<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER: 000-26735
TELEMATE.NET SOFTWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-1656726
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4250 PERIMETER PARK SOUTH, SUITE 200 30341
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (770) 936-3700
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the issuer's class of capital stock as of August 9,
2000, the latest practicable date, is as follows: 7,881,046 shares of Common
Stock, $0.01 par value.
================================================================================
<PAGE> 2
TELEMATE.NET SOFTWARE, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
Page
----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS.
Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 3
Statements of Income for the three months ended June 30, 2000 and 1999
(unaudited) and for the six months ended June 30, 2000 and 1999 (unaudited) 4
Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (unaudited) 5
Notes to Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK. 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 14
HOLDERS.
ITEM 5. OTHER INFORMATION. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 15
SIGNATURES. 15
</TABLE>
Form 10-Q
Page 2 of 16
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TELEMATE.NET SOFTWARE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED)
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 34,842 $ 42,755
Trade accounts receivable, net of allowance for
doubtful accounts and returns ................................... 3,357 3,467
Prepaid expenses and other current assets ........................... 503 518
---------- ----------
Total current assets ............................................ 38,702 46,740
Property and equipment, net of depreciation and amortization ........ 2,278 1,474
Other assets ........................................................ 75 60
---------- ----------
Total assets .................................................... $ 41,055 $ 48,274
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 968 $ 1,212
Accrued expenses and other liabilities .............................. 1,773 1,705
Deferred revenue .................................................... 3,333 3,041
---------- ----------
Total current liabilities ....................................... 6,074 5,958
---------- ----------
Total liabilities ............................................... 6,074 5,958
---------- ----------
Commitments and contingencies: ................................................. -- --
Shareholders' equity:
Preferred stock, $.01 par value; 19,700,000 authorized, and
undesignated, no shares issued and outstanding .................. -- --
Common stock, $.01 par value; 100,000,000 shares authorized,
7,881,046 shares issued and outstanding at June 30, 2000 and
7,359,962 issued and outstanding at December 31, 1999 ........... 79 73
Additional paid in capital .......................................... 53,041 52,537
Notes receivable and accrued interest from shareholders ............. (20) (27)
Retained Earnings (accumulated deficit) ............................. (18,119) (10,267)
---------- ----------
Total shareholders' equity .......................................... 34,981 42,316
---------- ----------
Total liabilities and shareholders' equity .......................... $ 41,055 $ 48,274
========== ==========
</TABLE>
See accompanying notes to financial statements
Form 10-Q
Page 3 of 16
<PAGE> 4
TELEMATE.NET SOFTWARE, INC
STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue .................................... $ 1,109 $ 1,443 $ 2,215 $ 2,807
Services revenue ................................... 1,663 1,322 3,675 2,616
------------ ------------ ------------ ------------
TOTAL REVENUE ............................ 2,772 2,765 5,890 5,423
COST OF REVENUE:
Product costs ...................................... 410 297 910 569
Service costs ...................................... 1,015 444 1,912 872
------------ ------------ ------------ ------------
Total cost of revenue .................... 1,425 741 2,822 1,441
Gross profit ............................. 1,347 2,024 3,068 3,982
OPERATING EXPENSES:
Research and development ........................... 937 402 1,834 799
Sales and marketing ................................ 4,151 1,247 7,564 2,273
General and administrative ......................... 1,484 570 2,550 1,375
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES ................. 6,572 2,219 11,948 4,447
OPERATING LOSS ........................... (5,225) (195) (8,880) (465)
INTEREST INCOME (EXPENSE):
Increase in redeemable stock purchase warrant ...... -- (10) -- (755)
Other interest income .............................. 510 8 1,028 15
Other interest expense ............................. -- (35) -- (71)
------------ ------------ ------------ ------------
Total interest income (expense) .......... 510 (37) 1,028 (811)
------------ ------------ ------------ ------------
Net loss before income taxes .................. (4,715) (232) (7,852) (1,276)
PROVISION FOR (BENEFIT FROM) INCOME TAXES ............. -- -- -- --
------------ ------------ ------------ ------------
Net loss ...................................... $ (4,715) $ (232) $ (7,852) $ (1,276)
============ ============ ============ ============
