SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File Number 0-23611
DSET CORPORATION
---------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-3000022
- ---------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
661 Shrewsbury Avenue, Shrewsbury, New Jersey 07702
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(732) 945-6000
---------------------------
(Registrant's Telephone Number,
Including Area Code)
1160 US Highway 22, Bridgewater, New Jersey 08807
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of July 31, 2002:
Class Number of Shares
----- ----------------
Common Stock, no par value 5,159,558
DSET CORPORATION
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION................................................... 1
Item 1. Condensed Consolidated Financial Statements....................... 1
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001.............................................. 2
Condensed Consolidated Statements of Loss and Comprehensive Loss
for the Three Months Ended June 30, 2002 and 2001.............. 3
Condensed Consolidated Statements of Loss and Comprehensive Loss
for the Six Months Ended June 30, 2002 and 2001................ 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2002 and 2001............................ 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 19
Results of Operations.......................................... 24
Liquidity and Capital Resources................................ 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 32
PART II. OTHER INFORMATION..................................................... 33
Item 5. Other Information................................................. 33
Item 6. Exhibits and Reports on Form 8-K.................................. 33
SIGNATURES...................................................................... 34
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
1
DSET Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
- --------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
Assets
Current assets:
Cash and cash equivalents $ 3,892,960 $ 12,958,074
Accounts receivable, net of allowance for doubtful accounts
of $7,388,115 at June 30, 2002 and $7,697,383 at December 31, 2001 774,061 823,793
Income taxes receivable 461,594 8,416
Prepaid licenses 916,416 935,000
Prepaid expenses and other current assets 396,358 329,864
------------ ------------
Total current assets 6,441,389 15,055,147
Fixed assets, net 1,643,061 2,173,139
Acquired technology, net 3,666,667 -
Goodwill, net - 19,004
Loans to ISPsoft Inc. - 3,850,000
Merger and acquisition costs - 1,042,985
Other assets, net 308,169 417,289
------------ ------------
Total assets $ 12,059,286 $ 22,557,564
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,669,007 $ 2,459,972
Deferred revenues 1,782,026 2,293,214
Accrued restructuring expenses 2,182,413 1,177,154
Notes payable 848,889 493,786
Current portion of capital lease obligation 158,855 138,367
------------ ------------
Total current liabilities 6,641,190 6,562,493
Long term accrued restructuring expenses 611,785 1,021,344
Deferred rent 106,540 549,566
Capital lease obligation 186,844 282,494
Other liabilities 21,996 21,000
------------ ------------
Total liabilities 7,568,355 8,436,897
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, no shares
issued or outstanding at June 30, 2002 and December 31, 2001 - -
Series A Junior Participating Preferred stock, no par value; 5,000
shares authorized, no shares issued authorized, no shares issued or
outstanding at June 30, 2002 and December 31, 2001 - -
Common stock, no par value; 10,000,000 shares authorized, 5,189,236 and
2,907,400 shares issued at June 30, 2002 and December 31, 2001,
respectively 56,946,302 50,138,022
Accumulated deficit (52,388,072) (35,837,420)
Other comprehensive loss (23,644) (21,875)
Treasury stock, at cost; (28,073 and 106,141 shares at June 30, 2002
and December 31, 2001, respectively) (43,655) (158,060)
------------ ------------
Total shareholders' equity 4,490,931 14,120,667
------------ ------------
Total liabilities and shareholders' equity $ 12,059,286 $ 22,557,564
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
DSET Corporation and Subsidiaries
Condensed Consolidated Statements of Loss and Comprehensive Loss (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended June 30,
---------------------------
2002 2001*
---- -----
Revenues:
License revenues $ 123,522 $ 586,179
Service revenues 1,077,576 2,030,061
------------ ------------
Total revenues 1,201,098 2,616,240
------------ ------------
Cost of revenues:
License revenues 133,288 524,064
Service revenues 880,410 1,564,951
------------ ------------
Total cost of revenues 1,013,698 2,089,015
------------ ------------
Gross profit 187,400 527,225
------------ ------------
Operating expenses:
Sales and marketing 495,083 2,119,597
Research and product development 1,091,594 2,993,705
General and administrative 912,819 1,416,865
Bad debt expense (benefit) and other charges (307,468) 545,188
Amortization of goodwill - 103,284
Restructuring and other charges 1,786,297 6,360,616
Impairment of goodwill 11,443,763 419,541
------------ ------------
Total operating expenses 15,422,088 13,958,796
------------ ------------
Operating loss (15,234,688) (13,431,571)
Interest expense and other income (expense) (13,271) (30,661)
Interest income and realized gains and losses on marketable securities 20,332 404,130
------------ ------------
Loss before income taxes (15,227,627) (13,058,102)
Provision (benefit) for income taxes (448,603) 98,315
------------ ------------
Net loss $(14,779,024) $(13,156,417)
============ ============
Other comprehensive income (loss), net of tax
Unrealized appreciation on investments - (55,805)
Translation adjustment (1,842) 19,389
------------ ------------
Comprehensive loss $(14,780,866) $(13,192,833)
============ ============
Net loss applicable to common shares $(14,779,024) $(13,156,417)
============ ============
Net loss per common share - basic and diluted $ (2.91) $ (4.53)
============ ============
Weighted average number of common shares outstanding 5,082,402 2,907,199
============ ============
*Certain amounts have been reclassified for comparative purposes.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
DSET Corporation and Subsidiaries
Condensed Consolidated Statements of Loss and Comprehensive Loss (Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------
2002 2001*
---- -----
Revenues:
License revenues $ 376,864 $ 2,107,339
Service revenues 2,325,588 3,924,342
------------ ------------
Total revenues 2,702,452 6,031,681
------------ ------------
Cost of revenues:
License revenues 335,761 1,025,890
Service revenues 1,914,776 3,555,615
------------ ------------
Total cost of revenues 2,250,537 4,581,505
------------ ------------
Gross profit 451,915 1,450,176
------------ ------------
Operating expenses:
Sales and marketing 1,230,584 4,649,189
Research and product development 2,078,260 6,903,239
General and administrative 2,131,916 3,269,130
Bad debt expense (benefit) and other charges (307,468) 985,275
Amortization of goodwill - 203,400
Restructuring and other charges 2,250,078 9,789,534
Impairment of goodwill 11,443,763 419,541
------------ ------------
Total operating expenses 18,827,133 26,219,308
------------ ------------
Operating loss (18,375,218) (24,769,132)
Interest expense and other income (expense) (76,675) (77,589)
Interest income and realized gains and losses on marketable securities 66,251 894,395
------------ ------------
Loss before income taxes (18,385,642) (23,952,326)
Provision (benefit) for income taxes (1,834,991) 127,153
------------ ------------
Net loss $(16,550,651) $(24,079,479)
============ ============
Other comprehensive income (loss), net of tax
Unrealized appreciation on investments - 1,135
Translation adjustment (1,768) 21,059
------------ ------------
Comprehensive loss $(16,552,419) $(24,057,285)
============ ============
Net loss applicable to common shares $(16,550,651) $(24,079,479)
============ ============
Net loss per common share - basic and diluted $ (3.53) $ (8.28)
============ ============
Weighted average number of common shares outstanding 4,691,709 2,907,199
============ ============
*Certain amounts have been reclassified for comparative purposes.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
DSET Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
-------------------------
2002 2001*
---- -----
Cash flows from operating activities:
Net loss $(16,550,651) $(24,079,479)
Adjustments to reconcile net loss to net cash
(used in) operating activities, net of effects of acquisitions:
Stock based compensation charges 2,575 4,404
Realized (gain) on marketable securities - (233,241)
Depreciation 329,746 715,857
Amortization 333,333 763,498
Loss on disposal of assets - 6,645
Restructuring and other charges 918,548 7,063,914
Bad debt expense (benefit) and other charges (307,468) 985,275
Impairment of goodwill 11,443,763 419,541
Changes in operating assets and liabilities:
Accounts receivable 373,200 3,685,778
Income taxes receivable (453,178) 211,298
Prepaid licenses 18,584 (438,114)
Prepaid expenses and other current assets (81,933) 806,695
Other assets (24,661) 21,682
Accounts payable and accrued expenses (546,829) (3,061,360)
Deferred revenues (511,188) (104,672)
Accrued restructuring expenses 596,695 1,698,643
Deferred rent (443,025) 22,233
------------ ------------
Net cash (used in) operating activities (4,902,489) (11,511,403)
------------ ------------
Cash flows from investing activities:
Redemption of marketable securities - 12,907,260
Acquisition of business, less cash acquired (3,524,369) -
Purchase of acquired technology - (607,035)
Acquisition of fixed assets (153,580) (666,358)
Loans to ISPsoft Inc. - (1,000,000)
------------ ------------
Net cash provided by (used in) investing activities (3,677,949) 10,633,867
------------ ------------
Cash flows from financing activities:
Loan proceeds from financing insurance 68,444 -
Reissuance of treasury stock 14,599 -
Repayments of notes payable (513,341) (500,000)
Repayments of capital lease obligation (75,162) (69,095)
Repayment from officers and shareholders 22,552 8,726
Proceeds from the exercise of stock options - 4,538
------------ ------------
Net cash (used in) financing activities (482,908) (555,831)
------------ ------------
Effect of foreign exchange rate changes on cash (1,768) 21,059
------------ ------------
Net (decrease) in cash and cash equivalents (9,065,114) (1,412,308)
------------ ------------
Cash and cash equivalents, beginning of period 12,958,074 7,314,254
------------ ------------
Cash and cash equivalents, end of period $ 3,892,960 $ 5,901,946
============ ============
Supplemental disclosure of cash flow information:
Cash received during the period for income taxes $ (1,381,813) $ (118,150)
Cash paid during the period for interest 22,577 76,038
Non-cash activities:
Accrued merger and acquisition costs $ 89,223 -
Issuance of common stock and options in business acquisition $ 6,905,511 -
Supplemental information of business acquired:
Fair value of assets acquired:
Cash 1,182 -
Current assets 23,113 -
Non-current assets 430,855 -
Acquired technology 4,000,000 -
Goodwill 11,424,759 -
Less liabilities assumed and non-cash consideration:
Current liabilities (268,695) -
Notes payable (800,000) -
Stock issued (6,378,077) -
Stock options issued (527,434) -
Accrued merger and acquisition costs (89,223) -
------------ ------------
Cash paid 7,816,480 -
Less, cash acquired (1,182) -
Net cash paid 7,815,298 -
Less, cash paid prior to December 31, 2001 4,290,929 -
------------ ------------
Acquisition of business, less cash acquired $ 3,524,369 $ -
============ ============
*Certain amounts have been reclassified for comparative purposes
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The condensed consolidated financial information presented as of June 30,
2002 and for the three month and six month periods ended June 30, 2002 and
2001 is unaudited, but in the opinion of the management of DSET
Corporation ("DSET" or the "Company"), contains all adjustments
(consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the Company's financial
position as of June 30, 2002, the results of its operations and its cash
flows for the three and six month periods ended June 30, 2002 and 2001.
