UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________
(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 0-24081
Evolving Systems, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-1010843
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
9777 Mt. Pyramid Court, Englewood, Colorado 80112
(Address of Principal Executive Offices) (Zip Code)
(303) 802-1000
(Registrant's Telephone Number, Including Area Code)
Indicate by check 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 filed such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
-----
As of June 30, 2000, there were outstanding 12,710,320 shares of
Registrant's Common Stock (par value $0.001 per share).
1
EVOLVING SYSTEMS, INC.
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets
June 30, 2000 and December 31, 1999 (unaudited)................................ 3
Statements of Operations
for the three-month and six-month periods ended June 30,
2000 and June 30, 1999 (unaudited).............................................. 4
Condensed Statements of Cash Flow
for the six-month periods ended June 30, 2000 and
June 30, 1999 (unaudited)....................................................... 5
Notes to Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 6
PART II OTHER INFORMATION............................................................... 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults on Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES...................................................................................... 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVOLVING SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
June 30, Dec. 31,
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 455 $ 4,266
Short-term investments - unrestricted 6,900 12,087
Short-term investments - restricted 5,964 5,920
Contract receivables, net 9,261 9,624
Unbilled work-in-progress 14,993 8,349
Prepaid and other current assets 1,771 1,575
-------- --------
Total current assets 39,344 41,821
Property and equipment, net 6,029 6,260
Deferred tax assets 1,547 1,547
-------- --------
Total assets $ 46,920 $ 49,628
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 471 $ 640
Accounts payable and accrued liabilities 2,814 2,999
Unearned revenue and customer deposits 5,467 9,278
-------- --------
Total current liabilities 8,752 12,917
Long-term obligations 10 170
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized,
no shares issued - -
Common stock, $.001 par value; 25,000,000 shares authorized;
12,710,320 and 12,446,965 shares issued and outstanding as of
June 30, 2000 and December 31, 1999, respectively. 13 12
Additional paid-in-capital 52,455 51,774
Deferred compensation (67) (89)
Accumulated deficit (14,243) (15,156)
-------- --------
Total stockholders' equity 38,158 36,541
-------- --------
Total liabilities and stockholders' equity $ 46,920 $ 49,628
======== ========
The accompanying notes are an integral part of the financial statements.
3
EVOLVING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenue:
License fees and related services $ 5,438 $ 605 $ 8,717 $ 1,304
Other services 8,663 9,200 17,073 17,361
-------- -------- -------- --------
Total revenue 14,101 9,805 25,790 18,665
-------- -------- -------- --------
Cost of revenue:
License fees and related services 2,013 2,056 3,857 4,069
Other services 6,500 5,100 11,825 9,875
-------- -------- -------- --------
Total cost of revenue 8,513 7,156 15,682 13,944
-------- -------- -------- --------
Gross margin 5,588 2,649 10,108 4,721
Operating expenses:
Sales and marketing 2,274 911 4,319 1,583
General and administrative 2,925 2,391 5,330 4,815
Research and development -- -- -- 393
-------- -------- -------- --------
Total operating expenses 5,199 3,302 9,649 6,791
-------- -------- -------- --------
Income (loss) from operations 389 (653) 459 (2,070)
Other income (expense), net 211 121 454 (2,951)
-------- -------- -------- --------
Net income (loss) $ 600 $ (532) $ 913 $ (5,021)
======== ======== ======== ========
Earnings per common share:
Basic $ .05 $ (.04) $ .07 $ (.42)
Diluted $ .05 $ (.04) $ .07 $ (.42)
Weighted average shares outstanding:
Basic shares outstanding 12,626 12,127 12,558 12,097
Diluted shares outstanding 13,268 12,127 13,804 12,097
The accompanying notes are an integral part of the financial statements.
