<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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 July 31, 2001, there were outstanding 13,182,057 shares of
Registrant's Common Stock (par value $0.001 per share).
<Page>
EVOLVING SYSTEMS, INC.
<Table>
<Caption>
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited)
Balance Sheets
June 30, 2001 and December 31, 2000 (unaudited) ............... 3
Statements of Operations
for the three-month and six-month periods ended June 30,
2001 and June 30, 2000 (unaudited) ............................ 4
Condensed Statements of Cash Flow
for the six-month periods ended June 30, 2001 and
June 30, 2000 (unaudited) ..................................... 5
Notes to Financial Statements (unaudited) ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 7
PART II OTHER INFORMATION ................................................ 11
Item 1. Legal Proceedings ................................................ 11
Item 2. Changes in Securities ............................................ 12
Item 3. Defaults on Senior Securities .................................... 12
Item 4. Submission of Matters to a Vote of Security Holders .............. 12
Item 5. Other Information ................................................ 12
Item 6. Exhibits and Reports on Form 8-K ................................. 12
SIGNATURES ............................................................... 12
</Table>
2
<Page>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVOLVING SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
<Table>
<Caption>
June 30, Dec. 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 12,209 $ 4,382
Short-term investments 596 5,931
Contract receivables, net of allowance for doubtful accounts of
$492 and $643 as of June 30, 2001 and December 31, 2000,
respectively 9,934 15,202
Unbilled work-in-progress 14,402 14,110
Prepaid and other current assets 1,260 1,622
-------- --------
Total current assets 38,401 41,247
Property and equipment, net 5,105 5,141
Long-term prepaids 367 0
Deferred tax assets 1,485 1,547
-------- --------
Total assets $ 45,358 $ 47,935
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 28 $ 163
Accounts payable and accrued liabilities 4,438 5,054
Unearned revenue and customer deposits 3,190 5,880
-------- --------
Total current liabilities 7,656 11,097
Long-term obligations 131 0
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized,
no shares issued -- --
Common stock, $.001 par value; 25,000,000 shares authorized;
13,181,964 and 12,950,620 shares issued and outstanding as
of June 30, 2001 and December 31, 2000, respectively 13 13
Additional paid-in-capital 53,540 53,063
Deferred compensation 0 (37)
Accumulated deficit (15,982) (16,201)
-------- --------
Total stockholders' equity 37,571 36,838
-------- --------
Total liabilities and stockholders' equity $ 45,358 $ 47,935
======== ========
</Table>
The accompanying notes are an integral part of the financial statements.
3
<Page>
EVOLVING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(unaudited)
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
Revenue: 2001 2000 2001 2000
-------- -------- -------- --------
License fees and related services $ 6,069 $ 5,438 $ 11,214 $ 8,717
Other services 5,897 8,663 14,347 17,073
-------- -------- -------- --------
Total revenue 11,966 14,101 25,561 25,790
-------- -------- -------- --------
Cost of revenue:
License fees and related services 1,810 2,013 4,412 3,857
Other services 5,624 6,500 11,069 11,825
-------- -------- -------- --------
Total cost of revenue 7,434 8,513 15,481 15,682
-------- -------- -------- --------
Gross margin 4,532 5,588 10,080 10,108
Operating expenses:
Sales and marketing 2,143 2,274 4,448 4,319
General and administrative 2,115 2,925 4,565 5,330
Research and development 701 -- 1,062 --
-------- -------- -------- --------
Total operating expenses 4,959 5,199 10,075 9,649
-------- -------- -------- --------
Income (loss) from operations (427) 389 5 459
Other income, net 112 211 276 454
-------- -------- -------- --------
Income (loss) before income taxes (315) 600 281 913
Provision for (benefit from) income taxes (66) -- 62 --
-------- -------- -------- --------
Net income (loss) $ (249) $ 600 $ 219 $ 913
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ (.02) $ .05 $ .02 $ .07
Diluted $ (.02) $ .05 $ .02 $ .07
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic shares outstanding 12,973 12,626 12,963 12,558
Diluted shares outstanding 12,973 13,268 13,524 13,804
</Table>
The accompanying notes are an integral part of the financial statements.