Net loss per share
Basic .................................... $ (0.61) $ (0.07) $ (1.03) $ (0.40)
Diluted .................................. $ (0.61) $ (0.07) $ (1.03) $ (0.40)
Weighted average shares outstanding:
Basic .................................... 7,736,679 3,175,703 7,616,052 3,218,520
============ ============ ============ ============
Diluted .................................. 7,736,679 3,175,703 7,616,052 3,218,520
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
Form 10-Q
Page 4 of 16
<PAGE> 5
TELEMATE.NET SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net Loss ........................................................................... $ (7,852) $ (1,276)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization .............................................. 468 155
Provision for bad debts and returns ........................................ 100 120
Compensation on stock options .............................................. 4 --
Accrued interest on shareholder notes ...................................... (1) (12)
Amortization of discount on redeemable stock purchase warrants ............. -- 21
Accretion of redeemable stock purchase warrant ............................. -- 734
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivables .................... 10 (1,089)
(Increase) decrease in prepaids expenses and other current assets .... 14 (28)
(Increase) in other assets ........................................... (15) (313)
Increase (decrease) in accounts payable, accrued expenses, and
other liabilities ................................................ (175) 755
Increase in deferred revenue ......................................... 292 1,035
-------- --------
Net cash provided by (used in) operating activities .............. (7,155) 102
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ................................................ (1,271) (161)
-------- --------
Net cash used in investing activities ............................ (1,271) (161)
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of Series A redeemable convertible preferred
stock, net ................................................................. -- 5,950
Proceeds from the exercise of stock options ........................................ -- 500
Purchase and retirement of common stock ............................................ -- (4,000)
Shareholder distributions .......................................................... -- (5)
Repayment of credit facility ....................................................... -- (80)
Proceeds from the exercise of stock options ........................................ 505 --
Payments received on notes receivable from shareholders ............................ 8 --
-------- --------
Net cash provided by (used in) financing activities ............. 513 2,365
-------- --------
Net decrease in cash ............................................................... (7,913) 2,306
Cash and cash equivalents at beginning of period ......................................... 42,755 46
-------- --------
Cash and cash equivalents at end of period ............................................... $ 34,842 $ 2,352
-------- --------
Supplemental disclosure of cash - cash paid for interest ................................. $ -- $ 72
======== ========
Supplemental disclosure of significant noncash investing and financing activities:
Reduction of notes from shareholders in exchange for cash distributions ............ $ -- $ 265
======== ========
======== ========
Issuance of common stock in exchange for software .................................. $ -- $ 120
======== ========
</TABLE>
See accompanying notes to financial statements
Form 10-Q
Page 5 of 16
<PAGE> 6
TELEMATE.NET SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. Costs and expenses reflect
certain reclassifications. These financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1999, found in filings made by Telemate.Net Software, Inc. with the
Securities and Exchange Commission, including its Annual Report on Form 10-K
filed with the Commission on March 30, 2000.
2. Shareholders' Equity
On October 4, 1999, Telemate.Net Software, Inc. completed an initial
public offering of 3,500,000 shares of common stock including 3,284,000 newly
issued shares sold by Telemate.Net Software and 216,000 outstanding shares sold
by existing shareholders. The offered shares generated net proceeds to
Telemate.Net Software of approximately $42.8 million before offering expenses.
Subsequently, pursuant to the underwriters' exercise of their over-allotment
option, the selling shareholders sold an additional 100,000 shares and
Telemate.Net Software sold 165,000 shares. Telemate.Net Software received $2.1
million from the proceeds of the sale of the 165,000 shares on November 1, 1999.
3. Net Income (Loss) Per Common Share
Basic net income (loss) per share was computed using the weighted
average number of shares of common stock outstanding during the period. Diluted
net income per share includes the effect of dilutive common stock equivalents.
Dilutive common equivalent shares consist of stock options. However, because the
inclusion of the common stock equivalents would be anti-dilutive, the weighted
average number of common shares outstanding during the period for the basic and
diluted net income per share is the same.
