this agreement well generate this level of revenue in the
future.
17
<PAGE> 19
Call Accounting Revenue. Total call accounting revenue was $8.9 million,
or 68.8% of total revenue, in 1999, representing a 4.4% decrease from $9.3
million, or 89.8% of total revenue, in 1998. Call accounting product revenue was
$3.8 million, or 29.2% of total revenue, in 1999, representing a 15.5% decrease
from $4.5 million, or 43.1% of total revenue, in 1998. Call accounting service
revenue was $5.1 million, or 39.6% of total revenue, in 1999, representing a
5.8% increase from $4.8 million, or 46.7% of total revenue, in 1998. The decline
in call accounting revenue and percentage share of total revenue for the year
was due to the increased focus of our sales force on selling our
Internet/integrated products as compared to selling call accounting only
products. We expect this trend of Call Accounting revenue declining as a
percentage of overall revenue to continue.
Internet/Integrated Revenue. Total Internet/integrated revenue was $4.0
million, or 31.2% of total revenue, in 1999, representing a 284.4% increase from
$1.1 million, or 10.2% of total revenue, in 1998. Internet/integrated product
revenue was $2.9 million, or 22.7% of total revenue, in 1999, representing a
203.4% increase from $971,000, or 9.4% of total revenue, in 1998.
Internet/integrated service revenue was $1.1 million, or 8.5% of total revenue,
in 1999, representing a 1,243.9% increase from $82,000, or 0.8% of total
revenue, in 1998. The increase in Internet/integrated product revenue and
percentage of total revenue was due to the increased focus of our sales force on
selling our Internet/integrated products. The increase in Internet/integrated
service revenue was driven by the increase in Internet/integrated product sales,
including the sales agreement mentioned under Total Revenue above.
Cost of Product Revenue. Cost of product revenue includes employee
compensation, costs of complementary hardware, costs of materials related to
production, shipment and fulfillment and payments under third-party licensing
agreements. Cost of product revenue was $1.4 million, or 10.6% of total revenue,
in 1999, representing a 49.5% increase from $923,000, or 8.9% of total revenue,
in 1998. This increase in cost and the corresponding increase as a percentage of
total revenue was primarily attributable to higher hardware costs on a number of
large product sales requiring an unusually large amount of hardware and an
increase in the percentage of total costs for royalty payments for third-party
licensing.
Cost of Service Revenue. Cost of service revenue is comprised primarily of
service employee compensation. Cost of service revenue was $1.8 million, or
13.6% of total revenue, in 1999, representing a 38.8% increase from $1.3
million, or 12.3% of total revenue, 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
include salaries and related costs for software developers, quality assurance
personnel and documentation personnel involved in our research and development
efforts. Research and development expenses were $2.1 million, or 16.3% of total
revenue, in 1999, representing a 14.3% increase from $1.8 million, or 17.8% of
total revenue, in 1998. The increase in total research and development
expenditures reflects the increased headcount during the second half of the year
as we accelerated our new product development. The Company expects research and
development expenses to increase in amount as it continues to commit substantial
resources to enhancing existing product functionality and to developing new
products
Sales and Marketing Expenses. Sales and marketing expenses include
salaries and related costs, commissions, travel, facilities, communications
costs and promotional expenses for our sales organization and marketing staff.
Sales and marketing expenses were $6.6 million, or 50.5% of total revenue, in
1999, representing a 42.0% increase from $4.6 million, or 44.4% of total
revenue, in 1998. This increase in expenditures and percentage of total revenue
is the result of higher commissions on greater sales and expansion of both the
sales and marketing staffs in the second half of the year, as we positioned
ourselves for future growth. We expect that the absolute dollar amount of sales
and marketing expenses will continue to increase due to the planned growth of
its sales force, including the establishment of additional sales offices both
domestically and in Europe. We also expect additional increases in advertising
and marketing programs and other promotional activities and anticipate that
sales and marketing expenses will vary as a percentage of total revenues from
period to period.
18
<PAGE> 20
General and Administrative Expenses. General and administrative expenses
include administrative salaries and related benefits, depreciation and
amortization, recruiting and relocation expenses, as well as legal, accounting
and other professional fees. General and administrative expenses were $4.1
million, or 31.8% of total revenue, in 1999, representing a 40.9% increase from
$2.9 million, or 28.2% of total revenue, for the same period in 1998. This
increase was primarily due to an increased provision for uncollectable accounts,
an increase in a sales tax provision, recruiting fees and other professional
services. We expect general and administrative costs to increase in absolute
amounts as we continue to add infrastructure to support a larger organization,
and incur costs related to being a publicly-held company.
Non-cash Compensation Expenses. Non-cash compensation of $188,000, or 1.5%
of total revenue, was charged in 1999 in connection with stock options granted
at a price below market value, primarily to an executive officer.
Years Ended December 31, 1998 and 1997
Total Revenue. Total revenue was $10.4 million in 1998, representing a
16.0% increase from $8.9 million in 1997. Total product revenue was $5.5
million, or 52.5% of total revenue, in 1998, representing an 11.5% increase from
$4.9 million, or 54.6% of total revenue, in 1997. Total service revenue was $4.9
million, or 47.5% of total revenue, in 1998, representing a 21.5% increase from
$4.1 million, or 45.4% of total revenue, in 1997. These increases were primarily
the result of an increase in our Internet/ integrated revenue and an increase in
call accounting service revenue.
Call Accounting Revenue. Total call accounting revenue was $9.3 million,
or 89.8% of total revenue, in 1998, representing a 7.6% increase from $8.7
million, or 96.9% of total revenue, in 1997. Call accounting product revenue was
$4.5 million, or 43.1% of total revenue, in 1998, representing a 3.1% decrease
from $4.6 million, or 51.6% of total revenue, in 1997. Call accounting service
revenue was $4.9 million, or 46.7% of total revenue, in 1998, representing a
19.7% increase from $4.1 million, or 45.3% of total revenue, in 1997. The
decline in call accounting product revenue in absolute dollars and as a percent
of total revenue reflects our decision to focus some of our call accounting
resources on developing the Internet/integrated market opportunity. The
increased call accounting service revenue reflects the continued historical
renewal rate on annual maintenance contracts and a significant increase in
installation and training service revenue.
Internet/Integrated Revenue. Total Internet/integrated revenue was $1.1
million, or 10.2% of total revenue, in 1998, representing a 282.9% increase from
$275,000, or 3.1% of total revenue, in 1997. Internet/integrated product revenue
was $971,000, or 9.4% of total revenue, in 1998, representing a 260.0% increase
from $270,000, or 3.0% of total revenue, in 1997. Internet/integrated service
revenue was $82,000, or 0.8% of total revenue, in 1998, representing an increase
from $5,000, or 0.1% of total revenue, in 1997. The increase in
Internet/integrated revenue and percentage of total revenue was due to the
increased focus of our sales force on selling our Internet/integrated products
and an increase in revenue from third-party distributors put in place during
1997.
Cost of Product Revenue. Cost of product revenue was $923,000, or 8.9% of
total revenue, in 1998, representing a 25.4% increase from $736,000, or 8.2% of
total revenue, in 1997. The increase was primarily attributable to an increase
in product shipments. The increased percentage of revenue reflects a slight
increase in the percentage of sales derived from third-party products.
Cost of Service Revenue. Cost of service revenue was $1.3 million, or
12.3% of total revenue, in 1998, representing a 21.0% increase from $1.1
million, or 11.8% of total revenue, in 1997. The dollar increase was primarily
due to growth in services staff needed to support the additional customers under
annual maintenance contracts. The increased percentage of revenue reflects a
slight increase in the services staff necessary to meet the expected support and
service requirements for the new Internet product.
Research and Development Expenses. Research and development expenses were
$1.8 million, or 17.8% of total revenue, in 1998, representing a 33.0% increase
from $1.4 million, or 15.5% of total revenue,
19
<PAGE> 21
for 1997. The absolute and percentage increases reflect the growth in research
and development staff to maintain and continue to expand our Internet/integrated
product line.
Sales and Marketing Expenses. Sales and marketing expenses were $4.6
million, or 44.4% of total revenue, in 1998, representing a 30.9% increase from
$3.5 million, or 39.4% of total revenue, in 1997. The increase in absolute
dollars was attributable primarily to increased commission expenses associated
with increased sales and personnel costs resulting from an increase in our sales
and marketing staff. The increased percentage of total revenue was attributable
to sales staff focusing on developing new Internet distribution channels.
General and Administrative Expenses. General and administrative expenses
were $2.9 million, or 28.2% of total revenue, in 1998, representing a 31.2%
increase from $2.2 million, or 24.9% of total revenue, in 1997. The absolute and
percentage increases were primarily attributable to increased costs of
personnel, rent and professional fees to accommodate our growth.
20
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly statements of operations
data for each of our last eight quarters. All information other than the tables
of revenue information has been derived from our financial statements. The
unaudited quarterly financial statements have been prepared on substantially the
same basis as the audited financial statements contained herein. In the opinion
of management, the unaudited quarterly financial statements include all
adjustments, consisting only of normal recurring adjustments, that we consider
to be necessary to fairly present this information when read in conjunction with
our financial statements and related notes appearing elsewhere in this
prospectus. The results of operations for any quarter are not necessarily
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue.......... $1,369 $1,197 $1,407 $1,477 $ 1,364 $1,442 $ 1,798 $ 2,127
Service revenue.......... 1,138 1,320 1,303 1,171 1,294 1,323 1,685 1,932
------ ------ ------ ------ ------- ------ ------- -------
Total revenue.... 2,507 2,517 2,710 2,648 2,658 2,765 3,483 4,059
Cost of revenue:
Product costs............ 192 240 210 281 265 290 403 422
Service costs............ 317 309 324 324 339 369 492 568
------ ------ ------ ------ ------- ------ ------- -------
Total cost of
revenue........ 509 549 534 605 604 659 895 990
------ ------ ------ ------ ------- ------ ------- -------
Gross profit............... 1,998 1,968 2,176 2,043 2,054 2,106 2,588 3,069
Operating expenses:
Research and
development........... 399 483 495 468 379 380 585 764
Sales and marketing...... 983 1,252 1,216 1,162 979 1,196 1,662 2,715
General and
administrative........ 717 806 711 692 966 724 970 1,464
------ ------ ------ ------ ------- ------ ------- -------
Non cash compensation.... -- -- 153 35
Total operating
expenses....... 2,099 2,541 2,422 2,322 2,324 2,300 3,370 4,978
------ ------ ------ ------ ------- ------ ------- -------
Operating income (loss).... (101) (573) (246) (279) (270) (194) (782) (1,909)
Interest income (expense):
Increase in redeemable
stock purchase
warrant............... -- -- -- -- (734) -- (856) --
Other interest income
(expense)............. (1) (39) (32) (35) (41) (37) (89) 503
------ ------ ------ ------ ------- ------ ------- -------
Total interest
income
(expense)...... (1) (39) (32) (35) (775) (37) (945) 503
------ ------ ------ ------ ------- ------ ------- -------
Net income (loss).......... $ (102) $ (612) $ (278) $ (314) $(1,045) $ (231) $(1,727) $(1,406)
====== ====== ====== ====== ======= ====== ======= =======
</TABLE>
Fourth quarter 1999 operating expenses have increased reflecting the impact
of the completion of our initial public offering and the implementation of our
plan to expand our operation.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations from cash generated from
operations and the issuance of long-term debt. In October 1999, we completed our
initial public offering that provided us approximately $44.0 million in net cash
proceeds. We had cash and cash equivalents of $42.8 million at December 31,
1999, and $46,000 at December 31, 1998.
Cash used in operating activities during 1999 and 1998 was $1.8 million,
and $771,000, respectively. This increase reflects the net impact of increases
in our net loss and in accounts receivable, which were
21
<PAGE> 23
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 $1.0 million in 1999, compared to $306,000
in 1998. This increase resulted primarily from an increase in fixed assets
purchased.
Net cash provided by financing activities was $45.5 million in 1999,
compared to $1.0 million in 1998. This change was due primarily to our initial
public offering that provided $44.0 million in cash proceeds in October 1999.
Other significant events in 1999 were 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. Net cash provided in 1998
resulted from the issuance of long-term debt. We also had a $750,000 bank line
of credit with Silicon Valley Bank, which expired in November 1999.
On June 16, 1999, we completed the private placement of 300,000 shares of
Series A Preferred Stock, resulting in gross proceeds to us of $6.0 million and
net proceeds of approximately $5.9 million after payment by us of expenses
relating to the transaction. Of these funds, $4.0 million was used to redeem an
aggregate of 600,000 shares of common stock from David Couchman, our Chairman
and founder, and his spouse. The balance of the net proceeds will be used to
fund our operational growth. The Series A Preferred Stock automatically
converted to 900,000 shares of common stock concurrently with the consummation
of our initial public offering.
On June 21, 1999, we sold 75,000 shares of common stock for $500,000 to
James C. Davis, whom we subsequently added to our Board of Directors.
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, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal years beginning after June 15, 1999. Subsequently, the
effective date was deferred until June 15, 2000. We are in the process of
evaluating this pronouncement and will adopt it upon its effective date.
22
<PAGE> 24
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. This SOP
amends SOP 97-2 to, among other things, require recognition of revenue using the
"residual method" in circumstances outlined in the SOP. Under the residual
method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections of
SOP 97-2, and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related to
the delivered elements. SOP 98-9 is effective for fiscal years beginning after
March 15, 1999. We do not anticipate any impact from the provisions of the new
pronouncement.
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
We have not experienced any immediate adverse impact from the transition to
the year 2000. It is possible that some of the internal systems of our customers
or other parties with whom we do business have already been or will be
negatively affected by the year 2000 date changes. We currently have no
contingency plan to manage any year 2000 issues that may arise.
We did not separately track expenditures relating to year 2000 compliance.
Such expenditures were primarily absorbed within our development organization
and were not considered material relative to our overall development
expenditures.
ITEM 7A. 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 earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are submitted as a separate section of this
Report, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information required by this item is incorporated by reference from
the information contained in the Company's Proxy Statement for the Annual
Meeting of Shareholders expected to be filed with the Commission on April 28,
2000 under the captions "Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement for the Annual Meeting of
Shareholders expected to be filed with the Commission on April 28, 2000 under
the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement for the Annual Meeting of
Shareholders expected to be filed with the
23
<PAGE> 25
Commission on April 28, 2000 under the caption "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement for the Annual Meeting of
Shareholders expected to be filed with the Commission on April 28, 2000 under
the caption "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are submitted as a separate section of this
report, beginning on page F-1.
2. Financial Statement Schedules contained on page 27
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ended December 31, 1999.
(c) Exhibits. The following exhibits are filed as part of, or are incorporated
by reference into, this report on Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1* -- Amended and Restated Articles of Incorporation of the
Registrant.
3.3* -- Amended and Restated Bylaws of the Registrant.
4.1* -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Registrant Defining rights of the holders of
common stock of the Registrant.
4.2* -- Specimen Stock Certificate.
10.1* -- Form of Employment Agreement for Officers and Key Employees.
10.2* -- Lease Agreement, dated January 28, 1992, between KGE
Associates, LP and Complementary Solutions, Inc.
10.3* -- First Amendment to Lease, dated June 11, 1993, between KGE
Associates, LP and LP and Complementary Solutions, Inc.
10.4* -- Second Amendment to Lease, dated June 22, 1994, between KGE
Associates, LP and LP and Complementary Solutions, Inc.
10.5* -- Third Amendment to Lease, dated March 30, 1995, between KGE
Associates, LP and LP and Complementary Solutions, Inc.
10.6* -- Fourth Amendment to Lease, dated June 14, 1996, between KGE
Associates, LP and LP and Telemate Software, Inc.
10.7* -- Fifth Amendment to Lease, dated July 26, 1996, between KGE
Associates, LP and Telemate Software, Inc.
10.8* -- Sixth Amendment to Lease, dated August 2, 1996, between KGE
Associates, LP and Telemate Software, Inc.
10.9* -- Seventh Amendment to Lease, dated July 16, 1998, between KGE
Associates, LP and Telemate Software, Inc.
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.10* -- Telemate Software, Inc. Stock Incentive Plan.
10.11* -- Employment Agreement, dated June 16, 1999, between Richard
L. Mauro and Telemate.Net Software, Inc.
10.12* -- Employment Agreement, dated June 16, 1999, between David H.
Couchman and Telemate.Net Software, Inc.
10.13* -- Telemate.Net Software, Inc. 1999 Stock Incentive Plan.
10.14* -- Amendment to Telemate.Net Software, Inc. 1999 Stock
Incentive Plan.
10.15 -- Eighth Amendment to Lease, dated November 9, 1999, between
KGE Associates, LP and Telemate.Net Software, Inc.
10.16 -- Ninth Amendment to Lease, dated November 10, 1999, between
KGE Associates, LP and Telemate.Net Software, Inc.
10.17 -- Tenth Amendment to Lease, dated November 15, 1999, between
KGE Associates, LP and Telemate.Net Software, Inc.
10.18 -- Telemate.Net Software, Inc. Employee Stock Purchase Plan.
23.1 -- Consent of KPMG LLP
24.1 -- Powers of Attorney (included on signature page).
27.1 -- Financial Data Schedule (for SEC use only).
99.1 -- Safe Habor Compliance Statement.
</TABLE>
* Incorporated herein by reference to the exhibit of the same number filed with
Telemate.Net Software, Inc.'s Registration Statement on Form S-1 (Registration
No. 33-81443)
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this the 30 day of
March, 2000.