4
<Page>
EVOLVING SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(unaudited)
<Table>
<Caption>
Six Months Ended
June 30,
-----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net income $ 219 $ 913
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred compensation 37 22
Depreciation, amortization and loss on disposal
of property and equipment 1,316 1,772
Provision for deferred income taxes 62 --
Change in operating assets and liabilities:
Contract receivables 5,268 363
Unbilled work-in-progress (292) (6,644)
Prepaid and other assets (5) (196)
Accounts payable and accrued liabilities (616) (186)
Unearned revenue and customer deposits (2,690) (3,811)
-------- --------
Net cash provided by (used in) operating activities 3,299 (7,767)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,131) (1,540)
Sales of short-term investments, net 5,335 5,143
-------- --------
Net cash provided by investing activities 4,204 3,603
-------- --------
FINANCING ACTIVITIES:
Repayment of long-term obligations (153) (329)
Proceeds from issuance of common stock 477 682
-------- --------
Net cash provided by financing activities 324 353
-------- --------
Net increase (decrease) in cash and cash equivalents 7,827 (3,811)
Cash and cash equivalents at beginning of period 4,382 4,266
-------- --------
Cash and cash equivalents at end of period $ 12,209 $ 455
======== ========
Supplemental disclosure of other cash and non-cash
financing transactions:
Assets acquired under capital lease $ 190 --
</Table>
The accompanying notes are an integral part of the financial statements.
5
<Page>
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, we believe
that the disclosures are adequate to make the information presented not
misleading. The unaudited financial statements included in this document 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.
Our results for the period ended June 30, 2001 are not necessarily indicative of
the results we will have for any subsequent quarter or full fiscal year. You
should read these financial statements in conjunction with the audited financial
statements and the notes to those statements for the year ended December 31,
2000 including Evolving Systems Form 10-K/A for the year ended December 31,
2000.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires us 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 or 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):
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Basic earnings per share:
Net income (loss) $ (249) $ 600 $ 219 $ 913
Weighted average common shares outstanding 12,973 12,626 12,963 12,558
Basic net income (loss) per common share $ (.02) $ .05 $ .02 $ .07
Effect of dilutive securities:
Options and warrants -- 642 561 1,246
Diluted weighted average common shares outstanding 12,973 13,268 13,524 13,804
Diluted net income (loss) per common share $ (.02) $ .05 $ .02 $ .07
</Table>
Options to purchase 1,748,000 and 1,825,000 shares of common stock were excluded
from dilutive stock option calculations for the three and six month periods
ended June 30, 2001 respectively because their exercise prices were greater than
the average fair market value of the Company's stock for the period and as such,
they would be anti-dilutive. Options to purchase an additional 1,998,000 shares
of common stock whose exercise prices were below the average fair market value
of the company's stock were excluded from the dilutive stock option calculation
for the three month period ended June 30, 2001 due to the net loss.
(3) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," we define operating segments as components of an
enterprise for which discrete financial information is available and is reviewed
regularly by the chief operating decision-maker, or decision-making group, to
evaluate performance and make operating decisions. We identified our chief
operating decision-makers as three key executives-the Chief Executive Officer,
Chief Operating Officer, and Chief Financial Officer. This chief operating
decision-making group reviews the revenue and overall results of operations by
the nature of the products and services provided. The accounting policies of the
operating segments below are the same as those described in the summary of
significant accounting policies included in our Annual Report on Form 10-K/A for
the year ended December 31, 2000. We develop products and solutions for the
telecommunications industry and provide a broad range of both fixed-price and
time-and-materials software solutions.