Form 10-Q
Page 6 of 16
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain of the information included in this report, including
statements regarding our growth and operating strategy, liquidity and capital
expenditures, and trends in our industry, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
we intend that such forward-looking statements be subject to the safe harbors
created thereby. Examples of words indicating forward-looking statements include
"believes," "expects" and "will." These forward-looking statements reflect our
current views with respect to future events and financial performance, but are
subject to many uncertainties and factors relating to our operations and
business environment that may cause our actual results to be materially
different from any future results expressed or implied by such forward-looking
statements. Please see Exhibit 99.1 entitled "Safe Harbor Compliance Statement"
attached to this quarterly report.
OVERVIEW
Telemate.Net Software, Inc. solutions enable businesses to monitor,
analyze and manage the use of their Internet, intranet and voice networks. From
our inception in 1986, through 1996, we focused exclusively on providing call
accounting software solutions. By the early 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 April of 2000, we expanded our product line to include
e-business intelligence with the launch of our eSpective application.
In 1996, our management decided to invest the cash flow from our call
accounting business in the development of an Internet usage management solution.
Our focus on developing an Internet product included 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. With the
proceeds from our initial public offering we have continued our investment in
Internet products as evidenced by the release of our eSpective application,
which collects activity data from web servers and translates the data into
management analysis reporting. In July, 2000, we reorganized our company into
separate Call Accounting and Internet divisions in order to better focus on our
Internet product line while still maximizing the potential of our call
accounting business.
Our revenue consists of product and service revenue. Our product
revenue is derived primarily from licensing our software products. We also
resell complementary hardware. Support service revenue consists of fees paid for
maintenance services, product updates, and professional services. Maintenance
services include diagnosis and correction of errors in the current version of
the product and telephone consultation to discuss general support questions.
Product updates include error correction and minor enhancements to the product
models purchased, and periodic updates to tariff information for call accounting
products. Substantially all of our license agreements are perpetual. Support
agreements are typically for a term of one year and renew automatically upon
payment of an annual maintenance fee by the customer. This support fee typically
represents 20% of the current list price of 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 98-9, Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.
Revenue derived from software license fees and hardware is typically recognized
upon shipment. Revenue derived from software support services primarily involves
Form 10-Q
Page 7 of 16
<PAGE> 8
annual contracts and is recognized ratably over the service period. Revenue
related to professional services is recognized as services are provided.
Deferred revenue generally represents advance payments received from customers
and billings invoiced to customers for software support and professional
services in advance of the time revenue is recognized.
We identify revenue as call accounting revenue or Internet /integrated
revenue based upon the types of data sources licensed and the delivery of call
accounting product features. If a customer is delivered tariff information for
all data sources they have licensed, the product revenue is identified as call
accounting. All other product revenue is identified as Internet/integrated.
Service revenue is identified based on the associated product identification.
Upon the development of our Internet product, we believed that many
customers would prefer to purchase both our call accounting and Internet
solutions as an integrated solution in a single transaction. After additional
experience in the evolving Internet market, we now believe that most customers
typically have different purchasing processes and decision makers for call
accounting and Internet usage management products. Based on this market
feedback, the company reorganized its business as announced on July 19, 2000
into two distinct business divisions - the Internet division and the Call
Accounting division. As a result, management believes that most future sales
will be either dedicated call accounting or dedicated Internet products.
We sell our products through a combination of direct sales by our sales
personnel and indirect sales primarily through resellers and distributors.
Distributors and resellers purchase the product for resale at a discount from
our standard price list. This discount ranges from 20% to 65% and varies based
on a number of factors including their volume of business, whether they
distribute to other resellers and whether they provide product support.
We also maintain relationships with leading networking and network
security product vendors 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, on March 6, 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 were taxed directly to our existing
shareholders. On June 16, 1999, we terminated our status as an S corporation
under the tax code upon closing of the sale of 300,000 shares of Series A
redeemable convertible preferred stock. In connection with the termination of
our S corporation status, we distributed $270,000 and we reclassified the
accumulated deficit of $296,000 through the S corporation termination date,
limited to the amount of paid in capital, to additional paid-in capital.