By: /s/ RICHARD L. MAURO
------------------------------------
Richard L. Mauro
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David H. Couchman and Richard L. Mauro, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Report on Form 10-K,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD L. MAURO Chief Executive Officer, March 30, 2000
- --------------------------------------------------- President and Director
Richard L. Mauro (Principal Executive Officer)
/s/ RICHARD J. POST Senior Vice President-Finance and March 30, 2000
- --------------------------------------------------- Operations, Chief Financial
Richard J. Post Officer
and Treasurer (Principal
Financial Officer)
/s/ DAVID H. COUCHMAN Chairman of the Board of March 30, 2000
- --------------------------------------------------- Directors
David H. Couchman
/s/ JAMES C. DAVIS Director March 30, 2000
- ---------------------------------------------------
James C. Davis
/s/ J. LAWRENCE BRADNER Director March 30, 2000
- ---------------------------------------------------
J. Lawrence Bradner
/s/ MURALI ANANTHARAMAN Director March 30, 2000
- ---------------------------------------------------
Murali Anantharaman
</TABLE>
26
<PAGE> 28
SCHEDULE I
ACCOUNTANTS SCHEDULE
TELEMATE.NET SOFTWARE, INC.
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
ALLOWANCES
<TABLE>
<CAPTION>
ADDITIONS
BALACE AT CHARGED BALANCE
BEGINNING TO COSTS AND AT END
YEAR ENDED OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ---------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
December 31, 1997................................ $50,000 $ 33,158 $ 23,158 $ 60,000
December 31, 1998................................ $60,000 $403,501 $368,501 $ 95,000
December 31, 1999................................ $95,000 $525,091 $320,091 $300,000
</TABLE>
27
<PAGE> 29
TELEMATE.NET SOFTWARE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-1
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Telemate.Net Software, Inc.:
We have audited the accompanying balance sheets of Telemate.Net Software,
Inc. as of December 31, 1999 and 1998, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three year period ended December 31, 1999. In connection with our audits of the
financial statements, we also have audited the schedule of valuation accounts
for each of the years in the three year period ended December 31, 1999. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Telemate.Net Software, Inc.
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
February 11, 2000
F-2
<PAGE> 31
TELEMATE.NET SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- --------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,755 $ 46
Trade accounts receivable, net of allowance for returns
and doubtful accounts of $300 and $95 for 1999 and
1998, respectively..................................... 3,467 1,809
Prepaid expenses and other current assets................. 518 127
-------- -------
Total current assets.............................. 46,740 1,982
Property and equipment, net of depreciation and
amortization.............................................. 1,474 591
Other assets................................................ 60 102
-------- -------
$ 48,274 $ 2,675
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable to bank...................................... $ -- $ 80
Accounts payable.......................................... 1,212 469
Accrued expenses and other liabilities.................... 1,705 769
Deferred revenue.......................................... 3,041 2,390
-------- -------
Total current liabilities......................... 5,958 3,708
Long-term debt.............................................. -- 909
Redeemable stock purchase warrant........................... -- 123
-------- -------
Total liabilities................................. 5,958 4,740
-------- -------
Shareholders' equity (deficit):
Preferred stock, $.01 par value; 19,700,000 authorized and
undesignated, none issued.............................. -- --
Common stock, $.01 par value; 100,000,000 shares
authorized,
7,359,962 shares issued at December 31, 1999 and
3,261,813 shares
issued at December 31, 1998............................ 73 33
Additional paid-in capital................................ 52,537 176
Accumulated deficit....................................... (10,267) (1,891)
Notes receivable and accrued interest from shareholders... (27) (383)
-------- -------
Total shareholders' equity (deficit).............. 42,316 (2,065)
Commitments and contingencies...............................
-------- -------
$ 48,274 $ 2,675
======== =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 32
TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Revenue:
Product sales............................................ $ 6,731 $ 5,450 $ 4,890
Service revenue.......................................... 6,234 4,932 4,058
---------- ---------- ----------
Total revenue.................................... 12,965 10,382 8,948
---------- ---------- ----------
Cost of revenue:
Product costs............................................ 1,380 923 736
Service costs............................................ 1,768 1,274 1,053
---------- ---------- ----------
Total cost of revenue............................ 3,148 2,197 1,789
---------- ---------- ----------
Gross profit..................................... 9,817 8,185 7,159
---------- ---------- ----------
Operating expenses:
Research and development................................. 2,108 1,845 1,387
Sales and marketing...................................... 6,552 4,613 3,522
General and administrative............................... 4,124 2,926 2,231
Noncash compensation..................................... 188 -- --
---------- ---------- ----------
Total operating expenses......................... 12,972 9,384 7,140
---------- ---------- ----------
Operating income (loss).......................... (3,155) (1,199) 19
---------- ---------- ----------
Interest income (expense):
Increase in redeemable stock purchase warrant............ (1,590) -- --
Other interest income.................................... 534 35 23
Other interest expense................................... (198) (142) (4)
---------- ---------- ----------
Total interest income (expense).................. (1,254) (107) 19
---------- ---------- ----------
Net income (loss) before income taxes............ (4,409) (1,306) 38
Provision for (benefit from) income taxes.................. -- -- --
---------- ---------- ----------
Net income (loss)................................ $ (4,409) $ (1,306) $ 38
========== ========== ==========
Basic net income (loss) per share.......................... $ (1.07) $ (.40) $ .01
========== ========== ==========
Diluted net income (loss) per share........................ $ (1.07) $ (.40) $ .01
========== ========== ==========
Weighted average shares outstanding:
Basic.................................................... 4,102,999 3,261,813 3,261,813
========== ========== ==========
Diluted.................................................. 4,102,999 3,261,813 3,732,768
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 33
TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES
RETAINED RECEIVABLE TOTAL
COMMON STOCK ADDITIONAL EARNINGS AND ACCRUED SHAREHOLDERS'
------------------- PAID-IN (ACCUMULATED INTEREST FROM EQUITY
SHARES AMOUNTS CAPITAL DEFICIT) SHAREHOLDERS (DEFICIT)
--------- ------- ---------- ------------ ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 3,197,799 $32 $ 122 $ (623) $(217) $ (686)
Issuance of common stock under stock
incentive plan.................... 64,014 1 48 -- (44) 5
Notes receivable from
shareholders...................... -- -- -- -- (84) (84)
Accrued interest on shareholder
notes............................. -- -- -- -- (16) (16)
Net income.......................... -- -- -- 38 -- 38
--------- --- ------- -------- ----- -------
Balance at December 31, 1997........ 3,261,813 33 170 (585) (361) (743)
Grant of compensatory stock
options........................... -- -- 6 -- -- 6
Accrued interest on shareholder
notes............................. -- -- -- -- (22) (22)
Net loss............................ -- -- -- (1,306) -- (1,306)
--------- --- ------- -------- ----- -------
Balance at December 31, 1998........ 3,261,813 33 176 (1,891) (383) (2,065)
Issuance of common stock for
software product.................. 30,000 -- 306 -- -- 306
Effects of change from S corporation
to C corporation for income taxes:
Distributions..................... -- -- -- (269) 264 (5)
Reclassification of accumulated
deficit to additional paid-in
capital........................ -- -- (296) 296 -- --
Purchase and retirement of common
stock............................. (600,000) (6) -- (3,994) -- (4,000)
Sale of common stock................ 75,000 1 499 -- -- 500
Conversion of Series A redeemable
convertible preferred stock to
common stock...................... 900,000 9 5,941 -- -- 5,950
Rescission of put feature on
redeemable stock purchase warrant
and issuance of common stock...... 122,418 1 1,713 -- -- 1,714
Issuance of common stock under stock
incentive plan.................... 121,731 1 106 -- -- 107
Proceeds from initial public
offering, net of costs............ 3,449,000 34 43,904 -- -- 43,938
Grant of compensatory stock
options........................... -- -- 188 -- -- 188
Repayment of notes receivable from
shareholders...................... -- -- -- -- 109 109
Accrued interest on shareholder
notes............................. -- -- -- -- (17) (17)
Net loss............................ -- -- -- (4,409) -- (4,409)
--------- --- ------- -------- ----- -------
Balance at December 31, 1999........ 7,359,962 $73 $52,537 $(10,267) $ (27) $42,316
========= === ======= ======== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 34
TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(4,409) $(1,306) $ 38
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 467 353 323
Provision for bad debts and returns.................... 245 35 10
Compensation on stock options.......................... 188 6 --
Interest earned on shareholder notes................... (17) (23) (16)
Amortization of discount on redeemable stock purchase
warrants............................................. 91 33 --
Accretion of common stock put warrants................. 1,590 -- --
Loss on fixed asset disposal........................... -- 1 --
Changes in assets and liabilities:
Increase in trade accounts receivable................ (1,903) (274) (434)
(Increase) decrease in prepaid expenses and other
current assets.................................... (391) 77 (252)
Decrease in other assets............................. 43 24 --
Increase in accounts payable, accrued expenses, and
other liabilities................................. 1,679 54 351
Increase in deferred revenue......................... 651 249 101
------- ------- -----
Net cash provided by (used in) operating
activities...................................... (1,766) (771) 121
------- ------- -----
Cash flows from investing activities:
Purchases of property and equipment....................... (1,044) (313) (209)
Proceeds from sale of asset............................... -- 7 --
------- ------- -----
Net cash used in investing activities............. (1,044) (306) (209)
------- ------- -----
Cash flows from financing activities:
Proceeds (payments) from/on credit facility............... (80) 80 --
Proceeds (payments) from/on issuance of long-term debt,
net.................................................... (1,000) 965 --
Proceeds from the exercise of stock options............... 107 -- 5
Proceeds from issuance of common stock, net............... 44,438 -- --
Proceeds from issuance of Series A redeemable convertible
preferred stock, net................................... 5,950 -- --
Purchase and retirement of common stock................... (4,000) -- --
Payments received on notes receivable from shareholders... 109 -- (84)
Shareholder distributions................................. (5) -- --
------- ------- -----
Net cash provided by (used in) financing
activities...................................... 45,519 1,045 (79)
------- ------- -----
Net (decrease) increase in cash................... 42,709 (32) (167)
Cash and cash equivalents at beginning of period.......... 46 78 245
------- ------- -----
Cash and cash equivalents at end of period................ $42,755 $ 46 $ 78
======= ======= =====
Supplemental disclosure of cash -- cash paid for
interest............................................... $ 106 $ 110 $ 4
======= ======= =====
Supplemental disclosures of significant noncash investing
and financing activities:
Discount on redeemable stock purchase warrants......... $ -- $ 123 $ --
======= ======= =====
Financing costs withheld from long-term debt
proceeds............................................. $ -- $ 35 $ --
======= ======= =====
Reduction of notes from shareholders in exchange for
distributions........................................ $ 264 $ -- $ --
======= ======= =====
Issuance of common stock in exchange for software...... $ 306 $ -- $ --
======= ======= =====
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 35
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
Telemate.Net Software, Inc. (the "Company") develops, markets and supports
integrated network usage management software which allows customers to manage
the use of their voice and data networks. Organizations utilize the Company's
products to help improve employee productivity, enhance network security, and
control and recover network costs. In November 1998, the Company released its
patent-pending software product, Telemate.Net(TM), which integrates call
accounting and Internet usage management.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as of the balance sheet dates and revenues and
expenses for the reporting periods to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
On May 7, 1999, the Company changed its name to Telemate.Net Software, Inc.
from Telemate Software, Inc.
(B) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition and Deferred Revenues
The Company recognizes revenue in accordance with The American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No.
97-2, Software Revenue Recognition, and Statement of Position 98-4, Deferral of
the Effective Date of a Provision of SOP 97-2.
Product revenue primarily consists of software license revenue.
Complementary hardware sales are also included in product revenue and represent
less than 10% of total revenue.
Revenues derived from software license fees and hardware are recognized
upon shipment. Revenues derived from software maintenance and support services
involve primarily annual contracts and are recognized ratably over the service
period. Revenues related to professional services (installation and training)
are recognized as services are provided.
Deferred revenues generally represent advance payments received from
customers and billings invoiced to customers for software maintenance and
professional services billed in advance of the time revenues are recognized.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided using accelerated
methods over the shorter of the estimated useful life or lease term. The
estimated useful lives of the assets are as follows:
<TABLE>
<S> <C>
3 -- 5
Computer equipment and purchased software................... years
5 -- 7
Furniture and office equipment.............................. years
Leasehold improvements...................................... 5 years
</TABLE>
F-7
<PAGE> 36
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Computation of 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.
Following is a reconciliation between basic and diluted shares for the
purposes of calculating the basic and diluted earnings per share in the
accompanying financial statements.
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Shares used in the calculation of net earnings (loss) per
share:
Basic shares outstanding.................................. 4,102,999 3,261,813 3,261,813
Effect of dilutive securities -- options granted.......... -- -- 470,955
--------- --------- ---------
Diluted shares outstanding.................................. 4,102,999 3,261,813 3,732,768
========= ========= =========
</TABLE>
As of December 31, 1999, potentially dilutive securities include stock
options (note 8).
Research and Development Costs
Research and development costs are expensed as incurred. Costs incurred
subsequent to establishing technological feasibility, in the form of a working
model, are capitalized and amortized over their estimated useful lives. To date,
software development costs incurred after technological feasibility has been
established have not been material.
Income Taxes
For Federal and state income tax purposes until June 16, 1999, the
shareholders of the Company elected that the earnings of the Company be taxed
under the S Corporation provisions of the Internal Revenue Code. As a result of
this election, the Company had not provided for Federal or state income tax
expense or any deferred income taxes as earnings were passed through to, and the
related income tax liabilities became the individual responsibility of, the
shareholders of the Company.
On June 16, 1999, the Company's S corporation status terminated upon
closing of the Series A Preferred Stock sale.
Subsequent to June 16, 1999, income taxes were accounted for under the
asset and liability method. In accordance with the asset and liability method,
deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of changes in tax rates is recognized in
income in the period that includes the enactment date.
Stock Compensation Plan
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
Accounting for Stock Issued to Employees, and complies with the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, which
encourages entities to recognize as compensation expense over the vesting period
the fair value of all
F-8
<PAGE> 37
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stock-based awards on the date of grant. Under APB No. 25, compensation cost, if
any, for fixed plan accounting, is recognized over the respective vesting period
based on the difference, on the date of grant, between the fair value of the
Company's common stock, and the grant price.
Comprehensive Income
No statement of comprehensive income has been included in the accompanying
financial statements since the results would not differ from the accompanying
statements of operations or shareholders' equity.
Industry Segment
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. The Company operates and
manages its business in one segment, that being a software and services provider
to the network usage management market.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The fair value of each of the following instruments approximates their
carrying value because of short maturity of these instruments: cash, trade
accounts receivable, accounts payable, accrued expenses, and other liabilities.
The fair value of the Company's long-term debt and redeemable stock
purchase warrant were estimated by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities by the Company's bankers.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for all fiscal years beginning after June
15, 1999. Subsequently, the effective date was deferred until June 15, 2000. The
Company is in the process of evaluating this pronouncement and will adopt it
upon its effective date.
In December 1998, the AICPA issued SOP No. 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. This SOP
amends SOP No. 97-2 to, among other matters, require recognition of revenue
using the "residual method" in circumstances outlined in the SOP. Under the
residual method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections of
SOP No. 97-2 and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is recognized as revenue related to
the delivered elements. SOP No. 98-9 is effective for fiscal years beginning
after March 15, 1999. The Company does not believe that the adoption of SOP No.
98-9 will have a material effect on its revenue recognition.
Stock Split
On September 2, 1999, the Company consummated a three-for-one stock split
in the form of a stock dividend. The information in the accompanying financial
statements has been retroactively restated to reflect the effects of the stock
split.
F-9
<PAGE> 38
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Computer equipment and purchased software................... $2,619 $1,451
Furniture and office equipment.............................. 484 322
Leasehold improvements...................................... 121 101
------ ------
3,224 1,874
Less accumulated depreciation and amortization.............. 1,750 1,283
------ ------
$1,474 $ 591
====== ======
</TABLE>
3. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following at December
31:
<TABLE>
<CAPTION>
1999 1998
------ ----
<S> <C> <C>
Accrued bonuses............................................. $ 408 $220
Personnel related accruals.................................. 458 277
Other accruals.............................................. 839 272
------ ----
$1,705 $769
====== ====
</TABLE>
4. NOTE PAYABLE TO BANK
On June 1, 1998, the Company increased its credit facility from $500,000 to
$750,000. Originally issued in December 1996, the credit facility was with a
commercial bank, bore interest at the prime rate plus 1 1/4% (9% at December 31,
1998), and matured on May 31, 1999. The Company extended its line of credit
under similar terms and conditions through November 1999, but did not
subsequently renew. The credit facility was secured by substantially all assets
of the Company and also required that the Company maintain a financial ratio
with respect to current assets to current liabilities and certain other
covenants. At December 31, 1998, $80,000 was outstanding on this facility.
5. NOTE PAYABLE
In March 1998, the Company obtained $1 million from the issuance of a
secured promissory note. The proceeds of the note provided working capital for
the Company's continued product development activities. During September 1999,
the total balance outstanding was repaid. At December 31, 1998, the balance
outstanding, net of an unaccreted discount of $91 totaled $908.
Interest accrued monthly at 14% and was secured by substantially all of the
assets of the Company.
