UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2004
Commission File Number: 0-24983
NetSolve, Incorporated
(Exact name of the registrant as specified in its charter)
| Delaware | 75-2094811-2 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
9500 Amberglen Boulevard
Austin, Texas 78729
(Address of principal executive offices, including zip code)
(512) 340-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). Yes ¨ No x
Number of shares outstanding of the issuer’s common stock, $.01 par value, as of August 6, 2004: 11,677,855
INDEX
| Page | ||||
| PART I. FINANCIAL INFORMATION |
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| Item 1. |
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| Condensed Consolidated Balance Sheets as of March 31, 2004 and June 30, 2004 (unaudited) |
3 | |||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||
| Item 3. |
23 | |||
| Item 4. |
23 | |||
| PART II. OTHER INFORMATION |
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| Item 1. |
23 | |||
| Item 4. |
24 | |||
| Item 5. |
24 | |||
| Item 6. |
25 | |||
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| 3/31/2004 |
6/30/2004 |
|||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 19,885 | $ | 9,972 | ||||
| Short-term investments |
20,085 | 30,870 | ||||||
| Restricted cash |
358 | 358 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $303 at March 31, 2004 and $398 at June 30, 2004 |
4,696 | 3,387 | ||||||
| Prepaid expenses and other assets |
3,001 | 2,067 | ||||||
| Deferred tax assets |
672 | 672 | ||||||
| Total current assets |
48,697 | 47,326 | ||||||
| Property and equipment: |
||||||||
| Computer equipment and software |
12,553 | 12,926 | ||||||
| Furniture, fixtures and leasehold improvements |
5,115 | 5,115 | ||||||
| Other equipment |
523 | 423 | ||||||
| 18,191 | 18,464 | |||||||
| Less accumulated depreciation and amortization |
(11,979 | ) | (12,756 | ) | ||||
| Net property and equipment |
6,212 | 5,708 | ||||||
| Deferred tax assets, net of current portion |
3,053 | 3,308 | ||||||
| Other assets |
— | 41 | ||||||
| Total assets |
$ | 57,962 | $ | 56,383 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 961 | $ | 652 | ||||
| Accrued liabilities |
1,722 | 1,229 | ||||||
| Accrued employee liabilities |
814 | 483 | ||||||
| Deferred revenue |
387 | 19 | ||||||
| Total current liabilities |
3,884 | 2,383 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $.01 par value; 25,000,000 shares authorized at March 31, 2004 and June 30, 2004; 16,085,635 issued and 11,628,149 outstanding at March 31, 2004 and 16,123,885 issued and 11,666,399 outstanding at June 30, 2004 |
160 | 161 | ||||||
| Additional paid-in capital |
84,831 | 85,150 | ||||||
| Treasury stock |
(30,888 | ) | (30,888 | ) | ||||
| Retained earnings (accumulated deficit) |
(25 | ) | (423 | ) | ||||
| Total stockholders’ equity |
54,078 | 54,000 | ||||||
| Total liabilities and stockholders’ equity |
$ | 57,962 | $ | 56,383 | ||||
The accompanying notes are an integral part of these financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
| Three Months Ended |
||||||||
| 6/30/2003 |
6/30/2004 |
|||||||
| (unaudited) | ||||||||
| Revenues: |
||||||||
| IT infrastructure management services |
$ | 10,052 | $ | 8,811 | ||||
| Maintenance and equipment |
2,479 | 1,299 | ||||||
| Total revenues |
12,531 | 10,110 | ||||||
| Costs of revenues: |
||||||||
| IT infrastructure management services |
6,198 | 5,528 | ||||||
| Maintenance and equipment |
1,803 | 852 | ||||||
| Total costs of revenues |
8,001 | 6,380 | ||||||
| Gross profits: |
||||||||
| IT infrastructure management services |
3,854 | 3,283 | ||||||
| Maintenance and equipment |
676 | 447 | ||||||
| Total gross profits |
4,530 | 3,730 | ||||||
| Operating expenses: |
||||||||
| Development |
1,480 | 1,089 | ||||||
| Selling and marketing |
2,091 | 2,177 | ||||||
| General and administrative |
1,514 | 1,138 | ||||||
| Total operating expenses |
5,085 | 4,404 | ||||||
| Operating loss |
(555 | ) | (674 | ) | ||||
| Other income (expense): |
||||||||
| Interest income |
165 | 75 | ||||||
| Other, net |
— | (3 | ) | |||||
| Total other income |
165 | 72 | ||||||
| Loss before income taxes |
(390 | ) | (602 | ) | ||||
| Income tax benefit |
(152 | ) | (204 | ) | ||||
| Net loss |
$ | (238 | ) | $ | (398 | ) | ||
| Basic and diluted net loss per share |
$ | (0.02 | ) | $ | (0.03 | ) | ||
| Weighted average shares used in basic and diluted per share calculation |
11,393 | 11,644 | ||||||
| Diluted net loss per share |
$ | (0.02 | ) | $ | (0.03 | ) | ||
| Weighted average shares used in diluted per share calculation |
11,393 | 11,644 | ||||||
The accompanying notes are an integral part of these financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Three Months Ended |
||||||||
| 6/30/2003 |
6/30/2004 |
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| (unaudited) | ||||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (238 | ) | $ | (398 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
889 | 782 | ||||||
| Loss on the disposition of property |
3 | 1 | ||||||
| Change in assets and liabilities: |
||||||||
| Accounts receivable, net |
2,550 | 1,309 | ||||||
| Prepaid expenses and other assets |
(93 | ) | 893 | |||||
| Deferred tax assets |
(16 | ) | (255 | ) | ||||
| Accounts payable |
(829 | ) | (309 | ) | ||||
| Accrued Liabilities |
655 | (822 | ) | |||||
| Reduction in future rentals for idle facility |
(358 | ) | (2 | ) | ||||
| Deferred revenue |
8 | (368 | ) | |||||
| Net cash provided by operating activities |
2,571 | 831 | ||||||
| Cash flows from investing activities: |
||||||||
| Purchases of short-term investments |
(7,975 | ) | (23,909 | ) | ||||
| Sales of short-term investments |
7,339 | 13,124 | ||||||
| Transfer of funds to restricted cash |
(1 | ) | — | |||||