At the time we terminated our S corporation status, we established our
net deferred tax assets and liabilities. In assessing the realizability of
deferred tax assets, our management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. As a
result of this assessment, we recorded a valuation allowance of 100% of our net
deferred tax asset.
In October 1999, we completed our initial public offering, which
resulted in net proceeds to us of approximately $42.8 million before payment of
related expenses. We used $1.0 million of the proceeds from our initial public
offering to repay existing indebtedness. We intend to use the remaining net
proceeds for working capital and other general corporate purposes, which may
include increasing our sales and marketing activities, increasing our product
development activities, and pursuing strategic acquisitions and relationships.
Form 10-Q
Page 8 of 16
<PAGE> 9
RESULTS OF OPERATIONS
The following tables set forth our Internet/integrated and call
accounting revenue, both in absolute dollars and as a percentage of total
revenue:
REVENUE INFORMATION
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
INTERNET/INTEGRATED:
Product revenue ......................... $ 631 $ 406 $ 1,350 $ 776
Services revenue ........................ 462 159 1,205 212
-------- -------- -------- --------
TOTAL INTERNET/INTEGRATED REVENUE ....... 1,093 565 2,555 988
CALL ACCOUNTING:
Product revenue ......................... 478 1,037 865 2,031
Services revenue ........................ 1,201 1,163 2,470 2,404
-------- -------- -------- --------
TOTAL CALL ACCOUNTING REVENUE ........... 1,679 2,200 3,335 4,435
TOTAL:
Product revenue ......................... 1,109 1,443 2,215 2,807
Services revenue ........................ 1,663 1,322 3,675 2,616
-------- -------- -------- --------
TOTAL REVENUE ................... $ 2,772 $ 2,765 $ 5,890 $ 5,423
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUE:
INTERNET/INTEGRATED:
Product revenue ......................... 22.8% 14.7% 22.9% 14.3%
Services revenue ........................ 16.7 5.8 20.5 3.9
-------- -------- -------- --------
TOTAL INTERNET/INTEGRATED REVENUE ....... 39.5 20.5 43.4 18.2
CALL ACCOUNTING:
Product revenue ......................... 17.2 37.5 14.7 37.5
Services revenue ........................ 43.3 42.0 41.9 44.3
-------- -------- -------- --------
TOTAL CALL ACCOUNTING REVENUE ........... 60.5 79.5 56.6 81.8
TOTAL:
Product revenue ......................... 40.0 52.2 37.6 51.8
Services revenue ........................ 60.0 47.8 62.4 48.2
-------- -------- -------- --------
TOTAL REVENUE ................... 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
Revenue. Total revenue was $2.8 million for the three months
ended June 30, 2000, unchanged from the second quarter of 1999. Total
product revenue was $1.1 million, or 40.0% of total revenue, in the
three months ended June 30, 2000, representing a 23.1% decrease from
$1.4 million, or 52.2% of total revenue, for the same period in 1999.
Revenue from the resale of complementary hardware included in product
revenue represented 11.9% of total revenue for the three months ended
June 30, 2000 an increase from 9.0% for the same period in 1999. Total
service revenue was $1.7 million, or 60.0% of total revenue, in the
three months ended June 30, 2000, representing a 25.8% increase from
$1.3 million, or 47.8% of total revenue, for the same period in 1999.
The increase in service revenue was attributable to an increase in
service fees related to our Internet and integrated products. The
majority of this increase was attributable to a sales agreement with a
Form 10-Q
Page 9 of 16
<PAGE> 10
third party contractor to provide software, hardware and installation
services for a single customer at 51 different sites. During the second
quarter of 2000, this sales agreement represented 11.0% of total
revenue. We do not believe this agreement will generate significant
revenue in the future.
Internet/Integrated Revenue. Total Internet/integrated revenue
was $1.1 million, or 39.5% of total revenue, in the three months ended
June 30, 2000, representing a 93.5% increase from $565,000, or 20.5% of
total revenue, for the same period in 1999. Internet/integrated product
revenue was $631,000, or 22.8% of total revenue, in the three months
ended June 30, 2000, representing a 55.4% increase from $406,000 or
14.7% of total revenue, for the same period in 1999. Internet/
integrated service revenue was $462,000, or 16.7% of total revenue, in
the three months ended June 30, 2000, representing a 190.6% increase
from $159,000, or 5.8% of total revenue, for the same period in 1999.