6. NOTES RECEIVABLE FROM SHAREHOLDERS
In 1997 and prior years, the Company issued shares of common stock for
options that were exercised under the terms of the Company's Stock Incentive
Plan. Upon exercise, the Company received cash and full recourse promissory
notes payable to the Company secured by this common stock. The notes accrue
interest at 110% of the Long-Term Applicable Federal Rate, as adjusted each
January 1, and are due at various dates through 2007. In addition, funds were
also advanced to certain shareholders in 1997 and prior years for various
reasons. The shareholders have signed promissory notes for the advanced funds
which are due on demand. The notes bear interest at rates ranging from 6.00% to
7.11%. Total accrued interest on the notes from shareholders was $5 and $43 at
December 31, 1999 and 1998, respectively.
F-10
<PAGE> 39
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' EQUITY
(A) AMENDMENT IN THE ARTICLES OF INCORPORATION
Effective June 16, 1999, the articles of incorporation of the Company were
amended whereby the amount of common stock authorized for issuance was increased
from 10 million shares to 100 million shares. Additionally, the articles of
incorporation were amended whereby 20 million shares of preferred stock with a
par value of $.01 per share were authorized, part or all of which shares of
Preferred Stock will be established and designated from time to time by the
Board of Directors in such series and with such preferences, limitations, and
relative rights as may be determined by the Board of Directors. Of the preferred
shares authorized, the Series A Redeemable Convertible Preferred Stock
(Preferred Stock) was established and has many rights and privileges, including,
but not limited to, those included herein. The Series A Redeemable Convertible
Preferred Stock was automatically converted into three shares of common stock
for each share of preferred upon the completion of the public offering.
(B) COMMON STOCK
On June 8, 1999, the Company entered into an asset purchase agreement
whereby the Company issued 30,000 shares of common stock in exchange for a
software product from an unrelated party. The purchase was valued at $306,000
based on the estimated fair value of common stock at the time of the
accomplishment of certain milestones. The seller has certain rights, privileges,
and restrictions, including, but not limited to, piggyback registration rights.
On June 16, 1999, the Company purchased and retired an aggregate of 600,000
shares of common stock from two principal shareholders, one of which is a
Director, for $4,000,000.
On June 21, 1999, the Company sold 75,000 shares of common stock to a
prospective board member for $500,000 in total proceeds. The purchaser has
certain rights, including, but not limited to, registration rights and piggyback
rights.
(C) SALE OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 16, 1999, the Company issued 300,000 shares of Series A redeemable
convertible preferred stock for cash totaling $6,000,000 ($5,950,000 after
expenses of $50,000). Upon the completion of the initial public offering, the
Preferred Stock automatically converted into three shares of common stock for
each share of preferred stock.
The holders of Preferred Stock were entitled to receive a 12% accruing
dividend, compounded annually, payable only upon liquidation or redemption.
Holders of the Preferred Stock were also entitled to participate equally (on an
as-converted basis) in any cash dividends paid to any other class of equity
securities of the Company. The Preferred Stock was voting, and the holders of
the Preferred Stock were entitled to representation by two board members. The
holders of Preferred Stock also had the right of first refusal for sale of
additional shares.
As part of the Series A Preferred Stock sale, an executive and the
principal stockholder became a party to a noncompete agreement.
(D) COMPLETION OF INITIAL PUBLIC OFFERING
On October 4, 1999, the Company successfully completed its initial public
offering of common stock. The Company sold 3,284,000 shares of common stock in
the initial public offering for approximately $42,758 less issuance costs of
$968.
F-11
<PAGE> 40
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On November 1, 1999, the Company sold 165,000 shares of common stock as
part of the underwriters' overallotment from the initial public offering for
$2,148.
8. STOCK INCENTIVE PLAN
In June 1999, the Board of Directors and Shareholders approved the 1999
Stock Incentive Plan (the "1999 Plan") authorizing 1,000,000 options to acquire
common stock; the shares are subject to adjustments based on various features.
The 1999 Plan provides for the grant of incentive stock options, nonqualified
stock options, and restricted stock awards to selected employees. The stock
options are vested and exercisable over a period determined by the Board of
Directors not to exceed 10 years after the date of grant.
The Company also has a previously existing Stock Incentive Plan (the
"Plan"), under which the Board of Directors is authorized to grant selected
employees, including officers, options to purchase the Company's common stock.
Options granted pursuant to the Plan are exercisable for shares of common stock
at a price not less than 100% of the fair market value on the date of grant. On
May 18, 1999, the number of shares of common stock reserved for issuance under
the Plan was increased by 600,000 to an aggregate of 3,900,000 shares. In July
1998, the number of shares of common stock reserved for issuance under the Plan
was increased by 300,000 to an aggregate of 3,300,000 shares. The Plan provides
for the grant of incentive stock options, nonqualified stock options, and
restricted stock awards to selected employees. The stock options are vested and
exercisable over a period determined by the Board of Directors not to exceed ten
years after the date of grant.
In 1997, 64,014 options were exercised at prices raging from $0.73 to $0.87
per share. The optionees entered into notes (see note 6) in the amount of $44
payable to the Company for these purchases during the year ended December 31,
1997. The notes accrue interest at 110% of the Long-Term Applicable Federal
Rate, as adjusted and are due at variable dates through 2007. During 1998 and
1999, there were no notes issued in conjunction with stock option exercises.
A summary of stock option activity under the 1999 Plan and the Stock
Incentive Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OUTSTANDING PRICE
OPTIONS PER SHARE
----------- ----------
<S> <C> <C>
Options outstanding at December 31, 1996.................... 2,125,701 $ .78
Options granted............................................. 714,000 .96
Options canceled............................................ (63,000) .89
Options exercised........................................... (64,014) .77
---------
Options outstanding at December 31, 1997.................... 2,712,687 .82
Options granted............................................. 674,025 .96
Options canceled............................................ (458,025) .91
Options exercised........................................... -- --
---------
Options outstanding at December 31, 1998.................... 2,928,687 .84
Options granted............................................. 1,398,446 9.51
Options canceled............................................ (136,332) 2.11
Options exercised........................................... (121,731) .88
---------
Options outstanding at December 31, 1999.................... 4,069,070 3.77
---------
Options available for grant at December 31, 1999............ 447,386
=========
</TABLE>
F-12
<PAGE> 41
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------ -----------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
RANGE OF AT LIFE EXERCISE AT EXERCISE
EXERCISE PRICES 12/31/99 (YEARS) PRICE 12/31/99 PRICE
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.73 -- 0.96 2,702,070 6.3 0.84 2,135,070 0.81
$ 6.67 604,500 9.4 6.67 -- --
$11.50 -- 12.38 666,500 9.7 11.54 -- --
$14 96,000 9.8 14.00 -- --
--------- ---------
4,069,070 7.4 3.76 2,135,070 0.81
========= =========
</TABLE>
The weighted-average fair value of options granted during the year ended
December 31, 1999, 1998, and 1997 was $2.79, $.32, and $.32, respectively. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during 1999, 1998, and 1997: expected dividend yield
of 0%; expected volatility of 0% for the period of January 1, 1999 to October 1,
1999, 1998, and 1997, and 75% for the period of October 1, 1999 to December 31,
1999; risk-free interest rate of 5.52%, 5.25%, and 6.54% for 1999, 1998, and
1997, respectively; and expected lives of six years.
During 1999, the Company granted 31,482 options with an exercise price less
than the market value per share at the date of grant. As a result, a
compensation charge totaling approximately $167 will be expensed over the
vesting period. These options vest over periods ranging from immediately to
three years.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Plans. Accordingly, no other compensation cost has been
recognized for its stock option plans because the exercise price of the option
equals or exceeds the fair value of the underlying stock at the date of grant.
Had compensation costs for the Company's stock-based compensation plan been
determined in accordance with SFAS No. 123, the Company's net income (loss)
would have been increased to the unaudited pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ----
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $(4,409) $(1,306) $ 38
Pro forma................................................. (5,590) (1,433) (48)
Basic net income (loss) per common share:
As reported............................................... (1.07) (.40) .01
Pro forma................................................. (1.36) (.43) (.01)
Diluted earnings (loss) per common share:
As reported............................................... (1.07) (.40) .01
Pro forma................................................. (1.36) (.43) (.01)
</TABLE>
In November 1999 the Board of Directors approved an employee stock purchase
plan in which 500,000 shares were designated. This plan is subject to
shareholder approval.
9. COMMITMENTS
(A) LEASES
In the ordinary course of business, the Company enters into noncancelable
operating lease agreements for its office facilities. Management expects that,
as these lease agreements expire, they will be renewed or
F-13
<PAGE> 42
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
replaced by similar operating lease agreements. During 1999, the Company
modified its existing lease contract to assume additional rental space. Rental
expense under the operating leases was $418, $324, and $263 for the years ended
1999, 1998, and 1997, respectively. The lease term for the entire facility is
through September 2003. The future minimum annual lease payments under the
noncancelable operating lease agreements with remaining terms greater than one
year for the next five years and in the aggregate are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
2000........................................................ $ 655
2001........................................................ 667
2002........................................................ 690
2003........................................................ 460
------
$2,472
======
</TABLE>
(B) EMPLOYEE BENEFIT PLAN
Effective January 1, 1993, the Company adopted the Telemate Software 401(k)
Savings and Investment Plan (the "401(k) Plan"). In order to participate in the
401(k) Plan, employees must be at least 21 years of age and have completed 90
days of service. The terms of the 401(k) Plan allow employees to contribute up
to 20% of pretax compensation up to the maximum allowed under Internal Revenue
Service ("IRS") regulations. The Company may make discretionary matching
contributions up to the maximum allowed under IRS regulations. In addition, the
Company may make a discretionary profit-sharing contribution to the 401(k) Plan.
The discretionary matching and profit-sharing contributions vest at the rate of
20% per year. For the years ended December 31, 1999, 1998, and 1997, the Company
made discretionary matching contributions of $72, $73, and $45, respectively, to
the Plan. The Company did not make any discretionary profit sharing
contributions during 1999, 1998, or 1997.
(C) ROYALTY AGREEMENTS
The Company has royalty agreements whereby royalties are paid to vendors
for the use of the vendor's software in conjunction with the Company's products.
10. REDEEMABLE STOCK PURCHASE WARRANT
In connection with the $1 million note payable described in note 5, in
March 1998, the Company issued a warrant for the purchase of common stock at an
exercise price of $.003 per share. The terms of the stock purchase warrants
provide for the number of shares available for exercise to increase at certain
future dates if the note payable remains outstanding. The lender exercised its
warrants in September 1999 in a cashless exercise using 30 shares at the current
market value at the date of exercise.
The terms of the stock purchase warrants included many rights and
privileges in favor of the lender, including but not limited to certain
registration rights and put rights for cash for a period of 30 days immediately
prior to the expiration thereof at a price equal to the fair market value of the
common stock issuable to the holder upon exercise, as defined. In accordance
with Emerging Issues Task Force No. 96.13, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, the
Company estimated the fair value of the warrant at the date of issuance. The
Company anticipated repaying the indebtedness in February 2000; accordingly, the
Company amortized the initial fair value of the warrant to the extent of 122,448
shares, or $123, over 23 months as additional interest cost. The Company revised
the warrant to fair value with changes in fair value reported in interest
expense. At the exercise date, the fair value was $14.00 per share, as
determined by Black-Scholes and,
F-14
<PAGE> 43
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
accordingly, the Company increased the redeemable stock purchase warrant and
recorded a charge of $1,590 to interest expense.
11. INCOME TAXES
On June 16, 1999, the Company converted to a C corporation for income tax
purposes. In connection with the change in income tax status to a C corporation,
the Company recorded the following additional entries on June 16, 1999:
- Reclassified the accumulated deficit totaling approximately $296 on this
date to additional paid-in capital which represented undistributed
estimated losses during the S corporation period limited to the amount of
paid-in capital.
- Established net deferred income tax asset/liability since the Company has
assumed the income tax basis on its assets and liabilities. No net amount
was recorded since the deferred tax assets are fully reserved.
The components of income taxes for the period of June 17, 1999 through
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
JUNE 17
THROUGH
DECEMBER 31,
1999
------------
<S> <C>
Current:
Federal................................................... $--
State..................................................... --
Total current..................................... --
Deferred:
Federal................................................... --
State..................................................... --
Total deferred.................................... --
Total income taxes................................ --
</TABLE>
The following table reconciles the expected corporate Federal income taxes
(computed multiplying the Company's net income before income taxes by 34%) to
the Company's provision for income taxes:
<TABLE>
<CAPTION>
JUNE 17
THROUGH
DECEMBER 31,
<S> <C>
Expected provision for (benefit from) income taxes.......... (1,054)
State income taxes, net of Federal tax effect............... --
Permanent differences....................................... 298
Change in valuation allowance............................... 755
Other, net.................................................. 1
------
Total............................................. --
======
</TABLE>
F-15
<PAGE> 44
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liability as of December 31, 1999, are
presented below:
<TABLE>
<S> <C>
Deferred income tax assets:
Allowance and deferrals................................... $ 210
Accrued bonuses and vacation pay.......................... 160
Research and development capitalization................... 630
Stock option grants....................................... 62
Net operating losses...................................... 821
-------
Gross deferred income tax assets.................. 1,883
Valuation allowance....................................... (1,621)
-------
Net deferred income tax assets.................... 262
-------
Deferred income tax liability:
Amortization.............................................. 250
Depreciation.............................................. 12
-------
Deferred income tax liability..................... 262
-------
Net deferred income tax asset (liability)......... $ --
=======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled referral of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.
At December 31, 1999, the Company has net operating loss carry forwards for
Federal income tax purposes of approximately $2,053 which are available to
offset future Federal taxable income, if any, through 2019.
12. UNAUDITED PRO FORMA INCOME TAXES AND UNAUDITED PRO FORMA NET INCOME (LOSS)
PER SHARE
On June 16, 1999, the Company converted to a C corporation for income tax
purposes. Following are the provisions for income taxes for each of the years in
the three years ended December 31, 1999, on an unaudited pro forma basis, using
the asset and liability method, as if the Company had been a C corporation,
fully subject to Federal and state income taxes. The components of unaudited pro
forma income taxes are as follows:
<TABLE>
<CAPTION>
(JANUARY 1
THROUGH DECEMBER 31,
JUNE 16, -------------
1999) 1998 1997
----------- ----- -----
<S> <C> <C> <C>
Pro forma income taxes:
Current
Federal................................................... $ (9) $ 9 $(3)
State..................................................... (4) 4 (1)
---- --- ---
Total current..................................... $(13) $13 $(4)
---- --- ---
</TABLE>
F-16
<PAGE> 45
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
(JANUARY 1
THROUGH DECEMBER 31,
JUNE 16, -------------
1999) 1998 1997
----------- ----- -----
<S> <C> <C> <C>
Deferred:
Federal................................................... -- -- --
State..................................................... -- -- --
---- --- ---
Total deferred.................................... -- -- --
---- --- ---
Total pro forma income taxes...................... $(13) $13 $(4)
---- --- ---
</TABLE>
The following table reconciles the expected corporate Federal income taxes
(computed by multiplying the Company's net income before income taxes by 34%) to
the Company's unaudited pro forma provision for (benefit from) income taxes:
<TABLE>
<CAPTION>
JANUARY 1,
THROUGH
JUNE 16, DECEMBER 31, DECEMBER 31,
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Expected pro forma provision for (benefit from)
income taxes...................................... $(445) $(444) $ 13
State income taxes, net of Federal tax effect....... (2) 2 --
Permanent differences............................... 261 52 4
Change in valuation allowance....................... 192 486 (31)
Other, net.......................................... (19) (83) 10
----- ----- ----
$ (13) $ 13 $ (4)
----- ----- ----
</TABLE>
Pro forma net income (loss) per share is computed on the same basis
described in note 1 using pro forma income. Pro forma net income is actual net
income adjusted for unaudited pro forma income tax expense (benefits) as
follows:
<TABLE>
<CAPTION>
JANUARY 1,
THROUGH
JUNE 16, DECEMBER 31, DECEMBER 31,
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Unaudited pro forma net income (loss) data:
Pro forma provision for (benefit from) income
taxes.......................................... $ (13) $ 13 $(4)
======= ======= ===
Pro forma net income (loss)....................... $(4,396) (1.319) 42
======= ======= ===
Unaudited pro forma net income (loss) per share:
Basic............................................. $ (1.07) (.40) .01
======= ======= ===
Diluted........................................... $ (1.07) (.40) .01
======= ======= ===
</TABLE>
13. MAJOR CUSTOMER
The Company entered into an sales agreement with a third party contractor
to provide software, hardware and installation services for 51 different sites.
This sales agreement comprised 13.9% of total revenue. Accounts receivable from
this customer totaled $709,980 at December 31, 1999.
F-17
<PAGE> 1
EXHIBIT 10.15
EIGHTH AMENDMENT TO LEASE
THIS AGREEMENT made this 9th day of November, 1999 by and between KGE
Associates, L.P., a partnership hereinafter referred to as "Landlord" and
Telemate.Net Software, Inc. a Georgia Corporation hereinafter referred to as
"Tenant".
WHEREAS, the parties hereto made and entered into a lease agreement
dated January 28, 1992 and amended on June 11, 1993, June 22, 1994, March 30,
1995, June 14, 1996, July 26, 1996, August 2, 1996 and July 16, 1998, for
certain premises (hereinafter referred to as the "Premises") situated at
Perimeter Crest Office Park, 4250 Perimeter Park Drive, Suite 200, Atlanta,
Georgia 30341.