The financial statements included herein have been prepared in accordance
with generally accepted accounting principles and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. These financial statements should be read in
conjunction with the Company's audited financial statements and
accompanying notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 as amended. The
December 31, 2001 balance sheet data contained in this Form 10-Q was
derived from audited financial statements, but does not include all the
disclosures required by generally accepted accounting principles.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
On August 14, 2001 the Company announced a reverse stock split effective
on the close of business on August 21, 2001, pursuant to which one new
share of common stock of the Company was issued in exchange for each four
outstanding shares of common stock. The Board of Directors approved the
reverse split under New Jersey law and also authorized the reduction of
the Company's authorized common stock four-fold from 40,000,000 to
10,000,000 shares. The Company's common stock commenced trading at the
post-split price on August 22, 2001. All share and per share amounts in
this Form 10-Q have been adjusted retroactively to reflect the
one-for-four reverse stock split.
Effective with the May 2002 restructuring (see Note 6) , DSET's corporate
headquarters changed from Bridgewater, New Jersey to Shrewsbury, New
Jersey and Mr. Binay Sugla replaced Mr. William McHale as Chief Executive
Officer. Mr. McHale separated from the Company effective May 24, 2002 but
remains on the Board of Directors.
2. Going Concern
The condensed consolidated financial statements of DSET have been prepared
on the basis that DSET will continue as a going concern, which
contemplates the realization of assets and satisfaction of liabilities and
commitments in the normal course of business. At June 30, 2002 and
6
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
December 31, 2001, DSET had an accumulated deficit of $52.4 million and
$35.8 million and working capital (deficit) of ($200,000) and $8.5
million, respectively. DSET also incurred net losses of $14.8 million and
$16.6 million for the three and six month periods ended June 30, 2002,
respectively, and $33.3 million for the year ended December 31, 2001.
These factors raise substantial doubt about DSET's ability to continue as
a going concern. The losses and deficits resulted principally from the
lack of demand for DSET's products due to a major downturn in the
telecommunications industry which began in the second half of 2000 (and
continues to the present), having its most acute impact on Competitive
Service Providers ("CSPs"), the Company's primary targeted customers. This
downturn was brought about by the sudden withdrawal of available financing
to the CSPs from traditional sources. Many of the Company's customers have
declared bankruptcy, refused to pay or delayed additional purchases. This
has resulted in the impairment of tangible and intangible assets, excess
capacities and substantial bad debts. The Company has taken action to
mitigate these circumstances by reducing headcount, subletting facilities
and searching for additional financing to enable it to fund its return to
positive cash flow and profitability.
In 2002 DSET received three non-compliance notifications from the Nasdaq
Stock Market, Inc. ("Nasdaq").
On February 14, 2002, the Company received notice from Nasdaq that for the
preceding 30 consecutive trading days, the Company's common stock had not
maintained the minimum Market Value of Publicly Held Shares ("MVPHS") of
$5,000,000 as required for continued inclusion by Marketplace Rule
4450(a)(2) on the Nasdaq National Market. MVPHS equals the closing bid
price multiplied by that portion of a company's outstanding shares which
is in the hands of public investors (i.e., - shares not held by company
officers, directors, or investors who hold a controlling interest in the
company.) Therefore, in accordance with Marketplace Rule 4450(e)(1), the
Company had 90 calendar days, or until May 15, 2002, to regain compliance.
On March 5, 2002, the Company received notice from Nasdaq that for the
previous 30 consecutive trading days, the price of the Company's common
stock had closed below the minimum $1.00 per share requirement for
continued inclusion under Marketplace Rule 4450(a)(5). Therefore, in
accordance with Marketplace Rule 4450(e)(2), the Company had 90 calendar
days, or until June 3, 2002, to regain compliance. If compliance with this
rule could not be demonstrated by June 3, 2002, the Company's securities
would have been delisted from the Nasdaq National Market.
Effective May 29, 2002 the Company transferred the trading of its common
stock to the Nasdaq SmallCap Market.
7
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
On July 17, 2002, the Company received notice from Nasdaq that for the
previous 30 consecutive trading days, the price of the Company's common
stock had not maintained a minimum market value of publicly held shares of
$1,000,000 as required for continued inclusion by Marketplace Rule
4310(c)(7). Therefore, in accordance with Marketplace Rule 4310(c)(8)(B),
the Company has 90 calendar days, or until October 15, 2002, to regain
compliance. If compliance with the $1,000,000 rule cannot be demonstrated
by October 15, 2002, the Company's securities will receive a written
notification from Nasdaq that the Company's securities will be delisted.
DSET's failure to meet the Nasdaq's maintenance criteria in the future may
result in the delisting of its common stock from the Nasdaq SmallCap
Market. In such event, trading, if any, of DSET's common stock may then
continue to be conducted in the over-the-counter market, on the
over-the-counter bulletin board or other electronic quotation services. As
a result, an investor may find it more difficult to dispose of or obtain
accurate quotations as to the market value of DSET's common stock. In
addition, in the event DSET's common stock is delisted, broker-dealers
would have certain regulatory burdens imposed upon them, which may
discourage them from effecting transactions in DSET's common stock,
further limiting the liquidity thereof. This may have the effect of
limiting DSET's ability to raise additional financing.
DSET's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flows to meet its obligations as they
come due. DSET believes that the cost reductions from its restructurings
in 2001 and 2002 (including work force reductions) and the merger with
ISPsoft will enhance its cash flows from operations. The Company is
seeking additional financing to fund its operating and capital
requirements through 2002. If cash flows are insufficient or the Company
is unable to raise funds on acceptable terms, there would be a material
adverse effect on DSET's financial position and operations and its ability
to continue as a going concern. This would force DSET to further reduce
its capital expenditures, reduce its workforce, sell certain assets or
possibly explore additional alternatives including seeking bankruptcy
protection. The consolidated financial statements do not include any
adjustments relating to the recoverability of the carrying amount of the
recorded assets or the amount of liabilities that might result from the
outcome of these uncertainties. The Company cannot be certain that
additional debt or equity financing will be available when required or, if
available, that it can secure it on terms satisfactory to the Company.
3. Summary of Significant Accounting Policies
Consolidation
The condensed consolidated financial statements include all wholly-owned
subsidiaries from the respective dates of their acquisition or formation.
The consolidated entity includes DSET Corporation and its wholly-owned
subsidiaries, DSET Acquisition Corp., a Delaware corporation; Konark Inc.