4
EVOLVING SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(unaudited)
Six Months Ended June 30,
-------------------------
2000 1999
-------- --------
Operating activities:
Net income (loss) $ 913 $ (5,021)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation 22 136
Depreciation and amortization 1,742 1,462
Loss (gain) on disposal of property and equipment 30 ---
Change in operating assets and liabilities:
Contract receivables 363 (1,591)
Unbilled work-in-progress (6,644) 775
Prepaid and other assets (196) 1,231
Accounts payable and accrued liabilities (186) (632)
Unearned revenue and customer deposits (3,811) 194
-------- --------
Net cash used in operating activities (7,767) (3,446)
-------- --------
Investing activities:
Purchases of property and equipment (1,540) (892)
Sales maturities (purchases) of short-term investments 5,143 (2,467)
-------- --------
Net cash provided by (used in) investing activities 3,603 (3,359)
-------- --------
Financing activities:
Repayment of long-term obligations (329) (777)
Proceeds from issuance of common stock 682 226
-------- --------
Net cash provided by (used in) financing activities 353 (551)
-------- --------
Net decrease in cash and cash equivalents (3,811) (7,356)
Cash and cash equivalents at beginning of period 4,266 11,707
-------- --------
Cash and cash equivalents at end of period $ 455 $ 4,351
======== ========
The accompanying notes are an integral part of the financial statements.
5
EVOLVING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
Interim Financial Statements. The accompanying financial statements of
Evolving Systems, Inc. (the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The unaudited financial statements included herein
have been prepared on the same basis as the audited annual financial statements
and reflect all adjustments, which include only normal recurring adjustments,
necessary for a fair presentation in accordance with generally accepted
accounting principles. The results for the period ended June 30, 2000 are not
necessarily indicative of the results to be expected for any subsequent quarter
or full fiscal year. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto for the year ended
December 31, 1999 and filed with the SEC March 21, 2000.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(2) Earnings (Loss) Per Common Share
Basic EPS was computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted EPS was
computed using the weighted average number of common shares plus all dilutive
potential common shares outstanding during the period unless the effect of the
potential common shares is anti-dilutive. There were 494,348 shares excluded
from the calculation of common shares calculation because these options are out
of the money and thus antidilutive in the weighted calculation.
The following is the reconciliation of the numerators and denominators of
the basic and diluted EPS computations (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Basic earnings per share:
Net income (loss) $600 $(532) $913 $(5,021)
Weighted average common shares outstanding 12,626 12,127 12,558 12,097
Basic net income (loss) per common share $.05 $(.04) $.07 $(.42)
Effect of dilutive securities:
Options and warrants 642 - 1,246 -
Diluted weighted average common shares outstanding 13,268 12,127 13,804 12,097
Diluted net income (loss) per common share $.05 $(.04) $.07 $(.42)
(3) Contingencies, Litigation Settlement and Legal Fees
In June 1998, four securities class action complaints were filed against
the Company and certain of its current and former officers and directors in the
Federal Court for the District of Colorado alleging violations of the federal
securities laws. The complaints were consolidated. The plaintiffs purported to
represent a class of persons who purchased the Company's securities during the
period of May 12, 1998 through July 23, 1998. The Company denied the
allegations. The parties reached a settlement of $10 million, of which the
Company paid $2.5 million in April 1999. The settlement was approved by the
Court on October 4, 1999. The Company incurred approximately $719,000 in legal
costs associated with the lawsuit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
- -------
Evolving Systems provides the telecommunications industry with solutions
containing software products and systems integration for a full range of
business and operational support systems and network element software.
6
The Company derives revenue from license fees and services under the terms
of both fixed price and time and materials contracts. License fees and related
services revenue consists of revenue from contracts that generally provide for
both licenses and services related to the Company's standard software products.
Other services revenue consists of revenue from custom programming, systems
integration of third-party products, annual maintenance contracts and training.
License fees and related services revenue is generated from fixed price
contracts that provide for both licenses and services. Revenue under these
arrangements, where the services are essential to the functionality of the
delivered software, is generally recognized using the percentage-of-completion
method of accounting. The percentage of completion for each contract is
determined based on the ratio of direct labor hours incurred to total estimated
direct labor hours. Amounts billed in advance of services being performed are
recorded as unearned revenue. Unbilled work in-progress represents revenue
earned but not yet billable under the terms of the fixed price contracts and all
such amounts are expected to be billed and collected during the succeeding 12
months.