NOW, THEREFORE, in consideration of the mutual promises given one to
the other, the parties hereto intending to be legally bound, do hereby covenant
and agree as follows:
1. PREMISES.
The Premises currently being leased by Tenant under the Lease is
33,356 square feet. With this expansion the space being leased by
Tenant will be 39,844.
2. EXPANSION SPACE
a. The Premises shall be expanded to include an additional 6,488
square feet ("Expansion Premises") located at 4200 Perimeter Park
South, Suite 103, Atlanta, Georgia 30341. Commencement Date" means the
earlier of (1) Landlord's delivery of possession of the Expansion
Premises to Tenant, or (ii) January 1, 2000. If by the Commencement
Date Landlord has not substantially completed the improvements to the
Expansion Premises required to be made hereof or if Landlord, for any
reason whatsoever cannot deliver possession of the Expansion Premises
to Tenant by the Commencement Date, then the Commencement Date shall
be postponed (and rent herein provided, pro-rata to the Expansion
Premises, shall not commence) until the earlier of either (I) the date
of actual occupancy of the Expansion Premises by Tenant or (ii) the
date immediately following the day Landlord has achieved substantial
completion of such improvements.
b. If, and to the extent, Landlord's substantial completion of
the improvements to Expansion Premises pursuant to Exhibit "A"
attached hereto is delayed due to any act or omission of Tenant or
anyone acting under or for Tenant (any such delay being hereinafter
referred to as "Tenant's Delay"), then the Commencement Date shall be
the date specified above, subject to adjustment as provided therein,
but without extension as result of Tenant's Delay; provided that from
the Commencement Date, as so determined, until the earlier of (I) the
date of actual occupancy of the Expansion Premises by Tenant or (ii)
the date immediately following the date Landlord should have achieved
substantial completion of such improvements but for Tenant's Delay,
Tenant's obligations under this Lease shall be to the payment of any
and all Rent due hereunder.
c. Within five (5) days of written request by Landlord, Tenant
agrees to execute and deliver to Landlord a Letter Agreement As To
Term and Premises pursuant to Exhibit "B" attached and made a part
hereof, setting forth the exact Commencement Date of the Expansion and
stating that all tenant improvements to be constructed by Landlord
have been substantially completed, subject to any outstanding
punch-list items.
3. ALTERATIONS AND IMPROVEMENTS
a. Landlord will make available a Tenant Improvements Allowance
("Landlord's Tenant Improvement Allowance") of $6.00 per square foot
of Expansion Space. Included as part of the Tenant Improvement
Allowance shall be a construction management fee in the amount of five
percent (5%) of the actual improvement cost, and all costs associated
with architectural & mechanical drawings. The design and construction
of the Tenant Improvements shall be in accordance with working
drawings to be approved by Landlord and Tenant prior to commencement
of construction. The Premises will be prepared in accordance with
Exhibit "A" attached hereto and by this reference made a part hereof
("Landlord's Construction"). Landlord shall have such work performed
promptly, diligently and in a good and workmanlike manner. In the
event the cost to make the necessary improvements exceeds the Tenant
Improvement Allowance above the Landlord agrees to amortize the excess
amount over the term of the lease with Tenant repaying the
<PAGE> 2
overage amount in equal monthly installments over the term of this
Agreement. Amortization shall be at an interest rate of 10% per annum.
b. Upon substantial completion of Landlord's Construction,
Tenant shall inspect the Premises and identify "punch-list" items for
Tenant's final acceptance. "Substantial Completion" means the Premise
is reasonably satisfactory for acceptance and in accordance with the
work depicted on Exhibit "A".
c. Tenant may request substitutions, additional or extra work
and/or materials over and above that required as depicted and
described on Exhibit "A" hereof and/or under Tenant's approved Plans
to be performed by Landlord, provided that the Extra Work, at
Landlord's option, (I) shall not require the uses of contractors or
types of contractors other than those normally engaged by Landlord in
the Building; (ii) shall not delay completion of Landlord's
Construction or the Commencement Date; (iii) shall be practicable and
consistent with existing physical conditions in the Building and with
plans for the Building which have been filed with the applicable
governmental authorities having jurisdiction thereover; (iv) shall not
impair Landlord's ability to perform any of Landlord's obligations
hereunder or under this Lease or any other Agreement with respect to
space in the Building; (v) shall not affect any portion of the
Building other than the Premises; and (vi) any such work requested by
Tenant and approved by Landlord, shall not cause Landlord's
Construction to exceed the Tenant Improvement Allowance provided for
herein. All Extra Work shall require the installation of new materials
and shall be otherwise subject to Landlord's reasonable approval.
4. TERM
This Eighth Lease Amendment shall commence on the Commencement Date as
defined herein and terminate September 30, 2003.
5. BASE RENTAL
Tenant agrees to pay base rental for the Premises in accordance with
the base rental schedules, and during the term, as defined in the
Sixth Amendment to Lease, Seventh Amendment to Lease, Eighth Amendment
to Lease and for this Ninth Amendment, Tenant agrees to pay base
rental for the Expansion Premises (6,440 square feet) to Landlord
during the term as defined in this Eighth Amendment To Lease, payable
on or before the first day of each and every month, in advance, in
accordance with the following schedule:
<TABLE>
<CAPTION>
Payment Periods Monthly Rent Annual Base Rent Base Rent/SF
--------------- ------------ ---------------- ------------
<S> <C> <C> <C>
12/1/99-11/30/00 $7,028.67 $84,344.00 $13.00
12/1/00-11/30/01 $7,274.67 $87,296.04 $13.46
12/1/01-11/30/02 $7,531.49 $90,377.84 $13.93
12/1/02-09/30/03 $7,791.01 $93,492.08 $14.41
</TABLE>
6. NAME CHANGE
Landlord & Tenant agree that beginning with the execution of this
Eighth Amendment to Lease Tenant has legally changed its name to
Telemate.Net Software, Inc.
7. EXPANSION
Tenant has no expansion rights under this Eighth Amendment to Lease
All other terms, provisions and covenants of the Lease Agreement dated January
28, 1992, as further amended, shall remain in full force and effect.
(Signatures on the following page)
<PAGE> 3
IN WITNESS WHEREOF, the parties herein have hereto set their hands and
seals, in duplicate, the day and year first above written.
"LANDLORD"
KGE ASSOCIATES, L.P.
By: /s/ Elizabeth B. Hawkins
-------------------------------------------
Its: Secretary of G.P.
------------------------------------------
Date: 12/02/99
-----------------------------------------
"TENANT"
TELEMATE.NET SOFTWARE, INC,
By: /s/ Richard J. Post
-------------------------------------------
Its: Chief Financial Officer
------------------------------------------
Date: 12/2/99
-----------------------------------------
<PAGE> 4
EXHIBIT "A"
LANDLORD'S CONSTRUCTION
TENANT'S PLANS AND SPECIFICATIONS.
Landlord and Tenant, at Landlord's sole cost and expense, subject to provisions
of Paragraph 6 hereof, shall cause to be prepared by Landlord's architect
and/or designer and/or engineer the following:
(a) Complete, finished, detailed construction documents and
specifications for Tenant's partition layout, ceiling and other installations
for the work to be done by Landlord under Paragraph 6 hereof, subject to
limitations therein, which shall be prepared by Landlord's architect and/or
designer.
(b) Complete mechanical and electrical plans and specifications
where necessary for the installation of air conditioning system and ductwork,
heating, electrical, plumping and other engineering plans for the work to be
done by Landlord under Paragraph 6 hereof, subject to limitations therein,
which shall be prepared by Landlord's architect and/or designer and/or
engineer.
(c) Any subsequent modifications to the construction documents
and specifications requested by Tenant.
All such plans and specifications are expressly subject to Landlord's approval
and shall comply with all applicable laws, rules, regulations and conditions of
Paragraph 6 hereof. Tenant's Plans shall be delivered to Tenant for Tenant's
approval on or before December 10, 1999 (subject to written modification
between the parties). Such approval shall not be unreasonably withheld. If
Tenant shall have reasonable grounds for withholding its approval of Tenant's
Plans, Tenant, within three (3) business days of receipt of Tenant's Plans,
shall provide Landlord with written notice of its disapproval detailing with
specificity those aspects of Tenant's Plans which Tenant disapproves. In the
event Tenant fails to provide Landlord with written notice within such three
(3) business day period, Tenant shall conclusively be deemed to have approved
Tenant's Plans. In the event Tenant provides timely written notice of its
disapproval of Tenant's Plans, within such three (3) business day period,
Landlord shall amend Tenant's Plans accordingly and deliver the amended plans
to Tenant for approval. The same procedures as for the original Tenant's Plans
shall be applicable to any amendments of Tenant's Plans under the preceding
sentences. If Tenant shall fail to approve Tenant's Plans within the times
provided in this paragraph, then and in addition to any other rights or
remedies of Landlord, at Landlord's option, may terminate this Lease Agreement
and/or accelerate by the number of days of such delay the Commencement Date. In
addition, Tenant shall reimburse Landlord for any and all expenses, losses,
costs and damages suffered by Landlord and caused by such delay. Such option
shall not be exercised until at least fifteen (15) days after the default in
question.
2. Without the prior written consent of Landlord, Tenant shall
make no changes in Tenant's Plans after approval thereof.
3. After approval of Tenant's Plans, Landlord shall obtain from
its general contractor and submit to Tenant a quotation of the cost of
improvements of the Premises in accordance with Tenant's Plans. Upon written
approval of such quotation by Tenant, Landlord and Tenant shall be deemed to
have given final approval to Tenant's Plans, including but not limited to a
date for completion of the work required thereunder, and Landlord shall be
authorized to proceed with the improvements of the Premises in accordance with
Tenant's Plans. Failure of Tenant to reasonably approve any such quotation
shall abate Landlord's obligation to proceed with any improvements of the
Premises, but shall not postpone the Commencement Date by more than seven (7)
days.
Tenant's Plans and a quotation of the cost of Tenant's extra work (as
hereinafter defined) shall be finally approved by Tenant and Landlord as
provided herein no later than December 15, 1999. A copy of Tenant's Plans as so
finally approved shall be signed and dated by both Tenant and Landlord and
delivered to Landlord for its records. A copy of the construction contract for
the improvements of the Premises in accordance with approved Tenant's Plans
shall be initialed and dated by both Tenant and Landlord and attached to this
Lease as an additional exhibit hereto.
<PAGE> 5
LANDLORD'S CONSTRUCTION
Landlord agrees, subject to limitations of Paragraph 6 hereof, at Landlord's
sole cost and expense and in conformance with Construction Documents to provide
and install the Tenant Improvements substantially in accordance with Tenant's
Plans as approved by Landlord and Tenant.
EXTRA WORK
Tenant may request substitutions, additional or extra work and/or materials
over and above that required in Paragraph 6 hereof and/or under Tenant's Plans
approved above (herein called "Extra Work") to be performed by Landlord,
provided that the Extra Work, at Landlord's option, (i) shall not require the
use of contractors or types of contractors other than those normally engaged by
Landlord in the Building; (ii) shall not delay completion of Landlord's
Construction or the Commencement Date; (iii) shall be practicable and
consistent with existing physical conditions in the Building and with plans for
the Building which have been filed with the applicable governmental authorities
having jurisdiction thereover; (iv) shall not impair Landlord's ability to
perform any of Landlord's obligations hereunder or under this Lease or any
other Agreement with respect to space in the Building; and (v) shall not affect
any portion of the Building other than the Premises. All Extra Work shall
require the installation of new materials and shall be otherwise subject to
Landlord's reasonable approval.
2. Subject to Landlord's written consent, Tenant may request the
omission of an item of work required under the approved Tenant's Plans,
provided that such omission shall not delay the completion of the Premises, and
Landlord thereafter shall not be obligated to install same. No credit shall be
granted to Tenant for such omitted items.
PAYMENTS
Any costs associated with the aforementioned improvements which exceeds the
Tenant Improvement Allowance of $6.00 per square foot shall be amortized with a
10% interest rate over the remaining term of this Eight Amendment, payable in
equal monthly installments.
COOPERATION
All work not within the scope of the normal construction trades employed for
the Building, such as the furnishing and installing of draperies, furniture,
telephone equipment and wiring, alarm systems, and office equipment, shall be
furnished and installed by Tenant at Tenant's expense. Tenant shall adopt a
schedule in conformance with the schedule of Landlord's contractors and shall
conduct its work in such a manner as to maintain harmonious relations and as
not to interfere unreasonably with or delay the work of Landlord's contractors.
Tenant shall cause its telephone and alarm contractors to contact Landlord with
regard to installation of a telephone system in the Premises within three (3)
business days of the date Landlord commences construction of the Premises.
<PAGE> 6
EXHIBIT "B"
KGE Associates, LP ("Landlord") and Telemate.Net Software, Inc., a Georgia
corporation ("Tenant"), do each hereby agree and certify to the other that the
Term of that certain Eighth Amendment to Lease between Landlord and Tenant dated
November 9, 1999, ("Lease") commenced on the 1st day of February 2000, and will
expire on the 30th day of September, 2003, unless extended or sooner terminated
as may be provided in the Lease. Tenant hereby acknowledges that it has accepted
delivery of the Premises, containing 6,488 rentable square feet, in
"substantially complete" condition as defined in the Lease, and that said
Premises are in full compliance with all requirements of the Lease, except for
defects of which Tenant gives Landlord notice with reasonable specificity within
ten (10) business days from the Commencement Date referenced above.
Tenant agrees to pay an additional $.74 per square foot for the term of this
agreement for the amortization of tenant improvements over the Tenant
Improvement Allowance.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this instrument under seal as of the 1st day of
February, 1999.
ATTEST: LANDLORD: KGE ASSOCIATES, LP
/s/ By: /s/ Elizabeth B. Hawkins
- --------------------------------- ----------------------------------------
Title: Secretary of G.P.
-------------------------------------
Its:
---------------------------------------
Date: 02/01/00
--------------------------------------
ATTEST: TENANT: TELEMATE.NET SOFTWARE, INC.
/s/ By: /s/ Richard J. Post
- --------------------------------- ----------------------------------------
Title: CFO
-------------------------------------
Date: 3/2/00
--------------------------------------
(Corporate Seal)
<PAGE> 7
EXHIBIT "B"
PHASE I
KGE Associates, LP ("Landlord") and Telemate.Net Software, Inc., a Georgia
corporation ("Tenant"), do each hereby agree and certify to the other that the
Term of that certain Tenth Amendment to Lease between Landlord and Tenant dated
November 15, 1999, ("Lease") commenced on the 1st day of February, 2000, and
will expire on the 30th day of September, 2003, unless extended or sooner
terminated as may be provided in the Lease. Tenant hereby acknowledges that it
has accepted delivery of the Phase I Premises, containing 3,570 rentable square
feet, in "substantially complete" condition as defined in the Lease, and that
said Premises are in full compliance with all requirements of the Lease, except
for defects of which Tenant gives Landlord notice reasonable specificity within
ten (10) business days from the Commencement Date referenced above.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this instrument under seal as of the 1st day of
February, 2000.
ATTEST LANDLORD: KGE Associates, LP
/s/
- ------------------------ By: ELIZABETH B. HAWKINS
-------------------------------------
Title: Secretary of G.P.
----------------------------------
Its:
------------------------------------
Date: 02/01/00
-----------------------------------
ATTEST TENANT: Telemate.Net Software, Inc.
/s/
- ------------------------ By: RICHARD J. POST
-------------------------------------
Title: CFO
----------------------------------
Date: 03/02/00
-----------------------------------
(Corporate Seal)
<PAGE> 1
EXHIBIT 10.16
NINTH AMENDMENT TO LEASE
THIS AGREEMENT made this 10th day of November, 1999 by and between KGE
Associates, L.P., a partnership hereinafter referred to as "Landlord" and
Telemate.Net Software, Inc., a Georgia Corporation hereinafter referred to as
"Tenant".
WHEREAS, the parties hereto made and entered into a lease agreement
dated January 28, 1992 and amended on June 11, 1993, June 22, 1994, March 30,
1995, June 14, 1996, July 26, 1996, August 2, 1996, July 16, 1998 and November
9, 1999 for certain premises (hereinafter referred to as the "Premises")
situated at Perimeter Crest Office Park, 4250 Perimeter Park Drive, Suite 200,
Atlanta, Georgia 30341.
NOW, THEREFORE, in consideration of the mutual promises given one to
the other, the parties hereto intending to be legally bound, do hereby covenant
and agree as follows:
1. PREMISES.
The Premises currently being leased by Tenant under the Lease is 39,844
square feet. With the addition of this expansion the total space leased
by Tenant will be 46,383.