The increase in Internet/integrated product revenue resulted primarily
from an increase in the sale of complementary hardware to several
large customers, including the major customer referred to under Revenue
above. The increase in service revenue was the result of increases in
fees from both the maintenance and professional services components.
Professional services revenue increased largely due to delivery of
services provided on our integrated product. The increase in the
percentage of Internet/integrated revenue to total revenue was due to
the focus of our sales force on the Internet/integrated products.
Call Accounting Revenue. Total call accounting revenue was
$1.7 million, or 60.5% of total revenue, for the three months ended
June 30, 2000, a 23.7% decrease from $2.2 million, or 79.5% of total
revenue, for the same period in 1999. Call accounting product revenue
was $478,000, or 17.2% of total revenue, for the three months ended
June 30, 2000, representing a 53.9% decrease from $1.0 million, or
37.5% of total revenue, for the same period in 1999. Call accounting
service revenue was $1.2 million, or 43.3% of total revenue, in the
three months ended June 30, 2000, representing a 3.3% increase from
$1.1 million, or 42.0% of total revenue, for the same period in 1999.
The decline in call accounting revenue in absolute dollars and as a
percentage of total revenue was due to our decision in the fourth
quarter of 1999 to emphasize the Internet products in our marketing and
sales efforts.
Cost of Product Revenue. Cost of product revenue was $410,000,
or 14.8% of total revenue, in the three months ended June 30, 2000, a
38.0% increase from $297,000, or 10.7 % of total revenue, for the same
period in 1999. This increase in both absolute dollars and as a
percentage of revenue was primarily attributable to a mix change toward
hardware and away from software licenses driven by the hardware
component of the sales agreement discussed in Revenue above. Our
management believes the hardware component of revenue will return to
historical levels for the remainder of the year.
Cost of Service Revenue. Cost of service revenue was $1.0
million, or 36.6% of total revenue, for the three months ended June 30,
2000, representing a 128.6% increase from $444,000, or 16.1% of total
service revenue, for the same period in 1999. The increase in both
absolute dollars and as a percentage of revenue resulted from increased
service staffing levels to improve the service level to existing
customers and in anticipation of future support and service
requirements.
Research and Development Expenses. Research and development
expenses were $937,000, or 33.8% of total revenue, for the three months
ended June 30, 2000, representing a 133.1% increase from $402,000, or
14.5% of total revenue, for the same period in 1999. The increase in
total research and development expenses reflects increased research and
development personnel to accelerate new product development. We expect
research and development expenses to increase as we continue to commit
substantial resources to enhancing existing product functionality and
to developing new products.
Sales and Marketing Expenses. Sales and marketing expenses
were $4.2 million, or 149.7% of total revenue, for three months ended
June 30, 2000, representing a 232.9% increase from $1.2 million, or
Form 10-Q
Page 10 of 16
<PAGE> 11
45.1% of total revenue, for the same period in 1999. The increase in
both absolute dollars and as a percentage of total revenue was due to
several factors, including the addition of sales personnel in the
second half of 1999 and the first half of 2000 in an effort to
accelerate our revenue growth, and establishment of additional sales
offices both domestically and in Europe. The increases were also due to
our initiation of significant advertising and marketing programs in the
first half of 2000 and increased marketing staffing to manage these
activities. We expect sales and marketing expenses to increase in
absolute dollars but decrease as a percentage of revenue toward the end
of 2000 due to the planned growth of our sales force, and other
promotional activities.
General and Administrative Expenses. General and
administrative expenses were $1.5 million, or 53.5% of total revenue,
in the three months ended June 30, 2000, representing a 160.4% increase
from $570,000, or 20.6% of total revenue, for the same period in 1999.
This increase was primarily due to staff related costs, insurance and
professional service fees largely related to the requirements of being
a public company. We expect general and administrative costs to
increase slightly in absolute dollars as we continue to add
infrastructure to support a larger organization and incur costs related
to being a publicly-held company.