In arrangements where the services are not essential to the functionality
of the delivered software, the Company recognizes license revenue when a license
agreement has been signed, delivery has occurred, the fee is fixed or
determinable, collectibility is probable and the customer has accepted the
software. Where applicable, fees from multiple element arrangements are
unbundled and recorded as revenue as the elements are delivered to the extent
that vendor specific objective evidence of fair value exists. If vendor specific
objective evidence of fair value does not exist, fees from such arrangements are
deferred until the earlier of the date that vendor specific objective evidence
of fair value does exist or all of the elements are delivered.
Services revenue provided under fixed price contracts is generally
recognized using the percentage-of-completion method of accounting described
above. Revenue from other services provided pursuant to time-and-materials
contracts is recognized as the services are performed.
Annual maintenance revenue is recorded as deferred revenue and is
recognized ratably over the service period, which is generally 12 months.
Revenue from training services is recognized as the training services are
performed. When maintenance or training services are bundled with the original
license fee arrangement, their fair value is deferred and recognized during the
periods such services are provided.
The Company may encounter budget and schedule overruns on fixed price
contracts caused by increased material, labor or overhead costs. Adjustments to
cost estimates are made in the periods in which the facts requiring such
revisions become known. Estimated losses, if any, are recorded in the period in
which current estimates of total contract revenue and contract costs indicate a
loss.
RESULTS OF OPERATIONS
- ---------------------
The following table presents, for the periods indicated, certain items in
the Company's unaudited statement of operations reflected as a percentage of
total revenue.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(unaudited) (unaudited)
----------- -----------
2000 1999 2000 1999
-------- -------- -------- --------
Revenue:
License fees and related services 38.6% 6.2% 33.8% 7.0%
Other services 61.4 93.8 66.2 93.0
-------- -------- -------- --------
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
License fees and related services 14.3 21.0 15.0 21.8
Other services 46.1 52.0 45.9 52.9
-------- -------- -------- --------
Total cost of revenue 60.4 73.0 60.9 74.7
Gross margin 39.6 27.0 39.1 25.3
Operating expenses:
Sales and marketing 16.1 9.3 16.7 8.5
General and administrative 20.7 24.4 20.7 25.8
Research and development 0.0 0.0 0.0 2.1
-------- -------- -------- --------
Total operating expenses 36.8 33.7 37.4 36.4
Income (loss) from operations 2.8 (6.7) 1.7 (11.1)
Other income (expense), net 1.5 1.2 1.8 (15.8)
-------- -------- -------- --------
Income (loss) before income taxes 4.3 (5.5) 3.5 (26.9)
Provision for (benefit from) income taxes 0.0 0.0 0.0 0.0
-------- -------- -------- --------
Net income (loss) 4.3% (5.5)% 3.5% (26.9)%
======== ======== ======== ========
7
The three months ended June 30, 2000 compared to the three months ended June 30,
1999
Revenue. Total revenue increased approximately $4.3 million or 44% to $14.1
million in the three months-ended June 30, 2000 from $9.8 million in the three
months ended June 30, 1999. License fees and related services revenue increased
by $4.8 million or 799% to $5.4 million in the three months ended June 30, 2000
from $605,000 in the three months ended June 30, 1999, reflecting the increase
in major LNP projects in 2000 and increased demand for Local Number Portability
("LNP") in the three months ended June 30, 2000 due to new features offered in
the LNP product suite. Other services revenue decreased by $537,000 or 6% to
$8.7 million in the three months ended June 30, 2000 from $9.2 million in the
three months ended June 30, 1999, reflecting less demand for integration
services. As a percentage of total revenue license fees and related services
revenue increased to 39% for the three months ended June 30, 2000 from 6% for
the three months ended June 30, 1999.
Cost of revenue. Total cost of revenue increased by $1.3 million or 19% to $8.5
million in the three months ended June 30, 2000 from $7.2 million in the three
months ended June 30, 1999. As a percentage of total revenue, costs decreased to
60% of revenue for the three months ended June 30, 2000 from 73% of revenue in
the three months ended June 30, 1999. This is due to the significant increase in
license fees and related services revenues in the three months ended June 30,
2000 compared to the three months ended June 30, 1999. Cost of license fees and
related services decreased by $43,000 or 2% to $2.0 million for the three months
ended June 30, 2000 from $2.1 million for the three months ended June 30, 1999,
due to decreased staffing.