2. EXPANSION SPACE
a. The Premises shall be expanded to include an additional 6,539 square
feet ("Expansion Premises") located at 4200 Perimeter Park South, Suite
208, Atlanta, Georgia 30341. Commencement Date" means the earlier of
(1) Landlord's delivery of possession of the Expansion Premises to
Tenant, or (2) December 15, 1999, subject to existing tenant vacating
the space. If by the Commencement Date Landlord has not substantially
completed the improvements to the Expansion Premises required to be
made hereof or if Landlord, for any reason whatsoever cannot deliver
possession of the Expansion Premises to Tenant by the Commencement
Date, then the Commencement Date shall be postponed (and rent herein
provided, pro-rata to the Expansion Premises, shall not commence) until
the earlier of either (I) the date of actual occupancy of the Expansion
Premises by Tenant or (ii) the date immediately following the day
Landlord has achieved substantial completion of such improvements.
b. If, and to the extent, Landlord's substantial completion of the
improvements to Expansion Premises pursuant to Exhibit "A" attached
hereto is delayed due to any act or omission of Tenant or anyone acting
under or for Tenant (any such delay being hereinafter referred to as
"Tenant's Delay"), then the Commencement Date shall be the date
specified above, subject to adjustment as provided therein, but without
extension as result of Tenant's Delay; provided that from the
Commencement Date, as so determined, until the earlier of (I) the date
of actual occupancy of the Expansion Premises by Tenant or (ii) the
date immediately following the date Landlord should have achieved
substantial completion of such improvements but for Tenant's Delay,
Tenant's obligations under this Lease shall be to the payment of any
and all Rent due hereunder.
c. Within five (5) days of written request by Landlord, Tenant agrees
to execute and deliver to Landlord a Letter Agreement As To Term and
Premises pursuant to Exhibit "B" attached and made a part hereof,
setting forth the exact Commencement Date of the Expansion and stating
that all tenant improvements to be constructed by Landlord have been
substantially completed, subject to any outstanding punch-list items.
3. ALTERATIONS AND IMPROVEMENTS
a. Landlord will make available a Tenant Improvements Allowance
("Landlord's Tenant Improvement Allowance") of $3.50 per square foot of
Expansion Space. Included as part of the Tenant Improvement Allowance
shall be a construction management fee in the amount of five percent
(5%) of the actual improvement cost, and all costs associated with
architectural drawings. The design and construction of the Tenant
Improvements shall be in accordance with working drawings to be
approved by Landlord and Tenant prior to commencement of construction.
The Premises will be prepared in accordance with Exhibit "A" attached
hereto and by this reference made a part hereof ("Landlord's
Construction"). Landlord shall have such work performed promptly,
diligently and in a good and workmanlike manner.
<PAGE> 2
b. Upon substantial completion of Landlord's Construction, Tenant shall
inspect the Premises and identify "punch-list" items for Tenant's final
acceptance. "Substantial Completion" means the Premise is reasonably
satisfactory for acceptance and in accordance with the work depicted on
Exhibit "A".
c. Tenant may request substitutions, additional or extra work and/or
materials over and above that required as depicted and described on
Exhibit "A" hereof and/or under Tenant's approved Plans to be performed
by Landlord, provided that the Extra Work, at Landlord's option, (I)
shall not require the uses of contractors or types of contractors other
than those normally engaged by Landlord in the Building; (ii) shall not
delay completion of Landlord's Construction or the Commencement Date;
(iii) shall be practicable and consistent with existing physical
conditions in the Building and with plans for the Building which have
been filed with the applicable governmental authorities having
jurisdiction thereover; (iv) shall not impair Landlord's ability to
perform any of Landlord's obligations hereunder or under this Lease or
any other Agreement with respect to space in the Building; (v) shall
not affect any portion of the Building other than the Premises; and
(vi) any such work requested by Tenant and approved by Landlord, shall
not cause Landlord's Construction to exceed the Tenant Improvement
Allowance provided for herein. All Extra Work shall require the
installation of new materials and shall be otherwise subject to
Landlord's reasonable approval.
4. TERM
This Ninth Lease Amendment shall commence on the Commencement Date (as
defined herein) and continue thirty-six (36) full calendar months (plus
any partial calendar month if the Commencement Date is not the first
day of the month), unless sooner terminated or extended hereunder.
5. BASE RENTAL
Tenant agrees to pay base rental for the Premises in accordance with
the base rental schedules, and during the term, as defined in the Sixth
Amendment to Lease, Seventh Amendment to Lease, Eighth Amendment to
Lease and for this Ninth Amendment, Tenant agrees to pay base rental
for the Expansion Premises (6,539 square feet) to Landlord during the
term as defined in this Ninth Amendment To Lease, payable on or before
the first day of each and every month, in advance, in accordance with
the following schedule:
<TABLE>
<CAPTION>
Payment Periods Monthly Rent Annual Base Rent Base Rent/SF
<S> <C> <C> <C>
12/15/99-12/31/99 $4,034.14 $13.50
01/01/00-12/31/00 $7,356.38 $88,276.50 $13.50
01/01/01-12/31/01 $7,613.85 $91,366.18 $13.97
01/01/02-12/31/02 $7,879.50 $94,553.94 $14.46
</TABLE>
6. RENEWAL OPTION
(a) So long as the Lease is in full force and effect, and Tenant is not
in default in the performance of any of the covenants or terms and
conditions of the Lease, either at the time of exercise of the option
set forth herein or at the commencement of the renewal term set forth
herein, Tenant is hereby granted the one-time option to renew the term
of this Ninth Amendment to Lease (the "Renewal Option") for a period of
three (3) additional years (the "Renewal Term"), to commence at the
expiration of the initial term of this Ninth Amendment. The renewal of
this Lease shall be upon the same terms and conditions of this Lease,
except: (1) the Base Rent during the Renewal Term shall be calculated
as set forth below based on the prevailing "Market Annual Base Rental
Rate" (as defined below), but shall in no event be less than the Base
Rent that Tenant is then paying under the terms of this Ninth
Amendment; (2) Tenant shall have no option to renew this Ninth
Amendment beyond the expiration of the Renewal Term; (3) Tenant shall
not have the right to assign its renewal rights to any subtenant of the
Premises or assignee of the Lease, nor may any such subtenant or
assignee exercise or enjoy the benefit of such renewal rights: and (4)
the leasehold improvements in the Premises will be provided in their
then-existing condition (on an "as is" basis) at the time the Renewal
Term commences; provided however, that Landlord may provide an
allowance for improvements as part of Landlord's determination of the
Market Annual Base Rental Rate. LANDLORD AGREES TO NEGOTIATE, IN GOOD
FAITH, A TENANT IMPROVEMENT ALLOWANCE.
<PAGE> 3
(b) If Tenant elects to exercise the Renewal Option, Tenant
shall do so by delivering written notice of such election to Landlord
at least four (4) months, but no earlier than six (6) months, prior to
the expiration of the initial term of this Ninth Amendment. Landlord
shall advise Tenant of Landlord's determination of the Market Annual
Base Rental Rate, as defined below, no later than thirty (30) days
after Landlord's receipt of Tenant's notice that Tenant elects to
exercise the Renewal Option. Landlord and Tenant shall negotiate in
good faith to reach an agreement on the Market Annual Base Rental Rate,
taking into consideration all factors set forth below. No later than
thirty (30) days following Tenant's receipt of Landlord's notice
specifying Landlord's determination of the Market Annual Base Rental
Rate, Tenant shall provide Landlord with written notice of Tenant's
acceptance or rejection of such determination, Tenant's failure to
notify Landlord of acceptance or rejection shall constitute Tenant's
acceptance of such rate. If Tenant shall fail to exercise the Renewal
Option, or Tenant rejects Landlord's determination of the Market Annual
Base Rental Rate, or the conditions set forth above for the exercise of
the Renewal Option are not entirely satisfied, this Lease shall expire
at the expiration of the initial term of this Ninth Amendment, and
Tenant shall have no further right thereafter to renew this Lease or to
acquire any further interest whatsoever in the Premises. If Tenant
accepts Landlord's determination of the Market Annual Base Rental Rate
and the lease amendment, then Tenant agrees that, within thirty (30)
days of request by Landlord, Tenant shall execute the amendment to this
Ninth Amendment setting forth such renewal. If for whatever reason,
Tenant delivers notice of its election to renew the Lease to Landlord
as provided above, but fails to execute the amendment to the Lease
described above, Tenant shall be in default of its obligations under
the Lease, but the Lease shall nonetheless be renewed in accordance
with the terms hereof.
(c) Whenever used in this Lease, the term "Market Annual Base
Rental Rate" shall mean Landlord's determination of the annual net
rental rate per square foot (exclusive of expense pass-through
additions) of net rentable area then being charged in comparable
buildings located in the metropolitan Atlanta area for space comparable
to the Premises, taking into consideration use, location, and/or floor
level within the applicable building, the definition of premises
rentable area, leasehold improvements provided, remodeling credits or
allowances granted, quality, age and location of the applicable
building, rental concessions (such as abatements or lease assumptions),
the provision of free or paid unassigned parking, the time the
particular rate under consideration became effective, size of tenant,
relative operating expenses, relative services provided, and other
similar factors. It is agreed that bona fide written offers to lease
comparable space located elsewhere in the Building from third parties
(at arm's length) may be used by Landlord as an indication of the
Market Annual Base Rental Rate. Neither party to this Lease shall have
the right to have a court or third party set the Market Annual Base
Rental Rate.
7. CANCELLATION
This Ninth Amendment to Lease is not subject to the existing
Cancellation Option which is in effect between Tenant and Landlord. In
the event Tenant exercises any cancellation option set forth in any
previous agreements, then Tenant will remain responsible for the full
obligation of this Ninth Amendment.
8. EXPANSION
Tenant has no expansion rights under this Ninth Amendment to Lease
All other terms, provisions and covenants of the Lease Agreement dated January
28, 1992, as further amended, shall remain in full force and effect.
(Signatures on the following page)
<PAGE> 4
IN WITNESS WHEREOF, the parties herein have hereto set their hands and
seals, in duplicate, the day and year first above written.
"LANDLORD"
KGE Associates, L.P.
By: /s/ Elizabeth B. Hawkins
------------------------------------
Its: Secretary of G.P.
Date: 12/02/99
"TENANT"
Telemate.Net Software, Inc.
By: /s/ Richard J. Pist
------------------------------------
Its: Chief Financial Officer
Date: 12/02/99
<PAGE> 5
EXHIBIT "A"
LANDLORD'S CONSTRUCTION
TENANT'S PLANS AND SPECIFICATIONS.
Landlord and Tenant, at Landlord's sole cost and expense, subject to provisions
of Paragraph 6 hereof, shall cause to be prepared by Landlord's architect and/or
designer and/or engineer the following:
(a) Complete, finished, detailed construction documents and
specifications for Tenant's partition layout, ceiling and other installations
for the work to be done by Landlord under Paragraph 6 hereof, subject to
limitations therein, which shall be prepared by Landlord's architect and/or
designer.
(b)Complete mechanical and electrical plans and specifications where
necessary for the installation of air conditioning system and ductwork, heating,
electrical, plumping and other engineering plans for the work to be done by
Landlord under Paragraph 6 hereof, subject to limitations therein, which shall
be prepared by Landlord's architect and/or designer and/or engineer.
(c) Any subsequent modifications to the construction documents and
specifications requested by Tenant.
All such plans and specifications are expressly subject to Landlord's approval
and shall comply with all applicable laws, rules, regulations and conditions of
Paragraph 6 hereof. Tenant's Plans shall be delivered to Tenant for Tenant's
approval on or before November 20, 1999 (subject to written modification between
the parties). Such approval shall not be unreasonably withheld. If Tenant shall
have reasonable grounds for withholding its approval of Tenant's Plans, Tenant,
within three (3) business days of receipt of Tenant's Plans, shall provide
Landlord with written notice of its disapproval detailing with specificity those
aspects of Tenant's Plans which Tenant disapproves. In the event Tenant fails to
provide Landlord with written notice within such three (3) business day period,
Tenant shall conclusively be deemed to have approved Tenant's Plans. In the
event Tenant provides timely written notice of its disapproval of Tenant's
Plans, within such three (3) business day period, Landlord shall amend Tenant's
Plans accordingly and deliver the amended plans to Tenant for approval. The same
procedures as for the original Tenant's Plans shall be applicable to any
amendments of Tenant's Plans under the preceding sentences. If Tenant shall fail
to approve Tenant's Plans within the times provided in this paragraph, then and
in addition to any other rights or remedies of Landlord, at Landlord's option,
may terminate this Lease Agreement and/or accelerate by the number of days of
such delay the Commencement Date. In addition, Tenant shall reimburse Landlord
for any and all expenses, losses, costs and damages suffered by Landlord and
caused by such delay. Such option shall not be exercised until at least fifteen
(15) days after the default in question.
2. Without the prior written consent of Landlord, Tenant shall make no
changes in Tenant's Plans after approval thereof.
3. After approval of Tenant's Plans, Landlord shall obtain from its
general contractor and submit to Tenant a quotation of the cost of improvements
of the Premises in accordance with Tenant's Plans. Upon written approval of such
quotation by Tenant, Landlord and Tenant shall be deemed to have given final
approval to Tenant's Plans, including but not limited to a date for completion
of the work required thereunder, and Landlord shall be authorized to proceed
with the improvements of the Premises in accordance with Tenant's Plans. Failure
of Tenant to reasonably approve any such quotation shall abate Landlord's
obligation to proceed with any improvements of the Premises, but shall not
postpone the Commencement Date by more than seven (7) days.
Tenant's Plans and a quotation of the cost of Tenant's extra work (as
hereinafter defined) shall be finally approved by Tenant and Landlord as
provided herein no later than November 30, 1999. A copy of Tenant's Plans as so
finally approved shall be signed and dated by both Tenant and Landlord and
delivered to Landlord for its records. A copy of the construction contract for
the improvements of the Premises in accordance with approved Tenant's Plans
shall be initialed and dated by both Tenant and Landlord and attached to this
Lease as an additional exhibit hereto.
<PAGE> 6
LANDLORD'S CONSTRUCTION
Landlord agrees, subject to limitations of Paragraph 6 hereof, at Landlord's
sole cost and expense and in conformance with Construction Documents to provide
and install the Tenant Improvements substantially in accordance with Tenant's
Plans as approved by Landlord and Tenant.
EXTRA WORK
Tenant may request substitutions, additional or extra work and/or materials over
and above that required in Paragraph 6 hereof and/or under Tenant's Plans
approved above (herein called "Extra Work") to be performed by Landlord,
provided that the Extra Work, at Landlord's option, (i) shall not require the
use of contractors or types of contractors other than those normally engaged by
Landlord in the Building; (ii) shall not delay completion of Landlord's
Construction or the Commencement Date; (iii) shall be practicable and consistent
with existing physical conditions in the Building and with plans for the
Building which have been filed with the applicable governmental authorities
having jurisdiction thereover; (iv) shall not impair Landlord's ability to
perform any of Landlord's obligations hereunder or under this Lease or any other
Agreement with respect to space in the Building; and (v) shall not affect any
portion of the Building other than the Premises. All Extra Work shall require
the installation of new materials and shall be otherwise subject to Landlord's
reasonable approval.
2. Subject to Landlord's written consent, Tenant may request the
omission of an item of work required under the approved Tenant's Plans, provided
that such omission shall not delay the completion of the Premises, and Landlord
thereafter shall not be obligated to install same. No credit shall be granted to
Tenant for such omitted items.
PAYMENTS
As costs are incurred and bills are received by Landlord in the performance of
Extra Work, Tenant shall make periodic payments to Landlord within ten (10) days
after receipt by Tenant of a statement therefore from Landlord.
COOPERATION
All work not within the scope of the normal construction trades employed for the
Building, such as the furnishing and installing of draperies, furniture,
telephone equipment and wiring, alarm systems, and office equipment, shall be
furnished and installed by Tenant at Tenant's expense. Tenant shall adopt a
schedule in conformance with the schedule of Landlord's contractors and shall
conduct its work in such a manner as to maintain harmonious relations and as not
to interfere unreasonably with or delay the work of Landlord's contractors.
Tenant shall cause its telephone and alarm contractors to contact Landlord with
regard to installation of a telephone system in the Premises within three (3)
business days of the date Landlord commences construction of the Premises.
<PAGE> 7
EXHIBIT "B"
KGE Associates, LP ("Landlord") and Telemate.Net Software, Inc., a Georgia
corporation ("Tenant"), do each hereby agree and certify to the other that the
Term of that certain Lease Agreement Addendum between Landlord and Tenant dated
November 10, 1999, ("Lease") commenced on the __ day of __________, _____, and
will expire on the __ day of ____________, _____, unless extended or sooner
terminated as may be provided in the Lease. Tenant hereby acknowledges that it
has accepted delivery of the Premises, containing 6,539 rentable square feet, in
"substantially complete" condition as defined in the Lease, and that said
Premises are in full compliance with all requirements of the Lease, except for
defects of which Tenant gives Landlord notice with reasonable specificity within
ten (10) business days from the Commencement Date referenced above.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this instrument under seal as of the __ day of ___,
1999.
ATTEST: LANDLORD: KGE ASSOCIATES, LP
- ------------------------- By:
------------------------------------
Title:
---------------------------------
Its:
-----------------------------------
Date:
-----------------------------------
ATTEST: TENANT: TELEMATE.NET SOFTWARE, INC.
- ------------------------- By:
------------------------------------
Title:
---------------------------------
Date:
------------------------------------
(Corporate Seal)
<PAGE> 1
EXHIBIT 10.17
TENTH AMENDMENT TO LEASE
THIS AGREEMENT made this 15th day of November, 1999 by and between KGE
Associates, L.P., a partnership hereinafter referred to as "Landlord" and
Telemate.Net Software, Inc., a Georgia Corporation hereinafter referred to as
"Tenant".
WHEREAS, the parties hereto made and entered into a lease agreement
dated January 28, 1992 and amended on June 11, 1993, June 22, 1994, March 30,
1995, June 14, 1996, July 26, 1996, August 2, 1996, July 16, 1998, November, 9,
1999 and November 10, 1999 for certain premises (hereinafter referred to as the
"Premises") situated at Perimeter Crest Office Park, 4250 Perimeter Park Drive,
Suite 200, Atlanta, Georgia 30341.