6
<Page>
The groupings presented below represent an aggregation of financial information
for business segments meeting certain criteria, including economic
characteristics, similar customers, and the same products and services. The OSS
Products Group encompasses a broad array of software and systems that perform
critical functions for telecommunications carriers, including ordering,
provisioning, service assurance and billing. The Wireless Data Group provides
custom software infrastructure products for Lucent, a leading equipment
supplier. The infrastructure products enable Cellular Digital Packet Data
(CDPD), Code Division Multiple Access (CDMA), and Over-the-Air-Service
Provisioning (OTASP) in wireless network environments. We provide services and
products solely within the United States geographic area. Total assets have not
been specified by segment, as it is impractical to do so as this information is
not available to the decision-making group. The following table provides revenue
and gross margin by segment for the three and six month periods ended June 30,
2001 and June 30, 2000, respectively:
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
REVENUE
OSS Products Group:
LNP $ 7,295 $ 7,243 $13,960 $11,596
NPAC 1,347 2,159 3,121 4,324
OSS Solutions 1,023 1,913 2,566 4,409
Wireless Data Group:
Wireless 2,301 2,786 5,914 5,461
Total Revenue $11,966 $14,101 $25,561 $25,790
GROSS MARGIN
OSS Products Group:
LNP $ 2,227 $ 3,274 $ 4,547 $ 5,102
NPAC 718 1,302 1,633 2,385
OSS Solutions 265 129 602 956
Wireless Data Group:
Wireless 1,322 883 3,298 1,665
Total Gross Margin $ 4,532 $ 5,588 $10,080 $10,108
</Table>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Evolving Systems provides the telecommunications industry with solutions
comprised of software products and systems integration services for a full range
of operational support systems, and network element software and wireless data
applications.
We derive revenue from license fees and services under the terms of both
fixed price and time-and-materials contracts. License fees and related services
revenue consists of revenue from contracts that generally provide for both
licenses and services related to our standard software products. Other services
revenue consists of revenue from custom programming, systems integration of
third-party products, annual maintenance contracts and training.
License fees and related services revenue is generated from fixed price
contracts that provide for both licenses and services. Where the services are
essential to the functionality of the delivered software, we generally recognize
revenue using the percentage-of-completion method of accounting. We determine
the percentage of completion for each contract based on the ratio of direct
labor hours incurred to total estimated direct labor hours. We record amounts
billed in advance of services being performed as unearned revenue. Unbilled
work-in-progress represents revenue earned but not yet billable under the terms
of the fixed price contracts. 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, we recognize license revenue when a license agreement
has been signed, delivery has occurred, the fee is fixed or determinable,
collectibility is probable and the customer has accepted the software. Where
applicable, fees from multiple element arrangements are unbundled and recorded
as revenue as the elements are delivered to the extent that vendor specific
objective evidence ("VSOE") of fair value exists. If VSOE does not exist, fees
from such arrangements are deferred until the earlier of the date that VSOE does
exist or all of the elements are delivered.
We generally recognize services revenue provided under fixed price
contracts using the percentage-of-completion method of accounting described
above. We recognize revenue from other services provided pursuant to
time-and-materials contracts as the services are performed.
We record annual maintenance revenue as deferred revenue and recognize it
ratably over the service period, which is generally 12 months. We recognize
revenue from training services as the training services are performed. When
7
<Page>
maintenance or training services are bundled with the original license fee
arrangement, we defer their fair value and recognize it during the periods in
which we provide the services.
We may encounter budget and schedule overruns on fixed price contracts
caused by increased material, labor or overhead costs. We make adjustments to
cost estimates in the periods in which the facts requiring such revisions become
known to us. We record estimated losses, if any, 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 statement of operations reflected as a percentage of total
revenue.
