Room 4561
December 28, 2005
Mr. T. Curtis Holmes, Jr.
President and Chief Executive Officer
MetaSolv, Inc.
5556 Tennyson Parkway
Plano, Texas 75024
Re: Metasolv, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2004
Filed March 31, 2005
Form 10-Q for the Fiscal Quarter Ended September 30,
2005
Filed November 3, 2005
Form 8-K
Filed October 27, 2005
File No. 0-28129
Dear Mr. Holmes,
We have reviewed the above referenced filing and have the
following comments. Please note that we have limited our review
to
only your financial statements and related disclosures and do not
intend to expand our review to other portions of your document.
Where
indicated, we think you should revise your document in response to
these comments. If you disagree, we will consider your
explanation
as to why our comment is inapplicable or a revision is
unnecessary.
Please be as detailed as necessary in your explanation. In some
of
our comments, we may ask you to provide us with supplemental
information so we may better understand your disclosure. After
reviewing this information, we may or may not raise additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comment or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the Fiscal Year Ended December 31, 2004
Management`s Discussion and Analysis of Financial Condition and
Results of Operations, page 28
Results of Operations, page 31
1. You disclose several factors that contributed to a 25 percent
decrease in general and administrative expenses in 2004. However,
it
appears that you quantify only one of the factors contributing to
just 13 percent of this decrease. Please tell us how you
considered
Section III.D of SEC Release No. 33-6835 in identifying and
quantifying the factors that contributed in the period to period
fluctuation of service cost of revenues, research and development
and
general and administrative expenses.
2. We note that research and development, selling and marketing
and
general and administrative expenses declined consistently over the
three reported periods. However, it appears that you do not
address
these trends in your results of operations. Please tell us how
you
considered Item 303 (a) (3) of Regulation S-K and SEC Release No.
33-
6835 Section III.B in disclosing these or any other material
trends
known to you that may affect your future liquidity and results of
operations.
3. You disclose that approximately 58 percent of your fiscal 2004
revenue is from international sources. You further disclose on
page
40 that this revenue is denominated in the local currency of the
foreign country. Please tell us how you considered the guidance
in
Section III.D of SEC Release No. 33-6835 in identifying and
quantifying the effect of foreign exchange rate fluctuations on
your
operations, if material.
4. You disclose that one customer accounted for 11 percent of your
2004 consolidated revenues, but you do not appear to identify this
customer. Please tell us how you considered the disclosure
requirements of Item 101(c)(1)(vii) of Regulation S-K.
Pro Forma Financial Results, page 30
5. On page 30 of Form 10-K for the fiscal ended December 31, 2004
you
discuss pro forma financial information that you provide in
earnings
releases and investor conference calls. Please explain to us how
you
considered the information in footnote 12 to SEC Release 33-8176
regarding the difference between "pro forma" and "non-GAAP"
financial
information.
Report of Independent Registered Public Accounting Firm, page 42
6. We note that your auditor`s report does not appear to be signed
by
the firm that issued the opinion. Revise your filing to include a
signed audit report. See Rule 2-02(a)(2) of Regulation S-X.
Note 1. Organization and Summary of Significant Accounting
Policies
b) Revenue Recognition, page 47
You disclose on page 10 that you sell your software products
trough
resellers. Describe for us any differences in the terms of your
direct and indirect/reseller arrangements. Describe any return,
price protection, stock rotation or similar rights or provisions
you
offer to indirect/reseller customers. Additionally, tell us how
your
revenue recognition policies reflect any such differences in the
terms of your arrangements. Finally, explain the consideration
you
have given to including corresponding disclosure in the notes to
your
financial statements. 7.
8. You indicate that you recognize revenue using the residual
method
when VSOE of the fair value of all undelivered elements exists.
In
circumstances when VSOE for undelivered elements does not exist,
you
defer all revenue from the arrangement. Tell us how you establish
VSOE for each undelivered element. Also, describe the specific
circumstances in which you conclude that VSOE does not exist.
Explain how you have considered providing similar disclosure in
the
notes to your financial statements.
Note 10. Segment Information and Concentration of Credit Risk,
page
57
9. You disclose on page 33 that 58 percent of your 2004 revenue
was
from international sources. Please tell us how you considered the
requirements of paragraph 38 of SFAS 131 in disclosing information
about geographic areas. Similarly, tell us how you considered the
disclosure requirements of paragraph (d) of Item 101 of Regulation
S-
K.
Note 13. Impairment of Goodwill and Intangible Assets, page 61
10. We note that in the quarter ended September 30, 2002 you wrote
the full amount of goodwill ($22.4 million) that you had initially
recorded in February 2002 in connection with the acquisition of
the
OSS assets. We further note that you accounted for the
acquisition
of these assets as a business combination. Please address the
following inquiries in reasonable detail:
* Tell us how you considered EITF 98-3 in determining whether the
OSS
assets constitute a business;
* Identify the subsidiary under which you report the OSS
operations
and provide us with the revenue , gross margin, operating
expenses,
total assets and total liabilities amounts of OSS as percentage of
the subsidiary`s respective amounts for the reported periods;
* Tell us how you considered paragraph 30 of SFAS 142 in
determining
whether the OSS operations constitute an operating unit for
goodwill
impairment testing purposes; and
* Describe the change in facts and circumstances between the date
you
recorded and the date you wrote off the goodwill associated with
the
OSS acquisition. See paragraph 47 (a) of SFAS 142.