NOW, THEREFORE, in consideration of the mutual promises given one to
the other, the parties hereto intending to be legally bound, do hereby covenant
and agree as follows:
PREMISES.
The Premises currently being leased by Tenant under the Lease is
46,383 square feet. With this expansion the space being leased by
Tenant will be 49,953.
EXPANSION SPACE
a. The Premises shall be expanded to include an additional 3,570
square feet ("Expansion Premises") located at 4250 Perimeter Park
South, Suites 104, 106 & 107, Atlanta, Georgia 30341. Commencement
Date" means the earlier of (1) Landlord's delivery of possession of
the Expansion Premises to Tenant, or (ii) January 1, 1999. If by the
Commencement Date Landlord has not substantially completed the
improvements to the Expansion Premises required to be made hereof or
if Landlord, for any reason whatsoever cannot deliver possession of
the Expansion Premises to Tenant by the Commencement Date, then the
Commencement Date shall be postponed (and rent herein provided,
pro-rata to the Expansion Premises, shall not commence) until the
earlier of either (I) the date of actual occupancy of the Expansion
Premises by Tenant or (ii) the date immediately following the day
Landlord has achieved substantial completion of such improvements.
b. If, and to the extent, Landlord's substantial completion of
the improvements to Expansion Premises pursuant to Exhibit "A"
attached hereto is delayed due to any act or omission of Tenant or
anyone acting under or for Tenant (any such delay being hereinafter
referred to as "Tenant's Delay"), then the Commencement Date shall be
the date specified above, subject to adjustment as provided therein,
but without extension as result of Tenant's Delay; provided that from
the Commencement Date, as so determined, until the earlier of (I) the
date of actual occupancy of the Expansion Premises by Tenant or (ii)
the date immediately following the date Landlord should have achieved
substantial completion of such improvements but for Tenant's Delay,
Tenant's obligations under this Lease shall be to the payment of any
and all Rent due hereunder.
c. Within five (5) days of written request by Landlord, Tenant
agrees to execute and deliver to Landlord a Letter Agreement As To
Term and Premises pursuant to Exhibit "B" attached and made a part
hereof, setting forth the exact Commencement Date of the Expansion and
stating that all tenant improvements to be constructed by Landlord
have been substantially completed, subject to any outstanding
punch-list items.
ALTERATIONS AND IMPROVEMENTS
a. Landlord will make available a Tenant Improvements Allowance
("Landlord's Tenant Improvement Allowance") of $14.00 per square foot
of Expansion Space. Included as part of the Tenant Improvement
Allowance shall be a construction management fee in the amount of five
percent (5%) of the actual improvement cost, and all costs associated
with architectural & mechanical drawings. The design and construction
of the Tenant Improvements shall be in accordance with working
drawings to be approved by Landlord and Tenant prior to commencement
of construction. The Premises will be prepared in accordance with
Exhibit "A" attached hereto and by this reference made a part hereof
("Landlord's Construction"). Landlord shall have such work performed
promptly, diligently and in a good and workmanlike manner. Landlord
agrees and acknowledges to allow Tenant to utilize any excess Tenant
Improvement Allowance within the existing premises or within other
premises occupied by Tenant for improvements to the Premises.
<PAGE> 2
Tenant acknowledges and agrees that any such work to be performed
pursuant to the herein defined excess Tenant Improvement Allowance,
shall be subject to Landlord's reasonable approval and in the event
Tenant does not utilize the excess Tenant Improvement Allowance prior
to December 31, 2000; this obligation of the Landlord shall be null
and void and of no further force or effect.
b. Upon substantial completion of Landlord's Construction,
Tenant shall inspect the Premises and identify "punch-list" items for
Tenant's final acceptance. "Substantial Completion" means the Premise
is reasonably satisfactory for acceptance and in accordance with the
work depicted on Exhibit "A".
c. Tenant may request substitutions, additional or extra work
and/or materials over and above that required as depicted and
described on Exhibit "A" hereof and/or under Tenant's approved Plans
to be performed by Landlord, provided that the Extra Work, at
Landlord's option, (I) shall not require the uses of contractors or
types of contractors other than those normally engaged by Landlord in
the Building; (ii) shall not delay completion of Landlord's
Construction or the Commencement Date; (iii) shall be practicable and
consistent with existing physical conditions in the Building and with
plans for the Building which have been filed with the applicable
governmental authorities having jurisdiction thereover; (iv) shall not
impair Landlord's ability to perform any of Landlord's obligations
hereunder or under this Lease or any other Agreement with respect to
space in the Building; (v) shall not affect any portion of the
Building other than the Premises; and (vi) any such work requested by
Tenant and approved by Landlord, shall not cause Landlord's
Construction to exceed the Tenant Improvement Allowance provided for
herein. All Extra Work shall require the installation of new materials
and shall be otherwise subject to Landlord's reasonable approval.
TERM
This Eighth Lease Amendment shall commence on the Commencement Date as
defined herein and terminate September 30, 2003.
BASE RENTAL
Tenant agrees to pay base rental for the Premises in accordance with
the base rental schedules, and during the term, as defined in the
Sixth Amendment to Lease, Seventh Amendment to Lease, Eighth Amendment
to Lease, Ninth Amendment to Lease and this Tenth Amendment to Lease,
Tenant agrees to pay base rental for the Expansion Premises (3,570
square feet) to Landlord during the term as defined in this Tenth
Amendment To Lease, payable on or before the first day of each and
every month, in advance, in accordance with the following schedule:
<TABLE>
<CAPTION>
Payment Periods Monthly Rent Annual Base Rent Base Rent/SF
--------------- ------------ ---------------- ------------
<S> <C> <C> <C>
1/1/00-12/31/00 $ 3,742.55 $ 44,910.60 $ 12.58
1/1/01-12/31/01 $ 3,873.45 $ 46,481.40 $ 13.02
1/1/02-12/31/02 $ 4,007.33 $ 48,087.90 $ 13.47
1/1/03-09/30/03 $ 4,147.15 $ 49,765.80 $ 13.94
</TABLE>
All other terms, provisions and covenants of the Lease Agreement dated January
28, 1992, as further amended, shall remain in full force and effect.
<PAGE> 3
IN WITNESS WHEREOF, the parties herein have hereto set their hands and
seals, in duplicate, the day and year first above written.
"LANDLORD"
KGE ASSOCIATES, L.P.
By: /s/ Elizabeth B. Hawkins
--------------------------------
Secretary of G. P.
--------------------------------
Date: 12/02/99
------------------------------
"TENANT"
TELEMATE.NET SOFTWARE, INC.
By: /s/ Richard J. Post
--------------------------------
Its: Chief Financial Officer
-------------------------------
Date: 12/2/99
------------------------------
<PAGE> 4
EXHIBIT "A"
LANDLORD'S CONSTRUCTION
TENANT'S PLANS AND SPECIFICATIONS.
Landlord and Tenant, at Landlord's sole cost and expense, subject to provisions
of Paragraph 6 hereof, shall cause to be prepared by Landlord's architect
and/or designer and/or engineer the following:
(a) Complete, finished, detailed construction documents and
specifications for Tenant's partition layout, ceiling and other installations
for the work to be done by Landlord under Paragraph 6 hereof, subject to
limitations therein, which shall be prepared by Landlord's architect and/or
designer.
(b) Complete mechanical and electrical plans and specifications
where necessary for the installation of air conditioning system and ductwork,
heating, electrical, plumping and other engineering plans for the work to be
done by Landlord under Paragraph 6 hereof, subject to limitations therein,
which shall be prepared by Landlord's architect and/or designer and/or
engineer.
(c) Any subsequent modifications to the construction documents
and specifications requested by Tenant.
All such plans and specifications are expressly subject to Landlord's approval
and shall comply with all applicable laws, rules, regulations and conditions of
Paragraph 6 hereof. Tenant's Plans shall be delivered to Tenant for Tenant's
approval on or before ________________________ (subject to written modification
between the parties). Such approval shall not be unreasonably withheld. If
Tenant shall have reasonable grounds for withholding its approval of Tenant's
Plans, Tenant, within three (3) business days of receipt of Tenant's Plans,
shall provide Landlord with written notice of its disapproval detailing with
specificity those aspects of Tenant's Plans which Tenant disapproves. In the
event Tenant fails to provide Landlord with written notice within such three
(3) business day period, Tenant shall conclusively be deemed to have approved
Tenant's Plans. In the event Tenant provides timely written notice of its
disapproval of Tenant's Plans, within such three (3) business day period,
Landlord shall amend Tenant's Plans accordingly and deliver the amended plans
to Tenant for approval. The same procedures as for the original Tenant's Plans
shall be applicable to any amendments of Tenant's Plans under the preceding
sentences. If Tenant shall fail to approve Tenant's Plans within the times
provided in this paragraph, then and in addition to any other rights or
remedies of Landlord, at Landlord's option, may terminate this Lease Agreement
and/or accelerate by the number of days of such delay the Commencement Date. In
addition, Tenant shall reimburse Landlord for any and all expenses, losses,
costs and damages suffered by Landlord and caused by such delay. Such option
shall not be exercised until at least fifteen (15) days after the default in
question.
2. Without the prior written consent of Landlord, Tenant shall
make no changes in Tenant's Plans after approval thereof.
3. After approval of Tenant's Plans, Landlord shall obtain from
its general contractor and submit to Tenant a quotation of the cost of
improvements of the Premises in accordance with Tenant's Plans. Upon written
approval of such quotation by Tenant, Landlord and Tenant shall be deemed to
have given final approval to Tenant's Plans, including but not limited to a
date for completion of the work required thereunder, and Landlord shall be
authorized to proceed with the improvements of the Premises in accordance with
Tenant's Plans. Failure of Tenant to reasonably approve any such quotation
shall abate Landlord's obligation to proceed with any improvements of the
Premises, but shall not postpone the Commencement Date by more than seven (7)
days.
Tenant's Plans and a quotation of the cost of Tenant's extra work (as
hereinafter defined) shall be finally approved by Tenant and Landlord as
provided herein no later than ____________________. A copy of Tenant's Plans as
so finally approved shall be signed and dated by both Tenant and Landlord and
delivered to Landlord for its records. A copy of the construction contract for
the improvements of the Premises in accordance with approved Tenant's Plans
shall be initialed and dated by both Tenant and Landlord and attached to this
Lease as an additional exhibit hereto.
<PAGE> 5
LANDLORD'S CONSTRUCTION
Landlord agrees, subject to limitations of Paragraph 6 hereof, at Landlord's
sole cost and expense and in conformance with Construction Documents to provide
and install the Tenant Improvements substantially in accordance with Tenant's
Plans as approved by Landlord and Tenant.
EXTRA WORK
Tenant may request substitutions, additional or extra work and/or materials
over and above that required in Paragraph 6 hereof and/or under Tenant's Plans
approved above (herein called "Extra Work") to be performed by Landlord,
provided that the Extra Work, at Landlord's option, (i) shall not require the
use of contractors or types of contractors other than those normally engaged by
Landlord in the Building; (ii) shall not delay completion of Landlord's
Construction or the Commencement Date; (iii) shall be practicable and
consistent with existing physical conditions in the Building and with plans for
the Building which have been filed with the applicable governmental authorities
having jurisdiction thereover; (iv) shall not impair Landlord's ability to
perform any of Landlord's obligations hereunder or under this Lease or any
other Agreement with respect to space in the Building; and (v) shall not affect
any portion of the Building other than the Premises. All Extra Work shall
require the installation of new materials and shall be otherwise subject to
Landlord's reasonable approval.
2. Subject to Landlord's written consent, Tenant may request the
omission of an item of work required under the approved Tenant's Plans,
provided that such omission shall not delay the completion of the Premises, and
Landlord thereafter shall not be obligated to install same. No credit shall be
granted to Tenant for such omitted items.
PAYMENTS
Any costs associated with the aforementioned improvements which exceeds the
Tenant Improvement Allowance of $6.00 per square foot shall be amortized with a
10% interest rate over the remaining term of this Eight Amendment, payable in
equal monthly installments.
COOPERATION
All work not within the scope of the normal construction trades employed for
the Building, such as the furnishing and installing of draperies, furniture,
telephone equipment and wiring, alarm systems, and office equipment, shall be
furnished and installed by Tenant at Tenant's expense. Tenant shall adopt a
schedule in conformance with the schedule of Landlord's contractors and shall
conduct its work in such a manner as to maintain harmonious relations and as
not to interfere unreasonably with or delay the work of Landlord's contractors.
Tenant shall cause its telephone and alarm contractors to contact Landlord with
regard to installation of a telephone system in the Premises within three (3)
business days of the date Landlord commences construction of the Premises.
<PAGE> 1
EXHIBIT 10.18
TELEMATE.NET SOFTWARE, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION 1.
PURPOSE
The purpose of the Telemate.Net Software, Inc. Employee Stock Purchase
Plan (the "Plan") is to promote the interests of the Company by providing the
opportunity to purchase Shares to Employees in order to attract and retain
Employees by providing an incentive to work to increase the value of Shares and
a stake in the future of the Company which corresponds to the stake of each of
the Company's shareholders. The Plan is intended to be an "employee stock
purchase plan" as defined in Section 423 of the Internal Revenue Code of 1986,
as amended ("Code"). The provisions of the Plan shall, accordingly, be
construed so as to comply with the requirements of Section 423 of the Code
whenever possible.
SECTION 2.
DEFINITIONS
2.1 "BASE PAY" means regular straight-time and overtime earnings
received from the Company, excluding payments for incentive compensation,
bonuses and other special payments.
2.2 "BOARD" means the Board of Directors of Telemate.Net
Software, Inc.
2.3 "COMMITTEE" means the Compensation Committee of the Board.
2.4 "COMPANY" means Telemate.Net Software, Inc., a Georgia
corporation, and any successor to such organization.
2.5 "CUSTODIAN" means such person or entity as the Committee
shall designate from time to time.
2.6 "EFFECTIVE DATE" means March 21, 2000, or such other date as
the Board or the Committee shall so choose. The Effective Date shall be subject
to shareholder approval pursuant to Section 17.
2.7 "EXERCISE DATE" means the last day of a Purchase Period.
2.8 "FAIR MARKET VALUE" means the closing sale price of the
Shares in the national securities market on which the Shares are traded, on the
trading day immediately preceding the day on which such value is to be
determined or, if no shares were traded on such day, on the next preceding day
on which the Shares were traded, as reported by NASDAQ or other reputable
national quotation service. If at any time the Shares are not traded on a
national securities exchange, Fair Market Value shall be the value determined
by the Board of Directors or Committee administering the Plan, taking into
consideration those factors affecting or reflecting value which they deem
appropriate.
2.9 "NASDAQ" means the NASDAQ Stock Market or its successor.
2.10 "PARTICIPANT" means an employee of the Company or of a parent
or subsidiary of the Company who has enrolled in the Plan by completing a
Participation Form (as such term is defined in Section 5 hereof) with the Plan
Administrator. The terms parent and subsidiary have the meanings set forth in
Code Sections 424(e) and (f), respectively.
<PAGE> 2
2.11 "PLAN ADMINISTRATOR" means such person or entity so
designated by the Board.
2.12 "PURCHASE PERIOD" means each quarterly period, beginning on
March 15, June 15, September 15 and December 15, with the first such Purchase
Period beginning with the Effective Date of the Plan. The first such Purchase
Period will be less than a quarter.
2.13 "PURCHASE RIGHT" means a Participant's option to purchase
shares of Common Stock that is deemed to be granted to a Participant during a
Purchase Period pursuant to Section 7.
2.14 "SECTION 16(b) INSIDER" means those persons subject to the
requirements of Section 16(b) of the Securities Exchange Act of 1934, as
amended.
2.15 "SHARES" means the common stock, par value $0.001 per share,
of Telemate.Net Software, Inc., and any other stock or securities (including
any other share or securities of an entity other than Telemate.Net Software,
Inc.) for or into which the outstanding shares of such common stock are
hereinafter exchanged or changed.
2.16 "TRADING DAY" refers to a day during which NASDAQ is
available for trading the Shares.
SECTION 3.
ELIGIBILITY
(a) Participation in the Plan is voluntary. All employees of the
Company who work at least twenty (20) hours per week, including officers and
directors who are employees but who are not members of the Committee, are
eligible to participate in the Plan. The employee's entry date in the Plan
shall be the first day of the Purchase Period immediately following the
employee's first day of employment by the Company.
(b) Notwithstanding any provision of the Plan to the contrary, no
employee may participate in the Plan if prior to the grant of Purchase Rights
or if following a grant of Purchase Rights under the Plan, the employee would
own, directly or by attribution, stock, Purchase Rights or other options to
purchase stock representing five percent (5%) or more of the total combined
voting power or value of all classes of the Company's stock as defined in Code
Section 423(b)(3).
SECTION 4.
SECURITIES SUBJECT TO THE PLAN
The maximum number of Shares which may be granted and purchased under
the Plan may not exceed five hundred thousand (500,000) Shares (subject to
adjustment as provided in Section 15), which may be authorized but unissued
shares, re-acquired shares or shares bought on the open market. If any Purchase
Right granted shall expire or terminate for any reason without having been
exercised in full, the unpurchased Shares shall again become available for
purposes of the Plan, unless the Plan has been terminated.
SECTION 5.
PARTICIPATION
Eligible employees become Participants in the Plan by completing a
"Participation Form," which authorizes payroll deductions for the purpose of
participating in the Plan, and filing such Participation Form with the Plan
Administrator prior to the start date of a Purchase Period.