<Table>
<Caption>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
Revenue: 2001 2000 2001 2000
------- ------- ------- -------
License fees and related services 50.7% 38.6% 33.8% 43.9%
Other services 49.3 61.4 56.1 66.2
------- ------- ------- -------
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue:
License fees and related services 15.1 14.3 17.3 15.0
Other services 47.0 46.1 43.3 45.9
------- ------- ------- -------
Total cost of revenue 62.1 60.4 60.6 60.9
Gross margin 37.9 39.6 39.4 39.1
Operating expenses:
Sales and marketing 17.9 16.1 17.4 16.7
General and administrative 17.7 20.7 17.9 20.7
Research and development 5.9 0.0 4.1 0.0
------- ------- ------- -------
Total operating expenses 41.5 36.8 39.4 37.4
Income (loss) from operations (3.6) 2.8 0.0 1.7
Other income, net 0.9 1.5 1.1 1.8
------- ------- ------- -------
Income (loss) before income taxes (2.7) 4.3 1.1 3.5
Provision for (benefit from) income taxes (.6) 0.0 0.2 0.0
------- ------- ------- -------
Net income (loss) (2.1)% 4.3% 0.9% 3.5%
======= ======= ======= =======
</Table>
THE THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2000
REVENUE. Total revenue decreased approximately $2.1 million or 15% to $12.0
million in the three months ended June 30, 2001 from $14.1 million in the three
months ended June 30, 2000. License fees and related services revenue increased
by $631,000 or 12% to $6.1 million in the three months ended June 30, 2001 from
$5.4 million in the three months ended June 30, 2000, reflecting the increased
customer interest in new LNP products for wireline and wireless customers. Other
services revenue decreased by $2.8 million or 32% to $5.9 million in the three
months ended June 30, 2001 from $8.7 million in the three months ended June 30,
2000, reflecting less demand for custom programming services as customers
migrate to more standardized solutions. As a percentage of total revenue,
license fees and related services revenue increased to 51% for the three months
ended June 30, 2001 from 39% for the three months ended June 30, 2000 reflecting
increasing focus on sales of license products and customer willingness to accept
more standardized products to meet their market timing demands.
COST OF REVENUE. Total cost of revenue decreased by $1.1 million or 13% to $7.4
million in the three months ended June 30, 2001 from $8.5 million in the three
months ended June 30, 2000. Cost of revenue has decreased compared to the three
months ended June 30, 2000 due to management focus on cost control and staff
utilization in the three months ended June 30, 2001. As a percentage of total
revenue, costs increased to 62% of revenue for the three months ended June 30,
2001 from 60% of revenue in the three months ended June 30, 2000. The percentage
increase in costs from the three months ended June 30, 2000 is a result of the
previously announced delayed contract resulting in decreased staff utilization.
Cost of license fees and related services decreased by $203,000 or 10% to $1.8
million for the three months ended June 30, 2001 from $2.0 million for the three
months ended June 30, 2000, due to reduced staffing requirements for these
services. As a percentage of total revenue, cost of license fees and related
services increased to 15% for the three months ended June 30, 2001 from 14% in
the three months ended June 30, 2000. The percentage increase in costs is a
reflection of the reduced revenues from the three months ended June 30, 2001.
Cost of other services decreased by $876,000 or 13% to
8
<Page>
$5.6 million for the three months ended June 30, 2001 from $6.5 million for the
three months ended June 30, 2000. Cost of other services revenue has decreased
from the three months ended June 30, 2000 due to management focus on cost
control and efficiency of staff utilization in the three months ended June 30,
2001. Cost of other services as a percent of revenue increased from 46% in the
three month period ended June 30, 2000 to 47% in the three month period ended
June 30, 2001. The change can be attributed to the lower revenue in the three
months ended June 30, 2001 compared to June 30, 2000 resulting in reduced staff
utilization.
We experienced a 38% gross margin. This is a 2% decrease in total gross margin
in the three months ended June 30, 2001 compared to the three months ended June
30, 2000. The change can be attributed to the lower revenue in the three months
ended June 30, 2001 compared to June 30, 2000 resulting in reduced staff
utilization. When short-term revenue declines, staffing costs will result in
lower gross margins.
The Company's expense levels are based in significant part on its expectations
regarding future revenues. The Company's revenue is difficult to forecast
because the market for the Company's products and services is rapidly evolving,
and the Company's sales cycle and the size and timing of significant contracts
vary substantially among customers.