As a percentage of total revenue, cost of license fees and related services
decreased to 14% for the three months ended June 30, 2000 from 21% in the three
months ended June 30, 1999. The decline in costs of license fees and related
services reflects the decreases in personnel assigned to LNP product development
and maintenance efforts, with the maturity of the product, and reassignment of
this staff to custom programming and systems integration efforts. Cost of other
services increased by $1.4 million or 27% to $6.5 million for the three months
ended June 30, 2000 from $5.1 million for the three months ended June 30, 1999.
The increase in costs is due primarily to the recent increases in the cost of
labor. Increases specifically are due to increasing salary expense and the cost
of subcontracted labor in India.
The Company experienced a 40% gross margin. This is an increase in total gross
margin in the three months ended June 30, 2000 of 13% from 27% for the three
months ended June 30, 1999. The change can be attributed to the increase in
higher margin product related revenues previously discussed and a largely fixed
cost of goods based on staffing.
The Company's expense levels are based in significant part on its expectations
regarding future revenues. The Company's revenue is difficult to forecast
because the market for the Company's products and services is rapidly evolving,
and the Company's sales cycle and the size and timing of significant contracts
vary substantially among customers.
Sales and marketing. Sales and marketing expenses increased by $1.4 million or
150% to $2.3 million in the three months ended June 30, 2000 from $911,000 in
the three months ended June 30, 1999. As a percentage of revenue, sales and
marketing increased to 16% of revenue in the three months ended June 30, 2000
from 9% in the three months ended June 30, 1999. This percentage increase
reflects management's decision to increase the sales staff in 2000 to increase
sales of the Company's products and services. The sales and marketing headcount
for the three months ended June 30, 2000 was 32 compared to 21 for the three
months ended June 30, 1999.
General and administrative. General and administrative expenses increased by
$534,000 or 22% to $2.9 million in the three months ended June 30, 2000 from
$2.4 million in the three months ended June 30, 1999. As a percentage of
revenue, general and administrative expenses decreased to 21% in the three
months ended June 30, 2000 from 24% in the three months ended June 30, 1999. The
percentage decrease is a result of the relatively constant general and
administrative expenses related to revenues increasing at a faster rate than
expenses.
Research and development. Research and development expenses remained at $0 in
the three months ended June 30, 2000 from the three months ended June 30, 1999,
reflecting the continuing company strategy to develop new products in connection
with funded customer projects. The Company records the cost of research and
development in cost of revenue as the Company records revenue related to these
projects.
Other (income) expense, net. Other (income) expense, net reflected increased
income of $90,000, or 74%, to $211,000 in the three months ended June 30, 2000
from $121,000 in the three months ended June 30, 1999. Interest expense remained
comparable in the three months ended June 30, 2000 at $45,000 to the three
months ended June 30, 1999. This expense resulted principally from interest
expense on the Company's outstanding long-term leases for the three months ended
June 30, 1999 and from a combination of interest expense on outstanding long-
term leases and a loss on the sale of company pc's for the three months ended
June 30, 2000. The increase in interest income for the three months ended June
30, 2000 is due to interest earned on increased customer deposits for work not
yet performed.
Litigation settlement and expense. In June 1998, four securities class action
complaints were filed against the Company and certain of its current and former
officers and directors in the Federal Court for the District of Colorado
alleging violations of the federal securities laws. The complaints were
consolidated. The plaintiffs purported to represent a class of persons
8
who purchased the Company's securities during the period of May 12, 1998 through
July 23, 1998. The Company denied the allegations. The parties reached a
settlement of $10 million, of which the Company paid $2.5 million in April 1999.
The settlement was approved by the Court on October 4, 1999. The Company
incurred approximately $719,000 in legal costs associated with the lawsuit.