("Konark"), a California corporation; PIC Technologies, Inc., a Delaware
corporation;
8
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
and DSET Canada, Inc. ("Canada"). All significant intercompany
transactions have been eliminated in consolidation.
Goodwill
Goodwill represents the excess of the purchase price of an acquistion over
the fair value of the net tangible and intangible assets acquired. In
accordance with Statement of Financial Accounting Standards ("SFAS") 142
"Goodwill and Other Intangible Assets", the Company ceased amortizing
goodwill effective January 1, 2002. In 2001 the Company amortized goodwill
using a straight-line method over an estimated useful life of five years.
The Company periodically tests goodwill for impairment by comparing its
carrying amount to the fair value of goodwill. Accumulated amortization
was zero and $162,000 as of June 30, 2002 and December 31, 2001,
respectively. On January 31, 2002 the Company merged with ISPsoft Inc. In
accordance with SFAS 141, "Business Combinations", the merger was
accounted for a purchase resulting in the recording of approximately $11.4
million in goodwill.
In the second quarter of 2002, the Company recognized a $11.4 million
write-down of goodwill due to the significant decline in the valuation of
the Company's stock due to the negative industry and economic trends
affecting both the Company's current operations and expected future sales
as well as the general decline of technology valuations. In accordance
with SFAS 142, the Company performed an assessment of the carrying value
of its goodwill and other intangible assets recorded in connection with
the Company's various acquisitions. The fair value of goodwill was
determined based on the market value of the Company (see Note 8).
Acquired Technology
Acquired technology represents the costs of feasible technology acquired
from external sources. Amortization of acquired technology is the greater
of the amount computed using (a) the ratio that current gross revenues for
a product bears to the total of current and anticipated future gross
revenues for that product or (b) the straight-line method over the
remaining estimated economic life ranging from three to five years of the
product including the period being reported on. The acquired technology,
resulting from the Company's merger with ISPsoft Inc., was valued at $4.0
million. It was determined that the technology had a finite life of five
years from the time of purchase. In the second quarter of 2002,
amortization expense of $200,000 was recognized as cost of revenues. In
the six months ended June 30, 2002, amortization expense of $333,333 was
recognized as cost of revenues. Based upon managements current plans, the
remaining balance of acquired technology is expected to be recovered from
the sale of related products (see Note 7).
Research and Product Development
Research and product development costs are charged to expense as incurred.
However, the costs incurred for the development of computer software that
will be sold, leased, or otherwise marketed are capitalized when
technological feasibility has been established.
9
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
Long-Lived Assets
In August 2001, SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", was issued, replacing SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and portions of APB Opinion 30, "Reporting the Results of Operations".
SFAS 144 provides a single accounting model for long-lived assets to be
disposed of and changes the criteria to be met to classify an asset as
held-for-sale. SFAS 144 retains the requirement of APB Opinion 30 to
report discontinued operations separately from continuing operations and
extends that reporting to a component of an entity that either has been
disposed of or is classified as held-for-sale. The Company adopted SFAS
144 effective January 1, 2002 and there was no impact on the condensed
consolidated financial statements at adoption.
Treasury Stock
The Company's purchases of shares of its common stock are recorded, at
cost, as Treasury Stock and results in a reduction of stockholders'
equity. When treasury shares are reissued, the Company uses a first-in,
first-out method and the difference between the repurchase cost and the
reissuance price is treated as an adjustment to common stock.
Revenue Recognition
License revenues are comprised of one time license fees for software
products released for general availability, royalties from third party
licensees, and repetitive license royalty fees for applications that are
sold on a multiple use basis. Revenue for the one time license fees is
recognized when there is persuasive evidence that an arrangement exists,
delivery has occurred, the fee is fixed and determinable and collection is
probable. Royalty revenue for the multiple use licenses is recognized when
the customer sells a product within which is embedded libraries of the
application development tools. The contracts for multiple-use licenses do
not call for any minimum royalties.
Service revenues are comprised of postcontract customer support service
fees, gateway rental fees, professional service fees which include
training, consulting, installation, implementation, and charges for
reimbursable expenses and custom product development fees. Revenues for
postcontract customer support services and gateway rental fees are
recognized ratably over the period in which the services are provided.
Revenues for training in the Company's products are recognized when the
training has been completed. Revenues for consulting services are
recognized in the period in which the consulting services are provided.
Revenues for product installation and implementation services are
recognized when contractually agreed upon milestones have been achieved.
It is not necessary for the Company to provide implementation services.
Outside third parties are available to perform integration of the
Company's software with the customer's systems or the customer can choose
to install the software. Revenues for reimbursable expenses are recognized
as the expenses are incurred. Revenues for custom product development are
recognized under the contract method of accounting in accordance with
AICPA Statement of Position 81-1,
10
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" since they generally require significant
production, modification or customization of the Company's products.
Revenue for custom product development is recognized as a percentage of
the contract completed based upon the ratio of direct labor costs incurred
to the estimated total direct labor costs required for the project. Any
revenue for custom product development that is recognized in excess of
amounts invoiced to the customer for progress billings is recorded as
unbilled accounts receivable.
Some customer contracts provide for multiple elements to be delivered (for
example, electronic-bonding gateway product, postcontract customer
support, training, custom product development, etc.). In those contracts
that include multiple elements, the contract fee is allocated to the
various elements based on vendor-specific objective evidence ("VSOE") of
fair value. VSOE of fair value is the price charged when the same element
is sold separately, or for an element not yet being sold separately, the
price established by the Company's product management department.
In 2001, the Company began a new gateway rental program which provides
existing and prospective customers the ability to rent electronic-bonding
gateways on a month-to-month basis, with a 90-day cancellation provision.
The program includes the use of the software, technical support, software
upgrades and change management services for a monthly fee. Revenue under
this program is recognized pro rata as customers use the Company's
software and services.
Income Taxes
The Company utilizes an asset and liability approach for financial
reporting for income taxes. Deferred income tax assets and liabilities are
computed for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts
in the future, based on enacted tax laws and rates applicable to the
period in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce the
deferred tax assets to the amount more likely than not to be realized.
For certain stock options, the Company receives a tax deduction for the
difference between the fair value at the date of exercise of the stock
option and the exercise price. To the extent the amount deducted for
income taxes exceeds the amount charged to operations for financial
statement purposes, the related tax benefits are credited to shareholders'
equity.
The tax benefit of $1.4 million recorded in the first quarter of 2002
related to the Job Creation and Worker Assistance Act ("JCWAA") signed
into law in March 2002, which allows an extension to the general net
operating loss carry-back period to five years (from two years). An
additional tax benefit of $449,000 was recorded in the second quarter of
2002 related to the research and development tax credit and the foreign
tax credit released as a result of the carry-back related to the JCWAA.
This benefit was recorded in the second quarter as a result of further
clarification of this new legislation.
11
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
Reclassifications
Certain amounts in 2001 have been reclassified to conform to the current
period presentation.
New Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 143, "Accounting for Asset Retirement Obligations", which addresses
financial accounting and reporting obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. The Statement applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and (or) the normal operation of a long-lived
asset, except for certain obligations of lessees. The effective date for
SFAS 143 is for financial statements issued for fiscal years beginning
after June 15, 2002. The Company does not expect that the adoption of the
provisions of SFAS 143 will have a material impact on its results of
operations or financial position.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical
Corrections". SFAS 145 eliminates the requirement (in SFAS No. 4) that
gains and losses from the extinguishments of debt be aggregated and
classified as extraordinary items, net of the related income tax. In
addition, SFAS No. 145 requires sales-lease back treatment for certain
modifications of a capital lease that result in the lease being classified
as an operating lease. The rescission of SFAS No. 4 is effective for
fiscal years beginning after May 15, 2002, which for the Company would be
December 31, 2003. Earlier application is encouraged. Any gain or loss on
extinguishment of debt that was previously classified as an extraordinary
item would be reclassified to other income (expense). The remainder of the
statement is generally effective for transactions occurring after May 15,
2002. The Company does not expect that the adoption of SFAS No. 145 will
have a material impact on the Company's financial condition, cash flows
and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 requires recording
costs associated with exit or disposal activities at their fair values
when a liability has been incurred. Under previous guidance, certain exit
costs were accrued upon management's commitment to an exit plan, which is
generally before an actual liability has been incurred. Adoption of SFAS
146 is required with the beginning of fiscal year 2003.
12
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. Revenue Concentration
The Company had two customers accounting for 12% of revenues each for the
quarter ended June 30, 2002 and two customers that accounted for 14% and
10% of revenues, repectively, for the quarter ended June 30, 2001. The
Company had two customers accounting for 13% and 12% of revenues,
respectively, for the six months ended June 30, 2002 and one customer that
accounted for 27% of revenues for the six months ended June 30, 2001.