SALES AND MARKETING. Sales and marketing expenses decreased by $131,000 or 6% to
$2.1 million in the three months ended June 30, 2001 from $2.3 million in the
three months ended June 30, 2000. The decrease in costs from the three months
ending June 30, 2000 is due to lower commissions paid out in the three months
ended June 30, 2001 due to lower sales. As a percentage of revenue, sales and
marketing increased to 18% of revenue in the three months ended June 30, 2001
from 16% in the three months ended June 30, 2000. The increase in sales and
marketing costs as a percentage of revenue from the three months ended June 30,
2000 is a result of the lower revenue earned in the three months ended June 30,
2001 as discussed above.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$810,000 or 28% to $2.1 million in the three months ended June 30, 2001 from
$2.9 million in the three months ended June 30, 2000. As a percentage of
revenue, general and administrative expenses decreased to 18% in the three
months ended June 30, 2001 from 21% in the three months ended June 30, 2000. The
decrease in dollars and as a percentage of revenues are a result of management
cost controls and efficiencies implemented since the three months ended June 30,
2000, including a 25% reduction in headcount. In addition, due to lower than
expected revenues, there was a reduction in bonus expense for the three months
ended June 30, 2001 compared to June 30, 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$701,000 in the three months ended June 30, 2001 from $0 in the three months
ended June 30, 2000, reflecting our strategic decision to begin investing in new
wireless products and additional LNP features. As a percentage of revenue,
research and development expenses increased to 6% in the three months ended June
30, 2001 from 0% in the three months ended June 30, 2000.
OTHER INCOME, NET. Other income, net, decreased $99,000, or 47%, to $112,000 in
the three months ended June 30, 2001 from $211,000 in the three months ended
June 30, 2000 due to lower interest income. While interest expense declined as
debt was paid down, interest income for the three months ended June 30, 2001
compared to the three months ended June 30, 2000, declined primarily due to
decreased investment balances and interest rates.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. Evolving Systems has recorded a
partial valuation allowance against carryforward tax benefits to the extent we
believe that it is more likely than not that all of such benefits will not be
realized in the foreseeable future. Our assessment of this valuation allowance
was made using all available evidence, both positive and negative. In
particular, we considered both historical results and our projections of
profitability for only reasonably foreseeable future periods. For the three
months ended June 30, 2001, we have recorded a benefit from income taxes of
$66,000 based on our estimated effective tax rate of 21% and our assessment that
we will realize the deferred tax assets recorded on the balance sheet at June
30, 2001. Our realization of our recorded net deferred tax assets is dependent
on future taxable income and therefore, we are not assured that such benefits
will be realized.
THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2000
REVENUE. Total revenue decreased approximately $229,000 or 1% to $25.6 million
in the six months ended June 30, 2001 from $25.8 million in the six months ended
June 30, 2000. License fees and related services revenue increased by $2.5
million or 29% to $11.2 million in the six months ended June 30, 2001 from $8.7
million in the six months ended June 30, 2000, reflecting growing LNP product
sales since the prior period. Other services revenue decreased by $2.7 million
or 16% to $14.3 million in the six months ended June 30, 2001 from $17.1 million
in the six months ended June 30, 2000, reflecting less demand for custom
programming services as customers migrate to more standardized solutions. As a
percentage of total revenue, other services revenue decreased to 56% for the six
months ended June 30, 2001 from 66% for the six months ended June 30, 2000.
COST OF REVENUE. Cost of revenue decreased $201,000 or 1% to $15.5 million in
the six months ended June 30, 2001 from $15.7 million in the six months ended
June 30, 2000. License fees and related services cost increased by $555,000 or
14% to $4.4 million for the six months ended June 30, 2001 from $3.9 million for
the six months ended June 30, 2000. The increase in cost of license fees and
related services in the three months ended June 30, 2001 reflects the effort
necessary to complete the custom development of new LNP Wireless products. Other
services cost decreased $756,000 or 6% to $11.1 million in the six months ended
June 30, 2001 from $11.8 million in the six months ended June 30, 2000. The
decrease in costs is due to management's focus on cost controls and a reduction
in staffing given the declining demand for custom services in the six months
ended June 30, 2001.