Redeemable Stock Purchase Warrant. Charges for the increase in
value of our redeemable common stock purchase warrant were zero in
2000, as compared to $10,000, or 0.4% of total revenue, for the second
quarter of 1999. This charge represents the increase in the value of
the warrant granted in connection with the $1,000,000 loan. The warrant
was exercised and the loan was repaid in September 1999.
Other Interest Income. Other interest income was $510,000 or
18.4% of total revenue, for the three months ended June 30, 2000,
compared to $8,000, or less than 1.0% of total revenue, for the same
quarter of 1999. Proceeds from investment of the funds received in the
initial public offering account for the interest income.
Other Interest Expense. Other interest expense was zero in the
three months ended June 30, 2000, compared to $ 35,000 for the same
period in 1999. We repaid all outstanding debt with the proceeds from
our initial public offering.
Six Months Ended June 30, 2000 and 1999
Revenue. Total revenue was $5.9 million for the six months
ended June 30, 2000, representing an 8.6% increase from $5.4 million
for the same period in 1999. Total product revenue was $2.2 million, or
37.6% of total revenue in the six months ended June 30, 2000,
representing a 21.1% decrease from $2.8 million, or 51.8% of total
revenue, for the same period in 1999. Included in product revenue are
revenues from the resale of complementary hardware, which has
historically accounted for less than 10% of our total annual revenue.
For the six months ended June 30, 2000, our hardware sales represented
13.2% of revenue. In the second quarter our hardware sales represented
11.9% of total revenue. We expect this percentage to return to
historical levels during the remainder of the year. Total service
revenue was $3.7 million, or 62.4% of total revenue, in the six months
ended June 30, 2000, representing a 40.5% increase from $2.6 million,
or 48.2% of total revenue, for the same period in 1999. The increase in
service revenue was due to an increase in service fees related to our
Internet and integrated products. The majority of the revenue increase
was attributable to a sales agreement with a third party contractor to
provide software, hardware and installation services for one customer
at 51 different sites. During the first half of the year, this sales
agreement represented 15.6% of revenue. We do not believe this
agreement will generate significant revenue in the future.
Internet/Integrated Revenue. Total Internet/integrated revenue
was $2.6 million, or 43.4% of total revenue, in the six months ended
June 30, 2000, representing a 158.6% increase from $988,000, or 18.2%
Form 10-Q
Page 11 of 16
<PAGE> 12
of total revenue, for the same period in 1999. Internet/integrated
product revenue was $1.4 million, or 22.9% of total revenue, in the six
months ended June 30, 2000, representing a 74.0% increase from $776,000
or 14.3% of total revenue, for the same period in 1999.
Internet/integrated service revenue was $1.2 million, or 20.5% of total
revenue, in the six months ended June 30, 2000, representing a 468.4%
increase from 212,000, or 3.9% of total revenue, for the same period in
1999. The increase in Internet/integrated revenue was driven by the
sale of software, hardware and delivery of professional services
related to the sales agreement mentioned under Revenue above.
Call Accounting Revenue. Total call accounting revenue was
$3.3 million, or 56.6% of total revenue, for the six months ended June
30, 2000, representing a 24.8% decrease from $4.4 million, or 81.8% of
total revenue, for the same period in 1999. Call accounting product
revenue was $865,000, or 14.7% of total revenue, for the six months
ended June 30, 2000, representing a 57.4% decrease from $2.0 million,
or 37.5% of total revenue, for the same period in 1999. Call accounting
service revenue was $2.5 million, or 41.9% of total revenue, in the six
months ended June 30, representing a 2.7% increase from $2.4 million,
or 44.3% of total revenue, for the same period in 1999. The decline in
call accounting revenue in absolute dollars and as a percentage of
total revenue was due to our decision in the fourth quarter of 1999 to
emphasize our Internet products in our marketing and sales efforts.