5. Earnings Per Share
The Company computes, presents and discloses earnings per share in
accordance with SFAS 128 "Earnings Per Share" ("EPS") which specifies the
computation, presentation and disclosure requirements for earnings per
share of entities with publicly held common stock or potential common
stock. The statement defines two earnings per share calculations, basic
and assuming dilution. The objective of basic EPS is to measure the
performance of an entity over the reporting period by dividing income
available to common stock by the weighted average shares outstanding. The
objective of diluted EPS is consistent with that of basic EPS, that is to
measure the performance of an entity over the reporting period, while
giving effect to all dilutive potential common shares that were
outstanding during the period. The calculation of diluted EPS is similar
to basic EPS except both the numerator and denominator are increased for
the conversion of potential common shares. Due to the Company's net loss
for the three month and six month periods ended June 30, 2002 and 2001,
all outstanding stock options are considered to be anti-dilutive.
At June 30, 2002, the exercise prices of all outstanding stock options
exceeded the market price of the Company's common stock. All outstanding
options to purchase 795,006 shares of common stock are antidilutive and
excluded from the computation of diluted loss per share for the three and
six month periods ended June 30, 2002.
6. Restructuring and Other Charges
In the first quarter of 2002, the Company decided to close its San Ramon,
California office and reduce the sales and marketing workforce by a total
of five employees.
The approximate restructuring and other charges recorded in the first
quarter 2002 are summarized as follows:
Fixed asset impairments $147,000
Employee severance 285,000
Other 32,000
--------
$464,000
========
13
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
In the second quarter of 2002, the Company decided to further reduce its
workforce by a total of 34 employees. As a result, the Company closed its
Bridgewater, New Jersey facility and consolidated those operations into
the Company's Shrewsbury, New Jersey office. As part of the restructuring,
the Company recorded a reserve to the outstanding loan balance of the
former Chief Executive Officer based on his severance agreement.
The approximate restructuring and other charges recorded in the second
quarter of 2002 are summarized as follows:
Employee severance $ 949,000
Fixed asset impairments 594,000
Officers loan reserve 177,000
Other 66,000
----------
$1,786,000
==========
In the first quarter of 2001, the Company decided to reduce the workforce
in the United States and to close its Canadian subsidiary due to the
changing and unpredictable conditions in the marketplace, and the
discontinuance of product lines in an effort to conserve cash.
The approximate restructuring and other charges recorded in the first
quarter of 2001 are summarized as follows:
Software license asset impairment $2,174,000
U.S. and Canadian employee severance 378,000
U.S. and Canadian fixed asset impairments and
future non-refundable lease payments 847,000
Other 30,000
----------
$3,429,000
==========
In June 2001, the Company further reduced its workforce in the United
States by approximately seventy-one employees due to the continued
changing and unpredictable conditions in the marketplace and discontinuing
certain product lines in an effort to conserve cash. The employees
terminated mainly supported the ezSubscribe, ez911, CNAM/LIDB and PIC
gateways.
14
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
The approximate restructuring charges recorded in the second quarter of
2001 are summarized as follows:
Intangible asset impairment $4,101,000
Workforce reduction 969,000
Fixed asset impairments and future non-refundable
lease payments 1,290,000
----------
$6,360,000
==========
The total remaining restructuring accrual inclusive of termination
benefits and non-refundable lease payments at June 30, 2002 is
approximately $2.8 million as summarized as follows:
Short-term Long-term
---------- ----------
Severance $ 794,000 $ -
Rent 418,000 491,000
Equipment leases 439,000 118,000
Deferred rent 455,000 -
Other 76,000 3,000
---------- ----------
Total accrued restructuring expenses at June 30, 2002 $2,182,000 $ 612,000
========== ==========
Reconciliation of accrued restructuring expenses
Balance, December 31, 2001 $2,198,000
Additions 317,000
Payments (510,000)
----------
Balance, March 31, 2002 $2,005,000
==========
Additions 1,015,000
Deferred rent 455,000
Payments (681,000)
----------
Balance, June 30, 2002 $2,794,000
==========
7. Merger with ISPsoft Inc.
In June 2001, the Company announced an agreement to merge with ISPsoft,
which closed on January 31, 2002. The merger was accounted for under the
purchase method of accounting in accordance with SFAS 141. ISPsoft has
developed Internet Protocol provisioning and activation software which has
achieved technological feasibility. At closing, ISPsoft security holders
received an aggregate of 2,281,143 shares of DSET common stock, $1,000,000
in cash, issuance of an aggregate of $800,000 of DSET notes payable and
payment of $544,519 in cash in exchange for
15
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
certain debts payable by ISPsoft to certain ISPsoft security holders
and/or affiliates, and were entitled to receive up to $500,000 in cash
and/or unregistered shares of DSET common stock in potential milestone
payments (if revenues from ISPsoft products were $4.0 million by June 30,
2002) in exchange for their ISPsoft securities in the merger. The
milestone payments were not required. In addition, the Company loaned
ISPsoft $4.4 million through the consummation of the transaction. DSET
also assumed the ISPsoft 2000 Stock Plan and granted the holders of
2,781,010 issued and outstanding options to purchase shares of ISPsoft
common stock the right to purchase up to 241,483 shares of DSET common
stock. The results of operations of ISPsoft are included in the
accompanying Condensed Consolidated Statements of Loss and Comprehensive
Loss beginning February 1, 2002.
In conjunction with the merger with ISPsoft, the Company issued two
$400,000 promissory notes on January 31, 2002 one to each of Signal Lake
Venture Fund, L.P. and Lucent Technologies, Inc. The principal of these
notes accrue interest at 8% per year and are due and payable on the
earlier of (a) January 31, 2003; (b) the consummation by DSET of at least
$10,000,000 in equity financing; or (c) the receipt by the Company of at
least $5,000,000 in cash from sales agreements for the sale of ISPsoft's
products, provided such agreements were executed prior to January 31,
2002.
Consideration and Purchase Price Allocation
The following is a summary of the consideration paid for ISPsoft and
related purchase price allocation:
DSET common stock equity consideration $ 6,378,077
Fair value of DSET's options in exchange for ISPsoft options 527,434
Cash consideration to shareholders of ISPsoft 1,544,519
Loans to ISPsoft prior to consummation 4,400,000
Assumption of notes payable 800,000
Merger and acquisition costs 1,961,185
-----------
Total consideration $15,611,215
===========
Allocation of consideration:
Net tangible assets of ISPsoft $ 186,456
Acquired Technology 4,000,000
Goodwill 11,424,759
-----------
$15,611,215
===========
16
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
Common stock consideration has been calculated based on Emerging Issues
Task Force Issue ("EITF") 99-12, "Accounting for Formula Arrangements
under EITF 95-19". For this calculation, DSET used the average market
price for a few days before and after the merger was agreed to and
announced, June 26, 2001 ($2.796 per common share).
The fair value of ISPsoft's options exchanged for the Company's options
has been calculated based on FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of
APB Opinion No. 25" and EITF 00-23, "Issues Related to the Accounting for
Stock Compensation Under APB 25 and FIN 44." DSET used the average market
price for a few days before and after the merger was agreed to (as
explained above) for the vested portion of the options issued, and the
market price on the consummation date, January 31, 2002, for the unvested
portion.
Selected Pro Forma Financial Information
The Company has prepared a pro forma loss statement in accordance with
SFAS 141, for the three and six month periods ended June 30, 2002 and 2001
as if ISPsoft were part of DSET as of January 1, 2002 and 2001,
respectively. In the period ended January 31, 2002, ISPsoft recorded a
non-recurring item which decreased the provision for income taxes expense
by $227,000 for the sale of ISPsoft tax credits, which is included below
in the selected pro forma information.
