-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ty+KsY5kKKZ+Sk3UZActD3qrZwj9GN5J7UwkMkTqiYwMJlcU2Hftgokbq/dC0Eu3 QN3PYMtcTm0vvQkduhBUfA== 0000927356-00-000930.txt : 20000505 0000927356-00-000930.hdr.sgml : 20000505 ACCESSION NUMBER: 0000927356-00-000930 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVOLVING SYSTEMS INC CENTRAL INDEX KEY: 0001052054 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 841010843 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24081 FILM NUMBER: 619170 BUSINESS ADDRESS: STREET 1: 9777 MT PYRAMID COURT CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3038021000 MAIL ADDRESS: STREET 1: 9777 MT PYRAMID COURT CITY: ENGLEWOOD STATE: CO ZIP: 80112 10-Q 1 FORM 10-Q FOR PERIOD ENDING 3/31/2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ____________ FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 March 31, 2000, there were outstanding 12,566,647 shares of Registrant's Common Stock (par value $0.001 per share). EVOLVING SYSTEMS, INC. PART 1 FINANCIAL INFORMATION PAGE Item 1. Financial Statements Balance Sheets March 31,2000 and December 31, 1999 (unaudited)................ 3 Statements of Operations for the three-month period ended March 31, 2000 and 1999 (unaudited)...................................... 4 Condensed Statements of Cash Flow for the three month period ended March 31, 2000 and 1999 (unaudited)............................................... 5 Notes to Financial Statements.................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 6 PART II OTHER INFORMATION................................................ 10 Item 1. Legal Proceedings................................................ 10 Item 2. Changes in Securities............................................ 10 Item 3. Defaults on Senior Securities.................................... 10 Item 4. Submission of Matters to a Vote of Security Holders.............. 10 Item 5. Other Information................................................ 11 Item 6. Exhibits and Reports on Form 8-K................................. 11 SIGNATURES............................................................... 11 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EVOLVING SYSTEMS, INC. BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (unaudited)
March 31, December 31, 2000 1999 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 5,798 $ 4,266 Short-term investments - unrestricted 7,210 12,087 Short-term investments - restricted 5,967 5,920 Contract receivables, net 7,798 9,624 Unbilled work-in-progress 10,421 8,349 Prepaid and other current assets 1,753 1,575 ------------- ------------- Total current assets 38,947 41,821 Property and equipment, net 6,412 6,260 Deferred tax assets 1,547 1,547 ------------- ------------- Total assets $ 46,906 $ 49,628 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 614 $ 640 Accounts payable and accrued liabilities 2,072 2,999 Unearned revenue and customer deposits 7,108 9,278 ------------- ------------- Total current liabilities 9,794 12,917 Long-term obligations 27 170 Stockholders' equity: Preferred stock, $.001 par value, 2,000,000 shares authorized; no ----- ----- shares issued or outstanding Common stock, $.001 par value; 25,000,000 shares authorized; 12,566,647 13 12 and 12,446,965 shares issued and outstanding as March 31, 2000 and December 31, 1999(unaudited), respectively Additional paid-in capital 51,989 51,774 Deferred compensation (74) (89) Accumulated deficit (14,843) (15,156) ------------- ------------- Total stockholders' equity 37,085 36,541 Total liabilities and stockholder's equity $ 46,906 $ 49,628 ============= =============
The accompanying notes are an integral part of the financial statements. EVOLVING SYSTEMS, INC STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) (unaudited)
Three Months Ended March 31, ------------------------------------ 2000 1999 ----------- ------------ Revenue: License fees and related services $ 3,280 $ 699 Other services 8,409 8,160 ----------- ------------ Total revenue 11,689 8,859 ----------- ------------ Cost of revenue: License fees and related services 1,844 2,012 Other services 5,324 4,776 ----------- ------------ Total cost of revenue 7,168 6,788 ----------- ------------ Gross margin 4,521 2,071 Operating expenses: Sales and marketing 2,045 672 General and administrative 2,405 2,423 Research and development ---- 394 Total operating expense 4,450 3,489 ----------- ------------ Income (loss) from operations 71 (1,418) Litigation settlement and expenses ---- 3,251 Other income (242) (178) ----------- ------------ Income (loss) before income taxes 313 (4,491) Provision for (benefit from) income taxes ---- ---- ----------- ------------ Net income (loss) $ 313 $(4,491) =========== ============ Basic earnings per common share: Net income (loss) per common share $0.03 $(0.37) =========== ============ Diluted earnings per common share: Net income (loss) per common share $0.02 $(0.37) =========== ============ Basic shares outstanding 12,490 12,068 Diluted shares outstanding 14,341 12,068
The accompanying notes are an integral part of the financial statements. EVOLVING SYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (unaudited)
Three Months Ended March 31, ------------------------------------ 2000 1999 ----------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 313 $ (4,491) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of deferred compensation (36) 75 Depreciation and amortization 912 966 Change in operating assets and liabilities: Contract receivables 1,826 618 Unbilled work-in-progress (2,072) (534) Prepaid and other current assets (178) 1,055 Accounts payable and accrued liabilities (927) 2,598 Unearned revenue and customer deposits (2,170) (263) ----------- ------------- Net cash provided by (used in) operating activities (2,332) 24 ----------- ------------- INVESTING ACTIVITIES: Purchase of property and equipment, net (1,064) (586) Sales (prchases) of short term investments 4,830 (3,465) ----------- ------------- Net cash provided by (used in) investing activities 3,766 (4,051) ----------- ------------- FINANCING ACTIVITIES: Repayments of long-term obligations (169) (419) Proceeds from the exercise of stock options 267 161 Net cash provided by (used in) financing activities 98 (258) ----------- ------------- Net increase (decrease) in cash and cash equivalents 1,532 (4,285) Cash and cash equivalents at beginning of period 4,266 11,707 ----------- ------------- Cash and cash equivalents at end of period $ 5,798 $ 7,422 =========== =============