11. We note that in the quarter ended March 31, 2003 you wrote-off
the full amount of goodwill ($2.3 million) that you had initially
recorded in February 2003 in connection with the acquisition of
Orchestream Holding plc stock. We further note that Orchestream
is
listed as one of your subsidiaries under exhibit 21. Please
address
the following inquiries in reasonable detail:
* Tell us how you considered paragraph 30 of SFAS 142 in
determining
whether Orchestream is a reporting unit for goodwill impairment
testing purposes;
* Describe the change in facts and circumstances between the date
you
recorded and the date you wrote off the goodwill associated with
the
Orchestream acquisition. See paragraph 47 (a) of SFAS 142; and
* Tell us how you considered paragraph B69 of Appendix B of SFAS
142
in writing off the full amount of the Orchestream goodwill
immediately after its acquisition and recognition.
12. You disclose that during 2002 you wrote off approximately $7.2
million of intangible assets. With respect to these write-offs,
please explain to us how you considered providing the following
disclosure:
* The amount of impairment by intangible asset category i.e.,
developed technology, customer contracts and customer
relationship;
* The facts and circumstances leading to the impairment write off;
and,
* The method you used in determining the fair value of the
impaired
intangible assets.
See paragraphs 46 (a) and 46 (b) of SFAS 142
13. Provide us with a roll forward of each of the intangible asset
categories for 2002, 2003 and 2004. In this roll forward
separately
identify the increases in the intangible balance due to
acquisitions
and the decreases due to impairments.
Schedule II, Valuation and Qualifying Accounts, page 63
14. We note that in 2004 you reduced the allowance for doubtful
accounts by approximately $1.2 million. Please describe the
factors
that contributed to your decision to reduce this allowance. Tell
us
how you considered discussing this decrease under the results of
operations and liquidity and capital resources sections of your
filing.
Form 10-Q for the Fiscal Quarter Ended September 30, 2005
Item 1. Financial Statements
Note 8. Subsequent Events
15. Please tell us how you will account for the sale of warrants
sold
on October 26, 2005 and identify the accounting literature that
supports your accounting. As part of your response, describe the
terms of any registration rights related to the warrants. Tell us
how you considered the applicability of EITF 00-19.
Form 8-K, filed October 27, 2005
16. We note that you refer to "pro forma" net income (loss), and
"pro
forma" earnings per basic and diluted share. The information you
have presented throughout these earnings releases should be
referred
to as "non-GAAP" and not "pro forma." Pro forma has a meaning as
defined by generally accepted accounting principles and SEC rules
that is significantly different than your presentation. See
endnote
12 to SEC Release 33-8176.
17. We note the non-GAAP information included in the press release
furnished in the Form 8-K filed October 27, 2005. Your non-GAAP
presentation does not appear consistent with our guidance and
requirements on such presentation. Following are such
inconsistencies in greater detail:
* Disclosure accompanying the presentation currently indicates
that
there are two non-GAAP measures-pro forma net income (loss) and
adjusted EBITDA. However, the presentation on page 5 includes
numerous non-GAAP measures including, but not limited to, non-GAAP
cost of revenue, non-GAAP gross profit, various non-GAAP operating
expense items and non-GAAP income (loss) before income taxes.
Note
that each line item, sub-total or total for which an adjustment
has
been made represents a separate non-GAAP measure that must be
separately identified and addressed in the accompanying
disclosure.
See Items 10(e)(1)(i)(C), 10(e)(1)(i)(D) and 10(e)(2) of
Regulation
S-K.
* We note no substantive disclosure that addresses the disclosures
in
Question 8 of the FAQ. For example, the disclosure does not
explain
the manner in which management uses each measure and the economic
substance behind that decision or why the measures are useful to
investors. Further, you do not explain the material limitations
associated with each measure or the manner in which management
compensates for such limitations.
As each of the non-GAAP measures excludes items that are
considered
recurring in nature, you must meet the burden of demonstrating the
usefulness of each measure and clearly disclose why each non-GAAP
measures is useful when these items are excluded. See Question 8
of
the June 13, 2003 FAQs.
18. In view of the nature, content and format of the presentation,
we
question whether it complies with Item 100(b) of Regulation G. In
this regard we note that the presentation of a full non-GAAP
Statement of Operations may create the unwarranted impression that
the presentation is based on a comprehensive set of accounting
rules
or principles.
As appropriate, please amend your filing and respond to
these
comments within 10 business days or tell us when you will provide
us
with a response. Please submit all correspondence and
supplemental
materials on EDGAR as required by Rule 101 of Regulation S-T. You
may wish to provide us with marked copies of any amendment to
expedite our review. Please furnish a cover letter with any
amendment that keys your responses to our comments and provides
any
requested information. Detailed cover letters greatly facilitate
our
review. Please understand that we may have additional comments
after
reviewing any amendment and your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Stathis Kouninis, Staff Accountant or me at
(202) 551-3489 if you have any questions regarding these comments.
Very truly yours,
Brad Skinner
Accounting Branch Chief
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T. Curtis Holmes, Jr.
MetaSolv, Inc.
December 28, 2005
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