The following pro forma statement of loss presents the consolidated
results had DSET and ISPsoft been combined at the beginning of the
respective periods:
Quarter ended June 30, Six Months ended June 30,
--------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues: $ 1,201,098 $ 2,616,240 $ 2,702,453 $ 6,031,681
Cost of revenues: 1,013,698 2,289,015 2,383,871 4,981,505
------------ ------------ ------------ ------------
Gross Profit: 187,400 327,225 318,582 1,050,176
------------ ------------ ------------ ------------
Operating expenses: 15,422,088 15,346,809 19,526,172 29,048,649
------------ ------------ ------------ ------------
Operating loss: (15,234,688) (15,019,584) (19,207,590) (27,998,473)
Loss before income taxes (15,227,627) (14,679,826) (19,343,650) (28,966,523)
17
DSET Corporation and Subsidiaries
June 30, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited)
Provision (benefit) for income taxes (448,603) 98,315 (2,062,595) 75,052
------------ ------------ ------------ ------------
Net loss applicable to common shares $(14,779,024) $(14,778,141) $(17,281,055) $(29,041,575)
============ ============ ============ ============
Net loss per common share - basic and $ (2.91) $ (2.85) $ (3.68) $ (5.60)
diluted
Weighted average number of common shares
outstanding 5,082,402 5,188,342 4,691,709 5,188,342
8. Impairment of Goodwill
In June 2002, the Company recorded a charge for the impairment of goodwill
of $11.4 million relating to DSET's merger with ISPsoft Inc. in January
2002. The amount of impairment reflects both the further decline in the
Company's stock price and resulting market valuation in recent months and a
reassessment of the market outlook for capital equipment and software
purchases in the telecommunications industry. Under SFAS 142, a goodwill
impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. The fair value was determined based on
the recent market value of the Company's shares. This charge is
non-operational in nature and does not affect cash flows.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
DSET develops and markets service-provisioning and electronic-bonding
solutions for use by telecommunications providers around the world. Our
IPSource'TM' software platform, acquired in our merger with ISPsoft in January
2002, enables a service provider to provision, activate, and manage services
such as Internet Protocol ("IP") based virtual private networks ("VPNs") in
complex multi-vendor network environments. We also offer a family of software
solutions for competitive service providers ("CSPs") that enables them to
exchange information with other telecommunications service providers to reduce
the time necessary to provision new voice and data services for their customers.
1999 and 2000 were years of unprecedented demand for all types of
communications products and services. Companies in the telecommunications
industry had access to and utilized abundant sources of investment capital.
However, the downturn in the industry, which began in the second half of 2000,
reduced our revenues significantly beginning in the third quarter of 2000 and
through the second quarter of 2002. This downturn was brought about by the
sudden withdrawal of available financing from almost all of the traditional
financing sources (vendors, lenders, private equity/venture capital sources,
public equity markets and large corporate partners) to our current and potential
customers. Prior to this downturn, the new CSPs were successfully and regularly
obtaining large capital commitments allowing them to increase the size and the
pace of their infrastructure spending. This funding crisis also affected our
collection efforts since many customers either declared bankruptcy or concluded
that they did not have sufficient available cash to pay their obligations to
DSET. We believe that we have adequately reserved for doubtful accounts,
although no assurance can be made that additional customers will not go bankrupt
or have financial difficulties.
Our policy to assess the probability of collection consists of reviewing
public and private sources of financial information for all potential customers
(e.g., financial statements, periodic filings and press releases), inquiring of
management of the potential customer how they intend to pay for their purchase,
reviewing available information from credit rating agencies, and if available,
contacting funding sources, reviewing recent announcements regarding completed
and proposed financing and discussing the potential customer's credit worthiness
with other suppliers.
In the second half of 2000 and continuing through the second quarter of
2002, the business models of many service providers came into doubt. The
industry continues to see a dramatic decline in the availability of capital and
spending by service providers. 2001 can be characterized as a year of survival
and retrenchment for the industry, with the contraction of the CSPs severely
impacting hardware and software vendors that had previously experienced
substantial growth in revenues and profits. Virtually every company that
remained in business,
19
including DSET, had to reorganize. In 2001, we incurred substantial losses, and
accordingly reduced headcount and expenses in an effort to conserve cash. We
have utilized cash previously invested in marketable securities to finance the
losses brought about by the downturn. Through the second quarter of 2002, we
continue to see turmoil in the industry as additional customers have either
commenced or declared their intent to commence formal reorganization
proceedings.
For our electronic bonding gateway products, we currently offer two
additional sales models, in addition to the traditional perpetual license and
services arrangement, to our customers to acquire our products and services: a
transaction based payment plan ("Pay as You Grow") and a rental program with
little cash due up front ("Gateway Rental Program"). Prior to the inclusion of
these alternative programs, our license revenues were derived from the sale of
electronic-bonding gateways to CSPs under contracts that provided for perpetual
licenses and corresponding fees, with the total price of a license sale to a
customer depending on the number of licensed products, the number of trading
partners and amount of additional services acquired.
In the fourth quarter of 2001, in an effort to find the right financial
model to encourage CSPs to once again start buying electronic-bonding gateways,
we announced our Gateway Rental Program, which provides existing and prospective
customers the ability to rent electronic-bonding gateways on a month-to-month
basis, with a 90-day cancellation provision. The program includes the use of the
software, technical support, software upgrades and change management services
for a monthly charge that is roughly equivalent to what they had been paying for
the maintenance services only. Service revenue is recognized in the month in
which customers use our software and services.
Prospective customers for our IPSource'TM' products are offered the basic
platform under a perpetual license and the right to establish services on a
usage basis similar to the "pay as you grow" model for gateways. This allows
prospective customers to only pay for those services or device drivers that they
need to provision and activate their customers' services.
Presently, we are in the process of conducting a trial of the IPSource'TM'
software with a major network provider and plan to initiate trials with
additional prospective customers in the near future. These trials are generally
required by prospects prior to purchasing software similar to IPSource'TM'.
Our service revenues are comprised of fees derived from custom program
development, implementation, installation, training fees and maintenance. Our
custom program development services are generally individually negotiated and
contracted for on a fixed price basis. Prices for such projects vary depending
upon the size and scope of the project and estimated time and effort to
completion. Revenues from custom program development services are generally
recognized on a percentage of completion basis calculated as direct labor costs
are incurred in relation to estimated total direct labor costs at completion for
each project. The impact of revisions in percentage of completion estimates is
reflected in the period in which the revisions are made. Maintenance services,
for which we typically charge annually between 15% and 30% of the price
20
of the products licensed by the customer annually, may be purchased at the
customer's option. Maintenance fees are recognized as service revenue over the
term of the maintenance period.
Our cost of license revenues consists primarily of royalties paid to
third-party software companies and the amortization of acquired technology and
capitalized software development costs. We generally are not contractually
obligated to make minimum royalty payments. Costs of service revenues include,
primarily, payroll, related benefit costs, personnel and other operating
expenses. Sales and marketing expenses consist of salaries, commissions and
bonuses paid to sales and marketing personnel, as well as travel and promotional
expenses. Research and product development expenses encompass primarily software
engineering personnel costs, costs of third-party equipment, costs associated
with customer satisfaction and quality and software utilized for development
purposes. Research and product development expenses are charged to operations as
such costs are incurred. Our research and development projects are evaluated for
technological feasibility in order to determine whether they meet capitalization
requirements. General and administrative expenses are comprised of personnel
costs and occupancy costs for administrative, executive and finance personnel.
For the quarters ended June 30, 2002 and 2001, we derived approximately
10.3% and 22.4%, respectively, of our total revenues from license revenues and
approximately 89.7% and 77.6%, respectively, of our total revenues from service
revenues. During the second quarter of 2002, revenues generated from CSPs were
approximately $1.1 million and revenues generated from network equipment vendors
for LNP solutions, application development tools and related services were
approximately $146,000. During the second quarter of 2001, revenues generated
from CSPs were $2.0 million and revenues generated from network equipment
vendors were approximately $600,000.
We had two customers accounting for 12% revenues each, for the quarter
ended June 30, 2002 and two customers that accounted for 14% and 10% of
revenues, respectively, for the quarter ended June 30, 2001. Revenues from
international sales are currently insignificant.
The merger with ISPsoft was completed on January 31, 2002. ISPsoft has
developed what we believe to be a technically advanced version of IP
provisioning software. The global market for next generation IP based
service activation and configuration management solutions is expected to grow
from approximately $800 million in 2001 to almost $1.4 billion in 2005,
according to data compiled by the Yankee Group. At closing, ISPsoft security
holders received an aggregate of 2,281,143 shares of DSET common stock,
$1,000,000 in cash, issuance of an aggregate of $800,000 of DSET promissory
notes payable and payment of $544,519 in cash in exchange for certain debts
payable by ISPsoft to certain ISPsoft security holders and/or affiliates and
were entitled to receive up to $500,000 in cash and/or unregistered shares of
DSET common stock in potential milestone payments (if revenues from ISPsoft
products were $4.0 million by June 30, 2002) in exchange for their ISPsoft
securities in the merger. The milestone payments were not required. In addition,
we loaned ISPsoft $4.4 million through the consummation of the transaction. We
also assumed the ISPsoft 2000 Stock Plan and granted the holders of 2,781,010
issued and
21
outstanding options to purchase shares of ISPsoft common stock the right to
purchase up to 241,483 shares of DSET common stock.
In June 2002, the Company recorded a charge for the impairment of goodwill
of $11.4 million relating to DSET's merger with ISPsoft Inc. in January 2002.