9
<Page>
SALES AND MARKETING. Sales and marketing expenses increased by $129,000 or 3% to
$4.4 million in the six months ended June 30, 2001 from $4.3 million in the six
months ended June 30, 2000. This increase in costs is due to gradually increased
sales staff in 2001 and increased costs related to participation in more
industry trade shows. As a percentage of revenue, sales and marketing expenses
remained at 17% of revenue in the six months ended June 30, 2001 from the six
months ended June 30, 2000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$765,000 or 14% to $4.6 million in the six months ended June 30, 2001 from $5.3
million in the six months ended June 30, 2000. As a percentage of revenue,
general and administrative expenses decreased to 18% in the six months ended
June 30, 2001 from 21% in the six months ended June 30, 2000. The decrease in
general and administrative costs is due to a decrease in headcount from 65 at
June 30, 2000 compared to 50 at June 30, 2001.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by $1.1
million, or 100%, to $1.1 million in the six months ended June 30, 2001 from $0
in the six months ended June 30, 2000, reflecting our strategic decision to
begin investing in new wireless products and additional LNP features. As a
percentage of revenue, research and development expenses increased to 4% in the
six months ended June 30, 2001 from 0% in the six months ended June 30, 2000.
OTHER INCOME, NET. Other income, net decreased by $178,000 or 39%, to $276,000
in the six months ended June 30, 2001 from 454,000 in the six months ended June
30, 2000. As a percentage of revenue, other income, net decreased to 1% of
income in the six months ended June 30, 2001 from 2% of expense in the six
months ended June 30, 2000. This change resulted from reduced interest income
due to lower interest rates offset by a decline in interest expense as debt
continued to decline.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. Evolving Systems has recorded a
partial valuation allowance against carryforward tax benefits to the extent we
believe that it is more likely than not that all of such benefits will not be
realized in the foreseeable future. Our assessment of this valuation allowance
was made using all available evidence, both positive and negative. In
particular, we considered both historical results and our projections of
profitability for only reasonably foreseeable future periods. For the six months
ended June 30, 2001, we have recorded a provision for income taxes of $62,000
based on our estimated effective tax rate for the year. Our realization of our
recorded net deferred tax assets is dependent on future taxable income and
therefore, we are not assured that such benefits will be realized.
LIQUIDITY AND CAPITAL RESOURCES.
The Company has financed its operations through a combination of cash from
operations, borrowings and its initial public offering in May 1998. At June 30,
2001, the Company's principal sources of liquidity included $12.2 million in
cash and cash equivalents, and $596,000 in short-term investments.
Net cash provided by operating activities was $3.3 million in the six
months ended June 30, 2001 compared to $7.8 million used in operations in the
six months ended June 30, 2000. The primary source of cash from operations in
the six months ended June 30, 2001 was increased collection activity on major
accounts, reflected in decreased contract receivable of $5.3 million, partially
offset by a $2.7 million decrease in unearned revenue and customer deposits.
Net cash provided by investing activities during the six months ended June
30, 2001 was $4.2 million compared to $3.6 million in the six months ended June
30, 2000. Purchases of property and equipment to support operations accounted
for $1.1 million in the six months ended June 30, 2001 compared to $1.5 million
for the six months ended June 30, 2000. The sale of $5.3 million in short-term
investments provided cash during the six months ended June 30, 2001 compared to
$5.1 million in sales during the six months ended June 30, 2000.
Net cash provided by financing activities was $324,000 resulting from the
sale of common stock upon the exercise of $477,000 in stock options offset by
$153,000 in repayments of capital lease obligations for the six months ended
June 30, 2001. This compares to $353,000 provided by financing activities in the
six months ended June 30, 2000 resulting from the sale of common stock upon the
exercise of $682,000 in stock options offset by $329,000 in repayments for
capital lease obligations for the six months ended June 30, 2001.
The Company believes that its current cash and short-term investments,
together with anticipated cash flow from operations 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.
RECENT ACCOUNTING PRONOUNCEMENTS.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 establishes methods of accounting for business combinations using the
purchase method of accounting with goodwill initially recognized as an asset in
the financial statements. The provisions of SFAS No. 141 will apply to all
business combinations initiated after June 30, 2001. To date, we have not
entered into any business combination activities.