Provision for (benefit from) income taxes. The Company has recorded a partial
valuation allowance against its carryforward tax benefits to the extent that it
believes that it is more likely than not that all of such benefits will not be
realized in the foreseeable future. The Company's assessment of this valuation
allowance was made using all available evidence, both positive and negative. In
particular, the Company considered both its historical results and its
projections of profitability for only reasonably foreseeable future periods.
Management deems it inappropriate to record any additional tax until projected
operating results reflect greater certainty of profitability and the ability to
realize such benefits. The Company's realization of its recorded net deferred
tax assets is dependent on future taxable income and therefore, the Company is
not assured that such benefits will be realized.
The six months ended June 30, 2000 compared to the six months ended June 30,
1999
Revenue. Total revenue increased approximately $7.1 million or 38% to $25.8
million in the six months ended June 30, 2000 from $18.7 million in the six
months ended June 30, 1999. License fees and related services revenue increased
by $7.4 million or 568% to $8.7 million in the six months ended June 30, 2000
from $1.3 million in the six months ended June 30, 1999, reflecting growing LNP
product strength since the prior period. Other services revenue decreased by
$288,000 or 2% to $17.1 million in the six months ended June 30, 2000 from $17.4
million in the six months ended June 30, 1999, as a result of less demand for
integration services. As a percentage of total revenue, other services revenue
decreased to 66% for the six months ended June 30, 2000 from 93% for the six
months ended June 30, 1999.
Cost of revenue. Cost of revenue increased $1.7 million or 12% to $15.7 million
in the six months ended June 30, 2000 from $13.9 million in the six months ended
June 30, 1999. License fees and related services cost decreased by $212,000 or
5% to $3.9 million for the six months ended June 30, 2000 from $4.1 million for
the six months ended June 30, 1999. The decline in costs of license fees and
related services reflects the decreases in personnel assigned to LNP product
development and maintenance efforts, with the maturity of the product, and
reassignment of this staff to custom programming and systems integration
efforts. Other services cost increased $2 million or 20% to $11.8 million in the
six months ended June 30, 2000 from $9.9 million in the six months ended June
30, 1999. The increase in costs is due primarily to the recent increases in the
cost of labor. Increases specifically are due to increasing salary expense and
the cost of subcontracted labor in India.
Sales and marketing. Sales and marketing expenses increased by $2.7 million or
173% to $4.3 million in the six months ended June 30, 2000 from $1.6 million in
the six months ended June 30, 1999. As a percentage of revenue, sales and
marketing expenses increased to 17% of revenue in the six months ended June 30,
2000 from 9% in the six months ended June 30, 1999. This percentage increase
reflects management's decision to increase the sales staff in 2000 to increase
sales of the Company's products and services. The sales and marketing headcount
for the six months ended June 30, 2000 was 32 compared to 21 for the six months
ended June 30, 1999.
General and administrative. General and administrative expenses increased by
$515,000 or 11% to $5.3 million in the six months ended June 30, 2000 from $4.8
million in the six months ended June 30, 1999. As a percentage of revenue,
general and administrative expenses decreased to 21% in the six months ended
June 30, 2000 from 26% in the six months ended June 30, 1999. The percentage
decrease is a result of the relatively constant general and administrative
expenses compared to increased revenues from the prior period.
Research and development. Research and development expenses decreased by
$393,000, or 100%, to $0 in the six months ended June 30, 2000 from $393,000 in
the six months ended June 30, 1999. As a percentage of revenue, research and
development expenses decreased to 0% in the six months ended June 30, 2000 from
2% in the six months ended June 30, 1999, reflecting the change in company
strategy to develop new products in connection with funded customer projects.
The Company records the cost of research and development in cost of revenue as
the Company records revenue related to these projects.
Other income (expense), net. Other income (expense), net increased by $3.4
million or 115%, to $454,000 in the six months ended June 30, 2000 from an
expense of $(3.0) million in the six months ended June 30, 1999. As a percentage
of revenue, other income (expense) decreased to 2% of income in the six months
ended June 30, 2000 from (16)% of expense in the six months ended June 30, 1999.