Cost of Product Revenue. Cost of product revenue was $910,000,
or 15.4% of total revenue, in the six months ended June 30, 2000,
representing a 59.9% increase from $ 569,000, or 10.5% of total product
revenue, for the same period in 1999. This increase in both absolute
dollars and as a percentage of revenue was primarily attributable to a
mix change toward hardware and away from software licenses driven by
several large sales with a large hardware component, including the
major customer referred to under Revenue above. Our management believes
the hardware component of revenue will be at historical levels for the
remainder of the year. Higher royalty payments for third-party
licensing also contributed to the increase.
Cost of Service Revenue. Cost of service revenue was $1.9
million, or 32.5% of total revenue, for the six months ended June 30,
2000, representing a 119.3% increase from $872,000, or 16.1% of total
revenue, for the same period in 1999. The increase in absolute dollars
and as a percentage of revenue was the result of an increase in service
staff necessary to meet our anticipated support and service
requirements.
Research and Development Expenses. Research and development
expenses were $1.8 million, or 31.1% of total revenue, for the six
months ended June 30, 2000, representing a 129.5% increase from
$799,000, or 14.7% of total revenue, for the same period in 1999. The
increase in total research and development expenses reflects increased
research and development personnel during the second half of 1999 and
the first half of 2000 as we accelerated our new product development.
We expect research and development expenses to increase as we continue
to enhance existing product functionality and develop new products.
Sales and Marketing Expenses. Sales and marketing expenses
were $7.6 million, or 128.4% of total revenue, for the six months ended
June 30, 2000, representing a 232.8% increase from $2.3 million, or
41.9% of total revenue, for the same period in 1999. The increase in
both absolute dollars and as a percentage of total revenue was due to
several factors, including the addition of sales personnel in the
second half of 1999 and the first half of 2000 in an effort to
accelerate our revenue growth, and establishment of additional sales
offices both domestically and in Europe. The increases were also due to
our initiation of significant advertising and marketing programs in the
first half of 2000 and increased marketing staffing to manage these
activities. We expect sales and marketing expenses to increase in
absolute dollars but decrease as a percentage of revenue toward the end
of 2000 due to the planned growth of our sales force, and other
promotional activities.
Form 10-Q
Page 12 of 16
<PAGE> 13
General and Administrative Expenses. General and
administrative expenses were $2.6 million, or 43.3% of total revenue,
in the six months ended June 30, 2000, representing a 85.5% increase
from $1.4 million, or 25.4% of total revenue, for the same period in
1999. This increase was primarily due to staff related costs, insurance
and professional service fees largely associated with the requirements
of being a public company. We expect general and administrative costs
to increase slightly as we continue to add infrastructure to support a
larger organization and incur costs related to being a publicly-held
company.
Redeemable Stock Purchase Warrant. Charges for the increase in
value of our redeemable common stock purchase warrant were zero in
2000, as compared to $755,000, or 13.9% of total revenue, in the first
six months of 1999. This charge represents the increase in the value of
the warrant granted in connection with the $1,000,000 loan. The warrant
was exercised and the loan was repaid in September 1999.
Other Interest Income. Other interest income was $1.0 million
or 17.5% of total revenue, for the six months ended June 30, 2000,
representing an increase from $15,000, or less than 1.0% of total
revenue, for the same period in 1999. Proceeds from investment of the
funds received in the initial public offering account for the interest
income.
Other Interest Expense . Other Interest Expense was zero in
the six months ended June 30, 2000, compared to $71,000 for the same
period in 1999. We repaid all outstanding debt with the proceeds from
our initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations from cash generated from
operations and the issuance of long-term debt. In October 1999, we completed our
initial public offering that provided us approximately $42.8 million in net cash
proceeds. We had cash and cash equivalents of $34.8 million at June 30, 2000 and
$2.3 million at June 30, 1999.
Cash used in operating activities during the six months ended June 30,
2000 was $7.1 million. Cash provided by operating activities during the six
months ended June 30, 1999 was $102,000. This change reflects the net impact of
increases in our net loss, and smaller changes in accounts receivable, accounts
payable and deferred revenue, and the recording of accretion of the redeemable
common stock put warrant related to our loan in 1999.
Our investing activities primarily include expenditures for fixed
assets to support our expanding operations. Net cash used in investing
activities increased to $1.3 million in the first six months of 2000, compared
to $161,000 for the same period in 1999.