The amount of impairment reflects both the further decline in the Company's
stock price and resulting market valuation in recent months and a reassessment
of the market outlook for capital equipment and software purchases in the
telecommunications industry. Under SFAS 142, a goodwill impairment is deemed to
exist if the net book value of a reporting unit exceeds its estimated fair
value. The fair value was determined based on the recent market value of the
Company's shares. This charge is non-operational in nature and does not affect
cash flows.
Forward-Looking Statements
Statements contained in this Form 10-Q that are not based on historical
fact are "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "estimate," "anticipate," "continue," or similar terms,
variations of such terms or the negative of those terms. Such forward-looking
statements involve risks and uncertainties, including, but not limited to: (i)
our ability to continue as a going concern; (ii) risks associated with the
integration of ISPsoft with us following our recent acquisition of ISPsoft and
the potential acquisition of other businesses by us, including risks relating to
unanticipated liabilities or expenses, lower than expected revenues and the
commercialization of acquired technology or products; (iii) the need for
substantial financing to continue operations; (iv) the risk that our common
stock may be delisted from the Nasdaq SmallCap Market; (v) our dependence on the
market for advanced telecommunications products and services; (vi) rapid
technological change in our industry; (vii) our lack of an operating history in
providing Internet Protocol (IP) based provisioning and management applications
and services; (viii) the failure to protect proprietary rights or enforce
licensing rights; and (ix) the loss of third-party software we utilize in our
products. The success of the Company depends to a large degree upon increased
demand by telecom service providers for our products and services, and the
market for IP provisioning software. As a result of such risks and others
expressed from time to time in our filings with the Securities and Exchange
Commission, our actual results may differ materially from the results discussed
in or implied by the forward-looking statements contained herein.
Critical Accounting Estimates and Judgments
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets
22
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to bad debts, investments, recoverability of long-lived assets,
income taxes, restructuring charges, post-contract customer support agreements,
and contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
As more fully described in Note 3 to our consolidated financial statements, we
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
o We recognize both product and service revenue.
o We do not recognize revenue if, in our judgment, the revenue does
not meet the requirements of AICPA Statement of Position ("SOP")
97-2, `Software Revenue Recognition' (i.e., persuasive evidence that
an arrangement exists, delivery has occurred, the customer's fee is
fixed and determinable and collectibility is probable).
o On long-term, fixed price contracts, we recognize revenue using the
percentage-of-completion method in accordance with SOP 81-1,
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts." As work progresses, we rely on estimates
of total expected contract revenue and costs. We follow this method
since reasonably dependable estimates of the revenue and costs
applicable to various stages of a contract can be made. Recognized
revenues and profit are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are credited
to income in the period in which the facts that give rise to the
revision become known.
o We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments.
If the financial condition of our customers deteriorates, resulting in
an impairment of their ability to make payments, additional allowances
may be required.
o We make a determination as to the carrying value of intangibles,
long-lived assets such as acquired technology and related goodwill that
may not be recoverable based upon the existence of indicators of
impairment and measure any impairment in accordance with the provisions
of SFAS 142 and SFAS 144, based on applying the appropriate fair value
methodology.
o Contraction of the telecommunications industry commencing in the latter
half of 2000 and continuing through the second quarter of 2002 has led
us to re-examine all facets of
23
our business. In the face of declining revenues and certain customers'
unwillingness or inability to honor their commitments, it became
necessary for us to take steps to reorganize to a level commensurate
with the expected reduced revenue levels. These steps included
recognizing asset impairments on many of our long-lived intangible and
tangible assets, closing facilities, reducing and consolidating the
workforce, seeking sublet tenants for portions of facilities covered by
long term operating leases, and recognizing charges against earnings in
the current period for future fixed asset and facility lease payments
that will not benefit future periods. Considerable management judgment
is necessary to estimate the charges for asset impairments and
restructuring. Restructuring charges derived from our plans of closing
facilities and discontinuing certain product lines are recognized
pursuant to Emerging Issues Task Force ("EITF") No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring)"
and Staff Accounting Bulletin ("SAB") 100, "Restructuring and Impairment
Charges".
o We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance,
in the event we were to determine that we would be able to realize our
deferred tax assets in the future in excess of our net recorded amount
(zero at June 30, 2002 and December 31, 2001), an adjustment to the
deferred tax asset would increase income in the period such
determination was made.
o The financial statements have been prepared on the basis that we will
continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities and commitments in the normal
course of business. The consolidated financial statements do not include
any adjustments relating to the recoverability of the carrying amount of
the recorded assets and liabilities that might result from the outcome
of this uncertainty.
Results of Operations
Three Months Ended June 30, 2002 Compared to the Three Months Ended
June 30, 2001
Revenues. Total revenues decreased by 54.1% to $1.2 million in the
second quarter of 2002 from $2.6 million in the second quarter of 2001.
License revenues decreased by 78.9% to $123,500 in the second quarter of
2002 from $586,000 in the second quarter of 2001. This decrease was
attributable to the downturn in the telecom industry, especially in our
market niche, resulting in a reduction in orders by prospective customers
due to poor operating results of the CSPs, and the absence of available
funding from capital markets to these prospective customers. Service
revenues decreased 46.9% to $1.1 million in the second quarter of 2002 from
$2.0 million in the second quarter of 2001. This decrease reflects a
$500,000 decrease in gateway solutions service revenue, a $400,000 decrease
in revenue for network solutions and a $92,000 decrease in LNP solutions
revenue.
24
Gross profit. The Company's gross profit decreased 64.5% to $187,400
in the second quarter of 2002 from $527,200 in the second quarter of 2001.
Gross profit (loss) percentage for license revenues decreased to (7.9%) in
the second quarter of 2002 from 10.6% in the second quarter of 2001. Gross
profit percentage for service revenues decreased to 18.3% in the second
quarter of 2002 from 22.9% in the second quarter of 2001. The decrease is
primarily due to the amortization of acquired technology in the amount of
$200,000 for the current quarter.
Sales and marketing expenses. Sales and marketing expenses decreased
76.6% to $495,000 in the second quarter of 2002 from $2.1 million in the
second quarter of 2001. The decrease in sales and marketing expenses
reflects a $1.0 million decrease in personnel related expenses, a $300,000
decrease in occupancy costs and depreciation, a $200,000 decrease in
travel, and a $100,000 decrease in commissions (due to reduced sales). The
decrease was mainly due to a drop in average headcount in applicable
departments to eleven in the second quarter of 2002 as compared to 37 for
the second quarter of 2001.
Research and product development expenses. Research and product
development expenses decreased 63.5% to $1.1 million in the second quarter
of 2002 from $3.0 million in the second quarter of 2001. Personnel related
expenses decreased by $1.3 million, depreciation and occupancy and related
costs decreased by $400,000, travel and telephone expense decreased by
$100,000, and other expenses decreased by a net amount of $100,000. The
decrease was mainly due to a drop in average headcount in this department
to 27 in the second quarter of 2002 as compared to 69 for the second
quarter of 2001.
General and administrative expenses. General and administrative
expenses decreased 35.6% to $900,000 in the second quarter of 2002 from
$1.4 million in the second quarter of 2001. The decrease in general and
administrative expenses was mainly due to a decrease of $200,000 in
occupancy and depreciation costs, a $100,000 decrease in personnel and
related expenses, a $100,000 decrease in recruiting expenses and a $100,000
decrease in miscellaneous other expenses.
Bad debt expense. Bad debt expense was a credit of $307,000 in the
second quarter of 2002, due to the collection of previously reserved
accounts. Bad debt expense was $545,000 in the second quarter of 2001. The
Company's bad debt expense recorded in the second quarter of 2001
corresponded to $307,000 of revenue recognized in 1999, $218,000 of revenue
recognized in 2000, and $20,000 of revenue recognized in the first quarter
of 2001.
Amortization of goodwill and other intangibles. Amortization expense
was zero in the second quarter of 2002 compared to $103,000 in the second
quarter of 2001. The reduction is due to the effect of SFAS 142, which was
adopted on January 1, 2002 whereby goodwill amortization ceased.
Restructuring and other charges. Restructuring and other charges in the
second quarter of 2002 were $1.8 million which included a severance charge
of $948,900 for the reorganization of all departments within the Company,
$628,400 for the impairment of fixed assets
25
including leasehold improvements associated with the closed Bridgewater
facility, a $177,100 increase to the officer's loan reserve based on the
severance agreement of the former CEO, and $32,000 for legal, moving, and
rent charges associated with the closure of the Bridgewater, New Jersey
office. In the second quarter of 2001, a $6.4 million charge was taken
which included an asset impairment of $4.1 million for the carrying value
of certain licenses related to acquired technology, approximately $1.0
million in charges related to severances in June 2001 and $1.3 million in
charges related to fixed asset impairments and non-refundable future lease
payments.