This income (expense) change resulted from a decline in interest expense as debt
was retired and a one-time charge of $3.3 million for the settlement of the
shareholder suit, in the six months ended June 30, 1999.
Benefit from income taxes. The Company did not record any tax benefit for the
periods ending June 30, 1999 and June 30, 2000. The Company deems it
inappropriate to book such benefits until the market for the Company's products
and services stabilizes and projected operating results reflect greater
certainty of profitability and the ability to realize such benefits.
Liquidity and Capital Resources.
The Company has historically financed its operations through a combination
of cash flow from operations, borrowings and its initial public offering in May
1998. At June 30, 2000, the Company's principal sources of liquidity included
9
$455,000 million in cash and cash equivalents, $12.9 million in short-term
investments (excluding $6 million in restricted investments), a $5.0 million
secured bank line of credit, which expires in September 2000. As of June 30,
2000, the Company had no outstanding balance under the line of credit and the
Company was in compliance with all related covenants.
Net cash used by operating activities was $7.8 million in the six months
ended June 30, 2000 compared to $3.4 million used by operations in the six
months ended June 30, 1999. The primary uses of cash by operations in the three
months ended June 30, 2000 were a decrease in unearned income of $3.8 million,
an increase of $6.6 million in unbilled work-in-process, an increase of prepaid
and other assets of $196,000 and an increase of $186,000 in accounts payable and
accrued liabilities. The significant increase in unbilled work-in-process is due
primarily to the timing of milestone payments per contract terms compared to
revenue recognized based on a percent of completion basis for three significant
projects at the end of June 2000. Receivables provided cash of $363,000 during
this period reflecting increased collections on major accounts.
Net cash provided by investing activities during the six months ended June
30, 2000 was $3.6 million compared to $3.4 million used by investing activities
in the six months ended June 30, 1999. Purchases of property and equipment to
support operations accounted for $1.5 million in the six months ended June 30,
2000 compared to $892,000 for the six months ended June 30, 1999. The sale of
$5.1 million in short-term investments provided cash during the six months ended
June 30, 2000 compared to $2.5 million in cash used to purchase short-term
investments during the six months ended June 30, 1999.
The Company's financing activities provided for $352,000 in cash through a
combination of the sale of common stock options upon the exercise of stock
options for $681,000 and $329,000 in repayments for capital lease obligations
for the six months ended June 30, 2000. This compares to $551,000 in cash used
in financing activities in the six months ended June 30, 1999 for the repayment
of capital leases partially offset by the proceeds from the issuance of stock.
The Company believes that its current cash and short-term investments,
together with anticipated cash flow from operations and its existing credit
facilities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months. Thereafter, the
Company may require additional funds to support such activity through public or
private equity financing or from other sources. There can be no assurance that
additional financing will be available at all or that if available, such
financing will be obtainable on terms favorable to the Company and would not be
dilutive.
Factors that might affect operating results.
The Company's operating results have fluctuated significantly in the past
and are likely to continue to fluctuate significantly in the future.
Fluctuations in operating results may continue to result in volatility in the
price of the Company's Common Stock. There can be no assurance that the Company
will be profitable in the future or that the Company's level of profitability
will not vary significantly between quarters. These quarterly fluctuations may
result from a number of factors, including the magnitude, timing and signing of
new contracts; the Company's rate of progress under such contracts; the timing
of customer and market acceptance of the Company's product and service
offerings; actual or anticipated changes in government laws and regulations
related to the telecommunications market or judicial or administrative actions
with respect to such laws or regulations; the nature and pace of enforcement of
the Telecommunications Act of 1996; changes in management; product lifecycles;
the Company' success in building a product-based business; the mix of products
and services sold; changes in demand for the Company's products and services;
the timing of third-party contractors' delivery of software and hardware;
budgeting cycles of the Company's customers; changes in the renewal rate of
support agreements; the timing and amount of expenditures made by the Company
for research and development and sales, general and administrative expenses;
competition by existing and emerging competitors in the telecommunications
software markets; the Company's success in developing and marketing new
products, controlling costs, attracting and retaining qualified personnel and
expanding its sales and marketing programs; regional office expansion; software
defects and other product quality problems; changes in the Company's strategy;
the extent of industry consolidation; expansion into international markets, and
general economic conditions.