10
<Page>
In June 2001, the FASB issued SFAS No. 142, " Goodwill and Other Intangible
Assets". SFAS No. 142 eliminates the requirement to amortize goodwill and
provides for testing the value of the Goodwill for impairment at least annually.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001
with initial impairment tests performed on all goodwill within six months of
adoption. We anticipate that SFAS No. 142 will have no impact on our financial
condition or results of operations due to our lack of business combination
activity.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. We adopted SFAS No.
133, as amended, in the first quarter 2001. To date, we have not entered into
any derivative financial instruments or hedging activities.
FACTORS THAT MIGHT AFFECT OPERATING RESULTS.
Our operating results have fluctuated significantly in the past and are
likely to continue to fluctuate significantly in the future. Fluctuations in
operating results may continue to result in volatility in the price of our
Common Stock. We cannot provide assurance that we will be profitable in the
future or that our 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; our rate of
progress under such contracts; the timing of customer and market acceptance of
our 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; the impact of changes
to revenue recognition rules; changes in management; sale of our software in an
application service provider (ASP) model; product lifecycles; our success in
building a product-based business and developing and marketing new products; the
mix of products and services sold; changes in demand for our products and
services; the timing of third-party contractors' delivery of software and
hardware; budgeting cycles of our customers; changes in the renewal rate of
support agreements; the timing and amount of our expenditures for research and
development sales, general and administrative expenses; competition by existing
and emerging competitors in the telecommunications software markets; controlling
costs, attracting and retaining qualified personnel and expanding our sales and
marketing programs; regional office expansion; software defects and other
product quality problems; changes in our strategy; the extent of industry
consolidation; expansion into international markets, and general economic
conditions.
A significant portion of our 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 our products or
delays in the performance of services could have a material adverse effect on
our business, financial condition and results of operations. Historically, we
have generally recognized both license fees and service fee revenue under our
customer contracts using the percentage-of-completion method. We have broadened
our strategy to include the development and sale of standard, packaged software
products and we also offer our software under ASP arrangements. To the extent
that we are successful in our strategy, we expect that we may record future
revenue from license fees upon the acceptance of a software product by
customers, or as monthly payments are invoiced under an ASP arrangement.
Software companies that account for revenue from license fees upon acceptance of
software products may be exposed to increased risk of quarterly fluctuations.
Likewise, software companies that adopt an ASP licensing model, in lieu of
recording revenue upon acceptance, may have temporary revenue reductions until
the ASP licensing model is fully realized. To the extent that this pattern
develops, any failure or delay in the delivery and acceptance of orders during
any given quarter, or any signing of an ASP licensing arrangement in lieu of
receiving payment of the packaged software up front, could have a material
adverse effect on our business, financial condition and results of operations.
The timing of revenue recognition from our contracts has caused, and may
continue to cause, material fluctuations in our operating results, particularly
on a quarterly basis.
Our expense levels are based in significant part on our expectations
regarding future revenue. Our revenue is difficult to forecast because the
market for our products and services is rapidly evolving, and our sales cycle
and the size and timing of significant contracts vary substantially among
customers. Accordingly, we 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 our products and services could have a
material adverse effect on our business, financial condition and results of
operations.
Based on all of the foregoing, we believe 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, we believe that it
is likely that in some future quarter our 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 our business or generally, the market price of our Common Stock would likely
go down.
These results should be read in conjunction with the risk factors defined
in the Company's Amended Form 10-K/A for the year ended December 31, 2000.
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 those described
above and in more detail in our Amended Form 10-K/A.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
11
<Page>
From time to time we are involved in various legal proceedings arising in
the normal course of business operations. We do not expect that any such
proceedings will have a material adverse effect on our financial position,
results of operations or cash flows.
Item 2. Changes in Securities
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On March 23, 2001, 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 were voted on and approved by
the shareholders on April 25, 2001.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(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: 8/09/2000 /s/ David R. Johnson
-------------------------------
David R. Johnson
Senior Vice President of Finance, Chief
Financial Officer, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)
12