Net cash provided by financing activities was $513,000 for the six
month period ended June 30, 2000, compared to $2.4 million provided by financing
activities for the period ended June 30, 1999. This change in 2000 was due
primarily to issuance of common stock resulting from the exercise of options.
Net cash provided by financing activities in 1999 resulted from the issuance of
preferred stock and common stock for $6.0 million and $500,000, respectively,
and the repurchase of common shares for $4.0 million and repayment of $80,000 on
our bank line of credit, which expired in November 1999.
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.
Form 10-Q
Page 13 of 16
<PAGE> 14
We believe that our existing liquidity and capital resources, including
the proceeds resulting from the sale of our common stock in our initial public
offering, will be sufficient to satisfy our cash requirements for at least the
next 12 months. Beyond the next 12 months, we expect income from operations and
the remaining proceeds from our initial public offering to provide sufficient
liquidity and capital resources, and we are not aware of any events that may
cause our liquidity to increase or decrease in a material way. However, to the
extent that income from operations is insufficient to implement our business
strategies, or if we identify additional strategic investments in our business,
technology or products, we may be required to raise additional funds through
equity or debt financing. If adequate funds are not available on acceptable
terms or at all, our ability to implement our business strategies or take
advantage of unanticipated opportunities or otherwise respond to competitive
pressures would be limited. There can be no assurance that we will be able to
raise these additional funds on terms acceptable to us, or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to a number of market risks in the ordinary course of
our business, such as foreign currency exchange risk resulting from our
international operations. These risks arise in the normal course of business
rather than from trading. In addition, some of our traded assets are exposed to
market risks such as interest rate fluctuations. Our management has examined our
exposures to all of these risks and has concluded that none of our exposures in
these areas is material to fair values, cash flows or earnings.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No events occurred during the quarter covered by this Report that would
require response to this item.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
No events occurred during the quarter covered by this Report that would
require response to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No events occurred during the quarter covered by this Report that would
require response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Shareholders (the "Annual Meeting") of
the Company was held on May 31, 2000. There were present at
the Annual Meeting, in person or by proxy, holders of
6,973,673 shares of the common stock entitled to vote.
(b) The following directors were elected to hold office for a term
as designated below or until their successors are elected and
qualified, with the vote for each director being reflected
below:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Elected to hold office until the
2003 Annual Meeting:
James C. Davis 6,953,843 19,830
</TABLE>
The affirmative vote of the holders of a plurality of the outstanding
shares of common stock represented at the Annual Meeting was sufficient to elect
the director.
Form 10-Q
Page 14 of 16
<PAGE> 15
(c) The appointment of KPMG LLP as independent public accountants
to audit the accounts of the Company and its subsidiaries for
the year ending December 31, 2000, was ratified with 6,955,222
affirmative votes cast, 9,007 negative votes cast and 9,444
abstentions. The affirmative vote of the holders of a majority
of the outstanding shares of common stock represented at the
annual meeting was sufficient to ratify the appointment of
KPMG LLP.
(d) The Telemate.Net Software, Inc. Employee Stock Purchase Plan
was adopted, with 3,989,835 votes for, 144,575 votes against
and 217,069 abstentions.
(e) The amendments to the Telemate.Net Software, Inc. 1999 Stock
Incentive Plan, which increased the number of shares reserved
for issuance under that Plan, were adopted, with 3,864,709
votes for, 264,541 votes against and 222,229 abstentions.
ITEM 5. OTHER INFORMATION.
No events occurred during the quarter covered by this Report that would
require response to this item
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this Report:
Exhibit 27.1 Financial Data Schedule (for SEC
use only)
Exhibit 99.1 Safe Harbor Compliance Statement
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
quarter ended June 30, 2000.
Form 10-Q
Page 15 of 16
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELEMATE.NET SOFTWARE, INC.
Date: August 14, 2000 /s/ Richard L. Mauro
-----------------------------------------------
Richard L. Mauro
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 /s/ Janet Van Pelt
-----------------------------------------------
Janet Van Pelt
Senior Vice President - Finance and Operations,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
Form 10-Q
Page 16 of 16