Impairment of goodwill. In the second quarter of 2002, a charge was taken
for the impairment of goodwill of $11.4 million relating to DSET's merger
with ISPsoft Inc. in January 2002. The amount of impairment reflects both
the further decline in the Company's stock price and resulting market
valuation in recent months and a reassessment of the market outlook for
capital equipment and software purchases in the telecommunications
industry. Under SFAS 142, a goodwill impairment is deemed to exist if the
net book value of a reporting unit exceeds its estimated fair value. The
fair value was determined based on the recent market value of the Company's
shares. In the second quarter of 2001, a $420,000 charge was taken for the
impairment of goodwill related to DSET's electronic-bonding gateway
business.
Interest expense and other income (expense). Interest expense and other
income and expense decreased to an expense of $13,000 for the second
quarter of 2002 from an expense of $31,000 for the second quarter of 2001.
The difference was due to the accrual of interest expense on a note
payable, which was paid in full in March 2002.
Interest income and realized gains and losses on marketable securities.
Interest income decreased to $20,000 in the second quarter of 2002 as
compared to approximately $404,000 in the second quarter of 2001. This
decrease was due to lower principal balances in 2002 due to the funding of
operations and reduced interest rates due to the current economic climate
as well as lower realized gains from redemptions of marketable securities
and interest received on federal income tax refunds.
Income taxes. A tax benefit of $449,000 was recognized for the second
quarter of 2002 as compared to a tax provision (expense) of $98,000 in the
second quarter of 2001. The tax benefit in the second quarter of 2002
relates to the Job Creation and Worker Assistance Act ("JCWAA") signed into
law in March 2002, which allows an extension to the general net operating
loss carry-back period to five years (from two years). The benefit in the
second quarter of 2002 related to the research and development tax credit
and the foreign tax credit released as a result of the carry-back related
to the JCWAA. The benefit was recorded in the second quarter as a result of
further clarification of the legislation. The 2002 and 2001 rates differ
substantially from the statutory rate due to our losses and the effects of
the JCWAA.
26
Six Months Ended June 30, 2002 Compared to the Six Months Ended June
30, 2001
Revenues. Total revenues decreased by 55.2% to $2.7 million in the six
months ended June 30, 2002 from $6.0 million in the six months ended June
30, 2001. License revenues decreased by 82.1% to $377,000 in the six months
ended June 30, 2002 from $2.1 million in the six months ended June 30,
2001. This decrease reflects a downturn in the telecom industry, especially
in our market niche, resulting in a reduction in orders by prospective
customers due to poor operating results of the CSPs, and the absence of
available funding from capital markets to these prospective customers.
Service revenues decreased 40.7% to $2.3 million in the six months ended
June 30, 2002 from $3.9 million in the six months ended June 30, 2001. This
decrease was attributable to a $900,000 decrease in revenue for network
solutions, a $600,000 decrease in gateway solutions service revenue and a
$92,000 decrease in LNP solutions revenue.
Gross profit. The Company's gross profit decreased 68.8% to $451,900
in the six months ended June 30, 2002 from $1,450,000 in the six months
ended June 30, 2001. Gross profit percentage for license revenues decreased
to 10.9% in the six months ended June 30, 2002 from 51.3% in the six months
ended June 30, 2001. The decrease was due to one large contract signed in
the six months ended June 30, 2001, for which there was a significant gross
profit. Gross profit percentage for service revenues decreased to 17.7% in
the six months ended June 30, 2002 from 9.4% in the six months ended June
30, 2001. The difference is mainly due to the amortization of acquired
technology of $333,333 during the six months ending June 30, 2002.
Sales and marketing expenses. Sales and marketing expenses decreased
73.5% to $1.2 million in the six months ended June 30, 2002 from $4.6
million in the six months ended June 30, 2001. The decrease in sales and
marketing expenses reflects a $2.2 million decrease in personnel related
expenses, a $600,000 decrease in occupancy costs and depreciation, a
$400,000 decrease in travel expenses and a $200,000 decrease in
commissions. The decrease was mainly due to a drop in average headcount for
these departments.
Research and product development expenses. Research and product
development expenses decreased 69.9% to $2.1 million in the six months
ended June 30, 2002 from $6.9 million in the six months ended June 30,
2001. Personnel related expenses decreased by $3.4 million, depreciation
and occupancy and related costs decreased by $800,000, contract labor
decreased by $300,000, travel and telephone expense decreased by $200,000,
and hardware and software maintenance decreased by $100,000. The decrease
was mainly due to a 70% decrease in average headcount for this department;
27 employees as compared to 90 employees.
General and administrative expenses. General and administrative
expenses decreased 34.8% to $2.1 million in the six months ended June 30,
2002 from $3.3 million in the six months ended June 30, 2001. The decrease
in general and administrative expenses reflects a decrease of $300,000 in
occupancy and depreciation costs, a $200,000 decrease in personnel related
expenses, a $200,000 decrease in recruiting expense, a $200,000 decrease in
27
relocation expenses, a $100,000 decrease in contract labor costs, a
$100,000 decrease in legal and accounting expenses, and a $100,000 decrease
in miscellaneous other expenses.
Bad debt expense. Bad debt expense was a credit of $307,000 in the six
months ended June 30, 2002 due to the collection of previously reserved
accounts. Bad debt expense was $985,000 in the six months ended June 30,
2001. The Company's bad debt expense recorded for the six months ended June
30, 2001 corresponded to $609,000 of revenue recognized in 1999, $356,000
of revenue recognized in 2000, and $20,000 of revenue recognized in the
first quarter of 2001.
Amortization of goodwill and other intangibles. Amortization expense
was zero in the six months ended June 30, 2002 compared to $200,000 in the
six months ended June 30, 2001. The reduction is due to the effect of SFAS
142, which was adopted on January 1, 2002 whereby goodwill amortization
ceased.
Restructuring and other charges. Restructuring and other charges
in the six months ended June 30, 2002 were $2,250,000 which included a
severance charge of $1,234,000 for the reorganization in the sales and
marketing departments, $775,000 for the impairment of fixed assets, a
$177,000 addition to the officer's loan reserve, and $64,000 for legal,
moving, and rent charges associated with the closing of the offices in San
Ramon, California and Bridgewater, New Jersey. In the six months ended June
30, 2001, a $9.8 million dollar charge was taken, which included asset
impairments of $6.3 million for the carrying value of certain licenses
related to acquired technology, $1.3 million in severance charges related
to the March and June staffing reductions and $2.2 million for fixed asset
impairment and non-refundable future lease payments.
Impairment of goodwill. Charges for the impairment of goodwill in the
six months ended June 30, 2002 of $11.4 million were related to DSET's
merger with ISPsoft Inc. in January 2002. The amount of impairment reflects
both the further decline in the Company's stock price and resulting market
valuation in recent months and a reassessment of the market outlook for
capital equipment and software purchases in the telecommunications
industry. Under SFAS 142, a goodwill impairment is deemed to exist if the
net book value of a reporting unit exceeds its estimated fair value. The
fair value was determined based on the recent market value of the Company's
shares.
In the six month period ended June 30, 2001 charges for the impairment
of goodwill were $420,000 related to DSET's electronic-bonding gateway
business.
Interest expense and other income (expense). Interest expense and other
income and expense decreased to $77,000 for the six months ended June 30,
2002 from an expense of $78,000 for the six months ended June 30, 2001.
Interest income and realized gains and losses on marketable securities.
Interest income decreased to $66,000 in the six months ended June 30, 2002
as compared to approximately $894,000 in the six months ended June 30,
2001. This decrease was due to lower principal balances in 2002 due to the
funding of operations and reduced interest rates due to the current
28
economic climate as well as lower realized gains from redemptions of
marketable securities and interest received on federal income tax refunds.
Income taxes. We recognized a tax benefit of $1.8 million for the six
months ended June 30, 2002 as compared to a tax provision of $127,000 in
the six months ended June 30, 2001. The tax benefit in 2002 relates to the
Job Creation and Worker Assistance Act ("JCWAA") signed into law in March
2002, which allows an extension to the general net operating loss
carry-back period to five years (from two years). The 2002 and 2001 rates
differ substantially from the statutory rate due to our losses.
Liquidity and Capital Resources
Our condensed consolidated financial statements have been prepared on
the basis that we will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities and commitments in
the normal course of business. At June 30, 2002, our cash and cash
equivalents aggregated approximately $3.9 million. At December 31, 2001 our
cash and cash equivalents totaled $13.0 million. Our working capital
(deficit) was ($200,000) and $8.5 million at June 30, 2002 and December 31,
2001, respectively.
At June 30, 2002, our principal sources of liquidity were our cash and
cash equivalents that totaled $3.9 million. In addition, we expect to
receive $449,000 in cash for the expected U.S. Federal Income Tax refund
due to the amended tax return to claim the research and development tax
credit and foreign tax credit which is released as a result of an NOL
carry-back from 2001 to 1996 which released the 1996 research and
development tax credit and the foreign tax credit due to the new tax
carry-back provisions of the JCWAA. This refund should be received in the
fourth quarter of 2002.