-2-
<PAGE> 3
SECTION 6.
PAYROLL DEDUCTIONS
(a) In order to purchase Shares, a Participant may elect and
indicate on the Participation Form an amount he or she wishes to authorize the
Company to deduct at regular payroll intervals during the Purchase Period,
expressed either as (1) an integral percentage amount ranging from one percent
(1%) to ten percent (10%) of such Participant's Base Pay for the applicable
payroll period, with a minimum deduction of $10.00 per payday during the
Purchase Period, or (2) a dollar amount to be deducted pro rata at regular
payroll intervals during the Purchase Period, with a minimum deduction of
$10.00 per payday and a maximum dollar amount per payday to be set by the
Committee. The Committee shall determine from time to time whether method (1)
or (2), or both, shall be utilized. The Participation Form will include
authorization for the Company to make payroll deductions from the Participant's
Base Pay.
(b) Purchase Rights granted to a Participant under the Plan for
any calendar year may not represent Shares with a value in excess of
twenty-five thousand dollars ($25,000.00). The $25,000.00 limit is determined
based upon the Fair Market Value of the Shares subject to a Purchase Right as
of the first day (the grant date) of the Purchase Period during which such
Purchase Rights are granted. Participants will be notified if this limitation
becomes applicable to them.
(c) The amounts deducted from the Participant's Base Pay shall be
credited to a bookkeeping account established in the Participant's name under
the Plan, but no actual separate account will be established by the Company to
hold such amounts. There shall be no interest paid on the balance credited to a
Participant's account. Amounts deducted from the Participant's Base Pay may be
commingled with amounts deducted under the Plan for other Participants in a
separate account maintained by the Company. The amounts in such account may be
used by the Company for its general corporate purposes prior to the purchase of
Shares during a Purchase Period.
(d) Payroll deductions shall begin on the first payday of each
Purchase Period, and shall end on the last payday of each Purchase Period. A
Participant on an approved leave of absence may continue participating in the
Plan by making cash payments to the Company within a normal pay period equal to
the amount of the normal payroll deduction had the leave of absence not
occurred. The right of a Participant on an approved leave of absence to
continue participating in the Plan shall terminate upon the expiration of
twelve (12) weeks of leave, unless the Participant's right to re-employment by
the Company after a longer leave is guaranteed by statute or contract, in which
case termination of the right to participate will occur upon the expiration of
such extended period.
(e) So long as a Participant remains an employee of the Company,
payroll deductions will continue in effect from Purchase Period to Purchase
Period, unless prior to the first day of the next succeeding Purchase Period
the Participant:
(i) elects a different rate by filing a new
Participation Form with the Plan Administrator; or
(ii) withdraws from the Plan in accordance with Section 9
hereof.
SECTION 7.
GRANT OF PURCHASE RIGHTS
(a) Subject to the effective date provisions of Section 17, at
5:01 p.m. Eastern Standard Time, on the last day of each Purchase Period (the
Exercise Date), each Participant who has not withdrawn from the Plan pursuant
to Section 9 shall be deemed to have been granted a Purchase Right as of the
first day of the Purchase
-3-
<PAGE> 4
Period to purchase as many full Shares as can be purchased with the balance
credited to such Participant's account as of the Exercise Date.
(b) The price at which each Purchase Right to purchase Shares
shall be exercised is the lower of:
(i) 85% of the Fair Market Value of the Shares on NASDAQ
on the first Trading Day of a Purchase Period; or
(ii) 85% of the Fair Market Value of the
Shares on NASDAQ on the last Trading Day of such Purchase Period.
(c) A Participant may not be granted a Purchase Right to purchase
Shares with a Fair Market Value exceeding six thousand two hundred fifty
dollars ($6,250.00) for any particular Purchase Period. The Committee shall
have the power, exercisable at any time prior to the start of a Purchase
Period, to increase or decrease the dollar value maximum Purchase Right for
that Purchase Period. The maximum, as thus adjusted, will continue in effect
from Purchase Period to Purchase Period until the Committee once again
exercises its power to adjust the maximum.
SECTION 8.
EXERCISE OF PURCHASE RIGHTS
(a) Subject to the effective date provisions of Section 17, each
outstanding Purchase Right held by a Participant who has authorized payroll
deductions and not withdrawn from the Plan pursuant to Section 9 shall be
deemed automatically exercised as of 5:01 p.m. on the Exercise Date (the last
day of the Purchase Period). The exercise of the Purchase Right is accomplished
by applying the balance credited to each Participant's account as of the
Exercise Date to the purchase on the Exercise Date of whole Shares at the
purchase price in effect for the Purchase Period.
(b) Any amount in a Participant's account not applied to the
purchase of Shares for a Purchase Period will be held for the purchase of
Shares in the next Purchase Period.
(c) If the number of Shares for which Purchase Rights are
exercised exceeds the number of Shares available in any Purchase Period under
the Plan, the Shares available for exercise will be allocated by the Plan
Administrator pro rata among the Participants in such Purchase Period in
proportion to the relative amounts credited to their accounts. Any amounts not
thereby applied to the purchase of Shares under the Plan will be refunded to
the Participants after the end of the Purchase Period.
SECTION 9.
WITHDRAWAL AND TERMINATION OF PURCHASE RIGHTS
(a) A Participant who has authorized payroll deductions may
withdraw from the Plan during a Purchase Period by providing written notice to
the Plan Administrator on or before 5:00 p.m. of the last business day of such
Purchase Period. Such withdrawal will become effective upon receipt by the Plan
Administrator of such notice, payroll deductions will cease as soon as is
administratively feasible from the date of such notice, and no additional
payroll deductions will be made on behalf of such Participant during the
Purchase Period. Such notice shall be on a form (the "Withdrawal Form")
provided by the Plan Administrator for that purpose. The Withdrawal Form will
permit a Participant to elect to receive all accumulated payroll deductions as
a refund without penalty or to exercise such Participant's outstanding Purchase
Rights to purchase Shares on the following Exercise Date in the amount of all
payroll deductions withheld during the Purchase Period prior to the
Participant's withdrawal.
-4-
<PAGE> 5
(b) Any Participant who withdraws from the Plan or is deemed to
have withdrawn from the Plan pursuant to Section 9(a) will not be eligible to
rejoin the Plan until the Purchase Period following the Purchase Period of
withdrawal. A Participant wishing to resume participation may re-enroll in the
Plan by completing and filing a new Participation Form for a subsequent
Purchase Period by following the applicable enrollment procedures.
(c) If a Participant ceases to be an employee of the Company for
any reason during a Purchase Period, his or her outstanding Purchase Right will
immediately terminate, and all sums previously collected from such Participant
during such Purchase Period under the terminated Purchase Right will be
refunded to the Participant.
SECTION 10.
RIGHTS AS SHAREHOLDER
(a) A Participant shall not become a shareholder with respect to
Shares to be purchased during a Purchase Period until the Purchase Right has
been exercised on the Exercise Date. Thus, a Participant shall have no right to
any dividend or distribution made prior to the Exercise Date on Shares
purchased during the Purchase Period.
(b) The Custodian may impose upon, or pass through to, the
Participant a reasonable fee for the transfer of Shares in the form of stock
certificates from the Custodian to the Participant. It is the responsibility of
each Participant to keep his or her address current with the Company through
the Plan Administrator and with the Custodian.
SECTION 11.
SALE OF SHARES ACQUIRED UNDER THE PLAN
(a) Participants may sell the Shares they acquire under the Plan
only in compliance with the restrictions set forth below:
(i) Section 16(b) Insiders may be subject to certain
restrictions in connection with their transactions under the Plan and with
respect to the sale of Shares obtained under the Plan, including, but not
limited to, the Company's Insider Trading Policy, as the same may exist from
time to time.
(ii) Shares obtained under the Plan by a Participant must
comply with the Company's Insider Trading Policy, as the same may exist from
time to time.
(b) In order to insure compliance with the restrictions and
requirements herein, the Company may issue appropriate "stop transfer"
instructions to its transfer agent, if any, and, if the Company transfers its
own securities, it may make appropriate notations to the same effect in its own
records. By executing the Participation Form, each Participant acknowledges and
agrees to the Company's rights described in this Section 11(b).
(c) A Participant shall immediately inform the Plan Administrator
in writing if the Participant transfers any Shares purchased through the Plan
within two (2) years from the date of grant of the related Purchase Right. Such
transfer shall include disposition by sale, gift or other manner. The
Participant may be requested to disclose the manner of the transfer, the date
of the transfer, the number of Shares involved and the transfer price. By
executing the Participation Form, each Participant obligates himself or herself
to provide such information to the Plan Administrator.
-5-
<PAGE> 6
(d) The Company is authorized to withhold from any payment to
be made to a Participant, including any payroll and other payments not related
to the Plan, amounts of withholding and other taxes due in connection with any
transaction under the Plan, and a Participant's enrollment in the Plan will be
deemed to constitute his or her consent to such withholding.
SECTION 12.
PLAN ADMINISTRATION
(a) The Plan shall be administered by the Committee. No member of
the Board will be eligible to participate in the Plan during his or her period
of Committee service.
(b) The Committee shall have the plenary power, subject to and
within the express provisions of the Plan:
(i) to determine the commencement and termination date
of the offering of Shares under the Plan; and
(ii) to interpret the terms of the Plan, establish and
revoke rules for the administration of the Plan and correct or reconcile any
defect or inconsistency in the Plan.
(c) The Committee may delegate all or part of its authority to
administer the Plan to the Plan Administrator, who may in turn delegate the
day-to-day operations of the Plan to the Custodian. The Custodian will
establish and maintain, as agent for the Participants, accounts for the purpose
of holding the Shares and/or cash contributions as may be necessary or
desirable for the administration of the Plan.
(d) The Board may waive or modify any requirement that a notice
or election be made or filed under the Plan a specified period in advance in an
individual case or by adoption of a rule or regulation under the Plan, without
the necessity of an amendment to the Plan.
SECTION 13.
TRANSFERABILITY
(a) Any account maintained by the Custodian for the benefit of a
Participant with respect to shares acquired pursuant to the Plan may only be in
the name of the Participant; provided, however, that the Participant may elect
to maintain such account with right of joint ownership with such Participant's
spouse. Such election may only be made on a form (the "Joint Account Form")
provided by the Company.
(b) Neither payroll deductions credited to a Participant's
account nor any Purchase Rights or other rights to acquire Shares under the
Plan may be assigned, transferred, pledged or otherwise disposed of by
Participants other than by will or the laws of descent and distribution and,
during the lifetime of a Participant, Purchase Rights may be exercised only by
the Participant.
SECTION 14.
MERGER OR LIQUIDATION OF THE COMPANY
In the event the Company merges with another corporation and the
Company is not the surviving entity, or in the event all or substantially all
of the stock or assets of the Company is acquired by another company, or in the
event of certain other similar transactions, the Committee may, in its sole
discretion and in connection with such transaction, cancel each outstanding
Purchase Right and refund all sums previously collected from Participants under
the canceled outstanding Purchase Rights, or, in its discretion, cause each
Participant with outstanding Purchase Rights to have his or her outstanding
Purchase Right exercised
-6-
<PAGE> 7
immediately prior to such transaction and thereby have the balance of his or
her account applied to the purchase of whole Shares (subject to the maximum
dollar limitation of Section 7(c)) at the purchase price in effect for the
Purchase Period, which would be treated as ending with the effective date of
such transaction. The balance of the account not so applied will be refunded to
the Participant. In the event of a merger in which the Company is the surviving
entity, each Participant is entitled to receive, for each Share as to which
such Participant's outstanding Purchase Rights are exercised, as nearly as
reasonably may be determined by the Committee, in its sole discretion, the
securities or property that a holder of one Share was entitled to receive upon
the merger.
SECTION 15.
ADJUSTMENT FOR CHANGES IN CAPITALIZATION
To prevent dilution or enlargement of the rights of Participants under
the Plan, appropriate adjustments may be made in the event any change is made
to the Company's outstanding common stock by reason of any stock dividend,
stock split, combination of shares, exchange of shares or other change in the
Shares effected without the Company's receipt of consideration. Adjustments may
be made to the maximum number and class of securities issuable under the Plan,
the maximum number and class of securities purchasable per outstanding Purchase
Right and the number and class of securities and price per share in effect
under each outstanding Purchase Right. Any such adjustments may be made
retroactively effective to the beginning of the Purchase Period in which the
change in capitalization occurs, and any such adjustment will be made by the
Committee in its sole discretion.
SECTION 16.
AMENDMENT AND TERMINATION
The Committee may terminate or amend the Plan at any time, subject to
the following restrictions. First, the provisions of Sections 4, 5, 6, 7 and 8
which govern the formula for the automatic grant of Purchase Rights under the
Plan may not be amended more than once in any six (6) month period. Second, any
termination or amendment made to the Plan may not affect or change Purchase
Rights previously granted under the Plan without the consent of the affected
Participant, and any amendment that materially increases the benefits or number
of Shares under the Plan (except for certain allowable adjustments in the event
of changes to the Company's capital structure or for changes authorized by the
Plan to be made by the Committee or the Plan Administrator) or materially
modifies the eligibility requirements of the Plan shall be subject to
shareholder approval. If not sooner terminated by the Committee, the Plan shall
terminate at the time Purchase Rights have been exercised with respect to all
Shares reserved for grant under the Plan.
SECTION 17.
SHAREHOLDER APPROVAL AND EFFECTIVE DATE
The Plan is subject to the approval of shareholders of the Company
holding a majority of the shares of the Common Stock.
The Plan shall be deemed to have been adopted as of the Effective Date
upon the date of its approval by the shareholders of the Company. Until the
Plan is approved by the shareholders, no Purchase Rights shall be deemed
granted or exercised under Sections 7 and 8. Upon approval of the Plan by the
Company's shareholders, Purchase Rights shall be deemed granted and exercised
as of the appropriate dates in the Plan as of the Effective Date, and Shares
purchased shall be deemed purchased as of the applicable Exercise Date. In the
event the Plan is not approved by the shareholders on or before the date which
is one year from the Effective Date, the Plan shall be deemed not to have been
adopted, and all payroll deduction amounts withheld on behalf of Participants
pursuant to Section 6 shall be refunded to such Participants.
-7-
<PAGE> 8
SECTION 18.
NO EMPLOYMENT RIGHTS
Participation in the Plan will not impose any obligations upon the
Company to continue the employment of the Participant for any specific period
and will not affect the right of the Company to terminate such person's
employment at any time, with or without cause.
SECTION 19.
COSTS
Except as set forth in Section 10(b), costs and expenses incurred in
the administration of the Plan and the maintenance of accounts with the
Custodian may be shared by the Participant and the Company, to the extent
provided in this Section 19. Any brokerage fees and commissions for the
purchase of Shares under the Plan (including Shares purchased upon reinvestment
of dividends and distributions) will be shared equally by the Participant and
the Company, but any brokerage fees and commissions for the sale of Shares
under the Plan by a Participant will be borne by such Participant.
SECTION 20.
REPORTS
After the close of each Purchase Period, each Participant in the Plan
will receive a report from the Custodian indicating the amount of the
Participant's contributions to the Plan during the Purchase Period, the amount
of the contributions applied to the purchase of Shares for the Purchase Period,
the purchase price per share in effect for the Purchase Period and the amount
of the contributions (if any) carried over to the next Purchase Period.
SECTION 21.
GOVERNING LAW
The validity, construction and effect of the Plan and any rules and
regulations relating to the Plan will be determined in accordance with laws of
the State of Georgia, without giving effect to its principles of conflicts of
laws, and applicable federal law.
SECTION 22.
COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS
The Plan, the granting and exercising of Purchase Rights hereunder,
and the other obligations of the Company, the Plan Administrator and the
Custodian under the Plan will be subject to all applicable federal and state
laws, rules, and regulations, and to such approvals by any regulatory or
governmental agency as may be required. The Company may, in its discretion,
postpone the issuance or delivery of Shares upon exercise of Purchase Rights
until completion of such registration or qualification of such Shares or other
required action under any federal or state law, rule, or regulation, listing or
other required action with respect to any automated quotation system or stock
exchange upon which the Shares or other Company securities are designated or
listed, or compliance with any other contractual obligation of the Company, as
the Company may consider appropriate, and may require any Participant to make
such representations and furnish such information as it may consider
appropriate in connection with the issuance or delivery of Shares in compliance
with applicable laws, rules, and regulations, designation or listing
requirements, or other contractual obligations.
-8-
<PAGE> 9
SECTION 23.
EFFECT OF PLAN
The provisions of the Plan shall, in accordance with its terms, be
binding upon and inure to the benefit of, all successors of each employee
participating in the Plan, including, without limitation, such employee's
estate and the executors, administrators or trustees thereof, heirs and
legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such employee.
-9-
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Telemate.Net Software, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-81443) on Form S-8 of Telemate.Net Software, Inc. of our report dated
February 11, 2000, relating to the balance sheets of Telemate.Net Software, Inc.
as of December 31, 1999, and 1998, and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1999, and all related schedules, which
report appears in the December 31, 1999, annual report on Form 10-K of
Telemate.Net Software, Inc.