The accompanying notes are an integral part of the financial statements. 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 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 March 31, 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 included in the Company's Form 10-K for the year ended December 31, 1999. 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. 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 March 31, 2000 1999 ------- ------- Basic earnings per share: Net income (loss) $ 313 $(4,491) Weighted average common shares outstanding 12,490 12,068 Basic net income (loss) per common share $ .03 $ (.37) ======= ======= Effect of dilutive securities: Options and warrants 1,851 - Diluted weighted average common shares outstanding 14,341 12,068 Diluted net income (loss) per common share $ .02 $ (.37) ======= ======= (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 complaints alleged that the Company and certain of its officers misled the investing public regarding the financial prospects of the Company. 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. The Company is currently involved in a dispute with a former officer concerning amounts allegedly owed to the former officer in connection with his employment. The Company believes the former officer's claims are without merit and the parties are currently seeking to resolve the dispute through mediation. Although it is too early to evaluate the outcome of this dispute, in the event the parties are unable to reach a mutually agreeable resolution and the employee subsequently succeeds in his claim, the outcome could have a 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 or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- GENERAL - ------- Evolving Systems provides the telecommunications industry with software products and systems integration for a full range of business and operational support systems solutions. For contracts entered into subsequent to January 1, 1998, the Company recognizes revenue in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition". 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 involving the Company's LNP software products and related services. 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 and collectibility is probable. 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 March 31, ---------------------------- Revenue: 2000 1999 ------------- ------------- License fees and related services 28.1% 7.9% Other services 71.9 92.1 ------------- ------------- Total revenue 100.0 100.0 Cost of revenue: License fees and related services 15.8 22.7 Other services 45.5 53.9 ------------- ------------- Total cost of revenue 61.3 76.6 Gross margin 38.7 23.4 Operating expenses: Sales and marketing 17.5 7.6 General and administrative 20.6 27.4 Research and development 0.0 4.4 ------------- ------------- Total operating expenses 38.1 39.4 Income (loss) from operations .6 (16.0) Litigation settlement and expenses 36.7 Other income, net (2.1) (2.0) ------------- ------------- Income (loss) before income taxes 2.7 (50.7) Net income (loss) 2.7% (50.7)% ============= =============
The three months ended March 31, 2000 compared to the three months ended March 31, 1999 Revenue. Total revenue increased approximately $2.8 million or 32% to $11.7 million in the three months-ended March 31, 2000 from $8.9 million in the three months ended March 31, 1999. License fees and related services revenue increased by $2.6 million or 369% to $3.3 million in the three months ended March 31, 2000 from $699,000 in the three months ended March 31, 1999, reflecting the increased demand for LNP in the three months ended March 31, 2000 due to increased demand from ILEC customers. The Company had one customer that purchased software where the services were not essential to the functionality of the software. For this customer, the software revenue was booked upon shipment. Other services revenue increased by $249,000 or 3% to $8.4 million in the three months ended March 31, 2000 from $8.2 million in the three months ended March 31, 1999, reflecting growth in consulting and custom programming projects with long-standing customers in 2000. As a percentage of total revenue, license fees and related services revenue increased to 28% for the three months ended March 31, 2000 from 8% for the three months ended March 31, 1999. Cost of revenue. Total cost of revenue increased by $380,000 or 6% to $7.2 million in the three months ended March 31, 2000 from $6.8 million in the three months ended March 31, 1999. As a percentage of total revenue, costs decreased to 61.3% of revenue for the three months ended March 31, 2000 from 76.6% of revenue in the three months ended March 31, 1999. This is due to the mix in revenues moving to a higher percentage of license fees and related services in the three months ended March 31, 2000 that have a lower associated cost of revenues. Cost of license fees and related services decreased by $168,000 or 8% to $1.8 million for the three months ended March 31, 2000 from $2.0 million for the three months ended March 31, 1999. As a percentage of total revenue, cost of license fees and related services decreased to 15.8% for the three months ended March 31, 2000 from 22.7% in the three months ended March 31, 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 $548,000 or 12% to $5.3 million for the three months ended March 31, 2000 from $4.8 million for the three months ended March 31, 1999. The increase in other services revenue for the three months ended March 31, 2000 was due to costs related to the increase in other services revenues and expense controls initiated in late 1998, which favorably impacted cost of other services for the three months ended March 31, 1999. The increase in other services gross margin is primarily attributable to the increasing cost of labor. The Company experienced an increase to total gross margin in the three months ended March 31, 2000 of 39% from 23% for the three months ended March 31, 1999. The change can be attributed to the increase in product related revenues with higher gross margins as previously discussed. The Company's expense levels are based significantly 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 204% to $2 million in the three months ended March 31, 2000 from $672,000 in the three months ended March 31, 1999. As a percentage of revenue, sales and marketing increased to 17.5% of revenue in the three months ended March 31, 2000 from 7.6% in the three months ended March 31, 1999. This percentage increase reflects management's decision to increase the sales staff in 2000 to generate further demand for the