A significant portion of the Company's revenue has been and is expected to
continue to be derived from a small number of customers. Accordingly, the loss
of any significant customer, delays in delivery or acceptance of any of the
Company's products or delays in the performance of services could have a
material adverse effect on the Company's business, financial condition and
results of operations. Historically, the Company has generally recognized both
license fees and service fee revenue under its customer contracts using the
percentage-of-completion method. The Company has broadened its strategy to
include the development and sale of its standard, packaged software products and
third party software products. To the extent that the Company is successful in
doing so, the Company expects that it may be able to record future revenue from
license fees upon the acceptance of a software product to a customer. The
Company's ability to recognize revenue on software licenses as packaged software
solutions at the time of delivery depends on its ability to separately license
the software and separately sell implementation services, as well as technical
factors and customer expectations and requirements. There can be no assurance
that the Company will be able to achieve or maintain a sales model that allows
the Company to record license fees when software products are accepted by
customers. Furthermore, software companies that account for revenue from license
fees upon acceptance of software products may be exposed to increased risk of
quarterly fluctuations. To the extent that this pattern develops at the Company,
any failure or delay in the delivery of orders during any given quarter could
have a material adverse effect on the Company's business, financial condition
and results of operations. The timing of revenue recognition from the Company's
contracts has caused, and may continue to cause, material fluctuations in the
Company's operating results, particularly on a quarterly basis.
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The Company's expense levels are based in significant part on its
expectations regarding future revenue. The Company's revenue is difficult to
forecast because the market for the Company's products and services is rapidly
evolving, and the Company's sales cycle and the size and timing of significant
contracts vary substantially among customers. Accordingly, the Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenue. Any significant shortfall from anticipated levels of
demand for the Company's products and services could have a material adverse
effect on the Company's business, financial condition and results of operations.
Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter-to-quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Furthermore, the
Company believes it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business or generally,
the market price of the Company's Common Stock would likely be materially
adversely affected.
These results should be read in conjunction with the risk factors defined
in the Company's Form 10-K for the year ended December 31, 1999. Statements
contained in this Form 10-Q with respect to future revenue and expenses are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results may differ. Among the factors
that could cause actual results to differ are the following: (i) the Company's
dependence on the rapidly evolving telecommunications industry, (ii) delays in
enforcement and implementation of the Telecommunications Act of 1996; (iii)
customer's acceptance of Local Number Portability products, (iv) delays
associated with customers' internal approval and contracting procedures,
procurement practices, and testing and acceptance process including but not
limited to, (v) changes in management; and (vi) rapid technological change and
intense competition in the Company's industry.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June 1998, four securities class action complaints were filed against
the Company and certain of its current and former officers and directors in the
Federal Court for the District of Colorado alleging violations of the federal
securities laws. The complaints were consolidated. The plaintiffs purported to
represent a class of persons who purchased the Company's securities during the
period of May 12, 1998 through July 23, 1998. The Company denied these
allegations. The parties reached a settlement of $10 million, of which the
Company paid $2.5 million in April 1999. The settlement was approved by the
Court on October 4, 1999. The Company incurred approximately $719,000 in legal
costs associated with the lawsuit.
In June 2000 the Company resolved its dispute with a former officer through
mediation, without material adverse effect on the Company's business, financial
condition and results of operation.
From time to time the Company is involved in various legal proceedings
arising in the normal course of business operations. Management does not expect
that any such proceedings will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Item 2. Changes in Securities
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On March 15, 2000, the Company solicited the written consent of its
security holders with respect to (a) Election of Directors; (b) Amendment of the
Company's Stock Option Plan; (c) Amendment to the Company's Employee Stock
Purchase Plan; and (d) Ratification of PricewaterhouseCoopers LLP as the
independent auditors of the Company. All motions were passed by the
shareholders.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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.
Date: 8/10/2000 /s/ David R. Johnson
----------------------------------
David R. Johnson
Senior Vice President of Finance, Chief
Financial Officer, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)
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