/s/ KPMG LLP
KPMG LLP
Atlanta, Georgia
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TELEMATE.NET SOFTWARE FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 42,754,938
<SECURITIES> 0
<RECEIVABLES> 3,766,867
<ALLOWANCES> 300,000
<INVENTORY> 0
<CURRENT-ASSETS> 46,739,891
<PP&E> 3,224,848
<DEPRECIATION> 1,750,448
<TOTAL-ASSETS> 48,273,754
<CURRENT-LIABILITIES> 5,957,615
<BONDS> 0
0
0
<COMMON> 73,600
<OTHER-SE> 42,242,539
<TOTAL-LIABILITY-AND-EQUITY> 48,273,754
<SALES> 6,731,403
<TOTAL-REVENUES> 12,964,852
<CGS> 1,380,208
<TOTAL-COSTS> 3,147,730
<OTHER-EXPENSES> 12,971,852
<LOSS-PROVISION> 525,091
<INTEREST-EXPENSE> 1,788,434
<INCOME-PRETAX> (4,408,917)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,408,917)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,408,917)
<EPS-BASIC> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE, WHICH COULD ADVERSELY AFFECT OUR
STOCK PRICE.
During our operating history, we have experienced quarterly fluctuations in
our operating results, and we expect this trend to continue. These fluctuations
are caused by several factors described below and elsewhere in this "Safe Harbor
Compliance Statement" section, many of which are beyond our control. Factors
that affect our operating results include:
- the timing and release of new products or enhancements
- unexpected delays in introducing new products or enhancements
- delays of purchases of new technology by customers who are directing
their resources to resolve year 2000 issues
- the timing of shipment and installation of products ordered
- delays of purchases of our products by customers who anticipate the
release of a new product or enhancement
- the amount and timing of our sales and marketing, product development, or
administrative expenses
Due to these factors, we believe that quarter to quarter comparisons of our
operating results may not be meaningful. Therefore, you should not rely on the
results of one quarter as an indication of our future performance. Furthermore,
we plan to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services and support, and improve
operational and financial systems. Failure of our revenue to increase along with
these expenses could create fluctuations in our quarterly results of operations.
WE HAVE RECENTLY EXPERIENCED LOSSES, AND WE EXPECT TO INCUR LOSSES IN THE NEAR
TERM.
We experienced a net loss of approximately $4.4 million, or 34.0% of our
total revenue, in the year ended December 31, 1999. At December 31, 1999, we had
an accumulated deficit of $10.3 million. Our recent history of losses began as a
result of our shift from developing and marketing call accounting products only
to also developing and marketing an Internet usage management solution. We
anticipate that planned expenditures on sales, marketing and product development
will result in additional losses in the near term. Future expenditures on sales,
marketing and product development will be driven primarily by our ability to
achieve our targeted revenue goals.
Our rapid growth places a significant demand on management and operational
resources. In order to manage growth effectively, it is necessary to implement
and improve operational systems, procedures and controls on a timely basis. In
addition, the Company expects that future expansion will continue to challenge
its ability to hire, train, motivate and manage its employees. Competition is
intense for highly qualified technical, sales and marketing and management
personnel. If total revenue does not increase relative to operating expenses,
and management system do not expand to meet increasing demands, and if the
Company fails to attract, assimilate and retain qualified personnel or its
management otherwise fails to manage its expansion effectively, there would be a
material adverse effect on its business, financial condition and operating
results.
We are not certain when we will regain profitability. Even if we do regain
profitability, we may not sustain or increase profitability on a quarterly or
annual basis.
1
<PAGE> 2
WE HAVE DERIVED LIMITED REVENUES FROM OUR INTERNET AND INTEGRATED PRODUCTS TO
DATE, AND WE MAY NOT BE SUCCESSFUL IN ACHIEVING SUBSTANTIAL REVENUE FROM THESE
PRODUCTS.
We released the initial version of our Internet usage management product in
May 1997. Our initial Internet usage management product extracted usage data
from a limited number of Internet devices. In November 1998 we released our
integrated product that extracts usage data from multiple Internet devices and
voice network devices. For the years ended December 31, 1998 and 1999, we
derived revenue of $1.1 million and $ 4.0 million, respectively, from sales of
our Internet and integrated products. However, we also incurred significant
costs in the development of these products and expect to incur significant costs
related to further sales, distribution and development of our Internet and
integrated products in the near term. We cannot guarantee that our Internet and
integrated products will achieve broad market acceptance and generate
substantial revenue.
OUR SUCCESS DEPENDS ON CONTINUED ACCEPTANCE AND GROWTH OF THE INTERNET.
Sales of our Internet usage management solutions depend on the continued
acceptance and growth of the Internet. Because the Internet has only recently
become a viable medium for commerce and communications, demand and market
acceptance for Internet-related products are subject to high levels of
uncertainty and risk. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
The Internet infrastructure may not be able to support the demands placed on it
by this continued growth. Furthermore, the Internet has experienced a variety of
outages and other delays as a result of damage to portions of its
infrastructure, and such outages and delays could adversely affect the Internet
usage of organizations utilizing our solutions. Additionally, the Internet could
lose its viability due to delays in the development or adoption of new standards
and protocols to handle increased levels of Internet activity or due to
increased governmental regulation. Moreover, critical issues concerning the
commercial use of the Internet remain unresolved and may negatively affect the
growth of Internet use and the attractiveness of commerce and communication on
the Internet. If critical issues concerning the commercial use of the Internet
are not resolved in our favor, if the necessary infrastructure and complementary
products are not developed, or if the Internet does not become a viable
commercial marketplace, the demand for our Internet usage management solutions
could be significantly reduced, which would have a material adverse effect on
our business, results of operations and financial condition.
WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES THAT
PROVIDE SIMILAR PRODUCTS.
We currently compete with providers of Internet management software,
including WebTrends, Accrue Software, the SecureIT division of VeriSign, Elron
Software, Talley Systems and Sequel Technology and providers of call accounting
software, including IntegraTrak, ISI, MicroTel, Switchview, Telco Research,
Verimark, Xiox and Xtend. The market in which we compete is intensely
competitive, increasingly subject to rapid changes, and significantly affected
by new product introductions and other activities of market participants. In
addition, the market is highly fragmented, and our competitors vary depending
upon the segment of the market that our network usage management solutions
address.
In addition to current competition from producers of network usage
management solutions, in the future we may experience competition from vendors
of network devices, such as AXENT Technologies, Inc., Check Point Software
Technologies Ltd., Cisco Systems, Inc., Lucent Technologies, Inc., Microsoft
Corporation, Netscape Communications Corp., Nortel Networks Corporation, Siemens
Corporation and others, that could bundle network usage management solutions
with their network products. The bundling of competing products with network
devices could make it more difficult for us to market our products or render our
products obsolete. Even if the functionality, ease of use, and performance of
the products included with network devices is inferior to that of our products,
a significant number of customers may elect to accept these products instead of
purchasing additional software from us. In addition, we believe that additional
competitors will continue to enter the market as the size and visibility of the
market
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opportunity increases. These new market entrants may include traditional system
and network management software developers.
We also face competition from Internet management service providers, such
as consulting firms, web design firms, Internet audit firms, site management
vendors, Internet service providers and independent software vendors. These
service providers may use our solutions, our competitors' solutions or custom-
developed solutions to provide network usage management for their customers who
otherwise would have been sale opportunities for us. In addition, certain larger
potential customers may rely on their IT departments to internally develop
Internet usage management solutions.
Many of our current and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases, and
substantially greater financial, technical, marketing, distribution, service,
support and other resources than we have. As a result, they may be able to
respond more quickly than we can to new or changing opportunities, technologies,
standards or customer requirements. Our inability to develop products that are
technologically competitive, responsive to customer needs and competitively
priced could have a material adverse effect on our business, results of
operations and financial condition.
WE MUST INCREASE BRAND AWARENESS OF OUR PRODUCT TO REMAIN COMPETITIVE.
Due in part to the emerging nature of the market for Internet usage
management solutions and the substantial resources available to many of our
competitors, we may have limited time to achieve and maintain a significant
market share. Developing and maintaining awareness of the Telemate.Net brand
name is critical to achieving widespread acceptance of our network usage
management and reporting solutions. Furthermore, the importance of brand
recognition will increase as competition in the market for our products
increases. Successfully promoting and positioning the Telemate.Net brand will
depend largely on the effectiveness of our marketing efforts and our ability to
develop reliable and useful products at competitive prices. Therefore, we plan
to increase our financial commitment to create and maintain brand awareness
among potential customers. If we fail to successfully promote our brand name or
if we incur significantly greater expenses than planned in promoting and
maintaining our brand name, it could have a material adverse effect on our
business, results of operations, and financial condition.
IF WE DO NOT CONTINUE TO EXPAND THE DISTRIBUTION OF OUR PRODUCTS THROUGH DIRECT
AND INDIRECT SALES CHANNELS, OUR OPERATING RESULTS WILL SUFFER.
In order to increase our market share and revenue, we will need to expand
our direct and indirect sales operations and channels of distribution. We have a
broad base of customers, most of whom license a limited number of our products.
To improve our results of operations, we must increase our base of customers and
the number of products that each customer licenses. This may require an
increasingly sophisticated sales effort. In order to achieve increased sales, we
plan to hire additional sales personnel. Any new hires will require training and
take time to achieve full productivity. We may not be able to hire enough
qualified individuals when needed, or at all. Failure to do so could have a
material adverse effect on our business, results of operations, and financial
condition.
Our future success also depends upon our ability to expand our
relationships with domestic and international distributors, value-added
resellers, systems integrators, on-line and other resellers, Internet service
providers and original equipment manufacturers to build our indirect sales
channels. We currently maintain non-exclusive relationships with leading
networking and network security vendors that help market and distribute our
products, but we do not have written agreements with most of these companies. We
must also continue to expand and maintain our non-exclusive relationships with
key hardware and software vendors, distributors and resellers. We may not be
successful in these efforts. Moreover, because we do not have written agreements
with most of these parties, we cannot guarantee that these relationships will
continue at all or on terms acceptable to us.
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IF OUR SOFTWARE CONTAINS DEFECTS, OUR SALES ARE LIKELY TO SUFFER AND WE MAY BE
EXPOSED TO LEGAL CLAIMS.
Our products and product enhancements are very complex and may from time to
time contain defects or result in failures that we did not detect or anticipate
when introducing such products or enhancements to the market. In addition, the
computer and Internet environments in which our products are used are
characterized by a wide variety of standard and non-standard configurations and
by errors, failures and bugs in third-party platforms that can impede proper
operation of our products. Despite our testing, defects may still be discovered
in some new products or enhancements after the products or enhancements are
delivered to customers. The occurrence of these defects could result in:
- product returns;
- adverse publicity;
- loss of or delays in market acceptance of our products;
- delays or cessation of service to our customers; or
- legal claims by customers against us.
Our end-user licenses contain provisions that limit our exposure to legal
claims, but these provisions may not be enforceable in all jurisdictions.
Additionally, we maintain limited products liability insurance. To the extent
that our contractual limitations are unenforceable or such claims are not
covered by insurance, a successful products liability claim could have a
material adverse effect on our business, results of operations and financial
condition.
OUR BUSINESS IS DEPENDENT ON OUR CHIEF EXECUTIVE OFFICER AND PRESIDENT.
Our success depends largely upon the continued services of our Chief
Executive Officer and President, Richard L. Mauro. We cannot guarantee that Mr.
Mauro will continue to remain an employee. We have insurance on the life of Mr.
Mauro, but there can be no assurance that the proceeds of this insurance would
be adequate to compensate us for the loss of his services.
IF WE FAIL TO HIRE AND RETAIN ADDITIONAL PERSONNEL, WE WILL BE UNABLE TO GROW
OUR BUSINESS.
We intend to hire a significant number of additional sales, support,
marketing and development personnel. Our future success depends on our ability
to attract and retain highly qualified personnel in these areas. In the past
three years, our employee turnover rate has been between 20% and 30%. Moreover,
the competition for qualified personnel in the computer software and Internet
markets is intense, and we may be unable to attract, assimilate or retain
additional highly qualified personnel in the future. This could have a material
adverse effect on our business, results of operations and financial condition.
WE MUST EFFECTIVELY MANAGE THE GROWTH OF OUR BUSINESS TO BE SUCCESSFUL.
We are rapidly expanding our operations. In particular, we have expanded
our sales and marketing departments by 48 persons, or 117%, since 1998 in an
effort to increase revenue growth. We have also expanded our services and
support staff by 26 persons, or 68%, since 1998. We expect this expansion to
continue at an accelerated rate. This expansion has placed a significant strain
on our management and on our operational and financial resources, which we
expect will continue. If we are unable to manage our growth effectively, our
business could be materially and adversely affected. To successfully manage our
future growth, we will need to upgrade our resources and systems as well as
expand our employee base. Our future performance will depend, in part, on our
ability to effectively integrate our newly-hired executive officers into our
management team. We cannot be certain that our management, operational and
financial resources will be adequate to support our future operations.
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INFRINGEMENT OR DUPLICATION OF OUR PROPRIETARY TECHNOLOGY COULD HARM OUR
BUSINESS.
We currently rely on a combination of patent, trademark, service mark,
trade dress, copyright and trade secret laws, as well as confidentiality
provisions and contractual provisions to protect our proprietary technology.
However, we cannot guarantee that third parties will not infringe or duplicate
this technology and offer competing products that are substantially similar to
ours.
We currently have registered trademarks in Telemate and Telemate.Net and
one patent application pending on our Telemate.Net integrated network usage
management product. We cannot guarantee that this application or any future
applications to protect our intellectual property will not be rejected. Even if
they are not rejected, trademark, patent, copyright and trade secret protection
may not be effective or available in every country in which our products are
distributed or made available through the Internet. Despite taking steps to
protect our rights, third parties could infringe or misappropriate our
proprietary rights. Also, most protections do not preclude competitors from
independently developing products with functionality or features substantially
equivalent or superior to our products. Any infringement, misappropriation or
third-party development could have a material adverse effect on our business,
results of operations and financial condition.
In the future, litigation may be necessary to enforce and protect our trade
secrets, copyrights and other intellectual property rights. Legal standards
relating to the validity, enforceability and scope protection of intellectual
property rights in Internet-related industries are uncertain and still evolving,
and the future viability or value of any of our intellectual property rights is
uncertain. Litigation, regardless of its outcome, would divert management
resources, be expensive and may not effectively protect our intellectual
property.
OUR BUSINESS COULD BE HARMED IF WE ARE SUBJECTED TO INFRINGEMENT CLAIMS BROUGHT
BY THIRD PARTIES.
In addition to the technology we have developed internally, we also use
code libraries developed and maintained by Greenleaf Software, Stingray Software
and Microsoft and have acquired or licensed technologies from other companies.
Our integrated network management solutions are built around an embedded
Microsoft SQL 7.0 database and Seagate Software, Inc.'s custom report writing
tool. Our internally developed technology, the code libraries or the technology
we acquired or licensed may infringe on a third party's intellectual property
rights, and such third parties may bring claims against us. Such claims and any
resulting litigation could subject us to significant liability for damages and
invalidate our proprietary rights. Any infringement claims against us could also
force us to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms or at all; or
- redesign those products or services that incorporate the disputed
technology.
Any of these results could have a material adverse effect on our business,
results of operations and financial condition.
OUR PRODUCTS COULD BE TAMPERED WITH AND RENDERED INEFFECTIVE BY COMPUTER
HACKERS.
Because our products access a wide range of information relating to our
customers' businesses, computer hackers may attempt to infiltrate our software
systems to obtain sensitive data and information regarding our customers. In
addition, some of our products monitor network security. There is a risk that
those products will be targets of attacks by computer hackers who create bugs or
viruses or otherwise breach the security of those products in an attempt to
sabotage their functionality. Although we know of no material infiltration of
our products by hackers to date, our Internet usage products are new and we
cannot guarantee that we will be able to respond to such attacks in a timely or
effective manner. Any
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failure to do so could result in claims against us and make it difficult for us
to market and sell our products.
GOVERNMENT REGULATION COULD INCREASE THE COSTS OF DOING BUSINESS ON THE INTERNET
AND NEGATIVELY AFFECT SALES OF OUR PRODUCTS.
As Internet commerce continues to evolve, increasing regulation by federal,
state or foreign agencies becomes more likely. Such laws and regulations could
affect the network usage management activities of our customers. Regulation, if
imposed, is likely to be in the areas of user privacy, pricing, content, and
quality of products and services. Taxation of Internet use, or other charges
imposed by government agencies or by private organizations for accessing the
Internet, may also be imposed. Furthermore, any regulation imposing fees for
Internet use could result in a decline in the use of the Internet and the
viability of Internet commerce, which could have a material adverse effect on
our business, results of operations and financial condition.
OUR CHARTER DOCUMENTS AND GEORGIA LAW MAY PREVENT OR DELAY A FUTURE MERGER OR
ACQUISITION, THUS LOWERING OUR STOCK PRICE OR PREVENTING OUR SHAREHOLDERS FROM
REALIZING A PREMIUM OVER OUR STOCK PRICE.
Our Articles of Incorporation and Bylaws may have the effect of delaying,
preventing or making a merger or acquisition less desirable to a potential
acquirer, even where shareholders may consider the acquisition or merger
favorable. In addition, the issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control without further action by
the shareholders. Any such issuance may materially adversely affect the market
price of our common stock and the voting rights of the holders of our common
stock. The issuance of our preferred stock may also result in the loss of voting
control by the holders of our common stock to the holders of our preferred
stock. In addition, provisions of the Georgia Business Corporation Code also may
delay, prevent or discourage someone from acquiring or merging with us. The
prevention or delay of a merger or acquisition could reduce our stock price or
prevent our shareholders from realizing a premium over our stock price.
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