| Purchases of property and equipment |
(1,620 | ) | (279 | ) | ||||
| Net cash used in investing activities |
(2,257 | ) | (11,064 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Repurchase of common stock |
(1,175 | ) | — | |||||
| Proceeds from exercise of common stock options and warrants |
358 | 320 | ||||||
| Net cash provided by (used in) financing activities |
(817 | ) | 320 | |||||
| Net decrease in cash and cash equivalents |
(503 | ) | (9,913 | ) | ||||
| Cash and cash equivalents, beginning of period |
28,073 | 19,885 | ||||||
| Cash and cash equivalents, end of period |
$ | 27,570 | $ | 9,972 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid for interest |
$ | — | $ | — | ||||
| Income taxes paid |
$ | 7 | $ | 3 | ||||
The accompanying notes are an integral part of these financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
Information with respect to the three months ended June 30, 2003 and 2004 is unaudited.
1. Organization and Description of the Company
NetSolve, Incorporated, a Delaware corporation, (the “Company”) engages in the business of providing information technology (IT) infrastructure management services. These services include ongoing IT infrastructure management services and, to a lesser extent, network configuration and design and installation and implementation coordination services. The Company also resells CPE maintenance contracts and data network equipment manufactured by selected leading suppliers of these products. The Company also licenses its software to an entity in Japan. The Company’s IT infrastructure management services are designed to allow its customers to selectively outsource IT infrastructure management in order to simplify the timely migration to new technologies, increase network reliability, performance and security while reducing overall IT infrastructure operating costs.
2. Basis of Presentation
The quarterly financial information presented herein should be read in conjunction with the Company’s annual financial statements for the year ended March 31, 2004, which can be found in the Company’s annual report on Form 10-K, as filed on June 9, 2004 (File No. 000-24983). The accompanying unaudited interim financial statements reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.
3. Earnings Per Share
The Company’s earnings per share data are presented in accordance with SFAS 128, Earnings Per Share. Basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period, excluding shares subject to repurchase or forfeiture. Pursuant to Statement of Financial Accounting Standards No. 128, the effect of the assumed exercise of stock options and contingently issued shares has not been included as it is antidilutive.
6
NETSOLVE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2004
4. Contingencies
In December 2001, the Company and certain of its officers and directors, as well as the underwriters of its initial public offering (“IPO”) and hundreds of other companies (“Issuers”), directors and officers and IPO underwriters, were named as defendants in a series of class action shareholder complaints filed in the United States District Court for the Southern District of New York. Those cases are now consolidated under the caption In re Initial Public Offering Securities Litigation, Case No. 91 MC 92. In the amended complaint, the plaintiffs allege that the Company, certain of our officers and directors and our IPO underwriters violated section 11 of the Securities Act of 1933 based on allegations that the Company’s registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The complaint also contains a claim for violation of section 10(b) of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary damages and other relief.
In February 2003, the Court issued a decision denying the motion to dismiss the Section 11 claims against the Company and almost all of the other Issuers, and granting the motion to dismiss the Section 10(b) claim against the Company. The Court dismissed the Section 10(b) claim against the Company without leave to amend. In June 2003, the Issuers and plaintiffs reached a tentative settlement agreement that would, among other things, result in the dismissal with prejudice of all claims against the Issuers and their officers and directors in the IPO lawsuits. A special committee of disinterested directors appointed by the board of directors received and analyzed the settlement proposal and determined that, subject to final documentation, the settlement proposal should be accepted. Although the Company has approved this settlement proposal in principle, it remains subject to a number of procedural conditions, including formal approval by the Court. It is not feasible to predict or determine the final outcome of this proceeding, and if the outcome were to be unfavorable, the Company’s business, financial condition, cash flow and results of operations could be materially adversely affected.
5. Stock-Based Compensation Plans
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (“Statement 123”), prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options. As allowed by Statement 123, the Company has elected to continue to account for its employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company has calculated the fair value of options granted in these periods using the Black-Scholes option-pricing model and has determined the pro forma impact on net loss.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, this option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.
7
NETSOLVE, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2004
The following weighted-average assumptions were used to estimate the fair value of options:
| Three months ended June 30, |
||||||
| 2003 |
2004 |
|||||
| Expected life |
4 years | 4 years | ||||
| Expected volatility |
62.5 | % | ||||