Company's products and services. The sales and marketing headcount for the three months ended March 31, 2000 was 33 compared to 11 for the three months ended March 31, 1999. General and administrative. General and administrative expenses decreased by $18,000 or 1% to $2.4 million in the three months ended March 31, 2000 from $2.4 million in the three months ended March 31, 1999. As a percentage of revenue, general and administrative expenses decreased to 20.6% in the three months ended March 31, 2000 from 27.4% in the three months ended March 31, 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. In the first Quarter of 2000, all Research and development expenses were charged to cost of revenue. This results from the Company entering into licenses with customers prior to the completion of the internal development. Other income. Other income increased income by $64,000, or 36%, to $242,000 in the three months ended March 31, 2000 from $178,000 in the three months ended March 31, 1999. Interest expense declined $19,000 or 37% in the three months ended March 31, 2000 from $51,000 to $32,000 for the three months ended March 31, 1999. This expense results principally from interest expense on the Company's outstanding long term leases, which the Company has been steadily paying down. The increase in other income for the three months ended March 31, 2000 is due to interest income 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 who purchased the Company's securities during the period of May 12, 1998 through July 23, 1998. The complaints alleged that the Company and certain of its officers misled the investing public regarding the financial prospects of the Company. 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. 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. The Company recorded no income tax benefit related to 1999 operating losses, as management deems it inappropriate to book such benefits 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. Liquidity and Capital Resources. The Company has historically financed its operations through a combination of cash flows from operations and borrowings. At March 31, 2000, the Company's principal sources of liquidity included $5.8 million in cash and cash equivalents, $7.2 million in unrestricted short term investments, and a $5.0 million secured bank line of credit, which expires in September 2000. As of March 31, 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 $2.3 million in the three months ended March 31, 2000 compared to $24,000 provided by operations in the three months ended March 31, 1999. The primary uses of cash by operations in the three months ended March 31, 2000 were a decrease in unearned revenue and customer deposits of $2.2 million, an increase of $2.1 million in unbilled work-in- progress, a decrease of $927,000 in accounts payable and accrued liabilities and an increase in prepaid and other assets of $178,000. Receivables provided cash of $1.8 million during this period reflecting increased collections on major accounts. The main contributors to the provision of cash by operations in the three months ended March 31, 1999 were a decrease in prepaid and other assets of $1 million, partially offset by a decrease in unearned revenue and customer deposits of $263,000 and an increase in accounts payable and accrued liabilities of $2.6 million, primarily caused by the $2.5 million accrual of the litigation settlement. Receivables provided cash of $618,000 during this period reflecting increased collections on major accounts. Net cash provided from investing activities during the three months ended March 31, 2000 and used in investing activities during the three months ended March 31, 1999 was $3.8 million and $4.0 million respectively. Cash was provided from the sale of short term investments and used to acquire equipment and facilities to support operations. The Company's financing activities provided for $98,000 in cash through a combination of stock option exercises resulting in $267,000 and $169,000 in repayments of capital lease obligations for the period ended March 31, 2000. This compares to $258,000 in cash used in financing activities in the three months ended March 31, 1999 primarily for the repayment of capital leases. 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 have 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 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 is broadening its strategy to include the development and sale of its 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 delivery 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 engage third parties to implement its software and 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 delivered to customers. Furthermore, software companies that account for revenue from license fees upon delivery 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. 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 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 (v) changes in management; and (vi) rapid technological change and intense competition in the Company's industry. Year 2000 Capability To date, the Company has not encountered any significant problems with either the software sold to customers or to internal systems run by the Company. The Company had developed a detailed contingency plan and worked closely with customers and vendors to avoid Y2K problems. In 1999, expenses related to this effort were approximately $1,000,000. The Company does not expect to encounter any Y2K issues going forward and any additional resources needed to address Y2K if any, are not expected to be material. 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 complaints alleged that the Company and certain of its officers misled the investing public regarding the financial prospects of the Company. 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. 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 23, 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. These matters will be voted on by the shareholders on April 27, 2000. 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 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: 05/04/2000 s/ David R. Johnson ------------------- David R. Johnson Senior Vice President of Finance, Chief Financial Officer, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM I/S, B/S, STRAT. CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 5,798 13,177 7,798 0 0 38,947 6,412 0 46,906 9,794 0 0 0 13 37,072 46,906 0 11,689 7,168 11,618 (242) 0 0 313 0 0 0 0 0 313 .03 .02
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