Our operating activities used cash of $4.9 million and $11.5 million
for the six months ended June 30, 2002 and 2001, respectively. Cash used by
operations in the six months ended June 30, 2002 was primarily attributable
to a net loss adjusted for the non-cash charges for impairment of goodwill,
amortization, depreciation and restructuring, as well as an increase in
income taxes receivable, offset by decreases in deferred revenues, deferred
rent, accounts payable and accrued expenses.
Cash provided by (used in) investing activities in the six months ended
June 30, 2002, and 2001 was ($3.7) million and $10.6 million, respectively.
Cash used in investing activities in the six months ended June 30, 2002 was
primarily attributable to the merger with ISPsoft Inc. We expect minimal
capital equipment and leasehold improvement expenditures to be made in
2002.
We used approximately $483,000 and $556,000 in cash in financing
activities in the six months ended June 30, 2002, and 2001, respectively,
relating mainly to the repayment of loans.
In addition, in 2002 DSET has received three non-compliance
notifications from the Nasdaq Stock Market, Inc. ("Nasdaq").
29
On February 14, 2002, we received notice from the Nasdaq Stock Market,
Inc. ("Nasdaq") that for the preceding 30 consecutive trading days, our
common stock had not maintained the minimum Market Value of Publicly Held
Shares ("MVPHS") of $5,000,000 as required for continued inclusion by
Marketplace Rule 4450(a)(2) on the Nasdaq National Market. MVPHS equals the
closing bid price multiplied by that portion of a company's outstanding
shares which is in the hands of public investors (i.e., - shares not held
by company officers, directors, or investors who hold a controlling
interest in the company.) Therefore, in accordance with Marketplace Rule
4450(e)(1), we had 90 calendar days, or until May 15, 2002, to regain
compliance. Effective May 29, 2002, the Company transferred the trading of
its common stock to the Nasdaq SmallCap Market and no further action was
taken by Nasdaq.
On March 5, 2002, we received notice from Nasdaq that for the previous 30
consecutive trading days, the price of our common stock had closed below
the minimum $1.00 per share requirement for continued inclusion under
Marketplace Rule 4450(a)(5). Therefore, in accordance with Marketplace Rule
4450(e)(2), we had 90 calendar days, or until June 3, 2002, to regain
compliance. If compliance with this Rule could not be demonstrated by
June 3, 2002, our securities would have been delisted from the Nasdaq
National Market. Effective May 29, 2002 the Company transferred the trading
of its common stock to the Nasdaq SmallCap Market.
On July 17, 2002, the Company received notice from Nasdaq that for the
previous 30 consecutive trading days, the price of the Company's common
stock has not maintained a minimum market value of publicly held shares of
$1,000,000 as required for continued inclusion by Marketplace Rule
4310(c)(7). Therefore, in accordance with Marketplace Rule 4310(c)(8)(B),
the Company has 90 calendar days, or until October 15, 2002, to regain
compliance. If compliance with the $1,000,000 Rule cannot be demonstrated
by October 15, 2002, the Company will receive a written notification from
the Nasdaq that the Company's securities will be delisted.
Our failure to meet the Nasdaq's maintenance criteria in the future may
result in the delisting of our common stock from the Nasdaq SmallCap
Market. In such event, trading, if any, of DSET's common stock may then
continue to be conducted in the over-the-counter market, on the
over-the-counter bulletin board or other electronic quotation services. As
a result, an investor may find it more difficult to dispose of or obtain
accurate quotations as to the market value of DSET's common stock. In
addition, in the event DSET's common stock is delisted, broker-dealers
would have certain regulatory burdens imposed upon them, which may
discourage them from effecting transactions in DSET's common stock, further
limiting the liquidity thereof. This may have the effect of limiting our
ability to raise additional financing.
Our ability to continue as a going concern is dependent upon our ability
to generate sufficient cash flows to meet our obligations as they come
due. We believe that the cost reductions from our restructurings in 2001
and the first half of 2002 (including work force
30
reductions) and the merger with ISPsoft will enhance our cash flows from
operations. We are seeking additional financing to fund our operating and
capital requirements through 2002. If cashflows are insufficient or we are
unable to raise funds on acceptable terms, there would be a material
adverse effect on our financial position and operations and our ability to
continue as a going concern. This would force us to further reduce our
capital expenditures, reduce our work force, sell certain assets, or
possibly explore other alternatives including seeking bankruptcy
protection. The consolidated financial statements do not include any
adjustments relating to the recoverability of the carrying amount of the
recorded assets or the amount of liabilities that might result from the
outcome of these uncertainties. We cannot be certain that additional debt
or equity financing will be available when required or, if available, that
we can secure it on terms satisfactory to us.
Accounts receivable, net, decreased to $774,000 at June 30, 2002 from
$824,000 at December 31, 2001, primarily as a result of decreased sales
and the collection of outstanding receivables. Included in accounts
receivable at June 30, 2002 was $7.4 million for trade receivables and
$800,000 for unbilled project revenue as compared to $7.4 million for
trade receivables and $1.1 million for unbilled project revenue at
December 31, 2001. The allowance for doubtful accounts was $7.4 million
and $7.7 million at June 30, 2002 and December 31, 2001, respectively.
Unbilled project revenue is the excess amount of revenue recognized
through percentage of completion that has not been billed to the customer.
Payment terms to customers are generally net zero to net ninety days.
Contractual obligations including interest on these obligations are as
follows:
Payments Due by Period
July 1,2002 July 1,2003 July 1,2005
through through through After
Contractual Obligations Total June 30, 2003 June 30, 2005 June 30, 2007 June 30, 2007
Notes payable $ 914,067 $ 914,067 $ 0 $ 0 $ 0
Capitalized lease obligations* 376,125 180,540 195,585 0 0
Operating leases (equipment)* 1,087,474 791,227 259,215 37,032 0
Rental lease obligations* 12,295,608 2,363,424 4,507,079 2,670,197 2,754,908
NJTC Venture Fund commitment 800,000 200,000 600,000 0 0
----------- ----------- ----------- ---------- ----------
Total contractual cash obligations $15,473,274 $ 4,449,258 $ 5,561,879 $2,707,229 $2,754,908
Sublessor agreements* (2,461,756) (1,118,758) (1,342,998) - -
----------- ----------- ----------- ---------- ----------
Net $13,011,518 $ 3,330,500 $ 4,218,881 $2,707,229 $2,754,908
=========== =========== =========== ========== ==========
31
* A total of $1.5 million is included in accrued restructuring expenses in
the condensed consolidated financial statements for the period as of June
30, 2002.
We may seek additional funding through collaborative arrangements,
borrowing money and by the sale of additional equity securities. Any sales
of additional equity securities are likely to result in further dilution to
our then existing shareholders. Further, if we issue additional equity
securities, the new equity securities may have rights, preferences or
privileges senior to those of existing holders of DSET's common stock.
Alternatively, we may borrow money from conventional lenders, possibly at
high interest rates, which may affect the value of our shareholders'
holdings. Despite our efforts, funding may not be available at all or only
on terms that are unacceptable. We also could be required to seek funds
through arrangements with collaborative partners or others that may require
us to relinquish rights to certain of our technologies, product candidates
or products which we would otherwise pursue on our own.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We believe that we are not subject to a material impact to our
financial position or results of operations relating to market risk
associated with foreign currency rates or derivative securities.
32
PART II. OTHER INFORMATION
Item 5. Other Information.
Annual Meeting of Shareholders
We held our last annual meeting of shareholders on June 13, 2001. Our
Board of Directors has not yet selected a definitive date for the annual meeting
of shareholders for 2002. We will provide appropriate notice to shareholders in
connection with such meeting.
Relocation of Principal Executive Offices
Effective July 1, 2002 the Company moved its Principal Executive
Offices from 1160 US Highway 22 Bridgewater, New Jersey, 08807 to
661 Shrewsbury Avenue, Shrewsbury, New Jersey 07702.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.1. Amended and restated by-laws of DSET Corporation.
Exhibit 99.1. Certification pursuant to 18 U.S.C. 'SS' 1350
(b) There were no current reports on Form 8-K filed.
33
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.
DSET CORPORATION
DATE: August 14, 2002 By: /s/ Dr. Binay Sugla
--------------------------------------
Dr. Binay Sugla,
Chief Executive Officer
DATE: August 14, 2002 By: /s/ Bruce M. Crowell
--------------------------------------
Bruce M. Crowell
Vice President and Chief Financial
Officer
34
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as............................... 'TM'
The section symbol shall be expressed as................................. 'SS'